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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1998
REGISTRATION NO. 333-42189
333-42191
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MEGABANK FINANCIAL CORPORATION MB CAPITAL I
(Name of small business issuer in its charter) (Name of small business co-issuer in its charter)
COLORADO DELAWARE
(State or jurisdiction of incorporation or (State or jurisdiction of incorporation or
organization) organization)
6712 6719
(Primary Standard Industrial Classification Code (Primary Standard Industrial Classification Code
Number) Number)
84-0949755 84-6322538
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
8100 EAST ARAPAHOE ROAD 8100 EAST ARAPAHOE ROAD
ENGLEWOOD, COLORADO 80112 ENGLEWOOD, COLORADO 80112
(303) 740-2265 (303) 740-2265
(Address and telephone number of principal executive (Address and telephone number of principal executive
offices) offices)
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THOMAS R. KOWALSKI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
8100 EAST ARAPAHOE ROAD
ENGLEWOOD, COLORADO 80112
(303) 740-2265
(Name, address and telephone number of agent for service)
Copies to:
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REID A. GODBOLT, ESQ. MATTHEW C. BOBA, ESQ.
JONES & KELLER, P.C. CHAPMAN AND CUTLER
1625 BROADWAY, SUITE 1600 111 WEST MONROE STREET
DENVER, COLORADO 80202 CHICAGO, ILLINOIS 60603
(303) 573-1600 (312) 845-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED(1) REGISTERED PER UNIT(1) PRICE REGISTRATION FEE
- - -----------------------------------------------------------------------------------------------------------------------------------
% Cumulative Preferred Securities of MB
Capital I....................................... 1,200,000 $10.00 $12,000,000 $3,540
- - -----------------------------------------------------------------------------------------------------------------------------------
% Junior Subordinated Debentures of MegaBank
Financial Corporation........................... (2) -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
Guarantee of MegaBank Financial Corporation with
respect to the % Cumulative Preferred
Securities(3)................................... (3) -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Registration Fee............................ -- -- -- $3,540
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(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a).
(2) The % Junior Subordinated Debentures (the "Junior Subordinated
Debentures") will be purchased by MB Capital I ("MB Capital") with the
proceeds of the sale of the % Cumulative Preferred Securities (the
"Preferred Securities"). The Junior Subordinated Debentures may later be
distributed for no additional consideration to the holders of the Preferred
Securities upon MB Capital's dissolution and the distribution of its assets.
(3) This Registration Statement is deemed to cover the Junior Subordinated
Debentures of MegaBank Financial Corporation (the "Company"), the rights of
holders of the Junior Subordinated Debentures of the Company under the
Indenture, the rights of holders of the Preferred Securities under the Trust
Agreement, the Guarantee, the Expense Agreement entered into by the Company
and certain backup undertakings as described herein which, taken together,
fully, irrevocably and unconditionally guarantee all of the respective
obligations of MB Capital under the Preferred Securities. No separate
consideration will be received for the Guarantee or such backup
undertakings.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT 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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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 22, 1998
1,200,000 TRUST PREFERRED SECURITIES
MB CAPITAL I
% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
MEGABANK FINANCIAL CORPORATION
MEGABANK LOGO
The % Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent undivided beneficial interests in the
assets of MB Capital I, a statutory business trust formed under the laws of the
State of Delaware ("MB Capital"). MegaBank Financial Corporation, a Colorado
corporation (the "Company"), will be the owner of all of the beneficial
interests represented by common securities of MB Capital (the "Common
Securities" and, collectively with the Preferred Securities, the "Trust
Securities"). MB Capital exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in % Junior Subordinated
Debentures (the "Junior Subordinated Debentures") to be issued by the Company.
The Junior Subordinated Debentures will mature on , 2028, which date
may be shortened (such date, as it may be shortened, the "Stated Maturity") to a
date not earlier than , 2003 if certain conditions are met
(including the Company having received prior approval of the Board of Governors
of the Federal Reserve System (the "Federal Reserve") to do so if then required
under applicable capital guidelines or policies of the Federal Reserve). The
Preferred Securities will have a preference under certain circumstances with
respect to cash distributions and amounts payable on liquidation, redemption or
otherwise over the Common Securities, which will be held by the Company. See
"Description of the Preferred Securities -- Subordination of Common Securities
of MB Capital Held by the Company."
(Continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, BY ANY OTHER GOVERNMENTAL AGENCY, OR
OTHERWISE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) MB CAPITAL(2)(3)
- - --------------------------------------------------------------------------------------------------------------------------
Per Preferred Security........................ $10.00 (2) $10.00
- - --------------------------------------------------------------------------------------------------------------------------
Total......................................... $12,000,000 (2) $12,000,000
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(1) The Company and MB Capital have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) In view of the fact that all of the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Company has agreed to pay the Underwriters as compensation for arranging the
investment therein of such proceeds $ per Preferred Security, or
$ in the aggregate. See "Underwriting."
(3) Before deducting offering expenses payable by the Company estimated at
$250,000.
---------------------
The Preferred Securities are being offered by the Underwriters subject to
prior sale and when, as and if delivered to and accepted by the Underwriters. It
is expected that the Preferred Securities will be ready for delivery in
book-entry form only through the facilities of The Depository Trust Company in
New York, New York, on or about , 1998, against payment therefor in
immediately available funds.
HOWE BARNES INVESTMENTS, INC.
The date of this Prospectus is , 1998
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Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on the 15th day of January, April,
July and October of each year (subject to possible deferral as described below),
commencing April 15, 1998, at the annual rate of % of the Liquidation
Amount of $10 per Preferred Security ("Distributions"). The amount of each
Distribution due with respect to the Preferred Securities will include amounts
accrued through the date the distribution payment is due. The Company will have
the right to defer payments of interest on the Junior Subordinated Debentures at
any time or from time to time for a period not exceeding 20 consecutive quarters
with respect to each deferral period (each, an "Extension Period"), provided
that no Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, the Company may elect to begin a new
Extension Period subject to the requirements set forth herein. If interest
payments on the Junior Subordinated Debentures are so deferred, Distributions on
the Preferred Securities will also be deferred and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to its capital stock or to make any payment with
respect to its debt securities that rank pari passu with or junior to the Junior
Subordinated Debentures. During an Extension Period, interest on the Junior
Subordinated Debentures will continue to accrue (and the amount of Distributions
to which holders of the Preferred Securities are entitled will accumulate) at
the rate of % per annum, compounded quarterly, and holders of the Preferred
Securities will be required to accrue income and will be required to pay United
States federal income tax on that income. See "Description of Junior
Subordinated Debentures -- Option to Extend Interest Payment Period" and
"Certain Federal Income Tax Consequences -- Interest Income and Original Issue
Discount."
The Company has, through the Guarantee, Trust Agreement, Junior
Subordinated Debentures, Indenture and the Expense Agreement (each as defined
herein), taken together, fully, irrevocably and unconditionally guaranteed, on a
subordinated basis, all of MB Capital's obligations under the Preferred
Securities. See "Relationship Among the Preferred Securities, the Junior
Subordinated Debentures and the Guarantee -- Full and Unconditional Guarantee."
Under the Guarantee, the Company guarantees the payment of Distributions by MB
Capital and payments on liquidation of or redemption of the Preferred Securities
(subordinate to the right to payment of Senior and Subordinated Debt of the
Company) to the extent of funds held by MB Capital. The Guarantee does not cover
payment of Distributions when MB Capital does not have sufficient funds to pay
such Distributions. See "Description of Guarantee." If the Company does not make
required payments on the Junior Subordinated Debentures held by MB Capital, MB
Capital will have insufficient funds to pay Distributions on the Preferred
Securities. In such event, a holder of the Preferred Securities may institute a
legal proceeding directly against the Company to enforce payment of such
Distributions to such holder. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Preferred Securities."
The obligations of the Company under the Guarantee and the Junior Subordinated
Debentures are subordinate and junior in right of payment to all Senior and
Subordinated Debt (as defined in "Description of Junior Subordinated
Debentures -- Subordination") of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the underlying Junior Subordinated Debentures at
maturity or to the extent of their earlier redemption in an amount equal to the
amount of Junior Subordinated Debentures maturing or being redeemed. The
redemption price will equal the aggregate liquidation preference of the
Preferred Securities plus any accumulated and unpaid Distributions thereon to
the date of redemption. The Junior Subordinated Debentures are redeemable prior
to maturity at the option of the Company, subject to any required prior approval
of the Federal Reserve, (i) on or after , 2003, in whole at any time
or in part from time to time, or (ii) at any time, in whole (but not in part),
upon the occurrence and continuation of a Tax Event, an Investment Company Event
or a Capital Treatment Event (each as defined herein), in each case at a
redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures to the date fixed for redemption, plus 100% of the
principal amount thereof. See "Description of the Preferred
Securities -- Redemption."
The Company will have the right at any time to terminate MB Capital and
cause the Junior Subordinated Debentures to be distributed to the holders of the
Trust Securities in liquidation of MB Capital, subject to the
(Continued on next page)
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Company having received prior approval of the Federal Reserve if required. See
"Description of the Preferred Securities -- Redemption." The Junior Subordinated
Debentures are unsecured and subordinated to all Senior and Subordinated Debt,
which essentially consists of all debt of the Company. As of September 30, 1997,
the Company had $2.0 million aggregate principal amount of Senior and
Subordinated Debt outstanding, all of which will be paid with certain net
proceeds of the sale by the Company of the Junior Subordinated Debentures to MB
Capital. See "Use of Proceeds." The terms of the Junior Subordinated Debentures
place no limitation on the amount of Senior and Subordinated Debt that the
Company can incur. See "Description of Junior Subordinated
Debentures -- Subordination."
In the event of the termination of MB Capital, after satisfaction of
liabilities to creditors of MB Capital as required by applicable law, the
holders of Preferred Securities will be entitled to receive a liquidation amount
of $10 per Preferred Security ("Liquidation Amount"), plus accumulated and
unpaid Distributions thereon through the date of distribution, which may be in
the form of a distribution of a Like Amount (as defined herein) of Junior
Subordinated Debentures, including accumulated and unpaid interest thereon equal
to the accumulated and unpaid Distributions on the Preferred Securities through
the date of distribution. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Termination."
The Company intends to include the Preferred Securities for listing on the
American Stock Exchange. Although the Underwriters have indicated an intention
to make a market in the Preferred Securities, the Underwriters are not obligated
to do so, and any market making may be discontinued at any time at the sole
discretion of such Underwriters. There can be no assurance that a market will
develop for the Preferred Securities. See "Risk Factors -- Absence of Existing
Public Market; Market Prices" and "Underwriting."
The Preferred Securities will be represented by one or more global
certificates registered in the name of The Depository Trust Company (the
"Depositary") or its nominee. Beneficial interests in the Preferred Securities
will be shown on, and transfers thereof will be effected only through, records
maintained by participants in the Depositary. Except as described herein, the
Preferred Securities in certificate form will not be issued in exchange for
global certificates. See "Book-Entry Issuance."
AS USED HEREIN, (I) THE "INDENTURE" MEANS THE SUBORDINATED INDENTURE DATED
AS OF , 1998, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, BETWEEN
THE COMPANY AND WILMINGTON TRUST COMPANY, AS TRUSTEE (THE "INDENTURE TRUSTEE"),
UNDER WHICH THE JUNIOR SUBORDINATED DEBENTURES WILL BE ISSUED, (II) THE "TRUST
AGREEMENT" MEANS THE AMENDED AND RESTATED TRUST AGREEMENT, UNDER WHICH THE TRUST
SECURITIES WILL BE ISSUED, DATED AS OF , 1998, AS AMENDED AND
SUPPLEMENTED FROM TIME TO TIME, AMONG THE COMPANY, AS DEPOSITOR, WILMINGTON
TRUST COMPANY, AS TRUSTEE (THE "PROPERTY TRUSTEE" AND THE "DELAWARE TRUSTEE"),
AND THE ADMINISTRATIVE TRUSTEES NAMED THEREIN AND THE HOLDERS, FROM TIME TO
TIME, OF THE TRUST SECURITIES, (III) THE "GUARANTEE" MEANS THE GUARANTEE
AGREEMENT RELATING TO THE GUARANTEE BETWEEN THE COMPANY AND WILMINGTON TRUST
COMPANY, AS TRUSTEE (THE "GUARANTEE TRUSTEE"), AND (IV) THE "EXPENSE AGREEMENT"
MEANS THE EXPENSE AGREEMENT BETWEEN THE COMPANY AND MB CAPITAL.
---------------------
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," "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 THE
PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS,
INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS THAT
(Continued on next page)
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COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS.
---------------------
The Company intends to furnish its securityholders, including the
securityholders of MB Capital, with annual reports containing consolidated
financial statements of the Company audited by its independent public
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited financial information. Prior to this Offering, the
Company has not been a reporting company with the Securities and Exchange
Commission (the "SEC" or the "Commission").
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
PREFERRED SECURITIES, INCLUDING STABILIZING TRANSACTIONS, AND PASSIVE MARKET
MAKING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
---------------------
NO SEPARATE FINANCIAL STATEMENTS OF MB CAPITAL HAVE BEEN INCLUDED HEREIN.
THE COMPANY AND MB CAPITAL DO NOT CONSIDER THAT SUCH FINANCIAL STATEMENTS WOULD
BE MATERIAL TO HOLDERS OF THE PREFERRED SECURITIES BECAUSE MB CAPITAL IS A NEWLY
FORMED SPECIAL PURPOSE ENTITY, HAS NO OPERATING HISTORY OR INDEPENDENT
OPERATIONS AND IS NOT ENGAGED IN AND DOES NOT PROPOSE TO ENGAGE IN ANY ACTIVITY
OTHER THAN HOLDING AS TRUST ASSETS THE JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY AND ISSUING THE TRUST SECURITIES. SEE "PROSPECTUS SUMMARY -- MB
CAPITAL," "DESCRIPTION OF THE PREFERRED SECURITIES," "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES" AND "DESCRIPTION OF GUARANTEE."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial information appearing elsewhere in this
Prospectus. Unless the context clearly suggests otherwise, references to the
Company include the Company and its subsidiaries.
THE COMPANY
MegaBank Financial Corporation (the "Company") was founded in 1984 by its
Chairman and Chief Executive Officer, Thomas R. Kowalski, with the objective of
building a banking franchise in the Denver, Colorado metropolitan area that
would deliver a broad based package of products and services to businesses and
individuals. The Company's banking subsidiary, MegaBank of Arapahoe (the "Bank")
was organized in 1983. Since the advent of branch banking in Colorado in 1993,
the Bank has opened six additional banking locations throughout the Denver area.
Two more branches are in the planning and construction phases and are currently
expected to begin operations in 1998.
Since inception, the Bank has specialized its lending practice in the
residential construction industry. The Company's Chairman has extensive
experience in the home building industry and has expanded the Bank's lending
practice to date such that the Bank is one of the area's leading originators of
residential construction loans to small and medium sized homebuilders.
Currently, the Bank can finance a builder or developer from the acquisition and
development loan process, including assistance with special district financing,
through the construction loan phase. During the five years ended December 31,
1996, the Bank originated over $500 million in residential construction loans
and during the nine months ended September 30, 1997, originated an additional
$125 million of such loans. While some of these loans remain on the Company's
balance sheet, most have been repaid, refinanced or participated out to other
financial institutions.
The Company has experienced substantial growth over the past three years.
Total assets have increased to $159 million as of September 30, 1997 from $119
million, $102 million and $63 million as of December 31, 1996, December 31, 1995
and December 31, 1994, respectively. The Company has maintained above average
profitability while achieving strong asset growth. During the same time period,
net income grew to $2.4 million for the year ended December 31, 1996 from $1.6
million and $0.8 million for the years ended December 31, 1995 and 1994,
respectively. For the nine months ended September 30, 1997, net income was $2.0
million. On an annualized basis, as of September 30, 1997, return on average
assets for the Company equaled 1.93% while return on average equity equaled
27.37%. With respect to the Bank, a recent industry publication ranked it 22nd
nationally in overall profitability for banks between $100 million and $1
billion in assets with a return on assets of 2.28% during the five years ended
December 31, 1996.
The Bank intends to continue to focus on its niche of residential
construction lending in addition to providing a complete array of products and
services for its customers. High quality customer service has been a fundamental
tenet of the Bank's operating strategy since its inception. The Bank intends to
continue to pursue its successful strategies and concentrate on increasing its
market share through referrals from existing customers and the implementation of
advertising and marketing strategies targeted at the communities in which its
branches are located.
The Company's principal executive office is located at 8100 East Arapahoe
Road, Englewood, Colorado 80112, and its telephone number is (303) 740-2265.
MB CAPITAL
MB Capital is a statutory business trust formed under Delaware law and
continued pursuant to (i) the Trust Agreement and (ii) the filing of a
certificate of trust with the Delaware Secretary of State on December 8, 1997.
MB Capital's business and affairs are conducted by the Property Trustee, the
Delaware Trustee and three individual Administrative Trustees who are officers
of the Company. MB Capital exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the Trust
Securities to acquire the Junior Subordinated Debentures issued by the Company,
and
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(iii) engaging in only those other activities necessary, advisable or incidental
thereto (such as registering the transfer of the Trust Securities). Accordingly,
the Junior Subordinated Debentures will be the sole assets of MB Capital, and
payments by the Company under the Junior Subordinated Debentures and the Expense
Agreement will be the sole revenues of MB Capital. The Company will acquire
Common Securities in an aggregate liquidation amount equal to 3% of the total
Liquidation Amount of the Trust Securities. All of the Common Securities will be
owned by the Company. The Common Securities will rank pari passu, and payments
will be made thereon pro rata, with the Preferred Securities, except that upon
the occurrence and during the continuance of an event of default under the Trust
Agreement resulting from an event of default under the Indenture, the rights of
the Company as holder of the Common Securities to payment in respect of
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Preferred Securities. See
"Description of the Preferred Securities -- Subordination of Common Securities
of MB Capital Held by the Company." MB Capital has a term of 31 years, but may
terminate earlier as provided in the Trust Agreement.
MB Capital's principal executive offices are located at 8100 East Arapahoe
Road, Englewood, Colorado 80112, and its telephone number is (303) 740-2265.
THE OFFERING
Preferred Securities
issuer..................... MB Capital
Securities offered......... 1,200,000 Preferred Securities. The Preferred
Securities represent undivided beneficial interests
in MB Capital's assets, which will consist solely
of the Junior Subordinated Debentures and payments
thereunder.
Distributions.............. The Distributions payable on each Preferred
Security will be fixed at a rate per annum of
% of the Liquidation Amount of $10 per
Preferred Security, will be cumulative, will accrue
from the date of issuance of the Preferred
Securities, and will be payable quarterly in
arrears on the 15th day of January, April, July and
October of each year, commencing on April 15, 1998
(subject to possible deferral as described below).
The amount of each distribution due with respect to
the Preferred Securities will include amounts
accrued through the date the distribution payment
is due. See "Description of the Preferred
Securities -- Distributions."
Extension Periods.......... So long as no Debenture Event of Default (as
defined herein) has occurred and is continuing, the
Company will have the right, at any time, to defer
payments of interest on the Junior Subordinated
Debentures by extending the interest payment period
thereon for a period not exceeding 20 consecutive
quarters with respect to each deferral period (each
an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. If interest
payments are so deferred, Distributions on the
Preferred Securities will also be deferred and the
Company will not be permitted, subject to certain
exceptions described herein, to declare or pay any
cash distributions with respect to the Company's
capital stock or debt securities that rank pari
passu with or junior to the Junior Subordinated
Debentures. During an Extension Period,
Distributions will continue to accrue with income
thereon compounded quarterly. Because interest
would continue to accrue and compound on the Junior
Subordinated Debentures, to the extent permitted by
applicable law, holders of the Preferred Securities
would be required to accrue income for United
States federal income tax purposes. See
"Description of Junior Subordinated
Debentures -- Option to Extend Interest Payment
Period," "Cer-
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tain Federal Income Tax Consequences -- Interest
Income and Original Issue Discount" and "Risk
Factors -- Option to Extend Interest Payment
Period; Tax Consequences; Market Price
Consequences."
Maturity................... The Junior Subordinated Debentures will mature on
, 2028, which date may be shortened
(such date, as it may be shortened, the "Stated
Maturity") to a date not earlier than ,
2003 if certain conditions are met (including the
Company having received prior approval of the
Federal Reserve to do so if then required under
applicable capital guidelines or policies of the
Federal Reserve).
Redemption................. 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.
Subject to Federal Reserve approval, 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 the Company (i) on or
after , 2003, in whole at any time or
in part from time to time, or (ii) 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
100% of the principal amount of the Junior
Subordinated Debentures so redeemed, together with
any accrued but unpaid interest to the date fixed
for redemption. See "Description of the Preferred
Securities -- Redemption" and "Description of
Junior Subordinated Debentures -- Redemption."
Distribution of Junior
Subordinated
Debentures............... The Company has the right at any time to terminate
MB Capital and cause the Junior Subordinated
Debentures to be distributed to holders of
Preferred Securities in liquidation of MB Capital,
subject to the Company having received prior
approval of the Federal Reserve to do so if then
required under applicable capital guidelines or
policies of the Federal Reserve. See "Description
of the Preferred Securities -- Distribution of
Junior Subordinated Debentures."
Guarantee.................. Taken together, the Company's obligations under
various documents described herein, including the
Guarantee, provide a full guarantee on a
subordinated basis of payments by MB Capital of
Distributions and other amounts due on the
Preferred Securities. Under the Guarantee, the
Company guarantees the payment of Distributions by
MB Capital and payments on liquidation of or
redemption of the Preferred Securities (subordinate
to the right to payment of Senior and Subordinated
Debt of the Company, as defined herein) to the
extent of funds held by MB Capital. If MB Capital
has insufficient funds to pay Distributions on the
Preferred Securities (i.e., if the Company has
failed to make required payments under the Junior
Subordinated Debentures), a holder of the Preferred
Securities would have the right to institute a
legal proceeding directly against the Company to
enforce payment of such Distributions to such
holder. See "Risk Factors -- Limitations on Direct
Actions Against the Company and on Rights Under the
Guarantee" and
7
<PAGE> 9
"Description of Junior Subordinated
Debentures -- Debenture Events of Default,"
"-- Enforcement of Certain Rights of Holders of
Preferred Securities," "Description of Guarantee."
Ranking.................... The Preferred Securities will rank pari passu, and
payments thereon will be made pro rata, with the
Common Securities of MB Capital held by the
Company, except as described under "Description of
the Preferred Securities -- Subordination of Common
Securities of MB Capital Held by the Company." The
obligations of the Company under the Guarantee, the
Junior Subordinated Debentures and other documents
described herein are unsecured and rank subordinate
and junior in right of payment to all current and
future Senior and Subordinated Debt, the amount of
which is unlimited. At September 30, 1997, the
aggregate outstanding Senior and Subordinated Debt
of the Company was $2.0 million, all of which will
be paid with certain net proceeds of the sale by
the Company of the Junior Subordinated Debentures
to MB Capital. See "Use of Proceeds." In addition,
because the Company is a holding company, all
obligations of the Company relating to the
securities described herein will be effectively
subordinated to all existing and future liabilities
of the Company's subsidiaries, including the Bank.
The Company may cause additional preferred
securities to be issued by trusts similar to MB
Capital in the future, and there is no limit on the
amount of such securities that may be issued. In
this event, the Company's obligations under the
junior subordinated debentures to be issued to such
other trusts and the Company's guarantees of the
payments by such trusts will rank pari passu with
the Company's obligations under the Junior
Subordinated Debentures and the Guarantee,
respectively.
Voting Rights.............. The holders of the Preferred Securities will
generally have limited voting rights relating only
to the modification of the Preferred Securities,
the dissolution, winding-up or termination of MB
Capital and certain other matters described herein.
See "Description of the Preferred
Securities -- Voting Rights; Amendment of the Trust
Agreement."
Proposed American Stock
Exchange Symbol.......... MFC.Pr.A
Use of Proceeds............ The proceeds to MB Capital from the sale of the
Preferred Securities offered hereby will be
invested by MB Capital in the Junior Subordinated
Debentures of the Company. The Company intends to
use the net proceeds to pay all $2.0 million of its
Senior and Subordinated Debt, use approximately
$2.0 million to complete two new bank branch
locations expected to begin operations in 1998, and
contribute approximately $4.0 million of capital to
the Bank, with the remainder of the proceeds to be
used for general corporate purposes, which may
include, without limitation, purchase and
construction of future bank branch locations,
possible future acquisitions and additional capital
contributions to the Bank. The Company expects
approximately $3.5 million of the Preferred
Securities to qualify as Tier 1 capital under the
capital guidelines of the Federal Reserve subject
to regulatory limitations. See "Use of Proceeds."
8
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data for the years ended December
31, 1996 and 1995 and the consolidated balance sheet data as of December 31,
1996 are derived from the Company's consolidated financial statements and notes
thereto which have been audited by Fortner, Bayens, Levkulich & Co., P.C.,
independent public accountants and are included elsewhere in this Prospectus.
The consolidated statements of operations data for the year ended December 31,
1994 and the balance sheet data as of December 31, 1995 and 1994 are derived
from the Company's consolidated financial statements which have been audited by
Fortner, Bayens, Levkulich & Co., P.C. but are not included herein. The
consolidated statement of operations data for the nine months ended September
30, 1997 and 1996, and the consolidated balance sheet data at September 30, 1997
and 1996, have been derived from unaudited consolidated financial statements,
which, in the opinion of the Company, reflect all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations of the Company for those periods. The
statements of operations data for interim periods are not necessarily indicative
of results for subsequent periods or the full year. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the Consolidated
Financial Statements, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Interest income............................................. $ 11,085 $ 8,206 $ 11,359 $ 8,427 $ 5,930
Interest expense............................................ 3,619 2,237 3,131 2,154 1,092
Net interest income......................................... 7,466 5,969 8,228 6,273 4,838
Provision for loan losses................................... 360 262 457 280 155
Other income................................................ 540 780 961 807 526
Other expenses.............................................. 4,584 3,686 4,959 4,136 3,833
Income tax expense.......................................... 1,031 1,063 1,353 1,017 522
Net income.................................................. 2,031 1,738 2,420 1,647 854
BALANCE SHEET:
Total assets................................................ $158,850 $113,881 $118,929 $102,076 $62,649
Loans....................................................... 115,719 86,733 94,973 68,845 46,663
Allowance for loan losses................................... 1,567 1,008 1,150 759 546
Investment securities available for sale.................... 12,100 11,432 11,137 6,985 4,088
Investment securities held to maturity...................... -- -- -- 550 3,350
Nonperforming assets(1)..................................... 1,677 69 14 76 554
Deposits.................................................... 143,266 101,253 104,661 90,192 53,843
Shareholders' equity........................................ 10,962 8,095 8,827 6,393 4,617
PER COMMON SHARE:
Net income per share........................................ $ 9.51 $ 8.14 $ 11.33 $ 7.71 $ 4.00
Book value per share........................................ 51.33 37.90 41.33 29.93 21.62
Tangible book value per share............................... 51.33 37.90 41.33 29.93 21.62
KEY RATIOS:
Net interest margin(2)...................................... 8.01% 9.07% 9.01% 9.81% 9.39%
Net interest spread(2)...................................... 6.70 7.64 7.60 8.34 8.37
Return on average assets.................................... 1.93 2.35 2.36 2.27 1.48
Return on average common equity............................. 27.37 32.02 31.80 29.92 18.93
Shareholders' equity to total assets........................ 6.90 7.11 7.42 6.26 8.37
Tier 1 risk-based capital................................... 8.53 11.90 10.70 12.15 11.12
Total risk-based capital.................................... 9.78 13.12 11.85 13.18 12.33
Nonperforming assets to total assets........................ 1.06 0.06 0.01 0.07 0.88
Nonperforming loans to total loans.......................... 1.45 0.08 0.01 0.11 1.19
Allowance for loan losses to total loans.................... 1.35 1.16 1.21 1.10 1.17
Allowance for loan losses to nonperforming loans............ 93.43 1470.27 8463.03 998.23 98.49
RATIO OF EARNINGS TO FIXED CHARGES(3):
Including interest on deposits............................ 1.85x 2.25x 2.21x 2.24x 2.26x
Excluding interest on deposits............................ 12.73x 12.87x 12.20x 8.99x 9.76x
</TABLE>
- - ---------------
(1) Includes loans 90 days or more delinquent and still accruing interest,
nonaccrual loans and restructured loans.
(2) On a tax equivalent basis.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
represent earnings before income taxes, extraordinary items and fixed
charges. Fixed charges represent interest expense.
9
<PAGE> 11
MegaBank Mapa
10
<PAGE> 12
RISK FACTORS
Prospective investors should consider, among other things, the following
factors in connection with a decision to purchase the Preferred Securities.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
Ranking of the Company's Obligations Under the Junior Subordinated
Debentures and the Guarantee. The ability of MB Capital to pay amounts due to
holders of the Preferred Securities is solely dependent upon the Company making
payments on the Junior Subordinated Debentures as and when required. All
obligations of the Company under the Guarantee, the Junior Subordinated
Debentures and other documents described herein are unsecured and rank
subordinate and junior in right of payment to all current and future Senior and
Subordinated Debt, the amount of which is unlimited. At September 30, 1997, the
aggregate outstanding Senior and Subordinated Debt of the Company was $2.0
million, all of which will be paid with certain net proceeds of the sale by the
Company of the Junior Subordinated Debentures to MB Capital. See "Use of
Proceeds." None of the Indenture, the Guarantee or the Trust Agreement places
any limitation on the amount of secured or unsecured debt, including Senior and
Subordinated Debt, that may be incurred by the Company or its subsidiaries.
Further, there is no limitation on the Company's ability to issue additional
junior subordinated debentures in connection with any future offerings of
Preferred Securities, and any such additional debentures would rank pari passu
with the Junior Subordinated Debentures.
In addition, because the Company is a holding company, all obligations of
the Company relating to the securities described herein will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, including the Bank. As a holding company, the right of the Company
to participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Preferred Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that subsidiary,
except to the extent that the Company may itself be recognized as a creditor of
that subsidiary. Accordingly, holders of the Preferred Securities should look
only to the assets of the Company, and not of its subsidiaries, for principal
and interest payments on the Junior Subordinated Debentures. See "Description of
Junior Subordinated Debentures -- Subordination" and "Description of
Guarantee -- Status of the Guarantee."
Dependence on Dividends From Subsidiary Bank. As a holding company, with
the substantial majority of its assets represented by its equity interest in the
Bank, the Company's ability to pay interest on the Junior Subordinated
Debentures to MB Capital (and consequently MB Capital's ability to pay
Distributions on the Preferred Securities and the Company's ability to pay its
obligations on the Guarantee) depends primarily upon the cash dividends the
Company receives from the Bank. Dividend payments from the Bank are subject to
regulatory limitations, generally based on current and retained earnings,
imposed by the various regulatory agencies with authority over the Bank. Payment
of dividends is also subject to regulatory restrictions if such dividends would
impair the capital of the Bank. Payment of Bank dividends is also subject to its
profitability, financial condition and capital expenditures and other cash flow
requirements. No assurance can be given that the Bank will be able to pay
dividends at past levels, or at all, in the future.
Option to Extend Interest Payment Period; Tax Consequences; Market Price
Consequences. So long as no Debenture Event of Default (as defined herein) has
occurred and is continuing, the Company has the right under the Indenture to
defer the payment of interest on the Junior Subordinated Debentures at any time
or from time to time for a period not exceeding 20 consecutive quarters with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. As a
consequence of any such deferral, quarterly Distributions on the Preferred
Securities by MB Capital will be deferred (and the amount of Distributions to
which holders of the Preferred Securities are entitled will accumulate
additional amounts thereon at the rate of % per annum, compounded quarterly,
from the relevant payment date for such Distributions, to the extent permitted
by applicable law) during any such Extension Period. During any such Extension
Period, the Company will be prohibited from making certain payments or
distributions with respect to the Company's capital stock (including dividends
on or redemptions of common or preferred stock which may be issued in the
future) and from making certain
11
<PAGE> 13
payments with respect to any debt securities of the Company that rank pari passu
with or junior in interest to the Junior Subordinated Debentures; however, the
Company will not be restricted from (a) paying dividends or distributions in
common stock of the Company, (b) redeeming rights or taking certain other
actions under a stockholders' rights plan, if any, (c) making payments under the
Guarantee or (d) making purchases of common stock related to the issuance of
common stock or rights under any future benefit plans for the Company's
directors, officers or employees. Further, during an Extension Period, the
Company would have the ability to continue to make payments on Senior and
Subordinated Debt. Prior to the termination of any Extension Period, the Company
may further extend such Extension Period provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarters or to extend
beyond the Stated Maturity. Upon the termination of any Extension Period and the
payment of all interest then accrued and unpaid (together with interest thereon
at the annual rate of %, compounded quarterly, to the extent permitted by
applicable law), the Company may elect to begin a new Extension Period subject
to the above requirements. There is no limitation on the number of times that
the Company may elect to begin an Extension Period. See "Description of the
Preferred Securities -- Distributions" and "Description of Junior Subordinated
Debentures -- Option to Extend Interest Payment Period."
The Company believes the likelihood of it exercising its option to defer
payments of interest is remote. Consequently, the Junior Subordinated Debentures
will be treated as issued without "original issue discount" ("OID") for United
States federal income tax purposes, and each beneficial owner of the Preferred
Securities will be treated as owning an undivided beneficial interest in the
Junior Subordinated Debentures. As a result, holders of Preferred Securities
will include interest in taxable income under their own methods of accounting
(i.e., cash or accrual). If the Company exercises its right to defer payments of
interest or if the Internal Revenue Service successfully took the position that
the exercise of such right was not remote at the time of issuance of the Junior
Subordinated Debentures, OID would arise, and the holders of Preferred
Securities would be required to include their pro rata share of OID in gross
income as it accrues for United States federal income tax purposes in advance of
the receipt of cash. See "Certain Federal Income Tax Consequences -- Interest
Income and Original Issue Discount." The Company has no current intention of
exercising its right to defer payments of interest by extending the interest
payment period on the Junior Subordinated Debentures. However, should the
Company elect to exercise its right to defer payments of interest in the future,
the market price of the Preferred Securities is likely to be adversely affected.
A holder that disposes of such holder's Preferred Securities during an Extension
Period, therefore, might not receive the same return on such holder's investment
as a holder that continues to hold the Preferred Securities. In addition, the
mere existence of the Company's right to defer payments of interest on the
Junior Subordinated Debentures may cause the market price of the Preferred
Securities to be more volatile than the market prices of other securities on
which OID accrues that are not subject to such deferrals.
Tax Event Redemption, Investment Company Act Redemption or Capital
Treatment Event Redemption. Upon the occurrence and during the continuation of a
Tax Event, an Investment Company Event or a Capital Treatment Event (whether
occurring before or after , 2003), the Company has the right to
redeem the Junior Subordinated Debentures in whole (but not in part) at 100% of
the principal amount together with accrued but unpaid interest to the date fixed
for redemption within 90 days following the occurrence of such Tax Event,
Investment Company Event or Capital Treatment Event and therefore cause a
mandatory redemption of the Trust Securities. The exercise of such right is
subject to the Company having received prior approval of the Federal Reserve to
do so if then required under applicable guidelines or policies of the Federal
Reserve. See "Description of the Preferred Securities -- Redemption."
A "Tax Event" means the receipt by the Company and MB Capital of an opinion
of counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the original issuance of
the Preferred Securities, there is more than an insubstantial risk that (i) MB
Capital is, or will be within 90 days of the date of such opinion, subject to
United States federal income tax with respect to income received or accrued on
the Junior
12
<PAGE> 14
Subordinated Debentures, (ii) interest payable by the Company on the Junior
Subordinated Debentures is not, or within 90 days of such opinion, will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes, or (iii) MB Capital 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. See "-- Possible Tax Law Changes Affecting the
Preferred Securities" below for a discussion of certain legislative proposals
that, if adopted, could give rise to a Tax Event, which may permit the Company
to cause a redemption of the Junior Subordinated Debentures (and therefore a
redemption by MB Capital of the Preferred Securities) prior to ,
2003.
An "Investment Company Event" means the receipt by the Company and MB
Capital of an opinion of counsel experienced in such matters to the effect 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, MB Capital is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the original issuance of
the Preferred Securities.
A "Capital Treatment Event" means the reasonable determination by the
Company that, as a result of any amendment to, or change (including any proposed
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision thereof or therein, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such proposed change, pronouncement or decision is announced on or after the
date of issuance of the Preferred Securities under the Trust Agreement, there is
more than an insubstantial risk of impairment of the Company's ability to treat
the Preferred Securities (or any substantial portion thereof) as "Tier 1
Capital" (or the then equivalent thereof) for purposes of the capital adequacy
guidelines of the Federal Reserve, as then in effect and applicable to the
Company.
Possible Tax Law Changes Affecting Preferred Securities. Certain
legislative proposals were made in 1996 and 1997 which, if enacted, could have
adversely affected the ability of the Company to deduct interest paid on the
Junior Subordinated Debentures. These proposals were not, however, incorporated
into the legislation enacted on August 5, 1997 as the Taxpayer Relief Act of
1997. Nevertheless, there can be no assurance that other legislation enacted
after the date hereof will not otherwise adversely affect the ability of the
Company to deduct the interest payable on the Junior Subordinated Debentures.
Consequently, there can be no assurance that a Tax Event will not occur. A Tax
Event would permit the Company, upon approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve,
to cause a redemption of the Preferred Securities before, as well as after,
, 2003. See "Description of the Preferred Securities -- Redemption,"
"Description of Junior Subordinated Debentures -- Redemption," and "Certain
Federal Income Tax Consequences."
Possible Distribution of Junior Subordinated Debentures to Holders of
Preferred Securities. The Company will have the right at any time to terminate
MB Capital and cause the Junior Subordinated Debentures to be distributed to the
holders of the Preferred Securities in liquidation of MB Capital, subject to the
receipt of any required prior approval of the Federal Reserve. Because holders
of the Preferred Securities may receive Junior Subordinated Debentures in
liquidation of MB Capital and because Distributions are otherwise limited to
payments on the Junior Subordinated Debentures, prospective purchasers of the
Preferred Securities are also making an investment decision with regard to the
Junior Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained herein. See "Description
of the Preferred Securities -- Liquidation Distribution Upon Termination" and
"Description of the Junior Subordinated Debentures."
Limitations on Direct Actions Against the Company and on Rights Under the
Guarantee. Under the Guarantee, the Company guarantees the payment of
Distributions by MB Capital and payments on liquidation of or redemption of the
Preferred Securities (subordinate to the right to payment of Senior and
Subordinated Debt of the Company) to the extent of funds held by MB Capital. If
MB Capital has insufficient funds to pay Distributions on the Preferred
Securities (i.e., if the Company has failed to make required payments under the
Junior Subordinated Debentures), a holder of the Preferred Securities would have
the right to institute a legal
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<PAGE> 15
proceeding directly against the Company for enforcement of payment to such
holder of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder. Except as described herein, holders of the
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures.
Under the Guarantee, Wilmington Trust Company will act as indenture trustee
(the "Guarantee Trustee"). 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 in respect of the Guarantee or to direct the exercise of
any trust power conferred upon the Guarantee Trustee under the Guarantee
Agreement. Any holder of the Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against MB Capital, the
Guarantee Trustee or any other person or entity. The Trust Agreement provides
that each holder of the Preferred Securities by acceptance thereof agrees to the
provisions of the Guarantee Agreement and the Indenture. See "Description of
Junior Subordinated Debentures -- Enforcement of Certain Rights of Holders of
Preferred Securities" and "-- Debenture Events of Default" and "Description of
Guarantee."
Limited Covenants. The covenants in the Indenture are limited, and there
are no covenants relating to the Company in the Trust Agreement. As a result,
neither the Indenture nor the Trust Agreement protects holders of Junior
Subordinated Debentures or Preferred Securities, respectively, in the event of a
material adverse change in the Company's financial condition or results of
operations or limits the ability of the Company or any subsidiary to incur
additional indebtedness. Therefore, the provisions of these governing
instruments should not be considered a significant factor in evaluating whether
the Company will be able to comply with its obligations under the Junior
Subordinated Debentures or the Guarantee.
Limited Voting Rights. Holders of the Preferred Securities will generally
have limited voting rights relating only to the modification of the Preferred
Securities and certain other matters described herein. In the event that (i)
there is a Debenture Event of Default (as defined herein) with respect to the
Junior Subordinated Debentures (see "Description of the Junior Subordinated
Debentures -- Events of Default"), (ii) the Property Trustee fails to pay any
Distribution on the Preferred Securities for 30 days (subject to deferral of
Distributions as provided under "Description of the Preferred
Securities -- Extension Periods"), (iii) the Property Trustee fails to pay the
redemption price on the Preferred Securities when due upon redemption, (iv) the
Property Trustee fails to observe a covenant in the Trust Agreement for the
Preferred Securities for 60 days after receiving a Notice of Default, or (v) the
Property Trustee is declared bankrupt or insolvent and not replaced by the
Company within 60 days, the holders of a majority of the outstanding Preferred
Securities will be able to remove the Property Trustee and the Indenture Trustee
(but not the Administrative Trustees who may only be removed by the Company as
holder of the Common Securities). See "Description of the Preferred
Securities -- Removal of Trustees" and "-- Voting Rights; Amendment of the Trust
Agreement."
Trading Characteristics of the Preferred Securities. The Preferred
Securities may trade at a price that does not reflect fully the value of accrued
but unpaid interest with respect to the underlying Junior Subordinated
Debentures. A holder who uses the accrual method of accounting for tax purposes
(and a cash method holder, if the Junior Subordinated Debentures are deemed to
have been issued with OID) and who disposes of its Preferred Securities between
record dates for payments of Distributions thereon will be required to include
accrued but unpaid interest on the Junior Subordinated Debentures through the
date of disposition in income as ordinary income (i.e., interest or, possibly,
OID), and to add such amount to its adjusted tax basis in its share of the
underlying Junior Subordinated Debentures deemed disposed of. If the selling
price is less than the holder's adjusted tax basis (which will include all
accrued but unpaid interest), a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes. See "Certain Federal
Income Tax Considerations -- Interest Income and Original Issue Discount" and
"-- Sales or Redemption of Preferred Securities."
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<PAGE> 16
Absence of Existing Public Market; Market Prices. There is no existing
market for the Preferred Securities. An application for listing is pending for
the Preferred Securities on the American Stock Exchange (the "AMEX"). There can
be no assurance that a listing of the Preferred Securities will be available on
the AMEX or, if available, that an active and liquid trading market for the
Preferred Securities will develop. Although the representative of the
Underwriters has informed MB Capital and the Company that the Underwriters
intend to make a market in the Preferred Securities offered hereby, no
Underwriter is obligated to do so and any such market making activity may be
terminated at any time without notice to the holders of the Preferred
Securities. Future trading prices of the Preferred Securities will depend on
many factors including, among other things, prevailing interest rates, the
operating results and financial condition of the Company, and the market for
similar securities. 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 the Company exercises
its right to terminate MB Capital. Accordingly, the Preferred Securities that an
investor may purchase, or the Junior Subordinated Debentures that a holder of
the Preferred Securities may receive in liquidation of MB Capital, may decline
in value from the price that the investor paid to purchase the Preferred
Securities offered hereby.
RISK FACTORS RELATING TO THE COMPANY
Loan Concentration. Since the 1980's the Bank has been one of the leading
originators of residential construction loans to small and medium sized builders
in the Denver, Colorado area. As of September 30, 1997 these loans, in the
aggregate, comprised 74.7% of the Bank's total loans. These loans could be
adversely affected by adverse economic conditions in the home building industry.
These conditions could occur as a result of significant increases in interest
rates, moratoriums of new building by municipalities, overbuilding of new homes
in the Denver area and a general economic downturn. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Economic Conditions and Impact of Interest Rates. Results of operations for
financial institutions, including the Company, may be materially and adversely
affected by changes in prevailing economic conditions, including declines in
real estate values, rapid changes in interest rates and the monetary and fiscal
policies of the federal government. The profitability of the Company 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 the Company's assets are moderately
balanced in relation to maturities of liabilities ("asset/liability
management"), asset/liability management 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. A decrease in interest rate spreads would have a
negative effect on the net interest income and profitability of the Company, and
there can be no assurance that this spread will not decrease. Although economic
conditions in the market area of the Company have been generally stronger than
those in many other regions of the country, there can be no assurance that such
conditions will continue to prevail. Moreover, substantially all of the loans of
the Company are to individuals and businesses in the Denver area, and any
decline in the economy of this market area could have an adverse impact on the
Company. There can be no assurance that positive trends or developments
discussed herein will continue or that negative trends or developments will not
have a material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Growth and Acquisition Risks. The Company has pursued and intends to
continue to pursue an internal growth strategy, the success of which will depend
primarily on generating an increasing level of loans and deposits at acceptable
risk levels and terms without proportionate increases in noninterest expenses. A
significant portion of the net proceeds from the sale by the Company of the
Junior Subordinated Debentures is intended to be used to support future growth,
including the establishment of additional branches. The Company has grown and
intends to grow by the establishment of new branches. Establishing new branches
through land purchase and development takes significant amounts of capital and
time to build. Delays can be encountered in the process as a result of zoning,
building moratoriums by municipalities, and general construction and weather
problems. There can be no assurance that the Company will be successful in
continuing its internal growth strategy. Although the Company does not have any
discussions or negotiations
15
<PAGE> 17
underway relating to acquisitions, the Company in the future intends to review
and solicit acquisition opportunities and, at any given time, may attempt to
acquire financial institutions. The Company may not be successful in identifying
acquisition candidates, integrating acquired institutions or preventing deposit
erosion at acquired institutions. Competition for acquisitions in the Company's
market area is highly competitive, and the Company may not be able to acquire
institutions on terms beneficial to the Company. Furthermore, the level of
success of the Company's growth strategy will depend on maintaining sufficient
regulatory capital levels and on continued favorable economic conditions in the
Denver area.
Competitive Banking Environment. The banking business in Colorado is highly
competitive. The Company 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 the Company. Interstate banking is permitted in
Colorado. As a result, management believes that the Company may experience
greater competition in its market area.
Allowance for Loan Losses. Inability of borrowers to repay loans can erode
earnings and capital of banks. Like all banks, the Company maintains an
allowance for loan losses to provide for loan defaults and nonperformance. The
allowance is based on prior experience with loan losses, as well as an
evaluation of the risks in the current portfolio, 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 such losses may exceed current estimates. At December 31, 1997 the
Company had nonperforming loans of $1.7 million and an allowance for loan losses
of $2.1 million or 1.64% of total loans and 122.5% of nonperforming assets. At
September 30, 1997, the Company had nonperforming loans of $1.7 million and an
allowance for loan losses of $1.6 million or 1.35% of total loans and 93.43% of
nonperforming loans. There can be no assurance that the Company's allowance for
loan losses will be adequate to cover actual losses. Future provisions for loan
losses could materially and adversely affect results of operations of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dependence on Key Person. The Company is highly dependent on the continued
services of Thomas R. Kowalski, its Chairman and Chief Executive Officer. The
Company does not have an employment agreement with Mr. Kowalski. Although the
Company has a $3.0 million key man life insurance policy on Mr. Kowalski,
proceeds under the policy paid to the Company will, at the option of certain
affiliated shareholders of Mr. Kowalski, be utilized by the Company for the
repurchase of all or a portion of such shareholders' common stock. The loss of
the services of Mr. Kowalski could adversely affect the Company. See
"Management."
Control by Principal Stockholder. Approximately 51.1% of the outstanding
shares of Common Stock of the Company is owned by Thomas R. Kowalski, Chief
Executive Officer and Chairman of the Board. As a result, he alone may elect a
simple majority of the Board of Directors of the Company. This may impede the
efforts of a third party to acquire control of the Company or to change the
Board of Directors of the Company. In addition, the executive officers and
directors of the Company, as a group, own 63.5% of the Common Stock. Such
control may further impede the acquisition of control of the Company by a third
party.
Government Regulation and Recent Legislation. The Company and the Bank are
subject to extensive federal and state legislation, regulation and supervision
which is intended primarily to protect depositors and the Bank Insurance Fund,
rather than investors. Recently enacted, proposed and future legislation and
regulations designed to strengthen the banking industry have had and may have a
significant impact on the banking industry. Although some of the legislative and
regulatory changes may benefit the Company and the Bank, others may increase
their costs of doing business or otherwise adversely affect them and create
competitive advantages for non-bank competitors. See "Supervision and
Regulation."
16
<PAGE> 18
USE OF PROCEEDS
All of the proceeds from the sale of Preferred Securities will be invested
by MB Capital in the Junior Subordinated Debentures of the Company. The net
proceeds to the Company from the sale of the Junior Subordinated Debentures are
estimated to be approximately $11.2 million (net of estimated underwriting
commissions and offering expenses). The Company intends to use the net proceeds
to pay all $2.0 million of its Senior and Subordinated Debt, use approximately
$2.0 million to complete two new bank branch locations expected to begin
operations in 1998, and contribute approximately $4.0 million of capital to the
Bank, with the remainder to be used for general corporate purposes, which may
include, without limitation, purchase and construction of future bank branch
locations, possible future acquisitions and additional capital contributions to
the Bank. The $4.0 million of additional capital contribution to the Bank will
result in an increased legal lending limit which is designed to further the
Bank's internal growth objectives. Although the Company does not have any
discussions or negotiations underway relating to acquisitions, the Company in
the future intends to review and solicit acquisition opportunities and, at any
given time, may attempt to acquire financial institutions. Pending their
application, the net proceeds may be invested in short-term, marketable,
investment grade interest-bearing securities.
The Company is required by the Federal Reserve to maintain certain levels
of capital for bank regulatory purposes. On October 21, 1996, the Federal
Reserve announced that certain qualifying amounts of securities having the
characteristics of the Preferred Securities could be included as Tier 1 capital
for bank holding companies subject to certain limitations. See "Capitalization."
Such Tier 1 capital treatment, together with the Company's ability to deduct,
for federal income tax purposes, interest payable on the Junior Subordinated
Debentures, will provide the Company with a cost-effective means of obtaining
capital for bank regulatory purposes.
ACCOUNTING TREATMENT
For financial reporting purposes, MB Capital will be treated as a
subsidiary of the Company and, accordingly, the accounts of MB Capital will be
included in the consolidated financial statements of the Company. The Preferred
Securities will be presented as a separate line item in the consolidated balance
sheets of the Company 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 Guarantee and the Junior Subordinated Debentures will be
included in the notes to consolidated financial statements. For financial
reporting purposes, the Company will record Distributions payable on the
Preferred Securities as interest expense in the consolidated statements of
operations.
Future reports of the Company filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") will include a footnote to the financial
statements stating that (i) MB Capital is wholly-owned, (ii) the sole assets of
MB Capital are the Junior Subordinated Debentures (specifying the principal
amount, interest rate and maturity date of such Junior Subordinated Debentures),
and (iii) the obligations of the Company described herein, in the aggregate,
constitute a full and unconditional guarantee on a subordinated basis by the
Company of the obligations of MB Capital under the Preferred Securities. MB
Capital will not provide separate reports under the Exchange Act.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the consolidated borrowings and
capitalization of the Company at September 30, 1997 and as adjusted to give
effect to the issuance of the Preferred Securities by MB Capital in this
offering and the use of net proceeds therefrom as described in "Use of
Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Borrowings:
Advances from the Federal Home Loan Bank.................. $ 1,788 $ 1,788
Note payable.............................................. 2,000 --
------- -------
Total borrowings.................................. $ 3,788 $ 1,788
======= =======
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Junior
Subordinated Debentures(1)................................ $ -- $12,000
======= =======
Shareholders' equity:
Common Stock, no par value; 500,000 shares authorized(2);
213,578 shares issued and outstanding.................. $ 1,961 $ 1,961
Retained earnings......................................... 8,775 8,775
Unrealized gain (loss) on securities available for sale,
net of income tax
effect................................................. 226 226
------- -------
Total shareholders' equity........................ $10,962 $10,962
======= =======
Consolidated regulatory capital ratios:
Total capital to risk-weighted assets..................... 9.78% 19.12%
Tier 1 capital to risk-weighted assets(3)................. 8.53% 11.38%
Tier 1 capital to tangible assets(3)...................... 7.11% 8.93%
</TABLE>
- - ---------------
(1) The subsidiary trust is MB Capital, a wholly-owned subsidiary of the Company
that will hold, as its sole asset, $12.4 million principal amount of Junior
Subordinated Debentures, of which $12.0 million will be purchased with the
proceeds of the % Preferred Securities issued by MB Capital. The
remaining $0.4 million of Junior Subordinated Debentures will be purchased
with the proceeds of the Common Securities issued by MB Capital. The Company
will own all of the Common Securities. See "Description of Junior
Subordinated Debentures" and "Description of Preferred Securities." The
Junior Subordinated Debentures will mature on , 2028, which
date may be shortened to a date not earlier than , 2003 if
certain conditions are met. 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" and "Description
of Junior Subordinated Debentures -- Redemption."
(2) Effective January 15, 1998 the Company increased its authorized capital
stock to 50 million shares of Common Stock and 10 million shares of
Preferred Stock. The increase was made to provide for possible future
capital needs of the Company. There is no pending or planned transaction
which would require the issuance of any of the newly authorized stock. The
increase in capital was not part of a plan by the Company's management to
adopt a series of anti-takeover measures over a period of time.
(3) The Preferred Securities have been structured to qualify as Tier 1 capital.
However, they cannot be used to constitute more than 25% of the Company's
total Tier 1 capital. As adjusted for this offering, the Company's Tier 1
capital as of September 30, 1997 would have been $14.0 million of which $3.5
million would have been attributable to the Preferred Securities. Any future
increases in other elements of the Company's Tier 1 capital, including
retained earnings, should permit the Company to include greater portions of
the Preferred Securities proceeds in Tier 1 capital.
18
<PAGE> 20
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 elsewhere herein.
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include, among other
factors, the competitive banking environment in which the Company operates,
provisions for loan losses, risks relating to the Company's concentration of
loans related to residential construction, changes in general economic
conditions and interest rates, rapid or unexpected changes in technologies and
other uncertain business conditions that may affect the Company's business.
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. The
Company wishes to caution readers that a number of important factors discussed
herein could affect the Company's actual results and cause actual results to
differ materially from those in the forward-looking statements.
OVERVIEW
Since inception, the Company, through the Bank, has specialized its lending
practice in the residential construction industry. The Company's Chairman has
extensive experience in the home building industry and has expanded the Bank's
lending practice to date such that the Bank is one of the area's leading
originators of residential construction loans to small and medium sized
homebuilders. Currently, the Bank can finance a builder or developer from the
acquisition and development loan process, including assistance with special
district financing, through the construction loan phase.
The Company has experienced substantial growth over the past three years.
Total assets have increased to $159 million as of September 30, 1997 from $119
million, $102 million and $63 million as of December 31, 1996, December 31, 1995
and December 31, 1994, respectively. The Company has maintained above average
profitability while achieving its strong asset growth. During the same time
period, net income grew to $2.4 million for the year ended December 31, 1996
from $1.6 million and $0.8 million for the years ended December 31, 1995 and
1994, respectively. For the nine months ended September 30, 1997, net income was
$2.0 million. On an annualized basis, as of September 30, 1997, return on
average assets for the Company equaled 1.93% while return on average equity
equaled 27.37%.
RESULTS OF OPERATIONS
Net Interest Income. The Company's net income is derived primarily from net
interest income. Net interest income is the difference between interest income,
principally from loans, investment securities and funds sold, and interest
expense, principally on customer deposits. Changes in net interest income result
from changes in volume, net interest spread and net interest margin. Volume
refers to the average dollar levels of interest-earning assets and
interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
19
<PAGE> 21
The following tables set forth the average balances, net interest income
and expense and average yields and rates for the Company's earning assets and
interest-bearing liabilities for the indicated periods on a tax-equivalent basis
assuming a 34% tax rate.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,(1)
-----------------------------------------------------------------
1997 1996
------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
-------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
) (DOLLARS IN THOUSANDS
INTEREST-EARNING ASSETS
Investment securities:
Taxable......................................... $ 4,224 $ 209 6.60% $ 7,493 $ 382 6.80%
Tax exempt (tax equivalent)..................... 6,203 626 13.46 2,156 217 13.42
Funds sold and interest-bearing deposits........ 11,981 481 5.35 4,020 190 6.31
Loans(2)........................................ 106,806 9,982 12.46 76,024 7,491 13.14
Allowance for loan losses....................... (1,357) -- (855) --
-------- ------- ----- ------- ------ -----
Total interest-earning assets............. $127,857.. $11,298 11.78 $88,838 $8,280 12.43
======== ======= ===== ======= ====== =====
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing...................... $ 51,509 $ 1,776 4.60 $36,126 $1,218 4.50
Savings....................................... 4,769 119 3.33 5,286 136 3.43
Certificates of deposit:
Under $100,000.............................. 23,361 1,009 5.76 9,536 386 5.40
$100,000 and over........................... 10,610 454 5.71 6,550 261 5.31
-------- ------- ----- ------- ------ -----
Total interest-bearing deposits........... 90,249 3,358 4.96 57,498 2,001 4.64
Advances from the Federal Home Loan Bank and
federal funds purchased....................... 2,560 126 6.56 1,112 44 5.26
Notes payable................................... 2,250 135 8.00 3,673 192 6.97
-------- ------- ----- ------- ------ -----
Total interest-bearing liabilities........ $ 95,059 3,619 5.08 $62,283 2,237 4.79
======== ------- ===== ======= ------ =====
Net interest income (tax equivalent)...... $ 7,679 $6,043
======= ======
Net interest margin(3).......................... 8.01% 9.07%
Net interest spread............................. 6.70% 7.64%
Ratio of average interest-bearing liabilities to
average interest-earning assets................. 74.35% 70.11%
</TABLE>
- - ---------------
(1) Yields are annualized.
(2) Loans are net of unearned discount. Nonaccrual loans are included in average
loans outstanding. Loan fees are included in interest income as follows for
the nine months ended September 30, 1997 -- $1,879,441; 1996 -- $1,677,209.
(3) Net interest margin is net interest income divided by average total earning
assets (on an annualized basis).
Net interest income, on a tax-equivalent basis, was $7.7 million for the
nine months ended September 30, 1997, an increase of $1.6 million from $6.0
million for the same period in 1996. Interest income for the nine months ended
September 30, 1997 and 1996 was $11.3 million and $8.3 million, respectively.
The increase of $3.0 million is primarily due to higher balances of
interest-earning assets, which offset lower investment rates. The various
changes in the mix of taxable investment securities and tax exempt securities as
well as funds sold were a result of the Company attempting to maximize its yield
on interest-earning assets other than loans. The Company achieved an increase of
$39.0 million or 43.9% in average interest-earning assets to $127.8 million for
the nine months ended September 30, 1997 from $88.8 million for the same period
in 1996. The majority of the increase in interest-earning assets was
attributable to $30.8 million increase in average loans outstanding. The
majority of the loans in the Company's lending portfolio are floating rate loans
tied to the prime rate. The average yield on interest-earning assets decreased
to 11.78% for the nine months ended September 30, 1997 from 12.43% for the
comparable period in 1996.
20
<PAGE> 22
Interest expense increased $1.4 million to $3.6 million for the nine months
ended September 30, 1997 compared to $2.2 million for the same period in 1996.
The increase in average demand-bearing deposits to $51.5 million for the nine
months ended September 30, 1997 from $36.1 million for the comparable period in
1996 was due to the Bank's growth at existing facilities, including the opening
of two additional branches. The significant increase in average balances of
certificates of deposit under $100,000 to $23.4 million for the nine months
ended September 30, 1997 from $9.5 million for the comparable period in 1996 was
due to the Bank's growth as well as promotional campaigns by the Bank directed
at obtaining new accounts. The increase in certificates of deposit of $100,000
and over was again due to the growth in the Bank. The decrease in average notes
payable to $2.2 million for the nine months ended September 30, 1997 from $3.6
million for the comparable period in 1996 was due to the Company's paydown of
its note with a commercial lender. The Company expects to pay off the note with
the net proceeds from the sale of the Junior Subordinated Debentures. The cost
of interest-bearing liabilities for the nine months ended September 30, 1997 and
1996 was 5.08% and 4.79%, respectively, and, when combined with
noninterest-bearing deposits, the cost of funds for the nine months ended
September 30, 1997 and 1996 was 3.72% and 3.29%, respectively. See
"-- Deposits." These increases were due to an increase of $32.8 million in
average interest-bearing liabilities along with an increase in the cost of the
Federal Home Loan Bank ("FHLB") borrowings to 6.56% from 5.28%. Management
expects that borrowings will continue to supplement deposits with FHLB advances
when necessary to fund the lending and investing activities of the Company. As a
result of the foregoing, net interest margin, on a tax-equivalent basis,
decreased to 8.01% for the nine months ended September 30, 1997 from 9.07% for
the comparable period in 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable.............................................. $7,127 $ 487 6.83% $7,376 $ 484 6.58%
Tax exempt (tax equivalent).......................... 2,780 374 13.45 -- -- --
Funds sold and interest-bearing deposits............... 3,471 215 6.19 2,963 304 10.26
Loans(1)............................................... 80,213 10,410 12.98 54,219 7,639 14.09
Allowance for loan losses.............................. (909) -- (632) --
------- ------- ----- ------- ------ -----
Total interest-earning assets.................... $92,682 $11,486 12.39 $63,926 $8,427 13.18
======= ======= ===== ======= ====== =====
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing............................. $37,983 $ 1,717 4.52 $22,586 $1,004 4.45
Savings.............................................. 5,442 186 3.42 4,752 157 3.30
Certificates of deposit:
Under $100,000..................................... 9,639 522 5.42 8,033 427 5.32
$100,000 and over.................................. 6,885 369 5.36 5,045 263 5.21
------- ------- ----- ------- ------ -----
Total interest-bearing deposits.................. 59,949 2,794 4.66 40,416 1,851 4.58
Advances from the Federal Home Loan Bank and federal
funds purchased...................................... 1,771 97 5.48 376 23 6.12
Notes payable.......................................... 3,673 240 6.53 3,728 280 7.51
------- ------- ----- ------- ------ -----
Total interest-bearing liabilities............... $65,393 3,131 4.79 $44,520 2,154 4.84
======= ------- ===== ======= ------ =====
Net interest income (tax equivalent)............. $ 8,355 $6,273
======= ======
Net interest margin(2)................................. 9.01% 9.81%
Net interest spread.................................... 7.60% 8.34%
Ratio of average interest-bearing liabilities to average
interest-earning assets................................ 70.56% 69.64%
</TABLE>
- - ---------------
(1) Loans are net of unearned discount. Nonaccrual loans are included in average
loans outstanding. Loan fees are included in interest income as follows:
1996 -- $2,239,017; 1995 -- $1,800,165.
(2) Net interest margin is net interest income divided by average total earning
assets.
Net interest income, on a tax-equivalent basis, was $8.4 million for the
year ended December 31, 1996, an increase of $2.1 million from $6.3 million in
1995. Interest income increased $3.1 million to $11.5 million in 1996 from $8.4
million in 1995. This increase resulted primarily from an increase of $28.7
million in average
21
<PAGE> 23
interest-earning assets to $92.7 million in 1996 from $64.0 million in 1995. The
majority of the asset growth was due to growth in the loan portfolio. Average
loans increased $26.0 million or 47.9% to $80.2 million in 1996 from $54.3
million in 1995 due primarily to the Company's continuing growth. The change in
the relative mix of interest-earning assets other than loans was due primarily
to the Company's objective of maximizing its yield on funds not used for loans,
including investing in double tax exempt securities. The average yield on
interest-earning assets decreased to 12.39% in 1996 from 13.18% in 1995.
Interest expense increased $0.9 million to $3.1 million in 1996 from $2.2
million in 1995. A $15.4 million increase in interest-bearing demand deposits
accounted for $0.7 million of the increase. These deposits increased due to the
Company's growth, including the addition of a new branch in 1996. Changes in the
relative mix of average interest-bearing liabilities included a $1.4 million
increase in advances from the FHLB. The cost of interest-bearing liabilities for
the years ended December 31, 1996 and 1995 was 4.79% and 4.84%, respectively,
and, when combined with noninterest-bearing deposits, the cost of funds was
3.31% in 1996 compared to 3.23% in 1995. In spite of the lower cost of funds,
net interest margin, on a tax-equivalent basis, decreased to 9.01% in 1996 from
9.81% in 1995, primarily as a result of lower yields.
The following table illustrates, for the periods indicated, the changes in
the Company's net interest income (on a tax-equivalent basis) due to changes in
volume and changes in interest rates. Changes in net interest income due to both
volume and rate have been allocated to volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------- ----------------------- ----------------------
1997 COMPARED TO 1996: 1996 COMPARED TO 1995: 1995 COMPARED TO 1994
----------------------- ----------------------- ----------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME NET INTEREST INCOME NET INTEREST INCOME
DUE TO CHANGE IN DUE TO CHANGE IN DUE TO CHANGE IN
----------------------- ----------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ------ ------ ----- ------ ------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning securities
Taxable............................... $(162) $ (11) $ (173) $ (17) $ 20 $ 3 $ 41 $126 $ 169
Tax exempt (tax equivalent)........... 408 1 409 374 -- 374 -- -- --
Fund sold............................. 320 (29) 291 31 (120) (89) (9) 189 180
Loans................................. 2,877 (386) 2,491 3,373 (602) 2,771 1,690 458 2,148
------ ----- ------ ------ ----- ------ ------ ---- ------
Total interest-earning assets... 3,443... (425) 3,018 3,761 (702) 3,059 1,722 775 2,497
------ ----- ------ ------ ----- ------ ------ ---- ------
Interest-bearing liabilities:
Demand, interest bearing.............. 530 28 558 696 17 713 172 332 504
Savings............................... (13) (4) (17) 24 5 29 8 22 30
Certificates of deposit:
Under $100,000...................... 597 26 623 87 8 95 119 107 226
$100,000 and over................... 174 19 193 99 7 106 94 62 156
Advances from the Federal Home Loan
Bank and federal funds purchased.... 71 11 82 76 (2) 74 17 -- 17
Notes payable......................... (85) 28 (57) (4) (36) (40) 96 33 129
------ ----- ------ ------ ----- ------ ------ ---- ------
Total interest-bearing
liabilities................... 1,274 108 1,382 978 (1) 977 506 556 1,062
------ ----- ------ ------ ----- ------ ------ ---- ------
Net increase (decrease) in net
interest income (tax
equivalent)................... $2,169 $(533) $1,636 $2,783 $(701) $2,082 $1,216 $219 $1,435
====== ===== ====== ====== ===== ====== ====== ==== ======
</TABLE>
22
<PAGE> 24
Other Income. The following table sets forth the Company's other income for
the indicated periods.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- ------------
1997 1996 1996 1995
----- ----- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges............................................. $ 52 $ 42 $ 56 $ 45
Bank charges................................................ 202 187 269 196
Building rent............................................... 111 155 206 208
Payroll services............................................ -- 233 233 265
Gain on sale of subsidiary.................................. -- -- 65 --
Other....................................................... 175 163 132 93
---- ---- ---- ----
Total other income.......................................... $540 $780 $961 $807
==== ==== ==== ====
</TABLE>
During the nine months ended September 30, 1997 total other income
decreased from $780,000 to $540,000 for the comparable period in 1996 due
primarily to the Company's sale of its payroll services subsidiary. Other income
for the year ended December 31, 1996 compared to 1995 increased by approximately
$154,000 due primarily to increases in bank charges and a recognition of gain
following the sale of the payroll services subsidiary. However, payroll services
income declined and management sold this operation in 1996, and certain
contingent expenses in connection with the sale were incurred in 1997.
Other Expenses. The following table sets forth the Company's operating
expenses for the indicated periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1997 1996 1996 1995
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits..................... $2,216 $1,635 $2,261 $1,708
Occupancy expense of premises...................... 539 485 642 568
Furniture and equipment expense.................... 221 195 298 206
Payroll services................................... -- 370 384 461
Contract labor..................................... 59 93 130 65
Printing........................................... 44 8 19 16
Computer systems and services...................... 83 26 42 44
Postage and freight................................ 52 41 55 49
Supplies........................................... 110 79 113 104
Consulting fees.................................... 49 30 55 --
Loan, legal and collection fees.................... 130 58 73 76
Other.............................................. 1,081 666 887 839
------ ------ ------ ------
Total other expenses..................... $4,584 $3,686 $4,959 $4,136
====== ====== ====== ======
</TABLE>
During the nine months ended September 30, 1997 total other expenses
increased by $898,000 over the comparable 1996 period to $4.6 million, primarily
as a result of salaries and employee benefits increasing by $581,000 due to
increased operations of the Bank and salary increases to Bank personnel.
Generally, the remaining expenses increased due to an increased level of
operations and increased expenses associated with opening two additional
branches in 1997. Loan, legal and collection fees increased due to a greater
amount of loan documentation required on certain loans, as well as fees incurred
in connection with non-accrual loans. Payroll services expenses were not
incurred in 1997 as a result of the sale of the payroll services operation in
1996. During the year ended December 31, 1996 total operating expenses increased
$823,000 to $5.0 million from $4.1 million in 1995, with increases occurring
among the various components due to the Company's continued growth.
23
<PAGE> 25
Federal Income Tax. The Company's consolidated income tax rate varies from
statutory rates principally due to interest income from tax-exempt securities
and loans. The provision for income taxes was relatively unchanged at $1.0
million for the nine months ended September 30, 1997 from $1.1 million for the
comparable period in 1996. The Company recorded income tax expenses totaling
$1.4 million in 1996 and $1.0 million in 1995, reflecting the increase in net
income for the period.
FINANCIAL CONDITION
Loan Portfolio Composition. The following table sets forth the composition
of the Company's loan portfolio by type of loan at the dates indicated.
Management believes that the balance sheet information as of the dates indicated
should be read in conjunction with the average balance information in the tables
above under "-- Net Interest Income." As indicated above, the Company
specializes its lending practice in the residential construction industry.
Depending on life cycles of real estate development, balances of the Company's
commercial loans and construction loans may fluctuate significantly. Therefore,
the data below are not necessarily indicative of trends within a particular
category.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction........................ $ 85,287 74.7% $47,306 50.4% $29,732 43.7%
Commercial.......................... 27,024 23.7 44,356 47.2 36,148 53.1
Installment and other............... 4,196 3.6 4,103 4.4 3,444 5.0
Mortgage............................ 66 .1 67 .1 67 .1
Loans held for sale................. -- -- -- -- -- --
-------- ----- ------- ----- ------- -----
Total face amount of loans.......... 116,573 102.1 95,832 102.1 69,391 101.9
Deferred loan fees, discounts and
costs, net........................ (854) (.7) (859) (.9) (546) (.8)
-------- ----- ------- ----- ------- -----
Loans............................... 115,719 101.4 94,973 101.2 68,845 101.1
Less allowance for loan losses...... (1,567) (1.4) (1,150) (1.2) (759) (1.1)
-------- ----- ------- ----- ------- -----
Net loans........................... $114,152 100.0% $93,823 100.0% $68,086 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
As of September 30, 1997 loans were $115.7 million, or $20.7 million
greater than loans of $95.9 million as of December 31, 1996. The difference is
due primarily to a greater amount of construction loans. Loans as of December
31, 1996 were up $26.1 million compared to December 31, 1995, principally due to
greater amounts of construction and commercial loans, which reflect the
Company's growth discussed above.
The Company's two primary categories of loans, construction loans and
commercial loans, trended upward as indicated at the various dates. These loans
as a group were $112.3 million as of September 30, 1997, $20.6 million over the
$91.7 million balance as of December 31, 1996, which in turn was $25.9 million
greater than such loans as of December 31, 1995. In addition, the significantly
lower commercial loans as of September 30, 1997 compared to December 31, 1996 is
in large part due to the Company's reclassification in 1997 of land and
acquisition loans to construction loans, with the corresponding increase in
construction loans.
Installment loans remained relatively constant with the balance of $4.2
million as of September 30, 1997 compared to $4.1 million as of December 31,
1996. Installment loan balances were greater at $659,000 as of December 31, 1995
compared $3.5 million as of December 31, 1994, again due to the Company's
growth.
Mortgage loans also remained relatively constant, and have comprised less
than 1% of the Company's loan portfolio since year-end 1994. As discussed
earlier, the Company concentrates on construction lending rather than
residential mortgage lending.
Although the risk of non-payment exists for a variety of reasons with
respect to all loans, certain other more specific risks are associated with each
type of loan. Several risks are present in construction loans, including
economic conditions in the home building industry, fluctuating land values, the
failure of the
24
<PAGE> 26
contractor to complete the work and the borrower's inability to repay. The
primary risks of land loans include a general slowdown in the market resulting
in fewer building permits and lower absorption of newly developed sites to major
home builders, building moratoriums by municipalities, the general economy, and
the fiscal condition of the developer. Risks associated with commercial loans
are quality of the borrower's management and the impact of local economic
factors. Installment loans also have risks associated in a single type of loan.
Installment loans additionally face the 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.
The Company believes that its philosophy in extending credit is relatively
conservative in nature, with a presumption that most credit should have both a
primary and a secondary source of repayment, and that the primary source should
generally be operating cash flows, while the secondary source should generally
be disposition of collateral. The Company engages in very little unsecured
lending, and generally requires personal guarantees of principals for business
obligations. The Company practices a system of concurrence in the approval of
commercial credit whereby the documented concurrence of the loan committee is
obtained in addition to that of the recommending loan officer.
At September 30, 1997, net loans totaled approximately 79.7% of total
deposits and approximately 71.9% of total assets.
Loan Maturities. The following tables present, at September 30, 1997 and
December 31, 1996, loans by maturity in each major category of the Company'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 in the same manner as new credit
applications.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR -------------------------- --------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
-------- ---------- ------------- ---------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction................ $ 85,287 $ -- $ -- $ -- $ -- $ 85,287
Commercial.................. 21,719 4,902 -- 403 -- 27,024
Installment and other....... 1,482 2,714 -- -- -- 4,196
Mortgage.................... -- -- -- 66 -- 66
-------- ------ ---- ---- ---- --------
Total face amount of
loans.................. $108,488 $7,616 $ -- $469 $ -- $116,573
Deferred loans fees......... (642) (205) -- (7) -- (854)
-------- ------ ---- ---- ---- --------
Total loans............... $107,846 $7,411 $ -- $462 $ -- $115,719
======== ====== ==== ==== ==== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR -------------------------- --------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
-------- ---------- ------------- ---------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction................ $ 47,131 $ 175 $ -- $ -- $ -- $ 47,306
Commercial.................. 40,616 3,337 -- 403 -- 44,356
Installment and other....... 1,509 2,594 -- -- -- 4,103
Mortgage.................... -- -- -- 67 -- 67
-------- ------ ---- ---- ---- --------
Total face amount of
loans.................. $ 89,256 $6,106 -- $470 $ -- $ 96,832
Deferred loans fees......... (642) (209) -- (8) -- (859)
-------- ------ ---- ---- ---- --------
Total loans............... $ 88,614 $5,897 $ -- $462 $ -- $ 94,973
======== ====== ==== ==== ==== ========
</TABLE>
Nonperforming Loans. Nonperforming loans consist of loans 90 days or more
delinquent and still accruing interest, nonaccrual loans and restructured loans.
When, in the opinion of management, a reasonable doubt exists as to the
collectibility of interest, regardless of the delinquency status of a loan, the
accrual of interest income is discontinued and interest accrued during the
current year is reversed through a charge to
25
<PAGE> 27
current year's earnings. While the loan is on nonaccrual status, interest income
is recognized only upon receipt and then only if, in the judgment of management,
there is no reasonable doubt as to the collectibility of the principal balance.
Loans 90 days or more delinquent generally are changed to nonaccrual status
unless the loan is in the process of collection and management determines that
full collection of principal and accrued interest is probable.
Restructured loans are those for which concessions, including the reduction
of interest rates below a rate otherwise available to the borrower or the
deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur. The Company did not have any restructured loans as of September 30,
1997, December 31, 1996 or December 31, 1995.
The following table sets forth information concerning the nonperforming
assets of the Company at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996 1995 1994
------------- ------ ------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans:..................................... $1,611 $ 14 $ 75 $ 554
Other loans 90 days past due.......................... 66 -- 1 --
Other real estate..................................... -- -- -- --
------ ----- ----- -----
Total nonperforming loans............................. $1,677 $ 14 $ 76 $ 554
====== ===== ===== =====
Ratio of nonaccrual and other loans 90 days past due
to total loans...................................... 1.45% 0.01% 0.11% 1.19%
Ratio of nonperforming assets to total loans plus
other real estate................................... 1.45 0.01 0.11 1.19
Ratio of nonperforming assets to total assets......... 1.06 0.01 0.07 0.88
</TABLE>
Of the amount of nonaccrual loans as of September 30, 1997, approximately
$1.6 million is the Bank's portion of five related loans totaling approximately
$4.5 million which are subject to a Chapter 11 bankruptcy proceeding. The loans
were originated by the Bank and were made at various times during 1994, 1995 and
1996 in connection with a real estate development on which the developer has
constructed a residential building assembly plant. The loans are secured by real
estate consisting of 10 homes in various stages of completion, 72 developed
residential home sites as well as four homes that comprise the model homes and
the office property. The loans are also secured by certificates of deposit in
the amount of $770,000 as well as two personal guarantees from the owners of the
developer as well as guaranteed by a related limited partnership, all three of
which have substantial net worth. Management believes that the Company is
adequately collateralized on these loans. Management is not aware of any adverse
trend relating to the Company's loan portfolio.
As of September 30, 1997, there was no significant balance of loans
excluded from nonperforming loans set forth above, where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in such loans becoming nonperforming.
Analysis of Allowance for Loan Losses. The allowance for loan losses
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. The allowance is maintained at
a level considered adequate to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral and holding
and disposal costs. The allowance is increased by additional charges to
operating income and reduced by loans charged off, net of recoveries.
26
<PAGE> 28
The following table sets forth information regarding changes in the
allowance for loan losses of the Company for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1997 1996 1995
------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average total loans.............................. $106,806 $ 80,213 $54,219
======== ========= =======
Total loans at end of period..................... $115,719 $ 94,973 $68,845
======== ========= =======
Allowance at beginning of year................... $ 1,150 $ 759 $ 546
Charge-offs:
Construction................................... -- -- --
Commercial and industrial...................... -- -- --
Installment.................................... (4) (78) (76)
Mortgage....................................... -- -- --
Other.......................................... (1) (1) --
-------- --------- -------
Total charge-offs...................... (5) (79) (76)
Recoveries:
Construction................................... -- -- --
Commercial and industrial...................... -- 10 9
Installment.................................... 62 3 --
Mortgage....................................... -- -- --
Other.......................................... -- -- --
-------- --------- -------
Total recoveries....................... 62 13 9
-------- --------- -------
Net (charge-offs) recoveries..................... 57 (66) (67)
Provisions for loan losses....................... 360 457 280
-------- --------- -------
Allowance at end of period....................... $ 1,567 $ 1,150 $ 759
======== ========= =======
Ratio of net (charge-offs) recoveries to average
total loans.................................... 0.05% (0.08%) (0.12%)
Allowance to total loans at end of period........ 1.35% 1.21% 1.10%
Allowance to nonperforming loans................. 93.43% 8,462.72% 998.23%
</TABLE>
Net recoveries during the nine months ended September 30, 1997 totaled
approximately $57,000 or .07% of average loans compared to approximately $13,000
of net charge-offs or .02% of average loans for the nine months ended September
30, 1996. Net charge-offs during 1996 totaled approximately $66,000 or .08% of
average loans compared to approximately $67,000 or .12% of average loans in
1995.
The Company's lending personnel are responsible for continuous monitoring
of the quality of loan portfolios. The loan portfolios are also monitored and
examined by the Company loan review personnel. These reviews assist in the
identification of potential and probable losses, and also in the determination
of the level of the allowance for loan losses. The allowance for loan losses is
based primarily on management's estimates of possible loan losses from the
foregoing processes and historical experience. These estimates involve ongoing
judgments and may be adjusted over time depending on economic conditions and
changing historical experience.
State and federal regulatory agencies, as an integral part of their
examination process, review the Company's loans and its allowance for loan
losses. Management believes that the Company'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 increase the allowance for loan losses
or that regulators, when reviewing the Company's loan portfolios in the future,
will not require the Company to increase such allowance, either of which could
adversely affect the Company's earnings. Further, there can be no assurance that
the Company's actual loan losses will not exceed its allowance for loan losses.
27
<PAGE> 29
The following tables set forth an allocation of the allowance for loan
losses by loan category as of the dates indicated. Portions of the allowance
have been allocated to categories based on analysis of the status of particular
loans; however, the majority of the allowance is utilized as a single
unallocated allowance available for all 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>
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY
AS A AS A AS A
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
OF GROSS OF TOTAL OF GROSS OF TOTAL OF GROSS OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction................. $ 155 73.2% $ 155 49.3% $ -- 42.8%
Commercial and industrial.... 128 23.2 33 46.3 59 52.1
Installment and other........ -- 3.5 4 4.2 38 5.0
Mortgage..................... -- 0.1 -- 0.2 -- 0.1
Unallocated.................. 1,284 0.0 958 0.0 662 0.0
------ ----- ------ ----- ---- -----
Total.............. $1,567 100.0% $1,150 100.0% $759 100.0%
====== ====== ====
</TABLE>
As of December 31, 1997, the Company increased its loan loss reserve by
$516,000 compared to September 30, 1997 due to a significant increase in loan
production of $64 million in the fourth quarter and management's expectation of
continued increases in total loans in 1998. The total loan loss reserve at
December 31, 1997 was $2,083,000 or 1.64% of total loans and 122.5% of
nonperforming assets. The loan loss reserve increase at December 31, 1997
compared to September 30, 1997 was included in the unallocated category.
The allocation for loan losses takes into account many factors such as the
Company's prior experience with loan losses and an evaluation of the risks in
the loan portfolio at any given time, including changes in economic, operating
and other conditions of borrowers, the Denver economy and to a lesser extent,
the national economy. As indicated in the table above, a majority of the loan
loss allowance was not allocated to a single category. The Company's loan
portfolio contains a significant amount of loans that are construction and/or
development loans, and management assesses general risks to the portfolio that
are common to both categories. These risks include the economic conditions in
the building industry that could effect a slowdown in the market resulting in
fewer building permits and lower absorption of newly developed sites,
fluctuating land values, building moratoriums by municipalities, and the overall
general economy of the Company's area of operations.
Management believes that the approximate amount of charge-offs by category
during 1998 will be in the range of 0.23% to 0.27% for consumer loans, 0.14% to
0.17% for construction loans, and 0.12% to 0.15% for commercial loans, for an
overall total of approximately 0.15% of total loans. The foregoing is a good
faith best estimate only and is subject to several factors beyond the control of
the Company, including the risks discussed above.
Investments. The Company's investment policy is designed to ensure
liquidity for cash-flow requirements; to help manage interest rate risk; to
ensure collateral is available for public deposits, FHLB advances and repurchase
agreements; and to manage asset quality diversification. Investments are managed
centrally to maximize compliance and effectiveness of overall investing
activities. The Bank's President is responsible for implementing investment
strategy. Ongoing review of the performance of the investment portfolio, market
values, market conditions, current economic conditions, profitability, capital
ratios, liquidity needs, collateral position with the FHLB and other matters
related to investing activities is made.
28
<PAGE> 30
The Company's investment portfolio at September 30, 1997 is comprised of
U.S. Treasury bonds and bills and general obligation and revenue municipal
bonds. Although the municipal securities are non-rated and privately placed,
none of these investments are derivatives, structured notes or similar
instruments that are classified as "High-Risk Securities" as defined by the
Federal Financial Institutions Examinations Counsel. In accordance with the
principles of the Financial Accounting Standards Board ("FASB") in its statement
of financial accounting standards no. 115 ("FASB 115"), Accounting for Certain
Investment in Debt and Equity Securities, all investments are accounted for as
"Available for Sale."
The following table sets forth the estimated market value of the available
for sale securities and the amortized cost basis of held to maturity securities
in the Company's investment portfolio by type at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ DECEMBER 31,
1997 1996 1995(3)
------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities........................... $ 5,016 $ 4,390 $7,330
------- ------- ------
Municipal securities(1)............................ 6,202 6,203 --
------- ------- ------
Total(2)................................. $11,218 $10,593 $7,330
======= ======= ======
</TABLE>
- - ---------------
(1) Exempt from both federal and state income taxation.
(2) Equity investments are excluded from this table.
(3) Includes securities held to maturity of $549,946.
Investment Maturities and Yield. The following table sets forth the
estimated market value and approximate yield of the securities in the investment
portfolio by type and maturity at September 30, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
TYPE AND MATURITY AMOUNT YIELD
----------------- -------- ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
U.S. Treasury securities:
One year or less.......................................... $ 1,488 6.30%
Over one through five years............................... 3,528 6.25
Over five through 10 years................................ -- --
-------
Total............................................. $ 5,016 6.26
=======
Municipal securities:
One year or less.......................................... $ -- --
Over one through five years............................... -- --
Over five through 10 years................................ 777 9.00
Over 10 years............................................. 5,425 8.90
-------
Total............................................. $ 6,202 8.92
=======
Total investment in securities:
One year or less.......................................... $ 1,488 6.30
Over one through five years............................... 3,528 6.25
Over five through 10 years................................ 777 9.00
Over 10 years............................................. 5,425 8.90
-------
Total............................................. $11,218
=======
</TABLE>
Deposits. The Company's primary source of funds has historically been
customer deposits, and deposits have experienced significant growth in recent
years with average deposits increasing to $125.0 million for the nine months
ended September 30, 1997 from $89.0 million for the year ended December 31, 1996
and
29
<PAGE> 31
$62.5 million for the year ended December 31, 1995. These increases are
primarily a result of the opening of two branches in 1997, one branch in 1996
and one branch in 1995. At September 30, 1997, noninterest-bearing deposits
comprised 27.8% of total deposits. Management believes this ratio may decrease
as the mix of deposits in new branches tend to be more interest-bearing rather
than noninterest-bearing due to start up marketing activities.
The following table presents the average balances for each major category
of deposits and the weighted average interest rates paid for interest-bearing
deposits for the period indicated.
<TABLE>
<CAPTION>
1997
----
AVERAGE AVERAGE AVERAGE
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
BALANCE COST BALANCE COST BALANCE COST
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995
-------------------
NINE MONTHS ENDED
<-> SEPTEMBER 30, 1996
-------------------- -------------------
Demand, interest-bearing........ $ 51,509 4.60% $37,983 4.52% $22,586 4.45%
Savings......................... 4,769 3.33 5,442 3.42 4,752 3.30
Certificates of deposit under
$100,000...................... 23,361 5.76 9,639 5.42 8,033 5.32
Certificates of deposit $100,000
and over...................... 10,610 5.71 6,885 5.36 5,045 5.21
-------- ------- -------
Total interest-bearing
demand deposits..... 90,249 4.96 59,949 4.66 40,416 4.58
Noninterest-bearing demand
deposits...................... 34,760 29,096 22,078
-------- ------- -------
Total Deposits........ $125,009 $89,045 $62,494
======== ======= =======
</TABLE>
The increases in average costs were due primarily to higher rates offered
in connection with new branch promotions. See "-- Net Interest Income."
The following table sets forth the amount and maturity of certificates of
deposit that had balances of more than $100,000 at September 30, 1997.
<TABLE>
<CAPTION>
REMAINING MATURITY
------------------ (IN THOUSANDS)
<S> <C>
Less than three months............................... $ 4,122
Three months up to six months........................ 4,462
Six months up to one year............................ 1,525
One year and over.................................... 650
-------
Total...................................... $10,759
=======
</TABLE>
FHLB Borrowings. The Bank is a member of the Federal Home Loan Bank of
Topeka, which is one of 12 regional FHLB's. The FHLB system functions as a
central bank providing credit for members. As a member of the FHLB, the Bank is
entitled to borrow funds from the FHLB and is required to own FHLB stock in an
amount determined by a formula based upon the Bank's total assets and its FHLB
borrowings. The Bank may use FHLB borrowings to supplement deposits as a source
of funds. See "Liquidity -- Asset/Liability Management." Average FHLB borrowings
for the nine months ended September 30, 1997 were $2.2 million compared to $0.9
million and $0 for the years ended December 31, 1996 and 1995, respectively. At
September 30, 1997, based on its FHLB stockholdings, the Bank's total available
and unused borrowing capacity based on the Bank's current FHLB stockholdings was
approximately $7.0 million, which was available through a line of credit and
term advances. FHLB borrowings are collateralized by the Bank's FHLB stock,
other investment securities and certain loans.
A variety of borrowing terms and maturities can be chosen from the FHLB.
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 FHLB offers both amortizing and nonamortizing advances. To date, FHLB stock
has
30
<PAGE> 32
been redeemable at the preset price of $100 per share, but there can be no
assurance that this will continue to be the case.
CAPITAL RESOURCES
The Company monitors compliance with bank and bank-holding company
regulatory capital requirements, focusing primarily on risk-based capital
guidelines. 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, Tier 1 or core capital, and Total capital,
which consists of Tier 1 plus Tier 2 capital. See "Supervision and
Regulation -- MegaBank Financial Corporation -- Capital Adequacy" for
definitions of Tier 1 and Tier 2 capital.
The following tables set forth the Company's capital ratios as of the
indicated dates.
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ----------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 capital................................. $ 10,736 8.53% $10,632 10.70%
Tier 1 capital minimum requirement(1).......... 5,032 4.00 3,976 4.00
-------- ---- ------- -----
Excess......................................... $ 5,704 4.53% $ 6,656 6.70%
======== ==== ======= =====
Total capital.................................. $ 12,303 9.78% $11,782 11.85%
Total capital minimum requirement(1)........... 10,065 8.00 7,951 8.00
-------- ---- ------- -----
Excess......................................... $ 2,238 1.78% $ 3,831 3.85%
======== ==== ======= =====
Total risk adjusted assets..................... $125,808 $99,391
======== =======
</TABLE>
- - ---------------
(1) Based on risk-based capital guidelines of the Federal Reserve Bank, a bank
holding company is required to maintain a Tier 1 capital to risk-adjusted
assets ratio of 4% and a total capital to risk-adjusted assets ratio of 8%.
See "Supervision and Regulation -- MegaBank Financial Corporation -- Capital
Adequacy" for definitions of Tier 1 and Tier 2 capital.
LEVERAGE RATIOS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 capital............................... $ 10,736 7.11% $ 10,632 10.35%
Minimum requirement(1)....................... 7,555 5.00 5,136 5.00
-------- ----- -------- ------
Excess....................................... $ 3,181 2.11% $ 5,496 5.35%
======== ===== ======== ======
Average total assets......................... $151,097 $102,720
======== ========
</TABLE>
- - ---------------
(1) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets. Based on Federal Reserve Bank guidelines, a bank holding
company generally is required to maintain a leverage ratio of 5%. See
"Supervision and Regulation -- MegaBank Financial Corporation -- Capital
Adequacy" for definitions of Tier 1 and Tier 2 capital.
LIQUIDITY
Sources of Liquidity. The Company manages its liquidity in order to satisfy
cash flow requirements of depositors and borrowers and allow the Company to meet
its own cash flow needs. The Company has two
31
<PAGE> 33
basic sources of liquidity. The first is its retail deposit market served by its
banking offices. The Company has increased core deposits through growth of its
existing deposits and through promotions directed at existing and potential
customers. Average deposits increased by $26.5 million, or 42.5% in 1996 over
1995, and by $36.0 million or 40.4% from the nine months ended September 30,
1997 over 1996.
The second source of the Company's liquidity is FHLB advances and Company
lines of credit. FHLB advances are used regularly in the cash management
function both to fund a portion of the investment portfolio and to manage the
day-to-day fluctuations in liquidity resulting from needs of depositors and
borrowers. At September 30, 1997 the Company had available $7.0 million of
unused borrowing capacity from the FHLB and $5.5 million from its other lenders.
The Company anticipates that it will continue to rely primarily upon customer
deposits, FHLB borrowings, other lending sources, loan repayments, loan sales
and retained earnings to provide liquidity, and will use funds so provided
primarily to make loans and to purchase investment securities.
Asset/Liability Management. A principal function of asset/liability
management is to coordinate the levels of interest-sensitive assets and
liabilities to minimize net interest income fluctuations in times of fluctuating
market interest rates. Interest-sensitive assets and liabilities are those that
are subject to repricing in the near term, including both variable rate
instruments and those fixed-rate instruments which are approaching maturity.
Changes in net yield on interest-sensitive assets arise when interest rates on
those assets (e.g. loans and investment securities) change in a different time
period from that of interest rates on liabilities (e.g. time deposits). Changes
in net yield on interest-sensitive assets also arise from changes in the mix and
volumes of earning assets and interest-bearing liabilities.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities as of September 30, 1997, and sets forth the
repricing dates of the Company's interest-earning assets and interest-bearing
liabilities as of that date, as well as the Company's interest rate sensitivity
gap percentages for the periods presented. The table is based upon assumptions
as to when assets and liabilities will reprice in a changing interest rate
environment, and since such assumptions can be no more than estimates, certain
assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the
32
<PAGE> 34
following table does not and cannot necessarily indicate the actual future
impact of general interest rate movements on the Company's net interest income.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT SEPTEMBER 30, 1997
----------------------------------------------------------------
THREE MONTHS
LESS THAN TO LESS THAN ONE TO OVER
THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Funds sold and interest-bearing
deposits............................ $ 11,428 $ 1,291 $ 83 $ -- $ 12,802
Investment securities available for
sale................................ 251 1,237 3,528 6,202 11,218
Loans.................................. 106,137 1,709 7,411 462 115,719
-------- -------- ------- ------- --------
Total interest-earning
assets....................... 117,816 4,237 11,022 6,664 139,739
Interest-bearing liabilities:
Deposits:
Demand, interest-bearing............ 52,773 -- -- -- 52,773
Savings............................. 5,387 -- -- -- 5,387
Certificates of deposit
under $100,000.................... 3,733 17,427 6,038 -- 27,198
$100,000 and over................. 4,122 5,987 650 -- 10,759
Federal Home Loan Bank borrowings...... 365 176 1,247 -- 1,788
Note payable........................... -- 2,000 -- -- 2,000
-------- -------- ------- ------- --------
Total interest-bearing
liabilities.................. 66,380 25,590 7,935 -- 9,905
-------- -------- ------- ------- --------
Interest rate gap.............. $ 51,436 $(21,353) $ 3,087 $ 6,664 $ 39,834
======== ======== ======= ======= ========
Cumulative interest rate gap at September
30, 1997............................... $ 51,436 $ 30,083 $33,170 $39,834
======== ======== ======= =======
Cumulative interest rate gap to total
assets................................. 32.38% 18.94% 20.88% 25.08%
======== ======== ======= =======
</TABLE>
Due to the volume of loans that reprice with changes in the prime lending
rate and the volume of noninterest-bearing deposits, the Company has experienced
a positive gap in assets and deposits that reprice or mature in less than three
months. Of the total interest-earning assets at September 30, 1997, 84.3%
reprice or mature in less than three months while 66.4% of all interest-bearing
liabilities reprice or mature in that same time frame. The Bank's positive
interest rate gaps indicate that the Bank's net income would increase in the
event of rising interest rates and would decrease in the event of decreasing
interest rates. In the highly unlikely event of an immediate, parallel and
sustained shift of market interest rates of 200 basis points, management
estimates that the Bank's net income during the 12 months ending September 30,
1998 would likely increase greater than 10% compared to the prior like 12-month
period if interest rates rose by 200 basis points and likely fall by greater
than 10% compared to the prior like 12-month period if rates fell of the same
amount. These are good faith estimates assuming all other factors do not change
materially, and, in management's belief, are not necessarily indicative of what
actually could occur in the event of immediate interest rate increases or
deceases of this magnitude. Management believes that it is highly unlikely that
such changes would occur in a short time period. As interest-bearing assets and
liabilities reprice at different time frames and proportions to market interest
rate movements, various assumptions must be made based on historical
relationships of these variables in reaching any conclusion. Since these
correlations are based on competitive and market conditions, future results
would, in management's belief, be materially different from the foregoing
estimates.
EFFECTS OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in
33
<PAGE> 35
increased interest rates. Over short periods of time interest rates may not move
in the same direction or magnitude as inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS" or
"Statement") No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS
No. 118, Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures (collectively referred to as "SFAS 114") effective January 1,
1995. SFAS 114 requires that certain impaired loans be measured based on the
present value of expected cash flows discounted at the loan's original effective
interest rate. The adoption of this pronouncement did not have a material impact
on the Company.
In March 1995, the Financial Accounting Standards Board adopted SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This Statement established accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. This Statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted this Statement on January 1, 1996, with no
material impact on its financial condition, results of operations or liquidity.
In October 1995, the Financial Accounting Standards Board adopted SFAS No.
123, Accounting for Stock-Based Compensation. This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. This Statement defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees. Statement No. 123 requires that an employer's financial
statements include certain disclosures about stock-based employee compensation
arrangements regardless of the method used to account for them. The Company
adopted this Statement in 1996 and has elected to continue to follow the
provisions of APB Opinion No. 25 in accounting for stock-based compensation.
In June 1996, the Financial Accounting Standards Board adopted SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. It requires that servicing assets and other retained
interests in the transferred assets be measured by allocating the previous
carrying amount between the assets sold, if any, and retained interests, if any,
based on their relative fair values at the date of the transfer. The Statement
will be effective for certain transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The statement
will be effective for repurchase agreements, dollar-rolls, securities lending,
or similar transactions as of January 1, 1997. Management has not completed a
final determination of the expected impact of adopting this Statement but does
not believe its implementation will have a material impact on the Company.
In February 1997, the Financial Accounting Standards Board adopted SFAS No.
128, Earnings Per Share. This Statement establishes standards for computing and
presenting earnings per share ("EPS") and simplifies the standards for computing
earnings per share previously found in Accounting Principles Board Opinion No.
15, Earnings Per Share. SFAS No. 128 supersedes Accounting Principles Board
Opinion No. 15 and its interpretations and supersedes or amends other accounting
pronouncements related to current computations of EPS. The Statement replaced
the presentation of primary EPS with a presentation of basic
34
<PAGE> 36
EPS. It also requires dual presentation with equal prominence of basic and
diluted EPS for income from continuing operations and for net income on the face
of the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The provisions of SFAS No. 128 are effective for
financial statements for both interim and annual periods ending after December
15, 1997, or for the year ended December 31, 1997, for the Company, with all
prior period EPS data restated to conform with SFAS No. 128. Management believes
that the adoption of this Statement will not significantly change the results of
previously reported EPS data.
In February 1997, the Financial Accounting Standards Board adopted SFAS No.
129, Disclosure of Information about Capital Structure. This Statement
establishes standards for disclosing information about an entity's capital
structure. This Statement requires an entity to disclose in its financial
statements the pertinent rights and privileges of the various securities
outstanding and the number of shares upon conversion, exercise, or satisfaction
of required conditions during at least the most recent annual fiscal period and
any subsequent interim period presented. This Statement also requires disclosure
relative to liquidation preference of preferred stock and redeemable stock. The
provisions of SFAS No. 129 are effective for periods ending after December 15,
1997. Management believes that the adoption of this Statement will not result in
any significant disclosures in addition to those already contained in the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board adopted SFAS No.
130, Reporting Comprehensive Income. This Statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. Comprehensive income is the total of reported net
income and all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130 requires
that comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements with the aggregate amount
of comprehensive income reported in that same financial statement. SFAS No. 130
permits the statement of changes in stockholders' equity to be used to meet this
requirement. Companies are encouraged, but not required, to display the
components of other comprehensive income below the total for net income in the
statement of operations or in a separate statement of comprehensive income.
Companies are also required to display the cumulative total of other
comprehensive income for the period as a separate component of equity in the
statement of financial position. This Statement is effective for fiscal years
beginning after December 15, 1997, or January 1, 1998, for the Company, with
earlier application permitted. Companies are also required to report comparative
totals for comprehensive income in interim reports. Management of the Company
will adopt the provisions of this Statement, which are only of a disclosure
nature, effective January 1, 1998.
In June 1997, the Financial Accounting Standards adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
Statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, and utilizes the "management approach" for segment reporting. The
management approach is based on the way that the chief operating decision maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on any manner in which management
disaggregates its company such as by products and services, geography, legal
structure and management structure. SFAS No. 131 requires disclosures for each
segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and more specific and detailed
geographic disclosures especially by countries as opposed to broad geographic
regions. This Statement also requires descriptive information about the way the
operating segments were determined, the products/services provided by the
operating segments, the differences between the measurements used in reporting
segment information and those used in general purpose financial statements, and
the changes in the measurement of segment amounts from period to period. The
provisions of SFAS No. 131 are effective for fiscal years beginning after
December 15, 1997, or January 1, 1998, for the Company, with earlier application
permitted. SFAS No. 131 does not need to be applied to interim statements in the
initial year of application
35
<PAGE> 37
but such comparative information will be required in interim statements for the
second year. Comparative information for earlier years must be restated in the
initial year of application. Management of the Company will adopt the provisions
of this Statement, which are only of a disclosure nature, effective January 1,
1998.
YEAR 2000 COMPLIANCE
A significant issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. The financial impact
to the Company to ensure year 2000 compliance is not anticipated by management
to be material to the financial position, results of operations or cash flow of
the Company.
36
<PAGE> 38
BUSINESS
GENERAL
MegaBank Financial Corporation (the "Company") was founded in 1984 by its
Chairman and Chief Executive Officer, Thomas R. Kowalski, with the objective of
building a banking franchise in the Denver, Colorado metropolitan area that
would deliver a broad based package of products and services to businesses and
individuals. The Company's banking subsidiary, MegaBank of Arapahoe (the "Bank")
was organized in 1983. Since the advent of branch banking in Colorado in 1993,
the Bank has opened six additional banking locations throughout the Denver area.
Two more branches are in the planning and construction phases and are currently
expected to begin operations in 1998.
Since inception, the Bank has specialized its lending practice in the
residential construction industry. The Company's Chairman has extensive
experience in the home building industry and has expanded the Bank's lending
practice to date such that the Bank is one of the area's leading originators of
residential construction loans to small and medium sized homebuilders.
Currently, the Bank can finance a builder or developer from the acquisition and
development loan process, including assistance with special district financing,
through the construction loan phase. During the five years ended December 31,
1996, the Bank originated over $500 million in residential construction loans
and during the nine months ended September 30, 1997, originated an additional
$125 million of such loans. While some of these loans remain on the Company's
balance sheet, most have been repaid, refinanced or participated out to other
financial institutions.
The Bank intends to continue to focus on its niche of residential
construction lending in addition to providing a complete array of products and
services for its customers. High quality customer service has been a fundamental
tenet of the Bank's operating strategy since its inception. The Bank intends to
continue to pursue its successful strategies and concentrate on increasing its
market share through referrals from existing customers and focus on the
implementation of advertising and marketing strategies targeted at the
communities in which its branches are located.
STRATEGY
Growth. The Bank's goal in continuing its expansion is to maintain a
profitable, customer-focused financial institution. Management believes that the
Company's existing capital structure, management, data and operational systems
are sufficient to achieve further growth in asset size, revenues and capital.
This growth should allow the Bank to increase its lending limits, thereby
enabling it to continue to serve the needs of its customers.
The Bank expects to continue its growth strategy through internal growth
and possibly through acquisitions. Management believes that the Bank's largest
source of growth is through referrals by existing customers, and that the
primary reason for referrals is positive customer feedback regarding the Bank's
customer service and response time. The Colorado banking market is dominated by
large national and regional financial institutions. This dominance was achieved
through the purchase of Colorado-based holding companies over the past several
years, which resulted in a significant consolidation of the Colorado banking
industry. Management believes that small and medium size businesses often are
not of sufficient size to be of interest to these large banks, particularly as
it relates to residential construction lending, and that individuals frequently
have difficulty in finding personalized banking services. Many of these
customers seek a banking relationship with a smaller and significantly more
service-oriented community banking organization such as the Bank. Through the
Bank's primary emphasis on customer service, management's experience and the
Company's product line, the Company will continue to focus on attracting these
customers in achieving internal growth. Management also believes that the
economic expansion in the Company's market area contributes significantly to
internal growth.
The Bank's market area is the Denver metropolitan area, which is the most
densely populated area in the Rocky Mountain region. Total population is
approximately 2.2 million, and the area has received a net migration of over
200,000 persons since 1990. Employment in the area is diversified across the
manufacturing, construction, financial services, tourism, transportation,
technology, cable television, retail trade, services and
37
<PAGE> 39
government sectors. In 1996, Colorado achieved the tenth straight year of
employment growth, with nonagricultural employment increasing 3.4% during 1996
to approximately 1.9 million.
In addition to internal growth, management believes there are opportunities
to grow through branching. The Bank has two additional branches in the planning
and construction process that are expected to begin operations in 1998. In
addition, in some cases, branching opportunities have arisen through
eliminations by bank holding companies of certain overlapping branches resulting
from acquisitions. As a result, branch locations have become available from time
to time for purchase by the Company. To date, the Company has acquired one such
branch from a large bank holding company. Also, management intends to pursue
acquisitions of smaller financial institutions, although the sales prices of
such institutions are currently at significant premiums over those paid the past
few years. Thus, it may be difficult to complete such a transaction. Management
has considered and intends to consider a variety of criteria when evaluating
expansion. These include (i) the geographic location, (ii) the investment
required for, and opportunity costs of, the branch or acquisition, (iii) the
financial strength of a potential acquisition target, and (iv) economies of
scale that may be achieved.
Operations and Marketing. The Bank's objective is to continue to build a
profitable, growing community banking franchise. Management believes that, in
meeting the needs of consumers and small to medium sized businesses in its
market area, the Bank's first and foremost strategy is to provide excellent
customer service. This strategy is emphasized above all others of the Company,
from top management down to each bank teller. The Bank's operational systems
have been designed to complement superior customer service. Management believes
the Company's banking locations are small enough to facilitate personalized
services and decision-making, yet of sufficient size to meet most customers'
needs.
The Bank seeks to maximize operational and support efficiencies consistent
with maintaining high quality customer service. The Bank utilizes recently
developed technology to provide customer support. Various management and
administrative functions are consolidated, including consumer credit
administration and lending, investment management and accounting, enabling
branch personnel to better focus on customer service and sales.
In expanding its banking franchise, the Bank has focused on identifying and
developing products and services that satisfy customer needs, particularly
customer service. The Bank's marketing programs targeting each individual branch
utilize direct mail and local print (promotional materials in each location) as
well as sponsorship of community events within the branch area.
The Bank offers a wide range of consumer deposit products including regular
checking, checking with interest, money market accounts, regular savings,
certificates of deposit, and IRAs. The Bank also offers additional access to its
customers with an ATM/Visa Debit Card. The Bank's consumer loan products are
customized to meet the needs and requests of its customers. The Bank also offers
installment loans, including auto, recreational vehicle, classic car and other
secured and unsecured loans sourced directly by its branches and from indirect
sources. See "Loans" below for a discussion of products that the Bank provides
to commercial accounts.
LOANS
The Company has the ability to provide a broad range of commercial and
retail lending services. However, the vast majority of the Bank's loans are
residential construction loans. The Company follows a uniform credit policy
which sets forth 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. In addition, the
Company provides ongoing loan officer training and review, obtains outside
independent loan reviews, operates a centralized processing, underwriting and
servicing center for consumer loans and manages problem assets centrally. At
September 30, 1997, substantially all loans outstanding were to customers within
the Company's market area. For a discussion of risks associated with the
Company's various types of loans, see "Management Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Loan
Portfolio Composition."
38
<PAGE> 40
Construction Loans. Construction loans include real estate construction
loans and land loans. Real estate construction loans are principally made to
builders to construct single family residences. These loans typically have
maturities of six to 12 months and adjustable interest rates, and are subject to
origination fees. Terms may vary depending upon many factors, including, but are
not limited to, location, type of project and financial condition of the
builder.
Land loans consist of loans made on raw land for the acquisition and/or
development of real property. At September 30, 1997, approximately $30.0 million
in loans were land loans to customers where the collateral for the loan is raw
or partially developed land. These loans typically have maturities of six to 12
months and variable interest rates. Terms may vary depending upon many factors,
including adverse economic conditions in the home building industry, location,
type of project and financial condition of the builder.
Commercial Loans. Commercial loans consist primarily of loans to businesses
for various purposes, including revolving lines of credit, equipment financing,
and commercial real estate lending. The commercial loans secured by real estate
are typically 20 to 25 year amortizing loans, callable in three to five years,
with fixed interest rates. The loans secured by collateral other than real
estate generally mature within one year, have adjustable interest rates and are
secured by inventory, accounts receivable or other commercial assets. Revolving
lines of credit generally are for business purposes, generally mature annually
and have adjustable interest rates.
Installment Loans. Installment loans to individuals which are not secured
by real estate generally have terms of two to five years and bear interest at
fixed rates. These loans usually are secured by motor vehicles, equipment,
receivables, inventory, investment securities or other personal assets, and in
some instances are unsecured.
The Company maintains a loan committee approach to commercial lending,
which it believes yields positive results in both responsiveness to customer
needs and asset quality. The loan committee usually meets twice per week to
review and discuss new loan requests.
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.
Most of the loans in the Company's portfolio at September 30, 1997, had interest
rates that float with the prime rate.
In the ordinary course of business, the Company issues letters of credit.
See Note M of Notes to Consolidated Financial Statements. The Company applies
the same credit standards to these commitments as it uses in all its lending
activities and has included these commitments in its lending risk evaluations.
The Company's exposure to credit loss under letters of credit is represented by
the amount of these commitments. Under applicable federal and state law,
permissible loans to one borrower were limited to an aggregate of $1.8 million
for the Company at September 30, 1997. As of October 16, 1997, that limit was
raised to $2.0 million. With the infusion of approximately $4.0 million in
capital to the Bank (see "Use of Proceeds"), the Company expects that the Bank's
lending limit will increase by approximately $0.6 million to a total of $2.6
million.
COMPETITION
The Company faces a high degree of competition. In its marketplace, there
are numerous small banks and several larger national and regional financial
banking groups. The Company also competes with insurance companies, savings and
loan associations, credit unions, leasing companies, mortgage companies, and
other financial service providers. Many of the banks and other financial
institutions with which the Company competes have capital resources and legal
lending limits substantially in excess of the capital resources and legal
lending limits of the Company.
The Company competes for loans and deposits principally based on the range
and quality of services provided, interest rates, loan fees and office
locations. The Company actively solicits deposit customers and competes by
offering them superior customer service and a complete product line. Over the
past few years, competition has increased as a result of changes in Colorado
banking laws that permit statewide branching and
39
<PAGE> 41
allow out-of-state holding companies to acquire Colorado-based financial
institutions. The Company believes its customer service, broad product line and
banking franchise enable it to compete in its market area.
The Company will also face significant competition from other financial
institutions in any potential acquisitions. Many of these competitors have
substantially greater resources than the Company as well as the ability to issue
marketable equity securities that can be used as part of the purchase price.
PROPERTIES
The principal offices of both the Company and the Bank are located in a
three story building at 8100 East Arapahoe Road, Englewood, Colorado. The
building is owned by Nagrom LLC. See "Related Party Transactions." The Company
and the Bank lease approximately 22,300 square feet at this facility.
The Bank maintains six other full service banking facilities in the Denver
metropolitan area. The North Denver Branch is located at 4988 Federal Boulevard,
Denver; the land is leased from an unaffiliated third party but the facility,
consisting of approximately 3,000 square feet, is owned by the Company. The
Monaco Branch is located at 777 South Monaco, Denver, and the Company owns the
land and building at this site, of which the banking facility is approximately
3,000 square feet. The South Broadway Branch is located at 4600 South Broadway,
Englewood, and the Company owns the land and the building. The South Broadway
facility comprises approximately 3,000 square feet. The West Highland Branch is
located at 3804 West 32nd Avenue, Denver, and the Company leases the land and
facility, comprising approximately 2,600 square feet, from 1996 Newton LLC. See
"Related Party Transactions." The Greenwood Village Branch is located at 6300
South Syracuse Way, Greenwood Village, and the Company leases the facilities
from an unaffiliated third party. The Greenwood Village facility comprises
approximately 850 square feet. The Lower Downtown ("LoDo") Branch is located at
1401 17th Street, and the Company leases the 3,400 square foot facility from an
unaffiliated third party.
LEGAL PROCEEDINGS
The Company 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 the Company or any of its
subsidiaries which, if determined adversely, would have a material adverse
effect on the financial condition or results of operations of the Company.
EMPLOYEES
As of September 30, 1997, the Company had 78 full-time employees.
Management considers its relationship with its employees to be good.
40
<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their respective ages
and positions as of January 20, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Thomas R. Kowalski...... 58 Chairman of the Board and Chief Executive Officer of the
Company and the Bank
Larry A. Olsen(1)....... 52 President, Chief Operating Officer and Director of the
Company and the Bank
Raymond L. Anilionis.... 50 Vice President and Director of the Company and Director of
the Bank
Susan A. Putland........ 50 Vice President, Finance and Secretary of the Company and
Vice President, Financial Services of the Bank
Hiram J. Welton......... 47 Treasurer and Chief Accounting Officer of the Company and
Finance Officer of the Bank
Dr. Donald B. 69
Brown(1).............. Director of the Company and the Bank
William F. Sievers(1)... 54 Director of the Company and the Bank
</TABLE>
- - ---------------
(1) Member of the Audit Committee.
There are no family relationships among any of the directors and executive
officers of the Company or the Bank except that Thomas R. Kowalski is the father
of the Bank's Vice President of Real Estate, Ryan Kowalski. All directors of the
Company hold office until the next meeting of shareholders or until their
successors are elected and qualified.
THOMAS R. KOWALSKI has been Chairman of the Board and Chief Executive
Officer of the Company since he founded it in 1984, and has served in the same
positions for the Bank since January 1983. Since 1980 he has been Chairman of
the Board and Chief Executive Officer of the First State Bank of Hotchkiss, a
Colorado bank. Mr. Kowalski is also Chief Executive Officer, and beneficial
owner of approximately 97.0% of the outstanding stock, of Orchard Valley
Financial Corporation, the bank holding company that owns First State Bank of
Hotchkiss. From October 1972 through September 1992, Mr. Kowalski was President
of Realtek Company, a general contractor and real estate development corporation
he sold to Ryan Kowalski in 1992.
LARRY A. OLSEN has been President, Chief Operating Officer and Director of
the Company since 1997 and has served in the same positions of the Bank since
1994. From 1989 to 1994, Mr. Olsen was the Chief Operating Officer of Non-Legal
Affairs for Codilis and Stawiarski, P.C., a law firm. From 1972 to 1988, Mr.
Olsen was employed by Columbia Savings & Loan Association, having served from
1986 to 1988 as President and Chief Operating Officer.
RAYMOND L. ANILIONIS has been a Vice President and Director of the Company
since 1984 and a Director of the Bank since 1984. Since January 1994, Mr.
Anilionis has been the President of Landmark Realty Advisors, a real estate
consulting and appraisal company. From 1974 to December 1993, Mr. Anilionis was
employed in the mortgage banking and real estate development and management
industry by Mortgage Investment Company and Associated Investment Company in
various positions, including Senior Vice President. He is also the owner of
First Fidelity Service Corp., a real estate consulting firm.
SUSAN A. PUTLAND has been Vice President, Finance and Secretary of the
Company since 1997 and Vice President, Financial Services for the Bank since
1996. Ms. Putland also serves as an independent director of FirstPlus Funding
Corp. and CITGO Funding Corp II, special purpose finance securitization
entities. Ms. Putland was Vice President, Structured Finance for The Chotin
Group Corporation and its affiliates, a privately-held securities issuer and
investor, from 1989 to December 1995.
41
<PAGE> 43
HIRAM J. WELTON has been Treasurer and Chief Accounting Officer of the
Company since 1997 and Finance Officer for the Bank since 1997. Mr. Welton was
Vice President of Red Rocks Federal Credit Union from 1996 to 1997. He was Vice
President of Trepp Risk Management from 1994 to 1996. Prior to 1994, Mr. Welton
was Manager of GRA, Thompson, White & Co. P.A., an accounting and consulting
firm.
DR. DONALD B. BROWN has been a Director of the Company since 1997 and a
Director of the Bank since 1989. Dr. Brown previously served as a Director of
the Company from 1989 to 1994. Dr. Brown has practiced medicine as an
endocrinologist since 1961.
WILLIAM F. SIEVERS has been a Director of both the Company and the Bank
since 1997. Since 1994, Mr. Sievers has been employed with Lucent Technologies
as Program Management Vice President in the Network Systems Division.
Previously, he worked for AT&T for over 30 years in several capacities,
including the senior management positions of Manufacturing Vice President and
Regional Vice President.
Directors of the Company have not been compensated by the Company for their
services, but in 1997 received $200 per Board meeting attended in their
capacities as Directors of the Bank. In 1998 each Director will receive $500 for
each board meeting attended. In addition, directors are reimbursed for expenses
incurred in attending board meetings.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company to
its Chief Executive Officer for 1997 and 1996. No other executive officer of the
Company received compensation from the Company exceeding $100,000 during 1997
and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
AWARDS PAYOUTS
---------- SECURITIES -------
OTHER UNDER-
ANNUAL RESTRICTED LYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- - ------------------------------------------ ---- ------- ------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas R. Kowalski, 1997 150,000 275,000 -- -- -- -- --
Chairman of the 1996 150,000 238,101 -- -- -- -- --
Board and Chief Executive Officer
</TABLE>
The Company does not have any compensatory option or incentive plans. None
of the directors or officers of the Company have any options, warrants or other
similar rights to purchase securities of the Company. However, the Company has
the right to adopt or issue, as the case may be, such plans, options, warrants
or rights in the future.
INDEMNIFICATION
The Company's Articles of Incorporation provide that the board of directors
is authorized, without the need for shareholder approval, to indemnify
directors, officers and other persons without regard to whether or not such
powers are expressly provided for by Colorado law; provided, however, that the
exercise of such indemnification powers by the board of directors are consistent
with Colorado law. Generally under Colorado law, any director or officer who is
made or threatened to be made a party to any suit or proceeding may be
indemnified if such director or officer acted in good faith and had no
reasonable basis to believe that (i) in the case of conduct in an official
capacity with the Company, his or her conduct was in the Company's best
interests; and (ii) in all other cases, his or her conduct was at least not
opposed to the best interests of the Company; and, with respect to any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. Colorado law further provides that such indemnification is not
exclusive of any other rights to which such individuals may be entitled under a
company's Articles of Incorporation or Bylaws, or pursuant to any agreement,
insurance policies, vote of shareholders or disinterested directors or
otherwise.
42
<PAGE> 44
In addition, the Company's Articles of Incorporation provide that to the
fullest extent permitted by Colorado law, the Company's directors will not be
liable for monetary damages for breach of the directors' fiduciary duty of care
to the Company and its shareholders. Notwithstanding such limitations on
liability, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company or its shareholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for certain activities prohibited by Colorado law (relating
primarily to the unlawful payment of dividends, repurchase of stock or improper
loans or guarantees to directors), and for any transaction from which the
director derived an improper personal benefit. This provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought. The Company is not aware of any other threatened litigation that may
result in claims for indemnification by any director, officer, employee or other
agent.
43
<PAGE> 45
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock of the Company, as of January 20, 1998, by (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock and (ii) each director of the Company and certain
executive officers and (iii) all directors and executive officers as a group.
Unless otherwise indicated, based on information furnished by such owners,
management believes that the shareholders listed below have sole investment and
voting power with respect to their shares.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED OF CLASS
---------------- ------------ ----------
<S> <C> <C>
Thomas R. Kowalski.................................... 109,055(1) 51.1%
8100 East Arapahoe Road
Englewood, Colorado 80112
Raymond L. Anilionis.................................. 21,426(2) 10.0%
9034 East Easter Place, Suite 202
Englewood, Colorado 80112
Warren P. Cohen....................................... 23,750 11.1%
595 South Broadway, Suite 200
Denver, Colorado 80209
Orchard Valley Financial Corporation.................. 21,815(3) 10.2%
8100 East Arapahoe Road
Englewood, Colorado 80112
Realtek Company Employees' Profit..................... 20,494(3) 9.6%
Sharing Plan and Trust
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Vernon J. Purdy....................................... 15,625 7.3%
1900 East Girard, Suite 509
Englewood, Colorado 80110
William D. Kenny...................................... 13,000 6.1%
38 Eagle Drive
Littleton, Colorado 80123
Larry A. Olsen........................................ 5,053 2.4%
8100 East Arapahoe Road
Englewood, Colorado 80112
Dr. Donald B. Brown................................... -- --
4545 East Ninth Avenue
Denver, Colorado 80220
William F. Sievers.................................... -- --
26 West Dry Creek Circle, Suite 750
Littleton, Colorado 80120
All executive officers and directors as a group
(seven persons)..................................... 135,534 63.5%
</TABLE>
- - ---------------
(1) Of this amount, 53,160 shares are owned directly, and all other shares owned
indirectly through entities or persons controlled by Mr. Kowalski.
(2) Of this amount, 18,300 shares are owned directly, and all other shares are
owned by an entity controlled by Mr. Anilionis.
44
<PAGE> 46
(3) Due to Mr. Kowalski's significant beneficial ownership of the named
entities, these shares are included in the ownership of Thomas R. Kowalski
in the table.
Stock Purchase Agreement. In December 1990, the Company, Thomas R.
Kowalski, Ryan R. Kowalski Trust, Realtek Company Profit Sharing Plan and Trust,
Thomas Investments and Orchard Valley Financial Corporation (the "Shareholders")
entered into a Stock Purchase Agreement in order to provide for the orderly
continuation of the affairs of the Company. The agreement, as amended and
restated in December 1997, provides that upon the death of Thomas R. Kowalski,
the Shareholders will have the option to require the Company to purchase their
shares of Company common stock to the extent the Company receives proceeds from
a life insurance policy on the life of Thomas R. Kowalski. As of January 20,
1998, the Shareholders held an aggregate of 109,055 shares of common stock. The
agreement specifies that each year the Shareholders are to determine the value
of the stock for purposes of establishing the purchase price to be paid by the
Company. If the Shareholders do not determine a value, the value from the most
recent determination will be used, subject to appropriate adjustment to reflect
book value per share of the Company since the effective date of the last
valuation. For 1996, the Shareholders determined the value to be $45 per share.
A valuation has not been determined for 1997. The Company has purchased a life
insurance policy in the amount of $3,000,000 on Thomas R. Kowalski, which will
be used, at the option of Shareholders, to purchase all or a portion of the
Shareholders' shares. The value of the Shareholders' shares based on the 1996
valuation is approximately $4.9 million.
RELATED PARTY TRANSACTIONS
Nagrom LLC, a Colorado limited liability company, owns the building and
land in which the Company's principal office is located. The Company and the
Bank lease office space in the building. The lease began in 1995 and is for a
period of 10 years. The rent for 1997 was approximately $328,000, and will
increase 3.5% per year. The Board of Directors of the Company believes that the
rates are comparable to those which could be obtained from unaffiliated third
parties. Nagrom LLC is beneficially owned by Kowalski Capital LLC, a Colorado
limited liability company (71.0%), Raymond L. Anilionis (13.0%), an officer and
director of the Company, and Warren P. Cohen (16.0%), a director of the Bank.
Kowalski Capital LLC is owned 95.0% by the Thomas R. Kowalski Irrevocable Trust.
The beneficiaries of the trust are Ryan Kowalski (the adult son of Thomas R.
Kowalski) and Ryan Kowalski's minor daughter. The remaining 5.0% of Kowalski
Capital LLC is owned by Respond Corp., of which Thomas R. Kowalski is the sole
shareholder.
1996 Newton LLC, a Colorado limited liability company, leases space to the
Bank for its branch at 32nd Avenue and Newton, Denver. 1996 Newton LLC is owned
by Kowalski Capital (50.0%), Raymond L. Anilionis (25.0%) and Warren P. Cohen
(25.0%). The lease commenced in May 1996 and runs for a period of 10 years. Rent
is approximately $30,300 for the period of May 1997 through May 1998, and
incrementally increases to $36,000 per year for the last five years of the
lease. The Board of Directors of the Company believes that the rates are
comparable to those which could be obtained from unaffiliated third parties.
In July 1995, Thomas R. Kowalski, Raymond L. Anilionis and Warren P. Cohen
(the "Guarantors"), all of whom are officers and/or directors of the Company
and/or the Bank and significant shareholders of the Company, entered into an
agreement with the Company in connection with their personal guarantee of a $3.0
million loan to the Bank from First Interstate Bank of Denver. In return for the
guarantee, the Company agreed to indemnify the Guarantors for all liabilities,
costs or expenses relating to the guarantee and to provide additional
compensation to the Guarantors. The additional compensation has consisted of an
aggregate fee, allocated among the three Guarantors, equal to 1.5% of the
outstanding balance of the loan on each anniversary date plus a performance
bonus based on earnings of the Bank as specified in the agreement. The present
$2.0 million balance of the loan will be paid with net proceeds of the sale of
the Junior Subordinated Debentures to MB Capital. See "Use of Proceeds." The
fees paid to the Guarantors from 1995 through 1997 in the aggregate were as
follows: Mr. Kowalski -- $274,512; Mr. Anilionis -- $63,828; and Mr. Cohen --
$63,828.
In March 1997, the Bank entered into a Consulting Agreement with First
Fidelity Service Corp. ("First Fidelity"), a consulting firm which is
wholly-owned by Raymond L. Anilionis. The agreement provides
45
<PAGE> 47
that First Fidelity will render services regarding bank site acquisitions, real
estate acquisitions, management of construction projects, evaluation and
assistance with negotiations of complex loans and work out transactions and any
other services reasonably requested by the Bank. The term of the agreement is
for one year, but automatically renews each year unless terminated by either
party upon 30 days notice. Pursuant to the terms of the consulting agreement,
First Fidelity is paid $5,000 per month for its services.
The Bank has entered into certain loan participations with First State Bank
of Hotchkiss, an entity controlled by Thomas R. Kowalski. Approximate loan
principal balances outstanding under these participations are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1997 1996 1995
------------- ---- ----
(IN
THOUSANDS)
<S> <C> <C> <C>
Participations sold..................... $10,401 $10,916 $8,031
Participations purchased................ 1,755 250 1,100
</TABLE>
The Bank has also sold loan participations to shareholders, officers and
directors of the Company on the same terms as sold to third parties. At
September 30, 1997, the participations sold to related parties were
approximately $1.9 million. At December 31, 1996 and 1995, the participations
sold to related parties were approximately $7.9 million and $0.5, respectively.
In September 1993 the Bank entered into an agreement with First State Bank
of Hotchkiss to purchase its branching rights. In total, the Bank paid First
State Bank of Hotchkiss $2,500 a month over 40 months ending in September 1997.
The officers, directors and principal shareholders of the Company and
members of their immediate families and businesses in which they hold
controlling interests are customers of the Bank. Credit transactions with these
parties are subject to review by the Bank's board of directors. All outstanding
loans and extensions of credit by the Bank to these parties were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and in the opinion of management did not
involve more than the normal risk of collectibility or present other unfavorable
features. At September 30, 1997, the aggregate balance of loans and advances
under existing lines of credit to these parties was approximately $2.5 million
or 2.2% of the Bank's total loans.
SUPERVISION AND REGULATION
GOVERNMENT REGULATION
The Company and the Bank are extensively regulated under federal and
Colorado law. These laws and regulations are primarily intended to protect
depositors and the deposit insurance fund of the Federal Deposit Insurance
Corporation ("FDIC"), not shareholders of the Company. 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
the Company and the Bank. The Company 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.
MEGABANK FINANCIAL CORPORATION
General. The Company is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended, and is subject to regulation,
supervision and examination by the Federal Reserve. The Company is required to
file an annual report and such other reports as the Federal Reserve now requires
or may require.
46
<PAGE> 48
Acquisitions. As a bank holding company, the Company 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
such 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 capital adequacy of bank
holding companies. As discussed below, the Bank is also subject to the capital
adequacy requirements of the FDIC and the Division of Banking for the State of
Colorado. The Federal Reserve uses a combination of risk-based guidelines and
leverage ratios to evaluate capital adequacy of the Company.
The Federal Reserve has adopted a system using risk-based capital adequacy
guidelines to evaluate the 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. Certain
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 risk-based
capital guidelines, total capital is defined as the sum of "Tier 1" and "Tier 2"
capital elements, with Tier 2 being limited to 100% of Tier 1. For bank holding
companies, Tier 1 capital includes, with certain restrictions, common
shareholders' equity, perpetual preferred stock (no more than 25% of Tier 1
capital being comprised of cumulative preferred stock) and minority interests in
consolidated subsidiaries. Tier 2 capital includes, with certain limitations,
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 guidelines require a minimum ratio of total capital to
risk-weighted assets of 8% (of which at least 4% should be in the form of Tier 1
capital).
At September 30, 1997, the Company's Tier 1 capital was $10.7 million.
In addition to the risk-based capital guidelines, the Federal Reserve and
the FDIC 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 Tier 1 capital divided by its average tangible assets. Based upon
the current capital status of the Company, the applicable minimum required
leverage ratio is 5%.
The table below sets forth ratios of (i) total capital to risk-weighted
assets, (ii) Tier 1 capital to risk-weighted assets and (iii) Tier 1 capital to
tangible assets, at September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------
RATIO ACTUAL MINIMUM REQUIRED
----- ------ ----------------
<S> <C> <C>
Total capital to risk-weighted assets............... 9.78% 8%
Tier 1 capital to risk-weighted assets.............. 8.53% 4%
Tier 1 capital to average tangible assets........... 7.11% 5%
</TABLE>
Failure to meet the capital guidelines may result in the initiation by the
Federal Reserve of appropriate supervisory or enforcement actions.
47
<PAGE> 49
MEGABANK OF ARAPAHOE
General. The Bank is a Colorado banking corporation, the deposits of which
are insured by the FDIC, and is subject to supervision and regulation by the
FDIC and the Colorado Division of Banking.
Permissible Activities. No Colorado bank may engage in any activity not
permitted for national banks, unless the institution complies with applicable
capital requirements and the FDIC determines that the activity poses no
significant risk to the insurance fund. The Bank is not presently involved in
the types of transactions covered by this limitation. Colorado has no
limitations on the number of branches a bank may establish.
Community Reinvestment Act. Enacted in 1977, the federal Community
Reinvestment Act ("CRA") has become increasingly important to financial
institutions, including their holding companies. The CRA currently allows
regulators to turn down an applicant seeking to make an acquisition or establish
a branch unless it has performed satisfactorily under the CRA. Satisfactory
performance means meeting adequately the credit needs of the communities the
applicant serves. The applicable federal regulators regularly now conduct CRA
examinations to assess the performance of financial institutions. During the
last examination, the Bank received a satisfactory rating. As a result,
management believes that the Bank's performance under CRA will not impede
regulatory approvals of proposed acquisitions or branching opportunities.
Dividend Restrictions. Dividends paid by the Bank provide substantially all
of the operating and investing cash flow of the Company. Under Colorado law, the
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 combined with its retained net
profits for the preceding two years. In addition, a bank cannot pay a dividend
if it will cause the bank to be "undercapitalized." See "Risk
Factors -- Dependence on Dividends From Subsidiary Bank."
Examinations. The Bank is examined from time to time by the FDIC. Based
upon such 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 such assets. The Colorado Division of Banking (the "Division")
also conducts examinations of state-chartered banks. The Division may accept the
results of a federal examination in lieu of conducting an independent
examination. The Division also has the authority to revalue the assets of a
state-chartered institution and require it to establish reserves.
Capital Adequacy. The FDIC 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
Tier 1 and Tier 2 capital being determined in basically the same manner as
described above for bank holding companies. The FDIC 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 FDIC risk-based capital guidelines require state non-member banks to
have a ratio of Tier 1 or core capital to total risk-weighted assets of 4% and a
ratio of total capital to total risk-weighted assets of 8%.
The FDIC leverage guidelines require that state banks maintain Tier 1
capital of no less than 3% and up to 5% of total tangible assets. The Bank's
applicable guideline estimated to be 5%. Banks with capital ratios below the
required minimum are subject to certain 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 sets forth the Bank's capital ratios at September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------
RATIO ACTUAL MINIMUM REQUIRED
----- ------ ----------------
<S> <C> <C>
Total capital to risk-weighted assets............... 10.72% 8%
Tier 1 capital to risk-weighted assets.............. 9.48% 4%
Tier 1 capital to average tangible assets........... 8.66% 4%
</TABLE>
48
<PAGE> 50
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, a Tier 1 risk-based capital ratio of
6% or greater, and a Tier 1 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 less than 10% but not less than 8%, a Tier 1
risk-based capital ratio of less than 6% but not less than 4% and a leverage
ratio of less than 5% but not less than 4%. Under these regulations, as of
September 30, 1997, the Bank was well capitalized.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
requires the federal banking regulators to take "prompt corrective action" with
respect to capital-deficient institutions. In addition to requiring the
submission of a capital restoration plan, FDICIA contains broad restrictions on
certain activities of undercapitalized institutions involving asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain 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 such 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 very 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 higher
than the loan to value limitations established by the Bank.
Deposit Insurance Premiums. The assessment schedule for banks ranges from 0
to 27 cents per $100 of deposits subject to Bank Insurance Fund ("BIF")
assessments, based on each institution's risk classification. The Bank's insured
deposits are subject to assessment payable to BIF. An institution's risk
classification is based on an assignment of the institution by the FDIC 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). Currently, the Bank is a
well capitalized institution and a Group A supervisory subgroup.
Interstate Banking Legislation. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"), which became effective
September 1995, has eliminated many of the historical barriers to the
acquisition of banks by out-of-state bank holding companies. The Interstate Act
facilitates the interstate expansion and consolidation of banking organizations
by permitting: (i) bank holding companies that are adequately capitalized and
managed to acquire banks located in states outside their home states regardless
of whether such acquisitions are authorized under the laws of the host state;
(ii) the interstate merger of banks after June 1, 1997, subject to the right of
individual states either to pass legislation providing for earlier effectiveness
of such mergers or to "opt out" of this authority prior to such date; (iii)
banks to establish new branches on an interstate basis provided that such action
is specifically authorized by the law of the host state; (iv) 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 such state would be authorized to do so; and (v) banks to
receive deposits, renew time deposits, close loans, service loans and
49
<PAGE> 51
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.
Colorado has neither "opted-in" nor "opted-out" of the interstate branching
provisions and therefore out of state banks have become permitted to branch into
Colorado after June 30, 1997 in accordance with applicable laws. The Bank does
not currently have any plans generally to take any actions permitted by the
Interstate Act.
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 difficult 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 FDIC 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 Colorado Division of Banking possesses certain
enforcement powers to address violations of the Colorado Banking Code by
Colorado state-chartered banks.
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
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities and the Common Securities will be issued pursuant
to the terms of the Trust Agreement. The Trust Agreement will be qualified as an
indenture under the Trust Indenture Act. Initially, Wilmington Trust Company
will be the Delaware Trustee and 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 and those
made part of the Trust Agreement by the Trust Indenture Act. This summary of
certain terms and provisions of the Preferred Securities and the Trust Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Trust Agreement, including
the definitions therein of certain terms, and the Trust Indenture Act. However,
management believes that all material terms of the Preferred Securities in the
Trust Agreement are set forth in the Summary. Wherever particular defined terms
of the Trust Agreement (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein. The form of the
Trust Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Administrative Trustees
on behalf of MB Capital will issue the Preferred Securities and the Common
Securities (collectively, the "Trust Securities"). The
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Preferred Securities will represent preferred undivided beneficial interests in
the assets of MB Capital and the holders thereof will be entitled to a
preference in certain circumstances with respect to Distributions and amounts
payable on redemption or liquidation over the Common Securities of MB Capital
(which will be held by the Company), as well as other benefits as described in
the Trust Agreement.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata, with the Common Securities of MB Capital except as described
under "Subordination of Common Securities of MB Capital Held by the Company"
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 Guarantee executed by the Company for the benefit of the holders
of the Preferred Securities (the "Guarantee") 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 MB Capital does not have funds on hand available to make
such payments. See "Description of Guarantee."
If the Company does not make required payments on the Junior Subordinated
Debentures held by MB Capital, MB Capital will have insufficient funds to pay
Distributions on the Preferred Securities. In such event, a holder of the
Preferred Securities may institute a legal proceeding directly against the
Company to enforce payment of such Distributions to such holder. See
"Description of Junior Subordinated Debentures -- Enforcement of Certain Rights
by Holders of Preferred Securities."
DISTRIBUTIONS
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 in arrears on the 15th day of January, April, July and October
in each year, commencing April 15, 1998 to the holders of the Preferred
Securities on the relevant record dates (each date on which Distributions are
payable in accordance with the foregoing, a "Distribution Date"). The amount of
each Distribution due with respect to the Preferred Securities will include
amounts accrued through the date the Distribution is due. Distributions on the
Preferred Securities will be payable to the holders thereof as they appear on
the register of MB Capital on the relevant record date which, for so long as the
Preferred Securities remain in book-entry form, will be one Business Day (as
defined below) prior to the relevant Distribution Date and, in the event the
Preferred Securities are not in book-entry form, will be the first day of the
month in which the relevant Distribution Date occurs. Distributions will
accumulate from the date of original issuance. The first Distribution Date for
the Preferred Securities will be April 15, 1998.
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 date on
which Distributions are payable on the Preferred Securities is not a Business
Day, payment of the Distribution payable on such date will be made on the next
Business Day (and without any interest or other payment in respect to any such
delay) except that, if such Business Day is in the next succeeding calendar
year, payment of such Distribution shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the date
such payment was originally payable. 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 the State of Colorado 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 MB Capital available for distribution to holders of its
Preferred Securities will be limited to payments by the Company under the Junior
Subordinated Debentures in which MB Capital will invest the proceeds from the
issuance and sale of its Preferred Securities. See "Description of Junior
Subordinated Debentures." If the Company 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 MB Capital has funds legally available for
the payment of such Distributions and cash sufficient to make such payments) is
guaranteed by the Company. See "Description of Guarantee."
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Extension Period. So long as no Debenture Event of Default has occurred and
is continuing, the Company has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each such period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. As a consequence of any such election, quarterly Distributions on
the Preferred Securities will be deferred by MB Capital during any such
Extension Period. Distributions to which holders of Preferred Securities are
entitled will accumulate additional amounts thereon at the rate per annum of
% thereof, compounded quarterly from the relevant Distribution Date, to the
extent permitted under applicable law. The term "Distributions" as used herein
shall include any such additional accumulated amounts. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock (which includes common and preferred stock)
or (ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks pari passu
with or junior in interest to the Junior Subordinated Debentures (other than (a)
dividends or distributions in common stock of the Company, (b) any declaration
of a dividend in connection with the implementation of a stockholders' rights
plan, or the issuance of stock under any such plan in the future, or the
redemption or repurchase of any such rights pursuant thereto, (c) payments under
the Guarantee 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 such Extension Period, the Company may further extend such
Extension Period, provided that such extension does not cause such Extension
Period to exceed 20 consecutive quarters or extend beyond the Stated Maturity.
Upon the termination of any such Extension Period and the payment of all amounts
then due, and subject to the foregoing limitations, the Company may elect to
begin a new Extension Period. Subject to the foregoing, there is no limitation
on the number of times that the Company may elect to begin an Extension Period.
The Company 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 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 such repayment or redemption shall be applied by
the Property Trustee to redeem a Like Amount (as defined below) of the Trust
Securities, upon not less than 30 nor more than 60 days' notice of a date of
redemption (the "Redemption Date"), at the Redemption Price (as defined below).
See "Description of Junior Subordinated Debentures -- Redemption." If less than
all of the Junior Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption of the Trust Securities pro rata.
Optional Redemption of Junior Subordinated Debentures. The Company will
have the right to redeem the Junior Subordinated Debentures (i) on or after
, 2003, 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 so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof, or (ii) at any time, in whole (but not in
part), upon the occurrence of a Tax Event, an Investment Company Event or a
Capital Treatment Event at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof, in each case 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 shall
occur and be continuing, the Company has the right to redeem the Junior
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Subordinated Debentures in whole (but not in part) and thereby cause a mandatory
redemption of the Trust Securities in whole (but not in part) at the Redemption
Price (as defined below) within 90 days following the occurrence of such Tax
Event, Investment Company Event or Capital Treatment Event, in each case subject
to receipt of prior approval by the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. In the event a
Tax Event, an Investment Company Event or a Capital Treatment Event has occurred
and is continuing and the Company does not elect to redeem the Junior
Subordinated Debentures and thereby cause a mandatory redemption of the Trust
Securities or to liquidate MB Capital and cause the Junior Subordinated
Debentures to be distributed to holders of the Trust Securities in liquidation
of MB Capital as described below, such Trust Securities will remain outstanding
and Additional Sums (as defined below) may be payable on the Junior Subordinated
Debentures.
DEFINITIONS
"Additional Sums" means the additional amounts as may be necessary to be
paid by the Company with respect to the Junior Subordinated Debentures in order
that the amount of Distributions then due and payable by MB Capital on the
outstanding Trust Securities of MB Capital shall not be reduced as a result of
any additional taxes, duties and other governmental charges to which MB Capital
has become subject.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated 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 such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of MB Capital, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such 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 the Company having received prior approval of the Federal
Reserve if so required under applicable capital guidelines or policies of the
Federal Reserve, the Company will have the right at any time to liquidate MB
Capital and, after satisfaction of the liabilities of creditors of MB Capital as
provided by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of Trust Securities in liquidation of MB Capital.
After the liquidation date fixed for any distribution of Junior Subordinated
Debentures for Preferred Securities (i) such Preferred Securities will no longer
be deemed to be outstanding, (ii) 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 such distribution and (iii) 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 such Preferred Securities, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on the
Preferred Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or 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 MB
Capital 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 MB Capital, may trade at a discount to
the price that the investor paid to purchase the Preferred Securities offered
hereby.
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REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date will be redeemed at
the Redemption Price with the applicable 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 MB Capital has funds on hand available
for the payment of such Redemption Price. See "-- Subordination of Common
Securities of MB Capital Held by the Company" and "-- 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 such
holder's registered address. Unless MB Capital defaults in payment of the
applicable Redemption Price, on and after the Redemption Date, Distributions
will cease to accrue on such Preferred Securities called for redemption.
If MB Capital gives a notice of redemption in respect of the Preferred
Securities, then, by 12:00 noon, Denver time, on the Redemption Date, the
Property Trustee will pay the Redemption Price to the Depositary, as the record
holder of the Preferred Securities, and the Depositary thereafter will credit
the Redemption Price to the Participants for whom it holds the Preferred
Securities. See "Book-Entry Issuance." If such 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 such Preferred Securities
funds sufficient to pay the aggregate Redemption Price and will give such paying
agent irrevocable instructions and authority to pay the Redemption Price to the
holders thereof upon surrender of their certificates evidencing such Preferred
Securities. Notwithstanding the foregoing, Distributions payable on or prior to
the Redemption Date will be payable to the holders of such Preferred Securities
on the relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of the Preferred Securities will
cease, except the right of the holders of the Preferred Securities to receive
the applicable Redemption Price, but without interest on such Redemption Price,
and such Preferred Securities will cease to be outstanding. In the event that
any date fixed for redemption of such Preferred Securities is not a Business
Day, then payment of the Redemption Price payable on such date will be made on
the next succeeding Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day falls in the next
calendar year, such payment will be made on the immediately preceding Business
Day. In the event that payment of the Redemption Price in respect of Preferred
Securities called for redemption is improperly withheld or refused and not paid
either by MB Capital or by the Company pursuant to the Guarantee, Distributions
on such Preferred Securities will continue to accrue at the then applicable
rate, from the Redemption Date originally established by MB Capital for such
Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price. See "Description of Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), the Company 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 thereof as they appear
on the register of such Preferred Securities on the relevant record date, which
date will be one Business Day prior to the relevant Redemption Date or
Liquidation Date, as applicable; provided, however, that in the event that any
Preferred Securities are not in book-entry form, the relevant record date for
such Preferred Securities will be a date at least 15 days prior to the
Redemption Date or Liquidation Date, as applicable. In the case of a
liquidation, the record date will be no more than 45 days before the Liquidation
Date.
If less than all of the Trust Securities issued by MB Capital are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed will be allocated pro rata to the Preferred
Securities and Common Securities based upon the relative Liquidation Amounts of
such classes. The particular Preferred Securities to be redeemed will be
selected by the Property Trustee from the
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outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee shall deem fair and appropriate and which may
provide for the selection for redemption of portions (equal to $10 or an
integral multiple thereof) of the Liquidation Amount of Preferred Securities.
The Property Trustee shall 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 MB CAPITAL HELD BY THE COMPANY
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amounts of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default shall have occurred and be continuing, no payment of
any Distribution on, or applicable Redemption Price of, any of the Common
Securities, and no other payment on account of the redemption, liquidation or
other acquisition of the Common Securities, shall be made unless payment in full
in cash of all accumulated and unpaid Distributions on all of the outstanding
Preferred Securities for all Distribution periods terminating on or prior
thereto, or in the case of payment of the applicable Redemption Price the full
amount of such Redemption Price on all of the outstanding Preferred Securities
then called for redemption, shall have been made or provided for, and all funds
available to the Property Trustee shall first be applied to the payment in full
in cash of all Distributions on, or 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, the Company as holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default until the effects of all such Events of Default have been
cured, waived or otherwise eliminated. Until any such Events of Default have
been so cured, waived or otherwise eliminated, the Property Trustee shall act
solely on behalf of the holders of the Preferred Securities and not on behalf of
the Company 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
The Company will have the right at any time to terminate MB Capital and
cause the Junior Subordinated Debentures to be distributed to the holders of the
Preferred Securities. Such right is subject to the Company 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, pursuant to the Trust Agreement, MB Capital shall
automatically terminate upon expiration of its term and shall earlier terminate
on the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) delivery by the Company of written direction to
the Property Trustee to terminate MB Capital (which direction is optional and
wholly within the discretion of the Company); (iii) redemption of all of the
Preferred Securities as described under "Description of the Preferred
Securities -- Redemption -- Mandatory Redemption;" and (iv) the entry of an
order for the dissolution of MB Capital by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv)
above or upon the expiration of the term of MB Capital, MB Capital shall be
liquidated by the Trustees as expeditiously as the Trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of MB
Capital as provided by applicable law, to the holders of such Trust Securities a
Like Amount of the Junior Subordinated Debentures, unless such distribution is
determined by the Property Trustee not to be practical, in which event such
holders will be entitled to receive out of the assets of MB Capital available
for distribution to holders, after satisfaction of liabilities to creditors of
MB Capital as provided by applicable law, an amount equal to, in the case of
holders of Preferred Securities, the aggregate of the Liquidation Amount of $10
per Trust Security plus accrued and unpaid Distributions thereon to the date of
payment (such amount being the "Liquidation
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Distribution"). If such Liquidation Distribution can be paid only in part
because MB Capital has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by MB
Capital on the Preferred Securities will be paid on a pro rata basis. The
holder(s) of the Common Securities will be entitled to receive distributions
upon any such liquidation pro rata with the holders of the 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, MB Capital 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 "Certain
Federal Income Tax Consequences." If the Company elects neither to redeem the
Junior Subordinated Debentures prior to maturity nor to liquidate MB Capital 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 the Company elects to liquidate MB Capital and thereby causes the Junior
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of MB Capital, the Company will continue to have the right to
shorten the maturity of such Junior Subordinated Debentures, subject to certain
conditions. See "Description of Junior Subordinated Debentures -- General."
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 (an "Event of
Default") with respect to the Preferred Securities and Common Securities
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default under the Indenture
(see "Description of Junior Subordinated Debentures -- Debenture Events of
Default"); or
(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of
30 days; or
(iii) default by the Trust in the payment of any Redemption Price of
any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Property Trustee in the Trust Agreement
(other than a default or breach in the performance of a covenant or
warranty which is addressed in clause (ii) or (iii) above), and
continuation of such default or breach, for a period of 60 days after there
has been given, by registered or certified mail, to the Property Trustee by
the holders of at least 25% in aggregate Liquidation Amount of the
outstanding Preferred Securities, a written notice specifying such default
or breach and requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company 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 will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, unless such Event of Default shall have
been cured or waived. The Company 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 MB Capital 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 the Junior Subordinated Debentures then outstanding may
declare all of the Junior Subordinated Debentures to be due and payable
immediately by giving notice in writing to the Company (and to the Property
Trustee, if notice is 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 the right in certain
circumstances to bring a Direct Action (as defined below). See "Description of
Junior Subordinated Debentures -- Enforcement of Certain Rights by Holders of
Preferred Securities."
REMOVAL OF TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any Trustee may be removed at any time by the holder of the Common Securities.
If a Debenture Event of Default has occurred and is continuing, the Property
Trustee and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding 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 the Company 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 shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of Trust Property may at
the time be located, the Company, as the holder of the Common Securities, and
the Administrative Trustees will have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust Property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone will have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property
Trustee, the Delaware Trustee or any Administrative Trustee that is not a
natural person may be merged or converted or with which it may be consolidated,
or any Person resulting from any merger, conversion or consolidation to which
such Trustee will be a party, or any person succeeding to all or substantially
all the corporate trust business of such Trustee, shall be the successor of such
Trustee under the Trust Agreement, provided such corporation shall be otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF MB CAPITAL
MB Capital 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. MB Capital may, at the request of the Company, with the consent
of the Administrative Trustees and without the consent of the holders of the
Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety
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to a trust organized as such under the laws of any State; provided, that (i)
such successor entity either (a) expressly assumes all of the obligations of MB
Capital with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities rank the same as the Preferred Securities rank in priority with
respect to distributions and payments upon liquidation, redemption and
otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures, (iii) any such 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, (iv) such successor entity has a purpose identical to that of MB
Capital, (v) 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, (vi) prior to such a transaction, the Company has received an
opinion from independent counsel to MB Capital experienced in such matters to
the effect that (a) such 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 such
transaction, neither MB Capital nor such successor entity will be required to
register as an investment company under the Investment Company Act and (vii) the
Company or any permitted successor or designee owns all of the common securities
of such successor entity and guarantees the obligations of such successor entity
under the Successor Securities at least to the extent provided by the Guarantee.
Notwithstanding the foregoing, MB Capital shall not, except with the consent of
holders of 100% in Liquidation Amount of the Preferred Securities, enter into
any such transaction, or permit any other entity to consolidate, amalgamate,
merge with or into, or replace it if such transaction, would cause MB Capital 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 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 the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as will be
necessary to ensure that MB Capital 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 MB Capital will not be required to register as
an "investment company" under the Investment Company Act; provided, however,
that in the case of clause (i), such action shall not adversely affect in any
material respect the interests of any holder of Trust Securities, and any
amendments of the Trust Agreement shall become effective when notice thereof is
given to the holders of the Trust Securities. The Trust Agreement may be amended
by the Trustees and the Company (i) with the consent of holders representing not
less than a majority of the aggregate Liquidation Amount of the outstanding
Trust Securities, and (ii) upon receipt by the Trustees of an opinion of counsel
to the effect that such amendment or the exercise of any power granted to the
Trustees in accordance with such amendment will not affect MB Capital's status
as a grantor trust for United States federal income tax purposes or MB Capital's
exemption from status as an "investment company" under the Investment Company
Act, provided that without the consent of each holder of Trust Securities, the
Trust Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount of
any Distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a holder of Trust Securities to
institute suit for the enforcement of any such payment on or after such date.
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So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Trustees shall not (i) 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 Property Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Junior Subordinated Debentures shall be due and
payable or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in aggregate Liquidation Amount of all outstanding Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of Junior Subordinated Debentures affected
thereby, no such consent may be given by the Property Trustee without the prior
consent of each holder of the Preferred Securities. The Trustees shall 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 with respect to the Junior
Subordinated Debentures. In addition to obtaining the foregoing approvals of
such holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trustees shall obtain an opinion of counsel experienced in such
matters to the effect that MB Capital will not be classified as an association
taxable as a corporation for United States federal income tax purposes on
account of such action.
Any required approval of holders of the Preferred Securities may be given
at a meeting of holders of Preferred Securities convened for such purpose or
pursuant to 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 such 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 MB Capital to redeem and cancel the Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustees, shall, for purposes of such 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 ("Global
Preferred Security"). Beneficial interests in the Preferred Securities will be
shown on, and transfers thereof will be effected only through, records
maintained by participants in the Depositary. Except 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 (i) the
Depositary notifies the Company that it is unwilling or unable to continue as a
depositary for such global security and no successor depositary shall have been
appointed, or if at any time the Depositary ceases to be a clearing agency
registered under the Exchange Act, at a time when the Depositary is required to
be so registered to act as such depositary, (ii) the Company in its sole
discretion determines that such global security shall be so exchangeable, or
(iii) there shall have occurred and be continuing an Event of Default under the
Indenture. Any global security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for definitive certificates registered in such
names as the Depositary directs. It is expected that such instructions will be
based upon directions received by the Depositary with respect to ownership of
beneficial interests in such global security. In the event that Preferred
Securities are issued in definitive form, they will be in denominations of $10
and integral multiples thereof 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 represented thereby, such Global Preferred Security may not
be transferred except as a whole by the Depositary to a
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nominee of such Depositary or by a nominee of such Depositary to such Depositary
or another nominee of such Depositary or by the Depositary or any nominee to a
successor Depositary or any nominee of such 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, provided that payment of any
Distribution may be made at the option of the Administrative Trustees by check
mailed to the address of the persons entitled thereto 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 such
Global Preferred Security with or on behalf of the Depositary, the Depositary or
its nominee will credit, on its book-entry registration and transfer system, the
respective aggregate Liquidation Amounts of the individual Preferred Securities
represented by such Global Preferred Security to persons that have accounts with
such Depositary ("Participants"). Such accounts shall be designated by the
dealers, Underwriters or agents with respect to such 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 such 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 (with respect to interests
of Participants) and the records of Participants (with respect to interests of
persons who hold through Participants). The laws of some states require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Preferred Security.
So long as the Depositary for a Global Preferred Security, or its nominee,
is the registered owner of such Global Preferred Security, such Depositary or
such nominee, as the case may be, will be considered the sole owner or holder of
the Preferred Securities represented by such Global Preferred Security for all
purposes under the Trust Agreement governing such Preferred Securities. Except
as provided below, owners of beneficial interests in a Global Preferred Security
will not be entitled to have any of the individual Preferred Securities
represented by such Global Preferred Security registered in their names, will
not receive or be entitled to receive physical delivery of any such Preferred
Securities in definitive form and will not be considered the owners or holders
thereof under the Trust Agreement.
None of the Company, the Property Trustee, any Paying Agent, or the
Securities Registrar (defined below) for such 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 representing such Preferred Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that the Depositary for Preferred Securities or its
nominee, 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 such
Global Preferred Security as shown on the records of such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Preferred Security held through such
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." Such payments will be the responsibility of
such 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 the Company within 90 days, MB Capital will issue
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individual Preferred Securities in exchange for the Global Preferred Security.
In addition, MB Capital may at any time and in its sole discretion, subject to
any limitations described herein relating to such Preferred Securities,
determine not to have any Preferred Securities represented by one or more Global
Preferred Securities and, in such event, will issue individual Preferred
Securities in exchange for the Global Preferred Security or Securities
representing the Preferred Securities. Further, if MB Capital so specifies with
respect to the Preferred Securities, an owner of a beneficial interest in a
Global Preferred Security representing Preferred Securities may, on terms
acceptable to the Company, the Property Trustee and the Depositary for such
Global Preferred Security, receive individual Preferred Securities in exchange
for such beneficial interests, subject to any limitations described herein. In
any such instance, an owner of a beneficial interest in a Global Preferred
Security will be entitled to physical delivery of individual Preferred
Securities represented by such Global Preferred Security equal in Liquidation
Amount to such beneficial interest and to have such Preferred Securities
registered in its name. Individual Preferred Securities so issued will be issued
in denominations, unless otherwise specified by MB Capital, of $10 and integral
multiples thereof.
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 or, if any of the Preferred Securities are not
held by the Depositary, such payments will be made by check mailed to the
address of the holder entitled thereto as such address will appear on the
Register. The paying agent (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 the Company. The Paying Agent will be permitted
to resign as Paying Agent upon 30 days' written notice to the Property Trustee
and the Company. In the event that the Property Trustee shall no longer be the
Paying Agent, the Administrative Trustees will appoint a successor (which shall
be a bank or trust company acceptable to the Administrative Trustees and the
Company) to act as Paying Agent.
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 MB Capital, but upon payment of
any tax or other governmental charges that may be imposed in connection with any
transfer or exchange. MB Capital will not be required to register or cause to be
registered the transfer of the Preferred Securities after such Preferred
Securities have been called for redemption.
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 such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the 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 thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the 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 shall take such action as is directed by the Company and if not so
directed, shall take such action as it deems advisable and in the best interests
of the holders of the Trust Securities and will have no liability except for its
own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate MB Capital in such a way that MB Capital 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
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United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this regard, the Company and the Administrative
Trustees are authorized to take any action, not inconsistent with applicable
law, the certificate of trust of MB Capital or the Trust Agreement, that the
Company and the Administrative Trustees determine in their discretion to be
necessary or desirable for such purposes, as long as such action does not
materially adversely affect the interests of the holders of the related
Preferred Securities. Holders of the Preferred Securities have no preemptive or
similar rights.
MB Capital may not borrow money or issue debt or mortgage or pledge any of
its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures will be issued under the Subordinated
Indenture, dated as of , 1998 (the "Indenture"), between the Company
and Wilmington Trust Company, as trustee (the "Indenture Trustee"). The
following summary of the terms and provisions of the Junior Subordinated
Debentures and the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Indenture, which has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, and to the Trust Indenture Act. The Indenture is qualified under the
Trust Indenture Act. Whenever particular defined terms of the Indenture are
referred to herein, such defined terms are incorporated herein or therein by
reference.
Concurrently with the issuance of the Preferred Securities, MB Capital will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in Junior Subordinated Debentures issued by the
Company. The Junior Subordinated Debentures will be issued as unsecured debt
under the Indenture.
GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate
of % of the principal amount thereof, payable quarterly in arrears on the
15th day of January, April, July and October of each year (each, an "Interest
Payment Date"), commencing April 15, 1998, to the person in whose name each
Junior Subordinated Debenture is registered, subject to certain exceptions, at
the close of business on the Business Day next preceding such Interest Payment
Date. Notwithstanding the above, in the event that either the (i) Junior
Subordinated Debentures are held by the Property Trustee and the Preferred
Securities are no longer in book-entry only form or (ii) the Junior Subordinated
Debentures are not represented by a Global Subordinated Debenture (as defined
herein), the record date for such payment shall be the first day of the month in
which such payment is made. The amount of each interest payment due with respect
to the Junior Subordinated Debentures will include amounts accrued through the
Interest Payment Date. It is anticipated that, until the liquidation, if any, of
MB Capital, 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 such date will be made on
the next Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of % thereof,
compounded quarterly. The term "interest" as used herein shall include 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 , 2028 (such
date, as it may be shortened as hereinafter described, the "Stated Maturity").
Such date may be shortened once at any time by the Company to any date not
earlier than , 2003, subject to the Company having received prior
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approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. In the event that the Company
elects to shorten the Stated Maturity of the Junior Subordinated Debentures, it
will give notice to the registered holders of the Junior Subordinated
Debentures, the Property Trustee and the Indenture Trustee of such shortening no
less than 90 days prior to the effectiveness thereof. 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
the Company. Because the Company is a holding company, the right of the Company
to participate in any distribution of assets of any subsidiaries, including the
Bank, upon any such subsidiaries' liquidation or reorganization or otherwise
(and thus the ability of holders of the Preferred Securities to benefit
indirectly from such distribution), is subject to the prior claims of creditors
of that subsidiary, except to the extent that the Company 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 the Company's subsidiaries, and holders of Junior
Subordinated Debentures should look only to the assets of the Company for
payments on the Junior Subordinated Debentures. The Indenture does not limit the
incurrence or issuance of other secured or unsecured debt of the Company,
including Senior and Subordinated Debt, whether under the Indenture or any
existing or other indenture that the Company may enter into in the future or
otherwise. See "Subordination" below.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Indenture at any time during the term of the
Junior Subordinated Debentures to defer the payment of interest at any time or
from time to time for a period not exceeding 20 consecutive quarters (each such
period an "Extension Period"), provided that no Extension Period may extend
beyond the Stated Maturity. At the end of such Extension Period, the Company
must pay all interest then accrued and unpaid (together with interest thereon at
the annual rate of %, compounded quarterly, to the extent permitted by
applicable law). 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 "Certain
Federal Income Tax Consequences -- Potential Extension of Interest Payment
Period and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including other Junior
Subordinated Debentures) that rank pari passu with or junior in interest to the
Junior Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debentures (other than (a) dividends or distributions in
common stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee, and (d) purchases of
common stock related to rights under any of the Company's benefit plans for its
directors, officers or employees). Prior to the termination of any such
Extension Period, the Company may further extend such Extension Period, provided
that such extension does not cause such Extension Period to exceed 20
consecutive quarters or extend beyond the Stated Maturity. Upon the termination
of any such Extension Period and the payment of all amounts then due on any
Interest Payment Date, the Company may elect to begin a new Extension Period
subject to the above requirements. No interest shall be due and payable during
an Extension Period, except at the end thereof. The Company 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 (i) the date the Distributions on the Preferred Securities would have
been payable except for the election to begin or extend such Extension Period or
(ii) the date the Administrative Trustees are required to give notice to the
holders of the Preferred Securities of the record date or the date
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such Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Indenture Trustee shall give notice of the
Company's election to begin or extend a new Extension Period the holders of the
Preferred Securities. There is no limitation on the number of times that the
Company may elect to begin an Extension Period.
ADDITIONAL SUMS
If MB Capital is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Junior Subordinated Debentures such amounts
("Additional Sums") as shall be required so that the Distributions payable by MB
Capital shall not be reduced as a result of any such additional taxes, duties or
other governmental charges.
REDEMPTION
Subject to the Company 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 the Company (i) on or after , 2003, in
whole at any time or in part from time to time, or (ii) 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 so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof.
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 such holder's registered address. Unless the
Company defaults in payment of the Redemption Price, on and after the Redemption
Date interest ceases to accrue on such Junior Subordinated Debentures or
portions thereof 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 certain circumstances involving the
termination of MB Capital, the Junior Subordinated Debentures may be distributed
to the holders of the Preferred Securities and Common Securities in liquidation
of MB Capital after satisfaction of liabilities to creditors of MB Capital as
provided by applicable law. 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 MB Capital, 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.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there shall have occurred any event of which the Company
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
the Company shall not have taken reasonable steps to cure, or (ii) the Company
shall have given notice of its election of an Extension Period as provided in
the Indenture with respect to the Junior Subordinated Debentures and shall not
have rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing, or (iii) while the Junior Subordinated Debentures are held
by MB Capital, the Company shall be in default with respect to its payment of
any obligation under the Guarantee, then the Company will not (1) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (2)
make any payment of
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principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company (including other Junior Subordinated Debt) that
rank pari passu with or junior in interest to the Junior Subordinated Debentures
or make any guarantee payments with respect to any guarantee by the Company of
the debt securities of any subsidiary of the Company if such guarantee ranks
pari passu or junior in interest to the Junior Subordinated Debentures (other
than (a) dividends or distributions in common stock, (b) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Guarantee
and (d) purchases of common stock related to rights under any of the Company's
benefit plans for its directors, officers or employees).
SUBORDINATION
In the Indenture, the Company 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, reorganization, assignment for the benefit of creditors, marshaling of
assets or any bankruptcy, insolvency, debt restructuring or similar proceedings
in connection with any insolvency or bankruptcy proceeding of the Company, the
holders of Senior and Subordinated Debt will first be entitled to receive
payment in full of principal of (and premium, if any) and interest, if any, on
such Senior and Subordinated Debt before the holders of Junior Subordinated
Debentures will be entitled to receive or retain any payment in respect of the
principal of or interest, if any, 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 at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of Junior Subordinated Debentures will be entitled to receive or retain
any payment in respect of the principal of or interest, if any, on the Junior
Subordinated Debentures; provided, however, that holders of Subordinated Debt
shall not be entitled to receive payment of any such amounts to the extent that
such Subordinated Debt is by its terms subordinated to trade creditors.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior and Subordinated Debt
or an event of default with respect to any Senior and Subordinated Debt
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent: (i) every
obligation of such person for money borrowed; (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person; (iv) every obligation of such 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); (v) every capital lease obligation of such person; and (vi) every
obligation of the type referred to in clauses (i) through (v) of another person
and all dividends of another person the payment of which, in either case, such
person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior
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and Subordinated Debt shall not be deemed to include (i) any Debt of the Company
which when incurred and without respect to any election under section 1111(b) of
the United States Bankruptcy Code of 1978, as amended, was without recourse to
the Company, (ii) any Debt of the Company to any of its subsidiaries, (iii) any
Debt to any employee of the Company, (iv) any Debt which by its terms is
subordinated to trade accounts payable or accrued liabilities arising in the
ordinary course of business to the extent that payments made to the holders of
such Debt by the holders of the 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 such holders to pay
amounts over to the obligees on such trade accounts payable or accrued
liabilities arising in the ordinary course of business as a result of
subordination provisions to which such Debt is subject, (v) the Guarantee, and
(vi) any other debt securities issued pursuant to the Indenture.
The Indenture places no limitation on the amount of additional Senior and
Subordinated Debt that may be incurred by the Company. The Company 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 ("Global
Subordinated Debenture"). 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 represented thereby,
it may not be transferred except as a whole by the Depositary for such Global
Subordinated Debenture to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of such
successor.
A global security shall be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such global security and no successor depositary
shall have been appointed, or if at any time the Depositary ceases to be a
clearing agency registered under the Exchange Act at a time when the Depositary
is required to be so registered to act as such depositary, (ii) the Company in
its sole discretion determines that such global security shall be so
exchangeable or (iii) there shall have occurred and be continuing an Event of
Default under the Indenture with respect to such global security. Any global
security that is exchangeable pursuant to the preceding sentence shall be
exchangeable for definitive certificates registered in such names as the
Depositary shall direct. It is expected that such instructions will be based
upon directions received by the Depositary from its Participants with respect to
ownership of beneficial interests in such global security. In the event that
Junior Subordinated Debentures are issued in definitive form, such Junior
Subordinated Debentures will be in denominations of $10 and integral multiples
thereof 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
the Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto or by
wire transfer. In addition, if the Junior Subordinated Debentures are issued in
certificated form, the record dates for payment of interest will be the first
day of the month in which such 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."
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The Company will appoint the Indenture Trustee as securities registrar
under the Indenture (the "Securities Registrar"). 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 thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the Securities Registrar. The Company may at any time rescind the designation of
any such registrar or approve a change in the location through which any such
registrar acts, provided that the Company maintains a registrar in the place of
payment. The Company may at any time designate additional registrars with
respect to the Junior Subordinated Debentures.
In the event of any redemption, neither the Company nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
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 or (ii) transfer or exchange any
Junior Subordinated Debentures so selected for redemption, except, in the case
of any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
GLOBAL SUBORDINATED DEBENTURE
As described above under "-- Distribution Upon Liquidation," under certain
circumstances, the Junior Subordinated Debentures may be distributed to the
holders of the Preferred Securities and Common Securities upon the liquidation
of MB Capital. In such case, the Junior Subordinated Debentures will be
represented by the Global Subordinated Debenture, with beneficial interests and
transfers being reflected only on the books of the Depositary. The Global
Subordinated Debenture will be exchangeable for individual Junior Subordinated
Debentures, in certificated form, registered in the names of persons other than
the Depositary, only in certain circumstances as described above under
"-- Denominations, Registration and Transfer."
Upon the issuance of the Global Subordinated Debenture, and the deposit of
such Global Subordinated Debenture with or on behalf of the Depositary, the
Depositary for such Global Subordinated Debenture 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 such
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 such 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 (with respect to interests of Participants) and the
records of Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Subordinated Debenture.
So long as the Depositary for a Global Subordinated Debenture, or its
nominee, is the registered owner of such Global Subordinated Debenture, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Junior Subordinated Debentures represented by such Global
Subordinated Debenture for all purposes under the Indenture governing such
Junior Subordinated Debentures. 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 such 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
under the Indenture.
Payments of principal of and interest on individual Junior Subordinated
Debentures, including payments in respect of any redemption, 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 such
Junior Subordinated Debentures. The Depositary or its nominee, as the case may
be, will in turn make payments to Participants in proportion to the respective
principal amounts of the individual Junior Subordinated Debentures credited to
their accounts.
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None of the Company, the Indenture Trustee, any Paying Agent, or the Securities
Registrar for such Junior Subordinated Debentures 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
representing such Junior Subordinated Debentures or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of the Global Subordinated Debenture
representing the Junior Subordinated Debentures, 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 such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Subordinated Debenture held through such
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." Such payments will be the responsibility of
such Participants.
If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 90 days, the Company will issue individual Junior Subordinated
Debentures in exchange for the Global Subordinated Debenture. In addition, the
Company may at any time and in its sole discretion, determine not to have the
Junior Subordinated Debentures represented by one or more Global Subordinated
Debentures and, in such event, will issue individual Junior Subordinated
Debentures in exchange for the Global Subordinated Debenture. Further, if the
Company so specifies with respect to the Junior Subordinated Debentures, an
owner of a beneficial interest in a Global Subordinated Debenture representing
the Junior Subordinated Debentures may, on terms acceptable to the Company, the
Indenture Trustee and the Depositary for such Global Subordinated Debenture,
receive individual Junior Subordinated Debentures in exchange for such
beneficial interests. In any such 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 such
beneficial interest and to have such Junior Subordinated Debentures registered
in its name. Individual Junior Subordinated Debentures so issued will be issued
in denominations, unless otherwise specified by the Company, of $10 and integral
multiples thereof.
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 the Company payment of any interest may be made (i) except in the
case of a Global Subordinated Debenture, by check mailed to the address of the
person entitled thereto as such address shall appear in the securities register
or (ii) by transfer to an account maintained by the person entitled thereto as
specified in the securities register, provided that proper transfer instructions
have been received by the regular record date. Payment of any interest on Junior
Subordinated Debentures will be made to the person in whose name such Junior
Subordinated Debenture is registered at the close of business on the regular
record date for such interest. The Company may at any time designate additional
Paying Agents or rescind the designation of any Paying Agent; however, the
Company 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 the Company in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for two
years after such principal or interest has become due and payable shall, at the
request of the Company, be repaid to the Company and the holder of such Junior
Subordinated Debenture shall thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
MODIFICATION OF INDENTURE
From time to time the Company 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,
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including, among other things, curing ambiguities, defects or inconsistencies
(provided that any such action does not materially adversely affect the
interests of the holders of the Junior Subordinated Debentures or the Preferred
Securities so long as they remain outstanding) and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company 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, no such modification may, without the consent of the holder of
each outstanding Subordinated Debenture, (i) change the Stated Maturity of the
Junior Subordinated Debentures or extend the time of payment of interest thereon
(except as described under "Description of Junior Subordinated
Debentures -- General" and "-- Option to Extend Interest Payment Period"), or
reduce the principal amount thereof or the rate of interest thereon, or (ii)
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, provided that so long as any of the Preferred Securities remain
outstanding, no such modification may be made that adversely affects the holders
of such Preferred Securities in any material respect, and no termination of the
Indenture may occur, and 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 unless and until the principal of the Junior
Subordinated Debentures and all accrued and unpaid interest thereon have been
paid in full and certain other conditions are satisfied.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default" with respect to the
Junior Subordinated Debentures:
(i) 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); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due whether at maturity, upon redemption by declaration or
otherwise; or
(iii) failure by the Company to observe or perform in any material
respect certain other covenants contained in the Indenture for 90 days
after written notice to the Company from the Indenture Trustee or to the
Company and the Indenture Trustee by the holders of at least 25% in
aggregate outstanding principal amount of the Junior Subordinated
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company, including the voluntary commencement of bankruptcy proceedings,
entry of an order for relief against the Company in a bankruptcy
proceeding, appointment of a custodian over substantially all of the
Company's property, a general assignment for the benefit of creditors, or a
court order for liquidation of the Company.
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 such 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 such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee.
Should the holders of the Junior Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Preferred Securities shall have such right. In case a
Debenture Event of Default shall occur and be continuing, the Property Trustee
will have the right to declare the principal of and the interest on such Junior
Subordinated Debentures, and any other
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amounts payable under the Indenture, to be forthwith due and payable and to
enforce its other rights as a creditor with respect to such Junior Subordinated
Debentures.
The Company is required to file annually with the Indenture Trustee a
certificate as to whether the Company is in compliance with all the conditions
and covenants applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or principal
on the Junior Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of Preferred Securities may institute a legal
proceeding directly against the Company for enforcement of payment to such
holder of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder ("Direct Action"). If the right to bring a
Direct Action is removed, MB Capital may become subject to the reporting
obligations under the Exchange Act. The Company shall have the right under the
Indenture to set-off any payment made to such holder of Preferred Securities by
the Company 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
shall have been an Event of Default under the Trust Agreement. See "Description
of Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall 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 shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (i) in case the Company
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 such successor Person expressly assumes the Company's
obligations on the Junior Subordinated Debentures issued under the Indenture;
(ii) immediately after giving effect thereto, no Debenture Event of Default, and
no event which, after notice or lapse of time or both, would become a Debenture
Event of Default, shall have occurred and be continuing; and (iii) certain 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 the Company that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Company deposits or causes to
be deposited with the Indenture Trustee, in trust, funds for the purpose and in
an amount in the currency or currencies in which the Junior Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Indenture
Trustee for cancellation, for the principal and interest to the date of the
deposit or to the Stated Maturity, as the case may be, then the Indenture will
cease to be of further effect (except as to the Company's obligations to pay all
other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Company will be
deemed to have satisfied and discharged the Indenture.
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GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of Colorado.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the 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 such holder against the costs, expenses and liabilities
which might be incurred thereby. 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 THE COMPANY
The Company will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) MB Capital is the holder of all such
Junior Subordinated Debentures, (ii) a Tax Event in respect of MB Capital has
occurred and is continuing and (iii) the Company has elected, and has not
revoked such election, to pay Additional Sums (as defined under "Description of
the Preferred Securities -- Redemption") in respect of the Preferred Securities,
the Company will pay to MB Capital such Additional Sums. The Company will also
covenant, as to the Junior Subordinated Debentures, (i) to maintain directly or
indirectly 100% ownership of the Common Securities of MB Capital to which Junior
Subordinated Debentures have been issued, provided that certain successors which
are permitted pursuant to the Indenture may succeed to the Company's ownership
of the Common Securities, (ii) not to voluntarily terminate, wind up or
liquidate MB Capital, except upon prior approval of the Federal Reserve if then
so required under applicable capital guidelines or policies of the Federal
Reserve, and except (a) in connection with a distribution of Junior Subordinated
Debentures to the holders of the Preferred Securities in liquidation of MB
Capital or (b) in connection with certain mergers, consolidations, or
amalgamations permitted by the Trust Agreement and (iii) to use its reasonable
efforts, consistent with the terms and provisions of the Trust Agreement, to
cause MB Capital to remain classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes.
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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 pursuant to the provisions of Section 17A of the Exchange
Act. 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 certain 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 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 ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the 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 ("Beneficial
Owner") 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 Junior Subordinated Debentures; the Depositary's records
reflect only the identity of the Direct Participants to whose accounts such
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.
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 with respect to the Preferred Securities or the Junior
Subordinated Debentures is limited to the holders of record of the Preferred
Securities or the Junior Subordinated Debentures, in those instances
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in which a vote is required, neither the Depositary nor Cede & Co. will itself
consent or vote with respect to Preferred Securities or Junior Subordinated
Debentures. Under its usual procedures, the Depositary would mail an omnibus
proxy (the "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 such Preferred Securities
or Junior Subordinated Debentures are credited on the record date (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 such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of the
Depositary, the relevant Trustee, MB Capital or the Company, 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 such payments to Direct Participants is the
responsibility of the Depositary, and disbursements of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities
depositary with respect to any of the Preferred Securities or the Junior
Subordinated Debentures at any time by giving reasonable notice to the relevant
Trustee and the Company. In the event that a successor securities depositary is
not obtained, definitive Preferred Securities or Subordinated Debenture
certificates representing such Preferred Securities or Junior Subordinated
Debentures are required to be printed and delivered. The Company, 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 any
such event, definitive certificates for such 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 MB Capital
and the Company believe to be accurate, but MB Capital and the Company assume no
responsibility for the accuracy thereof. Neither MB Capital nor the Company has
any responsibility for the performance by the Depositary or its Participants of
their respective obligations as described herein or under the rules and
procedures governing their respective operations.
DESCRIPTION OF GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred Securities.
Wilmington Trust Company will act as trustee under the Guarantee (the "Guarantee
Trustee") for the purposes of compliance with the Trust Indenture Act, and the
Guarantee will be qualified under the Trust Indenture Act. The following summary
of certain provisions of the Guarantee does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Guarantee, including the definitions therein of certain terms, and the
Trust Indenture Act. The form of the Guarantee has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Preferred
Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of
all of MB Capital's obligations under the Preferred Securities, but will apply
only to the extent that MB Capital has funds sufficient to make such payments,
and is not a guarantee of collection.
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due,
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regardless of any defense, right of set-off or counterclaim that MB Capital may
have or assert other than the defense of payment. The following payments with
respect to the Preferred Securities, to the extent not paid by or on behalf of
MB Capital (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that MB Capital has funds on hand available therefor
at such time, (ii) the Redemption Price with respect to any Preferred Securities
called for redemption to the extent that MB Capital has funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary dissolution,
winding up or liquidation of MB Capital (unless the Junior Subordinated
Debentures are distributed to holders of the Preferred Securities), the lesser
of (a) the Liquidation Distribution and (b) the amount of assets of MB Capital
remaining available for distribution to holders of Preferred Securities. The
Company's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Company to the holders of the Preferred
Securities or by causing MB Capital to pay such amounts to such holders.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by MB Capital, MB Capital will not be able to pay Distributions
on the Preferred Securities and will not have funds legally available therefor.
The Guarantee will rank subordinate and junior in right of payment to all Senior
and Subordinated Debt of the Company. See "Status of the Guarantee" below.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the prior
claims of creditors of that subsidiary, except to the extent the Company may
itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Guarantee will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, and claimants
should look only to the assets of the Company for payments thereunder. Except as
otherwise described herein, the Guarantee does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, including Senior and
Subordinated Debt whether under the Indenture, any other indenture that the
Company may enter into in the future, or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed on a subordinated
basis all of MB Capital's obligations under the Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee on a subordinated basis of all of MB Capital's
obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company 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 Guarantee will constitute a guarantee of payment and not of collection.
The guaranteed party may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against any other person or entity. The Guarantee will be held
for the benefit of the holders of the Preferred Securities. The Guarantee will
not be discharged except by payment of the Guarantee Payments in full to the
extent not paid by MB Capital or upon distribution to the holders of the
Preferred Securities of the Junior Subordinated Debentures to the holders of the
Preferred Securities. The Guarantee does not place a limitation on the amount of
additional Senior and Subordinated Debt that may be incurred by the Company. The
Company expects from time to time to incur additional indebtedness constituting
Senior and Subordinated Debt.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of such
outstanding Preferred Securities. See "Description of the Preferred
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. 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 in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against MB Capital, the Guarantee Trustee
or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether the Company is in compliance with all the
conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the Guarantee Trustee is under no obligation
to exercise any of the powers vested in it by the Guarantee at the request of
any holder of the Preferred Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable upon liquidation of MB Capital or upon
distribution of Junior Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under the Preferred Securities or the
Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Colorado.
THE EXPENSE AGREEMENT
Pursuant to the Agreement as to Expenses and Liabilities entered into by
the Company under the Trust Agreement (the "Expense Agreement"), the Company
will irrevocably and unconditionally guarantee to each person or entity to whom
MB Capital becomes indebted or liable, the full payment of any costs, expenses
or liabilities of MB Capital, other than obligations of MB Capital to pay to the
holders of the Preferred Securities or other similar interests in MB Capital of
the amounts due such holders pursuant to the terms of the Preferred Securities
or such other similar interests, as the case may be.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent MB Capital has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of Guarantee." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the Trust
Agreement, the Expense Agreement and the 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 such 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 MB Capital's
obligations under the Preferred Securities. If and to the extent that the
Company does not make payments on the Junior Subordinated Debentures, MB Capital
will not pay Distributions or other amounts due on the Preferred Securities. The
Guarantee does not cover payment of Distributions when MB Capital does not have
sufficient funds to pay such Distributions. In such event, the remedy of a
holder of the Preferred Securities is to institute a legal proceeding directly
against the Company for enforcement of payment of such Distributions to such
holder. The obligations of the Company under the 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, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because: (i) 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; (ii) the interest rate and interest
and other payment dates on the Junior Subordinated Debentures will match the
Distribution rate and Distribution and other payment dates for the Preferred
Securities; (iii) the Company shall pay for all and any costs, expenses and
liabilities of MB Capital except MB Capital's obligations to holders of
Preferred Securities; and (iv) the Trust Agreement further provides that MB
Capital will not engage in any activity that is not consistent with the limited
purposes of MB Capital.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES UNDER THE GUARANTEE
A holder of any the Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, MB Capital
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 such 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 MB CAPITAL
The Preferred Securities evidence a beneficial interest in MB Capital, and
MB Capital exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in the Junior Subordinated Debentures. A
principal difference between the rights of a holder of the Preferred Securities
and a holder of a
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Subordinated Debenture is that a holder of a Subordinated Debenture is entitled
to receive from the Company 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 MB Capital (or from the Company under
the Guarantee) if and to the extent MB Capital has funds available for the
payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
MB Capital involving the liquidation of the Junior Subordinated Debentures, the
holders of Preferred Securities will be entitled to receive, out of assets held
by MB Capital, the Liquidation Distribution in cash. See "Description of the
Preferred Securities -- Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Company, 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
the Company receive payments or distributions. Since the Company is the
guarantor under the Guarantee and has agreed to pay for all costs, expenses and
liabilities of MB Capital (other than MB Capital'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 the Company in the event of liquidation or bankruptcy of the
Company are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Jones & Keller, P.C., counsel to the Company ("Counsel"),
the following summary accurately describes the material United States federal
income tax consequences that may be relevant to the purchase, ownership and
disposition of Preferred Securities. Unless otherwise stated, this summary deals
only with Preferred Securities held as capital assets by United States Persons
(defined below) who purchase the Preferred Securities upon original issuance at
the first price at which a substantial amount of Preferred Securities were sold.
As used herein, a "United States Person" means a person that is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust the
income of which is subject to United States federal income taxation regardless
of its source; provided, however, that for taxable years beginning after
December 31, 1996 (or, if a trustee so elects, for taxable years ending after
August 20, 1996), a "United States Person" shall include any trust if a court
within the United States is able to exercise primary supervision over the
administration of such trust and one or more United States fiduciaries have the
authority to control all substantial decisions of such trust. The tax treatment
of holders may vary depending on their particular situation. This summary 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, persons
whose functional currency is not the United States dollar or persons that do not
hold the Preferred Securities as capital assets. In addition, this summary does
not include any description of any alternative minimum tax consequences or the
tax laws of any state, local or foreign government that may be applicable to a
holder of Preferred Securities. This summary is based on the Internal Revenue
Code of 1986, as amended (the "Code"), 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 such change 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"). Non-United States Persons should consult their
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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 summary is based are subject to various
interpretations and the opinions of Counsel are not binding on the Internal
Revenue Service ("Service") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the Service with
respect to the transactions described herein. Accordingly, there can be no
assurance that the Service will not challenge the opinions expressed herein or
that a court would not sustain such a 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.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE 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 UPON THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE "DESCRIPTION OF
PREFERRED SECURITIES -- REDEMPTION."
CLASSIFICATION OF MB CAPITAL
In connection with the issuance of the Preferred Securities, Counsel is of
the opinion that, under current law and assuming compliance with the terms of
the Trust Agreement, and based on certain facts and assumptions contained in
such opinion, MB Capital 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 OID that is paid or accrued on the Junior Subordinated Debentures. See
"-- Interest Income and Original Issue Discount." No amount included in income
with respect to the Preferred Securities will be eligible for the dividends
received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position, based on the advice of Jones &
Keller, P.C., that the Junior Subordinated Debentures will be classified for
United States federal income tax purposes as indebtedness of the Company under
current law, and, by acceptance of a Preferred Security, each holder covenants
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 such
position of the Company will not be challenged by the Service 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 the Company. See "Risk
Factors -- Possible Tax Law Changes Affecting 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
such interest income is paid or accrued in accordance with such Securityholder's
regular method of tax accounting.
The Company believes that, under the applicable Treasury regulations, the
Junior Subordinated Debentures will not be considered to have been issued with
OID within the meaning of Section 1273(a) of the Code. This is because under
recently adopted amendments to the Treasury regulations a "remote" contingency
that stated interest will not be timely paid will be ignored in determining
whether a debt instrument is issued with OID. The Company believes that the
likelihood of exercising its option to defer payments of interest is "remote."
If the Company's option to defer payments of interest on the Junior Subordinated
Debentures were not treated as remote, the Junior Subordinated Debentures would
be
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considered issued with OID at original issuance which would, in general, accrue
over the term of the Junior Subordinated Debentures described below.
If the Company exercises its right to defer payments of interest on the
Junior Subordinated Debentures, the Junior Subordinated Debentures will become
OID instruments, and the amount of OID would be equal to the aggregate of all
future payments of interest on the Junior Subordinated Debentures. In such
event, all Securityholders would be required to accrue the OID on the Junior
Subordinated Debentures on a daily basis during the Extension Period, even
though the Company would not pay such 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 OID 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 OID 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 such interest income. Under
the OID economic accrual rules, a Securityholder would accrue an amount of
interest income each year that approximates the stated interest payments called
for under the Junior Subordinated Debentures, and actual cash payments of
interest on the Junior Subordinated Debentures would not be reported separately
as taxable income.
The Treasury regulations described above have not yet been addressed in any
rulings or other definitive interpretations by the Service, and it is possible
that the Service could take a contrary position. If the Service were to assert
successfully that the stated interest on the Junior Subordinated Debentures was
OID regardless of whether the Company exercises its right to defer payments of
interest on such debentures, all Securityholders would be required to include
such stated interest in income on a daily economic accrual basis as described
above.
The Company 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 MB Capital of the Junior Subordinated
Debentures as described under the caption "Description of 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 MB
Capital, with a holding period and aggregate tax basis equal to the holding
period and aggregate tax basis such Securityholder had in its Preferred
Securities before such distribution. If, however, the liquidation of MB Capital
were to occur because MB Capital is subject to United States federal income tax
with respect to 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 MB Capital would be a taxable event to MB
Capital 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 MB
Capital. See "-- Sales or Redemption of Preferred Securities." A Securityholder
would recognize interest income in respect of Junior Subordinated Debentures
received from MB Capital 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 OID 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 OID previously included in such
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 OID) received on the Preferred Securities.
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Any gain or loss on the sale, exchange or retirement of the Preferred Securities
generally will be treated as capital gain or loss. Under recently enacted
legislation, an individual U.S. holder generally will be subject to tax on the
net amount of his or her capital gain realized on the sale, exchange or
retirement of the Preferred Securities at a maximum rate of (i) 28% for
Preferred Securities held for more than one year but not more than 18 months,
(ii) 20% for Preferred Securities held for more than 18 months, and (iii)
provided that the holding period for such Preferred Securities begins after
December 31, 2001, 18% for Preferred Securities held for more than five years.
Special rules (and generally lower maximum rates) apply for individuals whose
taxable income is below certain levels.
Should the Company 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 with
respect to the underlying Junior Subordinated Debentures. In the event of such a
deferral, a Securityholder that disposes of its Preferred Securities between
record dates for payments of Distributions (and consequently does not receive a
Distribution from MB Capital for the period prior to such disposition) will
nevertheless be required to include in income as ordinary income accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in its Preferred
Securities disposed of. Such United States Person 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 interest) is less
than the United States Person's adjusted tax basis in the Preferred Securities
(which will include accrued but unpaid interest that has been taken into account
in income). Subject to certain 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 OID 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. "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 such number is
correct, certifies as to no loss of exemption from backup withholding and meets
certain other conditions. Any amounts withheld from a Securityholder under the
backup withholding rules will be allowed as a refund or a credit against such
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
There can be no assurance that future legislative proposals or final
legislation will not affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures. Such a change could give rise to a Tax Event,
which may permit the Company to cause a redemption of the Trust Preferred
Securities. See "Risk Factors -- Possible Tax Law Changes Affecting Preferred
Securities," "Description of the Preferred Securities -- Redemption" and
"Description of Junior Subordinated Debentures -- Redemption."
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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
("Plans"), 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.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to certain Plans
(generally, those Plans maintained or sponsored by, or contributed to by, any
such persons with respect to which the Company or an affiliate is a fiduciary or
Plans for which the Company or an affiliate provide services). The acquisition
and ownership of Preferred Securities by a Plan (or by an individual retirement
arrangement or other Plans described in Section 4975(e)(1) of the Code) with
respect to which the Company 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, unless such Preferred
Securities are acquired pursuant to and in accordance with an applicable
exemption.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption. Any other Plans or other
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.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company and the Underwriters listed on the
table below (referred to individually as an "Underwriter" and collectively as
"Underwriters") for whom Howe Barnes Investments, Inc. is acting as
representative (the "Representative"), the Underwriters have severally agreed to
purchase from MB Capital an aggregate of 1,200,000 Preferred Securities in the
amounts set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS PREFERRED SECURITIES
------------ --------------------
<S> <C>
Howe Barnes Investments, Inc................................
---------
Total............................................. 1,200,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all of the Preferred Securities offered hereby if the Underwriters
purchase any Preferred Securities.
The Underwriters have advised the Company and MB Capital that they propose
to offer the Preferred Securities to the public at the Price to Public set forth
on the cover page of this Prospectus and to selected dealers at such price less
a concession not in excess of $ per Preferred Security. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per Preferred Security to certain other dealers. After the
offering, the Price to Public, concessions and other selling terms may be
changed by the Underwriters.
In view of the fact that all of the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Underwriting Agreement provides that the Company will pay the Underwriters as
compensation for arranging the investment therein of such proceeds, $
per Preferred Security.
81
<PAGE> 83
Each of the Company and MB Capital has agreed to indemnify the Underwriters
and their controlling persons against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Underwriters may engage in stabilizing transactions in accordance with
Regulation M under the Exchange Act, as well as passive market making relating
to the Preferred Securities. Stabilizing transactions permit bids and purchases
of the Preferred Securities so long as the stabilizing bids do not exceed a
specified maximum. Such stabilizing transactions may cause the price of the
Preferred Securities to be higher than it would otherwise be in the absence of
such transactions. Such stabilizing transactions, if commenced, may be
discontinued at any time.
The Underwriters have advised MB Capital 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.
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 MB
Capital will be passed upon by Richards, Layton & Finger, P.A., Wilmington,
Delaware, special Delaware counsel to the Company and MB Capital. The validity
of the Guarantee and the Junior Subordinated Debentures will be passed upon for
the Company by Jones & Keller, P.C., Denver, Colorado, counsel to the Company.
Certain other legal matters regarding regulatory issues affecting the Company
will be passed upon for the Company by Slivka Robinson Waters & O'Dorsio, P.C.,
Denver, Colorado. Certain legal matters in connection with this Offering will be
passed upon for the Underwriters by Chapman and Cutler, Chicago, Illinois. Jones
& Keller, P.C. and Chapman and Cutler will rely on the opinions of Richards,
Layton & Finger as to matters of Delaware law. Certain matters relating to
United States federal income tax considerations will be passed upon for the
Company by Jones & Keller, P.C.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and for each of the years in the two-year period ended December 31, 1996
have been included and incorporated herein by reference in reliance upon the
report of Fortner, Bayens, Levkulich & Co., P.C., independent certified public
accountants, appearing elsewhere and incorporated herein by reference, and upon
the authority of said firm as experts in accounting and auditing.
82
<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
Board of Directors
MegaBank Financial Corporation
Englewood, Colorado
We have audited the consolidated balance sheet of MegaBank Financial
Corporation and Subsidiaries as of December 31, 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the two years in the period ended December 31, 1996. These consolidated
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 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MegaBank Financial Corporation and Subsidiaries at December 31, 1996 and the
consolidated results of their operations and consolidated cash flows for each of
the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
January 24, 1997
F-2
<PAGE> 86
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 (UNAUDITED)
AND DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and due from banks..................................... $ 14,434 $ 9,130
Interest-bearing deposits................................... 1,542 --
Investment securities available for sale.................... 12,100 11,137
Federal funds sold.......................................... 11,260 785
Loans....................................................... 115,719 94,973
Less allowance for loan losses.............................. (1,567) (1,150)
-------- --------
114,152 93,823
Bank premises, leasehold improvements and equipment, net.... 3,889 2,630
Accrued interest receivable................................. 895 681
Deferred tax asset.......................................... 153 300
Other....................................................... 425 443
-------- --------
$158,850 $118,929
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing........................... $ 47,149 $ 36,095
Demand, interest bearing............................... 52,773 44,191
Savings................................................ 5,387 4,591
Time, $100,000 and over................................ 10,759 8,680
Other time............................................. 27,198 11,104
-------- --------
143,266 104,661
Federal Home Loan Bank borrowings......................... 1,788 2,272
Income taxes payable...................................... -- 109
Accrued interest payable.................................. 152 106
Note payable.............................................. 2,000 2,628
Other..................................................... 682 326
-------- --------
Total liabilities................................. 147,888 110,102
Commitments (notes H, I, and L)
Shareholders' equity
Common stock; no par value, 500,000 shares authorized,
213,578 shares issued and outstanding.................. 1,961 1,961
Retained earnings......................................... 8,775 6,744
Unrealized gain on securities available for sale, net of
taxes.................................................. 226 122
-------- --------
10,962 8,827
-------- --------
$158,850 $118,929
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 87
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -------------------
1997 1996 1996 1995
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees............................. $ 9,982 $ 7,491 $ 10,410 $ 7,639
Taxable investment securities..................... 209 382 487 484
Nontaxable investment securities.................. 413 143 247 --
Funds sold........................................ 447 158 180 168
Other interest.................................... 34 32 35 136
-------- -------- -------- --------
Total interest income..................... 11,085 8,206 11,359 8,427
Interest expense
Deposits.......................................... 3,358 2,001 2,794 1,851
Borrowed funds.................................... 126 44 97 23
Notes payable..................................... 135 192 240 280
-------- -------- -------- --------
Total interest expense.................... 3,619 2,237 3,131 2,154
-------- -------- -------- --------
Net interest income....................... 7,466 5,969 8,228 6,273
Provision for loan losses........................... 360 262 457 280
-------- -------- -------- --------
Net interest income after provision for loan
losses............................................ 7,106 5,707 7,771 5,993
Other income
Service charges on deposit accounts............... 253 228 325 241
Payroll services.................................. -- 233 233 265
Other income...................................... 287 319 403 301
-------- -------- -------- --------
Total other income........................ 540 780 961 807
Other expenses
Salaries and employee benefits.................... 2,216 1,635 2,261 1,708
Occupancy expenses of premises.................... 539 485 642 568
Furniture and equipment expense................... 221 195 298 206
Payroll services.................................. -- 370 384 461
Other expenses.................................... 1,608 1,001 1,374 1,193
-------- -------- -------- --------
Total other expenses...................... 4,584 3,686 4,959 4,136
-------- -------- -------- --------
Income before income taxes................ 3,062 2,801 3,773 2,664
Income tax expense (benefit)
Current........................................... 1,025 1,061 1,431 1,019
Deferred.......................................... 6 2 (78) (2)
-------- -------- -------- --------
1,031 1,063 1,353 1,017
-------- -------- -------- --------
NET INCOME.......................................... $ 2,031 $ 1,738 $ 2,420 $ 1,647
======== ======== ======== ========
Income per share
Net income per share.............................. $ 9.51 $ 8.14 $ 11.33 $ 7.71
======== ======== ======== ========
Common shares outstanding......................... 213,578 213,578 213,578 213,578
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 88
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
SECURITIES
AVAILABLE
COMMON RETAINED FOR SALE,
STOCK EARNINGS NET OF TAXES TOTAL
------ -------- -------------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1995........................ $1,961 $2,677 $(21) $ 4,617
Net income for the year........................... -- 1,647 -- 1,647
Net change in unrealized gains/(losses)........... -- -- 129 129
------ ------ ---- -------
Balance at December 31, 1995...................... 1,961 4,324 108 6,393
Net income for the year........................... -- 2,420 -- 2,420
Net change in unrealized gains/(losses)........... -- -- 14 14
------ ------ ---- -------
Balance at December 31, 1996...................... 1,961 6,744 122 8,827
Net income for the period (unaudited)............. -- 2,031 -- 2,031
Net changes in unrealized gains/(losses)
(unaudited)..................................... -- -- 104 104
------ ------ ---- -------
Balance at September 30, 1997 (unaudited)......... $1,961 $8,775 $226 $10,962
====== ====== ==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 89
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- -------------------
1997 1996 1996 1995
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income........................................ $ 2,031 $ 1,738 $ 2,420 $ 1,647
Adjustments to reconcile net income to net cash
provided by operating activities...............
Provision for loan losses...................... 360 262 457 280
Depreciation and amortization.................. 203 162 238 185
Accretion of investment discount, net of
premium...................................... (21) (15) (20) (19)
Stock dividend................................. (16) (10) (15) --
Deferred income taxes.......................... 6 2 (78) (2)
Changes in deferrals and accruals
Interest receivable............................ (214) (60) (76) (208)
Interest payable............................... 46 (15) (1) 93
Income taxes payable........................... (109) (90) 20 197
Other, net..................................... 374 467 217 13
-------- -------- -------- --------
Net cash provided by operating
activities.............................. 2,660 2,441 3,162 2,186
Cash flows from investing activities
Net (increase) decrease in federal funds sold..... (10,475) 9,425 11,985 (12,770)
Net increase in interest-bearing deposits......... (1,542) -- -- --
Purchase of investment securities available for
sale........................................... (3,531) (4,847) (6,676) (2,799)
Proceeds from maturities of investment securities
available for sale............................. 2,850 350 2,550 2,800
Proceeds from maturities of investment securities
held to maturity............................... -- 550 550 100
Net increase in loans............................. (20,689) (17,901) (26,195) (22,249)
Expenditures for bank premises and equipment...... (1,462) (177) (1,623) (804)
-------- -------- -------- --------
Net cash used in investing activities..... (34,849) (12,600) (19,409) (35,722)
Cash flows from financing activities
Net increase in deposits.......................... $ 38,605 $ 11,061 $ 14,469 $ 36,349
Advances from Federal Home Loan Bank.............. (484) 1,323 2,272 --
Proceeds from notes payable....................... -- -- -- 3,000
Payments on notes payable......................... (628) (863) (735) (788)
Net decrease in federal funds purchased........... -- -- -- (1,000)
-------- -------- -------- --------
Net cash provided by financing
activities.............................. 37,493 11,521 16,006 37,561
-------- -------- -------- --------
Net increase (decrease) in cash and due from
banks............................................. 5,304 1,362 (241) 4,025
Cash and due from banks at beginning of period...... 9,130 9,371 9,371 5,346
-------- -------- -------- --------
Cash and due from banks at end of period............ $ 14,434 $ 10,733 $ 9,130 $ 9,371
======== ======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense............................... $ 3,573 $ 2,252 $ 3,077 $ 2,112
Income taxes................................... 1,168 1,160 1,433 822
Noncash transaction
Note receivable exchanged for extinguishment of
note payable................................. $ -- $ 1,700 $ 1,700 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 90
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS
MegaBank Financial Corporation (the Company) was incorporated for the
purposes of owning shares of and acting as parent holding company for MegaBank
of Arapahoe (the Bank). The Bank provides a full range of banking services to
individual and corporate customers principally in the Denver metropolitan area.
A majority of the Bank's loans are related to real estate (principally
residential construction) and commercial activities. The Bank is subject to
competition from other financial institutions for loans and deposit accounts.
The Bank is also subject to regulation by certain governmental agencies and
undergoes periodic examinations by those regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the 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 balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties and
assesses estimated future cash flows from borrowers' operations and the
liquidation of loan collateral.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additional losses based on their judgments about
information available to them at the time of their examination.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of its
respective subsidiaries. All material intercompany transactions have been
eliminated.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited interim financial statements have been prepared in conformity
with generally accepted accounting principles and include all adjustments which
are, in the opinion of management, normal and recurring in nature and necessary
to a fair presentation of the interim periods presented. Results of operations
for the nine months ended September 30, 1997 are not necessarily indicative of
the results to be expected for the full year.
INVESTMENT SECURITIES
Management determines the classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Bank has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a component of retained
earnings in shareholders' equity.
F-7
<PAGE> 91
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and accretion is included as
an adjustment to interest income from investments. Realized gains and losses and
declines in value judged to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the specific
identification method.
LOANS
Loans are reported at the principal amount outstanding, net of loan fees
and the allowance for credit losses. Interest on loans is calculated by using
the simple interest method on the daily balance of the principal amount
outstanding.
Loan fees which represent an adjustment to interest yield are deferred and
amortized over the estimated life of the loan. Most of the loans originated by
the Company are short-term.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Interest accruals are resumed on such loans only
when they are brought fully current with respect to interest and principal and
when, in the judgement of management, the loans are estimated to be fully
collectible as to both principal and interest.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance is an amount that management
believes will be adequate to absorb losses inherent in existing loans, leases
and commitments to extend credit, based on evaluations of the collectibility and
prior loss experience of loans, leases and commitments to extend credit. The
evaluations take into consideration such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, leases and commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to pay.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's original effective interest rate. As a
practical expedient, impairment may be measured based on the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost. Depreciation is
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives, principally on the straight-line
method.
F-8
<PAGE> 92
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of non-taxable income such as interest on
state and municipal securities) and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company has defined cash
equivalents as those amounts included in the balance sheet caption "Cash and Due
from Banks".
PER SHARE COMPUTATIONS
Net income per share is based on the weighted average number of common
shares outstanding during each year.
NOTE B -- INVESTMENT SECURITIES
At December 31, 1996, the Company had securities with the following
amortized cost and estimated fair market values (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale U.S. Treasury
securities................................ $ 4,341 $ 49 $ -- $ 4,390
State and political securities............ 6,180 25 (2) 6,203
Federal Home Loan Bank stock.............. 313 -- -- 313
Equity securities......................... 154 77 -- 231
------- ---- ---- -------
$10,988 $151 $ (2) $11,137
======= ==== ==== =======
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1996 by contractual maturity are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less..................................... $ 3,092 $ 3,113
Due after one year through five years....................... 1,249 1,277
Due after five years through ten years...................... 775 777
Due after ten years......................................... 5,405 5,426
------- -------
$10,521 $10,593
======= =======
</TABLE>
Securities included in the accompanying balance sheet at December 31, 1996
with an amortized cost of $5,748,882 are pledged as collateral for public
deposits and for other purposes as required or permitted by law.
There were no sales of investment securities in 1996 or 1995.
F-9
<PAGE> 93
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The components of the loan portfolio are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Construction............................................... $ 85,287 $47,306
Commercial................................................. 27,024 44,356
Installment................................................ 4,030 3,988
Mortgage................................................... 66 67
Other...................................................... 166 115
-------- -------
116,573 95,832
Less unearned loan fees.................................... (854) (859)
-------- -------
$115,719 $94,973
======== =======
</TABLE>
Transactions in the allowance for possible loan losses are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1997 1996 1995
----------------- ------ ----
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of period..................... $1,150 $ 759 $546
Provision for loan losses.......................... 360 457 280
Recoveries......................................... 62 13 9
Loans charged off.................................. (5) (79) (76)
------- ------ ----
Balance at end of period........................... $1,567 $1,150 $759
======= ====== ====
</TABLE>
The outstanding principal balance of accruing loans having payments
delinquent more than ninety days at December 31, 1996 and 1995 amounted to $-0-
and $1,025, respectively.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $3,592 and $75,000 at December 31, 1996 and 1995, respectively.
Unaudited data as of September 30, 1997, follows:
<TABLE>
<S> <C>
Outstanding principal balance of accruing loans having
payments delinquent more than 90 days..................... $66,399
Loans on which the accrual of interest has been
discontinued.............................................. 1,611,282
</TABLE>
Substantially all of the balance of nonaccrual loans as of September 30,
1997, relates to one borrower.
The Company had no impaired loans during 1996 and 1995 as recognized in
conformity with FASB Statement No. 114, as amended by FASB Statement No. 118.
No loans were transferred to foreclosed real estate in 1996 and 1995.
The Company is not committed to lend funds to debtors whose loans have been
modified.
F-10
<PAGE> 94
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
At December 31, 1996 leasehold improvements and equipment, less accumulated
depreciation and amortization, consisted of the following (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION
AND NET
COST AMORTIZATION AMOUNT
------ ------------ ------
<S> <C> <C> <C>
Buildings and improvements............................ $ 766 $ 24 $ 742
Leasehold improvements................................ 126 80 46
Equipment............................................. 1,672 843 829
Land.................................................. 1,013 -- 1,013
------ ---- ------
$3,577 $947 $2,630
====== ==== ======
</TABLE>
NOTE E -- DEPOSITS
At December 31, 1996, the scheduled maturities of certificates of deposit
are as follows (in thousands):
<TABLE>
<S> <C>
1997....................................................... $18,300
1998....................................................... 1,303
1999....................................................... 50
2000....................................................... 36
2001....................................................... 22
Thereafter................................................. 73
-------
$19,784
=======
</TABLE>
NOTE F -- FEDERAL HOME LOAN BANK BORROWINGS
As of December 31, 1996, the Bank had $2,275,275 in Federal Home Loan Bank
borrowings. The advances outstanding at December 31, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
INTEREST
AMOUNT RATE
------ --------
<S> <C>
$ 439....................................................... 6.81%
506...................................................... 6.90
176...................................................... 6.72
102...................................................... 6.87
100...................................................... 6.76
100...................................................... 6.58
365...................................................... 5.89
237...................................................... 6.07
247...................................................... 6.37
$2,272
</TABLE>
The Bank has a blanket pledge agreement with the FHLB of Topeka
collateralizing the above advances.
F-11
<PAGE> 95
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of the aforementioned borrowings are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 365
1998........................................................ 176
1999........................................................ 1,734
------
$2,275
======
</TABLE>
NOTE G -- NOTE PAYABLE
At December 31, 1996, the Company has a note payable to First Interstate
Bank of Denver, N.A. for $2,500,000 which will require one annual principal
payment of $500,000 due August 15, 1997, with interest calculated at the lending
bank's prime rate; ten consecutive quarterly interest payments, beginning
November 15, 1996, with interest calculated at the prime rate; and one principal
payment of $2,000,000, plus accrued interest on August 15, 1998. This note is
guaranteed by certain major shareholders of the Company. The loan also calls for
the Bank to maintain the following minimum financial ratios:
- Return on assets before taxes equal to, or greater than two percent (2%);
- Loan loss reserve of at least one percent (1%) of total loans, but not
less than 100% of subsidiary's total non-performing loans plus other real
estate owned (OREO);
- Non-performing loans plus OREO divided by total assets shall be less than
two percent (2%);
- The Bank's risk-based capital ratios, as defined in Regulation H of the
Federal Reserve Board 12 C.F.R. Section 208, et seq., shall not fall
below the following minimums:
<TABLE>
<S> <C>
Tier 1 capital ratio.............................. six percent (6%)
Total risk-based capital ratio.................... ten percent (10%)
Leveraged ratio................................... five percent (5%)
</TABLE>
As of December 31, 1996, minimum estimated annual principal payments are as
follows:
<TABLE>
<S> <C>
1997..................................................... $ 500,000
1998..................................................... 2,000,000
</TABLE>
The balance of the note payable as of September 30, 1997, was $2,000,000
(unaudited).
NOTE H -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a 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 stand-by
letters of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
F-12
<PAGE> 96
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
stand-by letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit.............................. $45,053 $47,573
Stand-by letters of credit................................ 4,864 7,022
</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.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire
without being drawn upon or be participated to other financial institutions, the
total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Company upon
extension of credit is based on management's credit evaluation. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties.
Stand-by letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE I -- LEASE COMMITMENTS
Future minimum rental and lease payments under noncancellable operating
leases for premises, expiring at various dates through 2006 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997................................................... $ 438
1998................................................... 416
1999................................................... 366
2000................................................... 364
2001................................................... 352
Thereafter 1,473
------
$3,409
======
</TABLE>
Total lease expense for all operating leases was $382,000 and $351,000 for
the years ended December 31, 1996 and 1995, respectively.
NOTE J -- INCOME TAXES
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax basis of assets and liabilities and the tax
rates in effect when these differences are expected to reverse. Temporary
differences result from differences in the allowance for loan losses, loan fees,
and depreciation on equipment.
F-13
<PAGE> 97
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Timing differences in the recognition of revenue and expense for tax and
financial reporting purposes resulted in a deferred tax asset as of December 31,
1996 as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets Provision for loan losses............... $322
Recognition of loan fees.................................. 63
----
Total deferred tax assets......................... 385
Deferred tax liabilities
Depreciation.............................................. $(52)
Market value adjustment................................... (27)
Federal Home Loan Bank stock dividend..................... (6)
----
Total deferred tax liabilities.................... (85)
----
Net deferred tax asset............................ $300
====
</TABLE>
The effective income tax rate varies from the statutory federal rate
because of several factors, the most significant being nontaxable interest
income earned on obligations of state and municipalities. The following table
reconciles the Company's effective tax rate to the statutory federal rate.
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- ------- -------------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Tax expense at statutory rate................... $1,283 34.0% $ 906 34.0%
Increase (decrease) in taxes due to:
Tax exempt municipal interest................. (84) (2.0) --
State tax..................................... 112 3.3 100 3.3
Other......................................... 42 .7 11 .7
------ ---- ------ ----
Total provision for income taxes...... $1,353 36.0% $1,017 38.0%
====== ==== ====== ====
</TABLE>
NOTE K -- RELATED PARTIES
The Bank has entered into certain loan participations with First State Bank
of Hotchkiss, a financial institution related through common ownership.
Approximate loan principal balances outstanding under these participations are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------
1997 1996 1995
------------- ------- ------
(UNAUDITED)
<S> <C> <C> <C>
Participations sold................................... $10,401 $10,916 $8,031
Participations purchased.............................. 1,755 250 1,100
</TABLE>
The Bank has also sold loan participations to other related parties
(shareholders, directors, family members, businesses related through common
ownership). At December 31, 1996 and 1995, the participations sold to related
parties were approximately $7,882,388 and $500,000, respectively. As of
September 30, 1997, participations sold to related parties were approximately
$1,900,000 (unaudited).
F-14
<PAGE> 98
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis of loans that were made to shareholders,
directors and executive officers of the Company, and to corporations and others
associated with those individuals (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1996................................. $ 297
New loans.................................................. 2,137
Repayments................................................. (1,372)
-------
Balance at December 31, 1996............................... $ 1,062
=======
</TABLE>
As of September 30, 1997, these amounted to approximately $2,524,000
(unaudited).
In September 1993 the Bank entered into an agreement with First State Bank
of Hotchkiss (FSBH), a bank related through common ownership, to purchase their
branching rights. The Bank agreed to pay FSBH the sum of $100,000 payable in
monthly installments of $2,500 for forty months. Payments commenced January 15,
1995, and are due on the 15th of each month thereafter. The Bank capitalized
these costs and the unamortized cost of $5,000 is included in other assets.
NOTE L -- EMPLOYEE BENEFITS
The Company has an IRA contribution plan available for all personnel who
have been employed at least six months. If an employee contributes 2 1/2% of his
or her salary to an IRA the Company will provide a contribution of up to two
times the employee's contribution to an aggregate total of both contributions of
$2,000. Contributions in 1996 and 1995 were $28,956 and $23,016, respectively.
NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. The Company
operates as a going concern and except for its investment portfolio, no active
market exists for its financial instruments. Much of the information used to
determine fair value is highly subjective and judgmental in nature and,
therefore, the results may not be precise. The subjective factors include, among
other things, estimates of cash flows, risk characteristics, credit quality and
interest rates, all of which are subject to change. Since the fair value is
estimated as of the balance sheet date, the amounts which will actually be
realized or paid upon settlement or maturity of the various financial
instruments could be significantly different.
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
INVESTMENTS
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. The carrying amount of
accrued interest receivable approximates its fair value.
LOANS
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. For
variable rate loans, the carrying amount is a reasonable estimate of fair value.
For loans where collection of principal is in doubt, an allowance for losses has
been estimated. Loans with similar characteristics were aggregated for purposes
of the calculations. The carrying amount of accrued interest approximates its
fair value.
F-15
<PAGE> 99
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the reporting
date (i.e. their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
SHORT-TERM BORROWINGS
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
LONG-TERM BORROWINGS
The fair value of long-term borrowings is estimated by discounting the
future cash flows using the current rate at which a similar loan could be
financed.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparts. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit and lines of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparts at the reporting date.
The following table presents estimated fair values of the Company's
financial instruments as of December 31, 1996:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Financial assets
Cash and due from banks................................... $ 9,130 $ 9,130
Federal funds sold........................................ 785 785
Investment securities
Securities held to maturity............................ -- --
Securities available for sale.......................... 11,137 11,137
Loans, less allowance for loan losses..................... 93,823 93,270
Accrued interest receivable............................... 681 681
Financial liabilities
Deposits
Non-interest bearing................................... $36,095 $36,095
Interest bearing....................................... 68,566 70,186
Other borrowings.......................................... 4,900 4,900
Accrued interest payable.................................. 79 79
Unrecognized financial instruments (net of contract
amount)
Commitments to extend credit........................... $47,574 $47,574
Standby letters of credit.............................. 7,022 7,002
</TABLE>
F-16
<PAGE> 100
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SHAREHOLDERS' EQUITY AND REGULATORY RESTRICTIONS
The Company has a Stock Purchase Agreement with certain of its
shareholders. This agreement, as amended and restated in November 1997, provides
that upon the death of the Company's Chairman of the Board of Directors, the
shareholders will have the option to require the Company to purchase their
shares of the Company's stock to the extent the Company receives proceeds from a
life insurance policy on the life of the Chairman. These shareholders currently
hold an aggregate of 109,510 shares of common stock. The agreement specifies
that each year the shareholders are to determine the value of the stock for
purposes of establishing the purchase price to be paid by the Company. If the
shareholders do not determine a value, the value of the most recent
determination will be used, subject to appropriate adjustment to reflect book
value per share of the Company since the effective date of the last valuation.
For 1996, the shareholders determined the value to be $45 per share. The Company
has purchased a life insurance policy in the amount of $3,000,000 on the
Chairman. Based on the current set value of the stock, a purchase of all of the
shares of the shareholders who are a party to the agreement would be
approximately $4.9 million.
Cash dividends paid to the Company by the Bank amounted to $950,000 and
$900,000 for the years ended December 31, 1996 and 1995, respectively, and
$1,000,000 as of September 30, 1997 (unaudited). The payment of dividends to the
Company by the Bank is subject to various state and federal regulatory
limitations.
The Bank is 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's 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 bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996 and as of
September 30, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ---------------------------- -----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital to risk weighted
assets.......................... $11,831 12.5% > or = $ 7,554 > or = 8.0% > or = $ 9,442 > or = 10.0%
Tier 1 capital to risk weighted
assets.......................... 10,681 11.3 > or = 3,777 > or = 4.0 > or = 5,665 > or = 6.0
Tier 1 capital to average
assets.......................... 10,681 9.0 > or = 4,741 > or = 4.0 > or = 5,926 > or = 5.0
</TABLE>
F-17
<PAGE> 101
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited capital ratios for the Bank as of September 30, 1997, are as
follows:
<TABLE>
<S> <C>
Total capital to risk-weighted assets....................... 10.72%
Tier 1 capital to risk-weighted assets...................... 9.48
Tier 1 capital to average assets............................ 8.66
</TABLE>
The Federal Reserve Board requires banks to maintain reserve balances
composed of cash on hand and balances maintained at the Federal Reserve Bank.
These reserve balances are based primarily on deposit levels and totaled
approximately $767,000 at December 31, 1996.
NOTE O -- CONDENSED FINANCIAL STATEMENTS -- PARENT COMPANY ONLY
The following presents the condensed balance sheets as of September 30,
1997 (unaudited) and December 31, 1996 and statements of income and of cash
flows for the nine months ended September 30, 1997 and 1996 (unaudited) and for
each of the two years ended December 31, 1996 for MegaBank Financial
Corporation.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and interest bearing deposits.......................... $ 337 $ 267
Investment in subsidiaries.................................. 12,011 10,681
Other assets, net........................................... 767 441
------- -------
Total assets...................................... $13,115 $11,389
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable.......................................... $ 2,000 $ 2,500
Accrued interest, taxes and other liabilities............... 153 62
Shareholders' equity........................................ 10,962 8,827
------- -------
Total liabilities and shareholders' equity........ $13,115 $11,389
======= =======
</TABLE>
F-18
<PAGE> 102
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ---------------
1997 1996 1996 1995
----------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income
Dividends from subsidiaries.......................... $1,000 $ 950 $ 950 $ 900
Interest............................................. 9 30 32 136
Intercompany income.................................. 245 197 263 266
Lease income......................................... 111 155 206 208
------ ------ ------ ------
Total income................................. 1,365 1,332 1,451 1,510
Expenses
Interest............................................. 135 192 240 280
Lease expense........................................ 298 272 360 348
Other................................................ 424 155 203 195
------ ------ ------ ------
Total expenses............................... 857 619 803 823
------ ------ ------ ------
Income before income taxes and equity in undistributed
net income of subsidiaries........................... 508 713 648 687
Income tax benefit..................................... 167 89 114 76
Equity in undistributed net income of Subsidiaries..... 1,356 936 1,658 884
------ ------ ------ ------
Net income............................................. $2,031 $1,738 $2,420 $1,647
====== ====== ====== ======
</TABLE>
F-19
<PAGE> 103
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1997 1996 1996 1995
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income................................ $2,031 $1,738 $ 2,420 $ 1,647
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for depreciation............. 2 3 5 1
Equity in undistributed net income of
subsidiaries......................... (1,356) (936) (1,658) (884)
(Increase) decrease in other assets.... (74) (395) (158) 171
Increase (decrease) in accrued expense
and other liabilities................ (33) 2 (2) 33
------ ------ ------- -------
Net cash provided by operating
activities...................... 570 412 607 968
Cash flows from investing activities
Investment in subsidiaries................ -- -- -- (3,000)
Purchase of leaseholds.................... -- (10) (10) (15)
------ ------ ------- -------
Net cash used in investing
activities...................... -- (10) (10) (3,015)
Cash flows from financing activities
Proceeds from note payable................ -- -- -- 3,000
Repayments of note payable................ (500) (646) (656) (764)
------ ------ ------- -------
Net cash provided by (used in)
financing activities............ (500) (646) (656) 2,236
------ ------ ------- -------
Net (decrease) increase in cash............. 70 (244) (59) 189
Cash, beginning of period................... 267 326 326 137
------ ------ ------- -------
Cash, end of period......................... $ 337 $ 82 $ 267 $ 326
====== ====== ======= =======
</TABLE>
F-20
<PAGE> 104
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THE INFORMATION HEREIN OR INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION OF AN OFFER TO BUY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.........................
Selected Consolidated Financial Data.......
Risk Factors...............................
Use of Proceeds............................
Accounting Treatment.......................
Capitalization.............................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................
Business...................................
Management.................................
Principal Shareholders.....................
Related Party Transactions.................
Supervision and Regulation.................
Description of the Preferred Securities....
Description of Junior Subordinated
Debentures...............................
Book-Entry Issuance........................
Description of Guarantee...................
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee.............
Certain Federal Income Tax Consequences....
ERISA Considerations.......................
Underwriting...............................
Legal Matters..............................
Experts....................................
Index to Financial Statements.............. F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING 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 OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
1,200,000 TRUST PREFERRED SECURITIES
MB CAPITAL I
% CUMULATIVE TRUST
PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER
TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY
GUARANTEED, AS DESCRIBED
HEREIN, BY
MEGABANK FINANCIAL
CORPORATION
LOGO
---------------------
PROSPECTUS
---------------------
HOWE BARNES INVESTMENTS, INC.
, 1998
======================================================
<PAGE> 105
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors, officers, employees and agents of the Company and/or the Bank
may be entitled to benefit from the indemnification provisions contained in the
Colorado Business Corporation Act, Title Seven of the Colorado Revised Statutes
(the "CBCA"), the Company's Articles of Incorporation and certain
indemnification agreements. In addition, certain provisions in the CBCA and the
Articles of Incorporation limit the liability of directors of the Company. The
general effect of these provisions is summarized below:
Article 109 of the CBCA permits a Colorado corporation to indemnify any
person who was or is a party or is threatened to be made a party to any suit,
action or other proceeding by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, or other enterprise. Such indemnification may
be against expenses, including attorneys' fees, judgments, fines and other
amounts in connection with such proceeding. Indemnification is available if such
person acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, or, with respect to any
criminal action or proceeding, such person had no reasonable cause to believe
that the conduct was unlawful. Unless a court of competent jurisdiction
otherwise orders, indemnification is not available in connection with a
proceeding by or in the right of the corporation if the person is adjudged
liable to the corporation or derived an improper personal benefit. A corporation
is required to indemnify a director or officer who is wholly successful in the
defense of any such proceeding. Expenses (including attorneys' fees) incurred by
a director, officer, employee or agent of the corporation in defending any such
proceeding may be advanced by the corporation before the final disposition if
such person furnishes an undertaking to repay such advances if it is ultimately
determined that such person is not entitled to be indemnified. Before a
corporation may indemnify or advance expenses to a person under these
provisions, the board of directors (excluding any directors who are parties to
such a proceeding), independent legal counsel appointed by the board of
directors, or the shareholders must provide authorization. A corporation may
purchase insurance against any liability of individuals for whom the corporation
may provide such indemnification. Any provisions in a corporation's articles of
incorporation, bylaws, resolutions or in a contract (except an insurance policy)
for such indemnification are valid only to the extent not inconsistent with
Article 109 of the CBCA.
Article XIII of the Company's Articles of Incorporation states that the
Company shall have all powers to indemnify and make advances in connection with
such indemnification to its directors, officers and others, provided that such
powers and the exercise thereof are consistent with the Colorado Corporation
Code (which preceded the CBCA). This Article also states that the board of
directors is authorized, without shareholder action, to exercise the Company's
powers of indemnification, whether by provision in the bylaws or otherwise.
The Bank has entered into indemnification agreements with certain of its
officers and directors in consideration of their agreement to serve in such
capacities. The terms of each agreement are identical for each such officer or
director. The indemnification agreement provides that the Bank will indemnify
and pay advances to the director or officer to the maximum extent provided in
the Bank's articles of incorporation or bylaws, subject to approval by the board
of directors and certain conditions and limitations. Such indemnification is not
available in connection with expenses, penalties or other amounts in connection
with proceedings brought by a regulatory agency resulting in the assessment of
civil money penalties of requiring the director or officer to make payments to
the Bank, nor will the Bank pay any advances in connection with a proceeding
brought by an regulatory agency. For each annual period following the date of
the indemnification agreement, the total liability of the Bank for
indemnification of all officers and directors of the bank, whether under the
agreement or otherwise, cannot exceed $1,000,000. The indemnification available
under the agreement does not limit any other indemnification which may be
available. However, indemnification under the agreement is available only after
the exhaustion of any available insurance coverage.
Section 7-108-402 of the CBCA permits a corporation, if so provided in the
articles of incorporation, to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary
II-1
<PAGE> 106
damages for breach of fiduciary duty. However, such a provision cannot eliminate
or limit such liability arising out of a breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or knowing violations of law, unlawful distributions, or any
transaction for which the director derived an improper personal benefit. Article
XV of the Company's Articles of Incorporation provides for such elimination of
director liability.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 3,540
NASD fee.................................................... 1,700
American Stock Exchange fees................................ 15,000
Trustees' fees and expenses................................. 25,000
Legal fees and expenses..................................... 100,000
Blue Sky fees and expenses.................................. --
Accounting fees and expenses................................ 30,000
Printing expenses........................................... 65,000
Miscellaneous expenses...................................... 9,760
--------
Total............................................. $250,000
========
</TABLE>
All of the above items except the registration fee are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 27. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement(1).
3.1 -- Amended and Restated Articles of Incorporation of
MegaBank Financial Corporation(2).
3.2 -- Amended and Restated Bylaws of MegaBank Financial
Corporation(2).
4.1 -- Form of Subordinated Indenture dated ,
to be entered into between the Registrant and Wilmington
Trust Company, as Indenture Trustee(1).
4.2 -- Form of Junior Subordinated Debenture (included as an
exhibit to Exhibit 4.1).
4.3 -- Certificate of Trust of MB Capital I(1).
4.4 -- Trust Agreement of MB Capital I dated as of December 8,
1997(1).
4.5 -- Form of Amended and Restated Trust Agreement of MB
Capital I, dated , (1).
4.6 -- Form of Preferred Security Certificate of MB Capital I
(included as an exhibit to Exhibit 4.5).
4.7 -- Form of Preferred Securities Guarantee Agreement(1).
4.8 -- Form of Agreement as to Expenses and Liabilities
(included as an exhibit to Exhibit 4.5).
5.1 -- Opinion and Consent of Jones & Keller, P.C.(2).
5.2 -- Opinion and Consent of Richards, Layton & Finger,
P.A.(2).
</TABLE>
II-2
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
8.1 -- Opinion of Jones & Keller, P.C., as to certain federal
income tax matters(2).
10.1 -- Federal Funds Transactions Purchase Agreement dated
November 8, 1993 between MegaBank of Arapahoe and
Bankers' Bank of the West and renewal letter dated
October 20, 1997 from Bankers' Bank of the West(1).
10.2 -- Lease dated December 29, 1994 between Nagrom, L.L.C. and
MegaBank Financial Corporation(1).
10.3 -- Advance, Pledge and Security Agreement dated October 26,
1995 between Federal Home Loan Bank of Topeka and
MegaBank of Arapahoe(1).
10.4 -- Federal Funds line of credit agreement signed September
24, 1997 between Norwest Bank Colorado, N.A. and MegaBnk
of Arapahoe(1).
10.5 -- Consulting Agreement -- First Fidelity Corp.(1).
10.6 -- Branching Rights Purchase Agreement -- First State Bank
of Hotchkiss(1).
10.7 -- Amended and Restated Stock Purchase Agreement by and
among MegaBank Financial Corporation, Thomas R. Kowalski,
the Ryan R. Kowalski Trust, the Realtek Company Profit
Sharing Plan and Trust, Thomas Investments Partnership
and Orchard Valley Financial Corporation dated as of
November 28, 1996(1).
10.8 -- Indemnification Agreement dated July 20, 1995 between
MegaBank Financial Corporation ("MegaBank") and Raymond
L. Anilionis, Warren P. Cohen and Thomas R. Kowalski (the
"Guarantors")(1).
11.1 -- Statement re Computation of per share earnings -- see
Consolidated Financial Statements.
23.1 -- Consent of Fortner, Bayens, Levkulich & Co., P.C.(2).
23.2 -- Consent of Jones & Keller, P.C. (included in Exhibit 5.1
above).
23.3 -- Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.2 above).
24.1 -- Power of attorney(2).
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).
</TABLE>
- - ---------------
(1) Previously filed with this Registration Statement.
(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, the 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 the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the 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 indemnifica-
II-3
<PAGE> 108
tion by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
The 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 a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of the 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> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Englewood, State of Colorado, on this 22nd day
of January, 1998.
<TABLE>
<S> <C>
MB CAPITAL I MEGABANK FINANCIAL CORPORATION
By: /s/ THOMAS R. KOWALSKI By: /s/ THOMAS R. KOWALSKI
------------------------------------------------- ------------------------------------------
Thomas R. Kowalski Thomas R. Kowalski
Administrative Trustee Chairman and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ THOMAS R. KOWALSKI Director, Chairman and Chief January 22, 1998
- - ----------------------------------------------------- Executive Officer (Principal
Thomas R. Kowalski Executive Officer)
/s/ THOMAS R. KOWALSKI Director, President and Chief January 22, 1998
- - ----------------------------------------------------- Operating Officer
Thomas R. Kowalski,
Attorney for
Larry A. Olsen
/s/ THOMAS R. KOWALSKI Director January 22, 1998
- - -----------------------------------------------------
Thomas R. Kowalski,
Attorney for
Raymond L. Anilionis
/s/ THOMAS R. KOWALSKI Director January 22, 1998
- - -----------------------------------------------------
Thomas R. Kowalski,
Attorney for
Dr. Donald B. Brown
/s/ THOMAS R. KOWALSKI Director January 22, 1998
- - -----------------------------------------------------
Thomas R. Kowalski,
Attorney for
William F. Sievers
/s/ THOMAS R. KOWALSKI Treasurer, Principal January 22, 1998
- - ----------------------------------------------------- Financial and Accounting
Thomas R. Kowalski, Officer
Attorney for
Hiram J. Welton
</TABLE>
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 -- Amended and Restated Articles of Incorporation of
MegaBank Financial Corporation
3.2 -- Amended and Restated Bylaws of MegaBank Financial
Corporation
5.1 -- Opinion and Consent of Jones & Keller, P.C.
5.2 -- Opinion and Consent of Richards, Layton & Finger, P.A.
8.1 -- Opinion of Jones & Keller, P.C., as to certain federal
income tax matters
23.1 -- Consent of Fortner, Bayens, Levkulich & Co., P.C.
23.2 -- Consent of Jones & Keller, P.C. (included in Exhibit 5.1
above)
23.3 -- Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.2 above)
24.1 -- Power of Attorney
</TABLE>
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MEGABANK FINANCIAL CORPORATION
MegaBank Financial Corporation (hereinafter referred to as the
"Corporation"), desiring to amend and restate its Articles of Incorporation,
hereby submits the following Amended and Restated Articles of Incorporation to
the Secretary of State of the State of Colorado pursuant to the provisions of
the Colorado Business Corporation Act:
ARTICLE I
CORPORATE NAME
The name of the Corporation shall be MegaBank Financial Corporation.
ARTICLE II
PURPOSES
The nature of the business of the Corporation and the objects and
purposes to be transacted, promoted and carried on by it are as follows:
2.1 To acquire as principal, agent or partner, general or limited or
as a single or multibank holding company, by purchase, contract or otherwise,
financial institutions and to own, hold, manage, and sell, encumber or
otherwise dispose of and deal in financial institutions of every kind and
description, together with other non-banking activities that are closely
related to the operations of financial institutions.
2.2 To acquire as principal, agent or partner, general or limited, by
purchase, lease contract or otherwise, lands and interest in lands, buildings,
or other structures and to own, hold, improve, develop and manage the same, and
to erect or cause to be erected on any lands owned, held or occupied by the
Corporation, buildings or other structures with their appurtenances, and to
rebuild, enlarge, alter or improve any buildings or other structures now or
hereafter erected on any lands so owned, held or occupied; and to mortgage,
sell, lease or otherwise dispose of any lands or interests in lands and in
buildings or other structures at any time owned or held by the Corporation.
2.3 To invest in and to buy, sell or otherwise acquire or dispose
of and deal in loans secured by liens upon real and personal property both as
principal and as agent.
2.4 To invest, as principal or agent, or partner, general or
limited, in all forms of personal investment property, including without
limitation, securities, stocks, bonds, mutual funds and secured or unsecured
notes.
<PAGE> 2
2.5 To purchase or otherwise acquire the whole or any part of the
property, assets, business, goodwill and rights and to undertake or assume the
whole or any part of the bonds, mortgages, franchises, leases, contracts,
indebtedness, guaranties, liabilities, and obligations of any person, firm,
association, corporation or organization, and to pay for the same or any part
or combination thereof, in cash, shares of the capital stock, bonds,
debentures, debenture stock, notes and other obligations of this corporation,
or otherwise, or by undertaking and assuming the whole or any part of the
liabilities or obligations of the transferor; and to conduct in any lawful
manner the whole or any part of the businesses so acquired and to exercise all
the powers necessary or convenient in and about the conduct, management and
carrying on of such business.
2.6 To borrow money for any of the purposes of this corporation
and to issue bonds, debentures, debenture stock, notes or other obligations
therefore, and to secure the same by pledge or mortgage of the whole or any
part of the property of this corporation whether real or personal, or to issue
bonds, debentures, debenture stock, notes or other obligations with any such
security.
2.7 To lend money, to guarantee, purchase, acquire, exchange,
hold, sell assign, transfer, mortgage, pledge, or otherwise dispose of shares
of the capital stock of, or any bonds, securities or evidences of indebtedness
created by any corporation or corporations organized under the laws of this
State or of any other state, district or county and also bonds or evidences of
indebtedness of the United States or any state, territory, dependency, or
county or subdivision or municipality thereof, and while the owner thereof to
exercise all rights, powers, and privileges of ownership, including the right
to vote thereon.
2.8 To transact any and all lawful business for which corporations
may be incorporated pursuant to the Colorado Business Corporation Act now
existing or as hereafter amended, in any state, territory, district,
possession, dependency or other political subdivision of the United States of
America, or in any foreign country, to the extent that such business is not
forbidden by the laws of such state, territory, district, possession,
dependency or political subdivision of the United States or America or by such
foreign country.
ARTICLE III
DURATION
This corporation shall have perpetual existence, unless dissolved
according to law.
ARTICLE IV
CAPITAL STOCK
4.1 The Corporation is authorized to issue two classes of stock,
to be designated, respectively, "common stock" and "preferred stock." The
total number of shares that the Corporation is authorized to issue is
60,000,000 shares, of which 50,000,000 shares shall be common stock, each
2
<PAGE> 3
having no par value, and of which 10,000,000 shares shall be preferred stock,
each having no par value.
4.2 The preferred stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, and the liquidation preferences of any wholly-unissued series of
preferred stock, and the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding. In the event
that the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
4.3 The Board of Directors of the Corporation may dispose of,
issue, and sell shares in accordance with, and in such amounts as may be
permitted by, the laws of the State of Colorado and the provisions of these
Articles of Incorporation, as amended from time to time, and for such
consideration, at such price or prices, at such time or times and upon such
terms and conditions (including the privilege of selectively repurchasing the
same) as the Board of Directors of the Corporation shall determine, without the
authorization or approval by any shareholder of the Corporation. Shares may be
disposed of, issued, and sold to such persons, firms or corporations as the
Board of Directors may determine, without any preemptive or other right on the
part of the owners or holders of other shares of the Corporation of any class
or kind to acquire such shares by reason of their ownership of such other
shares.
ARTICLE V
RIGHTS OF SHAREHOLDERS
The rights and privileges relating to the shares of common stock named
in Article IV shall be as follows:
5.1 Holders of the shares of the common stock of the Corporation
shall not be entitled to the right to purchase or subscribe for any unissued or
treasury shares, or any additional shares to be issued by reason of any
increase of the authorized shares of the Corporation, or any bonds,
certificates of indebtedness, debentures, or other securities, rights,
warrants, or options, convertible into shares of any unissued or treasury
shares in accordance with their proportionate equity in the Corporation.
5.2 Each share of common stock shall be entitled to one vote,
either in person or by proxy, at all shareholders' meetings. Cumulative voting
shall not be allowed in the election of directors.
3
<PAGE> 4
5.3 All outstanding shares of common stock shall share equally in
dividends and upon liquidation. Dividends are payable at the discretion of the
Board of Directors at such times and in such amounts as they deem advisable,
subject, however, to the provisions of the laws of the State of Colorado.
5.4 The Board of Directors may cause any stock issued by the
Corporation to be issued subject to such lawful restrictions, qualifications,
limitations or special rights as they deem fit, which restrictions,
qualifications, limitations or special rights may be created by provisions in
the Bylaws of the Corporation or in the minutes of any properly convened
meeting of the Board of Directors; provided, however, notice of such special
restrictions, qualifications, limitations or special rights must appear on the
certificate evidencing ownership of such stock.
ARTICLE VI
DIRECTORS
6.1 The affairs of the Corporation shall be governed by a Board of
Directors of not less than three (3) nor more than twenty-five (25) Directors
as the Bylaws may determine from time to time, who shall be elected in
accordance with the Bylaws of the Corporation.
6.2 Directors of the Corporation need not be residents of Colorado
nor holders of shares of the Corporation's capital stock.
6.3 Meetings of the Board of Directors, regular or special, may be
held within or without Colorado upon such notice as may be prescribed by the
Bylaws of the Corporation. Attendance of a Director at a meeting shall
constitute a waiver by him of notice of such meeting unless he attends only for
the express purpose of objecting to the transaction of any business at that
meeting on the ground that the meeting is not lawfully called or convened.
6.4 A majority of the number of Directors at any time constituting
the Board of Directors shall constitute a quorum for the transaction of
business, and the act of a majority of the Directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
6.5 By resolution adopted by a majority of the number of Directors
at any time constituting the Board of Directors, the Board of Directors may
designate two or more Directors to constitute an executive committee which
shall have and may exercise, to the extent permitted by law or in such
resolution, all of the authority of the Board of Directors in the management of
the Corporation; provided, however, that such delegation of authority shall not
operate to relieve the Board of Directors or any member thereof of any
responsibility imposed on it or him by law.
6.6 Any vacancy in the Board of Directors, however caused, may be
filled by the affirmative vote of a majority of the remaining Directors, though
less than a quorum of the Board of Directors. A Director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
4
<PAGE> 5
ARTICLE VII
PLACE OF BUSINESS
The address of the Corporation's principal office is 8100 East
Arapahoe Road, Englewood, Colorado 80112. The Board of Directors may, however,
from time to time establish such other offices, branches, subsidiaries or
divisions in such other place or places within or without the State of Colorado
as it deems advisable.
ARTICLE VIII
OFFICERS
The officers of the Corporation shall consist of a President, one or
more Vice Presidents as may be prescribed by the Bylaws of the Corporation, a
Secretary and a Treasurer, each of whom shall be elected by the Board of
Directors at such time and in such manner as may be prescribed by the Bylaws of
the Corporation. Any two or more offices may be held by the same person,
except the offices of President and Secretary.
ARTICLE IX
BYLAWS
The Board of Directors shall have the power to make and adopt such
prudent Bylaws for the government of the Corporation not inconsistent with the
laws of the State of Colorado or these Articles of Incorporation for the
purpose of regulating and carrying on the business of the Corporation within
the scope of its objects and purposes; and the Board of Directors from time to
time may change, alter or amend the same as may be beneficial to the interests
of the Corporation except as otherwise specifically provided therein.
ARTICLE X
MEETINGS OF SHAREHOLDERS
Meetings of shareholders of the Corporation shall be held at such
place within or without the State of Colorado and at such times as may be
prescribed in the Bylaws of the Corporation. Special meetings of the
shareholders of the Corporation may be called by the President of the
Corporation, the Board of Directors, or by the record holder or holders of at
least twenty-five percent (25%) of all shares entitled to vote at the meeting.
At the meeting of the shareholders, except to the extent otherwise provided by
the Bylaws, a quorum shall consist of a majority of the Shares entitled to vote
at the meeting, represented in person or by proxy and, if a quorum is present,
the affirmative vote of the majority of shares represented and entitled to vote
at the meeting shall be the act of the shareholders unless the vote of a
greater number or voting by classes is required by law.
5
<PAGE> 6
ARTICLE XI
SALE OF ASSETS
Whenever the Board of Directors at any meeting thereof, by a
two-thirds (2/3) majority vote of the whole Board, determines that it is in the
best interests of the Corporation, the Corporation may sell, lease, exchange,
or convey all of its property and assets, including its good will and its
corporate franchises, upon such terms and conditions and for such consideration
as the Board of Directors shall deem expedient; provided, however, that the
sale or disposal of all or substantially all of the property and assets of the
Corporation shall be authorized or ratified by the affirmative vote of the
holders of at least a two-thirds (2/3) majority of the capital stock then
issued and outstanding and entitled to vote on such proposal, such vote to be
taken at a meeting of shareholders duly called for that purpose as provided by
the statutes of the State of Colorado.
ARTICLE XII
INTEREST OF DIRECTORS IN CONTRACTS
Any contract or other transaction between the Corporation and one or
more of its Directors, between the Corporation and any firm of which one or
more of its Directors are members or employees, or in which they are
interested, or between the Corporation and any corporation or association of
which one or more of its Directors are shareholders, members, directors,
officers or employees, or in which they are interested, shall be valid for all
purposes, notwithstanding the presence of such Director or Directors at the
meeting of the Board of Directors of the Corporation which acts upon or in
reference to such contract or transaction, and notwithstanding his or their
participation in such action, if the facts of such interest shall be disclosed
or known to the Board of Directors, and the Board of Directors shall,
nevertheless, authorize, approve, and ratify such contract or transaction by a
vote of a majority of the Board of Directors present. Such interested Director
or Directors shall be counted in determining whether a quorum is present but
shall not be counted in calculating the majority necessary to carry such vote.
This Article shall not be construed to invalidate any contract or other
transaction which would otherwise be valid under the common and statutory law
applicable thereto.
ARTICLE XIII
INDEMNIFICATION
In addition to the other powers now or hereafter conferred upon the
Corporation by these Articles of Incorporation, the Colorado Business
Corporation Act or otherwise, the Corporation shall possess and may exercise
all powers to indemnify directors, officers and other persons and all powers
whatsoever incidental thereto (including without limitation the power to
advance expenses and the power to purchase and maintain insurance with respect
thereto), without regard to whether or not such powers are expressly provided
for by the Colorado Business Corporation Act, but provided that such powers and
the exercise thereof are consistent with the provisions of the Colorado
Business Corporation Act. The Board of Directors is hereby authorized on
behalf of the Corporation
6
<PAGE> 7
and without shareholder action to exercise all of the Corporation's powers of
indemnification, whether by provision in the Bylaws or otherwise.
ARTICLE XIV
AMENDMENT OF ARTICLES OF INCORPORATION
The Corporation expressly reserves the right to amend these Articles
of Incorporation and to alter, change, or repeal any provision contained herein
in any manner now or hereafter permitted by the Colorado Business Corporation
Act, and the rights of all shareholders are expressly made subject to such
power of amendment. Whenever an amendment to these Articles of Incorporation
shall be required to be adopted by the shareholders of the Corporation, the
proposed amendment shall be adopted upon receiving the affirmative vote of a
two-thirds (2/3) majority of shares entitled to vote thereon.
7
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
MEGABANK FINANCIAL CORPORATION
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Directors shall designate
and the Corporation shall maintain a principal office within the State of
Colorado. The location of the principal office may be changed by the Board of
Directors. The Corporation may have such other offices within the State of
Colorado as the Board of Directors may designate or as the business of the
Corporation may require from time to time.
Section 2. REGISTERED OFFICE. The registered office of the Corporation
required by the Colorado Business Corporation Act to be maintained in the State
of Colorado may be, but need not be, identical with the principal office, and
the address of the registered office may be changed from time to time by the
Board of Directors.
ARTICLE II
SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of the shareholders
shall be held on the third Thursday of the month of January following the close
of the fiscal year, beginning with the year following the year of
incorporation, for the purpose of electing directors and for the transaction of
such other business as may come before the meeting. If the day fixed for the
annual meeting shall be a legal holiday, the meeting shall be held on the next
succeeding business day. If the election of directors shall not be held on the
day designated herein for any annual meeting of the shareholders, or at any
adjournment thereof, the Board of Directors may thereafter cause the election
to be held at a special meeting of the shareholders.
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders,
for any proper purpose, unless otherwise prescribed by statute, may be called
by the President or by the Board of Directors, or by the record holders of at
least twenty-five percent (25%) of all shares entitled to vote at the meetings.
Section 3. PLACE OF MEETING. The Board of Directors may designate any
place, either within or without the State of Colorado, as the place for any
annual meeting or for any special meeting called by the Board of Directors or
the President of the Corporation or by the record holder or holders of at least
twenty-five percent (25%) of all shares entitled to vote at the meeting. A
waiver of notice signed by all shareholders entitled to vote at a meeting may
designate any place, either within or without the State of Colorado, as the
place for such meeting. If no designation is made, or if a special meeting
shall be called other than by the Board, the place of meeting shall be the
principal office of the Corporation.
<PAGE> 2
Section 4. NOTICE OF MEETING. Written notice stating the place, day
and hour of the meeting, and, in case of a special meeting, the purposes for
which the meeting is called, shall be delivered not less than ten (10) nor more
than fifty (50) days before the date of the meeting, either personally or by
mail, by or at the direction of the president, the secretary, or the officer or
persons calling the meeting, to each shareholder of record entitled to vote at
such meeting, except that if the authorized capital stock is to be increased,
at least thirty (30) days' notice shall be given. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail, addressed
to the shareholder at his address as it appears on the stock transfer books of
the Corporation, with postage thereon prepaid.
Section 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors may provide
that the stock transfer books shall be closed for any stated period not
exceeding fifty (50) days. If the stock transfer books shall be closed for the
purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders such books shall be closed for at least ten (10) days
immediately preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than fifty (50) days, and, in case of a meeting of shareholders, not less than
ten (10) days prior to the date on which the particular action, requiring such
determination of shareholders is to be taken. If the stock transfer books are
not closed, and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividends is adopted, as the case may be, shall be the record
date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof, except where the determination has been made through the closing of
the stock transfer books and the stated period of closing has expired.
Section 6. VOTING LISTS. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten
(10) days before each meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting, or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each, which list, for a period of ten (10) days prior to such meeting,
shall be kept on file at the principal office of the Corporation, and shall be
subject to inspection by any shareholder at any time during usual business
hours. Such list shall also be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any shareholder during
the whole time of the meeting. The original stock transfer books shall be
prima facie evidence as to who are the shareholders entitled to examine such
list or transfer books or to vote at any meeting of shareholders.
Section 7. QUORUM. A quorum of any annual or special meeting of
shareholders shall consist of shareholders representing either in person or by
proxy the majority of outstanding shares
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of stock of the Corporation entitled to vote at such meetings, and any action
taken during a meeting where less than a quorum is present shall be null and
void. If a quorum is not represented at a meeting, a majority of the shares
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented,
any business may be transacted which might have been transacted at the meeting
as originally called. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.
If a quorum is present, the affirmative vote of a majority of the
shares represented at the meeting and entitled to vote on the subject matter
shall be the act of the shareholders, unless the vote of a greater number, or
voting by classes, is required by law or the Articles of Incorporation.
Section 8. PROXIES. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the secretary or
any officer of the Corporation before or at the time of the meeting. No proxy
shall be valid after eleven (11) months from the date of its execution, unless
otherwise provided in the proxy.
Section 9. VOTING OF SHARES. Subject to any limits set forth in the
Articles of Incorporation, each outstanding share shall be entitled to one
vote, and each fractional share shall be entitled to a corresponding fractional
vote on each matter submitted to a vote at a meeting of shareholders. In the
election of directors, each record holder of stock entitled to vote at such
election shall have the right to vote the number of shares owned by him for as
many persons as there are directors to be elected, and for whose election he
has the right to vote. The election of directors shall be by ballot, except
that by the unanimous vote of all the shareholders represented at such meeting
the secretary of the meeting may be authorized and instructed to cast a single
ballot for one or more of all the directors to be elected.
Section 10. VOTING OF SHARES BY CERTAIN SHAREHOLDERS. Neither
treasury shares nor shares held by another corporation, if the majority of the
shares entitled to vote for the election of directors of the such other
corporation is held by the Corporation, shall be voted at any meeting or
counted in determining the total number of outstanding shares at any given
time.
Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the bylaws of the
corporation may prescribe, or, in the absence of such provisions, as the board
of directors of that corporation may determine.
Shares held by an administrator, executor, guardian or conservator may
be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him without a transfer of the shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer of the shares
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into his name if authority to do so is contained in an appropriate order of the
Court by which the receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Section 11. CHAIRMAN. The President of the Corporation or in his
absence the senior Vice President present shall act as Chairman at all meetings
of the shareholders.
Section 12. ORAL VOTE. Voting shall be oral but shall be by written
ballot if such vote is demanded by any shareholders present in person or by
proxy and entitled to vote.
Section 13. INFORMAL ACTION BY SHAREHOLDERS. Any action required to
be taken at a meeting of the shareholders, or any other action which may be
taken at a meeting of the shareholders, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all
of the shareholders entitled to vote with respect to the subject matter
thereof. Such consent shall have the same effect as a unanimous vote of the
shareholders, and may be stated as such in any articles or document filed under
the Colorado Business Corporation Act or otherwise.
ARTICLE III
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by its Board of Directors, except as otherwise
provided by applicable statute or by the Articles of Incorporation.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors
of the Corporation shall not be less than one (1) nor more than twenty-five
(25). The initial Board shall consist of seven (7) directors. Thereafter,
within the limits above specified, the number of directors shall be determined
by resolution of the Board of Directors, or by the shareholders at the annual
meeting. Directors shall be elected at each annual meeting of shareholders.
Each director shall hold office for the term for which he is elected and
thereafter until his successor shall have been elected and qualified.
Directors of the Corporation need not be residents of Colorado nor holders of
shares of the Corporation's capital stock.
Section 3. RESIGNATIONS AND VACANCIES. Any director may resign at any
time by giving written notice to the president or to the secretary of the
Corporation. Such resignation shall take effect at the time specified therein,
but not retroactively; and unless otherwise specified, the acceptance of such
resignation shall not be necessary to make it effective. Any vacancy occurring
in the Board of Directors may be filled by the affirmative vote of a majority
of the remaining directors though less than a quorum. A director elected to
fill a vacancy shall be elected for the unexpired term of his predecessor in
office. Any directorship to be filled by reason of an increase in the number
of directors shall be filled by the affirmative vote of a majority of the
directors then
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in office, and any director elected to fill such newly-created directorship
shall serve until the next annual meeting of shareholders and thereafter until
his successor shall have been elected and qualified.
Section 4. REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The Board of
Directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
Section 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the president or any two
directors. The person or persons authorized to call special meetings of the
Board of Directors may fix the place for holding any special meeting of the
Board of Directors called by them.
Section 6. NOTICE. Reasonable notice of any special meeting (which
need not in any event exceed two (2) days) shall be given by mail, telegram or
telephone to each director at his last known business or residence address. If
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail so addressed, with postage thereon prepaid. If notice be
given by telegram, such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company. Any director may waive notice
of any meeting. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
Section 7. QUORUM. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice.
Section 8. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
Section 9. COMPENSATION. By resolution of the Board of Directors, any
director may be paid any one or more of the following: his expenses, if any, of
attendance at meetings; a fixed sum for attendance at each meeting; or a stated
salary as director. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation therefor.
Section 10. PRESUMPTION OF ASSENT. A director of the Corporation who
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless his dissent shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the
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secretary of the Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in favor of such
action.
Section 11. EXECUTIVE COMMITTEE. The Board of Directors; by
resolution adopted by a majority of the number of directors fixed in Section 2
of this Article III may designate two (2) or more directors to constitute an
executive committee or other committee or committees which shall have and may
exercise all of the authority of the Board of Directors or such lesser
authority as may be set forth in said resolution. No such delegation of
authority shall operate to relieve the Board of Directors or any member of the
Board from any responsibility imposed by law.
Section 12. INFORMAL ACTION BY DIRECTORS. Any action required or
permitted to be taken at a meeting of the directors may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors entitled to vote with respect to the subject
matter thereof. Such consent shall have the same effect as a unanimous vote of
the directors, and may be stated as such in any articles or document filed with
the Secretary of State of the State of Colorado under the Colorado Business
Corporation Act.
Section 13. TELEPHONE MEETINGS. Members of the Board of Directors or
any committee designated by the Board may participate in a meeting of the Board
or committee by means of conference telephone or similar communications
equipment by which all persons participating in the meeting can hear each other
at the same time. Such participation shall constitute presence in person at
the meeting.
Section 14. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
officer shall be chosen by the Board of Directors, shall preside at all
meetings of the Board of Directors at which he is present. He shall, subject
to the direction of the Board of Directors, have general oversight over the
affairs of the Corporation, and shall, from time to time, advise and consult
with the President in the direction and management of the Corporation's
business, and shall also do and perform such other duties as may, from time to
time, be assigned to him by the Board of Directors.
Section 15. BANK ACCOUNTS. Anything herein to the contrary
notwithstanding, the Board of Directors may, except as otherwise required by
law, authorize any officer or officers, agent or agents, in the name of and on
behalf of the Corporation, to sign checks, drafts or other orders for the
payment of money or notes or other evidences of indebtedness, to endorse for
deposit, deposit to the credit of the Corporation at any bank or trust company
or banking institution in which the Corporation may maintain an account or to
cash checks, notes, drafts or other bank securities or instruments, and such
authority may be general or confined to specific instances, as the Board may
elect; but unless so authorized by the Board no officer, agent or employee
shall have the power or authority to bind the Corporation by any contract or
engagement, or to pledge its credit or to render it pecuniarily liable for any
purpose or to any amount.
Section 16. DIVIDENDS. The Board of Directors of the Corporation may,
from time to time, in the manner permitted by the Colorado Business Corporation
Act, declare, and the Corporation may pay, dividends in cash, property, or its
own shares.
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Section 17. SALE, MORTGAGE, OR LEASE OF ASSETS. The sale; lease,
exchange, or other disposition of all or substantially all of the property and
assets of the Corporation in the usual and regular course of its business and
the mortgage or pledge of any or all property and assets or the Corporation,
whether or not in the usual and regular course of business, may be made upon
such terms and conditions and for such consideration, which may consist in
whole or in part of cash or other property, including shares, obligations, or
other securities of any other corporation, domestic or foreign, as are
authorized by its board of directors; and in any such case no authorization or
consent of the shareholders shall be required.
A sale, lease, exchange, or other disposition of all or substantially
all of the property and assets of the Corporation, with or without its
goodwill, if not in the usual and regular course of its business, may be made
upon such terms and conditions and for such consideration, which may consist in
whole or in part of cash or other property, including shares, obligations, or
other securities of any other corporation, domestic or foreign, as may be
authorized in the following manner:
(a) The Board of Directors shall adopt a resolution
recommending the sale, lease, exchange, or other disposition or the
mortgage or pledge of any assets or property and directing the
submission thereof to a vote at a meeting of shareholders, which may
be either an annual or a special meeting.
(b) Not less than twenty days before such meeting,
written notice shall be given to each shareholder of record, whether
or not entitled to vote at the meeting, in the manner provided in
these Bylaws for the giving of notice of meetings of shareholders.
Whether the meeting is an annual or a special meeting, the notice
shall state that the purpose or one of the purposes of the meeting is
to consider the proposed sale, lease, exchange, or other disposition
or the proposed mortgage or pledge.
c) At such meeting the shareholders may authorize the
proposed sale; lease, exchange, or other disposition or the proposed
mortgage or pledge and may fix, or authorize the Board of Directors to
fix, any or all of the terms and conditions thereof and the
consideration to be received by the Corporation therefor. Such
authorization shall require the affirmative vote of two-thirds (2/3)
of the shares of the Corporation entitled to vote thereon.
(d) After such authorization by a vote of shareholders,
the Board of Directors nevertheless, in its discretion, may abandon
the sale, lease, exchange, or other disposition of assets, subject to
the rights of third parties under any contracts relating thereto,
without further action or approval by shareholders.
ARTICLE IV
OFFICERS AND AGENTS
Section 1. GENERAL. The officers of the Corporation shall be a
president, one or more vice presidents, a secretary and a treasurer. The
president shall be a shareholder and a director of the
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Corporation. The Board of Directors may appoint such other officers, assistant
officers, committees and agents, including a chairman of the board, controller,
assistant secretaries, and assistant treasurers, as they may consider
necessary, who shall be chosen in such manner and hold their offices for such
terms as from time to time may be determined by the Board of Directors. The
salaries of all the officers of the Corporation shall be fixed by the Board of
Directors. One person may hold any two offices, except that no person may
simultaneously hold the offices of president and secretary. In all cases where
the duties of any officer, agent or employee are not prescribed by the Bylaws
or by the Board of Directors, such officer, agent or employee shall follow the
orders and instructions of the president, who shall be the chief executive
officer of the Corporation unless otherwise provided by the Board of Directors.
Section 2. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected or appointed by the Board of Directors annually at
the first meeting of the Board held after each annual meeting of the
shareholders, or as soon thereafter as is convenient. Each officer shall hold
office until the first of the following to occur: until his successor shall
have been duly elected or appointed and shall have qualified; until death;
until resignation; or until he shall have been removed in the manner
hereinafter provided.
Section 3. REMOVAL Any officer or agent may be removed by the Board
of Directors, or by the executive committee, if any, whenever in its judgment
the best interests of the Corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment of an officer or agent shall not in itself
create contract rights.
Section 4. VACANCIES. A vacancy in any office, however occurring, may
be filled by the Board of Directors for the unexpired portion of the term.
Section 5. PRESIDENT. The President shall be the chief executive
officer of the Corporation; he shall preside at any meeting of the shareholders
at which he is present, and in the absence of the Chairman of the Board shall
preside at any meeting of the Board of Directors at which he is present. He
shall be in charge of the management of the business of the Corporation and
shall see that all orders and resolutions of the Board are carried into effect,
and he shall have the authority and powers necessary to perform such duties.
Section 6. VICE PRESIDENT. Any Vice President shall, in the absence
or disability of the President, perform the duties and exercise the powers of
the President, and shall perform such other duties as may, from time to time,
be prescribed by the Board of Directors.
Section 7. SECRETARY. The Secretary shall, if required by the
President, attend all sessions of the Board of Directors and all meetings of
the shareholders and record all votes and the minutes of all proceedings in a
book or books to be kept for that purpose, and shall perform like duties for
the standing committees when required. He shall cause due notice to be given
of all meetings of the shareholders and Board of Directors. He shall keep in
safe custody the corporate records and the seal of the Corporation and when
authorized by the Board shall affix the seal to any instrument requiring
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it, and when so affixed it shall be attested by his signature. He shall keep
at the registered office or the principal place of business of the Corporation
a record of the shareholders, giving names and addresses of all shareholders
and the number and class of shares held by each, and a copy of any voting trust
agreement, along with a copy of the names and addresses of the holders of
interests in the voting trust, the extent of each such holder's interest, the
number of shares of stock transferred to the voting trust, and the transfer of
interests in the voting trust, copies of all voting trust information shall be
furnished by the Trustee of the voting trust The Secretary shall sign with the
President or a Vice President Certificates for shares of the Corporation, the
issuance of which shall have been authorized by resolution of the Board of
Directors. He shall have general charge of the stock transfer books of the
Corporation and copies of information concerning voting trusts, if any. He
shall in general perform all duties incident to the office of Secretary and
such other duties as from time to time may be assigned to him by the President
or by the Board of Directors.
Assistant Secretaries, if any, shall have the same duties and powers,
subject to supervision by the Secretary.
Section 8. TREASURER. The Treasurer shall have custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in Books belonging to the Corporation, and shall
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board, take proper vouchers for such disbursements, and shall render to the
President and the Directors whenever they may require it, an account of all his
transactions and of the financial condition of the Corporation. He shall, if
required by the Board, give the Corporation a bond in such sums and with such
sureties as shall be satisfactory to the Board, conditioned upon the faithful
performance of the duties and for the restoration to the Corporation of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the Corporation.
Assistant Treasurers, if any, shall have the same powers and duties,
subject to the supervision of the Treasurer.
Section 9. POWERS AND DUTIES. The officers of the Corporation shall
have such additional powers and duties as usually pertain to their offices,
except as modified by the Board of Directors, and shall also have such powers
and duties as may from time to time be conferred upon them by the Board of
Directors.
ARTICLE V
STOCK
Section 1. CERTIFICATES. The shares of stock shall be represented by
consecutively numbered certificates signed in the name of the Corporation by
its president or a vice president and the secretary or an assistant secretary,
and shall be sealed with the seal of the Corporation, or with a facsimile
thereof. The signatures of the Corporation's officers on such certificate may
also be facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other
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than the Corporation itself or an employee of the Corporation. In case any
officer who has signed or whose facsimile signature has been placed upon such
certificate shall have cease to be such officer before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer at the date of its issue. Certificates of stock shall be in such
form consistent with law as shall be approved by the Board of Directors. No
certificate shall be issued until the shares represented thereby are fully
paid.
Section 2. CONSIDERATION FOR SHARES. Except as provided for in the
Articles of Incorporation, shares shall be issued for such consideration,
expressed in dollars; as shall be fixed from time to time by the Board of
Directors. Such consideration may consist, in whole or in part of money, other
property, tangible or intangible, or in labor or services actually performed
for the Corporation, but neither promissory notes nor future services shall
constitute payment or part payment for shares.
Section 3. TRANSFER OF SHARES ON CORPORATION'S BOOKS. Upon the
surrender to the Corporation or to its transfer agent of a certificate for
shares duly endorsed or accompanied by proper evidence of succeeding assignment
of authority to transfer, it shall be the duty of the Corporation to issue a
new certificate. Every transfer shall be entered in the transfer book of the
Corporation which shall be kept at its principal office. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of shares of the Corporation.
Section 4. REGISTERED SHAREHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Colorado.
Section 5. LOST AND DESTROYED CERTIFICATES. In case of the alleged
loss, destruction or mutilation of a certificate of stock the Board of
Directors may direct the issuance of a new certificate in lieu thereof upon
such terms and conditions in conformity with law as it may prescribe. The
Board of Directors may, in its discretion, require a bond in such form and
amount and with such surety as it may determine, before issuing a new
certificate.
ARTICLE VI
MISCELLANEOUS
Section 1. WAIVER OF NOTICE. Whenever notice is required by law, by
the Articles of Incorporation or by these Bylaws, a waiver thereof in writing
signed by the director, shareholder or other person entitled to said notice,
whether before, at or after the time stated therein, or his appearance at such
meeting in person or (in the case of a shareholder's meeting) by proxy, shall
be equivalent to such notice.
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Section 2. SEAL The corporate seal of the Corporation shall be in
such form as the Board of Directors shall prescribe. The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
Section 3. FISCAL YEAR. The fiscal year of the Corporation shall
begin on the first day of January and end on the last day of the next December
unless otherwise determined by resolution of the Board of Directors.
Section 4. AMENDMENTS. The Board of Directors shall have power to
make, amend and repeal the Bylaws of the Corporation at any regular meeting of
the board or at any special meeting called for this purpose.
Section 5. CONFLICTS. In the event of any conflict between any
provision in these Bylaws and the Corporation's Articles of Incorporation, the
provisions in the Articles shall control
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EXHIBITS 5.1 AND 23.2
[JONES & KELLER, P.C. LETTERHEAD]
January 22, 1998
MegaBank Financial Corporation
8100 E. Arapahoe Road
Englewood, Colorado 80112
Re: Registration Statement on Form SB-2 - Amendment No. 1
SEC File No. 333-42189
Ladies and Gentlemen:
In connection with Amendment No. 1 to the Registration Statement on
Form SB-2 filed by MegaBank Financial Corporation (the "Company") and MB Capital
I ("MB Capital") with the Securities and Exchange Commission on January 22, 1998
relating to a public offering by MB Capital of up to 1,200,000 % Cumulative
Preferred Securities (the "Preferred Securities"), please be advised that as
counsel to the Company, upon examination of such corporate documents and records
as we have deemed necessary or advisable for the purposes of this opinion, it is
our opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Colorado.
2. The Guarantee, when executed and delivered as contemplated by the
Registration Statement, and the Junior Subordinated Debentures, when issued and
paid for as contemplated by the Registration Statement, will be validly issued
obligations of the Company enforceable in accordance with their terms except as
such enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting the rights of creditors generally and subject to general
principles of equity.
Capitalized terms used herein shall have the definitions given to such
terms in the Registration Statement. We hereby consent to the filing of this
opinion as an exhibit to the Registration Statement, and to the reference to our
firm under the headings "Certain Federal Income Tax Consequences" and "Legal
Matters" in the Prospectus comprising a part of the Registration Statement.
Very truly yours,
/s/ JONES & KELLER, P.C.
JONES & KELLER, P.C.
<PAGE> 1
EXHIBIT 5.2
[RICHARDS, LAYTON & FINGER LETTERHEAD]
January 22, 1998
MB Capital I
c/o MegaBank Financial Corporation
8100 East Arapahoe Road
Englewood, Colorado 80112
Re: MegaBank Financial Corporation and MB Capital I - offering of trust
preferred securities
Ladies and Gentlemen:
We have acted as special Delaware counsel for MegaBank Financial
Corporation, a Colorado corporation (the "Company"), and MB Capital I, a
Delaware business trust (the "Trust"), in connection with the matters set forth
herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust, dated December 8, 1997, as
filed with the office of the Secretary of State of the State of Delaware (the
"Secretary of State") on December 8, 1997;
(b) The Trust Agreement of the Trust, dated as of December 8, 1997
between the Company and the trustee of the Trust named therein;
(c) The Registration Statement (the "Registration Statement") on Form
SB-2, including a preliminary prospectus with respect to the Trust (the
"Prospectus"), relating to the Preferred Securities of the Trust representing
preferred undivided beneficial interests in the assets of the Trust (each, a
"Preferred Security" and collectively, the "Preferred Securities"), filed by the
Company and the Trust with the Securities and Exchange Commission on December
12, 1997 and amended on or about January 22, 1998;
(d) A form of Amended and Restated Trust Agreement, to be entered into
among the Company, the trustees of the Trust named therein, and the holders,
from time to time, of the undivided beneficial interests in the assets of the
Trust (including Exhibits C and E thereto) (the "Trust Agreement"), attached as
an exhibit to the Registration Statement; and
(e) A Certificate of Good Standing for the Trust, dated January ___,
1998, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed in paragraphs (a) through (e) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (e) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that is inconsistent with the opinions
stated herein. We have conducted no independent factual investigation of our own
but rather have relied solely upon the foregoing documents, the statements and
information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
5.2-1
<PAGE> 2
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust
Agreement and the Certificate of Trust are in full force and effect and have not
been amended, (ii) except to the extent provided in paragraph 1 below, the due
organization or due formation, as the case may be, and valid existence in good
standing of each party to the documents examined by us under the laws of the
jurisdiction governing its creation, organization or formation, (iii) the legal
capacity of natural persons who are parties to the documents examined by us,
(iv) that each of the parties to the documents examined by us has the power and
authority to execute and deliver, and to perform its obligations under, such
documents, (v) the due authorization, execution and delivery by all parties
thereto of all documents examined by us, (vi) the receipt by each Person to whom
a Preferred Security is to be issued by the Trust (collectively, the "Preferred
Security Holders") of a Preferred Securities Certificate for such Preferred
Security and the payment for the Preferred Security, in accordance with the
Trust Agreement and the Registration Statement, and (vii) that the Preferred
Securities are issued and sold to the Preferred Security Holders in accordance
with the Trust Agreement and the Registration Statement. We have not
participated in the preparation of the Registration Statement and assume no
responsibility for its contents.
This opinion is limited to the laws of the State of Delaware, and we
have not considered and express no opinion on the laws of any other
jurisdiction, including federal laws and rules and regulations relating thereto.
Our opinions are rendered only with respect to Delaware laws and rules,
regulations and orders thereunder which are currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act.
2. The Preferred Securities of the Trust will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable undivided beneficial interests in the assets of the Trust.
3. The Preferred Security Holders, as beneficial owners of the Trust,
will be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware. We note that the Preferred Security
Holders may be obligated to make payments as set forth in the Trust Agreement.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. In addition, we
hereby consent to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving the foregoing consents, we do not thereby admit that we
come within the category of Persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. Except as stated above, without
our prior written consent, this opinion may not be furnished or quoted to, or
relied upon by, any other Person for any purpose.
Very truly yours,
/s/ RICHARDS, LAYTON & FINGER
Richards, Layton & Finger
5.2-2
<PAGE> 1
EXHIBIT 8.1
JONES & KELLER, P.C. LETTERHEAD
January 22, 1998
MegaBank Financial Corporation MB Capital I
8100 East Arapahoe Road c/o MegaBank Financial Corporation
Englewood, Colorado 80112 8100 East Arapahoe Road
Englewood, Colorado 80112
Re: Opinion of Counsel Related to the Material Federal Income Tax
Consequences of the Purchase and Ownership of Preferred Securities
Issued by MB Capital I
Ladies and Gentlemen:
We have acted as special counsel to MegaBank Financial Corporation (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"), of
a Form SB-2 Registration Statement, dated December 12, 1997, SEC File No.
333-42189, and Amendment No. 1 thereto, dated January 22, 1998 (the
"Registration Statement"). The Registration Statement relates to the offer for
sale of 1,200,000 _________% Cumulative Preferred Securities (the "Preferred
Securities") of MB Capital I ("MB Capital"), a statutory business trust formed
by the Company under the laws of the State of Delaware, and the Junior
Subordinated Debentures to be issued by the Company to MB Capital in connection
with the sale of the Preferred Securities.
This opinion letter relates to the material federal income tax
consequences of the purchase and ownership of the Preferred Securities by
investors. All capitalized terms used in this opinion letter and not otherwise
defined herein are used as described in the Registration Statement. The
consequences described herein are not applicable to investors 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, non-United States Persons or 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. In addition, this opinion does
not include any description of any alternative minimum tax consequences or the
tax laws of any state, local or foreign government that may be applicable to an
investor.
We have examined the Registration Statement and such other documents as
we have deemed necessary to render our opinion expressed below. In our
examination of such material, we have relied upon the current and continued
accuracy of the factual matters we have considered, and we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity to original documents of all copies of documents
submitted to us. In addition, we also have assumed that the transactions related
to the issuance of the Junior Subordinated Debentures and the Preferred
Securities will be consummated in accordance with the terms and forms of the
documents. As to any facts material to the opinions expressed herein which were
not independently established or verified, we have relied upon oral or written
statements and representations of officers, trustees, and other representatives
of the Company, MB Capital and others. Should any of the above facts,
circumstances, or assumptions be subsequently determined incorrect or
inaccurate, our conclusions may vary from those set forth below and such
variance could be material.
This letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be read in
conjunction therewith.
8.1-1
<PAGE> 2
Based on the foregoing, and assuming that MB Capital was formed and
will be maintained in compliance with the terms of the Trust Agreement it is our
opinion that:
(1) MB Capital will be classified for United States federal income tax
purposes as a grantor trust and not as an association taxable as a corporation
for United States federal income tax purposes, and as a result, each beneficial
owner of Preferred Securities will be treated as owning an undivided beneficial
interest in the Junior Subordinated Debentures.
(2) Stated interest on the Junior Subordinated Debentures generally
will be included in income by a Securityholder at the time such interest income
is paid or accrued in accordance with the Securityholder's regular method of tax
accounting.
(3) 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. Gain or loss recognized by the
Securityholder on Preferred Securities held for more than one year will
generally be taxable as long-term capital gain or loss.
This opinion is based upon the Internal Revenue Code of 1986, as
amended, the Treasury regulations promulgated thereunder and other relevant
authorities and law, all as in effect on the date hereof. All of the above are
subject to change or modification by subsequent legislative, regulatory,
administrative or judicial decisions which could adversely affect our opinions.
Consequently, future changes in the law, or administrative or judicial
interpretations thereof, may cause the tax treatment of the transactions
referred to herein to be materially different from that described above.
Other than the specific tax opinions set forth in this letter, no other
opinion has been rendered with respect to the tax treatment of the proposed
issuance and sale of the Junior Subordinated Debentures or the Preferred
Securities, including, but not limited to, the tax treatment of the proposed
transactions under other provisions of the Code and the regulations, the tax
treatment of any conditions existing at the time of, or effects resulting from,
the proposed transactions that are not specifically covered by the above
opinions, or the tax treatment of the proposed transactions under state, local,
foreign or any other tax laws.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and the use of our name in the Registration Statement
under the captions "Certain Federal Income Tax Consequences." In giving such
consent, we do not concede that this consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
/s/ JONES & KELLER, P.C.
JONES & KELLER, P.C.
8.1-2
<PAGE> 1
EXHIBIT 23.1
FORTNER, BAYENS, LEVKULICH & CO., P.C.
LETTERHEAD
Consent of Independent Auditors
THE BOARD OF DIRECTORS
MEGABANK FINANCIAL CORPORATION
Re: Amendment No. 1 to the Registration Statement on Form SB-2, SEC File
No. 333-42189
We consent to the use of our report included herein and incorporated herein by
reference and to the reference to our firm under the headings "Selected
Financial Data" and "Experts" in the prospectus.
/s/ FORTNER, BAYENS, LEVKULICH & CO., P.C.
FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
January 22, 1998
23.1.1
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Thomas R. Kowalski and Susan A. Putland
and each of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting upon said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- - ---------- ----- ----
<S> <C> <C>
/s/ Thomas R. Kowalski Director, Chairman December 11, 1997
- - ------------------------------------- and Chief Executive Officer
Thomas R. Kowalski (Principal Executive Officer)
/s/ Larry A. Olsen Director, President and December 11, 1997
- - ------------------------------------- Chief Operating Officer
Larry A. Olsen
/s/ Raymond L. Anilionis Director December 11, 1997
- - -------------------------------------
Raymond L. Anilionis
/s/ Dr. Donald B. Brown Director December 11, 1997
- - -------------------------------------
Dr. Donald B. Brown
/s/ William F. Sievers Director December 11, 1997
- - -------------------------------------
William F. Sievers
Hiram J. Welton Treasurer, Principal Financial December 11, 1997
- - ------------------------------------- and Accounting Officer
Hiram J. Welton
</TABLE>
24.1-1
