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RULE NO.424(b)(3)
REGISTRATION NO. 33-56935
[LETTERHEAD OF ARBOR NATIONAL HOLDINGS, INC. APPEARS HERE]
December 20, 1994
Dear Arbor Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Arbor National Holdings, Inc. ("Arbor"), which will be held on Tuesday,
January 24, 1995 at 10:00 a.m., local time, at the offices of Arbor, 333 Earle
Ovington Boulevard, Uniondale, New York (the "Special Meeting"). At this
meeting, you will be asked to consider and vote upon, among other matters, a
proposal to approve a merger agreement pursuant to which Arbor will be
acquired by BankAmerica Corporation ("BAC") and you will become a BAC
stockholder.
Upon consummation of the merger, each share of the common stock of Arbor
will be converted into a number of shares (the "Exchange Ratio") of common
stock of BAC determined pursuant to a formula set forth in the merger
agreement.
The merger agreement was executed following an extensive search by Arbor to
identify a sales transaction which would provide the greatest value to Arbor's
shareholders. Your Board of Directors has determined that the merger is in the
best interests of Arbor and its shareholders and unanimously recommends that
you vote FOR approval of the merger agreement. Goldman, Sachs & Co., financial
advisor to Arbor, has delivered a written opinion to your Board of Directors
that, as of the date of the attached Proxy Statement/Prospectus, the Exchange
Ratio is fair to the shareholders of Arbor.
Consummation of the merger is subject to certain conditions, including the
approval of the merger agreement by the holders of 66 2/3% of the shares of
Arbor's common stock and the approval of the merger by various regulatory
agencies. Anita Kaufman, a fellow director, and I have agreed to vote an
aggregate of approximately 58% of the shares of Arbor common stock in favor of
the merger agreement.
Specific information regarding the Special Meeting is contained in the
enclosed Notice of Special Meeting and Proxy Statement/Prospectus. Please read
these materials carefully.
It is very important that your shares are represented at the Special
Meeting, whether or not you plan to attend in person. A failure to vote for
approval of the merger agreement (including a failure to send in your proxy)
will have the same effect as a vote against the merger agreement. Therefore, I
urge you to mark, execute, date and return the enclosed proxy appointment card
in the enclosed postage-paid envelope as soon as possible to assure that your
shares will be voted at the Special Meeting. YOU SHOULD NOT SEND IN
CERTIFICATES FOR YOUR ARBOR SHARES AT THIS TIME.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote FOR approval of the merger agreement.
Sincerely,
Ivan Kaufman
Chairman and Chief
Executive Officer
[LOGO OF ARBOR NATIONAL HOLDINGS,
INC. APPEARS HERE]
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ARBOR NATIONAL HOLDINGS, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 24, 1995
To the Shareholders of
Arbor National Holdings, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Arbor
National Holdings, Inc. ("Arbor") will be held at the offices of Arbor, 333
Earle Ovington Boulevard, Uniondale, New York on Tuesday, January 24, 1995, at
10:00 a.m., local time (the "Special Meeting"), for the following purposes, all
of which are more fully described in the accompanying Proxy
Statement/Prospectus:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of September 23, 1994, as amended (as so
amended, the "Merger Agreement"), by and among BankAmerica Corporation
("BAC"), Bank of America, FSB, AH Acquisition Corp. ("AHAC") and Arbor
and the consummation of the transactions contemplated thereby, including
the merger (the "Merger") of AHAC with and into Arbor, pursuant to
which, among other things, Arbor shareholders will receive a number of
shares of BAC common stock and cash in lieu of fractional shares in
exchange for each of their shares of Arbor common stock pursuant to a
formula set forth in the Merger Agreement and described in the
accompanying Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
The Arbor Board of Directors has fixed December 9, 1994 as the record date
for the determination of shareholders entitled to notice of and to vote at the
Special Meeting. Only shareholders of record at the close of business on such
date are entitled to notice of and to vote at the Special Meeting.
The common stock, par value $0.01 per share, of Arbor (the "Arbor Common
Stock") is the only security of Arbor whose holders are entitled to vote upon
the proposals to be presented at the Special Meeting. Holders of Arbor Common
Stock who dissent from the Merger and who comply with Section 623 of the New
York Business Corporation Law will be entitled to receive payment of the "fair
value" of their shares of Arbor Common Stock as determined in accordance with
Section 623. The text of Section 623 of the New York Business Corporation Law
is included as Annex E to the accompanying Proxy Statement/Prospectus.
Your vote is important regardless of the number of shares you own. Each
shareholder, even though he or she now plans to attend the Special Meeting, is
requested to mark, sign, date and return the enclosed Proxy without delay in
the enclosed postage-paid envelope. You may revoke your Proxy at any time prior
to its exercise. Any shareholder present at the Special Meeting or at any
adjournments or postponements thereof may revoke his or her Proxy and vote
personally on each matter brought before the Special Meeting.
By Order of the Board of Directors,
Walter K. Horn,
Secretary
December 20, 1994
Uniondale, New York
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR THE PROPOSAL TO APPROVE
AND ADOPT THE MERGER AGREEMENT
PLEASE MARK, DATE AND SIGN THE ENCLOSED PROXY
AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE
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----------------
ARBOR NATIONAL HOLDINGS, INC.
PROXY STATEMENT
----------------
BANKAMERICA CORPORATION
PROSPECTUS
----------------
This Proxy Statement/Prospectus is being furnished to the shareholders of
Arbor National Holdings, Inc. ("Arbor") in connection with the solicitation of
proxies by the Board of Directors of Arbor for use at a special meeting of
shareholders of Arbor to be held on January 24, 1995, and at any adjournments
or postponements thereof (the "Special Meeting"). The Special Meeting will be
held at 10:00 a.m., Eastern time, at the offices of Arbor at 333 Earle Ovington
Boulevard, Uniondale, New York. This Proxy Statement/Prospectus and the
accompanying form of proxy are first being mailed to shareholders of Arbor on
or about December 21, 1994.
At the Special Meeting, the shareholders of record of the common stock, par
value $0.01 per share ("Arbor Common Stock"), of Arbor as of the close of
business on December 9, 1994 will consider and vote upon a proposal to approve
and adopt an Agreement and Plan of Merger, dated as of September 23, 1994, as
amended (as so amended, the "Merger Agreement"), by and between BankAmerica
Corporation ("BAC"), Bank of America, FSB, a federal savings bank and wholly-
owned subsidiary of BAC ("BAFSB"), AH Acquisition Corp., a New York corporation
and wholly-owned subsidiary of BAFSB ("AHAC") and Arbor, and the consummation
of the transactions contemplated thereby, as more fully described herein. A
copy of the Merger Agreement is attached to this Proxy Statement/Prospectus as
Annex A.
As more fully described herein, pursuant to the Merger Agreement, AHAC will
merge with and into Arbor (the "Merger"), and the shares of Arbor Common Stock
and options to purchase Arbor Common Stock outstanding immediately prior to the
Merger (other than shares with respect to which appraisal rights are perfected)
will be converted into a number of shares of common stock of BAC, par value
$1.5625 per share (the "BAC Common Stock"), or, in lieu of fractional shares,
cash, based on a formula set forth in the Merger Agreement.
This Proxy Statement/Prospectus also serves as a prospectus for BAC under the
Securities Act of 1933, as amended (the "Securities Act"), for the issuance of
shares of BAC Common Stock (including the associated preferred share purchase
rights described under "DESCRIPTION OF BAC CAPITAL STOCK--BAC Common Stock and
Rights" issued with respect to such shares) in the Merger. On December 9, 1994,
the closing sales price on the NYSE composite transactions tape of BAC Common
Stock was $39.75 and the closing sales price quoted on the Nasdaq National
Market for Arbor Common Stock was $14.38.
----------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/PROSPECTUS.
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. SHAREHOLDERS ARE STRONGLY URGED
TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY.
----------------
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE SHARES OF BAC COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND
OR ANY OTHER GOVERNMENT AGENCY.
----------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER 20, 1994.
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TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION.................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 4
SUMMARY.................................................................. 6
Parties to the Merger.................................................. 6
The Special Meeting.................................................... 6
Required Shareholder Approval; Voting Agreements....................... 6
Effect of the Merger; Liquidations..................................... 7
Effective Time......................................................... 7
Exchange Ratio......................................................... 7
Appraisal Rights....................................................... 9
Recommendation of the Board of Directors of Arbor; Reasons for the
Merger................................................................ 9
Opinion of Arbor's Financial Advisor................................... 9
Interests of Certain Persons in the Merger............................. 10
Conditions; Regulatory Approvals....................................... 10
Termination of the Merger Agreement.................................... 10
No Solicitation........................................................ 11
Stock Exchange Listing................................................. 11
Anticipated Accounting Treatment....................................... 11
Federal Income Tax Consequences........................................ 11
Subsidiary Sale........................................................ 12
Stock Option Agreements; Voting Agreements............................. 12
MARKET PRICES AND DIVIDEND INFORMATION................................... 13
SUMMARY HISTORICAL FINANCIAL DATA........................................ 14
ARBOR PRO FORMA EQUIVALENT PER SHARE DATA................................ 17
THE SPECIAL MEETING...................................................... 18
General................................................................ 18
Date, Place and Time................................................... 18
Record Date............................................................ 18
Vote Required.......................................................... 18
Voting and Revocation of Proxies....................................... 19
Solicitation of Proxies................................................ 19
THE MERGER............................................................... 20
General................................................................ 20
Exchange Ratio......................................................... 20
Options; Restricted Stock.............................................. 26
Appraisal Rights....................................................... 26
Background of the Merger............................................... 29
Recommendation of the Board of Directors of Arbor; Reasons for the
Merger................................................................ 31
Opinion of Arbor's Financial Advisor................................... 33
Interests of Certain Persons in the Merger............................. 36
Effect on Employee Benefit Plans....................................... 37
Effective Time......................................................... 38
Conversion of Shares; Procedures for Exchange of Certificates; Divi-
dends................................................................. 38
Conditions to the Merger............................................... 39
Regulatory Approvals Required for the Merger........................... 41
Conduct of Arbor's Business Pending the Merger......................... 41
Termination............................................................ 43
Amendment and Waiver................................................... 44
Expenses............................................................... 44
</TABLE>
2
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Effect of the Merger; Liquidations..................................... 44
No Solicitation of Transactions........................................ 45
Resales of BAC Common Stock Received in the Merger..................... 45
Stock Exchange Listing................................................. 46
Anticipated Accounting Treatment....................................... 46
Federal Income Tax Consequences........................................ 46
Dividends.............................................................. 47
CERTAIN RELATED TRANSACTIONS............................................. 47
Subsidiary Sale........................................................ 47
Stock Option Agreements................................................ 47
Voting Agreements and Proxy Agreements................................. 49
Effect of Stock Option and Voting Agreements........................... 49
CAPITALIZATION OF BANKAMERICA CORPORATION................................ 50
DESCRIPTION OF BAC CAPITAL STOCK......................................... 51
General................................................................ 51
BAC Common Stock and Rights............................................ 51
Outstanding Preferred Stock............................................ 53
COMPARISON OF RIGHTS OF STOCKHOLDERS OF ARBOR AND BAC.................... 55
Stockholder Action by Written Consent.................................. 56
Amendment of Certificate............................................... 56
Special Meetings of Shareholders....................................... 56
Removal of Directors................................................... 56
Vacancies and Newly Created Directorships.............................. 57
Shareholder Nominations and Proposals for Business..................... 57
Rights Plan............................................................ 58
Voting Rights with Respect to Certain Extraordinary Corporate Transac-
tions................................................................. 58
Dissenters' Rights..................................................... 58
Dividends.............................................................. 59
Interested Stockholder Transactions.................................... 59
Liquidation Rights..................................................... 60
Transactions Involving Directors and Officers.......................... 60
Inspection of Shareholder Ledger....................................... 61
Certain Regulatory Considerations...................................... 61
OTHER MATTERS............................................................ 61
Certain Pending Litigation............................................. 61
BANKAMERICA CORPORATION.................................................. 62
INFORMATION ABOUT ARBOR AND ITS SUBSIDIARIES............................. 64
Principal and Other Shareholders of Arbor.............................. 64
Description of Business of Arbor....................................... 65
Management's Discussion and Analysis of Financial Condition and Results
of Operation.......................................................... 73
SHAREHOLDER PROPOSALS.................................................... 82
EXPERTS.................................................................. 83
LEGAL MATTERS............................................................ 83
FINANCIAL STATEMENTS OF ARBOR............................................ F-1
ANNEX A--AGREEMENT AND PLAN OF MERGER AND AMENDMENT TO AGREEMENT AND PLAN
OF MERGER............................................................... A-1
ANNEX B--FORM OF STOCK OPTION AGREEMENT.................................. B-1
ANNEX C--FORM OF VOTING AGREEMENT........................................ C-1
ANNEX D--OPINION OF GOLDMAN, SACHS & CO.................................. D-1
ANNEX E--SECTION 623 OF THE NEW YORK BUSINESS CORPORATION LAW............ E-1
</TABLE>
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NO PERSON IS AUTHORIZED BY BAC OR ARBOR TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION, OTHER THAN ANY INFORMATION OR REPRESENTATION CONTAINED IN
THIS PROXY STATEMENT/PROSPECTUS, IN CONNECTION WITH THE OFFERING AND THE
SOLICITATION MADE BY THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE
SOLICITATION OF A PROXY, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
PURCHASE ANY SECURITIES, IN ANY JURISDICTION IN WHICH A SOLICITATION OR
OFFERING MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF BAC OR ARBOR SINCE THE DATE
HEREOF.
AVAILABLE INFORMATION
Under the rules and regulations of the Securities and Exchange Commission
(the "SEC"), the solicitation of the shareholders of Arbor to approve the
Merger Agreement and the Merger constitutes an offering of BAC Common Stock to
be issued in conjunction with the Merger. Accordingly, BAC has filed with the
SEC a Registration Statement on Form S-4 (together with any amendments thereto,
the "Registration Statement") under the Securities Act with respect to such
offering. This Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits thereto, certain
portions of which have been omitted as permitted by the rules and regulations
of the SEC. Copies of the Registration Statement are available from the SEC,
upon payment of prescribed rates. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
BAC and Arbor are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
with the Exchange Act, proxy statements, reports and other information are
filed with the SEC by BAC and Arbor. Material filed by BAC and Arbor can be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
Regional Offices in Chicago (Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511) and in New York (Seven World
Trade Center, 13th Floor, New York, New York 10048), and copies of such
material can be obtained by mail from the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, with respect to BAC, such material can be inspected at the offices of
the New York, Pacific and Chicago Stock Exchanges, where BAC Common Stock is
listed and, with respect to Arbor, whose common stock is quoted on the Nasdaq
National Market, such material can be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
BAC INCORPORATES HEREIN BY REFERENCE (A) BAC'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1993, (B) BAC'S QUARTERLY REPORTS ON FORM 10-Q FOR
THE QUARTERS ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 1994, (C) BAC'S CURRENT
REPORTS ON FORM 8-K DATED JANUARY 19, JANUARY 27, MARCH 11, MARCH 21, MARCH 29,
APRIL 20, MAY 12, JUNE 30, JULY 18, AUGUST 11 (WHICH CONTAINS PRO FORMA
FINANCIAL AND OTHER DETAILED INFORMATION REGARDING CONTINENTAL BANK
CORPORATION), AUGUST 22, AUGUST 31 AND OCTOBER
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19, 1994, (D) THE DESCRIPTION OF BAC COMMON STOCK SET FORTH IN THE REGISTRATION
STATEMENT ON FORM 8-A DATED MAY 25, 1976 (AS AMENDED BY FORMS 8 DATED JUNE 14,
AUGUST 18 AND SEPTEMBER 10, 1976), AND (E) THE DESCRIPTION OF BAC'S PREFERRED
SHARE PURCHASE RIGHTS SET FORTH IN THE REGISTRATION STATEMENT ON FORM 8-A DATED
APRIL 13, 1988 (AS AMENDED BY FORM 8 DATED AUGUST 20, 1991). SEE "DESCRIPTION
OF BAC CAPITAL STOCK."
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE RELATING
TO BAC THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE
PROVIDED WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM
A PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST OF ANY
SUCH PERSON, A COPY OF ANY OR ALL DOCUMENTS INCORPORATED HEREIN BY REFERENCE
(EXCLUDING EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED THEREIN
BY REFERENCE). WITH RESPECT TO BAC'S DOCUMENTS, REQUESTS SHOULD BE DIRECTED TO
BANKAMERICA CORPORATION, CORPORATE SECRETARY'S OFFICE, P.O. BOX 37000, SAN
FRANCISCO, CALIFORNIA 94137 (TELEPHONE (415) 622-3530). IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE SPECIAL MEETING TO WHICH
THIS PROXY STATEMENT/PROSPECTUS RELATES, ANY SUCH REQUEST SHOULD BE MADE BY
JANUARY 17, 1995.
All reports and definitive proxy or information statements filed by BAC
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent
to the date of this Proxy Statement/Prospectus and prior to the termination of
the offering of the BAC Common Stock to which this Proxy Statement/Prospectus
relates, shall be deemed to be incorporated by reference into this Proxy
Statement/Prospectus from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated herein by
reference shall be deemed to be modified or superseded for purposes of this
Proxy Statement/Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS RELATING TO BAC
HAS BEEN SUPPLIED BY BAC, AND ALL INFORMATION RELATING TO ARBOR HAS BEEN
SUPPLIED BY ARBOR.
5
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/ Prospectus. As this summary is necessarily incomplete,
reference is made to, and this summary is qualified in its entirety by, the
more detailed information contained or incorporated by reference in this Proxy
Statement/Prospectus and the Annexes hereto. Shareholders of Arbor are urged to
read this Proxy Statement/Prospectus and the Annexes hereto in their entirety.
Certain capitalized terms which are used but not defined in this summary are
defined elsewhere in this Proxy Statement/Prospectus.
PARTIES TO THE MERGER
BAC. BAC, through its banking and other subsidiaries, provides banking and
financial services throughout the United States and in selected overseas
markets to customers, including individuals, corporations, governments and
other institutions. BAC is headquartered at 555 California Street, San
Francisco, California 94104, telephone (415) 622-3530. For more information
about BAC, reference is made to BAC's 1993 Form 10-K and BAC's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1994, both of which
are incorporated herein by reference. See "AVAILABLE INFORMATION,"
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "BANKAMERICA
CORPORATION."
Arbor. Arbor is a holding company that, through its wholly-owned
subsidiaries, Arbor National Mortgage, Inc. ("Arbor Mortgage") and Arbor
National Commercial Mortgage Corporation ("ANCMC"), engages in a full range of
mortgage banking activities, consisting of the origination, purchase, sale and
servicing of first mortgage loans secured by one to four family residences and
commercial properties (principally multi-family), and the purchase and sale of
servicing rights associated with such loans. The principal executive offices of
Arbor are located at 333 Earle Ovington Boulevard, Uniondale, New York 11553,
and its telephone number is (516) 357-7400. For more information about Arbor,
see "AVAILABLE INFORMATION," "INFORMATION ABOUT ARBOR AND ITS SUBSIDIARIES" and
"FINANCIAL STATEMENTS OF ARBOR."
THE SPECIAL MEETING
The Special Meeting will be held at the offices of Arbor at 333 Earle
Ovington Boulevard, Uniondale, New York on Tuesday, January 24, 1995 beginning
at 10:00 a.m. local time. The purpose of the Special Meeting is to consider and
vote upon (i) a proposal to approve and adopt the Merger Agreement and the
consummation of the transactions contemplated thereby, including the Merger,
pursuant to which, among other things, Arbor shareholders will receive a number
of shares of BAC Common Stock and cash in lieu of fractional shares in exchange
for each share of Arbor Common Stock pursuant to a formula set forth in the
Merger Agreement and (ii) such other matters as may properly be brought before
the Special Meeting or any adjournments or postponements thereof. See "THE
SPECIAL MEETING--General."
Only holders of record of Arbor Common Stock at the close of business on
December 9, 1994 (the "Record Date") will be entitled to notice of and to vote
at the Special Meeting. As of December 9, 1994 there were 6,725,333 shares of
Arbor Common Stock outstanding and entitled to vote. See "THE SPECIAL MEETING--
Record Date; Voting and Revocation of Proxies."
REQUIRED SHAREHOLDER APPROVAL; VOTING AGREEMENTS
The approval and adoption of the Merger Agreement by Arbor shareholders will
require the affirmative vote of the holders of 66 2/3% of the outstanding
shares of Arbor Common Stock entitled to vote thereon. As of the Record Date,
directors and executive officers of Arbor and their affiliates may be deemed to
be beneficial owners of approximately 4,363,938 shares, or approximately 65% of
the shares, of Arbor Common Stock outstanding and entitled to vote at the
Special Meeting. All of such persons have informed Arbor that
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they intend to vote for approval and adoption of the Merger Agreement. Included
in such 4,363,938 shares are an aggregate of 3,886,734 shares owned by Ivan
Kaufman, the Chairman of the Board and Chief Executive Officer of Arbor, and by
Anita Kaufman, a director of Arbor. BAC has entered into separate voting
agreements (the "Voting Agreements") and proxy agreements (the "Proxy
Agreements") with each of Ivan Kaufman and Anita Kaufman pursuant to which each
has agreed to vote or direct the vote of, and has executed an irrevocable proxy
in favor of BAC to vote, all shares of Arbor Common Stock owned by each of
them, respectively, as of the date of such agreements (representing in the
aggregate approximately 58% of the outstanding shares of Arbor Common Stock on
the Record Date) for approval and adoption of the Merger Agreement and against
any proposal relating to an alternative business combination involving Arbor.
Execution of the Voting Agreements and the Proxy Agreements was required to
induce BAC, BAFSB and AHAC to enter into the Merger Agreement and no
compensation was paid to either of the Kaufmans in consideration for their
entering into such agreements. See "THE SPECIAL MEETING--Record Date; Voting
and Revocation of Proxies" and "CERTAIN RELATED TRANSACTIONS--Voting Agreements
and Proxy Agreements."
Approval of the Merger by BAC stockholders is not required.
EFFECT OF THE MERGER; LIQUIDATIONS
Pursuant to the Merger Agreement, at the Effective Time (as defined below),
AHAC, a wholly owned subsidiary of BAFSB, will be merged with and into Arbor,
with Arbor (the "Surviving Corporation") surviving the Merger. Arbor will
become a wholly owned subsidiary of BAFSB and Arbor shareholders will become
stockholders of BAC. See "THE MERGER--General."
Immediately following the Merger, BAC and BAFSB plan to cause first Arbor and
then each of its subsidiaries other than ANCMC (which will be sold prior to the
Effective Time; see "--Subsidiary Sale" below) to adopt plans of liquidation
pursuant to which they will transfer all of their respective assets and
employees and certain of their respective liabilities to BAFSB (collectively,
excluding the Merger, the "Liquidations"), and thereafter Arbor and its
subsidiaries will each be dissolved. BAFSB will continue as a federal savings
bank and a wholly owned subsidiary of BAC. See "THE MERGER--Effect of the
Merger; Liquidations."
The Merger Agreement provides that the Liquidations shall be treated with the
Merger as part of the same transaction. Accordingly, the Merger Agreement
requires Arbor to use all reasonable efforts to obtain all consents and
approvals required under all agreements between Arbor and third parties,
including leases, mortgage servicing agreements and software licenses, for the
valid assignment of such agreements to BAFSB immediately after the Merger.
EFFECTIVE TIME
The Merger will become effective upon the filing of a certificate of merger
with the Department of State of the State of New York in accordance with
applicable law or on such later date as the certificate may specify (the
"Effective Time"). The certificate will be filed on the first day which is (i)
the last day of a month and (ii) at least two business days after satisfaction
or waiver of the latest to occur of the conditions to the Merger specified in
the Merger Agreement and the expiration of Arbor's termination right, if any,
relating to the Minimum Value (as defined below), unless another date is agreed
to by BAC and Arbor (such day is sometimes hereinafter referred to as the
"Closing Date"). See "THE MERGER--Effective Time."
EXCHANGE RATIO
The terms of the Merger Agreement summarized below and described in greater
detail elsewhere in this Proxy Statement/Prospectus, including the Exchange
Ratio (as defined below), were determined as a result of arms-length
negotiations between representatives of BAC and Arbor (and were amended in
connection
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with the settlement of the Actions--see "OTHER MATTERS--Certain Pending
Litigation") and generally are intended to provide that each share of Arbor
Common Stock will be converted into a number of shares of BAC Common Stock with
a nominal value (valued at the Average Closing Price) equal to $16.35 (the
"Estimated Per Share Merger Price"). However, pursuant to the Merger Agreement,
such nominal value may increase or decrease based upon (i) the actual Average
Closing Price (as defined below) and (ii) certain adjustments which may be made
to the Estimated Per Share Merger Price.
At the Effective Time, each issued and outstanding share of Arbor Common
Stock, other than treasury shares and Dissenting Shares (as defined below--see
"THE MERGER--Appraisal Rights"), will be converted into and exchangeable for
that number of shares of BAC Common Stock equal to the quotient obtained by
dividing (i) the Final Per Share Merger Price by (ii) the Average Closing
Price, rounded to the nearest ten-thousandth of a share (the "Exchange Ratio"),
provided, however, that except as described in the next sentence, for purposes
of calculating the Exchange Ratio, notwithstanding the actual amount of the
Average Closing Price, in no event will the Average Closing Price used in
making such calculation be less than $39.31 nor more than $53.19. If the
Average Closing Price is less than $37.00, Arbor may terminate the Merger
Agreement unless BAC increases the Exchange Ratio such that the shares of BAC
Common Stock issued in exchange for each share of Arbor Common Stock have a
nominal value (valued at the Average Closing Price) equal to the value per
share of Arbor Common Stock that would have been paid had the Average Closing
Price been $37.00. As used in the Merger Agreement, "Average Closing Price"
means the average of the daily closing sales prices of a share of BAC Common
Stock on the New York Stock Exchange ("NYSE") (as reported by The Wall Street
Journal or, if not reported thereby, by another authoritative source) for the
20 NYSE trading days ending on the fifth business day (the "Share Valuation
Date") prior to the date (the "Last Approval Date") on which the later of the
approval of the Federal Reserve Board and the approval of the Office of Thrift
Supervision, as required to consummate the transactions contemplated by the
Merger Agreement, is obtained. See "THE MERGER--Exchange Ratio."
If the Average Closing Price is less than $37.00 and, in response to an
election by Arbor to terminate the Merger Agreement, BAC elects to increase the
Exchange Ratio, the shares of BAC Common Stock to be issued in the Merger for
each share of Arbor Common Stock will have a nominal value (valued at the
Average Closing Price) equal to the product of (i) the quotient obtained by
dividing the Final Per Share Merger Price by $39.31 and (ii) $37.00 (such
product being referred to as the "Minimum Value"). See "--Termination of the
Merger Agreement" below. Assuming the Merger is approved by the holders of
Arbor Common Stock, the Arbor Board may elect not to terminate the Merger
Agreement and to consummate the Merger without resoliciting Arbor shareholders
if the Average Closing Price is less than $37.00, even though, as a result of
the application of the Exchange Ratio, the nominal value of the shares of BAC
Common Stock (valued at the Average Closing Price) issued in exchange for each
share of Arbor Common Stock would be less than the Minimum Value. In such a
situation, in considering whether to consummate the Merger without the
resolicitation of Arbor shareholders, the Arbor Board will take into account,
consistent with its fiduciary duties, all relevant facts and circumstances that
exist at such time, including, without limitation, its evaluation of the then-
existing economic conditions and trends, its evaluation of the respective
business, financial condition, results of operations and prospects of each of
Arbor and BAC, its evaluation of the overall condition of the mortgage banking
and commercial banking industries and the advice of its financial advisor and
legal counsel. Arbor shareholders will have no vote in the decision of the
Arbor Board to either terminate the Merger Agreement or consummate the Merger
in the event that the Average Closing Price is less than $37.00. See "--
Termination of the Merger Agreement" below. See "THE MERGER--Exchange Ratio"
and "--Conditions to the Merger."
The Estimated Per Share Merger Price is subject to upward or downward
adjustment (as so adjusted, the "Final Per Share Merger Price") pursuant to the
terms and conditions of the Merger Agreement to reflect, among other matters,
certain changes in the size and composition of Arbor's mortgage servicing
portfolio and in Arbor's adjusted shareholders' equity, in each case between
May 31, 1994 and the last day (the
8
<PAGE>
"Valuation Date") of the month preceding the month in which the Merger is
consummated. The Estimated Per Share Merger Price is also subject to (i)
downward adjustment if certain deficiencies in the files documenting Arbor's
mortgage servicing portfolio are unremedied prior to the tenth day preceding
the closing date of the Merger or if certain consents required in connection
with the Merger from the investors (other than federal secondary market or
government agencies) (the "Private Investors") for whom Arbor services mortgage
loans are not obtained prior to such day and (ii) upward adjustment to reflect
the after-tax proceeds realized by Arbor in the sale of ANCMC, which amount is
expected to be approximately $0.19 on a per share basis. Except for the
adjustment described in clause (ii) above, no upward or downward adjustment to
the Estimated Per Share Merger Price will be made unless the aggregate increase
or decrease exceeds certain designated thresholds. See "THE MERGER--Exchange
Ratio (Calculation of Final Per Share Merger Price)."
APPRAISAL RIGHTS
Shareholders of Arbor are entitled to exercise dissenters' rights of
appraisal in connection with, or as a result of, the Merger and to have their
shares of Arbor Common Stock appraised by a court and to receive payment of the
"fair value" of their shares as determined by the court. To exercise such
rights, a shareholder must not vote in favor of the Merger and must comply with
certain statutory procedures within time periods specified in the appraisal
provisions of New York law. The value determined in such appraisal could be
more than, the same as, or less than the value of the consideration to be
received under the Merger Agreement by holders of Arbor Common Stock who do not
dissent from the Merger. For a summary of the provisions of the New York
Business Corporation Law regarding appraisal rights, see "THE MERGER--Appraisal
Rights." A copy of the applicable New York statutory provisions concerning
dissenters' rights of appraisal is attached as Annex E hereto. Arbor
shareholders are urged to read such statute carefully and in its entirety.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ARBOR; REASONS FOR THE MERGER
THE ARBOR BOARD BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY ARE IN THE BEST INTERESTS
OF ARBOR AND ARE FAIR TO, AND IN THE BEST INTERESTS OF, ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF ARBOR VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
In the course of reaching its decision to enter into the Merger Agreement
with BAC, the Arbor Board consulted with its legal and financial advisors, as
well as the management of Arbor, and considered a number of factors, including,
without limitation, the following: Arbor's business, results of operations,
prospects and financial condition; the opinion of Goldman, Sachs & Co.
("Goldman Sachs") that the Exchange Ratio was fair to Arbor's shareholders; the
conditions to the Merger and the risks to Arbor if the Merger were not
consummated; certain information concerning BAC's financial condition, results
of operations and prospects; the terms of the Merger Agreement; and the
alternative strategic courses available to Arbor. For an analysis of the
foregoing factors, see "THE MERGER--Background of the Merger" and "--
Recommendation of the Board of Directors of Arbor; Reasons for the Merger."
OPINION OF ARBOR'S FINANCIAL ADVISOR
Goldman Sachs has delivered its written opinion to the Arbor Board that, as
of the date of this Proxy Statement/Prospectus, the Exchange Ratio is fair to
Arbor shareholders. The full text of the written opinion of Goldman Sachs,
dated the date of this Proxy Statement/Prospectus, which sets forth the
assumptions made, matters considered and limitations on the review undertaken
in connection with such opinion, is attached as Annex D to this Proxy
Statement/Prospectus and is incorporated herein by reference. Arbor
shareholders are urged to, and should, read the Goldman Sachs opinion in its
entirety. The Goldman Sachs opinion is directed only to the Exchange Ratio and
does not constitute a recommendation to any Arbor shareholder as to how such
shareholder should vote at the Special Meeting. See "THE MERGER--Opinion of
Arbor's Financial Advisor."
9
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Two executive officers of Arbor who are parties to existing employment
agreements, Ivan Kaufman and Scott Brown, are entitled to certain rights and
benefits under those agreements (including lump sum payments and benefits
continuation) if their employment is terminated in connection with the
consummation of the Merger and prior to the respective terms of such
agreements. However, Mr. Kaufman has agreed to waive his rights under his
employment agreement in order to induce BAC to enter into the Merger Agreement,
and has entered into an employment agreement with BAC for a brief transition
period following the Merger. For a detailed description of the foregoing, see
"THE MERGER--Interests of Certain Persons in the Merger."
Following an auction process for the sale of ANCMC conducted by Goldman
Sachs, Ivan Kaufman was selected by Arbor as the winning bidder in the auction.
Arbor intends to consummate the sale of ANCMC to Mr. Kaufman prior to the
Effective Time. For a more complete discussion of the sale of ANCMC, see
"CERTAIN RELATED TRANSACTIONS -- Subsidiary Sale."
Pursuant to the Merger Agreement, BAC has, subject to certain limitations,
agreed to cause the Surviving Corporation to indemnify, defend and hold
harmless the present and former directors, officers, employees and agents of
Arbor and its subsidiaries against certain claims and the expenses and
liabilities resulting from actions or omissions prior to the Effective Time.
For a detailed description of the foregoing, see "THE MERGER--Interests of
Certain Persons in the Merger."
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to various conditions, including, among
others, receipt of the shareholder approval solicited hereby, consummation of
the sale of ANCMC prior to the Effective Time, receipt of the necessary bank
regulatory approvals for the Merger and the Liquidations, the receipt of
consents to the Merger and related transactions by federal secondary market
agencies and, with respect to a designated percentage of Arbor's mortgage
servicing portfolio, by Private Investors, receipt of a letter from BAC's
independent accountants advising that the transactions contemplated by the
Merger Agreement may be properly accounted for as a pooling of interests,
receipt of opinions of counsel regarding certain federal income tax
consequences of the Merger and satisfaction of other customary closing
conditions. See "THE MERGER--Conditions to the Merger."
The Merger is subject to the prior approval of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") pursuant to Section 4 of
the Bank Holding Company Act of 1956, as amended (the "BHCA"), and the prior
approval of the Office of Thrift Supervision ("OTS") pursuant to the Home
Owners' Loan Act of 1933. BAC has submitted applications seeking approval of
the Merger to the Federal Reserve Board and the OTS. Certain aspects of the
Merger may require notifications to, or approvals from, certain other federal
authorities and banking or other regulatory authorities in certain states. On
December 15, 1994 the Federal Reserve Board notified BAC of its approval of the
Merger. There can be no assurance that the OTS or any other regulatory
authority will approve or take other required action with respect to the Merger
or, if obtained, that there will not be delays in the processing of the
relevant applications. See "THE MERGER--Conditions to the Merger." There can
also be no assurance that any such approval will not contain a condition or
requirement which causes such approval to fail to satisfy the conditions to
consummation of the Merger. There can also be no assurance that the U.S.
Department of Justice will not challenge the Merger on antitrust grounds, or if
such a challenge is made, as to the result thereof. See "THE MERGER--Regulatory
Approvals Required for the Merger."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time by the mutual consent of BAC and Arbor and by either of them individually
under certain specified circumstances, including if the Merger has not been
consummated by June 30, 1995. In addition, if the Average Closing Price is less
than
10
<PAGE>
$37.00, Arbor may at its option terminate the Merger Agreement unless BAC
agrees to increase the Exchange Ratio such that the shares of BAC Common Stock
issued in exchange for each share of Arbor Common Stock have a nominal value
(valued at the Average Closing Price) equal to the value per share of Arbor
Common Stock that would have been paid had the Average Closing Price been
$37.00. Arbor may also at its option terminate the Merger Agreement if certain
expenses and other items related to the Stockholder Proceedings (as defined
below--see "THE MERGER--Termination") exceed a $1.5 million threshold unless
BAC agrees that any costs in excess of such threshold will not reduce the Final
Per Share Merger Price. See "THE MERGER--Termination."
NO SOLICITATION
Arbor has agreed in the Merger Agreement that neither it nor any of its
subsidiaries will solicit, initiate or encourage inquiries or proposals with
respect to, or, subject to the fiduciary duties of its Board of Directors (as
advised by its counsel), participate in any negotiations or discussions
concerning, any acquisition or purchase of all or a substantial portion of its
assets, or of a substantial equity interest in it or any of its subsidiaries,
or any merger or other business combination with it or any of its subsidiaries,
other than as contemplated by the Merger Agreement, except that Arbor may
communicate information about any such proposal to its shareholders if and to
the extent that the fiduciary duties of its Board of Directors require it to do
so (as advised by its counsel). See "THE MERGER--No Solicitation of
Transactions."
STOCK EXCHANGE LISTING
The BAC Common Stock is listed on the NYSE and the Pacific, Chicago, London
and Tokyo Stock Exchanges. BAC has agreed to use its reasonable efforts to
cause the shares of BAC Common Stock to be issued in the Merger to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time. The obligations of the parties to consummate the Merger are
subject to approval for listing by the NYSE of such shares. BAC also intends to
list such shares on the Pacific, Chicago, London and Tokyo Stock Exchanges. See
"THE MERGER--Conditions to the Merger" and "--Stock Exchange Listing."
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to BAC's obligation to
consummate the Merger that BAC receives a letter from its independent
accountants, dated as of the Effective Time, advising that the transactions
contemplated by the Merger Agreement may be properly accounted for as a pooling
of interests under Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB No. 16"), if the Merger is closed and consummated in
accordance with the Merger Agreement, provided, however, that this condition
shall be deemed to have been waived by BAC if the accountants' inability to
issue such letter is due to actions taken by BAC or its affiliates, other than
those actions required or contemplated under the Merger Agreement. See "THE
MERGER--Conditions to the Merger" and "--Anticipated Accounting Treatment."
FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger and Liquidations will be treated as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). Consummation of the Merger is
conditioned upon receipt by Arbor of an opinion of Skadden, Arps, Slate,
Meagher & Flom (the "Skadden Opinion") and receipt by BAC of an opinion of
Morrison & Foerster (the "Morrison & Foerster Opinion"), each dated as of the
Effective Time. The Skadden Opinion and the Morrison & Foerster Opinion will be
substantially to the effect that, on the basis of facts (which are consistent
with the state of facts existing at the Effective Time), representations and
assumptions set forth or referred to in such opinions, the Merger and
Liquidations will be treated for Federal income tax purposes as a
reorganization or part of one or more
11
<PAGE>
reorganizations within the meaning of Section 368(a) of the Code and,
accordingly, (i) no gain or loss will be recognized by the shareholders of
Arbor who exchange their Arbor Common Stock solely for BAC Common Stock
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in BAC Common Stock); (ii) the tax basis of the BAC
Common Stock received by Arbor shareholders who exchange all of their Arbor
Common Stock solely for BAC Common Stock in the Merger will be the same as the
tax basis of the Arbor Common Stock surrendered in exchange therefor (reduced
by any amount allocable to a fractional share interest for which cash is
received); and (iii) the holding period of the BAC Common Stock in the hands of
an Arbor shareholder will include the holding period of the Arbor Common Stock
exchanged therefor, provided such Arbor Common Stock is held as a capital asset
at the Effective Time. See "THE MERGER--Federal Income Tax Consequences."
SUBSIDIARY SALE
Pursuant to the Merger Agreement, Arbor agreed to initiate an auction of
ANCMC, its commercial mortgage subsidiary, and to consummate such sale for a
fixed price in cash prior to the consummation of the Merger. Arbor engaged
Goldman Sachs for the purpose of conducting the auction. Following the
completion of the auction process, Ivan Kaufman was selected by Arbor as the
winning bidder in the auction. The after-tax proceeds of the sale of ANCMC will
be applied to increase the Final Per Share Merger Price, which increase is
expected to be approximately $0.19. Consummation of the sale of ANCMC prior to
the Effective Time is a condition to the respective obligations of BAC, BAFSB
and AHAC to consummate the Merger. See "CERTAIN RELATED TRANSACTIONS--
Subsidiary Sale."
STOCK OPTION AGREEMENTS; VOTING AGREEMENTS
In order to induce BAC, BAFSB and AHAC to enter into the Merger Agreement,
Anita Kaufman and Ivan Kaufman each entered into a Voting Agreement and a Stock
Option Agreement with BAC. Pursuant to the Stock Option Agreements, Ivan and
Anita Kaufman each granted BAC an option (the "Stock Options") to purchase up
to 3,311,354 and 574,980 shares, respectively, of Arbor Common Stock,
representing approximately 58% of the issued and outstanding shares of such
common stock as of the Record Date, at an exercise price of $16.35, subject to
the terms and conditions set forth therein. The Stock Options may only be
exercised upon the occurrence of certain events set forth in the Stock Option
Agreements, none of which has occurred as of the date of this Proxy
Statement/Prospectus. Pursuant to the Voting Agreements, Ivan and Anita Kaufman
have agreed to vote, and have granted to BAC irrevocable proxies to vote, an
aggregate of 3,886,334 shares of Arbor Common Stock for approval of the Merger
Agreement and against any proposal with respect to an alternative business
combination. Forms of the Stock Option Agreements and the Voting Agreements are
attached as Annex B and Annex C, respectively, to this Proxy
Statement/Prospectus. See "CERTAIN RELATED TRANSACTIONS--Stock Option
Agreements;--Voting Agreements and Proxy Agreements."
The Stock Option Agreements and the Voting Agreements are intended to
increase the likelihood that the Merger will be consummated in accordance with
the terms of the Merger Agreement. Consequently, certain aspects of such
agreements may have the effect of discouraging persons who might now or prior
to the Effective Time be interested in acquiring all or a significant interest
in Arbor from considering or proposing such an acquisition, even if such
persons were prepared to pay a higher price per share for Arbor Common Stock
than the price per share provided for in the Merger Agreement.
12
<PAGE>
MARKET PRICES AND DIVIDEND INFORMATION
BAC Common Stock is listed for trading on the New York, Chicago, Pacific,
London and Tokyo Stock Exchanges under the symbol "BAC." Arbor Common Stock is
traded in the over-the-counter market and is quoted on the Nasdaq National
Market (the "NASDAQ/NM") under the symbol "ARBH."
The following tables set forth, for the fiscal quarters indicated, the high
and low sales prices per share for BAC Common Stock as reported on the NYSE
Composite Transactions Tape as reported in the Western Edition of The Wall
Street Journal, the high and low sales prices per share of Arbor Common Stock
as reported by the NASDAQ/NM, and the quarterly cash dividends per share paid
by BAC and Arbor, respectively, on such shares. The information with respect to
NASDAQ/NM quotations was obtained from the National Association of Securities
Dealers, Inc. and reflects interdealer prices, without retail markup, markdown
or commissions and may not represent actual transactions. Prior to August 7,
1992, the date of Arbor's initial public offering of the Arbor Common Stock,
there was no public market for Arbor Common Stock. Arbor's fiscal year ends on
the last day of February while BAC's fiscal year corresponds to the calendar
year.
BAC
----------------
<TABLE>
<CAPTION>
FISCAL 1992 HIGH LOW DIVIDENDS
- ----------- ------ ------ ---------
<S> <C> <C> <C>
1st Quarter............................................. $46.25 $35.38 $0.30
2nd Quarter............................................. 49.75 38.13 0.30
3rd Quarter............................................. 46.75 40.25 0.30
4th Quarter............................................. 48.25 40.88 0.30
<CAPTION>
FISCAL 1993
- -----------
<S> <C> <C> <C>
1st Quarter............................................. $55.50 $43.00 $0.35
2nd Quarter............................................. 53.88 40.50 0.35
3rd Quarter............................................. 49.13 43.38 0.35
4th Quarter............................................. 47.38 40.38 0.35
<CAPTION>
FISCAL 1994
- -----------
<S> <C> <C> <C>
1st Quarter............................................. $48.88 $38.75 $0.40
2nd Quarter............................................. 50.25 38.38 0.40
3rd Quarter............................................. 49.63 44.00 0.40
4th Quarter (through December 9, 1994).................. 46.25 38.63 0.40
</TABLE>
ARBOR
----------------
<TABLE>
<CAPTION>
FISCAL 1993 HIGH LOW DIVIDENDS
- ----------- ------ ------ ---------
<S> <C> <C> <C>
1st Quarter............................................. -- -- --
2nd Quarter............................................. $ 9.25 $ 8.13 --
3rd Quarter............................................. 10.25 8.00 --
4th Quarter............................................. 15.50 8.75 --
<CAPTION>
FISCAL 1994
- -----------
<S> <C> <C> <C>
1st Quarter............................................. $18.88 $13.50 --
2nd Quarter............................................. 17.00 13.25 --
3rd Quarter............................................. 20.75 16.38 --
4th Quarter............................................. 19.25 15.25 --
<CAPTION>
FISCAL 1995
- -----------
<S> <C> <C> <C>
1st Quarter............................................. $20.25 $10.69 --
2nd Quarter............................................. 20.50 16.50 --
3rd Quarter............................................. 21.00 13.63 --
4th Quarter (through December 9, 1994).................. 14.50 14.31 --
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
MARKET VALUE PER SHARE(1): BAC ARBOR EQUIVALENT(2)
- -------------------------- ------ ------ -------------
<S> <C> <C> <C>
April 15, 1994..................................... $42.38 $13.75 $16.35
September 23, 1994................................. $46.00 $20.00 $16.35
December 9, 1994................................... $39.75 $14.38 $16.35
</TABLE>
- --------
(1) The market values for BAC Common Stock and Arbor Common Stock represent the
last reported sale prices per share on (i) April 15, 1994, the last
business day preceding the date on which a newspaper or other publication
first contained an article speculating that Arbor was for sale, (ii)
September 23, 1994, the last business day preceding public announcement of
the Merger and (iii) December 9, 1994, the last practicable date prior to
the mailing of this Proxy Statement/Prospectus.
(2) The equivalent price per share of Arbor Common Stock at each specified date
was determined by multiplying the last reported sale price of a share of
BAC Common Stock on such date by the Exchange Ratio. For purposes of
determining the Exchange Ratio, the Final Per Share Merger Price was
assumed to be $16.35 and the Average Closing Price was assumed to be equal
to the last reported sale price of BAC Common Stock at each specified date
(resulting in an Exchange Ratio of 0.3858 on April 15, 1994, 0.3554 on
September 23, 1994 and 0.4113 on December 9, 1994). The actual Exchange
Ratio will be determined based on the Average Closing Price and will also
depend upon the actual Final Per Share Merger Price.
Arbor shareholders are advised to obtain current market quotations for Arbor
Common Stock and BAC Common Stock. The market price of BAC Common Stock will
fluctuate between the date of this Proxy Statement/Prospectus and the Share
Valuation Date, and between the Share Valuation Date and the Effective Time.
Although the Merger Agreement provides that the Exchange Ratio will adjust to
absorb fluctuations in the market price of BAC Common Stock within certain
ranges prior to the Share Valuation Date, fluctuations in such market price
prior to the Effective Time could result in an increase or decrease in the
market price as of the Effective Time of the shares of BAC Common Stock to be
received by Arbor shareholders in the Merger. No assurance can be given
concerning the market price of BAC Common Stock before or after the Effective
Time.
SUMMARY HISTORICAL FINANCIAL DATA
The following tables set forth consolidated historical summary financial data
for the periods and as of the dates indicated for BAC and its consolidated
subsidiaries and for Arbor and its consolidated subsidiaries. BAC's book value
per share, cash dividends per share and income per share for the fiscal year
ended December 31, 1993 and any interim period since December 31, 1993 and the
date of this Proxy Statement/Prospectus would not be materially affected if
such financial statements were presented on a pro forma basis to reflect the
acquisition of Arbor using the pooling of interests method of accounting in
accordance with APB No. 16 and, hence, no such pro forma presentation is made
in this Proxy Statement/Prospectus.
The following information should be read in conjunction with and is qualified
in its entirety by the consolidated financial statements and accompanying notes
of BAC and Arbor included elsewhere in this Proxy Statement/Prospectus or in
the documents described under "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE." Interim results are not necessarily indicative of the results to be
expected for the year ending December 31, 1994 (in the case of BAC) or February
28, 1995 (in the case of Arbor).
14
<PAGE>
BAC CONSOLIDATED HISTORICAL SUMMARY OF OPERATIONS DATA
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
1994(A)(B) 1993(A) 1993(A) 1992(A) 1991 1990 1989
---------- -------- -------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF
OPERATIONS
Interest income......... $ 8,905 $ 8,751 $ 11,627 $ 11,613 $ 9,860 $ 10,249 $ 9,559
Interest expense........ 3,375 3,175 4,186 4,895 5,388 6,097 5,536
-------- -------- -------- -------- -------- -------- -------
Net interest income..... 5,530 5,576 7,441 6,718 4,472 4,152 4,023
Provision for credit
losses................. 360 653 803 1,009 805 905 770
-------- -------- -------- -------- -------- -------- -------
Net interest income af-
ter provision for
credit losses.......... 5,170 4,923 6,638 5,709 3,667 3,247 3,253
Noninterest income...... 3,096 3,154 4,273 3,649 2,408 2,074 1,830
Noninterest expense..... 5,543 5,509 7,483 6,676 4,202 3,922 3,735
-------- -------- -------- -------- -------- -------- -------
Income before income
taxes and extraordinary
credit................. 2,723 2,568 3,428 2,682 1,873 1,399 1,348
Provision for income
taxes.................. 1,138 1,110 1,474 1,190 749 522 528
-------- -------- -------- -------- -------- -------- -------
Income before extraordi-
nary credit............ 1,585 1,458 1,954 1,492 1,124 877 820
Extraordinary credit
resulting from
previously unrecognized
tax benefits........... -- -- -- -- -- 238 283
-------- -------- -------- -------- -------- -------- -------
Net income.............. $ 1,585 $ 1,458 $ 1,954 $ 1,492(c) $ 1,124 $ 1,115 $ 1,103
======== ======== ======== ======== ======== ======== =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
Income before extraordi-
nary credit............ $ 3.95 $ 3.58 $ 4.79 $ 4.24(c) $ 4.81 $ 3.85 $ 3.79
Extraordinary credit
resulting from
previously unrecognized
tax benefits........... -- -- -- -- -- 1.10 1.40
-------- -------- -------- -------- -------- -------- -------
Net income.............. $ 3.95 $ 3.58 $ 4.79 $ 4.24(c) $ 4.81 $ 4.95 $ 5.19
======== ======== ======== ======== ======== ======== =======
EARNINGS PER COMMON
SHARE--ASSUMING FULL
DILUTION
Income before extraordi-
nary credit............ $ 3.93 $ 3.56 $ 4.76 $ 4.21(c) $ 4.78 $ 3.84 $ 3.74
Extraordinary credit
resulting from
previously unrecognized
tax benefits........... -- -- -- -- -- 1.10 1.37
-------- -------- -------- -------- -------- -------- -------
Net income.............. $ 3.93 $ 3.56 $ 4.76 $ 4.21(c) $ 4.78 $ 4.94 $ 5.11
======== ======== ======== ======== ======== ======== =======
STOCK DATA
Dividends declared per
common share........... $ 1.20 $ 1.05 $ 1.40 $ 1.30 $ 1.20 $ 1.00 $ 0.60
Book value per common
share(d)............... 42.02 38.69 39.58 35.88 30.78 27.21 23.31
Number of common shares
outstanding (d) (in
thousands)............. 370,206 357,343 357,912 348,603 218,880 213,364 210,319
CONSOLIDATED BALANCE
SHEET DATA(D)
Loans (net of unearned
income and allowance
for credit losses)..... $135,066 $122,261 $123,048 $122,690 $ 84,214 $ 82,903 $72,530
Total assets............ 214,230 187,109 186,933 180,646 115,509 110,728 98,764
Deposits................ 152,666 140,969 141,618 137,883 94,067 92,321 81,186
Long-term debt.......... 14,504 14,008 13,508 14,326 3,101 2,648 2,699
Subordinated capital
notes.................. 605 933 607 2,069 1,277 1,283 1,376
Total stockholders'
equity................. 18,930 16,805 17,144 15,488 8,063 6,419 5,534
RETURN ON AVERAGE
Total assets............ 1.07% 1.05% 1.05% 0.90% 0.99% 1.04% 1.14%
Total stockholders'
equity................. 12.78 12.11 12.00 11.84 15.78 18.68 23.10
AVERAGE TOTAL
STOCKHOLDERS' EQUITY TO
AVERAGE TOTAL ASSETS... 8.72% 8.71% 8.79% 7.60% 6.25% 5.55% 4.91%
</TABLE>
- --------
(a) This financial information reflects the effects of the merger with Security
Pacific Corporation ("SPC") subsequent to its consummation on April 22,
1992.
(b) This financial information reflects the effects of the merger with
Continental Bank Corporation ("Continental") subsequent to its consummation
on August 31, 1994.
(c) Earnings and earnings per share were affected by the net effect of
nonrecurring items, including the accrual of merger related expenses
resulting from the merger with SPC and a net gain on the sale of the
payroll processing business of Bank of America National Trust and Savings
Association. If the nonrecurring items had been excluded from the results
of operations, net income would have been $1,682 million for the year ended
December 31, 1992. In addition, earnings per common and common equivalent
share would have been $4.85 and earnings per common share, assuming full
dilution, would have been $4.81 for the year ended December 31, 1992.
(d) As of period end.
15
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED AUGUST 31, FISCAL YEAR ENDED FEBRUARY 28 OR 29,
---------------------- ---------------------------------------------------
1994 1993 1994 1993 1992(1) 1991(2) 1990
---------- ---------- ---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Revenues
Mortgage originations,
net................... $ 9,771 $ 25,332 $ 49,929 $ 38,438 $ 25,592 $ 8,569 $ 7,185
Interest earned
(expense), net........ 4,167 4,511 10,772 6,819 1,591 (153) 873
Servicing released
premiums and bulk
sale of servicing
rights, net........... 8,595 3,485 13,386 8,024 8,000 6,022 2,616
Servicing revenue,
net................... 8,008 5,956 13,577 6,809 3,438 2,684 1,578
---------- ---------- ---------- ---------- ---------- -------- --------
Total revenues....... 30,541 39,284 87,664 60,090 38,621 17,122 12,252
---------- ---------- ---------- ---------- ---------- -------- --------
Expenses
Sales commissions and
other fees............ 5,171 7,781 15,618 11,968 8,662 3,406 2,293
Employee compensation
and benefits.......... 15,513 12,211 26,415 18,816 13,713 6,665 4,900
Selling and
administrative........ 14,483 10,898 24,435 15,589 9,918 4,355 4,264
---------- ---------- ---------- ---------- ---------- -------- --------
35,167 30,890 66,468 46,373 32,293 14,426 11,457
---------- ---------- ---------- ---------- ---------- -------- --------
(Loss) income before
income taxes........... (4,626) 8,394 21,196 13,717 6,328 2,696 795
(Benefit) provision for
income taxes(3)........ (1,924) 3,526 9,220 5,961 2,554 1,088 321
---------- ---------- ---------- ---------- ---------- -------- --------
Net (loss) income....... $ (2,702) $ 4,868 $ 11,976 $ 7,756 $ 3,774 $ 1,608 $ 474
========== ========== ========== ========== ========== ======== ========
Net (loss) income per
share(4)............... $ (0.40) $ 0.72 $ 1.77 $ 1.30
========== ========== ========== ==========
CONSOLIDATED OPERATING
DATA:(5)
Mortgage loans
originated............ $1,344,339 $2,104,387 $4,235,045 $2,522,115 $1,419,153 $583,852 $511,287
Loan servicing
portfolio............. $5,268,945 $4,196,612 $4,927,268 $2,670,941 $1,169,721 $585,230 $496,440
<CAPTION>
SIX MONTHS
ENDED AUGUST 31, FISCAL YEAR ENDED FEBRUARY 28 OR 29,
---------------------- ---------------------------------------------------
1994 1993 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Mortgage loans held
for sale, net......... $ 266,667 $ 343,634 $ 236,389 $ 131,008 $ 147,710 $ 40,350 $ 44,977
Total assets........... 329,778 385,550 294,065 164,444 173,035 62,092 69,533
Borrowings............. 272,712 333,988 231,031 124,788 152,794 52,117 62,826
Total shareholders'
equity................ 37,136 32,422 39,551 27,486 10,797 5,416 2,747
</TABLE>
- --------
(1) In December 1990, Arbor acquired certain retail branch offices from GE
Capital Mortgage Services, Inc. Fiscal 1992 reflects the first full year of
operations for these branches. See "INFORMATION ABOUT ARBOR AND ITS
SUBSIDIARIES--Description of Business of Arbor (Retail Branch Network)" and
Note 1 to the Consolidated Financial Statements of Arbor.
(2) In Fiscal 1991, Arbor revised the estimated useful lives of certain assets.
The effect of this change was to reduce depreciation expense and increase
pretax income by $152.
(3) Includes pro forma income taxes of $0 (Fiscal 1994), $345 (Fiscal 1993),
$1,607 (Fiscal 1992), $1,062 (Fiscal 1991) and $321 (Fiscal 1990) as if
Arbor were taxed as a "C" corporation. See Notes 1 and 8 to the
Consolidated Financial Statements of Arbor.
(4) Per share data for periods prior to Fiscal 1993 is not applicable due to
Arbor's initial public offering in August 1992.
(5) The Consolidated Operating Data for all periods are unaudited.
16
<PAGE>
ARBOR PRO FORMA EQUIVALENT PER SHARE DATA
(UNAUDITED)
The following table sets forth for Arbor Common Stock certain historical per
share financial information of Arbor for the six months ended August 31, 1994
and for the years ended February 28, 1994 and 1993. Information with respect to
the book value per common share of Arbor at August 31, 1994 and at February 28,
1994 and 1993 also is presented.
In addition, the following table sets forth certain pro forma equivalent per
share financial information of Arbor for the six months ended June 30, 1994 and
the years ended December 31, 1993, 1992 and 1991, or as of the end of such
periods. The pro forma combined amounts included in the table below have been
computed based on BAC historical amounts for the periods indicated as such
amounts would not be materially affected if presented on a pro forma basis to
reflect the acquisition of Arbor using the pooling of interests method of
accounting. Consequently, the pro forma information presented below reflects
BAC's fiscal year, which corresponds to the calendar year, while Arbor's fiscal
year ends on the last day of February.
The following information should be read in conjunction with and is qualified
in its entirety by the consolidated financial statements and accompanying notes
of BAC included in the documents described under "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and the consolidated financial statements and
accompanying notes of Arbor set forth elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED -----------------------------------
8/31/94 OR 2/28/94 OR 2/28/93 OR
6/30/94(A) 12/31/93(B) 12/31/92(C) 12/31/91(D)
---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (loss) per common
share:
Historical(e).......... $(0.40) $1.77 $1.30 (d)
Pro forma
equivalent(f)......... 1.07 1.97 1.74 $1.98
Dividends per common
share:
Historical............. -- -- -- (d)
Pro forma
equivalent(f)......... 0.33 0.58 0.53 0.49
Book value per common
share at period end:
Historical............. 5.52 5.91 4.12 (d)
Pro forma
equivalent(f)......... 16.74 16.28 14.76 12.66
</TABLE>
- --------
(a) Represents historical Arbor financial information for its most recent
interim period--the six months ended August 31, 1994, and pro forma
equivalent financial information for the most recent six month year-to-date
interim period reported by BAC and its consolidated subsidiaries--the six
months ended June 30, 1994.
(b) Represents historical Arbor financial information for its most recent
fiscal year--the year ended February 28, 1994, and pro forma equivalent
financial information for the most recent fiscal year of BAC and its
consolidated subsidiaries--the year ended December 31, 1993.
(c) Represents historical Arbor financial information for its fiscal year ended
February 28, 1993, and pro forma equivalent financial information for the
fiscal year of BAC and its consolidated subsidiaries ended December 31,
1992.
(d) Represents pro forma equivalent financial information for the fiscal year
of BAC and its consolidated subsidiaries ended December 31, 1991. The
initial public offering of Arbor Common Stock occurred on August 7, 1992.
No historical income or book value information is presented for Arbor for
its fiscal year ended February 29, 1992 since during such fiscal year there
was no public market for Arbor Common Stock.
(e) Based on income from continuing operations of Arbor.
(f) Amounts are calculated by multiplying the BAC historical amounts by an
assumed Exchange Ratio of 0.4113. For purposes of determining the Exchange
Ratio, the Final Per Share Merger Price was assumed to be $16.35 and the
Average Closing Price was assumed to be equal to $39.75, the last reported
sale price of BAC Common Stock on December 9, 1994. The actual Exchange
Ratio will be determined based on the Average Closing Price and will also
depend upon the actual Final Per Share Merger Price.
17
<PAGE>
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to shareholders of Arbor
in connection with the solicitation of proxies by the Board of Directors of
Arbor (the "Arbor Board") for use at the Special Meeting and at any
adjournments or postponements thereof. At the Special Meeting, the shareholders
of Arbor will be asked (i) to approve and adopt the Merger Agreement and the
consummation of the transactions contemplated thereby, which are more fully
described herein (the "Merger Proposal") and (ii) to act upon such other
matters as may properly be brought before the Special Meeting and at any
adjournments or postponements thereof. A copy of the Merger Agreement is
attached as Annex A hereto. The Merger Agreement provides, among other things,
that AHAC will merge with and into Arbor and, except as described below, each
share of Arbor Common Stock will be converted into and exchangeable for that
number of shares of BAC Common Stock as shall be equal to the Exchange Ratio.
This Proxy Statement/Prospectus constitutes a prospectus of BAC with respect
to the shares of BAC Common Stock to be issued in connection with the Merger.
The information in this Proxy Statement/Prospectus concerning BAC and Arbor has
been furnished by each of such entities, respectively.
THE ARBOR BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, AND RECOMMENDS
THAT ARBOR SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
This Proxy Statement/Prospectus is first being mailed to shareholders of
Arbor on or about December 21, 1994.
DATE, PLACE AND TIME
The Special Meeting will be held at 10:00 a.m. local time on Tuesday, January
24, 1995, at the offices of Arbor at 333 Earle Ovington Boulevard, Uniondale,
New York.
RECORD DATE
The Arbor Board has fixed December 9, 1994 as the Record Date for the
determination of those Arbor shareholders entitled to notice of and to vote at
the Special Meeting. Only holders of record of Arbor Common Stock at the close
of business on the Record Date will be entitled to notice of and to vote at the
Special Meeting. As of the Record Date, there were 6,725,333 shares of Arbor
Common Stock outstanding, entitled to vote and held by approximately 92 holders
of record.
VOTE REQUIRED
Each holder of record of shares of Arbor Common Stock on the Record Date is
entitled to cast one vote per share on (i) the Merger Proposal and (ii) any
other matter properly submitted for the vote of Arbor shareholders at the
Special Meeting or at any adjournments or postponements thereof. The presence,
either in person or by properly executed proxy, of the holders of a majority of
the outstanding shares of Arbor Common Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting. Shares of
Arbor Common Stock which are present in person or by proxy but abstain from
voting at the Special Meeting will be included for purposes of determining a
quorum at such meeting.
The approval and adoption of the Merger Proposal by Arbor shareholders will
require the affirmative vote of the holders of 66 2/3% of the outstanding
shares of Arbor Common Stock entitled to vote thereon. Under applicable New
York law, in determining whether the proposal has received the requisite number
of affirmative votes, abstentions and broker non-votes will be counted and will
have the same effect as a vote against the proposal. As described in "THE
MERGER--Conditions to the Merger," such approval is a condition to consummation
of the Merger.
18
<PAGE>
As of the Record Date, directors and executive officers of Arbor and their
affiliates may be deemed to be beneficial owners of approximately 4,363,938
shares, or approximately 65% of the shares, of Arbor Common Stock outstanding
and entitled to vote at the Special Meeting. Such persons have informed Arbor
that they intend to vote for approval and adoption of the Merger Proposal.
Included in such 4,363,938 shares are an aggregate of 3,886,734 shares owned by
Ivan Kaufman, the Chairman of the Board and Chief Executive Officer of Arbor,
and Anita Kaufman, a director of Arbor. BAC has entered into the Voting
Agreements and the Proxy Agreements with Ivan Kaufman and Anita Kaufman
pursuant to which each has agreed to vote or direct the vote of, and has
executed an irrevocable proxy in favor of BAC to vote, all shares of Arbor
Common Stock owned by each of them, respectively, as of the date of such
agreements (representing in the aggregate approximately 58% of the outstanding
shares of Arbor Common Stock as of the Record Date) for approval and adoption
of the Merger Agreement and the transactions contemplated thereby and against
any proposal relating to an alternative business combination involving Arbor.
Execution of the Voting Agreements was required to induce BAC, BAFSB and AHAC
to enter into the Merger Agreement and no compensation was paid to either of
the Kaufmans in consideration for entering into the Voting Agreements. See
"CERTAIN RELATED TRANSACTIONS--Voting Agreements and Proxy Agreements."
VOTING AND REVOCATION OF PROXIES
Shares of Arbor Common Stock which are entitled to be voted and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting and not revoked will be voted at such meeting, and
any adjournments or postponements thereof, in accordance with the instructions
indicated on such proxies. If no instructions are indicated, such proxies will
be voted for (i) approval and adoption of the Merger Proposal, and (ii)
otherwise in the discretion of the proxy holders as to any other matter which
may come before the Special Meeting or any adjournment or postponement thereof,
including, among other things, a motion to adjourn or postpone the Special
Meeting to another time and/or place, for the purpose of soliciting additional
proxies or otherwise; provided, however, that no proxy which is voted against
the Merger Proposal will be voted in favor of any such adjournment or
postponement.
If any other matters are properly presented at the Special Meeting for
consideration, the persons named in the form of proxy enclosed herewith and
acting thereunder will have discretion to vote on such matters in accordance
with their best judgment; provided however, that such discretionary authority
will only be exercised to the extent possible under applicable federal and
state securities and corporation laws. As of the date of this Proxy
Statement/Prospectus, Arbor does not have any knowledge of any matters to be
presented at the Special Meeting other than the matter set forth above under
"--General."
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Arbor, at or before the taking of the vote at the Special
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of Arbor before the taking of the vote at the
Special Meeting, or (iii) attending the Special Meeting and voting in person
(although attendance at the meeting will not in and of itself constitute a
revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to Arbor National Holdings, Inc., 333
Earle Ovington Boulevard, Uniondale, New York 11553, Attention: Walter K. Horn
or hand delivered to Mr. Horn at such address at or before the taking of the
vote at the Special Meeting.
SOLICITATION OF PROXIES
Arbor will bear all expenses of this solicitation, except that the cost of
preparing and mailing this Proxy Statement/Prospectus will be borne equally by
Arbor and BAC. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Arbor in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation. In
19
<PAGE>
addition, Arbor will make arrangements with brokerage firms and other
custodians, nominees and fiduciaries to send proxy materials to their
principals and will reimburse such parties for their expenses in doing so.
ARBOR SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
THE MERGER
The following information concerning the Merger, insofar as it relates to
matters contained in the Merger Agreement, is qualified in its entirety by
reference to the Merger Agreement (including the amendment thereto) which is
incorporated herein by reference and attached hereto as Annex A. Arbor
shareholders are urged to read carefully the Merger Agreement.
GENERAL
Pursuant to the terms of the Merger Agreement, subject to the satisfaction or
waiver (where permissible) of certain conditions, including, among other
things, consummation of the sale of ANCMC prior to the Effective Time in
accordance with the Merger Agreement, the receipt of all necessary regulatory
approvals, the expiration of all waiting periods in respect thereof, the
receipt of consents to the Merger and related transactions by federal secondary
market agencies and, with respect to a designated percentage of Arbor's
mortgage servicing portfolio, by Private Investors, and the approval of the
Merger Agreement by the shareholders of Arbor, AHAC will be merged with and
into Arbor. Arbor will be the surviving company in the Merger. As a result of
the Merger, the separate corporate existence of AHAC will cease, the
shareholders of Arbor will become stockholders of BAC, and Arbor will become a
wholly owned subsidiary of BAFSB.
Immediately following the consummation of the Merger, BAC and BAFSB plan to
cause first Arbor and then each of its subsidiaries (i) to adopt plans of
liquidation (each of which shall be a plan of complete liquidation and
dissolution for purposes of Sections 332 and 337 of the Code) and (ii) to
transfer all of its assets and employees and certain of its liabilities to
BAFSB pursuant to such plans of liquidation and, within the time provided by
Section 332 of the Code, to file articles of dissolution with the Department of
State of the State of New York (the "Department") in accordance with Article X
of the New York Business Corporation Law (the "NYBCL").
Pursuant to the Merger Agreement, Arbor agreed to initiate an auction of
ANCMC, its commercial mortgage subsidiary, and to consummate the sale of such
subsidiary (the "Subsidiary Sale") prior to the consummation of the Merger.
Arbor engaged Goldman Sachs for the purpose of conducting the auction.
Following the completion of the auction process, Ivan Kaufman was selected by
Arbor as the winning bidder in the auction. See "CERTAIN RELATED TRANSACTIONS--
Subsidiary Sale" below.
EXCHANGE RATIO
GENERAL. The formula for determining the Exchange Ratio was arrived at
through arms-length negotiations between Arbor and BAC and generally is
intended to provide Arbor shareholders with BAC Common Stock with a nominal
value (valued at the Average Closing Price (as defined below)) equal to $16.35
(the "Estimated Per Share Merger Price") for each share of Arbor Common Stock.
However, pursuant to the Merger Agreement, as more fully described below, such
nominal value may increase or decrease based upon (i) the actual Average
Closing Price and (ii) certain adjustments which may be made to the Estimated
Per Share Merger Price.
EXCHANGE RATIO CALCULATION. At the Effective Time, each issued and
outstanding share of Arbor Common Stock (other than shares held by Arbor in its
treasury and Dissenting Shares (as defined below)) will be converted into and
exchangeable for the number of shares (the "Exchange Ratio") of BAC Common
20
<PAGE>
Stock determined by dividing the Final Per Share Merger Price (as defined
below) by the Average Closing Price (as defined below), rounded to the nearest
ten-thousandth of a share, provided, however, that except as described in the
next sentence, for purposes of calculating the Exchange Ratio, notwithstanding
the actual amount of the Average Closing Price, in no event will the Average
Closing Price used in making such calculation be less than $39.31 nor more than
$53.19. If the Average Closing Price is less than $37.00, Arbor may terminate
the Merger Agreement unless BAC increases the Exchange Ratio such that the
shares of BAC Common Stock issued in exchange for each share of Arbor Common
Stock have a nominal value (valued at the Average Closing Price) equal to the
per share value of the consideration that would have been paid had the Average
Closing Price been $37.00. The Average Closing Price is defined as the average
closing price per share of the BAC Common Stock on the New York Stock Exchange
(the "NYSE") for the 20 consecutive NYSE trading days (the "Valuation Period")
ending on the fifth NYSE trading day (the "Share Valuation Date") prior to the
date (the "Last Approval Date") on which the later of the required regulatory
approvals from the Federal Reserve Board and the OTS with respect to the
transactions contemplated by the Merger Agreement is obtained.
If the Average Closing Price is less than $37.00 and, in response to an
election by Arbor to terminate the Merger Agreement, BAC elects to increase the
Exchange Ratio, the shares of BAC Common Stock to be issued in the Merger in
exchange for each share of Arbor Common Stock will have a nominal value (valued
at the Average Closing Price) equal to the product of (i) the quotient obtained
by dividing the Final Per Share Merger Price by $39.31 and (ii) $37.00 (such
product being referred to as the "Minimum Value"). See "--Termination" below.
Assuming the Merger is approved by the holders of Arbor Common Stock, the Arbor
Board may elect not to terminate the Merger Agreement and to consummate the
Merger without resoliciting Arbor shareholders if the Average Closing Price is
less than $37.00, even though, as a result of the application of the Exchange
Ratio, the nominal value of the shares of BAC Common Stock (valued at the
Average Closing Price) issued in exchange for each share of Arbor Common Stock
would be less than the Minimum Value. In such a situation, in considering
whether to consummate the Merger without the resolicitation of Arbor
shareholders, the Arbor Board will take into account, consistent with its
fiduciary duties, all relevant facts and circumstances that exist at such time,
including, without limitation, its evaluation of the then-existing economic
conditions and trends, its evaluation of the respective business, financial
condition, results of operations and prospects of each of Arbor and BAC, its
evaluation of the overall condition of the mortgage banking and commercial
banking industries and the advice of its financial advisor and legal counsel.
Arbor shareholders will have no vote in the decision of the Arbor Board to
either terminate the Merger Agreement or consummate the Merger in the event
that the Average Closing Price is less than $37.00. See "--Termination" below.
Under the terms of the Merger Agreement, the Exchange Ratio will be
determined by reference to the Average Closing Price of BAC Common Stock as of
the Share Valuation Date. Depending upon the date upon which the OTS and the
Federal Reserve Board act upon the relevant regulatory applications, it is
possible that the Share Valuation Date will occur 30 days or more prior to the
Effective Time. The market price of BAC Common Stock will fluctuate between the
date of this Proxy Statement/Prospectus and the Share Valuation Date, and
between the Share Valuation Date and the Effective Time. Although the Merger
Agreement provides that the Exchange Ratio will adjust to absorb fluctuations
in the market price of the shares of BAC Common Stock within certain ranges
prior to the Share Valuation Date, fluctuations in such market price prior to
the Effective Time could result in an increase or decrease in the market price
as of the Effective Time of the shares of BAC Common Stock to be received by
Arbor shareholders in the Merger. In addition, as more fully explained below,
the number of shares of BAC Common Stock issued in the Merger for each share of
Arbor Common Stock may vary based upon the Final Per Share Merger Price. For
further information concerning the market prices of Arbor Common Stock and BAC
Common Stock, see "MARKET PRICES AND DIVIDEND INFORMATION." No assurance can be
given concerning the market price of BAC Common Stock before or after the
Effective Time.
No fractional shares of BAC Common Stock will be issued in connection with
the Merger. In lieu of the issuance of fractional shares, BAC will make a cash
payment to each Arbor shareholder who otherwise would
21
<PAGE>
be entitled to receive a fractional share equal to the product of (i) the
fractional interest which an Arbor shareholder would otherwise receive and (ii)
the Average Closing Price.
Upon consummation of the Merger, any shares of Arbor Common Stock that were
owned by Arbor as treasury stock will be cancelled and retired and no payment
will be made with respect thereto.
The Merger Agreement provides that, if BAC effects a stock dividend, split-up
or combination, or other distribution in BAC Common Stock, an appropriate
adjustment to the Exchange Ratio and certain other affected provisions of the
Merger Agreement will be made.
CALCULATION OF FINAL PER SHARE MERGER PRICE. The Final Per Share Merger Price
will be calculated pursuant to a complex formula set forth in the Merger
Agreement, the material provisions of which are described herein.
The Final Per Share Merger Price is calculated by first determining the
"Final Merger Price." The "Final Merger Price" is equal to the sum of (i) the
Estimated Merger Price (as defined below), (ii) the Purchase Price Adjustment
(as defined below) and (iii) the cash price received by Arbor in the sale of
the capital stock of ANCMC less 43% of any gain recognized with respect to such
sale for federal and state income tax purposes (the "Net ANCMC Amount"), which
amount is expected to be approximately $0.19 per share of Arbor Common Stock
outstanding. The Estimated Merger Price is equal to $117,940,758, which amount
represents a purchase price per share of Arbor Common Stock (on a fully diluted
basis as of September 23, 1994) of $16.35. The "Final Per Share Merger Price"
is the amount obtained by dividing (x) the Final Merger Price by (y) the sum of
the total number of shares of Arbor Common Stock outstanding (excluding
treasury shares) immediately prior to the Effective Time and the total number
of shares of Arbor Common Stock which, immediately prior to the Effective Time
and prior to the cancellation of Arbor Options pursuant to the Merger
Agreement, are issuable upon the exercise of Arbor Options outstanding
immediately prior to the Effective Time.
The Purchase Price Adjustment is determined as follows:
(a) Portfolio Adjustment. The Estimated Merger Price will be (i)
increased by an amount equal to the Servicing Value (as defined below) of
all mortgage loans included in Arbor's mortgage servicing portfolio as of
the last day (the "Valuation Date") of the month preceding the month in
which the consummation of the Merger occurs (the "Valuation Date
Portfolio") which were not included in Arbor's mortgage servicing portfolio
on May 31, 1994 (the "Base Portfolio"); (ii) decreased by an amount equal
to the reduction between May 31, 1994 and the Valuation Date in the
Servicing Value of the mortgage loans which were included in the Base
Portfolio; (iii) increased or decreased, as the case may be, by an amount
equal to the decrease or increase, respectively, between May 31, 1994 and
the Valuation Date in the Servicing Value of all Excluded Loans (i.e., all
loans that on either May 31, 1994 or the Valuation Date, as the case may
be, were 90 days or more delinquent or otherwise in default or in
bankruptcy, in foreclosure or in litigation); (iv) decreased by an amount
equal to the Servicing Value of any "REO" included in the Valuation Date
Portfolio; (v) increased or decreased, as the case may be, by an amount
equal to the decrease or increase, respectively, between May 31, 1994 and
the Valuation Date, in the Servicing Value of all Investment Loans (as
defined in the Merger Agreement); and (vi) decreased by an amount equal to
the aggregate Servicing Value of all mortgage loans included in the
Valuation Date Portfolio subserviced, serviced or master serviced by Arbor
or any of its subsidiaries for certain affiliated parties; provided,
however that in the event that the net effect of the adjustment to the
Estimated Merger Price pursuant to sections (i)-(vi) of this paragraph (a)
would be a decrease to the Estimated Merger Price of less than $2.0 million
(without taking into account the impact of the last sentence of paragraph
(e) below), then notwithstanding anything to the contrary in this paragraph
(a), no adjustment to the Estimated Merger Price will be made pursuant to
this paragraph (a).
(b) Adjusted Equity Adjustment. The Estimated Merger Price shall be (i)
increased by the amount, if any, by which the Adjusted Equity (as defined
below) exceeds $28,804,547 (which amount represents Arbor's adjusted equity
as of May 31, 1994) or (ii) decreased by the amount, if any, by which
$28,804,547
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exceeds the Adjusted Equity; provided, however, that for purposes of this
paragraph (b), the balance of Adjusted Equity will be adjusted as required
by paragraph (e) below, if applicable.
(c) Adjustment for Net Gain or Loss on Pipeline Loans and Investor
Commitments. The Estimated Merger Price shall be increased or decreased, as
the case may be, by an amount equal to the amount by which the aggregate
net after-tax gain or loss on (i) Pipeline Loans (as defined in the Merger
Agreement) that are Rate-Locked Loans (as defined in the Merger Agreement),
(ii) Investor Commitments (as defined in the Merger Agreement), (iii)
Pipeline Loans that are not Rate-Locked Loans, and (iv) mortgage loans
which, as of the Valuation Date, were Warehouse Loans (as defined in the
Merger Agreement), is greater or less than $1,313,556. For purposes of the
Merger Agreement, the gain or loss on each such Rate-Locked Loan, Investor
Commitment, Pipeline Loan that is not a Rate-Locked Loan, and mortgage loan
which, as of the Valuation Date, was a Warehouse Loan, will be determined
as of the Valuation Date in accordance with the procedures set forth in an
exhibit to the Merger Agreement.
(d) Post-Valuation Date Adjustment. The Estimated Merger Price shall be
decreased by the amount of the Post Valuation Date Adjustment, which is
defined as the sum of the Trailer Document Deduction (as defined below),
the Non-Consenting Deduction (as defined below) and certain other potential
accruals for expenses incurred by Arbor following the Valuation Date.
(e) Net Adjustment. The adjustments to the Estimated Merger Price
described in paragraphs (a) through (d) above will be netted, such that
there will be determined an aggregate increase or decrease in the Estimated
Merger Price. Such aggregate increase or decrease is referred to herein as
the "Purchase Price Adjustment." Notwithstanding anything to the contrary
contained in the Merger Agreement, in the event (i) the aggregate increase
to the Estimated Merger Price described in paragraphs (a) through (d) above
is equal to or less than $1.0 million or (ii) the aggregate decrease to the
Estimated Merger Price described in paragraphs (a) through (d) above is
equal to or less than $2.0 million, the Purchase Price Adjustment will be
equal to zero (0). On the day which is the tenth day immediately preceding
the Closing Date, the parties will meet and recalculate the Adjusted Equity
and Litigation Expenses (as defined below) as follows: (I) the amount used
in calculating Litigation Expenses pursuant to clause (i) of the definition
thereof will equal the amount (calculated on an after-tax basis) equal to
the sum of (A) all attorneys' fees and expenses incurred by or on behalf of
Arbor on or prior to such date related to the Actions (as defined below--
see "OTHER MATTERS--Certain Pending Litigation"), (B) the estimated amount
of all such attorneys' fees and expenses which BAC, Arbor, BAFSB and AHAC
agree are expected to be incurred by or on the behalf of Arbor in
connection with the Actions after such date and on or prior to the Closing
Date, and (C) all attorneys' fees and expenses of the plaintiffs in the
Actions payable by Arbor pursuant to the terms of the memorandum of
understanding relating to the Actions, in each case whether or not
previously paid by Arbor (the "Expense Amount"), (II) the amount used in
calculating Litigation Expenses pursuant to clause (ii) of the definition
thereof will equal the total amount (calculated on an after-tax basis)
actually received by Arbor from its insurance companies under any
directors' and officers' insurance policies in respect of such attorneys'
fees and expenses on or prior to such date (the "Insurance Proceeds"),
(III) the Adjusted Equity will be decreased by the amount by which the
Expense Amount exceeds the Valuation Date Expense Amount (as defined below)
and (IV) the Adjusted Equity will be increased by the amount by which the
Insurance Proceeds exceeds the Initial Insurance Proceeds (as defined
below). If in calculating the Purchase Price Adjustment using the
recalculated Adjusted Equity and Litigation Expenses, (Y) the $2.0 million
threshold set forth in the third sentence of this paragraph (e) is exceeded
or the $1.0 million threshold in the third sentence of this paragraph (e)
is not exceeded, as the case may be, and (Z) the applicable threshold would
not have been exceeded or failed to have been exceeded but for the
reduction to the recalculated Adjusted Equity caused by the recalculated
Litigation Expenses, then the members of the Arbor Board named as
defendants in the Actions (the "Director Defendants") may, or if none of
the other Director Defendants choose to do so then Ivan Kaufman shall, make
a reimbursement payment to Arbor, at least five days prior to the Closing
Date, in an aggregate amount of one-half the recalculated Litigation
Expenses, and, upon receipt by Arbor of such payment, the balance of
Adjusted Equity used to calculate the amount of any adjustment pursuant to
paragraph (b) above and this paragraph (e) will be increased by the full
amount of the recalculated Litigation Expenses. In the event that, during
the period following the tenth
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day prior to the Closing Date, Arbor or BAFSB actually receives payments
which would have been Insurance Proceeds had they been received on or prior
to such tenth day, Arbor shall promptly repay to the applicable director or
directors, on a pro rata basis, the proportionate amount of the
reimbursement payments made by such director or directors pursuant to
clause (Z) of the preceding sentence, as if such insurance payments had
been received by Arbor on or prior to such tenth day.
The following is a description of the meaning of certain defined terms used
above in describing the calculation of the Purchase Price Adjustment:
Adjusted Equity--The amount equal to the consolidated stockholders'
equity of Arbor as of the Valuation Date as determined in accordance with
generally accepted accounting principles ("GAAP") consistent with the
principles used in connection with the preparation of Arbor's May 31, 1994
balance sheet; provided, however, that in determining the Adjusted Equity,
the following adjustments shall be made to consolidated stockholders'
equity: (i) all purchased mortgage servicing rights and capitalized excess
servicing fees will be deducted; (ii) all net deferred income tax
liabilities associated with purchased mortgage servicing rights and
capitalized excess servicing fees will be added; (iii) any net after-tax
gain resulting from the sale of ANCMC will not be reflected; (iv) any net
after-tax gain or loss resulting from mandatory changes in GAAP adopted by
Arbor after May 31, 1994 will not be reflected; (v) all deferred financing
costs (other than prepaid interest on commercial paper), all deferred
acquisition costs and all capitalized costs (exclusive of equipment)
related to Arbor's "laptop project" will be deducted (all of which
deductions will be on an after-tax basis); (vi) stockholders' equity will
be increased by $741,000 if Arbor has expensed on its books and records all
foreclosure and escrow advances made in connection with Warehouse Loans and
Investment Loans which are 180 days or more past due and REO; (vii) an
amount equal to 57% of the amount of all costs, expenses and write-offs
incurred by Arbor after the date of the Merger Agreement in reconciling and
accruing shortages with respect to accounts of Arbor and its subsidiaries
as of the first day of the month preceding the month in which the Valuation
Date occurs and all similar costs, expenses and write-offs incurred by
Arbor after July 31, 1994 and prior to the date of the Merger Agreement, up
to an aggregate of $300,000, will be added back to stockholders' equity;
(viii) the amount of all additions to the allowance for possible losses
recognized by Arbor after May 31, 1994 and on or prior to the Valuation
Date, up to an aggregate of $1.0 million, will be disregarded (including
any related tax benefit) (ix) the net after-tax amounts by which the
carrying values of any Warehouse Loans, Pipeline Loans and Investor
Commitments have been reduced as required by FASB 65 by Arbor on the
Valuation Date Balance Sheet will be added to such stockholders' equity;
(x) all proceeds received by Arbor upon the exercise of Arbor Options
between May 31, 1994 and the Valuation Date will be subtracted from such
stockholders' equity; and (xi) if BAC has delivered a notice to Arbor with
respect to Excess Litigation Accruals (as defined below; see "--
Termination"), then the amount of all such Excess Litigation Accruals will
be added back to Adjusted Equity.
Investor--Any person who owns a mortgage loan, or the servicing rights or
master servicing rights to a mortgage loan, subserviced, serviced or master
serviced by Arbor or any of its subsidiaries pursuant to a mortgage
servicing agreement.
Litigation Expenses--The amount equal to the difference, if any, between
(i) the total amount (calculated on an after-tax basis) of all attorneys'
fees and expenses incurred by or on behalf of Arbor and paid by Arbor on or
prior to the Valuation Date or accrued by Arbor on the Valuation Date
Balance Sheet related to the Actions (collectively, the "Valuation Date
Expense Amount") and (ii) the total amount (calculated on an after-tax
basis) of payments received by Arbor from its insurance companies under any
directors' and officers' insurance policies in respect of such attorneys'
fees and expenses on or prior to the Valuation Date (the "Initial Insurance
Proceeds").
Non-Consenting Deduction--The aggregate amount equal to the aggregate
Servicing Value as of the Valuation Date of all Non-Consenting Mortgage
Loans in the portfolio of mortgage loans which are subserviced, serviced or
master serviced by Arbor or one of its subsidiaries for Investors other
than federal governmental or secondary market agencies (the "Private
Servicing Portfolio"); provided that, with respect to that portion of the
Non-Consenting Mortgage Loans in the Private Servicing Portfolio that does
not exceed 25% of the aggregate unpaid principal balance of the Private
Servicing Portfolio (with such mortgage loans selected on a proportional
basis so as to reflect the average Servicing Value
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for all Non-Consenting Mortgage Loans in the Private Servicing Portfolio)
(the "First Tranche"), the Non-Consenting Deduction otherwise applicable to
all No Response Loans (as defined below) included in the First Tranche
shall be reduced by 50%.
Non-Consenting Mortgage Loan--Each mortgage loan in Arbor's mortgage
servicing portfolio with respect to which an Investor may, solely as a
result of the consummation of the transactions contemplated by the Merger
Agreement, assert a material breach under, or terminate its relationship
with Arbor or any of its subsidiaries with respect to such mortgage loan
pursuant to the terms of, the related mortgage servicing agreement, unless
such Investor shall have expressly consented in writing at least ten days
prior to the Closing Date to the transactions contemplated by the Merger
Agreement or otherwise waived in writing its right to so terminate such
relationship.
No Response Loans--All Non-Consenting Mortgage Loans with respect to
which the relevant Investor has not expressly refused to consent to the
transactions contemplated by the Merger Agreement or refused to waive its
rights to terminate the related mortgage servicing agreement or indicated
an intent to terminate such mortgage servicing agreement.
Servicing Value--The value attributable to any particular mortgage loan
in Arbor's mortgage servicing portfolio for purposes of calculating the
Purchase Price Adjustment determined as follows:
Any GNMA Adjustable Rate
Mortgage Loan: An amount equal to four (4) multiplied by the
actual annual servicing fee for the mortgage loan
multiplied by the unpaid principal balance of the
mortgage loan.
Any Other Adjustable
Rate Mortgage Loan: An amount equal to three (3) multiplied by the
actual annual servicing fee for the mortgage loan
(such fee, in the case of one-year mortgage loans
where the servicing fee increases after one year,
to be the annual servicing fee as of the
thirteenth month after the date of the closing of
the mortgage loan) multiplied by the unpaid
principal balance of the mortgage loan.
Any Fixed Rate Mortgage Loan
(including Balloon Loans): An amount equal to 5.1 multiplied by the actual
annual servicing fee for the mortgage loan
multiplied by the unpaid principal balance of the
mortgage loan.
Trailer Document Deduction--The amount equal to the sum of (I) the
aggregate of the Servicing Value as of the Valuation Date of each mortgage
loan which, as of the date ten days prior to the Closing Date, is missing
one or more Trailer Documents which are not Permitted Trailer Documents (as
defined in the Merger Agreement) or as to which one or more Trailer
Documents contain defects which would allow the Investor to require Arbor
or any of its subsidiaries to repurchase or guaranty the mortgage loan,
provided that with respect to that portion of such mortgage loans (with
such mortgage loans selected on a proportional basis so as to reflect the
average Servicing Value for all mortgage loans which, as of such date, are
missing one or more Trailer Documents which are not Permitted Trailer
Documents or as to which one or more Trailer Documents contain such
defects) whose aggregate principal balance does not exceed $100,000,000 in
the aggregate, the amount of such deduction shall be reduced by 50%, plus
(II) the following amount for each such missing Trailer Document that is
not a Permitted Trailer Document and each such defective Trailer Document
(determined as of the date ten days prior to the Closing Date): (i) title
policy endorsements--$15 per endorsement; (ii) settlement statements and
HUD-1 forms--$15; (iii) title policies--$30; (iv) intervening assignments
(original or certified copy)--$22.50; (v) mortgage, deed of trust or other
security instrument--$22.50; (vi) corporate assignments--$22.50; (vii)
private mortgage insurance certificate (or other verification of insurance
acceptable to BAC)--$10.00; (viii) FHA mortgage insurance certificates and
VA loan guaranty certificates--$35.00; and (ix) promissory notes--$10.00.
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Trailer Documents. The following types of documents with respect to a
mortgage loan sold to any Investor, the absence of which, or the existence
of any defect in which, would allow the Investor to require Arbor or any
subsidiary of Arbor to repurchase or guaranty the mortgage loan: (i) any
title policy endorsements; (ii) any settlement statement or HUD-1 form;
(iii) any title policy; (iv) any intervening assignments; (v) any mortgage,
deed of trust or other security instrument; (vi) any corporate assignments;
(vii) any private mortgage insurance certificate; (viii) any promissory
note; and (ix) any FHA mortgage insurance certificate or VA loan guaranty
certificate.
OPTIONS; RESTRICTED STOCK
At the Effective Time, each option to purchase Arbor Common Stock (each an
"Arbor Option") issued pursuant to the Arbor 1992 Stock Incentive Plan (the
"Stock Incentive Plan") or the Arbor Stock Option Plan for Non-Employee
Directors (collectively the "Arbor Option Plans") which is outstanding at the
Effective Time, whether or not vested as of the date of the Merger Agreement,
will terminate effective as of the Effective Time and each holder of an Arbor
Option will be entitled to receive from BAFSB, for each share of Arbor Common
Stock subject to such Arbor Option, shares of BAC Common Stock in cancellation
thereof with a nominal value equal to the excess, if any, of the Final Per
Share Merger Price over the per share exercise price of such Arbor Option. The
nominal value of the BAC Common Stock will be calculated based on the Average
Closing Price. Documents previously evidencing the Arbor Options will be
exchanged for certificates representing whole shares of BAC Common Stock and
cash in lieu of fractional shares issued in consideration therefor upon the
surrender of such documents in accordance with the Merger Agreement, without
any interest thereon. As of the Record Date, there were outstanding options to
purchase 472,545 shares of Arbor Common Stock at an average price of $10.45 per
share.
In addition, all restrictions applicable to any outstanding shares of
restricted stock granted pursuant to the Stock Incentive Plan ("Restricted
Stock") will lapse and such Restricted Stock will become fully vested as of the
date of shareholder approval of this Agreement. Upon consummation of the
Merger, each share of Restricted Stock will be converted into shares of BAC
Common Stock and cash in lieu of fractional shares in the manner contemplated
by the Merger Agreement. As of the Record Date, there were 9,585 shares of
Restricted Stock outstanding.
APPRAISAL RIGHTS
Pursuant to Section 910 of the NYBCL, holders of Arbor Common Stock who
follow the procedures set forth in Section 623 of the NYBCL (the "Appraisal
Statute") will be entitled to have their Arbor Common Stock appraised by a New
York court and to receive payment of the "fair value" of such shares as
determined by the court. The Appraisal Statute is reprinted in its entirety as
Annex E to this Proxy Statement/Prospectus. The following discussion is not a
complete statement of the law pertaining to appraisal rights under the NYBCL
and is qualified in its entirety by the full text of the Appraisal Statute. Any
Arbor shareholder who wishes to exercise such appraisal rights or who wishes to
preserve his right to do so, should review the following discussion and Annex E
carefully because failure to timely and properly comply with the procedures
specified will result in the loss of dissenters' appraisal rights under the
NYBCL.
All references in the Appraisal Statute and in this summary to a
"shareholder" are to the record holder of the Arbor Common Stock on the Record
Date as to which appraisal rights are asserted. A person having a beneficial
interest in shares of Arbor Common Stock that are held of record in the name of
another person such as a broker or nominee must act promptly to cause the
record holder to follow the steps summarized below properly and in a timely
manner to perfect whatever appraisal rights the beneficial owner may have.
A shareholder wishing to exercise his appraisal rights (i) must deliver to
Arbor, prior to or at the Special Meeting but before the vote is taken on the
Merger, a written objection to the Merger (the "Notice of Election"), which
shall include a notice of his election to dissent, his name and residence
address, the number of shares of Arbor Common Stock as to which he dissents and
a demand for payment of the fair value of his shares (which Notice of Election
must be in addition to and separate from any proxy or vote against the Merger)
and (ii) must not vote in favor of the Merger. BECAUSE A PROXY WHICH DOES NOT
CONTAIN VOTING INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED FOR APPROVAL
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OF THE MERGER, A SHAREHOLDER WHO VOTES BY PROXY AND WHO WISHES TO EXERCISE HIS
APPRAISAL RIGHTS MUST (A) VOTE AGAINST THE APPROVAL AND ADOPTION OF THE MERGER
OR (B) ABSTAIN FROM VOTING ON THE MERGER. Neither a vote against the Merger, in
person or by proxy, nor a proxy directing such vote for an abstention will in
and of itself constitute a written objection to the Merger satisfying the
requirements of the Appraisal Statute (shareholders who timely file such
written objection and who do not vote their Arbor Common Stock in favor of the
Merger are referred to hereinafter as "Dissenting Shareholders" and the shares
as to which such Dissenting Shareholder dissents are hereinafter referred to as
"Dissenting Shares").
A shareholder may not dissent as to less than all of the shares as to which
such shareholder has a right to dissent held by such shareholder of record or
which he owns beneficially. A nominee or fiduciary may not dissent on behalf of
any beneficial owner as to less than all of the shares held of record by such
nominee or fiduciary on behalf of such owner and as to which such nominee or
fiduciary has a right to dissent. All Notices of Election should be addressed
to Arbor National Holdings, Inc., 333 Earle Ovington Boulevard, Uniondale, New
York 11553, Attention: Walter K. Horn, Secretary.
Within 10 days after the date on which shareholders approve the Merger, Arbor
must send written notice by registered mail to each Dissenting Shareholder that
the Merger has been approved and adopted. At the Effective Time, each
Dissenting Shareholder will cease to have any of the rights of a shareholder of
Arbor except the right to be paid the fair value of his shares and any of the
other rights under the Appraisal Statute.
A Notice of Election may be withdrawn by a Dissenting Shareholder prior to
his acceptance in writing of an offer made by Arbor to pay for the value of
such Dissenting Shares, except that a Notice of Election may not be withdrawn
later than 60 days following the Effective Time unless Arbor shall fail to make
a timely offer to pay for the value of the Dissenting Shares, in which case
such Dissenting Shareholder shall have 60 days from the date such offer was
made to withdraw his election. In either event, after such time, a Notice of
Election may not be withdrawn without the written consent of Arbor. In order to
be effective, withdrawal of a Notice of Election must be accompanied by a
return to Arbor of any advance payment made to the Dissenting Shareholder by
Arbor as described below.
If any shareholder who demands appraisal of his Arbor Common Stock under the
Appraisal Statute effectively withdraws or loses such right to appraisal after
the Effective Time, such shareholder shall have all rights as a shareholder as
of the Effective Time reinstated.
At the time of filing the Notice of Election, or within one month thereafter,
Dissenting Shareholders must submit the certificates representing their Arbor
Common Stock to Arbor or its transfer agent, and Arbor or the transfer agent,
as the case may be, shall note conspicuously thereon that a Notice of Election
has been filed and shall return the certificates to the Dissenting
Shareholders. Any Dissenting Shareholder who fails to submit his or her
certificates for such notation shall, at the option of Arbor exercised by
written notice to such Dissenting Shareholder within 45 days of the date of
filing of such Notice of Election, lose his or her appraisal rights unless a
court, for good cause shown, shall otherwise direct.
Within 15 days after the expiration of the period within which shareholders
may file their Notice of Election, or within 15 days after the Merger is
consummated, whichever is later (but in no case later than 90 days after the
shareholders' vote adopting the Merger), the Surviving Corporation or any
successor thereof must make a written offer to pay for the Arbor Common Stock
held by the Dissenting Shareholders at a price which the Surviving Corporation
or any successor thereof considers to be their fair value. This offer will be
accompanied by a statement setting forth the aggregate number of shares of
Arbor Common Stock with respect to which Notices of Election to dissent have
been received and the aggregate number of holders of such shares.
If the Merger has been consummated at the time the offer is made, the offer
will be accompanied by (i) advance payment to each Dissenting Shareholder who
has submitted his certificates for notation thereon of the election to dissent
of an amount equal to 80% of such offer, or (ii) as to each Dissenting
Shareholder who
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has not yet submitted his certificates for notation thereon of the election to
dissent, a statement that advance payment to him of an amount equal to 80% of
the amount of such offer will be made by Arbor promptly upon submission of his
certificates. If the Merger has not been consummated at the time of the making
of such offer, such advance payment or statement as to advance payment will be
sent to each shareholder entitled thereto upon consummation of the Merger.
Acceptance of such advance payment by a Dissenting Shareholder will not
constitute a waiver of his dissenter's rights. If the Merger is not consummated
within 90 days after approval of the Merger by the shareholders, such offer may
be conditioned upon the consummation of the Merger.
If within 30 days after the making of such offer, the Surviving Corporation
or any successor thereof and any Dissenting Shareholder agree on the price to
be paid for such shareholder's Dissenting Shares, the Surviving Corporation or
any successor thereof will pay the agreed price to such holder within 60 days
after the later of the date such offer was made or the Effective Time, upon
surrender of certificates representing such holder's Arbor Common Stock. No
such payment shall be made at any time when the Surviving Corporation or any
successor thereof is insolvent or when payment would render it insolvent.
If the Surviving Corporation or any successor thereof fails to make an offer
within the 15-day period described above, or if it makes an offer and any
Dissenting Shareholder fails to agree with it within 30 days of the making of
such offer, the Surviving Corporation or any successor thereof must, within 20
days thereafter, institute a special proceeding in the appropriate court to
determine the rights of Dissenting Shareholders and to fix the fair value of
their shares. However, if the Surviving Corporation or any successor thereof
does not institute such a proceeding within such 20-day period, any Dissenting
Shareholder may, within 30 days after such 20-day period expires, institute a
proceeding for the same purpose. If such proceeding is not instituted by any
Dissenting Shareholder within such 30-day period, all dissenters' rights shall
be extinguished unless the New York Supreme Court, for good cause shown,
otherwise directs. All Dissenting Shareholders, other than those who agreed
with the Surviving Corporation or any successor thereof as to the price to be
paid for their shares, will be made parties to such proceeding.
With respect to Dissenting Shareholders who are entitled to payment, the
court shall proceed to fix the value of the Arbor Common Stock which shall be
the fair value as of the close of business on the day prior to the Special
Meeting. In fixing the fair value of the shares, the court considers the nature
of the Merger and its effects on the Surviving Corporation or any successor
thereof and its shareholders, the concepts and methods then customary in the
relevant securities and financial markets for determining fair value of shares
of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The final order by the court
shall include an allowance for interest (unless the court finds the refusal of
any Dissenting Shareholder to accept the offer of the Surviving Corporation or
any successor thereof as arbitrary, vexatious, or otherwise not in good faith)
of such rate as the court finds to be equitable, accruing from the Effective
Date to the date of payment.
Each party in the appraisal proceeding shall bear its own costs and expenses,
including counsel fees. The court may, however, in its discretion, assess any
of the costs, fees and expenses incurred by the Surviving Corporation or any
successor thereof against Dissenting Shareholders (including those who withdraw
their Notice of Election) if the court finds that their refusal to accept the
Surviving Corporation or any successor thereof offer of payment was arbitrary,
vexatious or otherwise not in good faith. Similarly, the costs, fees and
expenses incurred by Dissenting Shareholders may be assessed by the court, in
its discretion, against the Surviving Corporation or any successor thereof if
the fair value of the shares as determined by the court materially exceeds the
amount which the Surviving Corporation or any successor thereof offered to pay,
or under certain other circumstances, including a failure by the Surviving
Corporation or any successor thereof to follow certain procedures of the
Appraisal Statute.
Within 60 days after the final determination of the proceeding, the Surviving
Corporation or any successor thereof shall pay to each Dissenting Shareholder
the amount found in such proceeding to be due such shareholder, upon surrender
of the certificates of Arbor Common Stock.
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Any shareholder who duly demands, prior to the Special Meeting, an appraisal
in compliance with the Appraisal Statute will not, after the Effective Time, be
entitled to vote the shares subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on those shares,
except dividends or other distributions payable to shareholders of record as of
a date prior to the Effective Time.
Failure to follow the steps required by the Appraisal Statute for perfecting
appraisal rights may result in the loss of such rights. IN VIEW OF THE
COMPLEXITY OF THE PROVISIONS OF THE APPRAISAL STATUTE, SHAREHOLDERS WHO ARE
CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT THEIR OWN LEGAL ADVISORS.
If more than 10 percent of Arbor shareholders perfect their rights as
dissenting shareholders, the ability of the Merger, if completed as proposed,
to qualify as a pooling of interests for accounting and financial reporting
purposes will be adversely affected. The qualifications of the Merger for
pooling of interests accounting treatment is a condition to the obligations of
BAC, BAFSB and AHAC to consummate the Merger. Additionally, it is a condition
to the obligations of BAC, BAFSB and AHAC to consummate the Merger that the
aggregate of (i) the cash value of all fractional share interests of BAC Common
Stock to be paid in cash in the Merger, and (ii) the value of the Dissenting
Shares together with those shares held in Arbor's treasury which were
repurchased by Arbor within 2 years of the anticipated Closing Date (valued as
a product of (x) the number of such Dissenting Shares and treasury shares, (y)
the Exchange Ratio and (z) the Average Closing Price) not exceed 10% of the
Final Merger Price. See "--Conditions to the Merger" and "--Anticipated
Accounting Treatment."
BACKGROUND OF THE MERGER
Arbor became a publicly held company in August 1992. In the immediately
preceding years, the residential mortgage banking industry had grown rapidly to
become the largest originator of one-to-four family residential mortgage loans
in the United States. During this period and continuing through early 1994,
historically low interest rates gave rise to unprecedented levels of loan
origination activities by both Arbor and other mortgage banking companies. At
the same time, competition among mortgage banking companies intensified
significantly as numerous mortgage banking companies, many of which had also
recently become publicly held, sought to expand their market penetration.
During the early part of 1994, prevailing interest rates began to rise. This
rise resulted in a significant reduction in loan originations in connection
with mortgage refinancings for both Arbor and the mortgage banking industry as
a whole. This slowdown in refinancings resulted in excess mortgage origination
capacity which, in turn, was accompanied by increasingly competitive loan
pricing and downward pressure on profit margins. For Arbor, these trends
resulted in a decline in both Arbor's loan origination volume and its loan
registration volume in its fiscal quarter ending February 28, 1994, the former
dropping 29.1% to $884 million as compared with $1.247 billion in the previous
quarter, and the latter falling 42.4% to $952 million from $1.652 billion in
the previous quarter. Arbor was concerned that this trend might continue and
intensify, leading to potentially significant pressure on pricing and margins
in the industry. In response to these concerns, Arbor determined to explore a
possible sale of the company as a means of maximizing shareholder value.
Accordingly, Arbor engaged Goldman Sachs to solicit indications of interest
from institutions which Goldman Sachs and Arbor's management identified as
potential purchasers of Arbor.
Commencing in March 1994, Goldman Sachs contacted a broad range of potential
acquirors located throughout the United States. The parties contacted included
but were not limited to many of the large and moderately sized bank holding
companies which had been active participants in previous sales of mortgage
banking companies. Fourteen potential acquirors executed confidentiality
agreements and were furnished with a confidential memorandum and other
information describing Arbor. Thereafter, Goldman Sachs met and/or had
telephone conversations with a number of these companies. Each potential
acquiror was instructed to submit a preliminary indication of interest (with
the acquirors being informed that any and all forms of consideration would be
considered) in April 1994. Each potential acquiror was advised that thereafter,
Arbor intended to allow a limited number of potential acquirors who had
expressed the preliminary indications of interest most favorable to the
shareholders of Arbor (with particular emphasis on the value of the
consideration contemplated by such proposals) to perform due diligence
investigations.
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In April 1994, two potential acquirors, each a regional bank holding company
(and neither of them BAC) (referred to herein as the "Holding Company" and the
"Alternative Acquiror," respectively), submitted preliminary indications of
interest and were selected to perform due diligence on Arbor. During May 1994
each of the selected companies performed due diligence and each was provided
with a draft merger agreement for a possible acquisition. At the end of May,
each submitted a definitive indication of interest which included a mark-up of
the draft agreement.
During late May and early June 1994, Arbor conducted extensive negotiations
with both the Holding Company and the Alternative Acquiror, both of whom
continued to perform additional due diligence and other analytical work. In
early June, however, the Alternative Acquiror withdrew its indication of
interest because it was unwilling to proceed with a potential transaction.
Arbor thereafter continued to conduct discussions and negotiations with the
Holding Company, and in late June 1994, the senior management of Arbor and the
Holding Company, together with their legal and financial advisors, conducted
extensive meetings concerning a potential transaction over a four day period.
During these meetings, the Holding Company withdrew its prior proposal and
indicated that it would proceed with a transaction only if such transaction was
structured so that a portion of the purchase price would be contingent and
dependent on the results achieved by the Arbor loan origination offices
following the closing of the transaction. These meetings ended with no agreed-
upon price or structure. In mid-July, shortly following the conclusion of these
meetings, the Holding Company withdrew its indication of interest and stated
that it was no longer willing to pursue a transaction.
During the period from April through July 1994, prevailing interest rates
continued to increase, resulting in further declines in mortgage refinancings
and loan originations for Arbor and the mortgage banking industry. The existing
excess mortgage origination capacity and the concomitant contraction in profit
margins in the industry worsened. In addition, as a result of rising interest
rates, variable rate mortgages were increasing significantly as a percentage of
total mortgage loan originations. This placed Arbor at a significant
competitive disadvantage because it was unable to compete effectively with the
below market rate adjustable mortgage products being offered by commercial
banks and other portfolio lenders. Accordingly, while no definitive decision to
sell Arbor was reached, Arbor's management believed that it was important to
seek to negotiate a sale transaction at the earliest possible time in order to
be in a position to ascertain whether such an alternative would in fact be in
the best interests of shareholders.
In early July, fearing that a definitive agreement with the Holding Company
could not be reached, Arbor again contacted the senior management of the
Alternative Acquiror and was able to persuade the Alternative Acquiror to
resume negotiations concerning a potential transaction. Thereafter, the
Alternative Acquiror resumed its due diligence activities and the senior
management of Arbor and the Alternative Acquiror, together with their
respective professional advisors, engaged in continuing meetings and
negotiations through mid-September of 1994.
During this time, conditions in the mortgage banking industry continued to
deteriorate and, as Arbor's own origination volume further declined, the
Alternative Acquiror changed its indication of interest by reducing its
proposed purchase price and restructuring the transaction. By mid-August 1994,
Arbor and its legal and financial advisors had become concerned that a
transaction with the Alternative Acquiror could not be negotiated on terms
which were in the best interests of Arbor and its shareholders. While on its
face, the restructured proposal from the Alternative Acquiror contemplated that
Arbor shareholders (other than Ivan Kaufman) would receive $17.37 in cash for
each of their Arbor shares, the Arbor Board viewed such proposal as illusory
for a variety of reasons. First, the Arbor Board believed that certain
conditions contained in such proposal resulted in a substantial risk that the
transaction with the Alternative Acquiror, even if approved by Arbor and its
shareholders, would nonetheless not be consummated. In addition, the proposal
contemplated certain potential adjustments to the purchase price which would
reduce such price substantially if the transaction was actually consummated.
In addition, the purchase price offered by the Alternative Acquiror to Arbor
shareholders other than Mr. Kaufman was contingent upon Mr. Kaufman receiving
approximately $15 million less for his shares
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(i.e., he would receive approximately $13.22 per share) than he was entitled to
receive on a pro rata basis as a shareholder of Arbor. Under the Alternative
Acquiror's proposal, Mr. Kaufman was purportedly entitled to "earn back" a
portion or all of (but under no conditions more than) such $15 million by
entering into an employment contract with the Alternative Acquiror which
provided for bonus payments of up to an aggregate of $15 million to be paid
over a five year period if, and only if, certain loan origination volumes could
be achieved during such period. However, based on recent industry trends, it
was questionable whether such volumes could be achieved, making it doubtful
that Mr. Kaufman would recover a substantial portion of the $15 million
purchase price he had foregone. In addition, the Alternative Acquiror insisted
on retaining the right to terminate Mr. Kaufman at any time without cause and,
in the event of such termination, the Alternative Acquiror would not be
obligated to pay a substantial portion of the $15 million bonus to Mr. Kaufman
even if the targeted loan origination volumes were achieved. Finally, in no
event would Mr. Kaufman ever truly be made whole relative to shareholders
generally because the bonus payments (i) would be subject to taxation at the
rate applicable to ordinary income rather than capital gains and (ii) would be
received over a five year period rather than at the closing of the transaction,
with no compensation for the time value of money. For these reasons, Mr.
Kaufman (whose approval as a shareholder was required for any transaction to be
consummated) indicated to Arbor that he would support a transaction with the
Alternative Acquiror only as a last resort.
For these reasons, Arbor determined to continue negotiations with the
Alternative Acquiror but to also pursue alternative transactions. Accordingly,
during this time period, Goldman Sachs contacted and re-contacted various other
potential acquirors. In early August, BAC contacted Goldman Sachs to express
its interest in a potential transaction. Following further discussions, BAC
submitted a preliminary proposal which Arbor believed could result in a
transaction which was both superior to that offered by the Alternative Acquiror
and in the best interests of the shareholders of Arbor. BAC was then allowed to
proceed with a more thorough due diligence examination of Arbor, and extensive
negotiations concerning the terms of a definitive transaction agreement
commenced. These negotiations continued through late August and September. At
the same time, discussions with the Alternative Acquiror concerning the terms
of a definitive transaction continued to take place from time to time, although
the Alternative Acquiror did not improve the terms of its acquisition proposal
in any material respect.
On September 21, 1994, the Arbor Board met to consider the status of the
ongoing negotiations with BAC, and was informed that substantial progress had
been made in negotiating definitive transaction agreements with BAC. At the
meeting, the management of Arbor, as well as Arbor's legal and financial
advisors, reviewed for the Arbor Board, among other things, a summary of
management's due diligence findings regarding BAC and the terms of the then-
current drafts of the Merger Agreement and related documents. The Arbor Board
also considered the terms of the Alternative Acquiror's proposal. After
considering these factors, the Arbor Board directed management and its advisors
to continue negotiations with BAC with a view towards entering into definitive
transaction agreements. The meeting was then adjourned pending further
discussion. During the next two days, discussions between BAC and Arbor
resulted in the finalization of the transaction agreements. While some further
contacts with the Alternative Acquiror took place, management and the Arbor
Board believed that the terms of BAC's proposal offered value superior to that
offered by the proposal of the Alternative Acquiror.
At the reconvened meeting of the Arbor Board held on September 23, 1994, the
management of Arbor, as well as Arbor's legal and financial advisors, again
reviewed, among other things, the terms of the definitive Merger Agreement and
related agreements and Goldman Sachs' fairness opinion concerning the Exchange
Ratio. Based upon that review, and after receiving the advice of Goldman Sachs
and consideration of other factors, the Arbor Board unanimously approved and
authorized the execution of the Merger Agreement and the related agreements.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ARBOR; REASONS FOR THE MERGER
THE ARBOR BOARD BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST
INTERESTS OF, ARBOR AND ITS SHAREHOLDERS. ACCORDINGLY, THE ARBOR BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT ARBOR'S
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SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY. SEE "--BACKGROUND OF THE
MERGER" ABOVE AND "--OPINION OF ARBOR'S FINANCIAL ADVISOR" BELOW.
In reaching its decision to approve the Merger Agreement, the Arbor Board
consulted with its legal advisors regarding the legal terms of the transaction
and the Arbor Board's obligations in its consideration of the proposed
transaction, and with its financial advisors regarding the financial aspects of
the proposed transaction and the fairness of the Exchange Ratio, as well as
with management of Arbor, and, without assigning any relative or specific
weights, considered a number of factors, both from a short-term and a longer-
term perspective, including the following:
(i) Arbor's business, financial condition, results of operations and
prospects, including, but not limited to, its potential growth,
development, productivity and profitability and the business risks
associated therewith;
(ii) the current and prospective environment in which Arbor operates,
including national and local economic conditions, the competitive
environment for mortgage banking companies generally and the trend toward
consolidation in the mortgage banking industry;
(iii) the significant decline in the volume of Arbor's loan origination
activity during the period following February 28, 1994, and the substantial
likelihood that, given the current and prospective economic and competitive
environment, Arbor will not soon be able to again achieve the level of loan
originations achieved throughout fiscal 1994;
(iv) the severe pressure on profitability created as a result of
continued competition, lower loan origination volume and continued industry
consolidation, and the likelihood that profitability would not return to
levels experienced during fiscal 1994;
(v) the likelihood that smaller mortgage banking companies would in the
future find it increasingly difficult to effectively compete with mortgage
banking operations which are affiliated with larger institutions such as
BAC, which institutions can provide their mortgage banking affiliates with
capital to grow, competitively priced portfolio products and investments in
expensive technology which reduces the cost of producing loans and
increases efficiencies in servicing loans;
(vi) the fact that, despite an extensive search for potential acquirors
conducted by Goldman Sachs and Arbor management, and despite widespread
public speculation concerning a potential sale of Arbor contained in
numerous articles published in newspapers and industry publications, no
other acquiror had made a definitive offer to acquire Arbor on terms (both
from a value perspective and the perspective of likelihood of closing)
superior to those contemplated by the Merger Agreement;
(vii) the financial terms and other significant terms of the transaction
proposed by the Alternative Acquiror, including the terms and conditions of
the draft merger agreement with such party and the fact that Mr. Kaufman
indicated that he would approve such transaction in his capacity as a
shareholder only as a last resort;
(viii) information concerning the business, financial condition, results
of operations and prospects of BAC, including the long-term growth
potential of BAC Common Stock and the business risks associated therewith;
(ix) the written opinion of Arbor's financial advisor, Goldman Sachs,
that the Exchange Ratio was fair to the holders of Arbor Common Stock;
(x) the financial and other significant terms of the proposed Merger,
including the terms and conditions of the Merger Agreement and the related
agreements;
(xi) the benefits of a business combination with a bank holding company
such as BAC;
(xii) the anticipated tax-free nature of the Merger to Arbor shareholders
(except for the portion of the consideration paid in cash for fractional
shares). See "--Federal Income Tax Consequences" below; and
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(xiii) the alternative strategic courses available to Arbor, including
remaining independent or exploring other indications of interest from other
potential acquirors.
OPINION OF ARBOR'S FINANCIAL ADVISOR
On September 23, 1994, Goldman Sachs delivered its written opinion to the
Board of Directors of Arbor that, as of the date of such opinion, the Exchange
Ratio was fair to the holders of Arbor Common Stock. Goldman Sachs subsequently
confirmed its earlier opinion by delivery of its written opinion dated as of
the date hereof.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED AS OF THE DATE
OF THIS PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH
THE OPINION, IS ATTACHED HERETO AS ANNEX D TO THIS PROXY STATEMENT/PROSPECTUS
AND IS INCORPORATED HEREIN BY REFERENCE. ARBOR SHAREHOLDERS ARE URGED TO, AND
SHOULD, READ SUCH OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(i) the Merger Agreement, (ii) this Proxy Statement/Prospectus, (iii) the
Annual Reports to Stockholders and Annual Reports on Form 10-K of Arbor for the
two fiscal years ended February 28, 1994, (iv) the prospectus, dated August 7,
1992, relating to Arbor's initial public offering, (v) Annual Reports to
Stockholders and Annual Reports on Form 10-K of BAC for the five years ended
December 31, 1993, (vi) certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of Arbor and BAC, (vii) certain other communications from
Arbor and BAC to their respective stockholders and (viii) certain internal
financial analyses and forecasts for Arbor and BAC prepared by their respective
managements. Goldman Sachs also held discussions with members of the senior
managements of Arbor and BAC regarding the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, Goldman Sachs reviewed the reported price and trading
activity for the shares of Arbor Common Stock and the shares of BAC Common
Stock, compared certain financial and stock market information for Arbor and
BAC with similar information for certain other companies the securities of
which are publicly traded, reviewed the financial terms of certain recent
business combinations in the mortgage banking industry specifically and in
other industries generally and performed such other studies and analyses as it
considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy and
completeness of all the financial and other information reviewed by Goldman
Sachs for purposes of its opinion. In addition, Goldman Sachs has not made an
independent evaluation or appraisal of the assets and liabilities of Arbor or
BAC or any of their subsidiaries and Goldman Sachs has not been furnished with
any such evaluation or appraisal. Goldman Sachs assumed, with the consent of
Arbor, that the Merger will be accounted for as a pooling of interests under
generally accepted accounting principles.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its written opinion to Arbor's Board
of Directors on September 23, 1994. Goldman Sachs utilized substantially the
same type of financial analyses in connection with providing the written
opinion attached hereto as Annex D.
(i) Historical Stock Trading Analysis. Goldman Sachs reviewed the
historical trading prices and volumes for Arbor Common Stock and BAC Common
Stock. Goldman Sachs also reviewed the historical trading prices for Arbor
Common Stock in comparison to the Standard & Poor's 500 Index and the seven
year U.S. treasury bond yield, as well as selected companies in the
mortgage banking industry including Countrywide Credit Industries Inc.,
North American Mortgage Company and Fleet Financial Group Inc.
(collectively, the "Comparable Companies") for the period commencing August
8, 1992 and ending September 20, 1994. Such analysis indicated that Arbor
Common Stock, over the period examined, outperformed the Standard & Poor's
500 Index and the Comparable Companies. In addition, Goldman Sachs analyzed
the consideration to be received by holders of Arbor Common Stock
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pursuant to the Merger Agreement in relation to the price of Arbor Common
Stock on April 15, 1994 (the last trading day prior to speculation
regarding the sale of Arbor) and September 20, 1994. Such analysis assumed
a per share purchase price of $16.35 to be paid pursuant to the Merger
Agreement and indicated that such per share purchase price represented a
18.9% premium based on the April 15, 1994 share price of $13.75 and a
discount of 13.9% based on the September 20, 1994 share price of $19.
(ii) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to Arbor to corresponding financial
information, ratios and public market multiples for four publicly traded
corporations: Countrywide Credit Industries Inc., Fleet Mortgage Group,
Inc., North American Mortgage Company and Imperial Credit Industries Inc.
(the "Selected Companies"). The Selected Companies were chosen because they
are publicly-traded companies with operations that for purposes of analysis
may be considered similar to Arbor. Goldman Sachs calculated and compared
various financial multiples and ratios. In each of the analyses described
in this section, the multiples of Arbor were calculated using prices for
Arbor as of April 15, 1994 and as of September 20, 1994. The multiples and
ratios for Arbor were based on information provided by Arbor and the
multiples for each of the Selected Companies were based on the most recent
publicly available information. Goldman Sachs considered the Selected
Companies' price/earnings ratios for (i) the latest full fiscal year, which
ranged from 6.1x to 30.8x, compared to 14.6x and 10.6x for Arbor, (ii)
estimated earnings for the current fiscal year (based on Institutional
Brokers Estimate System ("IBES") median estimates as of September 1, 1994),
which ranged from 9.5x to 33.6x, compared to 12.9x and 9.4x for Arbor, and
(iii) estimated earnings for the next fiscal year (based on IBES median
estimates as of September 1, 1994), which ranged from 7.0x to 13.6x,
compared to 10.3x and 7.5x for Arbor (in the case of Arbor and Countrywide
Credit Industries, Inc., the latest full fiscal year means the fiscal year
ended February 28, 1994, the current fiscal year means the fiscal year
ending February 28, 1995 and the next fiscal year means the fiscal year
ending February 29, 1996; the analogous dates for the other Selected
Companies are December 31, 1993, 1994 and 1995). Goldman Sachs also
examined the earnings per share ("EPS") growth rate for the Selected
Companies for the current fiscal year and the next fiscal year ranging from
36% to 209%, compared to 25% for Arbor, and the latest twelve months
("LTM") dividend yields for the Selected Companies which ranged from .77%
to 2.21% (Arbor has not declared any dividends during the LTM). Goldman
Sachs also considered for the Selected Companies, as of the latest
available quarter ends, price/book ratios which ranged from 1.46x to 2.93x,
compared to 3.06x and 2.22x for Arbor and the premium over tangible book
value as a percentage of the owned servicing portfolio which ranged from
1.56% to 1.83% as compared to 2.19% and 1.46% for Arbor. The review also
indicated that the LTM price/origination value (premium over tangible book
value plus the estimated value of servicing rights as a multiple of the
estimated value of servicing originated annually net of direct costs) for
the Selected Companies ranged from .4x to 1.6x, compared to 1.5x and .4x
for Arbor; the LTM price/net value income ratio (price as a multiple of net
income minus after-tax increase in capitalized servicing rights plus after-
tax value of net new servicing) for the Selected Companies ranged from 6.5x
to 20.5x, compared to 6.9x and 5.0x for Arbor; the LTM price/adjusted
equity (price as a multiple of tangible book value plus servicing value)
for the Selected Companies ranged from 1.16x to 1.83x, compared to 1.60x
and 1.16x for Arbor; LTM return on equity for the Selected Companies ranged
from 14.4% to 24.7%, compared to 35% for Arbor; LTM servicing revenue
(percentage of total revenue derived from servicing fees) for the Selected
Companies ranged from 11% to 56%, compared to 16% for Arbor; the percentage
change in originations between June 1994 and June 1993 ranged from (29)% to
(59)%, compared to (46)% for Arbor; and 1993 retail and brokerage
originations as a percentage of total originations for the Selected
Companies ranged from 44% to 100%, compared to 100% for Arbor.
(iii) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to selected transactions in the mortgage banking
industry since May 1993 (the "Selected Transactions"). The Selected
Transactions included the acquisition by Chase Manhattan Bank Corporation
of Troy & Nichols Inc., the acquisition by PNC Bank Corporation of Sears
Mortgage Group, the acquisition by First Tennessee National Corporation of
Maryland National Mortgage Corporation, the acquisition by First Tennessee
National Corporation of Sunbelt National Mortgage Corporation, the
acquisition by
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Barnett Banks Inc. of LoanAmerica Financial Corporation, the acquisition by
First Security Corporation of CrossLand Mortgage Corporation, the
acquisition by Chemical Banking Corporation of Margaretten Financial
Corporation, the acquisition by Mellon Bank Corporation of U.S. Bancorp
Mortgage, the acquisition by Chase Manhattan Bank Corporation of American
Residential Mortgage Corporation, the acquisition by First Tennessee
National Corporation of Carle I. Brown & Company and the acquisition by
Fleet Financial Group Inc. of Plaza Home Mortgage Corporation. Such
analysis indicated that for the Selected Transactions the median production
premium (the premium over tangible book value plus the estimated value of
servicing rights) was $42 million, the selected median (the median
production premium excluding certain transactions involving target
companies with national production operations) was $21 million and the
comparable measure for the Merger was $36 million; the median production
premium as a percentage of retail and brokered volume (premium paid over
tangible book value and estimated servicing portfolio value expressed as a
percentage of retail plus brokered originations) was 1.0%, the selected
median was .84% and the comparable measure for the Merger was 1.63%; and
the production premium as a multiple of estimated value created (premium
paid over tangible book value and servicing portfolio value expressed as a
multiple of estimated annual value created) was 1.9x, the selected median
was 1.9x and the comparable measure for the Merger was 4.9x.
(iv) Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses
of the financial impact of the Merger. Using earnings estimates for Arbor
prepared by its management and IBES median estimates as of September 1,
1994 for BAC for the years 1994 and 1995 and based on certain assumptions
regarding potential expense and funding cost savings, Goldman Sachs
compared the EPS of BAC Common Stock, on a stand alone basis, to the EPS of
the common stock of the combined companies on a pro forma basis. Based on
such analyses, the proposed transaction would be modestly accretive to
BAC's EPS. Goldman Sachs also calculated certain capital ratios for BAC pro
forma for the Merger based on data for Arbor as of May 31, 1994 and BAC as
of June 30, 1994. Based on such calculations, the proposed transaction
would modestly increase such capital ratios.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analysis as comparison is identical to Arbor or
BAC or the contemplated transaction. The analyses were prepared solely for
purposes of Goldman Sachs' providing its opinion as to the fairness of the
Exchange Ratio to the Board of Directors of Arbor and do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by such analyses. Because such analyses
are inherently subject to uncertainty, being based upon numerous factors or
events beyond the control of the parties or their respective advisors, none of
Arbor, BAC, Goldman Sachs or any other person assumes responsibility if future
results are materially different from those forecast. As described above,
Goldman Sachs' opinion to the Board of Directors of Arbor was one of many
factors taken into consideration by Arbor's Board of Directors in making its
determination to approve the Merger Agreement. The foregoing summary does not
purport to be a complete description of the analysis performed by Goldman Sachs
and is qualified by reference to the written opinion of Goldman Sachs set forth
in Annex D hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. Arbor selected Goldman
Sachs as its financial advisor because it is a nationally recognized investment
banking firm that has substantial experience in transactions similar to the
Merger. Goldman Sachs has provided certain investment banking services to BAC
from time to time, including acting as managing underwriter of a public
offering of subordinated notes of BAC in
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February, 1993 and advising BAC in the sale of certain of its real estate
assets in 1993, and may provide investment banking services to BAC in the
future. In addition, Goldman Sachs represented Continental Bank Corporation in
its merger with BAC.
Pursuant to a letter agreement dated April 26, 1994 (the "Engagement
Letter"), Arbor engaged Goldman Sachs to act as its financial advisor in
connection with the sale of Arbor. Pursuant to the terms of the Engagement
Letter, Arbor has agreed to pay Goldman Sachs upon consummation of the Merger a
transaction fee equal to $500,000 plus 2% of the aggregate consideration paid
in the Merger in excess of $115,000,000. Arbor has agreed to indemnify Goldman
Sachs against certain liabilities, including certain liabilities under the
federal securities laws.
Arbor has also engaged Goldman Sachs to act as its financial advisor in
connection with the sale of ANCMC. See "CERTAIN RELATED TRANSACTIONS--
Subsidiary Sale." Pursuant to the terms of such engagement, Arbor has agreed to
pay Goldman Sachs a transaction fee equal to $250,000 and has agreed to
indemnify Goldman Sachs in the same manner as in the Engagement Letter.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Arbor's management and the Arbor Board may be deemed to
have certain interests in the Merger in addition to their interests as
stockholders of Arbor generally. The Arbor Board was aware of these interests
and considered them, among other matters, in unanimously approving the Merger
Agreement and the transactions contemplated thereby.
Employment Agreements. Ivan Kaufman is Chairman of the Board, Chief Executive
Officer and President of Arbor and is presently a party to an employment
agreement with Arbor for a term expiring on July 17, 1997. Under this
agreement, Mr. Kaufman currently receives a base annual salary of $551,250
(with automatic 5% annual increases) and is entitled to participate in any
bonus pool for the benefit of executive officers. The agreement provides that
upon termination of his employment by Arbor without cause, Mr. Kaufman will not
compete with Arbor for a period of two years and that if his employment is
terminated by Arbor for cause or by Mr. Kaufman for a reason other than Arbor's
material breach of its obligations under the agreement, he will not compete
with Arbor for a period of five years. The Agreement further provides that upon
termination due to a material breach by Arbor, which includes failure of any
successor in interest to assume the agreement, Mr. Kaufman will be entitled to
a lump sum payment in cash equal to his base salary at the time of breach plus
the highest bonus awarded to him during the previous two years and the
continuation of Arbor benefit plans for a period of two years after termination
or, if earlier, through the commencement of full-time employment.
In connection with the Merger Agreement, Mr. Kaufman agreed to waive all of
his rights under his existing employment agreement and to enter into a new
employment agreement (the "Revised Agreement") with Arbor (which agreement was
prepared by and negotiated by Mr. Kaufman with BAC as the owner of Arbor
following the Merger) pursuant to which Arbor has agreed to employ Mr. Kaufman
for a period of six months (the "Term") commencing at the Effective Time
(provided that Arbor may extend the term at its sole option for an additional
three months). The Revised Agreement provides for a monthly base salary of
$45,937.50 (Mr. Kaufman's current monthly base salary with Arbor) and
participation in Arbor's benefit program. Mr. Kaufman will not participate in
any of Arbor's bonus programs during the Term. If the Revised Agreement is
terminated by Mr. Kaufman for any reason prior to the end of the Term (or any
extension thereof) or by Arbor for "Cause" (as defined in the Revised
Agreement) then Mr. Kaufman will not be entitled to any further payment or
benefits under the Revised Agreement. If Arbor terminates the Revised Agreement
without Cause prior to the end of the Term (or any extension thereof), Arbor
will pay to Mr. Kaufman a gross sum equal to the base salary he would have
received had his employment continued for the length of the Term (and including
salary for the three month extension if Arbor has exercised its option to
extend) and will provide Mr. Kaufman with continued health and life insurance
benefits under Arbor's benefit programs until the earlier of (i) two years
following the termination date or (ii) Mr. Kaufman's full time
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employment with a new employer. The Revised Agreement includes a non-compete
provision extending five years after Mr. Kaufman's employment is terminated for
any reason.
Arbor has also entered into an employment agreement with Scott Brown, Senior
Vice President of Secondary Marketing, dated as of December 15, 1993. The
agreement provides Mr. Brown with a base salary of $125,000 annually, incentive
bonuses of up to 100% of the base salary, a grant of 25,000 options to purchase
Arbor Common Stock (with an additional 25,000 options to be granted on the
first anniversary of Mr. Brown's employment with Arbor) and participation in
Arbor's employee benefit programs. Mr. Brown's employment agreement also
provides for a severance payment equal to two years of his base salary (payable
either in a lump sum or according to Arbor's normal payroll schedule) in the
event Mr. Brown's employment is terminated other than "for cause" within two
years following the date of his employment agreement. Accordingly, it is
possible that Mr. Brown will become entitled to receive such a severance
payment in connection with the Merger.
Bonuses. The Merger Agreement provides that Arbor, prior to the Effective
Time, may pay or agree to pay up to an aggregate amount of $2.0 million in
bonus payments to certain key employees (other than Mr. Kaufman) provided that
the full amount of such payments are accrued on Arbor's books and records in
accordance with GAAP effective not later than the Valuation Date. Arbor has
made no definitive decision as to whether it will pay any such bonuses.
Indemnification. Pursuant to the Merger Agreement, for six years after the
Effective Time, BAC will cause the Surviving Corporation to indemnify, defend
and hold harmless the present and former officers, directors, employees and
agents of Arbor and its subsidiaries (each, an "Indemnified Party") after the
Effective Time against all losses, expenses, claims, damages or liabilities
arising out of actions or omissions occurring at or prior to the Effective Time
to the full extent then permitted under New York law and by Arbor's charter and
by-laws as in effect on the date of the Merger Agreement; provided, however,
that any rights to indemnification in respect of any claims asserted or made
within such six-year period will continue until the final disposition of such
claim. In the event BAC, the Surviving Corporation or any of their respective
successors or assigns (i) consolidates with or merges into any other person and
is not the continuing or surviving corporation or entity of such consolidation
or merger, or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, to the extent
necessary, proper provision shall be made so that the successors and assigns of
BAC and the Surviving Corporation assume such indemnification obligations.
Sale of ANCMC. Following an auction process for the sale of ANCMC conducted
by Goldman Sachs, Ivan Kaufman was selected by Arbor as the winning bidder in
the auction. Arbor intends to consummate the sale of ANCMC to Mr. Kaufman prior
to the Effective Time. For a more complete discussion of the sale of ANCMC, see
"CERTAIN RELATED TRANSACTIONS--Subsidiary Sale."
EFFECT ON EMPLOYEE BENEFIT PLANS
Pursuant to the terms of the Merger Agreement, Arbor has agreed to take such
actions as BAC may reasonably require in order to amend or terminate certain of
its employee benefit plans on terms satisfactory to BAC, such amendments or
terminations to be effective as of the Effective Time. Additionally, Arbor has
agreed to amend its qualified employee benefit plans prior to the Effective
Time to meet all of the requirements under the Code then applicable to such
plans. During the twelve months following the Closing Date, the Surviving
Corporation will provide severance payments to the employees of Arbor and its
subsidiaries in amounts no less than those payments payable under BAC's then
current severance program.
As soon as practicable after the Effective Time, Arbor's employee benefit
plans will be discontinued or merged into BAC's plans. Arbor employees will be
eligible to participate in BAC's employee benefit plans on the same terms as
are generally offered to employees of BAC and its subsidiaries with comparable
positions. Under BAC's employee benefit plans, Arbor employees will be credited
for their years of service with Arbor or one of its subsidiaries to the same
extent such service was recognized under comparable employee benefit plans of
Arbor. However, with respect to any BAC pension benefit plan, the service of
Arbor employees will be counted only for purposes of vesting, eligibility and
the rate of prospective benefit accrual.
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EFFECTIVE TIME
The Merger will become effective upon the filing of a certificate of merger
with the Department in accordance with applicable law or at such later time as
is specified in such certificate. The filing with respect to the Merger will
occur on the first day which is (i) the last day of a month and (ii) at least
two business days after satisfaction or waiver of the latest to occur of the
conditions to the Merger specified in the Merger Agreement and the expiration
of the period for Arbor's termination right, if any, relating to the Minimum
Value, unless another date is agreed to in writing by the parties. See "--
Conditions to the Merger" below. It is expected that a period of time will
elapse between the Special Meeting and the Effective Time while the parties
seek to obtain the regulatory approvals required in order to consummate the
Merger. There can be no assurance that such approvals will be obtained, that
such approvals will not contain a Burdensome Condition (as defined below) which
would allow BAC to decline to consummate the Merger or that the Merger will be
completed at any time. See "--Regulatory Approvals Required for the Merger"
below. The Merger Agreement may be terminated by either party if, among other
reasons, the Merger has not been consummated on or before June 30, 1995. See
"--Termination" below.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; DIVIDENDS
Conversion of Shares. The conversion of Arbor Common Stock into BAC Common
Stock will occur automatically at the Effective Time.
Procedures for Exchange of Certificates. As soon as practicable after the
Effective Time, an exchange agent selected by BAC (the "Exchange Agent") shall
mail to each holder of record of Arbor Common Stock or an Arbor Option a form
letter of transmittal and instructions for use in effecting the surrender of
such holder's certificate representing shares of Arbor Common Stock (each, a
"Certificate") or Arbor Options in exchange for certificates representing
shares of BAC Common Stock and cash in lieu of fractional shares.
No certificates representing fractional shares of BAC Common Stock will be
issued upon the surrender for exchange of Certificates or Arbor Options, no
dividend or distribution with respect to BAC Common Stock shall be payable on
or with respect to any fractional share, and such fractional share interests
shall not entitle the owner thereof to vote or to any other rights of a
stockholder of BAC. In lieu of the issuance of any such fractional share, BAC
shall pay to each former shareholder or optionholder, respectively, of Arbor
who otherwise would be entitled to receive a fractional share of BAC Common
Stock an amount in cash determined by multiplying (i) the Average Closing Price
by (ii) the fraction of a share of BAC Common Stock which such holder would
otherwise be entitled to receive.
At or prior to the Effective Time, BAC and BAFSB shall deposit, or shall
cause to be deposited, with the Exchange Agent certificates representing the
shares of BAC Common Stock and the cash in lieu of fractional shares to be
issued and paid in exchange for outstanding shares of Arbor Common Stock and
Arbor Options, respectively (such cash and certificates for shares of BAC
Common Stock, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund").
Any portion of the Exchange Fund that remains unclaimed by the shareholders
or optionholders of Arbor for twelve months after the Effective Time shall be
repaid to BAC or BAFSB, as appropriate. Any shareholders or optionholders of
Arbor who have not theretofore complied with the terms of the Merger Agreement
for the exchange, shall thereafter look only to BAC or BAFSB, respectively, for
payment of their shares of BAC Common Stock, cash in lieu of fractional shares
and unpaid dividends and distributions on the BAC Common Stock deliverable in
respect of each share of Arbor Common Stock or Arbor Option that such
shareholder or optionholder holds, in each case, without any interest thereon.
None of BAC, BAFSB, Arbor, the Exchange Agent or any other person shall be
liable to any former holder of shares of Arbor Common Stock or an Arbor Option
for any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
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Any shares of Arbor Common Stock with respect to which appraisal rights have
been properly perfected will be purchased in accordance with the procedures
described under "--Appraisal Rights" and under Section 623 of the New York
Business Corporations Law, attached as Annex E to this Proxy
Statement/Prospectus.
After the Effective Time, there will be no transfers on the stock transfer
books of Arbor of shares of Arbor Common Stock issued and outstanding
immediately prior to the Effective Time. If Certificates are presented for
transfer after the Effective Time, they will be cancelled and exchanged for
certificates representing shares of BAC Common Stock and cash in lieu of
fractional Shares, if any.
ARBOR SHAREHOLDERS AND OPTIONHOLDERS SHOULD NOT FORWARD CERTIFICATES OR ARBOR
OPTIONS TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. ARBOR
SHAREHOLDERS SHOULD NOT RETURN CERTIFICATES WITH THE ENCLOSED PROXY.
Dividends. No dividends or other distributions declared after the Effective
Time with respect to BAC Common Stock and payable to the holders of record
thereof shall be paid to the holder of any unsurrendered Certificate or Arbor
Option until the holder thereof surrenders such Certificate or Arbor Option in
accordance with the Merger Agreement. After the surrender of a Certificate or
Arbor Option, the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest, which theretofore had
become payable with respect to shares of BAC Common Stock represented by such
Certificate or Arbor Option. Each certificate which represents shares of Arbor
Common Stock and each Arbor Option outstanding at the Effective Time will be
deemed to evidence ownership of the BAC Common Stock or the cash into which
those shares or Arbor Options have been converted by virtue of the Merger.
CONDITIONS TO THE MERGER
The respective obligations of BAC and Arbor to effect the Merger are both
subject to the satisfaction of the following conditions at or prior to the
Effective Time: (i) Arbor shall have obtained the approval of the Merger
Agreement by the affirmative vote of the holders of at least 66-2/3% of the
outstanding shares of Arbor Common Stock entitled to vote thereon; (ii) the
shares of BAC Common Stock issuable to holders of Arbor Common Stock pursuant
to the Merger shall have been authorized for listing on the NYSE, subject to
official notice of issuance; (iii) the receipt of all requisite regulatory
approvals (the "Requisite Regulatory Approvals") required to consummate the
transactions contemplated by the Merger Agreement, and the expiration of any
statutory waiting periods in respect thereof (see "--Regulatory Approvals
Required for the Merger" below); (iv) the Registration Statement of which this
Proxy Statement/Prospectus forms a part shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC; (v) no order,
injunction or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition (an "Injunction") which prohibits the
consummation of the Merger, or any of the other transactions contemplated by
the Merger Agreement shall be in effect; and (vi) no statute, rule, regulation,
order, injunction or decree shall have been enacted, entered, promulgated or
enforced by any governmental authority which prohibits, restricts or makes
illegal consummation of the Merger.
The obligations of BAC, BAFSB and AHAC to effect the Merger are further
subject to the satisfaction, or waiver by BAC, of the following conditions: (i)
the representations and warranties of Arbor contained in the Merger Agreement
(including without limitation the representation (the "Arbor Material Adverse
Change Representation") that since May 31, 1994 there has not been any change
in the business of Arbor or any of its subsidiaries which has had, individually
or in the aggregate, a Material Adverse Effect (as defined below) on Arbor)
shall be true and correct in all material respects as of the date of the Merger
Agreement and (except to the extent that such representations and warranties
relate to an earlier date) as of the Closing Date as though made at and as of
the Closing Date, provided, however, that for purposes of determining the
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satisfaction of this condition, such representations and warranties will be
deemed to be true and correct in all material respects unless the failure of
such representations and warranties to be so true and correct, in the
aggregate, has had or could reasonably be expected to have a Material Adverse
Effect on Arbor; (ii) Arbor shall have performed, in all material respects,
all obligations required to be performed by it under the Merger Agreement at
or prior to the Closing Date; (iii) all material conditions prescribed by
applicable law and by the Requisite Regulatory Approvals to be satisfied by
the Closing Date shall be satisfied, and no Requisite Regulatory Approval
shall have imposed any condition (a "Burdensome Condition") applicable to BAC
or any of its affiliates which BAC in its reasonable judgment determines would
be materially burdensome upon the business of BAC or any of its affiliates or
the business of Arbor and its subsidiaries as conducted prior to the Closing
Date or as anticipated to be conducted after the Closing Date; (iv) there
shall be no pending or threatened actions or proceedings by any governmental
entity challenging or in any manner seeking to restrict or prohibit the
transactions contemplated by the Merger Agreement; (v) Arbor and BAC shall
have received (X) all consents required from all federal secondary market or
state regulatory agencies in connection with the transactions contemplated
hereby, in form and substance reasonably satisfactory to BAC, (Y) such other
consents required from any investor or other person (other than a federal
secondary market or state regulatory agency) such that the aggregate unpaid
principal balance of the Non-Consenting Loans constituting part of the Private
Servicing Portfolio as of the Valuation Date is less than 40% of the aggregate
unpaid principal balance of all mortgage loans in the Private Servicing
Portfolio, as of the Valuation Date, and (Z) all other consents, approvals and
waivers required from any person in connection with any material contracts of
Arbor or otherwise shall have been obtained in form and substance reasonably
satisfactory to BAC, except where the failure to obtain such consents,
approvals, and waivers has not had and could not reasonably be expected to
have a Material Adverse Effect on the Surviving Corporation, BAFSB or their
subsidiaries following the Closing Date (and Arbor shall have properly filed
all notices with such federal secondary market or state regulatory agencies,
investors and persons which are required as a result of the transactions
contemplated hereby); (vi) certain scheduled suits, litigation, disputes,
proceedings, claims, actions and investigations and certain suits, litigation,
or claims which may arise after the date of the Merger Agreement, in the
aggregate, have not had and could not reasonably be expected to have a
Material Adverse Effect on Arbor; (vii) BAC shall have received an opinion of
its counsel dated as of the Effective Time, substantially to the effect that,
on the basis of facts, representations and assumptions set forth in such
opinion, which are consistent with the state of facts existing at the
Effective Time, the Merger and the Liquidations will be treated for Federal
income tax purposes as part of one or more reorganizations within the meaning
of Section 368 of the Code (see "--Federal Income Tax Consequences" below);
(viii) BAC shall have received a customary legal opinion from counsel to
Arbor, as well as an opinion of Arbor's general counsel; (ix) BAC shall have
received a letter, dated as of the Effective Time, from its independent public
accountants, in form and substance satisfactory to BAC in its sole discretion,
advising that the transactions contemplated by the Merger Agreement properly
may be accounted for as a pooling of interests, unless such firm advises BAC
that it is unable to issue a letter to such effect solely due to actions taken
by BAC or any of its affiliates other than those actions required under the
Merger Agreement; (x) BAC shall have received from Arbor's independent public
accountants certain customary comfort letters with respect to certain
financial information of Arbor; (xi) the aggregate of (A) the cash value of
the fractional share interests of BAC Common Stock to be paid in cash and (B)
the shares of BAC Common Stock which are Dissenting Shares and those shares
held in the Company's treasury which were repurchased by the Company within
two years of the anticipated Closing Date (valued as the product of the number
of such Dissenting Shares and treasury shares multiplied by the Exchange
Ratio, multiplied by the Average Closing Price), shall not exceed 10% of the
Final Merger Price; (xii) the Final Purchase Price shall have been determined
in accordance with the terms of the Merger Agreement; (xiii) BAC shall have
received duly executed Affiliates Agreements in accordance with the Merger
Agreement from all affiliates of Arbor; (xiv) Arbor shall have closed the
Subsidiary Sale; and (xv) BAC shall have received a certificate dated as of
the Closing Date signed on behalf of Arbor by its Chief Executive Officer and
the Chief Financial Officer as to the satisfaction of certain of the
aforementioned conditions.
The Merger Agreement defines a "Material Adverse Effect," when applied to a
party to the Merger Agreement, as a material adverse effect on the business,
properties, results of operations or financial condition
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of such party and its subsidiaries taken as a whole, other than any such effect
attributable to or resulting from changes in law, rules or regulations
generally applicable to mortgage banks, banks or their holding companies, or
changes in GAAP.
The obligations of Arbor to effect the Merger are further subject to the
satisfaction, or waiver by Arbor, of the following conditions: (i) the
representations and warranties of BAC contained in the Merger Agreement
(including without limitation the representation (the "BAC Material Adverse
Change Representation") that since June 30, 1994 there has not been any change
in the business of BAC or any of its subsidiaries which has had, individually
or in the aggregate, a Material Adverse Effect on BAC) shall be true and
correct in all material respects as of the date of the Merger Agreement and
(except to the extent they relate to an earlier date) as of the Closing Date as
though made at and as of the Closing Date; provided, however, that for purposes
of determining the satisfaction of this condition, such representations and
warranties will be deemed true and correct in all material respects unless the
failure or failures of such representations and warranties to be so true and
correct, in the aggregate, has had or could reasonably be expected to have a
Material Adverse Effect on BAC; (ii) BAC and AHAC shall have each performed in
all material respects all obligations required to be performed by it under the
Merger Agreement at or prior to the Closing Date and Arbor shall have received
a certificate signed on behalf of BAC by the Chief Executive Officer and the
Chief Financial Officer of BAC to such effect; (iii) no proceeding initiated by
any Governmental Entity seeking an Injunction shall be pending; (iv) Arbor
shall have received an opinion of its counsel dated as of the Effective Time,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion, which are consistent with the state of
facts existing at the Effective Time the Merger and the Liquidations will be
treated for Federal income tax purposes as part of one or more reorganizations
within the meaning of Section 368 of the Code (see "--Federal Income Tax
Consequences" below); (vi) Arbor shall have received a customary legal opinion
from counsel to BAC; and (vii) Arbor shall received a certificate dated as of
the Closing Date signed on behalf of BAC by the Chief Executive Officer and
Chief Financial Officer as to the satisfaction of certain of the aforementioned
conditions.
No assurance can be provided as to when, or whether, the regulatory consents
and approvals necessary to consummate the Merger will be obtained or whether
all of the other conditions precedent to the Merger will be satisfied or waived
by the party permitted to do so. See "--Regulatory Approvals Required for the
Merger" below. If the Merger is not consummated on or before June 30, 1995, the
Merger Agreement may be terminated, and the Merger abandoned, by either BAC or
Arbor, unless the failure to effect the Merger by such date is due to the
failure of the party seeking to terminate the Merger Agreement to perform or
observe the covenants and agreements of such party set forth therein.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
The Merger is subject to the prior approval of the Federal Reserve Board
pursuant to Section 4 of the BHCA, and the prior approval of the OTS pursuant
to the Home Owners' Loan Act of 1933. BAC has submitted applications seeking
approval of the Merger to the Federal Reserve Board and the OTS. Certain
aspects of the Merger may require notifications to, or approvals from, certain
other federal authorities and banking or other regulatory authorities in
certain states. On December 15, 1994 the Federal Reserve Board notified BAC of
its approval of the Merger. There can be no assurance that the OTS or any other
regulatory authority will approve or take other required action with respect to
the Merger or, if obtained, that there will not be delays in the processing of
the relevant applications. See"--Conditions to the Merger." There can also be
no assurance that any such approval will not contain a condition or requirement
which causes such approval to fail to satisfy the conditions to consummation of
the Merger. There can also be no assurance that the U.S. Department of Justice
will not challenge the Merger on antitrust grounds, or if such a challenge is
made, as to the result thereof.
CONDUCT OF ARBOR'S BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, Arbor has agreed that until the Effective
Time, except as provided in the Merger Agreement, or with the prior written
consent of BAC, Arbor and its subsidiaries will carry on
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their respective businesses in the ordinary course consistent with past
practice. Arbor has agreed to use its best efforts to (x) preserve its business
organization and that of its subsidiaries intact, (y) keep available to itself
and BAC the present services of its and its subsidiaries' employees and (z)
preserve for itself and BAC the goodwill of its and its subsidiaries' customers
and others with whom business relationships exist.
The Merger Agreement also contains certain restrictions on the conduct of
Arbor's business pending consummation of the Merger. In particular, the Merger
Agreement provides that, except as provided in the Merger Agreement or with the
prior written consent of BAC, Arbor may not, among other things, (i) solely in
the case of Arbor, declare or pay any dividend on or make any other
distributions in respect of any of its capital stock, (ii)(a) subject to
certain exceptions, split, combine or reclassify any shares of its capital
stock or (b) repurchase, redeem or otherwise acquire any shares of the capital
stock of Arbor or any of its subsidiaries or convertible securities therefor,
(iii) subject to certain exceptions, issue, deliver or sell, or authorize or
propose the issuance, delivery or sale of, any shares of its capital stock or
securities convertible therefor, (iv) amend its Certificate of Incorporation or
By-laws, (v) make any capital expenditures other than expenditures of $50,000
each and $250,000 in the aggregate in the ordinary course of business or as
necessary to maintain existing assets in good repair, (vi) subject to certain
exceptions, enter into any new line of business, (vii) subject to certain
exceptions, acquire or agree to acquire any business or entity or otherwise
acquire any assets of such business or entity, (viii) except as required by
applicable law, take any action that is intended or may reasonably be expected
to result in any of its representations and warranties set forth in the Merger
Agreement being or becoming untrue in any material respect, or in any of the
conditions to the Merger not being satisfied, or in a violation of any
provision of the Merger Agreement, (ix) change its methods of accounting in
effect at May 31, 1994, subject to certain exceptions, (x) (a) adopt, amend,
renew or terminate (except as may be required by law) any employee benefit plan
or agreement, arrangement, plan or policy between Arbor or any of its
subsidiaries and any of its current or former directors, officers or employees,
(b) except for normal increases in the ordinary course of business consistent
with past practice or except as required by applicable law, increase the
compensation or fringe benefits of any director, officer or employee, (c) enter
into, modify or renew any contract or obligation providing for the payment to
any director, officer or employee of compensation, severance or benefits
contingent upon the occurrence of any of the transactions contemplated by the
Merger Agreement, or (d) enter into any employment, consulting, non-
competition, retirement, parachute or indemnification agreement with any
officer, director, employee or agent of Arbor or any of its subsidiaries, (xi)
except as required by applicable law, take or cause to be taken any action that
would cause the Merger to fail to qualify (a) for pooling of interests
accounting treatment or (b) as a tax-free reorganization under Section 368 of
the Code, (xii) other than in the ordinary course of business consistent with
past practice, dispose of its material assets, properties or other rights or
agreements, provided, however, that Arbor may not sell or acquire mortgage loan
servicing rights (other than the acquisition of mortgage loan servicing rights
in connection with the origination of mortgage loans) or sell any mortgage loan
on a servicing released basis; provided further that Arbor and its subsidiaries
may, without BAC's consent, (A) sell Investment Loans and (B) sell mortgage
loan servicing rights or mortgage loans on a servicing released basis to
investors on a "flow" basis in the ordinary course of business under agreements
with Investors existing as of the date of the Merger Agreement, provided that
Arbor shall and shall cause its subsidiaries to first offer BAC the right to
buy such "flow" servicing rights or mortgage loans and shall cause its
subsidiaries to, sell such servicing rights or mortgage loans to BAC if BAC
offers comparable or better terms than those offered by other prospective
purchasers; (xiii) other than in the ordinary course of business consistent
with past practice, incur any indebtedness for borrowed money or assume,
guarantee, endorse or otherwise become responsible for the obligations of any
other person or entity, (xiv) commit any act or omission which constitutes a
material breach or default by Arbor or any of its subsidiaries under any
material contract, (xv) other than in the ordinary course of business, create,
renew, amend or terminate any material contract, (xvi) subject to bona fide
disputes, fail to pay and discharge any of its obligations, bills or other
liabilities as they become due, (xvii) subject to certain exceptions,
materially alter or vary its policies of (A) underwriting, pricing,
originating, warehousing, selling or servicing, or buying or selling rights to
service, mortgage loans, (B) hedging its mortgage loan positions or
commitments, and (C) obtaining financing and credit, (xviii) subject to certain
exceptions, terminate any Mortgage Servicing Agreement, (xix) enter into any
mortgage
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servicing agreement with respect to a recourse loan, (xx) other than in the
ordinary course of business, cancel any indebtedness or waive any rights having
a value of $10,000 or more, (xxi) terminate, cancel or amend any insurance
coverage maintained by Arbor or any of its subsidiaries which is not replaced
by an adequate amount of insurance coverage, (xxii) settle pending or
threatened litigation in an amount, for any individual matter, exceeding
$25,000, (xxiii) subject to certain exceptions, enter into any Investor
Commitment, (xxiv) enter into any forward commitment with GNMA extending beyond
the Closing Date, or (xxv) agree to do any of the foregoing.
Pursuant to the Merger Agreement, BAC has also agreed that until the
Effective Time, except as provided in the Merger Agreement or with the prior
consent of Arbor, BAC and its subsidiaries will not take any action that is
intended or may reasonably be expected to result in any of its representations
and warranties set forth in the Merger Agreement being or becoming untrue in
any material respect, or in a violation of any provision of the Merger
Agreement except as may be required by applicable law.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, either before or after its approval by the Arbor shareholders, as
follows: (i) by the mutual consent of BAC and Arbor in writing; (ii) by either
BAC or Arbor upon written notice to the other (a) 90 days after the date on
which any request or application for a Requisite Regulatory Approval is denied
or withdrawn at the request of the Governmental Entity which must grant such
approval, unless within such 90-day period a petition for rehearing or an
amended application has been filed with the applicable Governmental Entity (or
unless the failure to obtain the necessary regulatory approval is due to the
failure of the party seeking to terminate the Merger Agreement to perform or
observe its covenants and agreements set forth in the Merger Agreement) or (b)
if any Governmental Entity of competent jurisdiction issues a final
nonappealable order enjoining or otherwise prohibiting the consummation of any
of the transactions contemplated by the Merger Agreement; (iii) by either BAC
or Arbor in the event that the Merger has not been consummated by June 30,
1995, unless the failure to consummate the Merger by such date is due to the
failure of the party seeking to terminate the Merger Agreement to perform its
covenants set forth in the Merger Agreement; (iv) by either BAC or Arbor, if
the Arbor shareholders fail to approve the Merger Agreement (provided that if
Arbor is the terminating party, it is not in material breach of its obligations
in the Merger Agreement); (v) by either BAC or Arbor in the event of (a) a
material breach by the other of any of its representations or warranties
contained in the Merger Agreement which is not cured within 30 days after
written notice of such breach is given to the breaching party (or which breach
cannot be cured prior to the Closing) and which breach, individually or
together with all other such breaches, has had or could reasonably be expected
to have, a Material Adverse Effect on the breaching party, or (b) a material
breach of any of the covenants or agreements contained in the Merger Agreement
by the other which is not cured within 30 days after written notice of such
breach is given to the breaching party (provided that in either case the
terminating party is not in material breach of any of its representations,
warranties or covenants); (vi) by Arbor, by action of its Board of Directors,
whether before or after approval of the Merger by Arbor's shareholders, in the
event that the Average Closing Price is less than $37.00 per share; provided
that Arbor will have no right of termination if BAC notifies Arbor that BAC has
increased the Exchange Ratio such that the per share consideration to be paid
for each share of Arbor Common Stock upon consummation of the Merger is equal
to the consideration that would have been paid had the Average Closing Price
been $37.00 per share; and (vii) by Arbor, if the net after tax amount accrued
by Arbor on its books and records as of the Valuation Date with respect to any
action, suit, claim or proceeding brought against Arbor or its officers and
directors by any shareholder arising out of the transactions contemplated by
the Merger Agreement or alleging violations of federal or state securities laws
("Stockholder Proceedings") exceeds $1.5 million; provided, however, that, if
within 5 business days after the receipt by BAC of notice from Arbor of its
intention to exercise its termination right, BAC agrees to add back to Adjusted
Equity any net after tax amounts accrued by Arbor on its books and records as
of the Valuation Date with respect to such Stockholder Proceedings in excess of
$1.5 million (such amounts being referred to as the "Excess Litigation
Accruals"), then such termination by Arbor will be rescinded; provided
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further, however, that the Actions will not be deemed to be "Stockholder
Proceedings" for purposes of this termination right.
In the event of the termination of the Merger Agreement by either BAC or
Arbor, neither BAC nor Arbor will have any further obligations under the Merger
Agreement except as set forth below. If the Merger Agreement is terminated (A)
(1) by either BAC or Arbor pursuant to clause (iv) of the immediately preceding
paragraph or (2) by BAC pursuant to clause (iii) of the immediately preceding
paragraph (provided that Arbor shall not itself be entitled to terminate the
Merger Agreement pursuant to clause (iii)), and prior thereto there shall have
been a public announcement with respect to an Acquisition Event (as defined
below) or Arbor's Board of Directors shall have failed to recommend that
Arbor's shareholders vote in favor of the Merger Agreement or shall have
withdrawn or modified such recommendations in any manner adverse to BAC or an
Acquisition Event shall occur within 6 months after the date of such
termination referred to in this clause (A), or (B) by BAC pursuant to clause
(v)(b) of the immediately preceding paragraph, Arbor shall pay promptly, but in
no event later than two business days after the later of the applicable date of
the termination or the Acquisition Event described in clause (A)(1) or (2)
above, by wire transfer of immediately available funds, to BAC the sum of $3
million as reimbursement for BAC's time, effort and expense in pursuing the
transactions contemplated by the Merger Agreement. "Acquisition Event" means
any of the following: (i) any person or group of persons (other than BAC, any
affiliate thereof or Ivan and Anita Kaufman) has publicly announced, commenced
or completed a tender offer for or otherwise acquired beneficial ownership of
19.9% or more of the outstanding shares of Arbor Common Stock; (ii) Arbor has
authorized, recommended, proposed or publicly announced an intention to
authorize, recommend or propose, or entered into, an agreement with any person
(other than BAC or an affiliate thereof) to (A) effect a merger, consolidation
or similar transaction involving Arbor, (B) sell, lease or otherwise dispose of
assets of Arbor or its subsidiaries representing 19.9% or more of the
consolidated assets of Arbor and its subsidiaries, or (C) issue, sell or
otherwise dispose of (including by way of merger, consolidation, share exchange
or any similar transaction) securities representing 19.9% or more of the voting
power of Arbor or any subsidiaries (other than ANCMC) thereof. The Merger
Agreement further provides that no party will be relieved or released from any
liabilities or damages arising out of its willful breach of any provisions of
the Merger Agreement.
AMENDMENT AND WAIVER
Subject to compliance with applicable law, the Merger Agreement may be
amended by BAC or Arbor by action taken or authorized by their respective
Boards of Directors at any time before or after approval by the Arbor
shareholders of the matters presented at the Special Meeting in connection with
the Merger, provided, however, that after Arbor's shareholders have approved
the transactions contemplated by the Merger Agreement, any amendment which
reduces the amount or changes the form of consideration to be delivered to the
Arbor shareholders must be approved by the Arbor shareholders.
Prior to the Effective Time, any provision of the Merger Agreement may be
waived (or the time for performance of any obligation may be extended) by the
party benefitting from such provision by an agreement in writing signed on
behalf of the party waiving such provision.
EXPENSES
All costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated therein shall be paid by the party incurring such
expense, provided, however, that the costs and expenses of printing and mailing
this Proxy Statement/Prospectus, and all filing and other fees paid to the SEC
in connection with the Merger, shall be borne equally by BAC and Arbor.
EFFECT OF THE MERGER; LIQUIDATIONS
Pursuant to the Merger Agreement, at the Effective Time, AHAC, an indirect
wholly owned subsidiary of BAC, will be merged with and into Arbor. Arbor will
become an indirect wholly owned subsidiary of BAC, and Arbor shareholders will
become stockholders of BAC. See "THE MERGER--General."
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Immediately following the Merger, BAC and BAFSB plan to cause first Arbor and
then each of its subsidiaries to adopt plans of liquidation pursuant to which
they will transfer all of their respective assets and employees and certain of
their respective liabilities to BAFSB, and thereafter Arbor and its
subsidiaries will each be dissolved. BAFSB will continue as a federal savings
bank and a wholly owned subsidiary of BAC.
The Merger Agreement provides that the transfer of assets from Arbor and its
subsidiaries to BAFSB following the Merger shall be treated with the Merger as
part of the same transaction. Accordingly, the Merger Agreement requires Arbor
to use all reasonable efforts to obtain all consents and approvals required
under all agreements between Arbor and third parties, including leases,
mortgage servicing agreements and software licenses, for the valid assignment
of such agreements to BAFSB immediately after the Merger.
NO SOLICITATION OF TRANSACTIONS
Arbor has agreed in the Merger Agreement that neither it nor any of its
subsidiaries will authorize or permit any of its officers, directors, employees
or agents to directly or indirectly solicit, initiate or encourage any
inquiries relating to, or the making of any proposal which constitutes, or
which may reasonably be expected to lead to, a "takeover proposal" (as defined
below), or, except to the extent legally required for the discharge of the
fiduciary duties of the Arbor Board as reasonably determined by the Arbor Board
after consultation with Arbor's outside counsel, recommend or endorse any
takeover proposal, or participate in any discussions or negotiations, or
provide third parties with any non-public information, relating to any such
inquiry or proposal or otherwise facilitate any effort or attempt to make or
implement a takeover proposal; provided, however, that Arbor may communicate
information about any such takeover proposal to its shareholders if, in the
reasonable judgment of the Arbor Board after consultation with Arbor's outside
counsel, such communication is required under applicable law. As used in the
Merger Agreement, "takeover proposal" means any tender or exchange offer,
proposal for a merger, consolidation or other business combination involving
Arbor or any subsidiary of Arbor or any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the assets
of, Arbor or any subsidiary of Arbor other than the transactions contemplated
or permitted by the Merger Agreement.
RESALES OF BAC COMMON STOCK RECEIVED IN THE MERGER
The shares of BAC Common Stock to be issued in the Merger will be registered
under the Securities Act and will be freely transferable under the Securities
Act, except for shares issued to any shareholder who may be deemed to be an
"affiliate" of BAC or Arbor for purposes of Rule 145 under the Securities Act.
Persons who may be deemed to be affiliates generally include individuals or
entities that control, are controlled by or are under common control with Arbor
or BAC at the time of the Special Meeting or BAC at or after the Effective
Time, and may include certain officers and directors of Arbor or BAC as well as
principal stockholders of Arbor or BAC. Rules 144 and 145 promulgated by the
SEC under the Securities Act restrict the sale of BAC Common Stock received in
the Merger by affiliates and certain of their family members and related
interests. Generally speaking, during the two years following the Effective
Time, affiliates of Arbor, provided they are not affiliates of BAC, may
publicly resell the BAC Common Stock received by them in the Merger with
certain limitations as to the amount of BAC Common Stock sold in any rolling
three-month period and as to the manner of such sale. After the two-year
period, such affiliates of Arbor who are not affiliates of BAC may resell their
shares without such restrictions. Persons who become affiliates of BAC prior to
the Effective Time may publicly resell the BAC Common Stock received by them in
the Merger subject to similar limitations and subject to certain filing
requirements specified in Rule 144. The ability of affiliates to resell shares
of BAC Common Stock received in the Merger under Rule 144 or 145 as summarized
herein generally will be subject to BAC's having satisfied the Exchange Act
reporting requirements for specified periods prior to the time of such sale.
Affiliates also would be permitted to resell BAC Common Stock received in the
Merger pursuant to an effective "resale" registration statement under of
Securities Act (other than the Registration Statement of which this Proxy
Statement/Prospectus forms a part) or any available exemption from the
Securities Act registration requirements.
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SEC guidelines regarding qualifying for the pooling of interests method of
accounting also limit sales by affiliates of the acquiring and acquired company
in a business combination. SEC guidelines indicate further that the pooling of
interests method of accounting will generally not be challenged on the basis of
sales by affiliates of the acquiring or acquired company if they do not dispose
of any of the shares they own or shares they receive in connection with a
merger during the period beginning 30 days before the Merger and ending when
financial results covering at least 30 days of post-merger operations of the
combined entity have been published.
Arbor has agreed in the Merger Agreement to use its reasonable efforts to
cause each person who may be deemed to be an affiliate (for purposes of Rule
145 of the Securities Act) of Arbor to deliver to BAC a written agreement
intended to ensure compliance with the Securities Act and preserve the
accounting treatment of the Merger as a pooling of interests (collectively, the
"Affiliates Agreements").
STOCK EXCHANGE LISTING
BAC Common Stock is listed on the NYSE and the Pacific, Chicago, London and
Tokyo Stock Exchanges. BAC has agreed to use its reasonable efforts to cause
the shares of BAC Common Stock to be issued in the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time. The obligations of the parties to consummate the Merger are
subject to approval for listing by the NYSE of such shares. See "--Conditions
to the Merger" above. BAC also intends to list such shares on the Pacific,
Chicago, London and Tokyo Stock Exchanges.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
amounts of assets, liabilities and equity of BAC and Arbor will be combined at
the Effective Time.
The Merger Agreement provides that a condition to BAC's obligation to
consummate the Merger is the receipt of a letter from BAC's independent
accountants, dated as of the Effective Date, advising that the transactions
contemplated by the Merger Agreement may be properly accounted for as a pooling
of interests under APB No. 16 if closed and consummated in accordance with the
Merger Agreement, provided, however, that this condition shall be deemed to
have been waived by BAC if the accountants' inability to issue such letter is
due to actions taken by BAC, or its affiliates, other than those actions
required or contemplated under the Merger Agreement. See "--Conditions to the
Merger" above.
For information concerning certain restrictions to be imposed on the
transferability of BAC Common Stock to be received by affiliates in order,
among other things, to ensure the availability of pooling of interests
accounting treatment, see "--Resales of BAC Common Stock Received in the
Merger" above.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal Federal income tax consequences
of the Merger to the shareholders of Arbor. The discussion set forth below is
based on current provisions of the Code, Treasury Regulations (proposed,
temporary and final) promulgated thereunder, judicial decisions and
administrative rulings. All of the foregoing are subject to change and any such
change may be retroactively applied, which could affect the validity of this
discussion. The Federal income tax discussion set forth below may not be
applicable to certain classes of taxpayers, including securities dealers,
foreign persons and persons who acquired shares of Arbor Common Stock pursuant
to the exercise of employee stock options or rights or otherwise as
compensation. Arbor shareholders are urged to consult their tax advisors as to
the tax consequences specific to them of the Merger including the applicability
and effect of state, local and other tax laws.
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Consummation of the Merger is conditioned upon receipt by BAC of the Morrison
& Foerster Opinion and receipt by Arbor of the Skadden Opinion, each dated as
of the Effective Time. The Morrison & Foerster Opinion and the Skadden Opinion
will be substantially to the effect that, on the basis of facts (which are
consistent with the state of facts existing at the Effective Time),
representations and assumptions set forth or referred to in such opinions, the
Merger and Liquidations will be treated for Federal income tax purposes as a
reorganization or part of one or more reorganizations within the meaning of
Section 368(a) of the Code; and, accordingly, (i) no gain or loss will be
recognized by the shareholders of Arbor who exchange their Arbor Common Stock
solely for BAC Common Stock pursuant to the Merger (except with respect to cash
received in lieu of a fractional share interest in BAC Common Stock) (ii) the
tax basis of the BAC Common Stock received by Arbor shareholders who exchange
all of their Arbor Common Stock solely for BAC Common Stock in the Merger will
be the same as the tax basis of the Arbor Common Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share interest for
which cash is received); and (iii) the holding period of the BAC Common Stock
in the hands of an Arbor shareholder will include the holding period of the
Arbor Common Stock exchanged therefor, provided such Arbor Common Stock is held
as a capital asset at the Effective Time.
Any cash received by the holders of Arbor Common Stock in lieu of a
fractional share of BAC Common Stock will be treated as having been received in
redemption of the fractional share interest so cashed out, and will result in
taxable gain or loss. The receipt of such cash generally should result in gain
or loss in an amount equal to the difference between the amount of cash
received and the basis of the fractional share interest surrendered in exchange
therefor. Such gain or loss will be capital gain or loss if the fractional
share interest was held as a capital asset at the Effective Time, and such
capital gain or loss will be long-term capital gain or loss if the holding
period for such fractional share interest was greater than one year.
DIVIDENDS
Under the Merger Agreement, Arbor has agreed that, until the Effective Time,
it will not declare or pay any dividends on, or make any other distributions in
respect of, Arbor Common Stock. See "--Conduct of Arbor's Business Pending the
Merger."
CERTAIN RELATED TRANSACTIONS
SUBSIDIARY SALE
In the Merger Agreement, Arbor agreed to use its reasonable efforts to enter
into an agreement, on or before the Valuation Date, to sell, prior to the
Effective Time, all of the outstanding shares of capital stock of ANCMC to a
third party other than any of Arbor's subsidiaries, for a fixed price in cash.
Pursuant to this undertaking, Arbor engaged Goldman Sachs to conduct an auction
of ANCMC. Goldman Sachs solicited bids from interested purchasers in the
auction. Arbor selected Ivan Kaufman, the bidder offering the highest cash
price in the auction, as the winning bidder, and plans to consummate the sale
of ANCMC to Mr. Kaufman prior to the Effective Time. Goldman Sachs has rendered
an opinion as to the fairness of the sale price to Arbor and its shareholders,
in form and substance reasonably acceptable to BAC. The compensation
arrangement for Goldman Sachs for rendering the fairness opinion was not
contingent upon the consummation of the sale of the ANCMC stock. A majority of
Arbor's independent directors have approved the sale of ANCMC to Mr. Kaufman.
Consummation of the sale of ANCMC prior to the Effective Time is a condition to
the respective obligations of BAC, BAFSB and AHAC to consummate the Merger.
STOCK OPTION AGREEMENTS
In order to induce BAC, BAFSB and AHAC to enter into the Merger Agreement,
Ivan Kaufman and Anita Kaufman (the "Grantors") have each granted to BAC a
Stock Option, exercisable only in certain
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circumstances, to purchase up to 3,311,354 and 574,980 shares of Arbor Common
Stock owned by the Grantors, respectively, for a purchase price (the "Exercise
Price") of $16.35 per share (subject to appropriate adjustment in the event of
any stock split, reclassification, recapitalization, reorganization or other
similar event).
BAC (or any lawful subsequent holder of the Stock Option Agreements) may
exercise the Stock Options following the occurrence of any of the following
events (each, a "Triggering Event"):
(a) prior to the termination of the Merger Agreement, (i) any person or
group, other than BAC or any of its affiliates, shall have commenced a
tender or exchange offer for 19.9% or more of the outstanding shares of
Arbor Common Stock, (ii) any person or group, other than BAC or any of its
affiliates and other than the Grantors, shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 19.9% or more of
the outstanding shares of Arbor Common Stock; (iii) Arbor's shareholders
shall fail to approve the Merger Agreement at a meeting called to consider
the Merger Agreement, if such meeting shall have been preceded by (x) the
public announcement by any person or group (other than BAC or any of its
affiliates) of an offer or proposal to acquire, merge or consolidate with
the Arbor, (y) the filing of an application or notice, other than by BAC or
any of its affiliates, under any federal or state banking, insurance,
antitrust or other statute, with respect to the acquisition or proposed
acquisition of 19.9% or more of the outstanding Shares of Arbor Common
Stock, or (z) the Arbor Board publicly withdrawing or modifying, or
publicly announcing its intent to withdraw or modify, its recommendation
that the Arbor shareholders approve the transactions contemplated by the
Merger Agreement; or (iv) the acceptance by the Arbor Board or the public
recommendation by the Arbor Board that the shareholders accept, an offer or
proposal from any person or group (other than BAC or any of its
affiliates), to acquire 19.9% or more of the outstanding shares of Arbor
Common Stock, or a substantial portion (19.9% or more) of Arbor's
consolidated assets, or for a merger or consolidation or any similar
transaction involving Arbor;
(b) the occurrence of any of the events described in clause (a) within
six (6) months following the termination of the Merger Agreement by BAC
based on a material breach by Arbor of any of its covenants or agreements
contained in the Merger Agreement;
(c) after a proposal is made by a third party to Arbor or its
shareholders to engage in (i) a merger or consolidation, or any similar
transaction, involving Arbor, (ii) a purchase, lease or other acquisition
representing 19.9% or more of Arbor's consolidated assets, or (iii) a
purchase or other acquisition of securities representing 19.9% or more of
the voting power of Arbor, Arbor shall have breached any covenant or
obligation contained in the Merger Agreement and such breach (x) would
entitle BAC to terminate the Merger Agreement and (y) shall not have been
cured prior to the date the holder of a Stock Option Agreement duly gives
notice of its desire to exercise the Stock Option; and
(d) with respect to each Option Agreement, any material breach by the
applicable Grantor of such Option Agreement or the Voting Agreement or
Proxy Agreement signed by such Grantor.
The Stock Options will expire upon the first to occur of (i) the consummation
of the Merger, (ii) consent of BAC and the respective Grantors, (iii) the
termination of the Merger Agreement, unless a Triggering Event shall have
occurred or may occur within six months after the date of such termination,
(iv) the expiration of the 6-month period after the termination of the Merger
Agreement, unless a Triggering Event shall have occurred, and (v) the
expiration of a 12-month period following the first occurrence of a Triggering
Event.
BAC shall pay in cash for any shares of Arbor Common Stock purchased pursuant
to the Stock Options.
Upon exercise of the Stock Options, the holder or holders of shares of Arbor
Common Stock acquired upon such exercise (the "Underlying Shares") shall,
within 6 months from the date of such exercise, either:
(i) offer, or cause Arbor or an affiliate of such holder to offer, to
acquire all of the outstanding shares of Arbor Common Stock not then held
by such holder or any affiliate thereof (the "Minority Shares")
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for cash at a per share price not less than the per share exercise price
paid to the Grantors upon such exercise (as adjusted for any changes in
Arbor's capitalization after the exercise date); or
(ii) sell, exchange, transfer or otherwise dispose of all of the
Underlying Shares to one or more persons or entities (other than BAC or any
affiliate thereof) (a "Third Party") on terms substantially equivalent to
those offered by such persons or entities to the holders of those Minority
Shares not already held by such persons or entities.
In the event that the holder of the Underlying Shares fails to purchase all
of the Minority Shares or a Third Party shall not have purchased all of the
Underlying Shares and the Minority Shares within the period specified above,
each Grantor shall have the option, within 60 days after the expiration of such
period, to repurchase at a per share price equal to the Exercise Price (subject
to adjustment as provided above) all shares of Arbor Common Stock previously
acquired from such Grantor upon exercise of the Stock Options from the holder
or holders thereof.
VOTING AGREEMENTS AND PROXY AGREEMENTS
In order to induce BAC, BAFSB and AHAC to enter into the Merger Agreement,
the Grantors have each entered into the Voting Agreements. Under the Voting
Agreements, the Grantors agree to vote (or cause to be voted) the shares of
Arbor Common Stock owned by them, in any circumstance in which the vote or
approval of the shareholders of Arbor is sought, (a) in favor of (i) adoption
of the Merger Agreement and approval of the Merger and the transactions
contemplated by the Merger Agreement, and (ii) any other matter relating to the
consummation of the transactions contemplated by the Merger Agreement; and (b)
against (i) any proposal for any recapitalization, merger, sale of assets or
other business combination (other than the Merger) between Arbor or any other
person or entity or any other action or agreement that would result in a breach
of any covenant, representation or warranty or any other obligation or
agreement of Arbor under the Merger Agreement or which could result in any of
the conditions to BAC's or Arbor's obligations under the Merger Agreement not
being fulfilled, or (ii) any proposal or transaction which would in any manner
impede, frustrate, prevent or nullify the Merger, the Merger Agreement or any
of the other transactions contemplated by the Merger Agreement.
In connection with the voting agreements, each of the Grantors entered into a
Proxy Agreement with BAC whereby the Grantors irrevocably granted to BAC (with
full power of substitution) their respective proxies (the "Proxies") to vote
the shares of Arbor Common Stock owned by them in the manner described in the
preceding paragraph, as more fully described in, and under the circumstances
set forth in, the Proxy Agreements.
The Voting Agreements and the Proxies will terminate upon the first to occur
of (i) the Effective Time, (ii) the termination of the Merger Agreement, and
(iii) September 23, 1995.
EFFECT OF STOCK OPTION AND VOTING AGREEMENTS
The Stock Option Agreements and the Voting Agreements are intended to
increase the likelihood that the Merger will be consummated in accordance with
the terms of the Merger Agreement. Consequently, certain aspects of such
agreements may have the effect of discouraging persons who might now or prior
to the Effective Time be interested in acquiring all or a significant interest
in Arbor from considering or proposing such an acquisition, even if such
persons were prepared to pay a higher price per share for Arbor Common Stock
than the price per share provided for in the Merger Agreement.
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CAPITALIZATION OF BANKAMERICA CORPORATION
The consolidated capitalization of BAC at September 30, 1994, and the
adjusted consolidated capitalization of BAC after giving effect to the Merger
is set forth below. All amounts shown are in millions of dollars.
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED(A)
---------- --------------
<S> <C> <C>
Long-term debt
Senior Debt
BAC................................................ $ 8,635 $ 8,639
Subsidiary Obligations............................. 327 327
------- -------
8,962 8,966
Subordinated Debt
BAC................................................ 5,077 5,077
Subsidiary Obligations............................. 465 465
------- -------
5,542 5,542
------- -------
Total Long-Term Debt............................. $14,504 $14,508
======= =======
Subordinated Capital Notes (b)....................... $ 605 $ 605
======= =======
Preferred Stock (authorized: 70,000,000 shares;
issued 54,185,457 shares)........................... $ 3,368 $ 3,368
======= =======
Common Stockholders' Equity:
Common Stock, par value $1.5625 (authorized:
700,000,000 shares; issued 370,903,066 shares
(historical), 373,668,453 (as adjusted))(c)........ 580 584
Additional paid-in capital(c)....................... 7,732 7,749
Retained earnings................................... 7,480 7,496
Net unrealized losses on available-for-sale
securities......................................... (201) (201)
Common stock in treasury, at cost (696,911 shares).. (29) (29)
Total Common Stockholders' Equity................ $15,562 $15,599
======= =======
Total Capitalization of BAC.................... $34,039 $34,080
======= =======
</TABLE>
- --------
(a) Subsequent to September 30, 1994, the capitalization of BAC and its
consolidated subsidiaries has been affected by various issuances,
redemptions, repurchases and maturities which are not reflected in this
table.
(b) Issuances of common and preferred stock of $600 million have been dedicated
to retire or redeem subordinated capital notes.
(c) Pursuant to the Merger Agreement, each share of Arbor Common Stock and each
Arbor Option will be converted into a number of shares of BAC Common Stock
based upon an exchange ratio of shares of BAC Common Stock for each share
of Arbor Common Stock. For purposes of this Capitalization table, common
stock and additional paid-in capital were adjusted based on BAC Common
Stock market price of $39.75 at December 9, 1994, assuming an Exchange
Ratio of 0.4113 and the issuance of 2.8 million shares of BAC Common Stock.
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DESCRIPTION OF BAC CAPITAL STOCK
GENERAL
BAC's authorized capital stock consists of 700,000,000 shares of BAC Common
Stock, par value $1.5625 per share, and 70,000,000 shares of preferred stock,
without par value ("BAC Preferred Stock"). At the close of business of
September 30, 1994, there were approximately 370,206,155 shares of BAC Common
Stock outstanding, exclusive of treasury shares and 54,185,457 shares of BAC
Preferred Stock outstanding.
Descriptions of the material terms of BAC's capital stock are set forth
below. Such descriptions are not complete and are subject in all respects to
the Delaware Corporation Law and BAC's Certificate of Incorporation, including
the certificates of designation pursuant to which the outstanding shares of BAC
Preferred Stock have been issued.
BAC COMMON STOCK AND RIGHTS
The description of BAC Common Stock should be read carefully by the holders
of Arbor Common Stock. As described in "THE MERGER--Exchange Ratio," at the
Effective Time, the issued and outstanding shares of Arbor Common Stock will be
converted into the right to receive shares of BAC Common Stock or, in lieu of
fractional shares, cash.
Subject to any prior rights of BAC Preferred Stock then outstanding, holders
of BAC Common Stock are entitled to such dividends as may be declared from time
to time by BAC's Board of Directors out of the funds legally available
therefor.
Each holder of BAC Common Stock is entitled to one vote for each share owned
by him or her on all matters submitted to a vote of the stockholders of BAC.
Such shares are not entitled to any cumulative voting rights. In the event of
any liquidation, dissolution or winding up of BAC, the holders of BAC Common
Stock are entitled to share equally and ratably in any assets remaining after
the payment of all debts and liabilities, subject to the prior rights, if any,
of holders of BAC Preferred Stock. Holders of BAC Common Stock have no
preemptive or other subscription or conversion rights. BAC Common Stock is not
subject to redemption, and the outstanding shares are, and the shares issued in
connection with the Merger will be, fully paid and nonassessable.
Each share of BAC Common Stock, including those to be issued to holders of
Arbor Common Stock in connection with the Merger, is accompanied by one
preferred share purchase right (a "BAC Right"). Each BAC Right entitles the
registered holder to purchase from BAC one-hundredth of a share of Cumulative
Participating Preferred Stock, Series E, without par value, of BAC (the "BAC
Series E Preferred"), at a price of $50 per one-hundredth of a preferred share
(the "BAC Rights Purchase Price"), subject to adjustment. The description and
terms of the BAC Rights are set forth in a Rights Agreement (the "BAC Rights
Agreement") between BAC and Manufacturers Hanover Trust Company of California
(now Chemical Trust Company of California), as rights agent, as amended by
Amendment No. 1 to the BAC Rights Agreement dated as of August 11, 1991.
Certificates for shares of BAC Common Stock issued in connection with the
Merger will contain a notation incorporating the BAC Rights Agreement by
reference.
Until the earlier to occur of (i) ten days following a public announcement
that a person or group of affiliates or associated persons (a "BAC Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
BAC Common Stock, or (ii) ten business days (or such later date as may be
determined by action of the BAC Board of Directors prior to such time as any
person becomes a BAC Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person or
group of persons of 20% or more of such outstanding BAC Common Stock (the
earlier of such dates being called
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the "BAC Distribution Date"), the BAC Rights will be evidenced by the
certificates representing BAC Common Stock. In addition, the BAC Rights
Agreement provides that, until the BAC Distribution Date, the BAC Rights will
be transferred with and only with shares of BAC Common Stock.
The BAC Rights are not exercisable until the BAC Distribution Date.
BAC Series E Preferred purchasable upon exercise of the BAC Rights will be
redeemable by BAC at a formula price. Each share of BAC Series E Preferred will
be entitled to an aggregate dividend of 100 times the dividend declared per
share of BAC Common Stock. In the event of liquidation, the holders of BAC
Series E Preferred will be entitled to a minimum preferential liquidation
payment of $100 per share, plus accrued and unpaid dividends, but will be
entitled to an aggregate payment of 100 times the payment made per share of BAC
Common Stock. Each share of BAC Series E Preferred will have 100 votes, voting
together with shares of BAC Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of BAC Common Stock are
exchanged, each share of BAC Series E Preferred will be entitled to receive 100
times the amount received per share of BAC Common Stock. These rights are
protected by customary antidilution provisions.
Because of the nature of the BAC Series E Preferred's dividend, liquidation
and voting rights, the value of the one-hundredth interest in a share of BAC
Series E Preferred purchasable upon exercise of each BAC Right should
approximate the value of one share of BAC Common Stock.
In the event that BAC is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are
sold, proper provision will be made so that each holder of a BAC Right will
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the right, that number of shares of common stock of
the acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the BAC Right. In the event that any
person or group of affiliated or associated persons acquires beneficial
ownership of 20% or more of the outstanding shares of BAC Common Stock (unless
such person increased its beneficial ownership from less than 20% to 80% or
more of the outstanding shares of BAC Common Stock by a purchase pursuant to a
tender offer for all of the shares of BAC Common Stock for cash), proper
provisions shall be made so that each holder of a BAC Right, other than BAC
Rights beneficially owned by such person or group of affiliated or associated
persons (which will thereafter be void), will thereafter have the right to
receive upon exercise that number of shares of BAC Common Stock having a market
value of two times the exercise price of the BAC Right.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
shares of BAC Common Stock, the Board of Directors of BAC may redeem the BAC
Rights in whole, but not in part, at a price of $0.001 per BAC Right (rounded
upward for each holder to the nearest $0.01). In addition, the BAC Rights may
be subject to automatic redemption in certain circumstances upon approval of
the majority of the outstanding shares of BAC Common Stock entitled to vote
thereon at a special meeting to be held in connection with certain acquisition
offers.
Copies of the BAC Rights Agreement and Amendment No. 1 thereto, which was
executed on August 11, 1991, have been filed with the SEC as an exhibit to a
Registration Statement on Form 8-A dated April 13, 1988, and as an exhibit to
the amendment to such Registration Statement filed on Form 8 dated August 20,
1991, respectively.
The foregoing description of the material terms of the BAC Common Stock and
the BAC Rights does not purport to be a complete description of all of the
terms of the BAC Common Stock and the BAC Rights and is qualified in its
entirety by reference to the terms of the BAC Common Stock and the BAC Rights,
which are incorporated herein by reference and are set forth in full in Article
Fourth of BAC's Certificate of Incorporation and the BAC Rights Agreement,
respectively.
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OUTSTANDING PREFERRED STOCK
Under BAC's Certificate of Incorporation, the BAC Board of Directors is
authorized without further stockholder action to provide for the issuance of up
to 70,000,000 shares of BAC Preferred Stock in one or more series with such
voting powers, full or limited, and with such designation, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be set forth in resolutions
providing for the issue thereof adopted by the BAC Board of Directors.
As of September 30, 1994, BAC had outstanding 5,178,000 shares of Cumulative
Adjustable Preferred Stock, Series A (the "BAC Series A Preferred"), 3,546,100
shares of Cumulative Adjustable Preferred Stock, Series B (the "BAC Series B
Preferred"), 7,250,000 shares of 9 5/8% Cumulative Preferred Stock, Series F
(the "BAC Series F Preferred"), 4,998,357 shares of 6 1/2% Cumulative
Convertible Preferred Stock, Series G (the "BAC Series G Preferred"),
11,250,000 shares of 9% Cumulative Preferred Stock, Series H (the "BAC Series H
Preferred"), 200,000 shares of 11% Preferred Stock, Series I (the "BAC Series I
Preferred"), 400,000 shares of 11% Preferred Stock, Series J (the "BAC Series J
Preferred"), 14,600,000 shares of 8 3/8% Cumulative Preferred Stock, Series K
(the "BAC Series K Preferred"), 800,000 shares of 8.16% Cumulative Preferred
Stock, Series L (the "BAC Series L Preferred"), 700,000 shares of 7 7/8%
Cumulative Preferred Stock, Series M (the "BAC Series M Preferred"), 475,000
shares of 8 1/2% Cumulative Preferred Stock, Series N (the "BAC Series N
Preferred"), 1,788,000 shares of Adjustable Rate Preferred Stock, Series 1 (the
"BAC Series 1 Preferred") and 3,000,000 shares of Adjustable Rate Cumulative
Preferred Stock, Series 2 (the "BAC Series 2 Preferred"). The holders of all
outstanding series of BAC Preferred Stock rank on parity with each other, and
prior to the holders of the BAC Common Stock, with respect to dividends and
liquidation.
If the equivalent of six quarterly dividends payable on any series of the BAC
Preferred Stock are in default (whether or not declared or consecutive), the
authorized number of directors on the BAC Board of Directors shall be increased
by two and the holders of all outstanding series of BAC Preferred Stock (except
that BAC Series 2 Preferred shall only be entitled to vote if six quarterly
dividends payable on BAC Series 2 Preferred are in default), voting as a single
class without regard to series, will be entitled to elect such two additional
directors until all dividends in default have been paid or declared and set
apart for payment.
Except as provided below, the affirmative vote of the holders of at least
two-thirds of the outstanding shares of the BAC Preferred Stock, voting as a
single class without regard to series, will be required (i) for any amendment
of BAC's Certificate of Incorporation (or any certificate supplemental thereto
providing for the capital stock of BAC) or By-laws that will materially and
adversely change the preferences, privileges, rights or powers of the BAC
Preferred Stock, but in any case in which one or more, but not all, series of
BAC Preferred Stock would be so affected as to their preferences, privileges,
rights or powers, only the consent of holders of at least two-thirds of the
shares of each series that would be so affected, voting separately as a class,
shall be required or (ii) to issue any class of stock that shall have
preference as to dividends or distribution of assets over any outstanding
series of BAC Preferred Stock. So long as the dividends thereon have been paid,
shares of BAC Series I Preferred and BAC Series J Preferred have no voting
power, except that the vote or consent of holders of at least two-thirds of all
outstanding shares of BAC Series I Preferred and BAC Series J Preferred, each
voting separately as a class, is required to authorize any amendment to BAC's
Certificate of Incorporation or to the Certificates of Designation for the BAC
Series I Preferred and BAC Series J Preferred, respectively; provided, however,
that any increase or decrease in the amount of authorized preferred stock or
the creation and issuance of other series of preferred stock or any increase or
decrease in the amount of authorized shares or issued shares of the BAC Series
I Preferred and BAC Series J Preferred or of any other series of preferred
stock, in each case ranking on a parity with or junior to such series of the
BAC Series I Preferred and BAC Series J Preferred with respect to the payment
of dividends and the distribution of assets upon liquidation, dissolution or
winding up, will not be deemed to materially and adversely affect the powers,
preferences, privileges or rights of the BAC Series I Preferred and BAC
Series J Preferred.
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In the event of voluntary or involuntary liquidation, dissolution or winding
up of BAC, the holders of BAC Preferred Stock are entitled to receive out of
the assets of BAC available for distribution to stockholders, before any
distribution of assets is made to holders of BAC Common Stock, an amount equal
to the stated value per share, plus accrued and unpaid dividends. Except as
required by law, the holders of BAC Preferred Stock are not entitled to vote
except under limited circumstances. The BAC Preferred Stock is not convertible
into shares of other capital stock, except for the BAC Series G Preferred
Stock. The BAC Preferred Stock does not have preemptive rights and is not
subject to any sinking fund or other obligation of BAC to repurchase or retire
the BAC Preferred Stock.
BAC Series A Preferred. The BAC Series A Preferred has a stated value of
$50.00 per share. The BAC Series A Preferred provides for cumulative dividends
payable quarterly at adjustable rates based on the discount rates and average
yields of certain United States government securities. The BAC Series A
Preferred is subject to redemption, in whole or in part, at the option of BAC,
at $50.00 per share, plus accrued and unpaid dividends.
BAC Series B Preferred. The BAC Series B Preferred has a stated value of
$100.00 per share. The BAC Series B Preferred provides for cumulative dividends
payable quarterly at adjustable rates based on the discount rates and average
yields of certain United States government securities. The BAC Series B
Preferred is subject to redemption, in whole or in part, at the option of BAC,
at $100.00 per share, plus accrued and unpaid dividends.
BAC Series F Preferred. The BAC Series F Preferred has a stated value of
$25.00 per share. The BAC Series F Preferred provides for cumulative dividends
payable quarterly at the rate of 9 5/8% per annum calculated as a percentage of
the stated value. The BAC Series F Preferred is subject to redemption, in whole
or in part, at the option of BAC at $25.00 per share on and after April 15,
1996, plus accrued and unpaid dividends.
BAC Series G Preferred. The BAC Series G Preferred has a stated value of
$50.00 per share. The BAC Series G Preferred provides for cumulative dividends
payable quarterly at the rate of 6 1/2% per annum calculated as a percentage of
the stated value. The BAC Series G Preferred is subject to redemption, in whole
or in part, at the option of BAC at $51.95 per share during the twelve months
beginning May 31, 1995, at decreasing prices thereafter through May 30, 2001,
and at $50.00 per share thereafter, in each case plus accrued and unpaid
dividends.
The BAC Series G Preferred is convertible, at any time, unless previously
redeemed, into BAC Common Stock at a conversion rate of 1.09649 shares of BAC
Common Stock for each share of BAC Series G Preferred (equivalent to a
conversion price of $45.60 per share of BAC Common Stock). The conversion rate
is protected by customary antidilution provisions.
BAC Series H Preferred. The BAC Series H Preferred has a stated value of
$25.00 per share. The BAC Series H Preferred provides for cumulative dividends
payable quarterly at the rate of 9% per annum calculated as a percentage of the
stated value. The BAC Series H Preferred is subject to redemption, in whole or
in part, at the option of BAC at $25.00 per share on and after January 15,
1997, plus accrued and unpaid dividends.
BAC Series I Preferred. The BAC Series I Preferred has a stated value of
$500.00 per share. The BAC Series I Preferred provides for cumulative dividends
payable quarterly at a rate of 11% per annum calculated as a percentage of the
stated value. The BAC Series I Preferred is subject to redemption, in whole or
in part, at the option of BAC at $527.50 per share on or after September 30,
1995 and prior to September 30, 1996, at decreasing prices thereafter through
September 29, 2000, and at $500.00 per share thereafter, in each case plus
accrued and unpaid dividends.
BAC Series J Preferred. The BAC Series J Preferred has a stated value of
$500.00 per share. The BAC Series J Preferred provides for cumulative dividends
payable quarterly at a rate of 11% per annum calculated
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as a percentage of the stated value. The BAC Series J Preferred is subject to
redemption, in whole or in part, at the option of BAC at $527.50 per share on
or after March 31, 1996 and prior to March 31, 1997, at decreasing prices
thereafter through March 30, 2001, and at $500.00 per share thereafter, in each
case plus accrued and unpaid dividends.
BAC Series K Preferred. The BAC Series K Preferred has a stated value of
$25.00 per share. The BAC Series K Preferred provides for cumulative dividends
payable quarterly at a rate of 8 3/8% per annum calculated as a percentage of
the stated value. The BAC Series K Preferred is subject to redemption, in whole
or in part, at the option of BAC on or after February 15, 1997, at $25.00 per
share, plus accrued and unpaid dividends.
BAC Series L Preferred. The BAC Series L Preferred has a stated value of
$500.00 per share. The BAC Series L Preferred provides for cumulative dividends
payable quarterly at a rate of 8.16% per annum calculated as a percentage of
the stated value. The BAC Series L Preferred is subject to redemption, in whole
or in part, at the option of BAC on or after July 13, 1997, at $500.00 per
share, plus accrued and unpaid dividends.
BAC Series M Preferred. The BAC Series M Preferred has a stated value of
$500.00 per share. The BAC Series M Preferred provides for cumulative dividends
payable quarterly at a rate of 7 7/8% per annum calculated as a percentage of
the stated value. The BAC Series M Preferred is subject to redemption, in whole
or in part, at the option of BAC on or after September 30, 1997, at $500.00 per
share, plus accrued and unpaid dividends.
BAC Series N Preferred. The BAC Series N Preferred has a stated value of
$500.00 per share. The BAC Series N Preferred provides for cumulative dividends
payable quarterly at a rate of 8 1/2% per annum calculated as a percentage of
the stated value. The BAC Series N Preferred is subject to redemption, in whole
or in part, at the option of BAC on or after December 15, 1997, at $500.00 per
share, plus accrued and unpaid dividends.
BAC Series 1 Preferred. The BAC Series 1 Preferred has a stated value of
$50.00 per share. The BAC Series 1 Preferred provides for cumulative dividends
payable quarterly at adjustable rates based on the discount rates and average
yields of certain United States government securities, provided that such rates
shall in no event be less than 7.5% or greater than 13.5% per annum. The BAC
Series 1 Preferred is subject to redemption, in whole or in part, at the option
of BAC, at $50.00 per share, plus accrued and unpaid dividends.
BAC Series 2 Preferred. The BAC Series 2 Preferred has a stated value of
$100.00 per share. The BAC Series 2 Preferred provides for cumulative dividends
payable quarterly at adjustable rates based on the discount rates and average
yields of certain United States government securities, provided that such rates
shall in no event be less than 9.0% or greater than 15.7% per annum. The BAC
Series 2 Preferred is subject to redemption in whole or in part, at the option
of BAC, at $108.00 per share for redemptions occurring on or before August 15,
1999, or at $100.00 per share for redemptions occurring thereafter, in each
case plus accrued and unpaid dividends. On November 1, 1994, BAC announced that
it will redeem all of the outstanding shares of BAC Series 2 Preferred on
December 5, 1994.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF ARBOR AND BAC
Upon consummation of the Merger, the shareholders of Arbor, a New York
corporation, will become stockholders of BAC, a Delaware corporation.
Accordingly, the rights of shareholders of Arbor following the Merger will be
governed by Delaware law, as well as the BAC Certificate of Incorporation (the
"BAC Certificate") and Bylaws.
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The following is a summary of the material differences between the rights and
privileges of Arbor shareholders and those of BAC stockholders. References to
the "DGCL" are to the General Corporation Law of Delaware, while references to
the "NYBCL" are to the Business Corporation Law of New York. This summary is
not meant to be relied upon as an exhaustive description of such differences
and is qualified in its entirety by reference to the BAC Certificate, BAC's
Bylaws, the Arbor Certificate of Incorporation (the "Arbor Certificate"), the
Arbor Bylaws, the DGCL, and the NYBCL.
STOCKHOLDER ACTION BY WRITTEN CONSENT
BAC. Under the DGCL, unless otherwise provided by a corporation's certificate
of incorporation, any action which may be taken by the stockholders may be
taken without a meeting if such action is authorized by written consents signed
by the holders of stock having not less than the minimum number of votes that
would be necessary to take such action at a meeting at which all shares were
present and voted. However, the BAC Certificate provides that no action may be
taken by BAC stockholders except at an annual or special meeting of
stockholders, and the power of BAC stockholders to act by written consent
without a meeting is specifically denied therein.
Arbor. Under the NYBCL, the shareholders of a New York corporation may act
without a meeting only by unanimous written consent, unless the certificate of
incorporation or bylaws otherwise provide. The Arbor Certificate and Bylaws do
not provide otherwise.
AMENDMENT OF CERTIFICATE
BAC. The DGCL provides that amendments to a corporation's certificate of
incorporation generally require an affirmative vote of the holders of a
majority of the shares of stock entitled to vote thereon.
Arbor. The Arbor Certificate provides that any amendment to the Arbor
Certificate by its shareholders must be approved by the affirmative vote of the
holders of at least 66 2/3% of the shares of Arbor Common Stock entitled to
vote thereon.
SPECIAL MEETINGS OF SHAREHOLDERS
BAC. The DGCL provides that special meetings of stockholders may be called by
a corporation's Board of Directors or by such persons as the corporation's
certificate or bylaws shall authorize. Pursuant to BAC's Bylaws, special
meetings of stockholders may be called by the Chairman of the Board, the
President, a majority of the Board of Directors or at the written request of
stockholders holding a majority of the entire capital stock outstanding and
entitled to vote.
Arbor. The NYBCL also provides that special meetings of shareholders may be
called by a corporation's Board of Directors or by such persons as may be
authorized by the corporation's certificate or bylaws. Pursuant to Arbor's
Bylaws, special meetings of stockholders may only be called by the Chairman of
the Board, the President or a majority of the Board of Directors.
REMOVAL OF DIRECTORS
BAC. Under the DGCL, unless otherwise provided in a corporation's certificate
or bylaws, the entire Board of Directors or any individual director may be
removed from office, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors. The BAC Certificate
and Bylaws contain no provisions relating to removal of directors.
Arbor. The NYBCL provides that, unless otherwise provided in a corporation's
certificate or bylaws, any or all of the directors may be removed for cause by
a majority of votes cast by shareholders at a meeting of shareholders, and, if
the certificate of incorporation or the specific provisions of a bylaw adopted
by the shareholders provide, directors may be removed with cause by action of
the Board of Directors or without
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cause by vote of the shareholders. The Arbor Bylaws provide that any or all
directors may be removed with cause by a 66 2/3% vote of those shareholders
entitled to vote. The Arbor Bylaws also provide that the Arbor Board may, by
majority vote of all directors then in office, remove a director for cause.
Neither the Arbor Certificate nor the Arbor Bylaws provide for removal of
directors without cause.
VACANCIES AND NEWLY CREATED DIRECTORSHIPS
BAC. The DGCL provides that, unless otherwise provided in a corporation's
certificate of incorporation or by-laws, vacancies and newly created
directorships resulting from an increase in the authorized number of directors
elected by all of the shareholders having the right to vote as a single class
may be filled by a majority of the directors then in office, even if less than
a quorum, or by a sole director. The BAC Certificate and Bylaws do not provide
otherwise.
Arbor. The NYBCL provides that newly created directorships resulting from an
increase in the number of directors and vacancies occurring in the board for
any reason, except the removal of directors without cause, may be filled by the
vote of the board, and if the number of directors remaining in office is less
than a quorum, by the vote of a majority of the directors then in office. The
certificate of incorporation or the by-laws may provide that such newly created
directorships or vacancies must be filled by the vote of shareholders and the
certificate of incorporation may impose greater requirements relating to the
quorum and vote of directors needed to fill such newly created directorships or
vacancies. The Arbor Bylaws provide that vacancies and newly created
directorships may be filled by a majority of directors then in office,
provided, however, that if in the event of any such vacancy, the directors
remaining in office are unable to so fill such vacancy by a majority vote
within 30 days of the occurrence thereof, the President or Secretary may call a
special meeting of shareholders at which such vacancy will be filled.
SHAREHOLDER NOMINATIONS AND PROPOSALS FOR BUSINESS
BAC. BAC's Bylaws establish procedures that must be followed for stockholders
to nominate individuals for election to the BAC Board or to propose business at
an annual meeting of BAC's shareholders. In order to nominate individuals to
the BAC Board, a shareholder must provide timely notice of such nomination in
writing to the Secretary of BAC and a written statement by the candidate of his
or her willingness to serve. Such notice must include the information required
to be disclosed in solicitations for proxies for election of directors pursuant
to Regulation 14A under the Exchange Act, along with the name, record address,
class and number of shares of BAC Common Stock beneficially owned by the
stockholder giving such notice.
In order to properly propose that certain business come before the annual
meeting of stockholders, a stockholder must provide timely notice in writing to
the Secretary of BAC which notice must include a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting. In addition, the notice must
contain the name, record address, class and number of shares of BAC capital
stock beneficially owned by the stockholder giving such notice and any material
interest of the stockholder in such business.
To be timely, notice must be delivered to BAC not less than 30 nor more than
60 days prior to the meeting at which directors are to be elected or the
proposed business is to be conducted, or, if BAC gives less than 40 days notice
of the meeting, then notice by the stockholder must be received by the close of
business on the 10th day following the date notice of the meeting was mailed.
Arbor. Neither the NYBCL nor the Arbor Certificate or Bylaws contain any
provisions establishing procedures which must be followed in order for an Arbor
shareholder to nominate directors or propose items of business.
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RIGHTS PLAN
BAC. On April 11, 1988, the BAC Board adopted the BAC Preferred Share
Purchase Rights Plan and declared a distribution of one BAC Right for each
outstanding share of BAC Common Stock to shareholders of record at the close of
business on April 22, 1988. For a description of the BAC Rights, see
"DESCRIPTION OF BAC CAPITAL STOCK--BAC Common Stock and Rights."
The BAC Rights have certain anti-takeover effects. The BAC Rights will cause
substantial dilution to a person or group that attempts to acquire BAC in a
manner which causes the BAC Rights to become exercisable unless the offer is
conditional on the BAC Rights being redeemed or on a substantial number of BAC
Rights being acquired. The BAC Rights, however, should not interfere with any
merger or other business combination approved by the BAC Board since the BAC
Board may, at its option, at any time prior to the acquisition by a person or
group of beneficial ownership of 20% or more of the outstanding shares of BAC
Common Stock, redeem all but not less than all of the then outstanding BAC
Rights.
Arbor. Arbor has not adopted a shareholder rights or similar plan.
VOTING RIGHTS WITH RESPECT TO CERTAIN EXTRAORDINARY CORPORATE TRANSACTIONS
BAC. Under the DGCL, mergers, consolidations and sales, leases or exchanges
of all or substantially all of the property or assets of a corporation require
the approval of a majority of the outstanding stock of the corporation entitled
to vote thereon; provided, that no vote of stockholders of a corporation
surviving a merger is necessary to authorize a merger if (i) the agreement of
merger does not amend the certificate of incorporation of such corporation,
(ii) each share of stock of such corporation outstanding immediately prior to
the merger is to be an identical outstanding or treasury share of the surviving
corporation after the merger, and (iii) either no shares of common stock of the
surviving corporation and no shares, securities or obligations convertible into
such stock are to be issued or delivered under the plan of merger, or the
authorized unissued shares or the treasury shares of common stock of the
surviving corporation to be issued or delivered under the plan of merger plus
those initially issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under such plan do not exceed 20% of the
shares of common stock of such corporation outstanding immediately prior to the
merger. The DGCL does not require the separate vote of each class of stock for
such transactions unless the certificate of incorporation so provides. BAC's
Certificate does not so provide.
Arbor. The NYBCL generally requires that approval of mergers, consolidations
and sales, leases, exchanges or other dispositions of all or substantially all
of the assets of a corporation be authorized by a vote of the holders of 66
2/3% of all outstanding shares entitled to vote on such transactions. The NYBCL
also grants holders of shares of any class or series the right to vote and to
vote as a class on certain mergers and consolidations which contain provisions
which exclude or limit their rights to vote, adversely affect certain of their
rights or authorize shares having a preference over their shares. In such case,
in addition to the vote of the holders of two-thirds of all outstanding shares
entitled to vote thereon, the merger or consolidation must be approved by the
holders of a majority of all outstanding shares of such class or series.
DISSENTERS' RIGHTS
BAC. Under the DGCL, appraisal rights are available only in connection with
certain statutory mergers or consolidations, unless the certificate of
incorporation grants such rights with respect to sales of all or substantially
all of the assets of a corporation. No appraisal rights are available (i) to
stockholders of a surviving corporation if such corporation's stockholders are
not entitled to vote on the merger or (ii) with respect to shares which were
either listed on a national securities exchange or held of record by more than
2,000 stockholders, unless, in the case of either (i) or (ii) above, the
holders of such shares are required by the terms of the merger or consolidation
to accept any consideration other than stock of the surviving corporation,
shares of stock of another corporation which are listed on a national
securities exchange or held of record by more than 2,000 stockholders, cash in
lieu of fractional shares, or any combination thereof.
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Arbor. Under the NYBCL, dissenting shareholders are entitled to receive
payment of the "fair value" of their shares in connection with certain mergers,
consolidations and sales, leases, exchanges or other dispositions of all or
substantially all the assets of a corporation, unless (i) in the case of a
merger or consolidation, the corporation is the surviving corporation in such
merger or consolidation and certain specified shareholder rights are not
adversely affected and (ii) in the case of a sale, lease, exchange or other
disposition of all or substantially all the assets of a corporation, the
transaction is wholly for cash and is conditioned upon the dissolution of the
corporation and the distribution of substantially all of its net assets to
shareholders within one year. See "THE MERGER--Appraisal Rights" for a
description of the rights of Arbor shareholders to dissent from the Merger.
DIVIDENDS
BAC. A Delaware corporation, unless otherwise restricted in its certificate
of incorporation, may declare and pay dividends in cash, property or shares
either (i) out of its paid-in and earned surplus or (ii) if no surplus exists,
out of its net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year; provided, that, in the case of dividends paid
pursuant to (ii), after the payment of any such dividend, the capital account
of the corporation shall not be less than an amount represented by all classes
of stock having a preference upon the distribution of assets. In addition, BAC
has outstanding various series of Preferred Stock with various dividend rates
fixed for each series. Dividends on BAC Preferred Stock, when and as declared
by its Board of Directors, are payable in cash on a quarterly basis on such
dates as may be fixed by its Board of Directors. Such dividends are cumulative.
BAC may only declare dividends on the BAC Common Stock out of legally available
funds after full cumulative dividends on the outstanding BAC Preferred Stock of
all series have been paid for the current dividend period and all prior
dividend periods.
Arbor. A New York corporation may declare and pay dividends in cash, bonds of
the corporation or property of the corporation only out of surplus and, if out
of capital surplus, only if shareholders are notified in writing of that fact;
provided, that no dividend may be declared and paid when the corporation is
insolvent, when the corporation would be made insolvent by such payment or if
the certificate of incorporation restricts such payment.
INTERESTED STOCKHOLDER TRANSACTIONS
BAC. Section 203 of the DGCL ("Section 203") restricts a corporation's
ability to engage in certain transactions involving the corporation (or its
majority-owned subsidiaries) and any person holding 15% or more of such
corporation's outstanding voting stock together with the affiliates or
associates of such person (an "Interested Stockholder"). Section 203 prohibits,
for a period of three years following the date that a person became an
Interested Stockholder, the following types of transactions between the
corporation and the Interested Stockholder (unless certain conditions,
described below, are met): (i) mergers or consolidations; (ii) sales, leases,
exchanges or other transfers of 10% or more of the aggregate assets of the
corporation; (iii) issuances or transfers by the corporation of any stock of
the corporation which would have the effect of increasing the Interested
Stockholder's proportionate share of the stock of any class or series of the
corporation; (iv) any other transaction which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
which is owned by the Interested Stockholder; and (v) receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of loans,
advances, guarantees, pledges or other financial benefits provided by the
corporation. Section 203 does not apply to transactions involving persons who
became Interested Stockholders prior to December 23, 1987, through a tender
offer commenced prior to December 23, 1987 or as result of action taken solely
by the corporation.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Interested Stockholder becomes an Interested
Stockholder is approved by the board of directors of the corporation prior to
the date such stockholder becomes an Interested Stockholder. Additionally an
Interested Stockholder may avoid the statutory restriction if, upon
consummation of the transaction whereby such stockholder becomes an Interested
Stockholder, the stockholder owns at least 85% of the outstanding voting
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stock of the corporation without regard to those shares owned by the
corporation's officers and directors or certain employee stock plans. Business
combinations are also permitted within the three-year period if approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the holders of at least 66 2/3% of the outstanding voting stock
not owned by the Interested Stockholder.
Delaware corporations were given the option to exclude themselves from the
coverage of Section 203 by taking board action prior to May 2, 1988.
Additionally, a Delaware corporation may exclude itself by amending its
certificate of incorporation or bylaws at any time to exempt itself from
coverage of Section 203, provided that any bylaw or certificate amendment
adopted on or after May 2, 1988 may not become effective for 12 months after
the date such amendment is adopted. In addition, any transaction is exempt from
the statutory ban if it is proposed at a time when the corporation has
proposed, and a majority of certain continuing directors of the corporation has
approved, a transaction with a party who is not an Interested Stockholder of
the corporation (or who became such with board approval) if the proposed
transaction involves (i) certain mergers or consolidations involving the
corporation; (ii) a sale or other transfer of over 50% of the aggregate assets
of the corporation; or (iii) a tender or exchange offer for 50% or more of the
outstanding voting stock of the corporation.
BAC has not excluded itself from the coverage of Section 203.
Arbor. The NYBCL contains a similar interested shareholder transaction
provision except that an interested shareholder is defined as a holder of
twenty percent or more of the outstanding shares of a corporation, and New York
corporations are precluded from entering into certain business combinations
with such interested shareholders for a period of five years. However, pursuant
to Article Tenth of the Arbor Certificate, Arbor has elected not to be governed
by the NYBCL interested shareholder statute.
LIQUIDATION RIGHTS
BAC. BAC's capital structure, consists of both Preferred Stock and Common
Stock. In the event of liquidation of BAC, the holders of all shares of BAC
Preferred Stock of all series shall be entitled to be paid in full the
liquidation preferences established for such series without priority between
the different series, plus accrued but unpaid dividends, prior to any payment
to the holders of BAC Common Stock, but after proper provision is made for
unpaid liabilities. After payment of such unpaid liabilities and the
preferences and dividends to the holders of BAC Preferred Stock, the holders of
BAC Common Stock shall be entitled to share ratably in all remaining assets of
BAC to be distributed.
Arbor. The Arbor Certificate authorizes the Arbor Board to issue, without
prior shareholder approval, up to five million shares of preferred stock in one
or more series, which preferred stock could be entitled to liquidation
preferences relative to the Arbor Common Stock. However, at the present time
there is no preferred stock issued or outstanding.
TRANSACTIONS INVOLVING DIRECTORS AND OFFICERS
BAC. Under the DGCL, no contract or transaction between a corporation and one
or more of its directors or officers or certain entities affiliated with such
directors and officers is deemed to be void or voidable solely for this reason,
even if such director or officer is present at or participates in the meeting
of the board or committee which authorizes the contract and votes thereon, if:
(1) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the board and the board,
in good faith, authorizes the contract or transaction by the affirmative votes
of a majority of the disinterested directors, even though the disinterested
directors do not comprise a quorum; or (2) the material facts as to the
interested director's (or officer's) relationship or interest and as to the
contract or transaction are disclosed or known to the stockholders entitled to
vote thereon, and the contract or transaction is specifically approved in good
faith by vote of the stockholders; or (3) the contract or transaction is fair
as to
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the corporation as of the time it is approved by the board of directors, a
committee thereof, or the stockholders.
Arbor. The NYBCL's provision for the transactions with interested directors
and officers is substantially the same as the DGCL provision except for the
following differences: (1) if the affirmative votes of the disinterested
directors are insufficient to constitute a majority of a quorum, the
transaction must be approved by a unanimous vote of the disinterested directors
and (2) under the NYBCL, the certificate of incorporation may contain
additional restrictions on contracts or transactions between a corporation and
its directors and may provide that contracts or transactions in violation of
such restrictions shall be void or voidable by the corporation. The Arbor
Certificate does not contain such a provision.
INSPECTION OF SHAREHOLDER LEDGER
BAC. The DGCL allows any stockholder to inspect the stockholder list for a
purpose reasonably related to such person's interest as a stockholder. The
stockholders' list also must be open to inspection by any stockholder for a
period of at least ten days prior to, and during the whole time of, any meeting
of stockholders, such inspection being for any purpose germane to the meeting.
Arbor. The NYBCL allows any person who has been a shareholder of record for
at least six months immediately proceeding his demand, or any person holding at
least five percent of any class of shares to inspect the shareholder list
provided that such inspection is not desired for a purpose which is in the
interest of a business other than the business of the corporation and that such
shareholder has not within five years sold or offered for sale any list of
shareholders of any corporation.
CERTAIN REGULATORY CONSIDERATIONS
While Arbor's business is subject to regulation by federal, state and local
authorities (see "INFORMATION ABOUT ARBOR AND ITS SUBSIDIARIES--Description of
Business of Arbor (Regulation)"), the business conducted by BAC through its
subsidiaries is highly regulated by a variety of federal and state bank and
thrift regulatory authorities, including the Federal Reserve Board, the OTS,
the Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation and various state banking regulators. For a more detailed
description of the supervision and regulation of BAC's business, reference is
made to BAC's 1993 Form 10-K, which is incorporated herein by reference. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
OTHER MATTERS
CERTAIN PENDING LITIGATION
Following the public announcement of the Merger Agreement, six separate
purported class actions were filed in New York State Supreme Courts naming
Arbor, the individual members of the Arbor Board, and in five cases, BAC, as
defendants (collectively, the "Defendants"). The following four actions were
filed in the Supreme Court, Nassau County: Martin Freedman, et al. v. Arbor
National Holdings, Inc., et al., Index No. 94-026865 (filed September 26,
1994), Jini Shapiro v. Arbor National Holdings, Inc., et al., Index No. 94-
026897 (filed September 26, 1994), Elyse and Sidney Olkes, et al. v. Arbor
National Holdings, Inc., et al., Index No. 94-026949 (filed September 27, 1994)
and Samuel Duetscher v. Arbor National Holdings, Inc., et al., Index No. 94-
027764 (filed October 4, 1994); one action was filed in the Supreme Court, New
York County: Jerome Fuss v. Arbor National Holdings, Inc., et al., Index No.
94-127314 (filed September 26, 1994); and one action was filed in the Supreme
Court, Kings County: Chaim Kirschner v. Arbor National Holdings, Inc., et al.,
Index No. 94-31881 (filed September 30, 1994) (collectively, the "Actions").
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The plaintiffs in the Actions (the "Plaintiffs") generally allege that, in
authorizing Arbor to enter into the Merger Agreement, the members of the Arbor
Board failed to maximize the value to be received by Arbor's shareholders in a
sale of Arbor and thereby breached their fiduciary duties. Certain of the
Actions also allege that the members of the Arbor Board and BAC acted
collusively in order to benefit Ivan Kaufman, Anita Kaufman and BAC. The
Plaintiffs seek, on behalf of themselves and all similarly situated
shareholders of Arbor, among other things, (i) class certification, (ii)
declaratory relief stating that the members of the Arbor Board breached their
fiduciary duties, (iii) an order enjoining the Merger or, in the alternative,
damages, including rescissory damages, in the event the Merger is consummated,
and (iv) costs including attorney's fees.
Following the filing of the complaints in the Actions, counsel for the
Plaintiffs met with counsel for the Defendants concerning the director
defendants' efforts to sell Arbor, the results of those efforts, the
circumstances surrounding the negotiation and execution of the Merger
Agreement, the terms of the proposed Merger and the possibility of settling the
Actions. As a result of these discussions, the parties to the Merger Agreement
agreed to amend the Merger Agreement. The principal effects of such revision
are to decrease the likelihood that the Estimated Per Share Merger Price will
be reduced and to increase the likelihood that the Estimated Per Share Merger
Price will be increased pursuant to the provisions of the Merger Agreement
providing for an adjustment to such Estimated Per Share Merger Price. In
addition, Arbor has agreed to provide to the Plaintiffs certain oversight
capacities regarding the sale of ANCMC in connection with the settlement of the
Actions. Counsel for the Plaintiffs have entered into an agreement with counsel
for the Defendants to settle the Actions. The currently proposed settlement of
the Actions is subject to the completion of certain additional discovery, the
execution of a stipulation of settlement and the approval of the New York State
Supreme Court.
All Defendants have denied, and continue to deny, that they have committed
any violations of law. All Defendants are entering into the proposed settlement
solely because the proposed settlement would reduce or eliminate the burden and
expense of further litigation as well as the possibility that such expense
would reduce the Estimated Per Share Merger Price.
For a discussion of certain conditions to consummation of the Merger relating
to the Actions, see "THE MERGER--Conditions to the Merger."
BANKAMERICA CORPORATION
BAC is a bank holding company registered under the BHCA, and was incorporated
in the State of Delaware in 1968. At September 30, 1994, BAC, including its
consolidated subsidiaries, was the second largest bank holding company in the
United States, based on total assets of $214.2 billion.
Bank of America National Trust and Savings Association, a national banking
association ("Bank of America"), became a subsidiary of BAC in 1969. Bank of
America began business in San Francisco, California as the Bank of Italy in
1904 and adopted its present name in 1930. The capital stock of Bank of America
is the principal asset of BAC.
On April 22, 1992, Security Pacific Corporation was merged with and into BAC.
SPC's principal subsidiary, Security Pacific National Bank, was also merged
with and into Bank of America on that date.
On August 31, 1994, Continental Bank Corporation was merged with and into
BAC. Continental's principal subsidiary, Continental Bank National Association,
became a wholly owned subsidiary of BAC, and was renamed "Bank of America
Illinois."
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BAC also owns all of the capital stock of Seafirst Corporation, a registered
bank holding company ("Seafirst"), the principal asset of which is the capital
stock of Seattle-First National Bank ("SFNB"). SFNB is a national banking
association headquartered in the State of Washington. BAC acquired Seafirst in
1983.
BAC also owns all of the capital stock of BAFSB, which provides consumer and
retail banking services, including residential mortgage lending services. BAFSB
is headquartered in Portland, Oregon and was organized in 1990.
In addition to the mergers with SPC and Continental, BAC has expanded its
presence in the western United States through several acquisitions beginning in
1989. As of September 30, 1994, BAC's subsidiaries operate retail bank branches
in Alaska, Arizona, Hawaii, Idaho, Nevada, New Mexico, Oregon and Texas, in
addition to California and Washington. During 1994, BAFSB has also expanded its
mortgage lending activities through the acquisition of United Mortgage
Corporation and those mortgage servicing operations of Margaretten & Co., Inc.
based in Richmond, Virginia. As of September 30, 1994, BAC's subsidiaries
operated mortgage lending operations (primarily first mortgage lending secured
by one to four family residences) in California, Florida, Minnesota, North
Dakota, Oregon, Texas, Virginia, Washington and Wisconsin.
BAC, through its various subsidiaries, provides a diversified range of
financial services to its customers. BAC, primarily through Bank of America and
its other domestic banking subsidiaries, provides consumer banking services
(including residential real estate and other consumer loans, deposit and
investment services and credit card products and services) and other retail
banking services.
BAC, through its banking and other subsidiaries, provides wholesale banking
and financial products and services throughout the United States and in
overseas markets to business customers, including corporations, middle market
companies, governments and other institutions. These products and services
encompass corporate lending, business finance, leasing, cash management
services, trade finance and investment banking services, including interest
rate risk and foreign exchange management products, capital markets products
and advisory and venture capital services.
BAC's principal executive offices are located at 555 California Street, San
Francisco, California 94104 (telephone (415) 622-3530).
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INFORMATION ABOUT ARBOR AND ITS SUBSIDIARIES
PRINCIPAL AND OTHER SHAREHOLDERS OF ARBOR
The following table sets forth certain information regarding beneficial
ownership of Arbor Common Stock as of November 30, 1994, by (i) each director
of Arbor, (ii) Arbor's chief executive officer and each of Arbor's four most
highly compensated executive officers other than the chief executive officer,
(iii) each person known to Arbor to be the beneficial owner of more than 5% of
the outstanding Arbor Common Stock, and (iv) all directors and executive
officers of Arbor as a group. Unless otherwise indicated, the persons named
below have, to the knowledge of Arbor, sole voting and investment power with
respect to the shares beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
SHARES OF CLASS
----------- --------
<S> <C> <C>
Ivan Kaufman............................................. 3,699,858(1) 55.0%
Anita Kaufman............................................ 576,380(2) 8.6%
Richard A. Lippe......................................... 302,000(3) 4.5%
Joseph Martello.......................................... 35,250(4) *
Walter K. Horn........................................... 33,200(5) *
Kevin Crichton........................................... 25,000(6) *
Vincent Labatte.......................................... 21,600(7) *
John J. Bishar, Jr....................................... 2,000(8) *
Ethan Penner............................................. 1,000(8) *
All executive officers and directors as a group (15 per-
sons)................................................... 4,588,663(9) 66.0%
</TABLE>
- --------
* Indicates less than 1%
(1) Includes 130,000 shares held in the Anita Kaufman Family Trust of which Mr.
Kaufman is trustee, 225,000 shares held under a Trust Agreement for the
benefit of certain members of Mr.Kaufman's family of which Mr. Kaufman is
co-trustee and 33,504 shares held in Arbor's 401(k) plan of which Mr.
Kaufman is trustee. Mr. Kaufman may therefore be deemed to beneficially own
such shares pursuant to Rule 13d-3 under the Exchange Act. Mr. Kaufman
disclaims beneficial ownership of such shares.
(2) Includes currently exercisable options to purchase 1,000 shares of Arbor
Common Stock.
(3) Includes 225,000 shares held under a Trust Agreement for the benefit of
certain members of Mr. Kaufman's family of which Mr. Lippe is a co-trustee
and 75,000 shares held under a Trust Agreement for the benefit of certain
members of Mr. Kaufman's family of which Mr. Lippe is the sole trustee. Mr.
Lippe may therefore be deemed to beneficially own such shares pursuant to
Rule 13d-3 under the Exchange Act. Mr. Lippe disclaims beneficial ownership
of such shares. This figure also includes currently exercisable options to
purchase 2,000 shares of Arbor Common Stock.
(4) Includes currently exercisable options to purchase 22,500 shares of Arbor
Common Stock and options to purchase 10,000 shares of Arbor Common Stock
which will become fully vested and exercisable following shareholder
approval of the Merger.
(5) Includes currently exercisable options to purchase 22,500 shares of Arbor
Common Stock and options to purchase 7,500 shares of Arbor Common Stock
which will become fully vested and exercisable following shareholder
approval of the Merger.
(6) Includes currently exercisable options to purchase 15,000 shares of Arbor
Common Stock and options to purchase 10,000 shares of Arbor Common Stock
which will become fully vested and exercisable following shareholder
approval of the Merger.
(7) Includes currently exercisable options to purchase 2,900 shares of Arbor
Common Stock and options to purchase 18,700 shares of Arbor Common Stock
which will become fully vested and exercisable following shareholder
approval of the Merger.
(8) Reflects amounts underlying currently exercisable options to purchase
shares of Arbor Common Stock.
(9) Includes currently exercisable options to purchase an aggregate of 107,150
shares of Arbor Common Stock held by executive officers and directors of
Arbor and 117,575 options to purchase shares of Arbor Common Stock which
will become fully vested and exercisable following shareholder approval of
the Merger.
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DESCRIPTION OF BUSINESS OF ARBOR
General. Arbor is a holding company that, through its wholly-owned
subsidiaries, Arbor Mortgage and ANCMC, engages in a full range of mortgage
banking activities, consisting of the origination, purchase, sale and servicing
of first mortgage loans secured by one to four family residences and commercial
properties (principally multi-family), and the purchase and sale of servicing
rights associated with such loans.
Arbor Mortgage was co-founded by its current president and chief executive
officer in 1983. Arbor's branch network, mortgage origination volume and
revenues grew steadily through the 1980s as a result of several factors,
including Arbor's focus on originating mortgages for home purchases rather than
refinancings. In December 1990, Arbor acquired certain retail branch offices
from GE Capital Mortgage Services, Inc. ("GECMSI"). Arbor completed its initial
public offering of common stock in August 1992 and received net proceeds of
$15.5 million. Arbor currently has a staff of approximately 740 employees and
originates mortgages nationwide through 20 retail branch offices (the "Retail
Branch Network") operating in eight states, five regional wholesale lending
centers (the "Wholesale Lending Centers") and, through ANCMC, four commercial
lending centers (the "Commercial Lending Centers").
Arbor's other subsidiaries, which are related to Arbor Mortgage's residential
mortgage banking business, provide administrative services to Arbor Mortgage
and its customers in connection with real property appraisal services and
homeowners' hazard and flood insurance.
Pursuant to the Merger Agreement, Arbor initiated an auction of ANCMC and
selected Ivan Kaufman as the winning bidder. Arbor plans to consummate the sale
of ANCMC to Mr. Kaufman prior to the consummation of the Merger. See "CERTAIN
RELATED TRANSACTIONS--Subsidiary Sale."
Retail Branch Network. Arbor's primary source of mortgage loan originations
is its community-based Retail Branch Network. Arbor currently operates 20
retail branch offices in eight states.
A significant factor in the growth of Arbor's Retail Branch Network was the
acquisition in December 1990 of certain retail branch offices of GECMSI.
Arbor's intent in acquiring these offices was to expand Arbor's presence into
adjacent areas creating increased capabilities to market Arbor's mortgage
products. Arbor believes that the acquisition allowed it to obtain an
experienced sales and operations staff without the expense and delay of hiring
and training new employees. Arbor believes that a significant amount of the
increase in its volume of mortgage originations in the fiscal year ended
February 29, 1992 can be attributed to the acquisition of the GECMSI branch
offices and the retention of GECMSI personnel.
Arbor's principal marketing strategy for its Retail Branch Network is to seek
customers who are purchasing homes as opposed to those seeking refinancings.
Active and well-trained loan officers offering competitive mortgage products
reach such customers through relationships with real estate brokers, mortgage
brokers, builders, attorneys and other real estate professionals. Arbor
supports this strategy through marketing programs developed and implemented by
its full service in-house marketing and advertising department. These programs
include: market-sensitive advertising; public relations and promotional
materials customized for consumers and real estate professionals in both
general and niche markets; and collateral materials supporting particular
product promotions, educational seminars, consumer and professional trade shows
and other special events. These marketing programs focus on enhancing market
awareness of Arbor's superior service to consumers. Arbor seeks to have a
positive image in the communities it serves by, among other things, sponsorship
of local civic activities, charities, sports teams, etc. and through the work
of "Ready Set Grow," a campaign that works in cooperation with Global Releaf, a
program of the American Forestry Association. The "Ready Set Grow" program
furnishes each Arbor mortgagor with a gift certificate for a free two-year old
tree at closing, sponsors tree-planting events at schools, hospitals, parks and
other community events, and has served as a motivating factor behind Arbor's
use of recycled paper, its recycling program at the corporate headquarters and
its dedication to reducing documents wherever possible. Other programs
developed by Arbor include: the "Arbor Home Bridal Registry," which encourages
wedding guests to contribute to a fund established on behalf of the couple to
be married for the purpose of saving for a down
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payment on a first home; the "HomeStretch" program, which provides financing to
low to middle income buyers through the Federal National Mortgage Association
underwriting incentives; and "WorkPerk," a program designed to assist buyers
through participation by their employers. These programs have provided numerous
public relations opportunities for Arbor and serve to establish name
recognition and corporate identity in all its marketing and advertising
materials. Arbor's name was selected as a result of its commitment to
reforestation.
Wholesale Lending Centers. Over the past two years, Arbor has opened
Wholesale Lending Centers in the following locations:
<TABLE>
<CAPTION>
REGION SERVED
---------------
<S> <C>
Glastonbury, CT New England
Pittsburgh, PA Eastern Central
Fairfax, VA Mid-Atlantic
Farmington Hills, MI Upper Midwest
Jacksonville, FL Southeast
</TABLE>
The Wholesale Lending Centers originate loans through established mortgage
banking companies, banks, savings and loans and other financial institutions.
These entities are screened and approved by Arbor and generally supply a
significant portion of loans originated by them to Arbor. Customers' loan
applications are processed by the local financial institution and are
underwritten in accordance with their procedures and guidelines for mortgage
loans. Before committing to acquire these mortgages, Arbor's underwriting
department performs a review in accordance with Arbor's own underwriting
criteria. After Arbor's approval, mortgage loans are closed in the name of the
originating financial institution and are immediately assigned to Arbor for
resale generally on a servicing retained basis. The Wholesale Lending Centers
are intended to build Arbor's mortgage servicing portfolio and to provide a
cost-effective means to gain access into other markets, thereby further
diversifying Arbor's geographic areas of originations.
Sale of Loans to FNMA, FHLMC, GNMA and Investors. Arbor sells substantially
all the loans that it originates and generally seeks to retain the servicing
rights. Approximately 71% of Arbor's Fiscal 1994 mortgage originations qualify
under the various Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC") and the Government National Mortgage
Association ("GNMA") program guidelines which include specific property and
credit standards and limits on loan size. In connection with sales of loans
under these programs, Arbor will customarily retain all of the mortgage
servicing rights to such loans.
Loans with an original balance in excess of $203,150 for single family
residences or which otherwise do not conform to FNMA or FHLMC guidelines are
considered "non-conforming" loans. Such loans must also meet the underwriting
standards of the investor who purchases the loans from Arbor. With respect to
loans which are insured by the Federal Housing Administration ("FHA") or
partially guaranteed by the Veterans Administration ("VA") (collectively
"FHA/VA loans"), Arbor is authorized to sell loans to investors on a servicing
retained basis with the financial guarantee of GNMA.
The Loan Approval Process. Arbor has a decentralized loan origination process
in which the review and underwriting of a loan application generally takes
place at the office which originates the loan. In some cases, the underwriting
process is performed at an office serving a specific geographic area
encompassing several other offices. The loan review and underwriting activity
process includes verification of an applicant's income and bank deposits,
review of a credit report from a credit reporting agency, receipt of a
preliminary title report, receipt of a real estate appraisal, verification of
the accuracy of the applicant's information and compliance with Arbor's
underwriting criteria and those of either FNMA, FHLMC, GNMA, FHA, VA or
institutional investors. Appraisals may be conducted by either third-party
approved appraisers or appraisers employed or contracted by Designated
Appraisers, Inc., a wholly-owned subsidiary of Arbor.
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Upon approval of the loan, Arbor issues a written loan commitment to
qualified applicants. These written loan commitments state, among other things,
the loan amounts, interest rate, fees, funding conditions and approval
expiration dates. Customers have a choice of electing to "lock-in" their
interest rate or to float their interest rate. A floating interest rate is
subject to change in accordance with market interest rate fluctuations and is
set by Arbor, based on its prevailing rates, three to eight days prior to
closing. In cases where a customer "locks-in" the interest rate, he is required
to pay an additional fee of usually one percent of the loan amount (one
"point") at the time of the election to "lock-in" the rate. Interest rate
commitments beyond sixty days are generally not issued unless Arbor receives an
appropriate fee premium based upon an assessment of the risk associated with
the longer commitment period.
Quality Control. A significant element of Arbor's quality control process for
mortgage originations is that Arbor's underwriting personnel function
independently of Arbor's mortgage loan origination personnel and do not report
to anyone directly involved in the mortgage loan origination process. Arbor's
Quality Control Department examines a representative percentage of all loans in
order to evaluate compliance with FNMA, FHLMC and the U.S. Department of
Housing and Urban Development ("HUD") regulations and other federal, state and
private investor lending standards, which may involve reverifying employment
and bank information and obtaining separate credit reports and property
appraisals. Monthly quality control reports are submitted to Arbor's Senior
Vice President/General Counsel and Senior Vice President/Risk Management, with
quarterly reports to Arbor's President.
Mortgage Loan Products. Arbor makes available a variety of fixed rate and
adjustable rate ("ARM") mortgage products that are designed to respond to
consumer needs and competitive factors, as well as the requirements of
prospective purchasers of such loans. These mortgage products include 15-year
and 30-year conventional mortgages in a variety of formats. Arbor, like many of
its competitors, has introduced a variety of new products during the last
several years, including 20-year mortgages and balloon mortgages that have
relatively short maturity dates (e.g., five or seven years) with longer
amortization schedules (e.g., 30 years). Arbor also offers a wide variety of
interest rate and point combinations on many of its products so that its
customers may elect to lower the interest rate by paying higher points at
closing or to keep a higher interest rate but reduce or eliminate points
payable at closing. In addition, Arbor offers buy-down type mortgages, which
allow the borrower to make lower monthly payments for the first one, two or
three years of the loan, and ARMs in which the interest rate is adjusted,
primarily annually, based upon an independent index.
MORTGAGE LOAN ORIGINATION REVENUES
Arbor's mortgage origination revenues result from amounts earned by Arbor
from fees relating to loan origination activities and from net gains or losses
from the sale by Arbor of its originated mortgages in the secondary mortgage
market. Mortgage origination revenues are recorded net of any hedging gains or
losses incurred by Arbor in its hedging activities.
Arbor receives fees, including origination fees, or discount points, from
customers and borrowers for its commitment and its funding of mortgage loans.
Such fees generally range from one to three percent of the principal amount of
the loan. Arbor receives lesser fees in connection with wholesale mortgage
origination because the mortgage bankers and other financial institutions
originating the wholesale mortgages collect a separate fee from the borrower.
Arbor may charge additional or lesser fees depending upon market conditions or
Arbor's objectives relating to loan origination volume and pricing. Arbor
incurs certain costs in originating loans, including commissions, overhead,
out-of-pocket costs and, where loans are subject to a purchase commitment from
private investors, related commitment fees. The volume and type of loans
originated, and purchase commitments made by investors, vary with competitive
and economic conditions.
Arbor records gains or losses from its sales of mortgage loans by adding the
origination points paid by the customer to the price for which the loan is sold
and subtracting the loan amount funded by Arbor. All of Arbor's mortgage
products afford the customer the option of reducing the interest rate on the
mortgage by paying additional origination points or, alternatively, increasing
the interest rate on the mortgage and
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reducing these origination points. Arbor offers these alternatives to its
customers since the origination points to be paid and the interest rate on the
mortgage are based on a mathematical formula in which the two are approximately
equivalent. Thus, while Arbor will receive a lower price on sale for a given
mortgage loan which carries a lower rate of interest, Arbor will have received
additional origination points for that same mortgage loan to compensate for the
lower sales price to be received. For this reason, Arbor believes that it is
not meaningful to allocate its mortgage origination revenues between
origination points and net gains from its sale of originated mortgages.
Sales of Loans-Hedging Activities. Arbor obtains commitments from investors
to purchase loans from Arbor which it expects to fund where the interest rates
on such loans have been committed to and accepted by the customer (a "locked-
in" loan). Arbor projects the number of these loans which will, in fact, close,
recognizing that a certain percentage of its customers will change their minds,
not close on their homes, obtain a mortgage from another source or be rejected
by Arbor (i.e., "fall-out"). Arbor projects the number of these loans which
will fall-out through the use of internally developed software which enables it
to monitor and evaluate on a real time basis its closed mortgage loans held in
inventory and the status of all other mortgage loans where the interest rate
has already been locked-in and which are in various stages from application to
commitment.
By using its software in conjunction with a data base which contains all
registered loans, Arbor, on a daily basis, makes forward commitments to sell to
investors those loans which it expects to close for which interest rates have
been locked-in. At the same time, Arbor seeks to hedge the accuracy of its
projection of fall-out generally by purchasing options contracts on mortgage
backed securities. By engaging in this hedging strategy, Arbor seeks to reduce
any losses it could incur if it is unable to deliver the number of loans it has
committed to sell to investors or if it closes more loans than it has committed
to sell.
Arbor adjusts its net forward commitment and options contracts positions on a
daily basis by entering into new positions or by buying back positions.
Generally, the amount of forward sale commitments outstanding is equal to the
closed mortgage loans held in inventory, plus a portion of the locked-in loans
which are projected to close. Arbor's purchase of forward commitments and
options contracts are funded from a portion of the fees it receives from its
customers including certain points that are paid to Arbor for the right to
lock-in an interest rate on the mortgage loan prior to the date of closing.
As noted above, Arbor's strategy is to seek a prior investment commitment for
all mortgage loans which Arbor projects to close. Arbor, through its projection
of a fall-out rate and its related hedging activities, seeks to maintain a
neutral market position with respect to interest rate fluctuations. Arbor's
objective is to realize no market gain or loss in the sale of its mortgage
loans which arise from market fluctuations in interest rates.
Sale of Loans-The Process. The mortgage loans which Arbor sells are either
conforming loans, non-conforming loans or FHA/VA loans. Conforming loans are
either pooled by Arbor and exchanged for securities guaranteed by FNMA or
FHLMC, which securities are then sold to national or regional broker/dealers,
or sold directly to FNMA or FHLMC through their whole loan purchase programs.
Arbor sells all of its loans in the secondary market on a non-recourse basis.
Arbor's sales of substantially all its loans are preceded by the investor's
commitment to pay Arbor an agreed upon purchase price when the loan is
delivered. In the event Arbor is unable to fulfill its sale commitment to such
investor, Arbor is obligated to compensate the investor for its commitment.
Additionally, although Arbor usually retains the servicing rights to its non-
conforming loans, in some cases, the ultimate owner will purchase such loans on
a servicing released basis.
Sale of Loans-Representations and Warranties. In connection with sales of
loans, Arbor normally makes representations and warranties (which are customary
in the industry) relating to, among other things, Arbor's compliance with laws,
regulations and program standards and the accuracy of the information which has
been supplied by borrowers and verified by Arbor. In the event of a breach of
these representations and
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warranties, Arbor could be required to repurchase such loans notwithstanding
their characterization as "non-recourse" loans. Prior to Fiscal 1991, Arbor
sold mortgage loans to FNMA with recourse. At October 31, 1994, the remaining
principal balance of mortgage loans sold with recourse was approximately $35
million. To date, Arbor has not experienced any material losses relating to
such representations and warranties on mortgage loans sold with recourse.
INTEREST EARNED, NET
Arbor normally "warehouses" or holds mortgage loans which it has originated
and which are held for sale for 30 to 45 days, depending upon the delivery
dates negotiated with FNMA, FHLMC, GNMA or institutional investors. Arbor
receives, as interest earned, net (interest earned less interest expense), the
difference between the interest received on mortgage loans held prior to sale
and the interest paid by Arbor under its financing arrangements. During those
periods when the interest rates Arbor pays for its short term borrowings are
higher than the interest rates which Arbor receives from the mortgages it owns,
Arbor will pay higher interest costs than the interest revenue it receives from
borrowers.
LOAN SERVICING
Arbor's loan servicing operation involves the day-to-day administration of
mortgage loans which are owned by third parties (such as FNMA, FHLMC, GNMA or
private institutional investors), and sales, from time to time, of servicing
rights to a portion of Arbor's mortgage servicing portfolio.
Loan Servicing Administration. Mortgage loan servicing activities include
collecting mortgage, property tax and insurance payments from the borrower;
paying when due the principal and interest portion of such monthly payments,
net of servicing fees, to the owner of the mortgage; accounting for loan
principal and interest payments; making advances when required; holding
escrowed funds for the payment of taxes and insurance; contacting delinquent
borrowers; foreclosing in the event of unremedied defaults; and other
administrative duties. The Quality Control Department is responsible for
monitoring compliance with federal, state, agency and investor guidelines in
connection with Arbor's loan servicing administration.
Servicing Fees. As compensation for its residential servicing activities,
Arbor receives loan servicing fees under its servicing contracts, ranging
typically from .25% to .50% per annum of the aggregate unpaid principal balance
of the mortgage loans serviced, plus any late charges collected from delinquent
borrowers and other fees incidental to the services provided. These fees are
deducted and paid to Arbor from the monthly mortgage payments collected.
Arbor's servicing portfolio is subject to reduction by reason of normal
amortization, prepayment and foreclosure of outstanding loans. Additionally,
Arbor has in the past sold a portion of its loan servicing rights to other
mortgage servicers.
As mortgage interest rates decline, loan prepayments increase because
homeowners seek to refinance at lower interest rates. As a result, the market
value of, and earnings from, Arbor's loan servicing portfolio may be adversely
affected. In a period of declining interest rates and accelerated prepayments,
income generated from Arbor's loan servicing portfolio may decline. Mortgage
loans with higher rates are more likely to result in prepayments. Conversely,
as mortgage interest rates stabilize or increase over an extended period of
time and prepayments slow, the market value of Arbor's loan servicing portfolio
may be positively affected.
Arbor's servicing agreements with FNMA, FHLMC and GNMA, under which Arbor
acts as a servicer of the mortgage loans underlying mortgage-backed securities
issued by FNMA and FHLMC, and its agreements with respect to FHA/VA loans,
generally obligate Arbor to make timely payments of mortgage principal and
interest whether or not such payments by borrowers on the underlying mortgage
loans have been made to Arbor as servicing agent. These payments are known as
"advances." FNMA and FHLMC are obligated to reimburse Arbor for principal and
interest payments which Arbor has advanced; however, until
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reimbursed, Arbor must use its own funds to advance such payments to the
mortgage holders. The interest cost to Arbor for these advances is not
reimbursed. Arbor may also not be fully compensated for legal costs and other
expenses relating to mortgage loans in default or a property in foreclosure.
These unreimbursed costs have a negative impact on the overall profitability of
Arbor's servicing activities. Arbor's unreimbursed costs relating to its
obligations to advance payments have not been material. With respect to non-
conforming loans which are sold to private investors, Arbor is also obligated
to continue to make timely payments of mortgage principal and interest on
delinquent loans. Arbor's servicing contract provides for priority
reimbursement from the proceeds of the sale of such properties upon
foreclosure.
Bulk Sale of Loan Servicing Rights. Arbor sold a portion of its servicing
portfolio on a "bulk" basis in each of Fiscal 1994, Fiscal 1993, Fiscal 1992
and the first quarter of Fiscal 1995. Additionally, Arbor, in some cases, does
not retain the servicing rights to the mortgages it sells. Sales of mortgages
on a servicing released basis generates higher revenues than sales of mortgages
on a servicing retained basis. Sales of mortgage servicing rights generate
revenues to Arbor at the time of the sale, but reduce future servicing income
that Arbor would otherwise receive from providing administrative services for
such mortgages.
Pursuant to the Merger Agreement, Arbor may not, prior to the Closing, sell
any servicing rights without the consent of BAC, other than the sale of
servicing rights or mortgage loans on a servicing released basis to Investors
on a flow basis in the ordinary course of business pursuant to agreements
existing as of the date of the Merger Agreement, provided that BAC shall have
the right to purchase any such servicing rights or loans from Arbor if it
offers Arbor comparable or better terms than those of the other prospective
purchases.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends
reflecting the general regional pattern of sales and resales of homes, although
refinancings tend to be less seasonal and more closely related to changes in
interest rates. The mortgage servicing business is generally not subject to
seasonal trends.
COMPETITION
The mortgage banking industry is highly competitive, both on a national level
and within the states where Arbor does business. Since there are significant
costs involved in establishing a community-based retail network focused on
mortgages for home purchases and a need for substantial capital, there are
potential barriers to market entry for any company seeking to provide a full
range of mortgage banking services. No single lender or any group of lenders
has, on a national level, a significant percentage of market share or a
dominant position with respect to loan originations for first mortgages.
Arbor's competitors are other financial institutions, such as mortgage bankers,
state and national banks, savings and loan associations, credit unions and
insurance companies. Arbor competes principally by offering loans with
competitive features, by emphasizing the quality of its service and pricing its
range of products at competitive rates. Many of Arbor's competitors, including
some competitors which have a significant presence in areas where Arbor
conducts its business or where Arbor is considering entering into that market,
have financial resources that are substantially greater than those of Arbor.
Arbor's competition for servicing rights includes the aforementioned
entities, plus independent servicing entities and, recently, pension funds,
money managers, mutual funds and other institutional investors. Arbor competes
for servicing rights based upon price, availability and reputation in the
industry.
In recent years, at least in part due to dislocation within the thrift
industry, the aggregate share of the U.S. market for residential mortgage loans
that are serviced by companies other than savings and loans has increased.
According to industry statistics, mortgage bankers' aggregate share of this
market increased from approximately 34% in 1989 to approximately 52% in 1993.
Beginning early in 1994 the mortgage banking industry has experienced an
increase in mortgage interest rates, resulting in a decline in the volume of
mortgage loan originations both industry-wide and with respect
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to Arbor. This steady decline in origination volume during calendar year 1994
resulted in excess origination capacity in the industry, which, in turn, was
accompanied by increasingly competitive loan pricing and a reduction in profit
margins. These factors have resulted in increased consolidation in the mortgage
banking industry during the past year.
REGULATION
Arbor's mortgage banking business is subject to extensive regulation by
federal, state and local authorities, as well as rules and regulations of FNMA,
FHLMC, HUD and GNMA with respect to originating, processing, selling and
servicing mortgage loans which are designated to be sold or packaged for their
respective programs. These rules and regulations, among other things, prohibit
consumer discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Moreover, lenders such as
Arbor are required to submit audited financial statements on an annual basis to
FNMA, FHLMC, GNMA and to various state licensing authorities, with each
regulatory entity employing its own review procedures and financial
requirements. Arbor's affairs are, at all times, subject to examination by
FNMA, FHLMC, GNMA and by various state licensing authorities to assure
compliance with their respective regulations, policies and procedures.
Mortgage origination activities are subject to the Truth-in-Lending Act and
Regulation Z promulgated thereunder. The Truth-in-Lending Act contains
disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. The Truth-in-Lending Act provides consumers a three day right to cancel
certain credit transactions, including any refinance mortgage or junior
mortgage loan on a consumer's primary residence. Arbor believes that it is in
compliance in all material respects with the Truth-in-Lending Act.
Arbor is required to comply with the Equal Credit Opportunity Act (the
"ECOA") and Regulation B promulgated thereunder, which prohibit creditors from
discriminating against applicants on such bases as race, color, religion,
national origin, sex, age or marital status, and restrict creditors from
obtaining certain types of information from loan applicants. They also require
certain disclosures by lenders regarding consumer rights and require lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit, or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act, requires the lenders to supply the applicant
with the name and address of the reporting agency. Arbor believes that it is in
compliance in all material respects with the ECOA and the Fair Credit Reporting
Act.
The Real Estate Settlement Procedures Act ("RESPA") and Regulation X
promulgated thereunder imposes, among other things, limits on the amount of
funds a borrower can be required to deposit with Arbor in any escrow account
for the payment of taxes, insurance premiums or other charges. Arbor has
policies, procedures and systems in place to ensure compliance with RESPA.
Effective December 2, 1992, the federal regulations under RESPA were
substantially amended in a number of respects. Among other things, the new
regulations (i) clarified that fees for referrals of federally related loan
originations are prohibited, unless otherwise expressly permitted by
regulation, (ii) authorized referrals of settlement service business (including
federally related loan originations) from persons having a "controlled business
arrangement" with the provider of the settlement services, if the business
relationship is disclosed, consumers are free to obtain services elsewhere and
no specific fee is paid for the referral, (iii) permitted payment of fees by
borrowers for computer loan origination services if a required disclosure is
provided and (iv) subjected, for the first time, certain types of correspondent
origination arrangements to the full requirements of RESPA. Arbor believes that
the impact of these regulations have not had a material impact on its
operations.
In October of 1994, HUD enacted new regulations under RESPA relating to
accounting and collection procedures for escrow accounts for all federally
related mortgage loans. The new regulations require
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aggregate accounting, rather than single-item accounting, for all escrow
accounts for federally related mortgage loans and also establish HUD's
interpretation of the permissible "cushion" for such escrow account balances.
These newly enacted rules may negatively impact the monetary benefit which
Arbor currently derives from such escrow accounts.
A number of federal statutes, including the Home Mortgage Disclosure Act
("HMDA") and the Fair Housing Act ("FH Act"), seek to promote fair lending. The
federal government has recently increased its efforts concerning fair lending.
Arbor does not believe that it has affirmatively engaged in discriminatory
lending practices. Nevertheless, Arbor has undertaken the implementation of a
Company-wide program which is designed to educate employees to the housing
needs of minorities and to create greater housing opportunities for minorities
by such items as the elimination of minimum loan size requirements and a second
review procedure for all declined loans.
Many of the aforementioned statutes, regulations and requirements are
designed to protect the interest of consumers, while others protect the owners
or insurers of mortgage loans. If Arbor were to fail to comply with these
requirements, it could lead to Arbor's loss of approved status with FNMA,
FHLMC, HUD and/or GNMA, termination of Arbor's servicing contracts without
compensation to Arbor, demands against Arbor for indemnification or loan
repurchases, class action lawsuits against Arbor and administrative enforcement
actions.
Certain states require that interest be paid to mortgagors on funds deposited
by them in escrow to cover mortgage related payments such as property taxes and
insurance premiums. Proposed federal legislation, if enacted, would establish
in all states a uniform interest payment requirement regarding the payment of
interest on escrow accounts. Other proposed federal legislation, if enacted,
would impose minimum capital requirements on FNMA and FHLMC. To the extent this
increases such entities' costs of operation and a portion of this cost is
passed on to Arbor, Arbor's results of operations could be adversely impacted.
Arbor is in possession of all licenses in those states in which it does
business that require such licenses, except where the absence of such licenses
is not material to the business operations of Arbor as a whole.
EMPLOYEES
As of October 31, 1994 Arbor had approximately 740 employees, substantially
all of whom were full-time employees. Of these, approximately 168 were employed
at Arbor's Uniondale, New York headquarters, 62 at Arbor's Carle Place, New
York servicing center and 510 were employed at Arbor's Retail Branch Network,
Wholesale Lending Centers and Commercial Lending Centers, of which 205 were
commission-based loan officers. None of Arbor's employees is represented by a
union. Arbor considers its relations with its employees to be satisfactory.
PROPERTIES
Arbor's corporate and administrative headquarters are located in
approximately 48,000 square feet of leased facilities in Uniondale, New York.
In addition, Arbor leases an aggregate of approximately 123,000 square feet of
space in various locations for its operations. Such leases will expire at
various periods between 1994 and 2004. The aggregate annual lease payments on
properties leased by Arbor as of August 31, 1994 were approximately $4.6
million. Arbor believes that its present facilities are adequate for its
current level of operations.
LEGAL PROCEEDINGS
In the ordinary course of its business, Arbor is from time to time subject to
litigation. Arbor does not believe that any litigation to which Arbor is
currently subject is likely, individually or in the aggregate, to have a
material adverse effect on Arbor's financial position, liquidity or future
operating results.
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Following public announcement of the Merger Agreement, the Actions were filed
in New York State Supreme Courts naming Arbor, the individual members of the
Arbor Board, and in five cases, BAC, as defendants. The plaintiffs in the
Actions generally allege that, in authorizing Arbor to enter into the Merger
Agreement, the Arbor Board failed to maximize the value to be received by
Arbor's shareholders in a sale of Arbor and thereby breached their fiduciary
duties.
The parties to the Actions have entered into an agreement to settle the
Actions. The proposed settlement entails, among other things, certain revisions
to the purchase price adjustments in the Merger Agreement. See "OTHER MATTERS--
Certain Pending Litigation."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
OVERVIEW
Arbor's business activities are focused on the origination, sale and
servicing of mortgage loans with an emphasis on the origination of such loans
through its Retail Branch Network. Arbor has grown consistently since its
inception in 1983 with substantial growth over the past three fiscal years. The
primary reason for this growth is the expansion of the Retail Branch Network,
establishment and development of Wholesale Lending Centers, and primarily
during the last two fiscal years, the significant increase in demand for
mortgage loan refinancing as a result of decreased mortgage interest rates.
The mortgage banking industry has experienced an increase in mortgage
interest rates since approximately January 1994. The increase in mortgage
interest rates has resulted in a significant reduction in the volume of Arbor's
mortgage loan refinancings which has contributed to the significant decline in
mortgage origination revenue. In addition, as a result of industry
overcapacity, significant price competition among lenders has reduced Arbor's
profit margins on its mortgage originations. Mortgage origination volume
decreased 54% to $561 million for the quarter ended August 31, 1994 from $1.2
billion for the quarter ended August 31, 1993.
Arbor significantly increased the size of its servicing portfolio from $1.2
billion at February 29, 1992 to $2.7 billion at February 28, 1993, to $4.9
billion at February 28, 1994 and further to $5.3 billion at August 31, 1994.
This increase was due to Arbor's net mortgage originations during these
periods. Arbor has not acquired any material amounts of servicing rights
through bulk purchases.
Accounting Principles. GAAP requires different methodologies to account for
the value of servicing rights produced from wholesale originations as compared
to retail originations. GAAP treats wholesale originations, such as from the
Wholesale Lending Centers, as the purchase of mortgage servicing rights
("PMSR") from third-party lenders and requires Arbor to capitalize on the
balance sheet the net direct costs associated with the PMSRs in the period of
origination. The capitalized PMSRs must be amortized over the expected
servicing life of the underlying mortgages.
A retail originated mortgage servicing right ("OMSR"), such as from the
Retail Branch Network, is not treated as the purchase of a mortgage servicing
right, and, accordingly, the direct costs of originating an OMSR loan are not
capitalized, but are expensed when the loan is sold to an investor. The value
of an OMSR is recognized over the life of the underlying mortgage in the form
of servicing revenue or realized through subsequent sales of servicing rights.
GAAP provides for consistent treatment for recording excess servicing from
both wholesale originations and retail originations. Excess servicing is that
part of the total service fee that exceeds the normal contractual minimum
servicing fee established by FNMA, FHLMC or GNMA. Excess servicing is
capitalized on Arbor's balance sheet in the period of origination and amortized
in the future as the servicing fee is received.
A retail originator, as compared to a wholesale originator, generally
records, as an asset, a smaller portion of the total value of servicing rights
generated during a particular period. Approximately 60% of
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Arbor's mortgage originations were from its Retail Branch Network and 35% were
from its Wholesale Lending Centers. At August 31, 1994 capitalized servicing
rights aggregated $21.4 million, or .41%, of Arbor's $5.3 billion servicing
portfolio.
The Financial Accounting Standards Board ("FASB") is currently considering
modifying certain accounting standards for companies engaged in mortgage
banking activities. Statement of Financial Accounting Standards No.65
("Accounting for Certain Mortgage Banking Activities") currently requires that
the cost of OMSRs be expensed rather than capitalized. The contemplated
revisions to Statement No.65 would require companies to capitalize some or all
of the value of OMSRs. If the revisions are adopted by the FASB, Arbor would be
required to capitalize as an asset some or all of the net cost of OMSRs which,
under current accounting rules, would otherwise be expensed. This asset would
then be amortized against income over the expected period of net servicing
income. It is expected that, if adopted, this change is likely to have a
positive impact on future reported earnings.
SECOND QUARTER ENDED AUGUST 31, 1994 COMPARED TO SECOND QUARTER ENDED AUGUST
31, 1993
Total revenues for the second quarter of fiscal 1995 decreased 58%, or $12.4
million, to $9.2 million, from $21.6 million for the second quarter of fiscal
1994. Total expenses for the second quarter of fiscal 1995 increased 10%, or
$1.7 million to $18.3 million compared to $16.6 million for the second quarter
of fiscal 1994. Net loss for the second quarter of fiscal 1995 was ($5.3)
million compared to net income of $2.9 million for the second quarter of fiscal
1994.
Mortgage Origination Revenue. Mortgage origination revenue includes all
mortgage related revenues other than servicing released premiums and bulk sales
of servicing rights, net interest revenue and servicing revenue. Mortgage
origination revenue for the second quarter of fiscal 1995 decreased 88%, or
$13.4 million, to $1.9 million compared to $15.3 million for the second quarter
of fiscal 1994. The decrease in mortgage origination revenue was the result of
lower margins on loans sold and lower volume of mortgage loan originations.
Arbor's lower margins on loans sold is the result of industry overcapacity
which has resulted in significant price competition. At August 31, 1994, Arbor
reduced the carrying value of mortgage loans held for sale by $900,000 to
reflect the estimated decline in fair value of such loans. The volume of
mortgage loans originated for the second quarter of fiscal 1995 decreased 54%,
or $664 million, to $561 million compared to $1.2 billion for the second
quarter of fiscal 1994.
The sources of mortgage origination volume are (in millions):
<TABLE>
<CAPTION>
SECOND QUARTER
-----------------------
FISCAL 1995 FISCAL 1994
----------- -----------
<S> <C> <C>
Retail Branch Network............................. $328 $ 712
Wholesale Lending Centers......................... 196 397
---- ------
Total Residential............................... 524 1,109
Commercial Mortgage Centers....................... 37 116
---- ------
$561 $1,225
==== ======
</TABLE>
Mortgage originations from the Wholesale Lending Centers do not generate
significant amounts of mortgage origination revenue as the primary purpose of
the Wholesale Lending Center's activities is the acquisition of servicing
rights. Arbor receives smaller fees in connection with the origination of
wholesale loans as the third party lenders retain the majority of fees
collected from loan applicants. Mortgage originations from the Retail Branch
Network contribute the majority of Arbor's mortgage origination revenue. The
decrease in mortgage origination revenue for the second quarter of fiscal 1995
reflects a 54% decrease in mortgage origination volume from the Retail Branch
Network and a 50% decrease in mortgage origination volume from the Wholesale
Lending Centers.
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Interest Earned, Net. Interest earned, net is the difference between interest
revenue from Arbor's mortgage loans which generally carry long-term interest
rates and Arbor's financing costs, which carry short-term interest rates. Arbor
generally sells loans it has originated within 30 to 45 days and finances the
funding of such loans through short-term borrowings. Ordinarily, short-term
rates are lower than long-term rates, and Arbor benefits from this difference,
or "spread," during the period that the mortgage loans are held by Arbor.
Interest earned, net for the second quarter of fiscal 1995 decreased 5%, or
$120,000 to $2.4 million compared to $2.5 million for the second quarter of
fiscal 1994, reflecting lower mortgage loan originations offset by higher
interest rates earned on mortgage originations. Arbor's cost of funds increased
slightly due to higher short-term interest rates offset, in part, by greater
earnings on mortgage loan escrow balances deposited with various banks.
Servicing Released Premium and Bulk Sale of Servicing Rights, Net. Arbor
sells servicing rights related to its mortgage originations through negotiated
individual loan sales and through bulk sales. Arbor bases its decisions to sell
servicing rights on many factors, including market conditions, cash flow and
earnings objectives and overall growth in Arbor's servicing portfolio. Revenues
from the sale of servicing rights for the second quarter of fiscal 1995
increased 69%, or $364,000, to $892,000, compared to $528,000 for the second
quarter of fiscal 1994. Arbor did not execute any bulk sale of servicing rights
in either the second quarter of fiscal 1995 or the second quarter of fiscal
1994. Overall, Arbor retained servicing rights on 86% of second quarter of
fiscal 1995 mortgage originations compared to 95% of mortgage originations for
the second quarter of fiscal 1994. The volume of servicing rights sold for the
second quarter of fiscal 1995 increased 53%, or $28 million to $81 million
compared to $53 million for the second quarter of fiscal 1994.
Servicing Revenue. Servicing revenue represents fees received by Arbor as
compensation for its servicing activities under servicing contracts with the
owners of the underlying loans. Servicing revenue for the second quarter of
fiscal 1995 increased 22%, or $726,000, to $4.0 million compared to $3.2
million for the second quarter of fiscal 1994. The servicing portfolio at
August 31, 1994 increased 26% to $5.3 billion from $4.2 billion at August 31,
1993, reflecting Arbor's mortgage originations during the period. Annualized
portfolio runoff was 12% at August 31, 1994 compared to 13% at August 31, 1993.
Arbor amortizes capitalized servicing in proportion to, and over the period
of the estimated servicing life of the underlying loans. Scheduled amortization
expense of capitalized servicing increased 88%, or $385,000, to $820,000 for
the second quarter of fiscal 1995 compared to $435,000 for the second quarter
of fiscal 1994. This increase resulted primarily from greater amounts of PMSR
related to servicing rights acquired through the Wholesale Lending Centers. At
August 31, 1994 capitalized servicing as a percentage of the servicing
portfolio was .41% compared to .37% at February 28, 1994 and .25% at August 31,
1993.
Arbor reviews, on a quarterly basis, the actual prepayment rates of its
servicing portfolio in comparison to the original prepayment rates utilized in
the calculation of capitalized servicing and records a write-off for a portion
of the capitalized servicing, if necessary. Future prepayment rates depend, in
part, on the interest rate characteristics of Arbor's servicing portfolio
compared to prevailing mortgage interest rates for new mortgage loans. Arbor
did not experience any significant unanticipated prepayments in either the
second quarter of fiscal 1995 or the second quarter of fiscal 1994.
The weighted average interest rate for Arbor's servicing portfolio at August
31, 1994 and 1993 was 7.5%.
Sales Commissions and Other Fees. Sales commissions and other fees for the
second quarter of fiscal 1995 decreased 41%, or $1.8 million to $2.6 million
compared to $4.4 million for the second quarter of fiscal 1994. This decrease
is directly attributable to the decrease in mortgage originations. Average
sales commissions paid to employees were approximately .41% per originated
mortgage loan in the second quarter of fiscal 1995 compared to .36% in the
second quarter of fiscal 1994 primarily reflecting costs associated with
recruiting new retail loan officers.
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Employee Compensation and Benefits. Employee compensation and benefits for
the second quarter of fiscal 1995 increased 22%, or $1.4 million, to $7.8
million compared to $6.4 million for the second quarter of fiscal 1994. This
increase reflects expansion of the Southwest retail region, Wholesale Lending
Centers, Commercial Mortgage Centers and the servicing center. In September
1994, Arbor reduced its salaried staff levels (excluding commissioned loan
officers) by approximately 13% to reflect current and projected mortgage
origination levels.
Selling and Administrative. Selling and administrative expenses for the
second quarter of fiscal 1995 increased 35%, or $2.1 million, to $7.9 million
compared to $5.8 million for the second quarter of fiscal 1994. This increase
primarily reflects costs associated with the increase in Arbor's servicing
portfolio, expansion of the Commercial Mortgage Centers, higher occupancy costs
and certain legal and professional fees incurred in connection with the Merger
Agreement (see Note 3 to the accompanying Financial Statements).
Provision for Income Taxes. The effective tax rate for each of the second
quarter of fiscal 1995 and fiscal 1994 was 42%.
SIX MONTHS ENDED AUGUST 31, 1994 COMPARED TO SIX MONTHS ENDED AUGUST 31, 1993
For the six months ended August 31, 1994 ("the fiscal 1995 period") revenues
decreased 22%, or $8.8 million, to $30.5 million from $39.3 million for the six
months ended August 31, 1993 ("the fiscal 1994 period"). Total expenses for the
fiscal 1995 period increased 14%, or $4.4 million, to $35.2 million compared to
$30.9 million for the fiscal 1994. Net loss for the fiscal 1995 period was
($2.7) million compared to net income of $4.9 million for the fiscal 1994
period.
The sources of mortgage origination volume are (in millions):
<TABLE>
<CAPTION>
SIX MONTHS
-----------------------
FISCAL 1995 FISCAL 1994
----------- -----------
<S> <C> <C>
Retail Branch Network........................... $ 726 $1,288
Wholesale Lending Centers....................... 518 700
------ ------
Total Residential............................. 1,244 1,988
Commercial Mortgage Centers..................... 100 116
------ ------
$1,344 $2,104
====== ======
</TABLE>
Mortgage Origination Revenue. Mortgage origination revenue for the fiscal
1995 period decreased 61%, or $15.6 million, to $9.8 million compared to $25.3
million for the fiscal 1994 period. The decrease in mortgage origination
revenue was the result of lower margins on loans sold and lower volume of
mortgage loan originations. The volume of mortgage loans originated for the
fiscal 1995 period decreased 36%, or $760 million, to $1.3 billion compared to
$2.1 billion for the fiscal 1994 period.
Interest Earned, Net. Net interest earned for the fiscal 1995 period
decreased 8%, or $340,000 to $4.1 million, compared to $4.5 million for the
fiscal 1994 period, reflecting lower mortgage loan originations offset by
higher interest rates earned on mortgage originations. Arbor's cost of funds
increased slightly due to higher short-term interest rates offset by earnings
on mortgage loan escrow balances.
Servicing Released Premiums and Bulk Sale of Servicing Rights, Net. Revenues
from the sale of servicing rights for the fiscal 1995 period increased 147%, or
$5.1 million, to $8.6 million compared to $3.5 million for the fiscal 1994
period. Net revenues recorded from the bulk sale of servicing rights have been
reduced by transaction costs and the write-off of capitalized servicing.
Overall, Arbor retained servicing rights on 47% of fiscal 1995 period mortgage
originations compared to 81% of mortgage originations for the fiscal 1994
period. The volume of servicing rights sold for the fiscal 1995 period
increased 79%, or $315 million, to $712 million compared to $397 million for
the fiscal 1994 period.
76
<PAGE>
Servicing Revenue. Servicing revenue for the fiscal 1995 period increased
34%, or $2.0 million to $8.0 million, compared to $6.0 million for the fiscal
1994 period. The increase in servicing income is directly related to the growth
in Arbor's servicing portfolio.
Sales Commissions and Other Fees. Sales commissions and other fees for the
fiscal 1995 period decreased 34%, or $2.6 million to $5.2 million, compared to
$7.8 million for the fiscal 1994 period. This decrease is directly attributable
to the decrease in mortgage originations. Average sales commissions paid to
employees were approximately .38% per originated mortgage loan in the fiscal
1995 period compared to .35% in the fiscal 1994 period.
Employee Compensation and Benefits. Employee compensation and benefits for
the fiscal 1995 period increased 27%, or $3.3 million, to $15.5 million
compared to $12.2 million for the fiscal 1994 period. This increase reflects
increased staffing levels associated with the geographic expansion of Arbor's
lending activities and an increase in the servicing portfolio.
Selling and Administrative. Selling and administrative expenses for the
fiscal 1995 period increased 33%, or $3.6 million, to $14.5 million compared to
$10.9 million for the fiscal 1994 period. This increase primarily reflects
costs associated with the increase in Arbor's servicing portfolio, expansion of
the Commercial Mortgage Centers, higher occupancy costs and certain legal and
professional fees incurred in connection with the Merger Agreement (see Note 3
to the accompanying Financial Statements).
Provision for Income Taxes. The effective tax rate for fiscal 1995 and fiscal
1994 periods was 42%.
FISCAL 1994 COMPARED TO FISCAL 1993
Net income for Fiscal 1994 increased 54%, or $4.2 million, to $12.0 million
from $7.8 million for Fiscal 1993. Revenues for Fiscal 1994 increased 46%, or
$27.6 million, to $87.7 million from $60.1 million for Fiscal 1993. The
increase in revenue resulted from increased mortgage origination revenue due to
increased mortgage origination volume, higher levels of net interest revenue,
greater revenues from Arbor's servicing portfolio and additional revenues from
bulk sales of servicing rights. Expenses for Fiscal 1994 increased 43%, or
$20.1 million, to $66.5 million from $46.4 million for Fiscal 1993 primarily as
a result of higher personnel costs, commission expense and other direct
expenses related to the increase in mortgage origination volume and the
increased servicing portfolio.
Mortgage Originations, Net. Mortgage origination revenue for Fiscal 1994
increased 30%, or $11.5 million, to $49.9 million compared to $38.4 million for
Fiscal 1993. The volume of mortgage loans originated for Fiscal 1994 increased
68% or $1.7 billion to $4.2 billion compared to $2.5 billion for Fiscal 1993.
The increase in mortgage origination volume was due to Arbor's expansion of all
its lending activities and increased mortgage loan refinancing.
The sources of mortgage origination volume are (in millions):
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993
----------- -----------
<S> <C> <C>
Retail Branch Network............................. $2,518 $2,101
Wholesale Lending Centers......................... 1,545 421
------ ------
Total Residential............................... 4,063 2,522
Commercial Mortgage Centers....................... 172 --
------ ------
$4,235 $2,522
====== ======
</TABLE>
The increase in mortgage origination revenue for Fiscal 1994 reflects a 20%
increase in mortgage origination volume from the Retail Branch Network and a
267% increase in mortgage origination volume from the Wholesale Lending
Centers. ANCMC did not have material mortgage origination revenues for Fiscal
1994.
77
<PAGE>
Mortgage originations for home purchases for Fiscal 1994 increased 22%, or
$200 million, to $1.4 billion compared to $1.2 billion for Fiscal 1993.
Residential refinancings for Fiscal 1994 were $2.6 billion, or 65% of total
residential mortgage originations compared to $1.3 billion, or 53%, of
residential mortgage originations for Fiscal 1993. The continued low interest
rate environment during Fiscal 1994 contributed to the greater number of
refinancings. All of the mortgage originations from ANCMC were refinancings.
Interest Earned, Net. Interest earned, net for Fiscal 1994 increased 58%, or
$4.0 million, to $10.8 million compared to $6.8 million for Fiscal 1993,
reflecting increased mortgage loan originations, more favorable borrowing
arrangements, better cash management, and higher levels of compensating
balances. The interest rate spreads during Fiscal 1994 and Fiscal 1993 were
high by historical standards, and there can be no assurance that the spread
will remain at these levels.
The average interest rate earned during Fiscal 1994 was 6.7% on average
outstanding mortgage loans held for sale of $284 million, compared to an
average interest rate earned during Fiscal 1993 of 7.6% on average outstanding
mortgage loans held for sale of $199 million. The average borrowings during
Fiscal 1994 were $268 million at an average interest rate of 4.6% compared to
average borrowings of $180 million at an average interest rate of 5.1% during
Fiscal 1993.
Servicing Released Premiums and Bulk Sales of Servicing Rights, Net. Revenues
from the sale of servicing rights for Fiscal 1994 increased 67%, or $5.4
million, to $13.4 million, compared to $8.0 million for Fiscal 1993. The volume
of servicing rights sold for Fiscal 1994 increased 66%, or $545 million, to
$1.4 billion (including bulk sales of $1.1 billion) compared to $825 million
(including bulk sales of $586 million) for Fiscal 1993. Revenues recorded from
the bulk sale of servicing rights have been reduced by transaction costs and
the write-off of related capitalized servicing. Overall, Arbor retained
servicing rights on 68% of mortgage originations for both Fiscal 1994 and
Fiscal 1993.
Servicing Revenue. Servicing revenue for Fiscal 1994 increased 99%, or $6.8
million, to $13.6 million compared to $6.8 million for Fiscal 1993. The
increase in servicing revenue is directly related to the growth in Arbor's
servicing portfolio. The servicing portfolio at February 28, 1994 increased
84%, or $2.2 billion, to $4.9 billion from $2.7 billion at February 28, 1993
reflecting increased mortgage originations and Arbor's decision to retain a
high percentage of servicing rights of mortgage loans originated.
Scheduled amortization expense of capitalized servicing increased 198%, or
$1.0 million, to $1.5 million for Fiscal 1994 as compared to $520,000 for
Fiscal 1993. This increase resulted primarily from greater amounts of PMSR
related to servicing rights acquired through the Wholesale Lending Centers. At
February 28, 1994, capitalized servicing as a percentage of the servicing
portfolio was .37% compared to .21% at February 28, 1993.
Arbor reviews, on a quarterly basis, the actual prepayment rate of its
servicing portfolio in comparison to the original prepayment rates utilized in
the calculation of capitalized servicing and records a write-off for a portion
of the capitalized servicing if necessary. As a result of this review, Arbor
wrote off an additional $418,000 (including $90,000 related to the prepayment
in March 1994 of one multi-family mortgage) and $76,000 in Fiscal 1994 and
Fiscal 1993, respectively, of capitalized excess servicing. The Fiscal 1994
write-off of $418,000 included $218,000 related to an accelerated level of
prepayments during Fiscal 1994 and $200,000 for impairment as a result of Arbor
revising its estimate of future prepayment rates. Future prepayment rates
depend, in part, on the interest rate characteristics of Arbor's servicing
portfolio compared to prevailing mortgage interest rates for new mortgage
loans.
The weighted average interest rate for Arbor's servicing portfolio at
February 28, 1994 was 7.4% compared to 7.9% at February 28, 1993. The decline
in the weighted average interest rate is due to Arbor's mortgage originations
for Fiscal 1994 which carried generally lower interest rates than loans
originated in prior years and due to the prepayment during Fiscal 1994 of loans
with higher interest rates.
78
<PAGE>
Sales Commissions and Other Fees. Sales commissions and other fees for Fiscal
1994 increased 30%, or $3.6 million, to $15.6 million compared to $12.0 million
for Fiscal 1993. This increase is directly attributable to the 68% increase in
total mortgage originations, offset in part by lower commissions paid for
wholesale originations. Average sales commissions were approximately .33% per
originated mortgage loan in Fiscal 1994 compared to .45% in Fiscal 1993.
Employee Compensation and Benefits. Employee compensation and benefits for
Fiscal 1994 increased 40%, or $7.6 million, to $26.4 million compared to $18.8
million for Fiscal 1993. This increase reflects increased staffing levels
associated with the geographic expansion of Arbor's lending activities, the
increase in the servicing portfolio and the increase in mortgage origination
volume.
Selling and Administrative. Selling and administrative expenses for Fiscal
1994 increased 57%, or $8.8 million, to $24.4 million compared to $15.6 million
for Fiscal 1993. This increase reflects higher marketing, telecommunication and
facility expenses associated with the expansion of Arbor's lending offices and
the increase in mortgage origination volume. Costs associated with Arbor's
servicing operation increased due to the increase in the servicing portfolio.
Provision for Income Taxes. The effective tax rate for Fiscal 1994 and Fiscal
1993 was 43.5%. During Fiscal 1993, certain of Arbor's subsidiaries terminated
elections to be taxed as small business corporations (S-Corporation) under the
Internal Revenue Code of 1986, as amended. Therefore, included in the Fiscal
1993 provision for taxes are pro forma taxes aggregating $345,000 as if these
affiliates were taxed as "C" corporations throughout Fiscal 1993.
FISCAL 1993 COMPARED TO FISCAL 1992
Net income for Fiscal 1993 increased 106%, or $4.0 million, to $7.8 million
compared to $3.8 million for Fiscal 1992. Revenues for Fiscal 1993 increased
56%, or $21.5 million, to $60.1 million from $38.6 million for Fiscal 1992. The
increase in revenue resulted from increased mortgage origination revenue
reflecting an increase in the volume of loans originated, higher levels of net
interest revenue, greater revenues from Arbor's servicing portfolio and
additional revenues from bulk sales of servicing rights. Expenses for Fiscal
1993 increased 44%, or $14.1 million, to $46.4 compared to $32.3 million for
Fiscal 1992 primarily as a result of higher personnel costs and higher
commissions expense related to the increase in mortgage origination volume.
Mortgage Originations Revenue. Mortgage origination revenue for Fiscal 1993
increased 50%, or $12.8 million, to $38.4 million compared to $25.6 million in
Fiscal 1992. The volume of mortgage loans originated for Fiscal 1993 increased
78%, or $1.1 billion, to $2.5 billion compared to $1.4 billion for Fiscal 1992.
The sources of mortgage origination volume are (in millions):
<TABLE>
<CAPTION>
FISCAL 1993 FISCAL 1992
----------- -----------
<S> <C> <C>
Retail Branch Network............................. $2,101 $1,419
Wholesale Lending Centers......................... 421 --
------ ------
$2,522 $1,419
====== ======
</TABLE>
During the first quarter of Fiscal 1993, Arbor commenced its wholesale
origination activities which contributed $421 million of mortgage originations
or 17% of total Fiscal 1993 mortgage originations.
Mortgage originations for home purchases for Fiscal 1993 increased 33% or
$300 million, to $1.2 billion compared to $900 million for Fiscal 1992. Arbor's
Wholesale Lending Centers contributed $125 million of the Fiscal 1993 home
purchase mortgage originations. Refinancings for Fiscal 1993 were $1.3 billion,
or 53% of total mortgage originations compared to $431 million, or 32% of total
mortgage originations for Fiscal
79
<PAGE>
1992. The decreasing interest rate environment and the low level of interest
rates during Fiscal 1993 contributed to the greater number of refinancings.
Interest Earned, Net. Interest earned, net for Fiscal 1993 increased 329%, or
$5.2 million, to $6.8 million compared to $1.6 million for Fiscal 1992,
reflecting increased mortgage loan originations, more favorable borrowing
arrangements, better cash management, and higher levels of compensating
balances.
The average interest rate earned during Fiscal 1993 was 7.6% on average
outstanding mortgage loans held for sale of $199 million, compared to an
average interest rate earned during Fiscal 1992 of 8.7% on average outstanding
mortgage loans held for sale of $101 million. Average borrowings during Fiscal
1993 were $180 million at an average interest rate of 5.1% compared to average
borrowings during Fiscal 1992 of $94 million at an average interest rate of
7.4%.
Servicing Released Premiums and Bulk Sales of Servicing Rights. Arbor
recorded net revenues of $8.0 million for Fiscal 1993 from the sale of $825
million of servicing rights (including bulk sales of $586 million) compared to
$8.0 million for Fiscal 1992 from the sale of $747 million of servicing rights
(including bulk sales of $279 million). The net revenues recorded have been
reduced by transaction costs and the write-off of capitalized servicing
associated with the servicing rights sold. Overall, Arbor retained servicing
rights on 68% of mortgage originations for Fiscal 1993 compared to 47% of
mortgage originations for Fiscal 1992.
Servicing Revenue. Servicing revenue for Fiscal 1993 increased 100%, or $3.4
million, to $6.8 million compared to $3.4 million for Fiscal 1992. This
increase is directly related to the growth in Arbor's servicing portfolio. The
servicing portfolio at February 28, 1993 increased 128%, or $1.5 billion, to
$2.7 billion from $1.2 billion at February 29, 1992 reflecting increased
mortgage originations and Arbor's decision in Fiscal 1993 to retain a greater
percentage of servicing rights of mortgage loans originated.
Greater amortization of capitalized servicing for Fiscal 1993 as compared to
Fiscal 1992 reflects higher mortgage originations and Arbor's new wholesale
lending activities. At February 28, 1993, capitalized servicing as a percentage
of the servicing portfolio was .21% compared to .12% at February 29, 1992.
The weighted average interest rate for Arbor's servicing portfolio at
February 28, 1993 was 7.9% compared to 9.2% at February 29, 1992. The decline
in the weighted average interest rate was due to Arbor's mortgage originations
for Fiscal 1993 which carried generally lower interest rates than loans
originated in prior years and due to the prepayment during Fiscal 1993 of loans
with higher interest rates.
Sales Commissions and Other Fees. Sales commissions and other fees for Fiscal
1993 increased 38%, or $3.3 million, to $12 million compared to $8.7 million
for Fiscal 1992. This increase is directly attributable to the 53% increase in
retail mortgage originations, offset in part by lower commissions paid for
wholesale originations. Average sales commissions were approximately .45% per
originated mortgage loan in Fiscal 1993 compared to .58% in Fiscal 1992.
Employee Compensation and Benefits. Employee compensation and benefits for
Fiscal 1993 increased 37%, or $5.1 million, to $18.8 million compared to $13.7
million for Fiscal 1992 reflecting increased staffing levels and higher
overtime levels associated with the increase in mortgage origination volume.
Selling and Administrative. Selling and administrative expenses for Fiscal
1993 increased 57%, or $5.7 million, to $15.6 million compared to $9.9 million
for Fiscal 1992. This increase reflects the higher administrative and marketing
costs associated with the increase in mortgage origination volume, increased
data processing costs associated with the expansion of Arbor's data processing
capabilities . Costs associated with Arbor's servicing operation increased due
to the increase in the servicing portfolio.
Provision for Taxes. The effective tax rate for Fiscal 1993 was 43.5%
compared to 40% for Fiscal 1992 reflecting higher state income taxes. During
Fiscal 1993, each of Arbor's subsidiaries terminated its election to be taxed
as a small business corporation (S Corporation) under the Internal Revenue Code
of 1986, as
80
<PAGE>
amended. Therefore, included in provision for taxes are pro forma taxes as if
Arbor were taxed as a "C" corporation throughout Fiscal 1993. Pro forma taxes
were $345,000 for Fiscal 1993 compared to $1,607,000 for Fiscal 1992,
reflecting the S Corporation status throughout Fiscal 1992 and only partially
for Fiscal 1993.
INFLATION
During periods of rising inflation, interest rates generally tend to
increase. If mortgage rates increase, loan refinancing activity tends to
decline as do prepayment rates, thus tending to extend the average life of
Arbor's servicing portfolio and generally enhance its servicing related
revenues. If mortgage interest rates increase substantially, this may also
result in a decline in the origination of mortgages for home purchases. During
periods of declining inflation, interest rates generally tend to decline. If
mortgage interest rates decline, loan refinancing activity tends to increase,
which tends to reduce Arbor's servicing portfolio and servicing revenues as a
result of increased prepayments. A substantial decline in mortgage interest
rates may also result in an increase in the origination of mortgages for home
purchases.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends
reflecting the general regional pattern of sales and resales of homes, although
refinancings tend to be less seasonal and more closely related to changes in
interest rates. The mortgage servicing business is generally not subject to
seasonal trends.
LIQUIDITY AND CAPITAL RESOURCES
Arbor's principal financing needs consist of funding its mortgage loans, the
working capital requirements of its operations and the capital requirements of
its wholesale lending operations in which Arbor acquires servicing rights.
Arbor's future financing needs will depend on the level of mortgage
originations and cash flow from operations. Arbor currently finances its
operations and mortgage fundings through bank borrowings, the use of
"gestation" repurchase agreements and Arbor's own capital.
On April 29, 1994, Arbor signed a $400 million Credit and Security Agreement
(the "Credit Facility") with sixteen commercial banks. The Credit Facility
included (i) up to $160 million of commercial paper issuable by Arbor which is
supported by a letter of credit from a commercial bank and (ii) up to $200
million as gestation financing for loan pools and mortgage backed securities.
The Credit Facility has a 364-day term which is renewable for additional 364-
day terms. Amounts available under the Credit Facility may be increased to $550
million. The Credit Facility contains certain financial covenants limiting
indebtedness, liens, mergers, affiliated transactions, sales of assets and
dividends, and requires Arbor to maintain minimum net worth, minimum servicing
portfolio size and certain other financial ratios. Arbor reduced the amount
available under the Credit Facility to $200 million in August 1994, and again
in October 1994 to its current amount of $150 million (including up to $75
million of commercial paper).
In addition, on April 29, 1994, Arbor entered into a $25 million Secured
Revolving Credit Agreement (the "Secured Facility") with three commercial
banks. At August 31, 1994, $7.5 million was outstanding under the Secured
Facility. The Secured Facility is intended for working capital purposes and is
secured by a pledge of Arbor's servicing portfolio. Financial covenants under
the Secured Facility are similar to those under the Credit Facility.
In addition to the Credit Facility Agreement and the Secured Facility
Agreement, Arbor has made use of certain loan purchase and short-term credit
programs provided by major investment banks, including a $50 million committed
lending program with one investment bank which expires in February 1995. These
programs permit Arbor to lower its short-term borrowing costs and, during
periods of peak volumes, provide additional liquidity by accelerating the
turnover of loans in inventory. The uncommitted arrangements may be terminated
by either party at any time upon notice. Arbor believes that other institutions
provide similar funding programs and, in the event its current arrangements
with these investment banking firms terminate, Arbor believes it will be able
to enter into similar arrangements without disruption of Arbor's business.
81
<PAGE>
In addition to commitments obtained from FNMA, FHLMC and GNMA, Arbor obtains
commitments to purchase its mortgage loans from various institutional investors
on both a servicing retained and servicing released basis. The terms of these
purchase arrangements vary according to each investor's purchasing
requirements; however, Arbor believes that the loss of any one or group of such
investors (excluding FNMA or FHLMC) would not have a material adverse effect on
Arbor.
Net cash used by operations during the fiscal 1995 period was $35.3 million.
Arbor used cash to fund the $30.3 million increase in mortgage loans held for
sale which was financed by increased borrowings, primarily amounts under the
Credit Facility. Arbor's net loss, non-cash items and changes in working
capital components used $5.0 million of cash.
During the fiscal 1995 period, Arbor invested $1.6 million in property and
equipment primarily related to purchases of computer and telecommunications
equipment and furniture and equipment associated with Arbor's new corporate
headquarters. Arbor continuously evaluates its requirements for property and
equipment especially in the area of new and evolving technologies in
telecommunications, computer hardware and computer software.
During the fiscal 1995 period, Arbor acquired servicing rights, primarily
through its Wholesale Lending Centers, to $518 million of mortgage loans for
$5.5 million compared to servicing rights to $700 million of mortgage loans for
$5.0 million for the fiscal 1994 period. Arbor believes that the Wholesale
Lending Centers will continue to be a material part of Arbor's activities and,
as such, the capital required to finance the acquisition of servicing rights
from the Wholesale Lending Centers is expected to be significant.
Financing activities provided $42.0 million of cash for the fiscal 1995
period. Increased borrowings under the Credit Facility are directly related to
the increase in mortgage loans held for sale.
Arbor believes that its liquidity and capital resources are adequate for its
current level of operations.
NEW ACCOUNTING STANDARDS
Accounting for Certain Investments in Debt and Equity Securities. The FASB
has issued Statement 114 ("Accounting by Creditors for Impairment of a Loan"),
which requires a lender to consider a loan to be impaired if the lender
believes it is probable that it will be unable to collect all principal and
interest due according to the original contractual terms of the loan. This
statement is effective for fiscal years beginning after December 15, 1994.
Management does not believe this statement will have a material adverse effect
on the financial condition or results of operations of Arbor.
SHAREHOLDER PROPOSALS
It is possible that Arbor's next Annual Meeting of Shareholders will be held
prior to consummation of the Merger. Any shareholder who wishes to submit a
proposal for presentation to such annual meeting, and for inclusion, if
appropriate, in Arbor's proxy statement and the form of proxy relating to such
annual meeting, must comply with the rules and regulations of the SEC then in
effect and must submit such proposal to the Secretary of Arbor. In the event
that Arbor's Annual Meeting of Shareholders is held on or before July 15, 1995,
any shareholder proposal must have been received by Arbor not later than
February 28, 1995. In the event that Arbor's Annual Meeting of Shareholders is
held after July 15, 1995, any shareholder proposal must be received by Arbor a
reasonable time before the solicitation of proxies for such annual meeting is
made.
82
<PAGE>
EXPERTS
The consolidated financial statements of BAC and subsidiaries incorporated by
reference to BAC's Annual Report on Form 10-K for the year ended December 31,
1993 have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Arbor and subsidiaries as of
February 28, 1994 and 1993 and for the three years ended February 28, 1994,
included in this Proxy Statement/Prospectus have been audited by Kenneth
Leventhal & Company, independent auditors, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of BAC Common Stock offered hereby will be passed
upon for BAC by Michael J. Halloran, Executive Vice President and General
Counsel of BAC. As of September 30, 1994, Mr. Halloran had a direct or indirect
interest in 2,077 shares of BAC Common Stock and had options to purchase 67,832
additional shares, of which 36,832 options were exercisable.
Certain legal matters relating to the Merger will be passed upon for BAC by
Morrison & Foerster, San Francisco, California and for Arbor by Skadden, Arps,
Slate, Meagher & Flom, New York, New York; Meltzer, Lippe, Goldstein, Wolf,
Schlissel & Sazel, Mineola, New York; and Walter K. Horn, General Counsel of
Arbor.
83
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of February 28, 1994 and February 28, 1993. F-3
Consolidated Statements of Operations for the Years Ended February 28 or
29, 1994, 1993 and 1992.................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
February 28 or 29, 1994, 1993 and 1992................................... F-5
Consolidated Statements of Cash Flows for the Years Ended February 28 or
29, 1994, 1993 and 1992.................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
Condensed Consolidated Balance Sheets (unaudited) as of August 31, 1994... F-18
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended August 31, 1994 and 1993 and for the six months ended August
31, 1994 and 1993........................................................ F-19
Condensed Consolidated Statements of Cash Flows (unaudited) for the six
months ended August 31, 1994 and 1993.................................... F-20
Notes to Condensed Consolidated Financial Statements...................... F-21
</TABLE>
F-1
<PAGE>
[LETTERHEAD OF KENNETH LEVENTHAL & COMPANY]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Arbor National Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Arbor
National Holdings, Inc. and subsidiaries as of February 28, 1994 and February
28, 1993, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended February 28, 1994, February 28, 1993
and February 29, 1992. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Arbor National Holdings, Inc. and subsidiaries as of February 28, 1994 and
February 28, 1993, and the consolidated results of their operations and their
cash flows for the years ended February 28, 1994, February 28, 1993 and
February 29, 1992 in conformity with generally accepted accounting principles.
/S/ KENNETH LEVENTHAL & COMPANY
New York, New York
April 8, 1994
F-2
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 1,366 $ 849
Mortgage loans held for sale, net................... 236,389 131,008
Mortgage loans held for investment
and real estate owned, net......................... 10,227 10,052
Due from sales of servicing......................... 5,793 3,092
Advances and other receivables...................... 9,384 6,010
Capitalized excess servicing fees................... 4,375 3,789
Purchased mortgage servicing rights................. 13,859 1,815
Deferred costs and other assets..................... 6,617 5,301
Property and equipment, net......................... 6,055 2,528
---------- ----------
Total Assets................................ $294,065 $164,444
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and mortgage fundings payable................. $184,823 $117,916
Repurchase agreements............................... 46,208 6,872
Customer deposits................................... 1,475 2,050
Accounts payable and accrued expenses............... 16,114 8,656
Income taxes........................................ 1,106 772
Deferred income taxes............................... 4,788 692
---------- ----------
Total Liabilities........................... 254,514 136,958
---------- ----------
Commitments and contingencies
Stockholders' equity
Preferred stock--$.01 par value;
authorized 5,000,000 shares, no shares issued
Common stock--$.01 par value;
authorized 50,000,000 shares, issued and
outstanding 6,691,706 (1994) and 6,666,667
(1993) shares...................................... 67 67
Additional paid-in capital.......................... 20,534 20,309
Retained earnings................................... 19,086 7,110
Treasury stock, at cost, 8,000 shares............... (136) --
---------- ----------
Total Stockholders' Equity.................. 39,551 27,486
---------- ----------
Total Liabilities and.......................
Stockholders' Equity........................ $294,065 $164,444
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 OR 29,
----------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES
Mortgage originations, net.................... $ 49,929 $ 38,438 $ 25,592
Interest earned, net of interest expense of
$17,021, $12,809, and $7,024, respectively... 10,772 6,819 1,591
Servicing released premiums and bulk sales of
servicing rights, net........................ 13,386 8,024 8,000
Servicing revenue, net........................ 13,577 6,809 3,438
----------- ----------- --------
TOTAL REVENUES............................ 87,664 60,090 38,621
----------- ----------- --------
EXPENSES
Sales commissions and other fees.............. 15,618 11,968 8,662
Employee compensation and benefits............ 26,415 18,816 13,713
Selling and administrative.................... 24,435 15,589 9,918
----------- ----------- --------
TOTAL EXPENSES............................ 66,468 46,373 32,293
----------- ----------- --------
INCOME BEFORE INCOME TAXES.................... 21,196 13,717 6,328
PROVISION FOR INCOME TAXES--Notes 1 and 8..... 9,220 5,961 2,554
----------- ----------- --------
NET INCOME................................ $ 11,976 $ 7,756 $ 3,774
=========== =========== ========
NET INCOME PER SHARE.......................... $ 1.77 $ 1.30 --
=========== =========== ========
WEIGHTED AVERAGE NUMBER OF SHARES............. 6,783,368 5,982,796 --
=========== =========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER COMMON PAID-IN RETAINED TREASURY
OF SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
--------- ------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--FEBRUARY 28,
1991................... 4,666,667 $ 47 $ 1,424 $ 3,945 -- $ 5,416
Net income.............. -- -- -- 3,774 -- 3,774
Pro forma income taxes.. -- -- -- 1,607 -- 1,607
--------- ---- ------- ------- ----- -------
BALANCE--FEBRUARY 29,
1992................... 4,666,667 47 1,424 9,326 -- 10,797
Issuance of common
stock, net............. 2,000,000 20 15,520 -- -- 15,540
Distribution of S-Corp
earnings............... -- -- -- (6,952) -- (6,952)
Reclassification of
undistributed S-Corp
earnings............... -- -- 3,365 (3,365) -- --
Net income.............. 7,756 -- 7,756
Pro forma income taxes.. -- -- -- 345 -- 345
--------- ---- ------- ------- ----- -------
BALANCE--FEBRUARY 28,
1993................... 6,666,667 67 20,309 7,110 -- 27,486
Net income.............. -- -- -- 11,976 -- 11,976
Purchase of treasury
stock.................. -- -- -- -- $(136) (136)
Stock issued--exercise
of stock options....... 25,039 -- 225 -- -- 225
--------- ---- ------- ------- ----- -------
BALANCE--FEBRUARY 28,
1994................... 6,691,706 $ 67 $20,534 $19,086 $(136) $39,551
========= ==== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 OR 29,
---------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 11,976 $ 7,756 $ 3,774
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 656 447 531
Capitalization of excess servicing fees. (2,281) (3,717) (1,389)
Amortization of capitalized servicing... 1,966 596 77
Write-off of capitalized servicing from
bulk servicing sales................... 2,770 1,302 --
Allowance for possible losses........... 900 800 780
Pro forma income taxes.................. -- 345 1,607
Deferred income taxes................... 4,096 (125) 817
Decrease (increase) in:
Mortgage loans held for sale, net....... (105,381) 16,702 (107,360)
Mortgages held for investment and real
estate owned, net...................... (1,075) (1,741) 320
Advances and other receivables.......... (3,374) 1,403 (3,847)
Due from sales of servicing............. (2,701) (2,368) 443
Deferred costs and other assets......... (1,316) (1,259) (346)
Increase (decrease) in:
Customer deposits....................... (575) (73) 1,125
Accounts payable and accrued expenses... 7,792 2,923 2,943
---------- --------- ----------
Net cash (used) provided by operating ac-
tivities................................. (86,547) 22,991 (100,525)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchased mortgage servicing rights....... (15,085) (2,338) --
Additions to property and equipment, net.. (4,183) (1,100) (1,215)
Sale of property and equipment............ -- -- 843
---------- --------- ----------
Net cash (used) in investing activities... (19,268) (3,438) (372)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in warehouse facility
and repurchase agreements, net........... 106,559 (28,309) 101,882
Issuance of debt.......................... -- 611 --
Principal payments on notes payable....... (316) (309) (832)
Issuance of common stock, net............. 225 15,540 --
Purchase of treasury stock................ (136) -- --
Distribution of S-Corp earnings........... -- (6,952) --
---------- --------- ----------
Net cash provided (used) by financing ac-
tivities................................. 106,332 (19,419) 101,050
---------- --------- ----------
NET INCREASE IN CASH...................... 517 134 153
CASH at beginning of year................. 849 715 562
---------- --------- ----------
CASH at end of year....................... $ 1,366 $ 849 $ 715
========== ========= ==========
Supplemental cash flow information:
Cash used to pay interest................. $ 15,137 $ 12,054 $ 7,052
========== ========= ==========
Cash used to pay taxes.................... $ 4,692 $ 5,050 $ 32
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1994
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Initial Public Offering
Arbor National Holdings, Inc. ("Holdings"), a New York corporation, was
organized in May, 1992 and owns the stock of Arbor National Mortgage Inc.
("Arbor"), Arbor National Commercial Mortgage Corp. ("Arbor Commercial") which
commenced operations in April, 1993 and certain other wholly-owned subsidiaries
(the "Affiliates"). Holdings, Arbor, Arbor Commercial and the Affiliates are
collectively referred to as the "Company." Prior to the initial public
offering, the existing shareholders of Arbor and the Affiliates contributed
their stock in each of the entities to Holdings in exchange for common stock of
Holdings (the "Reorganization"). Accordingly, the accompanying financial
statements for the years ended February 28, 1993 and February 29, 1992 reflect
the effect of the Reorganization throughout the periods, including presentation
as consolidated financial statements. The Reorganization was accounted for as a
reorganization of entities under common control and, accordingly, retained
earnings, at the time of the Reorganization, were reclassified to paid in
capital.
On August 7, 1992, Holdings completed an initial public offering of common
stock through the issuance of 2,000,000 shares at an initial offering price of
$9.00 per share. The Company used the net proceeds from the offering to expand
its retail branch network, repay certain short-term debt, further develop its
wholesale loan origination business and to fund an S corporation distribution
of $3.6 million to a previous stockholder of Arbor and the Affiliates.
The Company originates and services mortgages for residential and commercial
(principally multi- family) properties. Mortgages are originated through retail
branches and wholesale lending centers located primarily in the Mid-Atlantic
and Northeast regions.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Holdings and its wholly-owned subsidiaries. All of Holding's subsidiaries are
involved in activities related to mortgage banking. Intercompany accounts and
transactions have been eliminated in consolidation.
Acquisition
On December 31, 1990, the Company acquired the assets and assumed certain
obligations of ten branch offices located in six states from GE Capital
Mortgage Services Inc. ("GECMSI"). This transaction was accounted for as a
purchase. The cost of this acquisition was approximately $1.25 million which
has been allocated to the assets acquired (fixed assets and purchase
commitment) and liabilities assumed (principally leases) based on their
estimated fair values. No goodwill was recorded as a result of this
transaction.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and short-term
investments with maturities of three months or less at purchase.
Mortgage Loans
Mortgage loans held for sale are collateralized real estate loans and are
reported at the lower of cost (net of principal collected) or market, on an
aggregate basis.
F-7
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Mortgages held for investment are reported at the lower of cost or net
realizable value. Interest income is generally accrued on delinquent loans
until such time that the aggregate carrying value is equal to the loan's
estimated net realizable value.
Real Estate Owned
Real estate owned acquired through foreclosure and mortgage loans considered
to be in substance foreclosed are recorded at fair value when the Company
obtains actual or effective control of the real estate. Real estate owned is
carried at the lower of cost or market value.
Revenue Recognition and Commitment Fees
The Company sells whole mortgage loans and mortgage backed securities with
the related servicing rights retained or sold. Mortgage origination fees, net
of direct costs to complete a loan, are deferred until the loans are sold.
Revenue recognition from the sale of mortgage loans, which is included in
mortgage origination revenue, occurs when all the incidence of ownership passes
to a permanent investor. Loan commitment fees paid to permanent investors to
ensure the ultimate sale of funded loans are deferred when paid and recognized
as expense upon completion of the sale of the loans to an investor or when it
is evident that the commitment will not be used.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets ranging from three to ten years. Leasehold
improvements are amortized over the lesser of the useful life of the asset or
the remaining lease period.
Capitalized Excess Servicing Fees
When the Company sells mortgage loans and retains the servicing rights, the
resulting gain or loss on sale is adjusted to provide for the recognition of
normal servicing fees over the estimated servicing lives of the loans.
Capitalized excess servicing is the present value of the difference between the
actual net servicing fee and the normal net servicing fee based on prepayment,
default and interest rate assumptions similar to those used in the capital
markets. The amount capitalized does not exceed the Company's estimate of the
market value of the servicing rights at the time the loans are sold.
Capitalized excess servicing fees are amortized in proportion to the estimated
future excess servicing income over the estimated economic life of the related
loans, based on the original prepayment assumptions. The Company reviews, on a
quarterly basis, the prepayment assumptions utilized in calculating capitalized
excess servicing fees. The Company disaggregates capitalized excess servicing
fees into layers by product type, interest rate and year of origination. An
analysis is made as to each of these layers. If the analysis shows that
capitalized excess servicing fees exceeds the estimated future discounted cash
flows using original discount rates, an impairment adjustment for the affected
layer is recorded. In Fiscal 1994 and Fiscal 1993, the Company wrote-off
$418,000 (including $90,000 related to the prepayment in March 1994 of one
multi-family mortgage) and $76,000, respectively, of capitalized excess
servicing fees as a result of this recomputation. The Company believes its
method of disaggregation adequately groups loans with similar economic
characteristics and credit and prepayment risks. Should circumstances change or
events occur which would require different disaggregations, the Company will
modify its methodology.
F-8
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Purchased Mortgage Servicing Rights ("PMSR")
The Company acquires servicing rights primarily through its wholesale lending
operation. The net cost of these PMSRs is capitalized limited to the extent the
present value of estimated future servicing revenue exceeds the present value
of estimated future servicing costs. PMSRs are amortized in proportion to, and
over the period of, the estimated future net servicing revenue adjusted for
actual prepayment experience, if it materially exceeds expectations. The
Company periodically evaluates PMSR for impairment by comparing the estimated
discounted future net cash flows of the PMSR, disaggregated by year of
acquisition, geographic location and interest rate, to the unamortized balance
of the amounts capitalized. If recorded balances for any of the disaggregated
PMSR categories exceed the estimated discounted future net cash flows, a
current impairment adjustment equal to the difference between the carrying
value and the estimated discounted future net cash flows is recorded. The
Company believes its method of disaggregation adequately groups loans with
similar economic characteristics and credit and prepayment risks. Should
circumstances change or events occur which would require different
disaggregation the Company will modify its methodology.
Servicing Released Premiums and Bulk Sales of Servicing Rights
Gains resulting from bulk sales of servicing rights are recognized when title
and substantially all risks and rewards of ownership are irrevocably passed to
the buyer. Gains are reduced by the amount of capitalized servicing associated
with the servicing rights sold. Premiums received when mortgage loans are sold
on a servicing released basis are estimated based on market prices.
Loan Servicing
Fees for servicing loans are recognized when earned. Costs of servicing loans
are expensed as incurred.
Financial Instruments
The Company uses financial instruments having off-balance-sheet risk in the
normal course of business in order to reduce exposure to fluctuations in
interest rates and market prices. Included in the Notes to Consolidated
Financial Statements are disclosures relating to financial instruments having
off-balance sheet risk. These disclosures indicate the magnitude of the
Company's involvement in such activities and reflect the instruments at their
face, contract or notional amounts and do not necessarily represent the credit
risk of such instruments. In connection with the Company's hedging and loan
sale programs, the Company has credit risk exposure to the extent purchasers
are unable to meet the terms of their forward purchase contracts. None of the
forward payment obligations of any of the Company's counterparties is secured
or subject to margin requirements.
Income Taxes
Prior to the Reorganization, Arbor and the Affiliates had elected to be
treated as small business corporations ("S Corporation") for federal, and where
allowed, state and local tax purposes. Under this treatment, taxable income or
loss was passed through to the stockholders rather than taxed to the Company.
Arbor elected to be taxed as a regular corporation ("C Corporation") effective
March 1, 1992 and the Affiliates elected to be taxed as C Corporations
effective August 6, 1992.
The accompanying consolidated statements of operations include provisions for
income taxes on a pro forma basis as if the Company was liable for income taxes
as a C Corporation for Fiscal 1993 and Fiscal 1992 (See Note 8--Income Taxes).
Such pro forma income taxes have been computed in accordance with Financial
Accounting Standards Board Statement No. 109 ("FAS 109"), "Accounting for
Income Taxes,"
F-9
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
which is required to be adopted for fiscal years beginning after December 15,
1992. The Company adopted FAS 109 effective March 1, 1992.
Net Income Per Share
Net income per share for Fiscal 1994 and Fiscal 1993 is computed on the
basis of weighted average number of common shares and dilutive common stock
equivalents outstanding during the periods. Per share information for Fiscal
1992 is not applicable as this period was prior to the Company's initial
public offering.
Reclassifications
Certain amounts in the Fiscal 1993 and Fiscal 1992 consolidated financial
statements have been reclassified to conform with the Fiscal 1994
presentation.
NOTE 2--MORTGAGE LOANS AND REAL ESTATE OWNED
Mortgage Loans Held for Sale consist of (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
Principal.......................................... $236,430 $131,397
Unearned discount, net............................. (41) (389)
-------- --------
$236,389 $131,008
======== ========
</TABLE>
Mortgage Loans Held for Investment and Real Estate Owned consist of (in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
Mortgage loans held for investment, including
second mortgage loans of $466 (1994) and $979
(1993)........................................... $ 8,285 $ 9,789
Real estate owned................................. 3,886 1,895
Allowance for possible losses..................... (1,944) (1,632)
------- -------
$10,227 $10,052
======= =======
</TABLE>
Included in mortgage loans held for investment at February 28, 1994 are loans
on non-accrual of interest status of approximately $7.3 million of which
substantially all are in foreclosure. At February 28, 1993, loans on non-
accrual of interest status were approximately $8.2 million, of which
substantially all were in foreclosure.
NOTE 3--BALANCE SHEET INFORMATION
Advances and Other Receivables consist of (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
Servicing advances................................. $3,470 $1,998
Interest and service fees receivable............... 2,761 1,819
Due from investors................................. 1,220 706
Other receivables.................................. 1,933 1,487
------ ------
$9,384 $6,010
====== ======
</TABLE>
F-10
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--BALANCE SHEET INFORMATION--CONTINUED
The following summarizes the changes in capitalized servicing (in thousands):
Capitalized Excess Servicing Fees:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Balance, beginning of period..................... $3,789 $ 1,447
Additions........................................ 2,281 3,717
Scheduled amortization........................... (724) (420)
Impairment/unscheduled amortization.............. (418) (76)
Bulk sales of servicing rights................... (553) (879)
------------ ------------
Balance, end of period........................... $4,375 $ 3,789
============ ============
</TABLE>
Purchased Mortgage Servicing Rights:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Balance, beginning of period...................... $ 1,815 --
Additions......................................... 15,085 $ 2,338
Scheduled amortization............................ (824) (100)
Bulk sales of servicing rights.................... (2,217) (423)
------------ -----------
Balance, end of period............................ $ 13,859 $ 1,815
============ ===========
</TABLE>
Deferred Costs and Other Assets consist of (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
Deferred mortgage origination costs................ $3,677 $3,532
Prepaid expenses and other......................... 2,940 1,769
------ ------
$6,617 $5,301
====== ======
</TABLE>
Deferred mortgage origination costs represents direct costs incurred with
respect to the origination and underwriting of loans in process and are
deferred until the mortgages are sold.
Property and Equipment consist of (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
Furniture and equipment............................ $ 6,791 $ 2,942
Leasehold improvements............................. 978 992
------- -------
7,769 3,934
Accumulated depreciation and amortization.......... (1,714) (1,406)
------- -------
$ 6,055 $ 2,528
======= =======
</TABLE>
F-11
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--BALANCE SHEET INFORMATION--CONTINUED
Accounts Payable and Accrued Expenses consist of (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
Accounts payable................................... $ 3,621 $2,656
Accrued commissions and salaries................... 2,878 1,734
Due to brokers dealers............................. 2,880 --
Other accrued expenses............................. 6,735 4,266
------- ------
$16,114 $8,656
======= ======
</TABLE>
NOTE 4--NOTES AND MORTGAGE FUNDINGS PAYABLE AND REPURCHASE AGREEMENTS
Notes and Mortgage Fundings Payable consists of (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
-------------------------
1994 1993
------------ ------------
<S> <C> <C>
Warehouse credit facility......................... $ 184,348 $ 117,125
Other notes payable............................... 475 791
------------ ------------
$ 184,823 $ 117,916
============ ============
</TABLE>
Arbor's warehouse credit facility, which expired on February 25, 1994 and was
extended until May 2, 1994, permitted maximum aggregate borrowings of $322.5
million with interest at 5.0% per annum at February 28, 1994.
On April 29, 1994 Arbor replaced the warehouse credit facility by entering
into a $400 million Credit and Security Agreement (the "Credit Facility") with
sixteen commercial banks. Amounts available under the Credit Facility may be
increased to $550 million. Under the Credit Facility, Arbor may borrow up to
$200 million as gestation financing for loan pools and mortgage backed
securities and up to $160 million in the form of commercial paper. The
commercial paper issued by Arbor is supported by a letter of credit from a
commercial bank. The Credit Facility expires on April 28, 1995, and is
renewable for additional 364-day periods. The Credit Facility contains certain
financial covenants limiting indebtedness, liens, mergers, affiliated
transactions, sales of assets and dividends, and requires Arbor to maintain
minimum net worth, minimum servicing portfolio size and other financial ratios.
Borrowings under the Credit Facility are secured by a pledge of the mortgage
loans held for sale funded by the Company and the related servicing rights to
these loans. Interest on borrowings is variable based on the federal funds
rate, prime commercial lending rate and/or the London inter bank offered rate
("LIBOR"). Interest charges are reduced in relation to the amount of non-
interest earnings balances maintained at certain banks.
On April 29, 1994, Arbor entered into a $25 million Secured Revolving Credit
Agreement (the "Secured Facility") with three commercial banks. Interest rates
on borrowings are variable based on federal funds rate, prime commercial
lending rate and LIBOR. The Secured Facility expires on April 28, 1995.
Financial covenants under the Secured Facility are similar to those under the
Credit Facility.
Repurchase Agreements
The Company utilizes repurchase agreements in conjunction with sales of loan
pools or mortgage backed securities. Under these arrangements, rights to the
commitments from the ultimate investor are assigned to
F-12
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--NOTES AND MORTGAGE FUNDINGS PAYABLE AND REPURCHASE AGREEMENTS--
CONTINUED
the investment banks in exchange for immediate funds equal to approximately
97%-98% of the commitment price. The remaining 2%-3% is paid when the investor
purchases the mortgage backed securities. Interest rates are variable based on
LIBOR and were 4.28% and 4.06% per annum at February 28, 1994 and February 28,
1993, respectively.
NOTE 5--MORTGAGE SERVICING
At February 28, 1994 and February 28, 1993, the Company was servicing loans
of approximately $4.9 billion and $2.7 billion, respectively, including
mortgage loans owned by the Company. At February 28, 1994 and February 28,
1993, approximately $101.7 million and $38.3 million, respectively, was held in
trust by the Company in regard to these mortgages. This cash balance and its
related liability are not reflected in the accompanying consolidated balance
sheets. Properties securing the mortgage loans in the Company's servicing
portfolio are primarily located in the Mid-Atlantic and Northeast regions. The
Company's servicing portfolio at February 28, 1994 and February 28, 1993 is
comprised primarily of conventional loans.
The loans serviced by the Company that were securitized through Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC") or Government National Mortgage Association ("GNMA") programs,
primarily on a non-recourse basis, whereby foreclosure losses are generally not
the responsibility of the Company. Since Fiscal 1991 the Company's policy has
been to sell loans on a non-recourse basis. Prior to Fiscal 1991, the Company
sold certain mortgage loans to FNMA with recourse. At February 28, 1994, the
remaining principal balance of mortgages sold subject to such recourse
provisions approximated $37 million.
Arbor sold bulk servicing rights applicable to mortgage loans of $1.1 billion
(Fiscal 1994), $586 million (Fiscal 1993) and $279 million (Fiscal 1992). A
sale of servicing rights in Fiscal 1992 relating to $270 million in mortgage
loans was to Arbor Services Associates, L.P., ("ASA"), a partnership controlled
by the Company's majority shareholders. The total sales price was approximately
$3.2 million. Additionally, Arbor has entered into agreements for ASA to lease
from Arbor data processing capabilities and office space. Arbor has also agreed
to pay ASA a fee equal to one percent of the outstanding principal balance for
each loan Arbor successfully refinances from ASA's servicing portfolio. In
Fiscal 1994 and Fiscal 1993, Arbor paid ASA fees of $405,000 and $217,000,
respectively, and ASA paid to Arbor lease payments of $23,000 and $17,000
respectively.
Anivan Inc. ("Anivan") which is owned by a party related to the Company's
majority stockholders, identifies loan portfolios owned by third parties for
possible acquisition by the Company. Anivan pays its own expenses and assumes
all risks in connection with the identification and preliminary review and the
processing of these loan portfolios. The gains and losses generated from these
sales and the subsequent servicing income is shared with Anivan on an
approximately equal basis. During Fiscal 1994 , Fiscal 1993, and Fiscal 1992,
Arbor purchased loan portfolios of approximately $39 million, $41 million, and
$72 million, respectively, referred by Anivan and has paid Anivan fees and
compensation of $414,000, $212,000, and $1.2 million, during Fiscal 1994,
Fiscal 1993 and Fiscal 1992. Anivan's current share of continuing servicing
fees in connection with these mortgage loan portfolios is approximately $13,000
per month.
F-13
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--COMMITMENTS AND CONTINGENCIES
Leases
The following summarizes the minimum annual operating lease payments for
leases with a term in excess of one year in effect as of February 28, 1994:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995.......................................................... $3,575,000
1996.......................................................... 4,472,000
1997.......................................................... 3,341,000
1998.......................................................... 2,170,000
1999.......................................................... 2,069,000
</TABLE>
Rental expense amounted to approximately $4,005,000 in Fiscal 1994, $2,793,000
in Fiscal 1993, and $1,810,000 in Fiscal 1992. On January 1, 1992, Arbor
entered into a sale-leaseback arrangement covering certain furniture and
equipment. A $500,000 letter of credit secures Arbor's obligations under this
lease which expires in Fiscal 1997.
Financial Instruments
The Company enters into financial instruments with off-balance sheet risk in
the normal course of business through the origination and sale of mortgage
loans and the management of potential loss exposure caused by fluctuations of
interest rates. These financial instruments include commitments to extend
credit (e.g., mortgage loan pipeline), mandatory forward commitments, and
options contracts (primarily on mortgage backed securities). These instruments
involve, to varying degrees, elements of credit and interest rate risk. Credit
risk is managed by the Company by entering into agreements only with Wall
Street investment bankers having primary dealer status and with permanent
investors meeting the standards of the Company. At any time the risk to the
Company, in the event of default by the purchaser, is the difference between
the contract price and current market prices.
The Company's pipeline of loans in process totaled approximately $930 million
and $671 million at February 28, 1994 and February 28, 1993, respectively.
Until an interest rate commitment is extended by the Company to a borrower,
there is no market risk to the Company. Loans in process for which interest
rates were committed to the borrower totaled approximately $147 million and
$132 million as of February 28, 1994 and February 28, 1993, respectively. These
interest rate commitments are hedged by the Company by entering into mandatory
forward commitments to sell loans to investors and with option contracts.
Realized gains and losses on mandatory forward commitments are recognized in
the period settlement occurs. Unrealized gains and losses on mandatory forward
commitments are included in the lower of cost or market valuation of mortgage
loans held for sale. At February 28, 1994 and 1993, the Company had mandatory
forward commitments aggregating $564 million and $248 million, respectively,
which covered the market risk associated with the mortgage loans held for sale
to investors and the pipeline loans for which interest rates were committed.
Realized gains and losses on options contracts are recognized when the
positions are closed. Unrealized gains and losses on open options contracts are
included in the lower of cost or market valuation of mortgage loans held for
sale. As of February 28, 1994 and 1993, the Company had open options contracts
approximating $6 million and $65 million, respectively.
F-14
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--COMMITMENTS AND CONTINGENCIES--CONTINUED
The Company had adequate lines of credit at February 28, 1994 to fund its
projected loan closings from its mortgage loan pipeline.
Other Matters
As of February 28, 1994, and February 28, 1993, Arbor had sold to investment
banks approximately $84 million and $57 million, respectively, of mortgage
loans subject to contractual technical recourse provisions if investors did not
fulfill their commitments regarding the related mortgage backed securities. In
March 1994 and March 1993, investors fulfilled their commitments related to
these transactions.
The Company is a defendant in various lawsuits, none of which is expected to
have a material effect on the Company's financial position, liquidity or future
results of operations.
The Company maintains a 401(k) plan to which eligible employees may elect to
contribute a percentage of their earnings. The Company incurred expense of
$110,000 (Fiscal 1994), $88,000 (Fiscal 1993), and $108,000 (Fiscal 1992)
representing the Company's voluntary matching contributions.
NOTE 7--STOCKHOLDERS' EQUITY
The Company adopted a Stock Incentive Plan (the "Incentive Plan") in Fiscal
1993. The Incentive Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"), which has the exclusive power to select
eligible employees of the Company, and to determine the terms and conditions of
any options or awards granted, including but not limited to the option price,
method of exercise and the term during which the options may be exercised.
There are 666,667 shares of common stock reserved for issuance under the
Incentive Plan. The option price of each incentive stock option granted under
the Incentive Plan shall not be less than the fair market value of the common
stock subject to the option. The option exercise price and period within which
non-qualified options may be exercised will be determined at the discretion of
the Committee. The Company granted to employees options to purchase up to an
aggregate of 470,000 shares of common stock upon effectiveness of the initial
public offering of common stock.
Stock option transactions under the incentive plan are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
----------------------------
1994 1993
-------------- ------------
<S> <C> <C>
Balance, beginning of period.................... $422,597 $ --
Options granted................................. 32,000 483,315
Options exercised............................... (25,039) --
Options canceled................................ (54,018) (60,718)
-------------- ----------
Balance, end of period.......................... $375,540 $422,597
============== ==========
Exercise price for options outstanding at end of
period......................................... $9.00-$18.50 $9.00
============== ==========
</TABLE>
As of February 28, 1994, 250,000 of the outstanding options were immediately
exercisable and as of February 28, 1994, 266,000 shares were available for
future grants.
In April 1994, an additional 168,000 shares were granted at an exercise price
of $12.375. In July, 1993, the Board of Directors approved the adoption of a
stock repurchase program. The stock repurchase program provides for the
repurchase of up to 250,000 shares of common stock over a two year period.
F-15
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--INCOME TAXES
The accompanying provisions for income taxes for Fiscal 1993 and Fiscal 1992
includes pro forma adjustments for income taxes representing the differences
between historical income taxes and the income taxes that would have been
reported had the Company filed income tax returns as taxable C Corporations.
The following summarizes historical and pro forma provisions for income taxes
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 OR 29,
---------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Historical income taxes:
Current.................................
Federal................................. $ 2,779 $ 3,810 --
State................................... 2,345 1,931 $ 130
Deferred................................ 4,096 (125) 817
---------- ---------- ----------
$ 9,220 5,616 947
========== ---------- ----------
Pro forma income tax adjustments:
Federal................................. 345 1,127
State................................... -- 480
---------- ----------
345 1,607
---------- ----------
$ 5,961 $ 2,554
========== ==========
</TABLE>
The Company records a deferred tax liability (asset) for the tax effect of
temporary differences between financial reporting and tax reporting. The tax
effect of such temporary differences consist of (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1994 1993
------------ ------------
<S> <C> <C>
Purchased mortgage servicing rights.............. $4,612 --
Deferred origination cost, net................... 1,344 $1,150
Allowance for possible losses.................... (680) (555)
Other............................................ (488) 97
------ ------
$4,788 $ 692
====== ======
</TABLE>
Provision for income taxes differ from the amounts computed by applying
federal statutory rates due to (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 OR 29,
--------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory rate of 35% (Fiscal 1994),
34% (Fiscal 1993 and 1992).................. $ 7,419 $ 4,664 $ 2,151
State income taxes, net of federal tax
benefit..................................... 1,526 1,297 403
Other........................................ 275 -- --
---------- ---------- ----------
$ 9,220 $ 5,961 $ 2,554
========== ========== ==========
</TABLE>
F-16
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
fair value of financial instruments:
Cash: The carrying amount approximates fair value.
Mortgage loans held for sale: Fair values for loans held for sale are based
on prices for mandatory forward commitment for March 1994 delivery and quoted
market prices. At February 28, 1994 and 1993 the fair value of mortgage loans
held for sale exceeded its carrying value by approximately $575,000 and
$917,000.
Excess servicing fee receivable: Fair value is based on the present value of
the excess servicing fee discounted over the estimated remaining life of the
underlying loans, using current prepayment, default and interest rate
assumptions that market participants would use for similar financial
instruments subject to prepayment, default, and interest rate risk; and is
discounted using an estimated current interest rate that a purchaser, unrelated
to the Company, would require. The carrying amount approximates fair value.
Off-balance-sheet instruments: Fair values of the Company's mandatory forward
contracts used as a hedge against loan originations are based on quoted market
prices for securities and loans deliverable into the forward contracts compared
to actual settlement prices of the forward contracts. At February 28, 1994 and
February 28, 1993, the Company had mandatory forward contracts expiring in
April and May 1994 outstanding with notional value of approximately $390
million and $248 million, respectively, and fair value of approximately $3.3
million and $1.1 million, respectively.
Notes Payable: The carrying amount of borrowings under the Company's short-
term warehouse credit facility approximates its fair value.
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Fiscal 1994
Revenues(1)........... $ 17,637 $ 21,647 $ 23,967 $ 24,413 $ 87,664
Expenses.............. 14,256 16,634 17,862 17,716 66,468
Net income............ 1,978 2,890 3,510 3,598 11,976
Net income per share.. $ 0.30 $ 0.42 $ 0.52 $ 0.53 $ 1.77
Fiscal 1993
Revenues(2)........... $ 11,955 $ 15,454 $ 15,463 $ 17,218 $ 60,090
Expenses.............. 9,610 11,804 12,370 12,589 46,373
Net income............ 1,408 2,189 1,841 2,318 7,756
Net income per share.. $ 0.27 $ 0.40 $ 0.28 $ 0.35 $ 1.30
</TABLE>
- --------
(1) Fiscal 1994 revenues includes servicing released premiums and bulk sale of
servicing rights of $2,957 (first quarter), $528 (second quarter), $3,426
(third quarter) and $6,475 (fourth quarter).
(2) Fiscal 1993 revenues includes servicing released premiums and bulk sale of
servicing rights of $2,557 (first quarter), $2,698 (second quarter), $201
(third quarter) and $2,568 (fourth quarter).
F-17
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 31, 1994
---------------
<S> <C>
ASSETS
Cash and cash equivalents...................................... $ 840,971
Mortgage loans held for sale, net.............................. 266,667,125
Mortgage loans held for investment and real estate owned, net.. 10,174,562
Due from sales of servicing rights............................. 3,665,380
Advances and other receivables................................. 11,043,617
Prepaid and refundable income taxes............................ 3,419,640
Capitalized excess servicing fees.............................. 3,726,258
Purchased mortgage servicing rights............................ 17,701,089
Deferred costs and other assets................................ 5,343,231
Property and equipment, net.................................... 7,196,153
------------
TOTAL ASSETS................................................. $329,778,026
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and mortgage fundings payable............................ $272,712,323
Customer deposits.............................................. 1,476,029
Accounts payable and accrued expenses.......................... 12,213,509
Current and deferred income taxes.............................. 6,240,000
------------
TOTAL LIABILITIES............................................ 292,641,861
------------
STOCKHOLDERS' EQUITY
Preferred stock--$.01 par value; authorized 5,000,000 shares,
no shares issued.............................................. --
Common stock--$.01 par value; authorized 50,000,000 shares,
issued and outstanding 6,723,529.............................. 67,235
Additional paid-in capital..................................... 20,820,620
Retained earnings.............................................. 16,384,316
Treasury stock, at cost, 8,000 shares.......................... (136,006)
------------
TOTAL STOCKHOLDERS' EQUITY................................... 37,136,165
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $329,778,026
============
</TABLE>
See notes to condensed consolidated financial statements
F-18
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------ ------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Mortgage originations, net. $ 1,909,179 $15,336,854 $ 9,770,511 $25,332,233
Interest earned, net....... 2,413,627 2,532,437 4,167,114 4,510,936
Servicing released premiums
and bulk sale of servicing
rights, net............... 891,965 528,000 8,595,324 3,485,451
Servicing revenue, net..... 3,976,075 3,249,558 8,008,137 5,955,678
----------- ----------- ----------- -----------
TOTAL REVENUES........... 9,190,846 21,646,849 30,541,086 39,284,298
----------- ----------- ----------- -----------
EXPENSES
Sales commissions and other
fees...................... 2,604,797 4,402,580 5,170,935 7,780,534
Employee compensation and
benefits.................. 7,807,334 6,403,617 15,512,831 12,210,805
Selling and administrative. 7,883,474 5,827,309 14,482,867 10,898,519
----------- ----------- ----------- -----------
TOTAL EXPENSES........... 18,295,605 16,633,506 35,166,633 30,889,858
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME
TAXES....................... (9,104,759) 5,013,343 (4,625,547) 8,394,440
(Benefit) Provision for
income taxes................ (3,839,000) 2,123,000 (1,924,000) 3,526,000
----------- ----------- ----------- -----------
NET (LOSS) INCOME............ $(5,265,759) $ 2,890,343 $(2,701,547) $ 4,868,440
=========== =========== =========== ===========
NET (LOSS) INCOME PER SHARE.. $ (0.78) $ 0.43 $ (0.40) $ 0.72
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES...................... 6,710,841 6,783,887 6,699,618 6,726,673
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31,
---------------------------
1994 1993
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income............................... $ (2,701,547) $ 4,868,440
Adjustments to reconcile net (loss) income to
net cash used by operating activities:
Depreciation and amortization................. 474,063 253,069
Capitalization of excess servicing fees....... (244,406) (1,166,578)
Amortization of capitalized servicing fees.... 1,539,467 660,000
Write-off of capitalized servicing from bulk
servicing sales.............................. 1,045,829 753,000
Allowance for possible losses................. 525,000 425,000
Deferred income taxes......................... 857,000 --
Decrease (increase) in:
Mortgage loans held for sale, net............. (30,278,412) (213,276,444)
Mortgage loans held for investment and real
estate owned................................. (472,558) 308,969
Advances and other receivables................ (1,658,943) (3,226,407)
Due from sale of servicing.................... 2,127,792 (157,562)
Prepaid and refundable income taxes........... (3,419,640) --
Deferred costs and other assets............... 1,273,741 843,724
Increase (decrease) in:
Customer deposits............................. 1,694 284,689
Accounts payable and accrued expenses......... (3,900,732) 6,685,811
Current income taxes.......................... (511,341) --
------------ -------------
Net cash used by operating activities........... (35,342,993) (202,744,289)
============ =============
INVESTING ACTIVITIES:
Purchased mortgage servicing rights............. (5,534,228) (5,042,214)
Additions to property and equipment, net........ (1,615,633) (1,168,237)
------------ -------------
Net cash used by investing activities........... (7,149,861) (6,210,451)
============ =============
FINANCING ACTIVITIES:
Increase in notes and mortgage fundings payable,
net............................................ 38,288,605 209,289,675
Issuance of equipment term loan................. 4,185,511 --
Principal payments on notes payable............. (792,710) (90,000)
Issuance of common stock........................ 286,409 67,554
------------ -------------
Net cash provided by financing activities....... 41,967,815 209,267,229
============ =============
NET (DECREASE) INCREASE IN CASH................... (525,039) 312,489
Cash at beginning of period....................... 1,366,010 849,247
------------ -------------
Cash at end of period............................. $ 840,971 $ 1,161,736
============ =============
Supplemental cash flow information:
Cash used to pay interest....................... $ 6,761,686 $ 6,404,790
============ =============
Cash used to pay taxes.......................... $ 1,157,125 $ 1,980,782
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1994
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Arbor National Holdings, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation (consisting of normal recurring accruals) have been
included. Operating results for the three and six months ended August 31, 1994
are not necessarily indicative of the results that may be expected for the
fiscal year ending February 28, 1995. For further information, refer to the
audited consolidated financial statements and notes thereto for the year ended
February 28, 1994.
NOTE 2--BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1994 1994
----------- ------------
<S> <C> <C>
Advances and other receivables consists of:
Servicing advances................................... $ 6,586,580 $3,470,242
Interest and service fees receivable................. 2,235,728 2,760,858
Due from investors................................... 621,946 1,220,222
Other receivables.................................... 1,599,363 1,933,352
----------- ----------
$11,043,617 $9,384,674
=========== ==========
</TABLE>
NOTE 3--MERGER AGREEMENT WITH BANKAMERICA CORPORATION
On September 23, 1994, BankAmerica Corporation ("BankAmerica") and the
Company entered into a definitive merger agreement (the "Merger Agreement") in
which BankAmerica will acquire 100 percent of the common stock of the Company.
Under the terms of the transaction, BankAmerica common stock will be exchanged
for all of the outstanding shares of the Company's common stock at a rate that
represents a nominal value (valued at the "Average Closing Price") of $16.35
(the "per share merger price") per share of Company common stock. However,
pursuant to the Merger Agreement, as more fully described below, such nominal
value may increase or decrease based upon (i) the actual Average Closing Price
and (ii) certain adjustments which may be made to the per share merger price.
The per share merger price may be adjusted under the terms of the Merger
Agreement to reflect, among other things, certain changes prior to the closing
date, including changes in the Company's shareholders' equity and servicing
portfolio. Also under the terms of the Merger Agreement, the per share merger
price will be adjusted to reflect the after-tax proceeds from the sale of Arbor
National Commercial Mortgage Corporation, a commercial mortgage subsidiary
which the Company has agreed to sell prior to the closing date through an
auction process to the highest bidder. Ivan Kaufman, Chairman, President and
Chief Executive Officer of the Company, was selected by the Company as the
winning bidder in the auction.
The terms of the Merger Agreement call for the Company shareholders to
receive, subject to the provisions described below, BankAmerica stock with a
nominal value (valued at the Average Closing Price) equal to the per share
merger price if the Average Closing Price is between $39.31 and $53.19 per
share. If the Average Closing Price is less than $39.31, the Company
shareholders will receive the number of shares that would have been payable if
the average price were $39.31. If the Average Closing Price is greater than
F-21
<PAGE>
ARBOR NATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$53.19, the Company shareholders will receive the number of shares that would
have been payable if the Average Closing Price were $53.19. If the Average
Closing Price during the 20-day period is less than $37.00, the Company has
the right to terminate the agreement unless BankAmerica elects to provide
additional shares sufficient to bring the value of the transaction to the
level that would have been payable at a $37.00-per-share Average Closing
Price. The Average Closing Price is defined as the average closing sales price
per share of the BankAmerica Common Stock on the New York Stock Exchange for
the 20 consecutive trading days ending on the 5th trading day prior to the
date on which the last required regulatory approval from the Federal Reserve
Board and the Office of Thrift Supervision for the transactions contemplated
by the Merger Agreement is obtained.
The transaction is expected to close during the first calendar quarter of
1995, subject to the satisfaction of certain conditions, including approval by
the Company shareholders and regulatory authorities and the ability to treat
the transaction as tax-free to the Company shareholders and to BankAmerica and
as a pooling of interests for accounting purposes.
In connection with the transaction, BankAmerica has received stock options
and voting agreements from Ivan Kaufman and Anita Kaufman, a director, with
respect to approximately 3.9 million shares (or 58%) of the Company's
outstanding shares as of August 31, 1994. The voting agreements obligate the
Kaufmans to vote their shares in favor of the BankAmerica transaction and
against any competing transaction. The stock options, which have an exercise
price of $16.35 per share, are exercisable in certain circumstances relating
to the existence of a competing offer for the Company or the withdrawal of the
Company board of directors' recommendations that the transaction be approved
by its shareholders.
The Merger Agreement contains certain restrictions relating to the Company's
conduct of business prior to closing which, among other things, prohibits the
Company from paying dividends and limits the Company's ability to incur
capital expenditures or entering into new borrowing, leasing or other
significant contracts. The Company is also prohibited from selling or
acquiring servicing rights in bulk transactions.
Following the public announcement of the Merger Agreement, six separate
purported class action lawsuits (collectively, the "Litigation") were filed in
state court in New York by certain shareholders of the Company naming the
Company, its individual directors and, in certain cases, BankAmerica (among
others) as defendants. The plaintiffs in the Litigation have alleged, among
other things, that the members of the Board of Directors of the Company
breached their fiduciary duties to the Company's shareholders by entering into
the Merger Agreement. The plaintiffs seek, on behalf of themselves and all
similarly situated shareholders of the Company, among other things, (i) class
certification, (ii) an order enjoining the Merger or, in the alternative,
damages in the event the Merger is consummated and (iii) costs, including
attorneys' fees.
The parties to the Litigation have reached an agreement to settle the
Litigation. The proposed settlement entails, among other things, certain
revisions to the purchase price adjustments in the Merger Agreement.
Pursuant to the Merger Agreement, the costs and expenses incurred by the
Company in connection with the Litigation prior to the Valuation Date (as
defined in the Merger Agreement), as well as any accruals on the Company's
balance sheet as of the Valuation Date with respect to the Litigation which
are required to be made under generally accepted accounting principles, will
reduce Adjusted Equity (as defined in the Merger Agreement), and accordingly
may negatively impact the value of the consideration received in the Merger by
the Company's shareholders. The Merger Agreement provides that if the net
after tax amount accrued and reflected on the Valuation Date balance sheet
with respect to certain stockholder proceedings such as, and including, the
Litigation exceeds $1.5 million, the Company may terminate the Merger
Agreement unless BankAmerica notifies the Company that it will add back to the
Adjusted Equity any net after tax amounts reflected on the Valuation Date
balance sheet with respect to such stockholder proceedings in excess of $1.5
million.
F-22
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of September 23, 1994, by and
among BankAmerica Corporation, a Delaware corporation ("Parent"), Bank of
America, FSB, a federal savings bank and a wholly-owned subsidiary of Parent
("BAFSB"), AH Acquisition Corp., a New York corporation and a wholly-owned
subsidiary of BAFSB ("Merger Sub"), and Arbor National Holdings, Inc., a New
York corporation (the "Company") amends and restates in its entirety the
Agreement and Plan of Merger of same date herewith by and among the parties
hereto.
Whereas, the Board of Directors of each of Parent and the Company have
determined that it is in the best interests of their respective companies and
shareholders to consummate the business combination transaction provided for
herein in which (i) Merger Sub will, subject to the terms and conditions set
forth herein, merge (the "Merger") with and into the Company, and (ii) the
assets, employees and certain liabilities of first the Company and then the
Company's subsidiaries will be transferred in complete liquidation and
dissolution to BAFSB or its successor, the holder of all of the capital stock
of the Company following the Merger; and
Whereas, the parties hereto desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger; and
Whereas, concurrently herewith Parent has entered into separate option
agreements and voting agreements with holders of 58% of the Company's
outstanding common stock (the "Kaufman Agreements");
Now, Therefore, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
Definitions
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires, the terms defined in this Article I have
the meanings assigned to them in this Article I and include the plural as well
as the singular.
Acquisition Event--As defined in Section 9.3 hereof.
Adjusted Equity--The amount equal to the consolidated stockholders' equity of
the Company as of the Valuation Date as determined in accordance with GAAP
consistent with the principles used in connection with the preparation of the
Balance Sheet; provided, however, that in determining the Adjusted Equity, the
following adjustments shall be made to consolidated stockholders' equity: (i)
all purchased mortgage servicing rights and capitalized excess servicing fees
shall be deducted; (ii) all net deferred income tax liabilities associated with
purchased mortgage servicing rights and capitalized excess servicing fees shall
be added; (iii) any net after-tax gain resulting from the sale of ANCMC
pursuant to Section 7.12 shall not be reflected; (iv) any net after-tax gain or
loss resulting from mandatory changes in GAAP adopted by the Company after May
31, 1994 shall not be reflected; (v) all deferred financing costs (other than
prepaid interest on commercial paper), all deferred acquisition costs and all
capitalized costs (exclusive of equipment) related to the Company's and its
Subsidiaries' "laptop project" shall be deducted (all of which deductions shall
be on an after-tax basis); (vi) Adjusted Equity shall be increased by $741,000
if the Company has fully complied with Section 7.16(ii) hereof; (vii) an amount
equal to 57% of the amount of all costs, expenses and write-offs incurred by
the Company after the date hereof in reconciling and accruing shortages with
respect to accounts of the Company and its Subsidiaries pursuant to Section
7.16(i) hereof and all similar costs, expenses and
A-1
<PAGE>
write-offs incurred by the Company after July 31, 1994 and prior to the date
hereof, up to an aggregate of $300,000, shall be added back to stockholders'
equity; and (viii) the amount of all additions to the allowance for possible
losses recognized by the Company after May 31, 1994 and on or prior to the
Valuation Date, up to an aggregate of $1.0 million shall be disregarded
(including any related tax benefit) for purposes of calculating Adjusted
Equity; (ix) the net-after-tax amounts by which the carrying values of any
Warehouse Loans, Pipeline Loans and Investor Commitments have been reduced as
required by FASB 65 by the Company on the Valuation Date Balance Sheet shall be
added to such stockholders' equity; (x) all proceeds received by the Company
upon the exercise of Company Options between May 31, 1994 and the Valuation
Date shall be subtracted from such stockholders' equity; and (xi) if Parent
shall have delivered the notice to the Company pursuant to Section 9.1(h) with
respect to Excess Litigation Accruals, then the amount of all such Excess
Litigation Accruals shall be added back to Adjusted Equity.
Advances--As defined in Section 4.29 hereof.
Affiliate--With respect to any Person, any Person directly or indirectly
controlling, controlled by, or under common control with such other Person, and
any Subsidiary of such Person. For purposes of this definition, "control"
(including with correlative meaning, the terms "controlled by" and "under
common control with") as used with respect to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through ownership of voting
securities, by contract or otherwise.
ANCMC--Arbor National Commercial Mortgage Corporation, a New York corporation
and wholly-owned Subsidiary of the Company.
Agency--FHA, VA, GNMA, FNMA, FHLMC or a State Agency, as applicable.
Agreement--This Agreement and Plan of Merger.
Average Closing Price--As defined in Section 2.4(a) hereof.
BAFSB--As defined in the RECITALS hereof.
Balance Sheet--As defined in Section 4.5 hereof.
Base Portfolio--The Mortgage Servicing Portfolio on May 31, 1994, with an
aggregate unpaid principal balance of $4,696,128,829.
Base Portfolio Loan--Any Mortgage Loan included in the Base Portfolio.
BHC Act--The Bank Holding Company Act of 1956, as amended.
Certificate--As defined in Section 2.4(a) hereof.
Certificate of Merger--As defined in Section 2.2 hereof.
Closing--As defined in Section 10.1 hereof.
Closing Adjustment Documents--As defined in Section 2.7(a) hereof.
Closing Date--As defined in Section 10.1 hereof.
Code--The Internal Revenue Code of 1986, as amended.
Collateral--The property securing a Mortgage Loan.
Company--As defined in the RECITALS hereto.
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Company Common Stock--As defined in Section 2.4(a) hereof.
Company Contracts--As defined in Section 4.14(a).
Company Option--As defined in Section 2.9(a) hereof.
Company Option Plans--As defined in Section 2.9(a) hereof.
Company Preferred Stock--As defined in Section 4.2(a) hereof.
Company Reports--As defined in Section 4.11 hereof.
Custodial Accounts--As defined in Section 4.27 hereof.
Department--As defined in Section 2.2 hereof.
Designated Property--As defined in Section 4.31(d) hereof.
Disagreement--As defined in Section 2.7(b) hereof.
Disclosure Schedule--As defined in Section 4.1(a) hereof.
Dissenting Shares--As defined in Section 2.4(c) hereof.
Effective Time--As defined in Section 2.2 hereof.
Encumbrance--Any lien, pledge, security interest, claim, charge, easement,
limitation, commitment, restriction or encumbrance of any kind or nature
whatsoever.
Environmental Laws--As defined in Section 4.31(a) hereof.
ERISA--As defined in Section 4.10(a) hereof.
ERISA Affiliate--As defined in Section 4.10(a) hereof.
Escrow Account--As defined in Section 2.4(c) hereof.
Estimated Merger Price--As defined in Section 2.5 hereof.
Excess Litigation Accruals--As defined in Section 9.1(h) hereof.
Exchange Act--As defined in Section 4.5 hereof.
Exchange Agent--As defined in Section 3.1 hereof.
Exchange Fund--As defined in Section 3.1 hereof.
Exchange Ratio--As defined in Section 2.4(a) hereof.
Excluded Loans--All Mortgage Loans which, as of May 31, 1994 or the Valuation
Date, as the case may be, were (i) 90 days or more delinquent or otherwise in
default or (ii) in bankruptcy, in Foreclosure, or in litigation.
Federal Reserve Board--The Board of Governors of the Federal Reserve System.
FHA--Federal Housing Administration.
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FHA Loans--Mortgage Loans which satisfy all applicable rules and requirements
to be insured by FHA and which are insured by FHA.
FHLMC--Federal Home Loan Mortgage Corporation.
Final Merger Price--As defined in Section 2.5 hereof.
Final Per Share Merger Price--As defined in Section 2.5 hereof.
FNMA--Federal National Mortgage Association.
Foreclosure--The acquisition of title to Collateral in a foreclosure sale or
pursuant to any other comparable procedure allowed under applicable law or
Regulation, including pending foreclosures where the first step required under
applicable Regulations to initiate a foreclosure proceeding has been taken.
FRA--The Federal Reserve Act.
GAAP--Generally accepted accounting principles as used in the United States
of America as in effect at the time any applicable financial statements were
prepared.
GNMA--Government National Mortgage Association.
Goldman--As defined in Section 4.6 hereof.
Governmental Entity--As defined in Section 4.4 hereof.
Hazardous Materials--As defined in Section 4.31(d) hereof.
HOLA--The Home Owners' Loan Act.
HUD--United States Department of Housing and Urban Development.
Independent Accounting Firm--Shall mean Arthur Andersen & Co., or, if such
firm shall be unwilling to serve in such capacity, any "Big Six" accounting
firm or its successor (other than the respective independent public accountants
of each of Parent and the Company).
Injunction--As defined in Section 8.1(e).
Insurer--A Person who insures or guarantees all or any portion of the risk of
loss upon borrower default on any of the Mortgage Loans, including, without
limitation, the FHA, the VA and any private mortgage insurer, and providers of
life, hazard, disability, title or other insurance with respect to any of the
Mortgage Loans or the Collateral.
Indemnified Party--As defined in Section 7.9(a) hereof.
Investment Loans--Mortgage Loans owned by the Company or any of its
Subsidiaries and held for investment including any Mortgage Loan characterized
on the books and records of the Company as a Warehouse Loan that was originated
or purchased more than 90 days prior to May 31, 1994 or the Valuation Date, as
the case may be.
Investor--Any Person who owns a Mortgage Loan, or the servicing rights or
master servicing rights to a Mortgage Loan, subserviced, serviced or master
serviced by the Company or any Company Subsidiary pursuant to a Mortgage
Servicing Agreement.
Investor Commitment--The optional or mandatory commitment of a Person to
purchase a Mortgage Loan, a Pipeline Loan or a portion of a Mortgage Loan or
Pipeline Loan owned or to be acquired by the
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Company or any of its Subsidiaries, or securities based on and backed by such
Mortgage Loans or Pipeline Loans.
IRS--Internal Revenue Service.
Kaufman Agreements--As defined in the RECITALS hereof.
Last Approval Date--As defined in Section 2.4(a) hereof.
Licenses--As defined in Section 4.21.
Liquidation--As defined in Section 2.13 hereof.
Loan Documents--The credit and closing packages, custodial documents, escrow
documents, and all other documents: (i) in the possession of the Company or its
Subsidiaries specifically pertaining to a Mortgage Loan, (ii) reasonably
necessary for prudent servicing of a Mortgage Loan or (iii) necessary to
establish the eligibility of the Mortgage Loan for insurance by an Insurer or
sale to an Investor; in each case as required by applicable Regulations.
Loss--Any liability, loss, cost, damage, penalty, fine, obligation or expense
of any kind whatsoever (including, without limitation, reasonable attorneys',
accountants', consultants' or experts' fees and disbursements).
Master Serviced Loans--The Mortgage Loans master serviced by the Company or
one of its Subsidiaries for an Investor.
Material Adverse Effect--As defined in Section 4.1(a) hereof.
Merger--As defined in the RECITALS hereto.
Merger Sub--As defined in the RECITALS hereto.
Merger Sub Common Stock--As defined in Section 5.2 hereof.
Minimum Average Closing Price--As defined in Section 9.1(g) hereof.
Mortgage Bank--Arbor National Mortgage, Inc., a New York corporation and a
wholly-owned subsidiary of the Company.
Mortgage Loan--Any closed 1-4 family residential mortgage loan (including all
Warehouse Loans and Investment Loans), whether or not such mortgage is included
in a securitized portfolio, in the Mortgage Servicing Portfolio, as evidenced
by notes duly secured by mortgages or deeds of trust.
Mortgage Servicing Agreements--All contracts or arrangements (written or
oral) between the Company or any of its Subsidiaries and an Investor pursuant
to which the Company or any of its Subsidiaries subservices, services or master
services mortgage loans for such Investor.
Mortgage Servicing Portfolio--The portfolio of mortgage loans subserviced,
serviced or master serviced by the Company or any of its Subsidiaries pursuant
to Mortgage Servicing Agreements, together with all Warehouse Loans and
Investment Loans.
Net ANCMC Amount--An amount equal to the cash sale price received by the
Company for all of the capital stock of ANCMC pursuant to Section 7.12, minus
43% of the gain recognized with respect to such sale for federal and state
income tax purposes.
Non-Consenting Deduction--The aggregate amount equal to the aggregate
Servicing Value as of the Valuation Date of all Non-Consenting Mortgage Loans
in the Private Servicing Portfolio; provided that, with
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respect to that portion of the Non-Consenting Mortgage Loans in the Private
Servicing Portfolio that does not exceed 25% of the aggregate unpaid principal
balance of the Private Servicing Portfolio (with such Mortgage Loans selected
on a proportional basis so as to reflect the average Servicing Value for all
Non-Consenting Mortgage Loans in the Private Servicing Portfolio) (the "First
Tranche"), the Non-Consenting Deduction otherwise applicable to all No Response
Loans included in the First Tranche shall be reduced by 50%.
Non-Consenting Mortgage Loan--Each Mortgage Loan with respect to which an
Investor may, solely as a result of the consummation of the transactions
contemplated hereby, assert a material breach under, or terminate its
relationship with the Company or any of its Subsidiaries with respect to such
Mortgage Loan pursuant to the terms of, the related Mortgage Servicing
Agreement (including without limitation all Mortgage Servicing Agreements
referred to in Section 4.25 of the Disclosure Schedule), unless such Investor
shall have expressly consented in writing at least ten days prior to the
Closing Date to the transactions contemplated hereby or otherwise waived in
writing its right to so terminate such relationship.
No Response Loans--All Non-Consenting Mortgage Loans with respect to which
the relevant Investor has not expressly refused to consent to the transactions
contemplated hereby or refused to waive its rights to terminate the related
Mortgage Servicing Agreement or indicated an intent to terminate such Mortgage
Servicing Agreement.
Notice of Disagreement--As defined in Section 2.7(b) hereof.
NYBCL--As defined in Section 2.1 hereof.
NYSE--As defined in Section 2.4(a) hereof.
OTS--The Office of Thrift Supervision.
Parent--As defined in the RECITALS hereto.
Parent Common Stock--As defined in Section 2.4(a) hereof.
Parent Preferred Stock--As defined in Section 5.2 hereof.
Parent Reports--As defined in Section 5.9 hereof.
Permitted Trailer Documents. (A) Any missing or defective Trailer Document
with respect to which the relevant Investor has delivered to the Company or its
Subsidiary, as applicable, a written waiver, in form and substance reasonably
satisfactory to Parent, of the Company's or its Subsidiary's failure to comply
with the related Mortgage Servicing Agreement with respect to the absent or
defective Trailer Document and of such Investor's right to require the Company
or any of its Subsidiaries to repurchase the related Mortgage Loan as a result
of the absence or defectiveness of such Trailer Document and (B) any of the
Trailer Documents listed below notwithstanding that its absence would allow the
Investor to require the Company or any of its Subsidiaries to repurchase or
guaranty the Mortgage Loan:
(i) title policy endorsements during the sixty (60) days after the issue
date of the title policy;
(ii) settlement statements or HUD-1 forms, as applicable, during the
thirty (30) days after the date of the closing of the applicable Mortgage
Loan;
(iii) title policies during the period from the date of the closing of
the applicable Mortgage Loan to the earlier of (A) thirteen (13) months
after such closing or (B) sixty (60) days after the date the related
recorded mortgage, deed of trust or other security agreement is received by
the Company; provided, however, that if Parent shall conclude in its
reasonable judgment that extraordinary delays in a particular jurisdiction
make compliance with this time limit impossible, this provision shall be
deemed to be satisfied upon receipt of evidence satisfactory to Parent,
that the applicable Mortgage Loan is covered by a valid title policy;
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(iv) intervening assignments (A) during the ninety (90) days after the
date of acquisition of the Mortgage Loan, (B) during the twelve (12) months
after acquisition of the Mortgage Loan, if evidenced by a certified true
copy from the settlement agent and by an insured closing letter in such
jurisdictions where such is applicable, or such other comparable form of
protection as is typically given to mortgage lenders in other jurisdictions
or (C) at any time, if evidenced by an original recorded instrument or a
copy of such instrument certified by the applicable governmental recording
official; provided, however, that if Parent shall conclude in its
reasonable judgment that extraordinary delays in a particular jurisdiction
make compliance with this time limit impossible, this provision shall be
deemed to be satisfied upon receipt of evidence satisfactory to Parent that
all necessary documents have been properly filed with the appropriate
governmental recording official;
(v) mortgage, deed of trust or other security instrument, (A) during the
ninety (90) days after the date of origination of the Mortgage Loan, (B)
during the twelve (12) months after origination of the Mortgage Loan, if
evidenced by a certified true copy from the settlement agent and by an
insured closing letter in such jurisdictions where such is applicable, or
such other comparable form of protection as is typically given to mortgage
lenders in other jurisdictions or (C) at any time, if evidenced by an
original recorded instrument or a copy of such instrument certified by the
applicable governmental recording official; provided, however, that if
Parent shall conclude in its reasonable judgment that extraordinary delays
in a particular jurisdiction make compliance with this time limit
impossible, this provision shall be deemed to be satisfied upon receipt of
evidence satisfactory to Parent that all necessary documents have been
properly filed with the appropriate governmental recording official;
(vi) corporate assignments, upon receipt by Parent of a chief executive
officer's certificate from the Company certifying that all corporate
assignment provisions of the applicable Regulations have been complied
with;
(vii) private mortgage insurance certificate (or other verification
acceptable to Parent) during the thirty (30) days after the date of the
closing of the applicable Mortgage Loan; and
(viii) FHA mortgage insurance certificate or VA loan guaranty certificate
for Mortgage Loans included in GNMA Pools, (A) for loans originated or
purchased by the Company after the date hereof, during the ninety (90) days
after the date of the closing of the applicable Mortgage Loan and
thereafter if the Company provides evidence satisfactory to Parent that all
documents required for the issuance of such certificate have been submitted
to the appropriate FHA or VA office; (B) for Mortgage Loans included in
GNMA Pools which have not been finally certified by GNMA for more than 12
months from the date of issuance of the Pool, if the Company provides
evidence satisfactory to Parent that all documents required for the
issuance of such certificate have been submitted to the appropriate FHA or
VA office, and (C) for all other Mortgage Loans included in GNMA Pools, all
missing FHA mortgage insurance certificates or VA loan guaranty
certificates shall be Permitted Trailer Documents.
Per Share Value--As defined in Section 2.9(a).
Person--Any individual, corporation, company, partnership (limited or
general), joint venture, association, trust or other entity.
Pipeline Loans--Means (X) those pending loans to be secured by a first
priority mortgage lien on a one-to-four family residence (a) with respect to
which, as of the Valuation Date, an application has been filed by the
prospective borrower with (i) the Company or any of its Subsidiaries or (ii) a
correspondent or brokerage originator (and such correspondent or brokerage
originator has registered such loan with the Company or any of its
Subsidiaries), and (b) which, as of the Valuation Date, have not yet closed or
been purchased by the Company or any of its Subsidiaries from the correspondent
or brokerage originator and been funded and (Y) those whole loans which the
Company or one of its Subsidiaries has contracted to purchase.
Plans--As defined in Section 4.10 hereof.
Pool--An aggregate of one or more Mortgage Loans that have been pledged or
granted to secure mortgage-backed securities or participation certificates.
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Post Valuation Date Adjustment--The net amount of the Non-Consenting
Deduction plus the Trailer Document Deduction plus all amounts to be included
in the Post Valuation Date Adjustment pursuant to Sections 2.7(c) and 7.13(b)
hereof.
Post Valuation Date Adjustment Document--As defined in Section 2.7(d) hereof.
Private Servicing Portfolio--The portfolio of all Mortgage Loans in the
Mortgage Servicing Portfolio not subserviced, serviced or master serviced for
an Agency.
Proxy Statement--As defined in Section 4.4 hereof.
Purchase Price Adjustment--As defined in Section 2.6(e) hereof.
Rate-Locked Loans--All Pipeline Loans which, as of the Valuation Date, the
Company or any of its Subsidiaries has committed to fund or purchase at a
specified interest rate; provided, however, that a Rate-Locked Loan need not
have been approved to be eligible as such.
Recourse Loan--As defined in Section 4.24 hereof.
Regulations--(i) Federal, state and local laws, rules and regulations with
respect to the origination, insuring, purchase, sale, pooling, servicing,
subservicing, master servicing or filing of claims in connection with a
Mortgage Loan, (ii) the responsibilities and obligations set forth in any
agreement between the Company or any of its Subsidiaries and an Investor or
Insurer (including, without limitation, Mortgage Servicing Agreements and
selling and servicing guides), (iii) the laws, rules, regulations, guidelines,
handbooks and other requirements of an Investor, Agency, Insurer, public
housing program or Investor program with respect to the origination, insuring,
purchase, sale, pooling, servicing, subservicing, master servicing or filing of
claims in connection with a Mortgage Loan, and (iv) the terms and provisions of
the Loan Documents.
REO--Any residential real property owned in fee simple by the Company or any
of its Subsidiaries as a result of a Foreclosure instituted in the conduct of
the Company's or any such Subsidiary's mortgage servicing business (except for
any such real property foreclosed upon by the Company or one of its
Subsidiaries on behalf of an Investor provided such real property is not
reflected on the books and records of the Company as REO).
Requisite Regulatory Approvals--As defined in Section 8.1(c) hereof.
Restricted Stock--As defined in Section 2.9(b) hereof.
SEC--As defined in Section 4.4 hereof.
Securities Act--As defined in Section 4.11 hereof.
Servicing Released Loans--As defined in Section 4.24.
Servicing Sale Loan--As defined in Section 4.24.
Servicing Rights--The right to receive the servicing fees and any other
income the servicer is entitled to receive arising from or connected to the
Mortgage Loans and the related obligations to (i) administer and collect
payments for the reduction of principal and interest, (ii) pay taxes and
insurance premiums, (iii) remit all amounts in accordance with any servicing
agreements, (iv) provide foreclosure services and full escrow administration
and (v) perform such other obligations as may, from time to time, be imposed
under any Mortgage Servicing Agreement.
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Servicing Value--The value attributable to any particular Mortgage Loan for
purposes of calculating the Purchase Price Adjustment determined as follows:
Any GNMA Adjustable Rate Mortgage An amount equal to four (4) multiplied
Loan: by the actual annual servicing fee for
the Mortgage Loan multiplied by the un-
paid principal balance of the Mortgage
Loan
Any Other Adjustable Rate An amount equal to three (3) multiplied
Mortgage Loan: by the actual annual servicing fee for
the Mortgage Loan (such fee, in the
case of one-year Mortgage Loans where
the servicing fee increases after one
year, to be the annual servicing fee as
of the thirteenth month after the date
of the closing of the Mortgage Loan)
multiplied by the unpaid principal bal-
ance of the Mortgage Loan
Any Fixed Rate Mortgage Loan
(including Balloon Loans):
An amount equal to 5.1 multiplied by
the actual annual servicing fee for the
Mortgage Loan multiplied by the unpaid
principal balance of the Mortgage Loan
S-4--As defined in Section 4.12 hereof.
State Agency--Any state agency with authority to regulate the business of the
Company or any of its Subsidiaries, determine the investment or servicing
requirements with regard to loans originated, purchased or serviced by the
Company or any of its Subsidiaries, or otherwise participate in or promote
mortgage lending.
State Banking Approvals--As defined in Section 4.4 hereof.
Stockholder Proceedings--As defined in Section 9.1(h) hereof.
Subsidiary--As defined in Section 4.1(a) hereof.
Surviving Corporation--As defined in Section 2.1 hereof.
takeover proposal--As defined in Section 6.1(e) hereof.
Tax Return--As defined in Section 4.9(c) hereof.
Taxes--As defined in Section 4.9(c) hereof.
Trailer Document Deduction--The amount equal to the sum of (i) the aggregate
of the Servicing Value as of the Valuation Date of each Mortgage Loan which, as
of the date ten days prior to the Closing Date, is missing one or more Trailer
Documents which are not Permitted Trailer Documents or as to which one or more
Trailer Documents contain defects which would allow the Investor to require the
Company or any of its Subsidiaries to repurchase or guaranty the Mortgage Loan,
provided that with respect to that portion of such Mortgage Loans (with such
Mortgage Loans selected on a proportional basis so as to reflect the average
Servicing Value for all Mortgage Loans which, as of such date, are missing one
or more Trailer Documents which are not Permitted Trailer Documents or as to
which one or more Trailer Documents contain such defects) whose aggregate
principal balance does not exceed $100,000,000 in the aggregate, the amount of
such deduction shall be reduced by 50%, plus (ii) the following amount for each
such missing Trailer Document that is not a Permitted Trailer Document and each
such defective Trailer Document (determined as of the date ten days prior to
the Closing Date):
(i) title policy endorsements--$15 per endorsement;
(ii) settlement statements and HUD-1 forms--$15;
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(iii) title policies--$30;
(iv) intervening assignments (original or certified copy)--$22.50;
(v) mortgage, deed of trust or other security instrument--$22.50;
(vi) corporate assignments--$22.50;
(vii) private mortgage insurance certificate (or other verification of
insurance acceptable to Parent)--$10.00;
(viii) FHA mortgage insurance certificates and VA loan guaranty
certificates--$35.00; and
(ix) promissory notes--$10.00.
Trailer Documents. The following types of documents with respect to a
Mortgage Loan sold to any Investor, the absence of or existence of any defect
in, would allow the Investor to require the Company or any Subsidiary of the
Company to repurchase or guaranty the Mortgage Loan: (i) any title policy
endorsements; (ii) any settlement statement or HUD-1 form; (iii) any title
policy; (iv) any intervening assignments; (v) any mortgage, deed of trust or
other security instrument; (vi) any corporate assignments; (vii) any private
mortgage insurance certificate; (viii) any promissory note; and (ix) any FHA
mortgage insurance certificate or VA loan guaranty certificate.
Trust Account Shares--As defined in Section 2.4(b) hereof.
VA--The Veteran's Administration.
VA Loans--Mortgage Loans which satisfy all applicable rules and regulations
to be guaranteed by the VA and which are guaranteed by the VA.
VA No-Bid--A delinquent Mortgage Loan with respect to which the VA has
notified the Company or one of its Subsidiaries that it intends to exercise its
option to pay the amount guaranteed by the VA and relinquish all rights in the
collateral securing such Mortgage Loan to the Company or one of its
Subsidiaries.
Valuation Date--The last day of the month immediately preceding the month in
which the Closing Date occurs.
Valuation Date Balance Sheet--As defined in Section 2.7(a) hereof.
Valuation Date Portfolio--The Mortgage Servicing Portfolio on the Valuation
Date.
Valuation Period--As defined in Section 2.4(a) hereof.
Warehouse Lines--The Warehouse Credit and Security Agreement, dated April 29,
1994, among Mortgage Bank, the Bank of New York and NationsBank Texas, N.A., as
agents, other lenders, Westdeutsche Landesbank Girozentrale (New York branch),
as issuing bank and First Chicago National Processing Corp. as collateral agent
and the secured revolving credit facility entered into as of September 1, 1993,
between Mortgage Bank and Nomura Asset Capital Corporation.
Warehouse Loans--Mortgage Loans owned by the Company or one of its
Subsidiaries and held for sale (provided that no Mortgage Loan characterized on
the books and records of the Company as a warehouse loan that meets the
definition set forth herein for Investment Loans shall be considered to be a
Warehouse Loan).
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ARTICLE II
The Merger
2.1 The Merger. Subject to the terms and conditions of this Agreement, in
accordance with the New York Business Corporation Law (the "NYBCL"), at the
Effective Time (as defined in Section 2.2 hereof), Merger Sub shall merge with
and into the Company. The Company shall be the surviving corporation
(hereinafter sometimes called the "Surviving Corporation") in the Merger, and
shall continue its corporate existence under the laws of the State of New York
as a wholly owned subsidiary of BAFSB or its successor. The name of the
Surviving Corporation shall continue to be "Arbor National Holdings, Inc." Upon
consummation of the Merger, the separate corporate existence of Merger Sub
shall terminate.
2.2 Effective Time. The Merger shall become effective as set forth in the
certificate of merger (the "Certificate of Merger") which shall be filed with
the Department of State of the State of New York (the "Department") on the
Closing Date (as defined in Section 10.1 hereof). The term "Effective Time"
shall be the date and time when the Merger becomes effective, as set forth in
the Certificate of Merger.
2.3 Effects of the Merger. At and after the Effective Time, the Merger shall
have the effects set forth in Section 906 of the NYBCL.
2.4 Conversion of Company Common Stock.
(a) At the Effective Time, subject to Section 3.2(e) hereof, each share of
the common stock, par value $0.01 per share, of the Company (the "Company
Common Stock") issued and outstanding immediately prior to the Effective Time
(other than shares of Company Common Stock (x) held in the Company's treasury
and (y) which are Dissenting Shares, as such term is defined in Section 2.4(c)
hereof) shall, by virtue of this Agreement and without any action on the part
of the holder thereof, be converted into and exchangeable for the number of
shares (the "Exchange Ratio") of the common stock, par value $1.5625 per share,
of Parent ("Parent Common Stock"), determined by dividing the Final Per Share
Merger Price by the Average Closing Price (as defined below); provided,
however, that subject to the provisions of Section 9.1(g) hereof, for purposes
of calculating the Exchange Ratio pursuant to this Section 2.4(a),
notwithstanding the actual amount of the Average Closing Price, in no event
shall the Average Closing Price utilized in making such calculation be less
than $39.31 nor more than $53.19. As used herein, the term "Average Closing
Price" means the average closing sales price per share of Parent Common Stock
on the New York Stock Exchange ("NYSE") (as reported by The Wall Street Journal
or, if not reported thereby, another authoritative source), for the 20
consecutive NYSE trading days (the "Valuation Period") ending on the fifth NYSE
trading day prior to the date (the "Last Approval Date") on which the last of
the approval of the Federal Reserve Board under the BHC Act and the FRA and the
approval of the OTS under HOLA, as required to consummate the transactions
contemplated by this Agreement, is obtained. The Exchange Ratio shall be
rounded to four significant decimal places (i.e., to the ten-thousandth, for
example 1.1234). All of the shares of Company Common Stock converted into
Parent Common Stock pursuant to this Article II shall no longer be outstanding
and shall automatically be cancelled and shall cease to exist, and each
certificate (each a "Certificate") previously representing any such shares of
Company Common Stock shall thereafter represent the right to receive (i) the
number of whole shares of Parent Common Stock and (ii) cash in lieu of
fractional shares into which the shares of Company Common Stock represented by
such Certificate have been converted pursuant to this Section 2.4(a) and
Section 3.2(e) hereof. Certificates previously representing shares of Company
Common Stock shall be exchanged for certificates representing whole shares of
Parent Common Stock and cash in lieu of fractional shares issued in
consideration therefor upon the surrender of such Certificates in accordance
with Section 3.2 hereof, without any interest thereon. If prior to the
Effective Time, Parent should split or combine its common stock, or pay a
dividend or other distribution payable in such common stock, then the Exchange
Ratio and the minimum and maximum Average Closing Prices set forth in the
proviso to the first sentence of this Section 2.4(a), shall be appropriately
adjusted to reflect such split, combination, dividend or distribution. Parent
shall notify the Company by the close of business on the Last Approval Date,
that such date has occurred.
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(b) At the Effective Time, all shares of Company Common Stock that are owned
by the Company as treasury stock shall be cancelled and shall cease to exist
and no stock of Parent or other consideration shall be delivered in exchange
therefor. All shares of Parent Common Stock that are owned by the Company or
any of its Subsidiaries shall become treasury stock of Parent.
(c) For the purposes of this Agreement, "Dissenting Shares" shall refer to
those shares of Company Common Stock owned by stockholders (i) who, pursuant to
the NYBCL, file with the Company at or prior to the meeting of the Company's
stockholders referred to in Section 7.3 hereof written objection to the Merger,
(ii) whose shares are not voted in favor of the Merger, and (iii) who comply
with the notice and other provisions of Section 623 of the NYBCL.
Notwithstanding anything in this Agreement to the contrary, Dissenting Shares
shall not be converted into the right to receive, or be exchangeable for,
Parent Common Stock and cash in lieu of fractional shares, and instead, the
holders thereof shall be entitled to payment of the fair value of such
Dissenting Shares in accordance with the provisions of Section 623 of the
NYBCL; provided, however, that (i) if any holder of Dissenting Shares shall
subsequently deliver to the Surviving Corporation a written withdrawal of his
objections to the Merger in accordance with Section 623 of the NYBCL (with the
written approval of the Surviving Corporation, if required), (ii) if, after any
holder or holders of Dissenting Shares fails to agree with the Surviving
Corporation as to the fair value of his shares in accordance with Section 623
of the NYBCL, neither any such holder of Dissenting Shares nor the Surviving
Corporation has instituted a proceeding demanding a determination of the value
of all Dissenting Shares within the time provided in Section 623 of the NYBCL,
or (iii) if a court shall determine that a holder of Dissenting Shares is not
entitled to receive payment for such holder's shares, then such holder or
holders (as the case may be) shall not have the right to receive payment of the
fair value of such shares of Company Common Stock and each of such shares of
Company Common Stock shall thereupon be deemed to have been converted into the
right to receive, and to have become exchangeable for, as of the Effective
Time, Parent Common Stock and cash in lieu of fractional shares (without any
interest thereon) in accordance with the terms of this Agreement. Under this
Agreement, the Company may elect to establish an "Escrow Account" solely for
the purpose of and with an amount sufficient for satisfying the maximum
aggregate payment that may be required to settle claims, if any, of holders of
Dissenting Shares in accordance with Section 623 of the NYBCL. The Company may
establish the Escrow Account only if done so (i) prior to the Effective Time
and (ii) with funds supplied solely by the Company. On satisfaction of all
claims with respect to Dissenting Shares, the remaining amount, augmented by
income earned thereon and reduced by payment of the fees and expenses of the
escrow agent, will be transferred to BAFSB or its successor.
2.5 Calculation of Merger Price. The "Estimated Merger Price" shall mean
$117,940,758. The "Final Merger Price" shall mean the sum of the (i) Estimated
Merger Price, (ii) the Purchase Price Adjustment and (iii) the Net ANCMC
Amount. The "Final Per Share Merger Price" shall mean the amount obtained by
dividing (x) the sum of the Final Merger Price by (y) the sum of the total
number of shares of Company Common Stock outstanding (excluding treasury
shares) immediately prior to the Effective Time and the total number of shares
of Company Common Stock which, immediately prior to the Effective Time and
prior to the cancellation of Company Options pursuant to Section 2.9 hereof,
are issuable pursuant to the exercise of Company Options.
2.6 Adjustments to Estimated Merger Price. The Estimated Merger Price shall
be adjusted as follows:
(a) Valuation Date Portfolio. The Estimated Merger Price shall be (i)
increased by an amount equal to the Servicing Value of all Mortgage Loans
included in the Valuation Date Portfolio which were not included in the Base
Portfolio; (ii) decreased by an amount equal to the reduction between May 31,
1994 and the Valuation Date in the Servicing Value of the Mortgage Loans which
were included in the Base Portfolio; (iii) increased or decreased, as the case
may be, by an amount equal to the decrease or increase, respectively, between
May 31, 1994 and the Valuation Date in the Servicing Value of all Excluded
Loans; (iv) decreased by an amount equal to the Servicing Value of any REO
included in the Valuation Date Portfolio; (v) increased or decreased, as the
case may be, by an amount equal to the decrease or increase, respectively,
between May 31, 1994 and the Valuation Date in the Servicing Value of all
Investment Loans; and (vi) decreased by
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an amount equal to the aggregate Servicing Value of all Mortgage Loans included
in the Valuation Data Portfolio subserviced, serviced or Master Serviced by the
Company or any of its Subsidiaries pursuant to any Mortgage Servicing
Agreements listed on Section 2.6(a)(vi) of the Disclosure Schedule. Attached
Exhibit 2.6(a) sets forth (X) the Servicing Value of all Mortgage Loans
included in the Base Portfolio; (Y) the Servicing Value of all Excluded Loans
as of May 31, 1994; and (Z) the Servicing Value of all Investment Loans as of
May 31, 1994.
(b) Adjusted Equity. The Estimated Merger Price shall be (i) increased by the
amount, if any, by which the Adjusted Equity exceeds $28,804,547 or (ii)
decreased by the amount, if any, by which $28,804,547 exceeds the Adjusted
Equity.
(c) Adjustment for Net Gain or Loss on Rate-Locked Pipeline Loans and
Investor Commitments. The Estimated Merger Price shall be increased or
decreased, as the case may be, by an amount equal to the amount by which the
aggregate net after-tax gain or loss on (i) Pipeline Loans that are Rate-Locked
Loans, (ii) all of the Investor Commitments, (iii) Pipeline Loans that are not
Rate-Locked Loans, and (iv) Mortgage Loans which, as of the Valuation Date,
were Warehouse Loans, is greater or less than $1,313,556. For purposes of this
Section 2.6(c), the gain or loss on each such Rate-Locked Loan, Investor
Commitment, Pipeline Loan that is not a Rate-Locked Loan, and Mortgage Loan
which, as of the Valuation Date, was a Warehouse Loan, shall be determined as
of the Valuation Date in accordance with the provisions of Exhibit 2.6(c).
(d) Post Valuation Date Adjustment. The Estimated Merger Price shall be
decreased by the Post Valuation Date Adjustment.
(e) Net Adjustment. The adjustments to the Estimated Merger Price described
in paragraphs (a) through (d) shall be netted, such that there shall be
determined an aggregate increase or decrease in the Estimated Merger Price.
Such aggregate increase or decrease is referred to herein as the "Purchase
Price Adjustment." Notwithstanding anything to the contrary contained herein,
in the event the aggregate increase or decrease to the Estimated Merger Price
described in paragraphs (a) through (d) above shall be equal to or less than
$2.0 million, the Purchase Price Adjustment shall be equal to zero (0).
2.7 Closing Adjustment Documents.
(a) As soon as reasonably practicable following the Valuation Date, and in no
event more than 15 days thereafter, the Company shall prepare and deliver to
Parent (i) an unaudited consolidated balance sheet of the Company as of the
Valuation Date (the "Valuation Date Balance Sheet"), which Valuation Date
Balance Sheet shall be prepared in accordance with GAAP consistent with the
accounting principles used in the preparation of the Balance Sheet, (ii) a
schedule calculating the amount of the Adjusted Equity, (iii) a schedule of the
unpaid principal balance of the Mortgage Loans in the Valuation Date Portfolio,
by category, (iv) a schedule of the Excluded Loans, by category, (v) a schedule
of all REO, (vi) a schedule calculating the Net ANCMC Amount, (vii) a schedule
setting forth, in reasonable detail, the gain or loss, as of the Valuation
Date, on all Rate-Locked Loans, Investor Commitments, Warehouse Loans and
Pipeline Loans that are not Rate-Locked Loans and (viii) a schedule setting
forth in reasonable detail the calculations contemplated by Sections 2.5 and
2.6 above (collectively, the "Closing Adjustment Documents"). The parties shall
cooperate in the preparation of the Closing Adjustment Documents in accordance
with this Section 2.7. Without limiting the generality of the foregoing, the
Company shall provide Parent and its designees with reasonable access to the
books, records, personnel and representatives of the Company and its
Subsidiaries and such other information as Parent may require with respect to
the resolution of any Disagreement (as defined below).
(b) Within five days after delivery of the Closing Adjustment Documents to
Parent, Parent may dispute all or any portion of the Closing Adjustment
Documents by giving written notice (a "Notice of Disagreement") to the Company
setting forth in reasonable detail the basis for any such dispute (any such
dispute being hereinafter called a "Disagreement"). The parties shall promptly
commence good faith negotiations with a view to resolving all such
Disagreements. If Parent does not give a Notice of a
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Disagreement in accordance with the provisions of the first sentence of this
paragraph (b) within the five day period set forth therein, Parent shall be
deemed to have irrevocably accepted the Closing Adjustment Documents in the
form delivered to Parent by the Company.
(c) If Parent shall deliver a Notice of Disagreement and the Company shall
not dispute all or any portion of such Notice of Disagreement by giving written
notice to Parent setting forth in reasonable detail the basis for such dispute
within three business days following the delivery of such Notice of
Disagreement, the Company shall be deemed to have irrevocably accepted the
Closing Adjustment Documents as modified in the manner described in the Notice
of Disagreement. If the Company disputes all or any portion of the Notice of
Disagreement within the three business day period described in the previous
sentence, and within two days following the delivery to Parent of the notice of
such dispute Parent and the Company do not resolve the Disagreement, such
Disagreement shall be referred to the Independent Accounting Firm for a
resolution of such Disagreement in accordance with the terms of this Agreement.
If the Company and Parent do not immediately agree on the selection of an
Independent Accounting Firm, their respective independent public accountants
shall immediately select such firm. The determinations of such firm with
respect to any Disagreement shall be final and binding upon the parties and the
amount so determined shall be used to complete the final Closing Adjustment
Documents. Each party hereto shall use all reasonable efforts to cause the
Independent Accounting Firm to render its determination as soon as practicable
after referral of the Disagreement to such firm, and in any event prior to the
Closing Date, and each shall cooperate with such firm and provide such firm
with reasonable access to the books, records, personnel and representatives of
it and its Subsidiaries and such other information as such firm may require in
order to render its determination. All of the fees and expenses of any
Independent Accounting Firm retained pursuant to this paragraph (c) or
paragraph (d) below shall be shared equally by Parent and Company and the
portion of such fees and expenses to be borne by the Company shall be included
in the Post Valuation Date Adjustment. Notwithstanding anything to the contrary
contained herein, the balance of the Valuation Date Portfolio reflected in the
Closing Adjustment Documents shall be increased to reflect Mortgage Loans for
which a consent or waiver of the type contemplated by the definition of Non-
Consenting Mortgage Loan contained herein has been obtained subsequent to the
date the Closing Adjustment Documents are delivered by the Company to Parent
and prior to the tenth day immediately preceding the Closing Date.
(d) Nine days prior to the Closing Date, the Company shall prepare and
deliver to Parent a schedule calculating the Post Valuation Date Adjustment
(the "Post Valuation Date Adjustment Document"). The parties shall cooperate in
the preparation of the Post Valuation Date Adjustment Document in accordance
with this Section 2.7. Without limiting the generality of the foregoing, the
Company shall provide Parent and its designees with reasonable access to the
books, records, personnel and representatives of the Company and its
Subsidiaries and such other information as Parent may require with respect to
the resolution of any disagreement regarding the Post Valuation Date
Adjustment. If Parent disputes all or any portion of the Post Valuation Date
Adjustment Document by giving written notice to the Company setting forth in
reasonable detail the basis for any such dispute within two business days after
the receipt of the Post Valuation Date Adjustment Document, such dispute shall
be referred to the Independent Accounting Firm for a resolution of such dispute
in accordance with the terms of this Agreement. If Parent does not give notice
of a dispute in accordance with the preceding sentence within such two business
day period, Parent shall be deemed to have irrevocably accepted the Post
Valuation Date Adjustment Document in the form delivered to Parent by the
Company. The determination of such firm with respect to any such dispute shall
be final and binding upon the parties and the amount so determined shall be
used to complete the final Post Valuation Date Adjustment Document. Each party
hereto shall use all reasonable efforts to cause the Independent Accounting
Firm to render its determination as soon as practicable after referral of the
dispute to such firm, and in any event prior to the Closing Date, and each
shall cooperate with such firm and provide such firm with reasonable access to
the books, records, personnel and representatives of it and its Subsidiaries
and such other information as such firm may require in order to render its
determination.
2.8 Conversion of Merger Sub Common Stock. Each of the shares of the common
stock of Merger Sub issued and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger, automatically
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and without any action on the part of Parent, become and be converted into one
share of Company Common Stock.
2.9 Options; Restricted Stock.
(a) At the Effective Time, each option to purchase Company Common Stock (each
a "Company Option") issued pursuant to the Company's 1992 Stock Incentive Plan
or the Company's Stock Option Plan for Non-Employee Directors (the "Company
Option Plans") which is outstanding at the Effective Time, whether or not
vested as of the date hereof, shall terminate effective as of the Effective
Time and each holder of any such Company Option thereunder shall be entitled to
receive from BAFSB, for each share of the Company Common Stock subject to such
Company Option, shares of Parent Common Stock in cancellation thereof with a
value equal to the excess, if any, of the Final Per Share Merger Price over the
per share exercise price of such Company Option; provided that the value of the
Parent Common Stock shall be calculated based on the Average Closing Price.
Documents previously evidencing the Company Options shall be exchanged for
certificates representing whole shares of Parent Common Stock and cash in lieu
of fractional shares issued in consideration therefor upon the surrender of
such documents in accordance with Section 3.2 hereof, without any interest
thereon. The Company shall obtain waivers from all holders of options issued
under the Company Stock Option Plan for Non-Employee Directors to any rights
they may have to require the Company to repurchase such options after the
Valuation Date and any such repurchases or demands for repurchases prior to the
Valuation Date shall be accrued and reflected on the Valuation Date Balance
Sheet.
(b) All restrictions applicable to any outstanding shares of restricted stock
granted pursuant to the Company's 1992 Stock Incentive Plan ("Restricted
Stock") shall lapse and such Restricted Stock shall become fully vested as of
the date of stockholder approval of this Agreement in accordance with Section
8.1(a) hereof. At the Effective Time, each share of Restricted Stock shall be
converted into shares of Parent Common Stock and cash in lieu of fractional
shares in the manner contemplated by Section 2.4.
(c) Except with respect to the obligations of the parties as provided herein
or as otherwise agreed to by the parties, (i) the provisions of the Company
Option Plans and any other plan, program or arrangement pursuant to which the
Company or any of its Subsidiaries may, or may be required to, issue Company
Common Stock or compensation based on the Company Common Stock, shall be
amended or deleted as of the Effective Time, and (ii) assuming compliance by
BAFSB with its obligations under this Section 2.9, the Company shall ensure
that following the Effective Time no holder of Company Options or any
participant in any Company Option Plan shall have any right thereunder to
acquire any equity securities of the Company or any of its Subsidiaries.
2.10 Certificate of Incorporation. Effective as of the Effective Time, the
Certificate of Incorporation of the Company shall be amended in its entirety to
conform to the form of the Certificate of Incorporation of Merger Sub (other
than with respect to the name of the Surviving Corporation), as in effect at
the Effective Time, and such amended Certificate of Incorporation shall be the
Certificate of Incorporation of the Surviving Corporation.
2.11 By-Laws. The By-Laws of the Merger Sub, as in effect immediately prior
to the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended in accordance with applicable law.
2.12 Directors and Officers. The directors and officers of Merger Sub
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and By-Laws of the Surviving Corporation until
their respective successors are duly elected or appointed and qualified.
2.13 Subsequent Liquidations. The parties acknowledge that, immediately
following the Closing Date, Parent and BAFSB plan to cause first the Company
and then each of the Company's Subsidiaries (i) to adopt
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plans of liquidation (each of which shall be a plan of complete liquidation and
dissolution for purposes of Sections 332 and 337 of the Code) and (ii) to
transfer all of its respective assets, employees and certain of their
respective liabilities to BAFSB and that, within the time provided by Section
332 of the Code, the Company and such Subsidiaries will be dissolved
(collectively, excluding the Merger, the "Liquidation") following which
articles of dissolution will be filed with the Department in accordance with
Article X of the NYBCL. For purposes of this Agreement, all references to "the
transactions contemplated hereby" or "the transactions contemplated by this
Agreement" shall be deemed to refer both to the Merger and to the Liquidation.
2.14 Tax Consequences. It is intended that the transactions contemplated by
this Agreement shall constitute a reorganization within the meaning of Section
368(a) of the Code, and that this Agreement shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code.
2.15 Pooling-of-Interests. It is intended that the transactions contemplated
by this Agreement shall be accounted for as a pooling-of-interests pursuant to
Opinion No. 16 of the Accounting Principles Board. Each of Parent and the
Company agrees to use, and to cause its respective Subsidiaries to use, all
reasonable efforts to permit the transactions to be accounted for as a pooling-
of-interests under Opinion No. 16 of the Accounting Principles Board.
ARTICLE III
Exchange of Shares
3.1 Parent and BAFSB to Make Shares Available. At or prior to the Effective
Time, Parent and BAFSB shall deposit, or shall cause to be deposited, with a
bank or trust company (which may be a Subsidiary of Parent) selected by Parent
and reasonably satisfactory to the Company (the "Exchange Agent"), for the
benefit of the holders of Certificates and Company Options, respectively, for
exchange in accordance with this Article III, certificates representing the
shares Of Parent Common Stock and the cash in lieu of fractional shares to be
issued pursuant to Section 2.4 and 2.9 and paid pursuant to Section 3.2(a) in
exchange for outstanding shares of Company Common Stock and Company Options,
respectively (such cash and certificates for shares of Parent Common Stock,
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund"); provided, however, that
notwithstanding any other provision of this Agreement neither Parent nor BAFSB
shall deposit cash with the Exchange Agent with respect to fractional shares
unless and until Certificates or Company Options, respectively, and the
required transmittal materials pursuant to this Article III shall have been
received in proper form by the Exchange Agent.
3.2 Exchange of Shares and Company Options. (a) As soon as practicable after
the Effective Time, and in no event later than three business days thereafter,
the Exchange Agent shall mail to each holder of record of a Certificate or
Certificates or Company Options a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates or Company Options shall pass, only upon delivery of the
Certificates or Company Options to the Exchange Agent) and instructions for use
in effecting the surrender of the Certificates or Company Options in exchange
for certificates representing the shares of Parent Common Stock and the cash in
lieu of fractional shares into which the shares of Company Common Stock
represented by such Certificate or Certificates or Company Options shall have
been converted pursuant to this Agreement. Parent and BAFSB shall provide to
the Company a form of both the letter of transmittal and the instructions at
least seven NYSE trading days prior to the Closing Date and allow the Company
to provide reasonable comments thereon. Upon surrender of a Certificate or
Company Option for exchange and cancellation to the Exchange Agent, together
with such letter of transmittal, duly executed, the holder of such Certificate
or Company Option shall be entitled to receive in exchange therefor (x) a
certificate representing that number of whole shares of Parent Common Stock to
which such holder of Company Common Stock or Company Option shall have become
entitled pursuant to the provisions of Article II hereof and (y) a check
representing the amount of cash in lieu of fractional shares, if any, which
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such holder has the right to receive in respect of the Certificate or Company
Option surrendered pursuant to the provisions of this Article III, and the
Certificate or Company Option so surrendered shall forthwith be cancelled. No
interest will be paid or accrued on the cash in lieu of fractional shares and
unpaid dividends and distributions, if any, payable to holders of Certificates
or Company Options.
(b) No dividends or other distributions declared after the Effective Time
with respect to Parent Common Stock and payable to the holders of record
thereof shall be paid to the holder of any unsurrendered Certificate or Company
Option until the holder thereof shall surrender such Certificate or Company
Option in accordance with this Article III. After the surrender of a
Certificate or Company Option in accordance with this Article III, the record
holder thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Parent Common Stock represented by such
Certificate or Company Option.
(c) If any certificate representing shares of Parent Common Stock is to be
issued in a name other than that in which the Certificate or Company Option
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the Certificate or Company Option so surrendered shall be
properly endorsed (or accompanied by an appropriate instrument of transfer) and
otherwise in proper form (reasonably satisfactory to Parent) for transfer, and
that the person requesting such exchange shall pay to the Exchange Agent in
advance any transfer or other taxes required by reason of the issuance of a
certificate representing shares of Parent Common Stock in any name other than
that of the registered holder of the Certificate or Company Option surrendered,
or required for any other reason, or shall establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
issued and outstanding immediately prior to the Effective Time nor shall there
be any issuance of Company Common Stock upon the exercise of any Company
Options. If, after the Effective Time, Certificates representing such shares
are presented for transfer to the Exchange Agent or Company Options are
presented to the Exchange Agent for exercise thereof, they shall be cancelled
and exchanged for the certificates representing shares of Parent Common Stock
and cash in lieu of fractional shares as provided in Article II hereof.
(e) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Parent Common Stock
shall be issued upon the surrender for exchange of Certificates or the Company
Options, no dividend or distribution with respect to Parent Common Stock shall
be payable on or with respect to any fractional share, and such fractional
share interests shall not entitle the owner thereof to vote or to any other
rights of a stockholder of the Company. In lieu of the issuance of any such
fractional share, Parent or BAFSB, as appropriate, shall pay to each former
stockholder or optionholder, respectively, of the Company who otherwise would
be entitled to receive a fractional share of Parent Common Stock an amount in
cash determined by multiplying (i) the Average Closing Price by (ii) the
fraction of a share of Parent Common Stock which such holder would otherwise be
entitled to receive pursuant to Section 2.4 or 2.9 hereof, respectively.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders or optionholders of the Company for twelve months after the
Effective Time shall be repaid to Parent or BAFSB, as appropriate. Any
stockholders or optionholders of the Company who have not theretofore complied
with this Article III shall thereafter look only to Parent or BAFSB,
respectively, for payment of their shares of Parent Common Stock, cash in lieu
of fractional shares and unpaid dividends and distributions on the Parent
Common Stock deliverable in respect of each share of Company Common Stock or
Company Option such stockholder or optionholder holds as determined pursuant to
this Agreement, in each case, without any interest thereon. Notwithstanding the
foregoing, none of Parent, BAFSB, the Company, the Exchange Agent or any other
person shall be liable to any former holder of shares of Company Common Stock
or Company Options for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
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(g) In the event any Certificate or Company Option shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate or Company Option to be lost, stolen or destroyed
and, if required by Parent or BAFSB, as appropriate, the posting by such person
of a bond in such amount as Parent or BAFSB may direct as indemnity against any
claim that may be made against it with respect to such Certificate or Company
Option, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate or Company Option the shares of Parent Common Stock and
cash in lieu of fractional shares deliverable in respect thereof pursuant to
this Agreement.
ARTICLE IV
Representations and Warranties of the Company
The Company hereby represents and warrants to Parent, BAFSB and Merger Sub as
follows:
4.1 Corporate Organization. (a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of New York.
The Company has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure to be so
licensed or qualified has not had and could not reasonably be expected to have
a Material Adverse Effect (as defined below) on the Company. As used in this
Agreement the term "Material Adverse Effect" means, with respect to Parent, the
Company or the Surviving Corporation, as the case may be, a material adverse
effect on the business, properties, results of operations or financial
condition of such party and its Subsidiaries taken as a whole, other than any
such effect attributable to or resulting from (x) changes in law, rules or
regulations generally applicable to mortgage banks, banks or their holding
companies or (y) changes in GAAP. As used in this Agreement, the term
"Subsidiary" when used with respect to any party means any corporation,
partnership, joint venture or other association or organization, whether
incorporated or unincorporated, in which a party, directly or indirectly, holds
any equity or management interest or which is consolidated with such party for
financial reporting purposes. The Certificate of Incorporation and By-Laws of
the Company, copies of which are attached as Section 4.1(a) of the Disclosure
Schedule which is being delivered to Parent concurrently herewith (the
"Disclosure Schedule"), are true, complete and correct copies of such documents
as in effect as of the date of this Agreement.
(b) Each of the Company's Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation and has the corporate power and authority to own or lease all of
its properties and assets and to carry on its business as it is now being
conducted and is duly licensed or qualified to do business in each jurisdiction
in which the nature of the business conducted by it or the character or the
location of the properties and assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to be so
licensed or qualified has not had and could not reasonably be expected to have
a Material Adverse Effect on the Company. The articles of incorporation and by-
laws or other organizational documents of each Company Subsidiary, copies of
which are attached as Section 4.1(b) of the Disclosure Schedule, are true,
complete and correct copies of such documents as in effect as of the date of
this Agreement.
4.2 Capitalization. (a) The authorized capital stock of the Company consists
of 50,000,000 shares of Company Common Stock and 5,000,000 shares of preferred
stock, par value $0.01 per share (the "Company Preferred Stock"). As of August
31, 1994, there were (x) 6,734,709 shares of Company Common Stock issued and
outstanding (including vested and unvested Restricted Stock and 8,000 shares of
Company Common Stock held in the Company's treasury), (y) no shares of Company
Common Stock reserved for issuance upon exercise of outstanding stock options
or otherwise except for 483,751 shares of Company Common Stock reserved for
issuance pursuant to the Company Option Plans and (z) no shares of Company
Preferred Stock
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issued or outstanding, held in the Company's treasury or reserved for issuance
upon exercise of outstanding stock options or otherwise. All of the issued and
outstanding shares of Company Common Stock have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights,
with no personal liability attaching to the ownership thereof. Except as
referred to above or reflected in Section 4.2(a) of the Disclosure Schedule,
the Company does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments, agreements preemptive rights or other
rights of any character calling for the purchase or issuance of any shares of
Company Common Stock or Company Preferred Stock or any other equity security of
the Company or any securities representing the right to purchase or otherwise
receive any shares of Company Common Stock or any other equity security of the
Company. The names of the optionees, the date of each option to purchase
Company Common Stock granted, the number of shares subject to each such option,
the expiration date of each such option, and the price at which each such
option may be exercised under the Company Option Plans are set forth in Section
4.2(a) of the Disclosure Schedule. Since June 30, 1994, the Company has not
issued any shares of its capital stock or any securities convertible into or
exercisable for any shares of its capital stock, other than pursuant to the
exercise of employee stock options granted prior to such date.
(b) Section 4.2(b) of the Disclosure Schedule sets forth a true and correct
list of all of the Company's Subsidiaries as of the date of this Agreement.
Except as set forth on Section 4.2(b) of the Disclosure Schedule, the Company
owns, directly or indirectly, all of the issued and outstanding shares of
capital stock of each of the Company's Subsidiaries, free and clear of all
Encumbrances and security interests whatsoever, and all of such shares are duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof. Except as set forth on Section 4.2(b) of the Disclosure Schedule, none
of the Company's Subsidiaries has or is bound by any outstanding subscriptions,
options, warrants, calls, commitments, agreements, preemptive rights or other
rights of any character calling for the purchase or issuance of any shares of
capital stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
4.3 Authority; No Violation. (a) The Company has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of the Company. The Board of
Directors of the Company has directed that this Agreement and the transactions
contemplated hereby be submitted to the Company's stockholders for approval at
a meeting of such stockholders and, except for the adoption of this Agreement
by the holders of two-thirds of the outstanding shares of Company Common Stock,
no other corporate proceedings on the part of the Company are necessary to
approve this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by the Company
and (assuming due authorization, execution and delivery by Parent and Merger
Sub) constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as enforcement may be
limited by general principles of equity whether applied in a court of law or a
court of equity and by bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally.
(b) Except as set forth in Section 4.3(b) of the Disclosure Schedule, neither
the execution and delivery of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby, nor
compliance by the Company with any of the terms or provisions hereof, will (i)
violate any provision of the Certificate of Incorporation or By-Laws of the
Company or the certificate of incorporation, by-laws or similar governing
documents of any of the Company's Subsidiaries or (ii) assuming that the
consents and approvals referred to in Section 4.4 hereof are duly obtained, (x)
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to the Company or any of its Subsidiaries, or
any of their respective properties or assets, or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination
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or cancellation under, accelerate the performance required by, or result in the
creation of any Encumbrance upon any of the respective properties or assets of
the Company or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which the Company or any
of its Subsidiaries is a party, or by which they or any of their respective
properties or assets may be bound or affected.
4.4 Consents and Approvals. Except for (a) the approvals listed in Section
4.4 of the Disclosure Schedule (the "State Banking Approvals"), (b) the filing
with the Securities and Exchange Commission (the "SEC") of a proxy statement in
definitive form relating to the meeting of the Company's stockholders to be
held in connection with this Agreement and the transactions contemplated hereby
(the "Proxy Statement"), (c) the approval of this Agreement by the requisite
vote of the stockholders of the Company, (d) the filing of the Certificate of
Merger with the Department pursuant to the NYBCL, (e) the approval of each of
FNMA, FHLMC, GNMA, FHA, HUD and VA, and (f) such filings, authorizations,
permits, authorizations or approvals as may be set forth in Section 4.4 of the
Disclosure Schedule, no consents or approvals of or filings or registrations
with any court, administrative agency or commission or other governmental
authority or instrumentality (each a "Governmental Entity") or consents,
authorizations or approvals of any third party (including under any Company
Contract) are necessary in connection with the execution and delivery by the
Company of this Agreement or the consummation by the Company of the
transactions contemplated hereby.
4.5 Financial Statements. (a) Attached as Section 4.5 of the Disclosure
Schedule are copies of the consolidated balance sheets of the Company and its
Subsidiaries as of May 31, 1994 and as of February 28, 1994 and 1993, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the quarter ended May 31, 1994 as reported in the Company's
Quarterly Report on Form 10-Q and for the fiscal years 1992 through 1994,
inclusive, as reported in the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1994 filed with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in each case (other than
as of and for the quarter ended May 31, 1994) accompanied by the audit report
of Kenneth Leventhal & Company, independent public accountants with respect to
the Company. The May 31, 1994 consolidated balance sheet of the Company
(including the related notes, where applicable) (the "Balance Sheet") fairly
presents the consolidated financial position of the Company and its
Subsidiaries as of the date thereof, and the other financial statements
referred to in this Section 4.5 (including the related notes, where applicable)
fairly present, and the financial statements referred to in Section 7.2(c)
hereof will fairly present (subject, in the case of the unaudited statements,
to recurring audit adjustments normal in nature and amount), the results of the
consolidated operations and consolidated financial position of the Company and
its Subsidiaries for the respective fiscal periods or as of the respective
dates therein set forth; each of such statements (including the related notes,
where applicable) comply, and the financial statements referred to in Section
7.2(c) hereof will comply, in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto and each of such statements (including the related notes, where
applicable) has been, and the financial statements referred to in Section
7.2(c) hereof will be, prepared in accordance with GAAP consistently applied
during the periods involved, except in each case as indicated in such
statements or in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q. All changes in accounting methods reflected in the
financial statements referred to in this Section 4.5 and Section 7.2(c) and all
adjustments resulting from such changes were made in accordance with GAAP. The
transactions and other revenues reflected on such financial statements and the
books and records of the Company and its Subsidiaries represent valid, bona
fide transactions which have arisen from the business of the Company and its
Subsidiaries.
(b) The Company and each of its Subsidiaries maintains books and records
which accurately and validly reflect their respective transactions in
reasonable detail, and maintains accounting controls, policies and procedures,
sufficient to insure that such transactions are (i) executed in accordance with
its management's general or specific authorization and (ii) recorded in
accordance with GAAP, applicable law and Regulations, and that the
documentation pertaining thereto is retained, protected and duplicated in
accordance with applicable law and Regulations and prudent business practices.
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(c) The minute books of the Company and each of its Subsidiaries contain
accurate and complete records of all corporate actions of their respective
shareholders and Boards of Directors.
4.6 Broker's Fees. Neither the Company nor any Company Subsidiary nor any of
their respective officers or directors has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement, except
that the Company has engaged, and will pay a fee or commission to, Goldman
Sachs & Co. ("Goldman") in accordance with the terms of a letter agreement
dated April 26, 1994 between Goldman and the Company, a true, complete and
correct copy of which has been previously made available by the Company to
Parent.
4.7 Absence of Certain Changes or Events. (a) Except as may be set forth in
Section 4.7(a) of the Disclosure Schedule or as disclosed in the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1994, since May 31,
1994, (i) there has been no change in the business of the Company or any of its
Subsidiaries, or any occurrence, development or event of any nature, which has
had, or could reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on the Company, and (ii) neither the Company nor any
Subsidiary thereof has taken any action which would have been prohibited by
Section 6.1 hereof (other than paragraph (e) thereof) had it been in effect on
the date of such action.
(b) Except as set forth in Section 4.7(b) of the Disclosure Schedule, since
May 31, 1994, the Company and its Subsidiaries have carried on their respective
businesses in the ordinary and usual course consistent with their past
practices.
(c) Except as set forth in Section 4.7(c) of the Disclosure Schedule or as
specifically permitted by this Agreement, since May 31, 1994, neither the
Company nor any of its Subsidiaries has (i) except for normal increases in the
ordinary course of business consistent with past practice or except as required
by applicable law, increased the wages, salaries, rate of compensation,
pension, or other fringe benefits or perquisites payable to any executive
officer, employee, or director from the amount thereof in effect as of May 31,
1994, entered into any employment agreement, granted any severance or
termination pay, entered into any contract to make or grant any severance or
termination pay, or paid any bonus other than year-end bonuses for fiscal 1993
and 1994 or (ii) suffered any strike, work stoppage, slow-down, or other labor
disturbance.
4.8 Legal Proceedings. Except as set forth in Section 4.8 of the Disclosure
Schedule, as of the date of this Agreement neither the Company nor any of its
Subsidiaries is a party to any, and there are no pending or, to the best of the
Company's knowledge, threatened, legal, administrative, arbitral or other
proceedings, claims, actions or governmental or regulatory investigations of
any nature against the Company or any of its Subsidiaries or challenging the
validity or propriety of the transactions contemplated by this Agreement, or
against or otherwise involving, directly or indirectly, any current or former
officer, director, employee or agent of the Company or any of its Subsidiaries
(in connection with such officer's, director's, employee's or agent's
activities on behalf of the Company or any of its Subsidiaries or that
otherwise relate, directly or indirectly to the Company or any of its
Subsidiaries or properties or the securities or activities of any of them),
including, without limitation, any derivative actions that have been requested,
and any matters involving the Company's securities, or under or alleging
violation of any applicable law respecting employment discrimination, equal
opportunity, affirmative action, worker's compensation, occupational safety and
health requirements, unemployment insurance and related matters, or relating to
alleged unfair labor practices (or the equivalent thereof under any applicable
law) or relating to the right and ability to originate, purchase and sell FHA
Loans or VA Loans, or to sell and service GNMA, FNMA and FHLMC mortgage loans
and mortgage-backed securities, nor does the Company know of any material basis
therefor. Except as otherwise disclosed in Section 4.8 of the Disclosure
Schedule, as of the date of this Agreement there is no injunction, order,
judgment, decree, or regulatory restriction imposed upon the Company, any of
its Subsidiaries or the assets of the Company or any of its Subsidiaries.
4.9 Taxes and Tax Returns. (a) Except as may be reflected in Section 4.9 of
the Disclosure Schedule, each of the Company and its Subsidiaries has duly
filed all federal, state and local Tax Returns (as defined
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below) required to be filed by it on or prior to the date of this Agreement
(all such Tax Returns being accurate and complete in all material respects) and
has duly paid or otherwise made adequate provision for all material Taxes (as
defined below) with respect to all periods and transactions occurring prior to
Closing other than Taxes that are not yet due or are being contested in good
faith (and which are set forth in Section 4.9 of the Disclosure Schedule).
Except as may be reflected in Section 4.9 of the Disclosure Schedule, to the
best of the Company's knowledge, there are no material disputes pending, or
claims asserted, for Taxes with respect to the Company or any of its
Subsidiaries, nor has the Company or any of its Subsidiaries been requested to
give any currently effective waivers extending the statutory period of
limitation applicable to any Federal, state or local income Tax Return for any
period. Except as reflected in Section 4.9 of the Disclosure Schedule, the
amounts withheld by the Company and its Subsidiaries from their employees for
all periods ending prior to the date of this Agreement are in compliance in all
material respects with the Tax withholding provisions of applicable Federal,
state and local laws. Except as reflected in Section 4.9 of the Disclosure
Schedule, there are no Tax liens upon any property or assets of the Company or
its Subsidiaries except liens for current Taxes not yet due.
(b) Except as set forth in Section 4.9 of the Disclosure Schedule: (1)
neither Company nor any of its Subsidiaries has made any payments, is obligated
to make any such payments, or is a party to any contract, agreement or other
arrangement that could obligate it to make any such payments that would not be
deductible under Section 162(m) or Section 280G of the Code; (2) neither
Company nor any of its Subsidiaries is a party to any Tax sharing agreement or
has any continuing obligations under any prior Tax sharing agreement; and (3)
neither Company nor any of its Subsidiaries has been a member of an affiliated
group of corporations filing a U.S. federal consolidated income Tax Return as
to which Company was not the common parent.
(c) As used in this Agreement, the term "Tax" or "Taxes" means all federal,
state, county, local, and foreign income, excise, gross receipts, ad valorem,
profits, gains, property, sales, transfer, use, payroll, employment, severance,
withholding, duties, intangibles, franchise, and other taxes, charges, levies
or like assessments together with all penalties and additions to tax and
interest thereon, and the term "Tax Return" or "Tax Returns" means all reports,
estimates, declarations of estimated tax, information statements and returns
relating to or required to be filed in connection with any Tax, including
information returns with respect to transactions with third parties.
4.10 Employees Benefit Plans; ERISA.
(a) The Company has delivered to Parent true and complete copies of all Plans
(as defined below) to which the Company or any of its Subsidiaries is a party
and in which any current or former officer, director, employee or agent of the
Company or any of its Subsidiaries participates. All such Plans are listed in
Section 4.10(a) of the Disclosure Schedule. There are no Plans of the Company
or any of its Subsidiaries which are not evidenced by such written documents.
The term "Plan" shall include (i) any "employee benefit plan" within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), (ii) any profit sharing, pension, deferred compensation,
bonus, stock option, stock purchase, severance, retainer, consulting,
"cafeteria" benefits under Section 125 of the Code, health, welfare or
incentive plan or agreement whether legally binding or not, including any post-
employment benefits, (iii) any plan, agreement, contract, program, arrangement,
or policy providing for "fringe benefits" to its employees, including but not
limited to vacation, paid holidays, personal leave, employee discount,
educational benefit or similar programs.
(b) With respect to each Plan:
(1) it has been administered in accordance with its terms and applicable
laws and regulations, including ERISA and the Code;
(2) no action, claims (other than routine claims for benefits made in the
ordinary course of Plan administration for which Plan administrative review
procedures have not been exhausted) or
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investigation by any Governmental Entity are pending or, to the best
knowledge of the Company, threatened or imminent against or with respect to
the Plan, the Company or any of its Subsidiaries which is participating (or
who has participated) in any Plan or any fiduciary of the Plan; and
(3) it provides that it may be amended or terminated at any time and,
except for benefits protected under Section 411(d) of the Code or any other
applicable law and benefits listed in Section 4.10(b) of the Disclosure
Schedule, no Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or
former employees of the Company or any Company Subsidiary beyond their
retirement or other termination of service, other than (w) coverage
mandated by applicable law, or (x) death benefits or retirement benefits
under any "employee pension plan," as that term is defined in Section 3(2)
of ERISA.
(c) With respect to each Plan which is an employee benefit plan, as defined
under Section 3(3) of ERISA:
(1) no prohibited transaction (as defined in Section 406 of ERISA or
Section 4975 of the Code) or breach of fiduciary responsibility has
occurred;
(2) except as set forth in Section 4.10(c) of the Disclosure Schedule,
all reports, forms and other documents required to be filed with any
Governmental Entity or distributed to plan participants (including, without
limitation, summary plan descriptions, Forms 5500 and summary annual
reports) have been timely filed (if applicable) and distributed (if
applicable) and were accurate. The Company has made available to Parent
copies of all such reports, forms and documents required to have been filed
or distributed for the preceding three years;
(3) no accumulated funding deficiency (within the meaning of Section 302
of ERISA or Section 412 of the Code) has been incurred with respect to any
Plan, whether or not waived.
(d) Except as set forth in Section 4.10(d) of the Disclosure Schedule, each
Plan that is intended to qualify under Section 401(a) of the Code and Section
501(a) of the Code and its related trust, if any, complies in form and in
operation with Section 401(a) and 501(a) of the Code and has been determined by
the Internal Revenue Service to so comply and nothing has since occurred to
cause the loss of the Plan's qualification.
(e) Neither the Company nor any of its Subsidiaries (i) has ever maintained
or made any contributions to, (ii) has ever been a member of a controlled group
which has maintained or contributed to, or (iii) has ever been under common
control with an employer that maintained or contributed to any defined benefit
pension plan subject to Title IV of ERISA, including a multiemployer plan as
defined in Section 3(37) of ERISA.
(f) All contributions to each Plan for all periods ending prior to the
Closing Date (including periods from the first day of the current plan year to
the date immediately preceding the Effective Time) will be made prior to the
Effective Time by the Company in accordance with past practice and the
recommended contribution in any applicable actuarial report.
(g) All insurance premiums have been paid in full, subject only to normal
retrospective adjustments in the ordinary course, with regard to the Plans for
policy years or other applicable policy periods ending before the Effective
Time and have been paid as required under the policies for policy years or
other applicable policy periods beginning on or before the Effective Time and
ending on or after the Effective Time.
(h) All expenses and liabilities relating to all of the Plans have been, and
will on the Effective Time be, fully and properly accrued on the Company's or
its Subsidiary's books and records and disclosed in accordance with generally
accepted accounting principles and in Plan financial statements.
4.11 SEC Reports. The Company has (a) previously made available to Parent an
accurate and complete copy of each final registration statement, prospectus,
report, schedule and definitive proxy statement filed since June 5, 1992 by the
Company with the SEC pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act (the "Company Reports"), and (b)
attached as Section 4.11 of the Disclosure Schedule an accurate and complete
copy of all communications (other than those described in
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clause (a) above) mailed by the Company to its stockholders since January 1,
1992, and no such registration statement, prospectus, report, schedule, proxy
statement or communication contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances in which
they were made, not misleading, except that information as of a later date
shall be deemed to modify information as of an earlier date. The Company has
timely filed all Company Reports and other documents required to be filed by it
under the Securities Act and the Exchange Act, and, as of their respective
dates, all Company Reports complied in all material respects with the published
rules and regulations of the SEC with respect thereto.
4.12 Company Information. The information relating to the Company and its
Subsidiaries to be contained in the Proxy Statement and the registration
statement on Form S-4 (the "S-4") of which the Proxy Statement will be included
as a prospectus, or in any other document filed with the SEC or any other
regulatory agency in connection herewith, will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances in which they are made, not
misleading. The Proxy Statement (except for such portions thereof that relate
to Parent or any of its Subsidiaries) will comply in all material respects with
the provisions of the Securities Act, the Exchange Act and the rules and
regulations thereunder.
4.13 Compliance with Applicable Law. Except as disclosed in Section 4.13 of
the Disclosure Schedule, the Company and each of its Subsidiaries hold, and
have at all times held, all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to all, and have complied with and are not in default in any respect
under any, Regulation, applicable law, statute, order, decree, injunction,
rule, regulation, policy and/or guideline of any regulatory agency relating to
the Company or any of its Subsidiaries or any of their respective properties,
and neither the Company nor any of its Subsidiaries knows of, or has received
notice of, any material violations of the above.
4.14 Certain Contracts. (a) Except as set forth in Section 4.14(a) of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to or bound by any contract, arrangement, commitment or understanding (whether
written or oral) (i) with respect to the employment of any directors, officers,
employees or consultants; (ii) which, upon the consummation of the transactions
contemplated by this Agreement, will (either alone or upon the occurrence of
any additional acts or events) result in any payment (whether of severance pay
or otherwise) becoming due from Parent, the Company, the Surviving Corporation,
or any of their respective Subsidiaries to any current or former officer or
employee of the Company or any of its Subsidiaries; (iii) that provides for a
penalty or other charge upon termination; (iv) which involves the payment of
more than $20,000 per annum, or more than $50,000 for the remaining term of
such agreement or which involved a lump sum payment of $50,000 or more; (v)
which materially restricts the conduct of any line of business by the Company
or any of its Subsidiaries or the operations of the Company or any of its
Subsidiaries in any geographic area; (vi) with or to a labor union or guild
(including any collective bargaining agreement); (vii) (including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan) any of the benefits of which will be increased, or the vesting
of the benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement, or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement; (viii) in which the Company or any of its
Subsidiaries is participating as a general partner, limited partner or joint
venturer; (ix) existing as of the date of this Agreement, under which the
Company or any of its Subsidiaries has created, incurred, assumed, or
guaranteed (or may create, incur, assume, or guarantee) indebtedness for
borrowed money (including capitalized lease obligations) involving more than
$25,000; (x) pursuant to which the Company or any of its Subsidiaries leases
real property; (xi) between any officer, director or, to the knowledge of the
Company, employee of the Company or any of its Subsidiaries or any holder,
directly or indirectly, of more than 5% of the Company Common Stock known to
the Company, or any of their respective Affiliates or family members or
Affiliates of such family members (other than the Company or any of its
Subsidiaries), on the one hand, and the Company or any of its Subsidiaries, on
the other hand; (xii) between the Company or any of its Subsidiaries and an
insurance company which has authorized the Company or such Subsidiary to act as
its representative in the sale, placement, writing or
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administration of insurance; (xiii) existing as of the date of this Agreement,
which is an Investor Commitment; (xiv) which involves the ownership or
licensing of software, hardware or the provision of data processing services;
(xv) with any correspondent or wholesale loan originator which governs the
terms of such originator's relationship with the Company or any of its
Subsidiaries; or (xvi) which is material to the business of the Company or any
of its Subsidiaries which is not otherwise described in clauses (i) through
(xv) above. Attached to Section 4.14(a) of the Disclosure Schedule are true and
correct copies of all of the agreements identified in Section 4.14(a) of the
Disclosure Schedule which are in writing and to which the Company or any of its
Subsidiaries is a party. Each contract, arrangement, commitment or
understanding of the type described in this Section 4.14(a), whether or not set
forth in Section 4.14(a) of the Disclosure Schedule, is referred to herein as a
"Company Contract", and neither the Company nor any of its Subsidiaries knows
of, or has received notice of, any material violation of the above Company
Contracts by any of the other parties thereto.
(b) Except as set forth in Section 4.14(b) of the Disclosure Schedule, (i)
each Company Contract is valid and binding and in full force and effect, (ii)
the Company and each of its Subsidiaries have performed all material
obligations required to be performed by it to date under each Company Contract,
and (iii) no event or condition exists which constitutes or, after notice or
lapse of time or both, would constitute, a material default on the part of the
Company or any of its Subsidiaries under any such Company Contract or permit
termination, modification, or acceleration against the Company or the
Subsidiary which is a party to such Company Contract under the Company Contract
applicable to it; (iv) the Company or its Subsidiary which is a party to such
Company Contract has not repudiated or waived any material provision of any
such Company Contract; and (v) all amounts due and payable by the Company or
any of its Subsidiaries through the Closing Date have been or will be paid.
4.15 Undisclosed Liabilities. Except (a) as set forth in Section 4.15 of the
Disclosure Schedule, (b) for those liabilities that are fully reflected or
reserved against on the consolidated balance sheet of the Company included in
its Form 10Q for the period ended May 31, 1994, (c) for liabilities incurred in
the ordinary course of business after May 31, 1994 that are not fully accrued
or reserved against on the Valuation Date Balance Sheet and which have not had
nor could reasonably be expected to have, individually or in the aggregate, an
adverse financial effect with respect to the Company and its Subsidiaries in
excess of $500,000, and (d) liabilities that are fully accrued or reserved
against on the Valuation Date Balance Sheet, neither the Company nor any of its
Subsidiaries is subject to any liability of any nature whatsoever (whether
absolute, accrued, contingent or otherwise, whether due or to become due and
whether or not required to be accrued or disclosed under SFAS No. 5).
4.16 State Takeover Laws. The Board of Directors of the Company has approved
the transactions contemplated by this Agreement and the Kaufman Agreements,
such that the provisions of Section 912 of the NYBCL and any other applicable
state antitakeover statute will not, assuming the accuracy of the
representations contained in Section 5.10 hereof, apply to this Agreement or
any of the transactions contemplated hereby or the Kaufman Agreements.
4.17 Base Portfolio. The information set forth in Section 4.17 of the
Disclosure Schedule with respect to the Mortgage Loans in the Base Portfolio as
of May 31, 1994, is true and correct. The parties acknowledge and agree that
Parent has relied on Section 4.17 of the Disclosure Schedule in developing the
Estimated Merger Price.
4.18 Ownership of Property. The Company or one of its Subsidiaries, as the
case may be, has good and marketable title to or a valid leasehold interest in
all assets and properties, whether real or personal, tangible or intangible,
reflected in the Balance Sheet or acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of in the ordinary
course of business since the date of the Balance Sheet), subject to no
Encumbrances, except (i) as set forth in Section 4.18 of the Disclosure
Schedule, (ii) for statutory liens for amounts not yet delinquent or which are
being contested in good faith, (iii) liens and encumbrances on, and rights of
redemptions with respect to, REO and (iv) such Encumbrances that do not
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in the aggregate materially detract from the value or interfere in any material
respect with the use or operations of the assets and properties subject
thereto. Except as set forth in Section 4.18 of the Disclosure Schedule, as of
the date of this Agreement, the Company or one of its Subsidiaries, as the case
may be, as lessee has the right under valid and subsisting leases to occupy,
use, possess and control all property leased by any such party, as presently
occupied, used, possessed and controlled by any such party and all rents and
other amounts currently due thereunder have been paid; no waiver or indulgence
or postponement of any obligation thereunder has been granted by any lessor or
sublessor; the Company and its Subsidiaries have not entered into any sublease
or assignment with respect to its interest in any such lease; and none of the
Company or any of its Subsidiaries has received any notice that it has breached
any term, condition or covenant of any such lease. Neither the Company nor any
of its Subsidiaries owns any real property other than REO.
4.19 Insurance. (a) Section 4.19(a) of the Disclosure Schedule sets forth, as
of June 30, 1994, a list of (i) all policies of insurance maintained by the
Company or any of its Subsidiaries with respect to the Company's and such
Subsidiary's properties, assets, operations, business, employees or otherwise
and (ii) each life insurance policy of which the Company or any of its
Subsidiaries is the owner or beneficiary. Attached to Section 4.19 of the
Disclosure Schedule are true and correct copies of each such insurance policy.
(b) The Company and its Subsidiaries are insured with reputable insurers
against such risks and in such amounts normally insured against by companies of
the same type and in the same line of business. All of the insurance policies,
binders or bonds maintained by the Company or any of its Subsidiaries are in
full force and effect; neither the Company nor any of its Subsidiaries is in
default thereunder; all claims thereunder have been filed in due and timely
fashion; and, except as set forth in Section 4.19(b) of the Disclosure
Schedule, all such policies, binders and bonds will remain in full force and
effect after the Effective Time, unaffected by the transactions contemplated
hereby.
(c) All insurance policies required by Investors, FHA or VA are in full force
and effect.
4.20 Mortgage Banking Licenses and Qualifications. The Company (to the extent
applicable) and each of its Subsidiaries engaged in the business of originating
or servicing loans (i) is qualified (A) by FHA as a mortgagee and servicer for
FHA Loans, (B) by the VA as a lender and servicer for VA Loans, (C) by FNMA and
FHLMC as a seller/servicer of first mortgages to FNMA and FHLMC and (D) by GNMA
as an authorized issuer and servicer of GNMA-guaranteed mortgage-backed
securities; and (ii) has all other certifications, authorizations, franchises,
licenses, permits and other approvals (together with the items set forth in
clause (i) above, the "Licenses") necessary to conduct its current mortgage
banking business, and is in good standing under all applicable federal, state
and local laws and regulations thereunder as a mortgage lender and servicer.
Except as set forth in Section 4.20 of the Disclosure Schedule (such Section
4.20 to be delivered by the Company to Parent within fifteen (15) days after
the date hereof), neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will affect the validity
of any License, and all such Licenses will remain in full force and effect
immediately after the Closing Date and the consummation of the transactions
contemplated hereby. The Company and each of its Subsidiaries has complied with
all such Licenses, and the Company knows of no threatened suspension,
cancellation or invalidation of, or penalties (including fines or refunds)
under, any such License. Section 4.20 of the Disclosure Schedule sets forth a
true and complete list of all Licenses.
4.21 Loan Portfolio. The Company has previously delivered to Parent a tape
(magnetic media) which sets forth the following true and correct information,
as of July 31, 1994 with respect to each Mortgage Loan in the Mortgage
Servicing Portfolio as of such date (other than those loans set forth in
Section 4.21 of the Disclosure Schedule): (a) the loan number of each such
Mortgage Loan, (b) the unpaid principal balance of each such Mortgage Loan, (c)
the payment status of each such Mortgage Loan, (d) the monthly principal and
interest payment for each such Mortgage Loan, (e) the monthly escrow payment
for each such Mortgage Loan, (f) the interest rate of each such Mortgage Loan,
and whether such rate is adjustable, and (g) the state in which the property
securing each such Mortgage Loan is located. The tape (magnetic media) referred
to in the preceding sentence does not include Mortgage Loans closed by
correspondents or purchased by the
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Company or any Company Subsidiary but not yet reflected on the Company's
system. All information contained in such tape is true and correct as of such
date in all material respects. Each Mortgage Loan is (i) evidenced by a note
with such terms as are customary in the business, (ii) duly secured by a
mortgage or deed of trust with such terms as are customary in the business and
which grants the holder thereof a first priority lien on the subject property
(including any improvements thereon), each such mortgage or deed of trust
constituting a security interest that has been duly perfected and maintained
(or is in the process of perfection in due course) as a first lien subject only
to taxes and assessments not yet delinquent as evidenced by a lender's title
insurance policy, and is in full force and effect and (iii) accompanied by a
hazard insurance policy (and a flood insurance policy where required under the
terms of the Flood Disaster Protection Act) covering improvements on the
premises subject to such mortgage or deed of trust, with a loss payee clause in
favor of the Company or a Subsidiary of the Company or an assignee of the
Company or such Subsidiary, such insurance policy covering such risks as are
customarily insured against in accordance with industry practice and which are
required to be insured against pursuant to Investor requirements. Each of the
Company and each applicable Subsidiary of the Company has complied in all
material respects with all of its obligations under the insurance policies
described in the previous sentence.
4.22 Enforceability. All Mortgage Loans are genuine, valid and binding
obligations of the borrowers thereunder, have been duly executed by a borrower
of legal capacity, are enforceable in accordance with their terms (except as
enforcement thereof may be limited by (i) bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity (whether applied in a proceeding in equity or at
law), (ii) state laws requiring creditors to proceed against the collateral
before pursuing the borrower, and (iii) state laws on deficiencies), and
conform in all material respects to all applicable Regulations. Neither the
operation of any of the terms of any Mortgage Loan, nor the exercise of any
right thereunder, has rendered or will render the related mortgage or note
unenforceable, in whole or in part, or subject it to any right of rescission,
setoff, counterclaim or defense, and, to the best knowledge of the Company, no
such right of rescission, setoff, counterclaim or defense has been asserted
with respect thereto. The Loan Documents were in compliance with applicable
Regulations and Agency, Investor and Insurer requirements upon origination of
the underlying Mortgage Loan and are complete in all material respects. All
insertions in any Loan Documents were correct when made. All required
adjustments for those Mortgage Loans that are adjustable rate Mortgage Loans
have been timely and properly made in accordance with the underlying Loan
Documents and all such adjustments are recorded accurately and completely in
the Loan Documents.
4.23 Title to Certain Mortgage Loans; Mortgage Servicing Agreements. Except
as set forth in Section 4.23 of the Disclosure Schedule:
(a) All Mortgage Loans held in the Company's or any Company Subsidiary's
account (whether or not for future sale or delivery to an Investor) are owned
by the Company or such Subsidiary free and clear of any Encumbrance, except for
any security interest held by the Company's lenders under the Warehouse Lines.
Such Mortgage Loans have been duly recorded or submitted for recordation in due
course in the appropriate filing office in the name of a Company Subsidiary as
mortgagee. Neither the Company nor any Company Subsidiary has, with respect to
any such Mortgage Loan, released any security therefor, except upon receipt of
reasonable consideration for such release, or accepted prepayment of any such
Mortgage Loan which has not been promptly applied to such Mortgage Loan.
(b) All of the Mortgage Servicing Agreements and the rights created
thereunder are owned by the Company or the appropriate Company Subsidiary free
and clear of any Encumbrances, including without limitation the right to
receive servicing fees, except for any security interests held by the Company's
lenders under the Warehouse Lines.
4.24 No Recourse. Except as set forth in Section 4.24 of the Disclosure
Schedule and except with respect to VA No-Bids, neither the Company nor any of
its Subsidiaries is a party to: (i) any agreement or
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arrangement with (or otherwise obligated to) any Person, including an Investor
or Insurer, to repurchase from any such Person (or effect any substitution with
respect to) any Mortgage Loan, mortgaged property serviced for others, mortgage
loan sold by the Company or any of its Subsidiaries with servicing released
("Servicing Released Loans") or mortgage loan the servicing rights with respect
to which were sold on a bulk or flow basis by the Company or any of its
Subsidiaries ("Servicing Sale Loan") or (ii) any agreement, arrangement or
understanding to reimburse, indemnify, effect a substitution, "make whole" or
hold harmless any Person or otherwise assume any liability with respect to any
Loss suffered or incurred as a result of any default under or the foreclosure
or sale of any Mortgage Loan, mortgaged property serviced for others, Servicing
Released Loans or Servicing Sale Loans, except with respect to any of the
Mortgage Loans, mortgaged property serviced for others, Servicing Released
Loans or Servicing Sale Loans, described in clause (i) or (ii) above, insofar
as (A) such obligation to repurchase, reimburse, indemnify, substitute, "make
whole," hold harmless or otherwise assume liability is (x) based upon a breach
by the Company or any of its Subsidiaries of a contractual representation,
warranty or undertaking, or the misfeasance or malfeasance of the Company or
any such Subsidiary, and not (y) based solely upon the default under or
foreclosure or sale of any such Mortgage Loan, mortgaged property, Servicing
Released Loan or Servicing Sale Loan without regard to the occurrence of any
such breach, misfeasance or malfeasance or (B) the Company or any such
Subsidiary incurs expenses such as legal fees in excess of the reimbursement
limits, if any, set forth in the applicable Mortgage Servicing Agreement. For
purposes of this Agreement, the term "Recourse Loan" means, with the exception
of VA No-Bids, any Mortgage Loan, mortgaged property, Servicing Released Loan
or Servicing Sale Loans, including those items identified in Section 4.24 of
the Disclosure Schedule, under which the Company or any Company Subsidiary
bears the risk of loss as described in the preceding sentence.
4.25 Mortgage Servicing Agreements. Section 4.25 of the Disclosure Schedule
contains a list of all Mortgage Servicing Agreements to which the Company or
any of its Subsidiaries is a party as of the date hereof. Attached to Section
4.25 of the Disclosure Schedule are true and complete copies of all written
Mortgage Servicing Agreements to which the Company or any of its Subsidiaries
is a party as of the date hereof, and Section 4.25 of the Disclosure Schedule
contains true and complete summaries of the material terms of all oral Mortgage
Servicing Agreements to which the Company or any of its Subsidiaries is a
party. The Mortgage Servicing Agreements and the Regulations set forth all the
terms and conditions of the Company and any Company Subsidiary's rights against
and obligations to the Agencies and Investors and, except as set forth in
Section 4.25 of the Disclosure Schedule, there are no written or oral
agreements that modify or amend any such Mortgage Servicing Agreement in any
material respect. All of the Mortgage Servicing Agreements are valid and
binding obligations of the Company or the applicable Company Subsidiary and, to
the best knowledge of the Company, all of the other parties thereto, are in
full force and effect, and are enforceable in accordance with their terms,
except as enforcement thereof may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
Except as set forth in Section 4.25 of the Disclosure Schedule, there is no
default or breach under, or dispute regarding the material terms of, or to the
best knowledge of the Company, claim of default or breach by any party under
any such Mortgage Servicing Agreement, and, to the best knowledge of the
Company, no event has occurred which with the passage of time or the giving of
notice or both would constitute a default or breach by any party under any such
Mortgage Servicing Agreement or would permit termination, modification or
acceleration of any such Mortgage Servicing Agreement. To the Company's
knowledge, no dispute exists with any Investor regarding the nature of their
relationship with the Company and its Subsidiaries, the amount of remittances
between the parties or any other material term of their agreement. There is no
pending or, to the best knowledge of the Company or any of its Subsidiaries
that is a party thereto, threatened, cancellation of any Mortgage Servicing
Agreement, and neither the Company nor any of its Subsidiaries has received any
notice to the effect that any Investor or Agency intends to cease doing
business with the Company or any Company Subsidiary. Except as set forth in
Section 4.25 of the Disclosure Schedule, no sanctions or penalties have been
imposed upon the Company or any Company Subsidiary subsequent to September 30,
1991, and no sanctions or penalties are currently outstanding, under any
Mortgage Servicing Agreement or under any applicable Regulation.
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4.26 Compliance with Mortgage Banking Regulations.
(a) Except as disclosed in Section 4.26(a) of the Disclosure Schedule, the
Company and each of its Subsidiaries engaged in the business of originating or
servicing loans and, with respect to each Mortgage Loan, each prior servicer
and originator of any such loan, has been and is (including without limitation,
with respect to (i) the ownership and operation of its properties and (ii) the
documentation, underwriting, origination, purchase, assumption, modification,
sale, pooling and servicing of Mortgage Loans by the Company and such
Subsidiaries and such prior servicers and originators) in compliance with all
Regulations, orders, writs, decrees, injunctions and other requirements of any
court or Governmental Entities applicable to it, its properties and assets and
its conduct of business (including, without limitation, (x) the rules,
regulations and requirements of FHA, VA, FNMA, HUD, FHLMC and GNMA, (y) any
applicable local, state or federal law or ordinance, and any regulations or
orders issued thereunder, governing or pertaining to fair housing or unlawful
discrimination in residential lending (including without limitation anti-
redlining, equal credit opportunity, and fair credit reporting), truth-in-
lending, real estate settlement procedures, adjustable rate mortgages,
adjustable rate mortgage disclosures or consumer credit (including without
limitation the federal Consumer Credit Protection Act, the federal Truth-in-
Lending Act and Regulation Z thereunder, the federal Real Estate Settlement
Procedures Act of 1974 and Regulation X thereunder, and the federal Equal
Credit Opportunity Act and Regulation B thereunder) or with respect to the
Flood Disaster Protection Act and (z) all applicable usury and interest
limitations laws). Without limiting the generality of the foregoing, except as
set forth in Section 4.26(a) of the Disclosure Schedule, each of the Company
and each such Company Subsidiary has been and is in compliance in all material
respects with all servicer and other requirements of the FHA, VA, FNMA, FHLMC,
GNMA, Investors and any Insurer (including, without limitation, any applicable
net worth requirements) which are applicable to it, and all applicable
underwriting standards of such Agencies, Investors or Insurers, and each
correspondent or broker from whom the Company or a Company Subsidiary has
purchased FHA Loans or VA Loans had all FHA and VA approvals necessary to
enable it to take applications and close FHA Loans and/or VA Loans.
(b) Except as set forth in Section 4.26(b) of the Disclosure Schedule, the
Company and each Company Subsidiary, as the case may be, has timely filed, or
will have timely filed by the Effective Time, all reports required to be filed
by any Agency, Investor or Insurer or by any federal, state or municipal law,
regulation or ordinance. Except as set forth in Section 4.26(b) of the
Disclosure Schedule, neither the Company nor any Company Subsidiary has done or
failed to do, or has caused to be done or omitted to be done, any act, the
effect of which would operate to invalidate or materially impair (i) any
approvals of the FHA, VA, FNMA, FHLMC, GNMA, HUD or any Investor, (ii) any FHA
insurance or commitment of the FHA to insure, (iii) any VA guarantee or
commitment of the VA to guarantee, (iv) any private mortgage insurance or
commitment of any private mortgage insurer to insure, (v) any title insurance
policy, (vi) any hazard insurance policy, (vii) any flood insurance policy
required by the National Flood Insurance Act of 1968, as amended, (viii) any
fidelity bond, direct surety bond, or errors and omissions insurance policy
required by HUD, GNMA, FNMA, FHA, FHLMC, VA or private mortgage insurers, (ix)
any surety or guaranty agreement or (x) any guaranty issued by GNMA to the
Company or any Company Subsidiary respecting mortgage-backed securities issued
or serviced by the Company or any Company Subsidiary and other like guaranties.
(c) Except as set forth in Section 4.26(c) of the Disclosure Schedule, since
September 30, 1991, no Agency, Investor or Insurer has (y) claimed that the
Company or any Company Subsidiary has violated or not complied with the
applicable underwriting standards with respect to mortgage loans sold by the
Company or any Company Subsidiary to an Investor or (z) imposed restrictions on
the activities (including commitment authority) of the Company or any Company
Subsidiary. To the best knowledge of the Company, as of the date of this
Agreement, there exist no facts or circumstances which would entitle an
Investor or other Person to demand repurchase of a Mortgage Loan, Servicing
Released Loan or Servicing Sale Loan or which would entitle an Insurer to
demand indemnification from the Company or any Company Subsidiary, to cancel
any mortgage insurance held for any such Subsidiary's benefit or to reduce any
mortgage insurance benefits
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payable to the Company or any such Subsidiary, or would lead GNMA to require a
letter of credit from the Company or any Company Subsidiary.
4.27 Custodial Accounts. Each of the Company and its Subsidiaries so required
has full power and authority to maintain escrow accounts ("Custodial Accounts")
for certain of the Mortgage Loans, has established Custodial Accounts for all
escrow deposits relating to Servicing Rights, and is the lawful fiduciary of
all Custodial Accounts related to the Mortgage Loans. Such Custodial Accounts
comply in all material respects with (i) all applicable Regulations (including
without limitation Regulations governing the appropriate identification of such
accounts and the calculation of the amount of the monthly payments for deposit
into Custodial Accounts that mortgagors are required to make) and (ii) any
terms of the Mortgage Loans (and Mortgage Servicing Agreements) relating
thereto, and all such Custodial Accounts have been maintained in all material
respects in accordance with usual and customary industry practice. The
Custodial Accounts contain the amounts shown in the records of the Company or
the appropriate Company Subsidiary, which amounts represent all monies received
or advanced by the Company or such Company Subsidiary as required by the
applicable Mortgage Servicing Agreements, less amounts remitted by or on behalf
of the Company or such Company Subsidiary pursuant to applicable Mortgage
Servicing Agreements, except for checks in process. Except as to payments that
are past due under the terms of the applicable Loan Documents, all payments of
principal and interest due and payable on the Mortgage Loans and all Custodial
Account deposits for taxes, assessments, ground rents and fire or hazard
insurance have been credited to, and are on deposit in, the appropriate
Custodial Accounts. The Custodial Accounts do not have any material funding
deficiency. Except as set forth in Section 4.27 of the Disclosure Schedule, the
escrow analysis with respect to each Mortgage Loan has been completed for the
most recent required date under applicable Regulations. Notification to the
mortgagor of all payment adjustments resulting from such escrow analysis,
annual statements of taxes and interest paid by the mortgagor and any other
statement required by all applicable Regulations has been mailed by the Company
or the appropriate Company Subsidiary or, to the Company's and such
Subsidiary's knowledge, by the applicable servicer with respect to Master
Serviced Loans. To the extent required by applicable Regulations, funds have
been advanced by the Company or the appropriate Company Subsidiary or each
servicer, as applicable, to each Custodial Account as necessary to timely make
all scheduled escrow disbursements. As of the date of this Agreement, except as
required by applicable Regulations, neither the Company nor any Company
Subsidiary is required to pay interest on the Custodial Accounts. Subject to
and in accordance with the applicable requirements pertaining generally to the
type, size or capitalization of depository institutions qualified to hold such
balances, of Investors, Insurers, Agencies or other Governmental Entities
having jurisdiction, the Company and each of its Subsidiaries has the right and
power to determine the financial institution in which the Custodial Accounts
are held.
4.28 Inquiries. Section 4.28 of the Disclosure Schedule contains a true and
correct list of all of the audits, investigations, complaints and inquiries of
the Company or any of its Subsidiaries by any Agency, Investor or private
mortgage insurer or HUD commenced since September 30, 1991, the result of which
audits and investigations claimed a material failure to comply with applicable
Regulations and resulted in (i) a repurchase of Mortgage Loans, Servicing
Released Loans or related mortgage properties by the Company or any Company
Subsidiary, (ii) indemnification by the Company or any Company Subsidiary in
connection with Mortgage Loans, Servicing Released Loans or related mortgage
properties, (iii) rescission of an insurance or guaranty contract or agreement
or (iv) payment of a penalty to an Agency, HUD, an Investor or Insurer. Except
for customary ongoing quality control reviews, no such audit or investigation
is pending or, to the best knowledge of the Company, threatened. The Company
has made available to Parent copies of all written reports, letters and
materials received or sent by the Company or a Company Subsidiary in connection
with such audits, investigations, complaints and inquiries.
4.29 Advances. Except as set forth in Section 4.29 of the Disclosure
Schedule, there are no pooling, participation, servicing or other agreements to
which the Company or any of its Subsidiaries is a party which obligate it to
make advances with respect to defaulted or delinquent Mortgage Loans, other
than as provided in GNMA, FNMA or FHLMC pooling and servicing agreements. Any
Advances are valid and subsisting
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amounts owing to the Company or one of its Subsidiaries, subject to the terms
of the applicable Mortgage Servicing Agreement, are carried on the books of the
Company at values determined in accordance with GAAP and are not subject to
setoffs or claims of the account debtor (other than those already accounted
for) arising from acts or omissions of the Company or any of its Subsidiaries
nor, to the knowledge of the Company, is any Investor insolvent or otherwise
unable to repay any Advance as required by the pertinent Mortgage Servicing
Agreement. Section 4.29 of the Disclosure Schedule accurately summarizes the
Advances outstanding as of the date hereof. As used herein the term "Advances"
shall mean amounts that, as of the Closing Date, have been advanced by the
Company or any of its Subsidiaries in connection with servicing Mortgage Loans
(including, without limitation, principal, interest, taxes and insurance
premiums) and which are required or permitted to be paid by the Company or any
of its Subsidiaries as the servicer of Mortgage Loans pursuant to applicable
Investor requirements and the terms of the applicable Mortgage Servicing
Agreements.
4.30 Pool Certification. Each Mortgage Loan included in a Pool meets all
eligibility requirements for inclusion in such Pool, in accordance with all
applicable standards of eligibility for loan pooling. The Loan Documents for
each Mortgage Loan contain or will contain, within the period required by
applicable Investor Regulations, all items required by applicable Investor
Regulations for the certification of Pools by the appropriate Investor, and
such Pools will be in compliance with all applicable Investor requirements and
guidelines, within the period required by applicable Investor Regulations.
Except as set forth in Section 4.30 of the Disclosure Schedule, all Pools
relating to the Mortgage Loans have been or will be, within the period required
by applicable Investor Regulations, certified, finally certified and
recertified (if required) in accordance with applicable Investor Regulations,
and the securities backed by such Pools have been issued on uniform documents,
promulgated in the applicable Investor guide without any material deviations
therefrom. All Pools relating to the Mortgage Loans are or will be, within the
period required by applicable Investor regulations, eligible for
recertification by the appropriate custodian, and the Company will be
responsible for curing any deficiencies that must be cured in order to obtain
such recertification. The principal balance outstanding and owing on the
Mortgage Loans in each Pool equals or exceeds the amount owing to the
corresponding security holder of such Pool. To the extent that any Pools
relating to Mortgage Loans are not eligible for final certification within the
period required by applicable Investor regulations, the Company shall promptly
take such action as is necessary to cure such deficiency and cause such Pools
to be certified. No Mortgage Loan has been bought out of a Pool without
approval of the appropriate Investor. Each Mortgage Loan included in a Pool
satisfied the requirements of Section 3(a)(41)(A)(i) and (ii) of the Securities
Exchange Act of 1934, as amended, so that interests in such Pools constitute
"mortgage related securities" under Section 3(a)(41) of such Act.
4.31 Environmental Protection.
(a) Compliance with Environmental Laws. None of the Company, the Company's
Subsidiaries or, to the best of the Company's knowledge, any Designated
Property (as defined in Section 4.31(d) below) is or has been in violation of
any federal, state or local law, ordinance or regulation concerning industrial
hygiene or environmental conditions, including, but not limited to, soil and
groundwater conditions ("Environmental Laws").
(b) Reporting Requirement. Neither the Company nor any of the Company's
Subsidiaries has reported any, or has had knowledge of any circumstances giving
rise to any reporting requirement under applicable Environmental Laws as to
any, spills or releases of any Hazardous Material with respect to said
Designated Properties, nor have the Company or any of its Subsidiaries received
any notices of spills or releases of Hazardous Materials with respect thereto.
(c) Proceedings. There is no proceeding or investigation pending or, to the
best knowledge of the Company, threatened by any Governmental Entity or other
person with respect to the presence of Hazardous Material (as defined in
Section 4.31(d) below) on the Designated Properties or the migration thereof
from or to other property. Neither the Company nor any of its Subsidiaries has
ever been required by any
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Governmental Entity to treat, cleanup, or otherwise dispose, remove or
neutralize any Hazardous Material from or on any Designated Property.
(d) Hazardous Materials. To the best of the Company's knowledge, neither the
Company nor any current or former Subsidiary of the Company (no representation
is made as to former Subsidiaries for the period of time after they ceased to
be Subsidiaries of the Company) has engaged in the generation, use,
manufacture, treatment, transportation, storage in tanks or otherwise, or
disposal of Hazardous Material on or from any Designated Property. To the best
knowledge of the Company, no Person (other than the Company or any current or
former Subsidiary of the Company) has engaged in the generation, use,
manufacture, treatment, transportation, storage in tanks or otherwise, or
disposal of Hazardous Material on or from any Designated Property. To the best
of the Company's knowledge, no (i) presence, release, threatened release,
discharge, spillage or migration of Hazardous Material, (ii) condition relating
to Hazardous Materials that has resulted or could result in any use, ownership
or transfer restriction, or (iii) condition of actual or potential nuisance or
other condition relating to Hazardous Materials that could give rise to
liability has occurred on or from any Designated Property. To the best of the
Company's knowledge, no condition exists or has existed that would be
reasonably likely to give rise to any suit, claim, action, proceeding or
investigation by any Person or Governmental Entity against the Company, any of
its Subsidiaries or any Designated Property as a result of or in connection
with any (a) of the matters referred to in clause (i), (ii) or (iii) of the
immediately preceding sentence, (b) other activities involving Hazardous
Material, (c) failure to obtain any required permits or approvals of any
Governmental Entity relating to environmental matters, (d) violation of any
terms or conditions of such permits, or (e) other violation of applicable
Environmental Laws. "Hazardous Material" shall mean any substance, chemical,
waste or other material which is listed, defined or identified as hazardous,
toxic or dangerous or otherwise regulated under any applicable Environmental
Law as of the Closing Date; as well as any petroleum, petroleum product or by-
product, crude oil, natural gas, natural gas liquids, liquefied natural gas, or
synthetic gas usable for fuel, and "source," "special nuclear," and "by-
product" material as defined in the Atomic Energy Act of 1954, 42 U.S.C. (S)(S)
2011 et. seq., provided, however, that the term does not include any substance,
chemical, waste or other material contained in common household or residential
waste. "Designated Property" shall mean any real property (w) which the Company
or any current Subsidiary of the Company now owns or leases or owned or leased
at any time prior to the date of this Agreement, (x) which any former
Subsidiary of the Company owned or leased at any time when such former
Subsidiary was a Subsidiary of the Company, (y) in which the Company or any
current Subsidiary now holds or previously held any security interest, mortgage
or other lien or interest or (z) in which any former Subsidiary held a security
interest, mortgage or other lien or interest at any time when such former
Subsidiary was a Subsidiary of the Company.
(e) Condition of Property. To the best of the Company's knowledge, there are
no substances or conditions in or on the Designated Property which may support
a claim or cause of action under RCRA, CERCLA, or any other applicable
Environmental Law.
4.32 Intellectual Property. Section 4.32 of the Disclosure Schedule sets
forth a list of all trademarks, service marks, trademark and service mark
applications, trade names, copyrights and licenses presently owned or held by
the Company or any of its Subsidiaries. The Company and each of its
Subsidiaries has the right to use and continue to use such trademarks, service
marks and trade names in the operation of their businesses. Neither the Company
nor any of its Subsidiaries has received notice that it is infringing or
violating any patent, copyright, trademark, service mark, label filing or trade
name owned or otherwise held by any other party, nor has the Company or any of
its Subsidiaries used any confidential information or trade secrets owned or
otherwise held by any other party, unless a valid license for such use is held
by the Company or its Subsidiaries. Except as set forth in Section 4.32 of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries is
engaging, nor has it been charged with engaging, in any kind of unfair or
unlawful competition.
4.33 Servicing Sales. Attached to Section 4.33 of the Company Disclosure
Memorandum are true and correct copies of all agreements between the Company or
any of its Subsidiaries and an Investor or other
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Person with respect to Servicing Released Loans and Servicing Sale Loans.
Except as set forth in Section 4.33 of the Disclosure Schedule, to the best of
the Company's knowledge, there is no breach or violation of any representation,
warranty, covenant or indemnity for which the Company or any of its
Subsidiaries is directly or indirectly liable, made or given to any Investor or
other Person in connection with the transfer of any Servicing Released Loan or
Servicing Sale Loan to such Investor or other Person. To the best of the
Company's knowledge, each material representation and warranty made by the
Company or any of its Subsidiaries to any Person with respect to any Servicing
Released Loan or Servicing Sale Loan in connection with the sale of such
Servicing Released Loan or Servicing Sale Loan was and is accurate and complete
in all respects. Each Servicing Released Loan and Servicing Sale Loan complied,
at the time of sale, in all material respects with all Regulations.
4.34 Physical Damage. Except as set forth in Section 4.34 of the Disclosure
Schedule, there exists no physical damage to the Collateral or any REO from
fire, flood, windstorm, earthquake, tornado, hurricane or any other similar
casualty, which physical damage is not adequately insured against and would
cause any Mortgage Loan to become delinquent or materially adversely affect the
value or marketability of any Mortgage Loan, Servicing Right, REO or
Collateral.
4.35 Payment of Taxes, Insurance Premiums. Except as set forth in Section
4.35 of the Disclosure Schedule, the responsibilities of the Company, its
Subsidiaries and all prior servicers and originators of the Mortgage Loans with
respect to all applicable Taxes (including any tax reporting for any period
ending prior to the Closing), special assessments, ground rents, flood
insurance premiums, hazard insurance premiums and mortgage insurance premiums
that are related to the Mortgage Loans and REO have been met.
4.36 Tax Identification. Except as set forth in Section 4.36 of the
Disclosure Schedule, all tax identifications contained in the Loan Documents
are correct and complete in all respects, and property descriptions contained
in any Loan Document are legally sufficient.
4.37 Payoff. Except as set forth in Section 4.37 of the Disclosure Schedule,
all payoff and assumption statements with respect to each Mortgage Loan
provided by the Company or any of its Subsidiaries to borrowers or their agents
were, at the time they were provided, complete and accurate. All such documents
provided by the Company or its Subsidiary, as the case may be, were delivered,
and any reconveyances were processed, in a manner and within the timeframes
prescribed by applicable Regulations and Loan Documents.
4.38 Marketability of Mortgage Loans. Except as set forth in Section 4.38 of
the Disclosure Schedule, each Mortgage Loan owned by the Company or any of its
Subsidiaries is either a Mortgage Loan which is or is eligible to be an FHA
Loan or a VA Loan or which is or is eligible to be sold to FNMA or FHLMC, or is
or will be in compliance with secondary mortgage market standards and salable
in the ordinary course of business.
4.39 Labor and Employment Matters. Except to the extent set forth in Section
4.39 of the Disclosure Schedule:
(a) The Company and its Subsidiaries are and have been in compliance in all
material respects with all applicable laws of the United States or of any state
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, the Immigration
Reform and Control Act ("IRCA"), the Worker Adjustment and Retraining
Notification Act ("WARN"), any laws respecting employment discrimination,
disability rights or benefits, equal opportunity, plant closure issues,
affirmative action, workers' compensation, employee benefits, severance
payments, labor relations, employee leave issues, wage and hour standards,
occupational safety and health requirements and unemployment insurance and
related matters, and are not engaged in and have not engaged in any unfair
labor practice;
(b) there is no labor strike, dispute, slowdown or stoppage actually pending
or, to the best knowledge of the Company, threatened against or directly
affecting the Company or any of its Subsidiaries;
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(c) no union representation question or union organizational activity exists
respecting the employees of the Company or any of its Subsidiaries;
(d) no collective bargaining agreement exists which is binding on the Company
or any of its Subsidiaries nor has the Company or any of its Subsidiaries been
a party to any collective bargaining agreement within the last ten (10) years;
(e) neither the Company nor any of its Subsidiaries is [materially]
delinquent in payments to any of its officers, directors, employees or agents
for any wages, salaries, commissions, bonuses or other direct compensation for
any services performed by them or amounts required to be reimbursed to such
officers, directors, employees or agents; and
(f) in the event of termination of the employment of any of said officers,
directors, employees or agents for any reason, neither the Surviving Company,
any of its Subsidiaries, nor Parent will, pursuant to any agreement or by
reason of anything done prior to the Closing Date by the Company or any of its
Subsidiaries or predecessors, be liable to any of said officers, directors,
employees or agents for so-called "severance pay" or any other benefits or
similar payments, including without limitation, postemployment health care
(other than pursuant to COBRA) or insurance benefits.
(g) Except as listed in Section 4.39 of the Disclosure Schedule, all
officers, directors, employees and consultants of the Company and its
Subsidiaries are employed at will.
4.40 Questionable Transactions. To the best knowledge of the Company, no
officer, director, employee, agent or other representative of the Company or
any of its Subsidiaries or any person acting on their behalf has made, directly
or indirectly, any bribes, kickbacks, or political contributions with the
Company or its Subsidiaries' funds, payments from the Company's or its
Subsidiaries' funds not recorded on the Company's or its Subsidiaries' books
and records, payments from the Company or its Subsidiaries' funds to
governmental officials in their individual capacities or illegal payments from
the Company or its Subsidiaries' funds to obtain or retain business either
within the United States or abroad.
4.41 Affiliated Party Transactions. Except as set forth in Section 4.41 of
the Disclosure Schedule, no officer, director or, to the best knowledge of the
Company, employee of the Company or any of its Subsidiaries or holder of more
than 5% of the Company Common Stock known to the Company, or any of their
respective family members or Affiliates (i) has any ownership interest directly
or indirectly, in any competitor, supplier or customer of the Company or any of
its Subsidiaries; (ii) has any outstanding loan or other extension of credit to
or from the Company or any of its Subsidiaries; (iii) is a party to, or has any
interest in, any contract or agreement with the Company or any of its
Subsidiaries; or (iv) has engaged in any transaction with the Company or any of
its Subsidiaries. Attached to Section 4.41 of the Disclosure Schedule are true
and correct copies of each such written agreement described in clauses (ii)
through (iv) of the preceding sentence.
4.42 Supplements and Amendments. All information delivered to the Parent as
part of the Disclosure Schedule or any supplement or amendment thereof pursuant
to Section 7.11 is or will be true and correct as of the date when delivered.
ARTICLE V
Representations and Warranties of Parent
Parent hereby represents and warrants to the Company as follows:
5.1 Corporate Organization. (a) Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Parent has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being
conducted, and is duly
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licensed or qualified to do business in each jurisdiction in which the nature
of the business conducted by it or the character or location of the properties
and assets owned or leased by it makes such licensing or qualification
necessary, except where the failure to be so licensed or qualified has not had
and could not reasonably be expected to have a Material Adverse Effect on
Parent. Parent is duly registered as a bank holding company under the BHC Act.
The Certificate of Incorporation and By-Laws of Parent, copies of which have
previously been made available to the Company, are true, complete and correct
copies of such documents as in effect as of the date of this Agreement.
(b) Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York.
(c) BAFSB is a federal savings bank duly organized and in good standing under
the laws of the United States.
(d) The certificate of incorporation and by-laws of Merger Sub, copies of
which have previously been made available to the Company, are true, complete
and correct copies of such documents as in effect as of the date of this
Agreement.
5.2 Capitalization. The authorized capital stock of Parent consists of
700,000,000 shares of Parent Common Stock and 70,000,000 shares of preferred
stock ("Parent Preferred Stock"). At the close of business on September 1,
1994, there were 369,784,606 shares of Parent Common Stock and 50,185,457
shares of Parent Preferred Stock issued and outstanding, and 688,379 shares of
Parent Common Stock held in Parent's treasury. All of the issued and
outstanding shares of Parent Common Stock and Parent Preferred Stock have been
duly authorized and validly issued and are fully paid, nonassessable and free
of preemptive rights, with no personal liability attaching to the ownership
thereof. The authorized capital stock of Merger Sub consists of 1,000 shares of
common stock, par value $0.01 per share ("Merger Sub Common Stock"), 100 of
which are issued and outstanding and owned by BAFSB free and clear of all
liens, charges, encumbrances and security interests whatsoever, and all of such
shares are duly authorized and validly issued and fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to ownership
thereof. The shares of Parent Common Stock to be issued pursuant to the Merger
will be duly authorized and validly issued and, at the Effective Time, all such
shares will be fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof.
5.3 Authority; No Violation. (a) Parent has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of Parent, and no other corporate
proceedings on the part of Parent are necessary to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Parent and (assuming due authorization, execution and delivery by
the Company) constitutes a valid and binding obligation of Parent, enforceable
against Parent in accordance with its terms, except as enforcement may be
limited by general principles of equity whether applied in a court of law or a
court of equity and by bankruptcy, insolvency and similar law affecting
creditors' rights and remedies generally.
(b) Merger Sub has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Merger Sub. This Agreement has been approved by BAFSB as
the sole stockholder of Merger Sub, and by the Board of Directors of Merger
Sub, and no other corporate proceedings on the part of Merger Sub are necessary
to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by Merger Sub and (assuming due
authorization, execution and delivery by the Company) constitutes a valid and
binding obligation of Merger Sub, enforceable against Merger Sub in accordance
with its terms, except as enforcement may be limited by general principles of
equity whether
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applied in a court of law or a court of equity and by bankruptcy, insolvency
and similar laws affecting creditors' rights and remedies generally.
(c) BAFSB has full corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of BAFSB, and no other corporate proceedings on the part of BAFSB are
necessary to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by BAFSB and (assuming due
authorization, execution and delivery by the Company) constitutes a valid and
binding obligation of BAFSB, enforceable against BAFSB in accordance with its
terms, except as enforcement may be limited by general principles of equity
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(d) Neither the execution and delivery of this Agreement by Parent nor the
consummation by Parent, BAFSB or Merger Sub of the transactions contemplated
hereby, nor compliance by Parent, BAFSB or Merger Sub with any of the terms or
provisions hereof, will (i) violate any provision of the Certificate of
Incorporation or By-Laws of Parent or the Certificate of Incorporation, By-Laws
or other governing documents of any of its Subsidiaries (including without
limitation BAFSB and Merger Sub) or (ii) assuming that the consents and
approvals referred to in Section 5.4 are duly obtained, (x) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to Parent or any of its Subsidiaries or any of their
respective properties or assets, or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Encumbrance upon any of the respective properties
or assets of Parent or any of its Subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Parent or
any of its Subsidiaries is a party, or by which they or any of their respective
properties or assets may be bound or affected, except for such violations,
conflicts, breaches or defaults which either individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on Parent.
5.4 Consents and Approvals. Except for (i) the filing of applications and
notices, as applicable, with the Federal Reserve Board under the BHC Act and
the FRA and approval of such applications and notices, (ii) the filing of
applications and notices, as applicable, with the OTS under the HOLA and
approval of such applications (including any required in connection with the
delivery by BAFSB of shares of Parent Common Stock pursuant to Articles II and
III hereof), (iii) the State Banking Approvals, (iv) the filing with the SEC of
the Proxy Statement and the S-4, (v) the filing of the Certificate of Merger
with the Department, (vi) such filings and approvals as are required to be made
or obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of the shares of Parent Common Stock pursuant to
this Agreement, and (vii) the approval of each of FNMA, FHLMC, GNMA, FHA, HUD
and VA and any applicable State Agency, no consents or approvals of or filings
or registrations with any Governmental Entity or with any third party are
necessary in connection with the execution and delivery by Parent, BAFSB and
Merger Sub of this Agreement or the consummation by Parent, BAFSB and Merger
Sub of the Merger and the other transactions contemplated hereby, except for
such third party consents the failure of which to obtain could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Parent or materially delay the consummation of the
transactions contemplated hereby.
5.5 Financial Statements. Parent has previously made available to the Company
copies of (a) the consolidated balance sheets of Parent and its Subsidiaries as
of December 31 for the fiscal years 1992 and 1993 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
fiscal years 1991 through 1993, inclusive, as reported in Parent's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 and (b) the
unaudited consolidated balance sheet of Parent and its Subsidiaries as of June
30, 1994 and June 30, 1993 and the related unaudited consolidated statements of
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income, changes in shareholders' equity and cash flows for the three-month
periods then ended as reported in Parent's Quarterly Report on Form 10-Q for
the period ended June 30, 1994 filed with the SEC under the Exchange Act. The
December 31, 1993 consolidated balance sheet of Parent (including the related
notes, where applicable) fairly presents the consolidated financial position of
Parent and its Subsidiaries as of the date thereof, and the other financial
statements referred to in this Section 5.5 (including the related notes, where
applicable) fairly present and the financial statements referred to in Section
7.2(d) hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and changes in shareholders' equity and
consolidated financial position of Parent and its Subsidiaries for the
respective fiscal periods or as of the respective dates therein set forth; each
of such statements (including the related notes, where applicable) complies,
and the financial statements referred to in Section 7.2(d) hereof will comply,
in all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto; and each of
such statements (including the related notes, where applicable) has been, and
the financial statements referred to in Section 7.2(d) hereof will be, prepared
in accordance with GAAP consistently applied during the periods involved,
except as indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q.
5.6 Broker's Fees. Neither Parent, Merger Sub nor any Parent Subsidiary, nor
any of their respective officers or directors, has employed any broker or
finder or incurred any liability for any broker's fees, commissions or finder's
fees in connection with any of the transactions contemplated by this Agreement,
except that Parent has engaged, and will pay a financial advisory service fee
to Salomon Brothers Inc.
5.7 Absence of Certain Changes or Events. Except as disclosed in any Parent
Report filed prior to the date of this Agreement, since June 30, 1994, there
has been no change in the business of Parent or any of its Subsidiaries, or any
occurrence, development or event of any nature, which has had, or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent.
5.8 Legal Proceedings. As of the date hereof, there is no suit, action or
proceeding pending or, to the knowledge of Parent, threatened, against or
affecting Parent or any of its Subsidiaries which is required to be disclosed
by Parent in any Parent Report pursuant to Item 103 of Regulation S-K of the
SEC, which has not been so disclosed.
5.9 SEC Reports. Since January 1, 1992, no report, final registration
statement or definitive proxy statement filed by the Parent with the SEC under
the Securities Act or the Exchange Act (the "Parent Reports") and no
communications mailed by Parent to its stockholders contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading, except that
information as of a later date shall be deemed to modify information as of an
earlier date. Parent has timely filed all Parent Reports and other documents
required to be filed by it under the Securities Act and the Exchange Act, and,
as of their respective dates, all Parent Reports complied in all material
respects with the published rules and regulations of the SEC with respect
thereto.
5.10 Parent Information. The information relating to Parent and its
Subsidiaries to be contained in the Proxy Statement and the S-4, or in any
other document filed with any other regulatory agency in connection herewith,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading. The S-4 (except for such
portions thereof that relate to the Company or any of its Subsidiaries) will
comply in all material respects with the provisions of the Securities Act and
the Exchange Act and the rules and regulations thereunder.
5.11 Ownership of Company Common Stock; Affiliates and Associates.
(a) Other than pursuant to the Kaufman Agreements, neither Parent nor any of
its affiliates or associates (as such terms are defined under the Exchange
Act), (i) beneficially owns, directly or indirectly, or (ii) is a
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party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, any shares of capital
stock of the Company (other than shares of Company Common Stock held directly
or indirectly in trust accounts, managed accounts and the like or otherwise
held in a fiduciary capacity that are beneficially owned by third parties and
other than any shares of Company Common Stock held by Parent or any of its
Subsidiaries in respect of a debt previously contracted); and
(b) Other than pursuant to the Kaufman Agreements, neither Parent nor any of
its Subsidiaries is an "affiliate" (as such term is defined in Section
912(a)(1) of the NYBCL) or an "associate" (as such term is defined in Section
912(a)(3) of the NYBCL) of the Company.
ARTICLE VI
Covenants Relating to Conduct of Business
6.1 Covenants of the Company. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement or with the prior written consent
of Parent, the Company and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with past practice. The Company
will use its best efforts to (x) preserve its business organization and that of
its Subsidiaries intact, (y) keep available to itself and Parent the present
services of the employees of the Company and its Subsidiaries and (z) preserve
for itself and Parent the goodwill of the customers of the Company and its
Subsidiaries and others with whom business relationships exist. Without
limiting the generality of the foregoing, and except as set forth in the
Disclosure Schedule or as otherwise contemplated by this Agreement or consented
to in writing by Parent, the Company shall not, and shall not permit any of its
Subsidiaries to:
(a) solely in the case of the Company, declare or pay any dividends on, or
make other distributions in respect of, any of its capital stock;
(b) (i) split, combine or reclassify any shares of its capital stock or issue
or authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock except upon the
exercise or fulfillment of rights or options issued or existing pursuant to the
Company Option Plans to the extent outstanding and in existence on the date of
this Agreement and listed in Section 4.2 of the Disclosure Schedule, or (ii)
repurchase, redeem or otherwise acquire any shares of the capital stock of the
Company or any Company Subsidiary, or any securities convertible into or
exercisable for any shares of the capital stock of the Company or any Company
Subsidiary;
(c) issue, deliver or sell, or authorize or propose the issuance, delivery or
sale of, any shares of its capital stock or any securities convertible into or
exercisable for, or any rights, warrants or options to acquire, any such
shares, or enter into any agreement with respect to any of the foregoing, other
than the issuance of Company Common Stock pursuant to stock options granted
pursuant to the Company Option Plans prior to the date of this Agreement and
listed in Section 4.2 of the Disclosure Schedule, in each case in accordance
with their present terms;
(d) amend its Certificate of Incorporation, By-Laws or other similar
governing documents;
(e) authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative or agent retained by it or any of its Subsidiaries to directly
or indirectly solicit, initiate or encourage or take any other action to
facilitate any inquiries relating to, or the making of any proposal which
constitutes, or which may reasonably be expected to lead to, a "takeover
proposal" (as defined below), or, except to the extent legally required for the
discharge of the fiduciary duties of the Board of Directors of the Company as
reasonably determined by the Board of Directors after consultation with the
Company's outside nationally recognized counsel, recommend or endorse any
takeover proposal, or participate in any discussions or negotiations, or
provide any third party with any
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nonpublic information, relating to any such inquiry or proposal or otherwise
facilitate any effort or attempt to make or implement a takeover proposal;
provided, however, that the Company may communicate the factual aspects of any
such takeover proposal to its stockholders if, in the reasonable judgment of
the Company's Board of Directors after consultation with the Company's outside
national recognized counsel, such communication is required under applicable
law. As used in this Agreement, "takeover proposal" shall mean any tender or
exchange offer, proposal for a merger, consolidation or other business
combination involving the Company or any Subsidiary of the Company or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, the Company or any Subsidiary of the
Company other than the transactions contemplated or permitted by this
Agreement;
(f) make any capital expenditures other than expenditures of $50,000 per
occurrence and $250,000 in the aggregate in the ordinary course of business or
as necessary to maintain existing assets in good repair;
(g) other than the construction/permanent loan program recently initiated by
Mortgage Bank, enter into any new line of business;
(h) acquire or agree to acquire, by merging or consolidating with, or by
purchasing an equity interest in or a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or otherwise acquire any
assets, other than in connection with foreclosures, settlements in lieu of
foreclosure or troubled loan or debt restructurings in the ordinary course of
business, which would be material, individually or in the aggregate, to the
Company;
(i) take any action that is intended or may reasonably be expected to result
in any of its representations and warranties set forth in this Agreement being
or becoming untrue in any material respect, or in a violation of any provision
of this Agreement, except, in every case, as may be required by applicable law;
(j) change its methods of accounting in effect at May 31, 1994, except as
required by mandatory changes in GAAP as concurred in by the Company's
independent auditors;
(k) (i) except as required by applicable law or to maintain qualification
pursuant to the Code, adopt, amend, renew or terminate any Plan or any
agreement, arrangement, plan or policy between the Company or any Subsidiary of
the Company and one or more of its current or former directors, officers or
employees or (ii) except for normal periodic increases in the ordinary course
of business consistent with past practice or except as required by applicable
law, increase in any manner the rate of compensation or fringe benefits of any
director, officer or employee or pay any benefit not required by any plan or
agreement as in effect as of the date of this Agreement (including, without
limitation, the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units or performance units or shares) or
(iii) enter into, modify or renew any contract, agreement, commitment or
arrangement providing for the payment to any director, officer or employee of
such party of compensation, severance or benefits contingent, or the terms of
which are materially altered, upon the occurrence of any of the transactions
contemplated by this Agreement; or (iv) enter into any employment, consulting,
non-competition, retirement, parachute or indemnification agreement with any
officer, director, employee or agent of the company or any of its Subsidiaries;
(l) except as required by applicable law, take or cause to be taken any
action which would prevent the transactions contemplated hereby from qualifying
as a tax free reorganization under Section 368 of the Code or from being
accounted for as a pooling of interests under Opinion No. 16 of the Accounting
Principles Board;
(m) other than in the ordinary course of business consistent with past
practice, sell, lease, encumber, assign or otherwise dispose of, or agree to
sell, lease, encumber, assign or otherwise dispose of, or grant any mortgage or
security interest in, or make any pledge of, or permit any lien or encumbrance
to be placed on, any of its assets, properties or other rights or agreements;
provided, however, that nothing contained herein shall permit the Company or
any of its Subsidiaries to sell or acquire Servicing Rights (other than the
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acquisition of Servicing Rights in connection with the origination of mortgage
loans) or to sell any Mortgage Loan on a servicing released basis; provided
further that notwithstanding anything contained in this Section 6.1, the
Company and its Subsidiaries may, without Parent's consent, (i) sell Investment
Loans and (ii) sell Servicing Rights or Mortgage Loans on a servicing released
basis to Investors on a "flow" basis in the ordinary course of business under
Investor Agreements existing as of the date hereof, provided that the Company
shall and shall cause its Subsidiaries to first offer Parent the right to buy
such "flow" Servicing Rights or Mortgage Loans and shall cause its Subsidiaries
to, sell such Servicing Rights or Mortgage Loans to Parent if Parent offers
comparable or better terms than those offered by other prospective purchasers.
(n) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money, assume, guarantee, endorse
or otherwise as an accommodation become responsible for the obligations of any
other individual, corporation or other entity;
(o) commit any act or omission which constitutes a material breach or default
by the Company or any of its Subsidiaries under any Company Contract;
(p) create, renew, amend or terminate or give notice of a proposed renewal,
amendment or termination of, any Company Contract except that the Company may
renew contracts, agreements, leases or licenses in the ordinary course of
business;
(q) fail to pay and discharge any of its obligations, bills or other
liabilities as they become due, except to the extent that any such party is
disputing the amounts thereof in good faith; or
(r) except in response to competitive conditions in order to preserve the
value of its franchise or in compliance with Regulations, materially alter or
vary its methods or policies of (i) underwriting, pricing, originating,
warehousing, selling or servicing, or buying or selling rights to service,
mortgage loans, (ii) hedging (which term includes buying futures and forward
commitments from financial institutions) its mortgage loan positions or
commitments, and (iii) obtaining financing and credit;
(s) terminate any Mortgage Servicing Agreement, except for Mortgage Servicing
Agreements to which an Agency is not a party involving Mortgage Loans in the
aggregate not to exceed $50,000,000, that are terminated in the ordinary course
of business;
(t) enter into any Mortgage Servicing Agreement with respect to a Recourse
Loan;
(u) cancel any indebtedness or waive or compromise any rights having a value
to the Company or any of its Subsidiaries of $10,000 or more, other than in the
ordinary course of business;
(v) terminate, cancel or amend any insurance coverage maintained by the
Company or any of its Subsidiaries with respect to any assets of the Company or
any of its Subsidiaries which is not replaced by an adequate amount of
insurance coverage;
(w) settle pending or threatened litigation in an amount, for any individual
matter, exceeding $25,000;
(x) enter into any new mandatory Investor Commitments, except in amounts and
on terms consistent with past practices;
(y) enter into any Investor Commitment with any Person that is not an
Investor as of the date of this Agreement, other than Parent, any of its
Affiliates, D&N Bank, FSB, The Green Point Savings Bank, The Roslyn Savings
Bank, European American Bank, Barclays Bank, America Mortgage Corp., Commercial
Federal Mortgage Corporation, Sovereign Bank, FSB, and Flushing Savings Bank,
FSB;
(z) enter into any forward commitment with GNMA which will extend beyond the
Closing Date without Parent's consent as to the amount of such commitment based
on consultation between Parent and the
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Company with respect to the appropriate level of commitments to cover the
projected level of Mortgage Loan originations and pipeline loans based on the
business plans of the parties;
(aa) agree to do any of the foregoing.
6.2 Covenants of Parent. During the period from the date of this Agreement
and continuing until the Effective Time, except as expressly contemplated or
permitted by this Agreement or with the prior written consent of the Company,
Parent shall not, and shall not permit any of its Subsidiaries to, take any
action that is intended or may reasonably be expected to result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect, or in a violation of any provision of this
Agreement except, in every case, as may be required by applicable law.
ARTICLE VII
Additional Agreements
7.1 Regulatory Matters. (a) The Company and Parent shall promptly prepare and
file with the SEC the Proxy Statement, and Parent shall promptly prepare and
file with the SEC the S-4, in which the Proxy Statement will be included as a
prospectus. Each of Parent and the Company shall use all reasonable efforts to
have the S-4 declared effective under the Securities Act as promptly as
practicable after such filing, and the Company shall thereafter mail the Proxy
Statement to its stockholders. Parent shall also use reasonable efforts to
obtain all necessary state securities law or "Blue Sky" permits and approvals
required to carry out the transactions contemplated by this Agreement, and the
Company shall furnish all information concerning the Company and the holders of
Company Common Stock as may be reasonably requested in connection with any such
action.
(b) Promptly following the execution of this Agreement, Parent shall use all
reasonable efforts to file and obtain the filings and approvals identified in
clauses (i), (ii), (iii)(with respect to Parent), (vi) and (vii) of Section 5.4
and all consents required from Agencies in connection with the transactions
contemplated hereby.
(c) Promptly following the execution of this Agreement, the Company shall use
all reasonable efforts to file and obtain the filings and approvals identified
in Section 4.4 hereof (other than those identified in Section 7.1(b) above and
the State Banking Approvals), and to obtain (i) such other consents required
from any Investor or other Person (other than an Agency) to avoid a breach of,
default under, or right of termination of any Mortgage Servicing Agreement as a
result of the consummation of the transactions contemplated hereby, in form and
substance reasonably satisfactory to Parent; and (ii) all other consents,
approvals, waivers and other actions required from any Person in connection
with any Company Contracts or otherwise as a result of the consummation of the
transactions contemplated hereby, in form and substance reasonably satisfactory
to Parent.
(d) The parties hereto shall cooperate with each other and use their
reasonable efforts to promptly prepare, execute and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement. The parties hereto agree that they will consult with each other with
respect to the obtaining of all permits, consents, approvals and authorizations
of all third parties and Governmental Entities necessary or advisable to
consummate the transactions contemplated by this Agreement, and each party will
keep the other apprised of the status of matters relating to completion of the
transactions contemplated herein.
(e) Parent and the Company shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
stockholders and such other matters as may be
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reasonably necessary or advisable in connection with the Proxy Statement, the
S-4 or any other statement, filing, notice or application made by or on behalf
of Parent, the Company or any of their respective Subsidiaries to any
Governmental Entity in connection with the Merger and the other transactions
contemplated by this Agreement.
7.2 Access to Information.
(a) During the period from the date hereof to the Effective Time, the Company
and its Subsidiaries shall authorize and permit Parent and its representatives,
accountants and counsel to have full and complete access to all of the
properties, books, records, operating reports, audit reports, customer accounts
and records, any reports of Governmental Entities and responses thereto,
operating instructions and procedures (and all correspondence with Governmental
Entities), Tax Returns, Tax settlement letters, financial statements and other
financial information (including the work papers, information pertaining to
passed adjustments and other information supporting such work papers used to
audit the Financial Statements) and all other information with respect to the
business, affairs, financial condition, assets and liabilities of the Company
and its Subsidiaries, as Parent may from time to time request, to make copies
of such books, records and other documents and to discuss the business affairs,
condition (financial and otherwise), assets and liabilities of the Company and
its Subsidiaries, with such third persons, including, without limitation, their
directors, officers, employees, agents, accountants, attorneys, customers and
creditors, as Parent considers necessary or appropriate for the purposes of
familiarizing itself with the assets, liabilities, Mortgage Loans and business
and operations of the Company and its Subsidiaries, determining compliance with
any of the representations, warranties and covenants of the Company set forth
herein (including Section 7.16 hereof), and obtaining any necessary orders,
consents or approvals of the transactions contemplated by this Agreement. In
connection with such examination and access, Parent agrees to observe any
confidentiality agreements known to it between the Company or its Subsidiaries
and third parties related to such information. Parent shall also be authorized
and permitted with the written consent of the Company, which will not be
unreasonably withheld, to meet with the employees of the Company or any of its
Subsidiaries. The information and access contemplated by this Section 7.2 shall
be provided during normal business hours, upon reasonable written or oral
notice and in such manner as will not unreasonably interfere with the conduct
of the Company's or its Subsidiaries' businesses. Parent will hold all such
information in confidence to the extent required by, and in accordance with,
the provisions of the confidentiality agreement dated March 14, 1994, between
Parent and the Company.
(b) For purposes of Parent's investigation pursuant to this Section 7.2, the
Company and its Subsidiaries shall use their reasonable efforts to cause any
service bureau, accountant, loan correspondent, third party servicer or other
third party under contract to any of them to furnish, to Parent, and to its
authorized representatives, full access to such party's premises and all of its
books, records and properties, including, without limitation, all loan,
investment, regulatory, financial, accounting, real estate, tax and property
records and files relating to the operations of the Company and its
Subsidiaries including, without limitation, all files, computer records and
customer information necessary for the conversion after the Closing Date of all
accounts, products and operating systems of the Company and its Subsidiaries to
such systems as Parent may designate. The Company and its Subsidiaries shall
use their reasonable efforts to cause any service bureau, accountant, third
party servicer or other third party to provide adequate space and facilities
and the cooperation of its personnel, including, without limitation, copying
facilities, to the end that such examination shall be completed expeditiously,
completely and accurately. The Company and its Subsidiaries shall, upon
request, provide Parent, and its authorized representatives, with reasonable
access to any and all real and personal properties securing the Mortgage Loans,
to the extent legally permissible. Any such investigation or examination
pursuant to this Section 7.2, shall be at Parent's expense. Without limiting
any of the foregoing, Parent and its authorized representatives, shall be
specifically entitled to conduct (and the Company and its Subsidiaries shall
use their reasonable efforts to enable them to conduct) tests of any matters as
they deem appropriate, including environmental reviews, investigation and
testing as to the presence of Hazardous Materials in or on any property leased
by the Company or its Subsidiaries, or any property that secures any Mortgage
Loan, subject in each case to restrictions under applicable law.
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(c) During the period from the date hereof through the Effective Time, the
Company shall furnish to Parent (i) all reports filed by the Company or any
Subsidiary thereof with the SEC pursuant to the Securities Act or the Exchange
Act or any Governmental Entity promptly upon the filing thereof, (ii) a copy of
each federal income tax return filed by the Company or any Subsidiary with the
IRS and each state income tax or franchise tax return filed by the Company or
any Subsidiary with any state taxing authority and (iii) monthly and other
interim financial statements in the form prepared by the Company for its
internal use.
(d) During the period from the date hereof to the Effective Time, Parent will
afford the Company, and its accountants, counsel and other representatives,
reasonable access during normal business hours, to the properties, books,
contracts, tax returns, commitments and records of Parent and its Subsidiaries
and will furnish to the Company such information with respect to the assets and
business of Parent and its Subsidiaries as the Company may from time to time
reasonably request in connection with this Agreement and the transactions
contemplated hereby. During the period from the date hereof through the
Effective Time, Parent shall furnish to the Company copies of all Parent
Reports promptly following the filing thereof.
(e) Notwithstanding the foregoing provisions of this Section 7.2, neither
party shall be required to grant access or furnish information to the other
party to the extent that such access or the furnishing of such information is
prohibited by law. No investigation by the parties hereto made heretofore or
hereafter shall affect the representations and warranties of the parties which
are contained herein and each such representation and warranty shall survive
such investigation.
(f) All information furnished by Parent to the Company or its representatives
pursuant hereto shall be treated as the sole property of Parent and, if the
Merger shall not occur, the Company and its representatives shall return to
Parent all of such written information and all documents, notes, summaries or
other materials containing, reflecting or referring to, or derived from, such
information. The Company shall, and shall use its best efforts to cause its
representatives to, keep confidential all such information, and shall not
directly or indirectly use such information for any competitive or other
commercial purpose. The obligation to keep such information confidential shall
continue for five years from the date the proposed Merger is abandoned and
shall not apply to (i) any information which (x) was already in the Company's
possession prior to the disclosure thereof by Parent; (y) was then generally
known to the public; or (z) was disclosed to the Company by a third party not
bound by an obligation of confidentiality or (ii) disclosures made as required
by law. The Company shall give Parent prompt notice prior to making any such
disclosure so that the Parent may seek a protective order or other appropriate
remedy prior to such disclosure. It is further agreed that, if in the absence
of a protective order or the receipt of a waiver hereunder the Company is
nonetheless, in the opinion of its counsel, compelled to disclose information
concerning Parent to any tribunal or governmental body or agency or else stand
liable for contempt or suffer other censure or penalty, the Company may
disclose such information to such tribunal or governmental body or agency
without liability hereunder.
7.3 Stockholder Meeting. The Company shall take all steps necessary to duly
call, give notice of, convene and hold a meeting of its stockholders to be held
as soon as is reasonably practicable after the date on which the S-4 becomes
effective for the purpose of voting upon the approval of this Agreement. The
Company will, through its Board of Directors, except to the extent legally
required for the discharge of the fiduciary duties of such board as reasonably
determined by the Board after consultation with the Company's outside
nationally recognized counsel, recommend to its stockholders approval of this
Agreement and the transactions contemplated hereby and such other matters as
may be submitted to its stockholders in connection with this Agreement, and
shall use its best efforts (including, without limitation, soliciting proxies
for such approvals) to obtain such stockholder approvals. The Company and
Parent shall coordinate and cooperate with respect to the foregoing matters.
7.4 Legal Conditions to Merger. Subject to the terms and conditions of this
Agreement, each of Parent and the Company shall, and shall cause its
Subsidiaries to, use their reasonable efforts (a) to take, or cause to be
taken, all actions necessary, proper or advisable to consummate the
transactions contemplated by this Agreement including, without limitation,
using their respective reasonable efforts to lift or rescind any
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injunction or restraining order or other order adversely affecting the ability
of the parties to consummate the transactions contemplated hereby and to cause
any of the conditions to closing hereunder which are to be satisfied by such
party to be so satisfied, and (b) to obtain (and to cooperate with the other
party to obtain) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity and any other third party which is
necessary or advisable to be obtained by the Company or Parent or any of their
respective Subsidiaries in connection with the Merger and the other
transactions contemplated by this Agreement. The Company, upon request, shall
deliver to Parent such appropriate certifications or opinions by the Company's
officers or counsel as Parent shall reasonably request under the circumstances.
7.5 Listing of Shares. Parent shall use reasonable efforts to cause the
shares of Parent Common Stock to be issued in the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time.
7.6 Affiliates. At least 40 days prior to the Closing Date, the Company shall
deliver to Parent a letter identifying all persons who are, at the time this
Agreement is submitted for approval to the stockholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use all reasonable efforts to cause each person named in the
letter delivered by it to deliver to Parent prior to the Closing Date a written
"Affiliates" agreement, in the form attached hereto as Exhibit 7.6.
7.7 Amendments to Benefit Plans. The Company shall, and shall cause each of
its Subsidiaries to, execute and deliver such instruments and take such other
actions as Parent may reasonably require in order to cause the amendment or
termination of the Plans listed on Section 4.10 of the Disclosure Schedule on
terms satisfactory to Parent and effective as of the Effective Time. In
addition, the Company agrees to amend each of its Plans which are intended to
qualify under Section 401(a) of the Code prior to the Effective Time (and on a
retroactive basis when required) to meet all of the requirements under the Code
applicable to such plans as of the Effective Time. The Company agrees to permit
Parent to review, upon request, such amendments prior to adoption. Following
the Effective Time, the Surviving Corporation shall have the same legal rights
and obligations, which Parent shall cause the Surviving Corporation to honor
and shall cause the Company or any successor thereto to honor subject to the
terms thereof, as the Company and its Subsidiaries arising under all
employment, severance and other compensation agreements and arrangements
existing prior to the execution of the Agreement, which are between the Company
or one of its Subsidiaries and any director, officer or employee thereof and
which have been disclosed in the Disclosure Schedule. During the 12 months
following the Closing Date, Parent shall cause the Surviving Corporation to
provide severance to the employees, as of the Effective Time, of the Company
and its Subsidiaries in amounts no less than the amounts that would be payable
under Parent's then current severance program, as may be in effect from time to
time (with such employees receiving credit for years of service with the
Company and its Subsidiaries).
7.8 Benefit Plans. The Company's employee benefit plans will remain in effect
temporarily after the Effective Time. As soon as practicable after the
Effective Time, the Company's employee benefit plans will be discontinued or
merged into Parent plans and employees of the Company shall become eligible for
the employee benefit plans of Parent on the same terms as such plans and
benefits are generally offered from time to time to employees of Parent and its
Subsidiaries in comparable positions with Parent and its Subsidiaries. Such
employees shall be credited for the years of service with the Company and its
affiliates under the employee benefit plans to be provided by Parent to such
employees, to the same extent such service was recognized for similar plans of
the Company. However, with respect to any pension benefit plan of Parent, such
service will be counted only for purposes of vesting, eligibility for
participation and early retirement and the rate of prospective benefit accrual.
7.9 Indemnification.
(a) For six years after the Effective Time, Parent shall cause the Surviving
Corporation to, indemnify, defend and hold harmless the present and former
officers, directors, employees and agents of the Company
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and its Subsidiaries (each, an "Indemnified Party") after the Effective Time
against all losses, expenses, claims, damages or liabilities arising out of
actions or omissions occurring at or prior to the Effective Time to the full
extent then permitted under New York law and by the Company's charter and by-
laws as in effect on the date hereof; provided, however, that any rights to
indemnification in respect of any claims asserted or made within such six-year
period shall continue until the final disposition of such claim.
(b) In the event Parent, Surviving Corporation or any of their respective
successors or assigns (i) consolidates with or merges into any other Person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers or conveys all or substantially all
of its properties and assets to any Person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors and
assigns of Parent and Surviving Corporation assume the obligations set forth in
this Section 7.9.
(c) Subject to the provisions of Section 7.13 hereof, the Company may obtain,
at its option, a tail policy for directors' and officers' liability insurance
with respect to claims arising out of actions or omissions occurring at or
prior to the Effective Time.
(d) The provisions of this Section 7.9 are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
7.10 Additional Agreements. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, or to vest the Surviving Corporation or BAFSB with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger or any of the Company's Subsidiaries as contemplated
hereby, the proper officers and directors of each party to this Agreement and
their respective Subsidiaries shall take all such necessary action as may be
reasonably requested by, and at the sole expense of, Parent. The Company agrees
to, and to cause its Subsidiaries to, cooperate with Parent in order to
consummate the Liquidation, and to take such actions and prepare and execute
such documentation to be effective as of the Closing Date, as necessary or
appropriate to vest in BAFSB good and valid title to the assets, Contracts and
leasehold interests of the Company and its Subsidiaries so transferred
(including, without limitation, assignment and assumption agreements and
estoppel certificates from the Company's and its Subsidiaries' lessors and
sublessor in form and substance reasonably satisfactory to Parent) and executed
endorsements of notes and assignments of real property security interests in
recordable form or otherwise to consummate the Liquidation or as directed by
Parent to consummate the Liquidation.
7.11 Advice of Changes. Parent and the Company shall promptly advise the
other party of any change, occurrence or event which has had, or could
reasonably be expected to have, a Material Adverse Effect on the Parent or the
Company, respectively, or which it believes would or would be reasonably likely
to cause or constitute a material breach of any of its representations,
warranties or covenants contained herein. The Company will promptly notify
Parent of any material change in the normal course of business or in the
operation of the properties of the Company or any of its Subsidiaries and of
any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of material litigation involving the Company or any of its Subsidiaries, and
will keep Parent fully informed of such events. From time to time prior to the
Effective Time (including on the dates five (5) NYSE Trading Days prior to the
Valuation Date and the Closing Date), the Company will promptly supplement or
amend the Disclosure Schedule delivered in connection with the execution of
this Agreement to reflect any matter which, if existing, occurring or known at
the date of this Agreement, would have been required to be set forth or
described in such Disclosure Schedule or which is necessary to correct any
information in such Disclosure Schedule which has been rendered inaccurate
thereby. No supplement or amendment to such Disclosure Schedule shall have any
effect for the purpose of determining satisfaction of the conditions set forth
in Section 8.2(a) hereof, or the compliance by the Company with the covenants
set forth herein.
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7.12 ANCMC Sale. The Company shall use its reasonable efforts to enter into
an agreement, on or before the Valuation Date, to sell, prior to the Effective
Time, all of the outstanding shares of capital stock of ANCMC to a third party
other than any of the Company's Subsidiaries, for a fixed price in cash. Such
sale shall be accomplished by means of a public announcement immediately upon
execution of this Agreement that the Company intends to sell ANCMC in
connection with the transactions contemplated hereby, and the solicitation of
bids from interested purchasers in an "auction"-type transaction. The Company
shall sell ANCMC prior to the Effective Time to the party offering the highest
cash price; provided that before any sale of ANCMC is consummated the Company
shall have received an opinion of a nationally recognized investment banking
firm as to the fairness from a financial point of view of the sales price to
the Company and its stockholders, in form and substance reasonably acceptable
to Parent. Ivan Kaufman will be allowed to submit a bid in the auction under
the terms of this Section 7.12. The compensation arrangement for the investment
banking firm rendering the fairness opinion shall not be contingent upon the
consummation of the sale of the ANCMC stock. The terms of any such sale shall
have been approved by a majority of the Company's independent directors and
shall not impose any obligations on Parent or BAFSB, or any obligations on the
Surviving Corporation or its Subsidiaries following the Effective Time. In
connection with such sale, the Company shall, effective as of the time of the
sale, (i) terminate any agreements between the Company or any of its
Subsidiaries (other than ANCMC) and any third party that impose any obligation
on the Surviving Corporation or its Subsidiaries with respect to the past or
future operations of ANCMC (including any agreement with respect to providing,
maintaining or guarantying the net worth of ANCMC) and (ii) amend the
employment agreement between ANCMC and Michael Lucash to eliminate any
obligation of the Surviving Corporation to issue shares to Michael Lucash upon
exercise of his option under that agreement, in each case without penalty or
other charge to the Company or any of its Subsidiaries (other than ANCMC).
7.13 Valuation Date Accruals.
(a) The Company shall accrue (to the extent not previously accrued) on its
books and records effective not later than the Valuation Date the estimated
amount of all expenses incurred or to be incurred by the Company or its
subsidiaries in connection with the proposed sale of the Company and the
transactions contemplated hereby (other than those described in Section
7.13(b)), including officers' and directors' insurance premiums, any costs
related to general reductions in force and severance arrangements, in each case
in connection with the consummation of the transactions contemplated hereby;
provided, however, that nothing contained in this Agreement shall be deemed to
require the Company to (x) effect any change in its operations, or any
reduction in its workforce, in anticipation of BAFSB's or the Surviving
Corporation's business plan following the consummation of the transactions
contemplated hereby or (y) make any accruals on the Valuation Date Balance
Sheet to reflect any of the matters described in clause (x) above; provided,
further, however, that notwithstanding anything to the contrary contained
herein, the Company may pay or agree to pay, up to an aggregate amount of $2.0
million in bonus payments (to persons disclosed to Parent prior to Closing)
provided that the full amount of such payments are accrued on its books and
records effective not later than the Valuation Date. All such amounts shall be
accrued on the Valuation Date Balance Sheet in accordance with GAAP consistent
with the accounting principles used in preparation of the Balance Sheet, as if
the related expenses had been incurred prior to or on the Valuation Date.
(b) At least three NYSE trading days prior to the Valuation Date, all
attorneys, accountants, investment bankers and other advisors and agents for
the Company and its Subsidiaries, including, without limitation, Kenneth
Leventhal & Company, Skadden, Arps, Slate, Meagher & Flom, and Goldman, shall
have submitted to the Company estimates of their fees and expenses for all
services rendered in any respect in connection with the transactions
contemplated hereby to the extent not already accrued and paid. Based on such
summary the Company shall accrue for purposes of Adjusted Equity, and shall
cause its Subsidiaries to accrue, effective not later than the Valuation Date,
the amount of such fees and expenses as calculated above, and shall cause all
such advisors to release Parent and the Surviving Corporation from liability
for any such fees and expenses in excess of such estimates; provided, however,
that the terms of any such release from the Company's attorneys or accountants
may provide that such parties may provide additional services to the
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Company, and receive additional fees from the Company for the rendering of such
services, if material disputes arise concerning the Closing Adjustment
Documents or the terms of this Agreement (including, without limitation, any
dispute concerning the satisfaction of the conditions set forth in Article VIII
hereof); provided further, however, that the amount of fees and expenses
payable by the Company and its Subsidiaries for such additional services shall
be fully reflected in the final Post Valuation Date Adjustment Document and be
included in the Post Valuation Date Adjustment.
7.14 Termination of Affiliate Relationships. Prior to the Valuation Date, the
Company and its Subsidiaries shall terminate all affiliated party transactions
and arrangements listed on Section 7.14 of the Disclosure Schedule in such
manner that the Surviving Corporation and its Subsidiaries shall have no
obligations thereunder which shall survive the Effective Time. Any costs
associated with such termination shall be accrued on the Company's books and
records effective as of the Valuation Date.
7.15 Certain Accounting Adjustments. If requested by Parent, the Company
shall, to the extent consistent with GAAP, establish such additional accruals
and reserves as may be necessary to conform the Company's accounting and credit
loss reserve practices and methods to those of Parent (as such practices and
methods are to be applied from and after the Closing Date) and reflect Parent's
plans with respect to the conduct of the Company's business following the
Merger; provided, however, that the Company shall not be required to take such
action unless (A) Parent, BAFSB and Merger Sub agree in writing that all
conditions to their obligation to consummate the Merger set forth in Article
VIII hereof have been satisfied or waived; and (B) the Company shall have
received a written waiver by Parent, BAFSB and Merger Sub of their rights to
terminate this Agreement, and (C) all of the conditions to the Company's
obligation to consummate the Merger shall have been satisfied. Notwithstanding
anything to the contrary contained in this Agreement, no accrual or reserve
made by the Company or any Company Subsidiary pursuant to this Section 7.15, or
any other effect on the Company and its Subsidiaries resulting from the
Company's compliance with this Section 7.15, shall (I) constitute or be deemed
to be a breach or violation of, or failure to satisfy, any representation,
warranty, covenant, condition or other provisions of this Agreement or
otherwise be considered in determining whether any such breach, violation or
failure to satisfy shall have occurred or (II) have any bearing on the amount
of the Final Merger Price, the Final Per Share Merger Price or the calculation
of Adjusted Equity.
7.16 Operational Matters. The Company shall take any and all necessary or
appropriate actions such that, on the Valuation Date: (i) all accounts of the
Company and its Subsidiaries, including all clearing, disbursement, replacement
check and escrow funding accounts, and Investor and Custodial Accounts shall be
reconciled and any uncleared or uncorrected shortages shall be accrued on the
Company's books and records in accordance with the Regulations (in all cases as
of the first day of the month preceding the month in which the Valuation Date
occurs); (ii) all foreclosure and escrow Advances with respect to Warehouse
Loans and Investment Loans which are past due 180 days or more and REO shall be
expensed on the Company's books and records; (iii) not more than thirty-four
(34) GNMA Pools shall lack final certification from the GNMA for more than
sixteen (16) months from the date of issuance of the Pool, not more than
nineteen (19) GNMA Pools shall lack such certification for more than eighteen
(18) months from the date of issuance of the Pool, and not more than twenty-
eight (28) GNMA Pools shall lack such certification for more than seventeen
(17) months from the date of issuance of the Pool; (iv) it shall have
reconciled the borrower tax records of the Company to the tax records of
Transamerica Tax Service; (v) the aggregate principal balance of Mortgage Loans
which are missing one or more Trailer Documents which are not Permitted Trailer
Documents shall not exceed $500,000,000; (vi) the Company shall have
implemented all recommendations as to operational and compliance improvements
requested by Parent in writing prior to the date of this Agreement; (vii) the
Company shall have instituted an automated system for "forced placing"
homeowners insurance; and (viii) the Company shall have accrued in full on its
books and records all amounts payable by the Company and its Subsidiaries at
any time to Herman Held pursuant to the letter agreement between Mortgage Bank
and Herman Held dated February 5, 1992. Subject to the specific provisions of
this Agreement, all actions taken pursuant to this Section 7.16 shall be at the
Company's sole cost and expense. In the event that Parent reasonably concludes
that the provisions of this Section 7.16 will not be fully
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complied with by the date that is fifteen (15) days prior to the expected
Valuation Date, the Company shall immediately implement a remediation plan
prepared by Parent (which plan may include retention by the Company of third
party consultants selected by Parent) and the projected cost of the
implementation of such remediation plan shall be accrued in full by the Company
on the Valuation Date Balance Sheet. The Company shall, and shall cause its
Subsidiaries to, permit Parent and its representatives, accountants and counsel
to have full and complete access to all documents and information of the
Company and its Subsidiaries in accordance with Section 7.2 hereof, to
determine the existence of any defect in any Trailer Document that would result
in a Trailer Document Deduction. Parent must notify the Company within sixty
(60) days after the date of this Agreement, of any such defect for which a
Trailer Document Deduction would apply. The Company shall have the opportunity
to cure any such defect until the date ten (10) days prior to the Closing Date,
and if so cured no Trailer Document Deduction will apply. If the parties
dispute the existence, as of the date ten (10) days prior to the Closing Date,
of such a defect with respect to a Trailer Document, such dispute shall be
referred to the Independent Accounting Firm for a resolution of such dispute in
accordance with the terms of this Agreement. The determination of such firm
with respect to any such dispute shall be final and binding upon the parties.
7.17 Consent of Optionholders. Within twenty-five (25) days after the date of
this Agreement, the Company shall obtain the written consent, in form and
substance reasonably satisfactory to Parent, of all holders of Company Options
to the termination of such Company Options pursuant to the terms of Section
2.9(a) hereof.
7.18 Subservicing Agreement. Immediately following the Closing, BAFSB shall
enter into a subservicing agreement with Arbor Services Associates, L.P., under
terms and conditions customary for such agreements and acceptable to BAFSB
pursuant to which BAFSB will subservice mortgage loans for Arbor Services
Associates, L.P. at a rate of $7.50 per Mortgage Loan plus ancillary charges
and "junk" fees for a period beginning on the Closing Date and ending on the
first to occur of six months after the Effective Time and the date BAFSB moves
the servicing operations for the Mortgage Servicing Portfolio from the
Company's current servicing center. Following the date hereof, BAFSB shall
negotiate in good faith the remaining terms of such agreement.
7.19 Tax Free Reorganization. Parent shall not, and shall not permit any of
its Subsidiaries to, take or cause to be taken any action which would prevent
the transactions contemplated hereby from qualifying as a tax free
reorganization under Section 368 of the Code.
7.20 Mortgage Servicing Agreements. Within sixty (60) days after the date of
this Agreement, the Company shall deliver to Parent a true and complete copy of
all written Mortgage Servicing Agreements in its possession not attached to
Section 4.25 of the Disclosure Schedule as of the date hereof, or to the extent
any such Mortgage Servicing Agreement is oral or not in the possession of the
Company, a true and complete summary of the material terms of such Mortgage
Servicing Agreement acknowledged in writing by the applicable Investor.
ARTICLE VIII
Conditions Precedent
8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and adopted
by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Company Common Stock entitled to vote thereon.
(b) Listing of Shares. The shares of Parent Common Stock which shall be
issued to the stockholders of the Company upon consummation of the Merger shall
have been authorized for listing on the NYSE, subject to official notice of
issuance.
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(c) Other Approvals. All approvals of Governmental Entities required in
connection with the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect, and all notices required to be filed
with any Governmental Entity in connection with the transactions contemplated
hereby shall have been filed, and all notice periods and waiting periods
required by law in respect thereof shall have expired or been terminated (all
such approvals and the expiration of all such waiting periods being referred to
herein as the "Requisite Regulatory Approvals").
(d) S-4. The S-4 shall have become effective under the Securities Act, and no
stop order suspending the effectiveness of the S-4 shall have been issued and
no proceedings for that purpose shall have been initiated or threatened by the
SEC.
(e) No Injunctions or Restraints; Illegality. No order, injunction or decree
issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger or any of the other transactions contemplated by this Agreement shall be
in effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, restricts or makes illegal consummation of the Merger.
8.2 Conditions to Obligations of Parent and Merger Sub. The obligation of
Parent, BAFSB and Merger Sub to effect the Merger is also subject to the
satisfaction or waiver by Parent at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties. The representations and warranties of the
Company set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date; provided, however, that for
purposes of determining the satisfaction of the condition contained in this
Section 8.2(a), such representations and warranties (other than the
representation and warranty set forth in Section 4.17 hereof) shall be deemed
to be true and correct in all material respects unless the failure or failures
of such representations and warranties to be so true and correct, in the
aggregate, has had or could reasonably be expected to have a Material Adverse
Effect on the Company.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date.
(c) Burdensome Conditions. All material conditions and requirements
prescribed by applicable law and by the Requisite Regulatory Approvals to be
satisfied by the Closing Date shall have been satisfied, and no Requisite
Regulatory Approval shall have imposed any condition or requirement that is or
would have become applicable to Parent or any Affiliate of Parent (including
the Surviving Corporation or any of its Subsidiaries) after the Closing Date
which Parent in its reasonable judgment determines would be materially
burdensome upon the conduct of the business of Parent or any of its Affiliates
or the business of the Company and its Subsidiaries, as such businesses have
been conducted prior to the Closing Date or as said businesses are anticipated
to be conducted after the Closing Date.
(d) Litigation re Transaction. There shall be no pending or threatened
actions or proceedings by any Governmental Entity (or determinations by any
Governmental Entity) challenging or in any manner seeking to restrict or
prohibit the transactions contemplated hereby.
(e) Consents. The Company and Parent shall have received: (i) all consents
required from all Agencies in connection with the transactions contemplated
hereby, in form and substance reasonably satisfactory to Parent; (ii) such
other consents required from any Investor or other Person (other than an
Agency) such that the aggregate unpaid principal balance of the Non-Consenting
Loans constituting part of the Private Servicing Portfolio as of the Valuation
Date is equal to less than 40% of the aggregate unpaid principal balance of all
Mortgage Loans in the Private Servicing Portfolio, as of the Valuation Date, in
form and substance reasonably
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satisfactory to Parent; and (iii) all other consents, approvals, waivers and
other actions required from any Person in connection with any Company Contracts
or otherwise shall have been obtained in form and substance reasonably
satisfactory to Parent, except where the failure to obtain such consents,
approvals, and waivers and to take such other actions, has not had and could
not reasonably be expected to have a Material Adverse Effect on the Surviving
Corporation, BAFSB or their Subsidiaries following the Closing Date. The
Company shall have properly filed all notices with such Agencies, Investors and
Persons which are required as a result of the transactions contemplated hereby.
(f) Material Litigation. The suits, litigation, disputes, proceedings,
claims, actions and investigations set forth (or which should have been set
forth) in the supplements to Section 4.8 of the Disclosure Schedule delivered
pursuant to Section 7.11 or which should have been listed in Section 4.8 of the
Disclosure Schedule attached hereto, and which were not so listed, in the
aggregate, have not had and could not reasonably be expected to have a Material
Adverse Effect on the Company.
(g) Legal Opinions. Parent shall have received (i) the opinion of Skadden,
Arps, Slate, Meagher and Flom, counsel to the Company, dated the Closing Date,
substantially in the form attached hereto as Exhibit 8.2(g)(i); (ii) the
opinion of Walter K. Horn, general counsel of the Company, dated the Closing
Date, substantially in the form attached hereto as Exhibit 8.2(g)(ii); and
(iii) the opinion of Meltzer, Lippe, Goldstein, Wolf, Schlissel & Sazel, or
other counsel reasonably acceptable to Parent, dated the Closing Date,
substantially in the form attached hereto as Exhibit 8.2(g)(iii). As to any
matter in such opinions which involves matters of fact or matters relating to
laws other than federal securities or New York law, such counsel may rely upon
the certificates of officers and directors of the Company and of public
officials and opinions of local counsel, reasonably acceptable to Parent,
provided a copy of such reliance opinion shall be attached as an exhibit to the
opinion of such counsel.
(h) Pooling. Ernst & Young shall have issued its written opinion, dated as of
the Effective Time, in form and substance satisfactory to Parent in its sole
discretion, advising that the transactions contemplated hereby may be properly
accounted for as a pooling-of-interests; provided, however, that this condition
shall be deemed to have been waived by Parent if Ernst & Young's inability to
issue such an opinion is due to actions taken by Parent or any of its
Affiliates other than those actions required under this Agreement or in
connection with the transactions contemplated hereby.
(i) Dissenters. The aggregate of (i) the cash value of the fractional share
interests of Parent Common Stock to be paid in cash pursuant to Section 3.2(e),
and (ii) the shares of Parent Common Stock which are Dissenting Shares and
those shares held in the Company's treasury which were repurchased by the
Company within two years of the anticipated Closing Date (valued as the product
of (x) the number of such Dissenting Shares and treasury shares multiplied by
(y) the Exchange Ratio, multiplied by (z) the Average Closing Price), shall not
exceed 10% of the Final Merger Price.
(j) Final Purchase Price. The Final Purchase Price shall have been determined
in accordance with Article II hereof.
(k) Federal Tax Opinion. Parent shall have received from Morrison & Foerster,
counsel to Parent, an opinion, in form and substance reasonably satisfactory to
Parent, dated as of the Effective Time, substantially to the effect that on the
basis of facts, representations, and assumptions set forth in such opinion
which are consistent with the state of facts existing at the Effective Time,
the Merger and the Liquidation, as contemplated by this Agreement, will be
treated for Federal income tax purposes as part of one or more reorganizations
within the meaning of Section 368 of the Code. In rendering any such opinion,
such counsel may require and, to the extent they deem necessary or appropriate,
may rely upon representations made in certificates of officers of the Company,
Parent, Merger Sub, affiliates of the foregoing, and others.
(l) Comfort Letter. On the effective date of the S-4 and the Closing Date,
Parent shall have received a "comfort letter" from the Company's independent
public accountants addressed to the Company and Parent,
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in form and substance reasonably acceptable to Parent and customary in scope
and substance for letters delivered by independent public accountants in
transactions such as those contemplated by this Agreement.
(m) Affiliate Letters. Parent shall have received duly executed "Affiliates"
agreements in accordance with Section 7.6 hereof, from all affiliates of the
Company identified by the Company pursuant to Section 7.6 hereof.
(n) Sale of ANCMC. The Company shall have closed the sale of ANCMC in
accordance with the terms of Section 7.12 hereof.
(o) Officers' Certificate. Parent shall have received a certificate dated as
of the Closing Date and signed on behalf of the Company by the Chief Executive
Officer and the Chief Financial Officer of the Company as to the satisfaction
of the conditions set forth in Sections 8.2(a), (b), (d), (e), (f) and (n)
hereof.
8.3 Conditions to Obligations of the Company. The obligation of the Company
to effect the Merger is also subject to the satisfaction or waiver by the
Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date; provided, however, that for
purposes of determining the satisfaction of the condition contained in this
Section 8.3(a), such representations and warranties shall be deemed to be true
and correct in all material respects unless the failure or failures of such
representations and warranties to be so true and correct, in the aggregate, has
had or could reasonably be expected to have a Material Adverse Effect on
Parent.
(b) Performance of Obligations of Parent. Parent and Merger Sub shall have
each performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and the
Company shall have received a certificate signed on behalf of Parent by the
Chief Executive Officer and the Chief Financial Officer of Parent to such
effect.
(c) No Pending Governmental Actions. No proceeding initiated by any
Governmental Entity seeking an Injunction shall be pending.
(d) Legal Opinion. The Company shall have received the opinion of Morrison &
Foerster, special counsel to Parent, dated the Closing Date, substantially in
the form attached hereto as Exhibit 8.3(d). As to any matter in such opinion
which involves matters of fact or matters relating to laws other than federal
securities law or New York law, such counsel may rely upon the certificates of
officers and directors of Parent and of public officials, the opinion of
Michael J. Halloran, Executive Vice President and General Counsel of Parent and
opinions of local counsel, reasonably acceptable to the Company, provided a
copy of such reliance opinions shall be attached as an exhibit to the opinion
of such counsel.
(e) Federal Tax Opinion. The Company shall have received from Skadden, Arps,
Slate, Meagher and Flom, counsel to the Company, an opinion, in form and
substance reasonably satisfactory to the Company, dated as of the Effective
Time, substantially to the effect that on the basis of facts, representations,
and assumptions set forth in such opinion which are consistent with the state
of facts existing at the Effective Time, the Merger and the Liquidation, as
contemplated by this Agreement, will be treated for federal income tax purposes
as part of one or more reorganizations within the meaning of Section 368 of the
Code. In rendering any such opinion, such counsel may require and, to the
extent they deem necessary or appropriate, may rely upon representations made
in certificates of officers of the Company, Parent, Merger Sub, affiliates of
the foregoing, and others.
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(f) Officers' Certificate. The Company shall have received a certificate
dated as of the Closing Date and signed on behalf of the Parent by the Chief
Executive Officer and the Chief Financial Officer of the Parent as to the
satisfaction of the conditions set forth in Sections 8.3(a), (b) and (c)
hereof.
ARTICLE IX
Termination and Amendment
9.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company:
(a) by mutual consent of Parent and the Company in a written instrument;
(b) by either Parent or the Company upon written notice to the other party
(i) ninety (90) days after the date on which any request or application for a
Requisite Regulatory Approval shall have been denied or withdrawn at the
request or recommendation of the Governmental Entity which must grant such
Requisite Regulatory Approval, unless within the 90-day period following such
denial or withdrawal a petition for rehearing or an amended application has
been filed with the applicable Governmental Entity, provided, however, that no
party shall have the right to terminate this Agreement pursuant to this Section
9.1(b)(i) if such denial or request or recommendation for withdrawal 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 (ii)
if any Governmental Entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of any
of the transactions contemplated by this Agreement;
(c) by either Parent or the Company if the Merger shall not have been
consummated on or before June 30, 1995, 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 to perform or observe the covenants and agreements of
such party set forth herein;
(d) by either Parent or the Company (provided that if the terminating party
is the Company, the Company shall not be in material breach of any of its
obligations under this Agreement) if any approval of the stockholders of the
Company required for the consummation of the Merger shall not have been
obtained by reason of the failure to obtain the required vote at a duly held
meeting of stockholders or at any adjournment or postponement thereof;
(e) by either Parent or the Company (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any
of the representations or warranties set forth in this Agreement on the part of
the other party, which breach is not cured within thirty (30) days following
written notice to the party committing such breach, or which breach, by its
nature, cannot be cured prior to the Closing, and which breach, individually or
together with other such breaches, has had or could reasonably be expected to
have a Material Adverse Effect on the breaching party; or
(f) by either Parent or the Company (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any
of the covenants or agreements set forth in this Agreement on the part of the
other party, which breach shall not have been cured within thirty (30) days
following receipt by the breaching party of written notice of such breach from
the other party hereto;
(g) by the Company, by action of its Board of Directors, whether before or
after approval of the Merger by the Company's stockholders, by giving written
notice of such election to Parent within five NYSE trading
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days after the Last Approval Date, in the event that the Average Closing Price
is less than $37.00 per share (the "Minimum Average Closing Price"); provided,
however, that no right of termination shall arise under this Section 9.1(g) if
Parent notifies the Company in writing within 5 business days of receipt of the
written notice of termination from the Company, that Parent has waived its
right to utilize the minimum Average Closing Price set forth in Section 2.4(a)
and has increased the Exchange Ratio such that the per share value of the
consideration (valued at the Average Closing Price) to be paid in respect of
each share of Company Common Stock to be converted into Parent Common Stock and
cash in lieu of fractional shares upon consummation of the Merger is equal to
the per share value of the consideration that would have been paid had the
Average Closing Price been $37.00 per share. If Parent declares a stock
dividend or effects a reclassification, recapitalization, split-up,
combination, or subdivision of its common stock between August 31, 1994 and the
last day of the Valuation Period, the Minimum Average Closing Price shall be
adjusted appropriately for the purposes of this Section 9.1(g) so as to be
comparable to the price as of August 31, 1994. A termination resulting from the
Company's election under this Section 9.1(g) shall be deemed to have been a
termination by mutual consent of the parties; or
(h) by the Company, if the net after tax amount accrued and reflected on the
Valuation Date Balance Sheet pursuant to the terms of this Agreement with
respect to any action, suit, claim or proceeding brought against the Company or
its officers and directors, by any stockholder or stockholders, whether
directly or derivatively in the name of the Company, arising out of or relating
to the transactions contemplated by this Agreement or alleging violations of
federal or state securities laws ("Stockholder Proceedings") exceeds $1.5
million; provided, however, that, if within 5 business days after the receipt
by Parent of notice from the Company of its intention to exercise its
termination right under this Section 9.1(h), Parent shall notify the Company
that it will, in accordance with clause (x) of the definition of Adjusted
Equity, agree to add back to Adjusted Equity any net after tax amounts accrued
on the Valuation Date Balance Sheet with respect to such Stockholder
Proceedings in excess of $1.5 million ("Excess Litigation Accruals"), then the
termination by the Company shall be deemed rescinded ab initio.
9.2 Effect of Termination. (a) In the event of termination of this Agreement
by either Parent or the Company as provided in Section 9.1, this Agreement
shall forthwith become void and have no effect except (i) the last sentence of
Section 7.2(a), and Sections 7.2(f), 9.2, 9.3 and 10.4 through 10.10, shall
survive any termination of this Agreement, and (ii) notwithstanding anything to
the contrary contained in this Agreement, no party shall be relieved of or
released from any liabilities or damages arising out of its willful breach of
any provision of this Agreement.
9.3 Termination Payment and Other Matters. If this Agreement is terminated
(a)(i) by either the Parent or Company pursuant to Section 9.1(d) or (ii) by
Parent pursuant to Section 9.1(c) (provided that the Company shall not itself
be entitled to terminate this Agreement pursuant to such Section 9.1(c)), and
prior thereto there shall have been a public announcement with respect to an
Acquisition Event or the Company's Board of Directors shall have failed to
recommend in the Proxy Statement that the Company's stockholders vote in favor
of this Agreement or shall have withdrawn or modified such recommendations in
any manner adverse to Parent or an Acquisition Event shall occur within 6
months after the date of such termination referred to in (i) or (ii) above or
(b) by the Parent pursuant to Section 9.1(f), the Company shall pay promptly,
but in no event later than two business days after the later of the applicable
date of the termination or Acquisition Event described in clause (a) or (b)
above, by wire transfer of immediately available funds to such account as
Parent shall designate, the sum of $3 million as reimbursement for Parent's
time, effort and expense in pursuing the transactions contemplated by this
Agreement. For purposes of this subsection, the term "Acquisition Event" shall
mean any of the following: (i) any Person or group of Persons (other than
Parent, any Affiliate thereof or the parties to the Kaufman Agreements other
than Parent) shall have publicly announced, commenced or completed a tender
offer for or otherwise acquired beneficial ownership of 19.9% or more of the
outstanding shares of Company Common Stock; (ii) the Company shall have
authorized, recommended, proposed or publicly announced an intention to
authorize, recommend or propose, or entered into, an agreement with any Person
(other than Parent or an Affiliate thereof) to (A) effect a merger,
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consolidation or similar transaction involving the Company, (B) sell, lease or
otherwise dispose of assets of the Company or its Subsidiaries representing
19.9% or more of the consolidated assets of the Company and its Subsidiaries,
or (C) issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing 19.9% or more of the voting power of the Company or any
Subsidiaries (other than ANCMC pursuant to Section 7.12) thereof.
9.4 Amendment. Subject to compliance with applicable law, this Agreement may
be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of the
Company; provided, however, that after any approval of the transactions
contemplated by this Agreement by the Company's stockholders, there may not be,
without further approval of such stockholders, any amendment of this Agreement
which reduces the amount or changes the form of the consideration to be
delivered to the Company stockholders hereunder other than as contemplated by
this Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
9.5 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Board of Directors,
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party, but such extension or waiver or
failure to insist on strict compliance with an obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
ARTICLE X
General Provisions
10.1 Closing. Subject to the terms and conditions of this Agreement and the
Merger Agreement, the closing of the Merger (the "Closing") will take place at
10:00 a.m. on a date to be specified by the parties, which shall be the first
day which is the last day of a month and at least two business days after the
satisfaction or waiver (subject to applicable law) of the latest to occur of
the conditions set forth in Article VIII hereof and expiration of the 9.1(g)
termination period, if any (the "Closing Date"), at the offices of Morrison &
Foerster, 345 California Street, San Francisco, California 94104-2675, unless
another time, date or place is agreed to in writing by the parties hereto.
10.2 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those covenants and agreements contained herein and therein
which by their terms apply in whole or in part after the Effective Time.
10.3 Expenses. Except as otherwise set forth herein, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expense, provided, however,
that the costs and expenses of printing and mailing the Proxy Statement, and
all filing and other fees paid to the SEC in connection with the Merger, shall
be borne equally by Parent and the Company.
10.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt
requested) or delivered by an express courier (with confirmation) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
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(a)if to Parent, to:
BankAmerica Corporation
555 California Street
San Francisco, California 94104
Fax: (415) 953-0390
Attn: Terry Perucca
Director-Corporate Development
and
BankAmerica Corporation
555 California Street
San Francisco, California 94104
Fax: (415) 953-0944
Attn: Michael J. Halloran,
Executive Vice President and
General Counsel
with a copy to:
Morrison & Foerster
345 California Street, 32nd Floor
San Francisco, California 94104
Fax: (415) 677-7522
Attn: Todd H. Baker, Esq.
and
(b)if to the Company, to:
Arbor National Holdings, Inc.
333 Earle Ovington Boulevard
Uniondale, New York 11553
Fax: (516) 832-5285
Attn: Ivan Kaufman
Chief Executive Officer
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Fax: (212) 735-2000
Attn: Fred B. White III, Esq.
10.5 Interpretation. When a reference is made in this Agreement to Sections,
Exhibits or Schedules, such reference shall be to a Section of or Exhibit or
Schedule to this Agreement unless otherwise indicated. The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". Whenever the words "to the Company's knowledge", "to the best of
the Company's knowledge", or words to similar effect are used in this
Agreement, the Company's knowledge shall be deemed to include the knowledge of
its Subsidiaries.
10.6 Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties hereto and delivered
to the other parties hereto, it being understood that all parties need not sign
the same counterpart.
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10.7 Entire Agreement. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties hereto with respect to the subject matter hereof, other than the
confidentiality agreement dated March 14, 1994, between the Parent and the
Company.
10.8 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, without regard to any
applicable conflicts of law.
10.9 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in the last
sentence of Section 7.2(a) and in Section 7.2(f) of this Agreement were not
performed in accordance with its specific terms or was otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the last sentence of Section 7.2(a) and
Section 7.2(f) of this Agreement and to enforce specifically the terms and
provisions thereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
10.10 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
10.11 Publicity. Except as otherwise required by law or the rules of the NYSE
or the National Association of Securities Dealers, so long as this Agreement is
in effect, neither Parent nor the Company shall, or shall permit any of its
Subsidiaries to, issue or cause the publication of any press release or other
public announcement with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld.
10.12 Assignment; Third Party Beneficiaries. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that BAFSB's rights, interests and
obligations hereunder may be assigned to its successor in interest, if any,
provided that such successor is a wholly-owned direct or indirect Subsidiary of
Parent. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns. Except as otherwise specifically provided herein, this
Agreement (including the documents and instruments referred to herein) is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
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In Witness Whereof, Parent, BAFSB, Merger Sub and the Company have caused
this Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.
ARBOR NATIONAL HOLDINGS, INC.
By /s/ Ivan Kaufman
-----------------------------------
Name: Ivan Kaufman
Title: Chairman of the Board
and Chief Executive Officer
BANKAMERICA CORPORATION
By /s/ Terry Perucca
-----------------------------------
Name: Terry Perucca
Title: Senior Vice President
BANK OF AMERICA, FSB
By /s/ Thomas Quigg
-----------------------------------
Name: Thomas Quigg
Title: Executive Vice President
AH ACQUISITION CORP.
By /s/ David A. Thrailkill
-----------------------------------
Name: David A. Thrailkill
Title:Vice President
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AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
This Amendment to Agreement and Plan of Merger (the "Amendment"), dated as of
December 15, 1994, is made by and among BankAmerica Corporation, a Delaware
corporation ("Parent"), Bank of America, FSB, a federal savings bank and a
wholly-owned subsidiary of Parent ("BAFSB"), AH Acquisition Corp., a New York
corporation and a wholly-owned subsidiary of BAFSB ("Merger Sub"), and Arbor
National Holdings, Inc., a New York corporation (the "Company").
Recitals
A. The parties hereto have entered into that certain Agreement and Plan of
Merger, dated as of September 23, 1994 (the "Agreement"); and
B. The parties hereto wish to amend certain provisions of the Agreement in
connection with the settlement of certain claims alleged by shareholders of
Arbor relating to the terms of the proposed Merger.
Accordingly, the parties hereto agree as follows:
1. Defined Terms in Amendment. Except as otherwise expressly provided,
all capitalized terms used herein shall have the meanings assigned thereto
in the Agreement.
2. Definition of Litigation Expenses. The following definition of
"Litigation Expenses" is hereby added to Article I of the Agreement:
Litigation Expenses--The amount equal to the difference, if any,
between (i) the total amount (calculated on an after-tax basis) of all
attorneys' fees and expenses incurred by or on behalf of the Company
and paid by the Company on or prior to the Valuation Date or accrued by
the Company on the Valuation Date Balance Sheet related to the
Shareholder Actions (collectively, the "Valuation Date Expense Amount")
and (ii) the total amount (calculated on an after-tax basis) of
payments received by the Company from its insurance companies under any
directors' and officers' insurance policies in respect of such
attorneys' fees and expenses on or prior to the Valuation Date (the
"Initial Insurance Proceeds").
3. Definition of Shareholder Actions. The following definition of
Shareholder Actions shall be added to Article I of the Agreement:
Shareholder Actions--The following shareholder actions filed in the
Supreme Court of the State of New York: Martin Freeman, et al. v. Arbor
National Holdings, Inc., et al., Jini Shapiro v. Arbor National
Holdings, Inc., et al., Elyse and Sidney Olkes, et al. v. Arbor
National Holdings, Inc., et al., Samuel Duetscher v. Arbor National
Holdings, Inc., et al., Jerome Fuss v. Arbor National Holdings, Inc.,
et al. and Chaim Kirschner v. Arbor National Holdings, Inc., et al.
4. Section 2.6(a). The Agreement is hereby amended to add the following
language at the end of the first sentence of Section 2.6(a):
; provided, however, that in the event that the net effect of the
adjustment to the Estimated Merger Price pursuant to this Section
2.6(a)(i)-(vi) would be a decrease to the Estimated Merger Price of
less than $2.0 million (without taking into account the impact of the
last sentence of Section 2.6(e)), then notwithstanding anything to the
contrary in this Section 2.6(a), no adjustment to the Estimated Merger
Price will be made pursuant to this Section 2.6(a).
5. Section 2.6(b). Section 2.6(b) of the Agreement is hereby amended to
add the following language at the end of such Section: "provided, however,
that for purposes of this Section 2.6(b), the balance of Adjusted Equity
shall be adjusted as required by Section 2.6(e), if applicable."
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6. Section 2.6(e). Section 2.6(e) of the Agreement is hereby amended in
its entirety to read as follows:
(e) Net Adjustment. The adjustments to the Estimated Merger Price
described in paragraphs (a) through (d) shall be netted, such that
there shall be determined an aggregate increase or decrease in the
Estimated Merger Price. Such aggregate increase or decrease is referred
to herein as the "Purchase Price Adjustment." Notwithstanding anything
to the contrary contained herein, in the event (i) the aggregate
increase to the Estimated Merger Price described in paragraphs (a)
through (d) above shall be equal to or less than $1.0 million or (ii)
the aggregate decrease to the Estimated Merger Price described in
paragraphs (a) through (d) above shall be equal to or less than $2.0
million, the Purchase Price Adjustment shall be equal to zero (0). On
the day which is the tenth day immediately preceding the Closing Date,
the parties shall meet and recalculate the Adjusted Equity and
Litigation Expenses as follows: (I) the amount used in calculating
Litigation Expenses pursuant to clause (i) of the definition thereof
shall equal the amount (calculated on an after-tax basis) equal to the
sum of (A) all attorneys' fees and expenses incurred by or on behalf of
the Company on or prior to such date related to the Shareholder
Actions, (B) the estimated amount of all such attorneys' fees and
expenses which the parties agree are expected to be incurred by or on
the behalf of the Company in connection with the Shareholder Actions
after such date and on or prior to the Closing Date, and (C) all
attorneys' fees and expenses of the plaintiffs in the Shareholder
Actions payable by the Company pursuant to the terms of the memorandum
of understanding relating to the Shareholder Actions, in each case
whether or not previously paid by the Company (the "Expense Amount"),
(II) the amount used in calculating Litigation Expenses pursuant to
clause (ii) of the definition thereof shall equal the total amount
(calculated on an after-tax basis) actually received by the Company
from its insurance companies under any directors' and officers'
insurance policies in respect of such attorneys' fees and expenses on
or prior to such date (the "Insurance Proceeds"), (III) the Adjusted
Equity shall be decreased by the amount by which the Expense Amount
exceeds the Valuation Date Expense Amount and (IV) the Adjusted Equity
shall be increased by the amount by which the Insurance Proceeds exceed
the Initial Insurance Proceeds. If in calculating the Purchase Price
Adjustment using the recalculated Adjusted Equity and Litigation
Expenses as provided above, (Y) the $2.0 million threshold set forth in
the third sentence of this paragraph (e) is exceeded or the $1.0
million threshold in the third sentence of this paragraph (e) is not
exceeded, as the case may be, and (Z) the applicable threshold would
not have been exceeded or failed to have been exceeded but for the
reduction to the recalculated Adjusted Equity caused by the
recalculated Litigation Expenses, then the members of the Company's
board of directors named as defendants in the Shareholder Actions (the
"Director Defendants") may, or if none of the other Director Defendants
choose to do so then Ivan Kaufman shall, make a reimbursement payment
to the Company, at least five days prior to the Closing Date, in an
aggregate amount of one-half the recalculated Litigation Expenses, and,
upon receipt by the Company of such payment, the balance of Adjusted
Equity used to calculate the amount of any adjustment pursuant to
Section 2.6(b) and this paragraph (e) shall be increased by the full
amount of the recalculated Litigation Expenses. In the event that,
during the period following the tenth day prior to the Closing Date,
the Company or BAFSB shall actually receive payments which would have
been Insurance Proceeds had they been received on or prior to such
tenth day, the Company shall promptly repay to the applicable director
or directors, on a pro rata basis, the proportionate amount of the
reimbursement payments made by such director or directors pursuant to
clause (Z) of the preceding sentence, as if such insurance payments had
been received by the Company on or prior to such tenth day.
7. Section 9.1(h). The Agreement is hereby amended to add the following
language at the end of Section 9.1(h):
; provided further, however, that the Shareholder Actions shall not be
deemed "Stockholder Proceedings" for purposes of this Agreement.
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8. Exhibit 2.6(a). Exhibit 2.6(a) of the Agreement is hereby amended and
restated to read as attached hereto as Exhibit 2.6(a). The parties agree
that the methodology described in Exhibit 2.6(a) shall be utilized in
connection with certain of the calculations called for under Section 2.6(a)
of the Agreement.
9. Service Mark. A new Section 7.21 is hereby added as follows:
7.21 Service Mark. The parties acknowledge and agree that Mortgage Bank
is the sole owner of the service mark "Arbor", as reflected on the U.S.
Patent and Trademark Office Principal Register under Reg. No.
1,744,027. The parties further agree that, in the event that the sale
of ANCMC, as provided in Section 7.12, to Ivan Kaufman is consummated,
BAFSB shall enter, or shall cause Mortgage Bank to enter, into a
perpetual license of certain rights to the "Arbor" service mark to
ANCMC. The terms of such license, which shall be in form and substance
reasonably acceptable to the parties, shall include an unconditional
acknowledgment by ANCMC of Mortgage Bank's sole ownership of the
"Arbor" service mark and shall include the following restrictions on
ANCMC's use of the mark: (i) the mark will be used solely in connection
with ANCMC's participation in the multi-family and commercial mortgage
lending business and shall in no event be used in connection with any
1-4 family residential mortgage lending business; (ii) ANCMC will use
the word "Arbor" only as part of the name "Arbor National Commercial
Mortgage Corporation" and will in no event market itself or its
products to the public or its customers by use of the name "Arbor"
other than as part of such name in a manner giving equal prominence to
each word in the name; (iii) ANCMC will conduct its business in a
manner that will reflect positively on the name "Arbor"; (iv) ANCMC
shall not be entitled to use any existing "Arbor"-related logo or logos
or any logo which is substantially similar or which could cause
customer confusion; and (v) for a period of six (6) months following
the Closing Date, all marketing materials of ANCMC in which the word
"Arbor" is used will include a statement to the effect that ANCMC is
not an affiliate of Parent. ANCMC will also agree that it will not
attempt to participate in, or interfere with Mortgage Bank's or BAFSB's
participation in, the "Global Releaf" program and any related (directly
or indirectly) sales, marketing and promotional programs, and that it
will not commence or participate in any program that involves the
giving or planting of trees in connection with the making of a loan. As
a condition to the effectiveness of the license, Ivan Kaufman will
agree to rename, within ninety (90) days after the Closing Date, any
and all affiliated entities (including those listed on Section 7.14 of
the Disclosure Schedule) other than ANCMC using the name "Arbor" and to
cause such entities to cease, from and after the Closing Date, any and
all uses of the "Arbor" name for any purpose (except to the extent
necessary to facilitate the renaming referred to above or to conduct
business in the period prior to the renaming).
10. Counterparts. This Amendment may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
Amendment.
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In Witness Whereof, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
ARBOR NATIONAL HOLDINGS, INC.
By: /s/ Walter K. Horn
-----------------------------------
Name: Walter K. Horn
Title: Senior Vice
President/Secretary
BANKAMERICA CORPORATION
By: /s/ David Thrailkill
-----------------------------------
Name: David Thrailkill
Title: Vice President
BANK OF AMERICA, FSB
By: /s/ David Thrailkill
-----------------------------------
Name: David Thrailkill
Title: Attorney-in-fact
AH ACQUISITION CORP.
By: /s/ David Thrailkill
-----------------------------------
Name: David Thrailkill
Title:Attorney-in-fact
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ANNEX B
FORM OF STOCK OPTION AGREEMENT
This is to certify that for and in consideration of entering into an
Agreement and Plan of Merger dated as of September 23, 1994, BANKAMERICA
CORPORATION ("BAC"), is entitled to purchase from ("Shareholder"), all
of the shares of the common stock, par value $0.01 per share, of
Arbor National Holdings, Inc., a New York corporation (the "Company") owned by
the Shareholder, subject to the terms and conditions more fully set forth
herein.
ARTICLE I
Definitions
Except as otherwise provided herein, the capitalized terms set forth below
(in their singular and plural forms as applicable) shall have the following
meanings:
1.1 "Applicable Law" shall mean any domestic or foreign, federal, state or
local statute, law, ordinance, rule, administrative interpretation, regulation,
order, writ, injunction, directive, judgment, decree or other requirement of
any governmental authority applicable, in the case of the Shareholder, to the
Shareholder or his properties or assets, in the case of the Company, to the
Company, any of the subsidiaries of the Company or the respective properties,
assets, officers, employees or directors (in connection with any such
officer's, employee's or director's activities on behalf of it) of any of them,
and, in the case of BAC, to BAC, any of the subsidiaries of BAC or the
respective properties, assets, officers, employees or directors (in connection
with such officer's, employee's or director's activities on behalf of it) of
any of them.
1.2 "Acquisition Agreement" shall mean that certain Agreement and Plan of
Merger dated as of September 23, 1994 by and among BAC, Bank of America, FSB, a
federal savings bank and wholly-owned direct subsidiary of BAC ("BAFSB"), ARBH
Acquisition Corp., a New York corporation and wholly-owned direct subsidiary of
BAFSB ("Acquisition Corp.") and the Company.
1.3 "Triggering Event" shall mean the occurrence of any of the following
events on or after the date hereof:
(a) prior to the termination of the Acquisition Agreement, any person or
Group (as defined below), other than BAC or any of its affiliates, shall
have "commenced" (within the meaning of Rule 14d-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) a tender or exchange
offer for nineteen and nine-tenths percent (19.9%) or more of the
outstanding shares of the Company Common Stock (the term "affiliate" as
used herein having the meaning assigned thereto in Rule 405 promulgated
under the Securities Act of 1933, as amended);
(b) prior to the termination of the Acquisition Agreement, the
acquisition by any person or Group, other than BAC or any of its affiliates
and other than the Shareholder and (the "Kaufman Affiliates"), of
the beneficial ownership or the right to acquire beneficial ownership of
nineteen and nine-tenths percent (19.9%) or more of the outstanding shares
of the Company Common Stock (the terms "Group" and "beneficial ownership"
as used in this Option having the meanings assigned thereto in Section
13(d) of the Exchange Act and the regulations promulgated thereunder);
(c) prior to the termination of the Acquisition Agreement, (i) the
failure of the Company's stockholders to approve the Acquisition Agreement
at a meeting called to consider such Acquisition Agreement, if such meeting
shall have been preceded by (x) the public announcement by any person or
Group (other than BAC or any of its affiliates) of an offer or proposal to
acquire, merge or consolidate with the Company; (y) the filing of an
application or notice, other than by BAC or any of its affiliates, under
the federal Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"),
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or any other federal or state banking, insurance, antitrust or other
statute, with respect to the acquisition or proposed acquisition of
nineteen and nine-tenths percent (19.9%) or more of the outstanding shares
of the Company Common Stock; or (z) the Board of Directors of the Company
publicly withdrawing or modifying, or publicly announcing its intent to
withdraw or modify, its recommendation that the shareholders of the Company
approve the transactions contemplated by the Acquisition Agreement; or (ii)
the acceptance by the Company's Board of Directors of, or the public
recommendation by the Company's Board of Directors that the stockholders of
the Company accept, an offer or proposal from any person or Group (other
than BAC or any of its affiliates), to acquire nineteen and nine-tenths
percent (19.9%) or more of the outstanding shares of the Company Common
Stock, or a substantial portion (19.9% or more) of the consolidated assets
of the Company, or for a merger or consolidation or any similar transaction
involving the Company; or
(d) the occurrence of any of the events described in clauses (a), (b),
(c)(i)(x), (y) or (z), or (c)(ii) of this Paragraph 1.3 (without regard to
the provision that such event occur prior to the termination of the
Acquisition Agreement) within six (6) months following the termination of
the Acquisition Agreement by BAC pursuant to Section 9.1(f) thereof;
(e) after a proposal is made by a third party to the Company or its
shareholders to engage in (i) a merger or consolidation, or any similar
transaction, involving the Company, (ii) a purchase, lease or other
acquisition representing 19.9% or more of the consolidated assets of the
Company, or (iii) a purchase or other acquisition (including by way of
merger, consolidation, share exchange or otherwise) of securities
representing 19.9% or more of the voting power of the Company, the Company
shall have breached any covenant or obligation contained in the Acquisition
Agreement and such breach (x) would entitle BAC to terminate the
Acquisition Agreement pursuant to Section 9.1(f) thereof and (y) shall not
have been cured prior to the date the holder hereof duly gives notice to
the Shareholder of its desire to exercise this Option pursuant to Section
2.3 hereof; or
(f) any material breach by Shareholder of this Option or the Voting
Agreement and Irrevocable Proxy, dated of even date herewith, between the
Shareholder and BAC.
1.4 "Underlying Shares" shall mean the shares of the Company Common Stock
that may be acquired upon exercise of this Option.
1.5 "Company Common Stock" shall mean the Common Stock, par value $0.01 per
share, of the Company, or any capital stock into which such Common Stock of the
Company shall have been converted as a result of a recapitalization, merger or
consolidation.
1.6 "Option" shall mean this Option and any additional, substitute or partial
option that may be issued to the holder or holders thereof pursuant to the
terms and provisions contained herein.
ARTICLE II
Terms and Conditions
2.1 Number of Shares. This Option shall permit BAC or any subsequent holder
hereof to purchase from the Shareholder shares of the Company Common
Stock owned beneficially and of record by the Shareholder, subject to
adjustment as provided below:
(a) in the event the Shareholder acquires additional shares of the
Company Common Stock on or after the date hereof for any reason and by
whatever means, this Option shall also permit BAC or any subsequent holder
hereof to acquire all such additional shares of the Company Common Stock
from the Shareholder at the Exercise Price (as defined below);
(b) in the event the Shareholder acquires any option, warrant or other
right to acquire shares of the Company Common Stock (including, without
limitation, any agreement to acquire shares of the Company Common Stock or
options, warrants or other rights to acquire shares of the Company Common
Stock) on or after the date hereof for any reason, or any other security
convertible into shares of the Company Common Stock, this Option shall
permit BAC or any subsequent holder hereof to
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acquire from the Shareholder such option, warrant or other right or other
security convertible into shares of the Company for the same consideration
Shareholder paid to acquire such option, warrant or other right or other
security; and
(c) in the event of any stock dividend, stock split, reverse stock split,
reclassification, recapitalization or reorganization or any similar
transaction, the number of shares of the Company Common Stock that the
holder hereof may acquire upon exercise hereof shall be proportionately and
appropriately adjusted so as to enable BAC or any subsequent holder hereof
to acquire all of the shares of the Company Common Stock held beneficially
or of record by the Shareholder.
2.2 Exercise Price. The shares of the Company Common Stock that may be
acquired pursuant to the exercise of this Option may be acquired at a price
equal to $16.35 per share (the "Exercise Price"), payable in cash; provided
that in the event of any change in the Company Common Stock by reason of a
stock dividend, stock split, reverse stock split, reclassification,
recapitalization or reorganization or other similar event requiring adjustment
under Paragraph 2.1(c) hereof, the Exercise Price shall be appropriately and
proportionately adjusted to reflect such event. All references in this Option
to the term Exercise Price shall mean the Exercise Price as so adjusted from
time to time.
2.3 Exercise. This Option may be exercised as follows:
(a) this Option may be exercised only after the occurrence of a
Triggering Event;
(b) this Option may be exercised from time to time only as to the whole
(except as provided in Section 2.3(c) below) of the Underlying Shares and
only if the option of even date herewith executed by in favor of BAC
(the "Affiliate Option") is executed concurrently in accordance with its
terms;
(c) this Option may be exercised only by a holder lawfully entitled to
exercise this Option; provided, however, that a holder that is lawfully
permitted to partially exercise this Option shall be permitted to do so
notwithstanding the fact that such holder may not be lawfully entitled to
exercise the entire Option; provided further, however, that a holder that
is lawfully permitted to exercise this Option, in whole or in part
(pursuant to the previous proviso), shall be permitted to do so
notwithstanding the fact that such holder may not be lawfully entitled to
exercise concurrently the Affiliate Option;
(d) to exercise this Option, the holder shall present to the Shareholder
this Option, together with the Exercise Price for the number of Underlying
Shares to be purchased, in cash or by certified check or bank draft drawn
on immediately available funds, accompanied by a certificate of the holder
certifying to, or other satisfactory evidence of, the satisfaction of the
conditions to such exercise, whereupon this Option shall be exercised to
the extent specified, and the holder exercising the same shall be the
holder of the number of shares of the Company Common Stock purchased. The
Shareholder shall duly endorse the Underlying Shares in blank or with
appropriate stock powers, duly executed in blank attached thereto, in
proper form for transfer, with the signature of Shareholder thereon
guaranteed, and with all applicable taxes paid or provided for, and any
other documents necessary to transfer the purchased shares to the purchaser
free and clear of all liens within a reasonable time (not exceeding ten
(10) days) after this Option shall have been exercised as provided herein;
(e) this Option may not be exercised by BAC or any affiliate thereof
(other than any national bank subsidiary of BAC or any subsidiary of any
such national bank, which are not subject to the following restrictions) to
the extent that, as a result of such exercise, the number of shares of the
Company Common Stock held by BAC and its affiliates in the aggregate would
exceed five percent (5%) of the Company Common Stock then outstanding
unless such exercise first receives the approval of the Board of Governors
of the Federal Reserve System (the "Board") under the Bank Holding Company
Act; provided, however, that in lieu of the approval described above, BAC
or any affiliate may provide an opinion of counsel to the effect that such
approval is not required. For the purposes of this subsection 2.3(e), the
number of shares of the Company Common Stock deemed to be "then
outstanding" shall be determined with regard to the Bank Holding Company
Act or the applicable state statute, when calculating the percentage limit
set forth above, as applicable.
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2.4 Transferability of Option. This Option and any shares of Company Common
Stock acquired upon exercise of the Option, and interests herein, may be
transferred only as follows and, except in the case of Section 2.4(b) or (c)
hereof, only upon receipt by the Shareholder of an agreement, in form and
substance reasonably satisfactory to the Shareholder, providing that the
proposed transferee agrees to be bound by the terms of this Agreement:
(a) BAC may sell or transfer this Option and any shares of Company Common
Stock acquired upon exercise of the Option at any time without the written
consent of the Shareholder, to any affiliate or affiliates of BAC;
(b) BAC (or any affiliate of BAC that has acquired this Option or any of
the Underlying Shares pursuant to the provisions of Section 2.4(a) hereof)
shall be entitled to sell, exchange, transfer or otherwise dispose of all
shares of Company Common Stock acquired pursuant to the exercise of the
Option to a Third Party (as defined below) on terms substantially similar
to those offered by such Third Party to the holders of the Minority Shares
(as defined below);
(c) following the exercise of this Option and expiration of the
Shareholder's right of repurchase specified in Section 2.5 hereof, BAC (or
any affiliate of BAC that has acquired this Option or any Underlying Shares
pursuant to the provisions of Paragraph 2.4(a) above) shall be entitled to
sell or transfer any shares of Company Common Stock acquired upon exercise
of the Option in one or more transactions exempt from the registration
requirements of Section 5 of the Securities Act of 1933, as amended (the
"Securities Act") or in any transaction subject to the registration
requirements of Section 5 of the Securities Act;
2.5 Obligations of Holder Following Exercise. Upon exercise of this Option in
accordance with the provisions hereof, the holder or holders of the Underlying
Shares issued upon such exercise shall, within six (6) months from the date of
such exercise, either:
(a) offer, or cause the Company or an affiliate of such holder to offer,
to acquire all of the outstanding shares of the Company Common Stock not
then held by such holder or any affiliate thereof (the "Minority Shares")
(whether by means of a tender offer, merger, consolidation or other form of
transaction) for cash at a per share price not less than the per share
Exercise Price paid to Shareholder upon such exercise (as adjusted for any
changes in the Company's capitalization after the exercise date in
accordance with the procedures set forth in the proviso to Paragraph 2.2
hereof); or
(b) sell, exchange, transfer or otherwise dispose (whether by means of a
tender offer, merger, consolidation or other form of transaction) of all of
such Underlying Shares to one or more persons or entities (other than BAC
or any affiliate thereof) (a "Third Party") on terms substantially
equivalent to those offered by such persons or entities to the holders of
those Minority Shares not already held by such persons or entities.
In the event that (x) the holder of the Underlying Shares fails to purchase
all of the Minority Shares or (y) a Third Party shall not have purchased all of
the Underlying Shares and the Minority Shares within the period specified in
this Section 2.5, the Shareholder shall have the option, within 60 days after
the expiration of such period, to repurchase at a per share price equal to the
Exercise Price (subject to adjustment as provided in Section 2.1(c) hereof) all
shares of Company Common Stock previously acquired upon exercise of the Option
from the holder or holders thereof; provided, however, that any such sale
transaction shall fully comply with all applicable laws. Such repurchase shall
be affected in accordance with the procedures specified in Section 2.3(d)
hereof.
2.6 Termination. This Option (other than the provisions of Section 2.5
hereof), and the rights to acquire shares of the Company Common Stock pursuant
hereto, shall expire as follows upon the first to occur of the following:
(a) consummation of the merger of the Company with Acquisition Corp. as
contemplated by the Acquisition Agreement;
(b) the mutual consent of both BAC and the Shareholder to terminate this
Option;
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(c) the termination of the Acquisition Agreement, unless a Triggering
Event shall have occurred or a Triggering Event may occur pursuant to
Section 1.3(d) hereof;
(d) the expiration of the six-month period specified in Section 1.3(d)
hereof unless a Triggering Event shall have occurred; or
(e) the expiration of a twelve (12) month period following the first
occurrence of a Triggering Event.
2.7 Expenses. Except as otherwise set forth herein, all expenses incurred in
connection with this Agreement, the exercise of the Option or the exercise by
the Shareholder of the repurchase right set forth in Section 2.5 hereof shall
be borne by the party incurring such expense.
ARTICLE III
Representations, Warranties and Covenants of the Shareholder
The Shareholder hereby represents, warrants, covenants and agrees with BAC as
follows:
3.1 Authority. This Option has been duly executed by the Shareholder, and
(assuming due authorization, execution and delivery by BAC) constitutes a
legal, valid and binding obligation of the Shareholder, enforceable against the
Shareholder in accordance with its terms (except as may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar laws affecting
the rights of creditors generally and the availability of equitable remedies).
All corporate actions, if any, required by law to be taken by the Company or
the Shareholder to exempt this Option and the transactions contemplated hereby
from the requirements of Section 9.12 of the New York Business Corporation Law
and any other state antitakeover statute have been taken and are in full force
and effect.
3.2 Conflicting Instruments. Neither the execution and delivery of this
Option nor the consummation of the transactions contemplated hereby will
violate or result in any violation of or be in conflict with or constitute a
default under any term or condition contained in any agreement or instrument to
which the Shareholder is a party or by which the Shareholder or its respective
properties or assets are bound, or any Applicable Law.
3.3 Shares. The Underlying Shares are duly and validly issued, fully paid and
nonassessable, and are and shall be free and clear of all liens, security
interests, charges, claims, equities, options, proxies (other than the
Irrevocable Proxy) or encumbrances, and were not issued in violation of any
preemptive rights of any shareholders of the Company. As of the date of this
Option, the Shareholder holds beneficial and record interest in
Underlying Shares. The Shareholder has full right, power and authority to sell,
transfer and deliver the Underlying Shares hereunder. Upon exercise of this
Option in accordance with Section 2.3 hereof, the holder thereof shall receive
good and valid title to the Underlying Shares as to which the Option is
exercised, free and clear of any lien, security interest, charge, claim,
equity, option, proxy (other than the Irrevocable Proxy) or encumbrance of any
kind whatsoever.
3.4 Preservation of Rights of Holder. The Shareholder shall not by any
voluntary act, avoid or seek to avoid the observance or performance of any of
the covenants, stipulations or conditions to be observed or performed hereby by
the Shareholder. Without limitation of the foregoing, the Shareholder shall not
vote to amend the Company's Certificate of Incorporation in a manner that
adversely affects the voting or other rights of the Underlying Shares. The
Shareholder shall promptly take all action as may from time to time be
reasonably required in order to preserve the rights of the holder hereof to
exercise this Option and to permit the Shareholder to duly and effectively
transfer shares therefor in accordance with the terms hereof. The Shareholder
agrees to use its best efforts to cause the Company promptly to take all action
as may from time to time be required (including (x) complying with all
premerger notification, reporting and waiting period requirements specified in
15 U.S.C. Section 18a and regulations promulgated thereunder, (y) in the event,
under the Bank Holding Company Act, or any state banking law, prior approval of
or notice to the Federal Reserve Board or to any state regulatory authority is
necessary before the Option may be exercised,
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cooperating fully with the holder in preparing such applications or notices and
providing such information to the Federal Reserve Board or such state
regulatory authority as they may require and (3) complying with the provisions
of federal and state securities laws and regulations) in order to permit the
holder to exercise the Option and the Company duly and effectively to transfer
Underlying Shares pursuant hereto.
ARTICLE IV
Representations and Warranties of BAC
BAC hereby represents and warrants to the Shareholder that:
4.1 Authority. The execution and delivery of this Option and the consummation
of the transactions contemplated hereby have been duly and validly authorized
by all necessary corporate action in respect thereof on the part of BAC. The
Option has been duly authorized and executed by BAC, and (assuming due
authorization, execution and delivery by the Shareholder) constitutes a legal,
valid and binding obligation of BAC, enforceable against BAC in accordance with
its terms (except as may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting the rights of creditors generally and
the availability of equitable remedies).
4.2 Purchase for Distribution. This Option is not being acquired with a view
to the public distribution thereof and neither this Option nor any of the
Underlying Shares will be transferred or otherwise disposed of except in a
transaction registered or exempt from the Securities Act.
ARTICLE V
Miscellaneous
5.1 Severability. If any term, provision, covenant or restriction contained
in this Option is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void and unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
shall remain in full force and effect, and shall in no way be affected,
impaired or invalidated. If for any reason such court or regulatory agency
determines that this Option will not permit the holder hereof to acquire the
full number of shares of the Company Common Stock provided in Paragraph 2.1, it
is the express intention of the Shareholder to allow the holder hereof to
acquire such lesser number of shares as may be permissible, without any
amendment or modification hereof.
5.2 Governing Law. This Option shall in all respects be governed by and
construed in accordance with the laws of the State of New York.
5.3 Amendments. This Option may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written agreement
executed by the Shareholder and the holder hereof.
5.4 Notices. All notices, requests, claims, demands and other communications
hereunder shall be in writing, and shall be given as provided in Section 10.4
of the Acquisition Agreement at the addresses set forth therein for BAC and at
the following address for the Shareholder:
---------------------
---------------------
---------------------
5.5 Remedies. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Option by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.
5.6 Further Assurances. In the event of any exercise of the Option by BAC,
the Shareholder and BAC shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
B-6
<PAGE>
5.7 Entire Agreement. This Option constitutes the entire agreement of BAC the
Shareholder with respect to the matters contained herein, and supersede all
prior agreements and understandings between the parties with respect thereto.
5.8 Headings. The article and paragraph headings contained herein are for
convenience only, and shall not affect the construction of the terms and
provisions of this Option.
IN WITNESS WHEREOF, has executed and delivered this Option effective
as of this 23rd day of September, 1994.
By: _________________________________
Shareholder
The undersigned, BANKAMERICA CORPORATION, a Delaware corporation, hereby
accepts delivery of this Option and agrees to be bound by all of its terms.
BANKAMERICA CORPORATION
By: _________________________________
B-7
<PAGE>
ANNEX C
FORM OF VOTING AGREEMENT
This Voting Agreement (this "Agreement") dated as of September 23, 1994, is
made by and among BankAmerica Corporation, a Delaware Corporation ("BAC"), AH
Acquisition Corp., a New York corporation and wholly-owned indirect subsidiary
of BAC ("Newco"), the undersigned shareholder ("Shareholder") of Arbor National
Holdings, Inc., a New York corporation (the "Company"), and the Company.
Whereas, Shareholder is the record and beneficial owner and has the power to
vote the respective number of shares of the Company's common stock, $0.01 par
value (the "Common Stock"), set forth on Schedule A hereto (collectively, the
"Shares"), and
Whereas, Shareholder desires that the Company, BAC and Newco enter into a
Agreement and Plan of Merger (the "Merger Agreement") with respect to the
merger of Newco with and into the Company (the "Merger"), and
Whereas, Shareholder is executing this Agreement as an inducement to BAC and
Newco to enter into and execute the Merger Agreement,
Now therefore, in consideration of the execution and delivery by BAC and
Newco of the Merger Agreement and the mutual covenants, conditions and
agreements contained herein and therein and in that certain Irrevocable Proxy
of even date herewith made by and among the parties hereto which is attached
hereto as Exhibit A (the "Irrevocable Proxy") the parties agree as follows:
1. At any meeting of Company shareholders called to vote upon the Merger
and the Merger Agreement or at any adjournment thereof or in any other
circumstances upon which such vote or other approval of the Merger and the
Merger Agreement is sought, Shareholder shall vote (or cause to be voted)
the Shares set forth opposite his respective name in Schedule A hereto in
favor of (a) the adoption of the Merger Agreement and approval of the
Merger and the transaction contemplated by the Merger Agreement and (b) any
other matter relating to the consummation of the transactions contemplated
by the Merger Agreement.
2. At any meeting of Company shareholders or at any adjournment thereof
or in any other circumstance upon which their vote or approval is sought,
Shareholder shall vote (or cause to be voted) such Shares against (a) any
proposal for any recapitalization, merger, sale of assets or other business
combination between the Company or any other person or entity (other than
the Merger) or any other action or agreement that would result in a breach
of any covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or which could result
in any of the conditions to BAC's or the Company's obligations under the
Merger Agreement not being fulfilled, or (b) any proposal or transaction
which would in any manner impede, frustrate, prevent or nullify the Merger,
the Merger Agreement or any of the other transactions contemplated by the
Merger Agreement.
3. During the period commencing on the date of this Agreement and ending
on the earlier of either (a) the date that the Merger Agreement terminates
in accordance with its terms or (b) the Effective Time (as such term is
defined in the Merger Agreement), Shareholder shall not transfer (which
term shall include, without limitation, for the purposes of this Agreement,
any sale, gift or pledge) any or all of such Shareholder's Shares or any
interest therein, except pursuant to the Merger, unless the transferee
agrees with BAC and Newco that such transferee has acquired such Shares or
interest subject to this Agreement and the Irrevocable Proxy.
4. Shareholder represents and warrants to BAC and Newco that he is the
beneficial and record owner of, and has power and authority to dispose of,
and the unrestricted right to vote, the number of shares of Common Stock
set forth opposite his name in Schedule A hereto.
C-1
<PAGE>
5. Shareholder hereby agrees that if the shareholders of the Company vote
to approve the Merger and Merger Agreement, Shareholder's Shares will,
pursuant to the terms of the Merger Agreement, be exchanged for the
consideration provided in the Merger Agreement. Shareholder hereby waives
any rights of appraisal, or rights to dissent from the Merger, that he may
have.
6. If any action is brought before any court or agency as a shareholder
class action against the Company, any of its subsidiaries, or any of their
officers or directors, a class is certified and notice is sent to
Shareholder as a potential class member, Shareholder agrees not to join the
class and to "opt out" of treatment as a class member.
7. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be deemed to
have been duly received if so given) by delivery, by cable, telecopier,
telegram or telex, or by registered or certified mail, postage prepaid,
return receipt requested, to the respective parties as follows:
If to Shareholder, to the address set forth on Schedule A hereto.
If to BAC or Newco:
BankAmerica Corporation
555 California Street
Suite 4750, #3262
San Francisco, CA 94104
Attn: Doyle L. Arnold
Executive Vice President and
Director--Corporate Development
With a copies to:
BankAmerica Corporation
555 California Street
Legal Dept. #3017
San Francisco, CA 94104
Attn: Michael J. Halloran, Esq.
Executive Vice President
and General Counsel
Morrison & Foerster
345 California Street
San Francisco, CA 94104
Attn: Todd H. Baker, Esq.
If to the Company:
Arbor National Holdings, Inc.
333 Earle Ovington Boulevard
Uniondale, New York 11553
Attn: Chief Executive Officer
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attn: Fred B. White III, Esq.
or to such other address as any of the foregoing parties may have furnished
to the others in writing in accordance herewith, except that notices of
change of address shall only be effective upon receipt.
8. Shareholder agrees that this Agreement and the obligations hereunder
shall attach to the Shares and shall be binding upon any person or entity
to whom legal or beneficial ownership of the Shares shall pass, whether by
operation of law or otherwise, including without limitation its respective
heirs, guardians, administrators or successors. In the event of any stock
split, stock dividend, merger,
C-2
<PAGE>
reorganization, recapitalization or other change in the capital structure
of the Company affecting the Common Stock, or acquisition of additional
shares of Common Stock by Shareholder, the number of Shares listed in
Schedule A beside the name of Shareholder shall be adjusted appropriately
and this Agreement and the obligations hereunder shall attach to any
additional shares of Common Stock or other securities issued to or acquired
by Shareholder.
9. The Company and Shareholder hereby agree that upon BAC's request
Shareholder will tender to the Company any and all certificates
representing the Shares and request that the Company inscribe upon those
certificates the following legend: "The shares of Common Stock, $0.01 par
value, of Arbor National Holdings, Inc. represented by this certificate are
subject to an Irrevocable Proxy dated September 23, 1994 and to a Voting
Agreement of even date therewith. Copies of such Irrevocable Proxy and
Voting Agreement may be obtained at the principal executive offices of
Arbor National Holdings, Inc."
10. No person executing this Agreement who is or becomes during the term
hereof a director of the Company makes any agreement or understanding
herein in his or her capacity as such director. Shareholder signs solely in
his capacity as owner or holder of the power to vote Shares.
11. Each of the provisions of this Agreement is subject to compliance
with applicable regulatory conditions, including, without limitation, to
receipt of any necessary approvals.
12. This Agreement may be executed in two or more counterparts, each of
which shall be considered an original but all of which together shall
constitute the same instrument.
13. This Agreement, and all rights and obligations of the parties
hereunder, shall terminate upon the first to occur of (i) the Effective
Time, as defined in the Merger Agreement, (ii) the date upon which the
Merger Agreement is terminated in accordance with its terms or (iii) the
first anniversary of the date of this Agreement.
14. This Agreement is intended as an exclusive statement of the terms of
the agreement among the parties with respect to its subject matter,
supersedes all prior agreements with respect thereto and cannot be changed
or terminated except by written instrument executed by the party or parties
against whom enforcement thereof is sought.
15. This Agreement shall be governed by, and construed and enforced in
accordance with the laws of the State of New York without giving effect to
the principles of conflicts of law thereof.
BANKAMERICA CORPORATION
By: _________________________________
Name: _____________________________
Title: ____________________________
AH ACQUISITION CORP.
By: _________________________________
Name: _____________________________
Title: ____________________________
ARBOR NATIONAL HOLDINGS, INC.
By: _________________________________
Name: _____________________________
Title: ____________________________
SHAREHOLDER
-------------------------------------
Name:
C-3
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
SHARES OF
SHAREHOLDER COMMON STOCK ADDRESS
----------- ------------ -------
<S> <C> <C>
</TABLE>
C-4
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
This irrevocable proxy (this "Irrevocable Proxy") dated as of September 23,
1994 is made by and among BankAmerica Corporation, a Delaware corporation
("BAC"), AH Acquisition Corp., a New York corporation and wholly-owned indirect
subsidiary of BAC (the "Acquiror"), and the undersigned shareholder (the
"Shareholder").
Whereas, the Shareholder is the record and beneficial owner and has the power
to vote the number of shares of the common stock, $0.01 par value (the "Common
Stock") of Arbor National Holdings, Inc., a New York corporation (the
"Company"), set forth on Schedule A hereto (collectively, the "Shares"), and
Whereas, the Shareholder desires that the Company, BAC and the Acquiror enter
into an Agreement and Plan of Merger (the "Merger Agreement") with respect to
the merger of the Acquiror with and into the Company (the "Merger"), and
Whereas, the Shareholder is executing this Irrevocable Proxy to induce BAC
and the Acquiror to enter into and execute the Merger Agreement,
Now, Therefore, in consideration of the execution and delivery by BAC and the
Acquiror of the Merger Agreement and the mutual covenants, conditions and
agreements contained herein and therein, and in that certain Voting Agreement
of even date herewith made by and among the parties hereto (the "Voting
Agreement"), the parties agree as follows:
AGREEMENT
1. Grant of Irrevocable Proxy; Appointment of Proxy.
The Shareholder hereby irrevocably grants to BAC and appoints BAC (with full
power of substitution) his or her proxy to vote the Shares:
(a) In favor of (i) adoption of the Merger Agreement and approval of the
Merger and the transactions contemplated by the Merger Agreement, and (ii)
any other matter relating to the consummation of the transactions
contemplated by the Merger Agreement; and
(b) Against (i) any proposal for any recapitalization, merger, sale of
assets or other business combination between the Company or any other
person or entity (other than the Merger) or any other action or agreement
that would result in a breach of any covenant, representation or warranty
or any other obligation or agreement of the Company under the Merger
Agreement or which could result in any of the conditions to BAC's or the
Company's obligations under the Merger Agreement not being fulfilled, or
(ii) any proposal or transaction which would in any manner impede,
frustrate, prevent or nullify the Merger, the Merger Agreement or any of
the other transactions contemplated by the Merger Agreement.
The Shareholder represents that any proxies heretofore given in respect of
the Shares are not irrevocable; and that any such proxies are hereby revoked.
2. Irrevocability.
The Shareholder hereby affirms that this Irrevocable Proxy is given in
connection with the execution of the Merger Agreement and the Voting Agreement,
and that this Irrevocable Proxy is given to secure the performance of the
duties of the Shareholder under the Voting Agreement. The Shareholder hereby
further affirms that this Irrevocable Proxy is coupled with an interest and may
under no circumstances be revoked. The Shareholder hereby ratifies and confirms
all that this Irrevocable Proxy may lawfully do or cause to be done by virtue
hereof. This Irrevocable Proxy is executed and intended to be irrevocable in
accordance with the provisions of the New York Business Corporation Law.
C-5
<PAGE>
3. Termination.
This Irrevocable Proxy shall terminate upon the first to occur of (a) the
Effective Time, as defined in the Merger Agreement, (b) the date upon which the
Merger Agreement is terminated in accordance with its terms or (c) the first
anniversary of the date of this Irrevocable Proxy.
4. Further Actions.
The Shareholder agrees to perform such further acts and execute such further
documents as may reasonably be required to vest in the Acquiror the power to
vote the Shares as contemplated by the Irrevocable Proxy granted hereby.
5. Governing Law.
This Irrevocable Proxy shall be governed by and construed and enforced in
accordance with the laws of the State of New York without giving effect to the
principles of conflicts of law thereof.
6. Amendment.
Subject to applicable law, this Irrevocable Proxy may be amended or modified
in whole or in part only by an agreement in writing executed by the BAC, the
Acquiror and the Shareholder.
7. Regulatory Conditions.
Each of the provisions of this Irrevocable Proxy is subject to compliance
with any applicable regulatory conditions, including, without limitation, to
receipt of any necessary regulatory approvals.
8. Binding Effect.
The Shareholder agrees that this Irrevocable Proxy and the obligations
hereunder shall attach to the Shares and shall be binding upon any person or
entity to whom legal or beneficial ownership of the Shares shall pass, whether
by operation of law or otherwise, including without limitation the heirs,
executor, guardian, administrator or successors of the Shareholder. In the
event of any stock split, stock dividend, merger, reorganization,
recapitalization or other change in the capital structure of the Company
affecting the Shares, or acquisition of additional shares of Common Stock by
the Shareholder, this Irrevocable Proxy and the obligations hereunder shall
attach to any additional shares of Common Stock or other securities issued to
or acquired by the Shareholder.
9. Counterparts.
This proxy may be executed in counterparts and each such executed copy shall
be deemed an original
C-6
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Irrevocable Proxy as
of the day first noted above.
BANKAMERICA CORPORATION
By: _________________________________
Name: ____________________________
Title: ___________________________
AH ACQUISITION CORP.
By: _________________________________
Name: ____________________________
Title: ___________________________
SHAREHOLDER
-------------------------------------
Name:
C-7
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
NAME OF SHAREHOLDER SHARES ADDRESS
------------------- --------- -------
<C> <C> <S>
</TABLE>
C-8
<PAGE>
[LOGO OF GOLDMAN, SACHS & CO. APPEARS HERE]
ANNEX D
December 20, 1994
Board of Directors
Arbor National Holdings, Inc.
333 Earle Ovington Boulevard
Uniondale, New York 11553
Gentlemen and Madame:
You have requested our opinion as to the fairness to the holders of the
outstanding shares of Common Stock, par value $0.01 per share (the "Shares"),
of Arbor National Holdings, Inc. (the "Company") of the Exchange Ratio (as
defined below) of shares of Common Stock, par value $1.5625 per share (the
"BankAmerica Shares"), of BankAmerica Corporation ("BankAmerica") to be
received for each Share in the proposed merger (the "Merger") contemplated by
the Agreement and Plan of Merger dated as of September 23, 1994 and the
Amendment to the Agreement and Plan of Merger dated as of December 15, 1994 by
and among BankAmerica, Bank of America, FSB, a wholly-owned subsidiary of
BankAmerica ("BAFSB"), AH Acquisition Corp., a wholly-owned subsidiary of
BAFSB, and the Company (the "Agreement"). Pursuant to and subject to the terms
of the Agreement, the Exchange Ratio shall be determined by dividing the Final
Per Share Merger Price (as defined below) by the Average Closing Price (as
defined below). The Final Per Share Merger Price shall be determined by
dividing (a) the amount $117,940,758 (subject to certain adjustments provided
for in the Agreement) by (b) the number of Shares (not including treasury
shares) plus the number of options on Shares outstanding at the Effective Time
(as defined in the Agreement). The Average Closing Price means the average
closing sales price per share of BankAmerica Shares on the New York Stock
Exchange for the 20 consecutive trading days ending on the fifth trading day
prior to the date on which the last bank regulatory approval is obtained,
provided however, that in no event shall the Average Closing Price utilized in
determining the Exchange Ratio be less than $39.31 or greater than $53.19.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Agreement. We also have been engaged by the Company to act as its financial
advisor in connection with the possible sale of Arbor National Commercial
Mortgage Corporation, a wholly-owned subsidiary of the
[LOGO APPEARS HERE]
<PAGE>
Company. We also have provided certain investment banking services to
BankAmerica from time to time, including acting as managing underwriter of a
public offering of subordinated notes of BankAmerica in February, 1993 and
advising BankAmerica in the sale of certain of its real estate assets in 1993,
and may provide investment banking services to BankAmerica in the future. In
addition, we represented Continental Bank Corporation in its merger with
BankAmerica.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-4 including the Proxy
Statement/Prospectus relating to the Special Meeting of Stockholders of the
Company; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company for the two fiscal years ended February 28, 1994; the Prospectus dated
August 7, 1992 relating to the Company's initial public offering; Annual
Reports to Stockholders and Annual Reports on Form 10-K of BankAmerica for the
five years ended December 31, 1993; certain interim reports to stockholders and
Quarterly Reports on Form 10-Q of the Company and BankAmerica; certain other
communications from the Company and BankAmerica to their respective
stockholders; and certain internal financial analyses and
forecasts for the Company and BankAmerica prepared by their respective
managements. We also have held discussions with members of the senior
managements of the Company and BankAmerica regarding the past and current
business operations, financial condition and future prospects of their
respective companies. In addition, we have reviewed the reported price and
trading activity for the Shares and the BankAmerica Shares, compared certain
financial and stock market information for the Company and BankAmerica with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the mortgage banking industry specifically and in other
industries generally and performed such other studies and analyses as we
considered appropriate.
We have relied without independent verification upon the accuracy and
completeness of all the financial and other information reviewed by us for
purposes of this opinion. In addition, we have not made an independent
evaluation or appraisal of the assets and liabilities of the Company or
BankAmerica or any of their subsidiaries and we have not been furnished with
any such evaluations or appraisals. We have assumed with your consent that the
Merger will be accounted for as a pooling of interests under generally accepted
accounting principals.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Exchange
Ratio pursuant to the Agreement is fair to the holders of the Shares.
Very truly yours,
GOLDMAN, SACHS & CO.
D-2
<PAGE>
ANNEX E
NEW YORK BUSINESS CORPORATION LAW
SECTION 623
PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE
PAYMENT FOR SHARES.
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the
meeting of shareholders at which the action is submitted to a vote, or at such
meeting but before the vote, written objection to the action. The objection
shall include a notice of his election to dissent, his name and residence
address, the number and classes of shares as to which he dissents and a demand
for payment of the fair value of his shares if the action is taken. Such
objection is not required from any shareholder to whom the corporation did not
give notice of such meeting in accordance with this chapter or where the
proposed action is authorized by written consent of shareholders without a
meeting.
(b) Within ten days after the shareholders' authorization date, which term as
used in this section means the date on which the shareholders' vote authorizing
such action was taken, or the date on which such consent without a meeting was
obtained from the requisite shareholders, the corporation shall give written
notice of such authorization or consent by registered mail to each shareholder
who filed written objection or from whom written objection was not required,
excepting any shareholder who voted for or consented in writing to the proposed
action and who thereby is deemed to have elected not to enforce his right to
receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election
to dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such
nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer is
made. Upon expiration of such time, withdrawal of a notice of election shall
require the written consent of the corporation. In order to be effective,
withdrawal of a notice of election must be accompanied by the return to the
corporation of any advance payment made to the shareholder as provided in
paragraph (g). If a notice of election is withdrawn, or the corporate action is
rescinded, or a court shall determine that the shareholder is not entitled to
receive payment for his shares, or the shareholder shall otherwise lose his
dissenter's rights, he shall not have the right to receive payment for his
shares and he shall be reinstated to all his rights as a shareholder as of the
consummation of the corporate action, including any
E-1
<PAGE>
intervening preemptive rights and the right to payment of any intervening
dividend or other distribution or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu
thereof, at the election of the corporation, the fair value thereof in cash as
determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate
bearing such notation, each new certificate issued therefor shall bear a
similar notation together with the name of the original dissenting holder of
the shares and a transferee shall acquire no rights in the corporation except
those which the original dissenting shareholder had at the time of the
transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later
(but in no case later than ninety days from the shareholders' authorization
date), the corporation or, in the case of a merger or consolidation, the
surviving or new corporation, shall make a written offer by registered mail to
each shareholder who has filed such notice of election to pay for his shares at
a specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment
to each such shareholder who has submitted the certificates representing his
shares to the corporation, as provided in paragraph (f), of an amount equal to
eighty percent of the amount of such offer, or (2) as to each shareholder who
has not yet submitted his certificates a statement that advance payment to him
of an amount equal to eighty percent of the amount of such offer will be made
by the corporation promptly upon submission of his certificates. If the
corporate action has not been consummated at the time of the making of the
offer, such advance payment or statement as to advance payment shall be sent to
each shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does
not constitute a waiver of any dissenters' rights. If the corporate action has
not been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than
a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such balance
sheet or profit and loss statement or statements were previously furnished, nor
if in connection with obtaining the shareholders' authorization for or consent
to the proposed corporate action the shareholders were furnished with a proxy
or information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be
paid for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
E-2
<PAGE>
(h) The following procedure shall apply if the corporation fails to make such
offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is a
foreign corporation without an office in this state, such proceeding shall
be brought in the county where the office of the domestic corporation,
whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such rate
as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest,
the court shall consider all relevant factors, including the rate of
interest which the corporation would have had to pay to borrow money during
the pendency of the proceeding. If the court finds that the refusal of any
shareholder to accept the corporate offer of payment for his shares was
arbitrary, vexatious or otherwise not in good faith, no interest shall be
allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed
by it. Notwithstanding the foregoing, the court may,
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in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by the corporation against any or all of the
dissenting shareholders who are parties to the proceeding, including any
who have withdrawn their notices of election as provided in paragraph (e),
if the court finds that their refusal to accept the corporate offer was
arbitrary, vexatious or otherwise not in good faith. The court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by any or all of the dissenting shareholders who are parties
to the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer
or required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the period
specified therefor; or (D) that the action of the corporation in complying
with its obligations as provided in this section was arbitrary, vexatious
or otherwise not in good faith. In making any determination as provided in
clause (A), the court may consider the dollar amount or the percentage, or
both, by which the fair value of the shares as determined exceeds the
corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificate for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section
515 (Reacquired shares), except that, in the case of a merger or consolidation,
they may be held and disposed of as the plan of merger or consolidation may
otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is
not liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this
paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in paragraph (e), and except that
this section shall not exclude the right of such shareholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations). (Last amended by Ch. 117, L. '86, eff. 9-1-86).
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