<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1999.
REGISTRATION NO. 333-80551
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
SPECTRUM BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
IOWA 551111 42-0867112
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
Incorporation or organization) Classification Code Number) Identification
No.)
</TABLE>
10834 OLD MILL ROAD, SUITE ONE, OMAHA, NE 68154-2648 -- (402) 333-8330
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SPECTRUM CAPITAL TRUST I
(Exact name of coregistrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 551112 APPLIED FOR
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
Incorporation or organization) Classification Code Number) Identification
No.)
</TABLE>
10834 OLD MILL ROAD, SUITE ONE, OMAHA, NE 68154-2648 -- (402) 333-8330
(Address, including zip code, and telephone number, including area code, of
coregistrant's principal executive offices)
DERYL F. HAMANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SPECTRUM BANCORPORATION, INC.
10834 OLD MILL ROAD, SUITE ONE, OMAHA, NE 68154-2648 -- (402) 333-8330
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
John S. Zeilinger, Esq. Matthew C. Boba, Esq.
Baird, Holm, McEachen, Chapman and Cutler
Pedersen, Hamann & Strasheim 111 West Monroe, Chicago, Illinois
1500 Woodmen Tower, Omaha, Nebraska 60603
68102-2068 (312) 845-3000
(402) 636-8258
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Cumulative Preferred Securities of
Spectrum Capital Trust I.................. 2,300,000(2) $10.00 $23,000,000 $6,394(3)
% Junior Subordinated Debentures of Spectrum
Bancorporation, Inc....................... (4) -- -- --
Guarantee of Spectrum Bancorporation, Inc.
with respect to the % Cumulative Preferred
Securities................................ (5) -- -- --
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) Includes 300,000 ___% Cumulative Preferred Securities (the "Preferred
Securities") issuable upon exercise of the underwriters' over-allotment
option.
(3) $7,993 has previously been paid.
(4) The ___% Junior Subordinated Debentures (the "Junior Subordinated
Debentures") will be purchased by Spectrum Capital Trust I with the proceeds
of the sale of the Preferred Securities. The Junior Subordinated Debentures
may later be distributed for no additional consideration to the holders of
the Preferred Securities upon Spectrum Capital Trust I's dissolution and the
distribution of its assets.
(5) This Registration Statement is deemed to cover the Junior Subordinated
Debentures of Spectrum Bancorporation, Inc., the rights of holders of the
Junior Subordinated Debentures of Spectrum Bancorporation, Inc. under the
Indenture, the rights of holders of the Preferred Securities under the Trust
Agreement, the Guarantee, the Expense Agreement entered into by Spectrum
Bancorporation, Inc. and certain backup undertakings as described herein. No
separate consideration will be received for the Guarantee or such backup
undertakings.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 12, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
2,000,000 PREFERRED SECURITIES
SPECTRUM CAPITAL TRUST I
% CUMULATIVE PREFERRED SECURITIES
FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED
ON A SUBORDINATED BASIS BY
[SPECTRUM BANCORPORATION, INC. LOGO]
The preferred securities of Spectrum Capital Trust I offered by this
prospectus generally consist of an indirect interest in % junior subordinated
debentures of Spectrum Bancorporation, Inc. The junior subordinated debentures
of Spectrum have the same payment terms as the preferred securities and will be
purchased and held by Spectrum Capital Trust I using proceeds of this offering.
The preferred securities have been approved for trading on the American
Stock Exchange under the trading symbol SBK.Pr.A. The preferred securities are
expected to begin trading on the American Stock Exchange when they are issued.
YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 6 BEFORE INVESTING
IN THE PREFERRED SECURITIES.
The preferred securities are not savings accounts or deposits and are not
insured by the Federal Deposit Insurance Corporation or any other governmental
agency.
<TABLE>
<CAPTION>
PER PREFERRED
SECURITY TOTAL
----------------- -------------
<S> <C> <C>
Price to Investors.................................... $ 10 $ 20,000,000
Proceeds to Spectrum Capital Trust I.................. $ 10 $ 20,000,000
Underwriting Commissions.............................. $ $
Proceeds to Spectrum.................................. $ $
</TABLE>
The underwriters have entered into a firm commitment underwriting agreement
with Spectrum and Spectrum Capital Trust I, which means that all securities will
be purchased by the underwriters, if any are. In addition, the underwriters may
purchase up to an additional 300,000 preferred securities to cover
over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IF TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HOWE BARNES INVESTMENTS, INC.
, 1999
<PAGE>
[MAP]
[INSIDE FRONT COVER]
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER. YOU SHOULD ALSO READ THE MORE DETAILED INFORMATION SET FORTH IN THIS
PROSPECTUS, THE CONSOLIDATED FINANCIAL STATEMENTS OF SPECTRUM AND RELATED NOTES.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
SPECTRUM AND SPECTRUM CAPITAL TRUST I
Spectrum is a multibank holding company, offering full service community
banking through two banks with 17 banking locations in South Dakota, one bank
with seven banking locations in southern Iowa and one bank with two banking
locations in northern Missouri. Spectrum's operating strategy is to provide high
quality community banking services to its customers and increase market share
through solicitation of new business and repeat business and referrals from
customers. Spectrum's external expansion strategy is the acquisition of existing
community banks in or near its primary market areas, or in strategic markets
primarily within the Midwest and the establishment of new branches in these
markets.
At March 31, 1999, Spectrum had total assets of $593,937,000, total deposits
of $489,544,000, total loans, net of unearned fees, of $435,549,000 and total
stockholders' equity of $36,387,000. For the fiscal years ended June 30, 1998
and 1997, Spectrum had net income of $5,835,000 and $5,133,000. For the
nine-month periods ended March 31, 1999 and March 31, 1998 Spectrum had net
income of $5,048,000 and $4,317,000. On an annualized basis, for the nine-month
period ended March 31, 1999, Spectrum's return on average assets equaled 1.17%
and return on average equity was 19.71%.
On May 31, 1999, the merger of three affiliated bank holding companies,
Spectrum Bancorporation, Inc., Decatur Corporation and Rushmore Financial
Services, Inc. resulted in Spectrum. Management of Spectrum does not expect the
merger to have a material effect on the business or earnings of Spectrum. The
merger has been accounted for at historical cost in a manner similar to a
pooling-of-interests combination and, accordingly, the consolidated financial
statements prior to the combination have been restated to include the accounts
and results of operations of Spectrum. The restated financial statements are
included in this prospectus.
Spectrum's principal executive office is located at 10834 Old Mill Road,
Suite One, Omaha, Nebraska 68154-2648. Its telephone number is (402) 333-8330.
Spectrum Capital Trust I is a business trust created for the purpose of
offering the preferred securities and purchasing the junior subordinated
debentures of Spectrum. Spectrum Capital Trust I will have a term of 30 years,
but may terminate earlier as provided in its trust agreement. Spectrum Capital
Trust I's principal executive office and telephone number are the same as
Spectrum's.
THE OFFERING
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<S> <C>
Preferred Securities
Issuer..................... Spectrum Capital Trust I
Securities Offered........... Spectrum Capital Trust I is offering 2,000,000 of its
preferred securities, which generally represent an indirect
interest in junior subordinated debentures issued by
Spectrum and held by Spectrum Capital Trust I. Spectrum
believes that the preferred securities provide access to
30-year financing on more favorable terms to Spectrum than
other financing alternatives.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Trust securities include the preferred securities being sold
to the public and common securities being sold to Spectrum.
Spectrum Capital Trust I will use the proceeds from the sale
of the trust securities to buy the % junior subordinated
debentures due , 2029 from Spectrum with the same
payment terms as the preferred securities.
Quarterly Distributions Are
Payable to You on the
Preferred Securities....... The distributions payable on each preferred security will:
- be fixed and accumulate at a rate per year of %;
- accrue from the date of issuance of the preferred
securities; and
- be payable after each calendar quarter on the 15(th) day
of January, April, July, and October of each year that the
preferred securities are outstanding, beginning on October
15, 1999.
Spectrum and Spectrum Capital
Trust I Have Rights to
Defer Distributions to You
on the Preferred
Securities................. Spectrum Capital Trust I will defer distributions on the
preferred securities if Spectrum defers interest payments on
the junior subordinated debentures. Spectrum generally has
the right, if not in default, to defer interest payments on
the junior subordinated debentures at one or more times for
up to 20 consecutive quarters. During any deferral period,
you will still accrue unpaid distributions at the annual
rate of %, plus you will earn interest at the annual rate
of %, compounded quarterly, on any unpaid distributions.
You Will Still Be Taxed Even
If Distributions on the
Preferred Securities Are
Deferred................... If distributions on the preferred securities are deferred,
you will also be required to accrue interest income and
include it in your gross income for United States federal
income tax purposes for as long as the junior subordinated
debentures remain outstanding, even if you are a cash basis
taxpayer. For further information on deferrals and their tax
consequences, see "Risk Factors -- Distributions on the
preferred securities may be deferred; you may have to
include interest in your taxable income before you receive
cash," "Description of Junior Subordinated Debentures --
Option to Extend Interest Payment Period" and "Material
Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
You Will Be Required to Sell
Your Preferred Securities
to Spectrum Capital Trust I
When the Junior
Subordinated Debentures
Mature or If They Are
Prepaid.................... The junior subordinated debentures will mature on
, 2029. You will be required to sell your
preferred securities to Spectrum Capital Trust I upon the
stated maturity date of the junior subordinated debentures
or earlier if they are prepaid. In the case of prepayment of
the junior subordinated debentures, Spectrum Capital Trust I
will redeem your preferred securities on the date of payment
of the junior subordinated debentures.
If the Junior Subordinated
Debentures Are Prepaid,
Your Preferred Securities
Will Be Redeemed........... If Spectrum obtains any required regulatory approval,
Spectrum may prepay:
- all or some of the junior subordinated debentures on or
after , 2004; or
- all of the junior subordinated debentures at any time upon
events occurring which may have a significant adverse effect
on Spectrum's benefits of having the preferred securities
outstanding.
Upon any prepayment of the junior subordinated debentures,
your preferred securities will be redeemed for $10 per
preferred security plus any accrued and unpaid distributions
to the date of redemption. For further information on
redemptions, see "Description of the Preferred Securities --
Redemption -- Mandatory and Optional Rights of Spectrum" and
"Description of Junior Subordinated Debentures --
Redemption."
At Its Option, Spectrum May
Require You to Exchange
Your Preferred Securities
for its Junior Subordinated
Debentures................. Spectrum has the right at any time to terminate Spectrum
Capital Trust I and distribute the junior subordinated
debentures to you in exchange for your preferred securities.
However, Spectrum must receive prior approval of the Federal
Reserve and pay the creditors of Spectrum Capital Trust I.
Upon a termination of Spectrum Capital Trust I, you will
receive junior subordinated debentures in exchange for the
same principal amount of your holdings in preferred
securities. For further information concerning distribution
of the junior subordinated debentures, see "Description of
the Preferred Securities -- Distribution of Junior
Subordinated Debentures." If the junior subordinated
debentures are distributed, Spectrum will use its best
efforts to list them on the American Stock Exchange or the
Nasdaq National Market in place of the preferred securities
but there is no assurance that the listing will occur or
that the junior subordinated debentures will be marketable.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Your Preferred Securities Are
Fully and Unconditionally
Guaranteed by Spectrum on a
Subordinated Basis......... Spectrum will fully, irrevocably and unconditionally
guarantee Spectrum Capital Trust I's obligations under the
preferred securities on a subordinated basis.
If Spectrum does not make a payment on the junior
subordinated debentures, Spectrum Capital Trust I will not
have sufficient funds to make payments on the preferred
securities. The preferred securities guarantee does not
cover payments when Spectrum Capital Trust I does not have
sufficient funds. In the case of insufficient funds, you may
proceed directly against Spectrum for payment of principal
and interest on the junior subordinated debentures.
For further information concerning the preferred securities
guarantee of Spectrum, see "Description of Preferred
Securities Guarantee."
Your Preferred Securities
Rank Lower in Payment
Compared to Other
Obligations of Spectrum.... Spectrum's obligations under its preferred securities
guarantee and the junior subordinated debentures are
unsecured and rank junior in right of payment to all current
and future senior and subordinated debt of Spectrum. In
addition, because Spectrum is a multibank holding company,
all existing and future liabilities of Spectrum's
subsidiaries will rank prior to all obligations of Spectrum
relating to the preferred securities and the junior
subordinated debentures. There is no limit on the amount of
other preferred securities or other junior subordinated
debentures of Spectrum that may be issued in the future.
Future issuances of this type will rank equally with
Spectrum's obligations under the junior subordinated
debentures and its preferred securities guarantee. The
preferred securities will generally rank equally and
payments on them will be made proportionately, with the
common securities of Spectrum Capital Trust I, which will be
held by Spectrum.
You Will Have Limited Voting
Rights..................... As a holder of preferred securities, you have limited voting
rights. These rights relate only to the termination of
Spectrum Capital Trust I and removal of the property trustee
and the indenture trustee of Spectrum Capital Trust I. See
"Description of the Preferred Securities -- Voting Rights;
Amendment of the Trust Agreement."
Certificates Will Not Be
Issued to You.............. You will not receive a certificate for your preferred
securities. Instead, the preferred securities will be
deposited with and registered in the name of The Depository
Trust Company or its nominee.
American Stock Exchange
Listing.................... The preferred securities have been approved for trading on
the American Stock Exchange under the trading symbol
SBK.Pr.A.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds of Sale of
the Preferred Securities... The proceeds of the sale of the preferred securities will be
invested by Spectrum Capital Trust I in the junior
subordinated debentures. The net proceeds to Spectrum from
the sale of junior subordinated debentures will be used to
repay all of its outstanding holding company debt which was
$11,695,000 as of June 30, 1999, with the remainder to be
used for general corporate purposes. Pending their
application, the net proceeds may be invested in
certificates of deposit or short-term, marketable,
investment grade interest-bearing securities. See "Use of
Proceeds."
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully read the following risk factors and other sections of
this prospectus before purchasing any preferred securities.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
IF SPECTRUM DOES NOT MAKE PAYMENTS UNDER THE JUNIOR SUBORDINATED DEBENTURES,
SPECTRUM CAPITAL TRUST I WILL BE UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION
AMOUNTS AND THE PREFERRED SECURITIES GUARANTEE WILL NOT APPLY.
The ability of Spectrum Capital Trust I to pay distributions and the
liquidation amount of $10 per preferred security is solely dependent upon the
ability of Spectrum to make the related payments on the junior subordinated
debentures when due. If Spectrum defaults on its obligation to pay principal or
interest on the junior subordinated debentures, Spectrum Capital Trust I will
not have sufficient funds to pay distributions or the liquidation amount. In
that case, you will not be able to rely upon the preferred securities guarantee
for payment of these amounts because the preferred securities guarantee only
applies if Spectrum makes a payment of principal or interest on the junior
subordinated debentures. For more information on Spectrum's obligations under
the preferred securities guarantee and the junior subordinated debentures, see
"Description of Junior Subordinated Debentures -- Subordination of Junior
Subordinated Debentures to Senior and Subordinated Debt of Spectrum" and
"Description of Preferred Securities Guarantee -- Status of Preferred Securities
Guarantee."
IF THE SUBSIDIARY BANKS ARE UNABLE TO PAY SUFFICIENT DIVIDENDS TO SPECTRUM,
THEN SPECTRUM LIKELY WILL BE UNABLE TO MAKE PAYMENTS ON THE JUNIOR SUBORDINATED
DEBENTURES THEREBY LEAVING INSUFFICIENT FUNDS FOR SPECTRUM CAPITAL TRUST I TO
MAKE PAYMENTS TO YOU ON THE PREFERRED SECURITIES.
Spectrum's ability to pay interest and principal on the junior subordinated
debentures to Spectrum Capital Trust I depends upon the cash dividends Spectrum
receives from its subsidiary banks. The investment in these banks constitutes
most of Spectrum's assets. Dividend payments from the banks to Spectrum are
subject to, among other things:
- regulatory limitations, generally based on current and retained earnings
and capital maintenance requirements, imposed by various bank regulatory
agencies;
- profitability, financial condition and capital expenditures and other cash
flow requirements of the banks; and
- prior claims of creditors of the banks.
DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED; YOU MAY HAVE TO
INCLUDE INTEREST IN YOUR TAXABLE INCOME AND PAY TAX ON THE INTEREST BEFORE YOU
ACTUALLY RECEIVE THE CASH PAYMENT.
It is possible that you will not receive cash distributions on your
preferred securities for one or more periods of up to five years. If this
occurs, you will still be required to include accrued interest in your income
for United States federal income tax purposes before you actually receive the
cash distributions.
Spectrum has the right, at one or more times, to defer interest payments on
the junior subordinated debentures for up to 20 consecutive quarters, but not
beyond the maturity date of the junior subordinated debentures. This right
exists only if no event of default under the junior subordinated debentures has
occurred and is continuing. If Spectrum exercises this right, Spectrum Capital
Trust I would defer distributions on the preferred securities during any
deferral period. However, you would still accrue the right to unpaid
distributions at the annual rate of % of the liquidation amount of $10 per
preferred security, plus you will earn interest at the annual rate of %,
compounded quarterly, on any unpaid distributions.
During a deferral period and for as long thereafter as the junior
subordinated debentures remain outstanding, you will be required to accrue
interest income, as original issue discount, for United States
6
<PAGE>
federal income tax purposes in respect of your pro rata share of the junior
subordinated debentures held by Spectrum Capital Trust I. As a result, you must
include the accrued interest in your gross income for United States federal
income tax purposes prior to your receiving cash. You will also not receive the
cash distributions related to any accrued and unpaid interest from Spectrum
Capital Trust I if you sell the preferred securities before the end of any
deferral period. While Spectrum will take the position that original issue
discount will not arise before any first deferral period, it is possible that
all interest on the junior subordinated debentures would be required to be
accounted for as original issue discount. In these circumstances, stated
interest would not separately be reported as taxable income. See "Material
Federal Income Tax Consequences" for more information regarding the tax
consequences of the preferred securities.
THE MARKET PRICE OF THE PREFERRED SECURITIES IS LIKELY TO DECLINE IF
SPECTRUM DEFERS PAYMENT ON THE JUNIOR SUBORDINATED DEBENTURES.
Spectrum has no current intention of exercising its right to defer interest
payments on the junior subordinated debentures. However, if Spectrum exercises
its right in the future, the market price of the preferred securities is likely
to be adversely affected. If you sell the preferred securities during an
interest deferral period, you may not receive the same return on your investment
as someone else who continues to hold the preferred securities.
YOU ARE SUBJECT TO RISK THAT YOUR PREFERRED SECURITIES WILL NOT BE
OUTSTANDING FOR THIRTY YEARS DUE TO TAX OR REGULATORY EVENTS THAT MAY TRIGGER
THE REDEMPTION OF THE JUNIOR SUBORDINATED DEBENTURES BY SPECTRUM AND PREPAYMENT
OF THE PREFERRED SECURITIES PRIOR TO THE STATED MATURITY DATE PREVENTING YOU
FROM ACHIEVING YOUR ANTICIPATED RATE OF RETURN DUE TO THE POSSIBLE
UNAVAILABILITY OF COMPARABLE INVESTMENT OPPORTUNITIES.
You are subject to prepayment risk of your preferred securities, making a
potential long-term investment a much shorter term one without penalty to
Spectrum or Spectrum Capital Trust I. If prepayment occurs, you may not be able
to reinvest in securities that would produce a rate of return comparable to the
return that you would achieve if the preferred securities remain outstanding for
thirty years. Although the junior subordinated debentures have a stated maturity
date of , 2029, they may be redeemed by Spectrum prior to maturity
which would cause an early redemption of the preferred securities, as follows:
- In whole or in part, beginning on , 2004, at the option of
Spectrum.
- In whole upon a change in the federal tax laws or a change in the
interpretation of the tax laws by the courts or the IRS, which would
result in a risk that (1) Spectrum Capital Trust I may be subject to
federal income tax, (2) interest paid by Spectrum on the junior
subordinated debentures will not be deductible by Spectrum for federal
income tax purposes, or (3) Spectrum Capital Trust I is or will be subject
to more than a minimal amount of other taxes or governmental charges. From
time to time, the Clinton Administration has proposed tax law changes that
would, among other things, generally deny interest deductions to a
corporate issuer if the debt instrument has a term exceeding 15 years and
if the debt instrument is not reflected as indebtedness on the issuer's
consolidated balance sheet. For further information, see "Material Federal
Income Tax Consequences."
- In whole upon a change in the laws or regulations to the effect that
Spectrum Capital Trust I is or will be considered to be a registered
investment company.
- In whole upon a change in the laws or regulations if there is a risk that
Spectrum will not be able to treat all or a substantial portion of the
preferred securities as core capital for purposes of capital adequacy
guidelines of the Federal Reserve.
The exercise of these redemption rights is subject to Spectrum having
received prior approval of the Federal Reserve, if required. For further
information concerning tax or regulatory events that may trigger redemption of
the junior subordinated debentures and prepayment of the preferred securities,
7
<PAGE>
see "Description of the Preferred Securities -- Redemption -- Mandatory and
Optional Rights of Spectrum."
SPECTRUM'S OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES ARE
UNSECURED AND WILL RANK JUNIOR IN PRIORITY OF PAYMENT TO SPECTRUM'S SENIOR AND
SUBORDINATED DEBT, WHICH GENERALLY INCLUDES INDEBTEDNESS, LIABILITIES OR
OBLIGATIONS OF SPECTRUM, CONTINGENT OR OTHERWISE.
At March 31, 1999, the aggregate amount of Spectrum's senior and
subordinated debt was $59,621,000. Spectrum's obligations under the junior
subordinated debentures will also be effectively subordinated to all existing
and future liabilities and obligations of its subsidiaries, including its
subsidiary banks.
For more information on Spectrum's obligations under the preferred
securities guarantee and the junior subordinated debentures, see "Description of
Junior Subordinated Debentures -- Subordination of Junior Subordinated
Debentures to Senior and Subordinated Debt of Spectrum" and "Description of
Preferred Securities Guarantee -- Status of Preferred Securities Guarantee."
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED
SECURITIES MAY DECREASE THE MARKET VALUE OF THE INVESTMENT SINCE IT WILL NOT BE
IN THE FORM OF PREFERRED SECURITIES.
Your investment in the preferred securities may decrease in value if the
junior subordinated debentures are distributed to you. The financial markets are
accustomed to the investment in the form of preferred securities. Spectrum
cannot predict the liquidity or market prices for the junior subordinated
debentures that may be distributed. Accordingly, the junior subordinated
debentures that you receive upon a distribution, or the preferred securities you
hold pending such a distribution, may trade at a discount to the price that you
paid to purchase the preferred securities. If the junior subordinated debentures
are distributed, Spectrum will use its best efforts to list them on the American
Stock Exchange or the Nasdaq National Market in place of the preferred
securities.
Under "Material Federal Income Tax Consequences -- Distribution of Junior
Subordinated Debentures to Holders of Preferred Securities" there is information
regarding United States federal income tax consequences of a distribution of the
junior subordinated debentures.
YOU MAY NOT BE ABLE TO DIRECTLY ENFORCE RIGHTS AGAINST SPECTRUM IF AN EVENT
OF DEFAULT OCCURS.
If an event of default under the junior subordinated debentures occurs and
is continuing, this event will also be an event of default under the preferred
securities. In that case, the holders of the preferred securities would rely on
the enforcement by the property trustee of its rights as holder of the junior
subordinated debentures against Spectrum. The holders of a majority in
liquidation amount of the preferred securities will have the right to direct the
property trustee to enforce its rights. If the property trustee does not enforce
its rights any record holder may take action directly against Spectrum to
enforce the property trustee's rights. If a default under the preferred
securities occurs that is attributable to Spectrum's failure to pay interest or
principal on the junior subordinated debentures, a record holder of the
preferred securities may proceed directly against Spectrum. The holders of
preferred securities will not be able to exercise directly any other remedies
available to the holders of the junior subordinated debentures unless the
property trustee fails to do so. See "Description of the Preferred Securities --
Events of Default; Notice" and "Description of Junior Subordinated Debentures --
Indenture Events of Default" for more information on your rights if an event of
default occurs.
LIMITED COVENANTS RELATING TO THE PREFERRED SECURITIES AND THE JUNIOR
SUBORDINATED DEBENTURES DO NOT PROTECT YOU.
The covenants in the governing documents relating to the preferred
securities and the junior subordinated debentures are limited. As a result, the
governing documents do not protect you in the event of an adverse change in
Spectrum's financial condition or results of operations. Nor do the governing
instruments limit the ability of Spectrum or any of its subsidiaries to incur
additional debt. You should not consider any limitations found in the governing
documents to be a significant factor in
8
<PAGE>
evaluating whether Spectrum will be able to comply with its obligations under
the junior subordinated debentures or the preferred securities guarantee.
AS A HOLDER OF PREFERRED SECURITIES YOU WILL HAVE LIMITED VOTING RIGHTS.
These rights relate only to the modification of the preferred securities and
removal of the property and indenture trustees of Spectrum Capital Trust I upon
a limited number of events. You will not have any voting rights regarding
Spectrum or the administrative trustees. See "Description of the Preferred
Securities -- Voting Rights; Amendment of the Trust Agreement" for more
information on your limited voting rights.
SELLING THE PREFERRED SECURITIES BETWEEN RECORD DATES MAY RESULT IN TAX
LIABILITY TO YOU.
The preferred securities may trade at a price that does not reflect the
value of accrued but unpaid interest on the underlying junior subordinated
debentures. If you dispose of your preferred securities between record dates for
payments on the preferred securities, you may have adverse tax consequences.
Under these circumstances, you will be required to include accrued but unpaid
interest on the junior subordinated debentures allocable to the preferred
securities through the date of disposition in your income as ordinary income. If
interest on the junior subordinated debentures is included in income under the
original issue discount provisions, you would add this amount to your adjusted
tax basis in your share of the underlying junior subordinated debentures deemed
disposed. If your selling price is less than your adjusted tax basis, which will
include all accrued but unpaid original issue discount interest included in your
income, you could recognize a capital loss which cannot be applied to offset
ordinary income for federal income tax purposes, subject to exceptions. See
"Material Federal Income Tax Consequences -- Interest Income and Original Issue
Discount" and "-- Sales or Redemption of Preferred Securities" for more
information on possible adverse tax consequences to you.
THE PRICE OF YOUR PREFERRED SECURITIES COULD DECREASE IF THE PUBLIC MARKET
IS LIMITED.
Although the preferred securities have been approved for listing on the
American Stock Exchange, there can be no assurance that an active and liquid
trading market for the preferred securities will develop or be sustained due to
a possible limited number of owners of the preferred securities or lack of
interest by persons who may want to trade the preferred securities. An inactive
or illiquid trading market could adversely affect the price of your preferred
securities.
RISK FACTORS RELATING TO SPECTRUM
IF SPECTRUM'S ALLOWANCE FOR LOAN LOSSES IS NOT ADEQUATE TO COVER ACTUAL
LOSSES, SPECTRUM'S EARNINGS COULD DECREASE.
Spectrum faces the risk that the allowance for loan losses may not be
adequate to cover actual losses, and future provisions for loan losses could
materially and adversely affect results of operations. The inability of
borrowers to repay loans can erode earnings and capital of banks. Like all
financial institutions, Spectrum maintains an allowance for loan losses to
provide for loan defaults and nonperformance. The loan losses allowance is based
on prior experience with loan losses, as well as an evaluation of the risks in
the current portfolio and commitments to extend credit, and is maintained at a
level considered adequate by management to absorb anticipated losses. The amount
of future losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond management's
control, and these losses may exceed current estimates.
State and federal regulatory agencies, as an integral part of their
examination process, review Spectrum's loans and its allowance for loan losses.
Management believes that Spectrum's allowance for loan losses is adequate to
cover anticipated losses. There can be no assurance, however, that management
will not determine a need to further increase the allowance for loan losses or
that regulators, when reviewing Spectrum's loan portfolios in the future, will
not require Spectrum to increase this allowance, either of which could adversely
affect Spectrum's earnings. Further, there can be no assurance that Spectrum's
actual loan losses will not exceed its allowance for loan losses. For
9
<PAGE>
further information on loan allowances, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
IF ECONOMIC CONDITIONS IN SPECTRUM'S PRIMARY MARKET AREA DETERIORATE,
SPECTRUM'S REVENUES COULD DECREASE.
Spectrum's financial results may be adversely affected by changes in
prevailing economic conditions in the midwest, including declines in real estate
values, rapid changes in interest rates, adverse employment conditions and the
monetary and fiscal policies of the federal government. At March 31, 1999,
Spectrum had $276,533,000 of commercial and agricultural loans representing
64.4% of total loans. Changes in any of the prevailing economic conditions in
South Dakota, southern Iowa and northern Missouri could adversely affect
borrowers' abilities to repay commercial and agricultural loans. At March 31,
1999, Spectrum had $88,732,000 of loans secured by real estate. Declines in real
estate values could adversely affect the amount realized by Spectrum in the
event of a loan default and subsequent foreclosure. In addition, substantially
all of the loans of Spectrum are to individuals and businesses in
non-metropolitan areas. There can be no assurance that positive trends or
developments discussed in this prospectus will continue or that negative trends
or developments will not have a significant adverse effect on Spectrum.
A DECREASE IN INTEREST RATE SPREADS WOULD HAVE A NEGATIVE EFFECT ON THE NET
INTEREST INCOME AND PROFITABILITY OF SPECTRUM, AND THERE CAN BE NO ASSURANCE
THAT A DECREASE WILL NOT OCCUR.
Spectrum's profitability is in part a function of the spread between the
interest rates earned on assets and the interest rates paid on deposits and
other interest-bearing liabilities. Although management believes that the
maturities of Spectrum's assets are moderately balanced in relation to
maturities of liabilities, this balance involves estimates as to how changes in
the general level of interest rates will impact the yields earned on assets and
the rates paid on liabilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Net
Interest Income" and "-- Liquidity -- Asset/Liability Management" for further
discussion of the impact of interest rates on Spectrum.
SPECTRUM FACES SIGNIFICANT COMPETITION WHICH MAY NEGATIVELY IMPACT EARNINGS.
Spectrum competes for loans and deposits with other local, regional and
national commercial banks, savings banks, savings and loan associations, finance
companies, money market funds, brokerage houses, credit unions and nonfinancial
institutions, many of which have substantially greater financial resources than
Spectrum. In addition, interstate banking is permitted in South Dakota, Iowa and
Missouri. As a result, management believes that Spectrum may experience greater
competition in its market areas that may negatively impact interest margins and
its ability to grow.
IF THE COMPUTER SYSTEMS OF SPECTRUM OR ITS SUPPLIERS AND CUSTOMERS DO NOT
TIMELY BECOME YEAR 2000 COMPLIANT, SPECTRUM MAY BE ADVERSELY AFFECTED.
Spectrum faces a significant business issue regarding how existing
application software programs and operating systems can accommodate the date
value for the year 2000. Many existing software application products, including
software application products used by Spectrum and its suppliers and customers,
were designed to accommodate only a two-digit date value, which represents the
year. Such products may recognize a date using "00" as the year 1900 rather than
2000. This faulty recognition could result in a system failure, disruption of
operations, or inaccurate information or calculations. The interruption to
Spectrum's business could be substantial if its current computer service
provider fails in efforts to assist Spectrum in becoming year 2000 compliant. In
addition, failure by suppliers and customers of Spectrum to modify and convert
their own computer systems could have a significant adverse effect on the
suppliers' or customers' operations and profitability, thus inhibiting their
ability to provide services or repay loans to Spectrum. As a practical matter,
Spectrum will unlikely be able to accumulate information on its suppliers' and
customers' year 2000 programs to assess the impact on Spectrum. For further
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance."
10
<PAGE>
SINCE APPROXIMATELY HALF OF THE OFFERING PROCEEDS WILL NOT BE PUT TO
IMMEDIATE USE, SPECTRUM'S MANAGEMENT WILL HAVE BROAD DISCRETION TO USE THE
PROCEEDS FOR GENERAL CORPORATE PURPOSES WHICH MAY NOT RESULT IN THE MAXIMUM
RETURN OR BE IN YOUR BEST INTERESTS.
Spectrum will receive $18,900,000 in net proceeds from the sale of its
junior subordinated debentures, after deducting estimated underwriting
commissions and expenses payable by Spectrum. After the anticipated repayment of
holding company debt of $11,695,000, Spectrum's management will have broad
discretion to allocate the remaining net proceeds to uses it believes are
appropriate and in the best interests of Spectrum's common stockholders. See
"Use of Proceeds" for the application of proceeds. The amount and timing of the
allocations will depend on a number of factors, including Spectrum's and its
subsidiary banks' capital requirements, and will have a direct effect on
Spectrum's growth, earnings and ability to make payments on the junior
subordinated debentures.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for
Spectrum for each of the years in the five-year period ended June 30, 1998 and
for the nine-month periods ended March 31, 1999 and 1998. The data set forth
below as of, and for the nine-month periods ended March 31, 1999 and 1998 is
unaudited and, in the opinion of management of Spectrum, reflects all
adjustments considered necessary for a fair presentation of the results for such
interim periods. The interim results are not necessarily indicative of results
which may be expected for future periods, including the year ending June 30,
1999. The data set forth below includes the accounts of American Federal Bank,
fsb, Madison, South Dakota from May 31, 1996, the date of acquisition of
American Federal, and the accounts of First Savings and Loan Association of
South Dakota, Aberdeen, South Dakota, from March 27, 1998, the date of
acquisition of First Savings. The completed acquisitions were accounted for
under the purchase method of accounting. The following table should be read in
conjunction with the consolidated financial statements of Spectrum and the notes
thereto appearing elsewhere in this prospectus and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The merger of Spectrum and its affiliated entities on May 31, 1999 has been
accounted for at historical cost in a manner similar to a pooling-of-interests
combination and, accordingly, the consolidated financial statements prior to the
combination have been restated to include the accounts and results of operations
of Spectrum. The Selected Consolidated Financial Data below takes into account
this restatement.
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME:
Interest income.................. $ 33,768 $ 31,187 $ 41,905 $ 37,144 $ 29,197 $ 25,080 $ 20,037
Interest expense................. 17,406 16,098 21,760 18,531 14,196 11,983 8,255
Net interest income.............. 16,362 15,089 20,145 18,613 15,001 13,097 11,782
Provision for loan losses........ 882 1,105 1,374 1,233 2,541 667 461
Other income..................... 4,753 2,863 4,574 3,582 2,945 2,258 1,976
Other expenses................... 11,936 10,031 14,074 13,302 10,635 9,778 9,050
Income taxes..................... 2,985 2,266 3,124 2,266 1,691 1,725 1,429
Minority interest in earnings of
subsidiaries................... 264 233 312 261 248 182 199
Net income....................... 5,048 4,317 5,835 5,133 2,831 3,003 2,619
PER COMMON SHARE DATA:
Earnings per share............... $ 68.79 $ 58.52 $ 79.15 $ 69.34 $ 36.81 $ 39.20 $ 33.85
Cash dividends................... 1.05 0 0 0 0 0 0
Tangible book value per
share(1)....................... 445.13 354.59 376.67 315.30 237.17 204.05 156.72
CONSOLIDATED BALANCE SHEET:
Assets........................... 593,937 541,277 548,077 487,619 423,539 339,391 297,549
Loans, net of unearned fees(2)... 435,549 390,557 408,470 360,904 296,168 231,911 194,511
Allowance for loan losses........ 5,970 5,357 5,599 5,404 4,790 2,599 2,132
Deposits......................... 489,544 446,519 450,790 399,178 357,489 301,883 262,481
Nonperforming assets............. 7,392 7,535 8,109 7,068 2,934 1,996 595
Stockholders' equity............. 36,387 30,119 31,548 26,242 20,803 19,084 15,871
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
KEY RATIOS(3):
Net interest margin(4)........... 4.12% 4.27% 4.22% 4.49% 4.55% 4.47% 4.67%
Return on average assets......... 1.17 1.12 1.12 1.14 0.79 0.94 0.95
Return on average stockholders'
equity......................... 19.71 20.66 20.40 22.76 14.33 17.10 17.80
Nonperforming loans to total
loans.......................... 1.67 1.88 1.96 1.92 0.85 0.83 0.25
Loan charge-offs to average
loans.......................... 0.16 0.60 0.45 0.19 0.26 0.10 0.13
Allowance for loan losses to
total loans.................... 1.37 1.37 1.37 1.50 1.62 1.12 1.10
Allowance for loan losses to
nonperforming loans............ 81.89 72.95 69.93 77.84 189.55 135.72 431.58
Core risk-based capital.......... 8.03 7.58 7.55 7.30 6.74 5.88 7.68
Total risk-based capital......... 9.28 8.83 8.80 8.55 7.99 6.75 8.80
Leverage ratio................... 6.01 5.43 5.58 5.40 5.24 5.58 5.30
Stockholders' equity to assets... 6.13 5.56 5.76 5.38 4.91 5.62 5.33
RATIO OF EARNINGS TO FIXED
CHARGES(5)
Including interest on deposits... 1.46x 1.41x 1.41x 1.40x 1.31x 1.38x 1.47x
Excluding interest on deposits... 3.99x 3.35x 3.37x 3.70x 3.42x 4.97x 6.49x
</TABLE>
- ------------
(1) Stockholders equity less preferred stock less cost in excess of net assets
acquired, divided by period end shares outstanding of common stock.
(2) Before allowance for loan losses.
(3) The ratios for the nine months ended March 31, 1999 and 1998 have been
annualized and are not necessarily indicative of the results for the entire
year.
(4) On a tax equivalent basis.
(5) The ratio of earnings to fixed charges is computed by dividing (x) the sum
of income before income taxes and fixed charges by (y) fixed charges. Fixed
charges consist of interest on borrowings, amortization of debt expense,
implicit interest on leases and dividends on Spectrum's series 1 and 2
preferred stock.
13
<PAGE>
CAUTIONARY STATEMENTS
Statements which are not historical facts contained in this prospectus are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Factors that could cause actual
results to differ materially include the factors discussed in "Risk Factors" as
well as continued success of Spectrum's expansion strategy, general economic
conditions, economic conditions in Spectrum's market area, the monetary policy
of the Federal Reserve, changes in interest rates, inflation, and changes in the
state and federal regulatory regime applicable to Spectrum's and its banks'
operations.
Information included in this prospectus includes forward looking statements,
which can be identified by the use of forward-looking terminology such as may,
will, expect, anticipate, believe, estimate, or continue, or the negative
thereof or other variations thereon or comparable terminology. The statements in
"Risk Factors" and other statements and disclaimers in this prospectus
constitute cautionary statements identifying important factors, including risks
and uncertainties, relating to the forward-looking statements that could cause
actual results to differ materially from those reflected in the forward-looking
statements.
USE OF PROCEEDS
All of the proceeds from the sale of preferred securities will be invested
by Spectrum Capital Trust I in the junior subordinated debentures of Spectrum.
The net proceeds to Spectrum from the sale of the junior subordinated
debentures, after deducting estimated underwriting commissions and offering
expenses, will be $18,900,000 or $21,788,000 if the underwriters' over-allotment
option is exercised in full. Spectrum intends to use its net proceeds to repay
all of its outstanding holding company debt which bears interest at an indexed
rate which averaged 7.68% during fiscal 1999 and matures on July 31, 2001. The
balance of this outstanding debt was $11,695,000 as of June 30, 1999. The
remaining proceeds will be used for general corporate purposes. These purposes
may include possible future acquisitions, purchase and construction of future
branch bank locations and additional capital contributions to Spectrum's banks.
Although Spectrum engages from time to time in acquisition negotiations, it
currently has no agreement in principle to make any acquisition. Pending their
application, the net proceeds may be invested in certificates of deposit, loan
participations, or short-term, marketable, investment grade interest-bearing
securities.
Spectrum is required by the Federal Reserve to maintain defined levels of
capital for bank regulatory purposes. In 1996, the Federal Reserve announced
that qualifying amounts of securities having the characteristics of the
preferred securities could be included as core capital for bank holding
companies subject to limited exceptions. See "Capitalization." This capital
treatment, together with Spectrum's ability to deduct, for federal income tax
purposes, interest payable on the junior subordinated debentures, will provide
Spectrum with a cost-effective means of obtaining capital for bank regulatory
purposes.
14
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, Spectrum Capital Trust I will be treated
as a subsidiary of Spectrum and, accordingly, the accounts of Spectrum Capital
Trust I will be included in the Consolidated Financial Statements of Spectrum.
The preferred securities will be presented as a separate line item in the
consolidated balance sheets of Spectrum under the caption "Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures," and appropriate disclosures about the preferred
securities, the preferred securities guarantee of Spectrum and the junior
subordinated debentures will be included in the Notes to Consolidated Financial
Statements. For financial reporting purposes, Spectrum will record distributions
payable on the preferred securities as interest expense in the consolidated
statements of income.
Future reports of Spectrum filed under the Securities Exchange Act of 1934,
as amended will include a footnote to the consolidated financial statements
stating that:
- Spectrum Capital Trust I is wholly-owned;
- the sole assets of Spectrum Capital Trust I are the junior subordinated
debentures and specifying the principal amount, interest rate and maturity
date of the junior subordinated debentures; and
- the obligations of Spectrum described in this prospectus, in the
aggregate, constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by Spectrum of the obligations of Spectrum Capital
Trust I under the preferred securities. Spectrum Capital Trust I will not
provide separate reports under the Securities Exchange Act.
No separate financial statements of Spectrum Capital Trust I have been
included in this prospectus. Spectrum and Spectrum Capital Trust I do not
consider that financial statements of Spectrum Capital Trust I would be material
to holders of the preferred securities because Spectrum Capital Trust I 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 assets the junior subordinated debentures of Spectrum and
issuing the preferred securities. Spectrum and Spectrum Capital Trust I are not
seeking a "no action" request from the SEC with respect to staff accounting
bulletin No. 53, based upon a review of "no action" positions taken by the staff
of the SEC under similar circumstances, an analysis of the staff's position set
forth in its proposing Release No. 34-41118 and the fact that Spectrum Capital
Trust I has no independent operations. It is the SEC's current position that
staff accounting bulletin No. 53 treatment is only available upon application to
the SEC. The SEC has given Spectrum and Spectrum Capital Trust I no assurance
that it will not recommend enforcement action if Spectrum Capital Trust I does
not provide separate reports under the Securities Exchange Act. For more
information, see "Description of the Preferred Securities," "Description of
Junior Subordinated Debentures" and "Description of Preferred Securities
Guarantee."
15
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
Spectrum as of March 31, 1999 and as adjusted to give effect to the issuance of
the preferred securities by Spectrum Capital Trust I in this offering and the
use of net proceeds as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------
ACTUAL AS ADJUSTED
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Borrowings:
Securities sold under agreements to repurchase...................... $ 19,301 $ 19,301
Federal Home Loan Bank borrowings................................... 28,500 28,500
Notes payable....................................................... $ 11,820(1) 0
------------ -----------
Total borrowings................................................ $ 59,621 $ 47,801
------------ -----------
------------ -----------
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures(2)... $ 0 $ 20,000
------------ -----------
------------ -----------
Stockholders' equity:
Preferred stock, $100.00 par value; 500,000 shares authorized serial
preferred stock -- 9,000 shares of Series 1 8% non-voting
cumulative preferred; 8,000 shares of Series 2 10% non-voting
non-cumulative preferred; issued and outstanding.................. $ 1,700 $ 1,700
Common stock, $1.00 par value; 1,000,000 shares authorized; 71,727
shares issued and outstanding..................................... 72 72
Additional paid-in capital.......................................... 1,659 1,659
Retained earnings................................................... 32,609 32,609
Accumulated other comprehensive income.............................. 347 347
------------ -----------
Total stockholders' equity...................................... $ 36,387 $ 36,387
------------ -----------
------------ -----------
Capital ratios(3):
Leverage ratio(4)................................................... 6.01% 7.96%
Core capital to risk-weighted assets(5)............................. 8.03 10.64
Total risk-based capital to risk-weighted assets.................... 9.28 13.57
</TABLE>
- ------------
(1) The notes payable were $11,695,000 as of June 30, 1999. The notes will be
paid in their entirety with proceeds of this offering.
(2) The subsidiary trust is Spectrum Capital Trust I, a wholly-owned subsidiary
of Spectrum that will hold, as its sole assets, $20,618,000 principal amount
of junior subordinated debentures, of which $20,000,000 will be purchased
with the proceeds of the preferred securities issued by Spectrum Capital
Trust I. The remaining $618,000 of junior subordinated debentures will be
purchased with the proceeds of the common securities issued by Spectrum
Capital Trust I. Spectrum will own all of the common securities. See
"Description of Junior Subordinated Debentures" and "Description of the
Preferred Securities." The junior subordinated debentures will mature on
, 2029, which date may be shortened to a date not earlier than
, 2004 upon meeting conditions in the indenture relating to the
junior subordinated debentures. The preferred securities are subject to
mandatory redemption upon repayment of the junior subordinated debentures at
maturity or their earlier redemption in an amount equal to the amount of
junior subordinated debentures maturing or being redeemed at a redemption
price equal to the aggregate liquidation amount of the preferred securities,
plus accumulated and unpaid distributions thereon to the date of redemption.
See "Description of the Preferred Securities -- Redemption -- Mandatory and
Optional Rights of Spectrum" and "Description of Junior Subordinated
Debentures -- Redemption."
16
<PAGE>
(3) The capital ratios, as adjusted, are computed including the estimated net
proceeds from the sale of the preferred securities, in a manner consistent
with Federal Reserve guidelines.
(4) The leverage ratio is core capital divided by average quarterly assets,
after deducting intangible assets and net deferred tax assets in excess of
regulatory maximum limits.
(5) Federal Reserve guidelines for calculation of core capital to risk-weighted
assets limit the amount of cumulative preferred stock which can be included
in core capital to 25% of total core capital. A portion of the preferred
securities offered hereby, $12,404,000, will be included as core capital for
Spectrum, and the remaining $7,596,000 will be included as total capital for
Spectrum. Spectrum's series 1 cumulative preferred stock of $900,000 also
will be included in total capital.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included in this prospectus. Spectrum's
future operating results may be affected by various trends and factors which are
beyond Spectrum's control. These include the factors set forth in "Risk Factors"
and "Cautionary Statements." Accordingly, past results and trends may not be
reliable indicators of future results or trends. With the exception of
historical information, the matters discussed below include forward-looking
statements that involve risks and uncertainties. Spectrum cautions readers that
a number of important factors discussed below could affect Spectrum's actual
results and cause actual results to differ materially from those in the
forward-looking statements.
RECENT OPERATING RESULTS
The following summary of financial results for fiscal 1999 are unaudited.
During the quarter ended June 30, 1999, Spectrum's loans and assets
continued to grow as in each of the past five years. Net new loans for the
quarter were $37,376,000 bringing the total net new loans to $64,455,000 for the
year. Total loans at year-end 1999 increased to $472,925,000 compared to
$408,470,000 at June 30, 1998. Spectrum's total assets at June 30, 1999 were
$611,241,000 compared to total assets of $548,077,000 at June 30, 1998. The
total allowance for loan losses at June 30, 1999 was $6,020,000 or 1.27% of
total loans compared to $5,599,000 or 1.37% of total loans at June 30, 1998.
This increase was due primarily to the net new loans added during the year, and
is in accordance with Spectrum's methodology designed to identify losses
inherent in the existing loan portfolio and commitments to extend credit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Allowance for Loan Losses."
Spectrum had net income of $6,846,000 for the year ended June 30, 1999
compared to $5,835,000 for 1998. Return on average equity for 1999 was 19.69%
compared to 20.40% for 1998, while return on average assets was 1.17% compared
to 1.12% in 1998. Net interest income for 1999 was $22,704,000 compared to
$20,145,000 for 1998 with net interest margin for 1999 decreasing slightly to
4.20% compared to 4.22% for 1998. Other income for 1999 was $6,273,000 compared
to $4,574,000 for 1998, an increase of $1,699,000 which resulted primarily from
the net gains from sale of loans. Stockholders' equity increased to $37,197,000
at June 30, 1999 from $31,548,000 at June 30, 1998. Nonperforming assets at June
30, 1999 decreased to $6,719,000 from $8,109,000 at June 30, 1998.
THE MERGER
On May 31, 1999, Decatur Corporation became the surviving corporation in a
merger of its affiliated bank holding companies, Spectrum Bancorporation, Inc.
and Rushmore Financial Services, Inc. Decatur then changed its name to Spectrum
Bancorporation, Inc. but retained its Iowa charter to facilitate acquisitions
within that state. Management does not expect the merger to have a material
effect on the business or earnings of Spectrum. The merger has been accounted
for at historical cost in a manner similar to a pooling-of-interests combination
and, accordingly, the consolidated financial statements prior to the combination
have been restated to include the accounts and results of operations of
Spectrum.
Prior to the combination, Decatur's fiscal year ended December 31 and the
fiscal year of Spectrum Bancorporation, Inc. and its wholly-owned subsidiary,
Rushmore Financial Services, Inc., ended June 30. In recording the combination,
the related financial statements for the twelve months ended June 30, 1998 were
combined with Spectrum Bancorporation, Inc.'s financial statements for the same
period. For previous periods, Decatur's fiscal years ended December 31, 1997,
1996, 1995 and 1994 were combined with Spectrum Bancorporation, Inc.'s fiscal
years ended June 30, 1997, 1996, 1995 and 1994. An adjustment has been made to
stockholders' equity as of June 30, 1998, to eliminate the effect
18
<PAGE>
of including Decatur's results of operations for the six months ended December
31, 1997, in both the years ended June 30, 1998 and 1997. Spectrum's fiscal year
ends June 30. References in this prospectus to the first nine months ended March
31 refer to the nine-month period from July 1 to March 31 of the following
calendar year.
RECENT ACQUISITIONS
Effective March 27, 1998, Spectrum acquired all of the outstanding shares of
First Savings & Loan Association of South Dakota, Inc., Aberdeen, South Dakota.
First Savings was merged into F&M Bank, a subsidiary bank of Spectrum. Assets of
$16,999,000, loans, net of unearned fees, of $14,016,000, and deposits of
$14,085,000 were acquired in connection with the merger.
On May 31, 1996, Spectrum acquired all of the outstanding shares of Am-First
Financial Corporation. Am-First owned 100% of the outstanding stock of American
Federal Bank, fsb, Madison, South Dakota. American Federal was merged into F&M
Bank. Assets of $56,429,000, loans, net of unearned fees, of $29,338,000, and
deposits of $45,206,000 were acquired in connection with the merger.
RESULTS OF OPERATIONS
GENERAL
Net income for the nine-month period ended March 31, 1999, was $5,048,000
compared to net income of $4,317,000 for the nine-month period ended March 31,
1998. Net income for the year ended June 30, 1998, was $5,835,000 compared to
net income of $5,133,000 for the year ended June 30, 1997, and compared to net
income of $2,831,000 for the year ended June 30, 1996. The net income for the
year ended June 30, 1996, was negatively impacted by a high provision for loan
losses of $2,541,000 primarily associated with the bankruptcy reorganization of
an entity which serviced loans and leases for three of Spectrum's subsidiary
banks.
During the nine-month period ended March 31, 1999, on an annualized basis,
Spectrum's return on average assets was 1.17% compared to 1.12% for March 31,
1998. For the years ended June 30, 1998, 1997 and 1996, the return on average
assets was 1.12%, 1.14% and 0.79%. During the nine-month period ended March 31,
1999, on an annualized basis, Spectrum's return on average stockholders equity
was 19.71%, compared to 20.66% for March 31, 1998. For the years ended June 30,
1998, 1997 and 1996, the return on average stockholders' equity was 20.40%,
22.76% and 14.33%.
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
interest-earning assets, including loans and securities, exceeds interest paid
on interest-bearing liabilities, including deposits and other borrowed funds.
Net interest income is the principal source of Spectrum's earnings. Interest
rate fluctuations, as well as changes in the amount and type of interest-earning
assets and interest-bearing liabilities, combine to affect net interest income.
The following tables present the average balances of Spectrum for the
nine-month periods ended March 31, 1999 and 1998 and indicate the interest
earned or paid on each major category of interest-earning assets and
interest-bearing liabilities on a fully taxable-equivalent basis assuming a 34%
tax rate, and the average rates earned or paid on each major category. This
analysis details the contribution of interest-earning assets and the overall
impact of the cost of funds on net interest income.
19
<PAGE>
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED MARCH 31,
--------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE EXPENSE YIELD/ RATE BALANCE EXPENSE YIELD/ RATE
--------- --------- ----- --------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans, net of unearned fees(1)......... $ 418,435 $ 28,094 8.95% $ 373,995 $ 26,339 9.39%
Investment securities:
Taxable.............................. 84,343 4,009 6.34 70,514 3,422 6.47
Tax exempt (tax equivalent).......... 11,618 711 8.16 11,416 714 8.34
Federal funds sold..................... 23,494 1,196 6.79 23,011 955 5.53
--------- --------- --------- ---------
Total interest-earning assets...... $ 537,890 $ 34,010 8.43% $ 478,936 $ 31,430 8.75%
--------- ---------
--------- ---------
INTEREST-BEARING LIABILITIES:
Demand, savings and money market
deposits............................. $ 145,818 $ 2,952 2.70% $ 120,017 $ 2,664 2.96%
Time deposits.......................... 277,903 11,913 5.72 249,960 10,783 5.75
--------- --------- --------- ---------
Total interest-bearing deposits.... 423,721 14,865 4.68% 369,977 13,447 4.85%
Federal Home Loan Bank borrowings,
Federal funds purchased and
securities sold under agreements to
repurchase........................... 45,657 1,868 5.46 45,339 1,949 5.73
Notes payable.......................... 12,591 673 7.13 13,119 702 7.13
--------- --------- --------- ---------
Total interest-bearing
liabilities...................... $ 481,969 $ 17,406 4.82% $ 428,435 $ 16,098 5.01%
--------- --------- --------- ---------
--------- ---------
Net interest income.................... $ 16,604 $ 15,332
--------- ---------
--------- ---------
Interest rate spread(2)................ 3.61% 3.74%
Net interest margin(3)................. 4.12% 4.27%
Ratio of average interest-bearing
liabilities to average interest-earning
assets................................. 89.60% 89.46%
</TABLE>
- ------------
(1) Nonaccrual loans are included in the Average Balance columns, and income
recognized on these loans, if any, is included in the Interest
Income/Expense columns. Interest income on loans includes fees on loans,
which are not material in amount.
(2) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets, on an annualized basis.
Net interest income on a tax-equivalent basis for the nine months ended
March 31, 1999 was $16,604,000, an increase of $1,272,000 or 8.30% from net
interest income of $15,332,000 for the first nine months of 1998. Interest
income for the first nine months of 1999 was $34,010,000, an increase of
$2,580,000, or 8.20% from interest income of $31,430,000 for the first nine
months of 1998. The interest income increase is primarily due to higher average
balances of interest-earning assets, some of which were a result of the
acquisition of First Savings. Average interest-earning assets for the first nine
months of 1999 were $537,890,000, an increase of $58,954,000 or 12.31% from
average interest-earning assets of $478,936,000 for the first nine months of
1998. The average yield on interest-earning assets decreased to 8.43% for the
nine months ended March 31, 1999 from 8.75% for the comparable period in 1998.
The primary reason for the decrease in the net interest margin during 1999 is
that Spectrum's loans are repricing at lower rates as they mature. For the nine
months ended March 31, 1999, average loan rates dropped to 8.95% from 9.39% for
the nine months ended March 31, 1998.
20
<PAGE>
Net interest expense for the nine months ended March 31, 1999 was
$17,406,000, an increase of $1,308,000, or 8.13% from net interest expense of
$16,098,000 for the first nine months of 1998. The increase in average balances
of certificates of deposit to $277,903,000 for the nine months ended March 31,
1999 from $249,960,000 for the comparable period in 1998 was due primarily to
core growth at Spectrum's subsidiary banks and made up much of the increased
interest expense.
The cost of interest-bearing liabilities for the nine months ended March 31,
1999 was 4.82% compared to 5.01% for the same period ended March 31, 1998, and,
when combined with noninterest-bearing deposits, the cost of funds for the nine
months ended March 31, 1999 was 4.37% compared to 4.48% for March 31, 1998.
While the overall cost of interest-bearing liabilities was lower, it could
not compensate for the decline in the average yield on earning assets. As a
result of these factors, net interest margin, on a tax-equivalent basis,
decreased to 4.12% from 4.27%.
The following table presents the average balances of Spectrum for each of
the last three fiscal years and indicates the interest earned or paid on each
major category of interest-earning assets and interest-bearing liabilities on a
fully taxable-equivalent basis, assuming a 34% tax rate, and the average rates
earned or paid on each major category. This analysis details the contribution of
interest-earning assets and the overall impact of the cost of funds on net
interest income.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------
1998 1997
--------------------------- ---------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- --------- ------ -------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans, net of unearned fees(1)(2).......... $380,681 $ 35,414 9.30% $324,076 $ 30,839 9.52%
Investment securities:
Taxable.................................. 73,250 4,542 6.20% 76,290 4,961 6.50%
Tax exempt (tax equivalent).............. 11,720 964 8.23% 10,408 936 8.99%
Federal funds sold......................... 19,604 1,313 6.70% 10,661 726 6.81%
-------- --------- -------- ---------
Total interest-earning assets.......... $485,255 $ 42,233 8.70% $421,435 $ 37,462 8.89%
-------- --------
-------- --------
INTEREST-BEARING LIABILITIES:
Demand, savings and money market
deposits................................. $122,747 $ 3,622 2.95% $105,482 $ 3,137 2.97%
Time deposits.............................. 253,690 14,548 5.73% 223,980 12,854 5.74%
-------- --------- -------- ---------
Total interest-bearing deposits........ 376,437 18,170 4.83% 329,462 15,991 4.85%
Federal Home Loan Bank borrowings, federal
funds purchased and securities sold under
agreements to repurchase................. 45,509 2,591 5.69% 30,991 1,682 5.43%
Notes payable.............................. 12,681 999 7.88% 12,979 858 6.61%
-------- --------- -------- ---------
Total interest-bearing liabilities..... $434,627 $ 21,760 5.01% $373,432 $ 18,531 4.96%
-------- --------- -------- ---------
-------- --------
Net interest income........................ $ 20,473 $ 18,931
--------- ---------
--------- ---------
Interest rate spread(3).................... 3.69% 3.93%
Net interest margin(4)..................... 4.22% 4.49%
Ratio of average interest-bearing liabilities
to average interest-earning assets......... 89.57% 88.61%
<CAPTION>
1996
---------------------------
INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------- --------- ------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans, net of unearned fees(1)(2).......... $248,637 $ 23,861 9.60%
Investment securities:
Taxable.................................. 68,450 4,108 6.00%
Tax exempt (tax equivalent).............. 8,333 700 8.40%
Federal funds sold......................... 9,193 766 8.33%
-------- ---------
Total interest-earning assets.......... $334,613 $ 29,435 8.80%
--------
--------
INTEREST-BEARING LIABILITIES:
Demand, savings and money market
deposits................................. $ 95,977 $ 3,140 3.27%
Time deposits.............................. 170,399 9,497 5.57%
-------- ---------
Total interest-bearing deposits........ 266,376 12,637 4.74%
Federal Home Loan Bank borrowings, federal
funds purchased and securities sold under
agreements to repurchase................. 15,295 890 5.82%
Notes payable.............................. 10,720 669 6.24%
-------- ---------
Total interest-bearing liabilities..... $292,391 $ 14,196 4.86%
-------- ---------
--------
Net interest income........................ $ 15,239
---------
---------
Interest rate spread(3).................... 3.94%
Net interest margin(4)..................... 4.55%
Ratio of average interest-bearing liabilities
to average interest-earning assets......... 87.38%
</TABLE>
- ------------
(1) The data includes the accounts of American Federal from May 31, 1996, the
date of acquisition of American Federal, and those of First Savings from
March 27, 1998, the date of acquisition of First Savings. The completed
acquisitions were accounted for under the purchase method of accounting.
(2) Nonaccrual loans are included in the Average Balance columns and income
recognized on these loans, if any, is included in the Interest
Income/Expense columns. Interest income on loans includes fees on loans,
which are not material in amount.
(3) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) The net interest margin is equal to net interest income divided by average
interest-earning assets.
22
<PAGE>
Net interest income, on a tax-equivalent basis, was $20,473,000 for the year
ended June 30, 1998, an increase of $1,542,000 from $18,931,000 in 1997. This
increase resulted primarily from an increase of $63,820,000 in average
interest-earning assets to $485,255,000 for the year ended June 30, 1998 from
$421,435,000 in 1997. The majority of the asset growth was due to growth in the
loan portfolio. Average loans increased $56,605,000 to $380,681,000 for the year
ended June 30, 1998 from $324,076,000 in 1997.
Interest expense increased $3,229,000 to $21,760,000 for the year ended June
30, 1998 from $18,531,000 in 1997. The cost of interest-bearing liabilities for
the year ended June 30, 1998 was 5.01% compared to 4.96% in 1997. When combined
with noninterest-bearing deposits, the cost of funds was 4.26% for the year
ended June 30, 1998 compared to 4.22% in 1997. The average balance of Federal
Home Loan Bank borrowings, federal funds purchased, and securities sold under
agreements to repurchase increased to $45,509,000 in 1998, an increase of
$14,518,000 from $30,991,000 in 1997. This source was used to supplement core
deposits in funding the loan growth.
As a result of these factors, net interest margin, on a tax-equivalent
basis, decreased to 4.22% for the year ended June 30, 1998 compared to 4.49% for
the year ended June 30, 1997.
Net interest income, on a tax-equivalent basis, was $18,931,000 for the year
ended June 30, 1997, an increase of $3,692,000 from $15,239,000 in 1996. This
increase resulted primarily from an increase of $86,822,000 in average
interest-earning assets to $421,435,000 for the year ended June 30, 1997 from
$334,613,000 in 1996. The majority of the asset growth was due to growth in the
loan portfolio. Average loans increased $75,439,000 to $324,076,000 for the year
ended June 30, 1997 from $248,637,000 in 1996.
Interest expense increased $4,335,000 to $18,531,000 for the year ended June
30, 1997 from $14,196,000 in 1996. The cost of interest-bearing liabilities for
the year ended June 30, 1997 was 4.96% compared to 4.86% in 1996. When combined
with non-interest-bearing deposits, the cost of funds was 4.07% for the year
ended June 30, 1996. The average balances of Federal Home Loan Bank borrowings,
federal funds purchased, and securities sold under agreements to repurchase
increased to $30,991,000 in 1997, an increase of $15,696,000 from $15,295,000 in
1996. This source also was used to supplement core deposits in funding loan
growth.
Net interest margin, on a tax-equivalent basis, decreased to 4.49% for the
year ended June 30, 1997 compared to 4.55% for the year ended June 30, 1996.
23
<PAGE>
The following table presents the changes in the components of net interest
income and identifies the portion of each change due to differences in the
average volume of interest-earning assets and interest-bearing liabilities and
the portion of each change due to the average rate on those assets and
liabilities. The changes in interest due to both volume and rate changes in the
table have been allocated to volume or rate change in proportion to the absolute
dollar amounts of the change in each.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED MARCH
31, 1999 VS. 1998 1998 VS. 1997
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- -------- ------- --------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned fees................ $ 3,025 $ (1,270) $ 1,755 $ 5,273 $ (698) $ 4,575
Investment Securities:
Taxable.................................... 657 (70) 587 (195) (224) (419)
Tax exempt (tax equivalent)................ 13 (16) (3) 112 (84) 28
Federal funds sold........................... 21 220 241 599 (12) 587
--------- -------- ------- --------- -------- -------
Total interest income.................... 3,716 (1,136) 2,580 5,789 (1,018) 4,771
--------- -------- ------- --------- -------- -------
Interest-bearing liabilities:
Demand, savings and money market
deposits................................. 534 (246) 288 509 (24) 485
Time deposits.............................. 1,207 (77) 1,130 1,704 (10) 1,694
--------- -------- ------- --------- -------- -------
Total interest-bearing deposit expense... 1,741 (323) 1,418 2,213 (34) 2,179
Federal Home Loan Bank borrowings, federal
funds purchased and securities sold under
agreements to repurchase................... 7 (88) (81) 823 86 909
Notes payable................................ (20) (9) (29) (20) 161 141
--------- -------- ------- --------- -------- -------
Total interest expense................... 1,728 (420) 1,308 3,016 213 3,229
--------- -------- ------- --------- -------- -------
Increase (decrease) in net interest income... $ 1,988 $ (716) $ 1,272 $ 2,773 $ (1,231) $ 1,542
--------- -------- ------- --------- -------- -------
--------- -------- ------- --------- -------- -------
<CAPTION>
1997 VS. 1996
----------------------------
INCREASE (DECREASE)
DUE TO CHANGES IN:
----------------------------
VOLUME RATE TOTAL
--------- ------ -------
<S> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned fees................ $ 7,181 $ (203) $ 6,978
Investment Securities:
Taxable.................................... 495 358 853
Tax exempt (tax equivalent)................ 184 52 236
Federal funds sold........................... 112 (152) (40)
--------- ------ -------
Total interest income.................... 7,972 55 8,027
--------- ------ -------
Interest-bearing liabilities:
Demand, savings and money market
deposits................................. 36 (39) (3)
Time deposits.............................. 3,013 344 3,357
--------- ------ -------
Total interest-bearing deposit expense... 3,049 305 3,354
Federal Home Loan Bank borrowings, federal
funds purchased and securities sold under
agreements to repurchase................... 854 (62) 792
Notes payable................................ 148 41 189
--------- ------ -------
Total interest expense................... 4,051 284 4,335
--------- ------ -------
Increase (decrease) in net interest income... $ 3,921 $ (229) $ 3,692
--------- ------ -------
--------- ------ -------
</TABLE>
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on a quarterly or a
more frequent evaluation of the loan portfolio, especially nonperforming and
other potential problem loans. During these evaluations, consideration is given
to such factors as: management's evaluation of specific loans; the level and
composition of nonperforming loans; historical loss experience; results of
examinations by regulatory agencies; expectations of future economic conditions
and their impact on particular industries and individual borrowers; the market
value of collateral; the strength of available guarantees; concentrations of
credits; and other judgmental factors. In addition, an unaffiliated company
selected by Spectrum performs loan review services on an annual basis.
The provision for loan losses for the nine-month period ended March 31,
1999, was $882,000 compared to $1,105,000 for the nine-month period ended March
31, 1998. This represents a decrease of $223,000, or 20.18%. The provision for
loan losses for the year ended June 30, 1998, was $1,374,000, compared to
$1,233,000 for the previous year. The provision in 1997 represented a decrease
of $1,308,000, or 51.48%, from the 1996 provision. This decrease was primarily
due to an extraordinarily large provision in 1996 which resulted from the
bankruptcy of an unaffiliated company which originated and serviced pools of
purchased leases for three of Spectrum's subsidiary banks, and many other
non-affiliated purchasers.
24
<PAGE>
OTHER INCOME
The following table presents Spectrum's other income for the indicated
periods.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED MARCH 31, YEAR ENDED JUNE 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges and other fees................................... $ 1,804 $ 1,580 $ 2,126 $ 1,919 $ 1,667
Net gains from sale of loans..................................... 1,674 135 803 303 314
Gain (loss) on securities, net................................... (15) 179 179 259 239
Other income..................................................... 1,290 969 1,466 1,101 725
--------- --------- --------- --------- ---------
Total other income............................................. $ 4,753 $ 2,863 $ 4,574 $ 3,582 $ 2,945
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
During the nine-month period ended March 31, 1999, total other income
increased to $4,753,000 from $2,863,000 for the nine months ended March 31, 1998
due primarily to increases in mortgage loan originations and sales and fees for
customer services. Net gains from the sale of loans arise when the subsidiary
banks originate loans and sell them in the secondary market with servicing
released. For this they receive a fee that is realized immediately into income.
Other income for the year ended June 30, 1998 increased to $4,574,000 compared
to $3,582,000 in 1997, an increase of $992,000 due primarily to increased income
from mortgage loan origination and increased other operating income including
fees from the sales of credit life insurance. Spectrum's experience is that the
volume of mortgage loan originations increases as interest rates decrease.
Management does not expect this level of increase in net gains from sale of
loans to continue. Other income for the year ended June 30, 1997 compared to
1996 increased by $637,000, primarily due to increases in service charges and
other fees.
OTHER EXPENSES
The following table presents Spectrum's other expenses for the indicated
periods.
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
MARCH 31, YEAR ENDED JUNE 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............................. $ 6,150 $ 5,664 $ 7,854 $ 7,157 $ 5,610
Occupancy expense, net..................................... 755 655 804 992 688
Data processing............................................ 611 635 717 795 691
Other expenses............................................. 4,420 3,077 4,699 4,358 3,646
--------- --------- --------- --------- ---------
Total other expense.................................... $ 11,936 $ 10,031 $ 14,074 $ 13,302 $ 10,635
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Other expenses increased $1,905,000, or 18.99%, to $11,936,000 during the
first nine months of 1999 from $10,031,000 during the first nine months of 1998,
primarily as a result of costs associated with establishing an in-house data
center which is located at F&M Bank in Watertown, South Dakota. Other expenses
increased $771,000, or 5.80%, to $14,074,000 in 1998 from $13,302,000 in 1997,
primarily due to increases in salaries and benefits. Other expenses increased
$2,667,000, or 25.08%, in 1997 from $10,635,000 in 1996, primarily due to
increases in salaries and benefits.
Salaries and employee benefits rose $485,000, or 8.56%, to $6,150,000 for
the nine-month period ended March 31, 1999, from $5,664,000 for the
corresponding period of 1998. Salaries and benefits rose $697,000, or 9.74%, to
$7,854,000 in 1998 from $7,157,000 in 1997. Salaries and employee benefits
increased $1,547,000, or 27.58%, to $7,157,000 in 1997 from $5,610,000 in 1996.
The increases in salaries were due to Spectrum's continuing growth and the
entering of new markets with its existing subsidiary banks through branching as
well through acquisitions in 1996 and 1998.
25
<PAGE>
Net occupancy expense increased $100,000, or 15.27%, to $755,000 for the
nine-month period ended March 31, 1999 from $655,000 for the nine-month period
ending March 31, 1998. Net occupancy expense decreased $188,000, or 18.95%, to
$804,000 in 1998 from $992,000 in 1997. Net occupancy expense increased
$304,000, or 44.19%, to $992,000 in 1997 from $688,000 in 1996. Net occupancy
expenses increased in the nine-month period ended March 31, 1999 due to the
acquisition of First Savings, Aberdeen, South Dakota and costs associated with
the construction of a new facility in Leon, Iowa. Net occupancy costs decreased
in 1998 as efficiencies were realized from the prior year's acquisition of
American Federal in Madison, South Dakota. Net occupancy costs increased in 1997
due to the acquisition of American Federal.
Data processing costs decreased $24,000, or 3.78% to $611,000 for the
nine-month period ended March 31, 1999, from $635,000 during the first nine
months of 1998. Data processing expense decreased $78,000, or 9.8%, to $717,000
from $795,000 in 1997. Data processing expense increased $104,000, or 15.05%, to
$795,000 in 1997 from $691,000 in 1996. Data center costs increased minimally in
the nine-month period ended March 31, 1999 even though an in-house data center
was created which services all of Spectrum's subsidiary banks. Cost changes in
prior fiscal years are a reflection of normal processing costs along with one
time shares related to conversions of acquired institutions in 1996 and 1998.
Other operating expenses include, among many other items, equipment expense,
postage, due from bank account charges, armored car and courier fees, travel and
entertainment, advertising, regulatory examination fees, directors' fees, dues
and subscriptions, and FDIC insurance premiums. These expenses increased
$1,343,000, or 43.65%, to $4,420,000 for the first nine months of 1999 from
$3,077,000 for the first nine months of 1998. These expenses increased $341,000,
or 7.82%, to $4,699,000 during 1998 from $4,358,000 during 1997. Other operating
expenses increased $712,000, or 19.53% to $4,358,000 in 1997 from $3,646,000 in
1996. Other operating expenses increased for the nine-month period ended March
31, 1999 due to a number of factors. Even though data processing expense did not
increase substantially, costs associated with the start up of the data center
impacted other operating expenses as well. Communication expense increased
substantially from the prior nine-month period as Spectrum's implemented a frame
relay system. Also for retrieval purposes Spectrum kept the prior data
processing system online until December 31, 1998 causing a duplication of
certain expenses including telephone expense. In addition, Citizens Bank, Mt.
Ayr began construction of an 8,265 square foot facility in Leon, Iowa in this
period.
FEDERAL INCOME TAX
Spectrum's consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities. The provision for
income taxes increased by $719,000 to $2,985,000 for the nine months ended March
31, 1999 from $2,266,000 for the nine months ended March 31, 1998, reflecting
the increase of income before taxes for the period. Spectrum's recorded income
tax expenses totaled $3,124,000 in 1998 and $2,266,000 in 1997, and $1,691,000
in 1996.
ANALYSIS OF FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans, net of unearned fees, increased $27,079,000, or 6.63%, to
$435,549,000 at March 31, 1999, from $408,470,000 at June 30, 1998. Total loans,
net of unearned fees, increased $47,566,000, or 13.18%, at June 30, 1998, from
$360,904,000 at June 30, 1997.
Spectrum's subsidiary banks primarily make installment loans to individuals
and commercial loans to small to medium-sized businesses and professionals. The
subsidiary banks offer a variety of commercial lending products including
revolving lines of credit, letters of credit, working capital loans and loans to
finance accounts receivable, inventory and equipment. See "Business -- Loans."
Typically, the subsidiary banks' commercial loans have floating rates of
interest, are for varying terms, generally
26
<PAGE>
not exceeding five years, are personally guaranteed by the borrower and are
collateralized by accounts receivable, inventory or other business assets.
The following tables present Spectrum's loan balances at the dates indicated
separated by loan type:
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998 JUNE 30, 1997
--------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals............................ $ 68,541 16.0% $ 58,205 14.4% $ 54,982 15.5%
Real estate loans............................... 88,732 20.6 129,761 32.2 144,463 40.6
Commercial and agricultural..................... 276,533 64.4 209,387 52.0 152,906 43.0
Other loans..................................... 2,191 0.5 11,531 2.9 8,825 2.5
---------- --------- ---------- --------- ---------- ---------
Total face amount of loans.................. 435,997 101.5 408,884 101.5 361,176 101.6
Unearned loan fees.............................. (448) (0.1) (414) (0.1) (272) (0.1)
---------- --------- ---------- --------- ---------- ---------
Loans........................................... 435,549 101.4% 408,470 101.4% 360,904 101.5%
Less allowance for loan losses.................. (5,970) (1.4) (5,599) (1.4) (5,404) (1.5)
---------- --------- ---------- --------- ---------- ---------
Net loans....................................... $ 429,579 100.0% $ 402,871 100.0% $ 355,500 100.0%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
--------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals............................ $ 61,478 21.1% $ 55,077 24.0% $ 38,706 20.1%
Real estate loans............................... 107,939 37.0 71,152 31.0 57,806 30.0
Commercial and agricultural..................... 117,758 40.5 96,424 42.1 83,625 43.6
Other loans..................................... 9,065 3.1 9,349 4.1 14,506 7.5
---------- --------- ---------- --------- ---------- ---------
Total face amount of loans.................. 296,240 101.7 232,002 101.2 194,643 101.2
Unearned loan fees.............................. (72) (0.1) (91) (0.1) (132) (0.1)
---------- --------- ---------- --------- ---------- ---------
Loans........................................... 296,168 101.6% 231,911 101.1% 194,511 101.1%
Less allowance for loan losses.................. (4,790) (1.6) (2,599) (1.1) (2,132) (1.1)
---------- --------- ---------- --------- ---------- ---------
Net loans....................................... $ 291,378 100.0% $ 229,312 100.0% $ 192,379 100.0%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
As of March 31, 1999, loans, net of unearned fees, were $435,549,000, or
$27,079,000 greater than loans of $408,470,000 at June 30, 1998. Spectrum's
primary category of loans, commercial and agricultural loans, constituting
almost two-thirds of loans as of March 31, 1999, trended upward as indicated at
the stated dates. At March 31, 1999, agricultural loans totaled $57,403,000. Of
this amount, $23,666,000 comprised loans primarily secured by agricultural real
estate, and $33,737,000 comprised loans primarily secured by agricultural
operating assets. At June 30, 1998, agricultural loans totaled $57,913,000. Of
this amount, $21,034,000 comprised loans primarily secured by agricultural real
estate, and $36,879,000 comprised loans primarily secured by agricultural
operating assets. At June 30, 1997, agricultural loans totaled $50,490,000. Of
this amount, $17,646,000 comprised loans primarily secured by agricultural real
estate, and $32,844,000 comprised loans primarily secured by agricultural
operating assets. Commercial and agricultural loans were $276,533,000 as of
March 31, 1999, an increase of $67,146,000 over the $209,387,000 balance as of
June 30, 1998.
In the first quarter of fiscal year 1999, Spectrum converted to a new data
processing system at which time over $50,000,000 in commercial real estate loans
were reclassified from real estate to commercial loans. The conversion allowed
Spectrum to examine the consistency of classifications among its subsidiary
banks. This examination led to the reclassification of certain loans at F&M
Bank. Primarily as a result of this reclassification, real estate loans were
$88,732,000 on March 31, 1999, $41,029,000 less than the June 30, 1998 balance
of $129,761,000. Loans as of June 30, 1998 increased by $47,566,000 compared to
June 30, 1997, due to greater amounts of commercial loans.
Loan concentrations are considered to exist when there are amounts loaned to
a multiple number of borrowers engaged in similar activities that would cause
them to be similarly impacted by economic
27
<PAGE>
or other conditions. Spectrum had no concentrations of loans at March 31, 1999,
except for those set forth in the above table. Spectrum had no loans outstanding
to foreign countries or borrowers headquartered in foreign countries at March
31, 1999.
Management of Spectrum's subsidiary banks may renew loans at maturity, when
requested by a customer whose financial strength appears to support such renewal
or when such renewal appears to be in Spectrum's best interest. Spectrum
requires payment of accrued interest in such instances and may adjust the rate
of interest, require a principal reduction or modify other terms of the loan at
the time of renewal.
Although the risk of non-payment exists for a variety of reasons relating to
all loans, other more specific risks are associated with each type of loan.
Risks associated with real estate mortgage loans include the borrower's
inability to pay and deterioration in value of real estate held as collateral.
Several risks are present in construction loans, including economic conditions
in the building industry, fluctuating land values, failure of the contractor to
complete work and the borrower's inability to repay. Risks associated with
commercial and agricultural loans are the quality of the borrower's management
and the impact of local economic factors as well as prices received for
products. Loans to individuals face the additional risk of a borrower's
unemployment as a result of deteriorating economic conditions as well as the
personal circumstances of the borrower. Management believes that risk levels
associated with the various types of loans are dependent upon the existence of
the risks at any particular time, for example, economic conditions in the
building industry.
LOAN MATURITIES
The following tables present, at March 31, 1999 and June 30, 1998, loans,
net of unearned fees, by maturity in each major category of Spectrum's portfolio
based on contractual repricing schedules. Actual maturities may differ from the
contractual repricing maturities shown below as a result of renewals and
prepayments. Loan renewals are evaluated by Spectrum in the same manner as new
credit applications. If loans are not repaid upon maturity, these loans are
subject to the same credit evaluation and other underwriting criteria as new
loan applications, and are subject to new terms and conditions as deemed
appropriate by Spectrum's lending personnel.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
------------------------------------------------------------------------
OVER ONE YEAR THROUGH
FIVE YEARS OVER FIVE YEARS
---------------------- ------------------------
ONE YEAR FLOATING FLOATING
OR LESS FIXED RATE RATE FIXED RATE RATE TOTAL
---------- ----------- --------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals........................ $ 12,747 $ 43,558 $ 4,329 $ 7,907 $ 0 $ 68,541
Real estate loans........................... 43,244 27,772 1,304 16,303 0 88,623
Commercial and agricultural................. 120,889 83,802 47,089 19,214 5,200 276,194
Other loans................................. 394 1,347 134 316 0 2,191
---------- ----------- --------- ----------- ----------- ----------
Total loans............................. $ 177,274 $ 156,479 $ 52,856 $ 43,740 $ 5,200 $ 435,549
---------- ----------- --------- ----------- ----------- ----------
---------- ----------- --------- ----------- ----------- ----------
<CAPTION>
AT JUNE 30, 1998
------------------------------------------------------------------------
OVER ONE YEAR THROUGH
FIVE YEARS OVER FIVE YEARS
---------------------- ------------------------
ONE YEAR FLOATING FLOATING
OR LESS FIXED RATE RATE FIXED RATE RATE TOTAL
---------- ----------- --------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals........................ $ 15,890 $ 33,893 $ 1,150 $ 7,272 $ 0 $ 58,205
Real estate loans........................... 59,439 41,763 8,081 20,319 0 129,602
Commercial and agricultural................. 110,768 52,822 20,052 20,264 5,226 209,132
Other loans................................. 3,254 6,942 236 1,099 0 11,531
---------- ----------- --------- ----------- ----------- ----------
Total loans............................. $ 189,351 $ 135,420 $ 29,519 $ 48,954 $ 5,226 $ 408,470
---------- ----------- --------- ----------- ----------- ----------
---------- ----------- --------- ----------- ----------- ----------
</TABLE>
28
<PAGE>
LOAN REVIEW PROCESS
Spectrum's subsidiary banks follow both internal and external loan review
programs to evaluate the credit risk in their loan portfolios and assess the
adequacy of the allowance for loan losses.
Internally, each bank maintains a classified loan list that, along with the
list of non-performing loans discussed below, helps Spectrum management assess
the overall quality of the loan portfolio and the adequacy of the allowance for
loan losses. The classification categories of substandard, doubtful and loss
correspond with those of state and FDIC examiners. Loans classified as
"substandard" are those loans with clear and defined weaknesses such as highly
leveraged positions, unfavorable financial ratios, uncertain repayment sources
or poor financial condition, which may jeopardize repayment. Loans classified as
"doubtful" are those loans that have characteristics similar to substandard
loans, but also have an increased risk of loss or would require a partial
write-off in a liquidation. Although loans classified as substandard do not
duplicate loans classified as doubtful, both substandard and doubtful loans may
include some loans that are past due at least 90 days, are on nonaccrual status
or have been restructured. Loans classified as "loss" are those loans that are
in the process of being charged off.
In addition to the internally classified loans, the subsidiary banks also
have a "watch list" of loans that further assists their monitoring of their loan
portfolios. A loan is included on the watch list if it demonstrates one or more
deficiencies requiring attention in the near term or if the loan's ratios have
weakened to a point where more frequent monitoring is warranted. These loans do
not have all the characteristics of a classified loan (substandard, doubtful or
loss), but do have weakened elements as compared with those of a satisfactory
credit. Management of the subsidiary banks reviews these loans to assist in
assessing the adequacy of the allowance for loan losses. Substantially all of
the loans on the watch list at March 31, 1999, and June 30, 1998, were current
and paying in accordance with loan terms. The subsidiary banks have internally
conducted reviews of their real estate, commercial and agricultural loan
customers to assess credit risk associated with Year 2000 compliance, in
accordance with FDIC requirements. At March 31, 1999, such reviews were
substantially complete at each bank. Spectrum believes that such credit risk is
not material in relation to the banks' overall credit risk. Accordingly, no
specific provision has been made to the allowance for loan losses to reflect
credit risk associated with Year 2000 compliance.
Spectrum's external loan review process consists of an intensive, annual
on-site review of more than 50% of loans at each subsidiary bank. This review is
performed by a non-affiliated regional consulting firm with the assistance of
loan officers of Spectrum's affiliate banks, under the supervision of President
Daniel A. Hamann. The report of the consulting firm is presented to each bank's
management and board of directors for review. The external review is used to
supplement and provide a check on the internal review conducted by subsidiary
bank management.
NONPERFORMING LOANS
Nonperforming loans consist of nonaccrual, past due and restructured loans.
A past due loan is an accruing loan that is contractually past due 90 days or
more as to principal and/or interest payments. Loans on which management does
not expect to collect interest in the normal course of business are placed on
nonaccrual or are restructured. When a loan is placed on nonaccrual, any
interest previously accrued but not yet collected is reversed against current
income unless, in the opinion of management, the outstanding interest remains
collectible. Thereafter, interest is included in income only to the extent of
cash received. A loan is restored to accrual status when all interest and
principal payments are current and the borrower has demonstrated to management
the ability to make payments of principal and interest as scheduled.
A restructured loan is one upon which interest accrues at a below market
rate or upon which certain principal has been forgiven so as to aid the borrower
in the final repayment of the loan, with any interest previously accrued, but
not yet collected, being reversed against current income. Interest is accrued
based upon the new loan terms.
29
<PAGE>
Nonperforming loans are fully or substantially collateralized by assets,
with any excess of loan balances over collateral values allocated in the
allowance. Assets acquired through foreclosure are carried at the lower of cost
or estimated fair value, net of estimated costs of disposal, if any. See
"Analysis of Financial Condition -- Other Real Estate and Other Repossessed
Assets" below.
The following table lists nonaccrual, past due and restructured loans and
other real estate and other repossessed assets at March 31, 1999, and at
year-end for each of the past five years.
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, -----------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans...................................... $ 1,897 $ 2,337 $ 1,971 $ 1,936 $ 1,060 $ 314
Accruing loans past due over 90 days.................. 1,207 1,484 543 340 495 180
Restructured loans.................................... 4,186 4,186 4,428 251 360 0
----------- --------- --------- --------- --------- ---------
Total nonperforming loans............................. 7,290 8,007 6,942 2,527 1,915 494
Other real estate and other repossessed assets........ 102 102 126 407 81 101
----------- --------- --------- --------- --------- ---------
Total nonperforming assets............................ $ 7,392 $ 8,109 $ 7,068 $ 2,934 $ 1,996 $ 595
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Ratio of total nonperforming loans to total loans..... 1.67% 1.96% 1.92% 0.85% 0.83% 0.25%
Ratio of total nonperforming assets to total loans
plus other real estate and other repossessed
assets.............................................. 1.70 1.98 1.96 0.99 0.86 0.31
Ratio of nonperforming assets to total assets......... 1.24 1.48 1.45 0.69 0.59 0.20
</TABLE>
Restructured loans were $4,186,000, $4,186,000 and $4,428,000 at March 31,
1999, June 30, 1998, and June 30, 1997. Included in the category are loans for
which the increased provision was taken in 1996. These loans were primarily
serviced by a single servicer that declared bankruptcy in 1996. A settlement was
reached with the bankruptcy trustee that resulted in a partial charge-off of
amounts owing to Spectrum's subsidiary banks, with the remaining balances of
$4,186,000 carried at a below-market rate of interest for an eight-year period.
These loans begin a two-year principal amortization in 2002 and are scheduled to
be completely repaid in 2004. Payments of interest are being received monthly
and have been received according to the terms of the settlement since its
inception. Payments are current on these loans.
A potential problem loan is defined as a loan where information about
possible credit problems of the borrower is known, causing management to have
serious doubts as to the ability of the borrower to comply with the present loan
repayment terms and which may result in the inclusion of such loan in one of the
nonperforming asset categories. Spectrum does not believe it has any potential
problem loans other than those reported in the above table.
ALLOWANCE FOR LOAN LOSSES
Implicit in Spectrum's lending activities is the fact that loan losses will
be incurred and that the risk of loss will vary with the type of loan being made
and the creditworthiness of the borrower over the term of the loan. To reflect
the currently perceived risk of loss associated with Spectrum's loan portfolio,
additions are made to the allowance for possible loan losses. The allowance is
created by direct charges of the provision against income and the allowance is
available to absorb realized loan losses.
30
<PAGE>
The following table presents the provisions, loans charged off and
recoveries of loans previously charged off, the amount of the allowance, average
loans outstanding and certain pertinent ratios for the nine-month period ended
March 31, 1999, and for each of the last five years.
<TABLE>
<CAPTION>
MARCH JUNE 30,
31, --------------------------------------------------------
1999 1998 1997 1996 1995 1994
-------- ----------- ----------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average loans outstanding(1)................. $418,435 $ 380,681 $324,076 $248,637 $201,849 $169,397
-------- ----------- ----------- -------- -------- --------
-------- ----------- ----------- -------- -------- --------
Total loans at end of period(1)........ $435,549 $ 408,470 $360,904 $296,168 $231,911 $194,511
-------- ----------- ----------- -------- -------- --------
-------- ----------- ----------- -------- -------- --------
Allowance at beginning of period............. $ 5,599 $ 5,803(2) $ 4,790 $ 2,599 $ 2,132 $ 1,890
Loans charged off:
Loans to individuals....................... 157 481 203 550 107 54
Real estate loans.......................... 46 15 23 18 16 5
Commercial and agricultural loans.......... 438 1,013 379 510 214 265
Other loans................................ 17 422 421 451 0 0
-------- ----------- ----------- -------- -------- --------
Total charge-offs...................... 658 1,931 1,026 1,529 337 324
-------- ----------- ----------- -------- -------- --------
Recoveries of loans previously charged off:
Loans to individuals....................... 57 60 55 414 57 33
Real estate loans.......................... 4 2 2 5 30 11
Commercial and agricultural loans.......... 86 162 350 45 50 61
Other loans................................ 0 0 0 422 0 0
-------- ----------- ----------- -------- -------- --------
Total recoveries....................... 147 224 407 886 137 105
-------- ----------- ----------- -------- -------- --------
Net loans charged off.................... 511 1,707 619 643 200 219
Provision for loan losses.................. 882 1,374 1,233 2,541 667 461
Business acquisition....................... 0 129 0 293 0 0
-------- ----------- ----------- -------- -------- --------
Allowance at end of period................... $ 5,970 $ 5,599 $ 5,404(2) $ 4,790 $ 2,599 $ 2,132
-------- ----------- ----------- -------- -------- --------
-------- ----------- ----------- -------- -------- --------
Net loan charge-offs to average loans........ 0.16% 0.45% 0.19% 0.26% 0.10% 0.13%
Allowance to total loans, at end of period... 1.37% 1.37% 1.50% 1.62% 1.12% 1.10%
</TABLE>
- ------------
(1) Net of unearned fees.
(2) Restated balance at end of 1997 does not equal the 1998 beginning balance
due to a change in reporting periods. See "-- The Merger."
The amount of the allowance equals the cumulative total of the provisions
made from time to time, reduced by loan charge-offs and increased by recoveries
of loans previously charged off. Spectrum's allowance was $5,970,000, or 1.37%,
of loans, net of unearned fees, at March 31, 1999. Spectrum's allowance was
$5,599,000, or 1.37% of loans, net of unearned fees, at June 30, 1998, compared
to $5,404,000, or 1.50% of loans, net of unearned fees, at June 30, 1997, and
$4,790,000, or 1.62% of loans, net of unearned fees, at June 30, 1996. See
"Provision for Loan Losses."
Credit and loan decisions are made by management and the board of directors
of the subsidiary banks in conformity with loan policies established by their
boards of directors. The subsidiary banks' practice is to charge off any loan or
portion of a loan when the loan is determined by management to be uncollectable
due to the borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation of the
underlying collateral, the loan's classification as a loss by regulatory
examiners or for other reasons. Spectrum charged off $658,000 during the nine
months ended March 31, 1999. Recoveries during the first nine months of 1999
were $147,000.
31
<PAGE>
Foreclosures on defaulted loans result in Spectrum acquiring other real
estate and other repossessed assets. Accordingly, Spectrum incurs other
expenses, specifically net costs applicable to other real estate and other
repossessed assets, in maintaining, insuring and selling such assets. Spectrum's
subsidiary banks attempt to convert nonperforming loans into interest-earning
assets either through liquidation of the collateral securing the loan or through
intensified collection efforts.
The amount of the allowance is established by bank management based upon
estimated risks inherent in the existing loan portfolio. Management reviews the
loan portfolio on a continuing basis to evaluate potential problems. This review
encompasses management's estimate of current economic conditions and the
potential impact on various industries, prior loan loss experience and financial
conditions of individual borrowers. Loans that have been specifically identified
as problem or nonperforming loans are reviewed on at least a quarterly basis,
and management critically evaluates the prospect of ultimate losses arising from
such loans, based on the borrower's financial condition and the value of
available collateral. When a risk can be specifically quantified for a loan,
that amount is specifically allocated in the allowance. In addition, Spectrum
allocates the allowance based upon the historical loan loss experience of the
different types of loans. Despite such allocation, the entire allowance is
available for charge-offs of all loans.
The following table shows the allocations in the allowance and the
respective percentages of each loan category to total loans at March 31, 1999,
and at year-end for each of the past five years. Portions of the allowance have
been allocated to categories based on an analysis of the status of particular
loans and homogenous pools of loans. The allocation table should not be
interpreted as an indication of the specific amounts, by loan classification, to
be charged to the allowance. Management believes that the table may be a useful
device for assessing the adequacy of the allowance as a whole. The table has
been derived in part by applying historical loan loss ratios to both internally
classified loans and the portfolio as a whole in determining the allocation of
the loan losses attributable to each category of loans.
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT JUNE 30, 1998 AT JUNE 30, 1997
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS BY LOANS BY LOANS BY
AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals........................ $ 728 15.7% $ 625 14.2% $ 691 15.2%
Real estate loans........................... 503 20.4 912 31.7 850 40.0
Commercial and agricultural loans........... 4,034 63.4 3,460 51.3 3,248 42.4
Other loans................................. 705 0.5 602 2.8 615 2.4
----------- ----- ----------- ----- ----------- -----
Total allowance for loan losses......... $ 5,970 100.0% $ 5,599 100.0% $ 5,404 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996 AT JUNE 30, 1995 AT JUNE 30, 1994
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS BY LOANS BY LOANS BY
AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals........................ $ 635 20.8% $ 452 23.7% $ 295 19.9%
Real estate loans........................... 730 36.4 159 30.7 175 29.6
Commercial and agricultural loans........... 3,372 39.7 1,988 41.6 1,662 43.0
Other loans................................. 53 3.1 0 4.0 0 7.5
----------- ----- ----------- ----- ----------- -----
Total allowance for loan losses......... $ 4,790 100.0% $ 2,599 100.0% $ 2,132 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
32
<PAGE>
SECURITIES
Securities, all of which are classified as available-for-sale and carried at
fair value, increased $15,756,000, or 19.82%, to $95,267,000 at March 31, 1999,
from $79,511,000 at June 30, 1998. Securities available-for-sale increased
$30,000, or 0.04% from $79,481,000 at June 30, 1997.
The board of directors of each subsidiary bank reviews all securities
transactions monthly and the securities portfolio periodically. Spectrum's
current investment policy provides for the purchase of U.S. Treasury securities
and federal agency securities having maturities of five years or less. For
state, county, municipal and other securities, Spectrum's investment policy
allows for the purchase of securities with maturities in excess of ten years. As
of March 31, 1999, 86.38% of Spectrum's securities with defined maturities
mature in less than ten years.
As of March 31, 1999, 97.92% of Spectrum's investment portfolio had defined
maturities. The investment portfolio with defined maturities were concentrated
in the following categories: mortgage backed securities totaled $56,692,000, or
59.51% of the portfolio and other securities totaled $12,048,000, or 12.65% of
the portfolio. Approximately 50% of the other category is composed of corporate
securities. The remaining 2.08% of Spectrum's investment portfolio is in equity
securities which primarily is stock in the Federal Home Loan Bank of Des Moines.
Certain of Spectrum's securities are pledged to secure public and trust fund
deposits and for other purposes required or permitted by law. At March 31, 1999,
the book value of U.S. Government and other securities so pledged amounted to
$56,216,000, or 59.00% of the total securities portfolio.
The following table provides the maturity distribution and weighted average
interest rates of Spectrum's securities portfolio at March 31, 1999. The yield
has been computed by relating the forward income stream on the securities, plus
or minus the anticipated amortization of premium or accretion of discount, to
the book value of the securities. The book value of available-for-sale
securities is their fair value. All securities are held available for sale. The
restatement of the yields on tax-exempt securities to a fully taxable-equivalent
basis has been computed assuming a tax rate of 34%. The equity securities are
primarily composed of stock in the Federal Home Loan Bank of Des Moines. The
yield is set
33
<PAGE>
quarterly by the Federal Home Loan Bank's board of directors. For the quarter
ended March 31, 1999, the yield was 6.25%.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
------------------------------------------------
WEIGHTED
PRINCIPAL AMORTIZED ESTIMATED AVERAGE
TYPE AND MATURITY AMOUNT COST FAIR VALUE YIELD
- --------------------------------------------------------------------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year.................................................... $ 5,100 $ 5,100 $ 5,117 5.68%
After one but within five years.................................... 4,900 4,895 4,944 5.59
--------- ----------- -----------
Total U.S. Treasury securities............................... 10,000 9,995 10,061 5.63
--------- ----------- -----------
Obligations of other U.S. Government agencies and corporations:
Within one year.................................................... 1,032 1,032 998 4.82%
After one but within five years.................................... 3,200 3,199 3,229 5.95
--------- ----------- -----------
Total obligations of U.S. Government agencies and
corporations............................................... 4,232 4,231 4,227 5.68
--------- ----------- -----------
Mortgage-backed securities........................................... 56,327 56,304 56,692 6.44
--------- ----------- -----------
Obligations of states and political subdivisions:
Within one year.................................................... 395 585 913 7.00%
After one but within five years.................................... 835 1,040 1,069 7.34
After five but within ten years.................................... 4,087 4,090 4,214 7.96
After ten years.................................................... 3,495 4,063 4,062 7.04
--------- ----------- -----------
Total obligations of states and political subdivisions....... 8,812 9,778 10,258 7.55
--------- ----------- -----------
Other securities:
Within one year.................................................... 210 705 706 6.35%
After one but within five years.................................... 0 198 198 5.95
After five but within ten years.................................... 1,771 2,408 2,501 5.98
After ten years.................................................... 8,700 8,635 8,643 6.56
--------- ----------- -----------
Total other securities....................................... 10,681 11,946 12,048 6.42
--------- ----------- -----------
Total securities with defined maturities..................... 90,052 92,254 93,286 6.42
Equity securities.................................................... 1,981 1,981 1,981 6.25
--------- ----------- -----------
Total securities............................................. $ 92,033 $ 94,235 $ 95,267 6.42%
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
DEPOSITS
Total deposits increased $38,754,000, or 8.60%, to $489,544,000 at March 31,
1999, from $450,790,000 at June 30, 1998. The increase in total deposits of
$51,612,000, or 12.93%, at June 30, 1998, from $399,178,000 at June 30, 1997, is
partly attributable to the purchase of First Savings in March, 1998, which had
$14,085,000 in total deposits at the date of acquisition. Total deposits
increased $41,689,000, or 11.66%, at June 30, 1997, from $357,489,000 at June
30, 1996.
34
<PAGE>
The following table presents the average amounts and the average rate paid
on deposits of Spectrum for the nine-month period ended March 31, 1999, and for
each of the last three years:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
NINE-MONTH -------------------------------------------------------------------------
PERIOD ENDED
MARCH 31, 1999 1998 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing demand, savings
and money market deposits..... $ 145,818 2.70% $ 122,747 2.95% $ 105,482 2.97% $ 95,977 3.27%
Time deposits of less than
$100,000...................... 218,054 5.89 202,977 6.29 182,826 6.08 146,671 5.79
Time deposits of $100,000 or
more.......................... 59,849 5.06 50,713 3.55 41,154 4.19 23,728 4.51
---------- ---------- ---------- ----------
Total interest-bearing
deposits...................... 423,721 4.68 376,437 4.83 329,462 4.85 266,376 4.74
Noninterest-bearing demand
deposits...................... 49,259 0.00 50,165 0.00 49,405 0.00 43,831 0.00
---------- ---------- ---------- ----------
Total deposits................ $ 472,980 4.19% $ 426,602 4.26% $ 378,867 4.22% $ 310,207 4.07%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The maturity distribution of time deposits of $100,000 or more at March 31,
1999 is presented below:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
3 months or less.................................................................. $ 16,120
Over 3 through 6 months........................................................... 39,629
Over 6 through 12 months.......................................................... 9,459
Over 12 months.................................................................... 2,211
-------
Total time deposits of $100,000 or more....................................... $ 67,419
-------
-------
</TABLE>
The subsidiary banks rely to a limited extent on time deposits of $100,000
or more. Time deposits of $100,000 or more are a more volatile funding source
than other deposits and are most likely to affect Spectrum's future earnings
because of interest rate sensitivity.
FEDERAL HOME LOAN BANK BORROWINGS
All of the subsidiary banks are members of the Federal Home Loan Bank. Due
to the competitive rates available, each subsidiary bank has utilized Federal
Home Loan Bank advances as a source of funding. At March 31, 1999, the
subsidiary banks had $28,500,000 in Federal Home Loan Bank advances compared to
$24,500,000 at June 30, 1998 and $25,900,000 at June 30, 1997. At March 31,
1999, based on its Federal Home Loan Bank stockholdings, the aggregate unused
borrowing capacity of Spectrum was $15,931,000.
A variety of borrowing terms and maturities can be chosen from the Federal
Home Loan Bank. Maturities available range generally from one day to 10 years.
Interest rates can be either fixed or variable and prepayment options are
available if desired. The Federal Home Loan Bank offers both amortizing and
non-amortizing advances. Historically, Federal Home Loan Bank stock has been
redeemable at the preset price of $100 per share, its current carrying value,
but there can be no assurance that this policy will continue.
35
<PAGE>
LIQUIDITY
SOURCES OF LIQUIDITY
Liquidity with respect to a financial institution is the ability to meet its
short-term needs for cash without suffering an unfavorable impact on its
on-going operations. The need for the subsidiary banks to maintain funds on hand
arises principally from maturities of short-term borrowings, deposit
withdrawals, customers' borrowing needs and the maintenance of reserve
requirements. Liquidity with respect to a financial institution can be met from
either assets or liabilities. On the asset side of the balance sheet, the
primary sources of liquidity are cash and due from banks, federal funds sold,
maturities of securities and scheduled repayments and maturities of loans. The
subsidiary banks maintain adequate levels of cash and near-cash investments to
meet its day-to-day needs. Cash and due from banks averaged $17,194,000 and
$17,928,000 during the nine months March 31, 1999 and 1998, respectively. These
amounts comprised 2.99% and 3.49% of average total assets during the nine months
ended March 31, 1999 and 1998 respectively. The average level of securities and
federal funds sold was $119,455,000 and $104,941,000 during the nine months
March 31, 1999 and 1998 respectively.
At March 31, 1999, $7,734,000, or 21.13%, of Spectrum's securities
portfolio, excluding mortgage-backed securities and equity securities, matured
within one year and $9,440,000, or 25.80%, excluding mortgage-backed securities,
matured after one but within five years. The subsidiary banks' commercial
lending activities are concentrated in loans with maturities of less than five
years and with both fixed and adjustable interest rates. Its installment lending
activities are concentrated in loans with maturities of three to six years and
with generally fixed interest rates. At March 31, 1999, approximately
$177,274,000, or 40.70%, of Spectrum's loans, net of unearned fees, matured
within one year. See "Loan Maturities."
On the liability side of the balance sheet, the principal sources of
liquidity are deposits, borrowed funds and the accessibility to money and
capital markets. Spectrum attracts its deposits primarily from individuals and
businesses located within the market areas served by the subsidiary banks.
Borrowed funds come primarily from two sources, Federal Home Loan Bank
borrowings and Spectrum's notes payable at US Bank, N.A. Spectrum has loan
agreements with US Bank, N.A. Interest on the balance, $11,695,000 at May 31,
1999, is due quarterly at either the lender's reference rate, the CD rate plus
2% per annum or the Eurodollar rate plus 2% per annum, at the option of
Spectrum. The maturity date of this outstanding debt is July 31, 2001. Proceeds
from this offering will be used to pay this balance in full. See "Use of
Proceeds."
ASSET/LIABILITY MANAGEMENT
Interest rate risk arises when an interest-earning asset matures or when
such asset's rate of interest changes in a time frame different from that of the
supporting interest-bearing liability. Spectrum seeks to reduce the risk of
significant adverse effects on Spectrum's net interest income caused by interest
rate changes.
Spectrum does not attempt to match each interest-earning asset with a
specific interest-bearing liability. Instead, as shown in the table below, it
aggregates all of its interest-earning assets and interest-bearing liabilities
to determine the difference between the two in specific time frames. This
difference is known as the rate-sensitivity gap. A positive gap indicates that
more interest-earning assets than interest-bearing liabilities mature in a time
frame, and a negative gap indicates the opposite. Maintaining a balanced
position will reduce the risk associated with interest rate changes, but it will
not guarantee a stable interest rate spread since various rates within a
particular time frame may change by differing amounts and in different
directions. Management regularly monitors the interest sensitivity position and
considers this position in its decisions with regards to interest rates and
maturities for interest-earning assets acquired and interest-bearing liabilities
accepted.
36
<PAGE>
The following tables show the cumulative gap ratio to be (20.84%) at the
less than three-month interval, (32.16%) at the three month to less than one
year interval and (4.14%) at the one to five year interval at March 31, 1999.
Currently, Spectrum is in a liability-sensitive position. Spectrum had
$155,572,000 of interest-bearing demand, savings and money market deposits at
March 31, 1999, that are somewhat less rate-sensitive. Excluding these deposits,
Spectrum's interest-sensitive ratio would have been 5.36% at the less than
three-month interval, (5.97%) at the three month to less than one year interval
and 22.06% at the one to five year interval at March 31, 1999. The interest
sensitivity position is presented as of a point in time and can be modified to
some extent by management as changing conditions dictate.
The following table shows the interest rate sensitivity position of Spectrum
at March 31, 1999:
ESTIMATED MATURITY OR REPRICING AT MARCH 31, 1999
<TABLE>
<CAPTION>
THREE
LESS THAN MONTHS TO
THREE LESS THAN ONE TO FIVE OVER FIVE
MONTHS ONE YEAR YEARS YEARS TOTAL
--------- --------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned fees................ $ 88,043 $ 89,231 $ 209,335 $48,940 $435,549
Investment securities: --
Taxable.................................. 8,435 6,370 36,392 33,260 84,457
Tax exempt............................... 335 250 1,040 8,153 9,778
Federal funds sold and interest-bearing
deposits................................. 29,981 -- -- -- 29,981
--------- --------- ----------- ---------- --------
Total interest-earning assets............ 126,794 95,851 246,767 90,353 559,765
Interest-bearing liabilities:
Deposits:
Demand, savings and money market
deposits............................... 155,572 -- -- -- 155,572
Time deposits............................ 58,850 161,140 65,798 -- 285,788
Federal Home Loan Bank borrowings, Federal
funds purchased and securities sold under
agreements to repurchase................... 24,301 2,000 14,500 7,000 47,801
Notes payable................................ 11,820 -- -- -- 11,820
--------- --------- ----------- ---------- --------
Total interest-bearing liabilities........... $ 250,543 $ 163,140 $ 80,298 7,000 $500,981
--------- --------- ----------- ---------- --------
Interest rate gap............................ $(123,749) $ (67,289) $ 166,469 $83,353 $ 58,784
--------- --------- ----------- ---------- --------
--------- --------- ----------- ---------- --------
Cumulative interest rate gap at March 31,
1999....................................... $(123,749) $(191,038) $ (24,569) $58,784
--------- --------- ----------- ----------
--------- --------- ----------- ----------
Cumulative interest rate gap to total
assets..................................... (20.84)% (32.16)% (4.14)% 9.90%
--------- --------- ----------- ----------
--------- --------- ----------- ----------
</TABLE>
37
<PAGE>
The following table indicates that at March 31, 1999, if there had been a
sudden and sustained increase in prevailing market interest rates, Spectrum's
1999 interest income would be expected to decrease, while a decrease in rates
would indicate an increase in income.
<TABLE>
<CAPTION>
NET
INTEREST (DECREASE)
INCOME INCREASE PERCENT CHANGE
----------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Changes in Interest Rates
200 basis point rise.................................................... $ 20,540 $ (1,849) (8.26)%
100 basis point rise.................................................... 21,296 (1,093) (4.88)
Base rate scenario...................................................... 22,389 -- 0.00
100 basis point decline................................................. 23,147 758 3.39
200 basis point decline................................................. 23,567 1,178 5.26
</TABLE>
CAPITAL RESOURCES
Spectrum monitors compliance with bank and bank holding company regulatory
capital requirements, focusing primarily on risk-based capital guidelines. As
indicated in the table immediately below, at March 31, 1999, Spectrum was above
the total capital minimum requirements. Under the risk-based capital method of
capital measurement, the ratio computed is dependent upon the amount and
composition of assets recorded on the balance sheet, and the amount and
composition of off-balance sheet items, in addition to the level of capital.
Included in the risk-based capital method are two measures of capital adequacy,
core capital and total capital, which consists of core and supplementary
capital. See "Supervision and Regulation -- Spectrum -- Capital Adequacy."
The following tables present Spectrum's capital ratios as of the indicated
dates.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
--------------------------------------------
MARCH 31, JUNE 30,
1999 1998
--------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Core capital............................................................ $ 35,353 8.03% $ 30,323 7.55%
Core capital minimum requirement........................................ 17,611 4.00 16,059 4.00
---------- --------- ---------- ---------
Excess.................................................................. $ 17,742 4.03% $ 14,264 3.55%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Total capital........................................................... $ 40,857 9.28% $ 35,431 8.80%
Total capital minimum requirement....................................... 35,223 8.00 32,118 8.00
---------- --------- ---------- ---------
Excess.................................................................. $ 5,634 1.28% $ 3,313 0.80%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Total risk adjusted assets.............................................. $ 440,283 $ 401,471
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
--------------------------------------------
MARCH 31, JUNE 30,
1999 1998
--------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Core capital............................................................ $ 35,353 6.01% $ 30,323 5.58%
Minimum requirement..................................................... 23,533 4.00 21,731 4.00
--------- ---------- ---------
Excess.................................................................. $ 11,820 2.01% $ 8,592 1.58%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Average total assets.................................................... $ 588,319 $ 543,263
---------- ----------
---------- ----------
</TABLE>
38
<PAGE>
IMPACT OF INFLATION
The effects of inflation on the local economy and on Spectrum's operating
results have been relatively modest for the past several years. Because
substantially all of Spectrum's assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates. Spectrum attempts to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. See "-- Interest
Rate Sensitivity" above.
YEAR 2000 COMPLIANCE
Spectrum faces a significant business issue regarding the potential
inability of computers, software and other equipment utilizing microprocessors
to recognize and properly process data fields containing a four digit year. As
the year 2000 approaches, such systems may be unable to accurately process
certain date-based information.
Spectrum believes it has identified all significant systems that will
require modification to ensure Year 2000 compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
compliance. The modification process of all significant systems by outside
hardware and software suppliers is substantially complete. Spectrum replaced
this hardware, as well as the software used for its main operating system and
major banking applications, during this same time period.
In addition, Spectrum has had formal communications with other vendors with
which it does significant business to determine their Year 2000 readiness and
the extent to which Spectrum appears vulnerable to any third party Year 2000
issues. Substantially all of these vendors report that they are expending
efforts to become Year 2000 compliant and plan to be Year 2000 compliant well in
advance of December 31, 1999. However, no vendor has fully guaranteed to
Spectrum that they will achieve full compliance by this date. Spectrum can offer
no assurance that the systems of other companies will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with Spectrum's systems, would not have a material adverse effect
on Spectrum.
As a result of the timing of the replacement and upgrade of Spectrum's
hardware and software, management of Spectrum does not believe that the total
cost to Spectrum for Year 2000 compliance activities will be material to
Spectrum's financial position or results of operations in any given year.
Management estimates that Spectrum has spent approximately $140,000 on year 2000
compliance through March 31, 1999 and will spend approximately an additional
$70,000 through December 31, 1999. Year 2000 compliance costs and the date on
which Spectrum plans to complete the Year 2000 modifications and testing
processes are based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors. There can
be no assurance, however, that these estimates will be achieved and actual
results could differ from those plans.
Spectrum has prepared a contingency plan for Year 2000 should Spectrum's
data processing systems or other third-party systems fail to perform. The
contingency plan provides for communication with subsidiary bank staff, bank
customers and outside vendors under various scenarios that might occur as a
result of a Year 2000 system failure. The plan also provides for extraordinary
cash requirements, office opening and closing procedures, and manual operation
procedures that may be necessary under such scenarios. Management plans to
secure adequate resources to carry out these manual operations and believes that
this plan will allow Spectrum to carry on normal daily business for at least a
short period of time.
39
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Spectrum adopted this
statement beginning January 1, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position and that those instruments be measured at fair value.
Spectrum adopted this statement beginning July 1, 1998.
Management does not believe that the adoption of this pronouncement will
have a material impact on the financial statements of Spectrum.
40
<PAGE>
BUSINESS
OVERVIEW
Spectrum, a multi-bank holding company, offers full service community
banking through 17 banking locations in South Dakota, seven banking locations in
southern Iowa and two banking locations in northern Missouri. Spectrum was
acquired by its Chairman, Deryl F. Hamann, in 1971. At that time it had a single
location in Leon, Iowa. In 1974 Mr. Hamann acquired the parent company of F&M
Bank, Watertown, South Dakota. The parent was merged into Spectrum on May 31,
1999. Acquisitions of other banks and savings institutions had been made by both
holding companies in the years preceding the merger on both strategic and
opportunistic bases. Expansion also occurred through acquisition of offices of
failed financial institutions and de novo branching.
Spectrum has four direct subsidiaries: F&M Bank, Watertown, South Dakota;
Rushmore Bank & Trust, Rapid City, South Dakota; Citizens Bank, Mount Ayr, Iowa;
and Citizens Bank of Princeton, Princeton, Missouri. Each subsidiary bank is
chartered by the state banking authorities of the state in which its
headquarters is located. See "Supervision and Regulation." The following table
sets forth information regarding Spectrum's banks as of March 31, 1999:
<TABLE>
<CAPTION>
COMMON STOCK
OWNERSHIP ASSETS NET LOANS NET DEPOSITS
--------------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
F&M Bank................................................... 97.9% $ 293,336 $ 203,474 $ 236,308
Rushmore Bank & Trust...................................... 90.0% 173,000 137,141 144,070
Citizens Bank, Mount Ayr................................... 100.0% 91,507 63,036 78,938
Citizens Bank of Princeton................................. 100.0% 34,569 25,928 30,228
</TABLE>
The subsidiary banks own 89% of Spectrum Banc Service Corporation which
provides data processing services to its bank owners. The remaining 11% is owned
by an affiliated bank of Spectrum. See "Related Party Transactions."
STRATEGIES
GROWTH. Spectrum intends to grow within its existing markets, to branch
into or acquire financial institutions in existing markets, and to branch into
or acquire financial institutions in other markets consistent with its capital
requirements and management abilities.
Spectrum seeks opportunities to acquire banks at acceptable prices.
Spectrum's operating strategy is to provide high quality community banking
services to its customers and increase market share through solicitation of new
business, repeat business and referrals from customers, and continuation of
selected promotional strategies.
BRANCH EXPANSION. F&M Bank has purchased property for further expansion in
Sioux Falls, South Dakota. Rushmore Bank & Trust has two recently opened grocery
store branches in Rapid City, South Dakota. Should Spectrum be unable to acquire
existing banks or other financial institutions at acceptable prices, it will
continue to seek expansion through new branches or possibly by chartering new
banks.
LOANS
Spectrum has the ability to provide a broad range of commercial and retail
lending services. Rushmore Bank & Trust does not offer agricultural loans. The
other banking subsidiaries offer agricultural loans as well as other commercial,
retail and real estate loans. The two South Dakota banks have credit policies
tailored to their respective markets. Spectrum's Iowa and Missouri banks have
substantially uniform credit policies. All of the credit policies contain
underwriting and loan administration criteria, including levels of loan
commitment, loan types, credit criteria, concentration limits, loan
administration, loan review and grading and related matters.
41
<PAGE>
Prior to 1998, Spectrum provided loan review services through loan officers
of the various banks under the supervision of President Daniel A. Hamann. The
growth in the banks' loan portfolios and the geographic expansion of their
locations consumed too much loan officer time and would have required additional
personnel at the holding company level to continue the scope of review.
Accordingly, since late 1998, loan review is being outsourced to an independent
entity. Spectrum is able to facilitate substantial credit requests, or augment
loan demand, through the purchase and sale of participations among its
subsidiary banks, as well as other affiliated and unaffiliated banks or other
financial institutions. See "Related Party Transactions." As of March 31, 1999,
approximately 90% of all loans were to customers within Spectrum's market area.
REAL ESTATE MORTGAGE LOANS. These loans include various types of loans for
which Spectrum holds real property as collateral. As a result of a computer
conversion in the third quarter of calendar 1998, approximately $50,000,000 of
loans which were previously categorized as real estate mortgage loans were
reclassified as commercial loans secured by real estate. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Analysis of Financial Condition -- Loan Portfolio." These reclassified loans
were generally made for commercial operating purposes, for which the primary
collateral consists of assets other than real estate. Such loans often mature in
one year or less and typically have adjustable interest rates. However, Spectrum
is experiencing increasing demand for fixed rate loans for terms longer than one
year. The primary risks of real estate mortgage loans include the borrower's
inability to pay and deterioration in value of real estate that is held as
collateral.
Real estate mortgage loans include commercial and residential real estate
construction loans. Real estate construction loans are principally made to
builders to construct business buildings or single and multi-family residences.
These loans typically have maturities of 6 to 12 months and adjustable interest
rates, and are subject to origination fees. Terms may vary depending upon many
factors, including location, type of project and financial condition of the
builder.
COMMERCIAL AND AGRICULTURAL LOANS. These loans consist primarily of loans
to businesses for various purposes, including revolving lines of credit and
equipment financing. The loans secured by collateral other than real estate or
equipment generally mature within one year, have adjustable interest rates, and
are secured by inventory, accounts receivable, livestock, crops, machinery and
other commercial or agricultural project assets. Revolving lines of credit
generally are for business purposes and generally mature annually.
LOANS TO INDIVIDUALS. Loans to individuals, which are not secured by real
estate, generally have terms of two to six years and bear interest at fixed
rates. These loans usually are secured by motor vehicles, investment securities,
or other personal assets, and in some instances are unsecured.
Citizens Bank, Mount Ayr and Citizens Bank of Princeton have weekly joint
loan committee meetings with an affiliated bank. Rushmore Bank & Trust's loan
committee meets weekly. F&M Bank has three regional loan committees which meet
weekly.
Interest rates charged on loans vary with the degree of risk, maturity,
underwriting and servicing costs, loan amount and extent of other banking
relationships maintained with customers and are further subject to competitive
pressures, money market rates, availability of funds and government regulations.
In the ordinary course of business, Spectrum's banks issue letters of
credit. See Note 16 to Consolidated Financial Statements. Spectrum's banks apply
the same credit standards to those commitments as they use in direct lending
activities and have included these commitments in its lending risk evaluations.
Spectrum's exposure to credit loss under letters of credit is represented by the
amount of those commitments.
Under applicable federal and state law, permissible loans to one borrower
after March 31, 1999, were limited to $3,650,000 for F&M Bank, $2,408,000 for
Rushmore Bank & Trust, $1,282,000 for Citizens Bank, Mount Ayr, and $1,127,000
for Citizens Bank of Princeton. Certain exceptions,
42
<PAGE>
depending on the laws of the three respective states in which the Banks operate,
increase the loan limit to one borrower for certain purposes.
COMPETITION
The banking and financial services industry is highly competitive and
undergoing rapid consolidation. Within the market area of Spectrum's banks,
numerous commercial banks, savings and loan associations, mortgage brokers,
finance companies, credit unions, investment firms and private lenders compete
with the banks for deposits and loans. Many of these competitors have
significantly greater resources than Spectrum, including higher lending limits
and a wider range of financial, technical and marketing resources.
REGULATION
Spectrum and its banks are highly regulated. Spectrum is subject to
regulation by the Federal Reserve and the Iowa Division of Banking. All of the
bank subsidiaries are subject to regulation by the FDIC and by the regulatory
agencies of the state in which they are chartered. See "Supervision and
Regulation."
PROPERTIES
The offices of Spectrum are located in a leased one-story building at 10834
Old Mill Road, Suite One, Omaha, Nebraska 68154. The table below presents
property information concerning the main office and branches of Spectrum's
subsidiary banks.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
FOOTAGE OF
NAME OF BANK AND ADDRESS OF BRANCH YEAR OPENED TYPE OF INTEREST FACILITY
- ---------------------------------------- ----------- ------------------------------------------------ -------------
<S> <C> <C> <C>
F&M Bank Main Office ................... 1935 Land and building owned by F&M Bank 10,078
35 1(st) Ave. NE
Watertown, SD 57201
F&M Bank Watertown Branch .............. 1980 Land and building owned by F&M Bank 3,000
Hwys. 212 & 81
Watertown, SD 57201
F&M Bank Garden City Branch ............ 1946 Land and building owned by F&M Bank 1,250
Main Street
Garden City, SD 57236
F&M Bank Rosholt Branch ................ 1984 Land and building owned by F&M Bank 3,500
Main Street
Rosholt, SD 57260
F&M Bank McIntosh Branch ............... 1978 Land and building owned by F&M Bank 1,800
217 Main St.
McIntosh, SD 57641
F&M Bank Morristown Branch ............. 1978 Land and building owned by F&M Bank 1,250
302 Main St.
Morristown, SD 57645
F&M Bank Madison Branch ................ 1996 Land and building owned by F&M Bank 2,500
301 N. Egan Ave
Madison, SD 57042
F&M Bank Aberdeen Branch ............... 1996 Land and building owned by F&M Bank 4,200
517 So. Lincoln St.
Aberdeen, SD 57402
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
FOOTAGE OF
NAME OF BANK AND ADDRESS OF BRANCH YEAR OPENED TYPE OF INTEREST FACILITY
- ---------------------------------------- ----------- ------------------------------------------------ -------------
<S> <C> <C> <C>
F&M Bank Sioux Falls Branch ............ 1996 Land and building owned by F&M Bank 2,500
1901 W. 41(st) St.
Sioux Falls, SD 57105
F&M Bank Webster Branch ................ 1996 Land and building owned by F&M Bank 1,800
1301 Main St.
Webster, SD 57274
F&M Bank Chamberlain Branch ............ 1996 Leased 1,250
111 W. Lawler
Chamberlain, SD 57325
F&M Bank Gettysburg Branch ............. 1996 Land and building owned by F&M Bank 1,250
108 S. Exene
Gettysburg, SD 57442
Rushmore Bank & Trust .................. 1952 Land and building owned by Rushmore Bank & Trust 12,419
Main Office
14 St. Joseph St.
Rapid City, SD 57701
Rushmore Bank & Trust .................. 1974 Land and building owned by Rushmore Bank & Trust 3,798
South Canyon Branch
3510 Sturgis Rd.
Rapid City, SD 57702
Rushmore Bank & Trust .................. 1994 Land and building owned by Rushmore Bank & Trust 3,890
Spearfish Branch(1)
522 Main St.
Spearfish, SD 57785
Rushmore Bank & Trust .................. 1999 Land and building owned by Rushmore Bank 3,720
Spearfish Branch PO Building
526 N. Main St.
Spearfish, SD 57785
Rushmore Bank & Trust .................. 1997 Leased 500
FTC West Branch (grocery store)
751 Mountain View Rd.
Rapid City, SD 57702
Rushmore Bank & Trust .................. 1999 Leased 500
FTC East Branch (grocery store)
1516 E. St. Patrick St.
Rapid City, SD 57701
Citizens Bank, Mount Ayr ............... 1998 Land and building owned by Spectrum 2,500
Main Office
100 E. South
Mount Ayr, IA 50174
Citizens Bank, Mount Ayr ............... 1999 Land and building owned by Spectrum 8,265
Leon Branch
111 No. Main
Leon, IA 50144
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
FOOTAGE OF
NAME OF BANK AND ADDRESS OF BRANCH YEAR OPENED TYPE OF INTEREST FACILITY
- ---------------------------------------- ----------- ------------------------------------------------ -------------
<S> <C> <C> <C>
Citizens Bank, Mount Ayr ............... 1977 Land and building owned by Spectrum 1,200
Leon Drive-in Branch
1008 W. First
Leon, IA 50144
Citizens Bank, Mount Ayr ............... 1937 Land and building owned by Spectrum 960
Grand River Branch
126 Broadway
Grand River, IA 50108
Citizens Bank, Mount Ayr ............... 1993 Land and building owned by Spectrum 2,500
Hamburg Branch
1220 Main
Hamburg, IA 51640
Citizens Bank, Mount Ayr ............... 1993 Land and building owned by Spectrum 1,200
Riverton Branch
186 Summer St.
Riverton, IA 51650
Citizens Bank, Mount Ayr ............... 1994 Land and building owned by Spectrum 2,500
Osceola Branch
610 W. McLane
Osceola, IA 50313
Citizens Bank of Princeton ............. 1988 Land and building owned by Citizens Bank of 4,708
Main Office Princeton
US Highway 136 & 65
Princeton, MO 64673
Citizens Bank of Princeton ............. 1994 Land and building owned by Citizens Bank of 1,450
Milan Branch Princeton
825 N. Pearl
Milan, MO 63556
</TABLE>
- ------------
(1) To be closed upon remodeling of 526 N. Main St. branch
All of the leased properties are leased from unaffiliated third parties. The
grocery store leases are for five year terms. The Chamberlain branch is a
month-to-month lease with a sixty-day termination clause.
LEGAL PROCEEDINGS
Spectrum and its subsidiaries are from time to time parties to various legal
actions arising in the normal course of business. Management believes that there
is no proceeding threatened or pending against Spectrum or any of its
subsidiaries which, if determined adversely, would have a material adverse
effect on the financial condition or results of operations of Spectrum.
EMPLOYEES
As of March 31, 1999, Spectrum had approximately 223 full-time equivalent
employees. Management considers its relationship with its employees to be very
good.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Spectrum and their respective ages
and positions as of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH SPECTRUM POSITION WITH SUBSIDIARY
- -------------------------- --- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
Deryl F. Hamann........... 66 Chairman of the Board, CEO and Director Chairman and Director of F&M Bank and
Rushmore Bank & Trust
Daniel A. Hamann.......... 40 President and Director Chairman and Director of Citizens Bank,
Mount Ayr, and Citizens Bank of
Princeton; Vice Chairman and Director
of F&M Bank; Vice Chairman and
Director of Rushmore Bank & Trust;
Chairman and Director of Spectrum
Banc Service Corporation
Thomas B. Fischer......... 52 Senior Vice President and Director None
Daniel J. Brabec.......... 40 Vice President and Director Director of Rushmore Bank & Trust
W. Eric Bunderson......... 42 Vice President, Assistant Secretary and None
Director
John L. Kopecky........... 45 Vice President, Chief Financial None
Officer, Secretary and Treasurer
</TABLE>
Deryl F. Hamann is the father of Daniel A. Hamann and the father-in-law of
Daniel J. Brabec and W. Eric Bunderson. All directors of Spectrum hold office
until the next meeting of stockholders or until their successors are elected and
qualified.
DERYL F. HAMANN. Mr. Hamann has been Chairman or President and CEO of
Spectrum since 1971. He has been President and Director of Farmers & Merchants
Investment Co. since 1974, which merged into an acquired company, changing its
name to Spectrum Bancorporation, Inc. in 1996, and merged into Spectrum on May
31, 1999. He also serves as Chairman or President of two affiliated bank holding
companies, Great Western Securities, Inc. and Citizens Corporation, and as
Chairman of the Executive Committee of Great Western Bank, Omaha, Nebraska. He
is Chairman and President of the affiliated Spectrum Life Insurance Company, an
Arizona reinsurance company. He is Chairman of the affiliated Spectrum Financial
Services, Inc. He is a partner in the Omaha, Nebraska law firm of Baird, Holm,
McEachen, Pedersen, Hamann & Strasheim.
DANIEL A. HAMANN. Mr. Daniel Hamann has been President of Spectrum since
1996 and served as Vice President of Spectrum from 1992 to 1996. He is Chairman
and Director of Citizens Bank, Mount Ayr and Citizens Bank of Princeton and Vice
Chairman of F&M Bank and Rushmore Bank & Trust. He is Vice President and
Director of the affiliated Spectrum Life Insurance Company. He is Chairman and
Director of the affiliated Citizens Bank, Chariton, Iowa and of Spectrum's
banks' subsidiary, Spectrum Banc Service Corporation.
THOMAS B. FISCHER. Mr. Fischer is President of Spectrum Financial Services,
Inc. an affiliate of Spectrum. He has held this position since May of 1996. In
1997, he was elected Senior Vice President and Director of Spectrum. From 1992
to 1996, Mr. Fischer was Vice President, General Counsel, and
46
<PAGE>
Secretary of FirsTier Financial, Inc., a multi-bank holding company
headquartered in Omaha, Nebraska.
DANIEL J. BRABEC. Mr. Brabec has served as Vice President of Spectrum since
1992. Mr. Brabec served as Executive Vice President and Director of Rushmore
Bank & Trust from 1993 until July 1999, when he resigned to assume expanded
duties with Spectrum.
W. ERIC BUNDERSON. Mr. Bunderson has served since 1994 as a Commercial Real
Estate Loan Officer and since 1999 as Assistant Vice President at Great Western
Bank, an affiliate of Spectrum.
JOHN L. KOPECKY. Mr. Kopecky became Vice President-Chief Financial Officer
of Spectrum in September 1998. Mr. Kopecky was Executive Vice President-Chief
Financial Officer for the Thompson Banks in Kansas City from 1990 to 1998. Mr.
Kopecky is a Certified Public Accountant.
EXECUTIVE COMPENSATION
The following table presents the cash compensation paid by Spectrum and its
subsidiaries to its Chief Executive Officer, the only named executive officer,
for the years 1996 through 1998. No other executive officer of Spectrum received
compensation from Spectrum exceeding $100,000 for these years.
<TABLE>
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1)
- -------------------------------------------------------- --------- ---------- -----------------
<S> <C> <C> <C>
Deryl F. Hamann, Chairman and
Chief Executive Officer............................... 1998 $ 292,750 $ 5,434
1997 335,450 4,913
1996 330,618 4,928
</TABLE>
- ------------
(1) Amounts represent 401(k) Plan employer contributions.
Spectrum does not have any compensatory stock option plan for its executive
officers and directors. None of the directors or officers of Spectrum have any
options, warrants or other similar rights to purchase securities of Spectrum.
Spectrum has no board committees at the holding company level.
INDEMNIFICATION
The articles of incorporation of Spectrum provide that the board of
directors is authorized to indemnify, in the manner and to the extent provided
by the Iowa Business Corporation Act, any person entitled to indemnification
thereunder. Generally under Iowa law, any individual who is made a party to a
proceeding because the individual is or was a director may be indemnified if the
individual acted in good faith and had reasonable basis to believe that: (1) in
the case of conduct in the individual's official capacity with the corporation,
that the individual's conduct was in the corporation's best interests; and (2)
in all other cases, that the individual's conduct was at least not opposed to
the corporation's best interest; and regarding any criminal proceedings, the
individual had no reasonable cause to believe the individual's conduct was
unlawful. Iowa law also extends such indemnification to officers, employees, and
agents of the corporation and further provides that an Iowa corporation may
advance expenses to a director, officer, employee, or agent of the corporation.
Iowa law also provides that an Iowa corporation may purchase and maintain
insurance on behalf of an individual who is or was a director, officer,
employee, or agent of the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, against liability asserted against
or incurred by that individual in that capacity or arising from the individual's
status as a director, officer, employee, or agent.
47
<PAGE>
The indemnification and advancement of expenses provided by Iowa law are not
exclusive of any other rights to which persons seeking indemnification or
advancement of expenses are entitled under a provision in the articles of
incorporation or bylaws, agreements, vote of stockholders or disinterested
directors, or otherwise, both as to action in a person's official capacity and
as to action in another capacity while holding office. However, such provisions,
agreements, votes or other actions shall not provide indemnification for a
breach of a director's duty of loyalty to the corporation or its stockholders,
for acts or omissions not in good faith or which involve intentional misconduct
or knowing violation of the law, for a transaction from which the person seeking
indemnification derives an improper personal benefit, or for liability for
unlawful distributions.
Iowa law provides that a director is not liable for any action taken as a
director, or any failure to take any action, as long as the director discharged
his or her duties (1) in good faith, (2) with the care of an ordinarily prudent
person in a like position would exercise under similar circumstances, and (3) in
a manner the director reasonably believes to be in the best interests of the
corporation.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of Spectrum as to which indemnification is being sought.
Spectrum is not aware of any other threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent.
PHANTOM STOCK AGREEMENTS
Spectrum's subsidiary banks have phantom stock agreements with four senior
bank officers, including Daniel A. Hamann, Chairman of Citizens Bank, Mount Ayr.
Cash amounts are accumulated for the officers based on their bank's performance,
50% by achieving certain annual growth rates in net income and 50% by achieving
certain annual rates of return on assets. Accumulated amounts are payable to the
officers over ten years beginning at age 65 or prior death or permanent
disability.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding beneficial ownership of
common stock of Spectrum as of June 1, 1999, by (1) each shareholder known by
Spectrum to be the beneficial owner of more than 5% of its outstanding common
stock and (2) each director of Spectrum and each named executive officer and (3)
all directors and executive officers as a group. Based on information furnished
by the owners, management believes that the stockholders listed below have sole
investment and voting power regarding their shares, except that cotrustees share
investment and voting power.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS
- --------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Deryl F. Hamann...................................................... 44,023(1) 61.5%
1500 Woodmen Tower
Omaha, NE 68102
Daniel A. Hamann..................................................... 20,780(2) 29.0%
10834 Old Mill Road, Suite One
Omaha, NE 68154
Esther Hamann Brabec................................................. 22,696(3) 31.7%
14 East St. Joseph St.
Rapid City, SD 57709
Daniel J. Brabec..................................................... 389(4) *
14 East St. Joseph St.
Rapid City, SD 57709
Julie Hamann Bunderson............................................... 24,668(5) 34.4%
6015 Northwest Radial Highway
Omaha, NE 68104
W. Eric Bunderson.................................................... 423(6) *
6015 Northwest Radial Highway
Omaha, NE 68104
Thomas B. Fischer.................................................... -- --
10834 Old Mill Road, Suite One
Omaha, NE 68154
John L. Kopecky...................................................... -- --
10834 Old Mill Road, Suite One
Omaha, NE 68154
All executive officers and directors as a group (six persons)........ 65,615 91.6%
</TABLE>
- ------------
(1) Of this amount, an aggregate of 13,048 shares are held by four separate
trusts for which Mr. Hamann serves as trustee for the benefit of his
children, Daniel A. Hamann, Esther Hamann Brabec, Julie Hamann Bunderson,
and Karl E. Hamann.
(2) Of this amount, 325 shares are owned by his revocable trust for which he
serves as sole trustee, 175 shares are owned by his spouse, and an aggregate
of 20,280 shares are held by various Hamann family trusts for which he
serves as co-trustee with Esther Hamann Brabec and Julie Hamann Bunderson.
(3) Of this amount, 199 shares are owned by her revocable trust for which she
serves as sole trustee, 389 shares are owned by her spouse, an aggregate of
20,280 shares are held by various Hamann family trusts for which she serves
as co-trustee with Daniel A. Hamann and Julie Hamann Bunderson, and 1,828
shares are owned by her as trustee for Julie Hamann Bunderson's issue.
49
<PAGE>
(4) Does not include shares beneficially owned by his spouse. Mr. Brabec
disclaims beneficial ownership of such shares.
(5) Of this amount, 263 shares are owned by her revocable trust for which she
serves as sole trustee, 423 shares are owned by her spouse, an aggregate of
20,280 shares are held by various Hamann family trusts for which she serves
as co-trustee with Daniel A. Hamann and Esther Hamann Brabec, 2,217 shares
are owned by her as trustee for Esther Hamann Brabec's issue and 1,485
shares are owned by her as trustee for Daniel A. Hamann's issue.
(6) Does not include shares beneficially owned by his spouse. Mr. Bunderson
disclaims beneficial ownership of such shares.
RELATED PARTY TRANSACTIONS
Spectrum's subsidiary banks purchase loan participations from, and sell loan
participations to, Spectrum's affiliated banks, Great Western Bank, Omaha,
Nebraska, and Citizens Bank, Chariton, Iowa, in the ordinary course of business.
The participations are made on terms similar to those with unaffiliated parties.
Approximate loan principal balances outstanding under the participations are
summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
AFFILIATE LOAN PARTICIPATIONS AT MARCH 31, 1999 1998
- ---------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Purchased by Spectrum's banks............................. $ 17,633,000 $ 19,150,000
Sold by Spectrum's banks.................................. 4,050,000 3,978,000
</TABLE>
Deryl F. Hamann, Chairman, CEO and controlling stockholder of Spectrum, owns
as trustee for the benefit of his children 50% of the common stock of Great
Western Securities, Inc., a bank holding company for Great Western Bank, Omaha,
Nebraska. An unrelated individual owns the remaining 50% common stock interest.
Great Western Bank has ten banking locations in the Omaha, Nebraska metropolitan
area. At March 31, 1999, it had total assets of $541,361,000, total deposits of
$457,940,000 and total loans net of unearned fees of $379,655,000. Daniel A.
Hamann, Esther Hamann Brabec and Julie Hamann Bunderson individually and Deryl
F. Hamann as trustee for another of his children own all of the common stock of
Citizens Corporation, a bank holding company for Citizens Bank, Chariton, Iowa.
At March 31, 1999, it had total assets of $67,621,000, total deposits of
$60,832,000 and total loans net of unearned fees of $47,990,000. Citizens Bank,
Chariton has seven banking offices in Wayne and Lucas counties in southern Iowa.
Those counties are adjacent to Decatur and Clarke counties in Iowa where
Spectrum's subsidiary bank, Citizens Bank, Mount Ayr, has four banking offices.
Wayne County, Iowa is adjacent to Mercer County, Missouri where Spectrum's
subsidiary Citizens Bank of Princeton has a banking office.
Spectrum Life Insurance Company and Spectrum Financial Services, Inc. are
affiliates of Spectrum. They are owned, directly or indirectly, by Deryl F.
Hamann, individually or as trustee for the benefit of his children. Spectrum
Life Insurance Company reinsures certain credit life, accident, health and
unemployment insurance policies sold by Spectrum's subsidiary banks, its
affiliated banks and unaffiliated banks as agents for an unaffiliated insurance
company. Spectrum Life Insurance Company reinsures certain of the mortality and
morbidity risks under such policies in accordance with separate treaties with
the unaffiliated insurance company, and received compensation from such
insurance company of $134,078 during Spectrum's fiscal year ended June 30, 1998
and $152,853 for the nine-month period ended March 31, 1999 for assuming such
reinsurance risks with respect to credit insurance originated by Spectrum's
subsidiary banks. Spectrum's subsidiary banks receive a commission on such sales
of credit insurance as permitted by applicable state law.
In addition, Spectrum Financial Services receives a commission as general
agent from the unaffiliated insurance company on such sales of credit insurance
where permitted by law. Such commissions on credit insurance originated by
Spectrum's subsidiary banks was $33,173 during the fiscal year ended June 30,
1998 and $49,464 during the nine-month period ended March 31, 1999. Spectrum
50
<PAGE>
believes that the foregoing arrangements are on terms similar to those which
would be obtained with an unaffiliated party.
A subsidiary of Spectrum Financial Services places investment centers in
banks, including Spectrum's subsidiary banks, its affiliated banks and
unaffiliated banks. The investment centers engage in the sale of life insurance,
annuities, mutual funds and certain other securities on the premises of the
banks under lease arrangements and with joint or common employees. The
subsidiary of Spectrum Financial Services pays Spectrum's subsidiary banks lease
rentals based on commissions generated. Gross commissions originated from
Spectrum's subsidiary banks were $159,289 during Spectrum's fiscal year ended
June 30, 1998 and $198,949 during the nine-month period ended March 31, 1999.
Each Spectrum bank received approximately 25% of the amount of gross commissions
generated from its leased space as rental. Spectrum believes that these
arrangements are on terms similar to those that would be obtained with an
unaffiliated party.
Prior to May of 1998, another subsidiary of Spectrum Financial Services
provided investment management services to Spectrum's subsidiary banks, its
affiliated banks and others. Spectrum's banks paid this subsidiary approximately
$68,000 during Spectrum's fiscal year ended June 30, 1998 for such services.
Spectrum believes that these arrangements were on terms similar to those that
would have been obtained from an unaffiliated party.
Spectrum's banks and its affiliate, Citizens Bank, Chariton, Iowa own all of
the stock of Spectrum Banc Service Corporation. It provides data processing
services and certain related services to the five banks on a break even basis.
Spectrum believes that these arrangements are on terms similar to those that
would be obtained with an unaffiliated party.
On May 31, 1999, Spectrum, which was then named Decatur Corporation, became
the surviving corporation in a merger with two affiliated bank holding
companies, Spectrum Bancorporation, Inc. and Rushmore Financial Services, Inc.,
which owned F & M Bank, Watertown, South Dakota, and Rushmore Bank & Trust,
Rapid City, South Dakota. The Hamann family or their interests owned
beneficially all of the stock of all parties to the merger. In the merger, the
Hamann family or their interests received a total of 61,063 shares of common
stock of Spectrum and 8,000 shares of 10% nonvoting, noncumulative perpetual
preferred stock of Spectrum.
In 1995 Spectrum entered into a split dollar insurance agreement with Deryl
F. Hamann under which it pays an annual premium of $60,000 to purchase a policy
on Mr. Hamann's life in the face amount of $1,000,000. Mr. Hamann is taxed on
the economic benefit in accordance with Internal Revenue Service rules. The
policy is owned by three of Mr. Hamann's children, Daniel A. Hamann, Esther
Hamann Brabec, and Julie Hamann Bunderson, who have the right to designate
beneficiaries, borrow on the security of the policy and to surrender the policy.
They have assigned the death benefit under the policy to Spectrum as security
for repayment of the amounts which Spectrum contributes toward the payment of
the premiums due on the policy.
Deryl F. Hamann is a partner in the law firm of Baird, Holm, McEachen,
Pedersen, Hamann & Strasheim, Omaha, Nebraska, counsel to Spectrum. See "Legal
Matters." Mr. Hamann devotes approximately 15% of his time to law firm matters,
40% to Spectrum matters, and the remaining 45% of his time to other interests.
51
<PAGE>
SUPERVISION AND REGULATION
GOVERNMENT REGULATIONS
Spectrum and its subsidiary banks are extensively regulated under federal
and state laws. These laws and regulations are primarily intended to protect
depositors and the deposit insurance fund of the Federal Deposit Insurance
Corporation, not stockholders of Spectrum. The following information is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
Spectrum and its banks. Spectrum is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on its business and earnings in the future.
SPECTRUM
GENERAL. Spectrum is a bank holding company registered under the Bank
Holding Company Act of 1956 and is subject to regulation, supervision and
examination by the Federal Reserve. Spectrum is required to file an annual
report and the other reports as the Federal Reserve now requires or may require.
ACQUISITIONS. As a bank holding company, Spectrum is required to obtain the
prior approval of the Federal Reserve before acquiring direct or indirect
ownership or control of more than 5% of the voting shares of a bank or bank
holding company. The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantial anti-competitive result, unless the
anti-competitive effects of the proposed transaction are outweighed by a greater
public interest in meeting the needs and convenience of the public. The Federal
Reserve also considers managerial, capital and other financial factors in acting
on acquisition or merger applications.
PERMISSIBLE ACTIVITIES. Subject to limited exceptions, a bank holding
company may not engage in, or acquire direct or indirect control of more than 5%
of the voting shares of any company engaged in a non-banking activity, unless
this activity has been determined by the Federal Reserve to be closely related
to banking or managing banks. The Federal Reserve has identified specific
non-banking activities in which a bank holding company may engage with notice
to, or prior approval by, the Federal Reserve.
CAPITAL ADEQUACY. The Federal Reserve monitors the regulatory capital
adequacy of bank holding companies. As discussed below, Spectrum's banks are
also subject to the regulatory capital adequacy requirements of the Federal
Deposit Insurance Corporation and South Dakota, Iowa and Missouri regulations,
as applicable. The Federal Reserve uses a combination of risk-based guidelines
and leverage ratios to evaluate the regulatory capital adequacy of Spectrum.
The Federal Reserve has adopted a system using risk-based capital adequacy
guidelines to evaluate the regulatory capital adequacy of bank holding companies
on a consolidated basis. Under the risk-based capital guidelines, different
categories of assets are assigned different risk weights, based generally on the
perceived credit risk of the asset. These risk weights are multiplied by
corresponding asset balances to determine a risk-weighted asset base. Some off
balance sheet items, such as loan commitments in excess of one year, mortgage
loans sold with recourse and letters of credit, are added to the risk-weighted
asset base by converting them to a balance sheet equivalent and assigning to
them the appropriate risk weight. For purposes of the regulatory risk-based
capital guidelines, total capital is defined as the sum of core and
supplementary capital elements, with supplementary capital being limited to 100%
of core capital. For bank holding companies, core capital, also known as Tier I
capital, generally includes common stockholders' equity, perpetual preferred
stock and minority interests in consolidated subsidiaries less the unamortized
balance of intangible assets. No more than 25% of core capital may be comprised
of cumulative preferred stock. Supplementary capital, also known as Tier 2
capital, generally includes certain forms of perpetual preferred stock, as well
as maturing capital instruments and the allowance for loan losses, limited to
1.25% of risk-weighted assets. The regulatory
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<PAGE>
guidelines require a minimum ratio of total capital to risk-weighted assets of
8% to be adequately capitalized, of which at least 4% should be in the form of
core capital.
At March 31, 1999, Spectrum's core capital was $35,353,000.
In addition to the risk-based capital guidelines, the Federal Reserve and
the Federal Deposit lnsurance Corporation use a leverage ratio as an additional
tool to evaluate the capital adequacy of banks and bank holding companies. The
leverage ratio is defined to be a company's core capital divided by its average
tangible assets. Based upon the current capital status of Spectrum, the
applicable minimum required leverage ratio is 4%.
The table below presents ratios of (1) total capital to risk-weighted
assets, (2) core capital to risk-weighted assets and (3) core capital to
tangible assets, at March 31, 1999:
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------
MINIMUM
RATIO ACTUAL REQUIRED
- ------------------------------------------------------------------------------------ ----------- -------------
<S> <C> <C>
Total Capital to Risk-Weighted Assets............................................... 9.28% 8.00%
Core Capital to Risk-Weighted Assets................................................ 8.03% 4.00%
Core Capital to Average Assets...................................................... 6.01% 4.00%
</TABLE>
Failure to meet the regulatory capital guidelines may result in the
initiation by the Federal Reserve of appropriate supervisory or enforcement
actions. All three of Spectrum's capital ratios were above the minimum required
as of March 31, 1999.
THE BANKS
GENERAL. Spectrum owns four banks: F & M Bank, Watertown, South Dakota, a
South Dakota banking corporation with 12 banking locations; Rushmore Bank &
Trust Co., Rapid City, South Dakota, a South Dakota banking corporation, with
five banking locations; Citizens Bank, Mount Ayr, Iowa, an Iowa banking
corporation, with seven banking locations; and Citizens Bank of Princeton,
Princeton, Missouri, a Missouri banking corporation, with two banking locations.
The deposits of Spectrum's banks are insured by the Federal Deposit Insurance
Corporation, and the banks are subject to supervision and regulation by the
Federal Deposit Insurance Corporation. In addition, the South Dakota banks are
regulated by the South Dakota Division of Banking, the Iowa bank is regulated by
the Iowa Division of Banking, and the Missouri bank is regulated by the Missouri
Division of Finance.
PERMISSIBLE ACTIVITIES. No state bank may engage in any activity not
permitted for national banks, unless the institution complies with applicable
capital requirements and the Federal Deposit Insurance Corporation determines
that the activity poses no significant risk to the Bank Insurance Fund. None of
Spectrum's banks is presently involved in the types of transactions covered by
this limitation.
COMMUNITY REINVESTMENT ACT. Enacted in 1977, the federal Community
Reinvestment Act has become important to financial institutions, including their
holding companies. The Community Reinvestment Act currently allows regulators to
turn down an applicant seeking to make an acquisition or establish a branch
unless it has performed satisfactorily under the Community Reinvestment Act.
Satisfactory performance means meeting adequately the credit needs of the
communities the applicant serves. The applicable federal regulators regularly
conduct Community Reinvestment Act examinations to assess the performance of
financial institutions. During their last examinations, ratings of satisfactory
or outstanding were received by each of Spectrum's banks. As a result,
management believes that the banks' performance under the Community Reinvestment
Act will not impede regulatory approvals of any proposed acquisitions or
branching opportunities.
DIVIDEND RESTRICTIONS. Dividends paid by Spectrum's banks provide
substantially all of the operating and investing cash flow of Spectrum.
Spectrum's banks are subject to legal limitations on the frequency and amount of
dividends that may be paid to Spectrum. Under South Dakota law, the
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<PAGE>
approval of the principal regulator is required prior to the declaration of any
dividend by a bank if the total of all dividends declared in any calendar year
exceeds the total of its net profits of that year to date combined with its
retained net profits for the preceding two years. Under Iowa law, a bank may
declare and pay dividends only out of undivided profits and only if not
restricted by the principal regulator. The Iowa principal regulator requires
that Iowa state banks maintain an adjusted equity capital ratio of not less than
6.5% of adjusted assets plus a fully funded allowance for loan losses unless a
lower ratio is approved by the principal regulator. An Iowa state bank operating
below the minimum requirement would be subject to immediate dividend
restriction, a request for immediate capital injection and/or a possible cease
and desist order. Under Missouri law, a bank may not pay dividends which would
impair capital. The Missouri principal regulator generally requires that
Missouri state banks maintain equity capital of not less than 6% of assets. In
addition, either the applicable state banking regulator or the Federal Deposit
Insurance Corporation has the power to prohibit Spectrum's banks from paying
dividends if such payments would constitute unsafe or unsound banking practices
or cause the bank to be undercapitalized. See "Risk Factors -- Interest Payment
by Spectrum on the Junior Subordinated Debentures -- Dependent on Dividends From
Its Subsidiary Banks."
EXAMINATIONS. Spectrum's banks are examined from time to time by the
Federal Deposit Insurance Corporation. Based upon an evaluation, the examining
regulator may revalue the assets of an insured institution and require that it
establish specific reserves to compensate for the difference between the value
determined by the regulator and the book value of Spectrum's assets. The state
bank regulators also conduct examinations of state-chartered banks. State bank
regulators may accept the results of a federal examination in lieu of conducting
an independent examination. South Dakota, Iowa and Missouri regulators have the
authority to revalue the assets of a state-chartered institution and require it
to establish reserves.
CAPITAL ADEQUACY. The Federal Deposit Insurance Corporation has adopted
regulations establishing minimum requirements for the capital adequacy of
insured institutions. The requirements address both risk-based capital and
leverage capital, with risk-based assets and core and supplementary capital
being determined in basically the same manner as described above for bank
holding companies. The Federal Deposit Insurance Corporation may establish
higher minimum requirements if, for example, a bank has previously received
special attention or has a high susceptibility to interest rate risk.
The Federal Deposit Insurance Corporation risk-based capital guidelines
require state non-member banks to have a ratio of core capital to total
risk-weighted assets of 4% and a ratio of total capital to total risk-weighted
assets of 8%.
The Federal Deposit Insurance Corporation leverage guidelines require that
state banks maintain core capital of no less than 3% and up to 5% of total
tangible assets. The applicable guideline for Spectrum's banks is estimated to
be 4%. Banks with regulatory capital ratios below the required minimum are
subject to administrative actions, including the termination of deposit
insurance upon notice and hearing, or a temporary suspension of insurance
without a hearing in the event the institution has no tangible capital.
The table below presents the regulatory capital ratios of the Spectrum
subsidiary banks at March 31, 1999:
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------------------------------------------------------
CITIZENS CITIZENS
RUSHMORE BANK, BANK OF MINIMUM
RATIO F&M BANK BANK & TRUST MOUNT AYR PRINCETON REQUIRED
- --------------------------------------------------- ------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Total capital to risk-weighted assets.............. 12.06% 10.74% 11.57% 16.10% 8.00%
Core capital to risk-weighted...................... 10.83% 9.53% 10.55% 14.84% 4.00%
Core capital to average assets..................... 7.77% 8.02% 7.53% 11.04% 4.00%
</TABLE>
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<PAGE>
Banking regulators have adopted regulations that define five capital levels:
well capitalized, adequately capitalized, undercapitalized, severely
undercapitalized and critically undercapitalized. An institution is critically
undercapitalized if it has a tangible equity to total assets ratio that is equal
to or less than 2%. An institution is well capitalized if it has a total
risk-based capital ratio of 10% or greater, core risk-based capital ratio of 6%
or greater, and a core capital leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive, or
prompt corrective action directive to meet and maintain a specific capital level
for any capital measure. An institution is adequately capitalized if it has a
total risk-based capital ratio of not less than 8%, a core risk-based capital
ratio not less than 4% and a leverage ratio of not less than 4%. Under these
regulations, as of March 31, 1999, the Spectrum banks were well capitalized.
The Federal Deposit Insurance Corporation Improvement Act requires the
federal banking regulators to take prompt corrective action to resolve the
problems of depository institutions, including capital-deficient institutions.
In addition to requiring the submission of a capital restoration plan, Federal
Deposit Insurance Corporation Improvement Act contains broad restrictions on
activities of institutions which are less than adequately capitalized, involving
asset growth, acquisitions, branch establishment, and expansion into new lines
of business. With limited exceptions, an insured depository institution is
prohibited from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons if the institution
would be undercapitalized after any distribution or payment.
As an institution's capital decreases, the powers of the federal regulators
become greater. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions. The
regulators have limited discretion in dealing with a critically undercapitalized
institution and are virtually required to appoint a receiver or conservator if
the capital deficiency is not corrected promptly.
REAL ESTATE LENDING EVALUATIONS. The federal regulators have adopted
uniform standards for evaluations of loans secured by real estate or made to
finance improvements to real estate. Banks are required to establish and
maintain written internal real estate lending policies consistent with safe and
sound banking practices and appropriate to the size of the institution and the
nature and scope of its operations. The regulations establish loan to value
ratio limitations on real estate loans, which generally are equal to or less
than the loan to value limitations established by Spectrum's banks.
DEPOSIT INSURANCE PREMIUMS. The assessment schedule for banks ranges from 0
to 27 cents per $100 of deposits subject to Bank Insurance Fund assessments,
based on each institution's risk classification. The subsidiary banks' insured
deposits are subject to assessment payable to Bank Insurance Fund. An
institution's risk classification is based on an assignment of the institution
by the Federal Deposit Insurance Corporation to one of three capital groups and
to one of three supervisory subgroups. The capital groups are well capitalized,
adequately capitalized and undercapitalized. The three supervisory subgroups are
Group A, for financially solid institutions with only a few minor weaknesses,
Group B, for those institutions with weaknesses which, if uncorrected could
cause substantial deterioration of the institution and increase the risk to the
deposit insurance fund, and Group C, for those institutions with a substantial
probability of loss to the fund absent effective corrective action. All four
Spectrum subsidiary banks are rated "one" (well capitalized) and "Group A"
(financially solid institutions with only a few minor weaknesses) for these
purposes.
INTERSTATE BANKING LEGISLATION. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, which became effective September 1995, has
eliminated many of the historical barriers to the acquisition of banks by
out-of-state bank holding companies. This law facilitates the interstate
expansion and consolidation of banking organizations by permitting: (1) bank
holding companies that are adequately capitalized and managed to acquire banks
located in states outside their home states regardless of whether acquisitions
are authorized under the laws of the host state; (2) the interstate merger of
banks after June 1, 1997, subject to the right of individual states either to
pass legislation
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providing for earlier effectiveness of mergers or to opt out of this authority
prior to that date; (3) banks to establish new branches on an interstate basis
provided that this action is specifically authorized by the law of the host
state; (4) foreign banks to establish, with approval of the appropriate
regulators in the United States, branches outside their home states to the same
extent that national or state banks located in that state would be authorized to
do so; and (5) banks to receive deposits, renew time deposits, close loans,
service loans and receive payments on loans and other obligations as agent for
any bank or thrift affiliate, whether the affiliate is located in the same or
different state. Spectrum's subsidiary banks do not currently have any plans to
take any actions permitted by this law.
CHANGING REGULATORY STRUCTURE
The laws and regulations affecting banks and bank holding companies are in a
state of flux. The rules and the regulatory agencies in this area have changed
significantly over recent years, and there is reason to expect that similar
changes will continue in the future. It is not possible to predict the outcome
of these changes.
One of the major additional burdens imposed on the banking industry is the
increased authority of federal agencies to regulate the activities of federal
and state banks and their holding companies. The Federal Reserve, the
Comptroller of the Currency and the Federal Deposit Insurance Corporation have
extensive authority to police unsafe or unsound practices and violations of
applicable laws and regulations by depository institutions and their holding
companies. These agencies can assess civil money penalties and other laws have
expanded the agencies' authority in recent years, and the agencies have not yet
fully tested the limits of their powers. In addition, the South Dakota Division
of Banking, Iowa Division of Banking and Missouri Division of Finance possess
broad enforcement powers to address violations of their banking laws by banks
chartered in their respective state.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of the
Federal Reserve, have a significant effect on the operating results of bank
holding companies and their subsidiaries. Among the means available to the
Federal Reserve to affect the money supply are open market operations in U.S.
Government securities, changes in the discount rate on member bank borrowings,
and changes in reserve requirements against member bank deposits. These means
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may affect interest rates
charged on loans or paid on deposits.
The Federal Reserve's monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
these policies on the business and earnings of Spectrum and its subsidiaries
cannot be predicted.
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DESCRIPTION OF THE PREFERRED SECURITIES
The preferred securities and the common securities will be issued pursuant
to the trust agreement of Spectrum Capital Trust I. The trust agreement will be
qualified as an indenture under the Trust Indenture Act. Initially, Wilmington
Trust Company will be the property trustee and will act as trustee for the
purpose of complying with the Trust Indenture Act. The terms of the preferred
securities will include those stated in the trust agreement of Spectrum Capital
Trust I and those made part of the trust agreement by the Trust lndenture Act.
The following is a summary of the material terms and provisions of the preferred
securities and the trust agreement. Prospective investors of preferred
securities are urged to read all the provisions of the trust agreement,
including the definitions in the trust agreement, and the Trust Indenture Act.
The form of the trust agreement has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part.
GENERAL OVERVIEW
The trust agreement states that the administrative trustees will issue the
preferred securities and the common securities, collectively, the trust
securities. The preferred securities will represent preferred undivided
beneficial interests in the assets of Spectrum Capital Trust I and the holders
of the preferred securities will be entitled to a preference in most
circumstances regarding distributions and amounts payable on redemption or
liquidation over the common securities of Spectrum Capital Trust I.
The preferred securities will rank pari passu, and payments will be made pro
rata, with the common securities of Spectrum Capital Trust I except as described
under "Subordination of Common Securities of Spectrum Capital Trust I Held by
Spectrum" below.
Legal title to the junior subordinated debentures will be held by the
property trustee in trust for the benefit of the holders of the trust
securities. The preferred securities guarantee executed by Spectrum for the
benefit of the holders of the preferred securities will be a guarantee on a
subordinated basis and will not guarantee payment of distributions or amounts
payable on redemption of the preferred securities or on liquidation of the
preferred securities if Spectrum Capital Trust I does not have funds on hand
available to make the payments. See "Description of Preferred Securities
Guarantee." If an event of default under the indenture has occurred and is
continuing and the default is attributable to Spectrum's failure to pay interest
or principal on the junior subordinated debentures on the due date, a holder of
preferred securities may institute a legal proceeding directly against Spectrum
for payment of principal and interest on the junior subordinated debentures
having a principal amount equal to the aggregate liquidation amount of the
preferred securities of the holder. This action is referred to in this
discussion as a direct action. See "Description of Junior Subordinated
Debentures -- Enforcement of Rights by Holders of Preferred Securities" and
"Relationship Among the Preferred Securities, the Junior Subordinated Debentures
and the Preferred Securities Guarantee."
QUARTERLY DISTRIBUTION PAYMENTS AND EXTENSIONS ON DISTRIBUTION PAYMENTS
PAYMENT OF DISTRIBUTIONS. Distributions on the preferred securities will be
payable at the annual rate of % of the stated liquidation amount of $10,
payable quarterly after each calendar quarter on the 15th day of January, April,
July and October in each year, beginning October 15, 1999. The amount of each
distribution due will include amounts accrued through the date the distribution
is due. Distributions on the preferred securities will be payable to the holders
as they appear on the register of Spectrum Capital Trust I on the relevant
record date. Until the preferred securities do not remain in book-entry form,
the relevant record date will be one business day prior to the relevant
distribution date and, in the event the preferred securities are not in
book-entry form, the relevant record date will be the first day of the month in
which the relevant distribution date occurs. Distributions will accumulate from
the date of original issuance of the preferred securities.
The amount of distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any payment
date is not a business day, the distribution will be made on the next business
day, and without any interest or other payment regarding any delay,
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except that, if the business day is in the next succeeding calendar year,
payment of the distribution will be made on the immediately preceding business
day. As used in this prospectus, a business day means any day other than a
Saturday or a Sunday, or a day on which banking institutions in South Dakota 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 indenture
trustee is closed for business.
The funds of Spectrum Capital Trust I available for distribution to its
preferred securities holders will be limited to payments by Spectrum under the
junior subordinated debentures. See "Description of Junior Subordinated
Debentures." If Spectrum does not make interest payments on the junior
subordinated debentures, the property trustee will not have funds available to
pay distributions on the preferred securities. The payment of distributions, if
and to the extent Spectrum Capital Trust I has legally available funds and cash
sufficient to make payments, is guaranteed by Spectrum. For further information,
see "Description of Preferred Securities Guarantee."
EXTENSION PERIOD. Until a debenture event of default has occurred and is
continuing, Spectrum has the right under the indenture to defer interest
payments on the junior subordinated debentures at any time for a period not
exceeding 20 consecutive quarters regarding each extension period. However, no
extension period may extend beyond the stated maturity of the junior
subordinated debentures. As a consequence of any extension election by Spectrum,
quarterly distributions on the preferred securities will be deferred by Spectrum
Capital Trust I during any extension period. Distributions to which holders of
preferred securities are entitled will accumulate additional amounts at the rate
per year of % thereof, compounded quarterly from the relevant distribution
date. The term "distributions" as used in this prospectus includes any
additional accumulated amounts.
During any extension period, Spectrum may not (1) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation, payment regarding, any of its capital stock which includes common
and preferred stock, or (2) make any payment of principal, interest or premium,
if any, on or repay, repurchase or redeem any debt securities of Spectrum that
rank pari passu with or junior in interest to the junior subordinated debentures
or make any preferred securities guarantee payments regarding any preferred
securities guarantee by Spectrum of the debt securities of any subsidiary of
Spectrum if the preferred securities guarantee ranks pari passu with or junior
in interest to the junior subordinated debentures. These restrictions do not
apply to: (a) dividends or distributions in common stock of Spectrum, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any plan of this type
in the future, or the redemption or repurchase of any rights pursuant to this
type of plan, (c) payments under the preferred securities guarantee of Spectrum,
and (d) purchases of common stock for issuance under any future benefit plans
for its directors, officers or employees. Prior to the termination of any
extension period, Spectrum may further extend the extension period, provided
that the extension does not cause the extension period to exceed 20 consecutive
quarters or extend beyond the stated maturity of the junior subordinated
debentures. Upon the termination of any extension period and the payment of all
amounts then due, and subject to the above limitations, Spectrum may elect to
begin a new extension period. There is no limitation on the number of times that
Spectrum may elect to begin an extension period.
Spectrum has no current intention of exercising its right to defer payments
of interest by extending the interest payment period on the junior subordinated
debentures.
REDEMPTION -- MANDATORY AND OPTIONAL RIGHTS OF SPECTRUM
MANDATORY REDEMPTION OF PREFERRED SECURITIES. Upon the repayment or
redemption at any time, in whole or in part, of any junior subordinated
debentures, the proceeds from the repayment or redemption will be applied by the
property trustee to redeem a like amount of the trust securities at the
redemption price, as defined below. For more information, see "Description of
Junior Subordinated Debentures -- Redemption." If less than all of the junior
subordinated debentures are to be repaid or
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redeemed on a redemption date, then the proceeds will be allocated to the
redemption of the trust securities pro rata.
OPTIONAL REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES. Spectrum will have
the right to redeem the junior subordinated debentures (1) beginning on
, 2004, in whole at any time or in part from time to time at a
redemption price equal to the accrued and unpaid interest on the junior
subordinated debentures redeemed to the date fixed for redemption, plus 100% of
the principal amount of the junior subordinated debentures, or (2) at any time,
in whole, but not in part, upon a tax event, an investment company event or a
capital treatment event as defined in the following paragraph. The redemption
price will be equal to the accrued and unpaid interest on the redeemed junior
subordinated debentures, plus 100% of the principal amount. These payments will
be subject to receipt of prior approval by the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve. See
"Description of Junior Subordinated Debentures -- Redemption."
TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION, CAPITAL TREATMENT
EVENT REDEMPTION OR DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES. If a tax
event, an investment company event or a capital treatment event occurs after
original issuance of the preferred securities and is continuing, Spectrum has
the right to redeem the junior subordinated debentures in whole. If a redemption
of the junior subordinated debentures occurs, Spectrum would also cause a
mandatory redemption of the trust securities in whole at the redemption price,
as defined below, within 90 days following the occurrence of these events. In
each case the redemption would be subject to receipt of prior approval by the
Federal Reserve if then required under its applicable capital guidelines or
policies. If any of these events has occurred and is continuing, and Spectrum
does not elect to redeem the junior subordinated debentures and cause a
mandatory redemption of the trust securities or to liquidate Spectrum Capital
Trust I and cause the junior subordinated debentures to be distributed to
holders of the trust securities in liquidation of Spectrum Capital Trust I, the
trust securities will remain outstanding. Also, additional sums, as defined
below, may be payable on the junior subordinated debentures.
A tax event requires the receipt by Spectrum and Spectrum Capital Trust I of
a legal opinion. The legal opinion must state that, as a result of any amendment
to, including any announced prospective change, in the laws, or any regulations,
of the United States or any political subdivision or taxing authority of the
United States, or as a result of any official administrative pronouncement or
judicial decision interpreting or applying the tax laws or regulations, there is
more than an insubstantial risk that:
- Spectrum Capital Trust I is, or will be within 90 days of the date of the
opinion, subject to United States federal income tax regarding income
received or accrued on the junior subordinated debentures;
- interest payable by Spectrum on the junior subordinated debentures is not,
or within 90 days of the opinion, will not be, deductible by Spectrum, in
whole or in part, for United States federal income tax purposes; or
- Spectrum Capital Trust I is, or will be within 90 days of the date of the
opinion, subject to more than a de minimis amount of other taxes, duties
or other governmental charges.
An investment company event requires the receipt by Spectrum and Spectrum
Capital Trust I of a legal opinion. The legal opinion must state that, as a
result of any change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, Spectrum Capital Trust I is or will be
considered an investment company required to be registered under the Investment
Company Act.
A capital treatment event means the reasonable determination by Spectrum
that, as a result of any amendment to, including any proposed change in, the
laws or regulations of the United States or any of its political subdivisions,
or as a result of any official action or judicial decision interpreting the laws
or regulations, there is more than an insubstantial risk that Spectrum's ability
to treat the preferred
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securities as core capital or its equivalent for purposes of the Federal Reserve
capital adequacy guidelines, is impaired.
Additional sums means the additional amounts as may be necessary to be paid
by Spectrum on the junior subordinated debentures in order that the amount of
distributions payable by Spectrum Capital Trust I on the outstanding trust
securities will not be reduced as a result of any additional taxes, duties and
other governmental charges to which Spectrum Capital Trust I has become subject.
Like amount means (1) regarding 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 debentures to be
contemporaneously redeemed in accordance with the indenture, allocated to the
common securities and to the preferred securities based upon the relative
liquidation amounts of these classes and the proceeds of which will be used to
pay the redemption price of the trust securities, and (2) regarding a
distribution of junior subordinated debentures to holders of trust securities in
connection with a dissolution or liquidation of Spectrum Capital Trust I, junior
subordinated debentures having a principal amount equal to the liquidation
amount of the trust securities of the holder to whom the junior subordinated
debentures are distributed.
Liquidation amount means the stated amount of $10 per trust security.
Redemption price means, regarding any trust security, the liquidation amount
of the trust security, plus accumulated and unpaid distributions to the
redemption date, allocated on a pro rata basis, based on liquidation amounts,
among the trust securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Subject to Spectrum having received prior approval of the Federal Reserve,
Spectrum will have the right at any time to liquidate Spectrum Capital Trust I
and, after satisfaction of the liabilities of creditors of Spectrum Capital
Trust I as provided by applicable law, cause the junior subordinated debentures
to be distributed to the holders of trust securities in liquidation of Spectrum
Capital Trust I. After the liquidation date fixed for any distribution of junior
subordinated debentures for preferred securities:
- the preferred securities will no longer be deemed to be outstanding;
- the depositary or its nominee, as the record holder of the preferred
securities, will receive a registered global certificate or certificates
representing the junior subordinated debentures to be delivered upon the
distribution; and
- any certificates representing preferred securities not held by the
depositary or its nominee will be deemed to represent the junior
subordinated debentures having a principal amount equal to the liquidation
amount of the preferred securities, and bearing interest equal to the
accrued and unpaid distributions on the preferred securities, until the
certificates are presented to the administrative trustees or their agent
for reissuance.
There can be no assurance as to the market prices for the preferred
securities or the junior subordinated debentures that may be distributed in
exchange for the preferred securities if a dissolution and liquidation of
Spectrum Capital Trust I were to occur. Accordingly, the preferred securities
that an investor may purchase, or the junior subordinated debentures that the
investor may receive on dissolution and liquidation of Spectrum Capital Trust I,
may trade at a discount to the price that the investor paid to purchase the
preferred securities. If the junior subordinated debentures are distributed,
Spectrum will use its best efforts to list them on the American Stock Exchange
or the Nasdaq National Market in place of the preferred securities.
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REDEMPTION PROCEDURES
Preferred securities redeemed on each redemption date will be redeemed at
the redemption price with the proceeds from the contemporaneous redemption of
the junior subordinated debentures. Redemptions of the preferred securities will
be made and the redemption price will be payable on each redemption date only to
the extent that Spectrum Capital Trust I has funds on hand available for the
payment of the redemption price. See "Subordination of Common Securities of
Spectrum Capital Trust I Held by Spectrum" and "Description of Preferred
Securities Guarantee."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of trust securities at the
holder's registered address. Unless Spectrum Capital Trust I defaults in payment
of the applicable redemption price, on and after the redemption date,
distributions will cease to accrue on the preferred securities called for
redemption.
If Spectrum Capital Trust I gives a notice of redemption regarding the
preferred securities, then, by 12:00 noon, central time, on the redemption date,
the property trustee will pay the redemption price to the depositary, as the
record holder of the preferred securities. The depositary thereafter will credit
the redemption price to the participants for whom it holds the preferred
securities. See "Book-Entry Issuance." If the preferred securities are no longer
in book-entry form, the property trustee, to the extent funds are available,
will deposit with the paying agent for the preferred securities funds sufficient
to pay the aggregate redemption price. The property trustee will give the paying
agent irrevocable instructions and authority to pay the redemption price upon
surrender of certificates evidencing the preferred securities. Notwithstanding
the foregoing, distributions payable on or prior to the redemption date will be
payable to the holders of the preferred securities on the relevant record dates
for the related distribution dates. If notice of redemption has been given and
funds deposited as required, then upon the date of the deposit, all rights of
the holders of the preferred securities will cease, except the right of the
holders of the preferred securities to receive the redemption price, but without
interest on the redemption price, and the preferred securities will cease to be
outstanding. In the event that any date fixed for redemption of the preferred
securities is not a business day, then payment of the redemption price payable
on the date will be made on the next business day and without any interest or
other payment for any the delay. If, however, the business day falls in the next
calendar year, the payment will be made on the immediately preceding business
day. In the event that payment of the redemption price in respect of preferred
securities called for redemption is improperly withheld or refused and not paid
either by Spectrum Capital Trust I or by Spectrum under the preferred securities
guarantee, distributions on the preferred securities will continue to accrue at
the then applicable rate, from the redemption date originally established by
Spectrum Capital Trust I for the preferred securities to the date the redemption
price is actually paid. In this case the actual payment date will be the date
fixed for redemption for purposes of calculating the redemption price. See
"Description of Preferred Securities Guarantee."
Subject to applicable law, including, without limitation, federal securities
laws, Spectrum may at any time and from time to time purchase outstanding
preferred securities by tender, in the open market or by private agreement.
Payment of the redemption price on the preferred securities and any
distribution of junior subordinated debentures to holders of preferred
securities will be made to the applicable record holders as they appear on the
register of the preferred securities on the relevant record date, which date
will be one business day prior to the relevant redemption date; provided,
however, that in the event that any preferred securities are not in book-entry
form, the relevant record date for them will be a date at least 15 days prior to
the redemption date. In the case of a liquidation, the record date will be
established by the property trustee and be no more than 45 days before the
liquidation date.
If less than all of the trust securities are to be redeemed on a redemption
date, then the aggregate redemption price for the trust securities to be
redeemed will be allocated pro rata to the preferred securities and common
securities based upon the relative liquidation amounts of these classes. The
particular outstanding preferred securities to be redeemed will be selected by
any method as the
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property trustee deems fair and appropriate. This method may provide for the
selection for redemption of portions equal to $10 or an integral multiple of $10
of the liquidation amount of preferred securities. The property trustee will
promptly notify the trust securities registrar in writing of the preferred
securities selected for redemption and, in the case of any preferred securities
selected for partial redemption, the liquidation amount thereof to be redeemed.
For all purposes of the trust agreement, unless the context otherwise requires,
all provisions relating to the redemption of preferred securities will relate to
the portion of the aggregate liquidation amount of preferred securities which
has been or is to be redeemed.
SUBORDINATION OF COMMON SECURITIES OF SPECTRUM CAPITAL TRUST I HELD BY SPECTRUM
Payment of distributions on, and the redemption price of, the preferred
securities and common securities will be made pro rata based on the liquidation
amounts of these securities. However, if on any distribution date or redemption
date a debenture event of default has occurred and is continuing, no
distributions on or redemption of the common securities will be made. Further,
no other payment on account of the redemption, liquidation or other acquisition
of the common securities, will be made unless payment in full in cash of all
distributions payable on all of the outstanding preferred securities are made,
or in the case of redemption the full redemption price on all of the outstanding
preferred securities then called for redemption, has been made or provided for.
All funds available to the property trustee will first be applied to the payment
in full in cash of all distributions on, or redemption price of, the preferred
securities then due and payable.
In the case of any event of default under the trust agreement resulting from
a debenture event of default, Spectrum as holder of the common securities will
be deemed to have waived any right to act regarding any event of default until
the effects of all events of default have been cured, waived or otherwise
eliminated. Until any events of default have been so cured, waived or otherwise
eliminated, the property trustee will act solely on behalf of the holders of the
preferred securities and not on behalf of Spectrum as holder of the common
securities, and only the holders of the preferred securities will have the right
to direct the property trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
Spectrum will have the right at any time to terminate Spectrum Capital Trust
I and cause the junior subordinated debentures to be distributed to the holders
of the preferred securities. This right is subject to Spectrum having received
prior approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Distribution of Junior
Subordinated Debentures" above.
In addition, under the trust agreement, Spectrum Capital Trust I will
automatically terminate upon expiration of its term and will earlier terminate
on the first to occur of: (I) events of bankruptcy, dissolution or liquidation
of Spectrum; (2) delivery by Spectrum of written direction to the property
trustee to terminate Spectrum Capital Trust I, which direction is optional and
wholly within the discretion of Spectrum; (3) redemption of all of the preferred
securities as described under "Redemption -- Mandatory and Optional Rights of
Spectrum" above; and (4) the entry of an order for the dissolution of Spectrum
Capital Trust I by a court of competent jurisdiction.
If an early termination occurs as described in clause (1), (2) or (4) above
or upon the expiration of the term of Spectrum Capital Trust I, it will be
liquidated by the trustees as expeditiously as the trustees determine to be
possible. The liquidation will be made after satisfaction of liabilities to
creditors of Spectrum Capital Trust I as provided by applicable law. In the
liquidation, holders of the trust securities will receive a like amount of the
junior subordinated debentures, unless this distribution is determined by the
property trustee not to be practical. If the property trustee determines that a
distribution of the junior subordinated debentures is not practical, then the
holders of preferred securities will be entitled to receive an amount equal to
the liquidation amount of $10 per trust security plus accrued and unpaid
distributions thereon to the date of payment. This amount, payable out of the
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assets of Spectrum Capital Trust I available for distribution, is referred to as
the liquidation distribution. If the liquidation distribution can be paid only
in part because Spectrum Capital Trust I has insufficient assets available to
pay the full aggregate liquidation distribution, then the amounts payable
directly by Spectrum Capital Trust I on the preferred securities will be paid on
a pro rata basis. The holders of the common securities will be entitled to
receive distributions upon a liquidation pro rata with the holders of the
preferred securities, except that if a debenture event of default has occurred
and is continuing, the preferred securities will have a priority over the common
securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, Spectrum Capital Trust I is treated as a grantor trust, a
distribution of the junior subordinated debentures should not be a taxable event
to holders of the preferred securities. Should there be a change in law, a
change in legal interpretation, a tax event or other circumstances, however, the
distribution could be a taxable event to holders of the preferred securities.
See "Material Federal Income Tax Consequences." If Spectrum elects neither to
redeem the junior subordinated debentures prior to maturity nor to liquidate
Spectrum Capital Trust I and distribute the junior subordinated debentures to
holders of the preferred securities, the preferred securities will remain
outstanding until the repayment of the junior subordinated debentures.
If Spectrum elects to liquidate Spectrum Capital Trust I and cause the
junior subordinated debentures to be distributed to holders of the preferred
securities in liquidation of Spectrum Capital Trust I, Spectrum will continue to
have the right to shorten the maturity of the junior subordinated debentures
under most circumstances. See "Description of Junior Subordinated Debentures --
General Overview."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an event of default under the trust agreement:
- the occurrence of a debenture event of default under the indenture, see
"Description of Junior Subordinated Debentures -- Indenture Events of
Default"; or
- default by Spectrum Capital Trust I in the payment of any distribution
when it becomes due and payable, and continuation of the default for a
period of 30 days; or
- default by Spectrum Capital Trust I in the payment of any redemption price
of any trust security when it becomes due and payable; or
- default in the performance, or breach, in any material respect, of any
covenant or warranty of the property trustee in the trust agreement, other
than a default or breach in the performance of a covenant or warranty
which is addressed in the previous points above, and continuation of the
default or breach, for a period of 60 days after there has been given, by
registered or certified mail, to the property trustee by the holders of at
least 25% in aggregate liquidation amount of the outstanding preferred
securities, a written notice specifying the default or breach and
requiring it to be remedied and stating that the notice is a "Notice of
Default" under the trust agreement; or
- the occurrence of events of bankruptcy or insolvency regarding the
property trustee and the failure by Spectrum 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 is required to
transmit notice of the event of default to the holders of the preferred
securities, the administrative trustees and Spectrum, unless the event of
default has been cured or waived. Spectrum and the administrative trustees are
required to file annually with the property trustee a certificate as to whether
they are in compliance with all the conditions and covenants applicable to them
under the trust agreement.
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If a debenture event of default has occurred and is continuing, the
preferred securities will have a preference over the common securities upon
termination of Spectrum Capital Trust I as described above. See "Liquidation
Distribution Upon Termination." Upon a debenture event of default, unless the
principal of all the junior subordinated debentures has already become due and
payable, either the property trustee or the holders of not less than 25% in
aggregate principal amount of outstanding junior subordinated debentures may
declare all of the junior subordinated debentures to be due and payable
immediately. Written notice must be given to Spectrum, and to the property
trustee, if given by holders of the junior subordinated debentures. If the
property trustee or the holders of the junior subordinated debentures fail to
declare the principal of all of the junior subordinated debentures due and
payable upon a debenture event of default, the holders of at least 25% in
liquidation amount of the preferred securities then outstanding will have the
right to declare the junior subordinated debentures immediately due and payable.
In either event, payment of principal and interest on the junior subordinated
debentures will remain subordinated to the extent provided in the indenture. In
addition, holders of the preferred securities have to bring a direct action as
discussed below. See "Description of Junior Subordinated Debentures --
Enforcement of Rights by Holders of Preferred Securities."
REMOVAL OF TRUSTEES
Unless a debenture event of default has occurred and is continuing, any
trustee may be removed at any time by the holder of the common securities of
Spectrum Capital Trust I. If a debenture event of default has occurred and is
continuing, the property trustee may be removed by the holders of a majority in
liquidation amount of the outstanding preferred securities. In no event will the
holders of the preferred securities have the right to vote to appoint, remove or
replace the administrative trustees, which voting rights are vested exclusively
in Spectrum as the holder of the common securities. No resignation or removal of
a trustee and no appointment of a successor trustee will be effective until the
acceptance of appointment by the successor trustee in accordance with the
provisions of the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default has occurred and is continuing, at any time, for
the purpose of meeting the legal requirements of the Trust Indenture Act or of
any jurisdiction in which any part of trust property may at the time be located,
the holders of the common securities and the administrative trustees have power
to appoint one or more persons either to act as (1) a co-trustee, jointly with
the property trustee, of all or any part of the trust property, or (2) to act as
separate trustee of any such property. In either case these trustees will have
the powers which may be provided in the instrument of appointment, and will have
vested in them any property, title, right or power deemed necessary or
desirable, subject to the provisions of the trust agreement. In case a debenture
event of default has occurred and is continuing, the property trustee alone will
have power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, any person or successor to any of the trustees of Spectrum
Capital Trust I may be a successor trustee to any of the trustees, including a
successor resulting from a merger or consolidation. However, any successor
trustee must meet all of the qualifications and eligibility standards to act as
a trustee to Spectrum Capital Trust I.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF SPECTRUM CAPITAL TRUST
I
Spectrum Capital Trust I 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. Spectrum Capital Trust I may, at the request of Spectrum,
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with the consent of the administrative trustees and without the consent of the
holders of the preferred securities or the property trustee, undertake the
transactions described above; provided, that:
- the successor entity either (a) expressly assumes all of the obligations
of Spectrum Capital Trust I regarding the preferred securities or (b)
substitutes for the preferred securities other securities having
substantially the same terms as the preferred securities, or the successor
securities, if the successor securities rank the same as the preferred
securities rank in priority regarding distributions and payments upon
liquidation, redemption and otherwise;
- Spectrum expressly appoints a trustee of the successor entity possessing
the same powers and duties as the property trustee as the holder of the
junior subordinated debentures;
- any transaction of this kind does not adversely affect the rights,
preferences and privileges of the holders of the preferred securities,
including any successor securities, in any material respect;
- the successor entity has a purpose identical to that of Spectrum Capital
Trust I;
- the successor securities will be listed or traded on any national
securities exchange or other organization on which the preferred
securities may then be listed;
- prior to the transaction, Spectrum has received an opinion from
independent counsel to Spectrum Capital Trust I stating that (a) the
transaction does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities, including any
successor securities, in any material respect, and (b) following any
transaction of this kind, neither Spectrum Capital Trust I nor the
successor entity will be required to register as an investment company
under the Investment Company Act; and
- Spectrum or any permitted successor or designee owns all of the common
securities of the successor entity and guarantees the obligations of the
successor entity under the successor securities at least to the extent
provided by the preferred securities guarantee. Notwithstanding the
foregoing, Spectrum Capital Trust I will not, except with the consent of
holders of 100% in liquidation amount of the preferred securities, enter
into any transaction of this kind, or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it, if the
transaction would cause Spectrum Capital Trust I or the successor entity
to be classified as other than a grantor trust for United States federal
income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Preferred Securities
Guarantee -- Amendments and Assignment" and as otherwise required by law and the
trust agreement, the holders of the preferred securities will have no voting
rights.
The trust agreement may be amended from time to time by Spectrum and the
trustees, without the consent of the holders of the trust securities:
- to cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make
any other provisions regarding matters or questions arising under the
trust agreement, which are not inconsistent with the other provisions of
the trust agreement; or
- to modify, eliminate or add to any provisions of the trust agreement to
the extent that is necessary to ensure that Spectrum Capital Trust I will
be classified for United States federal income tax purposes as a grantor
trust at all times that any trust securities are outstanding or to ensure
that Spectrum Capital Trust I will not be required to register as an
investment company under the Investment Company Act.
Provided, however, that in the case of the first point above, this action
will not adversely affect in any material respect the interests of any holder of
trust securities, and any amendments of the trust agreement will become
effective when notice is given to the holders of the trust securities.
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The trust agreement may be amended by the trustees and Spectrum (1) with the
consent of holders representing not less than a majority of the aggregate
liquidation amount of the outstanding trust securities, and (2) upon receipt by
the trustees of an opinion of counsel to the effect that the amendment or the
exercise of any power granted to the trustees in accordance with the amendment
will not affect Spectrum Capital Trust I's status as a grantor trust for United
States federal income tax purposes or Spectrum Capital Trust I's exemption from
status as an investment company under the Investment Company Act. However,
without the consent of each holder of trust securities, the trust agreement may
not be amended to (1) 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
(2) restrict the right of a holder of trust securities to institute suit for the
enforcement of any payment of distributions afterwards.
For the time that any junior subordinated debentures are held by the
property trustee, the trustees will not:
- direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee, or executing any trust or power
conferred on the indenture trustee regarding the junior subordinated
debentures;
- waive any past default that is waivable under the indenture;
- exercise any right to rescind or annul a declaration that the principal of
all the junior subordinated debentures will be due and payable; or
- consent to any amendment, modification or termination of the indenture or
the junior subordinated debentures, where this consent is required,
without, in each case, obtaining the prior approval of the holders of a
majority in aggregate liquidation amount of all outstanding preferred
securities. However, where a consent under the indenture would require the
consent of each affected holder of junior subordinated debentures, this
consent may be given by the property trustee without the prior consent of
each holder of the preferred securities. The trustees will not revoke any
action previously authorized or approved by a vote of the holders of the
preferred securities except by subsequent vote of the holders of the
preferred securities. The property trustee will notify each holder of the
preferred securities of any notice of default regarding the junior
subordinated debentures. In addition to obtaining these approvals of the
holders of the preferred securities, prior to taking any of the above
actions, the trustees will obtain an opinion of counsel stating that
Spectrum Capital Trust I will not be classified as an association taxable
as a corporation for United States federal income tax purposes on account
of the action.
Any required approval of holders of the preferred securities may be given at
a meeting of holders of preferred securities convened for this purpose or under
written consent. The property trustee will cause a notice of any meeting at
which holders of the preferred securities are entitled to vote, or of any matter
upon which action by written consent of the holders is to be taken, to be given
to each holder of record of the preferred securities in the manner set forth in
the trust agreement.
No vote or consent of the holders of the preferred securities will be
required for Spectrum Capital Trust I to redeem and cancel the preferred
securities in accordance with the trust agreement.
Any of the preferred securities that are owned by Spectrum, the trustees or
any affiliate of Spectrum or any trustees, will, for purposes of the vote or
consent, be treated as if they were not outstanding.
GLOBAL PREFERRED SECURITIES
The preferred securities will be represented by one or more global
certificates registered in the name of the depositary or its nominee. Beneficial
interests in the preferred securities will be shown on, and transfers will be
effected only through, records maintained by participants in the depositary.
Except
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as described below, preferred securities in certificated form will not be issued
in exchange for the global certificates. See "Book-Entry Issuance."
A global security will be exchangeable for preferred securities registered
in the names of persons other than the depositary or its nominee only if:
- the depositary notifies Spectrum that it is unwilling or unable to
continue as a depositary for the global security and no successor
depositary has been appointed, or if at any time the depositary ceases to
be a clearing agency registered under the Securities Exchange Act of 1934,
at a time when the depositary is required to be so registered to act as a
depositary;
- Spectrum in its sole discretion determines that the global security will
be so exchangeable; or
- there has occurred and is continuing an event of default under the
indenture. Any global security that is exchangeable under the preceding
sentence will be exchangeable for definitive certificates registered in
the names which the depositary directs. It is expected that the
instructions will be based upon directions received by the depositary
regarding ownership of beneficial interests in the global security. In the
event that preferred securities are issued in definitive form, they will
be in denominations of $10 or integral multiples of $10 and may be
transferred or exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
preferred securities, the global preferred security may not be transferred
except (1) as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or (2) another nominee of the
depositary or (3) by the depositary or any nominee to a successor depositary or
any nominee of the successor.
Payments on preferred securities represented by a global security will be
made to the depositary, as the depositary for the preferred securities. In the
event the preferred securities are issued in definitive form, distributions will
be payable, the transfer of the preferred securities will be registrable, and
preferred securities will be exchangeable for preferred securities of other
denominations of a like aggregate liquidation amount, at the corporate office of
the property trustee, or at the offices of any paying agent or transfer agent
appointed by the administrative trustees. However, payment of any distribution
may be made at the option of the administrative trustees by check mailed to the
address of the persons entitled to payments or by wire transfer. In addition, if
the preferred securities are issued in certificated form, the record dates for
payment of distributions will be the first day of the month in which the
relevant distribution date occurs. For a description of the terms of the
depositary arrangements relating to payments, transfers, voting rights,
redemptions and other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a global preferred security, and the deposit of the
global preferred security with or on behalf of the depositary, the depositary
will credit, on its book-entry registration and transfer system, the respective
aggregate liquidation amounts of the individual preferred securities represented
by the global preferred security to persons that have accounts with the
depositary. The accounts will be designated by the dealers, underwriters or
agents regarding the preferred securities. Ownership of beneficial interests in
a global preferred security will be limited to participants or persons that may
hold interests through participants. Ownership of beneficial interests in the
global preferred security will be shown on, and the transfer of that ownership
will be effected only through, records maintained by the depositary or its
nominee and the records of participants regarding interests of persons who hold
through participants. The laws of some states require that some purchasers of
securities in those states take physical delivery of the securities in
definitive form. The limits, under these laws, may impair the ability to
transfer beneficial interests in a global preferred security.
For the time that the depositary for a global preferred security, or its
nominee, is the registered owner of the global preferred security, this
registered owner will be considered the sole owner or holder of the preferred
securities represented by the global preferred security for all purposes under
the trust agreement of Spectrum Capital Trust I. Except as provided below,
owners of beneficial
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interests in a global preferred security will not be entitled to have any of the
individual preferred securities represented by the global preferred security
registered in their names, will not receive or be entitled to receive physical
delivery of any the preferred securities in definitive form and will not be
considered the owners or holders thereof.
None of Spectrum, the property trustee, any paying agent, or the securities
registrar for the preferred securities will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the global preferred security or for
maintaining, supervising or reviewing any records relating to the beneficial
ownership interests.
Spectrum expects that the depositary, upon receipt of any payment of the
liquidation amount or distributions in respect of a permanent global preferred
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the aggregate
liquidation amount of the global preferred security as shown on the records of
the depositary or its nominee. Spectrum also expects that payments by
participants to owners of beneficial interests in the global preferred security
held through the participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in street name. The payments will be the
responsibility of the participants.
If the depositary for the preferred securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by Spectrum within 90 days, Spectrum Capital Trust I will issue
individual preferred securities in exchange for the global preferred security.
In addition, Spectrum Capital Trust I may at any time in its sole discretion,
subject to any limitations described in this prospectus relating to the
preferred securities, determine not to have any preferred securities represented
by one or more global preferred securities. In this event, Spectrum will issue
individual preferred securities in exchange for the global preferred security or
securities representing the preferred securities. Further, if Spectrum Capital
Trust I specifies, an owner of a beneficial interest in a global preferred
security representing preferred securities may receive individual preferred
securities in exchange for the beneficial interests, subject to any limitations
described in this prospectus. In any such instance, a beneficial interest owner
in a global preferred security will be entitled to physical delivery of
individual preferred securities represented by the global preferred security
equal in liquidation amount to the beneficial interest, and to have the
preferred securities registered in its name. Individual preferred securities
issued will be issued in denominations, unless otherwise specified by Spectrum
Capital Trust I, of $10 and integral multiples of $10.
PAYMENT AND PAYING AGENCY
Payments in respect of the preferred securities will be made to the
depositary, which will credit the relevant accounts at the depositary on the
applicable distribution dates. However, if any of the preferred securities are
not held by the depositary, the payments will be made by check mailed to the
address of the holder as the address appears on the register. The paying agent
will initially be the property trustee and any co-paying agent chosen by the
property trustee and acceptable to the administrative trustees and Spectrum. The
paying agent will be permitted to resign as paying agent upon 30 days' written
notice to the property trustee and Spectrum. In the event that the property
trustee is no longer the paying agent, the administrative trustees will appoint
a successor paying agent, which will be a bank or trust company acceptable to
the administrative trustees and Spectrum.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as registrar and transfer agent for the
preferred securities. Registration of transfers of the preferred securities will
be effected without charge by or on behalf of Spectrum Capital Trust I, but upon
payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. Spectrum Capital Trust I will not be
required to register or cause to be registered the transfer of the preferred
securities after the preferred securities have been called for redemption.
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INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, other than upon the occurrence and during the
continuance of an event of default, undertakes to perform only the duties which
are specifically set forth in the trust agreement. After an event of default,
the property trustee 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 trust agreement at the request of
any holder of preferred securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred. 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 trust agreement or is unsure of the application of any provision of the
trust agreement, and the matter is not one on which holders of the preferred
securities are entitled under the trust agreement to vote, then the property
trustee will take action as directed by Spectrum. If the property trustee is not
so directed, it will take action as it deems advisable and in the best interests
of the holders of the trust securities and will have no liability under the
trust agreement 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 Spectrum Capital Trust I in such a way that Spectrum
Capital Trust I 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 and so
that the junior subordinated debentures will be treated as indebtedness of
Spectrum for United States federal income tax purposes. In this regard, Spectrum
and the administrative trustees are authorized to take any lawful action not
inconsistent with the certificate of trust of Spectrum Capital Trust I or the
trust agreement, that they determine in their discretion to be necessary or
desirable for these purposes, as long as the action does not materially
adversely affect the interests of the holders of the related preferred
securities. Holders of the preferred securities have no preemptive or similar
rights.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures will be issued pursuant to the
subordinated indenture, dated as of , 1999, between Spectrum and
Wilmington Trust Company, as the indenture trustee. The following is a summary
of the material terms and provisions of the junior subordinated debentures and
the indenture. Prospective investors are urged to read the indenture, which has
been filed as an exhibit to the Registration Statement of which this prospectus
forms a part. The indenture is qualified under the Trust Indenture Act.
Concurrently with the issuance of the preferred securities, Spectrum Capital
Trust I will invest the proceeds from the sale of the preferred securities,
together with the consideration paid by Spectrum for the common securities, in
junior subordinated debentures issued by Spectrum. The junior subordinated
debentures will be issued as unsecured debt under the indenture.
GENERAL OVERVIEW
The junior subordinated debentures will bear interest at the rate of % per
year of their principal amount, payable quarterly after each calendar quarter on
the 15th day of January, April, July and October of each year, beginning October
15, 1999, to the person in whose name each junior subordinated debenture is
registered, subject to minor exceptions, at the close of business on the
business day next preceding the interest payment date. Notwithstanding the
above, in the event that either (1) the junior subordinated debentures are held
by the property trustee and the preferred securities are no longer in book-entry
only form or (2) the junior subordinated debentures are not represented by a
global subordinated debenture, the record date for the interest payment will be
the first day of the month in which the payment is made. The amount of each
interest payment due regarding the junior subordinated debentures will include
amounts accrued through the interest payment date. It is anticipated that, until
the liquidation, if any, of Spectrum Capital Trust I, each junior subordinated
debenture will be held in the name of the property trustee in trust for the
benefit of the holders of the preferred securities. The amount of interest
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months. In the event that any date on which interest is payable on the
junior subordinated debentures is not a business day, then payment of the
interest payable on that date will be made on the next business day, except
that, if the business day is in the next succeeding calendar year, the payment
will be made on the immediately preceding business day. Accrued interest that is
not paid on the applicable interest payment date will bear additional interest
at the rate per year of % compounded quarterly. The term "interest" as used in
this prospectus includes quarterly interest payments, interest on quarterly
interest payments not paid on the applicable interest payment date and
additional sums, as defined below, as applicable.
The junior subordinated debentures will mature on , 2029. This date,
as it may be shortened as described below, is the stated maturity. This date may
be shortened once at any time by Spectrum to any date not earlier than ,
2004, subject to Spectrum having received prior approval of the Federal Reserve
if then required under applicable capital guidelines or policies of the Federal
Reserve. In the event that Spectrum elects to shorten the stated maturity of the
junior subordinated debentures, it will give at least 90 days prior notice to
the registered holders of the junior subordinated debentures, the property
trustee and the indenture trustee. The property trustee must give notice to the
holders of the trust securities of the shortening of the stated maturity.
The junior subordinated debentures will be unsecured and will rank junior
and be subordinate in right of payment to all senior and subordinated debt of
Spectrum. Because Spectrum is a holding company, the right of Spectrum to
participate in any distribution of assets of any subsidiaries, including its
banks, upon any of its subsidiaries' liquidation or reorganization or otherwise,
and thus the ability of holders of the preferred securities to benefit
indirectly from the distribution, is subject to the prior claims of creditors of
that subsidiary, except to the extent that Spectrum may itself be recognized as
a creditor of that subsidiary. Accordingly, the junior subordinated debentures
will be effectively subordinated to all existing and future liabilities of
Spectrum's subsidiaries, and holders of junior
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subordinated debentures should look only to the assets of Spectrum for payments
on the junior subordinated debentures. The indenture does not limit the
incurrence or issuance of other secured or unsecured debt of Spectrum, including
senior and subordinated debt, whether under the indenture or any existing or
other indenture that Spectrum may enter into in the future or otherwise. See
"Subordination" below.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
If no debenture event of default has occurred and is continuing, Spectrum
has the right under the indenture at any time during the term of the junior
subordinated debentures to defer interest payments at any time for a period not
exceeding 20 consecutive quarters. However, no extension period may extend
beyond the stated maturity of the junior subordinated debentures. At the end of
an extension period, Spectrum must pay all interest then accrued and unpaid,
together with interest at the rate of % per year, compounded quarterly. During
an extension period, interest will continue to accrue and holders of junior
subordinated debentures will be required to accrue interest income for United
States federal income tax purposes. See "Material Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
During any extension period, Spectrum may not (1) declare or pay any
dividends or distributions on, or redeem, purchase, or make a liquidation
payment regarding, any of Spectrum's capital stock or (2) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of Spectrum, including other junior subordinated debentures,
that rank pari passu with or junior in interest to the junior subordinated
debentures or make any preferred securities guarantee payments regarding any
preferred securities guarantee by Spectrum of the debt securities of any
subsidiary of Spectrum if the preferred securities guarantee ranks pari passu
with or junior in interest to the junior subordinated debentures. These
restrictions do not apply to:
- dividends or distributions in common stock of Spectrum;
- any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any plan in the
future, or the redemption or repurchase of any rights pursuant to this
type of plan;
- payments under the preferred securities guarantee; or
- purchases of common stock related to rights under any of Spectrum's
benefit plans for its directors, officers or employees.
Prior to the termination of any extension period, Spectrum may further extend
the extension period, provided that the extension does not cause the extension
period to exceed 20 consecutive quarters or extend beyond the stated maturity of
the junior subordinated debentures. Upon the termination of any extension period
and the payment of all amounts then due on any interest payment date, Spectrum
may elect to begin a new extension period subject to the above requirements. No
interest will be due and payable during an extension period, except at the end
of the extension period.
If the property trustee is the only registered holder of the junior
subordinated debentures, Spectrum must give the property trustee, the
administrative trustees and the indenture trustee notice of its election of any
extension period at least one business day prior to the earlier of (1) the date
the distributions on the preferred securities would have been payable except for
the election to begin or extend the extension period or (2) the date the
administrative trustees are required to give notice to the holders of the
preferred securities of the record date or the date the distributions are
payable, but in any event not less than one business day prior to the record
date. The indenture trustee will give notice of Spectrum's election to begin or
extend a new extension period to the administrative trustees who, in turn, will
give notice to the holders of the preferred securities. There is no limitation
on the number of times that Spectrum may elect to begin an extension period.
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If Spectrum Capital Trust I is required to pay any additional taxes, duties
or other governmental charges as a result of a tax event, Spectrum will pay as
additional amounts on the junior subordinated debentures any amounts which will
be required so that the distributions payable by Spectrum Capital Trust I will
not be reduced as a result of any additional taxes, duties or other governmental
charges. See "Description of the Preferred Securities -- Redemption -- Mandatory
and Optional Rights of Spectrum" for a definition of tax event.
REDEMPTION
Subject to Spectrum having received prior approval of the Federal Reserve,
if then required under applicable capital guidelines or policies of the Federal
Reserve, the junior subordinated debentures are redeemable prior to maturity at
the option of Spectrum (1) beginning , 2004, in whole at any time or in
part from time to time, or (2) at any time in whole, but not in part, upon the
occurrence and during the continuance of a tax event, an investment company
event or a capital treatment event, in each case at a redemption price equal to
the accrued and unpaid interest on the junior subordinated debentures redeemed
to the date fixed for redemption, plus 100% of the principal amount of the
junior subordinated debentures. See "Description of the Preferred Securities --
Redemption -- Mandatory and Optional Rights of Spectrum" for a definitions of
tax event, investment company event and capital treatment event.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of junior subordinated
debentures to be redeemed at the holder's registered address. Unless Spectrum
defaults in payment of the redemption price, on and after the redemption date
interest will cease to accrue on the junior subordinated debentures or portions
of the junior subordinated debentures called for redemption.
The junior subordinated debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities -- Liquidation
Distribution Upon Termination," under circumstances involving the termination of
Spectrum Capital Trust I, the junior subordinated debentures may be distributed
to the holders of the preferred securities and common securities in liquidation
of Spectrum Capital Trust I after satisfaction of liabilities to creditors of
Spectrum Capital Trust I. If distributed to holders of the preferred securities
in liquidation, the junior subordinated debentures will initially be issued in
the form of one or more global securities and the depositary, or any successor
depositary for the preferred securities, will act as depositary for the junior
subordinated debentures. It is anticipated that the depositary arrangements for
the junior subordinated debentures would be substantially identical to those in
effect for the preferred securities. If the junior subordinated debentures are
distributed to the holders of preferred securities upon the liquidation of
Spectrum Capital Trust I, there can be no assurance as to the market price of
any junior subordinated debentures that may be distributed to the holders of
preferred securities. If the junior subordinated debentures are distributed,
Spectrum will use its best efforts to list them on the American Stock Exchange
or the Nasdaq National Market in place of the preferred securities.
RESTRICTIONS ON PAYMENTS
Spectrum has restrictions on paying dividends or making payments regarding
pari passu or junior debt if
- there has occurred any event of which Spectrum has actual knowledge that
(a) with the giving of notice or the lapse of time, or both, would
constitute a debenture event of default and (b) in respect of which
Spectrum has taken reasonable steps to cure;
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- Spectrum has given notice of its election of an extension period as
provided in the indenture regarding the junior subordinated debentures and
has not rescinded the notice, or the extension period, or any extension
thereof, is continuing; or
- while the junior subordinated debentures are held by Spectrum Capital
Trust I, Spectrum is in default regarding its payment of any obligation
under the preferred securities guarantee.
If any of the events above have occurred, Spectrum will not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment regarding, any of Spectrum's
capital stock; or
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of Spectrum, including other
junior subordinated debt, that rank pari passu with or junior in interest
to the junior subordinated debentures or make any preferred securities
guarantee payments regarding any preferred securities guarantee by
Spectrum of the debt securities of any subsidiary of Spectrum if the
preferred securities guarantee ranks pari passu or junior in interest to
the junior subordinated debentures.
Provided, however, Spectrum may (a) declare and pay dividends or
distributions in common stock, (b) make any declaration of a dividend in
connection with the implementation of a stockholders' rights plan, or the
issuance of stock under this type of plan in the future or the redemption or
repurchase of any rights under such plan, (c) make payments under the preferred
securities guarantee and (d) make purchases of common stock related to rights
under any of Spectrum's benefit plans for its directors, officers or employees.
SUBORDINATION OF JUNIOR SUBORDINATED DEBENTURES TO SENIOR AND SUBORDINATED DEBT
OF SPECTRUM
In the indenture, Spectrum has agreed that any junior subordinated
debentures will be subordinate and junior in right of payment to all senior and
subordinated debt to the extent provided in the indenture. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, or any bankruptcy, or similar proceedings in connection with any insolvency
or bankruptcy proceeding of Spectrum, the holders of senior and subordinated
debt will first be entitled to receive payment in full of principal, interest
and premium, if any, on the senior and subordinated debt before the holders of
junior subordinated debentures will be entitled to receive principal or interest
payments on the junior subordinated debentures.
In the event of the acceleration of the maturity of any junior subordinated
debentures, the holders of all senior and subordinated debt outstanding upon
acceleration will first be entitled to receive payment in full of all amounts
due to them, including any amounts due upon acceleration, before the holders of
junior subordinated debentures will be entitled to receive any principal or
interest payments on the junior subordinated debentures. However, holders of
subordinated debt will not be entitled to receive payment of any of these
amounts to the extent that the subordinated debt is by its terms subordinated to
trade creditors.
No principal or interest payments on the junior subordinated debentures may
be made if there has occurred and is continuing a default in any payment
regarding senior and subordinated debt or an event of default regarding any
senior and subordinated debt resulting in the acceleration of the maturity of
senior and subordinated debt, or if any judicial proceeding is pending regarding
any of this type of default.
Debt as used in this discussion means regarding any person, whether recourse
is to all or a portion of the assets of the person and whether or not
contingent:
- every obligation of the person for money borrowed;
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- every obligation of the person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
- every reimbursement obligation of the person regarding letters of credit,
bankers' acceptances or similar facilities issued for the account of the
person;
- every obligation of the person issued or assumed as the deferred purchase
price of property or services, but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business;
- every capital lease obligation of the person; and
- every obligation of the type referred to in all of the points immediately
above of another person and all dividends of another person the payment of
which, in either case, the person has guaranteed or is responsible or
liable, directly or indirectly, as obligor or otherwise.
Senior and subordinated debt means the principal of and premium, if any, and
interest, if any on debt, including interest accruing at the time of the filing
of any petition in bankruptcy or for reorganization relating to Spectrum,
whether incurred on or prior to the date of the indenture or thereafter
incurred, unless, in the instrument creating or evidencing the debt or under
which the debt is outstanding, it is provided that the obligations are not
superior in right of payment to the junior subordinated debentures or to other
debt which is pari passu with, or subordinated to, the junior subordinated
debentures.
However, senior and subordinated debt will not be deemed to include:
- any debt of Spectrum which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code was
without recourse to Spectrum;
- any debt of Spectrum to any of its subsidiaries;
- any debt to any employee of Spectrum;
- any debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of the debt by the holders of the
junior subordinated debentures as a result of the subordination provisions
of the indenture would be greater than they otherwise would have been as a
result of any obligation of the holders to pay amounts over to the
obligees on the trade accounts payable or accrued liabilities arising in
the ordinary course of business as a result of subordination provisions to
which the debt is subject;
- the preferred securities guarantee; and
- any other debt securities issued under the indenture.
The indenture places no limitation on the amount of additional senior and
subordinated debt that may be incurred by Spectrum. Spectrum expects from time
to time to incur additional indebtedness constituting senior and subordinated
debt.
DENOMINATIONS, REGISTRATION AND TRANSFER
The junior subordinated debentures will be represented by global
certificates registered in the name of the depositary or its nominee. Beneficial
interests in the junior subordinated debentures will be shown on, and transfers
thereof will be effected only through, records maintained by the depositary.
Except as described below, junior subordinated debentures in certificated form
will not be issued in exchange for the global certificates. See "Book-Entry
Issuance."
Unless and until a global subordinated debenture is exchanged in whole or in
part for the individual junior subordinated debentures, it may not be
transferred except (1) as a whole by the
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depositary for the global subordinated debenture to a nominee of the depositary
or (2) by a nominee of the depositary to the depositary or another nominee of
the depositary or (3) by the depositary or any nominee to a successor depositary
or any nominee of the successor.
A global security will be exchangeable for junior subordinated debentures
registered in the names of persons other than the depositary or its nominee only
if (1) the depositary notifies Spectrum that it is unwilling or unable to
continue as a depositary for the global security and no successor depositary has
been appointed, or if at any time the depositary ceases to be a clearing agency
registered under the Securities Exchange Act of 1934 at a time when the
depositary is required to be so registered to act as a depositary or (2)
Spectrum in its sole discretion determines that the global security will be so
exchangeable. Any global security that is exchangeable under the preceding
sentence will be exchangeable for definitive certificates registered in the
names which the depositary directs. It is expected that the instructions will be
based upon directions received by the depositary from its participants regarding
ownership of beneficial interests in the global security. In the event that
junior subordinated debentures are issued in definitive form, the junior
subordinated debentures will be in denominations of $10 and integral multiples
of $10 and may be transferred or exchanged at the offices described below.
Payments on junior subordinated debentures represented by a global security
will be made to the depositary, as the depositary for the junior subordinated
debentures. In the event junior subordinated debentures are issued in definitive
form, principal and interest will be payable, the transfer of the junior
subordinated debentures will be registrable, and junior subordinated debentures
will be exchangeable for junior subordinated debentures of other denominations
of a like aggregate principal amount, at the corporate office of the indenture
trustee, or at the offices of any paying agent or transfer agent appointed by
Spectrum. However, interest payments may be made at the option of Spectrum by
check mailed to the address of the persons entitled to payments or by wire
transfer. In addition, if the junior subordinated debentures are issued in
certificated form, the record dates for interest payments will be the first day
of the month in which the payment is to be made. For a description of the
depositary and the terms of the depositary arrangements relating to payments,
transfers, voting rights, redemptions and other notices and other matters, see
"Book-Entry Issuance."
Spectrum will appoint the indenture trustee as securities registrar under
the indenture. Junior subordinated debentures may be presented for exchange as
provided above, and may be presented for registration of transfer with the form
of transfer endorsed, or a satisfactory written instrument of transfer, duly
executed, at the office of the securities registrar. Spectrum may at any time
rescind the designation of any registrar or approve a change in the location
through which any registrar acts, provided that Spectrum maintains a registrar
in the place of payment. Spectrum may at any time designate additional
registrars regarding the junior subordinated debentures.
In the event of any redemption of the junior subordinated debentures,
neither Spectrum nor the indenture trustee will be required to issue or register
the transfer of junior subordinated debentures during a period beginning at the
opening of business 15 days before the day of selection for redemption of junior
subordinated debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption.
GLOBAL SUBORDINATED DEBENTURE
Upon the issuance of the global subordinated debenture, and the deposit of
the global subordinated debenture with or on behalf of the depositary, the
depositary or its nominee will credit, on its book-entry registration and
transfer system, the respective principal amounts of the individual junior
subordinated debentures represented by the global subordinated debenture to
participants. Ownership of beneficial interests in a global subordinated
debenture will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in the global
subordinated debenture will be shown on, and the transfer of that ownership will
be effected only through, records maintained by the applicable depositary or its
nominee, regarding interests of
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participants, and the records of participants, regarding interests of persons
who hold through participants. The laws of some states require that some
purchasers of securities in those states take physical delivery of the
securities in definitive form. The limits and the laws may impair the ability to
transfer beneficial interests in a global subordinated debenture.
During the time that the depositary for a global subordinated debenture, or
its nominee, is the registered owner of the global subordinated debenture, this
registered owner will be considered the sole owner or holder of the junior
subordinated debentures represented by the global subordinated debenture for all
purposes under the indenture. Except as provided below, owners of beneficial
interests in a global subordinated debenture will not be entitled to have any of
the individual junior subordinated debentures represented by the global
subordinated debenture registered in their names, will not receive or be
entitled to receive physical delivery of any such junior subordinated debentures
in definitive form and will not be considered the owners or holders thereof.
Payments of principal of and interest on individual junior subordinated
debentures represented by a global subordinated debenture registered in the name
of the depositary or its nominee will be made to the depositary or its nominee,
as the case may be, as the registered owner of the global subordinated debenture
representing the junior subordinated debentures. None of Spectrum, the indenture
trustee, any paying agent, or the securities registrar will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the global
subordinated debenture or for maintaining, supervising or reviewing any records
relating to the beneficial ownership interests.
Spectrum expects that the depositary, upon receipt of any payment of
principal or interest in respect of the global subordinated debenture,
immediately will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interest in the principal amount of
the global subordinated debenture as shown on the records of the depositary or
its nominee. Spectrum also expects that payments by participants to owners of
beneficial interests in the global subordinated debenture held through the
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." These payments will be the responsibility
of the participants.
If the depositary is at any time unwilling, unable or ineligible to continue
as depositary and a successor depositary is not appointed by Spectrum within 90
days, Spectrum will issue individual junior subordinated debentures in exchange
for the global subordinated debenture. In addition, Spectrum may at any time in
its sole discretion, determine not to have the junior subordinated debentures
represented by one or more global subordinated debentures. In this event,
Spectrum will issue individual junior subordinated debentures in exchange for
the global subordinated debenture. Further, if Spectrum specifies, an owner of a
beneficial interest in a global subordinated debenture may receive individual
junior subordinated debentures in exchange for the beneficial interests. In this
instance, an owner of a beneficial interest in a global subordinated debenture
will be entitled to physical delivery of individual junior subordinated
debentures equal in principal amount to the beneficial interest and to have the
junior subordinated debentures registered in its name. Individual junior
subordinated debentures so issued will be issued in denominations, unless
otherwise specified by Spectrum, of $10 and integral multiples of $10.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the junior subordinated
debentures will be made at the office of the indenture trustee, except that at
the option of Spectrum payment of any interest may be made, except in the case
of a global subordinated debenture, by check mailed to the address of the person
entitled to payment as the person's address appears in the securities register.
Payment of any interest on junior subordinated debentures will be made to the
person in whose name the junior subordinated debenture is registered at the
close of business on the regular record date for the interest. Spectrum may at
any time designate additional paying agents or rescind the designation of any
paying
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agent; however, Spectrum will at all times be required to maintain a paying
agent in each place of payment for the junior subordinated debentures.
Any moneys deposited with the indenture trustee or any paying agent, or then
held by Spectrum in trust, for the payment of the principal of or interest on
the junior subordinated debentures and remaining unclaimed for two years after
the principal or interest has become due and payable will, at the request of
Spectrum, be repaid to Spectrum. Thereafter, the holder of the junior
subordinated debenture will look, as a general unsecured creditor, only to
Spectrum for payment.
MODIFICATION OF INDENTURE
From time to time Spectrum and the indenture trustee may, without the
consent of the holders of the junior subordinated debentures, amend, waive or
supplement the indenture for specified purposes. These purposes may include,
among other things, curing ambiguities, defects or inconsistencies, provided
that this action does not materially adversely affect the interests of the
holders of the junior subordinated debentures or the preferred securities while
they remain outstanding, and qualifying, or maintaining the qualification of,
the indenture under the Trust Indenture Act. The indenture contains provisions
permitting Spectrum and the indenture trustee, with the consent of the holders
of not less than a majority in principal amount of the outstanding junior
subordinated debentures, to modify the indenture in a manner affecting the
rights of the holders of the junior subordinated debentures; provided, that, the
modification may not, without the consent of the holder of each outstanding
junior subordinated debenture:
- change the stated maturity of the junior subordinated debentures or extend
the time of payment of interest on them, except as described under
"Description of Junior Subordinated Debentures -- General Overview" and --
Option to Extend Interest Payment Period," or reduce the principal amount
thereof or the rate of interest thereon; or
- reduce the percentage of principal amount of junior subordinated
debentures, the holders of which are required to consent to any such
modification of the indenture. However, while any of the preferred
securities remain outstanding, (1) no modification may be made that
adversely affects the holders of the preferred securities in any material
respect, (2) no termination of the indenture may occur, and (3) no waiver
of any debenture event of default or compliance with any covenant under
the indenture may be effective, without the prior consent of the holders
of at least a majority of the aggregate liquidation amount of the
preferred securities, until the principal and interest of the junior
subordinated debentures have been paid in full and other conditions are
satisfied.
INDENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following described
events regarding the junior subordinated debentures that has occurred and is
continuing constitutes a debenture event of default:
- failure for 30 days to pay any interest on the junior subordinated
debentures, when due, subject to the deferral of any due date in the case
of an extension period;
- failure to pay any principal on the junior subordinated debentures when
due whether at maturity, upon redemption by declaration or otherwise;
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- failure by Spectrum to observe or perform in any material respect a number
of other covenants contained in the indenture for 90 days after written
notice to Spectrum from the indenture trustee or to Spectrum and the
indenture trustee by the holders of at least 25% in aggregate outstanding
principal amount of the junior subordinated debentures; or events in
bankruptcy, insolvency or reorganization of Spectrum, including the
voluntary commencement of bankruptcy proceedings, entry of an order for
relief against Spectrum in a bankruptcy proceeding, appointment of a
custodian over substantially all of Spectrum's property, a general
assignment for the benefit of creditors, or a court order for liquidation
of Spectrum.
The holders of a majority in aggregate outstanding principal amount of the
junior subordinated debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the indenture
trustee. The indenture trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the junior subordinated debentures may declare
the principal due and payable immediately upon a debenture event of default. The
holders of a majority in aggregate outstanding principal amount of the junior
subordinated debentures may annul the declaration and waive the default if the
default, other than the non-payment of the principal of the junior subordinated
debentures which has become due solely by the 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 indenture trustee.
Should the holders of the junior subordinated debentures fail to annul the
declaration and waive the default, the holders of a majority in aggregate
liquidation amount of the preferred securities will have the right to do so. In
case a debenture event of default occurs and is continuing, the property trustee
will have the right to declare the principal of and the interest on the junior
subordinated debentures, and any other amounts payable under the indenture, to
be due and payable and to enforce its other rights as a creditor.
Spectrum is required to file annually with the indenture trustee a
certificate as to whether Spectrum is in compliance with all the conditions and
covenants applicable to it under the indenture.
ENFORCEMENT OF RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If an event of default under the indenture has occurred and is continuing
and the default is attributable to Spectrum's failure to pay interest or
principal on the junior subordinated debentures on the due date, a holder of
preferred securities may institute a legal proceeding directly against Spectrum
for payment of principal and interest on the junior subordinated debentures
having a principal amount equal to the aggregate liquidation amount of the
preferred securities of the holder. This action is referred to in this
discussion as a direct action. If the right to bring a direct action is removed,
Spectrum Capital Trust I may become subject to the reporting obligations under
the Securities Exchange Act of 1934. Spectrum will have the right under the
indenture to set-off any payment made to the holder of preferred securities by
Spectrum in connection with a direct action.
The holders of the preferred securities would 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 debentures unless there has
been an event of default under the trust agreement. See "Description of the
Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The indenture provides that Spectrum will not consolidate with or merge into
any other person or convey, transfer or lease its properties and assets
substantially as an entirety to any person, and no person will consolidate with
or merge into Spectrum or convey, transfer or lease its properties and assets
substantially as an entirety to Spectrum, unless:
- in case Spectrum consolidates with or merges 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 the
successor
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person expressly assumes Spectrum's obligations on the junior subordinated
debentures issued under the indenture;
- immediately after giving effect to this type of transaction, no debenture
event of default, and no event which, after notice or lapse of time or
both, would become a debenture event of default, has occurred and is
continuing; and
- other conditions as prescribed in the indenture are met.
The provisions of the indenture do not afford holders of the junior
subordinated debentures protection in the event of a highly leveraged or other
transaction involving Spectrum that may adversely affect holders of the junior
subordinated debentures.
Under the indenture, Spectrum will have satisfied and discharged the
indenture when all junior subordinated debentures not previously delivered to
the indenture trustee for cancellation (1) have become due and payable or (2)
will become due and payable at their stated maturity within one year, and
Spectrum deposits in trust with the indenture trustee sufficient funds to pay
and discharge the entire indebtedness on the junior subordinated debentures to
the deposit date or to the stated maturity, as the case may be. This
satisfaction and discharge will not apply to Spectrum's obligations to pay all
other sums due under the indenture and to provide the officers' certificates and
opinions of counsel described in the indenture.
GOVERNING LAW
The indenture and the junior subordinated debentures will be governed by and
construed in accordance with the laws of the State of Iowa.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee will have and be subject to all the duties and
responsibilities specified for an indenture trustee under the Trust Indenture
Act. Subject to these provisions, the indenture 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 debentures, unless offered reasonable
indemnity by the holder against the costs, expenses and liabilities which might
be incurred. The indenture 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 indenture trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
COVENANTS OF SPECTRUM
Spectrum will covenant in the indenture, as to the junior subordinated
debentures, that during the time that (1) Spectrum Capital Trust I is the holder
of all junior subordinated debentures, (2) a tax event in respect of Spectrum
Capital Trust I has occurred and is continuing and (3) Spectrum has elected, and
has not revoked the election, to pay additional sums, as defined under
"Description of the Preferred Securities -- Redemption -- Mandatory and Optional
Rights of Spectrum," in respect of the preferred securities, Spectrum will pay
to Spectrum Capital Trust I these additional sums. Spectrum will also covenant,
as to the junior subordinated debentures:
- to maintain directly or indirectly 100% ownership of the common securities
of Spectrum Capital Trust I to which junior subordinated debentures have
been issued, provided that successors which are permitted under the
indenture may succeed to Spectrum's ownership of the common securities;
- to use its reasonable efforts to cause Spectrum Capital Trust I (a) to
remain a business trust, except in connection with a distribution of
junior subordinated debentures to the holders of the preferred securities
in liquidation of Spectrum Capital Trust I, (b) the redemption of all of
the
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trust securities or (c) in connection with mergers, consolidations, or
amalgamations permitted by the trust agreement; and
- to use its reasonable efforts to cause each Holder of trust securities to
be treated as owning an individual beneficial interest in the junior
subordinated debentures.
BOOK-ENTRY ISSUANCE
The depositary will act as securities depositary for all of the preferred
securities and the junior subordinated debentures. The preferred securities and
the junior subordinated debentures will be issued only as fully-registered
securities registered in the name of Cede & Co., the depositary's nominee. One
or more fully-registered global certificates will be issued for the preferred
securities and the junior subordinated debentures and will be deposited with the
depositary.
The depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered under the provisions of Section 17A of the Securities
Exchange Act of 1934. The depositary holds securities that its participants
deposit with the depositary. The depositary also facilitates the settlement
among participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations and other organizations.
The depositary is owned by a number of its direct participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the depositary system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with direct
participants, either directly or indirectly. The rules applicable to the
depositary and its participants are on file with the Securities and Exchange
Commission.
Purchases of preferred securities or junior subordinated debentures within
the depositary system must be made by or through direct participants, which will
receive a credit for the preferred securities or junior subordinated debentures
on the depositary's records. The ownership interest of each actual purchaser of
each preferred security and each junior subordinated debenture is in turn to be
recorded on the direct and indirect participants' records. Beneficial owners
will not receive written confirmation from the depositary of their purchases,
but beneficial owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the direct or indirect participants through which the beneficial owners
purchased preferred securities or junior subordinated debentures. Transfers of
ownership interests in the preferred securities or junior subordinated
debentures are to be accomplished by entries made on the books of participants
acting on behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interests in preferred securities or
junior subordinated debentures, except in the event that use of the book-entry
system for the or junior subordinated debentures is discontinued.
The depositary has no knowledge of the actual beneficial owners of the
preferred securities or the junior subordinated debentures. The depositary's
records reflect only the identity of the direct participants to whose accounts
the preferred securities or junior subordinated debentures are credited, which
may or may not be the beneficial owners. The participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the depositary to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners and the voting
rights of direct participants, indirect participants and beneficial owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
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Redemption notices will be sent to Cede & Co. as the registered holder of
the preferred securities or junior subordinated debentures. If less than all of
the preferred securities or the junior subordinated debentures are being
redeemed, the depositary will determine by lot or pro rata the amount of the
preferred securities of each direct participant to be redeemed.
Although voting regarding the preferred securities and the junior
subordinated debentures is limited to the holders of record of the preferred
securities and the junior subordinated debentures, in those instances in which a
vote is required, neither the depositary nor Cede & Co. will itself consent or
vote regarding preferred securities or the junior subordinated debentures. Under
its usual procedures, the depositary would mail an omnibus proxy to the relevant
trustee as soon as possible after the record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those direct participants to whose
accounts the preferred securities or junior subordinated debentures are credited
on the record date and which are used and identified in a listing attached to
the omnibus proxy.
Distribution payments on the preferred securities or the junior subordinated
debentures will be made by the relevant trustee to the depositary. The
depositary's practice is to credit direct participants' accounts on the relevant
payment date in accordance with their respective holdings shown on the
depositary's records unless the depositary has reason to believe that it will
not receive payments on the payment date. Payments by participants to beneficial
owners will be governed by standing instructions and customary practices.
Payments will be the responsibility of the participant and not of the
depositary, the relevant trustee, Spectrum Capital Trust I or Spectrum, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of distributions to the depositary is the responsibility of the
relevant trustee, disbursement of the payments to direct participants is the
responsibility of the depositary, and disbursements of the payments to the
beneficial owners is the responsibility of direct and indirect participants.
The depositary may discontinue providing its services as securities
depositary regarding any of the preferred securities or the junior subordinated
debentures at any time by giving reasonable notice to the relevant trustee and
Spectrum. In the event that a successor securities depositary is not obtained,
definitive preferred securities or subordinated debenture certificates
representing the preferred securities or junior subordinated debentures are
required to be printed and delivered. Spectrum, at its option, may decide to
discontinue use of the system of book-entry transfers through the depositary, or
a successor depositary. After a debenture event of default, the holders of a
majority in liquidation preference of preferred securities or aggregate
principal amount of junior subordinated debentures may determine to discontinue
the system of book-entry transfers through the depositary. In this event,
definitive certificates for the preferred securities or junior subordinated
debentures will be printed and delivered.
The information in this section concerning the depositary and the
depositary's book-entry system has been obtained from sources that Spectrum
Capital Trust I and Spectrum believe to be accurate, but Spectrum Capital Trust
I and Spectrum assume no responsibility for the accuracy thereof. Neither
Spectrum Capital Trust I nor Spectrum has any responsibility for the performance
by the depositary or its participants of their respective obligations as
described in this prospectus or under the rules and procedures governing their
respective operations.
DESCRIPTION OF PREFERRED SECURITIES GUARANTEE
The preferred securities guarantee agreement will be executed and delivered
by Spectrum concurrently with the issuance of the preferred securities. The
preferred securities guarantee will be for the benefit of the holders of the
preferred securities. Wilmington Trust Company will act as trustee under the
preferred securities guarantee for the purposes of compliance with the Trust
Indenture Act, and the preferred securities guarantee will be qualified under
the Trust Indenture Act. The following is a summary of the material provisions
of the preferred securities guarantee. Prospective investors are urged to read
the form of the preferred securities guarantee which has been filed as an
exhibit to the
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registration statement of which this prospectus forms a part. The guarantee
trustee will hold the preferred securities guarantee for the benefit of the
holders of the preferred securities.
GENERAL OVERVIEW
The preferred securities guarantee is an irrevocable guarantee on a
subordinated basis of all of Spectrum Capital Trust I's obligations to make
payments under the preferred securities, but will apply only to the extent that
Spectrum Capital Trust I has funds sufficient to make the payments, and is not a
guarantee of collection.
Spectrum will irrevocably agree to pay in full on a subordinated basis, to
the extent set forth in this prospectus, the preferred securities guarantee
payments, as defined below, to the holders of the preferred securities, as and
when due, regardless of any defense, right of set-off or counterclaim that
Spectrum Capital Trust I may have or assert other than the defense of payment.
The following payments regarding the preferred securities, to the extent not
paid by or on behalf of Spectrum Capital Trust I, will be subject to the
preferred securities guarantee of Spectrum:
- any accumulated and unpaid distributions required to be paid on the
preferred securities, to the extent that Spectrum Capital Trust I has
available funds on hand at the time;
- the redemption price regarding any preferred securities called for
redemption to the extent that Spectrum Capital Trust I has available funds
on hand at the time; and
- upon a voluntary or involuntary dissolution, winding up or liquidation of
Spectrum Capital Trust I, unless the junior subordinated debentures are
distributed to holders of the preferred securities.
The amount of the preferred securities guarantee will be the lesser of (a)
the liquidation distribution and (b) the amount of assets of Spectrum Capital
Trust I remaining available for distribution to holders of preferred securities.
Spectrum's obligation to make a preferred securities guarantee payment may be
satisfied by direct payment of the required amounts by Spectrum to the holders
of the preferred securities or by causing Spectrum Capital Trust I to pay these
amounts to the holders.
If Spectrum does not make interest payments on the junior subordinated
debentures held by Spectrum Capital Trust I, Spectrum Capital Trust I will not
be able to pay distributions on the preferred securities and will not have funds
legally available to pay distributions. The preferred securities guarantee will
rank subordinate and junior in right of payment to all senior and subordinated
debt of Spectrum. See "Status of the Preferred Securities Guarantee" below.
Because Spectrum is a holding company, the right of Spectrum to participate in
any distribution of assets of any subsidiary upon the subsidiary's liquidation
or reorganization or otherwise, is subject to the prior claims of creditors of
that subsidiary, except to the extent Spectrum may itself be recognized as a
creditor of that subsidiary. Accordingly, Spectrum's obligations under the
preferred securities guarantee will be effectively subordinated to all existing
and future liabilities of Spectrum's subsidiaries, and claimants should look
only to the assets of Spectrum for payments thereunder. Except as otherwise
described in this prospectus, the preferred securities guarantee does not limit
the incurrence or issuance of other secured or unsecured debt of Spectrum,
including senior and subordinated debt whether under the indenture, any other
indenture that Spectrum may enter into in the future, or otherwise.
Spectrum has, through the preferred securities guarantee, the trust
agreement, the junior subordinated debentures, the indenture and the expense
agreement relating to Spectrum Capital Trust I, taken together, fully,
irrevocably and unconditionally guaranteed on a subordinated basis all of
Spectrum Capital Trust I's obligations under the preferred securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes this preferred securities guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee on a subordinated basis of all Spectrum
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Capital Trust I's obligations under the preferred securities. See "Relationship
Among the Preferred Securities, the Junior Subordinated Debentures and the
Preferred Securities Guarantee."
STATUS OF THE PREFERRED SECURITIES GUARANTEE
The preferred securities guarantee will constitute an unsecured obligation
of Spectrum and will rank subordinate and junior in right of payment to all
senior and subordinated debt in the same manner as the junior subordinated
debentures.
The preferred securities guarantee will constitute a guarantee of payment
and not of collection. The guaranteed party may institute a legal proceeding
directly against Spectrum to enforce its rights under the preferred securities
guarantee without first instituting a legal proceeding against any other person
or entity. The preferred securities guarantee will be held for the benefit of
the holders of the preferred securities. The preferred securities guarantee does
not place a limitation on the amount of additional senior and subordinated debt
that may be incurred by Spectrum. Spectrum expects from time to time to incur
additional indebtedness constituting senior and subordinated debt.
AMENDMENT AND ASSIGNMENT
Except regarding any changes which do not adversely affect the rights of
holders of the preferred securities in a material manner, in which case no vote
will be required, the preferred securities guarantee may not be amended without
the prior approval of the holders of not less than a majority of the aggregate
liquidation amount of the outstanding preferred securities. See "Description of
the Preferred Securities -- Voting Rights; Amendment of the Trust Agreement."
All guarantees and agreements contained in the preferred securities guarantee
will bind the successors, assigns, receivers, trustees and representatives of
Spectrum and will inure to the benefit of the holders of the preferred
securities then outstanding.
EVENTS OF DEFAULT
An event of default under the preferred securities guarantee will occur upon
the failure of Spectrum to perform any of its payment or other obligations under
the preferred securities guarantee. The holders of not less than a majority in
aggregate liquidation amount of the preferred securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the guarantee trustee regarding the preferred securities guarantee
or to direct the exercise of any trust or power conferred upon the guarantee
trustee under the preferred securities guarantee.
Any holder of preferred securities may institute a legal proceeding directly
against Spectrum to enforce the holder's rights under the preferred securities
guarantee without first instituting a legal proceeding against Spectrum Capital
Trust I, the guarantee trustee or any other person or entity.
Spectrum, as guarantor, is required to file annually with the guarantee
trustee a certificate as to whether Spectrum is in compliance with all the
conditions and covenants applicable to it under the preferred securities
guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and continuance of a
default by Spectrum in performance of the preferred securities guarantee,
undertakes to perform only the duties which are specifically set forth in the
preferred securities guarantee. After default regarding the preferred securities
guarantee, the guarantee trustee 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 preferred securities guarantee
at the request of any holder of the preferred securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred.
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TERMINATION OF THE PREFERRED SECURITIES GUARANTEE
The preferred securities guarantee will terminate and be of no further force
and effect upon full payment of the redemption price of the preferred
securities, upon full payment of the amounts payable upon liquidation of
Spectrum Capital Trust I or upon distribution of junior subordinated debentures
to the holders of the preferred securities. The preferred securities guarantee
will continue to be effective or will be reinstated, as the case may be, if at
any time any holder of the preferred securities must restore payment of any sums
paid under the preferred securities or the preferred securities guarantee.
GOVERNING LAW
The preferred securities guarantee will be governed by and construed in
accordance with the laws of the State of Iowa.
THE EXPENSE AGREEMENT
Under the agreement as to expenses and liabilities entered into by Spectrum
under the trust agreement, Spectrum will irrevocably and unconditionally
guarantee to each person or entity to whom Spectrum Capital Trust I becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
Spectrum Capital Trust I, other than obligations of Spectrum Capital Trust I to
pay to the holders of the preferred securities or other similar interests in
Spectrum Capital Trust I of the amounts due the holders under the terms of the
preferred securities or the other similar interests, as the case may be.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE
FULL AND UNCONDITIONAL PREFERRED SECURITIES GUARANTEE ON A SUBORDINATED BASIS
Payments of distributions and other amounts due on the preferred securities,
to the extent Spectrum Capital Trust I has funds available for the payment of
the distributions, are irrevocably guaranteed by Spectrum as and to the extent
set forth under "Description of Preferred Securities Guarantee." Taken together,
Spectrum's obligations under the junior subordinated debentures, the indenture,
the trust agreement, the expense agreement and the preferred securities
guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee on a subordinated basis of payments of distributions and other amounts
due on the preferred securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes the
preferred securities guarantee. It is only the combined operation of those
documents that has the effect of providing a full, irrevocable and unconditional
guarantee on a subordinated basis of Spectrum Capital Trust I's obligations
under the preferred securities. If and to the extent that Spectrum does not make
payments on the junior subordinated debentures, Spectrum Capital Trust I will
not pay distributions or other amounts due on the preferred securities. The
preferred securities guarantee does not cover payment of distributions when
Spectrum Capital Trust I does not have sufficient funds to pay the
distributions. In this event, the remedy of a holder of the preferred securities
is to institute a legal proceeding directly against Spectrum for enforcement of
payment of the distributions to the holder. The obligations of Spectrum under
the preferred securities guarantee are subordinate and junior in right of
payment to all senior and subordinated debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
junior subordinated debentures, the payments will be sufficient to cover
distributions and other payments due on the preferred securities, primarily
because: (1) the aggregate principal amount of the junior subordinated
debentures will be equal to the sum of the aggregate liquidation amount of the
preferred securities and common securities; (2) the interest rate and interest
and other payment dates on the junior subordinated debentures will match the
distribution rate and distribution and other payment
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dates for the preferred securities; (3) Spectrum will pay for all and any costs,
expenses and liabilities of Spectrum Capital Trust I except Spectrum Capital
Trust I's obligations to holders of preferred securities; and (4) the trust
agreement further provides that Spectrum Capital Trust I will not engage in any
activity that is not consistent with the limited purposes of Spectrum Capital
Trust I.
Notwithstanding anything to the contrary in the indenture, Spectrum has the
right to set-off any payment it is otherwise required to make under the
indenture to the extent Spectrum has made payments, or is concurrently on the
date of the payment making, a payment under the preferred securities guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES UNDER THE PREFERRED
SECURITIES GUARANTEE
A holder of any the preferred securities may institute a legal proceeding
directly against Spectrum to enforce its rights under the preferred securities
guarantee without first instituting a legal proceeding against the guarantee
trustee, Spectrum Capital Trust I or any other person or entity.
A default or event of default under any senior and subordinated debt would
not constitute an event of default. However, in the event of payment defaults
under, or acceleration of, senior and subordinated debt, the subordination
provisions of the indenture provide that no payments may be made in respect of
the junior subordinated debentures until the senior and subordinated debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on junior subordinated debentures would
constitute an event of default.
LIMITED PURPOSE OF SPECTRUM CAPITAL TRUST I
The preferred securities evidence a beneficial interest in Spectrum Capital
Trust I, and Spectrum Capital Trust I exists for the sole purpose of issuing the
trust securities and investing the proceeds from the sale of the trust
securities in the junior subordinated debentures. A principal difference between
the rights of a holder of the preferred securities and a holder of a junior
subordinated debenture is that a holder of a junior subordinated debenture is
entitled to receive from Spectrum the principal amount of and interest accrued
on junior subordinated debentures held, while a holder of the preferred
securities is entitled to receive distributions from Spectrum Capital Trust I,
or from Spectrum under the preferred securities guarantee, if and to the extent
Spectrum Capital Trust I has funds available for the payment of the
distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
Spectrum Capital Trust I involving the liquidation of the junior subordinated
debentures, the holders of preferred securities will be entitled to receive, out
of assets held by Spectrum Capital Trust I, the liquidation distribution in
cash. See "Description of the Preferred Securities -- Liquidation Distribution
Upon Termination." Upon any voluntary or involuntary liquidation or bankruptcy
of Spectrum, the property trustee, as holder of the junior subordinated
debentures, would be a subordinated creditor of Spectrum, subordinated in right
of payment to all senior and subordinated debt as set forth in the indenture,
but entitled to receive payment in full of principal and interest, before any
stockholders of Spectrum receive payments or distributions. Since Spectrum is
the guarantor under the preferred securities guarantee and has agreed to pay for
all costs, expenses and liabilities of Spectrum Capital Trust I, other than
Spectrum Capital Trust I's obligations to the holders of its preferred
securities, the positions of a holder of the preferred securities and a holder
of junior subordinated debentures relative to other creditors and to
stockholders of Spectrum in the event of liquidation or bankruptcy of Spectrum
are expected to be substantially the same.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The preferred securities and payments on the preferred securities generally
are subject to taxation. Therefore, you should consider the tax consequences of
owning and receiving payments on the preferred securities before acquiring them.
The following is the opinion of Baird, Holm, McEachen, Pedersen, Hamann &
Strasheim, Omaha, Nebraska, tax counsel to Spectrum and Spectrum Capital Trust
I. Tax counsel's legal opinion is based upon current law and the factual
representations, facts and assumptions set forth in this prospectus and assumes
that Spectrum Capital Trust I was formed and will be maintained in compliance
with the terms of the trust agreement and related documents described in the
prospectus.
Unless otherwise stated, this discussion deals only with preferred
securities held by United States persons who purchase the preferred securities
upon original issuance at the first price at which a substantial amount of
preferred securities were sold and who are not engaged in the sale of securities
to customers. As used in this prospectus, a "United States person" means a
person that is (1) a citizen or resident of the United States, (2) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (3) an estate
the income of which is subject to United States federal income taxation
regardless of its source, or (4) any trust if a court within the United States
is able to exercise primary supervision over the administration of Spectrum
Capital Trust I and one or more United States persons have the authority to
control all substantial decisions of Spectrum Capital Trust I. The tax treatment
of holders may vary depending on their particular situation. This discussion
does not address all the tax consequences that may be relevant to a particular
holder or to holders who may be subject to special tax treatment, such as banks,
real estate investment trusts, regulated investment companies, insurance
companies, dealers in securities or currencies, tax-exempt investors, foreign
investors, persons that will hold the preferred securities as part of a position
in a "straddle" or as part of a "hedging" or other integrated transaction, or
persons whose functional currency is not the United States dollar, or the
consequences to shareholders, partners or beneficiaries of a holder. In
addition, this discussion does not include any description of any alternative
minimum tax consequences or other collateral tax consequences under United
States federal income tax laws, or the tax laws of any state, local or foreign
government that may be applicable to a holder of preferred securities. This
discussion is based on the Internal Revenue Code of 1986, as amended, the
Treasury regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. Any change of this nature could cause
the tax consequences to vary substantially from the consequences described
below, possibly adversely affecting an owner of preferred securities.
The following discussion does not discuss the tax consequences that might be
relevant to persons that are not United States persons. Non-United States
persons should consult their own tax advisors as to the specific United States
federal income tax consequences of the purchase, ownership and disposition of
preferred securities.
The authorities on which this discussion is based are subject to various
interpretations and the opinions of counsel are not binding on the IRS or the
courts, either of which could take a contrary position. Moreover, no rulings
have been or will be sought from the IRS regarding the transactions described in
this prospectus. Accordingly, there can be no assurance that the IRS will not
challenge the opinions expressed in this discussion or that a court would not
sustain this type of challenge. It is therefore possible that the federal income
tax treatment of the purchase, ownership and disposition of preferred securities
may differ from the treatment described below.
SECURITYHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
PARTICULAR PERSONAL TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
UNITED STATES FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE
REDEMPTION OF THE PREFERRED SECURITIES IF A TAX EVENT OCCURS, SEE "DESCRIPTION
OF THE PREFERRED SECURITIES -- REDEMPTION -- MANDATORY AND OPTIONAL RIGHTS OF
SPECTRUM."
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CLASSIFICATION OF SPECTRUM CAPITAL TRUST I
Spectrum Capital Trust I will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each beneficial owner of the preferred securities, a
securityholder, will be treated as owning an undivided beneficial interest in
the junior subordinated debentures. Accordingly, each securityholder will be
required to include in its gross income its pro rata share of the interest
income or original issue discount that is paid or accrued on the junior
subordinated debentures. See "Interest Income and Original Issue Discount." No
amount included in income regarding the preferred securities will be eligible
for the dividends received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
Spectrum and Spectrum Capital Trust I intend to take the position that the
junior subordinated debentures will be classified for United States federal
income tax purposes as indebtedness of Spectrum under current law. Spectrum,
Spectrum Capital Trust I and, by acceptance of a preferred security, each holder
agree to treat the junior subordinated debentures as indebtedness and the
preferred securities as evidence of an indirect beneficial ownership interest in
the junior subordinated debentures. No assurance can be given, however, that
this classification will not be challenged by the IRS or, if challenged, that
such a challenge will not be successful. The remainder of this discussion
assumes that the junior subordinated debentures will be classified for United
States federal income tax purposes as indebtedness of Spectrum. See "Risk
Factors -- You are subject to prepayment risk because possible tax law changes
could result in a redemption of the preferred securities."
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the junior subordinated
debentures generally will be included in income by a securityholder at the time
the interest income is paid or accrued in accordance with the securityholder's
regular method of tax accounting.
If Spectrum exercises its right to defer payments of interest on the junior
subordinated debentures, the junior subordinated debentures will become original
issue discount instruments, and the amount of original issue discount would be
equal to the aggregate of all future payments of interest on the junior
subordinated debentures. In this event, all securityholders would be required to
include the original issue discount on the junior subordinated debentures in
income on a daily economic accrual basis during the extension period, even
though Spectrum would not pay the interest until the end of the extension
period, and even though some securityholders may use the cash method of tax
accounting. Moreover, thereafter the junior subordinated debentures would be
taxed as original issue discount instruments for as long as they remained
outstanding. Thus, even after the end of the extension period, all
securityholders would be required to continue to include the original issue
discount on the junior subordinated debentures in income on a daily economic
accrual basis, regardless of their method of tax accounting and in advance of
receipt of the cash attributable to this interest income. In this event, actual
cash payments of interest on the junior subordinated debentures would not be
reported separately as taxable income.
In addition, Spectrum's option to defer the payment of interest on the
junior subordinated debentures during an extension period might cause the junior
subordinated debentures to be considered initially issued with original issue
discount. Spectrum believes, and will take the position, that this result will
not arise because of an exception in the Treasury regulations that applies when
there is only a remote likelihood that a contingency, such as election to defer,
will occur. However, the Treasury regulations described above have not yet been
addressed in any rulings or other definitive interpretations by the IRS. It is
possible that the IRS could take a contrary position. If the IRS were to assert
successfully that the junior subordinated debentures were issued with original
issue discount regardless of whether Spectrum exercises its right to defer
payments of interest on the debentures, all
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securityholders would be required to include the stated interest thereon in
income on a daily economic accrual basis as described above.
Spectrum does not anticipate that additional sums, as defined in the
indenture, will be paid. However, if additional sums are paid, they will be
taxable to the securityholder as ordinary income, generally as interest income.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED
SECURITIES
Under current law, a distribution by Spectrum Capital Trust I of the junior
subordinated debentures as described under the caption "Description of the
Preferred Securities -- Liquidation and Distribution Upon Termination" will be
non-taxable and will result in the securityholder receiving directly its pro
rata share of the junior subordinated debentures previously held indirectly
through Spectrum Capital Trust I, with a holding period and aggregate tax basis
equal to the holding period and aggregate tax basis the securityholder had in
its preferred securities before the distribution. If, however, the liquidation
of Spectrum Capital Trust I were to occur because Spectrum Capital Trust I is
subject to United States federal income tax regarding income accrued or received
on the junior subordinated debentures as a result of a tax event or otherwise,
the distribution of junior subordinated debentures to securityholders by
Spectrum Capital Trust I would be a taxable event to Spectrum Capital Trust I
and each securityholder, and a securityholder would recognize gain or loss as if
the securityholder had sold or exchanged its preferred securities for the junior
subordinated debentures it received upon the liquidation of Spectrum Capital
Trust I. See -- "Sales or Redemption of Preferred Securities." A securityholder
would recognize interest income in respect of junior subordinated debentures
received from Spectrum Capital Trust I in the manner described above under
"Interest Income and Original Issue Discount."
SALES OR REDEMPTION OF PREFERRED SECURITIES
Gain or loss will be recognized by a securityholder on a sale of preferred
securities, including a redemption for cash, in an amount equal to the
difference between the amount realized, which for this purpose will exclude
amounts attributable to accrued interest or original issue discount not
previously included in income, and the securityholder's adjusted tax basis in
the preferred securities sold or so redeemed. A securityholder's adjusted tax
basis will be its initial purchase price, increased by any accrued original
issue discount previously included in the securityholder's gross income to the
date of disposition, and decreased by payments, other than stated interest on
the junior subordinated debentures that does not constitute original issue
discount, received on the preferred securities. Any gain or loss on the sale,
exchange or retirement of the preferred securities generally will be treated as
capital gain or loss. In general, amounts attributable to accrued interest
regarding a securityholder's pro rata share of the junior subordinated
debentures not previously included in income and which are excluded from the
amount realized on a sale of preferred securities and therefore not part of the
calculation of gain or loss, will be taxable as ordinary income. There is
conflicting authority regarding whether or not a cash basis taxpayer is required
to include in income accrued interest in the event the preferred securities are
sold for less than their principal amount. The Internal Revenue Service
Restructuring and Reform Act of 1998 provides that for taxpayers other than
corporations, net capital gain, which is defined as net long-term capital gain
over net short-term capital loss for the taxable year, realized from property,
with limited exceptions, is subject to a maximum marginal stated tax rate of
20%, or 10% in the case of taxpayers in the lowest tax bracket. Capital gain or
loss is long-term if the holding period for the asset is more than one year, and
is short-term if the holding period for the asset is one year or less. Capital
gains realized from assets held for one year or less are taxed at the same rates
as ordinary income. Subject to limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
Should Spectrum exercise its option to defer any payment of interest on the
junior subordinated debentures, the preferred securities may trade at a price
that does not fully reflect the value of accrued but unpaid interest on the
underlying junior subordinated debentures. In the event of a deferral under
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the option, a securityholder that disposes of its preferred securities between
record dates for payments of distributions, and consequently does not receive a
distribution from Spectrum Capital Trust I for the period prior to the
disposition, will nevertheless be required to include in income accrued original
issue discount on the junior subordinated debentures through the date of
disposition and will add this amount to its adjusted tax basis in its preferred
securities. The securityholder will recognize a capital loss on the disposition
of its preferred securities to the extent the selling price, which may not fully
reflect the value of accrued but unpaid original issue discount, is less than
the securityholder's adjusted tax basis in the preferred securities, which will
include accrued but unpaid original issue discount that has been included in
income. As stated previously, subject to limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest paid or original issue discount accrued, if any, on
the junior subordinated debentures, beneficial ownership of which is reflected
in the preferred securities held of record by United States persons, other than
corporations and other exempt securityholders, will be reported to the Service.
Generally, income on the preferred securities will be reported to
securityholders on Form 1099, which form should be mailed to securityholders by
January 31 following each calendar year. Proposed regulations, if adopted. could
alter the information reporting requirements which must be made to both the IRS
and the securityholders. Backup withholding at a rate of 31% will apply to
payments of interest to non-exempt United States persons unless the
securityholder furnishes its taxpayer identification number in the manner
prescribed in applicable Treasury regulations, certifies that the number is
correct, certifies as to no loss of exemption from backup withholding and meets
other conditions. Any amounts withheld from a securityholder under the backup
withholding rules will be allowed as a refund or a credit against the
securityholder's United States federal income tax liability, provided the
required information is furnished to the Service. Payment of the proceeds from
the disposition of preferred securities to or through the United States office
of a broker is subject to information reporting and backup withholding unless
the securityholder or beneficial owner establishes an exemption from information
reporting and backup withholding.
POSSIBLE TAX LAW CHANGES AFFECTING PREFERRED SECURITIES
Legislative proposals were made in 1996 and 1997, which if enacted, could
have adversely affected the ability of Spectrum to deduct interest paid on the
junior subordinated debentures. Although these proposals were not enacted, there
can be no assurance that future legislative proposals or final legislation will
not affect the ability of Spectrum to deduct interest on the junior subordinated
debentures or otherwise adversely affect the tax treatment of the transactions
described in this prospectus. A change of this nature could give rise to a tax
event, which may permit Spectrum to cause a redemption of the trust preferred
securities. See "Risk Factors -- You are subject to prepayment risk because
possible tax law changes could result in a redemption of the preferred
securities," "Description of the Preferred Securities -- Redemption -- Mandatory
and Optional Rights of Spectrum" and "Description of Junior Subordinated
Debentures -- Redemption."
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended (ERISA), or Section 4975 of the Code, generally
may purchase preferred securities subject to the investing fiduciary's
determination that the investment in preferred securities satisfies ERISA's
fiduciary standards and other requirements applicable to investments by the
Plan.
However, Spectrum and any of its affiliates may be considered a party in
interest, within the meaning of Section 3(14) of ERISA, or a disqualified
person, within the meaning of Section 4975 of the Code, regarding plans
maintained or sponsored by, or contributed to by, Spectrum or an affiliate, or
regarding which Spectrum or an affiliate is a fiduciary, or plans for which
Spectrum or an affiliate provide services. The acquisition and ownership of
preferred securities by an individual retirement
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arrangement or other Plan described in Section 4975(e) (1) of the Code,
regarding which Spectrum or any of its affiliates is considered a party in
interest or a disqualified person, may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, which could give rise to
the imposition of substantial taxes unless the preferred securities are acquired
under and in accordance with an applicable exemption.
As a result, plans regarding which Spectrum and/or any of its affiliates is
a party in interest or a disqualified person should not acquire preferred
securities unless the preferred securities are acquired under and in accordance
with an applicable exemption. Any plans or entities whose assets include Plan
assets subject to ERISA or Section 4975 of the Code proposing to acquire
preferred securities should consult with their own counsel.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among
Spectrum, Spectrum Capital Trust I and the underwriters listed on the table
below for whom Howe Barnes Investments, Inc. is acting as representative, the
underwriters have severally agreed to purchase from Spectrum Capital Trust I an
aggregate of 2,000,000 preferred securities in the amounts set forth below
opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
PREFERRED
UNDERWRITERS SECURITIES
- -------------------------------------------------------------------------- ------------------
<S> <C>
Howe Barnes Investments, Inc..............................................
----------
Total................................................................... 2,000,000
----------
----------
</TABLE>
The underwriting agreement requires the underwriters to accept and pay for
all of the preferred securities, if any are taken. In addition, the underwriting
agreement sets forth customary conditions that must be satisfied on the part of
Spectrum and Spectrum Capital Trust I before the underwriters are obligated to
purchase the preferred securities. These conditions include the accuracy of
specific representations and warranties and the receipt of opinions of counsel
and reports from accountants as to the status of Spectrum, Spectrum Capital
Trust I and the preferred securities.
Spectrum Capital Trust I has granted to the underwriters an option,
exercisable within 30 days after the date of this prospectus, to purchase up to
an additional 300,000 preferred securities at the same price per preferred
security to be paid by the underwriters for the other preferred securities
offered hereby. If the underwriters purchase any of the additional preferred
securities under this option, each underwriter will be committed to purchase the
additional shares in approximately the same proportion as set forth in the table
above. The underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the
preferred securities offered hereby.
The table below shows the price and proceeds on a per security and aggregate
basis.
<TABLE>
<CAPTION>
PER PREFERRED SECURITY TOTAL
----------------------- -------------
<S> <C> <C>
Price to Investors....................................... $ 10 $ 20,000,000
Proceeds to Spectrum Capital Trust I..................... $ 10 $ 20,000,000
Underwriting Commissions................................. $ $
Proceeds to Spectrum..................................... $ $
</TABLE>
The proceeds to be received by Spectrum as shown in the table above reflect
estimated expenses of $350,000 payable by Spectrum, as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee............................... $ 7,993
NASD fee.......................................................................... 3,175
American Stock Exchange fee....................................................... 20,000
Trustees' fees and expenses....................................................... 25,000
Legal fees and expenses........................................................... 120,000
Accounting fees and expenses...................................................... 80,000
Printing expenses................................................................. 85,000
Miscellaneous expenses............................................................ 8,832
----------
Total........................................................................... $ 350,000
----------
----------
</TABLE>
91
<PAGE>
All of the proceeds to Spectrum Capital Trust I will be used to purchase the
junior subordinated debentures from Spectrum. Spectrum has agreed to pay the
underwriters % of the public offering price per preferred security, as
compensation for arranging the investment in the junior subordinated debentures.
Should the underwriters exercise the over-allotment option, an aggregate of
$ will be paid to the underwriters for arranging the investment in the
junior subordinated debentures.
The underwriters propose to offer the preferred securities in part directly
to the public at the initial public offering price set forth above, and in part
to securities dealers at this price less a concession not in excess of
$ per preferred security. The underwriters may allow, and the dealers
may reallow, a concession not in excess of $ per preferred security to
brokers and dealers. After the preferred securities are released for sale to the
public, the offering price and other selling terms may from time to time be
varied by the underwriters.
Spectrum and Spectrum Capital Trust I have agreed to indemnify the several
underwriters against several liabilities, including liabilities under the
Securities Act of 1933. Generally, the indemnification provisions in the
underwriting agreement provide for full indemnification of the underwriters in
actions related to the disclosure in this prospectus unless such disclosure was
provided by the underwriters specifically for use in this prospectus.
In connection with the offering, the underwriters may purchase and sell the
preferred securities in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the offering. Stabilizing
transactions consist of bids or purchases for the purpose of preventing or
retarding a decline in the market price of the preferred securities; and
syndicate short positions involve the sale by the underwriters of a greater
number of securities than they are required to purchase from Spectrum in the
offering. The underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the securities sold in the offering for their account may be reclaimed by the
syndicate if the preferred securities are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Securities, which may be higher than
the price that might otherwise prevail in the open market. These activities, if
commenced, may be discontinued at any time. These transactions may be effected
in the over-the-counter market or otherwise.
The underwriters have advised Spectrum Capital Trust I that they do not
intend to confirm any sales of preferred securities to any discretionary
accounts. In connection with the offer and sale of the preferred securities, the
underwriters will comply with Rule 2810 under the NASD Conduct Rules.
REPORTS OF SPECTRUM
Spectrum intends to file with the Securities and Exchange Commission annual
reports containing its audited consolidated financial statements and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial information. Prior to this offering, Spectrum has not been a reporting
company with the Securities and Exchange Commission.
AVAILABLE INFORMATION
Spectrum and Spectrum Capital Trust I have filed electronically with the
Commission through EDGAR a registration statement on Form S-1 in accordance with
the requirements of the Securities Act of 1933 registering the preferred
securities. This prospectus does not contain all of the information set forth in
the registration statement and in the exhibits attached. Some items were omitted
in accordance with the rules and regulations of the Commission. Anyone may
inspect the registration statement without charge at the public reference
facilities of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 and
may obtain copies of all or any part of it from the Commission upon payment of
the required fees. Statements contained in this prospectus which refer to a
document filed as an exhibit to the registration statement are qualified in
their entirety by reference to the copy of that
92
<PAGE>
document. The registration statement may also be reviewed on the Commission's
Web Site at http://www.sec.gov.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the preferred
securities, the enforceability of the trust agreement and the formation of
Spectrum Capital Trust I will be passed upon by Richards, Layton & Finger, P.A.,
Wilmington, Delaware, special Delaware counsel to Spectrum and Spectrum Capital
Trust I. The validity of the preferred securities guarantee and the junior
subordinated debentures will be passed upon for Spectrum by Baird, Holm,
McEachen, Pedersen, Hamann & Strasheim, Omaha, Nebraska, counsel to Spectrum.
Matters with respect to the issuance of the preferred securities will be passed
upon for the underwriters by Chapman and Cutler, Chicago, Illinois. Chapman and
Cutler and Baird, Holm, McEachen, Pedersen, Hamann & Strasheim will rely on the
opinions of Richards, Layton & Finger, P.A. as to matters regarding the due
formation of Spectrum Capital Trust I in Delaware and the enforceability of the
trust agreement under Delaware law. Matters relating to United States federal
income tax consequences will be passed upon for Spectrum by Baird, Holm,
McEachen, Pedersen, Hamann & Strasheim.
Deryl F. Hamann, Chairman, CEO and controlling stockholder of Spectrum, is a
partner in the law firm of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim.
EXPERTS
The consolidated financial statements of Spectrum, except the statements of
income, stockholders' equity and cash flows of Decatur Corporation for the year
ended December 31, 1996, as of June 30, 1998 and 1997 and for each of the three
years in the period ended June 30, 1998, included in this prospectus have been
audited by McGladrey & Pullen, LLP as stated in their report appearing herein.
The 1996 financial statements of Decatur Corporation (consolidated with those of
Spectrum) not presented separately herein have been audited by Deloitte & Touche
LLP as stated in their report included herein. McGladrey & Pullen, LLP has
relied on the report of Deloitte & Touche LLP in issuing its report included in
this prospectus. Such consolidated financial statements of Spectrum are included
herein in reliance upon the respective reports of such firms given upon their
authority as experts in accounting and auditing. Both of the foregoing firms are
independent auditors.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORTS............................................. F-2 and F-3
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets at March 31, 1999, June 30, 1998 and 1997................ F-4
Statements of Income for the nine months ended March 31, 1999 and 1998
and years ended June 30, 1998, 1997 and 1996.......................... F-5
Statements of Stockholders' Equity for the nine months ended March 31,
1999 and years ended June 30, 1998, 1997 and 1996..................... F-6
Statements of Cash Flows for the nine months ended March 31, 1999 and
1998 and years ended June 30, 1998, 1997 and 1996..................... F-7 and F-8
F-9 through
Notes to Consolidated Financial Statements.............................. F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SPECTRUM BANCORPORATION, INC.
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of SPECTRUM
BANCORPORATION, INC. AND SUBSIDIARIES as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 financial statements of Decatur
Corporation which statements are included in the restated 1996 financial
statements as explained in Note 14 and reflect interest income constituting 30%
of the related consolidated total. Those statements were audited by other
auditors whose report has been furnished to us and our opinion for 1996, insofar
as it relates to the amounts included for Decatur Corporation, is based solely
on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of SPECTRUM BANCORPORATION, INC. AND
SUBSIDIARIES as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Sioux Falls, South Dakota
June 1, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Decatur Corporation and Subsidiaries:
We have audited statements of income, stockholders' equity and cash flows of
Decatur Corporation and Subsidiaries for the year ended December 31, 1996 (none
of which are presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Decatur
Corporation and Subsidiaries for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Deloitte & Touche, LLP
Omaha, Nebraska
February 7, 1997
F-3
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999, JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, JUNE 30,
1999 1998 1997
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks (Notes 3 and 16)..................... $ 14,240 $ 19,019 $ 17,458
Federal funds sold (Note 16)................................. 28,990 21,785 13,865
----------- --------- ---------
TOTAL CASH AND CASH EQUIVALENTS........................ 43,230 40,804 31,323
Certificates of deposit...................................... 991 2,008 297
Securities available for sale (Notes 4, 8 and 9)............. 95,267 79,511 79,481
Loans receivable, net (Notes 5, 9, and 17)................... 429,579 402,871 355,500
Premises and equipment, net (Note 6)......................... 13,117 10,313 8,414
Accrued interest receivable.................................. 4,959 5,323 4,882
Cost in excess of net assets acquired........................ 2,759 2,830 1,894
Other assets (Note 10)....................................... 4,035 4,417 5,828
----------- --------- ---------
$ 593,937 $ 548,077 $ 487,619
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7):
Non interest bearing..................................... $ 48,184 $ 47,315 $ 46,799
Interest bearing......................................... 441,360 403,475 352,379
----------- --------- ---------
TOTAL DEPOSITS......................................... 489,544 450,790 399,178
Federal funds purchased and securities sold under
agreements to repurchase (Note 8)........................ 19,301 18,788 17,583
Notes payable (Note 9)..................................... 40,320 39,302 38,490
Accrued interest and other liabilities (Note 11)........... 6,313 5,677 4,706
----------- --------- ---------
555,478 514,557 459,957
----------- --------- ---------
Minority interest in subsidiaries (Note 2)................... 2,072 1,972 1,420
----------- --------- ---------
Commitments and contingencies (Notes 15 and 16)
Stockholders' equity (Notes 9 and 13)
Preferred stock, $100 par value; 500,000 shares authorized;
issued and outstanding -- 9,000 shares of 8% cumulative,
nonvoting; 8,000 shares of 10% noncumulative,
nonvoting................................................ 1,700 1,700 1,700
Common stock, $1 par value, authorized 1,000,000 shares,
issued and outstanding: 1999 and 1998 71,727 shares; 1997
71,830 shares............................................ 72 72 72
Additional paid-in capital................................. 1,659 1,659 1,663
Retained earnings.......................................... 32,609 27,750 22,657
Accumulated other comprehensive income (Note 4)............ 347 367 150
----------- --------- ---------
36,387 31,548 26,242
----------- --------- ---------
$ 593,937 $ 548,077 $ 487,619
----------- --------- ---------
----------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 AND
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, JUNE 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income on:
Loans receivable........................................... $ 28,094 $ 26,339 $ 35,414 $ 30,839 $ 23,861
Taxable securities......................................... 3,929 3,224 4,308 4,771 4,011
Nontaxable securities...................................... 469 471 636 618 462
Dividends on securities.................................... 80 198 234 190 97
Federal funds sold and other............................... 1,196 955 1,313 726 766
--------- --------- --------- --------- ---------
33,768 31,187 41,905 37,144 29,197
--------- --------- --------- --------- ---------
Interest expense on:
Deposits................................................... 14,865 13,447 18,170 15,991 12,637
Federal funds purchased and securities sold under
agreements to repurchase................................. 507 564 934 846 565
Notes payable.............................................. 2,034 2,087 2,656 1,694 994
--------- --------- --------- --------- ---------
17,406 16,098 21,760 18,531 14,196
--------- --------- --------- --------- ---------
NET INTEREST INCOME.................................... 16,362 15,089 20,145 18,613 15,001
Provision for loan losses (Note 5)........................... 882 1,105 1,374 1,233 2,541
--------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 15,480 13,984 18,771 17,380 12,460
--------- --------- --------- --------- ---------
Other income:
Service charges and other fees............................. 1,804 1,580 2,126 1,919 1,667
Net gains from sale of loans............................... 1,674 135 803 303 314
Gain (loss) on securities, net (Note 4).................... (15) 179 179 259 239
Trust department income.................................... 170 117 165 139 121
Other...................................................... 1,120 852 1,301 962 604
--------- --------- --------- --------- ---------
4,753 2,863 4,574 3,582 2,945
--------- --------- --------- --------- ---------
Other expenses:
Salaries and employee benefits (Notes 11 and 12)........... 6,150 5,664 7,854 7,157 5,610
Occupancy expenses, net.................................... 755 655 804 992 688
Data processing............................................ 611 635 717 795 691
Equipment expenses......................................... 346 278 566 378 314
Advertising................................................ 634 694 708 614 428
Other operating expenses................................... 3,440 2,105 3,425 3,366 2,904
--------- --------- --------- --------- ---------
11,936 10,031 14,074 13,302 10,635
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST IN NET
INCOME OF SUBSIDIARIES............................... 8,297 6,816 9,271 7,660 4,770
Income taxes (Note 10)....................................... 2,985 2,266 3,124 2,266 1,691
--------- --------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST IN NET INCOME OF
SUBSIDIARIES......................................... 5,312 4,550 6,147 5,394 3,079
Minority interest in net income of subsidiaries.............. 264 233 312 261 248
--------- --------- --------- --------- ---------
NET INCOME............................................. $ 5,048 $ 4,317 $ 5,835 $ 5,133 $ 2,831
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per common share.............................. $ 68.79 $ 58.52 $ 79.15 $ 69.34 $ 36.81
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding.......................... 71,727 71,817 71,798 71,830 71,830
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999 AND YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPRE- ADDITIONAL COMPRE-
HENSIVE PREFERRED PAID-IN RETAINED HENSIVE INCOME
INCOME STOCK COMMON STOCK CAPITAL EARNINGS (LOSS)
----------- ----------- ------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995.................... $ 2,000 $ 72 $ 1,663 $ 15,032 $ 317
Comprehensive income:
Net income............................ $ 2,831 -- -- -- 2,831 --
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... (625) -- -- -- -- (625)
-----------
Comprehensive income.............. $ 2,206
-----------
-----------
Cash dividends paid on preferred
stock................................. (187) --
Redeem stock............................ (300) -- -- -- --
----------- --- ----------- ----------- -----
Balance, June 30, 1996.................... 1,700 72 1,663 17,676 (308)
Comprehensive income:
Net income............................ $ 5,133 -- -- -- 5,133 --
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... 458 -- -- -- -- 458
-----------
Comprehensive income.............. $ 5,591
-----------
-----------
Cash dividends paid on preferred
stock................................. -- -- -- (152) --
----------- --- ----------- ----------- -----
Balance, June 30, 1997.................... 1,700 72 1,663 22,657 150
Comprehensive income:
Net income............................ $ 5,835 -- -- -- 5,835 --
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... 233 -- -- -- -- 233
-----------
Comprehensive income.............. $ 6,068
-----------
-----------
Cash dividends paid on preferred
stock................................. -- -- -- (152) --
Redeem stock............................ -- -- (4) (51) --
Adjustment to conform year ends (Note
14)................................... -- -- -- (539) (16)
----------- --- ----------- ----------- -----
Balance, June 30, 1998.................... 1,700 72 1,659 27,750 367
Comprehensive income (unaudited):
Net income............................ $ 5,048 -- -- -- 5,048 --
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... (20) -- -- -- -- (20)
-----------
Comprehensive income.............. $ 5,028
-----------
-----------
Cash dividends paid (unaudited):
Preferred stock....................... -- -- -- (114) --
Common stock.......................... -- -- -- (75) --
----------- --- ----------- ----------- -----
Balance, March 31, 1999 (unaudited)....... $ 1,700 $ 72 $ 1,659 $ 32,609 $ 347
----------- --- ----------- ----------- -----
----------- --- ----------- ----------- -----
<CAPTION>
TOTAL
---------
<S> <C>
Balance, June 30, 1995.................... $ 19,084
Comprehensive income:
Net income............................ 2,831
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... (625)
Comprehensive income..............
Cash dividends paid on preferred
stock................................. (187)
Redeem stock............................ (300)
---------
Balance, June 30, 1996.................... 20,803
Comprehensive income:
Net income............................ 5,133
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... 458
Comprehensive income..............
Cash dividends paid on preferred
stock................................. (152)
---------
Balance, June 30, 1997.................... 26,242
Comprehensive income:
Net income............................ 5,835
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... 233
Comprehensive income..............
Cash dividends paid on preferred
stock................................. (152)
Redeem stock............................ (55)
Adjustment to conform year ends (Note
14)................................... (555)
---------
Balance, June 30, 1998.................... 31,548
Comprehensive income (unaudited):
Net income............................ 5,048
Other comprehensive income, net of
tax:
Net change in unrealized gain (loss)
on securities available for sale
(Note 4).......................... (20)
Comprehensive income..............
Cash dividends paid (unaudited):
Preferred stock....................... (114)
Common stock.......................... (75)
---------
Balance, March 31, 1999 (unaudited)....... $ 36,387
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 AND YEARS ENDED JUNE 30, 1998, 1997
AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------- ---------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income............................................. $ 5,048 $ 4,317 $ 5,835 $ 5,133 $ 2,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 921 899 1,344 1,041 953
(Gain) loss on sale of securities.................... 15 (179) (179) (259) (239)
(Gain) loss on sale of other real estate owned and
other.............................................. -- -- 37 (45) --
Provision for loan losses............................ 882 1,105 1,374 1,233 2,541
Provision for deferred income taxes.................. (110) 86 (146) (257) (662)
Minority interest in net income of subsidiaries...... 264 233 312 261 248
Loans originated for resale.......................... (47,951) (30,191) (40,255) (19,994) (17,038)
Proceeds from sale of loans originated for sale...... 52,061 27,643 36,858 19,750 17,352
(Increase) in accrued interest receivable............ 364 93 (442) (514) (293)
(Increase) decrease in other assets.................. 910 (660) (257) (791) 464
Increase (decrease) in accrued interest and other
liabilities........................................ 636 641 769 332 (23)
--------- --------- --------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 13,040 3,987 5,250 5,890 6,134
--------- --------- --------- ---------- ----------
Cash Flows from Investing Activities
Proceeds from maturity of securities held to
maturity............................................. -- -- -- -- 285
Purchase of certificates of deposit.................... -- -- (2,438) (1,000) --
Proceeds from maturities of certificates of deposit.... 1,017 297 1,721 2,260 288
Proceeds from sales and maturities of securities
available for sale................................... 37,116 30,987 41,316 48,490 42,299
Purchase of securities available for sale.............. (52,773) (24,921) (32,105) (41,196) (42,467)
Net increase in loans.................................. (31,730) (18,072) (35,176) (65,498) (35,842)
Purchase of premises and equipment..................... (3,378) (1,669) (2,764) (1,178) (538)
Purchase of other assets............................... (848) (1,469) (1,692) (1,731) (1,144)
Proceeds from sale of premises and equipment........... -- -- 186 215 --
Proceeds from sale of other real estate owned.......... 50 -- 73 619 16
Business acquisitions (Note 2)......................... -- (1,141) (1,141) -- (2,991)
--------- --------- --------- ---------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES............ (50,546) (15,988) (32,020) (59,019) (40,094)
--------- --------- --------- ---------- ----------
</TABLE>
(CONTINUED)
F-7
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 AND YEARS ENDED JUNE 30, 1998, 1997
AND 1996
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------- ---------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits............................... $ 38,754 $ 34,284 $ 38,555 $ 41,689 $ 10,188
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase....... 513 3,232 703 (478) 16,349
Proceeds from notes payable............................ 4,000 5,484 11,488 17,995 18,140
Principal payments on notes payable.................... (2,982) (7,781) (10,375) (1,015) (10,550)
Purchase of minority interest in subsidiaries.......... (152) -- -- -- (419)
Proceeds from sale of minority interest in
subsidiary........................................... -- 290 290 198 --
Purchase of common stock for retirement................ -- (30) (55) -- --
Dividends paid, including $12, $60, $52, $18 and $68
paid to minority interest, respectively.............. (201) (174) (204) (170) (255)
--------- --------- --------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 39,932 35,305 40,402 58,219 33,453
--------- --------- --------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 2,426 23,304 13,632 5,090 (507)
Cash and cash equivalents:
Beginning.............................................. 40,804 27,172 27,172 26,233 26,740
--------- --------- --------- ---------- ----------
Ending................................................. $ 43,230 $ 50,476 $ 40,804 $ 31,323 $ 26,233
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Supplemental Disclosures of Cash Flow
Cash payments for:
Interest............................................. $ 16,023 $ 15,733 $ 20,978 $ 18,118 $ 14,278
Income taxes......................................... 2,706 2,380 3,173 2,642 2,166
Supplemental Schedules of Noncash Investing and Financing
Activities
Reclassification of securities from held to maturity to
available for sale................................... -- -- -- -- 30,257
Note payable incurred for purchase of minority
interest............................................. -- -- -- -- 49
Redemption of preferred stock in settlement of note
receivable........................................... -- -- -- -- 300
Net change in unrealized gain/loss on securities
available for sale................................... (21) 392 391 728 (721)
Other real estate acquired in settlement of loans...... 30 -- 13 387 288
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company is a multi-bank holding company organized under the laws of Iowa
whose primary business is providing the traditional functions of trust,
commercial, consumer, and mortgage banking services through its South Dakota,
Missouri and Iowa based subsidiary banks. Substantially all of the Company's
income is generated from banking operations.
The accompanying consolidated financial statements reflect the merger of
Decatur Corporation and Spectrum Bancorporation, Inc. (See Note 14).
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES:
The accounting and reporting policies of the Company conform to generally
accepted accounting principles. In preparing the accompanying financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses for the period.
Actual results could differ from those estimates. A material estimate that is
particularly susceptible to significant change in the near term relates to the
determination of the allowance for loan losses. Management believes that the
allowance for loan losses is adequate. While management uses available
information to recognize possible losses, future additions to the allowance may
be necessary based on changes in economic conditions.
Financial Accounting Standards Board Statement (FASB) No. 130, "Reporting
Comprehensive Income" requires an entity to include a statement of comprehensive
income in its full set of general-purpose financial statements. Comprehensive
income consists of the net income or loss of the entity plus or minus the change
in equity of the entity during the period from transactions, other events, and
circumstances resulting from nonowner sources. The Company's items of other
comprehensive income consist of the net unrealized gains and losses on available
for sale securities. The accompanying financial statements have been
reclassified to conform to the requirements of Statement No. 130.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions with
subsidiaries are eliminated in consolidation.
The consolidated subsidiaries are as follows: Citizens Bank (100% owned),
which is chartered in Mount Ayr, Iowa; Citizens Bank of Princeton (100% owned),
which is chartered in Princeton, Missouri; F&M Bank (97.9%, 97.2% and 97.42%
owned at March 31, 1999, June 30, 1998 and 1997, respectively), which is
chartered in Watertown, South Dakota; Rushmore Bank & Trust (90% owned), which
is chartered in Rapid City, South Dakota; and Spectrum Banc Service Corporation
(89% owned), a data processing organization formed during 1998. Also at March
31, 1999, Rushmore Bank & Trust owns 99% of Ameriloan, LLC, a loan origination
company, which is currently inactive.
CASH AND CASH EQUIVALENTS AND CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks (including cash items in process of clearing)
and federal funds sold. Cash flows from
F-9
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
loans (other than those originated for resale), deposits, federal funds
purchased and securities sold under agreements to repurchase are reported net.
TRUST ASSETS:
Assets of the trust departments of the Company's subsidiaries, other than
trust cash on deposit at that bank, are not included in these financial
statements because they are not assets of the Company.
SECURITIES AVAILABLE FOR SALE:
Securities classified as available for sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available for sale are reported at fair value with unrealized gains or losses
reported as a separate component of stockholders' equity, net of the related
deferred tax effect. The amortization of premiums and accretion of discounts,
computed by the interest method over their contractual lives, are recognized in
interest income. Realized gains or losses, determined on the basis of the
amortized cost of specific securities sold, are included in earnings. Declines
in the fair value of individual securities classified as available for sale
below their amortized cost that are determined to be other than temporary result
in write-downs of the individual securities to their fair value with the
resulting write-downs included in current earnings as realized losses.
LOANS RECEIVABLE:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are stated at the amount of
unpaid principal, reduced by unearned discount and fees and an allowance for
loan losses.
The Company grants real estate, commercial, and consumer loans to customers
primarily in South Dakota, Missouri and Iowa and has purchased loans primarily
originated in surrounding states. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the borrower.
Collateral held varies, but includes accounts receivable, inventory, property
and equipment, residential real estate, income-producing commercial properties
and government guarantees.
Loans sold on the secondary market are sold on a prearranged basis. Loans
held for sale are included in loans receivable and are stated at the lower of
cost or market. Loans held for sale totaled $8,055,000, $12,165,000 and
$2,775,000 as of March 31, 1999, June 30, 1998 and 1997.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans receivable are charged against the allowance
for loan losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans, based on an evaluation of the
collectibility and prior loss experience. The evaluation also takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, regulatory agencies, as an integral
F-10
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
part of their examination process, periodically review the allowance for loan
losses, and may require the Company to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. The
amount of impairment, if any, and any subsequent changes are included in the
provision for loan losses.
Interest on loans is accrued daily on the outstanding balances. For impaired
loans, accrual of interest is discontinued when management believes, after
considering collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is doubtful. Cash collections on
impaired loans are credited to the loan receivable balance, and interest income
is generally not recognized on those loans until the principal balance has been
collected.
A substantial portion of loan fees charged or received on the origination of
mortgage loans are related to loans sold on the secondary market with servicing
released and are recognized as income when received. Certain other loan fees,
net of certain direct loan origination costs, are deferred and the net amount
amortized as an adjustment of the related loan's yield. The Company is generally
amortizing these amounts over the contractual life of the loan. Commitment fees
based upon the amount of a customer's line of credit and fees related to letters
of credit are not significant and are recognized in income when received.
OTHER REAL ESTATE OWNED:
Other real estate owned (OREO) represents properties acquired through
foreclosure or other proceedings and is initially recorded at fair value at the
date of foreclosure, which establishes cost. After foreclosure, OREO is held for
sale and is carried at the lower of cost or fair value less estimated costs of
disposal. Any write-down to fair value at the time of transfer to OREO is
charged to the allowance for loan losses. Property is evaluated regularly to
ensure the recorded amount is supported by its current fair value, and valuation
allowances to reduce the carrying amount to fair value less estimated costs to
dispose are recorded if necessary. OREO is included in other assets in the
accompanying consolidated balance sheets.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and building improvements.................................................... 3-50
Furniture and equipment................................................................ 5-15
</TABLE>
F-11
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED:
Cost in excess of net assets acquired represents the excess of the
acquisition cost over the fair value of the net assets acquired in the purchase
of subsidiaries and branches and is being amortized over periods of eleven to
forty years using the straight-line method. Costs in excess of net assets
acquired is net of accumulated amortization of $2,207,376, $2,136,066 and
$1,793,985 at March 31, 1999, June 30, 1998 and 1997, respectively.
Approximately 23% of the unamortized balance relates to a 1992 acquisition which
is being amortized over 40 years. In connection with the filing of a
registration statement to offer preferred securities, management has decided to
change, on a prospective basis, the amortization of the amount related to that
acquisition to a remaining 19 year period. The affect of this change will be to
increase amortization expense by approximately $12,000 per year.
LONG-LIVED ASSETS:
Long-lived assets, including intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset is not recoverable.
INCOME TAXES:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
DEFERRED COMPENSATION:
The net present value of payments expected to be made under deferred
compensation agreements is being accrued over the respective employees' expected
employment service period.
EARNINGS PER COMMON SHARE:
Earnings per common share has been computed on the basis of the
weighted-average number of common shares outstanding during each period
presented. Dividends accumulated or declared on cumulative and noncumulative
preferred stock, which totaled $114,000 in each of the nine month periods ended
March 31, 1999 and 1998, and totaled $152,000, $152,000 and $187,000 in the
years ended June 30, 1998, 1997 and 1996, respectively, reduced the earnings
available to common stockholders in the computation.
OPERATING SEGMENTS:
The Company has adopted Financial Accounting Standards Board Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS
No. 131). This statement establishes standards for reporting information about
segments in annual and interim financial statements. SFAS No. 131 introduces a
new model for segment reporting called "management approach". The management
approach is based on the way the chief operating decision-maker organizes
segments
F-12
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
within a company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure and any other in which management disaggregates
a company. Based on the "management approach" model, the Company has determined
that its business is comprised of a single operating segment and that SFAS No.
131 therefore has no impact on its consolidated financial statements.
INTERIM FINANCIAL STATEMENTS:
The consolidated financial statements as of March 31, 1999 and 1998 are
unaudited, but in the opinion of management, reflect all adjustments, consisting
only of a normal and recurring nature, necessary for a fair presentation. These
interim financial statements are condensed, and do not include all disclosures
required by generally accepted accounting principles.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments as presented in Note 18:
CARRYING AMOUNTS APPROXIMATE FAIR VALUES for the following instruments:
Cash and due from banks
Federal funds sold
Certificates of deposit
Securities available for sale
Variable rate loans that reprice frequently where no significant change in
credit risk has occurred
Accrued interest receivable
Variable rate money market deposit accounts and deposits payable on demand
Federal funds purchased and securities sold under agreements to repurchase
Notes payable with a variable interest rate
Accrued interest payable
DISCOUNTED CASH FLOWS using interest rates currently being offered on
instruments with similar terms and with similar credit quality:
All loans except variable rate loans described above
Fixed rate time certificates
Notes payable with a fixed interest rate
FEES CURRENTLY BEING CHARGED for similar instruments, taking into account
the remaining terms of the agreements and the counterparties' credit standing:
Off-balance sheet instruments:
Letters of credit
Commitments to extend credit
EMERGING ACCOUNTING STANDARDS:
The FASB has issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. This Statement establishes accounting and reporting
standards for derivative instruments and
F-13
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This Statement is effective for fiscal years
beginning after June 15, 1999. Management does not believe the application of
this Statement to transactions of the Company and its banking subsidiaries that
have been typical in the past will materially affect the Company's financial
position and results of operations.
NOTE 2. CHANGES IN MINORITY INTEREST AND BUSINESS COMBINATIONS
In May 1996, the Company acquired 341 shares (4.8%) of the common stock of
F&M Bank from minority shareholders for $418,832 in cash and a note payable of
$49,436. The transactions were accounted for as purchases.
In November 1996, the Company sold 106 shares (1.15%) of the common stock of
F&M Bank to a key employee for $197,914 in cash, and in March, 1998, sold an
additional 46 shares (.5%) to this same employee for $113,425 in cash.
On May 31, 1996, the Company acquired all of the outstanding shares of
Am-First Financial Corporation (Am-First) for $7,750,000 cash. Am-First owned
100% of the outstanding stock of American Federal Bank, F.S.B. The excess of the
acquisition cost over the fair value of the net assets acquired of $650,445 is
being amortized over eleven years using the straight-line method. The
acquisition has been accounted for as a purchase and results of operations of
Am-First since the date of acquisition are included in the consolidated
financial statements. Concurrent with the purchase, American Federal Bank,
F.S.B. was merged into the Company's subsidiary, F&M Bank.
On March 27, 1998, the Company acquired all of the outstanding shares of
First Savings & Loan Association of South Dakota, Inc. (First Savings & Loan)
for $2,287,254 in cash and incurred other acquisition costs of $35,408. The
excess of the acquisition cost over the fair value of the net assets acquired of
$327,184 is being amortized over eleven years using the straight-line method.
The acquisition has been accounted for as a purchase and results of operations
of First Savings & Loan since the date of acquisition are included in the
consolidated financial statements. Concurrent with the purchase, First Savings &
Loan was merged into the Company's subsidiary, F&M Bank.
A summary of the fair value of net assets acquired and net cash and cash
equivalents paid (in thousands) is as follows:
<TABLE>
<CAPTION>
FIRST SAVINGS
& LOAN AM-FIRST
MARCH 27, 1998 MAY 31, 1996
-------------- ------------
<S> <C> <C>
Assets acquired.......................................................... $ 16,999 $ 56,429
Liabilities assumed...................................................... 14,676 48,679
------- ------------
Net assets acquired.................................................. $ 2,323 $ 7,750
------- ------------
------- ------------
Cost of net assets acquired.............................................. $ 2,323 $ 7,750
Less cash and cash equivalents acquired.................................. 1,182 4,759
------- ------------
Net cash and cash equivalents paid for cash flow purposes............ $ 1,141 $ 2,991
------- ------------
------- ------------
</TABLE>
F-14
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 2. CHANGES IN MINORITY INTEREST AND BUSINESS COMBINATIONS (CONTINUED)
Unaudited proforma consolidated results of operations for the years ended
June 30, 1998 and 1997 as though First Savings & Loan had been acquired as of
July 1, 1996 (in thousands, except per share amounts) follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Interest income................................................................... $ 43,154 $ 38,545
Net income........................................................................ 5,906 5,179
Basic earnings per common share................................................... 80.14 69.98
</TABLE>
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company's banking subsidiaries are required to maintain reserve balances
in cash and on deposit with the Federal Reserve Bank based on a percentage of
deposits. The total requirement was approximately $3,253,000 and $3,129,000 at
June 30, 1998 and 1997, respectively.
NOTE 4. SECURITIES AVAILABLE FOR SALE
Amortized cost and fair value of investments in securities, all of which are
classified as available for sale according to management's intent, are
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
AMORTIZED
COST FAIR VALUE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury securities......................................................... $ 9,995 $ 10,061
U.S. Government agencies and corporations, including mortgage-backed
securities..................................................................... 60,535 60,919
States and political subdivision securities...................................... 9,778 10,258
Corporate debt securities and other.............................................. 11,946 12,048
Stock in Federal Home Loan Bank.................................................. 1,981 1,981
----------- -----------
$ 94,235 $ 95,267
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities........................................... $ 12,175 $ 50 $ (1) $ 12,224
U.S. Government agencies and corporations, including
mortgage-backed securities....................................... 52,470 516 (96) 52,890
States and political subdivision securities........................ 12,592 186 (81) 12,697
Corporate debt securities.......................................... 94 -- -- 94
Stock in Federal Home Loan Bank.................................... 1,606 -- -- 1,606
----------- ----- ----- ---------
$ 78,937 $ 752 $ (178) $ 79,511
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
F-15
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 4. SECURITIES AVAILABLE FOR SALE (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities........................................... $ 17,648 $ 50 $ (3) $ 17,695
U.S. Government agencies and corporations, including
mortgage-backed securities....................................... 45,288 251 (106) 45,433
States and political subdivision securities........................ 11,950 192 (130) 12,012
Corporate debt securities.......................................... 993 -- (10) 983
Stock in Federal Home Loan Bank.................................... 3,271 -- -- 3,271
Other.............................................................. 88 -- (1) 87
----------- ----- ----- ---------
$ 79,238 $ 493 $ (250) $ 79,481
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
No ready market exists for the Federal Home Loan Bank stock, and it has no
quoted market value. For disclosure purposes, such stock is assumed to have a
fair value which is equal to cost.
The amortized cost and fair value of debt securities available for sale (in
thousands) as of June 30, 1998, by contractual maturity, are shown below.
Maturities may differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or repaid without
any penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less.......................................................... $ 8,476 $ 8,502
Due after one year through five years............................................ 15,726 15,920
Due after five years through ten years........................................... 5,856 5,862
Due after ten years.............................................................. 4,080 4,084
Mortgage-backed securities....................................................... 43,193 43,537
----------- -----------
$ 77,331 $ 77,905
----------- -----------
----------- -----------
</TABLE>
Proceeds from sales of securities available for sale were $11,385,932,
$25,772,903 and $15,846,463 for the years ended June 30, 1998, 1997, and 1996
respectively. Gross gains of $194,849, $262,788 and $241,726 and gross losses of
$15,698, $3,858 and $3,102 were realized on those sales for the years ended June
30, 1998, 1997, and 1996 respectively.
Securities with an amortized cost of approximately $56,421,000 and
$54,870,000 at June 30, 1998 and 1997, respectively, were pledged as collateral
on public deposits, securities sold under agreements to repurchase, notes
payable to Federal Home Loan Bank and for other purposes as required or
permitted by law.
F-16
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 4. SECURITIES AVAILABLE FOR SALE (CONTINUED)
The components of other comprehensive income -- net unrealized gain (loss)
on securities available for sale (in thousands) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Unrealized holding gain (loss) arising during the period...................... $ 547 $ 987 $ (737)
Less reclassification adjustment for net gains realized in net income......... (179) (259) (239)
--------- --------- ---------
Net unrealized gain (loss) before income taxes............................ 368 728 (976)
Income (taxes) benefit........................................................ (126) (263) 333
Minority interest in unrealized gains......................................... (9) (7) 18
--------- --------- ---------
Other comprehensive income -- net unrealized gain (loss) on securities.... $ 233 $ 458 $ (625)
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 5. LOANS RECEIVABLE
The composition of net loans receivable (in thousands) is as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
---------- ----------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Commercial and agricultural........................................ $ 276,533 $ 209,387 $ 152,906
Real estate loans.................................................. 88,732 129,761 144,463
Loans to individuals............................................... 68,541 58,205 54,982
Other loans........................................................ 2,191 11,531 8,825
---------- ---------- ----------
435,997 408,884 361,176
---------- ---------- ----------
Deduct:
Allowance for loan losses........................................ 5,970 5,599 5,404
Unearned net loan fees........................................... 448 414 272
---------- ---------- ----------
6,418 6,013 5,676
---------- ---------- ----------
$ 429,579 $ 402,871 $ 355,500
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Loans guaranteed by agencies of the U.S. government totaled $19,868,098 and
$18,567,367 at June 30, 1998 and 1997, respectively.
Certain real estate mortgage loans are sold on the secondary market on a
prearranged basis. The loans are sold without recourse, except for limited
recourse during the first four months after the sale. The Company has
experienced no losses on these recourse sales during 1999, 1998 or 1997.
F-17
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 5. LOANS RECEIVABLE (CONTINUED)
Information about impaired loans (in thousands) is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Loans receivable for which there is a related allowance for loan losses.............. $ 2,104 $ 3,032
Other impaired loans................................................................. -- --
--------- ---------
Total impaired loans............................................................. $ 2,104 $ 3,032
Related allowance for loan losses.................................................... $ 164 $ 867
Average monthly balance of impaired loans (based on month-end balances).............. 2,670 2,203
Interest income recognized on impaired loans......................................... 127 107
</TABLE>
Past due and nonaccrual and restructured loans (in thousands) are as
follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
------------- --------------------
1999 1998 1997
------------- --------- ---------
<S> <C> <C> <C>
Outstanding principal balance of accruing loans having payment
delinquent by more than ninety days.................................. $ 1,207 $ 1,484 $ 543
Loans on which the accrual of interest has been discontinued or
reduced.............................................................. 6,083 6,523 6,399
</TABLE>
Changes in the allowance for loan losses (in thousands) are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH
31, YEARS ENDED JUNE 30,
----------- -------------------------------
1999 1998 1997 1996
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, beginning.......................................... $ 5,599 $ 5,803 $ 4,790 2,599
Provision charged to operating expense.................... 882 1,374 1,233 2,541
Business acquisition (Note 2)............................. -- 129 -- 293
Recoveries of amounts charged off......................... 147 224 407 886
----------- --------- --------- ---------
6,628 7,530 6,430 6,319
Amounts charged off....................................... (658) (1,931) (1,026) (1,529)
----------- --------- --------- ---------
Balance, ending............................................. $ 5,970 $ 5,599 $ 5,404 $ 4,790
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
F-18
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 6. PREMISES AND EQUIPMENT
The major classes of premises and equipment and the total amount of
accumulated depreciation (in thousands) are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Land.............................................................................. $ 2,491 $ 1,816
Buildings and building improvements............................................... 7,686 7,093
Furniture and equipment........................................................... 5,757 5,142
--------- ---------
15,934 14,051
Less accumulated depreciation..................................................... 5,621 5,637
--------- ---------
$ 10,313 $ 8,414
--------- ---------
--------- ---------
</TABLE>
NOTE 7. DEPOSITS
The composition of deposits (in thousands) is as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
---------- ----------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Demand............................................................. $ 48,184 $ 47,315 $ 46,799
NOW accounts, money market and savings............................. 155,572 133,626 115,870
Time certificates, $100,000 or more................................ 67,419 57,883 45,715
Other time certificates............................................ 218,369 211,966 190,794
---------- ---------- ----------
$ 489,544 $ 450,790 $ 399,178
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At June 30, 1998, the scheduled maturities of time certificates (in
thousands) are as follows:
<TABLE>
<S> <C>
Year ending June 30,
1999...................................................................... $ 188,144
2000...................................................................... 62,122
2001...................................................................... 13,125
2002...................................................................... 4,964
2003 and thereafter....................................................... 1,494
---------
$ 269,849
---------
---------
</TABLE>
NOTE 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which generally mature
within one to four days from the transaction date, totaled $18,787,531,
$17,582,854 and $15,350,466 at June 30, 1998, 1997 and 1996, respectively. The
mortgage-backed securities underlying the agreements had an amortized cost of
approximately $21,857,000, $21,296,000 and $20,843,000 and fair value of
approximately $22,037,000, $21,320,000 and $20,607,000 at June 30, 1998, 1997
and 1996, respectively. The securities are held by the Company. The maximum
month-end balance of the agreements was $22,278,990, $20,145,289 and
F-19
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (CONTINUED)
$17,363,774, they had an average balance of $19,197,839, $17,783,026 and
$11,565,018 and an average interest rate of 4.8%, 4.7% and 4.9% for the years
ended June 30, 1998, 1997 and 1996, respectively.
NOTE 9. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------- --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Notes payable to bank(a).............................................. $ 11,820 $ 12,957 $ 11,520
Notes payable to Federal Home Loan Bank, interest rates from 5.2% to
6.9% and maturity dates from September 1998 to January 2003, secured
by real estate loans and Federal Home Loan Bank stock............... 28,500 24,500 25,900
Note payable to Federal Reserve Bank, consisting of treasury, tax and
loan deposits, due on demand........................................ -- 1,800 1,000
Other................................................................. -- 45 70
----------- --------- ---------
$ 40,320 $ 39,302 $ 38,490
----------- --------- ---------
----------- --------- ---------
</TABLE>
- ------------
(a) The Company has loan agreements with US Bank, N.A. The balances are due in
annual principal payments totaling $675,000 through July, 2000 with the
balance due July 31, 2001. Interest on the balance is due quarterly at
either the lender's reference rate, the CD rate plus 2% per annum (7.67% at
June 30, 1998), or the Eurodollar rate plus 2% per annum, at the option of
the Company. The loans are secured by stock in the subsidiary banks. The
majority stockholder of the Company has guaranteed the loans. The loan
agreements require the Company and its banking subsidiaries, among other
provisions, to maintain certain capital ratios.
As of June 30, 1998, notes payable are due or callable (whichever is
earlier) as follows (in thousands):
<TABLE>
<S> <C>
Year ending June 30,
1999....................................................................... $ 8,748
2000....................................................................... 5,699
2001....................................................................... 11,875
2002....................................................................... 8,033
2003....................................................................... 4,528
Thereafter................................................................. 419
---------
$ 39,302
---------
---------
</TABLE>
F-20
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 10. INCOME TAX MATTERS
The provision for income taxes charged to operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Currently paid or payable:
Federal.................................................................. $ 2,816 $ 2,178 $ 2,036
State.................................................................... 454 345 317
Deferred (benefit)......................................................... (146) (257) (662)
--------- --------- ---------
$ 3,124 $ 2,266 $ 1,691
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income due to the following
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense............................................ $ 3,245 $ 2,681 $ 1,670
Increase (decrease) in income taxes resulting from:
Benefit of income taxed at lower rates................................... (93) (76) (48)
Tax exempt interest income............................................... (297) (276) (180)
State income tax, net of federal benefit................................. 300 264 212
Tax law change on pre-1988 allowance for loan losses of converted savings
bank................................................................... -- (368) --
Other.................................................................... (31) 41 37
--------- --------- ---------
$ 3,124 $ 2,266 $ 1,691
--------- --------- ---------
--------- --------- ---------
</TABLE>
Net deferred tax assets (liabilities) (in thousands) consist of the
following components:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Premises and equipment........................................................... $ (1,200) $ (1,012)
Securities available for sale.................................................... (279) (153)
Other............................................................................ (153) (53)
--------- ---------
(1,632) (1,218)
--------- ---------
Deferred tax assets:
Allowance for loan losses........................................................ 1,424 1,223
Deferred compensation............................................................ 130 96
Accrued expenses................................................................. 58 72
Other............................................................................ 102 12
--------- ---------
1,714 1,403
--------- ---------
$ 82 $ 185
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 10. INCOME TAX MATTERS (CONTINUED)
In the accompanying consolidated balance sheets, net deferred tax assets are
included in other assets. The deferred tax asset amounts above include no
valuation allowance.
Retained earnings at June 30, 1998 includes approximately $1,107,000 related
to the pre-1988 allowance for loan losses of an acquired savings bank for which
no deferred income tax liability has been recognized. If the Company no longer
qualifies as a bank or in the event of a liquidation of the Company, income
would be created, for tax purposes only, which would be subject to the then
current corporate income tax rate. The unrecorded deferred income tax liability
on the above amount for financial statement purposes was $376,000 at June 30,
1998.
NOTE 11. DEFERRED COMPENSATION
The Company has entered into deferred compensation agreements with certain
officers, directors and employees which provide for payments to the employees or
their beneficiaries over a period of ten years beginning at age 65 or prior
death or disability. The level of payments is dependent upon the Company's
earnings during employment. The net present value of the payments is being
accrued over the respective employees' expected employment service period.
Deferred compensation charged to expense during the years ended June 30, 1998,
1997 and 1996 was $61,884, $40,112 and $52,058, respectively, with a total
amount accrued as of June 30, 1998 and 1997 of $342,849 and $313,379,
respectively.
NOTE 12. PROFIT-SHARING PLAN
The Company participates in a multiple employer 401(k) profit sharing plan
(the Plan). All employees are eligible to participate beginning with the first
eligibility date following the completion of one year of service and having
reached the age of 21. In addition to employee contributions, the Company may
contribute discretionary amounts for eligible participants. Contribution rates
for participating employers must be equal. For the years ended June 30, 1998 and
1997, contributions were 4.25% of all eligible employees' gross pay, plus 100%
of each employee's contribution for the year up to 2.5% of such employee's gross
pay. The Company contributed $245,854, $247,081 and $178,976 to the Plan for the
years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 13. REGULATORY RESTRICTIONS
The Company and its banking subsidiaries are subject to certain restrictions
on the amount of dividends which may be declared without prior regulatory
approval and are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and its bank
subsidiaries must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its bank subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of
F-22
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 13. REGULATORY RESTRICTIONS (CONTINUED)
total and Tier I capital to risk-weighted assets, and of Tier I capital to
average assets (all as defined in the regulations). Management believes the
Company and its bank subsidiaries meet all capital adequacy requirements to
which they are subject as of June 30, 1998.
The most recent notifications from the regulatory agencies categorize each
of the Company's bank subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since those notifications that management believes have changed the category.
Actual capital amounts and ratios are also presented in the following tables
(amounts in thousands).
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT
CORRECTIVE ACTION
ACTUAL PURPOSES(a) PROVISIONS(a)
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total capital (to risk-weighted assets):
Consolidated.................................... $ 40,857 9.3% $ 35,223 8.0% $ N/A N/A
Citizens Bank, Mount Ayr........................ 7,465 11.6 5,161 8.0 6,452 10.0%
Citizens Bank of Princeton...................... 4,201 16.1 2,088 8.0 2,609 10.0
F&M Bank........................................ 24,886 12.1 16,502 8.0 20,628 10.0
Rushmore Bank & Trust........................... 15,262 10.7 11,373 8.0 14,217 10.0
Tier I capital (to risk-weighted assets:)
Consolidated.................................... 35,353 8.0 17,611 4.0 N/A N/A
Citizens Bank, Mount Ayr........................ 6,807 10.5 2,581 4.0 3,871 6.0
Citizens Bank of Princeton...................... 3,871 14.8 1,044 4.0 1,565 6.0
F&M Bank........................................ 22,332 10.8 8,251 4.0 12,377 6.0
Rushmore Bank & Trust........................... 13,555 9.5 5,686 4.0 8,530 6.0
Tier I capital (to average assets):
Consolidated.................................... 35,353 6.0 23,533 4.0 N/A N/A
Citizens Bank, Mount Ayr........................ 6,807 7.5 3,616 4.0 4,520 5.0
Citizens Bank of Princeton...................... 3,871 11.0 1,403 4.0 1,753 5.0
F&M Bank........................................ 22,332 7.8 11,498 4.0 14,373 5.0
Rushmore Bank & Trust........................... 13,555 8.0 6,753 4.0 8,441 5.0
</TABLE>
F-23
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 13. REGULATORY RESTRICTIONS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT
CORRECTIVE ACTION
ACTUAL PURPOSES(a) PROVISIONS(a)
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total capital (to risk-weighted assets):
Consolidated.................................... $ 35,341 8.8% $ 32,118 8.0% N/A N/A
Citizens Bank, Mount Ayr........................ 7,324 12.4 4,740 8.0 $ 5,926 10.0%
Citizens Bank of Princeton...................... 3,974 16.1 1,976 8.0 2,470 10.0
F&M Bank........................................ 21,537 11.0 15,663 8.0 19,579 10.0
Rushmore Bank & Trust........................... 13,226 10.8 9,797 8.0 12,246 10.0
Tier I capital (to risk-weighted assets:)
Consolidated.................................... 30,323 7.6 16,059 4.0 N/A N/A
Citizens Bank, Mount Ayr........................ 6,664 11.2 2,372 4.0 3,557 6.0
Citizens Bank of Princeton...................... 3,662 14.8 988 4.0 1,482 6.0
F&M Bank........................................ 20,267 10.4 7,826 4.0 11,739 6.0
Rushmore Bank & Trust........................... 11,840 9.6 4,912 4.0 7,369 6.0
Tier I capital (to average assets):
Consolidated.................................... 30,323 5.6 21,731 4.0 N/A N/A
Citizens Bank, Mount Ayr........................ 6,664 8.0 3,353 4.0 4,191 5.0
Citizens Bank of Princeton...................... 3,662 10.3 1,426 4.0 1,783 5.0
F&M Bank........................................ 20,267 8.2 9,953 4.0 12,441 5.0
Rushmore Bank & Trust........................... 11,840 7.6 6,232 4.0 7,790 5.0
</TABLE>
F-24
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 13. REGULATORY RESTRICTIONS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT
CORRECTIVE ACTION
ACTUAL PURPOSES(a) PROVISIONS(a)
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total capital (to risk-weighted assets):
Consolidated.................................... $ 30,003 8.6% $ 28,062 8.0% N/A N/A
Citizens Bank, Mount Ayr........................ 7,259 12.6 4,597 8.0 $ 5,746 10.0%
Citizens Bank of Princeton...................... 3,794 15.9 1,907 8.0 2,384 10.0
F&M Bank........................................ 18,033 10.6 13,609 8.0 17,100 10.0
Rushmore Bank & Trust........................... 11,064 11.2 7,896 8.0 9,870 10.0
Tier I capital (to risk-weighted assets:)
Consolidated.................................... 25,618 7.3 14,031 4.0 N/A N/A
Citizens Bank, Mount Ayr........................ 6,541 11.4 2,298 4.0 3,448 6.0
Citizens Bank of Princeton...................... 3,489 14.6 953 4.0 1,430 6.0
F&M Bank........................................ 15,887 9.3 6,805 4.0 10,207 6.0
Rushmore Bank & Trust........................... 9,829 9.9 3,948 4.0 5,922 6.0
Tier I capital (to average assets):
Consolidated.................................... 25,618 5.4 18,993 4.0 N/A N/A
Citizens Bank, Mount Ayr........................ 6,541 7.9 3,322 4.0 4,153 5.0
Citizens Bank of Princeton...................... 3,489 9.9 1,412 4.0 1,765 5.0
F&M Bank........................................ 15,887 6.9 9,233 4.0 11,541 5.0
Rushmore Bank & Trust........................... 9,829 7.2 5,441 4.0 6,801 5.0
</TABLE>
- ------------
(a) The amounts and ratios are minimums under the regulations. Prompt corrective
action provisions only apply to the bank subsidiaries.
NOTE 14. MERGER OF DECATUR CORPORATION AND SPECTRUM BANCORPORATION, INC.
On May 31, 1999, Decatur Corporation (Decatur) issued 61,063 shares of its
common stock in exchange for all outstanding common stock of Spectrum
Bancorporation, Inc. (Spectrum). Decatur simultaneously changed its name to
Spectrum Bancorporation, Inc. Since the entities were under common control, the
merger has been accounted for at historical cost in a manner similar to a
pooling-of-interests and, accordingly, the consolidated financial statements for
periods prior to the combination have been restated to include the accounts and
results of both entities.
F-25
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 14. MERGER OF DECATUR CORPORATION AND SPECTRUM BANCORPORATION, INC.
(CONTINUED)
The results of operations previously reported by the separate entities and
the combined amounts presented in the accompanying consolidated financial
statements (in thousands) are summarized below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest income:
Decatur Corporation and Subsidiaries..................... $ 6,953 $ 6,827 $ 9,103 $ 9,293 $ 8,825
Spectrum Bancorporation, Inc. and Subsidiaries........... 26,815 24,360 32,802 27,851 20,372
--------- --------- --------- --------- ---------
Combined............................................... $ 33,768 $ 31,187 $ 41,905 $ 37,144 $ 29,197
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income:
Decatur Corporation and Subsidiaries..................... $ 936 $ 892 $ 1,198 $ 1,328 $ 235
Spectrum Bancorporation, Inc. and Subsidiaries........... 4,187 3,500 4,737 3,905 2,696
Intercompany dividend income............................. (75) (75) (100) (100) (100)
--------- --------- --------- --------- ---------
Combined............................................... $ 5,048 $ 4,317 $ 5,835 $ 5,133 $ 2,831
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Prior to the combination, Decatur's fiscal year ended December 31. In
recording the combination, Decatur's financial statements for the twelve months
ended June 30, 1998 were combined with Spectrum's financial statements for the
same period. For previous periods, financial statements for Decatur's fiscal
years ended December 31, 1997 and 1996 were combined with Spectrum's fiscal
years ended June 30, 1997 and 1996, respectively. Decatur's unaudited results of
operations for the six months ended December 31, 1997 included interest income
of $4,513,000, net income of $575,032, dividends paid of $36,000, and other
comprehensive loss of $16,000. An adjustment has been made to stockholders'
equity as of June 30, 1998 to eliminate the effect of including Decatur's
results of operations for the six months ended December 31, 1997 in both the
years ended June 30, 1998 and 1997.
NOTE 15. STOCK PURCHASE AND REDEMPTION AGREEMENT
The Company has entered into a stock purchase agreement with one of the
stockholders of F&M Bank under which the Company has the right of first refusal
to purchase 152 shares of common stock of F&M Bank offered for sale by the
stockholder at a specified price. In addition, the Company has agreed to
purchase the shares upon the death or termination of employment of the
shareholder, and obligates the estate or shareholder to sell such shares. If the
purchase occurred on June 30, 1998, the total purchase price would be
approximately $375,000. This redemption price exceeds the recorded amount of
minority interest in subsidiaries by $56,000.
NOTE 16. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit. They involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheets. The Company's exposure to credit
loss in the event of
F-26
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
nonperformance by the other party to the financial instrument for commitments to
extend credit and letters of credit is represented by the contractual amount of
those instruments. A summary of the Company's commitments (in thousands) is as
follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------- --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Commitments to extend credit.......................................... $ 84,824 $ 70,640 $ 67,976
Letters of credit..................................................... 934 1,051 593
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The credit and collateral policy for
commitments and letters of credit is comparable to that for granting loans.
CONTINGENCIES:
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Company's financial
statements.
FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK:
CONCENTRATION BY GEOGRAPHIC LOCATION:
A substantial portion of the Company's customers' abilities to honor their
contracts is dependent on the economy in northern Missouri, southern Iowa and
South Dakota. Although the Company's loan portfolio is diversified, there is a
relationship in these regions between the agricultural economy and the economic
performance of loans made to nonagricultural customers. The concentration of
credit in the regional agricultural economy is taken into consideration by
management in determining the allowance for loan losses.
F-27
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATION BY INSTITUTION:
The Company has a concentration of funds on deposit (in thousands) as
follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
First USA Bank
Federal funds sold................................................................. $ 7,500 $ --
--------- ---------
--------- ---------
US Bank, N.A.
Noninterest-bearing accounts....................................................... $ 17 $ 14
Federal funds sold................................................................. 1,285 7,040
--------- ---------
$ 1,302 $ 7,054
--------- ---------
--------- ---------
</TABLE>
NOTE 17. TRANSACTIONS WITH RELATED PARTIES
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with stockholders, directors,
principal officers, their immediate families and affiliated companies in which
they are principal stockholders (commonly referred to as related parties). Total
loans to related parties were approximately $5,540,000 and $4,655,000 at June
30, 1998 and 1997, respectively. The Company had participation loans sold of
approximately $3,978,000 and $3,033,000 and participations loans purchased of
approximately $19,150,000 and $18,541,000 at June 30, 1998 and 1997,
respectively, with other banks partially owned by a stockholder of the Company.
These transactions have been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
F-28
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
The estimated fair values of the Company's financial instruments are (in
thousands) as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks................... $ 19,019 $ 19,019 $ 17,458 $ 17,458
Federal funds sold........................ 21,785 21,785 13,865 13,865
Certificates of deposit................... 2,008 2,008 297 297
Securities................................ 79,511 79,511 79,481 79,481
Loans receivable.......................... 402,871 403,976 355,500 359,390
Accrued interest receivable............... 5,323 5,323 4,882 4,882
Financial Liabilities
Deposits.................................. 450,790 452,233 399,177 400,154
Securities sold under agreements to
repurchase.............................. 18,788 18,788 17,583 17,583
Notes payable............................. 39,302 39,323 38,490 38,499
Accrued interest payable.................. 4,031 4,031 3,230 3,230
</TABLE>
The estimated fair value of commitments to extend credit and letters of
credit at June 30, 1998 and 1997 is insignificant. Loan commitments on which the
committed interest rate is less than the current market rate are also
insignificant at June 30, 1998 and 1997.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to repay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
F-29
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 19. CONDENSED FINANCIAL STATEMENTS--PARENT COMPANY ONLY
The following presents condensed parent company only financial statements
for Spectrum Bancorporation, Inc. (in thousands).
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------- --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Assets
Cash and due from banks....................................................... $ 88 $ 223 $ 164
Investment in subsidiaries.................................................... 46,200 42,292 35,558
Other assets.................................................................. 2,620 2,284 2,596
----------- --------- ---------
Total assets................................................................ $ 48,908 $ 44,799 $ 38,318
----------- --------- ---------
----------- --------- ---------
Liabilities
Note payable.................................................................. $ 11,956 $ 12,958 $ 11,545
Accounts payable and accrued liabilities...................................... 565 293 531
----------- --------- ---------
Total liabilities........................................................... 12,521 13,251 12,076
----------- --------- ---------
Stockholders' Equity
Preferred stock............................................................... 1,700 1,700 1,700
Common stock.................................................................. 72 72 72
Additional paid-in capital.................................................... 1,659 1,659 1,663
Retained earnings............................................................. 32,609 27,750 22,657
Accumulated other comprehensive income........................................ 347 367 150
----------- --------- ---------
Total stockholders' equity.................................................. 36,387 31,548 26,242
----------- --------- ---------
Total liabilities and stockholders' equity.................................. $ 48,908 $ 44,799 $ 38,318
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-30
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 19. CONDENSED FINANCIAL STATEMENTS--PARENT COMPANY ONLY (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income:
Dividends received from subsidiaries........................... $ 1,828 $ 1,592 $ 2,087 $ 993 $ 1,679
Other.......................................................... 90 87 111 145 221
Interest....................................................... 6 6 11 13 30
--------- --------- --------- --------- ---------
Total income................................................. 1,924 1,685 2,209 1,151 1,930
--------- --------- --------- --------- ---------
Expense:
Salaries and employee benefits................................. 48 71 81 104 111
Interest....................................................... 691 697 951 921 619
Other.......................................................... 176 187 232 192 179
--------- --------- --------- --------- ---------
Total expenses............................................... 915 955 1,264 1,217 909
--------- --------- --------- --------- ---------
Income (loss) before income tax (benefit) and equity in
undistributed income of subsidiaries......................... 1,009 730 945 (66) 1,021
Income tax (benefit)............................................. (263) (274) (362) (349) (223)
--------- --------- --------- --------- ---------
Income before equity in undistributed income of subsidiaries... 1,272 1,004 1,307 283 1,244
Equity in undistributed income of subsidiaries................... 3,776 3,313 4,528 4,850 1,587
--------- --------- --------- --------- ---------
Net income....................................................... $ 5,048 $ 4,317 $ 5,835 $ 5,133 $ 2,831
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-31
<PAGE>
SPECTRUM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1999 AND THE
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
NOTE 19. CONDENSED FINANCIAL STATEMENTS--PARENT COMPANY ONLY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------- --------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 5,048 $ 4,317 $ 5,835 $ 5,133 $ 2,831
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and other................................. 38 35 43 23 61
Equity in undistributed income of subsidiaries......... (3,776) (3,313) (4,528) (4,850) (1,587)
Changes in deferrals and accruals:
Other assets........................................... (400) 544 (104) (207) (349)
Accounts payable and accrued liabilities............... 297 (462) 120 133 270
--------- --------- --------- --------- ----------
Net cash provided by operating activities............ 1,207 1,121 1,366 232 1,226
--------- --------- --------- --------- ----------
Cash flows from investing activities:
Investment in subsidiary................................. -- -- -- -- (1,200)
Other.................................................... -- -- -- (52) (138)
Business acquisitions.................................... -- (2,321) (2,321) -- (3,924)
--------- --------- --------- --------- ----------
Net cash (used in) investing activities.............. -- (2,321) (2,321) (52) (5,262)
--------- --------- --------- --------- ----------
Cash flows from financing activities:
Proceeds from note payable............................... 46 2,188 2,188 -- 15,990
Payments on note payable................................. (1,047) (915) (1,065) (1,015) (10,550)
Proceeds from sale (purchase) of minority interest....... (152) 113 113 198 (419)
Dividends paid........................................... (189) (114) (152) (152) (187)
Stock purchased for retirement........................... -- (30) (55) -- --
--------- --------- --------- --------- ----------
Net cash provided by (used in) financing
activities......................................... (1,342) 1,242 1,029 (969) 4,834
--------- --------- --------- --------- ----------
Net increase (decrease) in cash............................ (135) 42 74 (789) 798
Cash at beginning of period................................ 223 149 149 953 155
--------- --------- --------- --------- ----------
Cash at end of period...................................... $ 88 $ 191 $ 223 $ 164 $ 953
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AUTHORIZED BY US AND REFERRED TO IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, YOU MUST NOT RELY UPON SUCH INFORMATION AND REPRESENTATIONS. THIS
PROPOSAL DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN
OFFER. WE DO NOT INTEND THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE TO
CREATE THE IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS SINCE THE
DATE OF THE INFORMATION PROVIDED IN THIS PROSPECTUS. HOWEVER, IF THERE IS ANY
MATERIAL CHANGE IN OUR AFFAIRS DURING THE TIME WHEN A COPY OF THIS PROSPECTUS IS
REQUIRED TO BE DELIVERED, WE WILL AMEND OR SUPPLEMENT THIS PROSPECTUS TO REFLECT
THE CHANGE.
---------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 6
Selected Consolidated Financial Data...................................... 12
Cautionary Statements..................................................... 14
Use of Proceeds........................................................... 14
Accounting Treatment...................................................... 15
Capitalization............................................................ 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 41
Management................................................................ 46
Principal Stockholders.................................................... 49
Related Party Transactions................................................ 50
Supervision and Regulation................................................ 52
Description of the Preferred Securities................................... 57
Description of Junior Subordinated Debentures............................. 70
Book-Entry Issuance....................................................... 80
Description of Preferred Securities Guarantee............................. 81
Relationship Among the Preferred Securities, the Junior Subordinated
Debentures and the Preferred Securities Guarantee....................... 84
Material Federal Income Tax Consequences.................................. 86
ERISA Considerations...................................................... 89
Underwriting.............................................................. 91
Reports of Spectrum....................................................... 92
Available Information..................................................... 92
Legal Matters............................................................. 93
Experts................................................................... 93
Index to Financial Statements............................................. F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATIONS. UNTIL , 1999, ALL DEALERS
THAT EFFECT TRANSACTIONS IN THE PREFERRED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND REGARDING THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 PREFERRED SECURITIES
SPECTRUM CAPITAL TRUST I
% CUMULATIVE
PREFERRED SECURITIES
FULLY, IRREVOCABLY AND UNCONDITIONALLY
GUARANTEED ON A SUBORDINATED BASIS BY
[SPECTRUM BANCORPORATION, INC. LOGO]
---------------------
P R O S P E C T U S
---------------------
HOWE BARNES INVESTMENTS, INC.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee............................... $ 7,993
NASD fee.......................................................................... 3,175
American Stock Exchange fee....................................................... 20,000
Trustees' fees and expenses....................................................... 25,000
Legal fees and expenses........................................................... 120,000
Accounting fees and expenses...................................................... 80,000
Printing expenses................................................................. 85,000
Miscellaneous expenses............................................................ 8,832
----------
Total........................................................................... $ 350,000
----------
----------
</TABLE>
All of the above items except the SEC registration fee and the NASD fee are
estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors, officers, employees, trustees and agents of Spectrum and the
Trust may be entitled to benefit from the indemnification provisions contained
in the Iowa Business Corporation Act and Spectrum's Articles of Incorporation.
In addition, certain provisions in the Articles of Incorporation limit the
liability of directors of Spectrum. The general effect of these provisions is
summarized below:
The articles of incorporation of Spectrum provide that the board of
directors is authorized to indemnify, in the manner and to the extent provided
by the Iowa Business Corporation Act, any person entitled to indemnification
thereunder. Generally under Iowa law, any individual who is made a party to a
proceeding because the individual is or was a director may be indemnified if the
individual acted in good faith and had reasonable basis to believe that (1) in
the case of conduct in the individual's official capacity with the corporation,
that the individual's conduct was in the corporation's best interests; and (2)
in all other cases, that the individual's conduct was at least not opposed to
the corporation's best interest; and regarding any criminal proceedings, the
individual had no reasonable cause to believe the individual's conduct was
unlawful. Iowa law also extends such indemnification to officers, employees, and
agents of the corporation and further provides that an Iowa corporation may
advance expenses to a director, officer, employee, or agent of the corporation.
Iowa law also provides that an Iowa corporation may purchase and maintain
insurance on behalf of an individual who is or was a director, officer,
employee, or agent of the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, against liability asserted against
or incurred by that individual in that capacity or arising from the individual's
status as a director, officer, employee, or agent.
The indemnification and advancement of expenses provided by Iowa law are not
exclusive of any other rights to which persons seeking indemnification or
advancement of expenses are entitled under a provision in the articles of
incorporation or bylaws, agreements, vote of stockholders or disinterested
directors, or otherwise, both as to action in a person's official capacity and
as to action in another capacity while holding office. However, such provisions,
agreements, votes or other actions shall not provide indemnification for a
breach of a director's duty of loyalty to the corporation or its stockholders,
for acts or omissions not in good faith or which involve intentional misconduct
or knowing violation of the law, for a transaction from which the person seeking
indemnification derives an improper personal benefit, or for liability for
unlawful distributions.
II-1
<PAGE>
Iowa law provides that a director is not liable for any action taken as a
director, or any failure to take any action, as long as the director discharged
his or her duties (1) in good faith, (2) with the care of an ordinarily prudent
person in a like position would exercise under similar circumstances, and (3) in
a manner the director reasonably believes to be in the best interests of the
corporation.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of Spectrum as to which indemnification is being sought.
Spectrum is not aware of any other threatened litigation that may result in
claims for indemnification by any director, officer, employee or other agent.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 31, 1999, Spectrum issued 61,063 shares of its common stock and 8,000
shares of its 10% non-voting non-cumulative perpetual preferred stock in the
merger of Spectrum Bancorporation, Inc. and Rushmore Financial Services, Inc.,
into Spectrum. Shares of common stock were issued to Deryl F. Hamann,
individually and as trustee of separate trusts for the benefit of his four
children and to three of his children as cotrustees of the Deryl F. Hamann
Irrevocable Qualified Marital Trust. Shares of preferred stock were issued to
Spectrum Financial Services, Inc., which is owned by Deryl F. Hamann
individually or as trustee for the benefit of his children. No underwriters were
involved in the transaction and the issuance was made in a transaction exempt
from the requirements of Section 5 of the Securities Act of 1933 pursuant to
Section 4(2) thereof.
Spectrum Capital Trust I has not issued any securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement(1).
2.1 Agreement and Plan of Merger dated March 31, 1999, between Spectrum Bancorporation, Inc., Decatur
Corporation and Rushmore Financial Services, Inc.(1).
3.1 Articles of Amendment to Articles of Incorporation of Spectrum Bancorporation, Inc.(1).
3.2 Bylaws of Spectrum Bancorporation, Inc.(1).
4.1 Form of Subordinated Indenture dated , 1999 to be entered into between the Registrant and
Wilmington Trust Company, as Indenture Trustee(1).
4.2 Form of Junior Subordinated Debenture(1).
4.3 Certificate of Trust of Spectrum Capital Trust I(1).
4.4 Trust Agreement of Spectrum Capital Trust I dated as of , 1999(1).
4.5 Form of Amended and Restated Trust Agreement of Spectrum Capital Trust I, dated , 1999(1).
4.6 Form of Preferred Security Certificate of Capital Trust I(1).
4.7 Form of Preferred Securities Guarantee Agreement(1).
4.8 Form of Agreement as to Expenses and Liabilities(1).
5.1 Opinion of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim(1).
5.2 Opinion and Consent of Richards, Layton & Finger, P.A.(1).
8.1 Opinion of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, as to certain federal income tax
matters(1).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.1 Amendment to Credit Agreement dated January 31, 1998, between Spectrum Bancorporation, Inc., as
borrower, and First Bank National Association(1).
10.2 Amendment No. 5 to Credit Agreement dated December 16, 1996, between Decatur Corporation, as
borrower, and First Bank National Association(1).
10.3 Agreement for Advances, Pledge and Security Agreement dated September 11, 1995 between Federal Home
Loan Bank of Des Moines and Rushmore Bank & Trust(1). (Registrant's other subsidiary banks have
identical agreements.)
10.4 Form of CMS-TM- Agency Agreement (reverse repurchase agreement) between F&M Bank and its
customers(1).
10.5 Phantom Stock Long-Term Incentive Plan dated January 16, 1998 between Daniel A. Hamann and Citizens
Bank(1).
10.6 License Agreement dated September 5, 1997 between Jack Henry & Associates, Inc. and Spectrum Banc
Service Corporation(1).
10.7 Split-Dollar Agreement dated July 12, 1995 among Decatur Corporation and Daniel A. Hamann, Esther
Hamann Brabec and Julie Hamann Bunderson(1).
12.1 Statement re Computation of Ratios(1).
21 Subsidiaries of Registrant(1).
23.1 Consent of McGladrey & Pullen, LLP(2).
23.2 Consent of Deloitte & Touche LLP(2).
23.3 Consent of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim(1).
23.4 Form of Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.2 above).
24.1 Power of attorney(1).
25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as trustee under the
Subordinated Indenture(1).
25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as trustee under the Amended and
Restated Trust Agreement(1).
25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as Trustee under the Preferred
Securities Guarantee Agreement(1).
27 Financial Data Schedule(1).
</TABLE>
- ------------
(1) Previously filed.
(2) Filed herewith.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, each Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by each Registrant of expenses incurred
or paid by a director, officer or controlling person of each Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
directors, officer or controlling person in connection with the securities being
registered, each Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
II-3
<PAGE>
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Each Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Omaha, State of Nebraska
on this 12th day of August, 1999.
<TABLE>
<S> <C>
Spectrum Capital Trust I Spectrum Bancorporation, Inc.
By: /s/ DANIEL A. HAMANN By: /s/ DERYL F. HAMANN
-------------------------------------- -----------------------------------------
Daniel A. Hamann Deryl F. Hamann
Administrative Trustee Chairman of the Board and CEO
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities of Spectrum Bancorporation, Inc. on the 12th day of August, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/s/ DERYL F. HAMANN
------------------------------------------- Chairman and Chief Executive Officer
Deryl F. Hamann (Principal Executive Officer) and Director
/s/ DANIEL F. HAMANN
------------------------------------------- President and Director
Daniel F. Hamann
*
------------------------------------------- Vice President and Chief Financial Officer
John L. Kopecky (Principal Financial and Accounting Officer)
*
------------------------------------------- Senior Vice President and Director
Thomas B. Fischer
*
------------------------------------------- Vice President and Director
Daniel J. Brabec
*
------------------------------------------- Vice President and Director
W. Eric Bunderson
*By: /s/ DERYL F. HAMANN
---------------------------------------
Deryl F. Hamann
As: Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement(1).
2.1 Agreement and Plan of Merger dated March 31, 1999, between Spectrum Bancorporation, Inc., Decatur
Corporation and Rushmore Financial Services, Inc.(1).
3.1 Articles of Amendment to Articles of Incorporation of Spectrum Bancorporation, Inc.(1).
3.2 Bylaws of Spectrum Bancorporation, Inc.(1).
4.1 Form of Subordinated Indenture dated , 1999 to be entered into between the Registrant and
Wilmington Trust Company, as Indenture Trustee(1).
4.2 Form of Junior Subordinated Debenture(1).
4.3 Certificate of Trust of Spectrum Capital Trust I(1).
4.4 Trust Agreement of Spectrum Capital Trust I dated as of , 1999(1).
4.5 Form of Amended and Restated Trust Agreement of Spectrum Capital Trust I, dated , 1999(1).
4.6 Form of Preferred Security Certificate of Capital Trust I(1).
4.7 Form of Preferred Securities Guarantee Agreement(1).
4.8 Form of Agreement as to Expenses and Liabilities(1).
5.1 Opinion of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim(1).
5.2 Opinion and Consent of Richards, Layton & Finger, P.A.(1).
8.1 Opinion of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, as to certain federal income tax
matters(1).
10.1 Amendment to Credit Agreement dated January 31, 1998, between Spectrum Bancorporation, Inc., as
borrower, and First Bank National Association(1).
10.2 Amendment No. 5 to Credit Agreement dated December 16, 1996, between Decatur Corporation, as
borrower, and First Bank National Association(1).
10.3 Agreement for Advances, Pledge and Security Agreement dated September 11, 1995 between Federal Home
Loan Bank of Des Moines and Rushmore Bank & Trust(1). (Registrant's other subsidiary banks have
identical agreements.)
10.4 Form of CMS-TM- Agency Agreement (reverse repurchase agreement) between F&M Bank and its
customers(1).
10.5 Phantom Stock Long-Term Incentive Plan dated January 16, 1998 between Daniel A. Hamann and Citizens
Bank(1).
10.6 License Agreement dated September 5, 1997 between Jack Henry & Associates, Inc. and Spectrum Banc
Service Corporation(1).
10.7 Split-Dollar Agreement dated July 12, 1995 among Decatur Corporation and Daniel A. Hamann, Esther
Hamann Brabec and Julie Hamann Bunderson(1).
12.1 Statement re Computation of Ratios(1).
21 Subsidiaries of Registrant(1).
23.1 Consent of McGladrey & Pullen, LLP(2).
23.2 Consent of Deloitte & Touche LLP(2).
23.3 Consent of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim(1).
23.4 Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.2 above).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
24.1 Power of attorney(1).
25.1 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as trustee under the
Subordinated Indenture(1).
25.2 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as trustee under the Amended and
Restated Trust Agreement(1).
25.3 Form T-1 Statement of Eligibility of Wilmington Trust Company to act as Trustee under the Preferred
Securities Guarantee Agreement(1).
27 Financial Data Schedule(1).
</TABLE>
- ------------
(1) Previously filed.
(2) Filed herewith.
II-7
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Amendment No. 3 to the Registration Statement
on Form S-1 (Registration No. 333-80551) and related Prospectus of Spectrum
Bancorporation, Inc. relating to Preferred Securities of Spectrum Capital
Trust I of our report dated June 1, 1999 with respect to the consolidated
financial statements of Spectrum Bancorporation, Inc. and subsidiaries as of
June 30, 1998 and 1997 and for each of the three years in the period ended
June 30, 1998. We also consent to the reference to our firm under the
caption "Experts."
McGladrey & Pullen, LLP
Sioux Falls, South Dakota
August 12, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Spectrum
Bancorporation, Inc. on Amendment No. 3 to Form S-1 of our report dated
February 7, 1997 (relating to the consolidated financial statements of
Decatur Corporation and Subsidiaries not presented separately herein)
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference of us under the heading "Experts" in such
Prospectus.
Deloitte & Touche, LLP
Omaha, Nebraska
August 12, 1999
