Filed On 1/13/03 1:07pm ET · SEC File 333-98267 · Accession Number 927016-3-96
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
1/13/03 State Street Corp 424B5 1:144 Donnelley R R & S..07/FA
Document/Exhibit Description Pages Size
1: 424B5 Prospectus HTML 1,190K
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
The information contained in this preliminary prospectus supplement is not complete and may be changed. This preliminary prospectus supplement
is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Filed Pursuant to Rule
424(b)(5)
1,375,000 Units
STATE STREET CORPORATION
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% SPACESSM* % Separate PACESSM* % Separate VSRCsSM*
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This is an offering of SPACES, separate PACES and separate VSRCs of State
Street Corporation.
Each SPACES has a stated amount of $200 and initially will consist of (a) a PACES and (b) a variable-share repurchase contract pursuant to
which you agree to deliver to us between zero and shares of our common stock on February 15, 2006. Each PACES has a stated amount of $200 and will consist of (1) a
fixed-share purchase contract pursuant to which you agree to purchase from us, for $200, shares of our common stock on November 15, 2005, (2) an ownership interest in a
zero-coupon U.S. treasury strip that will mature on November 15, 2005, which we refer to as the “pledged treasury strip,” and (3) an ownership interest in a portfolio of zero-coupon U.S. treasury strips that will mature on a quarterly
basis through November 15, 2005. Your ownership interest in the pledged treasury strip will be pledged to secure your obligation to purchase our common stock under the fixed-share purchase contract. In addition, the PACES initially will be pledged
to secure your obligation to deliver to us shares of our common stock under the variable-share repurchase contract. PACES and variable-share repurchase contracts
may be sold separately and not as components of SPACES, in which case we refer to them as “separate PACES” and as “separate VSRCs,” respectively. Each separate VSRC will consist of a variable-share repurchase contract secured by
a pledge of our common stock. We will make quarterly contract payments to you under each fixed-share purchase contract at the annual rate of
% of the stated amount of $200 and under each variable-share repurchase contract at the annual rate of % of the stated amount of $200. We may defer any of these quarterly payments as described herein.
You will also receive quarterly payments on the treasury portfolio of $ per PACES payable by the United States Government (equivalent to % per annum of the $200 stated amount of
the PACES). On January 9, 2003, the last reported sale price of our common stock on the New York Stock Exchange was $40.19 per share. SPACES have been
approved for listing on the New York Stock Exchange under the symbol “SBZ”. Under separate prospectus supplements, we are concurrently offering 6,220,000
shares of our common stock and State Street Capital Trust II is concurrently offering $275 million aggregate liquidation amount of floating rate medium term capital securities, in each case excluding the respective underwriters’ option to
purchase additional securities. This offering and the concurrent capital securities offering are contingent upon each other as well as upon the concurrent common stock offering.
See “Risk Factors” beginning on page S-19 to read about certain factors you should consider before buying SPACES, separate PACES or separate VSRCs.
These securities are not deposits or other obligations of any bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of
these securities or passed upon the accuracy or adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
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Per SPACES
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Total
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| Initial public offering price(1) |
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$ |
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$ |
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| Underwriting discount |
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$ |
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$ |
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| Purchase price of pledged treasury strips and treasury portfolio |
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$ |
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$ |
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| Proceeds, before expenses, to State Street Corporation |
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$ |
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$ |
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(1) |
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The initial public offering price of separate PACES is $ per separate PACES and
$ in total. The initial public offering price of separate VSRCs is $ per separate VSRC and
$ in total. The proceeds of separate VSRCs will be used to purchase the pledged common stock. |
The initial public offering prices set forth above do not include accumulated contract payments, if any. Contract payments on the fixed-share purchase contracts and variable-share repurchase contracts will accrue from the
date of original issuance of the securities, expected to be January , 2003. Within the 30-day period commencing with the date of the
initial issuance of the SPACES, the underwriters have the option to purchase up to an additional 206,250 SPACES from us at the initial public offering price less the underwriting discount.
The underwriters expect to deliver the securities against payment in New York, New York on January , 2003.
*SPACES, separate PACES and separate VSRCs are service marks of Goldman, Sachs & Co. The ideas, concepts and methodologies described in these materials and as may be embodied in
this offering are patent pending to Goldman, Sachs & Co. All rights reserved.
Goldman, Sachs & Co.
Deutsche Bank Securities
Prospectus Supplement dated
January , 2003.
ABOUT THIS PROSPECTUS SUPPLEMENT
You should read this prospectus supplement along with the accompanying prospectus carefully before you invest. Both documents contain important information you should consider when making your investment
decision. This prospectus supplement contains information about:
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shares of our common stock issuable upon settlement of the fixed-share purchase contracts and in respect of deferred contract payments, and
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our notes issuable in respect of deferred contract payments. |
The accompanying prospectus contains information about our securities generally, some of which does not apply to the securities covered by this prospectus supplement. This prospectus supplement may add, update or change information
in the accompanying prospectus. To the extent there is a conflict between the information contained in this prospectus supplement, on the one hand, and the information contained in the accompanying prospectus or any document incorporated by
reference in the accompanying prospectus, on the other hand, the information contained in this prospectus supplement shall control.
In this prospectus supplement, “we,” “our,” “ours” and “us” refer to State Street Corporation unless the context otherwise requires.
S-3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information contained elsewhere, or incorporated by reference, in this prospectus supplement and the accompanying prospectus. As a result, it does not contain all of the information that you should
consider before investing in SPACES, separate PACES or separate VSRCs. You should read the entire prospectus supplement, including the “Risk Factors” section, the accompanying prospectus and the documents incorporated by reference, which
are described under “Incorporation of Certain Documents by Reference” in the accompanying prospectus.
State Street
Corporation
We are a financial holding company organized under the laws of the Commonwealth of Massachusetts. Through
our subsidiaries, we provide a full range of products and services for sophisticated global investors.
We were organized in
1970 and conduct our business principally through our subsidiary, State Street Bank and Trust Company (State Street Bank), which traces its beginnings to the founding of the Union Bank in 1792. The charter under which State Street Bank now operates
was authorized by a special act of the Massachusetts Legislature in 1891, and its present name was adopted in 1960.
With
$6.2 trillion of assets under custody and $763 billion of assets under management at year-end 2002, we are a leading specialist in meeting the needs of sophisticated global investors. Our clients include mutual funds and other collective investment
funds, corporate and public pension funds, investment managers and others.
We provide services from 28 offices in the
United States, and from offices in Australia, Belgium, Canada, Cayman Islands, Chile, Czech Republic, France, Germany, Ireland, Japan, Luxembourg, Netherlands, Netherlands Antilles, New Zealand, People’s Republic of China, Singapore, South
Korea, Switzerland, Taiwan, United Arab Emirates and the United Kingdom. Our executive offices are located at 225 Franklin Street, Boston, Massachusetts 02110 (telephone (617) 786-3000).
Our Business
We report two lines of business: investment
servicing and investment management.
Investment Servicing
Our investment servicing business includes custody, accounting, daily pricing and administration, master trust and master custody, trustee and recordkeeping, foreign exchange,
securities lending, deposit and short-term investment facilities, lease financing, investment manager operations outsourcing and performance, risk and compliance analytics to support institutional investors. We provide shareholder services, which
include mutual fund and collective fund shareholder accounting, through 50%-owned affiliates, Boston Financial Data Services, Inc. and the International Financial Data Services group of companies.
We are the largest mutual fund custodian and accounting agent in the United States. We provide custody services for approximately 47% of registered
U.S. mutual funds. We believe we are distinct from other mutual fund service providers because clients make extensive use of a number of related services, including accounting, daily pricing and fund administration. We provide mutual fund
S-3
accounting and valuation services for more than four times the assets serviced by the next largest mutual fund accounting service provider. We calculate approximately 30% of the U.S. mutual fund
prices that appear daily in The Wall Street Journal.
We provide master trust, master custody, securities lending and
performance, risk and compliance analytics to corporate and public pension funds, other institutional retirement funds, insurance companies, foundations, endowments and corporate and public treasurers. These clients make extensive use of many other
products and services, including securities lending, investment management and foreign exchange and equity trade execution. At 29% market share, we have a leading position in the market for servicing U.S. tax-exempt assets for corporate and public
pension funds. Additionally, we provide trust and valuation services for over 3,600 daily-priced, unitized defined contribution accounts, making us a leader in this market.
Investment Management
Our investment management business offers a broad
array of services for managing financial assets, including investment management, investment research and trading services for both institutions and individual investors worldwide. We offer these services through State Street Global
Advisors® (SSgA®). SSgA is the sixth largest investment manager in the world based on assets under custody and the largest manager of tax-exempt (primarily pension) assets in the United States. SSgA offers a broad array of investment
strategies, including passive, enhanced and active management using quantitative and fundamental methods for both U.S. and global equities and fixed income securities.
Recent Developments
2002 Financial Results
We recently announced that, for the full-year 2002, reported earnings per share were $3.10 and net income was $1.0 billion, on revenue of $4.4
billion. Results for the full-year include a net gain on the sale of our Corporate Trust business of $495 million, equal to $296 million after taxes, or $0.90 in diluted earnings per share. Excluding the gain, return on stockholders’ equity was
17.1% for the year.
For the full-year 2001, reported earnings per share were $1.90 and net income was $628 million, on
revenue of $3.8 billion. Results for 2001 included both goodwill amortization expenses of $38 million, equal to $26 million after tax, or $0.08 per diluted share, and the write-off of our total investment in Bridge Information Systems, Inc. of $50
million, equal to $33 million after tax, or $0.10 per diluted share, which was recorded in the first quarter.
We prepare
supplemental information adjusting reported results for significant transactions, and define the information as operating results. Operating results provide financial information on a comparable basis from period to period to assist stockholders and
others in analyzing our financial results for ongoing businesses and operations. On an operating-results basis, consistent with prior presentations, for the full year, taxable-equivalent revenue was up $19 million, and net income was up 5%, or $32
million, from the prior year.
These operating results for 2002 exclude the net gain on the sale of our Corporate Trust
business. Operating results for 2001 exclude both the goodwill amortization expenses and the write-off of our total investment in Bridge Information Systems, Inc. Operating results for both years also include fully-taxable equivalent adjustments.
S-4
Revenue for the full year, on an operating-results basis as defined above, was $4.0
billion, up $19 million from 2001. New business success drove the growth, substantially offset by the impact of lower equity market valuations, low currency volatility and a less-favorable interest-rate environment.
Servicing fees were up 4% for the year, to $1.7 billion. Management fees were up 2%, to $526 million. Strong new business success drove growth in
both servicing fees and management fees, offsetting the impact of lower equity market valuations and lower securities lending revenue.
Foreign exchange trading revenue declined $68 million, to $300 million, reflecting low currency volatility. Brokerage fees rose $35 million, to $124 million, from a year ago, driven by significantly higher equity trading volumes.
Securities gains of $76 million, up $33 million, reflected opportunities created by the low-interest rate environment.
Reported net interest revenue for 2002 was $979 million. On a taxable-equivalent operating-results basis, net interest revenue was $1.0 billion, a decline of $52 million from 2001. Lower yields on assets offset growth in the balance
sheet and lower liability costs.
Operating expenses were $2.8 billion for the year. On a comparable basis, expenses were
down $17 million, or 1%. Comparable expenses for 2001 exclude $38 million of goodwill amortization expenses. Lower other expenses, reflecting reduced professional services and advertising expenses, contributed to the decline in total expenses.
For further information about our 2002 financial results, see the earnings release in our Current Report on Form 8-K filed
on January 10, 2003, which is incorporated by reference into the accompanying prospectus.
Completion of Sale of Corporate Trust Business
On December 31, 2002, we completed the sale of our Corporate Trust business to U.S. Bank, N.A., the lead bank of
U.S. Bancorp. The after-tax gain on the sale, net of exit and other associated costs, totaled $296 million, or $0.90 in diluted earnings per share, and was recorded in the fourth quarter of 2002. The premium received at closing on the sale was $650
million. An additional $75 million was placed in escrow pending the successful transition of the business over the next 18 months. Exit and other associated costs were $155 million. As previously announced, the after-tax proceeds from this
transaction will provide partial funding for the planned acquisition of substantial parts of Deutsche Bank’s Global Securities Services business. Accordingly, the impact of this transaction on our 2003 earnings is reflected in the estimates of
dilution set forth below under “—Acquisition of Deutsche Bank’s Global Securities Services Business—Financial Effect.”
Acquisition of Deutsche Bank’s Global Securities Services Business
Overview
On November 5, 2002, we entered into a definitive agreement to acquire substantial portions of Deutsche Bank AG’s
Global Securities Services business, which we refer to as the “Acquired Business.” The Acquired Business includes Deutsche Bank’s global custody, fund administration, securities lending, performance measurement and benefits payment
businesses, and it operates in 92 markets throughout the world. It also includes U.K.- and U.S.-based domestic custody and securities clearing as well as certain specialized depository and fund administration services in Germany, Austria and Italy
known as Depotbank services. The Acquired Business is one of Europe’s largest custodians and fund administrators, and one of the leading agency securities lenders in the world. As part of the acquisition, we will assume operations of
S-5
the Acquired Business in several locations, including New York, Nashville, London, Frankfurt, Dublin, Edinburgh and Singapore. With approximately $2.2 trillion of assets under custody and
approximately 3,200 employees worldwide as of August 31, 2002, the Acquired Business serves investment managers, private and public pension funds, insurance companies, and other investors throughout the world.
The Acquired Business had revenues of approximately €490 million for the eight-month period ended August 31, 2002. Approximately 25% of the Acquired Business’ total revenues during such period came from Deutsche Asset Management (DeAM), a division of Deutsche Bank. DeAM
is the Acquired Business’ largest client and one of Europe’s largest asset managers. After the acquisition, DeAM will be one of our largest clients. At August 31, 2002, the assets managed by DeAM represented approximately $350 billion of
the Acquired Business’ total assets under custody. At September 30, 2002, DeAM’s total assets under management were approximately $742 billion.
Transaction Terms
Under the terms of the definitive agreement, we will pay
Deutsche Bank a purchase price premium of up to approximately $1.5 billion, subject to certain adjustments. These adjustments include a holdback from the purchase price of no less than approximately $263 million, reducing the initial payment made to
Deutsche Bank at the closing of the acquisition to no more than approximately $1.2 billion. At closing, this holdback amount may be increased, thereby further reducing the initial payment at closing by an additional amount based upon a formula that
takes into account estimated changes in annualized revenues of the Acquired Business prior to the closing (i.e., the amount held back will increase if the annualized revenues, determined in accordance with certain procedures described in the
definitive agreement, decline below certain thresholds). After the closing of the acquisition, the holdback amount may be further adjusted based upon a similar formula in the event that the actual revenues, determined in accordance with certain
procedures described in the definitive agreement, of the Acquired Business during the relevant pre-closing measurement period differ from the estimate of those revenues. The extent to which the adjusted holdback amount is subsequently paid to
Deutsche Bank will be reduced based primarily on the extent to which (1) the annualized revenues for the six-month period ended June 30, 2002, generated by third-party clients of the Acquired Business who were clients of the Acquired Business prior
to the closing of the transaction exceed (2) the annualized most recent quarterly revenues generated at the one-year anniversary of closing. The holdback is intended to protect us from client attrition and loss of revenue in the Acquired Business in
the approximately one-year period following the closing. In addition to the premium, we will pay to Deutsche Bank at closing an amount, which we expect to be less than $25 million, with respect to primarily the fixed assets of the Acquired Business.
After the closing, this amount will be adjusted based on the final determination of such assets of the Acquired Business at the closing date.
As part of the agreement, we expect to enter into 10-year contracts to provide global investment services to DeAM entities and their clients, subject to regulatory approval and DeAM’s fiduciary requirements. In general,
in the event that some or all of the DeAM business is not transferred to us as of the closing, we will be permitted to withhold a portion of the purchase price attributable to that non-transferred business, to be released only after the business is
transferred. These withheld amounts, if any, would be in addition to the holdback described above. On the fifth and eighth anniversaries of the various contracts, the fees charged will be adjusted upward or downward to match the then current market
level of fees for such services. Individual DeAM entities and clients may terminate their contracts if we do not agree to reduce the fees to the then current market levels.
Under the terms of the agreement, we have the right to pay approximately $500 million of the purchase price of the Acquired Business by issuing our common stock to Deutsche Bank at
an agreed-upon price per share. We will not exercise this right if this offering is completed, but we intend to preserve our right to issue our common stock to Deutsche Bank until the completion of this offering.
S-6
We expect the acquisition to close in the first quarter of 2003, and at the earliest on
January 31, 2003. The closing of the acquisition is subject to customary closing conditions, including U.S. and certain European regulatory approvals. If the closing conditions are not met in a timely manner, the closing of the acquisition may not
occur in the timeframe that we expect and, while we believe it is highly unlikely, it is possible that the closing may not occur at all.
Strategic Rationale
The acquisition of the Acquired Business strengthens our position as a leader in
Europe’s investment servicing market and significantly expands the size of our cross-border assets under custody. We believe that the acquisition provides us with significant opportunities to grow our global investment servicing business,
particularly in Europe. In addition, we expect the acquisition to give us the opportunity to take advantage of considerable economies of scale. The sum of our assets under custody at September 30, 2002 and the assets under custody of the Acquired
Business at August 31, 2002 is approximately $7.9 trillion. Although we do not expect to retain all of the custodial assets of the Acquired Business following the acquisition primarily as a result of client attrition, we nevertheless believe that
following the closing we will have more assets under custody than any other custodian in the world.
Financial Effect
We expect the acquisition to be dilutive to our earnings per share by approximately $0.17 to $0.22 in 2003 (consisting
of dilution of approximately $0.16 to $0.19 per share from restructuring costs associated with the acquisition and dilution of approximately $0.01 to $0.03 per share from operations and financing costs), and accretive by approximately $0.01 to $0.03
in 2004. We expect to record $90 to $110 million of pretax restructuring costs associated with the acquisition in 2003. Based on the annualized costs of the Acquired Business for the eight-month period ended August 31, 2002, we expect to achieve
cumulative cost reductions in the Acquired Business of approximately $125 to $150 million in 2003, $175 to $225 million in 2004 and $225 to $300 million in 2005. We expect these cost reductions to be derived primarily from the migration of the
Acquired Business’ operations and technology platforms to ours and from headcount reductions. To achieve the expected financial results of the acquisition, among other things we must achieve significant cost reductions and greater economies of
scale by successfully integrating the Acquired Business into our operations and we must retain a substantial portion of the clients of the Acquired Business.
The Acquired Business includes a significant amount of client deposits. The average balance of these deposits, other than Depotbank deposits, for the six-month period ended June 30, 2002 was approximately $7
billion. Client deposits may fluctuate by substantial amounts in the normal course of business. During the transition period following the closing, we expect a substantial amount of these deposits to be transferred to our balance sheet in connection
with the conversion of client accounts to our systems. The conversion process will take many months. Pending the transfer to our system of the related client accounts, we and Deutsche Bank have agreed that, starting at the closing of the
acquisition, we will receive, through a revenue sharing agreement, a portion of the economic benefits associated with the related client deposits for so long as such deposits remain on Deutsche Bank’s balance sheet. Upon transfer to us, the
client deposits are expected to replace other funding sources on our balance sheet.
In addition, Depotbank deposits, the
average balance of which was approximately $7 billion for the six-month period ended June 30, 2002, will initially remain on Deutsche Bank’s balance sheet. The Depotbank deposits will also be subject to a revenue sharing agreement between
Deutsche Bank and us while they remain on Deutsche Bank’s balance sheet, which will, in general, provide for some of the economic benefits of holding the deposits to be paid to us. We have agreed with Deutsche Bank that
S-7
we will take the Depotbank deposits onto our balance sheet over time to the extent that either we receive client consents to the transfer under the underlying client contracts or the client
accounts have been converted to our systems, in each case subject to compliance with local regulations, including deposit insurance requirements.
Integration and Client Retention
Integration of the Acquired Business into our existing
operations and retention of a substantial portion of the Acquired Business’ current client base will be important to achieving the expected financial results of the acquisition. The conversion of client accounts to our systems will require, in
most cases, client consents. We expect to obtain consents through contract renewal, replacement, or assignment, although we do expect some client attrition in the normal course of business. We expect to complete the integration of substantially all
of the Acquired Business, other than the Depotbank business, within 24 months of closing. We expect to complete the integration of the Depotbank business within 36 months of closing. We have experience with complex business integrations and the
challenge of retaining newly-acquired client relationships. Our recent experience with business integrations and client retention initiatives include those associated with our acquisition of Wachovia’s institutional trust and custody business,
our appointment to provide Liberty Financial fund accounting, daily pricing and financial reporting for all of its fund management companies and our selection by Lloyds/Scottish Widows to provide custody, accounting, trustee and investment
administration services for its entire range of life, pension and investment products. We have been successful in the past in retaining clients after completing acquisitions. Nevertheless, the scale, scope and nature of the integration and client
retention efforts required as a result of the acquisition of the Acquired Business present a greater challenge than that presented by our previous efforts. We cannot assure you that the integration will take place on the expected schedule, that it
will provide the cost savings and economies of scale we are currently expecting to achieve or that we will be able to retain a significant number of clients of the Acquired Business, any of which could adversely impact our expected financial
results.
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Summary Consolidated Financial Information
The table below presents summary consolidated financial information of State Street Corporation and its subsidiaries. The statement of income data for the years ended December 31, 1999, 2000 and 2001 and the
balance sheet data as of December 31, 2000 and 2001 is derived from our audited consolidated financial statements incorporated by reference into the accompanying prospectus. The statement of income data for the years ended December 1997 and 1998 and
the balance sheet data as of December 31, 1997, 1998 and 1999 is derived from our audited consolidated financial statements not incorporated by reference into the accompanying prospectus. We are also providing unaudited statement of income data and
balance sheet data for the year ended and as of December 31, 2002.
The following consolidated financial information is
only a summary. You should read it in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on
Form 10-K for the year ended December 31, 2001, along with the earnings release in our Current Report on Form 8-K filed on January 10, 2003, which are incorporated by reference into the accompanying prospectus. See “Where You Can
Find More Information” in the accompanying prospectus.
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|
1998
|
|
1999
|
|
|
2000
|
|
2001
|
|
2002
|
| Statement of Income Data:(1)(3) (Dollars in millions, except per share data)
|
|
|
|
(unaudited) |
| |
| Fee revenue:(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Servicing fees |
|
$ |
861 |
|
$ |
1,043 |
|
$ |
1,189 |
|
|
$ |
1,447 |
|
$ |
1,648 |
|
$ |
1,716 |
| Management fees |
|
|
391 |
|
|
480 |
|
|
600 |
|
|
|
584 |
|
|
516 |
|
|
526 |
| Foreign exchange trading |
|
|
245 |
|
|
289 |
|
|
306 |
|
|
|
387 |
|
|
368 |
|
|
300 |
| Brokerage fees |
|
|
25 |
|
|
36 |
|
|
67 |
|
|
|
95 |
|
|
89 |
|
|
124 |
| Processing fees and other |
|
|
149 |
|
|
160 |
|
|
159 |
|
|
|
177 |
|
|
148 |
|
|
184 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total fee revenue |
|
|
1,671 |
|
|
2,008 |
|
|
2,321 |
|
|
|
2,690 |
|
|
2,769 |
|
|
2,850 |
| |
| Net interest revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest revenue |
|
|
1,755 |
|
|
2,237 |
|
|
2,437 |
|
|
|
3,256 |
|
|
2,855 |
|
|
1,974 |
| Interest expense |
|
|
1,114 |
|
|
1,492 |
|
|
1,656 |
|
|
|
2,362 |
|
|
1,830 |
|
|
995 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest revenue |
|
|
641 |
|
|
745 |
|
|
781 |
|
|
|
894 |
|
|
1,025 |
|
|
979 |
| Provision for loan losses |
|
|
16 |
|
|
17 |
|
|
14 |
|
|
|
9 |
|
|
10 |
|
|
4 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest revenue after provision for loan losses |
|
|
625 |
|
|
728 |
|
|
767 |
|
|
|
885 |
|
|
1,015 |
|
|
975 |
| Gains (losses) on the sales of available-for-sale investment securities, net |
|
|
2 |
|
|
10 |
|
|
(45 |
) |
|
|
2 |
|
|
43 |
|
|
76 |
| Gain on the sale of corporate trust business, net of exit and other associated costs |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
|
495 |
| Gain on the sale of commercial banking business, net of exit and other associated costs |
|
|
— |
|
|
— |
|
|
282 |
|
|
|
— |
|
|
— |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
2,298 |
|
|
2,746 |
|
|
3,325 |
|
|
|
3,577 |
|
|
3,827 |
|
|
4,396 |
| |
| Operating expenses:(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Salaries and employee benefits |
|
|
973 |
|
|
1,175 |
|
|
1,313 |
|
|
|
1,524 |
|
|
1,663 |
|
|
1,670 |
| Information systems and communications |
|
|
185 |
|
|
241 |
|
|
287 |
|
|
|
305 |
|
|
365 |
|
|
373 |
| Transaction processing services |
|
|
184 |
|
|
196 |
|
|
237 |
|
|
|
268 |
|
|
247 |
|
|
246 |
| Occupancy |
|
|
132 |
|
|
164 |
|
|
188 |
|
|
|
201 |
|
|
229 |
|
|
246 |
| Other |
|
|
260 |
|
|
313 |
|
|
332 |
|
|
|
373 |
|
|
393 |
|
|
306 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
1,734 |
|
|
2,089 |
|
|
2,357 |
|
|
|
2,671 |
|
|
2,897 |
|
|
2,841 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
|
564 |
|
|
657 |
|
|
968 |
|
|
|
906 |
|
|
930 |
|
|
1,555 |
| Income taxes |
|
|
184 |
|
|
221 |
|
|
349 |
|
|
|
311 |
|
|
302 |
|
|
540 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income |
|
$ |
380 |
|
$ |
436 |
|
$ |
619 |
|
|
$ |
595 |
|
$ |
628 |
|
$ |
1,015 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-10
| |
|
|
| |
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
| Statement of Income Data, continued(1)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
| Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
1.18 |
|
$ |
1.35 |
|
$ |
1.93 |
|
$ |
1.85 |
|
$ |
1.94 |
|
$ |
3.14 |
| Diluted |
|
|
1.16 |
|
|
1.33 |
|
|
1.89 |
|
|
1.81 |
|
|
1.90 |
|
|
3.10 |
| Average Shares Outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
321,323 |
|
|
321,873 |
|
|
321,320 |
|
|
321,678 |
|
|
325,030 |
|
|
323,520 |
| Diluted |
|
|
327,577 |
|
|
327,854 |
|
|
327,503 |
|
|
328,088 |
|
|
330,492 |
|
|
327,477 |
| Cash dividends declared per share |
|
$ |
0.22 |
|
$ |
0.26 |
|
$ |
0.30 |
|
$ |
0.345 |
|
$ |
0.405 |
|
$ |
0.48 |
| |
|
|
| |
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
| Balance Sheet Data: (Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
| Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and investment securities |
|
$ |
22,866 |
|
$ |
23,187 |
|
$ |
34,535 |
|
$ |
36,653 |
|
$ |
42,749 |
|
$ |
57,575 |
| Securities purchased under resale agreements |
|
|
5,544 |
|
|
13,979 |
|
|
17,518 |
|
|
21,134 |
|
|
16,680 |
|
|
17,215 |
| Loans (less allowance) |
|
|
5,479 |
|
|
6,225 |
|
|
4,245 |
|
|
5,216 |
|
|
5,283 |
|
|
4,113 |
| Intangibles, including goodwill |
|
|
224 |
|
|
216 |
|
|
233 |
|
|
284 |
|
|
612 |
|
|
589 |
| Total Assets |
|
|
37,975 |
|
|
47,082 |
|
|
60,896 |
|
|
69,298 |
|
|
69,850 |
|
|
85,794 |
| |
| Liabilities and Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total deposits |
|
$ |
24,878 |
|
$ |
27,539 |
|
$ |
34,145 |
|
$ |
37,937 |
|
$ |
38,559 |
|
$ |
45,468 |
| Securities sold under repurchase agreements |
|
|
7,409 |
|
|
12,563 |
|
|
18,399 |
|
|
21,351 |
|
|
19,006 |
|
|
21,963 |
| Long-term debt |
|
|
774 |
|
|
922 |
|
|
921 |
|
|
1,219 |
|
|
1,217 |
|
|
1,270 |
| Total liabilities |
|
|
35,980 |
|
|
44,771 |
|
|
58,244 |
|
|
66,036 |
|
|
66,005 |
|
|
81,007 |
| Total stockholders’ equity |
|
|
1,995 |
|
|
2,311 |
|
|
2,652 |
|
|
3,262 |
|
|
3,845 |
|
|
4,787 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Liabilities and Stockholders’ Equity |
|
|
37,975 |
|
|
47,082 |
|
|
60,896 |
|
|
69,298 |
|
|
69,850 |
|
|
85,794 |
(1) |
|
Share data restated for 2-for-1 stock split in 2001. |
(2) |
|
In November 2001, the Financial Accounting Standards Board, or FASB, issued Emerging Issues Task Force (EITF) No. 01-14, “Income Statement Characterization of
Reimbursements Received for Out-Of-Pocket Expenses Incurred.” This guidance, effective January 1, 2002, requires companies to recognize the reimbursement of client out-of-pocket expenses on a gross basis as revenue and operating expense.
Prior to 2002, we netted these client reimbursements against the corresponding operating expenses. Client reimbursements for out-of-pocket expenses are reflected in fee revenue in the information set forth for the year ended December 31, 2002.
The years ended December 31, 1998 through December 31, 2001 have been reclassified to reflect this presentation, which resulted in increases in fee revenue and operating expenses for such years. The reclassification had no impact on net income.
|
(footnotes continued on following page)
S-10
(3) |
|
Statement of Income data as presented above is prepared in accordance with accounting principles generally accepted in the United States (GAAP) and includes significant
non-operating special items and reports goodwill amortization expense in accordance with the accounting practices applicable for those periods presented. |
In order to provide information on a comparable basis from period to period and assist stockholders, analysts, other external parties and management in analyzing the
financial results and trends of our ongoing businesses and operations, we also present our financial results on an “Operating Results” basis. Operating Results are based on our GAAP results adjusted for the following three types of
financial activity:
| |
(1) |
|
Operating Results exclude the results of certain significant transactions not representative of ongoing operations. |
| |
(2) |
|
Operating Results include fully taxable equivalent adjustments that increase net interest revenue to reflect investment yield on tax-free investments on an equivalent
basis with taxable investments. |
| |
(3) |
|
Operating Results exclude goodwill amortization expense from operating expenses in 2001 and prior years, to be consistent with GAAP accounting required beginning in 2002.
|
The following table reconciles our Net Income as determined in accordance with GAAP to
our Net Income—Operating Results:
| |
|
|
|
| |
|
|
|
1998
|
|
1999
|
|
|
2000
|
|
2001
|
|
2002
|
|
| Net Income (as determined in accordance with GAAP)(a) |
|
$ |
380 |
|
$ |
436 |
|
$ |
619 |
|
|
$ |
595 |
|
$ |
628 |
|
$ |
1,015 |
|
| After-tax adjustments to arrive at Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deduct gain on sale of Commercial Banking business |
|
|
|
|
|
|
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
| Add loss on portfolio repositioning |
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
| Add loss on investment in Bridge Information Systems, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
| Deduct gain on the sale of Corporate Trust business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(296 |
) |
| Add goodwill amortization expense adjustment |
|
|
6 |
|
|
8 |
|
|
10 |
|
|
|
11 |
|
|
26 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income—Operating Results |
|
$ |
386 |
|
$ |
444 |
|
$ |
499 |
|
|
$ |
606 |
|
$ |
687 |
|
$ |
719 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a more detailed description of our Operating Results for the years ended December
31, 1997 through December 31, 2002, see “Supplemental Consolidated Statement of Income Data.”
S-11
The Offering
What are the
SPACES?
Each SPACES has a stated amount of $200 and initially will consist of:
| |
(1) |
|
a PACES, which will have a stated amount of $200 and will consist of |
| |
(a) |
|
a fixed-share purchase contract under which |
| |
• |
|
you will agree to purchase from us, for $200, shares of our common stock on November 15, 2005,
which we refer to as the “fixed-share stock purchase date” and |
| |
• |
|
we will pay you quarterly contract payments at the rate of % of the stated amount of $200 per year as specified below,
|
| |
(b) |
|
an ownership interest in a zero-coupon U.S. treasury strip that will mature on the fixed-share stock purchase date with a principal amount of $1,000, which we refer to as
the “pledged treasury strip” and |
| |
(c) |
|
an ownership interest in a portfolio of zero-coupon U.S. treasury strips that will mature on a quarterly basis through the fixed-share stock purchase date, each with a
principal amount of $1,000, which we refer to as the “treasury portfolio”; and |
| |
(2) |
|
a variable-share repurchase contract under which |
| |
• |
|
you will agree to deliver to us shares of our common stock on February 15, 2006, which we refer to as the “variable-share stock purchase date,” the number of
which will be determined based on the average trading price of our common stock for a period preceding that date, calculated in the manner described below, and |
| |
• |
|
we will pay you quarterly contract payments at the rate of % of the stated amount of $200 per year as specified below.
|
Because treasury strips can be purchased only in integral multiples of $1,000 principal amount, each PACES will
evidence a fractional ownership interest in the pledged treasury strip and a fractional ownership interest in the treasury portfolio. Your ownership interest in the pledged treasury strip included in each PACES will be pledged to the collateral
agent for our benefit to secure your obligations under the fixed-share purchase contract. Unless you elect to settle the fixed-share purchase contract early in the manner described below, principal of the pledged treasury strip, when paid at
maturity, automatically will be applied to satisfy in full your obligation to purchase shares of our common stock under the fixed-share purchase contract.
In addition, the PACES (to the extent of your right to purchase shares of our common stock under the fixed-share purchase contract) initially will be pledged to the collateral agent for our benefit to secure
your obligation to deliver to us shares of our common stock under the variable-share repurchase contract. You may elect at any time before the fixed-share stock purchase date to substitute a pledge of shares of our common stock, which we refer to as
the “pledged common stock,” for the pledged PACES.
Upon settlement of the fixed-share purchase
contract, of the shares of our common stock that you are entitled to receive automatically will be pledged to the collateral agent for our benefit to secure your continuing
obligation to deliver to us shares of our common stock under the related variable-share repurchase contract. If you elect to settle the variable-share repurchase contract at a time when your obligations under the contract are secured by the pledged
common stock, the pledged common stock automatically will be applied to satisfy those obligations and any excess shares will be returned to you.
S-13
What are the separate PACES and separate VSRCs?
You may separately hold PACES and not as a component of SPACES, in which case we refer to them as “separate PACES.” You may purchase separate PACES in this offering.
Alternatively, you may create separate PACES by splitting apart the SPACES as described below. In addition, if you hold a SPACES and elect to early settle the related variable-share repurchase contract, your SPACES will cease to exist and you will
thereafter hold a separate PACES. Separate PACES will entitle you to the same rights, and subject you to the same obligations, as PACES held as a component of SPACES except that separate PACES are held free and clear of any security interest.
You may separately hold variable-share repurchase contracts and not as a component of SPACES, in which case we refer to
them as “separate VSRCs.” You may purchase separate VSRCs in this offering. Each separate VSRC will consist of a variable-share repurchase contract and
shares of pledged common stock, which will secure your obligation to deliver to us shares of our common stock. Alternatively, you may create separate
VSRCs by splitting apart the SPACES as described below. In addition, if you hold a SPACES, upon settlement of the related PACES (whether on or prior to the fixed-share stock purchase date), your SPACES will cease to exist and you will thereafter
hold a separate VSRC.
The fixed-share purchase contract underlying each PACES obligates you to purchase, and us to sell, for $200, on the fixed-share stock purchase date,
newly issued shares of our common stock. We refer to the number of shares purchasable by a holder of a fixed-share purchase contract as the “fixed-share settlement
rate.”
The variable-share repurchase contract, whether held as a component of a SPACES or held as a separate security,
obligates you to deliver to us on the variable-share stock purchase date shares of our common stock, the number of which will be determined based on the average trading price of our common stock for a period preceding that date, calculated in the
manner described below. We refer to the number of shares deliverable by a holder of a variable-share repurchase contract as the “variable-share settlement rate.”
We refer to the fixed-share purchase contracts and the variable-share repurchase contracts together as the “contracts.” We refer to the fixed-share settlement rate and the
variable-share settlement rate together as the “settlement rates.”
What payments will be made to holders of SPACES, separate PACES or
separate VSRCs?
If you hold SPACES, you will be entitled to receive quarterly payments on the underlying PACES and
variable-share repurchase contract. If you hold separate PACES, you will be entitled only to the quarterly payments on the PACES. If you hold separate VSRCs, you will be entitled only to the quarterly contract payments payable on the variable-share
repurchase contract.
Payments on the PACES will consist of:
| |
(1) |
|
quarterly contract payments on the fixed-share purchase contract at the annual rate of % of the stated amount of $200 per fixed-share purchase
contract, including on the fixed-share stock purchase date; and |
| |
(2) |
|
quarterly payments of $ on the treasury portfolio payable by the United States Government (equivalent to
% per annum of the stated amount of $200 per PACES). |
S-13
Payments on the variable-share repurchase contract will consist of quarterly contract
payments payable by us at the annual rate of % of the stated amount of $200 per variable-share repurchase contract, including on the variable-share stock purchase date.
The quarterly contract payments on the contracts are subject to deferral by us at our option or at the direction of the Federal Reserve Board as described below and are
subordinate and junior in right of payment to our obligations under our senior debt.
What are the payment dates?
Subject to our deferral right in respect of the quarterly contract payments described below, distributions on the contracts and the treasury
portfolio will be paid quarterly in arrears on each February 15, May 15, August 15 and November 15, commencing May 15, 2003.
When can we defer
payments?
We may, at our option or at the direction of the Federal Reserve Board, defer payment of all or part of the
quarterly contract payments on the contracts until no later than the fixed-share stock purchase date or the variable-share stock purchase date, as applicable. We will pay additional contract payments on any deferred contract payments at a rate of
% per year until paid, compounded quarterly, to but excluding November 15, 2005, in the case of a fixed-share purchase contract, unless your fixed-share purchase contract has been earlier settled
(except in the case of merger early settlement described below) or terminated, and February 15, 2006, in the case of a variable-share repurchase contract, unless your variable-share repurchase contract has been earlier terminated. On the fixed-share
stock purchase date or the variable-share stock purchase date, as applicable, we may, at our option, pay the deferred contract payments to you in shares of our common stock (subject to a cap on the number of shares we will issue) or our junior
subordinated notes (subject to a cap on the interest rate).
How can you split apart SPACES to create separate PACES and separate VSRCs?
You may split apart SPACES to create separate PACES and separate VSRCs by substituting a pledge
of shares of our common stock per variable-share repurchase contract for the PACES pledged to secure your obligations under the variable-share repurchase
contract.
How can you re-create SPACES if you hold separate PACES and separate VSRCs?
You may re-create SPACES by substituting a pledge of PACES for the pledged common stock securing your obligations under the variable-share repurchase contract.
What are the settlement rates for the contracts?
The fixed-share settlement rate is the number of shares of our common stock that you are obligated to purchase, and we are obligated to sell, for $200 upon settlement of a fixed-share purchase contract underlying the PACES.
Subject to adjustment under specified circumstances, the fixed-share settlement rate will be shares of our common stock per fixed-share purchase contract
on the fixed-share stock purchase date or if you exercise your merger early settlement right. If you elect to
S-14
settle the fixed-share purchase contract prior to the fixed-share stock purchase date (other than merger early settlement), you will receive a number of shares equal to the percentage of the
fixed-share settlement rate shown below, which we refer to as the “fixed-share early settlement rate”:
| Date of Early Settlement
|
|
Percentage of Fixed-Share Settlement Rate
|
| |
|
90.0% |
| |
|
90.5% |
| |
|
91.0% |
| |
|
91.5% |
| |
|
92.0% |
| |
|
92.5% |
| |
|
93.0% |
| |
|
93.5% |
| |
|
94.0% |
| |
|
94.5% |
| |
|
95.0% |
The variable-share settlement rate is the number of shares of our common
stock that you are obligated to deliver to us upon settlement of a variable-share repurchase contract. Subject to adjustment under specified circumstances, the variable-share settlement rate for each variable-share repurchase contract on the
variable-share stock purchase date will be as follows:
| |
• |
|
if the applicable market value, determined as described below, of our common stock is equal to or greater than
$ , the variable-share settlement rate will be shares of our common stock;
|
| |
• |
|
if the applicable market value of our common stock is less than $ but
greater than $ , the settlement rate will be a number of shares of our common stock equal to (i) $200 divided by $ minus (ii) $200
divided by the applicable market value of our common stock; or |
| |
• |
|
if the applicable market value of our common stock is less than or equal to $ , the settlement rate
will be zero shares of our common stock. |
“Applicable market value” means the average of the
closing prices per share of our common stock on each of the 20 consecutive trading days ending on the third trading day immediately preceding the variable-share stock purchase date.
Prior to the variable-share stock purchase date, we may, at our option, fix the variable-share settlement rate according to a formula based on the Black-Scholes option pricing model,
which is a function of several variables, including the market price of our common stock, our dividend yield, the remaining maturity of the variable-share repurchase contract, the “risk-free rate,” and the volatility of our common stock.
If you elect to settle a variable-share repurchase contract prior to the variable-share stock purchase date (other than
merger early settlement) and before we have elected to fix the variable-share settlement rate, the applicable variable-share settlement rate will be shares. If you elect to
settle a variable-share repurchase contract after we have elected to fix the variable-share settlement rate, the applicable variable-share settlement rate will be the fixed variable-share settlement rate.
S-15
How can a fixed-share purchase contract be settled early?
You may settle a fixed-share purchase contract prior to November 15, 2005 by purchasing from us, for $200 in cash, a number of shares of our common
stock per fixed-share purchase contract equal to the fixed-share early settlement rate previously described. Upon early settlement:
| |
• |
|
the related PACES ceases to exist, the pledged treasury strip pledged as collateral to secure your obligation under the fixed-share purchase contract will be transferred
to you free and clear of our security interest, any remaining treasury strips in your treasury portfolio that are in integral multiples of $1,000 principal amount will be distributed to you and any remaining treasury strips in your treasury
portfolio not in integral multiples of $1,000 principal amount will be retained by the purchase contract agent for your benefit and the proceeds of those strips will be distributed to you as they mature; |
| |
• |
|
if you held PACES as a component of SPACES, since the PACES are no longer available to secure your obligation to deliver to us shares of our common stock under the
related variable-share repurchase contract, you must replace that collateral by pledging shares of our common stock per variable-share repurchase contract; and
|
| |
• |
|
your right to receive future contract payments and any deferred contract payments under the fixed-share purchase contract will terminate. |
If you elect to early settle the fixed-share purchase contract, the purchase contract agent will cause the related PACES first to be
offered to a financial institution chosen by us for exchange in lieu of early settlement. This will not affect your obligations upon early settlement, and you will still receive the same number of shares as described above.
You may also settle a fixed-share purchase contract prior to the fixed-share stock purchase date in connection with a merger in which at least 30%
of the consideration for our common stock consists of cash, which we refer to as “merger early settlement.” Upon merger early settlement, pursuant to each fixed-share purchase contract, in exchange for $200 in cash, you will receive the
cash, securities and other property that you would have received had you owned shares of common stock immediately prior to the merger. If you elect to merger early settle, you
will still be entitled to receive future contract payments and any deferred contract payments on the fixed-share purchase contract through the fixed-share stock purchase date.
How can a variable-share repurchase contract be settled early?
You may settle
a variable-share repurchase contract prior to February 15, 2006 by delivering to us shares of our common stock per variable-share repurchase contract
or, if we have previously fixed the variable-share settlement rate, a number of shares equal to the fixed variable-share settlement rate. Upon early settlement:
| |
• |
|
if the variable-share repurchase contract is secured by pledged common stock, such shares will be applied to satisfy your delivery obligation and any excess shares will
be released to you free and clear of our security interest, or |
| |
• |
|
if the variable-share repurchase contract is secured by the related PACES, you must deliver to us such number of shares of our common stock as specified above and the
PACES will then be released to you free and clear of our security interest. |
You may also settle a
variable-share repurchase contract prior to the variable-share stock purchase date in connection with a cash merger as described above. Upon merger early settlement,
S-16
pursuant to each variable-share repurchase contract, you must deliver to us cash, securities and other property equal to the then applicable variable-share settlement rate or, if the
variable-share settlement rate has been fixed prior to the merger, equal to the fixed variable-share settlement rate, in each case as adjusted to give effect to the merger.
If you elect to settle the variable-share repurchase contract early (either as a merger early settlement or otherwise), you will still be entitled to receive future contract payments
and any deferred contract payments on the variable-share repurchase contract through the variable-share stock purchase date.
What happens to
the contracts in the event of our bankruptcy, insolvency or reorganization?
Upon the occurrence of specified events of
our bankruptcy, insolvency or reorganization, the contracts, our related rights and obligations and those of the holders of SPACES, separate PACES and separate VSRCs, including their obligations to purchase or deliver shares of our common stock,
automatically will terminate. Upon such a termination of the contracts, the pledged treasury strip and, if applicable, the pledged common stock underlying separate VSRCs will be released and distributed to you. In addition, the purchase contract
agent will distribute to you any remaining treasury strips in the treasury portfolio that are in integral multiples of $1,000 principal amount and will dispose of the remainder of such treasury strips for cash and distribute the cash to you. If we
become the subject of a case under the federal bankruptcy code, a delay in the delivery of your collateral or treasury portfolio may occur as a result of the automatic stay under the bankruptcy code and continue until the automatic stay has been
lifted. The automatic stay will not be lifted until such time as the bankruptcy judge agrees to lift it and return your collateral and treasury portfolio to you. If the contracts are terminated early as the result of a bankruptcy event, you will
have no further right to receive any accrued or deferred contract payments.
What are the U.S. federal income tax consequences related to the
SPACES, separate PACES, separate VSRCs and treasury securities?
For U.S. federal income tax purposes, subject to the
discussion under “Certain U.S. Federal Income Tax Considerations”:
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if you own a SPACES, you will be treated as separately owning the underlying fixed-share purchase contract, variable-share repurchase contract, ownership interest in the
pledged treasury strip and ownership interest in the treasury portfolio; |
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if you own a separate PACES, you will be treated as separately owning the underlying fixed-share purchase contract, ownership interest in the pledged treasury strip and
ownership interest in the treasury portfolio; and |
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if you own a separate VSRC, you will be treated as separately owning the underlying variable-share repurchase contract and the pledged common stock.
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The purchase price of a SPACES, separate PACES or separate VSRC should be allocated among the components described in
the preceding paragraph in proportion to their respective fair market values at the time of purchase. For this purpose, we expect that the fair market value of the ownership interest in the pledged treasury strip will be treated as
$ , the fair market value of the ownership interest in the treasury portfolio will be treated as $ , the
fair market value of the fixed-share purchase contract will be treated as $ and the fair market value of the variable-share repurchase contract will be treated as $0.00.
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The pledged treasury strips and treasury portfolio will be treated as having original issue
discount, which you will be required to include in income as it accrues, regardless of your accounting method for tax purposes. We intend to report the contract payments as income to you. Non-U.S. holders will be subject to withholding tax on the
contract payments. You should consult your tax advisors concerning the possibility that the contract payments may not be taxable upon receipt. In addition, gain or loss may be realized on the sale or exchange of any of the securities.
Because there is no statutory, judicial or administrative authority directly addressing the tax treatment of SPACES, separate PACES or
separate VSRCs (or instruments similar to such securities), you are urged to consult your own tax advisor concerning the tax consequences of an investment in SPACES, separate PACES or separate VSRCs.
Will the SPACES, separate PACES or separate VSRCs be listed on a stock exchange?
The SPACES have been approved for listing on the New York Stock Exchange under the symbol “SBZ.” Neither the separate PACES nor the separate VSRCs initially will be listed
on any stock exchange; however, in the event that either of these securities are traded to a sufficient extent that applicable exchange listing requirements are met, we will endeavor to cause those securities to be listed on the exchange on which
the SPACES are then listed.
What are the expected uses of proceeds from this offering and the concurrent offerings?
Substantially all of the proceeds from this offering will be used by the underwriters to purchase the underlying pledged treasury strips
and treasury portfolio, and we do not expect to receive any additional net proceeds from this offering at closing. We estimate that we will receive net proceeds of approximately $ million, or $ million
if the underwriters’ option to purchase additional SPACES is exercised in full, on November 15, 2005 (the fixed-share stock purchase date) or such earlier dates as fixed-share purchase contracts are settled. We currently expect to use amounts
received upon settlement of the fixed-share purchase contracts for general corporate purposes.
We estimate that we will
receive net aggregate proceeds from our concurrent common stock offering and State Street Capital Trust II’s concurrent offering of capital securities of approximately $ million, or $ million
if the underwriters’ over-allotment options in those offerings are exercised in full. We intend to use (1) the net proceeds from those offerings, (2) the proceeds related to the sale of our Corporate Trust business to U.S. Bancorp, which closed
on December 31, 2002, and (3) other available funding sources to fund the initial purchase price for the Acquired Business. Pending such use, we may invest the proceeds temporarily in short-term securities.
Concurrent Offerings
In
addition to the securities offered by this prospectus supplement, we are concurrently offering, by means of a separate prospectus supplement, 6,220,000 shares of our common stock, plus up to 933,000 additional shares if the underwriters for that
offering exercise their option to purchase additional shares, and State Street Capital Trust II is concurrently offering, by means of a separate prospectus supplement, $275 million aggregate liquidation amount of floating rate medium term capital
securities, which we refer to as capital securities, plus up to $41.25 million additional aggregate liquidation amount of capital securities if the underwriters for that offering exercise their option to purchase additional capital securities. Each
capital security has a stated liquidation amount of $1,000, represents a beneficial interest in a corresponding amount of junior subordinated debentures to be purchased from us by State Street Capital Trust II and will be guaranteed on a junior
subordinated basis by us. This offering and the capital securities offering are contingent upon each other as well as upon the common stock offering.
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RISK FACTORS
In considering whether to purchase the SPACES, separate PACES or separate VSRCs, you should carefully consider all the information we have included or incorporated by reference in
this prospectus supplement and the accompanying prospectus. In particular, you should carefully consider the following risk factors, as well as the factors listed in “Forward-Looking Statements.” In addition, because each SPACES and
separate PACES includes a fixed-share purchase contract to acquire shares of our common stock, you are also making an investment decision with regard to our common stock. You should carefully review all the information in this prospectus supplement
and the accompanying prospectus about all of these securities.
Risks Relating to the SPACES, Separate PACES and Separate
VSRCs
If you hold SPACES or separate PACES, you will bear the entire risk of a decline in the price of our common stock.
The market value per share of the shares of our common stock you will purchase on the fixed-share stock purchase date may be materially
lower than the price per share that the fixed-share purchase contract requires you to pay. If the market value per share of our common stock on the fixed-share stock purchase date is less than
per share, you will, on the fixed-share stock purchase date, be required to purchase shares of common stock with an aggregate market value of less than the $200 stated amount
of the SPACES and separate PACES. Accordingly, a holder of SPACES or separate PACES assumes the entire risk that the market value of our common stock may decline and that the decline could be substantial.
If you hold SPACES, you will receive only a portion of any appreciation in our common stock price.
The aggregate market value of the shares of our common stock you will receive upon settlement of the fixed-share purchase contract less the shares delivered to us upon settlement of
the variable-share repurchase contract generally will exceed the stated amount of $200 only if the average of the closing price per share of our common stock over the 20 trading day period ending on the third trading day immediately preceding the
variable-share stock purchase date equals or exceeds $ , which we refer to as the “threshold appreciation price.” The threshold appreciation price represents an
appreciation of % over $ . If the applicable average closing price per share exceeds
$ , which we refer to as the “reference price,” but falls below the threshold appreciation price, you will realize no equity appreciation on the common stock for the
period during which you own the SPACES. Furthermore, if the applicable average closing price per share exceeds the threshold appreciation price, the value of the shares you will receive under the fixed-share purchase contract less the shares
delivered to us upon settlement of the variable-share repurchase contract will be approximately % of the value of the shares you could have purchased with $200 at the time of this offering. Therefore, an investment in SPACES
affords less opportunity for equity appreciation than a direct investment in our common stock.
If you hold SPACES or separate VSRCs, you will
be required to deliver a greater number of shares of our common stock to us as the price of our common stock rises.
If
you hold SPACES or separate VSRCs, the number of shares of common stock that you will be required to deliver to us on the variable-share stock purchase date will increase as the price per share of our common stock increases. Therefore, if you hold
SPACES, you will receive only a portion of the appreciation in our common stock as described above, and if you hold separate VSRCs, the value of the common stock that you must deliver to us will increase as the price per share of our common stock
increases.
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We have the right to fix the variable-share settlement rate prior to the variable-share stock purchase date.
At any time prior to December 31, 2005, we may elect to fix the variable-share settlement rate according to a formula
based on the Black-Scholes option pricing model, which is a function of several variables, including the market price of our common stock, our dividend yield, the remaining maturity of the variable-share repurchase contract, the “risk-free
rate,” and the volatility of our common stock. Once we have fixed the variable-share settlement rate, the number of shares you are required to deliver to us upon settlement of the variable-share repurchase contract no longer will depend on our
stock price. Accordingly, even if our stock price subsequently declines, you will be required to deliver a number of shares of our common stock equal to the fixed variable-share settlement rate. In no event will the fixed variable-share settlement
rate be greater than shares of our common stock, subject to adjustment as described in “Description of the Securities—Anti-dilution
Adjustments.”
The trading price of our common stock and the general level of interest rates will directly affect the trading price for
SPACES, separate PACES and separate VSRCs.
It is impossible to predict whether the price of our common stock or
interest rates will rise or fall. Our operating results and prospects and economic, financial and other factors will affect trading prices of our common stock. In addition, market conditions can affect the capital markets generally, therefore
affecting the price of our common stock. These conditions may include the level of, and fluctuations in, the trading prices of stocks generally and sales of substantial amounts of our common stock in the market after this offering or the perception
that those sales could occur. Fluctuations in interest rates may give rise to arbitrage opportunities based upon changes in the relative value of our common stock underlying the contracts and of the other components of SPACES. The arbitrage
could, in turn, affect the trading prices of SPACES and our common stock.
If you hold SPACES or separate PACES, you may suffer dilution of our
common stock issuable upon settlement of your fixed-share purchase contract.
The number of shares of our common stock
issuable upon settlement of the fixed-share purchase contract is subject to adjustment only for stock splits and combinations, stock dividends and specified other transactions that significantly modify our capital structure. The number of shares of
our common stock issuable upon settlement of each fixed-share purchase contract is not subject to adjustment for other events, such as employee stock option grants, offerings of common stock for cash, or in connection with acquisitions or other
transactions that may adversely affect the price of our common stock. The terms of SPACES and the separate PACES do not restrict our ability to offer common stock in the future or to engage in other transactions that could dilute our common stock.
We have no obligation to consider the interests of the holders of SPACES or separate PACES in engaging in any such offering or transaction. If we issue additional shares of common stock, that issuance may materially and adversely affect the price of
our common stock and, as a result, such issuance may adversely affect the trading price of SPACES and separate PACES.
If you hold SPACES or
separate PACES, you will have no rights as a common stockholder until you settle the fixed-share purchase contract.
Until you acquire shares of our common stock upon settlement of the fixed-share purchase contract, you will have no rights with respect to our common stock, including voting rights, rights to respond to tender offers and rights to
receive any dividends or other distributions on our common stock. Upon settlement of your fixed-share purchase contract, you will be entitled to exercise the rights of a holder of common stock only as to actions for which the record date occurs
after the settlement date.
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Your pledged securities will be encumbered.
Although holders of SPACES and separate PACES will be beneficial owners of the underlying pledged treasury strips, holders will pledge those securities with the collateral agent to
secure their obligations under the related fixed-share purchase contracts. In addition, holders of SPACES will be required to pledge PACES and holders of separate VSRCs will be required to pledge shares of our common stock to the collateral agent
for our benefit to secure their obligations to deliver shares of our common stock under the related variable-share repurchase contracts. For so long as the applicable contracts remain in effect, holders will not be allowed to withdraw the collateral
securing those contracts from these pledge arrangements except to split apart or re-create SPACES.
The secondary market for SPACES, separate
PACES and separate VSRCs may be illiquid.
We are unable to predict how SPACES, separate PACES and separate VSRCs will
trade in the secondary market or whether that market will be liquid or illiquid. There is currently no secondary market for any of the SPACES, separate PACES and separate VSRCs. The SPACES have been approved for listing on the New York Stock
Exchange. Neither the separate PACES nor the separate VSRCs initially will be listed for trading on any stock exchange. In the event that either of the separate PACES or separate VSRCs are traded to a sufficient extent that applicable exchange
listing requirements are met, we will endeavor to cause those securities to be listed on the exchange on which the SPACES are then listed. A listing application for separate PACES or separate VSRCs, if filed, may not be accepted and, if accepted, it
is possible that the SPACES, separate PACES or separate VSRCs may be delisted. In addition, the liquidity of SPACES, separate PACES or separate VSRCs may be adversely affected as a result of elections to split apart or re-create SPACES or early
settle underlying contracts, and if such elections cause the number of these securities to fall below the applicable requirements for listing securities on the New York Stock Exchange or other applicable securities exchange, trading in such
securities may be suspended.
We have been advised by the underwriters that they presently intend to make a market for the
SPACES, separate PACES and separate VSRCs; however, they are not obligated to do so and any market-making may be discontinued at any time without notice. We cannot assure you as to the liquidity of any market that may develop for the SPACES, the
separate PACES or the separate VSRCs, your ability to sell such securities or whether a trading market, if it develops, will continue.
Delivery
of your pledged securities and your treasury portfolio is subject to potential delay if we become subject to a bankruptcy proceeding.
Notwithstanding the automatic termination of the contracts, if we become the subject of a case under the federal bankruptcy code, the imposition of an automatic stay under the federal bankruptcy code may delay the delivery to you of
your treasury portfolio as well as securities being held as collateral under the pledge agreement and such delay may continue until the automatic stay has been lifted. The automatic stay will not be lifted until such time as the bankruptcy judge
agrees to lift it and return your collateral and/or the treasury portfolio to you.
The contract payments will be contractually subordinated to
our senior debt and will be effectively subordinated to the obligations of our subsidiaries.
Our obligations with
respect to contract payments will be subordinate and junior in right of payment to our obligations under our senior debt. At December 31, 2002, our senior debt totaled approximately $6.8 billion and included $5.3 billion of securities sold under
agreements to repurchase and $1.0 billion of commercial paper.
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Because we are a holding company, our right to participate in any distribution of assets of
any subsidiary upon such subsidiary’s liquidation or reorganization or otherwise (and thus your ability to benefit indirectly from such distribution) is subject to the prior claims of creditors of that subsidiary, except to the extent that we
may be recognized as a creditor of that subsidiary. There are various legal limitations on the extent to which our subsidiaries may extend credit, pay dividends or otherwise supply funds to us or certain of our other subsidiaries. Our subsidiaries
are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay amounts due under the contracts or otherwise to make any funds available to us. Accordingly, the contract payments effectively will be subordinated to
all existing and future liabilities of our subsidiaries, including deposits, and holders of the contracts should look only to our assets for payment of the contract payments.
We may, at our option or at the direction of
the Federal Reserve, defer the payment of all or part of the contract payments on the contracts until no later than the fixed-share stock purchase date or the variable-share stock purchase date, as applicable. To the extent permitted by applicable
law, deferred contract payments will accrue additional contract payments at the rate of % per year, compounding quarterly, until paid. If the contracts are terminated upon the occurrence of specified events of bankruptcy,
insolvency or reorganization with respect to us, or if the fixed-share purchase contract is settled prior to the fixed-share stock purchase date (except in the case of a cash merger early settlement), the right to receive contract payments and
deferred contract payments will also terminate. At the fixed-share stock purchase date or the variable-share stock purchase date, as applicable, we will pay to you the deferred contract payments in shares of our common stock or unsecured notes. If
we elect to pay deferred contract payments in shares of our common stock, the number of shares of common stock you will be entitled to receive will equal (a) the aggregate amount of deferred contract payments payable to you divided by (b) the
greater of (i) the applicable market value of our common stock as of the fixed-share stock purchase date or the variable-share stock purchase date, as applicable, and
(ii) . Because the price used to calculate the number of shares you are entitled to receive may be greater than the applicable market value, the
market value of the shares you receive may be less than the amount of the deferred contract payments. In addition, any note that we issue to you in satisfaction of deferred contract payments will bear interest at a rate no greater than 10%, which
could be less than our then current market rate of interest.
The U.S. federal income tax consequences of the purchase, ownership and
disposition of SPACES, separate PACES and separate VSRCs are unclear.
No statutory, judicial or administrative
authority directly addresses the treatment of SPACES, separate PACES or separate VSRCs or instruments similar to such securities for U.S. federal income tax purposes. As a result, certain of the U.S. federal income tax consequences of the purchase,
ownership and disposition of SPACES, separate PACES and separate VSRCs are not entirely clear.
In particular, the Internal
Revenue Service may successfully take the position that, in some circumstances, if you otherwise hold a position in our common stock (including a contract), losses you would otherwise recognize with respect to the contracts may be disallowed or
deferred and your holding period with respect to the contracts (or some portion of the contracts) may be suspended during the term of the contracts.
The purchase contract agreement is not qualified under the Trust Indenture Act of 1939, thus, the purchase contract agent has limited obligations to you.
The purchase contract agreement will not be qualified as an indenture under the Trust Indenture Act of 1939, and the purchase contract agent will not be required to qualify as a
trustee under the Trust
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Indenture Act. Accordingly, you will not have the benefits of the protections of the Trust Indenture Act. Under the terms of the purchase contract agreement, the purchase contract agent will have
only limited obligations to you.
Risks Related to our Business
We may be unable to achieve the cost reductions and economies of scale that we expect from integrating the Acquired Business into our existing operations, we may be unable to retain the clients of
the Acquired Business and the success of the acquisition will depend in part on our relationship with Deutsche Asset Management.
We intend to use the net proceeds of our concurrent offering of common stock and State Street Capital Trust II’s concurrent offering of capital securities to fund a portion of the purchase price for our acquisition of Deutsche
Bank AG’s Global Securities Services business, which we refer to as the Acquired Business. The closing of the acquisition is subject to various regulatory approvals which we expect to obtain, but it is possible that they will be delayed or will
not be obtained. Accordingly, the closing of the acquisition may not occur in the timeframe that we expect, and it is possible that the closing may not occur at all.
Following the closing of the acquisition, our ability to achieve significant cost reductions and greater economies of scale from the integration of the Acquired Business into our
existing operations and our ability to retain key employees of the Acquired Business will be important to achieving the expected financial results of the acquisition. The scale, scope and nature of the integration effort required as a result of the
acquisition present a greater challenge than that presented by our previous integration efforts. We cannot assure you that the integration will take place on the expected schedule or that it will provide the cost savings and economies of scale we
are currently expecting to achieve. Furthermore, the integration of the Acquired Business will require a significant commitment of time and resources by our management and other personnel. This may adversely affect our ability to service and retain
our existing clients.
In addition, we may be unable to retain a sufficient number of clients of the Acquired Business after
the acquisition in order to meet our expected financial results. Although we are actively engaging in efforts to retain, and market our investment services to, the clients of the Acquired Business, we expect that some clients will elect other
service providers as a result of the acquisition. We also expect that our competitors will actively solicit the clients of the Acquired Business during the transition of these clients into our operations. The holdback amount that we are withholding
from the purchase price payable at the closing of the acquisition will not protect us from client attrition and revenue loss in the Acquired Business after the approximately one-year period after the acquisition or from client attrition and revenue
loss in an amount greater than the holdback amount.
Further, in connection with the acquisition, we expect to enter into
10-year contracts to provide global investment services to Deutsche Asset Management (DeAM) entities and their clients. The early termination of these contracts would adversely affect our ability to achieve the expected financial results of the
acquisition. DeAM is the Acquired Business’ largest client, representing approximately 25% of the Acquired Business’ total revenues during the eight-month period ended August 31, 2002. After the acquisition, DeAM will be one of our largest
clients. On the fifth and eighth anniversaries of the contracts, the fees charged will be adjusted upward or downward to match the then current market level of fees for such services. Individual DeAM entities or their clients may terminate their
contracts with us if we do not agree to reduce the fees to the then current market levels.
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Our failure to properly perform our fiduciary, custodial and other obligations could adversely affect our
business, financial position or results of operations.
We provide custody, accounting, daily pricing and
administration, master trust and master custody, investment management, trustee and recordkeeping, foreign exchange, securities lending, cash management, trading, and information services to clients worldwide. Assets under custody and assets under
management are held by us in a fiduciary or custodial capacity and are not included as assets of ours. If we fail to perform these services in a manner consistent with our fiduciary, custodial and other obligations, clients may lose confidence in
our ability to properly perform these services and our business may be adversely affected. In addition, any such failure may result in contingent liabilities that could have an adverse effect on our financial position or losses that could have an
adverse effect on our results of operations.
Decreases in cross-border investing because of economic and political uncertainties may lower our
revenue.
Increased cross-border investing by our clients worldwide generally increases our revenue. Our future revenue
may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by our clients. Economic and political uncertainties resulting from terrorist attacks, subsequent military actions or other events could
result in decreased cross-border investment activities.
Changes in the savings rate or investment preferences of individuals may lower our
revenue.
Our business generally benefits when individuals invest their savings in mutual funds and other
collective funds or in defined contribution plans. If there is a decline in the savings rates of individuals, or if there is a change in investment preferences that leads to less investment in mutual funds, other collective funds and defined
contribution plans, our revenues may be adversely affected.
Declines in the value of worldwide financial markets may reduce the amount of our
fee revenue.
As worldwide financial markets increase or decrease in value, our opportunities to invest and service
financial assets may change. Since a portion of our fees are based on the value of assets under custody and management, fluctuations in the valuation of worldwide securities markets will affect our revenue. We estimate, based on a study conducted in
2000, that a 10% increase or decrease in worldwide equity values would cause a corresponding change in our total revenue of approximately 2%. If bond values worldwide were to increase or decrease by 10%, we would anticipate a corresponding change of
approximately 1% in our total revenue.
Changes in the markets we serve and applicable laws and regulations may adversely affect our growth and
business.
Changes in the markets we serve, including the growth rate of collective funds worldwide, outsourcing
decisions, mergers, acquisitions and consolidations among clients and competitors and the pace of debt issuance, can affect our revenue. In general, we benefit from increases in the volume of financial market transactions that we are able to
service.
We provide services worldwide. Global and regional economic factors and changes or potential changes in laws and
regulations affecting our business, including volatile currencies, pace of inflation, changes in monetary policy, changes in domestic and international banking supervisory regulations, including capital requirements, and social and political
instability, could adversely affect our results of operations. For example, the significant slowing of economic growth globally is affecting worldwide
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equity values and business growth. The terrorist attacks that took place in the United States on September 11, 2001, and subsequent military and terrorist activities, have caused economic and
political uncertainties. These activities, the national and global efforts to combat terrorism and other potential military activities and outbreaks of hostilities have affected and may further adversely affect economic growth, and may have other
adverse effects on us in ways that are not predictable. In a similar manner, financial reporting irregularities involving large and well-known companies may have other adverse effects on us in ways that are not predictable. Also, we cannot predict
the final form of, or the effects of, the regulatory accord on international banking institutions to be reached by the Basel Committee on Banking Supervision.
Legislation may cause changes in the competitive environment in which we operate, which could include, among other things, broadening the scope of activities of significant competitors, facilitating
consolidation of competitors into stronger entities or attracting large and well-capitalized new competitors into our traditional businesses. Such factors and changes and our ability to address and adapt to regulatory and competitive challenges may
adversely affect our future results of operations.
Changes in interest rates may adversely affect our net interest revenue and securities
lending revenue.
The levels of market interest rates, the shape of the yield curve and the direction of interest rate
changes affect our net interest revenue and securities lending revenue, which is recorded in both our servicing and management fees. In the short term, our net interest revenue and securities lending revenue generally increase during periods of
falling interest rates and generally decrease during periods of rising rates because interest-bearing liabilities reprice sooner than interest-earning assets. Sustained lower interest rates and a flat yield curve may have a constraining effect on
our net interest revenue and securities lending revenue growth.
Events or circumstances that limit our access to the funds markets may
adversely affect our liquidity.
Any occurrence that limits our access to the funds markets, such as a decline in the
confidence of debt purchasers, depositors or counterparties participating in the funds markets in general, or with us in particular, or a downgrade of any of our debt ratings, may adversely affect our ability to raise capital and, in turn, our
liquidity.
If we fail to maintain adequate capital for regulatory purposes, our business may be adversely affected.
Under regulatory capital adequacy guidelines, we and State Street Bank must meet guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements could have a direct material effect on our financial
condition. In particular, failure to maintain the status of “well capitalized” under our regulatory framework could affect our status as a financial holding company and eligibility for a streamlined review process for acquisition
proposals. In addition, our failure to maintain the status of “well capitalized” could affect the confidence of our clients in us and could adversely affect our business.
A decrease in the volatility of foreign exchange rates could reduce our foreign exchange trading revenue.
The degree of volatility in foreign exchange rates can affect the amount of our foreign exchange trading revenue. In general, we benefit from currency volatility. Accordingly, our foreign exchange revenue is
likely to decrease during times of decreased currency volatility.
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Delays in pension reform may adversely affect our revenue growth.
We expect that our business will benefit from worldwide pension reform that creates additional pools of assets that use custody and related
services, and investment management services. If the pace of pension reform and resulting programs, including public and private pension schemes, slows down or if pension reform does not occur, then our revenue growth may be adversely affected.
Changes in our ability to sell additional services to our clients and the mix of our business may adversely affect our revenues.
A decline in the pace at which we attract new clients and the pace at which existing and new clients use additional
services and assign additional assets to us for management or custody will adversely affect our future results of operations. A decline in the rate at which our clients outsource functions, such as their internal accounting activities, would also
adversely affect our results of operations. In addition, changes in our mix of business and the sources of our revenue, including the mix of our U.S. and non-U.S. business, may adversely affect our future results of operations. We generally earn
higher margins on our non-U.S. business.
Events that damage our physical facilities or disrupt our operational functions or similarly affect
those with whom we do business could adversely affect our results of operations.
Events, including terrorist or
military actions and resulting political and social turmoil, could arise that would cause unforeseen damage to our physical facilities or could cause delays or disruptions to operational functions, including information processing and financial
market settlement functions. Additionally, our clients, vendors and counterparties could suffer from such events. Should these events affect us, or the clients, vendors or counterparties with whom we conduct business, our results of operations could
be adversely affected.
Rapid technological changes in the market for our products and services may cause us to incur increased expenses or hurt
us competitively.
Technological change often creates opportunities for product differentiation and reduced costs, as
well as the possibility of increased expenses. Developments in the securities processing industry, including shortened settlement cycles and straight-through-processing, will result in changes to existing procedures. Alternative delivery systems
have emerged, including the widespread use of the Internet. Our financial performance depends in part on our ability to develop and market new and innovative services, and to adopt or develop new technologies that differentiate our products or
provide cost efficiencies.
Rapid technological change in our industry, changes in our ability to access technical and other
information from clients, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices could adversely affect our business. The introduction by our competitors of services that could
replace or provide lower-cost alternatives to our services would also adversely affect our business.
We may engage in unsuccessful acquisitions
and divestitures.
Acquisitions of complementary businesses and technologies, development of strategic alliances and
divestitures of portions of our business are an active part of our overall business strategy. Services, technologies, key personnel or businesses of acquired companies may not be effectively assimilated into our business or service offerings and our
alliances may not be successful. We may not be able to successfully complete any divestitures on satisfactory terms, if at all. Divestitures may result in a reduction in our total revenues and net income.
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If a third party misappropriates our technology or asserts that we have infringed its proprietary rights, we
may suffer a competitive disadvantage or be required to spend significant resources.
We use trademark, trade secret,
copyright and other proprietary rights procedures to protect our technology, and we have applied for a limited number of patents in connection with certain software programs. Despite these efforts, we cannot be certain that the steps we take to
prevent unauthorized use of our proprietary rights are sufficient to prevent misappropriation of our technology, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the
United States. In addition, we cannot assure you that the courts will adequately enforce contractual arrangements which we have entered into to protect our proprietary technologies. If any of our proprietary information were misappropriated by or
otherwise disclosed to our competitors, our competitive position could be adversely affected.
In the event that a third
party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against us, we may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or
obtain a license to the infringed process.
FORWARD-LOOKING STATEMENTS
This prospectus supplement, including documents incorporated by reference in the accompanying prospectus, contains forward-looking statements with respect to our financial
condition, results of operations, plans, objectives, future performance and business, including, without limitation, statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,”
“estimates” or similar expressions.
These forward-looking statements involve risks and uncertainties. Actual
results may differ materially from those contemplated by the forward-looking statements due to many factors, including:
| |
• |
|
the failure to achieve the cost reductions and economies of scale that we expect to achieve in the integration of the Acquired Business and the loss of clients of the
Acquired Business, including DeAM, may affect our ability to achieve the expected financial results from the acquisition of the Acquired Business; |
| |
• |
|
the extent of increases or decreases in cross-border investments made by clients or future clients may affect our revenues; |
| |
• |
|
changes in the savings rate of individuals that are invested in mutual funds and other collective funds or in defined contribution plans may affect our revenues;
|
| |
• |
|
fluctuations in worldwide securities market valuations may affect our revenues; |
| |
• |
|
changes in markets served, including the growth rate of collective funds worldwide, the pace of debt issuance, outsourcing decisions, and mergers, acquisitions and
consolidations among clients and competitors may affect our revenues; |
| |
• |
|
global and regional economic factors and changes or potential changes in laws and regulations affecting our business, including volatile currencies, pace of inflation and
changes in monetary policy, and social and political instability, could affect our results of operations; |
| |
• |
|
legislation may cause changes in the competitive environment in which we operate, which could include, among other things, broadening the scope of activities engaged in
by significant competitors, facilitating consolidation of competitors into stronger entities or attracting large and well-capitalized new competitors into our traditional businesses, which may affect our future results;
|
S-27
| |
• |
|
changes in accounting principles generally accepted in the United States and applicable to us, while not having an economic impact on our business, could have a material
impact on our reported results of operations and the attainment of the current measures of our financial goals; |
| |
• |
|
any occurrence which may limit our access to the funds markets, such as a decline in the confidence of debt purchasers, depositors or counterparties in the funds markets
in general or with us in particular, or a downgrade of our debt rating, may affect our future results; |
| |
• |
|
failure to meet minimum capital requirements and the status of “well capitalized” under the regulatory framework applicable to us could adversely affect our
business; |
| |
• |
|
market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect our net interest revenue and securities lending revenue;
|
| |
• |
|
the degree of volatility in foreign exchange rates can affect the amount of our foreign exchange trading revenue; |
| |
• |
|
the pace of pension reform and resulting programs, including public and private pension schemes, may affect the pace of our revenue growth;
|
| |
• |
|
future prices that we are able to obtain for our products may increase or decrease from current levels depending upon demand for our products, our competitors’
activities and the introduction of new products into the marketplace; |
| |
• |
|
the pace at which we attract new clients and at which existing and new clients use additional services and assign additional assets to us for management or custody will
affect our future results; |
| |
• |
|
changes in business mix, including the mix of U.S. and non-U.S. business, may affect our future results; |
| |
• |
|
unforeseen events, including terrorist or military actions and resulting political and social turmoil, could cause damage to our physical facilities or cause delays or
disruptions to our operational functions, including information processing and financial market settlement functions; |
| |
• |
|
technological change and our ability to develop and market new and innovative services may be more difficult or expensive than anticipated;
|
| |
• |
|
our ability to effectively assimilate services, technologies, key personnel or businesses of acquired companies may affect our future results; and
|
| |
• |
|
changes may occur in securities markets which may affect our revenues. |
S-28
USE OF PROCEEDS
Substantially all of the proceeds received on the closing date of the sale of the SPACES will be used by the underwriters to purchase the underlying pledged treasury strips and
treasury portfolio, and we do not expect to receive any additional net proceeds from this offering at such time. We estimate that we will receive gross proceeds of $275.0 million, or $316.25 million if the underwriters’ option to purchase
additional SPACES is exercised in full, on November 15, 2005, the fixed-share stock purchase date, or such earlier dates as fixed-share purchase contracts are settled. We estimate that our total expenses in connection with this offering, including
underwriting discounts and commissions, will be $10.25 million, or $11.49 million if the underwriters’ option to purchase additional SPACES is exercised in full. We expect to use amounts received upon settlement of the fixed-share purchase
contracts for general corporate purposes, which may include investments in the capital of, or extensions of credit to, our subsidiaries, the repayment or refinancing of long-term and short-term debt, acquisitions and other business opportunities.
Pending such uses, we may invest the proceeds temporarily in short-term securities.
We estimate that we will receive net
aggregate proceeds from our concurrent common stock offering and State Street Capital Trust II’s concurrent offering of capital securities of approximately $ million, or
$ million if the underwriters’ over-allotment options in those offerings are exercised in full. We intend to use (1) the net proceeds from those offerings, (2) the proceeds related to the sale of
our Corporate Trust business to U.S. Bancorp, which closed on December 31, 2002, and (3) other available funding sources to fund the initial purchase price for the Acquired Business.
We are required by the Federal Reserve Board to maintain specified levels of capital for bank regulatory purposes. Based upon a letter from the staff of the Federal Reserve Board, we
believe that the terms of the SPACES, together with the terms of the capital securities that State Street Capital Trust II is concurrently offering under a separate prospectus supplement, will enable us to treat the net proceeds from the offering of
the capital securities as Tier 1 capital.
ACCOUNTING TREATMENT
The net proceeds from the sale of the SPACES will be allocated in our financial statements between the underlying variable-share repurchase contract and the underlying fixed-share
purchase contract, based on the fair value of each contract.
The present value of the contract payments initially will be
charged to stockholders’ equity, with an offsetting credit to liabilities. Subsequent contract payments will be allocated between this liability account and interest expense based on a constant rate calculation over the life of the
transactions.
The fixed-share purchase contracts and variable-share repurchase contracts are forward transactions in our
common stock. Upon settlement of a fixed-share purchase contract, we will receive $200 pursuant to that contract and will issue the requisite number of shares of our common stock. The $200 we receive will be credited to stockholders’ equity and
allocated between our common stock and additional paid-in-capital accounts. Upon settlement of a variable-share repurchase contract, we will receive a number of shares of our common stock based on the variable-share settlement rate or, if
then in effect, the fixed variable-share settlement rate. While the number of shares of our common stock outstanding will be decreased accordingly, there will be no adjustment to stockholders’ equity at that time.
Before the issuance of shares of our common stock upon settlement of the fixed-share purchase contracts, the fixed-share purchase contracts will be
reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of
the number of shares that would be issued upon settlement of the fixed-share purchase contracts less the number of shares that could be purchased by us in the market, at the average market price during the period, using the proceeds receivable upon
settlement. Consequently, we anticipate that there will be some dilutive effect on our earnings per share during periods when the average market price of our common stock is above $
, but no dilutive effect on our earnings per share during periods when the average price is below $
. Before our receipt of shares of our common stock upon settlement of the variable-share repurchase contracts, the variable-share repurchase contracts will not be
reflected in our earnings per share calculations, as the result would be anti-dilutive.
S-29
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is listed and traded on the New York Stock Exchange under the symbol “STT.” The following table sets forth, for the
periods indicated, (i) the high and low sales prices per share of our common stock as reported on the New York Stock Exchange and (ii) the amount of per-share dividends declared on our common stock.
| Period
|
|
High
|
|
Low
|
|
Dividends
|
| 2001: |
|
|
|
|
|
|
|
|
|
| First Quarter |
|
$ |
64.39 |
|
$ |
38.76 |
|
$ |
0.095 |
| Second Quarter |
|
$ |
57.87 |
|
$ |
43.95 |
|
$ |
0.10 |
| Third Quarter |
|
$ |
54.98 |
|
$ |
36.25 |
|
$ |
0.10 |
| Fourth Quarter |
|
$ |
54.78 |
|
$ |
41.84 |
|
$ |
0.11 |
| |
| 2002: |
|
|
|
|
|
|
|
|
|
| First Quarter |
|
$ |
58.35 |
|
$ |
48.13 |
|
$ |
0.11 |
| Second Quarter |
|
$ |
55.68 |
|
$ |
41.26 |
|
$ |
0.12 |
| Third Quarter |
|
$ |
45.19 |
|
$ |
34.86 |
|
$ |
0.12 |
| Fourth Quarter |
|
$ |
47.47 |
|
$ |
32.11 |
|
$ |
0.13 |
The last reported sale price of our common stock on the New York Stock
Exchange was $40.19 per share on January 9, 2003. On December 31, 2002, there were approximately 5,454 holders of record of our common stock.
We have increased our quarterly dividend twice each year since 1978. We intend to continue the payment of dividends, although future dividend payments will depend upon our level of earnings, financial requirements and other
relevant factors, including dividend restrictions contained in our debt instruments.
S-30
CAPITALIZATION
| |
• |
|
the actual consolidated capitalization of State Street and our subsidiaries; and |
| |
• |
|
the actual consolidated capitalization of State Street and our subsidiaries as adjusted to give effect to this offering of SPACES (assuming no exercise of the
underwriters’ over-allotment option), as if such transaction had occurred on December 31, 2002; and |
| |
• |
|
the actual consolidated capitalization of State Street and our subsidiaries as adjusted to give effect to (1) this offering of SPACES (assuming no exercise of the
underwriters’ over-allotment option), (2) the anticipated issuance of $ 275,000,000 aggregate liquidation amount of capital securities in the concurrent capital securities offering (assuming no exercise of the underwriters’ over-allotment
option) and (3) the anticipated issuance of 6,220,000 shares of common stock in the concurrent common stock offering (assuming no exercise of the underwriters’ over-allotment option), as if such transactions had occurred on December 31, 2002.
|
The following table assumes an initial price to public in our concurrent offering of common stock of
$40.19 per share, the last reported sale price of our common stock on the New York Stock Exchange on January 9, 2003, and net proceeds from such offering (after deducting underwriting discounts and commissions and estimated fees and expenses) of
$236.1 million.
| |
|
Actual
|
|
|
As Adjusted for this Offering
|
|
|
As Adjusted for this Offering and
the Concurrent Offerings
|
|
| |
|
(in millions) |
|
| Long-Term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
| Capital Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Floating Rate Medium Term Capital Securities-due 2008 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
275 |
|
| 8.035% Capital Securities B due 2027 |
|
|
330 |
|
|
|
330 |
|
|
|
330 |
|
| 7.94% Capital Securities A due 2026 |
|
|
216 |
|
|
|
216 |
|
|
|
216 |
|
| Floating Rate Capital Trust I due 2028 |
|
|
149 |
|
|
|
149 |
|
|
|
149 |
|
| 7.65% Subordinated notes due 2010 |
|
|
309 |
|
|
|
309 |
|
|
|
309 |
|
| 7.35% Notes due 2026 |
|
|
150 |
|
|
|
150 |
|
|
|
150 |
|
| 5.95% Notes due 2003 |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
| 9.50% Mortgage note due 2009 |
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
| 7.75% Convertible subordinated debentures due 2008 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total Long-Term Debt |
|
|
1,269 |
|
|
|
1,269 |
|
|
|
1,544 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| Common Stock |
|
|
330 |
|
|
|
330 |
|
|
|
336 |
|
| Surplus |
|
|
104 |
|
|
|
56 |
(1) |
|
|
286 |
(2) |
| Retained earnings |
|
|
4,472 |
|
|
|
4,472 |
|
|
|
4,472 |
|
| Other unrealized comprehensive income |
|
|
106 |
|
|
|
106 |
|
|
|
106 |
|
| Treasury stock, at cost |
|
|
(225 |
) |
|
|
(225 |
) |
|
|
(225 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total Stockholders’ Equity |
|
|
4,787 |
|
|
|
4,739 |
|
|
|
4,975 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total Capitalization |
|
$ |
6,056 |
|
|
$ |
6,008 |
|
|
$ |
6,519 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The decrease in surplus represents the present value of the estimated contract fees payable in respect of SPACES, at an assumed discount rate of 3.5%, and the issuance
costs less uninvested proceeds from this offering of SPACES. |
(2) |
|
The increase in surplus represents the allocation of the remaining net proceeds of our concurrent common stock offering, after the allocation to common stock at par
value. |
S-31
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME DATA
(Unaudited)
We prepare our consolidated statement of income as presented in “Prospectus
Supplement Summary—Summary Consolidated Financial Information” in accordance with accounting principles generally accepted in the United States (GAAP). That financial information includes significant, non-recurring, non-operating special
items and reports goodwill amortization expense in accordance with accounting practice applicable for those periods presented.
In order to provide information on a comparable basis from period to period and assist stockholders, analysts, other external parties and management in analyzing the financial results and trends of our ongoing businesses and
operations, we also present our financial results on an “Operating Results” basis. We believe that such non-GAAP financial information assists investors and others by providing them financial information in a format that provides
comparable financial trends of recurring business activities. Operating Results are based on GAAP results adjusted for three types of financial activity:
| |
(1) |
|
Operating Results exclude the results of certain significant transactions not representative of ongoing operations. |
| |
(2) |
|
Operating Results include fully taxable equivalent adjustments that increase net interest revenue to reflect investment yield on tax-free investments on an equivalent
basis with taxable investments. |
| |
(3) |
|
Operating Results exclude goodwill amortization expense from operating expenses in 2001 and prior years, to be consistent with GAAP accounting required beginning in 2002.
|
The table set forth below contains our selected consolidated Operating Results for the periods
presented.
| |
|
|
| |
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
| |
|
(Dollars in millions, except per share data) |
| Fee Revenue: |
|
|
| Servicing fees |
|
$ |
861 |
|
$ |
1,043 |
|
$ |
1,189 |
|
$ |
1,447 |
|
$ |
1,648 |
|
$ |
1,716 |
| Management fees |
|
|
391 |
|
|
480 |
|
|
600 |
|
|
584 |
|
|
516 |
|
|
526 |
| Foreign exchange trading |
|
|
245 |
|
|
289 |
|
|
306 |
|
|
387 |
|
|
368 |
|
|
300 |
| Brokerage fees |
|
|
25 |
|
|
36 |
|
|
67 |
|
|
95 |
|
|
89 |
|
|
124 |
| Loss on invesment in Bridge Information Systems, Inc. |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| Processing fees and other |
|
|
149 |
|
|
160 |
|
|
159 |
|
|
177 |
|
|
198 |
|
|
184 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total fee revenue |
|
|
1,671 |
|
|
2,008 |
|
|
2,321 |
|
|
2,690 |
|
|
2,819 |
|
|
2,850 |
| Net interest revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest revenue |
|
|
1,755 |
|
|
2,237 |
|
|
2,437 |
|
|
3,256 |
|
|
2,855 |
|
|
1,974 |
| Interest expense |
|
|
1,114 |
|
|
1,492 |
|
|
1,656 |
|
|
2,362 |
|
|
1,830 |
|
|
995 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
641 |
|
|
745 |
|
|
781 |
|
|
894 |
|
|
1,025 |
|
|
979 |
| Taxable-equivalent adjustment |
|
|
44 |
|
|
40 |
|
|
40 |
|
|
65 |
|
|
67 |
|
|
61 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest revenue |
|
|
685 |
|
|
785 |
|
|
821 |
|
|
959 |
|
|
1,092 |
|
|
1,040 |
| Provision for loan losses |
|
|
16 |
|
|
17 |
|
|
14 |
|
|
9 |
|
|
10 |
|
|
4 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest revenue after provision for loan losses (taxable-equivalent basis) |
|
|
669 |
|
|
768 |
|
|
807 |
|
|
950 |
|
|
1,082 |
|
|
1,036 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gains on the sales of available-for-sale investment securities, net |
|
|
2 |
|
|
10 |
|
|
12 |
|
|
2 |
|
|
43 |
|
|
76 |
| Gain on the sale of corporate trust business, net of exit and other associated costs |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| Gain on the sale of commercial banking business, net of exit and other associated costs |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
2,342 |
|
|
2,786 |
|
|
3,140 |
|
|
3,642 |
|
|
3,944 |
|
|
3,962 |
(continued on following page)
S-32
| |
|
|
| |
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
| |
|
(Dollars in millions, except per share data) |
| |
| Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Salaries and employee benefits |
|
|
973 |
|
|
1,175 |
|
|
1,313 |
|
|
1,524 |
|
|
1,663 |
|
|
1,670 |
| Information systems and communications |
|
|
185 |
|
|
241 |
|
|
287 |
|
|
305 |
|
|
365 |
|
|
373 |
| Transaction processing services |
|
|
184 |
|
|
196 |
|
|
237 |
|
|
268 |
|
|
247 |
|
|
246 |
| Occupancy |
|
|
132 |
|
|
164 |
|
|
188 |
|
|
201 |
|
|
229 |
|
|
246 |
| Other |
|
|
252 |
|
|
301 |
|
|
317 |
|
|
356 |
|
|
355 |
|
|
306 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
1,726 |
|
|
2,077 |
|
|
2,342 |
|
|
2,654 |
|
|
2,859 |
|
|
2,841 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income taxes |
|
|
616 |
|
|
709 |
|
|
798 |
|
|
988 |
|
|
1,085 |
|
|
1,121 |
| Income taxes |
|
|
186 |
|
|
225 |
|
|
259 |
|
|
317 |
|
|
331 |
|
|
341 |
| Taxable-equivalent adjustment |
|
|
44 |
|
|
40 |
|
|
40 |
|
|
65 |
|
|
67 |
|
|
61 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income |
|
$ |
386 |
|
$ |
444 |
|
$ |
499 |
|
$ |
606 |
|
$ |
687 |
|
$ |
719 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average Shares Outstanding:(a)
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
321,323 |
|
|
321,873 |
|
|
321,320 |
|
|
321,678 |
|
|
325,030 |
|
|
323,520 |
| Diluted |
|
|
327,577 |
|
|
327,854 |
|
|
327,503 |
|
|
328,088 |
|
|
330,492 |
|
|
327,477 |
| |
| Cash dividends declared per share(a) |
|
$ |
0.22 |
|
$ |
0.26 |
|
$ |
0.30 |
|
$ |
0.345 |
|
$ |
0.405 |
|
$ |
0.48 |
(a) |
|
Share data restated for 2-for-1 stock split in 2001. |
The following non-GAAP adjustments applicable to the periods presented are necessary to reconcile the consolidated statement of income prepared in accordance with GAAP to the selected consolidated Operating
Results presented in the table above:
(1) |
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Operating Results include a fully taxable-equivalent adjustment. This is a method of presentation in which interest income on tax-exempt securities is adjusted to present
the earnings performance on a basis equivalent to interest earned on fully-taxable securities with a corresponding charge to income tax expense. The adjustment is computed using a federal income tax rate of 35%, adjusted for applicable state income
taxes, net of the related federal tax benefit. |
(2) |
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Operating Results exclude the gain on the sale of the commercial banking business and a one-time charge on sales of securities related to the repositioning of the
investment portfolio. This gain was $282 million after deductions for exit and other associated costs of $68 million. The one-time charge for the portfolio repositioning was $57 million. The after-tax gain of these combined items was $130 million
after tax or $.40 in diluted earnings per share. These transactions were recorded in October and December 1999. |
(3) |
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Operating Results exclude the write-off of our total investment in Bridge Information Systems, Inc. of $50 million. The after-tax loss was $33 million, or $.10 in diluted
earnings per share. This write-off was recorded in March 2001. |
(4) |
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Operating Results exclude the gain on the sale of our corporate trust business. This gain was $495 million after deductions for exit and other associated costs of $155
million. The after-tax gain was $296 million, or $.90 in diluted earnings per share. This gain was recorded in December 2002. |
(5) |
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Operating Results for each of the five years ended December 31, 2001 exclude goodwill amortization expense, as follows: 2001—expense of $38 million, equal to $26
million, or $.08 per diluted share after tax; 2000—expense of $17 million, equal to $11 million, or $.04 per diluted share after tax; 1999—expense of $15 million, equal to $10 million, or $.03 per diluted share after tax; 1998—expense
of $12 million, equal to $8 million, or $.03 per diluted share after tax; and 1997—expense of $8 million, equal to $6 million, or $.02 per diluted share after tax. |
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DESCRIPTION OF THE SECURITIES
We summarize below the principal terms of the SPACES, separate PACES and separate VSRCs. The following description is not complete, and we refer you to the agreements that will govern your rights as a holder of SPACES,
separate PACES or separate VSRCs. See “Where You Can Find More Information” in the accompanying prospectus. In addition, to the extent that the following description is not consistent with the descriptions contained in the accompanying
prospectus under “Description of Stock Purchase Contracts and Stock Purchase Units,” you should rely on the following description.
Overview
Each SPACES will have a stated amount of $200 and initially will consist of and represent:
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a PACES, which will have a stated amount of $200 and will consist of and represent |
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(a) |
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a fixed-share purchase contract pursuant to which |
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you will agree to purchase, and we will agree to sell, for $200, shares of our common stock on November 15, 2005, which we
refer to as the fixed-share stock purchase date, and |
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we will pay you quarterly contract payments at the annual rate of % of the $200 stated amount, subject to our right to
defer such payments as specified below, |
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(b) |
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an ownership interest in a zero-coupon U.S. treasury strip that will mature on the fixed-share stock purchase date with a principal amount of $1,000, which we refer to as
the pledged treasury strip, and |
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(c) |
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an ownership interest in a portfolio of zero-coupon U.S. treasury strips that will mature on a quarterly basis through the fixed-share stock purchase date, each with a
principal amount of $1,000, which we refer to as the treasury portfolio; and |
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(2) |
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a variable-share repurchase contract pursuant to which |
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you will agree to deliver to us shares of our common stock on February 15, 2006, which we refer to as the variable-share stock purchase date, the number of which will be
determined by the variable-share settlement rate described below based on the average trading price of our common stock for a period preceding the variable-share stock purchase date, and |
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we will pay you quarterly contract payments at the annual rate of % of the $200 stated amount, subject to our right to
defer such payments as specified below. |
Because treasury strips can be purchased only in integral
multiples of $1,000 principal amount, each PACES will evidence a fractional ownership interest in the pledged treasury strip and a fractional ownership interest in the treasury portfolio. Your ownership interest in the pledged treasury strip
included in each PACES will be pledged to the collateral agent for our benefit to secure your obligations under the related fixed-share purchase contract. Unless you elect to settle the fixed-share purchase contract early in the manner described
below, principal of the pledged treasury strip, when paid at maturity, automatically will be applied to satisfy in full your obligation to purchase shares of our common stock under the fixed-share purchase contract. For so long as a fixed-share
purchase contract remains in effect, the fixed-share purchase contract, the ownership interest in the pledged treasury strip securing it and the ownership interest in the related treasury portfolio will not be separable and may be transferred only
as an integrated security.
The PACES included in each SPACES will be owned by you but, to the extent of your right to
purchase shares of our common stock under the fixed-share purchase contract, initially will be
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pledged to the collateral agent for our benefit to secure your obligations under the related variable-share repurchase contract. You may elect, at any time not later than 10:00 a.m., New York
City time, on the third business day before the fixed-share stock purchase date, to substitute a pledge of shares of our common stock per variable-share repurchase contract, which we refer to as the
“pledged common stock,” for the pledged PACES, thereby creating separate PACES and separate VSRCs. A separate VSRC will consist of a variable-share repurchase contract and the pledged common stock. For so long as a variable-share
repurchase contract remains in effect (whether as a component of SPACES or as a component of a separate VSRC), except to substitute collateral in this manner, the variable-share repurchase contract and the pledged collateral securing it may not be
separated and may be transferred only as an integrated security. Even if you do not elect to substitute collateral in this manner, upon settlement of the fixed-share purchase contract (whether on or prior to the fixed-share stock purchase date),
of the shares of our common stock that you are entitled to purchase per fixed-share purchase contract automatically will be pledged to the collateral agent for our benefit to secure your continuing
obligation under the related variable-share repurchase contract, the related SPACES will cease to exist and you will thereafter hold a separate VSRC.
In addition to the foregoing methods by which separate PACES and separate VSRCs may be created, you may purchase separate PACES and separate VSRCs in this offering.
As a beneficial owner of SPACES, separate PACES or separate VSRCs, which we refer to collectively as the “securities,” you will be deemed
to have:
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irrevocably agreed to be bound by the terms of the purchase contract agreement, the pledge agreement and the applicable contract or contracts for so long as you remain a
beneficial owner of any of such securities; and |
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appointed the purchase contract agent under the purchase contract agreement as your agent and attorney-in-fact to enter into and perform the applicable contract or
contracts and pledge agreement on your behalf and in your name. |
In addition, as a beneficial owner of
SPACES or separate PACES, you will be deemed by your acceptance of such securities to have agreed, for all tax purposes, to treat yourself as the owner of the related treasury securities. The treasury securities will be obligations of the United
States Government and not of ours.
We will enter into:
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a purchase contract agreement with Bank One Trust Company, N.A., as purchase contract agent, governing the appointment of the purchase contract agent as the agent and
attorney-in-fact for the holders of the securities, the transfer, exchange or replacement of certificates representing the securities and certain other matters relating to the securities; and |
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a pledge agreement with Bank One Trust Company, N.A., as collateral agent, custodial agent and securities intermediary, creating a pledge and security interest for our
benefit to secure the obligations of holders of securities. |
Splitting Apart and Re-creating SPACES
At your option, you may split apart SPACES into separate PACES and separate VSRCs by substituting
shares of our common stock per variable-share repurchase contract for the PACES pledged to secure your obligation under the related variable-share repurchase contract. As a result of splitting apart a
SPACES, you will thereafter hold a separate PACES and a separate VSRC.
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A holder of separate PACES and separate VSRCs may re-create SPACES by substituting PACES
for the pledged common stock underlying the separate VSRCs.
Current Payments
If you hold SPACES, you will be entitled to receive quarterly payments on the underlying PACES and variable-share repurchase contract. If you hold separate PACES or separate VSRCs,
you will be entitled to receive only quarterly payments applicable to those securities.
Payments on the PACES (whether held
as a component of SPACES or as separate PACES) will consist of:
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quarterly contract payments on the fixed-share purchase contract payable by us at the annual rate of % of the stated
amount of $200, including on the fixed-share stock purchase date, and |
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quarterly payments of $ on the treasury portfolio payable by the United States Government (equivalent to an annual rate of
% of the stated amount of $200 per PACES). |
Payments on
the variable-share repurchase contract will consist of quarterly contract payments at the annual rate of % of the stated amount of $200, including on the variable-share stock purchase date.
If you hold SPACES, upon settlement of the fixed-share purchase contract (except merger early settlement), you will
thereafter receive only the quarterly contract payments payable by us with respect to the related variable-share repurchase contract and any remaining quarterly payments on the treasury portfolio.
We may, at our option or at the direction of the Federal Reserve Board, defer the contract payments on the contracts until no later than the
fixed-share stock purchase date or the variable-share stock purchase date, as applicable, as described below. If any of these payments are deferred, to the extent permitted by applicable law, we will accrue additional contract payments on the
deferred amounts at the annual rate of %, compounded quarterly, until paid.
Contract payments on the contracts will be computed (1) for any full quarterly period on the basis of a 360-day year of twelve 30-day months, (2) for any period shorter than a full quarterly period, on the basis of a 30-day month,
and (3) for periods of less than a month, on the basis of the actual number of days elapsed per 30-day month. Contract payments will accrue from the date of original issuance of the securities and will be payable quarterly in arrears on February 15,
May 15, August 15 and November 15 of each year, commencing May 15, 2003. The contract payment payable by us pursuant to the fixed-share purchase contract on the first quarterly payment date will be adjusted so that the aggregate of the contract
payment and the distribution on the treasury portfolio payable on such quarterly payment date will be paid at the annual rate of % of the stated amount of $200 accruing from the issuance date of the
securities. If the contracts are terminated upon the occurrence of specified events of bankruptcy, insolvency or reorganization with respect to us, you will thereafter have no right to receive any accrued or deferred contract payments. In addition,
if you elect to early settle the fixed-share purchase contract (except in the event you exercise your cash merger early settlement right), you will thereafter have no right to receive any accrued or deferred contract payments on the fixed-share
purchase contract.
Our obligations with respect to contract payments will be subordinate and junior in right of payment to
all senior debt (as defined below) to the extent provided in the purchase contract agreement. If we
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make any payment or distribution of our assets upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors, marshaling of assets or any bankruptcy,
insolvency, debt restructuring or similar proceedings in connection with any insolvency or bankruptcy proceeding, the holders of senior debt will first be entitled to receive payment in full of principal of and premium and interest, if any, on such
senior debt before the holders of the securities will be entitled to receive or retain any contract payment. However, holders of senior debt will not be entitled to receive payment of any such amounts if the subordination provisions of such senior
debt would require holders to pay such amounts over to the obligees on trade accounts payable or other liabilities arising in the ordinary course of our business.
No contract payments may be made if there shall have occurred and be continuing a default in any payment with respect to senior debt or an event of default with respect to any senior
debt resulting in the acceleration of the maturity thereof, or if any judicial proceedings are pending with respect to any such default.
Debt means, with respect to any person, whether recourse is to all or a portion of the assets of such person and whether or not contingent:
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every obligation of such person for money borrowed; |
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every obligation of such person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of
property, assets or businesses; |
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every reimbursement obligation of such person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such person;
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every obligation of such person issued or assumed as the deferred purchase price of property or services other than trade accounts payable or accrued liabilities arising
in the ordinary course of business; |
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every capital lease obligation of such person; |
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every obligation of such person for claims in respect of derivative products such as interest and foreign exchange rate contracts, commodity forward contracts and similar
arrangements; and |
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every obligation of the type referred to above of another person and all dividends of another person the payment of which, in either case, such person has guaranteed or
is responsible or liable for, directly or indirectly, as obligor or otherwise. |
Senior debt means the
principal of and premium and interest, if any, including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to us whether or not such claim for post-petition interest is allowed in such proceeding,
on our debt, whether incurred on or prior to the date of issuance of the securities or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations
are not superior in right of payment to the contract payments or to other debt that is equal or subordinated to the contract payments, other than:
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any debt of ours which when incurred and without respect to any election under Section 1111(b) of the United States Bankruptcy Code, as amended, was without recourse to
us; |
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any debt of ours to any of our subsidiaries, other than subsidiaries that are banks or bank holding companies as defined in the Bank Holding Company Act of 1956, as
amended; |
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any debt to any of our employees; |
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any debt which by its terms is subordinated to trade accounts payable or accrued liabilities arising in the ordinary course of business to the extent that payments made
to the holders of such debt by the holders of the securities as a result of the subordination provisions of the contracts would be greater than such payments otherwise would have been as a result of any obligation of such holders of such debt to pay
amounts over to the obligees on such trade accounts payable or accrued liabilities arising in the ordinary course of business as a result of subordination provisions to which such debt is subject; |
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any debt securities issued pursuant to our junior subordinated indenture described in the accompanying prospectus. |
The purchase contract agreement places no limitation on the amount of senior debt that we may incur. At December 31, 2002, our senior debt
aggregated approximately $946.0 million. We expect from time to time to incur additional indebtedness and other obligations constituting senior debt.
We have represented and warranted in the purchase contract agreement that, as of the date of issuance of the securities, we are not obligated in respect of any debt for borrowed money from:
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any subsidiary that is not a bank or bank holding company as defined in the Bank Holding Company Act of 1956, as amended; or |
except, in each case, (i)
in respect of debt on which we will defer payments of principal, interest and premium to the same extent that we defer contract payments on the securities; or (ii) in respect of debt incurred in the ordinary course of business.
We have covenanted in the purchase contract agreement that:
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except in the ordinary course of business, we will not incur debt for borrowed money from any subsidiary that is not a bank or bank holding company as defined in the Bank
Holding Company Act of 1956, as amended, unless, under the terms of such debt, we defer payments of principal, interest and premium, if any, in respect of such debt to the same extent that we defer contract payments on the securities; and
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except in the ordinary course of business, we will not incur debt for borrowed money from any of our employees, unless, under the terms of such debt, we defer payments of
principal, interest and premium, if any, in respect of such debt to the same extent that we defer contract payments on the securities. |
Contract payments and payments on the treasury portfolio, as applicable, will be payable to the holders of securities as they are registered on the books and records of the purchase contract agent on the
relevant record dates. So long as the securities remain in book-entry only form, the record date will be the business day prior to the relevant payment dates. Contract payments and payments on the treasury portfolio will be paid through the purchase
contract agent, who will hold amounts received in respect of the contract payments and the treasury portfolio for the benefit of the holders of the contracts. Subject to any applicable laws and regulations, each payment will be made as described
under “—Book-Entry System” below. If the securities do not remain in book-entry only form, the relevant record dates will be the 15th calendar day prior to the relevant payment dates. If any date on which these payments and
distributions are to be made is not a business day, then amounts payable on that date will be made on the next day that is a business day (and so long as the payment is made on the next business day, without any interest or other payment on account
of any such delay); however, if such business day is in the next calendar year, payment will be made on the prior business day, in each case with the same force and effect as if made on the payment date.
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We may, at our option or at the direction of the Federal Reserve Board, defer, upon prior written notice to the holders of securities and the purchase contract agent, payment of all
or part of the contract payments on the related contracts until no later than the fixed-share stock purchase date or the variable-share stock purchase date, as applicable. However, to the extent permitted by applicable law, deferred contract
payments will accrue additional contract payments at the rate of % per year, compounding quarterly, until paid. If the contracts are terminated upon the occurrence of specified events of bankruptcy, insolvency or
reorganization with respect to us, or if you elect to settle the fixed-share purchase contract prior to the fixed-share stock purchase date (except in the case of a merger early settlement), your right to receive contract payments and deferred
contract payments will also terminate.
If we elect or are directed by the Federal Reserve Board to defer the payment of
contract payments until the fixed-share stock purchase date or the variable-share stock purchase date, as applicable, then we will pay the deferred contract payments in either shares of our common stock or unsecured notes, in our sole discretion. If
we elect to pay deferred contract payments in shares of our common stock, the number of shares of our common stock that you will be entitled to receive will be equal to (a) the aggregate amount of deferred contract payments payable to you divided by
(b) the greater of (i) the applicable market value of our common stock as of the fixed-share stock purchase date or the variable-share stock purchase date, as applicable, and (ii)
$ . Because the stock price used
to calculate the number of shares you are entitled to receive may be greater than the applicable market value of our common stock, the market value of the shares of common stock you may receive in lieu of deferred contract payments may be less than
the amount of such deferred contract payments. If we elect to pay deferred contract payments in unsecured notes, the notes you will receive will (1) have a principal amount equal to the aggregate amount of deferred contract payments payable to you,
(2) mature two years from the fixed-share stock purchase date or the variable-share stock purchase date, as applicable, (3) bear interest at an annual rate equal to our then market rate of interest (not to exceed 10%), as determined by a nationally
recognized investment banking firm selected by us, (4) be subordinate and rank junior in right of payment to all of our senior debt on the same basis as the contract payments, and (5) will not be redeemable by us prior to their stated maturity. The
notes will be issued under our junior subordinated indenture described in the accompanying prospectus.
We will not issue
any fractional shares of our common stock with respect to the payment of deferred contract payments on the fixed-share stock purchase date or the variable-share stock purchase date. In lieu of fractional shares otherwise issuable with respect to
such payment of deferred contract payments, you will be entitled to receive an amount in cash equal to the fraction of a share, calculated on an aggregate basis with respect to all such payments you are entitled to receive, multiplied by the
applicable market value of our common stock as of the fixed-share stock purchase date or the variable-share stock purchase date, as applicable.
As used in this prospectus supplement, the “applicable market value” of our common stock as of a specified date is the average of the closing price per share of our common stock on each of the 20 consecutive
trading days ending on the third trading day immediately preceding that date.
If we elect or are directed by the Federal
Reserve Board to defer the payment of contract payments, then until the deferred contract payments have been paid, we will not declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect
to, any shares of our capital stock, other than:
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repurchases, redemptions or other acquisitions of shares of our capital stock in connection with any employment contract, benefit plan or other similar arrangement with
or for the benefit of any one or more employees, officers, directors or consultants, in connection with a dividend
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reinvestment or stockholder stock purchase plan or in connection with the issuance of our capital stock, or securities convertible into or exercisable for such capital stock, as consideration in
an acquisition transaction entered into prior to the deferral of contract payments; |
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as a result of an exchange or conversion of any class or series of our capital stock for any capital stock of our subsidiaries or for any class or series of our capital
stock, or of any class or series of our indebtedness for any class or series of our capital stock; |
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the purchase of fractional interests in shares of our capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being
converted or exchanged; |
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any declaration of a dividend in connection with any rights plan, or the issuance of rights, stock or other property under any rights plan, or the redemption or
repurchase of rights pursuant thereto; or |
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any dividend in the form of stock, warrants, options or other rights where the dividend stock or stock issuable upon exercise of such warrants, options or other rights is
the same stock as that on which the dividend is being paid or ranks equally with or junior to such stock. |
We will not make any
payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by us that rank equally in all respects with or junior in right of payment to the contract payments.
The Settlement Rates
Each fixed-share
purchase contract underlying a SPACES or separate PACES, unless earlier terminated, or earlier settled at your option as described below, will obligate you to purchase, and us to sell, for $200, shares of our
common stock on the fixed-share stock purchase date. We refer to the number of shares you are obligated to purchase as the fixed-share settlement rate, and the fixed-share settlement rate is subject to adjustment under certain circumstances as
described under “—Anti-dilution Adjustments” below.
Each variable-share repurchase contract held as a
component of SPACES or held as a component of a separate VSRC, unless earlier terminated, or earlier settled at your option as described below, will obligate you to deliver to us on the variable-share stock purchase date a number of shares of our
common stock equal to the variable-share settlement rate.
The variable-share settlement rate on the variable-share stock
purchase date, subject to adjustment under certain circumstances as described under “—Anti-dilution Adjustments” below, will be as follows:
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If the “applicable market value” of our common stock, which is the average of the closing price per share of our common stock on each of the 20 consecutive
trading days ending on the third trading day immediately preceding the variable-share stock purchase date, is equal to or greater than the threshold appreciation price of $ ,
which is % above $ , the settlement rate will be shares of our common stock per
variable-share repurchase contract. If the market price for our common stock increases to an amount that is greater than $ on the variable-share stock purchase date, the aggregate market value of the
shares of common stock issued upon settlement of the fixed-share purchase contract less the shares delivered to us upon settlement of the related variable-share repurchase contract, assuming that this market value is the same as the applicable
market value of our common stock, will be greater than $200, and if the market price equals $ , the aggregate market value of those shares, assuming that this market value is the
same as the applicable market value of our common stock, will equal $200. |
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If the applicable market value of our common stock is less than $ but greater than
$ , the settlement rate will be equal to (i) $200 divided by $ minus (ii) $200 divided by the applicable
market value of our common stock. If the market price for our common stock increases but that market price is less than $ on the variable-share stock purchase date, the
aggregate market value of the shares of common stock issued upon settlement of the fixed-share purchase contract less the shares delivered to us upon settlement of the related variable-share repurchase contract, assuming that this market value is
the same as the applicable market value of our common stock, will equal $200. |
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If the applicable market value of our common stock is less than or equal to $ , the settlement rate
will be zero shares of our common stock per variable-share repurchase contract. If the market price for our common stock decreases to an amount that is less than $ on the
variable-share stock purchase date, the aggregate market value of the shares of common stock issued upon settlement of the fixed-share purchase contract, assuming that this market value is the same as the applicable market value of our common stock,
will be less than $200, and if the market price equals $ , the aggregate market value of those shares, assuming that this market value is the same as the applicable market value
of our common stock, will equal $200. |
Prior to the variable-share stock purchase date, we may, at our
option, fix the variable-share settlement rate according to a formula based on the Black-Scholes option pricing model, as described in “—Option to Fix the Variable-Share Settlement Rate” below.
For purposes of determining the applicable market value for our common stock, the closing price of our common stock on any date of determination
means the closing sale price or, if no closing sale price is reported, the last reported sale price of our common stock on the New York Stock Exchange on that date. If our common stock is not listed for trading on the New York Stock Exchange on any
date, the closing price of our common stock on any date of determination means the closing sale price as reported in the composite transactions for the principal U.S. securities exchange on which our common stock is listed, or if our common stock is
not so listed on a U.S. securities exchange, as reported by the Nasdaq stock market, or, if our common stock is not so reported, the last quoted bid price for our common stock in the over-the-counter market as reported by the National Quotation
Bureau or similar organization or, if that bid price is not available, the market value of our common stock on that date as determined by a nationally recognized independent investment banking firm retained by us for this purpose.
A trading day is a day on which our common stock (1) is not suspended from trading on any national or regional securities exchange or
association or over-the-counter market at the close of business and (2) has traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of our common stock
by the close of business on such day.
Option to Fix the Variable-Share Settlement Rate
At any time prior to December 31, 2005, we may elect to fix the variable-share settlement rate. If we elect to fix the variable-share settlement
rate, we must provide written notice to the purchase contract agent setting forth our intention to fix the variable-share settlement rate in accordance with the formula specified in the purchase contract agreement. The formula provides that the
fixed variable-share settlement rate will equal (1) the then current value of the variable-share repurchase contract divided by (2) our stock price. The value of the variable-share repurchase contract will be computed as (a) the value
of call options, each with an exercise price of , minus (b) the value
of call options, each with an exercise price of , in each case as determined using the Black-Scholes option pricing
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formula for European call options with a proportional dividend and subject to adjustment under certain circumstances as described under “—Anti-dilution Adjustments” below. This
Black-Scholes valuation will be a function of several variables, including:
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our stock price, calculated as the average closing price per share of our common stock during the 20 consecutive trading day period commencing the third trading day
following the date of our notice to the purchase contract agent; |
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our dividend yield, calculated as (1) our last reported regular quarterly dividend multiplied by four, divided by (2) the average closing price per share of our common
stock during the 20 consecutive trading day period commencing the third trading day following the date of our notice to the purchase contract agent; |
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the remaining maturity of the variable-share repurchase contract as of the last trading day in the 20 consecutive trading day period used to determine our stock price;
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the “risk-free rate,” defined as the yield to maturity on the treasury security maturing on February 15, 2006 (CUSIP No. 912827W81), as of the last trading day
in the 20 consecutive trading day period used to determine our stock price; and |
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the annual volatility of our stock, calculated as the annualized unbiased standard deviation of the logarithmic daily returns on our common stock over the 260 consecutive
trading day period ending on the trading day immediately preceding the date of our initial notice to the purchase contract agent. |
In no event will the fixed variable-share settlement rate be greater than shares of our common stock, subject to adjustment under certain circumstances
as described under “—Anti-dilution Adjustments” below. We will be required, on the business day following the expiration of the 20 consecutive trading day period used to determine our stock price, to provide written notice to the
purchase contract agent setting forth our calculation of the fixed variable-share settlement rate. The fixed variable-share settlement rate will become effective at the opening of business two business days after the close of the 20 consecutive
trading day period.
Settlement
Settlement of the contracts will occur on the fixed-share stock purchase date or the variable-share stock purchase date, as applicable, unless:
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in the case of fixed-share purchase contracts, you have settled the fixed-share purchase contract prior to the fixed-share stock purchase date through the delivery of
cash to the purchase contract agent in the manner described in “—Early Settlement of the Fixed-Share Purchase Contracts” below; |
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in the case of variable-share repurchase contracts, you have settled the variable-share repurchase contract prior to the variable-share stock purchase date in the manner
described in “—Early Settlement of the Variable-Share Repurchase Contracts” below; |
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we are involved in a merger, acquisition or consolidation prior to the fixed-share stock purchase date or the variable-share stock purchase date, as applicable, in which
at least 30% of the consideration for our common stock consists of cash or cash equivalents and you have settled the contracts through a merger early settlement as described in “—Early Settlement Upon Cash Merger” below; or
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an event described under “—Termination of Contracts” below has occurred. |
S-42
The settlement of the contracts on the fixed-share stock purchase date or the
variable-share stock purchase date, as applicable, will occur as follows:
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In the case of the fixed-share purchase contracts, the principal payments on the pledged treasury strips, which are also due on the fixed-share stock purchase date,
automatically will be applied to satisfy in full your obligation to purchase our common stock under the fixed-share purchase contracts. If you hold PACES as a component of SPACES, upon such satisfaction, a portion of the shares of our common stock
which you are then entitled to receive automatically will be pledged to the collateral agent for our benefit to secure your continuing obligation under the related variable-share repurchase contracts. The number of shares pledged will
equal shares per variable-share repurchase contract. The shares of our common stock not pledged will be delivered to you or your designee upon presentation and surrender of the
certificate evidencing the SPACES, if the SPACES are held in certificated form, and payment by you of any transfer or similar taxes payable in connection with the issuance of our common stock to any person other than you. If the SPACES were held in
certificated form, and the circumstances so require, you or your designee will receive a new certificate or certificates evidencing the remaining separate VSRCs. |
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In the case of the variable-share repurchase contracts, the pledged common stock automatically will be applied to satisfy in full your obligation to deliver to us shares
of our common stock under the variable-share repurchase contracts. Any remaining shares will then be transferred to you or your designee upon presentation and surrender of the certificate or certificates evidencing the separate VSRCs, if the
separate VSRCs are held in certificated form, and payment by you of any transfer or similar taxes payable in connection with the transfer of our common stock to any person other than you. |
Prior to the date on which shares of our common stock are issued in settlement of the fixed-share purchase contracts, our common stock underlying
the fixed-share purchase contracts will not be deemed to be outstanding for any purpose and you will have no rights with respect to such common stock, including voting rights, rights to respond to tender offers and rights to receive any dividends or
other distributions on our common stock, by virtue of holding the fixed-share purchase contracts. With res 
