-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qyp125M42C5JZkHEcMr0olYuybvmJPQi4r9FHyOO0qJh+1S951aEeMAa77iR90eM XgI18ZUVHPDgbIcg1vwHsg== 0000893220-04-000973.txt : 20040510 0000893220-04-000973.hdr.sgml : 20040510 20040510121812 ACCESSION NUMBER: 0000893220-04-000973 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILMINGTON TRUST CORP CENTRAL INDEX KEY: 0000872821 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 510328154 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14659 FILM NUMBER: 04791794 BUSINESS ADDRESS: STREET 1: RODNEY SQUARE NORTH STREET 2: 1100 NORTH MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19890-0001 BUSINESS PHONE: 3026518378 MAIL ADDRESS: STREET 1: 1100 NORTH MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19890-0001 10-Q 1 w96674e10vq.txt FORM 10-Q WILMINGTON TRUST CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2004 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________ Commission File Number: 1-14659 WILMINGTON TRUST CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 51-0328154 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) RODNEY SQUARE NORTH, 1100 NORTH MARKET STREET, WILMINGTON, DELAWARE 19890 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (302) 651-1000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of issuer's common stock ($1.00 par value) outstanding at March 31, 2004 Class Outstanding at March 31, 2004 ----- ----------------------------- COMMON STOCK - PAR VALUE $1.00 66,403,314 WILMINGTON TRUST CORPORATION AND SUBSIDIARIES FIRST QUARTER 2004 FORM 10-Q TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Consolidated Statements of Condition 1 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 32 Item 4 - Controls and Procedures 33 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 33 Item 2 - Changes in Securities and Use of Proceeds 34 Item 3 - Defaults Upon Senior Securities 34 Item 4 - Submission of Matters to a Vote of Security Holders 34 Item 5 - Other Information 34 Item 6 - Exhibits and Reports on Form 8-K 34
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF CONDITION (unaudited) Wilmington Trust Corporation and Subsidiaries
--------------------- March 31, December 31, (in millions) 2004 2003 - --------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 193.5 $ 210.2 --------------------- Federal funds sold and securities purchased under agreements to resell 151.5 3.8 --------------------- Investment securities available for sale: U.S. Treasury and government agencies 468.1 470.0 Obligations of state and political subdivisions 11.2 12.9 Other securities 1,459.9 1,392.3 - ------------------------------------------------------------------------------------------------- Total investment securities available for sale 1,939.2 1,875.2 --------------------- Investment securities held to maturity: Obligations of state and political subdivisions 3.1 3.1 Other securities 1.0 1.1 - ------------------------------------------------------------------------------------------------- Total investment securities held to maturity (market values of $4.3 and $4.5, respectively) 4.1 4.2 --------------------- Loans: Commercial, financial, and agricultural 2,338.8 2,275.2 Real estate-construction 733.0 699.8 Mortgage-commercial 1,144.5 1,078.2 - ------------------------------------------------------------------------------------------------- Total commercial loans 4,216.3 4,053.2 --------------------- Mortgage-residential 471.9 489.6 Consumer 1,073.7 1,077.1 Secured with liquid collateral 609.1 605.4 - ------------------------------------------------------------------------------------------------- Total retail loans 2,154.7 2,172.1 --------------------- Total loans net of unearned income 6,371.0 6,225.3 Reserve for loan losses (91.2) (89.9) - ------------------------------------------------------------------------------------------------- Net loans 6,279.8 6,135.4 --------------------- Premises and equipment, net 151.4 152.3 Goodwill, net of accumulated amortization of $29.8 in 2004 and 2003 256.0 243.2 Other intangible assets, net of accumulated amortization of $11.8 in 2004 and $11.1 in 2003 23.6 24.0 Accrued interest receivable 43.6 39.5 Other assets 127.7 132.4 - ------------------------------------------------------------------------------------------------- Total assets $9,170.4 $8,820.2 =====================
1
----------------------- March 31, December 31, (in millions) 2004 2003 - --------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand $1,054.6 $1,025.5 Interest-bearing: Savings 379.0 369.0 Interest-bearing demand 2,275.4 2,364.1 Certificates under $100,000 769.3 788.3 Local CDs $100,000 and over 137.6 130.3 - ------------------------------------------------------------------------------------- Total core deposits 4,615.9 4,677.2 National CDs $100,000 and over 2,243.0 1,900.0 - ------------------------------------------------------------------------------------- Total deposits 6,858.9 6,577.2 --------------------- Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 885.5 820.5 U.S. Treasury demand 18.6 48.3 Line of credit -- 8.0 - ------------------------------------------------------------------------------------- Total short-term borrowings 904.1 876.8 --------------------- Accrued interest payable 24.9 23.6 Other liabilities 127.1 134.5 Long-term debt 418.6 407.1 - ------------------------------------------------------------------------------------- Total liabilities 8,333.6 8,019.2 --------------------- Minority interest 1.0 0.2 --------------------- Stockholders' equity: Common stock ($1.00 par value) authorized 150,000,000 shares; issued 78,528,346 78.5 78.5 Capital surplus 64.6 54.6 Retained earnings 966.2 948.4 Accumulated other comprehensive loss (8.6) (16.1) - ------------------------------------------------------------------------------------- Total contributed capital and retained earnings 1,100.7 1,065.4 Less: Treasury stock, at cost, 12,471,686 and 12,465,014 shares, respectively (264.9) (264.6) - ------------------------------------------------------------------------------------- Total stockholders' equity 835.8 800.8 --------------------- Total liabilities and stockholders' equity $9,170.4 $8,820.2 =====================
See Notes to Consolidated Financial Statements 2 CONSOLIDATED STATEMENTS OF INCOME (unaudited) Wilmington Trust Corporation and Subsidiaries
--------------------------- For the three months ended March 31, --------------------------- (in millions; except per share data) 2004 2003 - -------------------------------------------------------------------------------- NET INTEREST INCOME Interest and fees on loans $ 72.9 $ 77.1 Interest and dividends on investment securities: Taxable interest 16.2 13.6 Tax-exempt interest 0.1 0.3 Dividends 1.8 1.7 Interest on federal funds sold and securities purchased under agreements to resell -- 0.1 - ----------------------------------------------------------------------------- Total interest income 91.0 92.8 ------------------------- Interest on deposits 13.2 18.7 Interest on short-term borrowings 3.1 3.2 Interest on long-term debt 2.9 2.6 - ----------------------------------------------------------------------------- Total interest expense 19.2 24.5 ------------------------- Net interest income 71.8 68.3 Provision for loan losses (5.5) (4.9) - ----------------------------------------------------------------------------- Net interest income after provision for loan losses 66.3 63.4 ------------------------- NONINTEREST INCOME Advisory fees Wealth Advisory Services 39.7 33.6 Corporate Client Services 17.9 14.9 Cramer Rosenthal McGlynn 2.1 0.7 Roxbury Capital Management 0.2 (0.9) - ----------------------------------------------------------------------------- Advisory fees 59.9 48.3 Amortization of affiliate other intangibles (0.4) (0.3) - ----------------------------------------------------------------------------- Advisory fees after amortization of affiliate other intangibles 59.5 48.0 ------------------------- Service charges on deposit accounts 8.2 7.3 Loan fees and late charges 1.6 2.0 Card fees 2.1 2.6 Other noninterest income 1.3 1.2 - ----------------------------------------------------------------------------- Total noninterest income 72.7 61.1 ------------------------- Net interest and noninterest income 139.0 124.5 ------------------------- NONINTEREST EXPENSE Salaries and wages 32.4 29.8 Incentives and bonuses 8.3 9.5 Employment benefits 10.9 9.6 Net occupancy 5.3 5.4
3 Furniture, equipment, and supplies 7.6 7.3 Advertising and contributions 1.6 1.9 Servicing and consulting fees 4.6 4.0 Travel, entertainment, and training 1.7 1.5 Originating and processing fees 2.1 1.8 Other noninterest expense 8.7 8.8 - ----------------------------------------------------------------------------- Total noninterest expense 83.2 79.6 ------------------------- NET INCOME Income before income taxes and minority interest 55.8 44.9 Income tax expense 19.8 15.3 - ----------------------------------------------------------------------------- Net income before minority interest 36.0 29.6 Minority interest 0.3 0.2 - ----------------------------------------------------------------------------- Net income $ 35.7 $ 29.4 ========================= Net income per share: basic $ 0.54 $ 0.45 ========================= diluted $ 0.53 $ 0.44 ========================= Weighted average shares outstanding: basic 66,160 65,692 diluted 67,493 66,174
See Notes to Consolidated Financial Statements 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Wilmington Trust Corporation and Subsidiaries
-------------------------- For the three months ended March 31, (in millions) 2004 2003 - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 35.7 $ 29.4 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5.5 4.9 Provision for depreciation and other amortization 4.6 4.8 Amortization of other intangible assets 0.7 0.6 Minority interest in net income 0.3 0.2 Amortization of investment securities available for sale discounts and premiums 3.6 2.5 Deferred income taxes 1.5 (1.0) Originations of residential mortgages available for sale (16.9) (55.1) Gross proceeds from sales of residential mortgages 17.3 56.3 Gains on sales of residential mortgages (0.4) (1.2) (Increase)/decrease in other assets (1.1) 7.0 Decrease in other liabilities (10.3) (24.3) - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 40.5 24.1 ----------------- INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 5.5 0.1 Proceeds from maturities of investment securities available for sale 177.1 258.4 Proceeds from maturities of investment securities held to maturity 0.1 0.1 Purchases of investment securities available for sale (238.3) (458.0) Purchases of residential mortgages -- (0.3) Net increase in loans (149.9) 13.1 Purchases of premises and equipment (8.2) (5.5) Dispositions of premises and equipment 4.6 1.9 - ------------------------------------------------------------------------------------------------- Net cash used for investing activities (209.1) (190.2) ----------------- FINANCING ACTIVITIES Net (decrease)/increase in demand, savings, and interest-bearing demand deposits (49.6) 43.1 Net increase in certificates of deposit 331.3 196.9 Net increase/(decrease) in federal funds purchased and securities sold under agreements to repurchase 65.0 (54.9) Net decrease in U.S. Treasury demand (29.7) (31.2) Proceeds from issuance of long-term debt 11.5 -- Net decrease in line of credit (8.0) (10.0) Cash dividends (17.9) (16.8) Distributions to minority shareholders (0.3) (0.2) Proceeds from common stock issued under employment benefit plans, net of income taxes 4.6 1.9 Payments for common stock acquired through buybacks (7.4) (0.5) - ------------------------------------------------------------------------------------------------- Net cash provided by financing activities 299.5 128.3 ----------------- Effect of foreign currency translation on cash 0.1 -- ----------------- Increase in cash and cash equivalents 131.0 (37.8)
5 Cash and cash equivalents at beginning of period 214.0 248.9 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $345.0 $211.1 ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 17.9 $ 25.3 Taxes 7.3 1.0
See Notes to Consolidated Financial Statements 6 Notes to Unaudited Consolidated Financial Statements Note 1 - Stock-Based Compensation Plans At March 31, 2004, the Corporation had three types of stock-based compensation plans, which are described in "Note 15" to the "Consolidated Financial Statements" included in the Corporation's 2003 Annual Report to Shareholders. The Corporation applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for these plans. No stock-based compensation cost has been recognized in the accompanying consolidated financial statements for those plans. If compensation cost for the Corporation's three types of stock-based compensation plans had been determined based on the fair value at the grant dates for awards under those plans consistent with the methods outlined in Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income would have been as follows:
-------------------------- For the three months ended March 31, -------------------------- (in millions, except per share amounts) 2004 2003 - -------------------------------------------------------------------------------------- Net income: As reported $ 35.7 $ 29.4 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (0.8) (0.4) - ---------------------------------------------------------------------------------- Pro forma net income $ 34.9 $ 29.0 Basic earnings per share: As reported $ 0.54 $ 0.45 Pro forma 0.53 0.44 Diluted earnings per share: As reported $ 0.53 $ 0.44 Pro forma 0.52 0.44
Note 2 - Accounting and Reporting Policies The accounting and reporting policies of Wilmington Trust Corporation (the Corporation), a holding company that owns all of the issued and outstanding shares of capital stock of Wilmington Trust Company, Wilmington Trust of Pennsylvania, Wilmington Trust FSB, WT Investments, Inc. (WTI), Rodney Square Management Corporation, Wilmington Trust (UK) Limited, and Balentine Holdings, Inc., conform to accounting principles generally accepted in the United States of America and practices in the banking industry for interim financial information. The information for the interim periods is unaudited and includes all adjustments that are of a normal recurring nature and that management believes to be necessary for fair presentation. Results for the interim periods are not necessarily indicative of the results that may be expected for the full year. The consolidated financial statements presented herein should be read in conjunction with the "Notes to Consolidated Financial Statements" included in the 7 Corporation's 2003 Annual Report to Shareholders. Certain prior year amounts have been reclassified to conform to current year presentation. Note 3 - Comprehensive Income The following table depicts other comprehensive income as required by SFAS No. 130:
-------------------------- For the three months ended March 31, -------------------------- (in millions) 2004 2003 - --------------------------------------------------------------------------------------------------------- Net income $35.7 $29.4 Other comprehensive income, net of income taxes: Net unrealized holding gains/(losses) on securities 7.6 (0.5) Reclassification adjustment for securities gains included in net income -- -- Net unrealized holding gains arising during the period on derivatives used for cash flow hedge 0.1 -- Reclassification adjustment for derivative gains included in net income (0.1) -- Foreign currency translation adjustments (0.1) (0.1) Minimum pension/SERP liability adjustment -- -- --------------- Total comprehensive income $43.2 $28.8 ===============
Note 4 - Earnings Per Share The following table sets forth the computation of basic and diluted net earnings per share:
-------------------------- For the three months ended March 31, -------------------------- (in millions; except per share data) 2004 2003 - ----------------------------------------------------------------------------------------- Numerator: Net income $ 35.7 $ 29.4 - ------------------------------------------------------------------------------------ Denominator: Denominator for basic earnings per share - weighted-average shares 66.2 65.7 - ------------------------------------------------------------------------------------ Effect of dilutive securities: Employee stock options 1.3 0.5 - ------------------------------------------------------------------------------------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 67.5 66.2 - ------------------------------------------------------------------------------------ Basic earnings per share $ 0.54 $ 0.45 ==================================================================================== Diluted earnings per share $ 0.53 $ 0.44 ==================================================================================== Cash dividends per share $ 0.27 $ 0.255
8 The number of anti-dilutive stock options excluded for the three-month period ended March 31, 2004, was 1.0 million. The number of anti-dilutive stock options excluded for the three-month period ended March 31, 2003, was 2.0 million. Note 5 - Segment Reporting For the purposes of segment reporting, the Corporation discusses its business in four segments. There is a segment for each of the Corporation's three businesses, which are Regional Banking, Wealth Advisory Services, and Corporate Client Services, as well as a segment for Affiliate Money Managers. This segment reporting methodology was first implemented for the three and nine months ended September 30, 2003, and included in the Form 10-Q filed by the Corporation with the Securities and Exchange Commission on November 14, 2003. Segment reporting for the three months ended March 31, 2003, has been revised to reflect that change, and all prior period amounts have been restated accordingly. The new methodology employs activity-based costing principles to assign corporate overhead expenses to each segment. In addition, funds transfer pricing concepts are used to credit and charge segments for funds provided and funds used. The Regional Banking segment includes lending, deposit-taking, and branch banking in the Corporation's primary banking markets of Delaware, southeastern Pennsylvania, and Maryland's Eastern Shore. It also includes institutional deposit taking on a national basis. Lending activities include commercial loans, commercial and residential mortgages, and construction and consumer loans. Deposit products include demand checking, certificates of deposit, negotiable order of withdrawal accounts, and various savings and money market accounts. The Wealth Advisory Services segment includes financial planning, asset management, investment counseling, trust services, estate settlement, private banking, tax preparation, mutual fund services, broker-dealer services, and insurance services. Results from Balentine & Company are fully consolidated in the Wealth Advisory Services segment. The Corporate Client Services segment includes a variety of trust, custody, and administrative services that support capital markets transactions, entity management, and retirement plan assets. Results of SPV Management Limited are fully consolidated in the Corporate Client Services segment. The Affiliate Money Managers segment includes contributions from Cramer Rosenthal McGlynn (CRM) and Roxbury Capital Management (RCM), which are based on the Corporation's partial ownership interest in each. Services provided by these two affiliates include fixed income and equity investing services and investment portfolio management services. Neither CRM's or RCM's results are consolidated in the Corporation's financial statements. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in "Note 1" to the "Consolidated Financial Statements" in the Corporation's 2003 Annual Report to Shareholders. The Corporation evaluates performance based on profit or loss from operations before income taxes and without including nonrecurring gains and losses. The Corporation generally records intersegment sales and transfers as if the sales or transfers were to third parties (e.g., at current market prices). Profit or loss from infrequent events, such as the sale of a business, is reported separately for each segment. Financial data by segment for the quarters ended March 31, 2004, and March 31, 2003, is as follows:
Wealth Corporate Affiliate Regional Advisory Client Money Quarter ended March 31, 2004 (in millions) Banking Services Services Managers Totals - ---------------------------------------------------------------------------------------------------------------- Net interest income $64.3 $ 6.5 $ 2.3 $(1.3) $71.8 Provision for loan losses (5.3) (0.2) -- -- (5.5) - ---------------------------------------------------------------------------------------------------------------- Net interest income after provision 59.0 6.3 2.3 (1.3) 66.3 Advisory fees: Wealth Advisory Services 0.5 36.5 2.7 -- 39.7 Corporate Client Services 0.3 -- 17.6 -- 17.9 Affiliate Money Managers -- -- -- 2.3 2.3 - ----------------------------------------------------------------------------------------------------------------
9 - ----------------------------------------------------------------------------------------------------------------------- Advisory fees 0.8 36.5 20.3 2.3 59.9 Amortization of other intangibles -- (0.2) (0.1) (0.1) (0.4) - ----------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of of other intangibles 0.8 36.3 20.2 2.2 59.5 Other noninterest income 12.7 0.2 0.3 -- 13.2 - ----------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 72.5 42.8 22.8 0.9 139.0 Noninterest expense (34.1) (32.9) (16.2) -- (83.2) - ----------------------------------------------------------------------------------------------------------------------- Segment profit from operations 38.4 9.9 6.6 0.9 55.8 Segment gain from infrequent events -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 38.4 $ 9.9 $ 6.6 $ 0.9 $ 55.8 ======================================================================================================================= Depreciation and amortization $ 5.4 $ 1.9 $ 1.4 $ 0.2 $ 8.9 Investment in equity method investees -- -- -- 242.2 242.2 Segment average assets 7,315.7 1,149.7 206.8 242.9 8,915.1
- ----------------------------------------------------------------------------------------------------------------------- Wealth Corporate Affiliate Regional Advisory Client Money Quarter ended March 31, 2003 (in millions) Banking Services Services Managers Totals - ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 61.3 $ 6.0 $ 2.5 $ (1.5) $ 68.3 Provision for loan losses (4.8) (0.1) -- -- (4.9) - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision 56.5 5.9 2.5 (1.5) 63.4 Total advisory fees: Wealth Advisory Services 0.6 30.5 2.5 -- 33.6 Corporate Client Services 0.4 -- 14.5 -- 14.9 Affiliate Money Managers -- -- -- (0.2) (0.2) - ----------------------------------------------------------------------------------------------------------------------- Advisory fees 1.0 30.5 17.0 (0.2) 48.3 Amortization of other intangibles -- (0.1) (0.1) (0.1) (0.3) - ----------------------------------------------------------------------------------------------------------------------- Advisory fees after amortization of of other intangibles 1.0 30.4 16.9 (0.3) 48.0 Other noninterest income 12.3 0.5 0.3 -- 13.1 - ----------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 69.8 36.8 19.7 (1.8) 124.5 Noninterest expense (35.0) (30.5) (14.1) -- (79.6) - ----------------------------------------------------------------------------------------------------------------------- Segment profit before income taxes $ 34.8 $ 6.3 $ 5.6 $ (1.8) $ 44.9 ======================================================================================================================= Depreciation and amortization $ 4.6 $ 1.9 $ 1.3 $ 0.1 $ 7.9 Investment in equity method investees -- -- -- 241.2 241.2 Segment average assets 6,687.2 1,028.9 202.3 240.8 8,159.2
Note 6 - Derivative and Hedging Activities The Corporation previously has entered into interest rate swap and interest rate floor contracts in managing interest rate risk to reduce the impact of fluctuations in interest rates of identifiable asset categories, principally floating-rate commercial loans and commercial mortgage loans. 10 Swaps are contracts to exchange, at specified intervals, the difference between fixed- and floating-rate interest amounts computed on contractual notional principal amounts. Floors are contracts that generate interest payments to the Corporation based on the difference between the floating-rate index and a predetermined strike rate of the specific floor when the index is below the strike rate. When the index is equal to or above the strike rate, no payments are made or received by the Corporation. The Corporation also uses swaps to protect against the changes in fair value of fixed-rate bonds it has issued due to changes in interest rates. In April 2003 the Corporation entered into five interest rate swaps with notional values of $50 million each. The Corporation's objective was to protect against changes in the fair value of its $250 million fixed-rate subordinated debt issue due to changes in LIBOR. The swaps were designated as fair value hedges and, since the critical terms of the swaps and the hedged bonds were identical, the Corporation assumed no ineffectiveness. As a result, gains and losses attributable to changes in the fair value of the swaps are directly offset by changes in the fair value of the debt. Changes in the fair value of the floors attributed to the change in "time value" are excluded in assessing the hedge's effectiveness and are recorded in "Other noninterest income" in the Consolidated Statements of Income. Changes in the fair value that are determined to be ineffective are also recorded in "Other noninterest income" in the Consolidated Statements of Income. The effective portion of the change in fair value is recorded in "Other comprehensive income" in the Consolidated Statements of Condition. For the first quarter of 2004, approximately $77,100 of gains in "Accumulated other comprehensive income" were reclassified to earnings. During the 12 months ending March 31, 2005, approximately $308,400 of gains in "Accumulated other comprehensive income" are expected to be reclassified to earnings. The Corporation does not hold or issue derivative financial instruments for trading purposes. Note 7 - Goodwill and Other Intangible Assets A summary of goodwill and other intangible assets is as follows:
March 31, 2004 December 31, 2003 ----------------------------------------------------------------------- Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying (in millions) amount Amortization amount amount amortization amount - ------------------------------------------------------------------------------------------------------- Goodwill (nonamortizing) $ 285.8 $ 29.8 $ 256.0 $ 273.0 $ 29.8 $ 243.2 ======================================================================= Other intangibles Amortizing: Mortgage servicing rights $ 7.3 $ 4.2 $ 3.1 $ 7.2 $ 4.0 $ 3.2 Customer lists 19.3 5.3 14.0 19.1 4.8 14.3 Acquisition costs 1.7 1.7 -- 1.7 1.7 -- Other intangibles 0.7 0.6 0.1 0.7 0.6 0.1 Nonamortizing Other intangible assets 6.4 -- 6.4 6.4 -- 6.4 ----------------------------------------------------------------------- Total other intangibles $ 35.4 $ 11.8 $ 23.6 $ 35.1 $ 11.1 $ 24.0 =======================================================================
11 Amortization expense of other intangible assets for the three months ended March 31 is as follows:
-------------------------- For the three months ended March 31, -------------------------- (in millions) 2004 2003 - ---------------------------------------------------------------------------------------- Amortization expense $ 0.7 $ 0.6
The estimated amortization expense of other intangible assets for each of the five succeeding fiscal years is as follows:
Estimated annual amortization expense (in millions) - ------------------------------------------------------------------- For the year ended December 31, 2005 $ 2.5 For the year ended December 31, 2006 2.4 For the year ended December 31, 2007 1.5 For the year ended December 31, 2008 1.3 For the year ended December 31, 2009 1.2
The changes in the carrying amount of goodwill for the three months ended March 31 are as follows:
2004 -------------------------------------------------------------- Wealth Corporate Affiliate Regional Advisory Client Money (in millions) Banking Services Services Managers Total - ------------------------------------------------------------------------------------------------------------------- Balance as of January 1, 2004 $ 3.8 $ 4.4 $ 7.8 $ 227.2 $ 243.2 Goodwill acquired -- 12.7 -- -- 12.7 Increase in carrying value due to foreign currency translation adjustments -- -- 0.1 -- 0.1 -------------------------------------------------------------- Balance as of March 31, 2004 $ 3.8 $ 17.1 $ 7.9 $ 227.2 $ 256.0 ==============================================================
2003 --------------------------------------------------------------- Wealth Corporate Affiliate Regional Advisory Client Money (in millions) Banking Services Services Managers Total - -------------------------------------------------------------------------------------------------------------------- Balance as of January 1, 2003 $ 3.8 $ 4.4 $ 7.2 $ 224.8 $ 240.2 Decrease in carrying value due to foreign currency translation adjustments -- -- (0.1) -- (0.1) --------------------------------------------------------------- Balance as of March 31, 2003 $ 3.8 $ 4.4 $ 7.1 $ 224.8 $ 240.1 =============================================================== The goodwill acquired in 2004 above represents $12.7 million recorded in connection with the payment of a portion of the purchase price for Balentine Holdings, Inc.
12 The following table lists other intangible assets acquired during the three months ended March 31.
2004 2003 ----------------------------------------------------------------------- Weighted Weighted average average amortization amortization Amount Residual period Amount Residual period (in millions) Assigned Value in years Assigned Value in years - ------------------------------------------------------------------------------------------------------------- Mortgage servicing rights $ 0.1 -- 8 $ 0.5 -- 8 Customer list increase in carrying value due to foreign currency translation adjustments 0.1 -- -- -- ---------------- ---------------- $ 0.2 -- $ 0.5 -- ================ ================
Note 8 - Components of net periodic benefit cost The following table reflects the net periodic benefit cost of the pension plan, supplemental executive retirement plan (SERP), and other postretirement benefits for the three months ended March 31, 2004, and 2003. Descriptions of these plans are contained in "Note 15" to the "Consolidated Financial Statements" in the Corporation's 2003 Annual Report to Shareholders.
Pension benefits SERP benefits Postretirement benefits -------------------------------------------------------------------- (in millions) 2004 2003 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 1.6 $ 1.6 $ 0.1 $ 0.1 $ 0.3 $ 0.2 Interest cost 2.1 2.7 0.3 0.3 0.6 0.6 Expected return on plan assets (2.8) (3.4) -- -- -- -- Amortization of transition obligation/(asset) (0.2) (0.3) -- -- -- -- Amortization of prior service cost 0.2 0.3 0.1 0.1 -- -- Recognized actuarial (gain)/loss 0.2 -- 0.1 -- 0.2 0.1 -------------------------------------------------------------------- Net periodic benefit cost $ 1.1 $ 0.9 $ 0.6 $ 0.5 $ 1.1 $ 0.9 ==================================================================== Employer contributions $ -- $ 15.0 $ 0.1 $ 0.1 $ 1.0 $ 0.7
Note 9 - Temporarily impaired investment securities At March 31, 2004, the Corporation's investment portfolio consisted of 45 positions with an estimated market value of $469.6 million and unrealized losses of $6.9 million. Of the 45 positions, 15 were corporate and equity securities that have carried unrealized losses for a continuous 12-month period. 13 These unrealized losses reflected temporary impairment attributable to financial scandals which began in 2002 and whose effects continued throughout 2003. These events created a continuing negative impact on credit spreads, specifically for collateralized debt and equity securities. Improved credit ratings in the banking sector as well as a decline in benchmark interest rates led to a decline in the unrealized losses from December 2003. This trend continued in the first quarter of 2004. The following table shows the estimated market value and unrealized losses on debt and marketable equity securities that are temporarily impaired.
Less than 12 months 12 months or longer Total --------------------------------------------------------------------------- Estimated Estimated Estimated market Unrealized market Unrealized market Unrealized (in millions) value losses value losses value losses - ---------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2004 Other securities: Preferred stock $ 7.0 $ -- $ 2.7 $ 0.4 $ 9.7 $ 0.4 Mortgage-backed securities 318.5 5.2 -- -- 318.5 5.2 Other debt securities 63.2 0.4 78.2 0.9 141.4 1.3 --------------------------------------------------------------------------- Total temporarily impaired securities $ 388.7 $ 5.6 $ 80.9 $ 1.3 $ 469.6 $ 6.9 ===========================================================================
Note 10 - Accounting Pronouncements FIN No.46R: On December 24, 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R or the Interpretation), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate an entity. This Interpretation replaces Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was issued on January 17, 2003. FIN 46R requires that an enterprise review its degree of involvement in an entity to determine if consolidation of the entity is required or if disclosures are required about an enterprise's level of involvement in the entity. Public companies must apply either FIN 46 or FIN 46R to entities considered to be special-purpose entities for periods ending after December 15, 2003. Application by public companies for all other types of entities is required in financial statements for periods ending after March 15, 2004. The application of this Interpretation did not have a material impact on the Corporation's consolidated earnings, financial condition, or equity, nor has there been any requirement for disclosures. SFAS No. 148: In December, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The requirements for SFAS No. 148 are effective for financial statements for fiscal years ended and interim periods beginning after December 15, 2002. The Corporation uses the "intrinsic value" approach to accounting for stock-based compensation as permitted under APB Opinion No. 25. The Corporation has adopted the disclosure provisions of SFAS No. 148. The disclosure provisions had no impact on the Corporation's consolidated earnings, financial condition, or equity. On April 22, 2003, the FASB announced its intention to require that all companies expense the value of employee stock options. The FASB issued an exposure draft on March 31, 2004, that would require the expensing of the value of employee stock options for fiscal years beginning after December 15, 2004. The Statement is expected to be finalized in 2004. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPANY OVERVIEW The Corporation is a financial services holding company with a diversified mix of three businesses - Wealth Advisory Services, Corporate Client Services, and Regional Banking - which it delivers through its primary wholly owned subsidiaries: a) Wilmington Trust Company, a Delaware-chartered bank and trust company that has engaged in commercial and trust banking activities since 1903. Wilmington Trust Company is the 15th largest personal trust provider in the United States and the largest full-service bank in Delaware, with 43 branch offices throughout the state. b) Wilmington Trust of Pennsylvania, a Pennsylvania-chartered bank and trust company. Wilmington Trust of Pennsylvania has offices in center city Philadelphia, Doylestown, Villanova, and West Chester. c) Wilmington Trust FSB, which serves as the platform for the Corporation's activities beyond Delaware and Pennsylvania. Wilmington Trust FSB offices are located in California, Florida, Georgia, Maryland, Nevada, and New York. The Corporation and its affiliates also have offices in Tennessee, the Cayman Islands, the Channel Islands, and London, and other affiliates in Dublin and Milan. Through its subsidiaries, the Corporation engages in fiduciary, wealth management, investment advisory, financial planning, insurance, broker-dealer, and deposit taking services, and residential, consumer, commercial, and construction lending. The Wealth Advisory Services business provides a variety of financial planning and asset management services for high-net-worth individuals and families throughout the United States and in many foreign countries. The Corporate Client Services business provides a variety of specialty trust and administrative services for national and multinational institutions. The Regional Banking business targets consumer clients in the state of Delaware and commercial clients throughout the Delaware Valley region. In its commercial banking business, the Corporation targets family-owned or closely held businesses with annual sales of up to $250 million where there is an opportunity to develop an advisory as well as a lending relationship. The Corporation and its subsidiaries are subject to regulation by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Delaware Department of Banking, the Pennsylvania Department of Banking, and certain other federal and state authorities. The Corporation has ownership interests in two affiliate money managers, Cramer Rosenthal McGlynn and Roxbury Capital Management. For the purposes of segment reporting, the income, expenses, and assets of these two affiliates are reported as a separate segment in addition to the segments for the Wealth Advisory Services, Corporate Client Services, and Regional Banking businesses. SUMMARY OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 Higher sales volumes and the improving economy combined to produce strong 2004 first quarter results. Earnings per share were $0.53 on a diluted basis and net income was $35.7 million. These were increases of 20.5% and 21.4%, respectively, from the year-ago first quarter. This improvement was achieved opposite a 4.5% increase in expenses and a 22-basis-point decline in the net interest margin from a year ago. Several factors contributed to the positive first quarter performance. Each business engaged new clients and developed additional business with existing clients. The economic rebound that began to take shape in the latter half of 2003 gained traction in the first three months of 2004. Interest rates remained stable and equity markets remained above their year-ago levels. Highlights of the 2004 first quarter included: - - The 12th consecutive quarter of growth in loan balances, which rose 2.3% to $6.37 billion, a record high; - - 18% growth in Wealth Advisory Services revenue; - - 20% growth in Corporate Client Services revenue; - - Higher income from affiliate money manager Cramer Rosenthal McGlynn; - - A return to profitability at affiliate money manager Roxbury Capital Management; 15 - - An increase in combined assets under management to $32.7 billion; - - A net interest margin of 3.53%; and - - Stable credit quality. On an annualized basis, the 2004 first quarter return on average assets (ROA) was 1.61% and the return on average stockholders' equity (ROE) was 17.69%. These were upticks from the full-year 2003, when the ROA and ROE were 1.58% and 17.46%, respectively. They also were improvements from the 2003 first quarter annualized returns of 1.46% and 15.97%, respectively. In a reflection of continued growth in net income and stockholders' equity, the quarterly cash dividend was raised by $0.015 per share. This took the quarterly dividend from $0.27 to $0.285 per share, or $1.14 on an annualized basis. This was a 5.6% increase. This marked the 23rd consecutive year that the cash dividend has been raised. STATEMENT OF CONDITION This section discusses changes in the balance sheet for the period between December 31, 2003, and March 31, 2004. All balances referenced in this section are period-end balances unless otherwise noted. Assets Total assets rose 3.8% to $9.17 billion as a result of higher balances in earning assets, including the commercial loan portfolio and the investment securities portfolio. Earning assets increased 4.4% to $8.47 billion due to growth in loan and investment balances. Investment securities Investment portfolio balances rose 3.4% to $1.94 billion as new investments were made to offset anticipated paydowns in mortgage-backed instruments. On a percentage basis, the composition of assets within the investment portfolio remained relatively unchanged, as the following table illustrates.
SECURITY MARCH 31, 2004 DECEMBER 31, 2003 SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------------------------- Mortgage-backed securities and collateralized mortgage obligations 53% 52% 49% U.S. treasuries 11% 11% 17% Corporate issues 14% 14% 13% U.S. government agencies 13% 13% 11% Money market preferred stocks 7% 8% 7% Municipal bonds 1% 1% 1% Other 1% 1% 2%
At March 31, 2004, approximately 99% of the mortgage-backed securities in the portfolio were invested in fixed-rate instruments of 15 years or less. The Corporation believes that duration and risk can be managed more effectively by investing in mortgage-related instruments than by retaining individual residential mortgage loans on the balance sheet. The average life of mortgage-backed instruments in the investment portfolio was 3.7 years at March 31, 2004, and the duration was 3.9. The corresponding life and duration at December 31, 2003, were 4.50 and 4.50, respectively. At March 31, 2004, the average life of the total investment portfolio was 5.25 years and the duration was 2.37. In comparison, at December 31, 2003, the average life was 5.67 years and the duration was 2.81. Loan balances The 2004 first quarter marked the 12th consecutive quarter of growth in loan balances, which rose to a record high of $6.37 billion. This was an increase of 2.3%. This growth was achieved opposite a 3.6% decrease in residential 16 mortgage balances, which declined mainly because the Corporation sells all new residential mortgage production into the secondary market. The growth trend in loan balances was attributed to two primary factors. First was the concentration of the Regional Banking business on the Delaware Valley region, which benefits from a strong regional economy. The Corporation defines the Delaware Valley region as the state of Delaware, geographically adjacent areas along the I-95 corridor from Princeton, New Jersey, to Baltimore, Maryland, and Maryland's Eastern Shore. Second was the focus of the commercial banking business on family owned or closely held businesses in the Delaware Valley region. The Corporation holds a leading market share in the state of Delaware and continues to gain market share throughout southeastern Pennsylvania. Commercial loans Nearly all of the first quarter growth in loan balances occurred in the commercial portfolio, which rose 4.0% to $4.22 billion. Commercial loan balances are reported in three categories: - - Commercial, financial, and agricultural loans (commercial and industrial loans, or C and I); - - Commercial construction/real estate loans (CRE); and - - Commercial mortgage loans. Balance increases were recorded in all three categories during the first quarter. Most of the growth occurred in commercial mortgage balances, which increased $66.3 million, or 6.1%, to $1.14 billion. In large part, the increase reflected refinancing activity for new as well as existing clients, and included retail, restaurant, industrial park, and education-related projects. C and I balances rose $63.6 million to $2.34 billion. Factors in this growth included higher demand for automobile floor plan loans, as dealers borrowed to support new seasonal inventory. In addition, clients in the precision manufacturing and metal fabrication business were added as a result of the upturn in the light manufacturing sector in the southeastern Pennsylvania market. CRE balances rose 4.7%, or $33.2 million, to $733.0 million. Most of this growth occurred in Delaware, where residential real estate construction and land development activity continued to generate demand for loans. Retail loans Declines in residential mortgage balances were the primary cause of the modest decline in total retail loan balances. Residential mortgage balances fell $17.7 million, or 3.6%, to $471.9 million. While the Corporation continued to be a leading residential mortgage originator in Delaware, residential mortgage balances decreased mainly because the Corporation sells all new residential mortgage production into the secondary market. Mortgages are sold to reduce the Corporation's risk associated with rising interest rates. In addition, paydowns continued, and the low interest rate environment continued to generate a high volume of refinancings. Reserve for loan losses The reserve for loan losses increased 1.4% to $91.2 million. Changes in the reserve reflected the growth in loan balances and the Corporation's internal risk rating analysis, reserve methodology, and net charge-off experience. The loan loss reserve ratio was 1.43% at March 31, 2004, which was a decline of 1 basis point from December 31, 2003. For more information about credit quality, please refer to the "Asset Quality" section of this report. 17 Liabilities Total liabilities increased 3.9% to $8.33 billion. Most of the increase resulted from higher balances of national certificates of deposits (CDs) in amounts of $100,000 or more, which the Corporation uses as a source of funds. Deposit balances The national CDs were the primary driver of the 4.3% increase in deposit balances, which rose to $6.86 billion. National CD balances were 18.1%, or $343.0 million, higher than at December 31, 2003, because increased loan demand exceeded core deposits. Because national CDs represent a funding source that the Corporation can control, as opposed to client deposits, they are not considered to be core deposits. For more information about funding sources, please refer to the "Liquidity" section of this report. Core deposit balances decreased 1.3%, as interest-bearing demand deposit balances dropped $88.7 million and balances of CDs in amounts of less than $100,000 fell $19.0 million. These declines offset the growth in noninterest-bearing demand deposits, savings deposits, and balances of local CDs in amounts of $100,000 or more (which do represent client deposits). Part of the decrease in interest-bearing demand deposits was related to Corporate Client Services clients who use the Corporation's cash management and paying agent services. It is not unusual for the funds associated with the Corporate Client business to be deposited for short periods of time. As a result, average core deposit balances are a better indicator of trends in deposit balances. On an average balance basis, interest-bearing demand deposits decreased $31.1 million between the 2003 fourth quarter and the 2004 first quarter. This was $57.6 million less than the period-end decrease. Stockholders' equity Stockholders' equity increased 4.4% to $835.8 million. For more information about the increase, please refer to the "Capital Resources" section of this report. The Corporation repurchased 200,903 shares of its stock during the first quarter at an average price of $36.74 per share. This brought the total number of shares purchased under the current 8-million-share program, which commenced in April 2002, to 285,272 shares. INCOME STATEMENT This section compares the Corporation's income and expenses for the first quarter of 2004 with those of the first quarter of 2003. Net income for the first quarter of 2004 was $35.7 million and earnings per share were $0.53 on a diluted basis. These were increases of 21.4% and 20.5%, respectively. Higher revenue from each of the Corporation's businesses, improved results from the two affiliate money managers, and a stable net interest margin drove the increase. The size of the increase also was a reflection of the comparative weakness of the 2003 first quarter, when growth in loan balances and advisory business sales was offset by the low interest rate environment, low equity market levels, a loss in affiliate money manager income, and significant compression in the net interest margin. On an annualized basis, the 2004 first quarter return on average assets was 1.61% and the return on average stockholders' equity was 17.69%. This was an improvement from the 2003 first quarter annualized returns of 1.46% and 15.97%, respectively. 18 The Corporation has two sources of revenue: net interest income and noninterest income. This combination generates a diversified stream of revenue that enables the Corporation to deliver consistent profitability and growth, with low volatility, in a variety of economic conditions. The Corporation endeavors to strike a balance between its two sources of income. The following table illustrates that balance and how, on a percentage basis, it remained relatively unchanged.
SOURCE OF INCOME FOR THE FIRST QUARTER 2004 2003 - ----------------------------------------------------------------------------- Advisory business income 43.1% 38.8% Total noninterest income 52.3% 49.1% Net interest income (after provision for loan losses) 47.7% 50.9%
Net interest income, expenses, and margin Loan balances and earning assets reached record-high levels in the 2004 first quarter, but the absolute level of market interest rates precluded a corresponding increase in net interest income. The Federal Reserve's reduction in short-term interest rates in June 2003 brought rates to their lowest level since 1958. As a result, the pace of growth in net interest income - which was 4.6% after the provision for loan losses - did not match the pace of growth in loan balances, which rose 5.5%, on average, or that of earning assets, which increased 10.2%, on average. Both interest income and interest expense were lower for the 2004 first quarter than for the year-ago first quarter. Interest income decreased 1.9%, while interest expense dropped 21.6%. The low interest rate environment, combined with the Corporation's balance sheet expansion and asset sensitivity, led to a 22-basis-point decline in the net interest margin, which fell to 3.53%. The net interest margin improved 1 basis point from the 2003 fourth quarter level of 3.52%. To compute the net interest margin, the Corporation divides net interest income on a fully tax-equivalent (FTE) basis by average total earning assets. On an FTE basis, net interest income for the 2004 first quarter was $72.9 million, compared with $69.6 million for the 2003 first quarter. Total earning assets, on average, were $8.22 billion, which was $760.7 million more than for the 2003 first quarter average of $7.46 billion, and $198.6 million more than the 2003 fourth quarter average of $8.03 billion. Interest-rate-driven factors, which caused disparities between the magnitude of declines in the yields on earning assets and the cost of funds used to support the earning assets, were the primary cause of the margin compression. The drop of 61 basis points in the average yield on earning assets was considerably larger than the 39-basis-point decline in the average cost of funds. Investment portfolio balances, on average, were 29% higher, but the average yield on the portfolio was 56 basis points lower. The increase in balances reflected the investment of the proceeds from the Corporation's April 2003 issuance of $250 million in long-term subordinated debt. Loan balances, on average, rose 5.5%, with average yields declining 60 basis points. This decline outpaced the corresponding adjustments to core deposit pricing. The cost of core interest-bearing deposits fell 40 basis points to 0.77%. This was a new low. The cost of total interest-bearing deposits fell 45 basis points. The average cost of funds also was affected by favorable repricing of national CDs. The cost of these CDs, on average, declined 56 basis points, while their balances were $157.6 million higher. The following tables present comparative net interest income data and a rate/volume analysis of the changes in net interest income for the first quarters of 2004 and 2003. 19 QUARTERLY ANALYSIS OF EARNINGS
2004 First Quarter 2003 First Quarter ----------------------------------- ------------------------------------ (in millions; rates on Average Income/ Average Average Income/ Average tax-equivalent basis) balance expense rate balance expense rate - ------------------------------------------------------------------------------------------------------------------ Earning assets Federal funds sold and securities purchased under agreements to resell $ 16.8 $ -- 1.01% $ 24.1 $ 0.1 1.40% U.S. Treasury and government agencies 465.3 3.9 3.44 461.0 4.2 3.73 State and municipal 14.7 0.3 8.55 16.5 0.4 8.97 Preferred stock 120.3 2.2 7.42 114.0 2.2 7.68 Mortgage-backed securities 1,008.8 10.6 4.12 642.6 7.7 4.97 Other 289.4 2.0 2.79 227.5 1.8 3.17 - ---------------------------------------------------------------- ------------------------ Total investment securities 1,898.5 19.0 3.99 1,461.6 16.3 4.55 -------------------------------------------------------------------------- Commercial, financial, and agricultural 2,325.2 24.4 4.16 2,214.8 25.1 4.53 Real estate-construction 725.0 8.1 4.42 544.6 6.1 4.45 Mortgage-commercial 1,103.1 13.4 4.82 1,008.0 14.2 5.63 - ---------------------------------------------------------------- ------------------------ Total commercial loans 4,153.3 45.9 4.38 3,767.4 45.4 4.81 -------------------------------------------------------------------------- Mortgage-residential 481.7 7.3 6.08 649.0 11.1 6.82 Consumer 1,071.1 16.1 6.04 1,028.3 17.4 6.85 Secured with liquid collateral 602.6 3.8 2.51 532.9 3.8 2.87 - ---------------------------------------------------------------- ------------------------ Total retail loans 2,155.4 27.2 5.06 2,210.2 32.3 5.88 -------------------------------------------------------------------------- Total loans net of unearned income 6,308.7 73.1 4.61 5,977.6 77.7 5.21 -------------------------------------------------------------------------- Total earning assets $ 8,224.0 92.1 4.46 $ 7,463.3 94.1 5.07 ========================================================================== Funds supporting earning assets Savings $ 372.1 0.1 0.13 357.3 0.2 0.23 Interest-bearing demand 2,267.0 2.1 0.37 2,062.9 2.4 0.47 Certificates under $100,000 779.3 4.1 2.12 874.6 6.6 3.05 Local CDs $100,000 and over 134.8 0.5 1.44 151.1 0.8 1.99 - ---------------------------------------------------------------- ------------------------ Total core interest- bearing deposits 3,553.2 6.8 0.77 3,445.9 10.0 1.17 National CDs $100,000 and over 2,223.9 6.4 1.13 2,066.3 8.7 1.69 - ---------------------------------------------------------------- ------------------------ Total interest- bearing deposits 5,777.1 13.2 0.91 5,512.2 18.7 1.36 -------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 893.0 3.1 1.37 778.7 3.2 1.64 U.S. Treasury demand 11.8 ---- 0.77 8.1 ---- 0.99 - ---------------------------------------------------------------- ------------------------ Total short-term borrowings 904.8 3.1 1.37 786.8 3.2 1.64 -------------------------------------------------------------------------- Long-term debt 410.8 2.9 2.81 160.5 2.6 6.58 - ---------------------------------------------------------------- ------------------------ Total interest- bearing liabilities 7,092.7 19.2 1.08 6,459.5 24.5 1.52 --------------------------------------------------------------------------
20 Other noninterest funds 1,131.3 ---- ---- 1,003.8 ---- ---- - ---------------------------------------------------------------- ------------------------ Total funds used to support earning assets $ 8,224.0 19.2 0.93 $7,463.3 24.5 1.32 ========================================================================== Net interest income/yield 72.9 3.53 69.6 3.75 Tax-equivalent adjustment (1.1) (1.3) ------- ------- Net interest income $ 71.8 $ 68.3 ======= =======
In order to assure the comparability of yields and rates and their impact on net interest income, average rates are calculated using average balances based on historical cost and do not reflect the market valuation adjustment required by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. 21 RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
------------------------------------- For the three months ended March 31, ------------------------------------- 2004/2003 Increase (Decrease) due to change in ------------------------------------- 1 2 (in millions) Volume Rate Total - ----------------------------------------------------------------------------- Interest income: Federal funds sold and securities purchased under agreements to resell $ ---- $ (0.1) $ (0.1) ------------------------------------- U.S. Treasury and government agencies 0.1 (0.4) (0.3) State and municipal * ---- (0.1) (0.1) Preferred stock * 0.1 (0.1) ---- Asset-backed securities 4.7 (1.8) 2.9 Other * 0.5 (0.3) 0.2 - ----------------------------------------------------------------------------- Total investment securities 5.4 (2.7) 2.7 ------------------------------------- Commercial, financial, and agricultural * 1.2 (1.9) (0.7) Real estate-construction 2.0 ---- 2.0 Mortgage-commercial * 1.3 (2.1) (0.8) - ----------------------------------------------------------------------------- Total commercial loans 4.5 (4.0) 0.5 ------------------------------------- Mortgage-residential (2.8) (1.0) (3.8) Consumer 0.7 (2.0) (1.3) Secured with liquid collateral 0.5 (0.5) ---- - ----------------------------------------------------------------------------- Total retail loans (1.6) (3.5) (5.1) ------------------------------------- Total loans net of unearned income 2.9 (7.5) (4.6) - ----------------------------------------------------------------------------- Total interest income $ 8.3 $ (10.3) $ (2.0) ------------------------------------- Interest expense: Savings $ ---- $ (0.1) $ (0.1) Interest-bearing demand 0.2 (0.5) (0.3) Certificates under $100,000 (0.7) (1.8) (2.5) Local CDs $100,000 and over (0.1) (0.2) (0.3) - ----------------------------------------------------------------------------- Total core interest- bearing deposits (0.6) (2.6) (3.2)
22 National CDs $100,000 and over 0.7 (3.0) (2.3) - ----------------------------------------------------------------------------- Total interest- bearing deposits 0.1 (5.6) (5.5) ------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 0.5 (0.6) (0.1) U.S. Treasury demand ---- ---- ---- - ----------------------------------------------------------------------------- Total short-term borrowings 0.5 (0.6) (0.1) ------------------------------------- Long-term debt 4.1 (3.8) 0.3 - ----------------------------------------------------------------------------- Total interest expense $ 4.7 $ (10.0) $ (5.3) ------------------------------------- Changes in net interest income $ 3.6 $ (0.3) $ 3.3 =====================================
* Variances are calculated on a fully tax-equivalent basis, which includes the effects of any disallowed interest expense. 1 Changes attributable to volume are defined as a change in average balance multiplied by the prior year's rate. 2 Changes attributable to rate are defined as a change in rate multiplied by the average balance in the applicable period of the prior year. A change in rate/volume (change in rate multiplied by change in volume) has been allocated to the change in rate. 23 Noninterest income Noninterest income rose as a result of double-digit increases in Wealth Advisory Services revenue, Corporate Client Services revenue, and service charges on deposit accounts. In addition, revenue from the two affiliate money managers was much higher. Wealth Advisory Services The 18.2% jump in Wealth Advisory Services revenue was a reflection of higher sales, relative stability in the equity markets compared to the 2003 first quarter, and asset appreciation. The 2004 first quarter marked the first time in four years that equity markets were higher than their previous year first quarter levels. The sales growth occurred in large part because of high demand for financial and estate planning services and multi-manager investment consulting services. The following table compares changes in the components of Wealth Advisory Services income.
FIRST QUARTER WEALTH ADVISORY SERVICES INCOME (in millions) 2004 2003 - ----------------------------------------------------------- ---- ---- Trust and investment advisory fees $26.9 $22.5 Mutual fund fees $ 5.2 $ 5.6 Other service fees $ 7.6 $ 5.5 Wealth Advisory Services total $39.7 $33.6
The largest contributor to total Wealth Advisory Services revenue for the 2004 first quarter was trust and investment advisory income, which rose 19.6%. Trust and investment advisory fees accounted for 67.7% of total Wealth Advisory Services income for the 2004 first quarter, compared with 67.0% in the 2003 first quarter. Fees for trust and investment advisory services are based on asset valuations. Approximately 75% of trust and investment advisory fees are tied to the equity markets; the remainder is tied to fixed income instruments. The fastest-growing component of Wealth Advisory revenue in the 2004 first quarter was other service fees, which increased 38.2%. Other service fees include fees for financial and estate planning services. These fees are based on the complexity of the service provided, and bear no relationship to financial markets. Because other service fees represent client demand at any given point in time, they may fluctuate from period to period. Corporate Client Services First quarter 2004 Corporate Client Services income increased 20.1%. While sales were robust, the percentage increase reflected the relative weakness in the year-ago first quarter, particularly in the structured finance industry. All components of the Corporate Client Services business contributed to the growth, as the following table illustrates.
FIRST QUARTER CORPORATE CLIENT SERVICES INCOME (in millions) 2004 2003 - ------------------------------------------------------------ ---- ---- Capital markets services $ 7.8 $ 6.3 Entity management services $ 5.5 $ 4.9 Corporate retirement services $ 2.8 $ 2.4 Cash management services $ 1.8 $ 1.3 Corporate Client Services total $17.9 $14.9
Half of the increase in Corporate Client Services income was due to the strength of the capital markets component. The increase in this component reflected the rebounding structured finance industry. Demand was strong for trust and administrative services that support asset-backed securitizations, trust-preferred securities, and traditional debt issues. Cash management fees, which are associated mainly with capital markets or entity management services, are also tied to asset valuations. The other components of Corporate Client Services income are based on the complexity of the services provided. Most are performed under multiyear contracts and generate an annuity-like stream of revenue. 24 Cramer Rosenthal McGlynn (CRM) The significant improvement in equity market levels from the 2003 first quarter was the primary cause of the 200% increase in income from CRM. Assets under management also benefited, rising 59.4% to $5.1 billion. The amount of income received from CRM is based on the Corporation's ownership interest in the firm, which was 69.14% at March 31, 2004, and 63.47% at March 31, 2003. CRM's results are not consolidated in the Corporation's financial statements. Roxbury Capital Management (RCM) RCM returned to profitability in the 2004 first quarter and contributed $0.2 million. This was a considerable change for the better from the year-ago first quarter, when a $0.9 million loss was recorded for RCM. The improvement reflected the success of RCM's efforts over the past 12 months to reduce expenses, stem the flow of lost business, and attract additional assets, particularly to its small-capitalization stock product. This was evident in RCM's 6.2% increase in managed assets. The amount of income received from RCM represents the Corporation's ownership interest in the firm. At March 31, 2004, this was 41.23% of RCM's common shares and 30% of RCM's gross revenue, compared with 40.91% and 30%, respectively, at March 31, 2003. RCM's results are not consolidated in the Corporation's financial statements. The following table compares changes in the Affiliate Money Managers income. FIRST QUARTER AFFILIATE MONEY MANAGERS INCOME/LOSS (in millions) 2004 2003 - ---------------------------------------------------------------- ---- ---- Cramer Rosenthal McGlynn $2.1 $ 0.7 Roxbury Capital Management $0.2 $(0.9) Affiliate Money Managers Total $2.3 $(0.2)
Assets under management The following table compares changes in assets under management at Wilmington Trust and the two affiliate money managers.
ASSETS UNDER MANAGEMENT (in billions) MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003 - ------------------------------------- -------------- ------------- -------------- Wilmington Trust $24.2 $24.4 $21.6 Cramer Rosenthal McGlynn $ 5.1 $ 4.7 $ 3.2 Roxbury Capital Management $ 3.4 $ 3.2 $ 3.2 Total $32.7 $32.3 $28.0
The decline in Wilmington Trust's managed assets between December 31, 2003, and March 31, 2004, reflected trust distributions and tax payments. Wilmington Trust's managed assets are invested in a mix of instruments that reflects the primary considerations of Wealth Advisory Services clients, who count wealth preservation, tax savings, and income generation among their chief concerns. Approximately 80% of Wilmington Trust's managed assets pertain to Wealth Advisory Services relationships. The following table compares changes in the investment mix in Wilmington Trust's managed assets, excluding affiliate managers.
WILMINGTON TRUST ASSET MIX MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003 - -------------------------- -------------- ------------- -------------- Equities 54% 55% 54% Fixed income 26% 25% 26% Cash and equivalents 8% 9% 12% Mutual funds 7% 7% 5% Miscellaneous assets 5% 4% 3%
Noninterest expense Noninterest expense reflects the costs that the Corporation incurs in the course of normal operations. It includes expenses associated with employment, occupancy, supplies, advertising, third-party providers, and other items. As predicted and as planned, total noninterest expense increased in order to support business line growth. Higher salary, wage, and employment benefits costs were the primary causes of the increase. 25 Salary and wage costs accounted for approximately 72% of the increase in total noninterest expense. While full-time-equivalent headcount declined year-over-year, salary and wage expense rose as more staff members were added in high-cost markets such as Baltimore, Philadelphia, and Florida. The $1.2 million decrease in incentive and bonus costs reflected adjustments that were made to various incentive programs. Employment benefits expense rose $1.3 million due primarily to higher pension and health insurance costs. Servicing and consulting fees rose $0.6 million. This increase reflected demand for the multi-manager investment consulting capabilities, which resulted in additional payments to third-party investment advisors. Headcount At March 31, 2004, full-time equivalent (FTE) headcount was 2,340. This was 2 less than at March 31, 2003, when FTE headcount was 2,342, but 33 more than at December 31, 2003, when FTE headcount was 2,307. Income taxes Income tax expense for the 2004 first quarter was $19.8 million, an increase of 29.4%. Pre-tax income rose 24.3%. The Corporation's effective tax rate for the 2004 first quarter was 35.48%, compared with 34.07% for the 2003 first quarter. The changes reflected higher state income taxes due to higher income from the affiliate money managers. LIQUIDITY The Corporation manages its liquidity to ensure that its cash flows are sufficient to support its operating, investing, and financing activities. Liquidity management enables the Corporation to meet increases in demand for loans or other assets, and decreases in deposits or other funding sources. Liquidity is affected by the proportion of funding that is provided by core deposits and stockholders' equity. The Corporation's sources of funding include deposit balances, cash that is generated by the investment and loan portfolios; short- and long-term borrowings, including national certificates of deposit in amounts of $100,000 and more and term federal funds; internally generated capital; and other credit facilities. Among the Corporation's available sources of funds is the Federal Home Loan Bank of Pittsburgh, of which Wilmington Trust Company is a member. That company has $1 billion in available borrowing capacity secured by collateral. In addition, at March 31, 2004, the Corporation had $75 million in available borrowing capacity through two lines of credit that are maintained with major U.S. financial institutions. In April 2003 the Corporation added another source of funding by issuing $250 million of long-term subordinated debt. The issue was for general corporate purposes and the proceeds were invested initially in mortgage-backed securities. At March 31, 2004, the balance of the investment portfolio was $1.94 billion. This portfolio is expected to generate approximately $600 million of cash over the next 12 months. For the 2004 first quarter, the proportion of loan funding provided by core deposits - demand deposits, interest-bearing demand deposits, and certificates of deposit - was 72.5%, compared with 73.6% for the 2003 first quarter. The Corporation is a guarantor for a portion of two line-of-credit obligations of affiliate money manager Cramer Rosenthal McGlynn (CRM). The Corporation's guaranty portion is representative of its ownership interest in CRM, which at March 31, 2004, was 69.14%. The guaranty is for two lines of credit, at LIBOR plus 2%, which total $8 million and will expire on December 6, 2004. At March 31, 2004, the balance of these two lines was zero. Management continuously monitors the Corporation's existing and projected liquidity requirements, and believes that its standing in the national markets will enable it to obtain additional funding in a timely and cost-effective manner, should the need arise. 26 ASSET QUALITY, LOAN LOSS RESERVE, AND LOAN LOSS PROVISION Credit quality remained stable for the first three months of 2004, which was a reflection of the Corporation's strict adherence to underwriting standards. Before extending credit, the Corporation undertakes a comprehensive review of the financial condition of the individuals and companies to which it lends. One of the key determinants in the decision to extend credit is the nature and extent of the client relationship. The Corporation rarely makes loans outside of the Delaware Valley region and it rarely makes commercial loans outside of its target client market of family owned or closely held businesses. The geographic focus enables management to remain cognizant of economic and other external factors that may affect credit quality. To minimize the impact of such factors, management endeavors to maintain a loan portfolio that is well diversified across commercial and consumer lines and industry sectors. During the first three months of 2004, the composition of the loan portfolio remained well diversified and relatively unchanged, as the following table illustrates.
LOAN PORTFOLIO COMPOSITION MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003 - ---------------------------------------------------------------------------------------------------------- Commercial/financial/agricultural 37% 37% 36% - ---------------------------------------------------------------------------- ----------------------------- Commercial real estate construction 12% 11% 10% - ---------------------------------------------------------------------------- ----------------------------- Commercial mortgage 18% 17% 18% - ---------------------------------------------------------------------------- ----------------------------- Residential mortgage 7% 8% 10% - ---------------------------------------------------------------------------- ----------------------------- Consumer 17% 17% 17% - ---------------------------------------------------------------------------- ----------------------------- Secured by liquid collateral 10% 10% 9% - ----------------------------------------------------------------------------------------------------------
The Corporation's quarterly internal analysis of credits showed that more than 95% of the loans in the portfolio were rated pass. More than 95% of the loans have been rated pass since 2000. More than 92% of the loans have been rated pass every year since 1998. The internal analysis has four classifications, which are: - - Pass, which identifies loans with no current potential problems; - - Watchlisted, which identifies potential problem credits; - - Substandard, which identifies problem credits with some probability of loss; and - - Doubtful, which identifies problem credits with a higher probability of loss. The definitions of problem and potential problem credits are consistent with the classifications used by regulatory agencies. The following table illustrates changes in the analysis.
CATEGORY MARCH 31, 2004 DECEMBER 31, 2003 MARCH 31, 2003 - ------------------------------------------------------------------------------------------------------- Pass 95.90% 95.83% 95.52% - -------------------------------------------------------------------------------------------------- ---- Watchlisted 2.64% 2.58% 2.48% - -------------------------------------------------------------------------------------------------- ---- Substandard 1.21% 1.27% 1.79% - -------------------------------------------------------------------------------------------------- ---- Doubtful 0.25% 0.32% 0.21% - -------------------------------------------------------------------------------------------------------
Net charge-offs, which the Corporation regards as the primary indicator of credit quality, were 7 basis points and in line with historical levels. This was equal to net charge-offs for the 2003 first quarter and 3 basis points lower than for the 2003 fourth quarter, as the following table illustrates.
NET CHARGE-OFFS FOR THE QUARTER ENDED MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003 - ------------------------------------------------------------------------------------------------------------ Net charge-off ratio 7 basis points 10 basis points 7 basis points - ------------------------------------------------------------------------------------------------------------ Net charge-offs (on average) $4.2 million $6.4 million $4.1 million - ------------------------------------------------------------------------------------------------------------
Net charge-offs for the quarter ended December 31, 2003, reflected a large credit that had been transferred to nonaccruing status at the end of the 2003 first quarter. 27 The following table presents a period-end comparison of other risk elements in the Corporation's loan portfolio.
NONPERFORMING ASSETS (in millions) MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003 - ----------------------------------------------------------------------------------------------------------- Nonaccruing loans $40.6 $45.4 $ 64.6 - ------------------------------------------------------------------------------------------------------- --- Loans past due 90 days or more $ 6.2 $ 5.6 $ 8.3 - ------------------------------------------------------------------------------------------------------- --- Total $46.8 $51.0 $ 72.9 - ------------------------------------------------------------------------------------------------------- --- Percentage of period-end loans 0.73% 0.82% 1.21% - ------------------------------------------------------------------------------------------------------- --- Other real estate owned (OREO) $ 1.1 $ 1.4 $ 3.9 - -----------------------------------------------------------------------------------------------------------
The downward trends reflected a combination of pay-downs and charge-offs recorded earlier that were associated with the large credit mentioned previously. Nonaccruing loans decreased for the fourth consecutive quarter, as did other real estate owned (OREO). The decline in OREO was due to the successful work out throughout the past year of a residential beach resort project in Maryland that first was classified as OREO in December 2002. Of the loans past due 90 days or more at March 31, 2004, approximately 57% were in the commercial loan portfolio; 27% were in the residential mortgage portfolio; and 16% were consumer loans. At December 31, 2003, the corresponding ratios were 39%, 37%, and 24%. The corresponding ratios at March 31, 2003, were 50%, 31%, and 19%. In accordance with growth in loan balances, the provision for loan losses and the reserve for loan losses were increased, while the loan loss reserve ratio remained relatively unchanged, as the following table illustrates.
PROVISION AND RESERVE MARCH 31, 2004 DEC. 31, 2003 MARCH 31, 2003 - ------------------------------------------------------------------------------------------------------ Provision for loan losses (in millions) $ 5.5 $ 5.0 $ 4.9 - ------------------------------------------------------------------------------------------------------ Reserve for loan losses (in millions) $91.2 $89.9 $86.0 - ------------------------------------------------------------------------------------------------------ Loan loss reserve ratio 1.43% 1.44% 1.43% - ------------------------------------------------------------------------------------------------------
The reserve for loan losses reflects management's best estimate, based on subjective judgments regarding the collectibility of loans within the portfolio, of known and inherent estimated losses. In calculating the reserve, the Corporation evaluates micro- and macro-economic factors, historical net loss experience, delinquency trends, and movements within the internal risk rating classifications, among other things. To accommodate growth in loan balances, a portion of the reserve is allocated to new loans within the parameters of the reserve methodology. At March 31, 2004, in light of the levels of past due, nonaccruing, and problem loans, management believed that the reserve for loan losses was a reasonable assessment of estimated and inherent losses in the loan portfolio. The portion of the reserve allocated to new loans was relatively unchanged. At March 31, 2004, approximately $6.1 million, or 6.7%, of the reserve for loan losses was unallocated. In comparison, approximately $6.1 million, or 6.8%, of the reserve was unallocated at December 31, 2003. At March 31, 2003, approximately $6.1 million, or 7%, of the reserve was unallocated. Management reassesses the reserve on a quarterly basis as part of the regular application of the reserve methodology. The process that is used to calculate the reserve has provided a high degree of reserve adequacy over an extended period of time, and the Corporation believes that it is sound. Changes in the regional economy or other external factors could impair the ability of some borrowers to repay their loans. Such an environment would cause management to anticipate increases in nonperforming assets, credit losses, and the provision for loan losses. Management continually monitors the entire loan portfolio to identify potential problem loans and to avoid disproportionately high concentrations of loans to any one borrower or industry sector. Integral parts of this process include a regular analysis of all past-due loans and the identification of loans that management doubts will be repaid on a timely basis. At March 31, 2004, management identified approximately $23.1 million of loans that it doubted would be repaid on a timely basis, even though these loans were performing in accordance with their terms or were less than 90 days past due. This compares with $28.5 million of such loans at December 31, 2003, and $32.2 million of such loans at March 31, 2003. 28 CAPITAL RESOURCES For the first three months of 2004, the Corporation's capital continued to increase and its capital ratios continued to exceed the Federal Reserve Board's minimum guidelines. The annualized capital generation rate for the 2004 first quarter was 8.9%, compared with an annualized rate of 6.9% for the 2003 first quarter and 8.7% for the 2003 full year. Stockholders' equity rose 4.4%, or $35.0 million, to $835.8 million. Between December 31, 2003, and March 31, 2004, additions to capital included: - - $17.8 million, which reflected earnings of $35.7 million net of $17.9 million in cash dividends; - - $4.4 million from the issue of common stock under employment benefit plans; - - $0.1 million in foreign currency exchange adjustments; and - - $7.6 million in unrealized gains on securities, net of taxes. - - $12.7 million in common stock issued in connection with the payment of a portion of the purchase price for Balentine Holdings, Inc. These additions were partially offset by $7.6 million in reductions, which consisted of: - - $7.4 million for the repurchase of shares; and - - an $0.2 million reclassification adjustment for derivative and securities gains included in net income, net of income taxes. The Corporation purchased 200,903 shares of its shares during the first three months of 2004 at an average cost of $36.74 and a total cost of $7.4 million. This brought the total number of shares purchased under the 8-million-share program, which commenced in April 2002, to 285,272 shares at a cost of $9.8 million. The Corporation's capital ratios continued to exceed the Federal Reserve Board's minimum guidelines for both well-capitalized and adequately capitalized institutions. These guidelines are intended to reflect the varying degrees of risk associated with different on- and off-balance sheet items. The following table compares the Corporation's ratios to the guidelines.
ADEQUATELY WELL- CAPITALIZED CAPITALIZED CAPITAL RATIO MARCH 31, 2004 DECEMBER 31, 2003 MINIMUM MINIMUM - ------------------------------------------------------------------------------------------------------ Total risk-based capital 12.75% 12.45% 8% 10% - ---------------------------------------- ------------------ ------------------------------------ ----- Tier 1 risk-based capital 7.66% 7.46% 4% 6% - ---------------------------------------- ------------------ ------------------------------------ ----- Tier 1 leverage capital 6.38% 6.34% 4% 5% - ------------------------------------------------------------------------------------------------------
On April 15, 2004, the Corporation's Board of Directors raised the quarterly cash dividend from $0.27 to $0.285 per share. This was an increase of 5.6%. The Corporation has paid cash dividends on its common stock every year since 1908, paid quarterly cash dividends every year since 1916, and increased the dividend every year since 1982. Management reviews the Corporation's capital position and makes adjustments as needed to assure that the capital base is sufficient to satisfy existing and impending regulatory requirements, to meet appropriate standards of safety, and to provide for future growth. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS The Sarbanes-Oxley Act of 2002 requires the Corporation to disclose off-balance sheet transactions and other contractual obligations that may have a material current or future effect on the financial condition of the Corporation. In its day-to-day operations, the Corporation employs various financial instruments that generally accepted accounting principles deem to be off-balance sheet arrangements. Under regulatory guidelines, such instruments are considered for the purpose of calculating risk-based capital ratios, but they do not appear on the Corporation's balance sheet. Such instruments include stand-by and performance letters of credit, unfunded loan commitments, unadvanced lines of credit, and interest rate swaps. The interest rate swaps permit clients to convert floating-rate loan payments to fixed-rate loan payments without exposing the Corporation to interest rate risk. In these arrangements, the 29 Corporation retains the credit risk associated with the potential failure of counter-parties. The Corporation also uses interest rate swaps to manage interest rate risk associated with its issues of long-term subordinated debt. At March 31, 2004, the liquidity exposure of the Corporation that was associated with letters of credit, unfunded loan commitments, and unadvanced lines of credit was $3.05 billion. At March 31, 2004, the Corporation had entered into a total of $959.4 million of interest rate swaps as follows: - - $292.2 million of swaps were associated with loan clients for whom the Corporation exchanged floating rates for fixed rates. - - To offset the exposure from changes in the market value of those swaps, $292.2 million of swaps were made with other financial institutions that exchanged fixed rates for floating rates. - - $375.0 million of swaps associated with the Corporation's long-term subordinated debt issues were made with other financial institutions. The Corporation has two outstanding loans that total $35.5 million from the Federal Home Loan Bank of Pittsburgh. These funds were used to construct Wilmington Trust Plaza, the Corporation's operations center in Wilmington, Delaware, which was completed in 1998. Many of the Corporation's branch offices in Delaware, and all of its offices outside Delaware, are leased. Lease commitments, net of sublease arrangements, for these locations totaled $41.4 million at March 31, 2004. At March 31, 2004, the Corporation was the guarantor of two obligations of affiliate money manager Cramer Rosenthal McGlynn (CRM). The guaranty is for 69.14%, which represents the Corporation's ownership interest in CRM, of two lines of credit totaling $8 million, which will expire on December 6, 2004. The following table summarizes the obligations referenced above and the periods over which they extend.
MORE CONTRACTUAL OBLIGATION PAYMENTS LESS THAN 1 - 3 3 - 5 THAN 5 DUE BY PERIOD (in millions) TOTAL 1 YEAR YEARS YEARS YEARS - -------------------------------------------------------------------------------------------------------- Long-term debt obligations $578.0 $22.8 $75.8 $198.9 $280.5 - -------------------------------------------------------------------------------------------------------- Operating lease obligations $ 41.1 $ 6.7 $17.8 $ 11.5 $ 5.1 - -------------------------------------------------------------------------------------------------------- Guaranty obligations $ 8.0 $ 8.0 -- -- -- - -------------------------------------------------------------------------------------------------------- Total $627.1 $37.5 $93.6 $210.4 $285.6 - --------------------------------------------------------------------------------------------------------
The long-term debt obligations in the table above refer to the Corporation's two outstanding subordinated debt issues and its Federal Home Loan Bank advances. The first debt issue, in the amount of $125 million, was issued in 1998, is due in 2008, and was used in the acquisitions of affiliate money managers CRM and Roxbury Capital Management (RCM). The second debt issue, in the amount of $250 million, was issued in 2003, is due in 2013, and was for general liquidity purposes. All of these debt issues are included in the "Long-term debt" line of the Corporation's balance sheet. In addition, the acquisition agreements for CRM, RCM, and Balentine & Company, the Corporation's investment counseling firm, permit principal members and certain key employees (principals) of each firm, subject to certain restrictions, to put their interests in their respective firms to the Corporation. For more information on these acquisition agreements, please refer to "Note 1" of the "Notes to Consolidated Financial Statements" in the Corporation's 2003 Annual Report to Shareholders. INFLATION The Corporation's asset and liability structure is substantially different from that of an industrial company, since virtually all of the assets and liabilities of a financial institution are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a bank holding company's performance. Interest rates do not necessarily move in the same direction or at the same magnitude as the prices of goods and services. The impact, therefore, of inflation on a bank holding company's financial performance is indeterminable. 30 OTHER INFORMATION Accounting pronouncements Please refer to "Note 10" to the "Consolidated Financial Statements" in this report for a discussion of the impact of recent accounting pronouncements on the Corporation's financial condition and results of operations. Critical accounting policies and estimates Management's discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of the Corporation, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements and during the reporting period. Management evaluates those estimates on an ongoing basis, including those estimates related to the reserve for loan losses, stock-based employee compensation, affiliate fee income, impairment of goodwill, recognition of Corporate Client Services fees, loan origination fees, and mortgage servicing assets. Management bases its estimates on historical experience and other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and the estimates that are used in preparation of the consolidated financial statements and relate to the reserve for loan losses, stock-based employee compensation, and impairment of goodwill. Reserve for loan losses: The Corporation maintains a reserve for loan losses that is management's best estimate of known and inherent estimated losses, based on subjective judgments regarding the collectibility of loans within the portfolio. The reserve is reduced by actual credit losses, and is increased by the provision for loan losses and recoveries from loans previously charged-off. Personnel independent of the various lending functions evaluate the reserve on a quarterly basis. The level of the reserve is determined by assigning specific amounts to individually identified problem credits. A general amount is reserved for all other loans. In evaluating the reserve, management gives specific consideration to current micro- and macro-economic factors, historical net loss experience, current delinquency trends, and movement within the internal risk rating classification system. The methodology used to determine the necessary level of the reserve has been applied on a basis consistent with prior periods. A portion of the reserve is not specifically allocated to the individual components of the portfolio, and represents probable or inherent losses that could be caused by certain business conditions not accounted for otherwise. Typically, business conditions, including current economic and market conditions, portfolio complexity, payment performance, loan portfolio risk rating migration, the level of serious doubt loans, litigation impact, and bankruptcy trends, are the core of the unallocated reserve position. The determination of the reserve is inherently subjective, and it requires material estimates, including with respect to the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the reserve will not be necessary if the quality of loans deteriorates as a result of the factors discussed above. Management believes that it uses the best information available to make determinations about the reserve and that it has established its existing reserve for loan losses in accordance with generally accepted accounting principles. If circumstances differ substantially from the assumptions used in making those determinations, future adjustments to the reserve may be necessary and results of the Corporation's operations could be affected. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's banking affiliates' reserve for losses on loans. These agencies may require the Corporation to recognize additions to the reserve based on their judgments about information available to them at the time of their examination. Stock-based employee compensation: The Corporation accounts for its stock-based employee compensation plans under the "intrinsic value" approach, in accordance with the provisions of Accounting Principles Board (APB) 31 Opinion No. 25, rather than the "fair value" approach prescribed in Statement of Financial Accounting Standards (SFAS) No. 123. The "intrinsic value" approach limits the compensation expense to the excess of a stock option's market price on the grant date over the option's exercise price. Since the Corporation's stock-based employee compensation option plans have exercise prices equal to market values on the grant date, no compensation expense is recognized in the financial statements. The "fair value" approach under SFAS No. 123 takes into account the time value of the option and will generally result in compensation expense being recorded upon grant. Each year since the inception of SFAS No. 123, the Corporation has disclosed, in the notes to the financial statements contained herein and in its Annual Report to Shareholders, what the earnings impact would have been had the Corporation elected the "fair value" approach under SFAS No. 123. Future earnings would be impacted if any change in generally accepted accounting principles were to limit the continued use of the "intrinsic value" approach. The Financial Accounting Standards Board (FASB) is considering such changes, which were outlined in an exposure draft dated March 31, 2004. Upon their finalization, the new rules will require that options be expensed beginning in 2005. Impairment of goodwill: Through a series of acquisitions, the Corporation has accumulated goodwill with a net carrying value of $256.0 million at March 31, 2004. Through 2001, this goodwill was subject to periodic amortization in accordance with the provisions of APB No. 17, "Intangible Assets." This treatment provided for a gradual reduction in the book value of the assets over their useful lives. Amortization could be changed if later events and circumstances warrant a revised estimate of the useful lives of the assets. Additionally, under APB No. 17, estimations of value and future benefits could indicate that the unamortized cost should be reduced, which would result in a reduction in net income. The 2002 adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," eliminated the requirement to amortize goodwill, and substituted impairment testing in its place. The purpose of impairment testing is to ensure that an amount presented in the financial statements for goodwill does not exceed its actual fair value. A methodology that is consistent with how the acquired entity or business was originally valued is to be utilized in testing for impairment on an annual basis. If this testing indicates that the fair value of the asset is less than its book value, an impairment expense must be recorded. There may be more volatility in reported income than under the previous standard, because impairment losses are likely to occur irregularly and in varying amounts. A major portion of the goodwill on the Corporation's books is related to certain of its affiliate asset manager acquisitions. A decline in the fair value of the investment in any of these firms could result in an impairment expense. Cautionary statement Estimates, predictions, opinions, or statements of belief in this report might be construed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of such statements could relate to identification of trends, statements about the adequacy of the reserve for loan losses, credit quality, the impact of FASB pronouncements on the Corporation, and the effects of asset sensitivity, interest rate changes, and information concerning market risk described in the "Quantitative and Qualitative Disclosures About Market Risk" section of this report. Forward-looking statements are based on current expectations and assessments of potential developments. The Corporation's ability to achieve the results reflected in those statements could be affected by, among other things, changes in national or regional economic conditions, changes in market interest rates, significant changes in banking laws or regulations, increased competition in our businesses, higher-than-expected credit losses, the effects of acquisitions and integration of acquired businesses, unanticipated changes in regulatory, judicial, or legislative tax treatment of business transactions, and economic uncertainty created by unrest in other parts of the world. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a financial institution, the Corporation's primary market risk lies in its exposure to interest rate volatility. Fluctuations in interest rates impact net interest income, which is an important determinant of the Corporation's financial performance. Through management of its interest rate risk, the Corporation seeks to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates. The Corporation employs simulation models to assess interest rate exposure and the effect of variations in interest rates on net interest income. The models evaluate numerous factors, including: 32 - - the composition of assets, liabilities, and off-balance sheet instruments; - - their respective repricing and maturity characteristics; - - the level of market interest rates; and - - other external factors. The simulations compare multiple interest rate scenarios against a stable interest rate environment. As a general rule, the model employs scenarios in which rates gradually move up or down 250 basis points over a period of one year. The Corporation's objective is to keep market interest rate changes from reducing net interest income by 10% or more within a one-year period. Because interest rates were at historic lows at March 31, 2004, the declining rate scenario in the simulation model gradually moved down only 100 basis points, until the federal funds rate equaled zero. This prevented the creation of negative interest rates within the model. The rising rate scenario remained able to accommodate a 250-basis-point upside move. As of March 31, 2004, the model projected that, if interest rates were to experience a gradual decline of 100 basis points, net interest income would decrease 4.59% over a one-year period. At December 31, 2003, the model predicted a 5.33% decrease in net interest income. Conversely, the model projected that a gradual 250-basis-point increase in market interest rates would cause net interest income to rise 5.55% over a one-year period. At December 31, 2003, the model projected a 6.14% increase. The preceding paragraphs contain certain forward-looking statements regarding the anticipated effects on the Corporation's net interest income resulting from hypothetical changes in market interest rates. The assumptions the Corporation uses regarding the effects of changes in interest rates on the adjustment of retail deposit rates and the prepayment of residential mortgages, asset-backed securities, and collateralized mortgage obligations play a significant role in the results the simulation model projects. Rate and prepayment assumptions used in the Corporation's simulation model differ for both assets and liabilities in rising, as compared to declining, interest rate environments. Nevertheless, these assumptions are inherently uncertain and, as a result, the simulation model cannot predict precisely the impact of changes in interest rates on net interest income. Management reviews the exposure to interest rate risk regularly, and may employ a variety of strategies as needed to adjust its sensitivity. This includes changing the relative proportions of fixed-rate and floating-rate assets and liabilities; changing the number and maturity of funding sources; securitizing assets; and utilizing such derivative contracts as interest rate swaps and interest rate floors. ITEM 4. CONTROLS AND PROCEDURES The Chairman of the Board and Chief Executive Officer of the Corporation and its Chief Financial Officer conducted an evaluation of the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this report, pursuant to Securities Exchange Act Rule 13a-14. Based on that evaluation, the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in alerting them on a timely basis to material information about the Corporation (including its consolidated subsidiaries) required to be included in the periodic filings it makes with the Securities and Exchange Commission. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect those controls subsequent to the date of that evaluation. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Corporation and its subsidiaries are subject to various legal proceedings that arise from time to time in the ordinary course of their businesses and operations. Some of these seek relief or damages in amounts that may be substantial. Because of the complex nature of some of these proceedings, it may be a number of years before they are ultimately resolved. While it is not feasible to predict the outcome of these proceedings, the Corporation's management does not believe the ultimate resolution of any of them will have a material adverse effect on the 33 Corporation's consolidated financial condition. Further, the Corporation's management believes that some of the claims may be covered by insurance, and has advised its insurance carriers of the proceedings. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS. ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum Number (or Approximate (c) Total Number of Dollar Value) of Shares (or Units) Shares (or Units) (a) Total (b) Purchased as Part that May Yet Be Number of Average Price of Publicly Purchased Under Shares (or Units) Paid per Share Announced Plans the Plans or Period Purchased (or Unit) or Programs Programs - ----------------------------------------------------------------------------------------------------------------------------- Month #1 January 1, 2004 - January 31, 2004 11,918 $37.43 11,918 7,903,713 - ----------------------------------------------------------------------------------------------------------------------------- Month #2 February, 1, 2004 - February 29, 2004 6,559 $37.09 6,559 7,897,154 - ----------------------------------------------------------------------------------------------------------------------------- Month #3 March 1, 2004 - March 31, 2004 182,426 $36.69 182,426 7,714,728 - ----------------------------------------------------------------------------------------------------------------------------- Total 200,903 $36.74 200,903 7,714,728 - -----------------------------------------------------------------------------------------------------------------------------
In April 2002 the Corporation announced a plan to repurchase 8 million shares of its stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable ITEM 5. OTHER INFORMATION. Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit Number Exhibit - ------- ------- 3.1 Amended and Restated Certificate of Incorporation of the Corporation(1) 3.2 Amended and Restated Bylaws of the Corporation(2) 10.59 Limited Liability Company Interest Purchase Agreement dated as of April 2, 2004 among Grant, Tani, Barash & Altman, Inc. Warren Grant, Jane Tani, Corey Barash, Howard Altman and GTBA Holdings, Inc. (3) 99.1 Section 302 Certifications 99.2 Section 906 Certification
- --------------- (1) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 30, 1996. (2) Incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Wilmington Trust Corporation filed on March 27, 2003. (3) Filed herewith. 34 The Corporation filed a current report on Form 8-K on January 16, 2004, under Item 12 reporting its financial condition and results of operations for the fourth quarter and full year of 2003. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WILMINGTON TRUST CORPORATION Date May 10, 2004 /s/ Ted T. Cecala ------------------------------------------- Name: Ted T. Cecala Title: Chairman of the Board and Chief Executive Officer (Authorized Officer) Date May 10, 2004 /s/ David R. Gibson --------------------------------------------- Name: David R. Gibson Title: Executive Vice President and Chief Financial Officer (Principal Financial Officer) 36 EX-10.59 3 w96674exv10w59.txt LIMITED LIABILITY COMPANY INTEREST PURCHASE AGMNT. CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE SEC AND IS MARKED BY AN ASTERISK [*] LIMITED LIABILITY COMPANY INTEREST PURCHASE AGREEMENT AMONG GRANT, TANI, BARASH & ALTMAN, INC., WARREN GRANT, JANE TANI, COREY BARASH, HOWARD ALTMAN AND GTBA HOLDINGS, INC. EXHIBIT 10.59 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE SEC AND IS MARKED BY AN ASTERISK [*] LIMITED LIABILITY COMPANY INTEREST PURCHASE AGREEMENT AMONG GRANT, TANI, BARASH & ALTMAN, INC., WARREN GRANT, JANE TANI, COREY BARASH, HOWARD ALTMAN and GTBA HOLDINGS, INC. Made as of April 2, 2004 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS.......................................................................................... 2 ARTICLE 2 SALE AND PURCHASE OF LLC INTEREST.................................................................... 9 Section 2.1 Sale and Purchase.......................................................... 9 Section 2.2 Closing.................................................................... 9 Section 2.3 Execution of LLC Agreement................................................. 9 Section 2.4 Final Closing Balance Sheet................................................ 9 ARTICLE 3 PAYMENT.............................................................................................. 10 Section 3.1 Payment.................................................................... 10 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF GRANT TANI AND THE PRINCIPALS TO HOLDINGS.......................... 11 Section 4.1 Organization............................................................... 11 Section 4.2 Authority.................................................................. 12 Section 4.3 Governmental Filings; Non-Contravention.................................... 12 Section 4.4 Capitalization............................................................. 12 Section 4.5 Subsidiaries and Other Relationships....................................... 13 Section 4.6 Business................................................................... 13 Section 4.7 Assets..................................................................... 13 Section 4.8 Clients and Services....................................................... 14 Section 4.9 Receivables................................................................ 14 Section 4.10 Contracts.................................................................. 14 Section 4.11 Employment Arrangements.................................................... 14 Section 4.12 Financial Statements....................................................... 15 Section 4.13 Material Adverse Change.................................................... 15 Section 4.14 Ordinary Course of Business................................................ 15 Section 4.15 Litigation and Compliance with Laws........................................ 15 Section 4.16 Environmental Matters...................................................... 16 Section 4.17 Broker Dealer.............................................................. 17 Section 4.18 Insurance Policies......................................................... 17 Section 4.19 Tax Matters................................................................ 17 Section 4.20 Certain Transactions....................................................... 18 Section 4.21 Employee Benefit Plans..................................................... 18 Section 4.22 Brokerage.................................................................. 20
i Section 4.23 Access to Information...................................................... 20 Section 4.24 Privacy.................................................................... 20 Section 4.25 No Known Regulatory Delays................................................. 20 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF HOLDINGS TO GRANT TANI AND THE PRINCIPALS.......................... 21 Section 5.1 Organization............................................................... 21 Section 5.2 Authority.................................................................. 21 Section 5.3 Governmental Filings; Non-Contravention.................................... 21 Section 5.4 Litigation and Compliance with Laws........................................ 22 Section 5.5 Investment Representations................................................. 22 Section 5.6 No Known Regulatory Delays................................................. 23 Section 5.7 Brokerage.................................................................. 23 ARTICLE 6 COVENANTS OF GRANT TANI AND THE PRINCIPALS........................................................... 23 Section 6.1 Notice to Clients.......................................................... 23 Section 6.2 Conduct of Business........................................................ 23 Section 6.3 Preservation of Business and Assets........................................ 24 Section 6.4 Standstill................................................................. 24 Section 6.5 Non-Competition............................................................ 24 Section 6.6 Specific Performance....................................................... 25 Section 6.7 Licensing; Client Agreements............................................... 25 Section 6.8 Assignment and Assumption Agreement and Original LLC Agreement............. 26 ARTICLE 7 COVENANTS OF HOLDINGS................................................................................ 26 Section 7.1 Business Benefits.......................................................... 26 Section 7.2 Retirement Plan Rollovers.................................................. 27 ARTICLE 8 COVENANTS OF THE PARTIES............................................................................. 27 Section 8.1 Regulatory Authorizations.................................................. 27 Section 8.2 Confidentiality............................................................ 27 Section 8.3 Expenses Incident to this Agreement........................................ 28 Section 8.4 Access; Information........................................................ 28 Section 8.5 Press Releases............................................................. 28 ARTICLE 9 CONDITIONS PRECEDENT TO HOLDINGS' OBLIGATIONS........................................................ 28 Section 9.1 No Litigation; No Opposition............................................... 28 Section 9.2 Representations, Warranties and Covenants of Grant Tani and the Principals................................................................. 29 Section 9.3 Client Objection.......................................................... 29 Section 9.4 Licensing; Client Agreements............................................... 29 Section 9.5 Shareholder Approval....................................................... 30
ii Section 9.6 Engagement Letter and Marketing Materials.................................. 30 Section 9.7 Other Approvals............................................................ 30 Section 9.8 Capitalization............................................................. 30 Section 9.9 Deliveries................................................................. 30 Section 9.10 No Material Adverse Change................................................. 32 Section 9.12 Buy-Sell Agreement......................................................... 32 Section 9.13 Satisfaction of Employee Loans............................................. 32 Section 9.14 Accrual Basis Financial Statements......................................... 32 ARTICLE 10 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF GRANT TANI AND THE PRINCIPALS............................ 32 Section 10.1 No Litigation; No Opposition............................................... 32 Section 10.2 Representations, Warranties and Covenants.................................. 33 Section 10.3 Deliveries................................................................. 33 Section 10.4 No Material Adverse Change................................................. 33 ARTICLE 11 INDEMNIFICATION..................................................................................... 33 Section 11.1 Indemnification by the Principals.......................................... 33 Section 11.2 Indemnification by Holdings................................................ 34 Section 11.3 Limitation................................................................. 34 Section 11.4 Defense of Claims.......................................................... 34 Section 11.5 Prompt Payment............................................................. 35 Section 11.6 Certain Reductions; Subrogation............................................ 35 ARTICLE 12 TERMINATION......................................................................................... 36 Section 12.1 Termination................................................................ 36 Section 12.2 Effect of Termination...................................................... 36 ARTICLE 13 MISCELLANEOUS....................................................................................... 36 Section 13.1 Survival of Representations, Warranties and Covenants...................... 36 Section 13.2 Waivers.................................................................... 36 Section 13.3 Modifications.............................................................. 37 Section 13.4 Further Assurances......................................................... 37 Section 13.5 Governing Law; Consent to Jurisdiction..................................... 37 Section 13.6 Notices.................................................................... 37 Section 13.7 Assignability.............................................................. 39 Section 13.8 Captions................................................................... 39 Section 13.9 Number and Gender.......................................................... 39 Section 13.10 Severability............................................................... 39 Section 13.11 Counterparts............................................................... 39 Section 13.12 No Third-Party Beneficiaries............................................... 39 Section 13.13 Remedies for Section 8.2................................................... 39 Section 13.14 Integration................................................................ 39
iii LIST OF EXHIBITS A Assignment and Assumption Agreement B Original LLC Agreement C Form of Client Agreements D Form of Employment Agreements E Form of Amended and Restated Limited Liability Company Agreement F Form of Management Operating Agreement G Form of Offer Letter H Form of Notice to Clients I Form of Legal Opinion of Glassman, Browning & Saltsman, Inc. J Form of Legal Opinion of Jane Katz Crist, Esquire LIST OF SCHEDULES Schedule 1(uu) Certain Clients of Grant Tani Schedule 1(sss) Pro Forma Financial Statements and Valuation Examples Schedule 4.3 Governmental Filings of Grant Tani and the Principals Schedule 4.4(a) Stockholders and Shares Schedule 4.4(b) Members, Capital Account Balances and Membership Points Schedule 4.5 Subsidiaries and Other Relationships Schedule 4.7 Real and Personal Property Schedule 4.7(d) Art Owned by Warren Grant Schedule 4.8(a) Client Agreements of Grant Tani Schedule 4.8(b) Referral Arrangements Schedule 4.10 Material Contracts Schedule 4.11 Employment Arrangements Schedule 4.12(a) Financial Statements of Grant Tani Schedule 4.12(c) Other Liabilities Schedule 4.15 Regulatory Compliance Schedule 4.18 Insurance Policies Schedule 4.21(a) Amendments to Seller Qualified Plans Schedule 4.21(b) Title IV Plans and Qualified Beneficiaries Schedule 4.21(d) Seller Employee Plans Schedule 4.21(f) Seller Employee Plan Assets Schedule 5.3 Governmental Filings of Holdings Schedule 5.4 Regulatory Compliance of Holdings and WTC iv THIS LIMITED LIABILITY COMPANY INTEREST PURCHASE AGREEMENT (the "Agreement") is made as of April 2, 2004, among GRANT, TANI, BARASH & ALTMAN, INC., a California corporation ("Grant Tani"), WARREN GRANT, JANE TANI, COREY BARASH and HOWARD ALTMAN (such individuals sometimes individually referred to herein as a "Principal" and collectively referred to herein as the "Principals"), and GTBA HOLDINGS, INC., a Delaware corporation ("Holdings"). BACKGROUND A. Grant Tani provides business management services to its clients that include bookkeeping, cash flow management, budgeting, tax planning, insurance consultation and other services. B. The Principals own all of the outstanding shares of stock of Grant Tani. C. Grant Tani and Warren Grant (the "Second Member") have heretofore formed Grant Tani Barash & Altman, LLC, a Delaware limited liability company (the "LLC"), which will succeed to Grant Tani's business, have contributed certain assets to the LLC and have executed an operating agreement of the LLC in the form of Exhibit B hereto ("Original LLC Agreement"). D. The LLC has been formed as a limited liability company under the Delaware Limited Liability Company Act, 6 Del. C. Sections 18-101 et seq., as amended from time to time, by filing a Certificate of Formation of the LLC with the Office of the Secretary of State of Delaware on February 24, 2004 (the "LLC Certificate"). E. Pursuant to an Assignment and Assumption Agreement in the form of Exhibit A hereto, prior to the transactions contemplated hereby, Grant Tani will contribute all of its assets, including the goodwill of its business (excluding any right of Grant Tani to receive a reversion of surplus assets from the Grant, Tani, Barash & Altman, Inc. Defined Benefit Plan) to the LLC (which will assume all of Grant Tani's liabilities, except those liabilities relating to the Grant Tani Qualified Plans (as hereinafter defined) in exchange for which the LLC will issue Grant Tani an LLC Interest consisting of 99.99 Membership Points. At that time, Grant will own an LLC Interest consisting of .01 Membership Points. F. Holdings desires to purchase, and Grant Tani desires to sell, an LLC Interest consisting of 90 Membership Points, on the terms and conditions set forth herein. G. Holdings is a Delaware corporation and not a natural person. Under California law, for Holdings to own an interest in the LLC, certain activities Grant Tani conducts will need to be performed outside the LLC by a public accounting firm licensed with the California State Board of Accountancy. Accordingly, prior to Holdings' purchase of 90.00 Membership Points, Grant Tani will become licensed as such a public accounting firm and will conduct those activities. In addition, prior to that purchase, Grant Tani will cause individuals who will prepare and sign client tax returns on behalf of the LLC to become licensed as tax preparers under California law. H. Grant Tani, the Principals and Holdings intend that this Agreement memorialize their respective representations, warranties, covenants and other agreements to induce each of them to execute and deliver this Agreement and the other Transaction Documents, as defined herein. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1 DEFINITIONS Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings set forth below: a. "Advisers Act" means the Investment Advisers Act of 1940, as amended from time to time. b. "Affiliate" of a Person means a Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with the first Person. As used in this definition, the term "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to (i) vote 25% or more of the outstanding voting securities of a Person or (ii) otherwise direct the management policies of a Person by contract or otherwise. c. "Assignment and Assumption Agreement" means the instrument in the form of Exhibit A hereto by which Grant Tani assigns its business to the LLC (which will assume all of Grant Tani's liabilities, except those liabilities relating to the Grant Tani Qualified Plans). Nothing in the Assignment and Assumption Agreement shall be interpreted or construed to obligate Grant Tani to contribute, assign, transfer or convey to the LLC Grant Tani's right to receive a reversion of surplus assets from the Grant, Tani, Barash & Altman, Inc. Defined Benefit Plan. d. "Bankruptcy Code" means the U.S. Bankruptcy Code, as amended from time to time, and any successor to that code. e. "Berkshire" has the meaning assigned to that term in Section 5.7. f. "Business Day" means a day Wilmington Trust Company is open for business. g. "Cause," with respect to a Person, means any of the events set forth below, determined in accordance with the terms of the LLC Agreement, provided that a Person shall have 20 days after written notice of any such event to cure such an event that is curable: (1) A breach of any material provision of Article 11 of the LLC Agreement; (2) The failure of a Person to perform substantially that Person's duties with the LLC or the Management Company (other than any such failure resulting from incapacity due to physical or mental illness); 2 (3) The engaging by a Person in illegal conduct, dishonest conduct, conduct that is a breach of that Person's fiduciary duty or gross misconduct; or (4) Any disqualification, suspension or revocation of any applicable registration or license of a Person as a result of a final, non-appealable proceeding by the California State Board of Accountancy, any other state accounting board, the U.S. Securities and Exchange Commission, any state securities commission or any self-regulatory authority or court with jurisdiction over the LLC or the Management Company. h. "Change of Control" means (1) the acquisition by any Person or group of Persons of beneficial ownership (as that term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of 25% or more of the outstanding capital stock of Holdings or Wilmington Trust Corporation, a Delaware corporation that owns all of Holdings' outstanding shares of capital stock ("WTC"), entitled to vote for the election of directors ("Voting Shares"); (2) the acquisition by any person or any group of Persons (other than Holdings, WTC or any of their respective Affiliates) of 50% or more of the Membership Points in the LLC owned by Holdings or any of its Affiliates immediately prior to that acquisition; (3) the merger or consolidation of WTC with one or more other Persons as a result of which the holders of the outstanding Voting Shares of WTC immediately before the merger or consolidation hold less than 50% of the Voting Shares of the surviving or resulting Person; (4) the merger or consolidation of the LLC with one or more other Persons (other than Holdings or WTC or one or more of their respective Affiliates) as a result of which the holders of the outstanding Membership Points immediately before the merger or consolidation hold less than 50% of the total outstanding Membership Points (or equivalent) of the surviving or resulting Person; (5) the transfer of all or substantially all of Holdings', WTC's or the LLC's assets, other than to an Affiliate of Holdings or WTC; or (6) a proxy contest for the election of directors of WTC that results in Persons constituting the Board of Directors of WTC immediately before the initiation of that proxy contest ceasing to be a majority of the Board of Directors of WTC upon the conclusion of that proxy contest; provided that neither (x) any transfer of the capital stock or assets of Holdings or WTC to, or the merger or consolidation of Holdings or WTC with or into, (A) an entity that both prior to and also after that transfer, merger or consolidation had been and will be consolidated with Holdings or WTC for federal income tax purposes or (B) any newly-formed, wholly owned subsidiary of Holdings or WTC that will be consolidated with Holdings or WTC for federal income tax purposes, nor (y) a transfer of LLC Interests by one or more Principals to one or more Permitted Transferees (as that term is defined in the LLC Agreement) shall be deemed to be a Change of Control for purposes hereof. i. "Client Agreement" has the meaning assigned to that term in Section 6.7 and is in the form of Exhibit C attached hereto, except as that form may be revised to incorporate revisions requested by the California Department of Corporations. j. "Client Fees" has the meaning assigned to that term in Section 9.3(b). k. "Closing" and "Closing Date" have the meanings assigned to those terms in Section 2.2. l. "COBRA" has the meaning assigned to that term in Section 4.21(b). m. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any corresponding federal tax statute enacted hereafter. A reference to a specific section of the Code 3 refers to that section as well as any corresponding provision of any federal tax statute enacted hereafter, as that section is in effect on the date of application of the provisions hereof containing that reference. n. "Disclosing Party" has the meaning assigned to that term in Section 8.2. o. "Earnout Payment" shall mean a payment Holdings makes to Grant Tani under Section 3.1(a). p. "Effective Time" has the meaning assigned to that term in Section 2.2. q. "Employee Plan" or "Plan" has the meaning assigned to that term in Section 4.21(d). r. "Employment Agreements" means the employment agreements between the Management Company and each Principal substantially in the form of Exhibit D attached hereto. s. "Employment Arrangement" has the meaning assigned to that term in Section 4.11. t. "ERISA" has the meaning assigned to that term in Section 4.21(b). u. "Environmental Laws" has the meaning assigned to that term in Section 4.16(a). v. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. w. "Final Closing Balance Sheet" has the meaning assigned to that term in Section 2.4. x. "Financial Statements" has the meaning assigned to that term in Section 4.12(a). y. "401(k) Plan" has the meaning assigned to that term in Section 4.21(a). z. "GAAP" means United States generally accepted accounting principles applied consistently with prior periods. aa. "Good Reason" means, with respect to any Principal employed by the LLC or the Management Company: (1) a reduction by the LLC or the Management Company in that Principal's title or salary as the foregoing is in effect at Closing; (2) the LLC's or the Management Company's requiring that Principal, without his or her consent, to be based at any office or location more than 25 miles outside the Los Angeles, California Metropolitan Statistical Area; (3) without the written consent of a Principal, the assignment to that Principal of duties inconsistent in any material respect with the Principal's position, authority, duties or responsibilities as in effect on the effective date of that Principal's employment by the LLC or the Management Company, or any other action by the LLC or the Management Company, which 4 assignment, in each instance, results in a material diminution in that position, authority, duties or responsibilities; (4) the material breach by the Management Company of that Principal's Employment Agreement. "Good Reason" shall not include a Principal's death or Disability. The LLC or the Management Company shall have an opportunity to cure any claimed event of Good Reason within 30 days of notice from the Principal. bb. "Governmental Authority" means any United States or foreign government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, the SEC or any other government authority, agency, department, board, commission or instrumentality of the United States or any foreign government or any state or other political subdivision thereof or any state insurance, accounting, securities or banking authority (including the California State Board of Accountancy and the Securities Regulation Division of the California Department of Corporations), the Board of Governors of the Federal Reserve System, a Federal Reserve Bank, the Federal Deposit Insurance Corporation, the NASD, the NYSE, any other similar self-regulatory organization and any court or tribunal of competent jurisdiction. cc. "Grant Tani Entities" means the LLC, Grant Tani, the Management Company and any Subsidiary (present or future), and the term "Grant Tani Entity" means any one of the foregoing Grant Tani Entities. dd. "Grant Tani Qualified Plans" has the meaning assigned to that term in Section 7.2. ee. "Immediate Family" means, with respect to any natural person, that person's spouse, parents, grandparents, children, grandchildren, siblings, mother-in-law, father-in-law, brothers-in-law and sisters-in-law. ff. "Initial Payment" shall mean the payment Holdings is to make to Grant Tani under Section 3.1(a)(1). gg. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. hh. "Indemnified Party" means a Person entitled to be indemnified under Article 11 hereof. ii. "Indemnifying Party" means a Person obligated to indemnify another Person under Article 11 hereof. jj. "Knowledge" means that which a Person actually knows or should know. "Knowledge of Grant Tani" shall mean the Knowledge of the individual Principals. kk. "Leased Real Property" has the meaning assigned to that term in Section 4.16. ll. "Licenses" means licenses, franchises, permits and regulatory approvals. 5 mm. "Lien" means a charge, mortgage, pledge, security interest, restriction (other than a restriction on transfer arising under federal or state securities laws (or rules and regulations thereunder) or laws relating to the regulation of brokers, dealers, investment advisers, investment companies, banks, insurance companies and other regulated businesses), lien or encumbrance of any nature whatsoever. nn. "LLC" has the meaning assigned to that term in Recital C hereof. oo. "LLC Agreement" means the Amended and Restated Limited Liability Company Agreement of the LLC in the form of Exhibit E attached hereto. pp. "LLC Certificate" has the meaning assigned to that term in Recital D hereof. qq. "LLC Interest" has the meaning assigned to that term in the LLC Agreement. rr. "Losses" has the meaning assigned to that term in Section 11.1. ss. "Management Company" means Grant, Tani, Barash & Altman Management, Inc., a Delaware corporation owned by Holdings. tt. "Management Operating Agreement" means the Management Operating Agreement between the LLC and the Management Company in the form of Exhibit F attached hereto. uu. "Material Adverse Effect" with respect to a Person or Persons means a material adverse effect on the business, assets or condition (financial or otherwise) of that Person or Persons determined on a consolidated basis with respect to all Subsidiaries of that Person, as the case may be. A Material Adverse Effect with respect to a Person shall include, without limitation, any of the following: (1) in the case of Holdings, a decrease of 10% or more of WTC's annual net revenues or potential net revenues as a result of the occurrence of the Material Adverse Effect; (2) in the case of Grant Tani, a decrease of 20% or more of the number of its clients other than those clients set forth on Schedule 1(uu); or (3) a prolonged impairment of the Person's ability to conduct business in any material respect as it was conducted before the occurrence of the Material Adverse Effect. Notwithstanding the foregoing provisions, a Material Adverse Effect shall not include the effect of any event, change or occurrence arising out of or attributable to changes in accounting principles applicable to the Person to the extent required by law or GAAP. vv. "Member" has the meaning assigned to that term in the LLC Agreement. ww. "Membership Points" has the meaning assigned to that term in the LLC Agreement. xx. "Metropolitan Statistical Area" of a city means that city's metropolitan statistical area as defined by the United States Office of Management and Budget. yy. "NASD" means the NASD, Inc. and any successor thereto. zz. "NYSE" means the New York Stock Exchange, Inc. and any successor thereto. 6 aaa. "Offer Letter" means the letter agreement between the Management Company and each employee of the Management Company (other than a Principal) that performs business management services in the form of Exhibit G attached hereto. bbb. "Original LLC Agreement" has the meaning assigned to that term in Recital C hereof. ccc. "Party" means Grant Tani, any Principal or Holdings, and "parties" means all Persons that qualify as a Party. ddd. "PBGC" has the meaning assigned to that term in Section 4.21(e). eee. "Person" means any individual, partnership, corporation, limited liability company, limited liability partnership, association, trust, joint venture, unincorporated organization and any government, governmental department or agency or political subdivision thereof. fff. "Purchase Price" shall have the meaning assigned to that term in Section 3.1. ggg. "Receiving Party" has the meaning assigned to that term in Section 8.2. hhh. "Restricted Area" has the meaning assigned to that term in Section 6.5. iii. "Restricted Period" has the meaning assigned to that term in Section 6.5. jjj. "SEC" means the U.S. Securities and Exchange Commission. kkk. "Second Member" has the meaning assigned to that term in Recital C hereof. lll. "Securities Act" means the Securities Act of 1933, as amended from time to time. mmm. "Seller Employee Plan" has the meaning assigned to that term in Section 4.21(d). nnn. "Seller Qualified Plan" has the meaning assigned to that term in Section 4.21(a). ooo. "Shares" has the meaning assigned to that term in Section 4.4(a). ppp. "Subsidiary" or "Subsidiaries" means any corporation, partnership or other organization, whether incorporated or unincorporated, of which more than twenty-five percent (25%) of either the equity interests in, or the voting control of, that corporation, partnership or other organization is beneficially owned by a Person, directly or indirectly, through Subsidiaries or otherwise, or of which a Person serves as the general partner or managing member. qqq. "Taxes" has the meaning assigned to that term in Section 4.19. rrr. "Transaction Documents" means this Agreement, the LLC Agreement, the Employment Agreements, the Assignment and Assumption Agreement, the Management Operating Agreement, the Offer Letters, the Client Agreements and all other agreements, documents, instruments and certificates executed in connection herewith or therewith and any and all exhibits and schedules appertaining thereto. 7 sss. "Valuation" shall be based on a formula that weights the LLC's gross revenue and pre-tax net income at [*]% each, and applies a multiple based on the annual compound growth rate of each from the amounts reflected on Grant Tani's pro forma financial statements for the year ended December 31, 2003, which are attached hereto as part of Schedule 1(sss). For all purposes in calculating the Valuation, Grant Tani's gross revenues for the year ended December 31, 2003 shall be deemed to be [*] and its pre-tax net income for the year ended December 31, 2003 shall be deemed to be [*]. The gross revenue multiple shall be between [*]x and [*]x, based on a range of annual compound growth rates of gross revenues. The pre-tax net income multiple shall be between [*]x and [*]x, based on a range of annual compound growth rates of pre-tax net income. The multiples will be determined by calculating the annual compound growth rate of the LLC's gross revenues and pre-tax net income according to the following formula:
Pre-Tax Net Annual Compound Growth Gross Revenue Multiple Income Multiple - ---------------------- ---------------------- --------------- [*]% or less [*]x [*]x [*]% [*]x [*]x [*]% [*]x [*]x [*]% [*]x [*]x [*]% or greater [*]x [*]x
Annual compound growth in gross revenue or pre-tax net income between [*]% and [*]% shall be interpolated proportionately. The Valuation will be determined for each calendar year in accordance with GAAP, provided that the following items will be excluded: (1) extraordinary, non-recurring items of revenue (including any fees received for services previously provided to Burger Business, LLC) and expense; and (2) $[*] of recurring expense. For purposes of determining the Valuation, expenses of the LLC do not include the cost of support services generally available from WTC but do include the cost of the benefits described in Section 7.1 and the costs and fees paid to the Management Company under the Management Operating Agreement. For the calendar years following 2003, the Valuation will be calculated by reference to the LLC's financial statements prepared on an accrual basis in accordance with GAAP and separately audited by an independent accounting firm selected by the Principals and acceptable to Holdings, which acceptance will not be unreasonably withheld, and such other books and records as are sufficient to identify the items in the proviso in the first sentence of this paragraph. The following is a sample calculation of the Valuation at the end of the second calendar year after Closing assuming annual compound growth of gross revenue of [*]% and annual compound growth of pre-tax net income of [*]%: Gross Revenue = $[*] Interpolated gross revenue multiple = [*]x Valuation based on gross revenue = $[*] Pre-tax net income = $[*] Interpolated pre-tax net income multiple = [*]x Valuation based on pre-tax net income = $[*] 8 Earnout Valuation = ([*]% * $[*]) + ([*]% * $[*]) = $[*] Earnout Payment = [*]% * $[*] = $[*] Included in Schedule 1(sss) are additional examples of computations related to the Valuation. Notwithstanding the foregoing or anything to the contrary herein, for purposes of determining the Valuation, for any period beginning after January 1, 2004 until Closing, Grant Tani's financial statements, prepared on an accrual basis in accordance with GAAP (including, without limitation, an appropriate accrual for the Bonus Plan that is Schedule 5.1 to the LLC Agreement) and separately audited by an independent accounting firm selected by the Principals and acceptable to Holdings (which acceptance shall not be unreasonably withheld), and such other books and records as sufficient to identify the items in the proviso in the first sentence of the third paragraph of this Section 1(sss) for Grant Tani, shall be used in place of the LLC's financial statements. ARTICLE 2 SALE AND PURCHASE OF LLC INTEREST AND LLC AGREEMENT Section 2.1 Sale and Purchase. Subject to the terms, provisions and conditions and on the basis of the representations, warranties and covenants herein, Grant Tani shall issue, sell and deliver to Holdings, and Holdings shall purchase from Grant Tani, an LLC Interest free and clear of any Lien except restrictions that are set forth herein, consisting of 90 Membership Points, at the Purchase Price as set forth in Section 3.1. Section 2.2 Closing. The closing of the transactions contemplated hereby (the Closing") shall take place at the offices of Kirkpatrick & Lockhart LLP, 10100 Santa Monica Boulevard, Seventh Floor, Los Angeles, California 90067 at 10:30 a.m., local time, and be effective at the close of business on the closing date (the "Effective Time"), which shall be five Business Days after the fulfillment or waiver of each condition set forth in Articles 9 and 10 hereof (other than the conditions that are fulfilled or waived as a part of the Closing), or such other date as the Parties mutually agree, that date being referred to herein as the "Closing Date." The parties shall use their reasonable best efforts to cause the conditions to Closing set forth in Articles 9 and 10 hereof to be satisfied as soon as practicable, and shall cause to be executed at Closing the Transaction Documents (except for the Assignment and Assumption Agreement, which shall be executed prior to Closing) by the respective parties to each of documents. Section 2.3 Execution of LLC Agreement. On the Closing Date, the LLC Agreement shall be executed and a copy of the LLC Agreement shall be delivered to Holdings, Grant Tani and the Principals. Section 2.4 Final Closing Balance Sheet. Promptly after Closing, Grant Tani and the Principals shall prepare a consolidated balance sheet and related notes of Grant Tani as of the close of business on the Closing Date (the "Final Closing Balance Sheet"), audited by an independent 9 accounting firm selected by the Principals and acceptable to Holdings (which acceptance shall not be unreasonably withheld) and prepared in accordance with GAAP, except that (a) no item shall fail to be included therein or excluded therefrom on the basis of materiality, individually or collectively, and (b) at Holding's option, the effect of any breaches of the representations and warranties of Grant Tani or the Principals made herein and discovered by Holdings on or before the date of the Final Closing Balance Sheet shall be fully reserved therein. As soon as practicable following the Closing, the Final Closing Balance Sheet shall be delivered to Holdings by Grant Tani and the Principals, accompanied by the report of the auditors thereon. ARTICLE 3 PAYMENT Section 3.1 Payment. a. Subject to the terms and conditions hereof and as a part of this transaction, Holdings shall pay or cause to be paid to Grant Tani cash, by wire transfer of immediately available funds to a bank account designated in writing by Grant Tani, the following amounts (the "Purchase Price"): 1. At Closing, $[*]; 2. By March 31, 2006, [*]% times the Valuation for 2005; 3. By March 31, 2007, [*]% times the Valuation for 2006; 4. By March 31, 2008, [*]% times the Valuation for 2007; and 5. By March 31, 2009, [*]% times the Valuation for 2008. b. In the event of a Change of Control, and provided that some or all of the Principals so elect (which election may be made prior to the effective date of the Change of Control), any amounts due to Grant Tani with respect to the Principals making that election and unpaid under Sections 3.1(a)(2), 3.1(a)(3), 3.1(a)(4) and 3.1(a)(5) shall be calculated on the basis of the Valuation for the full calendar year preceding that Change of Control (the "Accelerated Valuation") and their respective ownership percentages of Grant Tani immediately prior to Closing as set forth in Schedule 4.4(a) hereto, and that amount shall be paid in cash to Grant Tani within a period of the later of (A) 30 days following the receipt of the respective Principals' election or (B) the closing of the transactions giving rise to the Change of Control in the proportions set forth in Schedule 4.4(a) hereto. For example, if a Change of Control occurs prior to the payment due under Section 3.1(a)(2), some Principals shall, if they so elect, receive in the aggregate [*]% of the Accelerated Valuation multiplied by the sum of their respective ownership percentages of Grant Tani immediately prior to Closing as set forth in Schedule 4.4(a) hereto. If some, but not all, of the Principals make the election contemplated by this Section 3.1(b) and Section 3.1(c) does not apply, then (1) the amounts payable to Grant Tani with respect to the Principals who have made that election shall be determined by multiplying (A) the sum of the amount determined in accordance with the preceding paragraph by (B) a percentage equal to the sum of their respective ownership percentages of Grant Tani immediately prior to Closing as set forth in 10 Schedule 4.4(a) hereto, and shall be distributed among them in accordance with those respective ownership percentages, and (2) the amounts payable to Grant Tani with respect to the Principals who have not made that election shall remain payable at the times they would otherwise be payable and shall be determined by multiplying the amount they would otherwise have received under Section 3.1 by a percentage equal to the sum of their respective ownership percentages of Grant Tani immediately prior to Closing as set forth on Schedule 4.4(a) hereto, and shall be allocated among them in accordance with those respective ownership percentages. c. To the extent that any Principals and/or their Permitted Transferees have exercised their right to purchase LLC Interests pursuant to Section 7.5(b) of the LLC Agreement, (1) neither Grant Tani nor those Principals shall be entitled to receive any future payments with respect to those Principals under this Section 3.1, and (2) the amounts otherwise payable to the Principals under this Section 3.1 shall be determined as though they had elected to receive the accelerated payments pursuant to Section 3.1(b), multiplied by a percentage equal to the sum of their respective ownership percentages of Grant Tani immediately prior to Closing as set forth in Schedule 4.4(a) hereto, and allocated among them in accordance with those relative ownership percentages. If this Section 3.1(c) applies, then none of the Principals shall have any rights to receive payments under Section 3.1, if any, other than through this Section 3.1(c). d. Notwithstanding anything to the contrary in Section 3.1, to the extent that some or all of the Principals and/or their Permitted Transferees have exercised their right to put some or all their LLC Interests to Holdings under Section 7.5(a) of the LLC Agreement, (1) the amounts otherwise payable to those Principals under this Section 3.1 shall be determined as though they had elected to receive the accelerated payments pursuant to Section 3.1(b) and shall be multiplied by a percentage equal to the sum of their respective ownership percentages of Grant Tani immediately prior to Closing as set forth in Schedule 4.4(a) hereto, and shall be distributed among them in accordance with those relative ownership percentages, and (2) unless Section 3.1(c) applies, the amounts otherwise payable under this Section 3.1 to those Principals who have not exercised their right to put their LLC Interests to Holdings under Section 7.5(a) of the LLC Agreement shall remain payable at the times they would otherwise be payable and shall be equal to the amount they would have otherwise received under this Section 3.1 multiplied by the sum of their respective ownership percentages of Grant Tani immediately prior to Closing as set forth in Schedule 4.4(a) hereto, and shall be allocated among them in accordance with those relative ownership percentages. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF GRANT TANI AND THE PRINCIPALS TO HOLDINGS Grant Tani and each Principal, jointly and severally, make each of the following representations, warranties and agreements to Holdings: Section 4.1 Organization. Each of Grant Tani and the LLC is duly organized, validly existing and in good standing under California law in the case of Grant Tani and Delaware law in the case of the LLC; and each is duly qualified to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires that qualification. Grant Tani has had in effect a valid and effective election under Section 1362(a)(2) of the Code to be an S corporation for each taxable year since its incorporation. Neither Grant Tani nor the Principals have 11 taken or will take any action prior to the Effective Time to terminate Grant Tani's S corporation election. Section 4.2 Authority. Grant Tani and the LLC have all requisite power and authority to (a) own assets and conduct business as presently carried on and as contemplated to be carried on after Closing and (b) execute, deliver and perform this Agreement and each other Transaction Document to which each is a party. This Agreement and each other Transaction Document to be executed, delivered and performed by any of Grant Tani, the LLC and the Principals in connection with the transactions contemplated hereby or thereby with respect to that Person has been duly and validly approved by all necessary action of that Person. This Agreement and each other Transaction Document to which any of Grant Tani, the LLC or any Principal is a party represents or, when executed, will represent, the valid and legally binding obligation of that Person, enforceable against it, him or her in accordance with its terms, except as may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws now or hereafter relating to creditors' rights generally or (ii) general principles of equity, whether asserted in a proceeding in equity or at law. Section 4.3 Governmental Filings; Non-Contravention. Except as set forth on Schedule 4.3, no notices, reports, applications or other filings are required to be made by any of Grant Tani, the LLC or the Principals with, nor are any consents, registrations, approvals, permits, Licenses or authorizations required to be obtained by any of them from, any Governmental Authority in connection with the execution and delivery of this Agreement and the other Transaction Documents and the consummation by each such Person of the transactions contemplated hereby and thereby. Except as set forth on Schedule 4.3, the execution, delivery and performance of this Agreement and each other Transaction Document to be executed, delivered and performed by any of Grant Tani, the LLC or any Principal in connection with the transactions contemplated hereby and thereby do not and will not: (a) violate any provision of the articles of incorporation or bylaws of Grant Tani, the LLC Certificate or the LLC Agreement; (b) violate, conflict with or result in a default under any material contract or material obligation to which any of Grant Tani, the LLC or any Principal is a party or by which any of that Person's assets are bound; (c) violate or result in a violation of, or constitute a default, in any material respect, under any law, regulation or rule, or any order of or restriction imposed by any court or other Governmental Authority on, any of Grant Tani, the LLC and/or any Principal or any of that Person's properties; (d) require any of Grant Tani, the LLC and/or any Principal to obtain any approval, consent or waiver of, or make any filing with, any person or entity that has not been obtained or made, except as contemplated by Section 8.1(b), which approvals, consents, waivers or filings, as applicable, will have been received prior to Closing or at any earlier time required hereunder or under applicable laws, rules and regulations; or (e) result in the creation or imposition of any Lien on any of the assets of any of Grant Tani, the LLC or any Principal. Section 4.4 Capitalization. a. The authorized capital stock of Grant Tani consists of 10,000 shares of common stock, no par value per share (the "Shares"). As at the date hereof, 1,070 shares are outstanding and are validly issued, fully paid and non-assessable. Schedule 4.4(a) lists by name, address and number of shares each holder of Shares. Except as set forth in Schedule 4.4(a), there are no (i) outstanding shares of capital stock or other securities of Grant Tani, (ii) outstanding options, warrants, puts, calls, commitments, agreements, contracts or preemptive or other rights to purchase, issue or otherwise acquire any capital stock or other securities of Grant Tani or (iii) obligations or securities convertible 12 into or exchangeable for capital stock or other securities of Grant Tani. None of the Shares is subject to any Lien. b. After giving effect to the transactions contemplated hereby, the LLC Agreement, and the Assignment and Assumption Agreement, the Members and their respective capital account balances and Membership Points in the LLC shall be as set forth in Schedule 4.4(b) hereto. Except as set forth in the Transaction Documents, there are no existing rights, agreements or commitments obligating or that might obligate the LLC or any of its Members to issue, transfer, sell or redeem any securities. Section 4.5 Subsidiaries and Other Relationships. Except as set forth in Schedule 4.5, neither Grant Tani nor the LLC: (a) owns, directly or indirectly, any capital stock of or other equity or proprietary interest in any Subsidiary or any other corporation, any such interest in any association, trust, partnership, limited liability company, joint venture or similar entity or in any other entity or enterprise; (b) is an Affiliate of any other entity that is not a Principal; or (c) is a party to any joint venture, profit-sharing or similar agreement regarding the profitability or financial results of any of Grant Tani, the LLC or any Principal or the division of revenues or profits of any Grant Tani, the LLC or any Principal. Neither Grant Tani nor the LLC has any off-balance sheet financial obligation, guaranty or promissory note to any Person. Section 4.6 Business. Since their inception, each of Grant Tani and the LLC has been engaged solely in the business of providing bookkeeping, cash flow management, budgeting, tax preparation, tax planning, insurance consultation and other services to its clients. Each of Grant Tani, the LLC and each Principal is in material compliance with all federal and state laws. Each of Grant Tani and the LLC has delivered to Holdings true and complete copies of its organizational documents, as amended to date. Each of Grant Tani, the LLC, and each Principal has all Licenses necessary to own its properties and conduct its business as it is presently conducted. Neither Grant Tani nor the LLC serves as trustee for any Person. Section 4.7 Assets. Grant Tani and the LLC have good and marketable title to all of their assets. None of the assets contributed by Grant Tani to the LLC is subject to any Lien in favor of any Person. Neither Grant Tani nor the LLC owns any real property. No personal property owned by any of Grant Tani or the LLC is or, to the Knowledge of Grant Tani will be, subject to any Lien except for minor imperfections of title or insignificant Liens that do not, in the aggregate, materially detract from the value of Grant Tani. Schedule 4.7 hereto lists: a. All leases for real property by Grant Tani or the LLC, together with the location of that property, monthly lease payments and lease termination dates, true and complete copies of which have been provided to Holdings; b. All personal property leases in which either Grant Tani or the LLC is obligated to make annual lease payments to any Person in excess of $10,000, true and complete copies of which have been provided to Holdings; and c. All personal property owned by either Grant Tani or the LLC, together with the book value thereof that is reflected on the books either of Grant Tani or the LLC (with any personal property owned by a Principal indicated on Schedule 4.7). 13 d. Certain art owned by Warren Grant set forth on Schedule 4.7(d) is not being conveyed to the LLC. All leases for real or personal property are valid and effective in accordance with their terms, and there is no existing breach or event under any lease that, which with the giving of notice, the lapse of time or both would become a breach, on the part of Grant Tani or the LLC or, to the Knowledge of Grant Tani, on the part of any other party thereto. Section 4.8 Clients and Services. a. Schedule 4.8(a) lists, as of December 31, 2003, the names of all of Grant Tani's clients, indicating the date when each first became a client and which have executed agreements with Grant Tani and the fee schedule with respect to that client. True and complete copies of each agreement listed in Schedule 4.8(a) have been delivered to Holdings. b. Except as set forth in Schedule 4.8(b), neither Grant Tani nor any employee of Grant Tani has paid, nor will the LLC or any employee of the LLC pay, any Person, directly or indirectly, for soliciting business of any kind for Grant Tani or the LLC. Section 4.9 Receivables. All accounts receivable set forth on the books and records of Grant Tani are (a) accurately reflected in Grant Tani's books and records, (b) valid receivables owned by Grant Tani, free and clear of any Lien and (c) to the Knowledge of Grant Tani, not subject to setoffs or counterclaims. Section 4.10 Contracts. All contracts to which either Grant Tani or the LLC is a party or by which either of them is bound are enforceable against that Person and, to the Knowledge of Grant Tani, the other parties thereto in accordance with their respective terms. There is not under any such contract an existing material breach or event that, with the giving of notice or the lapse of time or both, would become a material breach or event, on the part of Grant Tani or the LLC, or, to the Knowledge of Grant Tani, on the part of any other party thereto. Schedule 4.10 lists all material contracts to which either Grant Tani or the LLC is a party or by which either of them is bound together with a list of any material contract to which either Grant Tani or the LLC is a party or by which any of them is bound where the consent or approval of the other party(ies) to that contract is required for the consummation of the transactions contemplated hereby. True and complete copies of all contracts listed in Schedule 4.10 have been provided to Holdings. Section 4.11 Employment Arrangements. Except as set forth in Schedule 4.11 hereto, neither Grant Tani nor the LLC has any obligation, contingent or otherwise, under (a) any written or oral employment, collective bargaining or other labor agreement, (b) any written or oral agreement containing severance or termination pay arrangements, (c) any written or oral deferred compensation agreement, retainer or consulting arrangement, (d) any pension or retirement plan, bonus or profit-sharing plan or stock option or stock purchase plan (except any Seller Employee Plan listed on Schedule 4.21(d) hereto) or (e) any other written or oral employee contract or non-terminable employment arrangement (each, an "Employment Arrangement"). Neither Grant Tani nor the LLC is in default with respect to any term or condition of any Employment Arrangement. 14 Section 4.12 Financial Statements. a. Grant Tani has delivered to Holdings unaudited balance sheets, income statements and statements of cash flows of Grant Tani as of December 31, 2003 (collectively, the "Financial Statements"), as set forth in Schedule 4.12(a) hereto. b. The Financial Statements, subject to the qualifications and exceptions noted thereon or in the notes thereto: (i) are accurate and complete in accordance with the books of account and records of Grant Tani; (ii) have been prepared on a cash basis; and (iii) fairly present in all material respects the financial condition, assets and liabilities and results of operations of Grant Tani, as of the dates thereof or for the periods then ended. c. Except as set forth in Schedule 4.12(c), neither Grant Tani nor the LLC has any debt, obligation or liability, absolute, fixed, contingent or otherwise, of any nature whatsoever, whether due or to become due, including any unasserted claim, whether incurred directly or by any predecessor thereto, and whether arising out of any act, omission, transaction, circumstance, sale of goods or services, state of facts or other condition, except: (i) those reflected or reserved against on the Financial Statements in the amounts shown therein; and (ii) those incurred in the ordinary course of business since the date of the Financial Statements. Section 4.13 Material Adverse Change. Since December 31, 2003, no event or condition, individually or in the aggregate, has had a Material Adverse Effect on Grant Tani or the LLC, taken as a whole, and, to the Knowledge of Grant Tani, there is no impending event or condition that would have a Material Adverse Effect on Grant Tani and the LLC, taken as a whole. Section 4.14 Ordinary Course of Business. Since the date of the Financial Statements, Grant Tani has operated its business in the normal, usual and customary manner in the ordinary and regular course of business, consistent in all material respects with prior practice. Section 4.15 Litigation and Compliance with Laws. a. There are no orders, writs, injunctions, decrees or unsatisfied judgments, and no actions, suits, claims or proceedings or investigations pending or, to the Knowledge of Grant Tani, threatened against any of Grant Tani, the LLC or any Principal for any of their past or current business activities. b. (1) Except as set forth in Schedule 4.15, each of Grant Tani, the LLC and the Principals are currently and, during the past five years (or, with respect to the LLC, such shorter time that it has been in existence), have been, operating in compliance in all material respects with all laws, rules, regulations and orders applicable to that Person's business, and: (A) None of Grant Tani, the LLC or any Principal nor, to the Knowledge of Grant Tani, any Person "associated" (as that term is defined under the Advisers Act) with any of Grant Tani, the LLC or any Principal has, within five years prior to the date hereof (or, with respect to the LLC, such shorter time that it has been in existence), been convicted of any crime or is or has been subject to any disqualification in each case that would be the basis for denial, suspension or revocation of registration of an investment adviser under Section 203(e) or 206(4) of the Advisers Act or Rule 206(4)-4(b) thereunder or for disqualification as an investment adviser for 15 any investment company pursuant to Section 9 of the Investment Company Act of 1940, as amended; and (B) None of any of Grant Tani, the LLC or any Principal, nor to the Knowledge of Grant Tani, any Affiliate of Grant Tani, the LLC or any Principal, (i) is subject to a "statutory disqualification" as defined in Section 3(a)(39) of the Exchange Act or is subject to a disqualification that would be a basis for censure, limitations on the activities, functions or operations of, or suspension or revocation of registration as a broker-dealer, municipal securities dealer, government securities broker or government securities dealer under Section 15, Section 15B or Section 15C of the Exchange Act, or (ii) is subject to a disqualification that would be the basis for censure, denial, suspension or revocation of a certificate as an investment adviser under Sections 25232 or 25232.1 of the California Corporate Securities Law of 1968, and, to the Knowledge of Grant Tani, there is no reasonable basis for, or proceeding or investigation, whether formal or informal or whether preliminary or otherwise, that is reasonably likely to result in, any such censure, denial, limitations, suspension or revocation. (2) Without limiting the generality of the foregoing, (a) the information to be filed with the Securities Regulation Division of the California Department of Corporations with respect to the licensing of the LLC, the Management Company, their associated persons and the Principals as investment advisers or investment adviser representatives, as the case may be, (b) the information to be filed with respect to the licensing of at least two individuals as tax preparers under the provisions of California Business and Professions Code Sections 22250-22258 and (c) the information to be filed to cause Grant Tani, or a new entity to be formed by the Principals, to be licensed as a public accounting firm by the California State Board of Accountancy, when filed shall comply in all material respects with applicable rules and regulations and shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. c. None of Grant Tani, the LLC nor any Principal is in default with respect to any judgment, order, writ, injunction, decree, demand or assessment issued by any court or any federal, state, municipal or other governmental agency, board, commission, bureau, instrumentality or department, domestic or foreign, relating to any aspect of the business, affairs, properties or assets of that Person, provided that the foregoing representation and warranty does not apply to minor traffic violations. d. None of any of Grant Tani, the LLC nor any Principal is charged or, to the Knowledge of Grant Tani, threatened with or under investigation with respect to any violation of any federal, state, municipal or other law or any administrative rule or regulation, domestic or foreign, applicable to the business, affairs, properties or assets of that Person; provided, however, that the foregoing representation and warranty does not apply to minor traffic violations. Section 4.16 Environmental Matters. a. Each of Grant Tani and the LLC is currently and during the preceding five years (or, with respect to the LLC, such shorter time that it has been in existence) has operated its business at the properties identified in Schedule 4.7 ("Leased Real Property") in material compliance with all applicable federal, state and local statutes, ordinances, regulations and rules enacted or promulgated to protect air, water, land and human health and welfare (including, without limitation, 16 amendments thereto (collectively, "Environmental Laws"), and in accordance with the terms of all leases addressing Environmental Laws. b. Neither Grant Tani nor the LLC is subject to any liability, penalty or expense (including legal fees) by virtue of: (1) Any violation of any Environmental Law; (2) Any activity conducted on or with respect to any property owned or leased by that Person; (3) Any environmental condition existing on or with respect to any property owned or leased by that Person, in each case whether or not that Person permitted or participated in that act or omission; (4) Any off-site transportation, storage, treatment or disposal of any hazardous substance or waste; and (5) The presence of polychlorinated biphenyls, asbestos-containing material, urea formaldehyde insulation or storage tanks at any Leased Real Property. c. To the Knowledge of Grant Tani, none of the Leased Real Property is listed or proposed for listing on the National Priorities List Pursuant to the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, or any state or local list of sites requiring investigation or cleanup. d. Each of Grant Tani and the LLC has furnished Holdings copies of all environmental reports, studies or audits in its possession conducted on its behalf relating to the Leased Real Property. e. Neither Grant Tani nor the LLC has received any communication from a Governmental Authority requesting information relating to any environmental condition on the Leased Real Property. Section 4.17 Broker Dealer. None of Grant Tani, the LLC or any Principal is a "broker" or "dealer" that is registered or required to be registered with the SEC pursuant to the Exchange Act, with any self-regulatory organization (including, without limitation, the NASD) pursuant to its membership and registration rules or with any state pursuant to any applicable state securities law. Section 4.18 Insurance Policies. Each of Grant Tani and the LLC has in full force and effect insurance that management has reasonably determined is prudent with respect to its business, properties and assets (including, without limitation, errors and omissions liability insurance) as listed in Schedule 4.18 attached hereto. Neither Grant Tani nor the LLC is in material default under any such policy, and each will use commercially reasonable efforts to continue those policies in full force and effect. Section 4.19 Tax Matters. Each of Grant Tani, each Principal and the LLC has (a) paid or caused to be paid all federal, state, county, local, foreign and other taxes (including, without limitation, income, excise, property, withholding, sales, use and franchise taxes, unemployment 17 insurance, social security, gross receipt taxes, occupation taxes and other similar obligations) and all deficiencies or additions to tax, interest, fines and penalties (collectively, "Taxes") required to be paid by him, her or it (other than, with respect to Grant Tani, current taxes the liability for which is adequately provided for in the Financial Statements) and (b) in accordance with applicable law, filed all federal, state, county, local and foreign tax returns required to be filed by him, her or it. All such returns correctly and accurately set forth the amount of any Taxes relating to the applicable period. No taxing authority is now asserting or, to the Knowledge of Grant Tani, threatening to assert against any of them any deficiency or claim for additional taxes. Section 4.20 Certain Transactions. Other than as contemplated by this Agreement, the Transaction Documents or any schedule or exhibit hereto or thereto, no officer, director, stockholder, partner or member of any of Grant Tani, the LLC and/or any Principal is presently a party to any material transaction with any of Grant Tani, the LLC and/or any Principal (including, without limitation, any material contract, agreement or other material arrangement providing for the furnishing of services to or by or otherwise requiring payments to or from any such Person, any member of the Immediate Family of any such Person or any corporation, partnership, trust, limited liability company or other entity in which any such Person or any member of the Immediate Family of any such Person has an interest or is an officer, director, stockholder, trustee, member or partner). Without limiting the foregoing, neither Grant Tani, the LLC nor any Principal receives or is entitled to any referral or other fee for recommending an investment adviser, insurer, accountant, broker-dealer, trustee or other service provider to any of its clients. Section 4.21 Employee Benefit Plans. a. Each Seller Employee Plan (as that term is defined in Section 4.21(d) below) has at all times complied with all applicable laws, including the Code and ERISA. Except as set forth below, each Seller Employee Plan that is maintained as of the Closing Date and that is intended to be qualified under Section 401(a) of the Code (each, a "Seller Qualified Plan") is, in its current form, subject to a determination letter issued by the Internal Revenue Service with respect to its tax-qualified status, and those qualification requirements of Section 401(a) of the Code that are, under Internal Revenue Service rules, covered by a basic determination letter. The Grant Tani Barash & Altman, Inc. 401(k) Plan (the "401(k) Plan") is not the subject of a determination letter. The 401(k) Plan utilizes City National Bank's "GUST" prototype plan, and that plan's sponsor is relying upon the opinion letter received by City National Bank expressing the Internal Revenue Service's favorable opinion as to the form of the prototype plan. Schedule 4.21(a) sets forth a list of each amendment to each Seller Qualified Plan adopted on or after the date on which an application for a favorable determination letter was made, or in the case of the 401(k) Plan, the date of adoption of the GUST prototype plan. To the Knowledge of Grant Tani, no event or omission has occurred which could cause any such Seller Qualified Plan not to be so qualified or for any trust thereunder not to be tax-exempt under Section 501(a) of the Code. b. Neither Grant Tani nor the LLC now has, or within the past ten years had, an obligation to contribute to a Multiemployer Plan (as defined in Section 4001(a)(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), or, except as disclosed on Schedule 4.21(b), any other Plan subject to Title IV of ERISA. Neither Grant Tani nor the LLC has, within the past ten years, ever promised or provided health care or other non-pension benefits to its former employees (other than "Continuation Coverage" under the Consolidated Omnibus Reconciliation Act of 1985 required to be provided by Part 6 of Subtitle B of Title I of ERISA ("COBRA")), nor are any such benefits provided for in any Seller Employee Plan. Schedule 4.21(b) 18 lists each qualified beneficiary (as defined for purposes of COBRA) receiving benefits under COBRA as of the Closing Date and the aggregate amount of claims made by such beneficiary under COBRA. c. With respect to each Seller Employee Plan, there has been no transaction prohibited by Section 406 of ERISA or Section 4975 of the Code that could result in any tax, penalty or liability of Grant Tani or the LLC. There are no material actions, suits or claims pending or threatened with respect to any Seller Employee Plan. d. The term "Employee Plan" or "Plan" includes (i) any "employee benefit plan" as defined in Section 3(3) of ERISA, (ii) any profit-sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement severance, welfare or incentive plan, agreement or arrangement, and (iii) any plan, agreement or arrangement providing for fringe benefits or perquisites to employees, officers, directors or agents, including but not limited to benefits relating to automobiles, clubs, vacation, child care, parenting, sabbatical, sick leave, medical, dental, hospitalization, life insurance and other types of insurance. Schedule 4.21(d) hereto is a list of each Employee Plan that either Grant Tani or the LLC now maintains, contributes to or provides benefits under or has, within the past ten years, established, maintained, contributed to or provided benefits under (each a "Seller Employee Plan"). Grant Tani has delivered to Holdings, to the extent applicable, true and complete copies of all documents and summary plan descriptions of the Seller Employee Plans, including amendments thereto, and complete copies of the most recent Form 5500 filed with respect to that Seller Employee Plan. e. There is no matter pending with respect to any Plan before the Internal Revenue Service, the Pension Benefit Guaranty Corporation (the "PBGC"), the U.S. Department of Labor or any other Governmental Authority. f. Each of Grant Tani and the LLC has made full and timely payment of all amounts that are required under the terms of each Seller Employee Plan and any related trust or collective bargaining agreement or that are otherwise required by law to be paid as a contribution to each such Seller Employee Plan with respect to all periods through the Closing. No accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code) exists nor has any funding waiver from the IRS been received or requested with respect to any Seller Employee Plan. No excise tax or other taxes are due or owing because of any failure to comply with the minimum funding standards of the Code and ERISA with respect to any Seller Employee Plan. With respect to each Seller Employee Plan that is subject to Title IV of ERISA, (i) neither Grant Tani nor the LLC has filed a notice of intent to terminate any such Seller Employer Plan or adopted any amendment to treat any such Seller Employee Plan as terminated, (ii) the PBGC has not instituted proceedings to terminate any such Seller Employee Benefit Plan, (iii) no other event or condition has occurred that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any such Seller Employee Plan, (iv) all required premium payments to the PBGC have been paid when due, (v) no reportable event (as described in Section 4043 of ERISA) has occurred with respect to any such Seller Employee Plan, (vi) no excise taxes are payable under the Code, and (vii) no amendment with respect to which security is required under Section 307 of ERISA has been made or is reasonably expected to be made. All costs of any Seller Employee Plans subject to Title IV of ERISA have been provided for on the basis of consistent methods in accordance with sound actuarial assumptions and practices. Schedule 4.21(f) includes for each Seller Employee Plan, as of its last valuation date, the amount by which its assets exceeded (or were less than) its "benefit liabilities" (within the meaning of Section 4001(a)(16) of ERISA). Since 19 the last valuation date for each such Seller Employer Plan, there has been no amendment or change to such Seller Employer Plan that would increase the amount of benefits thereunder and, to the Knowledge of Grant Tani, there has been no event or occurrence that would cause the excess of assets over benefit liabilities as listed in Schedule 4.21(f) to be reduced or the amount by which benefit liabilities exceed assets as listed in Schedule 4.21(f) to be increased. g. There has been no act or omission by Grant Tani or the LLC that has given rise to or may give rise to fines, penalties, taxes, or related charges under Section 402(c), (i) or (l) or Section 4071 of ERISA or Chapter 43 of the Code of the imposition of a lien pursuant to Sections 401(a)(29) or 412(n) of the Code or pursuant to ERISA. h. Neither Grant Tani nor the LLC is required to be aggregated with any other entity under Sections 414(b), (c), (m) or (o) of the Code. i. To the Knowledge of Grant Tani, there are no claims (other than routine claims for benefits) pending or threatened with respect to any Seller Employee Plan and no facts exist which could give rise to any such claim. Section 4.22 Brokerage. None of any of Grant Tani, the LLC or any Principal has incurred any obligation for a brokerage commission or finders' fee in connection with the transactions contemplated hereby. Grant Tani and the Principals shall, jointly and separately, indemnify Holdings for any liability to any broker other than Berkshire. Section 4.23 Access to Information. a. Each Principal acknowledges that Holdings has not provided that Principal with information regarding Grant Tani because that Principal, as a result his or her position with Grant Tani, has access to all information, financial or otherwise, regarding Grant Tani necessary for that Principal to determine whether to execute this Agreement and otherwise participate in the transactions contemplated hereby. b. Each Principal acknowledges that his or her residence is set forth under his or her name on the signature pages to this Agreement. Section 4.24 Privacy. Each of Grant Tani and the LLC complies in all material respects with all applicable U.S. federal and state privacy laws in effect prior to the date of this Agreement, including, without limitation, Title V of the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and any and all applicable regulations implementing either act. Section 4.25 No Known Regulatory Delays. To the Knowledge of Grant Tani, there is no reason to believe that Grant Tani, the Management Company, the LLC and the Principals will be unable to obtain all Licenses, consents and permits from all Governmental Authorities and other Persons necessary to complete the transactions contemplated by this Agreement promptly and without undue delay, expense or restriction. 20 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF HOLDINGS TO GRANT TANI AND THE PRINCIPALS Holdings represents and warrants to Grant Tani and each Principal that: Section 5.1 Organization. Each of Holdings and WTC is a corporation duly organized, validly existing and in good standing under Delaware law. Section 5.2 Authority. Each of Holdings and WTC has all requisite power and authority to (a) own its assets and conduct its business and (b) execute, deliver and perform this Agreement and the other Transaction Documents to be executed, delivered and performed by it in connection with this Agreement and the transactions contemplated hereby and thereby. This Agreement and each other Transaction Document to be executed, delivered and performed by Holdings in connection with the transactions contemplated hereby have been duly and validly approved by all necessary corporate action. This Agreement and each other Transaction Document to which Holdings is a party represents, or when executed will represent, its valid and legally binding obligation, enforceable against it in accordance with its terms, except as may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws now or hereafter in effect affecting creditors; rights generally or (ii) general principles of equity, whether asserted in a proceeding in equity or at law. Section 5.3 Governmental Filings; Non-Contravention. Other than the filings and/or notices set forth in Schedule 5.3 (including those (a) under the HSR Act (if Holdings determines that a filing under that act is required), the Exchange Act and the Securities Act, and with the NYSE and (b) required to be made with the Federal Reserve Bank of Philadelphia), no notices, reports, applications or other filings are required to be made by Holdings with, nor are any Licenses, consents, registrations, approvals, permits or authorizations required to be obtained by it from, any Governmental Authority in connection with the execution and delivery of this Agreement and the other Transaction Documents, and the consummation by Holdings of the transactions contemplated hereby and thereby. Subject to the making or obtaining of all filings, notices, applications, Licenses, consents, registrations, approvals, permits or authorizations with or of any relevant Government Authority with respect to the transactions contemplated by this Agreement and the other Transaction Documents as set forth in Schedule 5.3, the execution, delivery and performance of this Agreement and each other Transaction Document to be executed, delivered and performed by Holdings or WTC in connection with the transactions contemplated hereby and thereby does not and will not: (a) violate any provision of its charter or bylaws; (b) violate, conflict with or result in a default under any contract or obligation to which Holdings or WTC is a party or by which it or its assets are bound; (c) violate or result in a violation of, or constitute a default under, any law, regulation or rule, or any order of or restriction imposed by any court or other Governmental Agency on Holdings or WTC or any of their respective properties; and (d) except with respect to a post-Effective Time notice to be filed or cause to be filed by WTC with the Federal Reserve Bank of Philadelphia and as contemplated by Section 8.1(b) hereof, require Holdings or WTC to obtain any approval, consent or waiver of, or make any filing with, any Governmental Authority that has not been obtained or made, except for approvals, consents, waivers or filings, as applicable, that are set forth in Schedule 5.3 and that will have been received prior to Closing or at any earlier time required hereunder or under applicable laws, rules and regulations. 21 Section 5.4 Litigation and Compliance with Laws. a. Except as set forth on Schedule 5.4, there are no orders, writs, injunctions, decrees or unsatisfied judgments, and no actions, claims, suits, proceedings or investigations pending or, to Holdings' or WTC's Knowledge, threatened against Holdings or WTC that, if adversely determined, might call into question the validity or hinder or delay the enforceability or performance of this Agreement or any other Transaction Document or have a Material Adverse Effect on Holdings and WTC or their respective assets or properties, taken as a whole. Except as set forth on Schedule 5.4, each of Holdings and WTC is and, during the past five years (or, with respect to Holdings, such shorter time that it has been in existence) has been, operating in material compliance with all laws and governmental rules and regulations, domestic or foreign (including, without limitation, all federal and state securities laws), applicable to the business, affairs, properties and assets of Holdings or WTC, as the case maybe. Except as set forth in Schedule 5.4, neither Holdings nor WTC is in default with respect to any judgment, order, writ, injunction, decree, demand or assessment issued by any court or any federal, state, municipal or other governmental agency, board, commission, bureau, instrumentality or department, domestic or foreign, relating to any aspect of its business, affairs, properties or assets. Except as set forth in Schedule 5.4, neither Holdings nor WTC has been charged or, to Holdings' Knowledge, threatened with or is under investigation with respect to any violation of any federal, state, municipal or other law or any administrative rule or regulation, domestic or foreign, affecting Holdings or WTC or the transactions contemplated hereby. b. To Holdings' Knowledge, neither Holdings, WTC nor any Person "associated" (as that term is defined under the Advisers Act) with Holdings or WTC has, within five years prior to the date hereof, been convicted of any crime or is or has been subject to any disqualification in each case that would be the basis for denial, suspension or revocation of registration of an investment adviser under Section 203(e) or 206(4) of the Advisers Act or Rule 206(4)-4(b) thereunder or for disqualification as an investment adviser for any investment company pursuant to Section 9 of the Investment Company Act of 1940, as amended. c. To Holdings' Knowledge, none of Holdings, WTC nor any Affiliate of Holdings or WTC is subject to a "statutory disqualification" as defined in Section 3(a)(39) of the Exchange Act or is subject to a disqualification that would be a basis for censure, limitation on the activities, functions or operations of, or suspension or revocation of the registration of any Affiliate of Holdings or WTC as a broker-dealer, municipal securities dealer, government securities broker or government securities dealer under Section 15, Section 15B or Section 15C of the Exchange Act, and, to Holdings' Knowledge, there is no reasonable basis for, or proceeding or investigation, whether formal or informal or whether preliminary or otherwise, that is reasonably likely to result in, any such censure, limitation, suspension or revocation. Section 5.5 Investment Representations. a. Holdings will acquire its LLC Interest under the terms of this Agreement for its own account for investment and not with a view to or for sale in connection with any distribution thereof or with any present intention of selling or distributing all or any part thereof. Holdings acknowledges that the LLC Interests have not been registered under the Securities Act or the securities laws of any state or other jurisdiction, and cannot be disposed of unless registered under the Securities Act and any applicable state laws or an exemption from that registration is available. 22 b. Holdings is sufficiently knowledgeable and experienced in making investments of this type as to be able to evaluate the risks and merits of its investment in LLC Interests and is able to bear the economic risk of its investment in the LLC. Holdings acknowledges that the LLC Interests are illiquid, that no market for the LLC Interests exists and that none is contemplated to be created. c. Holdings is an "accredited investor" within the meaning of Rule 501(a) under the Securities Act. Section 5.6 No Known Regulatory Delays. Holdings has no Knowledge or reason to believe that it will be unable to obtain all Licenses, consents and permits from all Governmental Authorities and other Persons necessary to complete the transactions contemplated by this Agreement promptly and without undue delay, expense or restriction. Section 5.7 Brokerage. Holdings has not incurred any obligation for a brokerage commission or finders' fee in connection with the transactions contemplated hereby other than to Berkshire Capital Corporation ("Berkshire"). Holdings shall indemnify Grant Tani and the Principals for any liability to Berkshire for a brokerage fee in connection with the transactions contemplated hereby. ARTICLE 6 COVENANTS OF GRANT TANI AND THE PRINCIPALS Grant Tani and each Principal covenants as follows: Section 6.1 Notice to Clients. As soon as practicable after the date hereof, Grant Tani shall notify each of its clients of the transactions contemplated hereby and by the other Transaction Documents. That notice shall be in the form of Exhibit H and shall indicate that Grant Tani will assume that each client consents to those transactions unless the client notifies Grant Tani otherwise. Grant Tani shall keep a record indicating when and by what means each client was contacted, and shall provide Holdings with an opportunity to review that record prior to Closing. Section 6.2 Conduct of Business. Until Closing, except as specifically contemplated by this Agreement, without Holdings' prior written consent: a. The business of Grant Tani shall be conducted only in the ordinary course, in a manner consistent in all material respects with past practices and in compliance in all material respects with all applicable laws, rules and regulations; b. Neither Grant Tani nor any Principal shall in any capacity make or assist in making any change in the charter documents or bylaws of Grant Tani; c. Neither Grant Tani nor any Principal shall acquire any asset or make any capital expenditure, or sell, lease or dispose of any asset other than (i) in the ordinary course of business and (ii) in an amount not to exceed $100,000; 23 d. Neither Grant Tani nor any Principal shall permit any Person to mortgage, pledge, subject to or permit to exist any Lien on any property or asset of Grant Tani except for minor imperfections of title or insignificant Liens that do not, in the aggregate, materially detract from the value of Grant Tani (and Grant Tani shall not, nor shall any Principal permit Grant Tani to, mortgage, pledge, subject to or permit to exist any Lien on, any properties, assets or contracts that are to be acquired by the LLC pursuant to the Transaction Documents); e. Grant Tani shall not issue any (i) shares of its capital stock or other securities, (ii) options, warrants, puts, calls, commitments, agreements, contracts or preemptive or other rights to purchase, issue or otherwise acquire any capital stock or other securities of Grant Tani or (iii) obligations or securities convertible into or exchangeable for capital stock or other securities of Grant Tani; f. Grant Tani shall not declare or pay any dividend or distribution on its capital stock or other securities, whether in the form of cash, capital stock or other securities, except that, prior to Closing, Grant Tani will distribute to (1) employees who are not Principals $[*], representing half of the retention bonuses payable to those employees, and (2) the Principals amounts consistent with past practices, including distributing all excess cash held on or before Closing except for $[*], representing one month's expenses for Grant Tani, which shall be contributed to the LLC; and g. Grant Tani shall cause the LLC not to conduct any business or take any actions, other than as specifically contemplated in Recital E to this Agreement. Section 6.3 Preservation of Business and Assets. a. Until Closing, except as contemplated hereby, each of Grant Tani and the Principals shall use his, her or its reasonable best efforts to: (1) preserve the current business of Grant Tani; (2) except for those clients set forth in Schedule 1(uu), maintain the present clients of Grant Tani, in each case on terms substantially equivalent to the terms of the existing agreements between those clients and Grant Tani in effect on the date hereof; and (3) preserve the goodwill of Grant Tani. b. Except for the transactions contemplated by the Transaction Documents prior to Closing, Grant Tani shall not materially change the fundamental nature or characteristics of its business from the business conducted as of the date hereof without Holdings' prior written consent. Section 6.4 Standstill. The relative interests of the Principals in Grant Tani as of the date hereof may not be altered without Holdings' prior written consent. Section 6.5 Non-Competition. With respect to each Principal, for a period commencing on the Closing Date and terminating on the later of (a) the fifth anniversary of the Closing Date or (b) the first anniversary of the termination of each Principal's employment with the Management Company (the "Restricted Period"), that Principal shall not, for whatever reason, whether for his or her account or for the account of any other Person, without the prior written consent of the LLC and the Management Company, as a shareholder, employee, partner, member, board member, consultant, independent contractor, representative or otherwise, engage in any business competitive with any business conducted by any of the Grant Tani Entities at any time during the Restricted Period, in the Metropolitan Statistical Area of Los Angeles, California (the "Restricted Area"). Notwithstanding the foregoing, nothing herein shall prohibit that Principal from being a shareholder or equity holder 24 in any publicly-traded entity whose business is competitive with, the business heretofore conducted, or conducted at any time during the Restricted Period and in the Restricted Area, by any of the Grant Tani Entities, as long as that Principal does not hold more than a three percent equity interest in that publicly-traded entity. Each Principal acknowledges that the restrictions set forth in this Section 6.5, including the Restricted Period and the Restricted Area, are made in connection with the sale of substantially all of the assets of Grant Tani, including the goodwill of that business, and are intended to comply with the California Business and Professions Code Section 16601. The restrictions set forth in this Section 6.5 shall not apply (1) to a Principal whose employment with the LLC and each of its Subsidiaries or by the Management Company is terminated by the LLC and those Subsidiaries or by the Management Company without Cause or by that Principal for Good Reason, (2) to a Principal if a Change of Control occurs and Holdings and its Permitted Transferees or WTC's successor, as the case may be, purchase all of the Principal's LLC Interests (including his or her Derivative Share (as that term is defined in the LLC Agreement) and the LLC Interests held by his or her Permitted Transferees (as that term is defined in the LLC Agreement)) pursuant to Section 7.5(a) of the LLC Agreement or (3) if the LLC is liquidated and its business is not continued by a successor entity. Section 6.6 Specific Performance. The Principals acknowledge that it is fair and reasonable that they make the covenants set forth in Section 6.5, and have done so with the benefit of the advice of counsel. In addition, the Principals acknowledge that any breach or attempted breach by any of them of the provisions of Section 6.5 will cause irreparable harm to Holdings, WTC, their respective Affiliates and each Grant Tani Entity, for which monetary damages will not be an adequate remedy. Accordingly, Holdings, WTC, their respective Affiliates and each Grant Tani Entity shall be entitled to apply for and obtain injunctive relief (temporary, preliminary and permanent) to restrain the breach or threatened breach of, or otherwise to specifically enforce, any provision of Section 6.5, without the requirement to post a bond or provide other security. Nothing herein shall be construed as a limitation or waiver of any other right or remedy that may be available to Holdings, WTC, their respective Affiliates or a Grant Tani Entity for that breach or threatened breach. For emergency relief (including temporary and preliminary injunctive relief), an application may be made in any court of competent jurisdiction. The Principals further agree that the subject matter and duration of the restrictions covered herein are reasonable in light of the facts as they exist today. If any restriction contained in Section 6.5 is deemed unreasonable by a court, it shall, to the extent permitted by applicable law, be reduced to the maximum restriction that is enforceable under such law. Section 6.7 Licensing; Client Agreements. a. (1) As soon as practicable after the date hereof, Grant Tani and the Principals shall cause the LLC and the Management Company and/or any Principal to be licensed as investment advisers and the Principals and associated persons of the LLC and of the Management Company to be licensed as investment adviser representatives with the Securities Regulation Division of the California Department of Corporations. Grant Tani shall provide Holdings with evidence that the LLC, the Principals and the Management Company have obtained any such licenses promptly after they are obtained. (2) As soon as practicable after such licenses have been obtained, Grant Tani shall cause the LLC to enter into a written agreement, in a form substantially similar to Exhibit C hereto except as that form may be revised to incorporate revisions requested by the California 25 Department of Corporations (a "Client Agreement"), with each client to or for whom the LLC or any Principal proposes to provide investment advice (including, without limitation, suggesting investment advisers or investment managers or monitoring or recommending investments) whether by itself, as a general partner or managing member of any entity or otherwise. Grant Tani shall provide Holdings with copies of all such agreements promptly after they are fully executed. b. As soon as practicable after the date hereof, Grant Tani shall cause at least two individuals who will primarily be responsible for preparing and signing client tax returns on behalf of the LLC to be licensed as tax preparers under the provisions of California Business and Professions Code Sections 22250-22258. Grant Tani shall provide Holdings with evidence that those licenses have been obtained promptly after they are obtained. c. As soon as practicable after the date hereof, Grant Tani and the Principals shall cause Grant Tani to be licensed as a public accounting firm by the California State Board of Accountancy. Grant Tani shall provide Holdings with evidence that license has been obtained promptly after it is obtained. After that license has been obtained, the Principals shall cause Grant Tani to enter into an agreement with the LLC under which Grant Tani would issue financial reports with a cover letter in compliance with professional standards under California law on behalf of the LLC at a fee not to exceed $[*] per report. Section 6.8 Assignment and Assumption Agreement and Original LLC Agreement. Prior to Closing, Grant Tani and the Second Member shall consummate the transactions contemplated by the Assignment and Assumption Agreement and execute the Original LLC Agreement. ARTICLE 7 COVENANTS OF HOLDINGS Section 7.1 Business Benefits. The LLC shall have the right to elect, on or prior to six months after the Closing Date, to have the officers and employees of the LLC (or the Management Company, if such Persons are employed by the Management Company) participate in some or all of the then-existing employee benefit plans of WTC (other than WTC bonus or incentive plans or defined benefit plans) at the cost of the LLC (or the Management Company, if those Persons are employed by the Management Company); provided, however, that (a) once the election to participate or not participate in a particular plan is made it cannot be changed without Holdings' written consent, which shall not be unreasonably withheld, (b) those officers and employees are otherwise eligible to participate in those plans in accordance with their terms and (c) nothing herein shall entitle such an officer or employee to participate in a plan where participation is not based solely on eligibility criteria set forth in the plan. With respect to the WTC employee benefit plans, Holdings agrees that years of service with Grant Tani shall be deemed to be years of service with WTC. Holdings shall pay the cost of (x) quarterly reviews of the LLC's financial statements by WTC's independent auditor and (y) computers and related infrastructure (such as computer firewalls) necessary for the LLC's computer systems to be compatible with Holdings' and WTC's. 26 Section 7.2 Retirement Plan Rollovers. Upon Grant Tani's request, Holdings shall cause a retirement plan qualified under Section 401(a) of the Code sponsored by WTC or an Affiliate of WTC to accept rollovers of distributions from the Grant, Tani, Barash & Altman, Inc. Defined Benefit Plan and/or the Grant, Tani, Barash & Altman, Inc. 401(k) Plan (the "Grant Tani Qualified Plans") to participants therein who, at the time of such distribution, are employed by WTC or an Affiliate of WTC, only if: (a) such distributions are "eligible rollover distributions" within the meaning of Section 401(a)(31) of the Code and (b) prior to any such rollover, Grant Tani has provided to Holdings a copy of a favorable determination letter issued by the Internal Revenue Service with respect to the termination of the applicable Grant Tani Qualified Plan. ARTICLE 8 COVENANTS OF THE PARTIES Section 8.1 Regulatory Authorizations. a. Holdings shall at its sole expense timely and promptly make all filings required to be made by it with any Governmental Authority with respect to the consummation of the transactions contemplated hereby (including, without limitation, filings with the Federal Reserve Bank of Philadelphia). Holdings shall furnish to Grant Tani such information and assistance it may reasonably request in connection with the preparation by it of necessary filings or submissions to any Governmental Authority. Holdings shall promptly supply Grant Tani with copies of all non-confidential correspondence, filings or communications (or memoranda summarizing the substance thereof) between Holdings or its counsel and any Governmental Authority with respect to this Agreement and the transactions contemplated hereby. b. Grant Tani and the Principals shall cause each of Grant Tani, the Principals and the Management Company, prior to the transactions contemplated hereby and at Grant Tani's or his or her sole expense, timely and promptly make all filings required to be made by him, her, Grant Tani, the Management Company, the LLC or its associated persons with any Governmental Authority with respect to the consummation of the transactions contemplated hereby (including, without limitation, (1) the filing with the Securities Regulation Division of the California Department of Corporations of an application necessary to license the LLC and the Management Company as investment advisers and the Principals and the Management Company's and the LLC's associated persons as investment adviser representatives in California, (2) the filing of applications for at least two individuals to be licensed as tax preparers under the provisions of California Business and Professionals Code Sections 22250-22258 and (3) an application for Grant Tani to be licensed as a public accounting firm by the California State Board of Accountancy). Each of Grant Tani and the Principals shall furnish to Holdings such information and assistance as Holdings may reasonably request in connection with its preparation of necessary filings or submissions to any Governmental Authority. Grant Tani shall promptly supply Holdings with copies of all non-confidential correspondence, filings or communications (or memoranda summarizing the substance thereof) between any of the Principals, Grant Tani, the Management Company, the LLC or his, her or its counsel and any Governmental Authority with respect to this Agreement and the transactions contemplated hereby. Section 8.2 Confidentiality. Each Party (each, a "Receiving Party") shall, on behalf of himself, herself or itself and his, her or its representatives and agents, keep confidential any and all 27 information and data of a proprietary or confidential nature with respect to any other party (a "Disclosing Party") in the Receiving Party's possession or that he, she or it receives as a result of any investigation made in connection with this Agreement, other than information that is or becomes generally available to the public other than as a result of disclosure by the Receiving Party in violation of this Agreement. Notwithstanding the preceding sentence, each party shall be free to disclose any such information or data (a) to the extent required by applicable law, order, rule or regulation and (b) during the course of or in connection with any litigation, arbitration or other proceeding based upon or in connection with the subject matter of this Agreement; provided that, prior to disclosing any such information in connection with any such litigation, arbitration or proceeding, the Receiving Party shall, to the extent permitted by law, give prior notice to the Disclosing Party and use reasonable efforts to obtain confidential treatment therefor. Section 8.3 Expenses Incident to this Agreement. Except as otherwise expressly provided herein, each party shall pay his, her or its own expenses incident to the negotiation and consummation of the transactions contemplated by this Agreement and the other Transaction Documents and the preparation and carrying out of this Agreement and the transactions contemplated hereby or thereby. Section 8.4 Access; Information. Grant Tani and the Principals hereby agree that, upon reasonable notice and subject to all applicable U.S. federal and state privacy laws in effect prior to the date of this Agreement, including, without limitation, Title V of the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and any and all applicable regulations implementing either act, Grant Tani and the Principals shall afford Holdings and its officers, employees and representatives access during normal business hours throughout the period prior to Closing to the books, records, properties, personnel and to such other information of Grant Tani as Holdings may reasonably request. Section 8.5 Press Releases. The Parties shall coordinate and approve, to the extent permitted by law, any public announcement, press release or response to media inquiries regarding this Agreement and the transactions contemplated hereby. ARTICLE 9 CONDITIONS PRECEDENT TO HOLDINGS' OBLIGATIONS The obligations of Holdings to consummate the transactions contemplated hereby are subject to the satisfaction at Closing or, where appropriate, before the Closing Date, of the following conditions, except to the extent Holdings waives any such condition in writing on or before the Closing Date: Section 9.1 No Litigation; No Opposition. No judgment, injunction, order or decree enjoining or prohibiting any of Holdings, the LLC, Grant Tani or any Principal or other party to any Transaction Document from consummating the transactions contemplated by this Agreement or by any other Transaction Document or from engaging in any advisory or broker-dealer activity shall have been entered. No suit, action, claim, proceeding or investigation shall be pending or threatened at any time prior to or on the Closing Date before or by any court or Governmental Authority seeking to materially restrain or prohibit, or seeking material damages or other significant relief in connection with, the execution and delivery of this Agreement or any other Transaction Document or the consummation of the transactions contemplated hereby or thereby. 28 Section 9.2 Representations, Warranties and Covenants of Grant Tani and the Principals. The representations and warranties of each of Grant Tani and the Principals contained in this Agreement, any schedule or exhibit hereto and in each other Transaction Document shall be true and correct in all material respects at and as of Closing as though newly made at that time. Each and all of the agreements and conditions to be performed or satisfied by each of Grant Tani, the LLC and/or the Principals hereunder and under the other Transaction Documents at or prior to Closing shall have been duly performed or satisfied in all material respects. Each of Grant Tani and the Principals shall have furnished Holdings with a certificate or certificates dated as of the Closing Date with respect to each of the foregoing. Section 9.3 Client Objection. a. Not more than ten percent (10%) (based on the total Client Fees for all of Grant Tani's clients other than those set forth in Schedule 1(uu)) of Grant Tani's clients shall have indicated in any manner that they will not continue as clients of the LLC following Closing. Compliance with this condition shall be measured five Business Days prior to the Closing Date. b. "Client Fees" shall mean, with respect to a client, the fees payable to Grant Tani for its fiscal year ending December 31, 2003, computed on an annualized basis for a client that was not a client of Grant Tani for the entire year, measured on an accrual basis (adjusted for any new clients since December 31, 2003 in the manner provided below). c. Client Fees for a new client added after December 31, 2003 shall be added by computing the reasonably expected Client Fees for the fiscal year ending December 31, 2004, computed on both an accrual and annualized basis, with respect to the value of the Client Fees on the date that Person became a new client (using the fee rate for that client when it first becomes a client) for the entire year. d. Fees associated with new clients shall be included in the numerator but not the denominator for purposes of computing such 10%. At Closing, Grant Tani shall deliver to Holdings a certificate certifying compliance with this Section 9.3. Section 9.4 Licensing; Client Agreements. a. (1) Grant Tani and the Principals shall have caused the LLC, the Management Company and/or any Principal to be licensed as investment advisers and the Principals and associated persons of the LLC and of the Management Company to be licensed as investment adviser representatives with the Securities Regulation Division of the California Department of Corporations. (2) Grant Tani and the Principals shall have provided Holdings a list identifying each client to or for whom the LLC proposes to provide investment advice after Closing (including, without limitation, suggesting investment advisers or investment managers or monitoring or recommending investments), whether by itself, as a general partner or managing member of any entity or otherwise, and shall have caused the LLC to enter into a Client Agreement with each such client. 29 b. Grant Tani shall have caused at least two individuals who will primarily be responsible for preparing and signing tax returns on behalf of the LLC to be licensed as tax preparers under the provisions of California Business and Professions Code Sections 22250-22258. c. Grant Tani shall have caused itself to be licensed as a public accounting firm by the California State Board of Accountancy, and the Principals shall have caused Grant Tani to enter into an agreement with the LLC under which Grant Tani would issue financial reports with a cover letter in compliance with professional standards under California law on behalf of the LLC for a fee not to exceed $[*] per report. At Closing, Grant Tani shall deliver to Holdings a certificate certifying compliance with this Section 9.4. Section 9.5 Shareholder Approval. Grant Tani's Board of Directors shall have approved the transactions contemplated by the Transaction Documents, Grant Tani's shareholders shall have approved the transactions contemplated by the Transaction Documents and, at Closing, Grant Tani shall deliver to Holdings a certificate certifying that such Board and shareholder approval have been obtained. Section 9.6 Engagement Letter and Marketing Materials. Grant Tani shall have revised its engagement letter and marketing materials in a manner acceptable to Holdings and shall have provided true and complete copies of those revised documents to Holdings. Section 9.7 Other Approvals. All actions and approvals by or in respect of, or filings with, any Governmental Authority required to permit the consummation of the transactions contemplated hereby so that the LLC, Grant Tani and the Management Company shall be able to continue to carry on after the Closing Date the business conducted by Grant Tani immediately prior to Closing shall have been taken, made or obtained. All other material permits, approvals, Licenses, consents or other actions commercially necessary to consummate the transactions hereunder shall have been received or taken, except where the failure to obtain that permit, approval, consent or other action would not have a Material Adverse Effect on Grant Tani and the LLC, taken as a whole. Without limiting the generality of the foregoing, the parties acknowledge that Grant Tani and WTC have received a letter from the Chief of Enforcement of the California State Board of Accountancy in form and substance satisfactory to Holdings indicating that, based on the proposed services to be provided by the LLC, the LLC will not be required to be registered as a public accounting firm with, or be required to obtain a permit to engage in the practice of public accountancy issued by, the California State Board of Accountancy. Section 9.8 Capitalization. The Members of the LLC, and the capital account balances and Membership Points of each Member in the LLC, shall be as set forth on Schedule 4.4(b) hereto. Section 9.9 Deliveries. Each of Grant Tani, the LLC and the Principals shall have executed, where applicable, and delivered to Holdings (or shall have caused to be executed and delivered to Holdings by the appropriate person) the following: a. A certificate of the Secretary of Grant Tani and a manager of the LLC that each entity has completed all required actions contemplated by the Transaction Documents; 30 b. The certificate or certificates contemplated by Section 9.2; c. The certificates contemplated by Section 9.3 and 9.4; d. The certificates contemplated by Sections 9.10, 9.11, 9.12 and 9.13; e. The LLC Agreement; f. Certified copies of resolutions of the board of directors (and, if necessary, the shareholders) authorizing the execution of each Transaction Document to which Grant Tani is a party; g. The articles of incorporation (certified as of a recent date by the Secretary of State of California) and bylaws of Grant Tani; h. A certificate of the Secretary of Grant Tani certifying that the resolutions, articles of incorporation and bylaws in paragraphs (f) and (g) above are in full force and effect and have not been amended or modified, and that the officers of Grant Tani are those persons named in the certificate; i. Certified copies of the resolutions of the board of managers (and, if necessary, the Members) authorizing the execution of each Transaction Document to which the LLC is a party; j. The LLC Certificate, certified as of a recent date by the Secretary of State of Delaware; k. A certificate of a manager of the LLC certifying that the resolutions and LLC Certificate in paragraphs (i) and (j) above are in full force and effect and have not been amended or modified; l. A certificate issued by the appropriate state authority certifying that each of Grant Tani and the LLC are validly existing in that state as of the most recent practicable date; m. The Employment Agreements; n. The Management Operating Agreement; o. The Offer Letters; p. True and correct copies of each of the other Transaction Documents (including, without limitation, the Assignment and Assumption Agreement); q. An opinion from Glassman, Browning & Saltsman, Inc., counsel to each of Grant Tani and the LLC, in the form of Exhibit I; r. An opinion from Jane Katz Crist, Esquire, special counsel to each of Grant Tani and the LLC, in the form of Exhibit J; and 31 s. A copy of the Form D to be filed with the SEC with respect to the issuance of the LLC Interests and of any similar filing or notification of filing that will be filed with any applicable state securities commission. Section 9.10 No Material Adverse Change. No event or condition, individually or in the aggregate, shall have had a Material Adverse Effect on Grant Tani and the LLC, taken as a whole. Grant Tani and the LLC shall have furnished Holdings with a certificate dated as of the Closing Date with respect to the foregoing. Without limiting the foregoing, the LLC shall have at least $[*] of cash on hand at Closing. Section 9.11 Liens. Any and all Liens on the Shares shall be released in full, and any and all Liens on the assets of Grant Tani shall be released in full and to Holdings' satisfaction, and Grant Tani's Secretary shall have furnished Holdings a certificate to this effect. Section 9.12 Buy-Sell Agreement. The Buy-Sell Agreement dated as of January 2, 1997 among Grant Tani, the Principals and Roger A. Browning, Trustee of the Grant-Tani Trust-1994 shall have been terminated to Holdings' satisfaction, and Grant Tani's Secretary shall have furnished Holdings a certificate to that effect. Section 9.13 Satisfaction of Employee Loans. All loans to any employee of Grant Tani (other than the loan to Kim A. Ibrahim in the principal amount of $[*]) shall have been satisfied to Holdings' satisfaction, and Grant Tani's Secretary shall have furnished Holdings a certificate to that effect. Section 9.14 Accrual Basis Financial Statements. Grant Tani shall have provided Holdings balance sheets, income statements and statements of cash flows, prepared on an accrual basis, for the fiscal year ending December 31, 2003. ARTICLE 10 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF GRANT TANI AND THE PRINCIPALS The obligations of Grant Tani and the Principals to consummate the transactions contemplated hereby and by the other Transaction Documents are subject to the satisfaction at Closing or prior to the Closing Date of the following conditions, except to the extent that any of Grant Tani or the Principals, as the case may be, has waived any such condition in writing on or prior to the Closing Date: Section 10.1 No Litigation; No Opposition. No judgment, injunction, order or decree enjoining or prohibiting any of Holdings, the LLC, Grant Tani or any Principal from consummating the transactions contemplated hereby or thereby shall have been entered. No suit, action, claim, proceeding or investigation shall be pending or threatened on the Closing Date before or by any court or Governmental Authority seeking to restrain or prohibit the execution and delivery of this Agreement or any other Transaction Document or the consummation of the transactions contemplated hereby or thereby. 32 Section 10.2 Representations, Warranties and Covenants. Each representation and warranty of Holdings contained in this Agreement and in any schedule or exhibit hereto and in each other Transaction Document shall be true and correct in all material respects at and as of Closing as though newly made at that time. Each and all of the agreements and conditions to be performed or satisfied by Holdings hereunder and under the other Transaction Documents at or prior to Closing shall have been duly performed or satisfied in all material respects. Holdings shall have furnished each Principal with a certificate dated as of the Closing Date to that effect. Section 10.3 Deliveries. Holdings shall have executed and delivered to Grant Tani or the Principals: a. Certified copies of resolutions of Holdings' board of directors authorizing the execution of this Agreement and each other Transaction Document to which Holdings is a party; b. A copy of the charter and current bylaws of Holdings which, in the case of the charter, is certified as of a recent date by the Secretary of State of Delaware; c. A certificate of the Secretary of Holdings certifying that the resolutions, charters and bylaws in paragraphs (a) and (b) above are in full force and effect and have not been amended or modified, and that the officers of Holdings are those persons named in the certificate; d. The certificate contemplated by Section 10.2; e. The certificate contemplated by Section 10.4; f. A certificate issued by the Secretary of State of Delaware certifying that Holdings is validly existing in Delaware as of the most recent practicable date; and g. True and correct copies of each other Transaction Document to which Holdings is a party. In addition, at Closing, Holdings shall have delivered or caused to be delivered to Grant Tani the Initial Payment. Section 10.4 No Material Adverse Change. No event or condition, individually or in the aggregate, shall have had a Material Adverse Effect on Holdings. Holdings shall have furnished Grant Tani and the Principals with a certificate dated as of the Closing Date with respect to the foregoing. ARTICLE 11 INDEMNIFICATION Section 11.1 Indemnification by the Principals. Subject to the provisions of this Article 11, Grant Tani and each Principal shall jointly and severally defend, indemnify, save and hold harmless Holdings, its Affiliates and the shareholders, directors, officers, employees and agents of each of the foregoing, from and against any and all actions, suits, claims, proceedings, demands, assessments, judgments, costs, losses, liabilities, damages, deficiencies and expenses (including, without limitation, interest, penalties, reasonable attorneys' and accountants' fees and all reasonable 33 amounts paid in the investigation, defense or settlement of any of the foregoing) (collectively, "Losses") incurred in connection with, arising out of, or resulting from (a) any misrepresentation or breach of any representation or warranty by any of Grant Tani, the LLC or the Principals herein or in any other Transaction Document, without regard to the information set forth in the Schedules to this Agreement, (b) any breach of any covenant or agreement to be performed pursuant to this Agreement or any other Transaction Document by any of Grant Tani, the LLC or the Principals or (c) the conduct of Grant Tani's business prior to Closing. Section 11.2 Indemnification by Holdings. Subject to the provisions of this Article 11, Holdings shall defend, indemnify, save and hold harmless Grant Tani, the LLC and the Principals from and against any and all Losses incurred in connection with, arising out of, or resulting from (a) any misrepresentation or breach of any representation or warranty by Holdings herein or in any other Transaction Document, and (b) any breach of any covenant or agreement to be performed pursuant to this Agreement or any other Transaction Document by Holdings. Section 11.3 Limitation. No amount shall be recoverable under this Article 11 by Holdings, on the one hand, or Grant Tani and the Principals, on the other hand, until the total amount of Losses suffered exceeds $[*]. Section 11.4 Defense of Claims. If any action, suit, claim, tax audit, proceeding, demand, assessment or enforcement action is filed or initiated against an Indemnified Party with respect to a matter subject to an indemnification claim by that Indemnified Party, the Indemnified Party shall give written notice thereof to the Indemnifying Party or Parties as promptly as practicable, and in any event within 20 days after service of the citation or summons, but the failure of an Indemnified Party to give timely notice shall not affect the rights of that party to indemnification hereunder to the extent that failure does not prejudice the Indemnifying Party. After that notice and a reasonable period of time to allow for analysis of the claim, if the Indemnifying Party acknowledges in writing to the Indemnified Party that the Indemnifying Party is obligated under the terms of its indemnity hereunder for all Losses of the Indemnified Party in connection with that action, suit, claim, tax audit, proceeding, demand, assessment or enforcement action, the Indemnifying Party shall be entitled, if it so elects and with counsel reasonably satisfactory to the Indemnified Party, to take control of the defense and investigation of that action, suit, claim, tax audit, proceeding, demand, assessment or enforcement action and to employ and engage attorneys to handle and defend the same, at the Indemnifying Party's cost, risk and expense, except that, if the Indemnifying Party elects not to assume that defense or counsel for the Indemnified Party determines in good faith and advises the Indemnifying Party in writing that there are issues that raise conflicts of interest between the Indemnifying Party and the Indemnified Party, the Indemnified Party may retain counsel satisfactory to him, her or it, and the Indemnifying Party shall pay all reasonable fees and expenses of such counsel for the Indemnified Party promptly as statements therefor are received; provided, however, that (a) the Indemnifying Party shall be obligated pursuant to this Section 11.4 to pay for only one firm of counsel (unless the use of one counsel for that Indemnified Party would present that counsel with a conflict of interest) for all Indemnified Parties in any jurisdiction, and (b) the Indemnified Party shall cooperate in the defense of any such matter. If the Indemnifying Party assumes the control of that defense, the Indemnified Party shall cooperate in all reasonable respects, at the Indemnifying Party's request and cost, risk and expense, with the Indemnifying Party and its attorneys in the investigation, trial and defense of the action, suit, claim, tax audit, proceeding, demand, assessment or enforcement action and any appeal arising therefrom; provided that the Indemnified Party may, at its own cost, participate in the investigation, trial and defense of that action, suit, claim, tax audit, proceeding, demand, assessment or enforcement action and any appeal 34 arising therefrom. The Indemnifying Party shall keep the Indemnified Party apprised of the status of the action, suit, claim, tax audit, proceeding, demand, assessment or enforcement action, furnish the Indemnified Party with all documents and information the Indemnified Party reasonably requests in connection therewith, and consult with the Indemnified Party before acting on major matters involved in that action, suit, claim, tax audit, proceeding, demand, assessment or enforcement action, including settlement discussions. Unless the Indemnified Party receives a complete release from all matters involved in the dispute, no settlement of any action for which indemnification may be payable hereunder shall be made without the prior written consent of the Indemnified Party. The Indemnified Party shall be entitled to defend, settle or proceed in such other manner as it deems fit, in its sole discretion, in connection with any action, suit, claim, proceeding, demand, assessment or enforcement action with respect to which the Indemnifying Party has not acknowledged its obligations in writing in accordance with the foregoing; and no reasonable action taken by the Indemnified Party in connection therewith shall affect or limit the obligations of the Indemnifying Party pursuant to this Section 11.4. If the Indemnifying Party assumes the control of the defense as provided above but subsequently, in the course of defending the matter, comes to believe that the matter is not properly an obligation of that Indemnifying Party, the Indemnifying Party may with reasonable promptness advise the Indemnified Party of that new information. In that case, (a) if the Indemnified Party then agrees with the Indemnifying Party, the Indemnifying Party and the Indemnified Party shall make mutually satisfactory arrangements for the Indemnified Party to assume the defense of that matter and to repay the Indemnifying Party for any amounts reasonably expended by it pursuant to this Article 11 with respect to that matter, and (b) if the Indemnified Party does not then agree with the Indemnifying Party, the Indemnifying Party shall have the right to commence legal proceedings to determine whether the matter is subject to indemnification by the Indemnifying Party; provided that, in the case of the foregoing clause (b), the Indemnifying Party shall continue to be obligated to defend the Indemnified Party with respect to that matter and to otherwise make the payments required by this Article 11 until that dispute is finally adjudicated by a court of competent jurisdiction and all rights to appeal with respect thereto have expired. Section 11.5 Prompt Payment. Any indemnity payable pursuant to this Article 11 shall be paid within the later of ten days of the Indemnified Party's request therefor or five days before the date on which the liability upon which the indemnity is based is required to be paid by the Indemnified Party. Section 11.6 Certain Reductions; Subrogation. All indemnification payments payable hereunder shall be reduced by the amount of insurance proceeds received by the Indemnified Party as a result of the Losses for which the Indemnified Party is seeking indemnification. If the Indemnifying Party is obligated to indemnify the Indemnified Party pursuant to this Article 11, the Indemnifying Party shall, upon payment of that indemnity in full, be subrogated to all rights of the Indemnified Party with respect to the Losses to which that indemnification relates; provided, however, that the Indemnifying Party shall only be subrogated to the extent of any amount paid by it pursuant to this Article 11 in connection with such Loss. 35 ARTICLE 12 TERMINATION Section 12.1 Termination. This Agreement may be terminated (a) by the mutual consent of Holdings and Grant Tani; (b) by Holdings or Grant Tani at any time after October 1, 2004 if for any reason the transactions contemplated by this Agreement have not been consummated by that date and the failure to consummate those transactions is not caused by a material breach of this Agreement by Holdings, if Holdings seeks to terminate this Agreement pursuant to this Section 12.1(b), or Grant Tani and the Principals, if Grant Tani seeks to terminate this Agreement pursuant to this Section 12.1(b); (c) by Holdings if there has been a material misrepresentation or breach on the part of Grant Tani or the Principals in the representations, warranties or covenants of Grant Tani or the Principals set forth herein that, if curable, has not been cured within 20 days after notice thereof by Holdings and which breach, if not cured, would cause a failure of the conditions set forth in Article 9; (d) by Grant Tani if there has been a material misrepresentation or breach on the part of Holdings in the representations, warranties or covenants of Holdings set forth herein that, if curable, has not been cured within 20 days after notice thereof by Grant Tani and which breach, if not cured, would cause a failure of the conditions set forth in Article 10; (e) by Holdings or Grant Tani if any court of competent jurisdiction or other competent governmental or regulatory authority (i) has issued an order making illegal or otherwise materially restricting, preventing or prohibiting any of the transactions contemplated hereby and that order has become final and non-appealable or (ii) whose approval is necessary to the consummation of the transactions contemplated hereby and whose approval has not been obtained after all appeals have been taken; (f) by Holdings if an event or condition or events or conditions occur that, either individually or the aggregate, have a Material Adverse Effect on the LLC and Grant Tani, taken as a whole; and (g) by Grant Tani if an event or condition or events or conditions occur, that, either individually or in the aggregate, have a Material Adverse Effect on Holdings. Section 12.2 Effect of Termination. If this Agreement is validly terminated pursuant to Section 12.1, it will become null and void immediately and there will be no liability or obligation on the part of any party hereto (or any of their respective representatives or Affiliates), except that (a) the provisions of Sections 8.2 and 8.3 and Article 11 shall continue to apply following that termination and (b) nothing contained herein shall relieve any Party hereto from liability for breach of its representations, warranties, covenants or agreements contained in this Agreement. ARTICLE 13 MISCELLANEOUS Section 13.1 Survival of Representations, Warranties and Covenants. The representations and warranties contained herein and in any certificate or other writing delivered pursuant hereto shall survive the Closing Date and the consummation of the transactions contemplated hereby. All covenants herein not fully performed shall survive the Closing Date and continue thereafter until fully performed. Section 13.2 Waivers. Any waiver of any term or condition or of the breach of any covenant, representation or warranty in this Agreement in any one instance shall not operate as or be deemed to be a further or continuing waiver of any other breach of that term, condition, covenant, representation or warranty or any other term, condition, covenant, representation or warranty. No 36 failure or delay at any time to enforce or require performance of any provision hereof shall operate as a waiver of or affect in any manner that party's right at a later time to enforce or require performance of that provision or any other provision hereof. No such waiver, unless by its own terms it explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision being waived, and no such waiver in any instance shall constitute a waiver in any other instance or for any other purpose or impair the right of the party against whom that waiver is claimed in all other instances or for all other purposes to require full compliance. Section 13.3 Modifications. Except as otherwise expressly provided in this Agreement, neither this Agreement (including the exhibits and schedules hereto) nor any term hereof or thereof may be changed, amended, modified, waived, discharged or terminated except to the extent the same is evidenced by the written consent of the party against whom enforcement of that change or modification is sought. Section 13.4 Further Assurances. Each Party agrees to execute all further instruments and documents and to take all additional actions as any other Party may reasonably require in order to effectuate the terms and purposes of this Agreement and the transactions contemplated hereby. Section 13.5 Governing Law; Consent to Jurisdiction. This Agreement shall be construed under and governed by California law, without giving effect to the choice or conflicts of law provisions thereof. Holdings hereby agrees to submit to the jurisdiction of the courts of the State of California and the courts of the United States of America located in the Central District in the State of California in any action or proceeding arising out of or relating to this Agreement. The Principals and Grant Tani hereby agree to submit to the jurisdiction of the courts of the State of Delaware and to the courts of the United States of America located in Delaware in any action or proceeding arising out of or relating to this Agreement. Section 13.6 Notices. a. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and sent as provided in Section 13.6(b) hereof: (1) If to Holdings, to: GTBA Holdings, Inc. Rodney Square North 1100 North Market Street Wilmington, DE 19890 Attention: David R. Gibson, Executive Vice President 37 with a copy to: GTBA Holdings, Inc. Rodney Square North 1100 North Market Street Wilmington, DE 19890 Attention: Gerard A. Chamberlain, Esquire Vice President (2) If to Grant Tani or the LLC, to: Grant, Tani, Barash & Altman, Inc. 9100 Wilshire Boulevard Suite 1000 West Beverly Hills, CA 90212 Attention: Warren Grant with a copy to: Glassman, Browning & Saltsman, Inc. 360 North Bedford Drive Suite 204 Beverly Hills, CA 90210 Attention: Roger Browning, Esquire (3) If to the Principals, to: c/o Grant, Tani, Barash & Altman, Inc. 9100 Wilshire Boulevard Suite 1000 West Beverly Hills, CA 90212 with a copy to: Glassman, Browning & Saltsman, Inc. 360 North Bedford Drive Suite 204 Beverly Hills, CA 90210 Attention: Roger Browning, Esquire b. All notices and other communications required or permitted hereunder that are addressed as provided in this Section 13.6, (i) if delivered personally against proper receipt shall be effective upon delivery and (ii) if sent (A) by certified or registered mail with postage prepaid or (B) by Federal Express or similar courier service with courier fees paid by the sender, shall be effective upon receipt. A party may change its address for the purpose of notices to that party from time to time by a similar notice specifying a new address, but no such change shall be deemed to have been given unless it is sent and received in accordance with this Section 13.6. 38 Section 13.7 Assignability. Neither this Agreement nor any rights or obligations hereunder shall be assignable by any party to any other Person without the prior written consent of the other Parties, except that WTC may, with notice to the other Parties, assign any or all of its interests in this Agreement and its rights and obligations hereunder to any Person directly or indirectly wholly owned by WTC or one of its Affiliates. This Agreement shall be binding upon, enforceable by and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Section 13.8 Captions. The captions in this Agreement are for convenience only and shall not affect the construction or interpretation of any term or provision hereof. Section 13.9 Number and Gender. Whenever used herein, the singular number shall include the plural, the plural shall include the singular unless the context otherwise requires and the use of any gender shall include all genders. Section 13.10 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects by interpreting that invalid or unenforceable provision as nearly to the original meaning as possible so as to make it valid and enforceable or, if that is not possible or permitted by applicable law, by omitting that invalid or unenforceable provision. Section 13.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Section 13.12 No Third-Party Beneficiaries. Except as otherwise provided in Article 11, no Person who is not a party to this Agreement shall be entitled to any rights or benefits hereunder; provided further that Holdings, WTC, their respective Affiliates, each Grant Tani Entity and each Subsidiary of a Grant Tani Entity is a third-party beneficiary of Sections 6.5 and 6.6. Section 13.13 Remedies for Section 8.2. Each Receiving Party acknowledges that any breach or attempted breach by that party of the provisions of Section 8.2 will cause irreparable harm to the Disclosing Party, for which monetary damages will not be an adequate remedy. Accordingly, each Disclosing Party shall be entitled to apply for and obtain injunctive relief (temporary, preliminary and permanent) to restrain the breach or threatened breach by a Receiving Party of, or otherwise to specifically enforce, any provision of Section 8.2, without the requirement to post a bond or provide other security. Nothing herein shall be construed as a limitation or waiver of any other right or remedy that may be available to the Disclosing Party for that breach or threatened breach. For emergency relief (including temporary and preliminary injunctive relief), an application may be made in any court of competent jurisdiction. Each Receiving Party further agrees that the subject matter and duration of the restrictions covered in Section 8.2 are reasonable in light of the facts as they exist today. Section 13.14 Integration. This Agreement (as it may be amended from time to time) and the exhibits and schedules hereto constitute the entire agreement among the parties hereto (including WTC) with respect to the subject matter hereof, and supersede all prior agreements and understandings, oral or written, express or implied, with respect thereto. 39 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. GRANT, TANI, BARASH & ALTMAN, INC. By: /s/ Warren Grant ----------------------------------- Name: Warren Grant Title: President Address: 9100 Wilshire Blvd. Suite 1000 Beverly Hills, CA 90212-3413 /s/ Warren Grant (SEAL) --------------------------------------- WARREN GRANT Address: 9100 Wilshire Blvd. Suite 1000 Beverly Hills, CA 90212-3413 /s/ Jane Tani (SEAL) --------------------------------------- JANE TANI Address: 9100 Wilshire Blvd. Suite 1000 Beverly Hills, CA 90212-3413 /s/ Corey Barash (SEAL) --------------------------------------- COREY BARASH Address: 9100 Wilshire Blvd. Suite 1000 Beverly Hills, CA 90212-3413 /s/ Howard Altman (SEAL) --------------------------------------- HOWARD ALTMAN Address: 9100 Wilshire Blvd. Suite 1000 Beverly Hills, CA 90212-3413 40 GTBA HOLDINGS, INC. By: /s/ Rodney P. Wood ----------------------------------- Name: Rodney P. Wood, Title: President By its execution below, Wilmington Trust Corporation guarantees the obligations of GTBA Holdings, Inc. under this Limited Liability Company Interest Purchase Agreement. WILMINGTON TRUST CORPORATION By: /s/ Rodney P. Wood ----------------------------------- Name: Rodney P. Wood Title: Executive Vice President 41 EX-99.1 4 w96674exv99w1.txt SECTION 302 CERTIFICATIONS SECTION 302 CERTIFICATIONS EXHIBIT 99.1 CERTIFICATIONS I, Ted T. Cecala, Chairman of the Board and Chief Executive Officer of Wilmington Trust Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wilmington Trust Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ Ted T. Cecala ------------------------------------------------- Ted T. Cecala Chairman of the Board and Chief Executive Officer 1 CERTIFICATIONS I, David R. Gibson, Executive Vice President and Chief Financial Officer of Wilmington Trust Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wilmington Trust Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2004 /s/ David R. Gibson ----------------------------------------------------- David R. Gibson Executive Vice President and Chief Financial Officer 2 EX-99.2 5 w96674exv99w2.txt SECTION 906 CERTIFICATION SECTION 906 CERTIFICATION EXHIBIT 99.2 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002 The undersigned certify that, to their knowledge, the Form 10-Q of Wilmington Trust Corporation (the "Corporation") for the first quarter of 2004 fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 and that the information contained in that report fairly presents, in all material respects, the financial condition and results of operation of the Corporation. /s/ Ted. T. Cecala -------------------------------------------------------- Ted. T. Cecala Chairman of the Board and Chief Executive Officer /s/ David R. Gibson -------------------------------------------------------- David R. Gibson Executive Vice President and Chief Financial Officer 1 -----END PRIVACY-ENHANCED MESSAGE-----