PROSPECTUS
HIGHLANDS CAPITAL TRUST I
$7,500,000
(Aggregate Liquidation Amount)
$2.3125 CAPITAL SECURITIES
(Liquidation Amount $25 per Capital Security)
guaranteed to the extent set forth herein by
HIGHLANDS BANKSHARES, INC.
The Capital Securities (the "Capital Securities") offered hereby
represent preferred undivided beneficial interests in the assets of HIGHLANDS
CAPITAL TRUST I, a statutory business trust formed under the laws of the State
of Delaware (the "Trust"). HIGHLANDS BANKSHARES, INC., a Virginia corporation
(the "Corporation"), will own all the common securities representing undivided
beneficial interests in the assets of the Trust (the "Common Securities" and,
together with the Capital Securities, the "Trust Securities").
(continued on next page)
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR CERTAIN
INFORMATION RELEVANT TO AN INVESTMENT IN THE CAPITAL SECURITIES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE VIRGINIA STATE CORPORATION COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS ANY STATE OR FEDERAL AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR BANK DEPOSITS, ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANKING AFFILIATE OF HIGHLANDS BANKSHARES,
INC., ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
<TABLE>
<CAPTION>
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
Price to Public Underwriting Discount (1)(2) Proceeds to Trust (2)(3)(4)
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
<S> <C> <C> <C>
Per Capital Security $25.00 $0.75 $25.00
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
Total $7,500,000 $225,000 $7,500,000
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
</TABLE>
(1) Highlands Capital Trust I and Highlands Bankshares, Inc. have agreed to
indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) In view of the fact that the proceeds of the sale of the Capital Securities
will be invested in the Junior Subordinated Debt Securities as described
herein, Highlands Bankshares, Inc. has agreed to pay directly to the
Underwriter, as compensation (the "Underwriters' Compensation') for its
arranging the investment therein of such proceeds $0.75 per Capital
Security (or up to $225,000 in the aggregate). See "Underwriting."
(3) Expenses of the offering which are payable by Highlands Bankshares, Inc.
are estimated to be $75,000.
(4) Assumes the sale of the entire 300,000 Capital Securities offered hereby.
----------------
The Capital Securities are offered by the Underwriter, as selling agent
for the Trust, subject to prior sale, on a best efforts basis, and subject to
certain other conditions, including the right to reject any order in whole or in
part. This offering will close on or about January 21, 1998. Funds received by
the Underwriter will be deposited at, and held by, Wilmington Trust Company (the
"Escrow Agent") in a noninterest-bearing escrow account in Wilmington, Delaware.
It is expected that such funds will be released from the escrow account and
delivery of the Capital Securities will be made on or about January 21, 1998.
---------------
McKinnon & Company, Inc.
The date of this Prospectus is January 14, 1998
---------------
<PAGE>
(cover page continued)
The Capital Securities offered hereby represent beneficial ownership
interests in Highlands Capital Trust I, a statutory business trust formed under
the laws of the State of Delaware (the "Trust"). Highlands Bankshares, Inc., a
Virginia corporation ("the Corporation"), will be the direct or indirect owner
of all of the beneficial ownership interests represented by common securities of
the Trust (the "Common Securities" and, collectively with the Capital
Securities, the "Trust Securities"). Wilmington Trust Company is the Property
Trustee of the Trust. The Trust exists for the exclusive purposes of issuing the
Trust Securities, investing the proceeds from the sale of the Trust Securities
in Junior Subordinated Debt Securities (the "Junior Subordinated Debt
Securities") to be issued by the Corporation and certain other limited
activities described herein. The Junior Subordinated Debt Securities will mature
on January 15, 2028 (the "Stated Maturity"). The Capital Securities will have a
preference under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise over the Common
Securities. See "Description of Capital Securities-Subordination of Common
Securities."
Holders of the Trust Securities will be entitled to receive cumulative
cash distributions, in each case arising from the payment of interest on the
Junior Subordinated Debt Securities accruing from the date of original issuance
and payable quarterly in arrears on the 15th day of April, July, October and
January of each year, commencing April 15, 1998, at 9.25% per annum of the
Liquidation Amount of $25 per Trust Security ("Distributions"). Subject to
certain exceptions, the Corporation has the right to defer payments of interest
on the Junior Subordinated Debt Securities at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods with respect to each
deferral period (each, an "Extension Period"); provided, however, that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debt Securities. Upon the termination of any Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon accumulated at 9.25% per annum, compounded quarterly, to the extent
permitted by applicable law), the Corporation may elect to begin a new Extension
Period, subject to the requirements set forth herein. If interest payments on
the Junior Subordinated Debt Securities are so deferred, during any Extension
Period, Distributions on the Capital Securities and on the Common Securities
will also be deferred and the Corporation will not be permitted, subject to
certain exceptions described herein, to declare or pay any cash distributions
with respect to, or make purchases of, the Corporation's capital stock (which
includes common and preferred stock) or to make any payment with respect to debt
securities of the Corporation that rank pari passu in all respects with or
junior to the Junior Subordinated Debt Securities. During an Extension Period,
interest on the Junior Subordinated Debt Securities will continue to accrue (and
the amount of Distributions to which holders of the Capital Securities are
entitled will accumulate) at 9.25% per annum, compounded quarterly, and holders
of Capital Securities will be required to accrue interest income for United
States Federal income tax purposes. See "Description of Junior Subordinated Debt
Securities-Option to Extend Interest Payment Date" and "Certain United States
Federal Income Tax Consequences-Interest Income and Original Issue Discount."
Taken together, the Corporation's obligations under the Guarantee
Agreement, the Declaration, the Junior Subordinated Debt Securities and the
Indenture (each as defined herein), including the Corporation's obligation to
pay the costs, expenses and liabilities of the Trust (other than the Trust's
obligations to holders of the Trust Securities under such Trust Securities),
provide, in the aggregate, a full irrevocable and unconditional guarantee, as
described herein, of all of the payments of Distributions and other amounts due
on the Capital Securities. See "Relationship Among the Capital Securities, the
Junior Subordinated Debt Securities and the Guarantee-Full and Unconditional
Guarantee." The Corporation has agreed to guarantee the payment of Distributions
and payments on liquidation or redemption of the Trust Securities, but only in
each case to the extent of funds held by the Trust, as described herein (the
"Guarantee"). See "Description of Guarantee." If the Corporation does not make
interest payments on the Junior Subordinated Debt Securities held by the Trust,
the Trust will have insufficient funds to pay Distributions on the Capital
Securities. The Guarantee does not cover the payment of Distributions when the
Trust does not have sufficient funds to pay such Distributions. In
ii
<PAGE>
event of a Debenture Event of Default (as hereafter defined), a holder of
Capital Securities may institute a legal proceeding directly against the
Corporation for enforcement of payment to such holder of the principal of or
interest on Junior Subordinated Debt Securities having a principal amount equal
to the aggregate Liquidation Amount of the Capital Securities held by such
holder (a "Direct Action"). See "Description of Junior Subordinated Debt
Securities-Enforcement of Certain Rights by Holders of Capital Securities." The
obligations of the Corporation under the Guarantee and the Junior Subordinated
Debt Securities are subordinate and junior in right of payment to all Senior
Debt (as defined in "Description of Junior Subordinated Debt
Securities-Subordination") of the Corporation. In addition, because the
Corporation is a holding company, the Junior Subordinated Debt Securities and
the Guarantee are effectively subordinated to all existing and future
liabilities of the Corporation's subsidiaries, including deposits. See "Risk
Factors-Ranking of Obligations Under the Guarantee and the Junior Subordinated
Debt Securities" and "Status of the Corporation as a Bank Holding Company."
The Capital Securities are subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated Debt
Securities at the Stated Maturity or their earlier redemption in whole upon the
occurrence of a Tax Event, an Investment Company Event or a Capital Treatment
Event (each as defined herein) and (ii) in whole or in part at any time on or
after January 15, 2008 contemporaneously with the optional redemption by the
Corporation of the Junior Subordinated Debt Securities in whole or in part. The
Junior Subordinated Debt Securities are redeemable prior to maturity at the
option of the Corporation (i) on or after January 15, 2008, in whole at any time
or in part from time to time, or (ii) in whole, but not in part, at any time
within 90 days following the occurrence and continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as defined herein), in
each case at a redemption price set forth herein, which includes the accrued and
unpaid interest on the Junior Subordinated Debt Securities so redeemed to the
date fixed for redemption. The ability of the Corporation to exercise its rights
to redeem the Junior Subordinated Debt Securities or to cause the redemption of
the Capital Securities prior to the Stated Maturity may be subject to prior
regulatory approval by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), if then required under applicable Federal Reserve capital
guidelines or policies.
The Corporation, as the holder of the outstanding Common Securities,
has the right at any time (including, without limitation, upon the occurrence of
a Tax Event, an Investment Company Event or a Capital Treatment Event (as
defined herein)) to terminate the Trust and cause a Like Amount (as defined
herein) of the Junior Subordinated Debt Securities to be distributed to the
holders of the Trust Securities upon liquidation of the Trust, subject to prior
approval of the Federal Reserve to do so if then required under applicable
capital guidelines or policies of the Federal Reserve. In the event of such
termination of the Trust, after satisfaction of liabilities to creditors of the
Trust as required by applicable law, the holders of the Capital Securities
generally will be entitled to receive a Liquidation Amount of $25 per Capital
Security plus accumulated and unpaid Distributions thereon to the date of
payment, which may be in the form of a distribution of a Like Amount of Junior
Subordinated Debt Securities in certain circumstances. See "Description of
Capital Securities-Liquidation of the Trust and Distribution of Junior
Subordinated Debt Securities."
As used herein, (i) the "Indenture" means the Junior Subordinated
Indenture, as amended and supplemented from time to time, between the
Corporation and Wilmington Trust Company, as trustee (the "Debenture Trustee"),
and (ii) the "Declaration means the Amended and Restated Declaration of Trust
relating to the Trust among the Corporation, as Depositor (the "Depositor"),
Wilmington Trust Company, as Property Trustee (the "Property Trustee"),
Wilmington Trust Company, as Delaware Trustee (the "Delaware Trustee"), and the
individuals named as Administrative Trustees therein (the "Administrative
Trustees") (collectively with the Property Trustee and the Delaware Trustee, the
"Trustees").
iii
<PAGE>
NO EMPLOYEE BENEFIT OR OTHER PLAN SUBJECT TO TITLE I OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (EACH, A "PLAN"), NO ENTITY WHOSE
UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN
THE ENTITY (A "PLAN ASSET ENTITY"), AND NO PERSON INVESTING "PLAN ASSETS" OF ANY
PLAN, MAY ACQUIRE OR HOLD THE CAPITAL SECURITIES OR ANY INTEREST THEREIN, UNLESS
SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER
U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION ("PTCE") 96-23,
95-60, 91-38, 90-1 OR 84-14 WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY
PURCHASER OR HOLDER OF THE CAPITAL SECURITIES OR ANY INTEREST THEREIN WILL BE
DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT IT EITHER
(A) IS NOT A PLAN OR A PLAN ASSET ENTITY AND IS NOT PURCHASING SUCH SECURITIES
ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY PLAN OR (B) IS ELIGIBLE FOR THE
EXEMPTIVE RELIEF AVAILABLE UNDER PTCE 96-23, 95-60, 91-38, 90-1 OR 84-14 WITH
RESPECT TO SUCH PURCHASE OR HOLDING.
iv
<PAGE>
NOTICE TO INVESTORS
Because of the following restrictions, purchasers of the Capital
Securities are advised to consult legal counsel prior to making any reoffer,
resale, pledge or other transfer of the Capital Securities.
Each purchaser of Capital Securities, by its acceptance thereof, will
be deemed to have acknowledged, represented to and agreed with the Corporation
and the Trust as follows:
(1) It acknowledges that it (a) is not itself, and is not
acquiring Capital Securities with "plan assets" of an employee benefit
or other plan subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code") (each, a
"Plan"), or an entity whose underlying assets include "plan assets" by
reason of any Plan's investment in the entity (a "Plan Asset Entity")
or (b) (1) is itself, or is acquiring Capital Securities with the
assets of an "investment fund" (within the meaning of Part V(b) of PTCE
84-14) managed by a "qualified professional asset manager" (within the
meaning of Part V(a) of PTCE 84-14) which has made or properly
authorized the decision for such fund to purchase Capital Securities
under circumstances such that PTCE 84-14 is applicable to the purchase
and holding of such Capital Securities, (2) is itself, or is acquiring
Capital Securities with the assets of, a Plan managed by an "in-house
asset manager" (within the meaning of Part IV(a) of PTCE 96-23) which
has made or properly authorized the decision for such Plan to purchase
Capital Securities under circumstances such that PTCE 96-23 is
applicable to the purchase and holding of such Capital Securities, (3)
is an insurance company pooled separate account purchasing Capital
Securities pursuant to Part I of PTCE 90-1 or a bank collective
investment fund purchasing Capital Securities pursuant to Part I of
PTCE 91-38, and in either case, no Plan owns more than 10% of the
assets of such account or collective fund (when aggregated with other
Plans of the same employer (or its affiliates) or employee
organization) or (4) is an insurance company using the assets of its
general account to purchase the Capital Securities pursuant to Part I
of PTCE 95-60, in which case the reserves and liabilities for the
general account contracts held by or on behalf of any Plan, together
with any other Plans maintained by the same employer (or its
affiliates) or employee organization, do not exceed 10% of the total
reserves and liabilities of the insurance company general account
(exclusive of separate account liabilities), plus surplus as set forth
in the National Association of Insurance Commissioners Annual Statement
filed with the state of domicile of the insurer. The Capital Securities
will bear legends reflecting the restrictions described above.
(2) It acknowledges that the Trust, the Corporation and
others will rely upon the truth and accuracy of the foregoing
acknowledgments, representations, warranties and agreements and agrees
that if any of the acknowledgments, representations, warranties and
agreements deemed to have been made with respect to its purchase of the
Capital Securities are no longer accurate, it shall promptly notify the
Corporation. If it is acquiring any Capital Securities as a fiduciary
or agent for one or more investor accounts, it represents that it has
full power to make the foregoing acknowledgments, representations,
warranties and agreements on behalf of each such investor account.
CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit
plan (a "Plan") subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the Capital Securities. Accordingly, among other factors, the fiduciary
should consider whether the investment
1
<PAGE>
would satisfy the prudence and diversification requirements of ERISA and would
be consistent with the documents and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code") prohibit Plans, as well as individual retirement
accounts and Keogh plans subject to Section 4975 of the Code (also "Plans"),
from engaging in certain transactions involving "plan assets" with persons who
are "parties in interest" under ERISA or "disqualified persons" under the Code
("Parties in Interest") with respect to such Plan. A violation of these
"prohibited transaction" rules may result in an excise tax or other liabilities
under ERISA and/or Section 4975 of the Code for such persons, unless exemptive
relief is available under an applicable statutory or administrative exemption.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and
foreign plans (as described in Section 4(b)(5) of ERISA) are not subject to the
requirements of ERISA or Section 4975 of the Code.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the Trust would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in the Trust
and no exception were applicable under the Plan Assets Regulation. An "equity
interest" is defined under the Plan Assets Regulation as any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features and
specifically includes a beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Trust would not be deemed to be "plan assets" of investing Plans
if, immediately after the most recent acquisition of any equity interest in the
Trust, less than 25% of the value of each class of equity interest in the Trust
were held by Plans, other employee benefit plans not subject to ERISA or Section
4975 of the Code (such as governmental, church and foreign plans) and entities
holding assets deemed to be "plan assets" of any Plan (collectively, "Benefit
Plan Investors"). No assurance can be given that the value of the Capital
Securities held by Benefit Plan Investors will be less than 25% of the total
value of such Capital Securities at the completion of this offering or
thereafter, and no monitoring or other measures will be taken with respect to
the satisfaction of the conditions to this exception. All of the Common
Securities will be purchased and held directly or indirectly by the Corporation.
Certain transactions involving the Trust could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the Capital Securities were acquired with "plan
assets" of such Plan and assets of the Trust were deemed to be "plan assets" of
Plans investing in the Trust. For example, if the Corporation is a Party in
Interest with respect to an investing Plan (either directly or by reason of its
ownership of the Trust or of any of the Corporation's other subsidiaries),
extensions of credit between the Corporation and the Trust (as represented by
the Junior Subordinated Debt Securities and the Guarantee) would likely be
prohibited by Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the
Code, unless exemptive relief were available under an applicable administrative
exemption (see below).
The DOL has issued five prohibited transaction class exemptions
("PTCEs") that may provide exemptive relief for direct or indirect prohibited
transactions resulting from the purchase or holding of the Capital Securities,
assuming that assets of the Trust were deemed to be "plan assets" of Plans
investing in the Trust (see above). Those class exemptions are PTCE 96-23 (for
certain transactions determined by in-house asset managers), PTCE 95-60 (for
certain transactions involving insurance company general accounts), PTCE 91-38
(for certain transactions involving bank collective investment funds), PTCE 90-1
(for certain transactions involving insurance company pooled separate accounts)
and PTCE 84-14 (for certain transactions determined by independent qualified
professional asset managers).
2
<PAGE>
Because the Capital Securities may be deemed to be equity interests in
the Trust for purposes of applying ERISA and Section 4975 of the Code, the
Capital Securities may not be purchased or held by any Plan, any entity whose
underlying assets include "plan assets" by reason of any Plan's investment in
the entity (a "Plan Asset Entity") or any person investing "plan assets" of any
Plan, unless such purchaser or holder is eligible for the exemptive relief
available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. Any purchaser or holder
of the Capital Securities or any interest therein will be deemed to have
represented by its purchase and holding thereof that it either (a) is not a Plan
or a Plan Asset Entity and is not purchasing such securities on behalf of or
with "plan assets" of any Plan or (b) is eligible for the exemptive relief
available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 with respect to such
purchase or holding. See "Notice to Investors." Furthermore, to avoid certain
prohibited transactions under ERISA and the Code that could result under certain
circumstances if the Capital Securities are deemed to be such equity interests,
each investing Plan, by purchasing the Capital Securities, will be deemed to
have directed the Trust to invest in the Junior Subordinated Debentures and to
have appointed the Property Trustee.
Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in nonexempt prohibited transactions, it is
particularly important that fiduciaries or other persons considering purchasing
the Capital Securities on behalf of or with "plan assets" of any Plan consult
with their counsel regarding the potential consequences if the assets of the
Trust were deemed to be "plan assets" and the availability of exemptive relief
under PITCE 96-23, 95-60, 91-38, 90-1 or 84-14.
AVAILABLE INFORMATION
The Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such
information may also be accessed electronically by means of the Commission's
home page on the Internet (http://www.sec.gov.).
No separate financial statements of the Trust have been included
herein. The Corporation and the Trust do not consider that such financial
statements would be material to holders of the Capital Securities because the
Trust is a newly formed special purpose entity, has no operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Junior Subordinated Debt
Securities and issuing the Trust Securities. See "Highlands Capital Trust I,"
"Description of Capital Securities," "Description of Junior Subordinated Debt
Securities" and "Description of Guarantee." In addition, the Corporation does
not expect that the Trust will file reports under the Exchange Act with the
Commission.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Corporation with the Commission
are incorporated into this Prospectus by reference:
1996 Annual Report to Shareholders.
The Corporation's Annual Report on Form 10-K for the year ended
December 31, 1996.
The Corporation's Quarterly Report on Form 10-Q for the three months
ended September 30, 1997.
Copies of these reports are being delivered with this Prospectus.
As used herein, the terms "Prospectus" and "herein" mean this
Prospectus, including the documents incorporated or deemed to be incorporated
herein by reference, as the same may be amended, supplemented or otherwise
modified from time to time. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein do not purport to
be complete, and where reference is made to the particular provisions of such
contract or other document, such provisions are qualified in all respects by
reference to all of the provisions of such contract or other document. The
Corporation will provide without charge to any person to whom this Prospectus is
delivered, on the written or oral request of such person, a copy of any or all
of the foregoing documents incorporated by reference herein (other than exhibits
not specifically incorporated by reference into the texts of such documents).
Requests for such documents should be directed to:
Highlands Bankshares, Inc.
340 West Main St.,
Abingdon, VA 24210
Attention: Samuel L. Neese
(540) 628-9181
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the documents
incorporated by reference. See "Incorporation of Certain Documents by
Reference."
HIGHLANDS BANKSHARES, INC.
Highlands Bankshares, Inc., a Virginia corporation (the "Corporation"),
is a bank holding company that was formed in 1995 and is headquartered in
Abingdon, Virginia. The Corporation's only subsidiary is Highlands Union Bank
(the "Bank"), which opened for business in 1985. Currently the Bank operates six
offices in southwestern Virginia (three in Abingdon, two in Bristol and one in
Marion in Smyth County). In addition, the Bank recently purchased an operations
center in Abingdon. All of the Bank offices are owned, with no liens, are free
standing brick structures and have ATMs. The new operations center,
approximately half of which is currently leased to third parties, has 18,000
square feet and is a steel reinforced concrete building.
From December 31, 1991 through December 31, 1996 the Corporation's
assets, loans, deposits and net income increased at compound annual growth rates
of: 28.9%; 33.1%; 29.4% and 29.9%, respectively. In the prior five year period,
1986 through 1991, the Corporation's assets, loans, deposits and net income
increased at compound annual growth rates of: 29.9%; 39.8%; 31.3% and 32.7%
respectively. At September 30, 1997 total assets of the Corporation were $241.4
million, total deposits $215.6 million, and stockholders' equity $16.3 million.
Net income for the nine months ended September 30, 1997 increased 16.9% to
$1,442,000, up from $1,234,000 in the first nine months of 1996, while earnings
per share increased 15.8% from the comparable fiscal of 1996 to $1.17.
Washington County, including the City of Abingdon, had a population of
approximately 45,000 in 1990 and 1980, while Bristol, Virginia and Bristol,
Tennessee, with a common border, had populations of approximately 20,000 each in
1990 and 1980. The Corporation's growth has been accomplished by hiring
experienced bank officers, particularly loan and credit officers, from large
state-wide banks and achieving significant gains in market share of deposits and
loans. Over the last five years the Corporation's market share in Washington
County, as measured by deposits, steadily increased to approximately 21% at
September 30, 1996, which was the second highest of nine commercial banks
operating in Washington County. Management believes it will be the largest
commercial bank, as measured by deposits, as of September 30, 1997, in
Washington County. Similarly, in Bristol, Virginia the Corporation has achieved
approximately a 19% market share, as measured by deposits, which is third in
size among seven commercial banks operating there. Total deposits of the
Corporation in Bristol, Virginia were approximately $68.0 million at September
30, 1997. The Corporation's second Bristol office, which opened in 1995, reached
$36.3 million in deposits and approximately $44.6 million in loans within the
first twenty-one months of opening, due primarily to hiring experienced, local
loan officers from larger regional banks.
5
<PAGE>
The Corporation is a legal entity separate and distinct from the Bank
and its nonbanking subsidiaries. Accordingly, the right of the Corporation, and
thus the right of the Corporation's creditors, to participate in any
distribution of the assets or earnings of the Bank or any other subsidiary is
necessarily subject to the prior claims of creditors of the Bank or such
subsidiary, except to the extent that claims of the Corporation in its capacity
as a creditor may be recognized.
The principal sources of the Corporation's revenues are dividends from the Bank.
The Corporation is a bank holding company registered with the Board of
Governors of the Federal Reserve under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Corporation's executive offices are located at 340
West Main Street, Abingdon, Virginia 24210. Its mailing address is P. O. Box
1128, Abingdon, Virginia 24210-1128, and its telephone number is (540) 628-9181.
HIGHLANDS CAPITAL TRUST I
The Trust is a statutory business trust formed under Delaware law
pursuant to (i) the Declaration and (ii) the filing of a certificate of trust
with the Delaware Secretary of State on October 3, 1997. The Trust's business
and affairs are conducted by the Trustees: Wilmington Trust Company, as Property
Trustee, Wilmington Trust Company, as Delaware Trustee, and individual
Administrative Trustees who are employees or officers of or affiliated with the
Corporation. The Trust exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the Trust
Securities to acquire the Junior Subordinated Debt Securities issued by the
Corporation and (iii) engaging in only those other activities necessary,
advisable or incidental thereto. The Junior Subordinated Debt Securities will be
the sole assets of the Trust, and payments under the Junior Subordinated Debt
Securities will be the sole revenues of the Trust. All of the Common Securities
will be owned directly or indirectly by the Corporation.
6
<PAGE>
THE OFFERING
Securities Offered.............. $7.5 million aggregate Liquidation Amount of
Capital Securities (Liquidation Amount $25
per Capital Security).
Offering Price.................. $25.00 per Capital Security (Liquidation
Amount $25), plus accrued Distributions, if
any.
Distributions................... Holders of the Capital Securities will be
entitled to receive cumulative cash
distributions at 9.25% per annum on the
stated liquidation amount of $25 per Capital
Security, accruing from the original date of
issuance of the Capital Securities, and
(subject to the extension of distribution
payment periods described below) will be
payable quarterly, in arrears, on the 15th
day of April, July, October and January of
each year, commencing April 15, 1998. See
"Description of Capital Securities-
Distributions."
Extension Periods............... Distributions on Capital Securities will be
deferred for the duration of any Extension
Period elected by the Corporation with
respect to the payment of interest on the
Junior Subordinated Debt Securities. No
Extension Period will exceed 20 consecutive
quarterly periods or extend beyond the
Stated Maturity of the Junior Subordinated
Debt Securities. See "Description of Junior
Subordinated Debt Securities-Option to
Extend Interest Payment Date" and "Certain
United States Federal Income Tax
Consequences--Interest Income and Original
Issue Discount."
Ranking......................... The Capital Securities will rank pari passu.
and payments thereon will be made pro rata,
with the Common Securities except as
described under "Description of Capital
Securities--Subordination of Common
Securities." The Junior Subordinated Debt
Securities will rank pari passu with all
other junior subordinated debt securities to
be issued by the Corporation pursuant to the
Indenture with substantially similar
subordination terms ("Other Debentures"),
and which may be issued and sold (if at all)
to other trusts to be established by the
Corporation (if any), in each case similar
to the Trust ("Other Trusts"), and will be
unsecured and subordinate and junior in
right of payment to the extent and in the
manner set forth in the Indenture to all
Senior Debt of the Corporation. See
"Description of Junior Subordinated Debt
Securities." The Guarantee will rank pari
passu with all other guarantees (if any)
which may be issued by the Corporation with
respect to capital securities (if any) which
may be issued by Other Trusts ("Other
Guarantees") and will constitute an
unsecured obligation of the Corporation and
will rank subordinate and junior in right of
payment to the extent and in the manner set
forth in the Guarantee to all Senior Debt of
the Corporation. See "Description of
Guarantee." In addition, because the
Corporation is a holding company, the Junior
Subordinated Debt Securities and the
Guarantee are effectively subordinated to
all existing and future liabilities of the
Corporation's subsidiaries, including
deposits. See "Risk Factors-Status of the
Corporation as a Bank Holding Company."
7
<PAGE>
Redemption...................... The Trust Securities are subject to
mandatory redemption (i) in whole, but not
in part, at the Stated Maturity upon
repayment of the Junior Subordinated Debt
Securities, (ii) in whole, but not in part,
contemporaneously with the optional
redemption at any time by the Corporation of
the Junior Subordinated Debt Securities at
any time within 90 days following the
occurrence and during the continuation of a
Tax Event, Investment Company Event or
Capital Treatment Event in each case,
subject to possible regulatory approval and
(iii) in whole or in part, at any time on or
after January 15, 2008, contemporaneously
with the optional redemption by the
Corporation of the Junior Subordinated Debt
Securities in whole or in part, in each case
at the applicable Redemption Price (as
defined herein). See "Description of Capital
Securities -- Mandatory Redemption."
No Rating....................... The Capital Securities are not expected to
be rated by any rating service, nor is any
other security issued by the Corporation so
rated.
ERISA Considerations............ Prospective purchasers must carefully
consider the restrictions on purchase set
forth. under "Notice to Investors" and
"Certain -ERISA Considerations."
Use of Proceeds................. All of the proceeds from the sale of the
Trust Securities will be invested by the
Trust in the Junior Subordinated Debt
Securities. The Corporation intends to apply
the net proceeds from the sale of the Junior
Subordinated Debt Securities to its general
funds and for general corporate purposes,
including, from time to time, the making of
advances to the Bank to support its
continued growth. A portion of such net
proceeds could be used in connection with
one or more future acquisitions. From time
to time, the Corporation investigates and
holds discussions and negotiations in
connection with possible transactions with
other banks. As of the date of this
Prospectus, the Corporation has not entered
into any agreements or understandings with
respect to any potential acquisitions or any
other material transactions of the type
referred to above, and no discussions or
negotiations are taking, place with respect
thereto. Pending any such application by the
Corporation, the net proceeds may be
invested in interest-bearing securities.
Proposed Nasdaq OTC
Bulletin Board Symbol........... Application has been made to have the
Capital Securities approved for quotation on
the Nasdaq OTC Bulletin Board under the
symbol "HGUBP".
For additional information regarding the Capital Securities, see
"Notice to Investors," "Description of Capital Securities," "Description of
Junior Subordinated Debt Securities," "Description of Guarantee" and "Certain
United States Federal Income Tax Consequences."
Risk Factors
Prospective investors should carefully consider the matters set forth
under "Risk Factors".
8
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to
fixed charges for the Corporation for each of the year in the five-year period
ended December 31, 1996 and for the nine months ended September 30, 1997. For
purposes of computing these ratios, earnings represent net income, plus total
taxes based on income, plus fixed charges. Fixed charges include interest
expense (ratios are presented both excluding and including interest on
deposits), the estimated interest component of net rental expense and
amortization of debt expense.
<TABLE>
<CAPTION>
Nine
Months
Ended
Sept. 30 Years Ended December 31
----------- ---------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Excluding interest on deposits (1) 60.79x 97.60x 111.85x 318.11x -- --
Including interest on deposits 1.29x 1.34x 1.36x 1.44x 1.44x 1.40x
- -------------------
</TABLE>
(1) The Corporation had no fixed charges other than interest on deposits in
1992 and 1993.
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following unaudited consolidated summary sets forth selected
financial data for the Corporation and its subsidiaries for the periods and at
the dates indicated. The following summary is qualified in its entirety by the
detailed information and the financial statements included in the documents
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference."
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30 Years Ended December 31
-------------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement data:
Gross interest income ...................... $ 13,657 $ 10,551 $ 14,596 $ 11,585 $ 8,425 $ 6,433 $ 5,581
Gross interest expense ..................... 7,474 5,672 7,822 6,161 3,985 3,064 2,718
Net interest income ........................ 6,183 4,879 6,774 5,424 4,440 3,369 2,863
Provision for possible loan losses.......... 703 190 374 143 120 150 304
Net interest income after provision for
loan losses .............................. 5,480 4,689 6,400 5,281 4,320 3,219 2,559
Non-interest income ........................ 618 503 660 488 425 395 402
Non-interest expense ....................... 3,908 3,343 4,439 3,541 3,004 2,264 1,873
Income before income taxes ................. 2,190 1,849 2,621 2,228 1,741 1,350 1,088
Income taxes ............................... 748 615 857 779 581 442 382
Net income ................................. 1,442 1,234 1,764 1,449 1,160 908 706
Per Share Data (1):
Net income (2) ............................. $ 1.17 $ 1.01 $ 1.45 $ 1.19 $ 0.96 $ 0.98 $ 0.78
Cash dividends ............................. 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Book value at period end ................... 13.27 11.39 11.97 10.52 8.43 8.33 6.16
Tangible book value at period end .......... 13.27 11.39 11.97 10.52 8.43 8.33 6.16
Period-End Balance Sheet Data:
Total assets ............................... $241,921 $190,122 $207,739 $162,543 $128,749 $ 105,520 $ 78,024
Total loans (net of unearned income) ....... 183,921 142,339 154,951 113,743 93,738 67,212 50,485
Total deposits ............................. 215,643 170,687 189,471 147,327 117,314 94,853 71,697
Long-term debt ............................. 1,715 1,858 1,858 -0- -0- -0- -0-
Shareholders' equity ....................... 16,293 13,910 14,617 12,812 10,243 10,042 5,610
Performance Ratios
Return on average assets ................... 0.86% 0.93% 0.97% 1.00% 1.00% 1.02% 1.06%
Return on average shareholders' equity ..... 12.35% 12.34% 13.01% 12.45% 11.38% 14.77% 13.52%
Average shareholders' equity to average
total assets ............................. 6.94% 7.58% 7.46% 8.05% 8.73% 7.64% 8.58%
Net interest margin (3) .................... 3.91% 3.97% 3.97% 3.96% 3.99% 4.00% 4.54%
Asset Quality Ratios
Net charge-offs to average loans ........... 0.17% 0.12% 0.16% 0.07% 0.08% 0.01% 0.10%
Allowance to period-end loans .............. 0.80% 0.66% 0.69% 0.80% 0.89% 1.16% 1.26%
Allowance to nonperforming loans ........... 156.90% 151.12% 161.93% 135.72% 394.33% 1,015.58% 477.89%
Nonaccrual loans to loans .................. 0.18% 0.11% 0.06% 0.21% -0- 0.11% 0.15%
Nonperforming assets to loans and
foreclosed properties .................... 0.51% 0.44% 0.43% 0.59% 0.23% 0.11% 0.28%
Risk-based capital ratios
Tier 1 capital ........................... 9.18% 10.61% 9.41% 11.11% 12.10% 16.16% 12.67%
Total capital ............................ 10.02% 11.32% 10.12% 11.90% 13.00% 17.41% 13.92%
Leverage capital ratio ..................... 6.80% 7.63% 6.82% 7.48% 8.32% 10.10% 7.68%
Total equity to total assets ............... 6.74% 7.32% 7.04% 7.88% 7.96% 9.52% 7.19%
_______________________
</TABLE>
(1) All per share figures have been adjusted to reflect a two-for-one
stock split on April 13, 1995.
(2) Net income per share is computed using the weighted average
outstanding shares.
(3) Net interest margin is calculated as tax-equivalent net interest
income divided by average earning assets and represents the
Corporation's net yield on its earning assets.
10
<PAGE>
RISK FACTORS
Prospective purchasers of the Capital Securities should carefully
review the information contained elsewhere in this Prospectus and should
particularly consider the following matters.
Ranking of Obligations Under the Guarantee and the Junior Subordinated Debt
Securities
The obligations of the Corporation under the Guarantee issued by the
Corporation for the benefit of the holders of Capital Securities and under the
Junior Subordinated Debt Securities are unsecured and rank subordinate and
junior in right of payment to all Senior Debt (which, as defined, includes all
outstanding subordinated debt of the Corporation). At September 30, 1997, the
aggregate outstanding Senior Debt of the Corporation was approximately $900,000.
The obligations of the Corporation under the Guarantee also rank subordinate and
junior in right of payment to creditors of the Bank and the Corporation's other
subsidiaries. See "Status of the Corporation as a Bank Holding Company." Upon
the issuance of the Junior Subordinated Debt Securities, the Corporation will
not have any indebtedness that ranks pari passu with or junior to its
obligations under the Guarantee and the Junior Subordinated Debt Securities.
None of the Indenture, the Guarantee or the Declaration places any limitation on
the amount of secured or unsecured debt, including Senior Debt, that may be
incurred by the Corporation or any subsidiary. See "Description of Junior
Subordinated Debt Securities--Subordination" and "Description of
Guarantee-Status of the Guarantee."
The ability of the Trust to pay amounts due on the Capital Securities
is solely dependent upon the Corporation making payments on the Junior
Subordinated Debt Securities as and when required.
Status of the Corporation as a Bank Holding Company
The Corporation is a legal entity separate and distinct from the Bank,
although the principal source of the Corporation's cash revenues is dividends
from the Bank. The right of the Corporation to participate in the distribution
of assets of any subsidiary, including the Bank, upon the latter's liquidation,
reorganization or otherwise (and thus the ability of the holders of Capital
Securities to benefit indirectly from any such distribution) will be subject to
the prior claims of such subsidiary's creditors, which will take priority except
to the extent that the Corporation may itself be a creditor of such subsidiary
with a recognized claim. Accordingly, the Junior Subordinated Debt Securities
will be effectively subordinated to all existing and future liabilities of the
Corporation's subsidiaries, and holders of Junior Subordinated Debt Securities
should look only to the assets of the Corporation for payments on the Junior
Subordinated Debt Securities. Because the Corporation is a holding company with
limited assets and liabilities, a substantial portion of the consolidated
liabilities of the Corporation are liabilities of its subsidiaries. The
Guarantee will constitute an unsecured obligation of the Corporation and will
rank subordinate and junior in right of payment to all Senior Debt in the same
manner as the Junior Subordinated Debt Securities.
As a holding company, the Corporation conducts its operations
principally through its subsidiaries and, therefore, its principal source of
cash is receipt of dividends from the Bank. However, there are legal limitations
on the source and amount of dividends that a Virginia-chartered, Federal Reserve
member bank such as the Bank is permitted to pay. A Virginia-chartered bank may
pay dividends only from net undivided profits. Additionally, a dividend may not
be paid if it would impair the paid-in capital of the bank. In addition, prior
approval of the Federal Reserve is required if the total of all dividends
declared by a member bank in any calendar year will exceed the sum of that
bank's net profits for that year and its retained net profits for the preceding
two calendar years, less any required transfers to either surplus or any fund
for retirement of any preferred stock. At September 30, 1997, the Bank could
have paid approximately $4.2 million in dividends to the Corporation without
prior Federal Reserve approval. The payment of dividends by the Bank may also be
affected by other factors, such as requirements for the maintenance of adequate
capital. In addition, the Federal Reserve is
11
<PAGE>
authorized to determine, under certain circumstances relating to the financial
condition of a member bank, whether the payment of dividends would be an unsafe
or unsound banking practice and to prohibit payment thereof.
Option to Extend Interest Payment Date; Tax Consequences; Market Price
Consequences
So long as no Debenture Event of Default (as defined herein) has
occurred and is continuing, the Corporation has the right under the Indenture to
defer the payment of interest on the Junior Subordinated Debt Securities at any
time or from time to time for a period not exceeding 20 consecutive quarterly
periods with respect to each Extension Period, provided, however, that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debt Securities. As a consequence of any such deferral, quarterly
Distributions on the Capital Securities by the Trust will also be deferred (and
the amount of Distributions to which holders of the Capital Securities are
entitled will accumulate additional Distributions thereon at 9.25% per annum
thereof, compounded quarterly from the relevant payment date for such
Distributions during any such Extension Period). During any Extension Period,
the Corporation may not (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
the Corporation's capital stock (which includes common and preferred stock),
(ii) make any payment of principal, interest or premium, if any, on, or repay,
repurchase or redeem any debt securities of the Corporation (including Other
Debentures) that rank pari passu with or junior in interest to, the Junior
Subordinated Debt Securities or (iii) make any guarantee payments with respect
to any guarantee by the Corporation of the debt securities of any subsidiary of
the Corporation (including Other Guarantees) if such guarantee ranks pari passu
with or junior in interest to the Junior Subordinated Debt Securities (other
than (a) dividends or distributions in Common Stock of the Corporation, (b) any
Declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) purchases or acquisitions of shares of the
Corporation's Common Stock in connection with the satisfaction by the
Corporation of its obligations under any employee benefit plan or any other
contractual obligation of the Corporation (other than a contractual obligation
ranking pari passu with or junior to the Junior Subordinated Debt Securities),
(e) as a result of a reclassification of the Corporation's capital stock or the
exchange or conversion of one class or series of the Corporation's capital stock
for another class or series of the Corporation's capital stock or (f) the
purchase of fractional interests in shares of the Corporation's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged). Prior to the termination of any
Extension Period, the Corporation may further extend such Extension Period,
provided, however, that such extension does not cause such Extension Period to
exceed 20 consecutive quarterly periods or to extend beyond the Stated Maturity.
Upon the termination of any Extension Period and the payment of all interest
then accrued and unpaid on the Junior Subordinated Debt Securities (together
with interest thereon accrued at 9.25% per annum, compounded quarterly, to the
extent permitted by applicable law), and subject to the foregoing limitations,
the Corporation may elect to begin a new Extension Period. There is no
limitation on the number of times that the Corporation may elect to begin an
Extension Period. See "Description of Capital Securities--Distributions" and
"Description of Junior Subordinated Debt Securities--Option to Extend Interest
Payment Date."
If an Extension Period occurs, for United States federal income tax
purposes, a holder of Capital Securities will continue to include income (in the
form of original issue discount) in respect of its pro rata share of the Junior
Subordinated Debt Securities held by the Trust as long as the Junior
Subordinated Debt Securities remain outstanding. As a result, during an
Extension Period a holder of Capital Securities will include such income in
gross income for United States federal income tax purposes in advance of the
receipt of cash, and will not receive the cash related to such income from the
Trust if the holder disposes of the Capital Securities prior to the record date
for the payment of distributions thereafter. See "Certain United States Federal
Income Tax Consequences--Interest Income and Original Issue Discount" and "Sales
or Redemption of the Capital Securities."
12
<PAGE>
Should the Corporation elect to exercise its right to defer payments of
interest on the Junior Subordinated Debt Securities in the future, the market
price of the Capital Securities is likely to be affected. A holder that disposes
of its Capital Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continues to hold its
Capital Securities. In addition, as a result of the existence of the
Corporation's right to defer interest payments on the Junior Subordinated Debt
Securities, the market price of the Capital Securities (which represent
beneficial ownership interests in the Trust holding the Junior Subordinated Debt
Securities as its sole assets) may be more volatile than the market prices of
other securities that are not subject to such deferrals.
Tax Event, Investment Company Event or Capital Treatment Event Redemption
Upon the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event, the Company has the right
to redeem the Junior Subordinated Debt Securities in whole, but not in part, at
any time within 90 days following the occurrence of such Tax Event, Investment
Company Event or Capital Treatment Event and thereby cause a mandatory
redemption of the Capital Securities and Common Securities. The ability of the
Corporation to exercise its rights to redeem the Junior Subordinated Debt
Securities prior to the stated maturity may be subject to prior regulatory
approval by the Federal Reserve, if then required under applicable Federal
Reserve capital guidelines or policies. See "Description of Junior Subordinated
"Optional Redemption" and "Description of Capital Securities - Mandatory
Redemption" and "Description of Capital Securities Liquidation of the Trust and
Distribution of Junior Subordinated Debt Securities."
A "Tax Event" means the receipt by the Trust of an opinion of counsel
to the Corporation experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Capital Securities, there is more than an insubstantial risk
that (i) the Trust is, or will be within 90 days of the delivery of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debt Securities (ii) interest
payable by the Corporation on the Junior Subordinated Debt Securities is not, or
within 90 days of the delivery of such opinion will not be, deductible by the
Corporation, in whole or in part, for United States federal income tax purposes
or (iii) the Trust is, or will be within 90 days of the delivery of the opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
"Investment Company Event" means the receipt by the Trust of an opinion
of counsel to the Corporation experienced in such matters to the effect that, as
a result of the occurrence of a change in law or regulation or a written change
(including any announced prospective change) in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, there is more than an insubstantial risk that the Trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), which change or prospective change becomes effective or would become
effective, as the case may be, on or after the date of the issuance of the
Capital Securities.
A "Capital Treatment Event" means the reasonable determination by the
Corporation that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the Capital
Securities, there is more than an insubstantial risk that
13
<PAGE>
the Corporation will not be entitled to treat an amount equal to the Liquidation
Amount of the Capital Securities as "Tier I Capital" (or the then equivalent
thereof) for purposes of the risk-based capital adequacy guidelines of the
Federal Reserve, as then in effect and applicable to the Corporation. See
"Description of Junior Subordinated Debt Securities --Optional Redemption,"
"Description of Capital Securities-Mandatory Redemption" and "Description of
Capital Securities--Liquidation of the Trust and Distribution of Junior
Subordinated Debt Securities."
Liquidation of the Trust and Distribution of Junior Subordinated Debt Securities
The Corporation, as the holder of the outstanding Common Securities,
will have the right at any time to terminate the Trust and cause the Junior
Subordinated Debt Securities to be distributed to the holders of the Trust
Securities. Under current United States federal income tax law, a distribution
of Junior Subordinated Debt Securities upon the dissolution of the Trust would
not be a taxable event to holders of the Capital Securities. If, however, the
Trust is characterized for United States federal income tax purposes as an
association taxable as a corporation at the time of dissolution of the Trust,
the distribution of the Junior Subordinated Debt Securities may constitute a
taxable event to holders of Capital Securities. See "Certain United States
Federal Income Tax Consequences--Distribution of the Junior Subordinated Debt
Securities to Holders of Capital Securities."
There can be no assurance as to the market prices for Capital
Securities or Junior Subordinated Debt Securities that may be distributed in
exchange for Capital Securities if a liquidation of the Trust occurs.
Accordingly, the Capital Securities or the Junior Subordinated Debt Securities
may trade at a discount to the price that the investor paid to purchase the
Capital Securities offered hereby. Because holders of Capital Securities may
receive Junior Subordinated Debt Securities on termination of the Trust,
prospective purchasers of Capital Securities are also making an investment
decision with regard to the Junior Subordinated Debt Securities and should
carefully review all the information regarding the Junior Subordinated Debt
Securities contained herein. See "Description of Capital Securities--Liquidation
of the Trust and Distribution of the Junior Subordinated Debt Securities" and
"Description of Junior Subordinated Debt Securities--General."
Rights Under the Guarantee
The Guarantee guarantees to the holders of the Trust Securities the
following payments, to the extent not paid by the Trust: (i) any accumulated and
unpaid Distributions required to be paid on the Trust Securities, to the extent
that the Trust has funds on hand available therefor at such time, (ii) the
Redemption Price with respect to any Trust Securities called for redemption, to
the extent that the Trust has funds on hand available therefor at such time, and
(iii) upon a voluntary or involuntary dissolution, winding-up or liquidation of
the Trust (unless the Junior Subordinated Debt Securities are distributed to
holders of the Trust Securities or all of the Capital Securities are redeemed),
the lesser of (a) the aggregate of the Liquidation Amount and all accumulated
and unpaid Distributions to the date of payment, to the extent that the Trust
has funds on hand available therefor at such time, and (b) the amount of assets
of the Trust remaining available for distribution to holders of the Trust
Securities after the satisfaction of liabilities to creditors of the Trust as
required by applicable law.
The holders of not less than a majority in aggregate Liquidation Amount
of the Capital Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee (as
defined herein) in respect of the Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Guarantee. Any holder
of the Trust Securities may institute a legal proceeding directly against the
Corporation to enforce its rights under the Guarantee without first instituting
a legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity. If the Corporation were to default on its obligation to pay amounts
payable under the Junior Subordinated Debt Securities, the Trust would lack
funds for the payment of Distributions or amounts payable on redemption of the
Capital Securities or otherwise, and, in such event, holders of the Capital
Securities would not be able to rely
14
<PAGE>
upon the Guarantee for payment of such amounts. Instead, in the event a
Debenture Event of Default shall have occurred and be continuing, and such event
is attributable to the failure of the Corporation to pay principal of or
interest on the Junior Subordinated Debt Securities on the applicable payment
date, then a holder of Capital Securities may institute a Direct Action.
Notwithstanding any payments made to a holder of Capital Securities by the
Corporation in connection with a Direct Action, the Corporation shall remain
obligated to pay the principal of and interest on the Junior Subordinated Debt
Securities, and the Corporation shall be subrogated to the rights of the holder
of such Capital Securities with respect to payments on the Capital Securities to
the extent of any payments made by the Corporation to such holder in any Direct
Action. Except as described herein, holders of Capital Securities will not be
able to exercise directly any other remedy available to the holders of the
Junior Subordinated Debt Securities or assert directly any other rights in
respect of the Junior Subordinated Debt Securities. See "Description of Junior
Subordinated Debt Securities--Enforcement of Certain Rights by Holders of
Capital Securities," "Description of Junior Subordinated Debt
Securities--Debenture Events of Default" and "Description of Guarantee." The
Declaration provides that each holder of Capital Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Indenture. Wilmington
Trust Company will act as Guarantee Trustee under the Guarantee Agreement and
will hold the Guarantee for the benefit of the holders of the Capital
Securities. Wilmington Trust Company will also act as Property Trustee under the
Declaration and as Debenture Trustee under the Indenture.
Limited Voting Rights
Holders of Capital Securities will generally have limited voting rights
relating only to the modification of the Capital Securities, the dissolution,
winding-up or liquidation of the Trust, and the exercise of the Trust's rights
as holder of Junior Subordinated Debt Securities. The right to vote to appoint,
remove or replace the Property Trustee, the Delaware Trustee or the
Administrative Trustees is vested exclusively in the holder of the Common
Securities except, with respect to the Property Trustee and the Delaware
Trustee, upon the occurrence of certain events described herein. The Property
Trustee, the Administrative Trustees and the Corporation may amend the
Declaration without the consent of holders of Capital Securities to ensure that
the Trust will not be classified for United States Federal income tax purposes
as an association taxable as a corporation or, as other than a grantor trust,
even if such action adversely affects the interests of such holders. See
"Description of Capital Securities--Removal of Highlands Capital Trust I
Trustees" and "Voting Rights; Amendment of the Declaration."
Regulatory Capital Requirements
The Corporation and the Bank are subject to regulatory capital
guidelines. At September 30, 1997, the Bank was in compliance with applicable
regulatory capital requirements. The Corporation, at that date, had a total
capital to risk-weighted assets ratio of 10.02% and a Tier I Capital to
risk-weighted assets ratio of 9.18%, both above the minimum requirements of 8.0%
and 4.0%, respectively. The Corporation's leverage ratio at that date was 6.80%.
Although the minimum leverage ratio requirement is 3.0%, most bank
holding companies, including the Corporation, are expected to maintain an
additional cushion of at least 100 to 200 basis points above the minimum.
However, the Federal Reserve may assign a specific capital ratio to an
individual bank holding company, including the Corporation, based on its
assessment of asset quality, earnings performance, interest-rate risk and
liquidity. As of the date of this Prospectus, the Federal Reserve has not
advised the Corporation of a specific leverage ratio requirement.
There can be no assurance that either the Corporation or the Bank will
continue to be able to meet their respective minimum capital ratios. In the
event that the Corporation or the Bank falls below the minimum capital
requirements described above, agencies may take regulatory action including, in
the case of the Bank,
15
<PAGE>
"prompt corrective action." Such actions could impair the Corporation's ability
to make principal and interest payments on the Junior Subordinated Debt
Securities.
Absence of Public Market
There is no existing market for the Capital Securities and there can be
no assurance as to the liquidity of any markets that may develop for the Capital
Securities, the ability of the holders to sell their Capital Securities or at
what price holders of the Capital Securities will be able to sell their Capital
Securities. Future trading prices of the Capital Securities will depend on many
factors including, among other things, prevailing interest rates, the
Corporation's operating results and the market for similar securities. The
Underwriter has informed the Trust and the Corporation that it intends to make a
market in the Capital Securities offered hereby; however, the Underwriter is not
obligated to do so and any such market making activity may be terminated at any
time without notice to the holders of the Capital Securities.
USE OF PROCEEDS
All of the proceeds from the sale of the Trust Securities will be
invested by the Trust in the Junior Subordinated Debt Securities. The
Corporation intends to apply the net proceeds from the sale of the Junior
Subordinated Debt Securities to its general funds to be used for general
corporate purposes, including, from time to time, the making of advances to the
Bank to support its continued growth. A portion of such net proceeds could be
used in connection with one or more future acquisitions. From time to time, the
Corporation investigates and holds discussions and negotiations in connection
with possible transactions with other banks. As of the date of this Prospectus,
the Corporation has not entered into any agreements or understandings with
respect to any potential acquisitions or any other material transactions of the
type referred to above, and no discussions or negotiations are taking place with
respect thereto. Pending any such application by the Corporation, the net
proceeds may be invested in interest-bearing securities.
HIGHLANDS CAPITAL TRUST I
The Trust is a statutory business trust formed under Delaware law
pursuant to (i) the original Declaration of Trust executed by the Corporation,
as Depositor, Wilmington Trust Company, as Delaware Trustee, and the
Administrative Trustees named therein, which original Declaration of trust will
be amended and restated and executed by the Corporation, as Depositor,
Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as
Delaware Trustee, and the Administrative Trustees named therein (the
"Declaration"), and (ii) the filing of a certificate of trust with the Delaware
Secretary of State on October 3, 1997. The Trust exists for the exclusive
purposes of (i) issuing and selling the Trust Securities, (ii) using the
proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debt Securities and (iii) engaging in only those other activities
necessary or incidental thereto. Accordingly, the Junior Subordinated Debt
Securities will be the sole assets of the Trust, and payments under the Junior
Subordinated Debt Securities will be the sole revenues of the Trust. All of the
Common Securities will be owned directly or indirectly by the Corporation. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Capital Securities, except that upon the occurrence and
continuance of any Debenture Event of Default (or an event that, with notice or
the passage of time, would become such an Event of Default) or an Event of
Default under the Declaration, the rights of the Corporation as holder of the
Common Securities to payment in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Capital Securities. See "Description of Capital
Securities--Subordination of Common Securities." The Corporation will acquire
Common Securities in an aggregate Liquidation Amount equal to approximately 3%
of the total capital of the Trust. The Trust has a term of 40 years, but may
terminate earlier as provided in
16
<PAGE>
the Declaration. The Trust's business and affairs are conducted by its trustees,
each appointed by the Corporation as holder of the Common Securities. The
trustees for the Trust will be Wilmington Trust Company, as the Property
Trustee, Wilmington Trust Company, as the Delaware Trustee, and individual
trustees as Administrative Trustees who are employees or officers of or
affiliated with the Corporation (collectively, the "Trustees"). Wilmington Trust
Company, as Property Trustee, will act as sole indenture trustee under the
Declaration. Wilmington Trust Company will also act as trustee under the
Guarantee Agreement and the Indenture. See "Description of Junior Subordinated
Debt Securities" and "Description of Guarantee." The holder of the Common
Securities, or the holders of a majority in Liquidation Amount of the Capital
Securities if an Event of Default under the Declaration resulting from a
Debenture Event of Default has occurred and is continuing, will be entitled to
appoint, remove or replace the Property Trustee and/or Delaware Trustee. In no
event will the holders of the Capital Securities have the right to vote to
appoint, remove or replace the Administrative Trustees; such voting rights are
vested exclusively in the holder of the Common Securities. The duties and
obligations of each Trustee are governed by the Declaration. Pursuant to the
expense provisions under the Indenture, the Corporation, as obligor on the
Junior Subordinated Debt Securities, will pay all fees and expenses related to
the Trust and the offering of the Capital Securities and will pay, directly or
indirectly, all ongoing costs, expenses and liabilities of the Trust. See
"Description of Capital Securities--Expenses and Taxes." The address and
telephone number of the principal executive office of the Trust is c/o:
Highlands Bankshares, Inc.
340 West Main St.,
Abingdon, VA 24210
Attention: Samuel L. Neese
(540) 628-9181
17
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following consolidated summary sets forth selected financial data
for the Corporation and its subsidiaries for the periods and at the dates
indicated. The following summary is qualified in its entirety by the detailed
information and the financial statements included in the documents incorporated
herein by reference. See "Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30 Years Ended December 31
-------------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement data:
Gross interest income ....................... $ 13,657 $ 10,551 $ 14,596 $ 11,585 $ 8,425 $ 6,433 $ 5,581
Gross interest expense ...................... 7,474 5,672 7,822 6,161 3,985 3,064 2,718
Net interest income ......................... 6,183 4,879 6,774 5,424 4,440 3,369 2,863
Provision for possible loan losses .......... 703 190 374 143 120 150 304
Net interest income after provision for
loan losses ............................... 5,480 4,689 6,400 5,281 4,320 3,219 2,559
Non-interest income ......................... 618 503 660 488 425 395 402
Non-interest expense ........................ 3,908 3,343 4,439 3,541 3,004 2,264 1,873
Income before income taxes .................. 2,190 1,849 2,621 2,228 1,741 1,350 1,088
Income taxes ................................ 748 615 857 779 581 442 382
Net income .................................. 1,442 1,234 1,764 1,449 1,160 908 706
Per Share Data (1):
Net income (2) .............................. $ 1.17 $ 1.01 $ 1.45 $ 1.19 $ 0.96 $ 0.98 $ 0.78
Cash dividends .............................. 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Book value at period end .................... 13.27 11.39 11.97 10.52 8.43 8.33 6.16
Tangible book value at period end ........... 13.27 11.39 11.97 10.52 8.43 8.33 6.16
Period-End Balance Sheet Data:
Total assets ................................ $241,921 $190,122 $207,739 $162,543 $128,749 $ 105,520 $78,024
Total loans (net of unearned income) ........ 183,921 142,339 154,951 113,743 93,738 67,212 50,485
Total deposits .............................. 215,643 170,687 189,471 147,327 117,314 94,853 71,697
Long-term debt .............................. 1,715 1,858 1,858 -0- -0- -0- -0-
Shareholders' equity ........................ 16,293 13,910 14,617 12,812 10,243 10,042 5,610
Performance Ratios
Return on average assets .................... 0.86% 0.93% 0.97% 1.00% 1.00% 1.02% 1.06%
Return on average shareholders' equity ...... 12.35% 12.34% 13.01% 12.45% 11.38% 14.77% 13.52%
Average shareholders' equity to average
total assets............................... 6.94% 7.58% 7.46% 8.05% 8.73% 7.64% 8.58%
Net interest margin (3) ..................... 3.91% 3.97% 3.97% 3.96% 3.99% 4.00% 4.54%
Earnings to fixed charges
Excluding interest on deposits (4) ........ 60.79x 115.71x 97.60x 111.85x 318.11x -- --
Including interest on deposits ............ 1.29x 1.33x 1.34x 1.36x 1.44x 1.44x 1.40x
Asset Quality Ratios
Net charge-offs to average loans ............ 0.17% 0.12% 0.16% 0.07% 0.08% 0.01% 0.10%
Allowance to period-end loans ............... 0.80% 0.66% 0.69% 0.80% 0.89% 1.16% 1.26%
Allowance to nonperforming loans ............ 156.90% 151.12% 161.93% 135.72% 394.33% 1,015.58% 477.89%
Nonaccrual loans to loans ................... 0.18% 0.11% 0.06% 0.21% -0- 0.11% 0.15%
Nonperforming assets to loans and
foreclosed properties...................... 0.51% 0.44% 0.43% 0.59% 0.23% 0.11% 0.28%
Risk-based capital ratios
Tier 1 capital ............................ 9.18% 10.61% 9.41% 11.11% 12.10% 16.16% 12.67%
Total capital ............................. 10.02% 11.32% 10.12% 11.90% 13.00% 17.41% 13.92%
Leverage capital ratio ..................... 6.80% 7.63% 6.82% 7.48% 8.32% 10.10% 7.68%
Total equity to total assets ............... 6.74% 7.32% 7.04% 7.88% 7.96% 9.52% 7.19%
________________________
</TABLE>
(1) All per share figures have been adjusted to reflect a two-for-one
stock split on April 13, 1995.
(2) Net income per share is computed using the weighted average
outstanding shares.
(3) Net interest margin is calculated as tax-equivalent net interest
income divided by average earning assets and represents the
Corporation's net yield on its earning assets.
(4) The Corporation had no fixed charges other than interest on
deposits in 1992 and 1993.
18
<PAGE>
THE CORPORATION
The following discussion includes selected financial and other data for
the Corporation and its subsidiaries and is qualified in its entirety by the
detailed information, and should be read in conjunction with the financial
statements and other information, included in the documents incorporated herein
by reference. See "Incorporation of Certain Documents by Reference."
Highlands Bankshares, Inc., a Virginia corporation (the "Corporation"),
is a bank holding company that was formed in 1995 and is headquartered in
Abingdon, Virginia. The Corporation's only subsidiary is Highlands Union Bank
(the "Bank"), which opened for business in 1985. Currently the Bank operates six
offices in southwestern Virginia (three in Abingdon, two in Bristol and one in
Marion in Smyth County). In addition, the Bank recently purchased an operations
center in Abingdon. All of the Bank's offices are owned, with no liens, are free
standing brick structures and have ATMs. The new operations center,
approximately half of which is currently leased to third parties, has 18,000
square feet and is a steel reinforced concrete building.
From December 31, 1991 through December 31, 1996 the Corporation's
assets, loans, deposits and net income increased at compound annual growth rates
of: 28.9%; 33.1%; 29.4% and 29.9%, respectively. In the prior five year period,
1986 through 1991, the Corporation's assets, loans, deposits and net income
increased at compound annual growth rates of: 29.9%; 39.8%; 31.3% and 32.7%
respectively. At September 30, 1997 total assets of the Corporation were $241.4
million, total deposits $215.6 million, and stockholders' equity $16.3 million.
Net income for the nine months ended September 30, 1997 increased 16.9% to
$1,442,000, up from $1,234,000 in the first nine months of 1996, while earnings
per share increased 15.8% from the comparable fiscal of 1996 to $1.17.
The business strategy of the Corporation is to provide its customers
with the financial sophistication and breadth of products of a regional bank
while maintaining the quick response and services of a community bank.
Washington County, including the City of Abingdon, had a population of
approximately 45,000 in 1990 and 1980, while Bristol, Virginia and Bristol,
Tennessee, with a common border, had populations of approximately 20,000 each in
1990 and 1980. The Corporation's growth has been accomplished by hiring
experienced bank officers, particularly loan and credit officers, from large
state-wide banks and achieving significant gains in market share of deposits and
loans. Over the last five years the Corporation's market share in Washington
County, as measured by deposits, steadily increased to approximately 21% at
September 30, 1996, which was the second highest of nine commercial banks
operating in Washington County. Management believes it will be the largest
commercial bank, as measured by deposits, as of September 30, 1997, in
Washington County. Similarly, in Bristol, Virginia the Corporation has achieved
approximately a 19% market share, as measured by deposits, which is third in
size among seven commercial banks operating there. Total deposits of the
Corporation in Bristol, Virginia were approximately $74.8 million at September
30, 1997. The Corporation's second Bristol office, which opened in 1995, reached
$36.3 million in deposits and approximately $43.1 million in loans within the
first twenty-one months of opening, due primarily to hiring experienced, local
loan officers from larger regional banks.
Management believes that there are, and will be, additional
opportunities to acquire branches, to expand services through the addition of
sophisticated bank personnel and, perhaps, to acquire other financial
institutions, as well as expansion into contiguous markets across state lines
such as Johnson City, Kingsport and Bristol, Tennessee (an area referred to as
Tri-Cities) and northern North Carolina. Sullivan County, Tennessee, including
Kingsport, had total bank deposits of approximately $1.2 billion at September
30, 1996 compared with $556.0 million for Washington County, Virginia and $358.0
million for Bristol, Virginia at the same date.
19
<PAGE>
Washington County, Tennessee, including Johnson City, Jonesboro and Blountville
had approximately $900.0 million in bank deposits as of September 30, 1996.
Despite its asset growth, the Corporation has experienced few problems
with non-performing assets or loan losses. At December 31, 1996, 1995 and 1994
non-performing loans totaled $662,000, $669,000 and $212,000, respectively, or,
as a percentage of loans and foreclosed properties, 0.43%, 0.59% and 0.23%,
respectively. The ratio of the provision for loan losses to net charge-offs was:
178.10%; 201.41% and 181.82% in 1996, 1995 and 1994, respectively. The allowance
for loan losses at December 31, 1996 was $1.1 million, or 1.6 times the level of
non-performing loans.
The return on average assets has ranged over the last five years from
0.97% in 1996 to 1.06% in 1992, while the return on average equity has ranged
from 13.52% in 1992 to 11.38% in 1994 over the same period and was 13.01% in
1996. At September 30, 1997 the allowance for loan losses was $1.5 million, up
37.9% from year-end 1996 and 56.7% from September 30, 1996.
The Corporation is a legal entity separate and distinct from the Bank
and its nonbanking subsidiaries. Accordingly, the right of the Corporation, and
thus the right of the Corporation's creditors, to participate in any
distribution of the assets or earnings of the Bank or any other subsidiary is
necessarily subject to the prior claims of creditors of the Bank or such
subsidiary, except to the extent that claims of the Corporation in its capacity
as a creditor may be recognized. The principal sources of the Corporation's
revenues are dividends from the Bank.
The Corporation is a bank holding company registered with the Board of
Governors of the Federal Reserve under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Corporation's executive offices are located at 340
West Main Street, Abingdon, Virginia 24210. Its mailing address is P. O. Box
1128, Abingdon, Virginia 24210-1128, and its telephone number is (540) 628-9181.
20
<PAGE>
The following table sets forth average balances of total interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the average distribution of assets, liabilities, stockholders' equity
and the related income, expense and corresponding weighted-average yields and
costs.
Average Balances, Interest Income and Expenses, and Average Yields and Rates
<TABLE>
<CAPTION>
Nine months ended Sept. 30 Year ended December 31
---------------------------- ----------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance(1) Expense Rate(2) Balance(1) Expense Rate(2) Balance(1) Expense Rate(2)
---------- ------- -------- ---------- ------- -------- ---------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest Earning Assets:
Securities............................ $ 37,353 $ 1,726 6.16% $ 34,353 $ 2,082 6.06% $ 30,079 $ 1,793 5.96%
Loans(3).............................. 170,298 11,801 9.24% 132,341 12,310 9.30% 103,069 9,590 9.30%
Interest bearing deposits in
other banks......................... 3,418 130 5.07% 3,773 204 5.41% 3,686 202 5.48%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest earning
assets............................ 211,069 13,657 8.63% 170,467 14,596 8.56% 136,834 11,585 8.47%
Noninterest earning assets:
Cash and due from banks............... 6,730 6,034 4,198
Premises and equipment................ 5,583 4,326 3,362
Other assets.......................... 2,171 1,964 1,095
Less: Allowance for loan
losses.............................. (1,205) (919) (852)
Total noninterest earning -------- -------- --------
assets.............................. 13,279 11,405 7,803
-------- -------- --------
Total Assets...................... $224,348 $181,872 $144,637
======== ======== ========
Liabilities and Stockholders'
Equity
Interest Bearing Liabilities:
Interest bearing deposits:
Demand/MMDA accounts................ $ 13,767 370 3.58% $ 12,566 452 3.60% 11,294 411 3.64%
Savings............................. 43,437 1,675 5.14% 36,070 1,843 5.11% 28,002 1,401 5.00%
Certificates of deposit............. 119,637 5,271 5.87% 93,695 5,419 5.78% 73,920 4,274 5.78%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing
deposits........................ 176,841 7,316 5.52% 142,331 7,714 5.42% 113,216 6,086 5.38%
FHLB advances and other
borrowings........................ 3,452 158 6.10% 1,808 108 5.97% 1,198 75 6.26%
Bonds payable....................... 0 0 0 0 0
-------- -------- ------- -------- -------
Total interest bearing
liabilities..................... 180,293 7,474 5.53% 144,139 7,822 5.43% 114,414 6,161 5.38%
Noninterest bearing liabilities:
Demand deposits....................... 26,590 22,569 17,410
Other liabilities..................... 1,893 1,603 1,176
-------- -------- --------
Total liabilities................... 28,483 24,172 18,586
Stockholders' equity.................... 15,572 13,561 11,637
Total liabilities and
stockholders' equity.............. $224,348 $181,872 $114,637
======== ======== ========
Interest spread (4)..................... 3.10% 3.13% 3.09%
Net interest income/net
interest margin (5)................... $ 6,183 3.91% $ 6,774 3.97% $ 5,424 3.96%
======= ======= =======
</TABLE>
----------------------------
1994
----------------------------
Average Income/ Yield/
Balance(1) Expense Rate(2)
---------- ------- --------
(Dollars in thousands)
Assets
Interest Earning Assets:
Securities............................ $ 29,643 $ 1,579 5.33%
Loans(3).............................. 79,400 6,765 8.52%
Interest bearing deposits in
other banks......................... 2,099 81 3.86%
-------- ------- ----
Total interest earning
assets............................ 111,142 8,425 7.58%
Noninterest earning assets:
Cash and due from banks............... 3,117
Premises and equipment................ 2,418
Other assets.......................... 672
Less: Allowance for loan
losses.............................. (810)
Total noninterest earning --------
assets.............................. 5,397
--------
Total Assets...................... $116,539
========
Liabilities and Stockholders'
Equity
Interest Bearing Liabilities:
Interest bearing deposits:
Demand/MMDA accounts................ 10,673 351 3.29%
Savings............................. 28,450 1,194 4.20%
Certificates of deposit............. 51,909 2,422 4.67%
-------- ------- -----
Total interest bearing
deposits........................ 91,032 3,967 4.36%
FHLB advances and other
borrowings........................ 392 18 4.59%
Bonds payable....................... 0 0
-------- -------
Total interest bearing
liabilities..................... 91,424 3,985 4.36%
Noninterest bearing liabilities:
Demand deposits....................... 14,217
Other liabilities..................... 703
--------
Total liabilities................... 14,920
Stockholders' equity.................... 10,195
Total liabilities and
stockholders' equity.............. $116,539
========
Interest spread (4)..................... 3.22%
Net interest income/net
interest margin (5)................... $ 4,440 3.99%
=======
________________________
(1) Average balances are computed on monthly balances and Management
believes such balances are representative of the operations of the
Corporation.
(2) Yield and rate percentages are all computed through the
annualization of interest income and expenses versus the average
balances of their respective accounts.
(3) Non-accrual loans are included in the average loan balances, and
income on such loans is recognized on a cash basis.
(4) Interest spread is the average yield earned on earning assets,
less the average rate incurred on interest bearing liabilities.
(5) Net interest margin is net interest income, expressed as a
percentage of average earning assets.
As the largest component of income, net interest income represents the
amount that interest and fees earned on loans and investments exceeds the
interest costs of funds used to support these earning assets. Net
21
<PAGE>
interest income is determined by the relative levels, rates and mix of earning
assets and interest-bearing liabilities.
For the nine months ended September 30, 1997, net interest income was
$6.2 million, compared to $5.0 million for the same period in 1996. Net interest
income for the year-ended December 31, 1996 increased 24.9%, or approximately
$1.4 million and over 1995. Average interest earning assets increased $33.6
million from 1995 to 1996 while average interest-bearing liabilities increased
$29.7 million. The yield on average interest-earning assets for the year ended
December 31, 1996 was 8.56% compared with 8.47% for the comparable 1995 period.
The 1996 yield on loans remained the same at 9.30% as compared to 1995. The
yield on average investments increased 10 basis points from December 31, 1995 to
1996. The yield on average interest-bearing liabilities increased four basis
points during 1996 to 5.42% as compared to 5.38% during 1995.
Net interest income for the year-ended December 31, 1995 increased
22.2%, approximately $984,000 over 1994. Average interest earning assets
increased $25.7 million from 1994 to 1995 while average interest-bearing
liabilities increased $23.0 million. The yield on average interest-earning
assets for the year-ended December 31, 1995 was 8.47% compared with 7.58% for
the comparable 1994 period. The 1995 yield on loans increased by 78 basis points
as compared to the 1994 period. The yield on average interest-bearing
liabilities increased 102 basis points during 1995 to 5.38% as compared to 4.36%
during 1994.
Interest Rate Sensitivity Analysis
Management evaluates interest sensitivity through the use of an
asset/liability management reporting gap model on a quarterly basis and then
formulates strategies regarding asset generation and pricing, funding sources
and pricing, and off-balance sheet commitments in order to decrease sensitivity
risk. These strategies are based on management's outlook regarding interest rate
movements, the state of the regional and national economics and other financial
and business risk factors. In addition, the Corporation establishes prices for
deposits and loans based on local market conditions and manages its securities
portfolio with policies set by itself.
The following table presents the amounts of the Corporation's interest
sensitive assets and liabilities that mature or reprice in the periods
indicated.
22
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
Maturing
---------------------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Investment securities $12,130 $16,999 $8,622 $3,997 $41,748
Loans 50,104 43,747 83,017 7,053 183,921
Other interest-earning assets 122 - - - 122
--- ------ ----- -----
Total interest-earning assets 62,356 60,746 91,639 11,050 225,791
------ ------ ------ ------ -------
Interest-Bearing Liabilities:
Deposits
Demand and savings 4,051 11,377 24,267 - 39,695
Time deposits, $100,000 and over 9,130 16,699 7,786 - 33,615
Other time deposits 38,054 39,704 37,453 - 115,211
Other interest-bearing liabilities 5,591 1,072 572 142 7,377
----- ----- --- --- -----
Total interest-bearing liabilities 56,826 68,852 70,078 142 195,898
------ ------ ------ --- -------
Period Gap $5,530 $ (8,106) $21,561 $10,908 $29,893
------ -------- ------- ------- -------
Cumulative Gap $5,530 $ (2,576) $18,985 $29,893
------ -------- ------- -------
Ratio cumulative gap to total
interest -earning assets 2.58% (1.14%) 8.41% 13.24%
----- ------- ---- ------
</TABLE>
The September 30, 1997 results of the rate sensitivity analysis show
the Corporation had $5.5 million more in assets than liabilities subject to
repricing within three months or less and was, therefore, in a
liability-sensitive position. The cumulative gap at the end of one year was a
negative $2.6 million, and therefore in an asset-sensitive position.
Approximately $93.9 million, or 51.1% of the total loan portfolio, matures or
reprices within one year or less. An asset-sensitive institution's net interest
margin and net interest income generally will be impacted favorably by rising
interest rates, while that of a liability sensitive institution generally will
be impacted favorably by declining rates.
Loan Portfolio
The table below classifies loans, net of unearned income, by major
category and percentage distribution at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------------ ---------------------------------------------------------------
1997 1996 1996 1995 1994
------------------------------------------ ---------------------------------------------------------------
Description Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $22,233 12.09% $19,219 13.50% $ 20,365 13.14% $ 12,699 11.16% $ 8,538 9.11%
Real Estate 103,349 56.19 92,666 65.10 101,491 65.50 76,516 67.27 62,903 67.11
Consumer 55,186 30.01 28,104 19.74 30,128 19.44 21,785 19.15 20,131 21.47
Other 3,153 1.71 2,350 1.66 2,967 1.92 2,743 2.41 2,166 2.31
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total $183,921 100.00% $142,339 100.00% $154,951 100.00% $113,743 100.00% $93,738 100.00%
======== ======= ======== ======= ======== ======= ======== ======= ======= =======
</TABLE>
23
<PAGE>
Nonperforming Assets
Unless well secured and in the process of collection, the Corporation
places loans on non-accrual status after being delinquent greater than ninety
days, or earlier in situations in which the loans have developed inherent
problems that indicated payment of principal and interest may not be made in
full. Whenever the accrual of interest is stopped, previously accrued but
uncollected income is reversed. Thereafter, interest is recognized only as cash
is received. The loan is reinstated to an accrual basis after has been brought
current as to principal and interest under the contractual terms of the loan. As
of December 31, 1996, 1995 and 1994, non-accrual loans amounted to $99,000,
$235,000 and $0, respectively.
<TABLE>
<CAPTION>
September 30, December 31,
----------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $325 $155 $99 $235 $ - $77 $77
Loans contractually past due 90 days or
more and still accruing 617 470 563 434 212 - 65
Troubled debt restructuring - - - - - - -
---- ---- ---- ---- ---- ---- ----
Total nonperforming loans 942 625 662 669 212 77 142
Other real estate owned - - - - - - -
---- ---- ---- ---- ---- ---- ----
Total nonperforming assets $942 $625 $662 $669 $212 $77 $142
==== ==== ==== ==== ==== === ====
Nonperforming assets to period-end total
loans and other real estate 0.51% 0.44% 0.43% 0.59% 0.23% 0.11% 0.28%
</TABLE>
Summary of Loan Loss Experience
The allowance for loan losses is increased by the provision for loan
losses and reduced by loans charged off net of recoveries. The allowance for
loan losses is established and maintained at a level judged by management to be
adequate to cover any anticipated loan losses to be incurred in the collection
of outstanding loans. In determining the adequate level of the allowance for
loan losses, management considers the following factors: (a) loan loss
experience; (b) problem loans, including loans judged to exhibit potential
charge-off characteristics, loans on which interest is no longer being accrued,
loans which are past due and loans which have been classified in the most recent
regulatory examination; and (c) anticipated economic conditions and the
potential impact these conditions may have on individual classifications of
borrowers.
24
<PAGE>
The following table presents the Corporation's loan loss experience for
the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------ -------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of period $1,072 $908 $908 $836 $782
Loans charged off:
Commercial 42 140 170 19 58
Real Estate -0- -0- -0- 122 -0-
Consumer 269 55 85 47 29
Other -0- -0- -0- -0- -0-
--- --- --- --- ---
Total 311 195 255 188 87
Recoveries of loans previously
charged off:
Commercial 5 32 32 -0- 11
Real Estate -0- -0- -0- 106 -0-
Consumer 9 8 13 11 10
Other -0- -0- -0- -0- -0-
--- --- --- --- ---
Total 14 40 45 117 21
-- -- -- --- --
Net loans charged off 297 155 210 71 66
Provision for loan losses 703 190 374 143 120
--- --- --- --- ---
Allowance for loan losses end
of period $1,478 $943 $1,072 $908 $836
====== ==== ====== ==== ====
Average total loans (net of unearned
income) $170,298 $126,558 $131,449 $102,216 $78,590
Total loans (net of unearned income)
at period-end $183,921 $142,338 $154,951 $113,743 $93,738
Ratio of net charge-offs to average
loans 0.17% 0.12% 0.16% 0.07% 0.08%
Ratio of provision for loan losses to
average loans 0.41% 0.15% 0.29% 0.14% 0.15%
Ratio of provision for loan losses to
net charge-offs 236.70% 122.58% 178.10% 201.41% 181.82%
Allowance for loan losses to period-end
loans 0.80% 0.66% 0.69% 0.80% 0.89%
</TABLE>
25
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Corporation at September 30, 1997. See "Use of Proceeds." This table is based
on, and is qualified in its entirety by, the historical consolidated financial
statements of the Corporation, including the related notes thereto, which are
included in documents incorporated by reference herein, and should be red in
conjunction therewith.
<TABLE>
<CAPTION>
Sept. 30, 1997
(Dollars in Thousands)
<S> <C>
Long-term debt $ 1,715
Capitalized lease obligations -0-
Shareholders' Equity
Common Stock, par value $2.50 per share, authorized 10,000,000
shares, shares outstanding - 1,228,462 3,077
Capital surplus 5,249
Retained earnings 7,836
Unrealized gains on securities available for sale, net of income
taxes 131
Total shareholders' equity 16,298
Total capitalization $18,008
Consolidated Capital Ratios
Equity to assets 6.75%
Tier 1 Capital 9.18%
Total Capital 10.02%
</TABLE>
ACCOUNTING TREATMENT
The financial statements of the Trust will be consolidated into the
Corporation's consolidated financial statements, with the Capital Securities
treated as minority interest and shown in the Corporation's consolidated balance
sheet as "Corporation-Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust." The financial statement footnotes of the Corporation will
reflect that the sole asset of the Trust will be the amount of the Junior
Subordinated Debt Securities maturing on January 15, 2028. All future reports
filed by the Corporation under the Exchange Act will present information
regarding the Trust and any other similar trusts in the manner described above.
REGULATORY TREATMENT
As a registered bank holding company, the Corporation is required by
the Federal Reserve to maintain certain levels of capital for bank regulatory
purposes. The Corporation expects that the Capital Securities will be treated as
"Tier I Capital" of the Corporation for such purposes.
26
<PAGE>
DESCRIPTION OF CAPITAL SECURITIES
Pursuant to the terms of the Declaration, the Trustees on behalf of the
Trust will issue the Capital Securities and the Common Securities. The Capital
Securities will represent beneficial ownership interests in the Trust and the
holders thereof will be entitled to a preference in certain circumstances with
respect to Distributions and amounts payable on redemption of the Trust
Securities or liquidation of the Trust over the Common Securities, as well as
other benefits as described in the Declaration. See "Subordination of Common
Securities." The Declaration will be qualified under the Trust Indenture Act of
1939 (the "Trust Indenture Act"). This summary of certain provisions of the
Capital Securities, the Common Securities and the Declaration does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Declaration, including the definitions therein of
certain terms. The form of the Declaration is available upon request from the
Trustees.
General
The Capital Securities will be limited to $7.5 million aggregate
Liquidation Amount at any one time outstanding. The Capital Securities will rank
pari passu, and payments will be made thereon pro rata, with the Common
Securities except as described under "Subordination of Common Securities." Legal
title to the Junior Subordinated Debt Securities will be held by the Property
Trustee on behalf of the Trust in trust for the benefit of the holders of the
Capital Securities and Common Securities. The Guarantee Agreement executed by
the Corporation for the benefit of the holders of the Capital Securities (the
"Guarantee Agreement") will provide for the Guarantee on a subordinated basis
with respect to the Capital Securities but will not guarantee payment of
Distributions or amounts payable on redemption of the Capital Securities or on
liquidation of the Trust when the Trust does not have funds on hand available to
make such payments. See "Description of Guarantee."
Distributions
The Capital Securities represent beneficial ownership interests in the
Trust, and Distributions on each Capital Security will be payable at 9.25% per
annum of the stated Liquidation Amount of $25, and will be payable quarterly in
arrears on the 15th day of April, July, October and January of each year to the
holders of the Capital Securities at the close of business on the Business Day
(as defined herein) immediately preceding such Distribution Date (each, a
"record date"). Distributions on the Capital Securities will be cumulative.
Distributions will accumulate from the Issue Date. The first Distribution Date
for the Capital Securities will be April 15, 1998. The amount of Distributions
payable for any period will be computed on the actual number of days elapsed in
a year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Capital Securities is not a Business Day,
payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional Distributions
or other payments in respect to any such delay) with the same force and effect
as if made on the date such payment was originally payable (each date on which
Distributions are payable in accordance with the foregoing. a "Distribution
Date"). A "Business Day" shall mean any day other than a Saturday or a Sunday,
or a day on which banking institutions in Richmond, Virginia are authorized or
required by law or executive order to remain closed, or a day on which the
corporate trust office of the Property Trustee or the Debenture Trustee is
closed for business.
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debt Securities at any time or
from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Junior Subordinated Debt Securities. As
a consequence of any such election, quarterly Distributions on the Capital
Securities by the Trust will be deferred during any such Extension Period.
Distributions to which holders of the Capital Securities are entitled will
accumulate additional Distributions thereon at 9.25% per annum thereof,
compounded quarterly
27
<PAGE>
from the relevant payment date for such Distributions during any such Extension
Period, to the extent permitted by applicable law. The term "Distributions" as
used herein shall include any such additional Distributions. During any such
Extension Period, the Corporation may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Corporation's capital stock (which includes common
and preferred stock), (ii) make any payment of principal, interest or premium,
if any, on or repay, repurchase or redeem any debt securities of the Corporation
(including Other Debentures) that rank pari passu with or junior in interest to
the Junior Subordinated Debt Securities, or (iii) make any guarantee payments
with respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including Other Guarantees) if such guarantee
ranks pari passu with or junior in interest to the Junior Subordinated Debt
Securities (other than (a) dividends or distributions in Common Stock of the
Corporation, (b) any Declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) purchases or
acquisitions of shares of the Corporation's Common Stock in connection with the
satisfaction by the Corporation of its obligations under any employee benefit
plan or any other contractual obligation of the Corporation (other than a
contractual obligation ranking pari passu with or junior to the Junior
Subordinated Debt Securities), (e) as a result of a reclassification of the
Corporation's capital stock or the exchange or conversion of one class or series
of the Corporation's capital stock for another class or series of the
Corporation's capital stock or (f) the purchase of fractional interests in
shares of the Corporation's stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged).
Prior to the termination of any such Extension Period, the Corporation may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods or to
extend beyond the Stated Maturity of the Junior Subordinated Debt Securities.
Upon the termination of any such Extension Period and the payment of all amounts
then accrued and unpaid on the Junior Subordinated Debt Securities (together
with interest thereon accrued at 9.25% per annum, compounded quarterly, to the
extent permitted by applicable law), and subject to the foregoing limitations,
the Corporation may elect to begin a new Extension Period. No interest or other
amounts shall be due and payable during an Extension Period, except at the end
thereof. The Corporation must give the Property Trustee, the Administrative
Trustees and the Debenture Trustee notice of its election of any such Extension
Period at least three Business Days prior to the earlier of (i) the date the
Distributions on the Capital Securities would have been payable except for the
election to begin such Extension Period or (ii) the date the Administrative
Trustees are required to give notice to any automated quotation system or to
holders of such Capital Securities of the record date or the date such
Distributions are payable, but in any event not less than three Business Days
prior to such record date. The Debenture Trustee shall give notice of the
Corporation's election to begin or extend an Extension Period to the holders of
the Capital Securities. There is no limitation on the number of times that the
Corporation may elect to begin an Extension Period. See "Description of Junior
Subordinated Debt Securities--Option to Extend Interest Payment Date" and
"Certain United States Federal Income Tax Consequences--Interest Income and
Original Issue Discount."
The Corporation has no current intention of exercising its right to
defer payments of interest on the Junior Subordinated Debt Securities.
The revenue of the Trust available for distribution to holders of the
Capital Securities will be limited to payments under the Junior Subordinated
Debt Securities in which the Trust will invest the proceeds from the issuance
and sale of the Trust Securities. See "Description of Junior Subordinated Debt
Securities--General." If the Corporation does not make interest payments on the
Junior Subordinated Debt Securities, the Property Trustee will not have funds
available to pay Distributions on the Capital Securities. The payment of
Distributions (if and to the extent the Trust has funds legally available for
the payment of such Distributions and cash sufficient to make such payments) is
guaranteed by the Corporation on a limited basis as set forth herein under
"Description of Guarantee."
28
<PAGE>
Mandatory Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debt Securities, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Trust Securities, upon not less than 30 nor more than
60 days' notice, at a redemption price (the "Redemption Price") equal to the
aggregate Liquidation Amount of such Capital Securities plus accumulated but
unpaid Distributions thereon to the date of redemption (the "Redemption Date")
and the related amount of the premium, if any, paid by the Corporation upon the
concurrent redemption of such Junior Subordinated Debt Securities. See
"Description of Junior Subordinated Debt Securities--Optional Redemption." If
less than all the Junior Subordinated Debt Securities are to be repaid or
redeemed on a Redemption Date, then the proceeds from such repayment or
redemption shall be allocated to the redemption pro rata of the Capital
Securities and the Common Securities. The amount of premium, if any, paid by the
Corporation upon the redemption of all or any part of the Junior Subordinated
Debt Securities to be repaid or redeemed on a Redemption Date shall be allocated
to the redemption pro rata of the Capital Securities and the Common Securities.
The Corporation has the right to redeem the Junior Subordinated Debt
Securities (i) on or after January 15, 2008, in whole at any time or in part
from time to time, or (ii) in whole, but not in part, at any time within 90 days
following the occurrence and during the continuation of a Tax Event, Investment
Company Event or Capital Treatment Event (each as defined below), in each case
subject to possible regulatory approval. A redemption of the Junior Subordinated
Debt Securities would cause a mandatory redemption of a Like Amount of the
Capital Securities and Common Securities at the Redemption Price.
The Redemption Price, in the case of a redemption under (i) above,
shall equal the following prices, expressed in percentages of the Liquidation
Amount (as defined below), together with accumulated Distributions to but
excluding the date fixed for redemption, if redeemed during the 12-month period
beginning January 15:
Year Redemption Price
- ---- ----------------
2008 104.625% ($26.15625)
2009 104.163% ($26.04075)
2010 103.700% ($25.92500)
2011 103.238% ($25.80950)
2012 102.775% ($25.69375)
2013 102.313% ($25.57825)
2014 101.850% ($25.46250)
2015 101.388% ($25.34700)
2016 100.925% ($25.23125)
2017 100.463% ($25.11575)
and at 100% on or after January 15, 2018.
The Redemption Price, in the case of a redemption on or after January
15, 2008 following a Tax Event, Investment Company Event or Capital Treatment
Event shall equal the Redemption Price then applicable to a redemption under (i)
above. The Redemption Price, in the case of a redemption prior to January 15,
2008 following a Tax Event, Investment Company Event or Capital Treatment Event
as described under (i) above, will equal for each Capital Security the
Make-Whole Amount for a corresponding $25 principal amount of Junior
Subordinated Debt Securities together with accumulated Distributions to but
excluding the date fixed for
29
<PAGE>
redemption. The "Make-Whole Amount" will be equal to the greater of (i)
100% of the principal amount of such Junior Subordinated Debt Securities and
(ii) as determined by a Quotation Agent (as defined below), the sum of the
present values of the principal amount and premium payable as part of the
Redemption Price with respect to an optional redemption of such Junior
Subordinated Debt Securities on January 15, 2008, together with the present
values of scheduled payments of interest (not including the portion of any such
payments of interest accrued as of the Redemption Date) from the Redemption Date
to January 15, 2008 (the "Remaining Life"), in each case discounted to the
Redemption Date on a quarterly basis (assuming a 360-day year consisting of
30-day months) at the Adjusted Treasury Rate.
"Adjusted Treasury Rate" means, with respect to any Redemption Date,
the Treasury Rate plus (i) 2.00% if such Redemption Date occurs on or before
January 15, 1999 or (ii) 1.25% if such Redemption Date occurs after January 15,
1999.
"Treasury Rate" means (i) the yield, under the heading which represents
the average for the week immediately prior to the calculation date, appearing in
the most recently published statistical release designated "H.15 (519)" or any
successor publication which is published weekly by the Federal Reserve and which
establishes yields on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for the
maturity corresponding to the Remaining Life (if no maturity is within three
months before or after the Remaining Life, yields for the two published
maturities most closely corresponding to the Remaining Life shall be determined
and the Treasury Rate shall be interpolated or extrapolated from such yields on
a straight-line basis, rounding to the nearest month) or (ii) if such release
(or any successor release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per annum equal to
the semi-annual equivalent yield to maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a
day on which banking institutions in the City of Richmond, Virginia are
authorized or required by law or executive order to remain closed, or (c) a day
on which the Property Trustee's Corporate Trust Office or the Corporate Trust
Office of the Debenture Trustee is closed for business.
"Like Amount" means (i) with respect to a redemption of Trust
Securities, Trust Securities having a Liquidation Amount (as defined below)
equal to that portion of the principal amount of Junior Subordinated Debt
Securities to be contemporaneously redeemed in accordance with the Junior
Subordinated Indenture, allocated to the Common Securities and to the Capital
Securities based upon the relative Liquidation Amounts of such classes and (ii)
with respect to a distribution of Junior Subordinated Debt Securities to holders
of Trust Securities in connection with a dissolution or liquidation of the
Highlands Capital Trust I Trust, Junior Subordinated Debt Securities having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
holder to whom such Junior Subordinated Debt Securities are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Tax Event" means the receipt by the Trust of an opinion of counsel to
the Corporation experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Capital Securities, there is more than an insubstantial risk
that (i) the Trust is, or will be within 90 days of the delivery of such
opinion, subject to
30
<PAGE>
United States federal income tax with respect to income received or accrued on
the Junior Subordinated Debt Securities, (ii) interest payable by the
Corporation on the Junior Subordinated Debt Securities is not, or within 90 days
of the delivery of such opinion, will not be, deductible by the Corporation, in
whole or in part, for United States federal income tax purposes or (iii) the
Trust is, or will be within 90 days of the delivery of such opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
"Investment Company Event" means the receipt by the Trust of an opinion
of counsel to the Corporation experienced in such matters to the effect that, as
a result of the occurrence of a change in law or regulation or a written change
(including any announced prospective change) in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, there is more than an insubstantial risk that the Trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act, which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Capital Securities.
"Capital Treatment Event" means the reasonable determination by the
Corporation that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the Capital
Securities, there is more than an insubstantial risk that the Corporation will
not be entitled to treat an amount equal to the Liquidation Amount of the
Capital Securities as "Tier I Capital" (or the then equivalent thereof) for
purposes of the risk-based capital adequacy guidelines of the Federal Reserve,
as then in effect and applicable to the Corporation.
Payment of Additional Sums. If a Tax Event described in clause (i) or
(iii) of the definition of Tax Event above has occurred and is continuing and
the Trust is the holder of all the Junior Subordinated Debt Securities, the
Corporation will pay Additional Sums (as defined below), if any, on the Junior
Subordinated Debt Securities.
"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust on the
outstanding Capital Securities and Common Securities of the Trust will not be
reduced as a result of any additional taxes, duties and other governmental
charges to which the Trust has become subject as a result of a Tax Event.
Redemption Procedures
Trust Securities shall be redeemed, if at all, at the Redemption Price
with the proceeds from the contemporaneous repayment or redemption of the Junior
Subordinated Debt Securities. Redemptions of the Trust Securities shall be made
and the Redemption Price shall be payable on each Redemption Date (as defined
below) only to the extent that the Trust has funds on hand available for the
payment of such Redemption Price. See also "Subordination of Common Securities."
If the Trust gives a notice of redemption in respect of the Capital
Securities, then, by 12:00 noon, Richmond, Virginia time, on the date fixed for
redemption (the "Redemption Date"), to the extent funds are available, with
respect to the Capital Securities held in global form, the Property Trustee will
deposit irrevocably with DTC funds sufficient to pay the Redemption Price and
will give DTC irrevocable instructions and authority to pay the Redemption Price
to the holders of the Capital Securities. See "Form, Denomination, Book-Entry
Procedures and Transfer." With respect to the Capital Securities held in
certificated form, the Property Trustee, to the extent funds are available, will
irrevocably deposit with the paying agent for the Capital Securities funds
sufficient to pay the Redemption Price and will give such paying agent
irrevocable instructions and authority to
31
<PAGE>
pay the Redemption Price to the holders thereof upon surrender of their
certificates evidencing the Capital Securities. See "Payment and Paying Agency."
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date shall be payable to the holders of the Capital Securities on the
relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of the Capital Securities will
cease, except the right of the holders of the Capital Securities to receive the
Redemption Price, but without interest on such Redemption Price, and the Capital
Securities will cease to be outstanding. In the event that any date fixed for
redemption of Capital Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day. In
the event that payment of the Redemption Price is improperly withheld or refused
and not paid either by the Trust or by the Corporation pursuant to the Guarantee
as described under "Description of Guarantee," Distributions on Capital
Securities will continue to accrue at the then applicable rate, from the
Redemption Date originally established by the Trust to the date such Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding, Capital Securities by tender in the open
market or by private agreement.
Notice of any redemption (other than at the Stated Maturity of the
Junior Subordinated Debt Securities) will be mailed at least 30 days but not
more than 60 days before the Redemption Date to each holder of Trust Securities
at its registered address. Unless the Corporation defaults in payment of the
Redemption Price on, or in the repayment of, the Junior Subordinated Debt
Securities, on and after the Redemption Date, Distributions will cease to accrue
on the Trust Securities called for redemption.
Liquidation of the Trust and Distribution of Junior Subordinated Debt Securities
The Corporation, as the holder of the outstanding Common Securities,
will have the right at any time (including, without limitation, upon the
occurrence of a Tax Event or Capital Treatment Event) to terminate the Trust and
cause a Like Amount of the Junior Subordinated Debt Securities to be distributed
to the holders of the Trust Securities upon liquidation of the Trust. Such right
to terminate is subject to prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve.
Upon liquidation of the Trust and certain other events, the Junior
Subordinated Debt Securities may be distributed to holders of the Capital
Securities. Under current United States federal income tax law, a distribution
of Junior Subordinated Debt Securities upon the dissolution of the Trust would
not be a taxable event to holders of the Capital Securities. If, however, the
Trust is characterized for United States federal income tax purposes as an
association taxable as a corporation at the time of dissolution of the Trust,
the distribution of the Junior Subordinated Debt Securities may constitute a
taxable event to holders of Capital Securities. See "Certain United States
Federal Income Tax Consequences--Distribution of Junior Subordinated Debt
Securities to Holders of Capital Securities."
The Trust shall automatically terminate upon the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of the Corporation;
(ii) the distribution of a Like Amount of the Junior Subordinated Debt
Securities to the holders of the Trust Securities if the Corporation, as
Depositor, has given written direction to the Property Trustee to terminate the
Trust (which direction is optional and, except as described above, wholly within
the discretion of the Corporation, as Depositor); (iii) redemption of all of the
Trust Securities as described
32
<PAGE>
under "Mandatory Redemption" above; (iv) expiration of the term of the Trust;
and (v) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If an early termination occurs as described in clause (i), (ii), (iv)
or (v) above, the Trust shall be liquidated by the Trustees as expeditiously as
the Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Junior Subordinated Debt
Securities, unless such distribution would not be practical, in which event such
holders will be entitled to receive out of the assets of the Trust available for
distribution to holders, after satisfaction of liabilities to creditors of the
Trust as provided by applicable law, an amount equal to, in the case of holders
of Capital Securities, the aggregate of the Liquidation Amount plus accumulated
and unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution"). If such Liquidation Distribution can be paid only
in part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Capital Securities shall be paid on a pro rata basis. The holder(s)
of the Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Capital Securities, except that if
a Debenture Event of Default (or an event that, with notice or passage of time,
would become such an Event of Default) or an Event of Default under the
Declaration has occurred and is continuing, the Capital Securities shall have a
priority over the Common Securities with respect to any such distributions. See
"Subordination of Common Securities." If an early termination occurs as
described in clause (v) above, the Junior Subordinated Debt Securities will be
subject to optional redemption in whole (but not in part).
"Like Amount" means (i) with respect to a redemption of Capital
Securities, Capital Securities having a Liquidation Amount equal to that portion
of the principal amount of Junior Subordinated Debt Securities to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Capital Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of the Capital Securities and (ii) with respect to a
distribution of Junior Subordinated Debt Securities to holders of Capital
Securities in connection with a dissolution or liquidation of the Trust, Junior
Subordinated Debt Securities having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debt Securities are distributed.
If the Corporation elects not to redeem the Junior Subordinated Debt
Securities prior to maturity and the Trust is not liquidated and the Junior
Subordinated Debt Securities are not distributed to holders of the Trust
Securities, the Capital Securities will remain outstanding until the repayment
of the Junior Subordinated Debt Securities at the Stated Maturity.
On and after the liquidation date is fixed for any distribution of
Junior Subordinated Debt Securities to holders of the Trust Securities, (i) the
Capital Securities will no longer be deemed to be outstanding, (ii) DTC or its
nominee, as the record holder of the Capital Securities, will receive a
registered global certificate or certificates representing the Junior
Subordinated Debt Securities to be delivered upon such distribution with respect
to Capital Securities held by DTC or its nominee and (iii) any certificates
representing Capital Securities not held by DTC or its nominee will be deemed to
represent Junior Subordinated Debt Securities having a principal amount equal to
the Liquidation Amount of such Capital Securities and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid Distributions on such
Capital Securities until such certificates are presented to the Administrative
Trustees or their agent for cancellation, whereupon the Corporation will issue
to such holder, and the Debenture Trustee will authenticate, a certificate
representing such Junior Subordinated Debt Securities.
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debt Securities that may be distributed in
exchange for the Trust Securities if a dissolution and liquidation of the Trust
were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior
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Subordinated Debt Securities that the investor may receive on dissolution and
liquidation of the Trust, may trade at a discount to the price that the investor
paid to purchase the Capital Securities offered hereby.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, the Capital
Securities and Common Securities, as applicable, shall be made pro rata to the
holders of Capital Securities and Common Securities based on the Liquidation
Amount of the Trust Securities, provided that, if on any Distribution Date or
Redemption Date any Debenture Event of Default (or an event that, with notice or
passage of time, would become such an Event of Default) or an Event of Default
under the Declaration shall have occurred and be continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, shall be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Capital
Securities for all Distribution periods terminating on or prior thereto, or, in
the case of payment of the Redemption Price, the full amount of such Redemption
Price on all of the outstanding Capital Securities, shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or the
Redemption Price of, the Capital Securities then due and payable.
In the case of any Event of Default under the Declaration resulting
from a Debenture Event of Default, the Corporation as holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default under the Declaration until the effect of all such Events
of Default have been cured, waived or otherwise eliminated. Until all such
Events of Default under the Declaration have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the holders of
such Capital Securities and not on behalf of the Corporation as holder of the
Common Securities, and only the holders of the Capital Securities will have the
right to direct the Property Trustee to act on their behalf.
Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under
the Declaration (an "Event of Default") (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see
"Description of Junior Subordinated Debt Securities--Debenture Events
of Default"); or
(ii) default by the Trust in the payment of any
Distribution when it becomes due and payable, and continuation of such
default for a period of 30 days; or
(iii) default by the Trust in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material
respect, of any covenant or warranty of the Trustees in the Declaration
(other than a covenant or warranty, a default in the performance of
which or the breach of which is addressed in clause (ii) or (iii)
above), and continuation of such default or breach for a period of 60
days after there has been given, by registered or certified mail, to
the defaulting Trustee or Trustees by the holders of at least 25% in
aggregate Liquidation Amount of the outstanding Capital Securities, a
written notice specifying such default or breach and
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requiring it to be remedied and stating that such notice is a "Notice
of Default" under the Declaration; or
(v) the occurrence of certain events of bankruptcy or
insolvency with respect to the Property Trustee and the failure by the
Corporation to appoint a successor Property Trustee within 60 days
thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Capital Securities, the
Administrative Trustees and the Corporation, as Depositor, unless such Event of
Default shall have been cured or waived. The Corporation, as Depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Declaration.
If a Debenture Event of Default (or an event that with notice or the
passage of time, would become such an Event of Default) or an Event of Default
under the Declaration has occurred and is continuing, the Capital Securities
shall have a preference over the Common Securities as described above. See
"Liquidation of the Trust and Distribution of Junior Subordinated Debt
Securities" and "Subordination of Common Securities."
Removal of Trustees
Unless a Debenture Event of Default shall have occurred and be
continuing, any Trustee may be removed at any time by the holder of the Common
Securities. If a Debenture Event of Default has occurred and is continuing, the
Property Trustee and the Delaware Trustee may be removed at such time by the
holders of a majority in Liquidation Amount of the outstanding Capital
Securities. In no event will the holders of the Capital Securities have the
right to vote to appoint, remove or replace the Administrative Trustees, which
voting rights are vested exclusively in the Corporation as the holder of the
Common Securities. No resignation or removal of a Trustee and no appointment of
a successor trustee shall be effective until the acceptance of appointment by
the successor trustee in accordance with the provisions of the Declaration.
Co-trustees and Separate Property Trustee
Unless an Event of Default shall have occurred and be continuing, at
any time or times, for the purpose of meeting the legal requirements of the
Trust Indenture Act or of any jurisdiction in which any part of the Trust's
property may at the time be located, the Corporation, as the holder of the
Common Securities, and the Administrative Trustees shall have power to appoint
one or more persons either to act as a co-trustee, jointly with the Property
Trustee, of all or any part of such Trust's property, or to act as separate
trustee of any such property, in either case with such powers as may be provided
in the instrument of appointment, and to vest in such person or persons in such
capacity any property, title, right or power deemed necessary or desirable,
subject to the provisions of the Declaration. In case a Debenture Event of
Default has occurred and is continuing, the Property Trustee alone shall have
power to make such appointment.
Merger or Consolidation of Trustees
Any person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Declaration,
provided such person shall be otherwise qualified and eligible.
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Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below or as otherwise set forth in the Declaration. The Trust may, at
the request of the Corporation, as Depositor, with the consent of the
Administrative Trustees but without the consent of the holders of the Capital
Securities, the Property Trustee or the Delaware Trustee, merge with or into,
consolidate, amalgamate or be replaced by, or convey, transfer or lease its
properties and assets substantially as an entirety to, a trust organized as such
under the laws of any State; provided, however, that (i) such successor entity
either (a) expressly assumes all of the obligations of the Trust with respect to
the Capital Securities or (b) substitutes for the Capital Securities other
securities having substantially the same terms as the Capital Securities (the
"Successor Securities") so long as the Successor Securities rank the same as the
Capital Securities rank in priority with respect to distributions and payments
upon liquidation, redemption and otherwise, (ii) the Corporation expressly
appoints a trustee of such successor entity possessing the same powers and
duties as the Property Trustee as the holder of the Junior Subordinated Debt
Securities, (iii) the Successor Securities are listed or traded, or any
Successor Securities will be listed or traded upon notification of issuance, on
any national securities exchange or other organization on which the Capital
Securities are then listed or traded, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Capital
Securities (including any Successor Securities) in any material respect, (v)
such successor entity has a purpose identical and limited to that of the Trust,
(vi) prior to such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, the Corporation has received an opinion from independent
counsel to the Trust experienced in such matters to the effect that (a) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Capital Securities (including any Successor Securities) in any material
respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act of 1940 (the "Investment Company Act") and (vii) the
Corporation or any permitted successor or assignee owns all of the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except
with the consent of holders of 100% in Liquidation Amount of the Trust
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to any other entity or permit any other entity to consolidate, amalgamate, merge
with or into, or replace it, if such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity to be classified as an association taxable as a corporation or
as other than a grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of the Declaration
Except as provided below and under "Description of
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Declaration, the holders of the Capital Securities will have no voting rights.
The Declaration may be amended from time to time by the Corporation,
the Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provision in the Declaration that may be inconsistent with any
other provision, or to make any other provisions with respect to matters or
questions arising under the Declaration, which shall not be inconsistent with
the other provisions of the Declaration, or (ii) to modify, eliminate or add to
any provisions of the Declaration to such extent as shall be necessary to ensure
that the Trust will be classified for United States federal income tax purposes
as a grantor trust or as other than an association taxable as a corporation at
all times that any Trust Securities are outstanding or to ensure that the Trust
will not be required to register as an
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"investment company" under the Investment Company Act; provided, however, that
in the case of clause (i), such action shall not adversely affect in any
material respect the interests of any holder of Trust Securities, and any
amendments of the Declaration shall become effective when notice thereof is
given to the holders of the Trust Securities. The Declaration may be amended by
the Trustees and the Corporation with (i) the consent of holders representing
not less than a majority (based upon Liquidation Amounts) of the outstanding
Capital Securities, and (ii) receipt by the Trustees of an opinion of counsel to
the effect that such amendment or the exercise of any power granted to the
Trustees in accordance with such amendment will not cause the Trust to be
classified as an association taxable as a corporation or affect the Trust's
status as a grantor trust for United States federal income tax purposes or the
Trust's exemption from status as an "investment company" under the Investment
Company Act. In addition, without the consent of each holder of Trust
Securities, the Declaration may not be amended to (i) change the amount or
timing of any Distribution on the Trust Securities or otherwise adversely affect
the amount of any Distribution required to be made in respect of the Trust
Securities as of a specified date or (ii) restrict the right of a holder of
Trust Securities to institute suit for the enforcement of any such payment on or
after such date.
So long as any Junior Subordinated Debt Securities are held by the
Trust, the Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debt Securities, (ii) waive any past default that is
waivable under Section 5.13 of the Indenture, (iii) exercise any right to
rescind or annul a declaration that the principal of all the Junior Subordinated
Debt Securities shall be due and payable or (iv) consent to any amendment,
modification or termination of the Indenture or the Junior Subordinated Debt
Securities, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Capital Securities; provided, however,
that where a consent under the Indenture would require the consent of each
holder of Junior Subordinated Debt Securities affected thereby, no such consent
shall be given by the Property Trustee without the prior consent of each holder
of the Capital Securities. The Trustees shall not revoke any action previously
authorized or approved by a vote of the holders of the Capital Securities except
by subsequent vote of such holders. The Property Trustee shall notify each
holder of Capital Securities of any notice of default with respect to the Junior
Subordinated Debt Securities. In addition to obtaining the foregoing approvals
of such holders of the Capital Securities, prior to taking any of the foregoing
actions, the Trustees shall obtain an opinion of counsel experienced in such
matters to the effect that the Trust will not be classified as an association
taxable as a corporation for United States federal income tax purposes as a
result of such action and such action would not cause the Trust to be classified
as other than a grantor trust for United States federal income tax purposes.
Any required approval of holders of Capital Securities may be given at
a meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of Capital Securities are entitled to vote, or of any matter upon which
action by written consent of such holders is to be taken, to be given to each
holder of record of Capital Securities in the manner set forth in the
Declaration.
No vote or consent of the holders of Capital Securities will be
required for the Trust to redeem and cancel the Capital Securities in accordance
with the Declaration.
Notwithstanding that holders of the Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Capital Securities that are owned by the Corporation, the Trustees or any
affiliate of the Corporation or any Trustees, shall, for purposes of such vote
or consent, be treated as if they were not outstanding.
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Expenses and Taxes
In the Indenture, the Corporation, as borrower, has agreed to pay all
debts and other obligations (other than with respect to payments of
Distributions, amounts payable upon redemption and the Liquidation Amount of the
Trust Securities) and all costs and expenses of the Trust (including costs and
expenses relating to the organization of the Trust, the fees and expenses of the
Trustees and the costs and expenses relating to the operation of the Trust) and
the offering of the Capital Securities, and to pay any and all taxes and all
costs and expenses with respect to the foregoing (other than United States
withholding taxes) to which the Trust might become subject. The foregoing
obligations of the Corporation under the Indenture are for the benefit of, and
shall be enforceable by, any person to whom any such debts, obligations, costs,
expenses and taxes are owed (a "Creditor") whether or not such Creditor has
received notice thereof. Any such Creditor may enforce such obligations of the
Corporation directly against the Corporation, and the Corporation has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Corporation. The Corporation has also agreed in the Indenture to execute such
additional agreement(s) as may be necessary or desirable to give full effect to
the foregoing.
Form, Denomination, Book-Entry Procedures and Transfer
The Capital Securities initially will be evidenced by certificates in
fully registered form (each, a "Certificate"). The Property Trustee will from
time to time register the transfer of any outstanding Certificate upon surrender
thereof at the office of the Property Trustee which is currently located at 1100
N. Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust
Administration (the "Property Trustee's Office"), duly endorsed by, or
accompanied by a written instrument or instruments of transfer in a form
satisfactory to the Property Trustee duly executed by the holder thereof, a duly
appointed legal representative or a duly authorized attorney. Such signature
must be guaranteed by a bank or trust company having a correspondent office in
New York City or by a broker or dealer that is a member of the National
Association of Securities Dealers, Inc. (the "NASD") or a member of a national
securities exchange. A new Certificate will be issued to the transferee upon any
such registration of transfer.
At the option of a holder, Certificates may be exchanged for other
Certificates representing a like number of Capital Securities, upon surrender to
the Property Trustee at the Property Trustee's Office of the Certificates to be
exchanged. The Corporation will thereupon execute, and the Property Trustee will
authenticate and deliver, one or more new Certificates representing such like
number of Capital Securities.
If any Certificate is mutilated, lost, stolen or destroyed, the
Corporation shall execute, and the Property Trustee shall authenticate and
deliver, in exchange and substitution for such mutilated Certificate, or in
replacement for such lost, stolen or destroyed Certificate, a new Certificate
representing the same number of Capital Securities represented by such
Certificate, but only upon receipt of evidence satisfactory to the Corporation
and to the Property Trustee of loss, theft or destruction of such Certificate
and security or indemnity, if requested, satisfactory to them. Holders
requesting replacement Certificates must also comply with such other reasonable
regulations as the Corporation or the Property Trustee may prescribe.
No service charge will be made for any registration of transfer or
exchange of Certificates, but the Corporation may require the payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection therewith, other than exchanges not involving any transfer. In the
case of the replacement of mutilated, lost, stolen or destroyed Certificates,
the Corporation may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith and any
other expenses (including the fees and expenses of the Property Trustee)
connected therewith.
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Possible Exchange for Book-Entry Capital Securities.
Following the issuance of the Capital Securities, the Corporation will
make the Capital Securities available in book-entry form ("Book-Entry Capital
Securities"). Holders may (but are not required to) exchange Certificates for
Book-Entry Capital Securities, which will be represented by a beneficial
interest in a Global Security (as defined below), by causing the Certificates to
be delivered to Depository Trust Corporation ("DTC"), in proper form for deposit
into DTC's book-entry system, on or after the Initial Exchange Date (as defined
below). Certificates received by DTC for exchange during the period commencing
on a date designated by the Corporation (the "Initial Exchange Date") and ending
on the fifth day after the Initial Exchange Date (the "Initial Exchange Period")
will be exchanged for Book-Entry Capital Securities by the close of business on
the Business Day on which they are received by DTC (if received by DTC by its
then applicable cut-off time for same-day credit) or on the following Business
Day (if received by DTC by its then applicable cut-off time for next-day
credit).
After the last day of the Initial Exchange Period, DTC will not be
required to accept delivery of Certificates in exchange for Book-Entry Capital
Securities, but DTC may permit such Certificates to be so exchanged on a
case-by-case basis. It is anticipated that after the Initial Exchange Period,
Certificates delivered to DTC in good order and in proper form for deposit will
be accepted by DTC for exchange for Book-Entry Capital Securities generally
within three to four Business Days after delivery to DTC. However, there can be
no assurance that such Certificates will be accepted for exchange or, if
accepted, that such exchange will occur within such time period. Certificates
surrendered at any time for exchange for Book-Entry Capital Securities may not
be delivered for settlement or transfer until such exchange has been effected.
Accordingly, persons purchasing Capital Securities in secondary market trading
after the Initial Exchange Date may wish to make specific arrangements with
brokers or DTC's participants if they wish to purchase only Book-Entry Capital
Securities and not Certificates.
The Corporation will notify DTC, the Property Trustee and each holder
of a Certificate by overnight mail that exchanges of Certificates for Book-Entry
Capital Securities will commence on the Initial Exchange Date, which will be
approximately one Business Day after the date on which the Corporation notifies
DTC that it has elected to permit such exchanges. The Initial Exchange Date will
not be later than one day after January 21, 1998.
In order to be exchanged for Book-Entry Capital Securities, a
Certificate must be delivered to DTC, in proper form for deposit, by a
Participant. Accordingly, holders of Capital Securities that are not
Participants must deliver their Certificates, in proper form for deposit, to a
Participant, either directly or through a brokerage firm that maintains an
account with a Participant, in order to have their Certificates exchanged for
Book-Entry Capital Securities. Holders of Capital Securities that desire to
exchange their Certificates for Book-Entry Capital Securities should contact
their broker or a Participant to obtain information on procedures for submitting
their Certificates to DTC, including the proper form for submission and (during
the Initial Exchange Period) the cut-off times for same-day and next-day
exchange. A Certificate that is held on behalf of a beneficial owner in nominee
or "street name" may be automatically exchanged for Book-Entry Capital
Securities by the broker or other entity that is the registered holder of such
Capital Securities, without any action of or consent by the beneficial owner of
the Capital Securities.
Book-Entry System.
Any Book-Entry Capital Securities will be represented by a single
global security (a "Global Security"), which will be deposited with, or on
behalf of, DTC, and registered in the name of a nominee of DTC. Certificates
that have been exchanged for Book-Entry Capital Securities may not be
re-exchanged for Certificates, except under the limited circumstances described
in "Description of Capital Securities--Form,
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Denomination, Book-Entry Procedures and Transfer - Exchange of Book-Entry
Capital Securities for Certificated Capital Securities." Unless and until it is
exchanged in whole or in part for Certificates, the Global Security may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC.
The Capital Securities (including beneficial interests in the Global
Capital Securities) will be subject to certain restrictions on transfer and will
bear a restrictive legend substantially similar to that described under "Notice
to Investors." In addition, transfer of beneficial interests in the Global
Capital Securities will be subject to the applicable rules and procedures of DTC
and its direct or indirect participants which may change from time to time.
Depositary Procedures
DTC has advised the Trust and the Corporation as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
to accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers
(including the Underwriter), banks, trust companies, clearing corporations and
certain other organizations. Indirect access to DTC's system is also available
to other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interest
and transfer of ownership interest of each actual purchaser of each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Trust and the Corporation that, pursuant to
procedures established by it, (i) upon deposit of the Global Capital Securities,
DTC will credit the accounts of Participants with portions of the principal
amount of the Global Capital Securities and (ii) ownership of such interests in
the Global Capital Securities will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Capital
Securities).
Investors in the Global Capital Securities may hold their interests
therein directly through DTC, if they are Participants in DTC, or indirectly
through organizations which are Participants in such system. All interests in a
Global Capital Security will be subject to the procedures and requirements of
DTC. The laws of some states require that certain persons take physical delivery
in certificated form of certain securities, such as the Capital Securities, that
they own. Consequently, the ability to transfer beneficial interests in a Global
Capital Security to such persons will be limited to that extent. Because DTC can
act only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Capital Security to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the Capital Securities, see "Exchange of Book-Entry Capital Securities for
Certificated Capital Securities."
Except as described below, owners of beneficial interests in the Global
Capital Securities will not be entitled to have Capital Securities registered in
their names, will not receive or be entitled to receive physical delivery of
Capital Securities in certificated form and will not be considered the
registered owners or holders thereof under the Declaration for any purpose.
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Payments in respect of the Global Capital Security registered in the
name of DTC or its nominee will be payable by the Property Trustee to DTC or its
nominee as the registered holder under the Declaration by wire transfer in
immediately available funds on each Distribution Date. Under the terms of the
Declaration, the Property Trustee will treat the persons in whose names the
Capital Securities, including the Global Capital Securities, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Property Trustee nor
any agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to, or payments made on account of, beneficial ownership interests in
the Global Capital Securities, or for maintaining, supervising or reviewing any
of DTC's records or any Participant's or Indirect Participant's records relating
to the beneficial ownership interests in the Global Capital Securities, or (ii)
any other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Trust and the
Corporation that its current practice, upon receipt of any payment in respect of
securities such as the Capital Securities, is to credit the accounts of the
relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in Liquidation Amount of beneficial
interests in the Global Capital Security, as shown on the records of DTC, unless
DTC has reason to believe it will not receive payment on such payment date.
Payments by the Participants and the Indirect Participants to the beneficial
owners of Capital Securities represented by Global Capital Securities held
through such Participants will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Property
Trustee or the Trust. Neither the Trust nor the Property Trustee will be liable
for any delay by DTC or any of its Participants in identifying the beneficial
owners of the Capital Securities, and the Trust and the Property Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Interests in the Global Capital Securities will trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such interests
will therefore settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its Participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
DTC has advised the Trust and the Corporation that it will take any
action permitted to be taken by a holder of Capital Securities (including,
without limitation, the presentation of Capital Securities for exchange as
described below) only at the direction of one or more Participants to whose
account with DTC interests in the Global Capital Securities are credited and
only in respect of such portion of the aggregate Liquidation Amount of the
Capital Securities represented by the Global Capital Securities as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Declaration, DTC reserves the right to exchange
the Global Capital Securities for legended Capital Securities in certificated
form and to distribute such Capital Securities to its Participants.
So long as DTC or its nominee is the registered owner of the Global
Capital Securities, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Capital Securities represented by the Global
Capital Security for all purposes under the Declaration.
Neither DTC nor its nominee will consent or vote with respect to the
Capital Securities. Under its usual procedures, DTC would mail an omnibus proxy
to the Trust as soon as possible after the record date. The omnibus proxy
assigns the consenting or voting rights of DTC or its nominee to those
Participants to whose
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accounts the Capital Securities are credited on the record date (identified in a
listing attached to the omnibus proxy).
The information in this section concerning DTC and its book-entry
system has been obtained from sources that the Trust and the Corporation believe
to be reliable, but neither the Trust nor the Corporation takes responsibility
for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Capital Securities among Participants in
DTC, it is under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trust nor the Property Trustee will have any responsibility for the performance
by DTC or its Participants or Indirect Participants of their respective
obligations under the rules and procedures governing their operations.
Exchange of Book-Entry Capital Securities for Certificated Capital Securities
A Global Capital Security is exchangeable for Capital Securities in
registered certificated form if (i) DTC (x) notifies the Trust that it is no
longer willing or able to properly discharge its responsibilities with respect
to the Capital Securities and the Corporation is unable to locate a qualified
successor, or (y) has ceased to be a "clearing agency" registered under the
Exchange Act; (ii) the Trust at its sole option elects to terminate the
book-entry system through DTC; or (iii) there shall have occurred and be
continuing a Debenture Event of Default. In addition, beneficial interests in a
Global Capital Security may be exchanged by or on behalf of DTC for certificated
Capital Securities upon request by DTC, but only upon at least 20 days prior
written notice given to the Property Trustee in accordance with DTC's customary
procedures. In all cases, certificated Capital Securities delivered in exchange
for any Global Capital Security or beneficial interests therein will be
registered in the names, and issued in any approved denominations, requested by
or on behalf of DTC (in accordance with its customary procedures) and will bear
the restrictive legend referred to in "Notice to Investors," unless the Property
Trustee (based on an opinion of counsel) determines otherwise in compliance with
applicable law.
Payment and Paying Agency
Payments in respect of the Capital Securities held in global form shall
be made to DTC, which shall credit the relevant accounts at DTC on the
applicable Distribution Dates or in respect of the Capital Securities that are
not held by DTC, such payments shall be made by check mailed to the address of
the holder entitled thereto as such address shall appear on the register. The
paying agent (the "Paying Agent") shall initially be the Property Trustee and
any co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the Corporation. The Paying Agent shall be permitted
to resign as Paying Agent upon 30 days' written notice to the Property Trustee,
the Administrative Trustees and the Corporation. In the event that the Property
Trustee shall no longer be the Paying Agent, the Administrative Trustees shall
appoint a successor (which shall be a bank or trust company acceptable to the
Administrative Trustees and the Corporation) to act as Paying Agent.
Wilmington Trust Company has informed the Trust that so long as it
serves as paying agent for the Capital Securities, it anticipates that
information regarding Distributions on the Capital Securities, including payment
date, record date and redemption information, will be made available through
Wilmington Trust Company at 1100 N. Market Street, Wilmington, Delaware,
Attention: Corporate Trust Administration.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of the Capital Securities will be effected
without charge by or on behalf of the Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any
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transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer or exchange of the Capital Securities after they have
been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Declaration and, during the existence of an Event
of Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Declaration at the request of any holder of Trust
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby. If no Event of Default has
occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the
Declaration or is unsure of the application of any provision of the Declaration,
and the matter is not one on which holders of the Capital Securities or the
Common Securities are entitled under the Declaration to vote, then the Property
Trustee shall take such action as is directed by the Corporation and, if not so
directed, shall take such action as it deems advisable and in the best interests
of the holders of the Trust Securities and will have no liability except for its
own bad faith, negligence or willful misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes or as other than a grantor trust
for United States federal income tax purposes, and so that the Junior
Subordinated Debt Securities will be treated as indebtedness of the Corporation
for United States federal income tax purposes. In this connection, the
Corporation and the Administrative Trustees are authorized to take any action,
not inconsistent with applicable law, the certificate of trust of the Trust or
the Declaration, that the Corporation and the Administrative Trustees determine
in their discretion to be necessary or desirable for such purposes, as long as
such action does not materially adversely affect the interests of the holders of
the Trust Securities.
Holders of the Trust Securities have no preemptive or similar rights.
The Trust may not borrow money or issue debt or mortgage or pledge any
of its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES
The Junior Subordinated Debt Securities are to be issued as a separate
series under a Junior Subordinated Indenture, as supplemented from time to time
(as so supplemented, the "Indenture"), between the Corporation and Wilmington
Trust Company, as trustee (the "Debenture Trustee"). The Indenture will be
qualified under the Trust Indenture Act. This summary of certain terms and
provisions of the Junior Subordinated Debt Securities and the Indenture does not
purport to be complete, and where reference is made to particular provisions of
the Indenture, such provisions, including the definitions of certain terms, some
of which are not otherwise defined herein, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a part
of the Indenture by the Trust Indenture Act.
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General
Concurrently with the issuance of the Trust Securities, the Trust will
invest the proceeds thereof in Junior Subordinated Debt Securities issued by the
Corporation. The Junior Subordinated Debt Securities will bear interest at 9.25%
per annum of the principal amount thereof, payable quarterly in arrears on the
15th day of April, July, October and January of each year (each, an "Interest
Payment Date"), commencing April 15, 1998, to the person in whose name each
Junior Subordinated Debt Security is registered, subject to certain exceptions,
at the close of business on the Business Day next preceding such Interest
Payment Date. It is anticipated that, until the liquidation of the Trust, each
Junior Subordinated Debt Security will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
amount of interest payable for any period will be computed on the basis of the
actual number of days elapsed in a year of twelve 30-day months. In the event
that any date on which interest is payable on the Junior Subordinated Debt
Securities is not a Business Day, then payment of the interest payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay), with the same force
and effect as if made on the date such payment was originally payable. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
9.25% per annum thereof, compounded quarterly from the relevant Interest Payment
Date. The term "interest" as used herein shall include quarterly payments,
interest on quarterly interest payments not paid on the applicable Interest
Payment Date and Additional Sums, as applicable.
The Junior Subordinated Debt Securities will be issued as a series of
Junior Subordinated Debt Securities under the Indenture. Unless previously
redeemed or repurchased, the Junior Subordinated Debt Securities will mature on
January 15, 2028. See "Optional Redemption."
The Junior Subordinated Debt Securities will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Debt. Because the
Corporation is a bank holding company, the right of the Corporation to
participate in any distribution of assets of any subsidiary, including the Bank,
upon such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Capital Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of such subsidiary,
except to the extent that the Corporation may itself be recognized as a creditor
of such subsidiary. Accordingly, the Junior Subordinated Debt Securities will be
subordinated to all Senior Debt and effectively subordinated to all existing and
future liabilities of the Corporation's subsidiaries, and holders of Junior
Subordinated Debt Securities should look only to the assets of the Corporation
for payments on the Junior Subordinated Debt Securities. The Indenture does not
limit the incurrence or issuance of other secured or unsecured debt of the
Corporation, including Senior Debt, whether under the Indenture or any existing
or other indenture that the Corporation may enter into in the future or
otherwise. See "Subordination."
The Junior Subordinated Debt Securities will rank pari passu with all
Other Debentures issued under the Indenture and will be unsecured and
subordinate and junior in right of payment to the extent and in the manner set
forth in the Indenture to all Senior Debt of the Corporation. See
"Subordination." As a holding company, the Corporation conducts its operations
principally through the Bank and, therefore, its principal source of cash, other
than its investing and financing activities, is receipt of dividends from the
Bank. The Corporation is a legal entity separate and distinct from the Bank and
its other subsidiaries. See "Risk Factors--Ranking of Obligations Under the
Guarantee and the Junior Subordinated Debt Securities" and "-Status of the
Corporation as a Bank Holding Company." The Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to, and certain
other transactions with, the Corporation and certain other affiliates, and on
investments in stock or other securities thereof. Such restrictions prevent the
Corporation and such other affiliates from borrowing from the Bank unless the
loans are secured by various types of collateral. In addition, payment of
dividends to the Corporation by the Bank is subject to ongoing review by banking
regulators and is subject to various statutory limitations and in certain
circumstances requires approval by banking regulatory
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authorities. The Other Debentures will be issuable in one or more series
pursuant to an indenture supplemental to the Indenture or a resolution of the
Corporation's Board of Directors or a committee thereof.
Denominations, Registration and Transfer
The Junior Subordinated Debt Securities will be represented by one or
more global certificates registered in the name of Cede & Co. as the nominee of
DTC if, and only if, distributed to the holders of the Trust Securities. Until
such time, the Junior Subordinated Debt Securities will be held in the name of
the Property Trustee in trust for the benefit of the holders of the Trust
Securities. Should the Junior Subordinated Debt Securities be distributed to
holders of the Trust Securities, beneficial interests in the Junior Subordinated
Debt Securities will be shown on, and transfers thereof will be effected only
through, records maintained by Participants in DTC. Except as described below,
Junior Subordinated Debt Securities in certificated form will not be issued in
exchange for the global certificates.
A global security shall be exchangeable for Junior Subordinated Debt
Securities registered in the names of persons other than Cede & Co. only if (i)
DTC notifies the Corporation that it is unwilling or unable to continue as a
depositary for such global security and no successor depositary shall have been
appointed, or if at any time DTC ceases to be a "clearing agency" registered
under the Exchange Act, at a time when DTC is required to be so registered to
act as such depositary, (ii) the Corporation in its sole discretion determines
that such global security shall be so exchangeable, or (iii) there shall have
occurred and be continuing a Debenture Event of Default. Any global security
that is exchangeable pursuant to the preceding sentence shall be exchangeable
for certificates registered in such names as DTC shall direct. It is expected
that such instructions will be based upon directions received by DTC from its
Participants with respect to ownership of beneficial interests in such global
security.
Payments on Junior Subordinated Debt Securities represented by a global
security will be made to DTC, as the depositary for the Junior Subordinated Debt
Securities. In the event Junior Subordinated Debt Securities are issued in
certificated form, principal and interest will be payable, the transfer of the
Junior Subordinated Debt Securities will be registrable, and Junior Subordinated
Debt Securities will be exchangeable for Junior Subordinated Debt Securities of
other denominations of a like aggregate principal amount, at the corporate
office of the Debenture Trustee in Wilmington, Delaware, or at the offices of
any paying agent or transfer agent appointed by the Corporation, provided that
payment of interest may be made at the option of the Corporation by check mailed
to the address of the persons entitled thereto or by wire transfer.
For a description of DTC and the terms of the depositary arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Description of Capital Securities--Form, Denomination,
Book-Entry Procedures and Transfer." If the Junior Subordinated Debt Securities
are distributed to the holders of the Trust Securities upon the termination of
the Trust, the form, denomination, book-entry and transfer procedures with
respect to the Capital Securities as described under "Description of Capital
Securities--Form, Denomination, Book-Entry Procedures and Transfer," shall apply
to the Junior Subordinated Debt Securities mutatis mutandis.
Payment and Paying Agents
Payment of principal of and any interest on Junior Subordinated Debt
Securities will be made at the office of the Debenture Trustee in Wilmington,
Delaware or at the office of such Paying Agent or Paying Agents as the
Corporation may designate from time to time, except that at the option of the
Corporation payment of any interest may be made (except in the case of Junior
Subordinated Debt Securities in global form), (i) by check mailed to the address
of the person entitled thereto as such address shall appear in the register for
Junior Subordinated Debt Securities or (ii) by wire transfer to an account
specified by the person entitled thereto as
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specified in such register, provided that proper transfer instructions have been
received by the relevant Record Date. Payment of any interest on any Junior
Subordinated Debt Security will be made to the person in whose name such Junior
Subordinated Debt Security is registered at the close of business on the Record
Date for such interest, except in the case of defaulted interest. The
Corporation may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent; however the Corporation will at all times be
required to maintain a Paying Agent in each Place of Payment for the Junior
Subordinated Debt Securities.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Corporation in trust, for the payment of the principal of or
interest on any Junior Subordinated Debt Security and remaining unclaimed for
two years after such principal or interest has become due and payable shall, at
the request of the Corporation, be repaid to the Corporation and the holder of
such Junior Subordinated Debt Security shall thereafter look, as a general
unsecured creditor, only to the Corporation for payment thereof.
Option to Extend Interest Payment Date
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debt Securities at any time or
from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each Extension Period, provided, that no Extension Period may
extend beyond the Stated Maturity of the Junior Subordinated Debt Securities. At
the end of an Extension Period, the Corporation must pay all interest then
accrued and unpaid on the Junior Subordinated Debt Securities (together with
interest thereon accrued at 9.25% per annum, compounded quarterly from the
relevant Interest Payment Date, to the extent permitted by applicable law).
During an Extension Period and for so long as the Junior Subordinated Debt
Securities remain outstanding, interest will continue to accrue and holders of
Junior Subordinated Debt Securities (and holders of the Capital Securities while
Capital Securities are outstanding) will be required to accrue interest income
(in the form of OID) for United States federal income tax purposes. See "Certain
United States Federal Income Tax Consequences-Interest Income and Original Issue
Discount."
During any Extension Period, the Corporation may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(which includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Corporation (including any Other Debentures) that rank pari
passu with or junior in interest to the Junior Subordinated Debt Securities or
(iii) make any guarantee payments with respect to any guarantee by the
Corporation of the debt securities of any subsidiary of the Corporation
(including any Other Guarantees) if such guarantee ranks pari passu with or
junior in interest to the Junior Subordinated Debt Securities (other than (a)
dividends or distributions in Common Stock of the Corporation, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) purchases or acquisitions of shares of the
Corporation's Common Stock in connection with the satisfaction by the
Corporation of its obligations under any employee benefit plan or any other
contractual obligation of the Corporation (other than a contractual obligation
ranking pari passu with or junior to the Junior Subordinated Debt Securities),
(e) as a result of a reclassification of the Corporation's capital stock or the
exchange or conversion of one class or series of the Corporation's capital stock
for another class or series of the Corporation's capital stock or (f) the
purchase of fractional interests in shares of the Corporation's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged). Prior to the termination of any
Extension Period the Corporation may further extend such Extension Period,
provided, however, that such extension does not cause such Extension Period to
exceed 20 consecutive quarterly periods or to extend beyond the Stated Maturity
of the Junior Subordinated Debt Securities. Upon the termination of any
Extension Period and the payment of all interest then accrued and unpaid on the
Junior Subordinated Debt Securities (together with interest thereon accrued at
9.25%
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per annum, compounded quarterly, to the extent permitted by applicable law), and
subject to the foregoing limitations, the Corporation may elect to begin a new
Extension Period. No interest shall be due and payable during an Extension
Period, except at the end thereof. The Corporation must give the Property
Trustee, the Administrative Trustees and the Debenture Trustee notice of its
election of any Extension Period (or an extension thereof) at least three
Business Days prior to the earlier of (i) the date the Distributions on the
Capital Securities would have been payable except for the election to begin or
extend such Extension Period or (ii) the date the Administrative Trustees are
required to give notice to any automated quotation system or to holders of
Capital Securities of the record date or the date such Distributions are
payable, but in any event not less than three Business Days prior to such record
date. The Debenture Trustee shall give notice of the Corporation's election to
begin or extend a new Extension Period to the holders of the Capital Securities.
There is no limitation on the number of times that the Corporation may elect to
begin an Extension Period.
Optional Redemption
The Junior Subordinated Debt Securities are redeemable prior to
maturity at the option of the Corporation (i) on or after January 15, 2008, in
whole at any time or in part from time to time, or (ii) in whole, but not in
part, at any time within 90 days following the occurrence and during the
continuation of a Tax Event, Investment Company Event or Capital Treatment Event
(each as defined under "Description of Capital Securities - Mandatory
Redemption"), in each case at the redemption price described below. The proceeds
of any such redemption will be used by the Trust to redeem the Capital
Securities.
The Federal Reserve's risk-based capital guidelines, which are subject
to change, currently provide that redemptions of permanent equity or other
capital instruments before stated maturity could have a significant impact on a
bank holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
The redemption of the Junior Subordinated Debt Securities by the
Corporation prior to their Stated Maturity would constitute the redemption of
capital instruments under the Federal Reserve's current risk-based capital
guidelines and may be subject to the prior approval of the Federal Reserve. The
redemption of the Junior Subordinated Debt Securities also could be subject to
the additional prior approval of the Federal Reserve under its current
risk-based capital guidelines.
The Redemption Price for Junior Subordinated Debt Securities in the
case of a redemption under (i) above shall equal the following prices, expressed
in percentages of the principal amount, together with accrued interest to but
excluding the date fixed for redemption. If redeemed during the 12-month period
beginning January 15:
Year Redemption Price
- ---- ----------------
2008 104.625%
2009 104.163%
2010 103.700%
2011 103.238%
2012 102.775%
2013 102.313%
2014 101.850%
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2015 101.388%
2016 100.925%
2017 100.463%
and at 100% on or after January 15, 2018
The Redemption Price in the case of a redemption on or after January
15, 2008 following a Tax Event, Investment Company Event or Capital Treatment
Event shall equal the Redemption Price then applicable to a redemption under (i)
above. The Redemption Price for Junior Subordinated Debt Securities, in the case
of a redemption prior to January 15, 2008 following a Tax Event, Investment
Company Event or Capital Treatment Event as described under (ii) above, will
equal the Make-Whole Amount (as defined under "Description of Capital Securities
- - Mandatory Redemption"), together with accrued interest to but excluding the
date fixed for redemption.
Additional Sums
The Corporation has covenanted in the Junior Subordinated Indenture
that, if and for so long as (i) the Trust is the holder of all Junior
Subordinated Debt Securities and (ii) the Trust is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Company will pay as additional sums on the Junior Subordinated Debt
Securities such amounts as may be required so that the Distributions payable by
the Trust will not be reduced as a result of any such additional taxes, duties
or other governmental charges. See "Description of Capital Securities -
Mandatory Redemption."
Interest
The Junior Subordinated Debt Securities shall bear interest at 9.25%
per annum, from the original date of issuance, payable quarterly in arrears on
the 15th day of April, July, October and January of each year, commencing April
15, 1998, to the person in whose name such Junior Subordinated Debt Security is
registered, subject to certain exceptions, at the close of business on the
Business Day next preceding, such Interest Payment Date. The term "interest" as
used herein, as such term relates to the Junior Subordinated Debt Securities,
includes any compounded interest or Additional Sums or any Additional
Distributions payable unless otherwise stated. In the event the Junior
Subordinated Debt Securities are not held solely in book-entry only form, the
Corporation will select relevant record dates, which shall be 15 days prior to
the relevant Interest Payment Date.
The amount of interest payable for any period will be computed on the
basis of the actual number of days elapsed in a year of twelve 30-day months. In
the event that any date on which interest is payable on the Junior Subordinated
Debt -Securities is not a Business Day, then payment of the interest payable -on
- -such date will -be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay) with the
same force and effect as if made on such date.
Additional Sums
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Corporation will pay as
additional amounts on the Junior Subordinated Debt Securities such amounts as
shall be required so that the Distributions payable by the Trust shall not be
reduced as a result of any such additional taxes, duties or other governmental
charges. The Corporation has covenanted in the Indenture that, if and so long as
(i) the Trust is the holder of all Junior Subordinated Debt Securities and (ii)
a Tax Event in respect of the Trust has occurred and is continuing, it will pay
Additional Sums (as defined under "Description of Capital Securities-Mandatory
Redemption") in respect of such Trust Securities to the Trust.
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Restrictions on Certain Payments
The Corporation will also covenant that it will not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(which includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay or repurchase or redeem any debt
securities of the Corporation (including Other Debentures) that rank pari passu
with or junior in interest to the Junior Subordinated Debt Securities or (iii)
make any guarantee payments with respect to any guarantee by the Corporation of
the debt securities of any subsidiary of the Corporation (including under Other
Guarantees) if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debt Securities (other than (a) dividends or distributions
in Common Stock of the Corporation, (b) any declaration of a dividend in
connection with the implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the
Guarantee, (d) purchases or acquisitions of shares of the Corporation's Common
Stock in connection with the satisfaction by the Corporation of its obligations
under any employee benefit plan or any other contractual obligation of the
Corporation (other than a contractual obligation ranking pari passu with or
junior in interest to the Junior Subordinated Debt Securities), (e) as a result
of a reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock or (f) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged), if at such time (i) there shall have occurred a
Debenture Event of Default, (ii) the Corporation shall be in default with
respect to its payment of any obligations under the Guarantee or (iii) the
Corporation shall have given notice of its election of an Extension Period as
provided in the Indenture and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing.
Modification of Indenture
From time to time the Corporation and the Debenture Trustee may,
without the consent of the holders of Junior Subordinated Debt Securities,
amend, waive or supplement the Indenture for specified purposes, including,
among other things, curing ambiguities, defects or inconsistencies (provided
that any such action does not materially adversely affect the interest of the
holders of Junior Subordinated Debt Securities or the holders of the Capital
Securities so long as they remain outstanding) and maintaining the qualification
of the Indenture under the Trust Indenture Act. The Indenture contains
provisions permitting the Corporation and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of
outstanding Junior Subordinated Debt Securities, to modify the Indenture in a
manner affecting the rights of the holders of Junior Subordinated Debt
Securities; provided, however, that no such modification may, without the
consent of the holder of each outstanding Junior Subordinated Debt Security so
affected, change the Stated Maturity, or reduce the principal amount of the
Junior Subordinated Debt Securities, or reduce the rate or extend the time of
payment of interest thereon or reduce the percentage of principal amount of
Junior Subordinated Debt Securities, or have certain other effects as set forth
in the Indenture.
In addition, the Corporation and the Debenture Trustee may execute,
without the consent of any holder of Junior Subordinated Debt Securities, any
supplemental Indenture for the purpose of creating any Other Debentures.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debt Securities that has occurred
and is continuing constitutes a "Debenture Event of Default":
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(i) failure for 30 days to pay any interest on the Junior
Subordinated Debt Securities when due (subject to the deferral of any
due date in the case of an Extension Period); or
(ii) failure to pay any principal on the Junior
Subordinated Debt Securities when due, whether at maturity, upon
redemption, by declaration of acceleration or otherwise; or
(iii) failure to observe or perform in any material respect
certain other covenants contained in the Indenture for 90 days after
written notice to the Corporation from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of
the Junior Subordinated Debt Securities; or
(iv) certain events in bankruptcy, insolvency or
reorganization of the Corporation; or
(v) the voluntary or involuntary dissolution, winding-up
or termination of the Trust, except in connection with the distribution
of the Junior Subordinated Debt Securities to the holder of Trust
Securities in liquidation of the Trust, the redemption of all of the
Trust Securities of the Trust, or certain mergers, consolidations or
amalgamations, each as permitted by the Declaration.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debt Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate outstanding principal amount of the Junior Subordinated Debt
Securities may declare the principal due and payable immediately upon a
Debenture Event of Default and, should the Debenture Trustee or such holders of
Junior Subordinated Debt Securities fail to make such declaration, the holders
of at least 25% in aggregate Liquidation Amount of the Capital Securities shall
have such right. The holders of a majority in aggregate outstanding principal
amount of the Junior Subordinated Debt Securities may annul such declaration and
waive the default if the default (other than the nonpayment of the principal of
the Junior Subordinated Debt Securities which has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debt Securities fail to annul such declaration and waive such
default, the holders of a majority in aggregate Liquidation Amount of the
Capital Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debt Securities affected thereby may, on behalf of the
holders of all the Junior Subordinated Debt Securities, waive any past default,
except a default in the payment of principal of or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) on the Junior Subordinated Debt Securities or a default in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each outstanding Junior
Subordinated Debt Security. Should the holders of such Junior Subordinated Debt
Securities fail to annul such declaration and waive such default, the holders of
a majority in aggregate Liquidation Amount of the Capital Securities shall have
such right. The Corporation is required to file annually with the Debenture
Trustee a certificate as to whether or not the Corporation is in compliance with
all the conditions and covenants applicable to it under the Indenture.
In case a Debenture Event of Default shall occur and be continuing, the
Property Trustee will have the right to declare the principal of and the
interest on the Junior Subordinated Debt Securities, and any other amounts
payable under the Indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to the Junior Subordinated Debt
Securities.
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Enforcement of Certain Rights by Holders of Capital Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Corporation to pay interest or
principal on the Junior Subordinated Debt Securities on the date such interest
or principal is otherwise payable, a holder of Capital Securities may institute
a Direct Action. The Corporation may not amend the Indenture to remove the
foregoing right to bring a Direct Action without the prior written consent of
the holders of all of the Capital Securities. Notwithstanding any payments made
to a holder of Capital Securities by the Corporation in connection with a Direct
Action, the Corporation shall remain obligated to pay the principal of and
interest on the Junior Subordinated Debt Securities, and the Corporation shall
be subrogated to the rights of the holder of such Capital Securities with
respect to payments on the Capital Securities to the extent of any payments made
by the Corporation to such holder in any Direct Action.
The holders of the Capital Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debt Securities unless there
shall have been an Event of Default under the Declaration. See "Description of
Capital Securities--Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Corporation shall not consolidate with
or merge with or into any other person or convey, transfer or lease its
properties and assets substantially as an entirety to any person, and no person
shall consolidate with or merge with or into the Corporation or convey, transfer
or lease its properties and assets substantially as an entirety to the
Corporation, unless (i) in case the Corporation consolidates with or merges with
or into another person or conveys or transfers its properties and assets
substantially as an entirety to any person, the successor person is organized
under the laws of the United States or any state or the District of Columbia,
and such successor person expressly assumes the Corporation's obligations on the
Junior Subordinated Debt Securities issued under the Indenture; (ii) immediately
after giving effect thereto, no Debenture Event of Default, and no event which,
after notice or lapse of time or both, would become a Debenture Event of
Default, shall have occurred and be continuing; (iii) if at the time any Capital
Securities are outstanding, such transaction is permitted under the Declaration
and the Guarantee and does not give rise to any breach or violation of the
Declaration or the Guarantee; and (iv) certain other conditions as prescribed in
the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debt Securities protection in the event of a highly
leveraged or other transaction involving the Corporation that may adversely
affect holders of the Junior Subordinated Debt Securities.
Subordination
In the Indenture, the Corporation has covenanted and agreed that any
Junior Subordinated Debt Securities issued thereunder shall be subordinate and
junior in right of payment to all Senior Debt to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, the holders of Senior Debt will first
be entitled to receive payment in full of principal of and interest, if any, on
such Senior Debt before the holders of Junior Subordinated Debt Securities, or
the Property Trustee on behalf of the holders, will be entitled to receive or
retain any payment or distribution in respect thereof.
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In the event of the acceleration of the maturity of the Junior
Subordinated Debt Securities, the holders of all Senior Debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of the Junior Subordinates Debt Securities will be entitled to receive
or retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debt Securities.
In the event that the Corporation shall default in the payment of any
principal of or interest, if any, on any, Senior Debt when the same becomes due
and payable, whether at maturity or at a date fixed for prepayment or by
declaration of acceleration or otherwise, then, unless and until such default
shall have been cured or waived or shall have ceased to exist or all Senior Debt
shall have been paid, no direct or indirect payment (in cash, property,
securities, by set-off or otherwise) shall be made or agreed to be made for
principal or interest, if any, on the Junior Subordinated Debt Securities, or in
respect of any redemption, repayment, retirement, purchase or other acquisition
of any of the Junior Subordinated Debt Securities.
"Senior Debt" means (a) the principal of, and premium, if any, and
interest on all indebtedness of the Corporation for money borrowed, whether
outstanding on the date of execution of the Indenture or thereafter created,
assumed or incurred, (b) all obligations to make payment pursuant to the terms
of financial instruments, such as (i) securities contracts and foreign currency
exchange contracts, (ii) derivative instruments, such as swap agreements
(including interest rate and foreign exchange rate swap agreements), cap
agreements, floor agreements, collar agreements, interest rate agreements,
foreign exchange agreements, options, commodity futures contracts and commodity
options contracts, and (iii) similar financial instruments; except, in the case
of both (a) and (b) above, such indebtedness and obligations that are expressly
stated to rank junior in right of payment to, or pari passu in right of payment
with, the Junior Subordinated Debt Securities, (c) and indebtedness or
obligations of others of the kind described in both (a) and (b) above for the
payment of which the Corporation is responsible or liable as guarantor or
otherwise, and (d) any deferrals, renewals or extensions of any such Senior
Debt; provided, however, that Senior Debt shall not be deemed to include (i) any
debt of the Corporation which, when incurred and without respect to any election
under Section 1111 (b) of the United States Bankruptcy Code of 1978, was without
recourse to the Corporation, (ii) any debt of the Corporation to any of its
subsidiaries, (iii) debt to any employee of the Corporation, (iv) debt which by
its terms is subordinated to trade accounts payable or accrued liabilities
arising in the ordinary course of business to the extent that payments made to
the holders of such debt by the holders of the Junior Subordinated Debt
Securities as a result of the subordination provisions of the Indenture would be
greater than such payments otherwise would have been as a result of any
obligation of such holders of such debt to pay amounts over to the obligees on
such trade accounts payable or accrued liabilities arising in the ordinary
course of business as a result of subordination provisions to which such debt is
subject, (v) trade accounts payable or accrued liabilities arising in the
ordinary course of business and (vi) any other debt securities issued pursuant
to the Indenture.
The Indenture places no limitation on the amount of Senior Debt that
may be incurred by the Corporation. The Corporation expects from time to time to
incur additional indebtedness constituting Senior Debt. At September 30, 1997
the aggregate outstanding Senior Debt of the Corporation was approximately
$900,000 on an unconsolidated basis. The Indenture also places no limitation on
the indebtedness of the Corporation's subsidiaries, which rank senior in right
of payment to the Junior Subordinated Debt Securities.
Governing Law
The Indenture and the Junior Subordinated Debt Securities will be
governed by and construed in accordance with the laws of the State of Virginia.
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Information Concerning the Debenture Trustee
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debt Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Corporation
concurrently with the issuance by the Trust of the Trust Securities for the
benefit of the holders from time to time of such Trust Securities. Wilmington
Trust Company will act as trustee (the "Guarantee Trustee") under the Guarantee
Agreement. The Guarantee Agreement will be qualified under the Trust Indenture
Act. This summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Guarantee, including the definitions therein of certain
terms, and the Trust Indenture Act. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Trust Securities.
General
The Corporation will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined
herein) to the holders of the Trust Securities, as and when due, regardless of
any defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Trust Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accrued and
unpaid Distributions required to be paid on the Trust Securities, to the extent
that the Trust has funds on hand available therefor at such time, (ii) the
Redemption Price with respect to Trust Securities called for redemption, to the
extent that the Trust has funds on hand available therefor at such time, and
(iii) upon a voluntary or involuntary dissolution, winding up or liquidation of
the Trust (other than in connection with the distribution of Junior Subordinated
Debt Securities to the holders of the Trust Securities or the redemption of all
of the Capital Securities) the lesser of (a) the Liquidation Distribution, to
the extent the Trust has funds available therefor and (b) the amount of assets
of the Trust remaining available for distribution to holders of the Trust
Securities upon liquidation of the Trust after satisfaction of liabilities to
creditors of the Trust as required by applicable law. The Corporation's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Corporation to the holders of the Trust Securities or by
causing the Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis
of the Trust's obligations under the Trust Securities, although it will apply
only to the extent that the Trust has funds sufficient to make such payments,
and is not a guarantee of collection. If the Corporation does not make interest
payments on the Junior Subordinated Debt Securities held by the Trust, the Trust
will not be able to pay Distributions on the Capital Securities and will not
have funds legally available therefor.
The Guarantee will rank subordinate and junior in right of payment to
all Senior Debt. See "Status of the Guarantee." As a holding company, the
Corporation conducts its operations principally through its subsidiaries and,
therefore, its principal source of cash is receipt of dividends from the Bank.
However, there are legal limitations on the source and amount of dividends that
a Virginia-chartered, Federal Reserve member
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bank such as the Bank is permitted to pay. A Virginia-chartered bank may pay
dividends only from net undivided profits. Additionally, a dividend may not be
paid if it would impair the paid-in capital of the bank. In addition, prior
approval of the Federal Reserve is required if the total of all dividends
declared by a member bank in any calendar year will exceed the sum of that
bank's net profits for that year and its retained net profits for the preceding
two calendar years, less any required transfers to either surplus or any fund
for the retirement of any preferred stock. At September 30, 1997, the Bank could
have paid approximately $4.2 million in dividends to the Corporation without
prior Federal Reserve approval. The payment of dividends by the Bank may also be
affected by other factors, such as requirements for the maintenance of adequate
capital. In addition, the Federal Reserve is authorized to determine, under
certain circumstances relating to the financial condition of a member bank,
whether the payment of dividends would be an unsafe or unsound banking practice
and to prohibit payment thereof. See "the Corporation." The Guarantee does not
limit the incurrence or issuance of other secured or unsecured debt of the
Corporation, including Senior Debt, whether under the Indenture, any other
indenture that the Corporation may enter into in the future or otherwise.
Taken together, the Corporation's obligations under the Guarantee, the
Declaration, the Junior Subordinated Debt Securities and the Indenture,
including the Corporation's obligation to pay the costs, expenses and other
liabilities of the Trust (other than the Trust's obligations to the holders of
the Trust Securities under the Trust Securities), provide, in the aggregate, a
full, irrevocable and unconditional guarantee of all of the Trust's obligations
under the Capital Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Capital Securities. See "Relationship Among the
Capital Securities, the Junior Subordinated Debt Securities and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Debt in the same manner as Junior Subordinated Debt Securities.
The Guarantee will rank pari passu with all Other Guarantees issued by
the Corporation. The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Corporation to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Trust Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payments
in full to the extent not paid by the Trust or upon distribution to the holders
of the Trust Securities of the Junior Subordinated Debt Securities. The
Guarantee does not place a limitation on the amount of additional Senior Debt
that may be incurred by the Corporation. The Corporation expects from time to
time to incur additional indebtedness constituting Senior Debt.
Amendments and Assignment
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Trust Securities (in which case no vote will
be required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of such
outstanding Capital Securities. The manner of obtaining any such approval will
be as set forth under "Description of Capital Securities--Voting Rights;
Amendment of the Declaration." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Corporation and shall inure to the benefit of the holders
of the Capital Securities then outstanding.
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Events of Default
An event of default under the Guarantee will occur upon the failure of
the Corporation to perform any of its payment or other obligations thereunder;
provided, however, that except with respect to a default in payment of any
Guarantee Payment, the Corporation shall have received notice of default and
shall not have cured such default within 60 days after receipt of such notice;
and provided, further, that no event of default under the Guarantee shall occur
unless an Event of Default under the Declaration or a Debenture Event of Default
shall have occurred. The holders of not less than a majority in aggregate
Liquidation Amount of the Capital Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other person or entity.
The Corporation, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Corporation in performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of the Trust Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Trust Securities, upon full payment
of the amounts payable upon liquidation of the Trust or upon distribution of
Junior Subordinated Debt Securities to the holders of the Trust Securities. The
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of the Trust Securities must restore payment of
any sums paid under the Trust Securities or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of Virginia.
RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE JUNIOR SUBORDINATED DEBT SECURITIES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Capital
Securities (to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Corporation as and to
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the extent set forth under "Description of Guarantee." Taken together, the
Corporation's obligations under the Junior Subordinated Debt Securities, the
Indenture, the Declaration and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of Distributions and other
amounts due on the Capital Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Capital Securities. If and to the extent that the
Corporation does not make payments on the Junior Subordinated Debt Securities,
the Trust will not pay Distributions or other amounts due on the Capital
Securities. The Guarantee does not cover payment of Distributions when the Trust
does not have sufficient funds to pay such Distributions. In such event, the
remedy of a holder of Capital Securities is to institute a Direct Action. The
obligations of the Corporation under the Guarantee are subordinate and junior in
right of payment to all Senior Debt.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debt Securities, such payments will be sufficient to
cover Distributions and other payments due on the Capital Securities, primarily
because (i) the aggregate principal amount or Redemption Price of the Junior
Subordinated Debt Securities will be equal to the sum of the aggregate
Liquidation Amount or Redemption Price, as applicable, of the Trust Securities;
(ii) the interest rate and interest and other payment dates on the Junior
Subordinated Debt Securities will match the Distribution rate and Distribution
and other payment dates for the Capital Securities; (iii) the Corporation shall
pay for all costs, expenses and liabilities of the Trust except the Trust's
obligations to holders of Trust Securities under such Trust Securities; and (iv)
the Declaration further provides that the Trust will not engage in any activity
that is not consistent with the limited purposes thereof.
Notwithstanding anything to the contrary in the Indenture, the
Corporation has the right to set off any payment it is otherwise required to
make thereunder with and to the extent the Corporation has theretofore made, or
is concurrently on the date of such payment making, any payment under the
Guarantee used to satisfy the related payment of indebtedness under the
Indenture.
Enforcement Rights of Holders of Capital Securities
A holder of any Capital Security may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person or entity.
A default or event of default under any Senior Debt would not
constitute a default or Event of Default under the Declaration. However, in the
event of payment defaults under, or acceleration of, Senior Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debt Securities until such Senior Debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on Junior Subordinated Debt Securities would
constitute an Event of Default under the Declaration.
Limited Purpose of the Trust
The Capital Securities evidence a beneficial interest in the Trust, and
the Trust exists for the sole purpose of issuing the Capital Securities and
Common Securities, investing the proceeds of the Trust Securities in Junior
Subordinated Debt Securities and engaging in other activities necessary or
incidental thereto.
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Rights Upon Termination
Upon any voluntary or involuntary termination, winding-up or
liquidation of the Trust involving the liquidation of the Junior Subordinated
Debt Securities, after satisfaction of the liabilities of creditors of the Trust
as required by applicable law, the holders of the Trust Securities will be
entitled to receive, out of assets held by the Trust, the Liquidation
Distribution in cash. See "Description of Capital Securities--Liquidation of the
Trust and Distribution of Junior Subordinated Debt Securities." Upon any
voluntary or involuntary liquidation or bankruptcy of the Corporation, the
Property Trustee, as holder of the Junior Subordinated Debt Securities, would be
a subordinated creditor of the Corporation, subordinated in right of payment to
all Senior Debt as set forth in the Indenture, but entitled to receive payment
in full of principal and interest, before any stockholders of the Corporation
receive payments or distributions. Since the Corporation is the guarantor under
the Guarantee and has agreed to pay for all costs, expenses and liabilities of
the Trust (other than the Trust's obligations to the holders of its Trust
Securities), the positions of a holder of Capital Securities and a holder of
Junior Subordinated Debt Securities relative to other creditors and to
stockholders of the Corporation in the event of liquidation or bankruptcy of the
Corporation are expected to be substantially the same.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal
income tax consequences of the purchase, ownership and disposition of Capital
Securities. Unless otherwise stated, this summary addresses only the tax
consequences to a "U.S. Holder" (as defined below) that acquires Capital
Securities on their original issue at their original offering price and does not
address the tax consequences to persons that may be subject to special treatment
under United States federal income tax law, such as banks, insurance companies,
thrift institutions, regulated investment companies, real estate investment
trusts, tax-exempt organizations, dealers in securities or currencies, persons
that hold Capital Securities as part of a position in a "straddle" or as part of
a "hedging", "conversion" or other integrated investment transaction for United
States federal income tax purposes, persons whose functional currency is not the
United States dollar or persons that do not hold Capital Securities as capital
assets. For purposes of this summary, a U.S. Holder is a Securityholder (as
defined below) who or that is (i) an individual citizen or resident of the
United States, (ii) a domestic corporation or partnership organized under the
laws of the United States or any State thereof or the District of Columbia or
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of source.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Williams Mullen Christian & Dobbins, tax counsel to
the Corporation and the Trust. This summary is based upon the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue
Service rulings and pronouncements and judicial decisions now in effect, all of
which are subject to change at any time. Such changes may be applied
retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below, possibly adversely
affecting a beneficial owner of the Capital Securities. The authorities on which
this summary is based are subject to various interpretations, and it is
therefore possible that the United States federal income tax treatment of the
purchase, ownership and disposition of the Capital Securities may differ from
the treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CAPITAL
SECURITIES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
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Classification of the Junior Subordinated Debt Securities and the Trust
Under current law and assuming compliance with the terms of the Trust
Agreement, the Trust will not be classified as an association taxable as a
corporation for United States federal income tax purposes. Moreover, the Trust
should be classified as a grantor trust, and if not so classified will be
classified as a partnership, for United States federal income tax purposes. As a
result, each beneficial owner of Capital Securities (a "Securityholder") that is
a U.S. Holder will be required to include in its gross income its pro rata share
of the interest income, including OID, paid or accrued with respect to the
Junior Subordinated Debt Securities, whether or not cash is actually distributed
to the Securityholders. See "Interest Income and Original Issue Discount,"
below. The Junior Subordinated Debt Securities will be classified as
indebtedness of the Corporation for United States federal income tax purposes.
Interest Income and Original Issue Discount
Under applicable Treasury regulations (the "Regulations"), a "remote"
contingency that stated interest will not be timely paid will be ignored in
determining whether a debt instrument is issued with OID. The Corporation
believes that the likelihood of its exercising its option to defer payments of
interest is remote. Based on the foregoing, the Corporation believes that the
Junior Subordinated Debt Securities will not be considered to be issued with OID
at the time of their original issuance.
Because the discount at which the Junior Subordinated Debt Securities
are being issued is less than 1/4 of 1 percent of the Junior Subordinated Debt
Securities stated redemption price at maturity times the number of complete
years to maturity of the Junior Subordinated Debt Securities, such discount will
constitute de minimis OID and will not be required to be taken into account on a
current basis. The following discussion assumes that unless and until the
Corporation exercises its option to defer interest on the Junior Subordinated
Debt Securities, the Junior Subordinated Debt Securities will not be treated as
issued with OID other than de minimis OID.
Under the Regulations, if the Corporation exercised its option to defer
any payment of interest, the Junior Subordinated Debt Securities would be
treated as reissued with OID, and, thereafter, all stated interest on the Junior
Subordinated Debentures would be treated as OID as long as the Junior
Subordinated Debt Securities remained outstanding. In such event, all of a U.S.
Holder's taxable interest income with respect to the Junior Subordinated Debt
Securities would be accounted for as OID on an economic accrual basis regardless
of such U.S. Holder's method of tax accounting, and actual distributions of
stated interest would not be reported separately as taxable income.
Consequently, a U.S. Holder would be required to include OID in gross income
even though the Corporation would not make any actual cash payments during an
Extension Period.
The Regulations have not been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take the
position that the Junior Subordinated Debt Securities were issued with OID at
the time of their original issuance.
Because income on the Capital Securities will constitute interest or
OID, corporate U.S. Holders will not be entitled to the dividends-received
deduction with respect to any income recognized with respect to the Capital
Securities. If any Special Interest or Additional Distributions are paid on the
Capital Securities it is possible that such Special Interest or Additional
Distributions might constitute OID (whether or not an Extension Period has
occurred).
Subsequent uses of the term "interest" in this summary shall include
income in the form of OID.
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Distribution of the Junior Subordinated Debt Securities to Holders of Capital
Securities
Under current law, a distribution by the Trust of the Junior
Subordinated Debt Securities, as described under the caption "Description of
Capital Securities--Liquidation of the Trust and Distribution of Junior
Subordinated Debt Securities," will be nontaxable and will result in a U.S.
Holder receiving directly its pro rata share of the Junior Subordinated Debt
Securities previously held indirectly through the Trust, with a holding period
and aggregate adjusted tax basis equal to the holding period and aggregate
adjusted tax basis such U.S. Holder had in its Capital Securities immediately
before such distribution. If, however, the liquidation of the Trust were to
occur because the Trust were subject to United States federal income tax with
respect to income accrued or received on the Junior Subordinated Debt
Securities, the distribution of Junior Subordinated Debt Securities to U.S.
Holders by the Trust would be a taxable event to the Trust and each U.S. Holder,
and each U.S. Holder would recognize gain or loss as if the U.S. Holder had
exchanged its Capital Securities for the Junior Subordinated Debt Securities it
received upon the liquidation of the Trust. A U.S. Holder will include interest
in respect of the Junior Subordinated Debt Securities received from the Trust in
the manner described above under "Interest Income and Original Issue Discount."
Sales or Redemption of the Capital Securities
Gain or loss will be recognized by a U.S. Holder on a sale, exchange,
or other disposition of the Capital Securities (including a redemption for cash)
in an amount equal to the difference between the amount realized and the U.S.
Holder's adjusted tax basis in the Capital Securities sold or so redeemed.
Assuming that the Corporation does not exercise its option to defer payment of
interest on the Junior Subordinated Debt Securities, a U.S. Holder's adjusted
tax basis in the Capital Securities generally will be its initial purchase
price. If the Junior Subordinated Debentures are deemed to be issued with OID
(as a result of the Corporation's deferral of any interest payment), a U.S.
Holder's adjusted tax basis in the Capital Securities generally will be its
initial purchase price, increased by OID previously included in such U.S.
Holder's gross income to the date of disposition and decreased by distributions
or other payments received on the Capital Securities other than payments of
stated interest that are not treated as OID. Gain or loss recognized by a U.S.
Holder on the Capital Securities generally will be taxable as capital gain or
loss (except to the extent any amount realized is treated as a payment of
accrued interest with respect to such U.S. Holder's pro rata share of the Junior
Subordinated Debt Securities required to be included in income) and generally
will be long-term capital gain or loss if the Capital Securities have been held
for more than one year.
Should the Corporation exercise its option to defer any payment of
interest on the Junior Subordinated Debt Securities, the Capital Securities may
trade at a price that does not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debt Securities. In
the event of such a deferral, a Securityholder that disposes of its Capital
Securities between record dates for payments of Distributions (and consequently
does not receive a Distribution from the Trust for the period prior to such
disposition) will nevertheless be required to include in income as ordinary
income accrued but unpaid interest on the Junior Subordinated Debt Securities
through the date of disposition and to add such amount to its adjusted tax basis
in its Capital Securities disposed of Such U.S. Holder will recognize a capital
loss on the disposition of its Capital Securities to the extent the selling
price (which may not fully reflect the value of accrued but unpaid interest) is
less than the U.S. Holder's adjusted tax basis in the Capital Securities (which
will include accrued but unpaid interest). Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
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United States Alien Holders
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a nonresident alien individual, a foreign
partnership or a nonresident fiduciary of a foreign estate or trust.
Under current United States federal income tax law, and subject to the
discussion of backup withholding below: (i) payments by the Trust or any of its
paying agents to any Securityholder who or that is a United States Alien Holder
will not be subject to United States federal withholding tax; provided that (a)
the Securityholder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Corporation entitled
to vote, (b) the Securityholder is not a controlled foreign corporation that is
related to the Corporation through stock ownership and (c) either (A) the
Securityholder certifies to the Trust or its agent, under penalties of perjury,
that it is not a United States holder and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"Financial Institution"), and holds the Capital Security in such capacity,
certifies to the Trust or its agent, under penalties of perjury, that such
statement has been received from the Securityholder by it or by a Financial
Institution holding such security for the Securityholder and furnishes the Trust
or its agent with a copy thereof, and (ii) a United States Alien Holder of a
Capital Security will not be subject to United States federal withholding tax on
any gain realized upon the sale or other disposition of a Capital Security.
Recently proposed Internal Revenue Service Treasury regulations (the
"Proposed Regulations") would provide alternative methods for satisfying the
certification requirement described in clause (i)(c) above. The Proposed
Regulations also would require, in the case of Capital Securities held by a
foreign partnership, that (x) the certification described in clause (i)(c) above
be provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. The Proposed Regulations are proposed to be effective for payments
made after December 31, 1997. There can be no assurance that the Proposed
Regulations will be adopted or as to the provisions that they will include if
and when adopted in temporary or final form.
Information Reporting to Securityholders
Generally, income on the Capital Securities will be reported to
Securityholders on Forms 1099, which forms should be mailed to Securityholders
by January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, the Capital Securities
may be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any withheld amounts will be
allowed as a credit against the Securityholder's United States federal income
tax, provided the required information is furnished to the Internal Revenue
Service on a timely basis.
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UNDERWRITING
The Underwriter, McKinnon & Company, Inc., 555 Main Street, Norfolk,
Virginia, as agreed, subject to the terms and conditions contained in an
Underwriting Agreement with the Trust and the Corporation, to sell, as selling
agent, on a best efforts basis, up to $7.5 million of Capital Securities. The
Underwriter is not obligated to purchase the Capital Securities if they are not
sold to the public.
The Underwriter has informed the Trust and the Corporation that it
proposes to sell the Capital Securities as selling agent for the Trust, subject
to prior sale, when, as and if issued by the Trust, in part to the public at the
public offering price set forth on the cover page of this Prospectus and, in
part, through certain selected dealers, who are members of the National
Association of Securities Dealers, Inc., to customers of such selected dealers
at such public offering price, for which each selected dealer will receive a
commission of $0.50, for each $25 of Capital Securities that it sells. The
Underwriter reserves the right to reject any order for the purchase of Capital
Securities through it in whole or in part.
The public offering is not contingent upon the occurrence of any event
or the sale of a minimum or maximum number of Capital Securities. Funds received
by the Underwriter from investors in the public offering will be deposited with
and held by the Escrow Agent in a non-interest bearing account until the closing
of the public offering. Closing is expected to occur on or about January 21,
1998.
As the proceeds of the sale of the Capital Securities will ultimately
be used to purchase the Junior Subordinated Debt Securities, the Underwriting
Agreement provides that the Corporation will pay as compensation ("Underwriter's
Compensation") an amount directly to the Underwriter for its arranging the
investment therein of such proceeds $0.75 per Capital Security (or up to
$225,000 in the aggregate) for the account of the Underwriter.
The Underwriting Agreement provides that Corporation and the Trust will
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act or contribute to payments the Underwriter may be
required to make in respect thereof.
The Capital Securities are a new issue of securities with no
established trading market. The Corporation and the Trust do not intend to apply
for listing of the Capital Securities on any securities exchange. The
Corporation and the Trust have been advised by the Underwriter that it may make
a market in the Capital Securities. The Underwriter, however, is not obligated
to make a market in the Capital Securities and may discontinue any market making
at any time without notice. Neither the Corporation nor the Trust can provide
any assurance that a secondary market for the Capital Securities will develop.
Because the National Association of Securities Dealers, Inc. ("NASD")
may view the Capital Securities offered hereby as interests in a direct
participation program, the offering is being made in compliance with Rule 2810
of the NASD's Conduct Rules. Offers and sales of the Capital Securities will be
made only to (i) "qualified institutional buyers," as defined in Rule 144A under
the Securities Act of 1933, as amended, (the "Act"); (ii) institutional
"accredited Investors," as defined in Rule 501(a)-(1)-(3) of Regulation D under
the Act; or (iii) individual investors for whom an investment in
non-convertible, non-investment grade preferred securities is appropriate. The
Underwriter may not confirm sales to any accounts over which it exercises
discretionary authority without the prior written approval of the transaction by
the customer.
The Underwriter provides or has provided investment banking services to
the Corporation from time to time in the ordinary course of business.
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VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Capital
Securities, the enforceability of the Declaration and the formation of the Trust
will be passed upon by Richards, Layton & Finger, special Delaware counsel to
the Corporation and the Trust. The validity of the Guarantee and the Junior
Subordinated Debt Securities, as well as certain matters relating to United
States federal income tax considerations, will be passed upon for the
Corporation by Williams Mullen Christian & Dobbins. Williams Mullen Christian &
Dobbins will rely on the opinion of Richards, Layton & Finger as to matters of
Delaware law.
ACCOUNTANTS
The consolidated financial statements of Highlands Bankshares, Inc. and
subsidiaries as of December 31, 1996 and 1995 and for each of the years in the
three year period ended December 31, 1996, included in the Corporation's 1996
Annual Report to Shareholders incorporated by reference into this Prospectus,
have been incorporated by reference herein in reliance upon the report of Brown,
Edwards & Company, L.L.P., independent auditors, included in the Corporation's
1996 Form 10-K and incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
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<TABLE>
<CAPTION>
<S> <C>
No dealer, salesperson or other person has
been authorized to give any information or to
make any representations in connection with
the offer made hereby except as contained in
this Prospectus and, if given or made, no such
information or representations should be
relied upon as having been authorized by the
Corporation, the Trust, the Underwriter or any $7,500,000
of their respective agents. Neither the
delivery of this Prospectus nor any sale made HIGHLANDS CAPITAL TRUST I
hereunder shall, under any circumstances,
create an implication that there has been no
change in the information set forth herein or $2.3125 Capital Securities
in the affairs of the Corporation or the Trust
since the date hereof. This Prospectus does
not constitute an offer to sell, or a
solicitation of an offer to buy, the Capital (Liquidation Amount $25
Securities by anyone in any jurisdiction in per Capital Security)
which such offer or solicitation is not
authorized or in which the person making such
offer or solicitation is not qualified to do Fully and Unconditionally Guaranteed, as
so or to any person to whom it is unlawful to described herein, by
make such offer or solicitation.
-------------- HIGHLANDS BANKSHARES, INC.
TABLE OF CONTENTS
Page
Notice to Investors..........................1
Certain ERISA Considerations.................1
Available Information........................3
Incorporation of Certain Documents
by Reference...............................4 McKinnon & Company, Inc.
Prospectus Summary...........................5
Ratio of Earnings to Fixed Charges...........9
Summary Financial Information...............10
Risk Factors................................11
Use of Proceeds.............................16
Highlands Capital Trust I...................16
Selected Historical Financial Information...18
The Corporation.............................19 Prospectus
Capitalization..............................26
Accounting Treatment........................26 Dated January 14, 1998
Regulatory Treatment........................26
Description of Capital Securities...........27
Description of Junior Subordinated Debt
Securities................................43
Description of Guarantee....................53
Relationship Among the Capital
Securities, the Junior Subordinated
Debt Securities and the Guarantee.........55
Certain United States Federal Income
Tax Consequences..........................57
Underwriting................................61
Validity of Securities......................62
Accountants.................................62
</TABLE>
