<PAGE>
PROSPECTUS Pursuant to Rule 424b(5)
File # 333-87179
# 333-87179-01
1,000,000 CAPITAL SECURITIES
HEARTLAND FINANCIAL CAPITAL TRUST I
9.60% CUMULATIVE CAPITAL SECURITIES
FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED BY
HEARTLAND FINANCIAL USA, INC.
-------------------
The capital securities represent undivided beneficial interests in the assets of
Heartland Financial Capital Trust I. The trust will invest the proceeds of this
offering of capital securities in the 9.60% junior subordinated debentures of
Heartland Financial USA, Inc.
For each of the capital securities that you own, you will receive cumulative
cash distributions at an annual rate of 9.60% on March 31, June 30, September 30
and December 31 of each year, beginning December 31, 1999, from payments on the
debentures. We may defer payments of distributions at any time for up to 20
consecutive quarters. The capital securities are effectively subordinated to all
senior and subordinated indebtedness of Heartland Financial USA, Inc. and its
subsidiaries. The debentures mature and the capital securities must be redeemed
by September 30, 2029. The trust may redeem the capital securities, at a
redemption price of $25 per capital security plus accrued and unpaid
distributions, at any time on or after September 30, 2004, or earlier under
certain circumstances.
Application has been made to have the capital securities listed on the American
Stock Exchange under the symbol "HFT.Pr" upon completion of this offering.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OBLIGATIONS OF ANY BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
INVESTING IN THE CAPITAL SECURITIES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
-------------------
<TABLE>
<CAPTION>
PER CAPITAL
SECURITY TOTAL
----------- -----------
<S> <C> <C>
Public offering price......................................................... $25.00 $25,000,000
Underwriting fees to be paid by Heartland Financial USA, Inc.................. $ 0.97 $ 970,000
Proceeds to the trust......................................................... $25.00 $25,000,000
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
HOWE BARNES INVESTMENTS, INC.
-------------------
October 18, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary......................................................2
Summary Consolidated Financial Data..........................8
Risk Factors.................................................9
Cautionary Statements.......................................16
Use of Proceeds.............................................17
Capitalization..............................................18
Accounting and Regulatory Treatment.........................19
Management..................................................20
Description of the Trust....................................22
Description of the Capital Securities.......................23
Description of the Debentures...............................34
Book-Entry Issuance.........................................42
Description of the Guarantee................................44
Relationship Among the Capital
Securities, the Debentures and
the Guarantee............................................46
Federal Income Tax Consequences.............................48
ERISA Considerations........................................51
Underwriting................................................51
Legal Matters...............................................53
Where You Can Find Information..............................53
Experts.....................................................53
Incorporation of Documents
by Reference.............................................54
</TABLE>
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
capital securities being offered, including over-allotting the capital
securities and bidding for and purchasing capital securities at a level above
that which otherwise might prevail in the open market. For a description of
these activities, see "Underwriting." Such stabilizing transactions, if
commenced, may be discontinued at any time. In connection with this offering,
certain underwriters (and selling group members) may engage in passive market
making transactions in the capital securities on the American Stock Exchange or
otherwise in accordance with Rule 103 of the Securities and Exchange
Commission's Regulation M. See "Underwriting."
1
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN, OR
INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS. BECAUSE THIS IS A SUMMARY, IT
MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. THEREFORE, YOU
SHOULD ALSO READ THE MORE DETAILED INFORMATION SET FORTH IN THIS PROSPECTUS, OUR
FINANCIAL STATEMENTS AND THE OTHER INFORMATION THAT IS INCORPORATED BY REFERENCE
IN THIS PROSPECTUS.
HEARTLAND FINANCIAL USA, INC.
BACKGROUND
Heartland Financial USA, Inc. is a diversified financial services
holding company headquartered in Dubuque, Iowa. We offer full-service community
banking through six banking subsidiaries with a total of 24 banking locations in
Iowa, Illinois, Wisconsin and New Mexico. In addition, we have separate
subsidiaries in the consumer finance, vehicle leasing/fleet management,
insurance agency and investment management businesses. Our primary strategy is
to balance our focus on increasing profitability with asset growth and
diversification through acquisitions, DE NOVO bank formations, branch openings
and expansion into non-bank subsidiary activities. At June 30, 1999, we had
total assets of $1.0 billion, net loans and leases of $693.1 million, deposits
of $729.9 million and stockholders' equity of $85.5 million.
Our largest bank subsidiary, Dubuque Bank and Trust Company, was
organized in 1935 and was reorganized into the current holding company structure
with Heartland Financial in 1982. From this beginning, we have grown
significantly and have expanded geographically, acquiring entities or
establishing DE NOVO operations in selected other markets in Iowa, Illinois,
Wisconsin and New Mexico. The following table details our principal operating
subsidiaries:
<TABLE>
<CAPTION>
NUMBER ASSETS AT
YEAR OF JUNE 30, 1999
NAME HEADQUARTERS AFFILIATED LOCATIONS (IN MILLIONS) BUSINESS
- ------------------------------- ---------------- ---------- --------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
BANKING SUBSIDIARIES:
Dubuque Bank and Trust Company Dubuque, IA 1982 8 $582.7 Community banking
and trust services
Galena State Bank and Trust Galena, IL 1992 3 133.9 Community banking
Company and trust services
First Community Bank, FSB Keokuk, IA 1994 3 99.6 Community banking
and trust services
Riverside Community Bank Rockford, IL 1995 2 66.3 Community banking
Wisconsin Community Bank Cottage Grove, WI 1997 4 79.9 Community banking
and trust services
New Mexico Bank & Trust Albuquerque, NM 1998 4 60.0 Community banking
and trust services
NON-BANKING SUBSIDIARIES:
Citizens Finance Co. Dubuque, IA 1988 4 14.3 Consumer finance
ULTEA, Inc. Madison, WI 1996 2 41.0 Vehicle
leasing/fleet
management
</TABLE>
On July 23, 1999, we acquired Bank One Corporation's branch in Monroe,
Wisconsin, which had approximately $94.5 million in deposits at the time of the
acquisition. In addition, on August 17, 1999, we announced the expansion of our
New Mexico operations through the pending acquisition of National Bancshares,
Inc., the one-bank holding company of First National Bank of Clovis, located in
Clovis, New Mexico. At June 30, 1999, First National Bank of Clovis had $111.9
million in assets, $97.9 million in deposits and $68.6 million in loans,
primarily agricultural loans.
Our principal executive offices are located at 1398 Central Avenue,
Dubuque, Iowa 52001, and our telephone number is (319) 589-2000.
2
<PAGE>
OPERATING STRATEGY
Our primary operating strategy is to differentiate ourselves as a
growing consortium of strong community banks through community involvement,
active boards of directors, local presidents and local decision making. As part
of our operating strategy, we encourage all of our directors, officers and
employees to maintain a strong ownership interest in Heartland Financial. As of
June 30, 1999, these individuals owned approximately 54% of our outstanding
common stock.
We believe that the personal and professional service that we offer to
our customers provides an appealing alternative to the "megabanks" that have
resulted from the recent mergers and acquisitions in the financial services
industry. While we employ a community banking philosophy, we believe that our
size, combined with our full line of financial products and services, is
sufficient to effectively compete in our market areas. At the same time, we
realize that to remain price competitive we must manage expense levels by
centralizing our back office support functions to gain economies of scale.
In order to accomplish our strategic objectives, we have focused on
improving the performance of our existing subsidiaries while simultaneously
pursuing an acquisition and expansion strategy. With respect to our existing
subsidiaries, we have primarily focused on the following strategies:
- de-emphasizing lower-yielding, single-family mortgage loans
while increasing the emphasis on commercial and consumer loans
which yield higher risk-adjusted returns;
- improving our bank subsidiaries' funding costs by reducing the
levels of higher-cost certificates of deposit, increasing the
percentage of lower-cost transaction accounts such as
checking, savings and money market accounts, emphasizing
relationship banking and capitalizing on cross-selling
opportunities;
- emphasizing the expansion of our non-traditional sources of
income, including trust and investment services, consumer
finance and vehicle leasing and fleet management;
- centralizing back office support functions to enable us to
operate as efficiently as possible; and
- continually evaluating new technology and acquiring it when
the expected return justifies the cost.
EXPANSION STRATEGY
Another aspect of our primary strategy is to diversify both our market
area and asset base while increasing profitability through acquisitions and
through expansion of our current subsidiaries. Our goal is to expand through the
acquisition of established financial services organizations, primarily
commercial banks or thrifts, when suitable candidates can be identified and
acceptable business terms negotiated. We have also formed DE NOVO banking
institutions in market areas where we have identified market potential and
management with banking expertise and philosophies similar to our own. In
evaluating expansion and acquisition opportunities, we have focused on
geographic areas in the Midwest or Southwest with growth potential.
Our acquisitions have historically focused on traditional community
banks and thrifts located in stable or growing areas of Iowa, Wisconsin and
Illinois. For example, in 1994 we acquired Keokuk Bancshares, Inc., the holding
company of First Community Bank, FSB. First Community, with its headquarters in
Keokuk, Iowa, had assets of $97.9 million at the time of the acquisition. In
March 1997, we acquired Cottage Grove State Bank (subsequently renamed Wisconsin
Community Bank), a Wisconsin state bank located in the Madison metropolitan area
with $39.0 million in assets at the time of acquisition. As discussed above, in
July 1999, we significantly increased our Wisconsin operations when we acquired
a branch office of Bank One in Monroe, Wisconsin, and as a result, obtained
$94.5 million in deposits, $38.8 million in loans and $46.7 million in trust
assets.
3
<PAGE>
We continually seek and evaluate opportunities to establish branches,
loan production offices or other business facilities as a means of expanding our
presence in current or new market areas. We established Riverside Community Bank
in Rockford, Illinois as a DE NOVO bank in October 1995. Since then, it has
grown to approximately $66.3 million in total assets. We also opened a new
branch of Riverside Community Bank in southeastern Rockford in July 1999. In
addition, Wisconsin Community Bank established offices in Green Bay, Sheboygan
and Eau Claire in 1999.
We also look for opportunities beyond the Midwest and beyond the
categories of community banks and thrifts when we believe that the opportunity
will provide a desirable strategic fit without posing undue risks. In May 1998,
we enhanced our geographic diversity by establishing New Mexico Bank & Trust as
a DE NOVO institution, in Albuquerque, New Mexico. This is a joint venture with
local investors, executive officers and directors in which we became the 80%
owner. Prior to May 5, 2003, each of the investors has the right to require us
to purchase their shares at a price that will provide the investor with a 10%
compounded return on their investment. On May 5, 2003, we are required to
purchase any remaining outstanding shares at a price determined by an appraisal
of New Mexico Bank & Trust. The purchase price is payable in cash, our common
stock or a combination of both. In no event may we pay a price that will give
the investors less than a 10% return on their investment. In the event that New
Mexico Bank & Trust has over $200 million in assets and a 12% return on equity
at the time of the repurchase, then we must pay a price that will give the
investors at least a 15% return on their investment. At June 30, 1999, New
Mexico Bank & Trust had grown to two branches and approximately $60.0 million in
total assets.
In the third quarter of 1998, we further diversified our asset base by
significantly enlarging our motor vehicle fleet leasing operations through the
acquisition of Lease Associates Group of Milwaukee, Wisconsin. The merger of
that company with our vehicle leasing and fleet management subsidiary, ULTEA,
Inc., created the largest fleet management company based in Wisconsin, with
total assets of $41.0 million at June 30, 1999. ULTEA specializes in motor
vehicle fleet leasing and management for small to medium sized companies with
strong credit histories.
We also acquired Citizens Finance, a consumer finance company, in
November 1988. Citizens Finance specializes in making consumer loans to
borrowers with past credit problems or limited credit histories. While it is
headquartered in Dubuque, Citizens Finance has opened locations in Madison and
Appleton, Wisconsin and Rockford, Illinois. Citizens Finance has experienced
significant growth during 1999 with total assets increasing to $14.3 million at
June 30, 1999.
In August 1999, we agreed to acquire National Bancshares, Inc., the
one-bank holding company of First National Bank of Clovis. The bank has four
locations, with $111.9 million in assets and $97.9 million in deposits. The
total purchase price for National Bancshares will be approximately $23.3
million, of which up to $5.8 million may be paid in our common stock. The
largest stockholder of National Bancshares, owning approximately 30% of its
outstanding capital stock, is also a director and stockholder of New Mexico Bank
& Trust. The acquisition is expected to close by the end of 1999 or during the
first quarter of 2000, pending stockholder and regulatory approvals. We expect
to merge the Clovis bank into New Mexico Bank & Trust after the closing of the
acquisition. As a result of this acquisition, our ownership interest in New
Mexico Bank & Trust will rise to approximately 86%.
At June 30, 1999 we had an 8.49% leverage ratio, a 10.21% tier 1
risk-based ratio and a total risk based ratio of 11.32%. As adjusted for this
offering, as well as for the acquisition of the Bank One branch in Monroe,
Wisconsin and the proposed acquisition of National Bancshares, these ratios
would have been 7.71%, 9.26% and 10.39%, respectively at June 30, 1999. In
addition, the combined assets of New Mexico Bank & Trust at June 30, 1999,
adjusted for the proposed acquisition of National Bancshares, would increase
from $60.0 million to $179.9 million.
4
<PAGE>
HEARTLAND FINANCIAL CAPITAL TRUST I
Upon issuance of the capital securities offered by this prospectus, the
purchasers in this offering will own all of the issued and outstanding capital
securities of the trust. In exchange for our capital contribution to the trust,
we will own all of the common securities of the trust. The trust exists for the
following purposes:
- issuing the capital securities to the public for cash;
- issuing the common securities to us;
- investing the proceeds from the sale of the capital and common
securities in an equivalent amount of 9.60% junior
subordinated debentures due September 30, 2029 issued by us;
and
- engaging in other activities that are incidental to those
listed above.
The trust's address is 1398 Central Avenue, Dubuque, Iowa 52001, and
its telephone number is (319) 589-2000.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
The issuer ...................... Heartland Financial Capital Trust I
Securities being offered ........ 1,000,000 capital securities, which
represent preferred undivided beneficial
interests in the assets of the trust. Those
assets will consist solely of the debentures
and payments received thereunder.
The trust will sell the capital securities
to the public for cash. The trust will use
that cash to buy the debentures from us.
Offering price .................. $25 per capital security.
Payment of distributions ........ If you purchase the capital securities, you
are entitled to receive cumulative cash
distributions at a 9.60% annual rate.
Distributions will accumulate from the date
the trust issues the capital securities and
will be paid quarterly on March 31, June 30,
September 30 and December 31 of each year
beginning December 31, 1999. The record
date for distributions on the capital
securities will be the business day prior to
the distribution date. Please note that we
may defer the payment of cash distributions,
as more fully described below.
Maturity ........................ The debentures will mature and the capital
securities must be redeemed on September 30,
2029. We have the option, however, to
shorten the maturity date to a date not
earlier than September 30, 2004. We will
not shorten the maturity date unless we have
received the prior approval of the Board
of Governors of the Federal Reserve System,
if required.
Redemption of the capital
securities is possible ..... The trust must redeem the capital securities
when the debentures are paid at maturity or
upon any earlier redemption of the
debentures. We may redeem all or part of
the debentures at any time on or after
September 30, 2004. In addition, we may
redeem, at any time, all of the debentures
if:
- the interest we pay on the
debentures is no longer deductible
by us for federal tax purposes, or
the trust becomes subject to
federal income tax;
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- there is a change in the
Investment Company Act of 1940
that requires the trust to
register under that law; or
- there is a change in the capital
adequacy guidelines of the Federal
Reserve that results in the
capital securities not being
counted as Tier 1 capital.
Redemption of the debentures prior to
maturity will be subject to the prior
approval of the Federal Reserve, if
required. If the capital securities are
redeemed by the trust, you will receive the
liquidation amount of $25 per capital
security plus any accrued and unpaid
distributions to the date of redemption.
We have the option to extend the
interest payment period .... The trust will rely solely on payments made
by us under the debentures to pay
distributions on the capital securities. As
long as we are not in default under the
indenture relating to the debentures, we
may, at one or more times, defer interest
payments on the debentures for up to 20
consecutive quarters, but not beyond
September 30, 2029. If we defer interest
payments on the debentures:
- the trust will also defer
distributions on the capital
securities;
- the distributions you are entitled
to will accumulate; and
- these accumulated distributions
will earn additional interest at
an annual rate of 9.60%,
compounded quarterly.
At the end of any deferral period, we will
pay to the trust all accrued and unpaid
interest under the debentures. The trust
will then pay all accumulated and unpaid
distributions to you.
You will still be taxed if
distributions on the
capital securities are
deferred ................... If a deferral of payment occurs, you will
still be required to recognize the deferred
amounts as income for United States federal
income tax purposes in advance of receiving
these amounts, even if you are a cash basis
taxpayer.
Our guarantee of payment ........ We guarantee the trust will use its assets
to pay the distributions on the capital
securities and the liquidation amount upon
liquidation of the trust. However, the
guarantee does not apply when the trust does
not have sufficient funds to make the
payments. If we do not make payments on the
debentures, the trust will not have
sufficient funds to make payments on the
capital securities. In this event, your
remedy is to institute a legal proceeding
directly against us for enforcement of
payments under the debentures.
We may distribute the debentures
directly to you ............ We may, at any time, dissolve the trust and
distribute the debentures to you, subject to
the prior approval of the Federal Reserve,
if required. If we distribute the
debentures, we will use our reasonable
efforts to list them on a national
securities exchange or comparable automated
quotation system.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
How the securities will rank in
right of payment ........... Our obligations under the capital
securities, debentures and guarantee are
unsecured and will rank as follows with
regard to right of payment:
- the capital securities will rank
equally with the common securities of
the trust. The trust will pay
distributions on the capital securities
and the common securities pro rata.
However, if we default with respect to
the debentures, then no distributions
on the common securities will be paid
until all accumulated and unpaid
distributions on the capital securities
have been paid;
- our obligations under the debentures
and the guarantee are unsecured and
generally will rank junior in priority
to our existing and future senior and
other subordinated indebtedness; and
- because we are a holding company, the
junior subordinated debentures and the
guarantee will effectively be
subordinated to all existing and future
liabilities of our subsidiaries.
Voting rights of the capital
securities ................. Except in limited circumstances, holders of
the capital securities will have no voting
rights.
American Stock Exchange symbol .. "HFT.Pr"
Book-entry ...................... The capital securities will be represented
by a global security that will be deposited
with and registered in the name of The
Depository Trust Company, New York, New York
or its nominee. This means that you will
not receive a certificate for the capital
securities.
Use of proceeds ................. The trust will invest all of the proceeds
from the sale of the capital securities in
the debentures. We will use the net
proceeds from the sale of the debentures,
which we estimate to be approximately $23.9
million, to repay approximately $15.0
million of indebtedness existing on our
revolving credit line currently outstanding
with The Northern Trust Company. We will
use the remaining net proceeds for general
corporate purposes, including, but not
limited to, investments in and extensions of
credit to our subsidiaries, possible common
stock repurchases and financing potential
acquisitions.
</TABLE>
Before purchasing the capital securities offered by this prospectus,
you should carefully consider the "Risk Factors" beginning on page 9.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below for, and as
of, the end of each of the years in the five-year period ended December 31,
1998, are derived from our consolidated financial statements, which have been
audited by KPMG LLP, independent certified public accountants. The summary
data presented below for the six-month periods ended June 30, 1999 and 1998,
are unaudited. In our opinion, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of results as of or for
the six-month periods indicated have been included. This information should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and the notes thereto incorporated by reference into this
prospectus from our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and our Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1999 and June 30, 1999. Results for past periods are not
necessarily indicative of results to be expected for any future period, and
results for the six-month period ended June 30, 1999 are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------------- --------------------------------
1999 1998 1998 1997
--------------------------------- --------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income ............................ $ 33,739 $ 31,599 $ 64,517 $ 59,261
Interest expense ........................... 18,556 17,245 36,304 31,767
---------- ---------- ---------- ----------
Net interest income ........................ 15,183 14,354 28,213 27,494
Provision for loan and lease losses ........ 1,296 585 951 1,279
---------- ---------- ---------- ----------
Net interest income after provision
for loan and lease losses ............... 13,887 13,769 27,262 26,215
Noninterest income ......................... 12,824 5,849 17,297 8,565
Noninterest expense ........................ 20,715 13,087 31,781 22,927
---------- ---------- ---------- ----------
Pre-tax income ............................. 5,996 6,531 12,778 11,853
Provision for income taxes ................. 1,784 1,959 3,757 3,338
---------- ---------- ---------- ----------
Net income ................................. $ 4,212 $ 4,572 $ 9,021 $ 8,515
========== ========== ========== ==========
BALANCE SHEET:
Total assets ............................... $1,027,833 $ 880,037 $ 953,785 $ 852,060
Securities and federal funds sold .......... 219,774 250,437 259,964 234,666
Loans and leases, net of unearned
interest ................................ 693,058 558,654 590,133 556,406
Allowance for loan and lease losses ........ 9,171 8,100 7,945 7,362
Deposits ................................... 729,914 660,551 717,877 623,532
Stockholders' equity ....................... 85,467 76,499 84,270 77,772
KEY RATIOS:
Return on average total assets (1) ......... 0.87% 1.08% 1.01% 1.09%
Return on average stockholders'
equity (1) .............................. 10.03 11.79 11.26 11.59
Net interest margin (1)(2)(3) .............. 3.59 3.78 3.58 3.89
Efficiency ratio (2)(4) .................... 74.82 67.06 71.58 64.77
Nonperforming assets to total assets........ 0.25 0.34 0.28 0.34
Allowance for loan and lease
losses to total loans and leases ........ 1.32 1.45 1.35 1.32
Net charge-offs (recoveries) to average
loans and leases ........................ 0.01 (0.03) 0.07 0.08
Average equity to average assets ........... 8.66 9.17 9.01 9.39
Earnings to fixed charges:
Excluding interest on deposits .......... 2.45x 2.76x 2.65x 2.97x
Including interest on deposits .......... 1.32 1.38 1.35 1.37
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income ............................ $ 51,886 $ 49,149 $ 43,373
Interest expense ........................... 27,644 25,529 20,128
---------- ---------- ----------
Net interest income ........................ 24,242 23,620 23,245
Provision for loan and lease losses ........ 1,408 820 811
---------- ---------- ----------
Net interest income after provision
for loan and lease losses ............... 22,834 22,800 22,434
Noninterest income ......................... 7,364 4,981 4,965
Noninterest expense ........................ 19,507 17,323 17,244
---------- ---------- ----------
Pre-tax income ............................. 10,691 10,458 10,155
Provision for income taxes ................. 2,685 2,884 3,015
---------- ---------- ----------
Net income ................................. $ 8,006 $ 7,574 $ 7,140
========== ========== ==========
BALANCE SHEET:
Total assets ............................... $ 736,552 $ 677,313 $ 626,490
Securities and federal funds sold .......... 183,966 171,726 162,968
Loans and leases, net of unearned
interest ................................ 484,085 454,905 422,216
Allowance for loan and lease losses ........ 6,191 5,580 5,124
Deposits ................................... 558,343 534,587 513,239
Stockholders' equity ....................... 70,259 64,506 56,930
KEY RATIOS:
Return on average total assets (1) ......... 1.16% 1.18% 1.18%
Return on average stockholders'
equity (1) .............................. 12.00 12.28 12.82
Net interest margin (1)(2)(3) .............. 3.98 4.13 4.32
Efficiency ratio (2)(4) .................... 63.03 59.15 59.40
Nonperforming assets to total assets . ..... 0.34 0.28 0.17
Allowance for loan and lease
losses to total loans and leases ........ 1.28 1.23 1.21
Net charge-offs (recoveries) to average
loans and leases ........................ 0.17 0.08 0.03
Average equity to average assets ........... 9.66 9.59 9.22
Earnings to fixed charges:
Excluding interest on deposits .......... 3.38x 3.97x 5.30x
Including interest on deposits .......... 1.39 1.41 1.50
</TABLE>
__________________
(1) The six-month ratios are annualized.
(2) Exclusive of the interest recorded on the debt of ULTEA, the net
interest margin for the six-month period ended June 30, 1999 was 3.83%.
Similarly, the efficiency ratio was 67.43% for the six-month period
ended June 30, 1999 when considering only the banking subsidiaries.
(3) Tax-equivalent using a 34% rate.
(4) Noninterest expense divided by the sum of net interest income before
provision for loan losses and noninterest income.
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE CAPITAL SECURITIES INVOLVES A NUMBER OF RISKS. WE
URGE YOU TO READ ALL OF THE INFORMATION CONTAINED IN THIS PROSPECTUS. IN
ADDITION, WE URGE YOU TO CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING
US, OUR BUSINESS AND THE TRUST BEFORE YOU PURCHASE THE CAPITAL SECURITIES
OFFERED BY THIS PROSPECTUS.
BECAUSE THE TRUST WILL RELY ON THE PAYMENTS IT RECEIVES ON THE
DEBENTURES TO FUND ALL PAYMENTS ON THE CAPITAL SECURITIES, AND BECAUSE THE TRUST
MAY DISTRIBUTE THE DEBENTURES IN EXCHANGE FOR THE CAPITAL SECURITIES, PURCHASERS
OF THE CAPITAL SECURITIES ARE MAKING AN INVESTMENT DECISION THAT RELATES TO THE
DEBENTURES AS WELL AS THE CAPITAL SECURITIES. PURCHASERS SHOULD CAREFULLY REVIEW
THE INFORMATION IN THIS PROSPECTUS ABOUT THE CAPITAL SECURITIES, THE DEBENTURES
AND THE GUARANTEE.
RISKS RELATED TO AN INVESTMENT IN HEARTLAND FINANCIAL
OUR CURRENT BUSINESS STRATEGY INVOLVES CHANGING THE FOCUS OF OUR LOAN PORTFOLIO,
WHICH MAY INCREASE OUR CONSOLIDATED CREDIT RISK
Our business strategy centers around increasing our commercial banking
activities. In order to realize this objective, one of our main strategies is to
replace lower-yielding one- to four-family residential mortgage loans with
commercial and consumer loans and leases with higher risk-adjusted returns. As
this process takes place, a gradual increase in our consolidated credit risk is
likely to occur, which means that there is a greater risk that borrowers will be
unable to repay their loans from us or make all required lease payments to us.
Borrower defaults resulting in losses in excess of our allowance for loan and
lease losses could have a material adverse effect on our business, profitability
and financial condition.
OUR CONCENTRATION OF ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS MAY
RESULT IN LOWER YIELDS AND PROFITABILITY. One- to four-family residential
mortgage loans comprised $160.1 million, or 23.0%, of our loan and lease
portfolio at June 30, 1999, and are secured primarily by properties located in
the Midwest. Our concentration of these loans results in lower yields and lower
profitability for us. These loans are generally made on the basis of the
borrower's ability to make repayments from his or her employment and the value
of the property securing the loan.
OUR COMMERCIAL REAL ESTATE LOANS INVOLVE HIGHER PRINCIPAL AMOUNTS THAN
OTHER LOANS, AND REPAYMENT OF THESE LOANS MAY BE DEPENDENT ON FACTORS OUTSIDE
OUR CONTROL OR THE CONTROL OF OUR BORROWERS. At June 30, 1999, commercial real
estate loans totaled $202.5 million, or 29.1%, of our total loan and lease
portfolio. Commercial real estate lending typically involves higher loan
principal amounts and the repayment of the loans generally is dependent, in
large part, on sufficient income from the properties securing the loans to cover
operating expenses and debt service. Economic events or governmental regulations
outside of the control of the borrower or lender could negatively impact the
future cash flow and market values of the affected properties. From time to
time, we have purchased participation interests in commercial real estate loans.
We apply the same approval standards and procedures to participation interests
as to the loans we originate directly. There is no assurance, however, that we
may not experience future delinquencies from these participation interests. At
June 30, 1999, participation interests included in our total commercial real
estate loan and lease portfolio totaled $43.7 million.
REPAYMENT OF OUR COMMERCIAL LOANS AND LEASES IS OFTEN DEPENDENT ON CASH
FLOWS OF THE BORROWER, WHICH MAY BE UNPREDICTABLE, AND COLLATERAL SECURING THESE
LOANS MAY FLUCTUATE IN VALUE. Our commercial loans and leases are primarily made
based on the identified cash flow of the borrower and secondarily on the
underlying collateral provided by the borrower. Most often, this collateral is
accounts receivable, inventory, machinery or real estate. Credit support
provided by the borrower for most of these loans and leases and the probability
of repayment is based on the liquidation of the pledged collateral and
enforcement of a personal guarantee, if any exists. As a result, in the case of
loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers. The collateral securing
other loans and equipment leases may depreciate over time, may
9
<PAGE>
be difficult to appraise and may fluctuate in value based on the success of
the business. Commercial loans and leases were $123.2 million, or 17.7% of
our total loan and lease portfolio, as of June 30, 1999. This amount does not
include $37.2 million of leases held by ULTEA. These leases require the
lessee to pay an amount over the life of the lease equal to the total of all
costs related to the purchase and use of the automobile and ULTEA's fleet
management fees less the amount received upon sale of the leased automobile.
In the event the lessee fails to pay the total required payment, ULTEA may
incur a loss.
OUR COMMERCIAL CONSTRUCTION LOANS ARE BASED UPON ESTIMATES OF COSTS AND
VALUE ASSOCIATED WITH THE COMPLETE PROJECT. THESE ESTIMATES MAY BE INACCURATE.
At June 30, 1999, commercial construction loans, including land acquisition and
development, totaled $28.3 million, or 4.1%, of our total loan and lease
portfolio. Construction and land acquisition and development lending involve
additional risks because funds are advanced upon the security of the project,
which is of uncertain value prior to its completion. Because of the
uncertainties inherent in estimating construction costs, as well as the market
value of the completed project and the effects of governmental regulation of
real property, it is relatively difficult to evaluate accurately the total funds
required to complete a project and the related loan-to-value ratio. As a result,
commercial construction loans often involve the disbursement of substantial
funds with repayment dependent, in part, on the success of the ultimate project
and the ability of the borrower to sell or lease the property, rather than the
ability of the borrower or guarantor to repay principal and interest. If our
appraisal of the value of the completed project proves to be overstated, we may
have inadequate security for the repayment of the loan upon completion of
construction of the project.
OUR AGRICULTURAL LOANS INVOLVE A GREATER DEGREE OF RISK THAN OTHER
LOANS, AND THE ABILITY OF THE BORROWER TO REPAY MAY BE AFFECTED BY MANY FACTORS
OUTSIDE OF THE BORROWER'S CONTROL. At June 30, 1999, agricultural real estate
loans totaled $56.6 million, or 8.1%, of our total loan and lease portfolio.
Agricultural real estate lending involves a greater degree of risk and typically
involves larger loans to single borrowers than lending on single-family
residences. Payments on agricultural real estate loans are dependent on the
profitable operation or management of the farm property securing the loan. The
success of the farm may be affected by many factors outside the control of the
farm borrower, including adverse weather conditions that prevent the planting of
a crop or limit crop yields (such as hail, drought and floods), loss of
livestock due to disease or other factors, declines in market prices for
agricultural products (both domestically and internationally) and the impact of
government regulations (including changes in price supports, subsidies and
environmental regulations). In addition, many farms are dependent on a limited
number of key individuals whose injury or death may significantly affect the
successful operation of the farm. If the cash flow from a farming operation is
diminished, the borrower's ability to repay the loan may be impaired. The
primary crops in our market areas are corn and soybean. Accordingly, adverse
circumstances affecting corn and soybean crops could have an adverse effect on
our agricultural real estate loan portfolio.
We also originate agricultural operating loans. At June 30, 1999, these
loans totaled $27.6 million, or 4.0%, of our total loan and lease portfolio. As
with agricultural real estate loans, the repayment of operating loans is
dependent on the successful operation or management of the farm property.
Likewise, agricultural operating loans involves a greater degree of risk than
lending on residential properties, particularly in the case of loans that are
unsecured or secured by rapidly depreciating assets such as farm equipment or
assets such as livestock or crops. The primary livestock in our market areas
include dairy cows, hogs and feeder cattle. In these cases, any repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation.
First National Bank of Clovis had $32.1 million in agricultural
operating loans and $8.0 million in agricultural real estate loans at June 30,
1999. These loans were heavily concentrated in the cattle industry as well as in
grain operations. Because National Bancshares' underwriting standards are
different than ours, this portion of the loan portfolio may initially involve
more risk. At June 30, 1999, First National Bank of Clovis had $1.1 million in
nonperforming loans, which was 1.6% of its total loan portfolio.
OUR CONSUMER LOANS GENERALLY HAVE A HIGHER RISK OF DEFAULT THAN OUR
OTHER LOANS. At June 30, 1999, consumer loans totaled $88.3 million, or 12.7%,
of our total loan and lease portfolio. Consumer loans typically have shorter
terms and lower balances with higher yields as compared to one- to four-family
residential mortgage
10
<PAGE>
loans, but generally carry higher risks of default. Consumer loan
collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered
on these loans. Our consumer loan portfolio at June 30, 1999 included $16.8
million of consumer loans made by Citizens Finance to borrowers with past
credit problems or limited credit histories. Lending to these borrowers
entails a greater risk of default than does lending to individuals who have a
better credit history. We expect to incur a higher level of credit losses on
Citizens Finance's loans as compared to our other consumer loans.
WE MAY EXPERIENCE DIFFICULTIES IN MANAGING OUR GROWTH
As part of our general strategy, we may acquire banks and related
businesses that we believe provide a strategic fit with our business. To the
extent that we grow through acquisitions, we cannot assure you that we will be
able to adequately and profitably manage such growth. Acquiring other banks and
businesses, including our proposed acquisition of National Bancshares, will
involve risks commonly associated with acquisitions, including:
- potential exposure to unknown or contingent liabilities of
banks and businesses we acquire;
- exposure to potential asset quality issues of the acquired
bank or related business;
- difficulty and expense of integrating the operations and
personnel of banks and businesses we acquire;
- potential disruption to our business;
- potential diversion of our management's time and attention;
- the possible loss of key employees and customers of the banks
and businesses we acquire; and
- incurrence of goodwill if we account for an acquisition as a
purchase.
In addition to acquisitions, we may expand into additional communities
or attempt to strengthen our position in our current markets by undertaking
additional DE NOVO bank formations or branch openings. Based on our experience,
we believe that it generally takes up to two years for new banking facilities to
first achieve operational profitability, due to the impact of organization and
overhead expenses and the start-up phase of generating loans and deposits. To
the extent that we undertake additional branching and DE NOVO bank and business
formations, we are likely to continue to experience the effects of higher
operating expenses relative to operating income from the new operations, which
may have an adverse effect on our levels of reported net income, return on
average equity and return on average assets.
OUR ALLOWANCE FOR LOAN AND LEASE LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN
LOSSES
As a lender, we are exposed to the risk that our customers will be
unable to repay their loans according to their terms and that any collateral
securing the payment of their loans may not be sufficient to assure repayment.
Credit losses are inherent in the lending business and could have a material
adverse effect on our operating results and our ability to make payments on the
debentures. We make various assumptions and judgments about the collectibility
of our loan portfolio and provide an allowance for potential losses based on a
number of factors. If our assumptions are wrong, our allowance for loan and
lease losses may not be sufficient to cover our losses, thereby having an
adverse effect on our operating results, and may cause us to increase the
allowance in the future. Additions to our allowance for loan and lease losses
would decrease our net income.
11
<PAGE>
CHANGES IN LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR LOAN PORTFOLIO
Most of our business is located in adjoining portions of Iowa, Illinois
and Wisconsin with a substantial amount concentrated in the Dubuque, Iowa area.
Unfavorable or worsening economic conditions in these areas could have a
material adverse effect on us in a number of ways. The ability of our borrowers
to repay their loans and the value of the collateral securing these loans would
be negatively impacted by adverse changes in local economic conditions. In
addition, these regions are heavily dependent on the agricultural industry,
which has a history of fluctuating economic conditions.
WE HAVE NO CONTROL OVER INTEREST RATES AND OTHER CONDITIONS WHICH IMPACT OUR
RESULTS OF OPERATIONS
Our profitability is in part a function of the spread between the
interest rates earned on investments and loans and the interest rates paid on
deposits and other interest-bearing liabilities. Like most banking institutions,
our net interest spread and margin will be affected by general economic
conditions and other factors, including fiscal and monetary policies of the
federal government, that influence market interest rates and our ability to
respond to changes in such rates. At any given time, our assets and liabilities
will be such that they are affected differently by a given change in interest
rates. As a result, an increase or decrease in rates, the length of loan terms
or the mix of adjustable and fixed rate loans in our portfolio could have a
positive or negative effect on our net income, capital and liquidity. At June
30, 1999, we had a liability sensitive gap at one year and in time periods
exceeding one year. With a liability sensitive gap, a decrease in interest rates
will generally have a positive effect on net interest income, while increases in
interest rates will generally have a negative effect on net interest income.
WE RELY HEAVILY ON OUR MANAGEMENT AND THE LOSS OF ANY OF OUR SENIOR OFFICERS MAY
ADVERSELY AFFECT OUR OPERATIONS
We are dependent upon the efforts and services of Lynn B. Fuller, our
president and chief executive officer and our other senior officers. The loss of
the services of Mr. Fuller, or any of our other senior officers, could have a
material adverse effect on our operations. Because Mr. Fuller has taken on
increased responsibilities at the holding company level, we are in the process
of searching for a replacement president of Dubuque Bank and Trust, our largest
bank subsidiary, where Mr. Fuller has been president since 1987. Until this
occurs, Mr. Fuller will continue to hold this position.
Our success also depends on the experience of the officers of our
subsidiaries, the managers of our banking facilities and on their relationships
with the communities they serve. The loss of these key persons could negatively
impact the affected banking operations. We may not be able to retain our current
key personnel or attract additional qualified key persons as needed.
WE HAVE A CONTINUING NEED FOR TECHNOLOGICAL CHANGE AND WE MAY HAVE LESS
RESOURCES THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL
IMPROVEMENTS
The financial services industry is undergoing rapid technological
changes with frequent introductions of new technology-driven products and
services. In addition to better serving customers, the effective use of
technology increases efficiency and enables financial institutions to reduce
costs. Our future success will depend in part upon our ability to address the
needs of our customers by using technology to provide products and services that
will satisfy customer demands for convenience as well as to create additional
efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. We cannot provide you
with assurance that we will be able to effectively implement new
technology-driven products and services or be successful in marketing such
products and services to our customers.
12
<PAGE>
UNCERTAINTY EXISTS WITH RESPECT TO THE YEAR 2000 AND OUR OPERATIONS MAY BE
INTERRUPTED
The year 2000 has posed a unique set of challenges to those industries
reliant on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the year 2000 from the year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependence on electronic data processing systems. We could experience
interruptions in our business and suffer significant losses if we, or a supplier
or vendor with whom we contract, are unable to achieve year 2000 readiness
before January 1, 2000. In addition, our bank subsidiaries' customers may
withdraw their deposits due to uncertainty of the impact of year 2000 issues,
resulting in decreased liquidity.
THERE IS STRONG COMPETITION IN THE FINANCIAL SERVICES INDUSTRY AND OUR
COMPETITORS MAY HAVE GREATER CAPITAL RESOURCES THAN WE DO
We compete for loan and deposit customers with other banks and thrifts,
as well as other financial services organizations such as credit unions, finance
companies, brokerage firms, insurance companies and money market mutual funds,
all of whom aggressively solicit customers within our market areas by
advertising through direct mail, electronic media, including the internet, and
other means. Many of the competitors in our markets have been in business for
many years, have established customer bases and are substantially larger than
us. In addition, many of these entities have greater capital resources than we
do, and some of these are not subject to the same degree of regulation.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION AND ANY CHANGES MAY
ADVERSELY AFFECT OUR OPERATIONS
The banking industry is heavily regulated under both federal and state
law. These regulations are primarily intended to protect customers, not our
creditors or stockholders. We are also subject to extensive regulation by the
Federal Reserve Board, in addition to other regulatory and self-regulatory
organizations. Regulations affecting banks and financial services companies
undergo continuous change, and we cannot predict the ultimate effect of such
changes, which could have a material adverse effect on our profitability or
financial condition. Regulations and laws may be modified at any time, and new
legislation may be enacted that adversely affects us and our subsidiaries.
RISKS RELATED TO AN INVESTMENT IN THE CAPITAL SECURITIES
IF WE DO NOT MAKE INTEREST PAYMENTS UNDER THE DEBENTURES, THE TRUST WILL BE
UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION AMOUNTS. THE GUARANTEE WILL NOT
APPLY BECAUSE THE GUARANTEE COVERS PAYMENTS ONLY IF THE TRUST HAS FUNDS
AVAILABLE
The trust will depend solely on our payments on the debentures to pay
amounts due to you on the capital securities. If we default on our obligation to
pay the principal or interest on the debentures, the trust will not have
sufficient funds to pay distributions or the liquidation amount on the capital
securities. In that case, you will not be able to rely on the guarantee for
payment of these amounts because the guarantee only applies if the trust has
sufficient funds to make distributions on or to pay the liquidation amount of
the capital securities. Instead, you or the property trustee will have to
institute a direct action against us to enforce the property trustee's rights
under the indenture relating to the debentures.
TO THE EXTENT WE MUST RELY ON DIVIDENDS FROM OUR SUBSIDIARIES TO MAKE INTEREST
PAYMENTS ON THE DEBENTURES TO THE TRUST, OUR AVAILABLE CASH FLOW MAY BE
RESTRICTED
We are a holding company and substantially all of our assets are held
by our subsidiaries. Our ability to make payments on the debentures when due
will depend primarily on available cash resources at the holding company and
dividends from our subsidiaries. Dividend payments or extensions of credit from
our banking subsidiaries are subject to regulatory limitations, generally based
on capital levels and current and retained earnings, imposed by the various
regulatory agencies with authority over such subsidiaries. The ability of each
13
<PAGE>
banking subsidiary to pay dividends is also subject to its profitability,
financial condition, capital expenditures and other cash flow requirements. We
cannot assure you that our subsidiaries will be able to pay dividends in the
future.
THE DEBENTURES AND THE GUARANTEE RANK LOWER THAN OUR OTHER INDEBTEDNESS AND OUR
HOLDING COMPANY STRUCTURE EFFECTIVELY SUBORDINATES ANY CLAIMS AGAINST US TO
THOSE OF OUR SUBSIDIARIES' CREDITORS
Our obligations under the debentures and the guarantee are unsecured
and will rank junior in priority of payment to our existing and future senior
and subordinated indebtedness, which totaled approximately $195.4 million at
June 30, 1999. The issuance of the debentures and the capital securities does
not limit our ability or the ability of our subsidiaries to incur additional
indebtedness, guarantees or other liabilities.
Because we are a holding company, the creditors of our subsidiaries
also will have priority over you in any distribution of our subsidiaries' assets
in liquidation, reorganization or otherwise. Accordingly, the debentures and the
guarantee will be effectively subordinated to all existing and future
liabilities of our subsidiaries, and you should look only to our assets for
payments on the capital securities and the debentures.
WE HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE DEBENTURES FOR SUBSTANTIAL
PERIODS
We may, at one or more times, defer interest payments on the debentures
for up to 20 consecutive quarters. If we defer interest payments on the
debentures, the trust will defer distributions on the capital securities during
any deferral period. During a deferral period, you will be required to recognize
as income for federal income tax purposes the amount approximately equal to the
interest that accrues on your proportionate share of the debentures held by the
trust in the tax year in which that interest accrues, even though you will not
receive these amounts until a later date.
You will also not receive the cash related to any accrued and unpaid
interest from the trust if you sell the capital securities before the end of any
deferral period. During a deferral period, accrued but unpaid distributions will
increase your tax basis in the capital securities. If you sell the capital
securities during a deferral period, your increased tax basis will decrease the
amount of any capital gain or increase the amount of any capital loss that you
may have otherwise realized on the sale. A capital loss, except in certain
limited circumstances, cannot be applied to offset ordinary income. As a result,
deferral of distributions could result in ordinary income, and a related tax
liability for the holder, and a capital loss that may only be used to offset a
capital gain.
We do not currently intend to exercise our right to defer interest
payments on the debentures. However, if we exercise our right in the future, the
market price of the capital securities would likely be adversely affected. The
capital securities may trade at a price that does not fully reflect the value of
accrued but unpaid interest on the debentures. If you sell the capital
securities during an interest deferral period, you may not receive the same
return on investment as someone who continues to hold the capital securities.
Due to our right to defer interest payments, the market price of the capital
securities may be more volatile than the market prices of other securities
without the deferral feature.
WE HAVE MADE ONLY LIMITED COVENANTS IN THE INDENTURE AND THE TRUST AGREEMENT
The indenture governing the debentures and the trust agreement
governing the trust do not require us to maintain any financial ratios or
specified levels of net worth, revenues, income, cash flow or liquidity, and
therefore do not protect holders of the debentures or the capital securities in
the event we experience significant adverse changes in our financial condition
or results of operations. In addition, neither the indenture nor the trust
agreement limits our ability or the ability of any subsidiary to incur
additional indebtedness. Therefore, you should not consider the provisions of
these governing instruments as a significant factor in evaluating whether we
will be able to comply with our obligations under the debentures or the
guarantee.
14
<PAGE>
WE MAY REDEEM THE DEBENTURES BEFORE SEPTEMBER 30, 2029
Under the following circumstances, we may redeem the debentures before
their stated maturity:
- We may redeem the debentures, in whole or in part, at any time
on or after September 30, 2004.
- We may redeem the debentures in whole, but not in part, within
90 days after certain occurrences at any time during the life
of the trust. These occurrences may include adverse tax,
Investment Company Act or bank regulatory developments.
You should assume that we will exercise our redemption option if we are
able to obtain capital at a lower cost than we must pay on the debentures or if
it is otherwise in our interest to redeem the debentures. If the debentures are
redeemed, the trust must redeem capital securities having an aggregate
liquidation amount equal to the aggregate principal amount of debentures
redeemed, and you may be required to reinvest your principal at a time when you
may not be able to earn a return that is as high as you were earning on the
capital securities.
WE CAN DISTRIBUTE THE DEBENTURES TO YOU, WHICH MAY HAVE ADVERSE TAX CONSEQUENCES
FOR YOU AND WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF THE CAPITAL
SECURITIES
The trust may be dissolved at any time before maturity of the
debentures on September 30, 2029. As a result, and subject to the terms of the
trust agreement, the trustees may distribute the debentures to you.
We cannot predict the market prices for the debentures that may be
distributed in exchange for capital securities upon liquidation of the trust.
The capital securities, or the debentures that you may receive if the trust is
liquidated, may trade at a discount to the price that you paid to purchase the
capital securities. Because you may receive debentures, your investment decision
with regard to the capital securities will also be an investment decision with
regard to the debentures. You should carefully review all of the information
contained in this prospectus regarding the debentures.
Under current United States federal income tax laws, a distribution of
the debentures to you upon the dissolution of the trust would not be a taxable
event to you. Nevertheless, if the trust is classified for United States income
tax purposes as an association taxable as a corporation at the time it is
dissolved, the distribution of the debentures would be a taxable event to you.
In addition, if there is a change in law, a distribution of debentures upon the
dissolution of the trust could be a taxable event to you.
THERE IS NO CURRENT PUBLIC MARKET FOR THE CAPITAL SECURITIES AND THEIR MARKET
PRICE MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS
There is currently no public market for the capital securities.
Although we have applied to list the capital securities on the American Stock
Exchange, there is no guarantee that an active or liquid trading market will
develop for the capital securities or that listing of the capital securities
will continue on the American Stock Exchange. If an active trading market does
not develop, the market price and liquidity of the capital securities will be
adversely affected. Even if an active public market does develop, there is no
guarantee that the market price for the capital securities will equal or exceed
the price you pay for the capital securities.
Future trading prices of the capital securities may be subject to
significant fluctuations in response to prevailing interest rates, our future
operating results and financial condition, the market for similar securities and
general economic and market conditions. The initial public offering price of the
capital securities has been set at the liquidation amount of the capital
securities and may be greater than the market price following the offering.
The market price for the capital securities, or the debentures that you
may receive in a distribution, is also likely to decline during any period that
we are deferring interest payments on the debentures. If this were
15
<PAGE>
the case, the capital securities or the debentures would not trade at a
price that accurately reflects the value of accumulated but unpaid interest
on the debentures.
YOU MUST RELY ON THE PROPERTY TRUSTEE TO ENFORCE YOUR RIGHTS IF THERE IS AN
EVENT OF DEFAULT UNDER THE INDENTURE
You may not be able to directly enforce your rights against us if an
event of default under the indenture occurs. If an event of default under the
indenture occurs and is continuing, this event will also be an event of default
under the trust agreement. In that case, you must rely on the enforcement by the
property trustee of its rights as holder of the debentures against us. The
holders of a majority in liquidation amount of the capital securities will have
the right to direct the property trustee to enforce its rights. If the property
trustee does not enforce its rights following an event of default and a request
by the record holders to do so, any record holder may, to the extent permitted
by applicable law, take action directly against us to enforce the property
trustee's rights. If an event of default occurs under the trust agreement that
is attributable to our failure to pay interest or principal on the debentures,
or if we default under the guarantee, you may proceed directly against us. You
will not be able to exercise directly any other remedies available to the
holders of the debentures unless the property trustee fails to do so.
AS A HOLDER OF CAPITAL SECURITIES YOU HAVE LIMITED VOTING RIGHTS
Holders of capital securities have limited voting rights. Your voting
rights pertain primarily to amendments to the trust agreement. In general, only
we can replace or remove any of the trustees. However, if an event of default
under the trust agreement occurs and is continuing, the holders of at least a
majority in aggregate liquidation amount of the capital securities may replace
the property trustee and the Delaware trustee.
THE CAPITAL SECURITIES ARE NOT FDIC INSURED
Neither the Federal Deposit Insurance Corporation nor any other
governmental agency has insured the capital securities.
CAUTIONARY STATEMENTS
This prospectus contains forward-looking statements which describe our
future plans, strategies and expectations. All forward-looking statements are
based on assumptions and involve risks and uncertainties, many of which are
beyond our control and which may cause our actual results, performance or
achievements to differ materially from the results, performance or achievements
that we anticipate. Factors that might affect forward-looking statements
include, among other things:
- the demand for our products;
- our inability to sustain or improve the performance of our
subsidiaries;
- our ability to enter new markets successfully and capitalize
on growth opportunities;
- our inability to identify suitable future acquisition
candidates;
- the timing, impact and other uncertainties of our future
acquisitions and our success or failure in the integration of
their operations;
- increased costs or other difficulties relating to our pending
acquisition of National Bancshares, Inc.;
- our inability to achieve the financial goals in our strategic
plans, including any financial goals related to both
contemplated and consummated acquisitions;
- increases in defaults by borrowers and other loan
delinquencies resulting in increases in our provision for
losses on loans and related expenses;
16
<PAGE>
- our ability to manage growth, including the successful
expansion of the customer support, administrative
infrastructure and internal management systems necessary to
manage such growth;
- adverse changes in the economy or business conditions, either
nationally or in our market areas that could increase
credit-related losses and expenses;
- the consequences of continued bank acquisitions and mergers in
our market areas, resulting in fewer but much larger and
financially stronger competitors, and actions taken by our
competitors which could increase competition for financial
services to our detriment;
- fluctuations in interest rates and market prices, which could
reduce our net interest margins, asset valuations and expense
expectations;
- changes in legislative or regulatory requirements applicable
to bank holding companies and our present and future banking
and other subsidiaries;
- changes in tax requirements, including tax rate changes, new
tax laws and revised tax law interpretations;
- general economic conditions;
- year 2000 (Y2K) computer, embedded chip and related data
processing issues; and
- other factors discussed in "Risk Factors."
We undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
events discussed in any forward-looking statements in this prospectus might not
occur.
You should rely on the information contained or incorporated by
reference in this prospectus. We have not, and our underwriters have not,
authorized any person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and our underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is
accurate as of the date on the front cover of this prospectus only.
USE OF PROCEEDS
The trust will invest all of the proceeds from the sale of the capital
securities in the debentures. We will use the net proceeds from the sale of the
debentures, which we estimate to be approximately $23.9 million, to repay $15.0
million of indebtedness existing on our revolving credit line currently
outstanding with The Northern Trust Company. The interest rate on the revolving
line of credit is currently a weighted average of the rates on overnight Federal
fund transactions plus 60 to 90 basis points, based on our total debt to
tangible net worth ratio. The interest rate fluctuates daily because the
interest rate is tied to Federal funds. Under the loan agreement, we are
required to reduce the total outstanding principal on this revolving credit line
by $15.0 million by December 31, 1999. The revolving line of credit matures on
July 23, 2000. We used $20.0 million of the proceeds of this revolving credit
line to capitalize Wisconsin Community Bank after the acquisition of the Monroe
bank branch in July 1999, and used the balance for other general corporate
purposes.
We will use the remaining net proceeds from the sale of the debentures
for general corporate purposes, including, but not limited to, investments in
and extensions of credit to our subsidiaries, possible common stock repurchases
and financing of potential acquisitions, including the acquisition of National
Bancshares, Inc., the holding company for First National Bank of Clovis.
17
<PAGE>
CAPITALIZATION
The following table sets forth our total deposits, indebtedness and
capitalization at June 30, 1999, on an historical basis and as adjusted for the
offering and the application of the estimated net proceeds from the
corresponding sale of the debentures as if such sale had been consummated on
June 30, 1999. These data should be read in conjunction with the Consolidated
Financial Statements and notes thereto incorporated by reference into this
prospectus from our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999 (See "Incorporation of Documents by
Reference").
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------
ACTUAL AS ADJUSTED
---------------------------------
(Dollars in thousands)
<S> <C> <C>
DEPOSITS:
Noninterest-bearing deposits .......................................... $ 80,580 $ 80,580
Interest-bearing deposits ............................................. 649,334 649,334
------------- ------------
Total deposits ................................................... $ 729,914 $ 729,914
------------- ------------
------------- ------------
INDEBTEDNESS:
Short-term borrowings (including short-term portion of Federal
Home Loan Bank advances and contracts payable) ................... $ 140,992 $ 140,992
Other borrowings
Federal Home Loan Bank advances .................................. 19,112 19,112
Notes payable on leased assets ................................... 14,109 14,109
Credit lines with The Northern Trust Company(1) .................. 20,000 20,000
Contracts payable to previous stockholders of
Lease Associates Group for acquisition ....................... 643 643
Contracts payable to previous stockholders of
Wisconsin Community Bank for acquisition ..................... 583 583
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated debentures ....... - 25,000
------------- ------------
Total indebtedness ............................................... $ 195,439 $ 220,439
============= ============
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, authorized 200,000 shares ........... $ - $ -
Common stock, $1.00 par value, authorized 12,000,000
shares; issued 9,707,252 shares .................................. 9,707 9,707
Capital surplus ....................................................... 15,281 15,281
Retained earnings ..................................................... 62,844 62,844
Accumulated other comprehensive income ................................ (381) (381)
Treasury stock at cost (118,433 shares) ............................... (1,984) (1,984)
------------- ------------
Total stockholders' equity ....................................... 85,467 85,467
------------- ------------
TOTAL DEPOSITS, INDEBTEDNESS AND STOCKHOLDERS' EQUITY ................. $ 1,010,820 $ 1,035,820
------------- ------------
------------- ------------
</TABLE>
_________________
(1) In July 1999, we entered into an Amended and Restated Loan Agreement with
The Northern Trust Company to establish a term credit line as well as to
increase the availability under an existing revolving credit line. Under
this agreement, we incurred an additional $20.0 million of indebtedness,
a majority of the proceeds were used to fund the acquisition of Bank
One's branch in Monroe, Wisconsin. The total principal amount outstanding
under the loan agreement with Northern Trust was $40.0 million at October
1, 1999. We will repay $15.0 million of this amount with the net proceeds
from the sale of the debentures.
18
<PAGE>
ACCOUNTING AND REGULATORY TREATMENT
The trust will be treated, for financial reporting purposes, as our
subsidiary and, accordingly, the accounts of the trust will be included in our
consolidated financial statements. The capital securities will be presented as a
separate line item in our consolidated balance sheet under the caption "Company
obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely subordinated debentures," and appropriate disclosures about the
capital securities, the guarantee and the debentures will be included in the
notes to our consolidated financial statements. For financial reporting
purposes, we will record distributions payable on the capital securities in our
consolidated statements of income.
Our future reports filed under the Securities Exchange Act of 1934 will
include a footnote to the consolidated financial statements stating that:
- the trust is wholly-owned;
- the sole assets of the trust are the debentures and specifying
the debentures' principal amount, interest rate and maturity
date; and
- our obligations described in this prospectus, in the
aggregate, constitute a full, irrevocable and unconditional
guarantee on a subordinated basis by us of the obligations of
the trust under the capital securities.
The capital securities have been structured to qualify as Tier 1
capital. However, the capital securities cannot be used to constitute, together
with any outstanding cumulative preferred stock of Heartland Financial, more
than 25% of Heartland Financial's total Tier 1 capital. As adjusted for this
offering as well as for the acquisition of Bank One's branch in Monroe,
Wisconsin and the pending acquisition of National Bancshares, Heartland
Financial's Tier 1 capital as of June 30, 1999 would have been approximately
$88.3 million, of which $22.1 million would have been attributable to the
capital securities. At the close of this offering, we anticipate that the total
net proceeds will qualify as Tier 1 capital.
19
<PAGE>
MANAGEMENT
The names and ages of the executive officers of Heartland Financial as
of September 1, 1999, offices held by these officers on that date and other
positions held with Heartland Financial and its principal operating subsidiaries
are set forth below.
<TABLE>
<CAPTION>
POSITIONS WITH HEARTLAND FINANCIAL
NAME AGE AND PRINCIPAL OPERATING SUBSIDIARIES
- -------------------------------- ------------------ ---------------------------------------------------
<S> <C> <C>
Lynn B. Fuller 50 Director, President and Chief Executive Officer of
Heartland Financial and Dubuque Bank and Trust;
Director of Galena State Bank, First Community Bank,
Riverside Community Bank, Wisconsin Community Bank,
New Mexico Bank & Trust and Keokuk Bancshares;
Director and President of Citizens Finance; Director
and Chairman of ULTEA
Lynn S. Fuller 74 Chairman of the Board of Heartland Financial;
Director and Vice Chairman of the Board of Dubuque
Bank and Trust; Director of Citizens Finance
James A. Schmid 76 Vice Chairman of the Board of Heartland Financial;
Chairman of the Board of Dubuque Bank and Trust;
Director of Citizens Finance
John K. Schmidt 40 Executive Vice President and Chief Financial Officer
of Heartland Financial; Senior Vice President and
Chief Financial Officer of Dubuque Bank and Trust;
Treasurer of Citizens Finance and ULTEA
Kenneth J. Erickson 48 Senior Vice President of Heartland Financial; Senior
Vice President, Lending of Dubuque Bank and Trust;
Senior Vice President of Citizens Finance; Senior
Vice President and Director of ULTEA
Edward H. Everts 48 Senior Vice President, Heartland Financial; Senior
Vice President of Operations and Retail Banking of
Dubuque Bank and Trust
Douglas J. Horstmann 46 Senior Vice President, Lending of Dubuque Bank and
Trust
Paul J. Peckosh 54 Senior Vice President, Trust of Dubuque Bank and Trust
</TABLE>
Mr. Lynn B. Fuller is the son of Mr. Lynn S. Fuller. There are no other
family relationships among any of the directors or executive officers of
Heartland Financial.
LYNN B. FULLER has been a director of Heartland Financial and of
Dubuque Bank and Trust since 1984 and has been President of Heartland Financial
and Dubuque Bank and Trust since 1987. In May 1999, Mr. Fuller became Chief
Executive Officer of Heartland Financial, a position which he has held at
Dubuque Bank and Trust since 1986. He has been a director of Galena State Bank
since its acquisition by Heartland Financial in 1992 and of Keokuk Bancshares
and First Community Bank since the merger in 1994. Mr. Fuller
20
<PAGE>
joined Dubuque Bank and Trust in 1971 as a consumer loan officer and was
named Dubuque Bank and Trust's Executive Vice President and Chief Executive
Officer in 1986. He was named Chairman and director of Riverside Community
Bank in conjunction with the opening of the DE NOVO operation in 1995,
director of Wisconsin Community Bank in conjunction with the purchase of
Cottage Grove State Bank in 1997 and director of New Mexico Bank & Trust in
conjunction with the opening of the DE NOVO bank in 1998.
LYNN S. FULLER has been a director of Heartland Financial since its
formation in 1981 and of Dubuque Bank and Trust since 1964. Mr. Fuller began his
banking career in 1946 in Minnesota, and he returned to Iowa in 1949 to serve as
Executive Vice President and Cashier of Jackson State Savings Bank in Maquoketa.
Mr. Fuller joined Dubuque Bank and Trust in 1964. He was later named President
of Dubuque Bank and Trust and held this position until 1987. Mr. Fuller
currently serves as the Chairman of the Board of Heartland and Vice Chairman of
Dubuque Bank & Trust.
JAMES A. SCHMID has been a director of Heartland Financial since its
formation in 1981 and of Dubuque Bank and Trust since 1966. Mr. Schmid also
currently serves as the Vice Chairman of Heartland Financial and as the Chairman
of the Board of Dubuque Bank and Trust.
JOHN K. SCHMIDT has been Heartland Financial's Executive Vice President
and Chief Financial Officer since 1991. He has been employed by Dubuque Bank and
Trust since September 1984 and became Dubuque Bank and Trust's Vice President,
Finance in 1986, and Senior Vice President and Chief Financial Officer in
January, 1991. Mr. Schmidt is a certified public accountant and worked at KPMG
Peat Marwick in Des Moines, Iowa, from 1982 until joining Dubuque Bank and
Trust.
KENNETH J. ERICKSON has been Senior Vice President of Heartland
Financial since 1992 and Senior Vice President, Lending of Dubuque Bank and
Trust since 1989. Mr. Erickson joined Dubuque Bank and Trust in 1975 and was
appointed Vice President, Commercial Loans in 1985.
EDWARD H. EVERTS was appointed as Senior Vice President of Heartland
Financial in 1996. Mr. Everts joined Dubuque Bank and Trust as Senior Vice
President, Operations and Retail Banking in 1992. Prior to his service with
Dubuque Bank and Trust, Mr. Everts was Vice President and Lead Retail Banking
Manager of First Bank, Duluth, Minnesota.
DOUGLAS J. HORSTMANN has been Senior Vice President, Lending, of
Dubuque Bank and Trust since 1989. Mr. Horstmann joined Dubuque Bank and Trust
in 1980 and was appointed Vice President, Commercial Loans in 1985. Prior to
joining Dubuque Bank and Trust, Mr. Horstmann was an examiner for the Iowa
Division of Banking.
PAUL J. PECKOSH has been Senior Vice President, Trust, of Dubuque Bank
and Trust since 1991. Mr. Peckosh joined Dubuque Bank and Trust in 1975 as
Assistant Vice President, Trust and was appointed Vice President, Trust in 1980.
Mr. Peckosh is an attorney and graduated from the Marquette University School of
Law in 1970.
21
<PAGE>
DESCRIPTION OF THE TRUST
The trust is a statutory business trust formed pursuant to the Delaware
Business Trust Act under a trust agreement executed by us, as sponsor for the
trust, and the trustees, and a certificate of trust filed with the Delaware
Secretary of State. The trust agreement will be amended and restated in its
entirety in the form filed as an exhibit to the registration statement of which
the prospectus is a part, as of the date the capital securities are initially
issued. The trust agreement will be qualified under the Trust Indenture Act of
1939.
The holders of the capital securities issued pursuant to the offering
described in this prospectus will own all of the issued and outstanding capital
securities. We will not initially own any of the capital securities. We will
acquire common securities in an amount equal to at least 3% of the total capital
of the trust and will initially own, directly or indirectly, all of the issued
and outstanding common securities (together with the capital securities, the
"trust securities"). The trust exists for the purposes of:
- issuing the capital securities to the public for cash;
- issuing its common securities to us in exchange for our
capitalization of the trust;
- investing the proceeds from the sale of the trust securities
in an equivalent amount of debentures; and
- engaging in other activities that are incidental to those
listed above.
The rights of the holders of the trust securities are as set forth in
the trust agreement, the Delaware Business Trust Act and the Trust Indenture
Act. The trust agreement does not permit the trust to borrow money or make any
investment other than in the debentures. Other than with respect to the trust
securities, Heartland Financial has agreed to pay for all debts and obligations
and all costs and expenses of the trust, including the fees and expenses of the
trustees and any income taxes, duties and other governmental charges, and all
costs and expenses related to these charges, to which the trust may become
subject, except for United States withholding taxes that are properly withheld.
The number of trustees of the trust will initially be five. Three of
the trustees will be persons who are employees or officers of or who are
affiliated with Heartland Financial (the "administrative trustees"). The fourth
trustee will be an entity that maintains its principal place of business in the
State of Delaware (the "Delaware trustee"). Initially, First Union Trust
Company, National Association, a national banking association ("First Union"),
will act as Delaware trustee. The fifth trustee will be a financial institution
that is unaffiliated with us and will serve as institutional trustee under the
trust agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the "property trustee"). Initially, First
Union will also be the property trustee. For the purpose of compliance with the
Trust Indenture Act, First Union will also act as guarantee trustee and
indenture trustee under the guarantee agreement and the indenture. See
"Description of the Debentures" and "Description of the Guarantee." We, as
holder of all of the common securities, will have the right to appoint or remove
any trustee unless an event of default under the indenture shall have occurred
and be continuing, in which case only the holders of the capital securities may
remove the indenture trustee or the property trustee. The trust has a term of
approximately 31 years but may terminate earlier as provided in the trust
agreement.
The property trustee will hold the debentures for the benefit of the
holders of the trust securities and will have the power to exercise all rights,
powers and privileges under the indenture as the holder of the debentures. In
addition, the property trustee will maintain exclusive control of a segregated
noninterest-bearing "property account" to hold all payments made on the
debentures for the benefit of the holders of the trust securities. The property
trustee will make payments of distributions and payments on liquidation,
redemption and otherwise to the holders of the trust securities out of funds
from the property account. The guarantee trustee will hold the guarantee for the
benefit of the holders of the capital securities. We will pay all fees and
expenses related to the trust and the offering of the capital securities,
including the fees and expenses of the trustees.
22
<PAGE>
DESCRIPTION OF THE CAPITAL SECURITIES
The capital securities will be issued pursuant to the trust agreement,
which will be qualified as an indenture under the Trust Indenture Act. First
Union will act as property trustee for the capital securities under the trust
agreement for purposes of complying with the provisions of the Trust Indenture
Act. The terms of the capital securities will include those stated in the trust
agreement and those made part of the trust agreement by the Trust Indenture Act.
A form of the trust agreement has been filed as an exhibit to the registration
statement of which this prospectus forms a part.
GENERAL
The trust agreement authorizes the administrative trustees, on behalf
of the trust, to issue the trust securities, which are comprised of the capital
securities to be sold to the public and the common securities. We will own all
of the common securities issued by the trust. The capital securities will
represent preferred undivided beneficial interests in the assets of the trust,
and the holders of the capital securities will be entitled to a preference over
the common securities upon an event of default with respect to distributions and
amounts payable on redemption or liquidation. The trust is not permitted to
issue any securities other than the trust securities or incur any other
indebtedness.
The capital securities will rank equally, and payments on the capital
securities will be made proportionally, with the common securities, except as
described under "--Subordination of Common Securities of the Trust" below.
The property trustee will hold legal title to the debentures in trust
for the benefit of the holders of the trust securities. We will guarantee the
payment of distributions out of money held by the trust, and payments upon
redemption of the capital securities or liquidation of the trust, to the extent
described under "Description of the Guarantee." The guarantee agreement does not
cover the payment of any distribution or the liquidation amount when the trust
does not have sufficient funds available to make these payments.
DISTRIBUTIONS
SOURCE OF DISTRIBUTIONS. The funds of the trust available for
distribution to holders of the capital securities will be limited to payments
made under the debentures, which the trust will purchase with the proceeds from
the sale of the trust securities. Distributions will be paid through the
property trustee, which will hold the amounts received from our interest
payments on the debentures in the property account for the benefit of the
holders of the trust securities. If we do not make interest payments on the
debentures, the property trustee will not have funds available to pay
distributions on the capital securities.
PAYMENT OF DISTRIBUTIONS. Distributions on the capital securities will
be payable at the annual rate of 9.60% of the $25 stated liquidation amount,
payable quarterly on March 31, June 30, September 30 and December 31 of each
year, to the holders of the capital securities on the relevant record dates. The
record date will be the business day immediately preceding the relevant
distribution date. The first distribution date for the capital
securities will be December 31, 1999.
Distributions will accumulate from the date of issuance, will be
cumulative and will be computed on the basis of a 360-day year of twelve 30-day
months. If the distribution date is not a business day, then payment of the
distributions will be made on the next day that is a business day, without any
additional interest or other payment for the delay. However, if the next
business day is in the next calendar year, payment of the distribution will be
made on the business day immediately preceding the scheduled distribution date.
"Business day" means any day other than a Saturday, a Sunday, a day on which
banking institutions in New York, New York or Wilmington, Delaware 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.
23
<PAGE>
EXTENSION PERIOD. As long as no event of default under the indenture
has occurred and is continuing, we have the right to defer the payment of
interest on the debentures at any time for a period not exceeding 20 consecutive
quarters. However, no extension period may extend beyond September 30, 2029 or
end on a date other than an interest payment date, which dates are the same as
the distribution dates. If we defer the payment of interest, quarterly
distributions on the capital securities will also be deferred during any such
extension period. Any deferred distributions under the capital securities will
accumulate additional amounts at the annual rate of 9.60%, compounded quarterly
from the relevant distribution date. The term "distributions" as used in this
prospectus includes those accumulated amounts.
During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect
to, any of our capital stock (other than the reclassification
of any class of our capital stock into another class of
capital stock) or allow any of our subsidiaries to do the same
with respect to their capital stock (other than the payment of
dividends or distributions to us);
- make any payment of principal, interest or premium on or
repay, repurchase or redeem any debt securities that rank
equally with or junior in interest to the debentures or allow
any of our subsidiaries to do the same;
- make any guarantee payments with respect to any other
guarantee by us of any other debt securities of any of our
subsidiaries if the guarantee ranks equally with or junior to
the debentures (other than payments under the guarantee); or
- redeem, purchase or acquire less than all of the debentures or
any of the capital securities.
After the termination of any extension period and the payment of all amounts
due, we may elect to begin a new extension period, subject to the above
requirements.
We do not currently intend to exercise our right to defer distributions
on the capital securities by extending the interest payment period on the
debentures.
REDEMPTION OR EXCHANGE
GENERAL. Subject to the prior approval of the Federal Reserve, if
required, we will have the right to redeem the debentures:
- in whole at any time, or in part from time to time, on or
after September 30, 2004; or
- at any time, in whole, within 90 days following the occurrence
of a Tax Event, an Investment Company Event or a Capital
Treatment Event, as defined below.
MANDATORY REDEMPTION. Upon our repayment or redemption, in whole or in
part, of any debentures, whether on September 30, 2029 or earlier, the property
trustee will apply the proceeds to redeem the same amount of the trust
securities, upon not less than 30 days' nor more than 60 days' notice, at the
redemption price. The redemption price will equal 100% of the aggregate
liquidation amount of the trust securities plus accumulated but unpaid
distributions and Additional Interest (as defined below) to the date of
redemption. If less than all of the debentures are to be repaid or redeemed on a
date of redemption, then the proceeds from such repayment or redemption will be
allocated to redemption of the capital securities and the common securities
proportionately.
"Additional Interest" means the additional amounts as may be necessary
to be paid by us in order that the amount of distributions then due and payable
by the trust on the outstanding trust securities will not be
24
<PAGE>
reduced as a result of any additional taxes, duties and other governmental
charges to which the trust has become subject.
DISTRIBUTION OF DEBENTURES. Upon prior approval of the Federal Reserve,
if required, we will have the right at any time to dissolve, wind-up or
terminate the trust and, after satisfaction of the liabilities of creditors of
the trust as provided by applicable law, including, without limitation, amounts
due and owing the trustees of the trust, cause the debentures to be distributed
directly to the holders of trust securities in liquidation of the trust. See
"--Liquidation Distribution Upon Termination."
After the liquidation date fixed for any distribution of debentures in
exchange for capital securities:
- those capital securities will no longer be deemed to be
outstanding;
- any certificates representing capital securities will be
deemed to represent debentures with a principal amount equal
to the liquidation amount of those capital securities, and
bearing accrued and unpaid interest in an amount equal to the
accumulated and unpaid distributions on the capital securities
until the certificates are surrendered to the administrative
trustees in exchange for certificates representing the
debentures.
There can be no assurance as to the market prices for the capital
securities or the debentures that may be distributed if a dissolution and
liquidation of the trust were to occur. The capital securities that an investor
may purchase, or the debentures that an investor may receive on dissolution and
liquidation of the trust, may trade at a discount to the price that the investor
paid to purchase the capital securities.
REDEMPTION UPON A TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL
TREATMENT EVENT. If a Tax Event, an Investment Company Event or a Capital
Treatment Event occurs, we will have the right to redeem the debentures in whole
and thereby cause a mandatory redemption of the trust securities in whole at the
redemption price. If one of these events occurs and we do not elect to redeem
the debentures, or to dissolve the trust and cause the debentures to be
distributed to holders of the trust securities, then the capital securities will
remain outstanding and Additional Interest may be payable on the debentures. See
"Description of Debentures--Redemption or Exchange."
"Tax Event" means the receipt by the trust and us of an opinion of
counsel experienced in such matters stating that there is more than an
insubstantial risk that:
- interest payable by us on the debentures is not, or within 90
days of the date of the opinion will not be, deductible by us,
in whole or in part, for federal income tax purposes;
- the trust is, or will be within 90 days after the date of the
opinion, subject to federal income tax with respect to income
received or accrued on the debentures; or
- the trust is, or will be within 90 days after the date of
opinion, subject to more than an immaterial amount of other
taxes, duties, assessments or other governmental charges, as a
result of any amendment to any tax laws or regulations.
"Investment Company Event" means the receipt by the trust and us of an
opinion of counsel experienced in such matters to the effect that the trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act, as a result of a change in law or regulation
or a change in interpretation or application of law or regulation.
"Capital Treatment Event" means the receipt by the trust and us of an
opinion of counsel experienced in such matters to the effect that there is more
than an insubstantial risk of impairment of our ability to treat the capital
securities as Tier 1 capital for purposes of the current capital adequacy
guidelines of the Federal Reserve, as a result of any amendment to any laws or
any regulations.
25
<PAGE>
For all of the events described above, we or the trust must request and
receive an opinion with regard to the event within a reasonable period of time
after we become aware of the possible occurrence of an event of this kind.
REDEMPTION PROCEDURES
Capital securities will be redeemed at the redemption price with the
applicable proceeds from our contemporaneous redemption of the debentures.
Redemptions of the capital securities will be made and the redemption price will
be payable on each redemption date only to the extent that the trust has funds
available for the payment of the redemption price. See "--Subordination of
Common Securities."
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the date of redemption to each holder of trust securities to
be redeemed at its registered address. Unless we default in payment of the
redemption price on the debentures, interest will cease to accumulate on the
debentures called for redemption on and after the date of redemption.
If the trust gives notice of redemption of its trust securities, then
the property trustee, to the extent funds are available, will irrevocably
deposit with the depositary for the trust securities funds sufficient to pay the
aggregate redemption price and will give the depositary for the trust securities
irrevocable instructions and authority to pay the redemption price to the
holders upon surrender of their certificates evidencing the trust securities.
See "Book-Entry Issuance." If the capital securities are no longer in book-entry
form, the property trustee, to the extent funds are available, will deposit with
the designated paying agent for such capital securities funds sufficient to pay
the aggregate redemption price and will give the paying agent irrevocable
instructions and authority to pay the redemption price to the holders upon
surrender of their certificates evidencing the capital securities.
Notwithstanding the foregoing, distributions payable on or prior to the date of
redemption for any trust securities called for redemption will be payable to the
holders of the trust securities on the relevant record dates for the related
distribution dates.
If notice of redemption has been given and we have deposited funds as
required, then on the date of the deposit all rights of the holders of the trust
securities called for redemption will cease, except the right to receive the
redemption price, but without interest on such redemption price after the date
of redemption. The trust securities will also cease to be outstanding on the
date of the deposit. If any date fixed for redemption of trust securities is not
a business day, then payment of the redemption price payable on that date will
be made on the next day that is a business day without any additional interest
or other payment in respect of the delay. However, if the next business day is
in the next succeeding calendar year, payment of the interest will be made on
the immediately preceding business day.
If payment of the redemption price in respect of trust securities
called for redemption is improperly withheld or refused and not paid by the
trust, or by us pursuant to the guarantee, distributions on the trust securities
will continue to accumulate at the applicable rate from the date of redemption
originally established by the trust for the trust securities to the date the
redemption price is actually paid. In this case, the actual payment date will be
considered the date fixed for redemption for purposes of calculating the
redemption price. See "Description of the Guarantee."
Payment of the redemption price on the capital securities and any
distribution of debentures to holders of capital securities will be made to the
applicable recordholders as they appear on the register for the capital
securities on the relevant record date. The record date will be the business day
immediately preceding the date of redemption or liquidation date, as applicable.
If less than all of the trust securities are to be redeemed, then the
aggregate liquidation amount of the trust securities to be redeemed will be
allocated proportionately to those trust securities based upon the relative
liquidation amounts. The particular capital securities to be redeemed will be
selected by the property trustee from the outstanding capital securities not
previously called for redemption by a method the property trustee deems fair and
appropriate. This method may provide for the redemption of portions equal to $25
or an integral
26
<PAGE>
multiple of $25 of the liquidation amount of the capital securities. The
property trustee will promptly notify the registrar for the capital
securities in writing of the capital securities selected for redemption and,
in the case of any capital securities selected for partial redemption, the
liquidation amount to be redeemed.
Subject to applicable law, and if we are not exercising our right to
defer interest payments on the debentures, we may, at any time, purchase
outstanding capital securities.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the capital
securities and common securities will be made based on the liquidation amount of
these securities. However, if an event of default under the indenture has
occurred and is continuing, no distributions on or redemption of the common
securities may be made. Further, no payments may be made on the common
securities unless payment in full in cash of all accumulated and unpaid
distributions (including Additional Interest, if any is required) on all of the
outstanding capital securities for all distribution periods terminating on or
before that time, or in the case of payment of the redemption price, payment of
the full amount of the redemption price on all of the outstanding capital
securities then called for redemption, has been made or provided. All funds
available to the property trustee will first be applied to the payment in full
in cash of all distributions (including Additional Interest, if any is required)
on, or the redemption price of, the capital securities then due and payable.
In the case of the occurrence and continuance of any event of default
under the trust agreement resulting from an event of default under the
indenture, we, as holder of the common securities, will be deemed to have waived
any right to act with respect to that event of default under the trust agreement
until the effect of the event of default has been cured, waived or otherwise
eliminated. Until the event of default under the trust agreement has been so
cured, waived or otherwise eliminated, the property trustee will act solely on
behalf of the holders of the capital securities and not on our behalf, and only
the holders of the capital securities will have the right to direct the property
trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
We will have the right at any time to dissolve, wind-up or terminate
the trust and cause the debentures to be distributed to the holders of the
capital securities. This right is subject, however, to us receiving approval of
the Federal Reserve, if required.
In addition, the trust will automatically terminate upon expiration of
its term and will terminate earlier on the first to occur of:
- our bankruptcy, dissolution or liquidation;
- the distribution of a like amount of the debentures to the
holders of its trust securities, if we have given written
direction to the property trustee to terminate the trust;
- redemption of all of the capital securities as described under
"--Redemption or Exchange--Mandatory Redemption;" or
- the entry of a court order for the dissolution of the trust.
With the exception of a redemption as described under "--Redemption
or Exchange--Mandatory Redemption," if an early termination of the trust
occurs, the rtust will be liquidated by the administrative trustees as
expeditiously as they determine to be possible. After satisfaction of
liabilities to creditors of the trust as provided by applicable law, the
trustees will distribute to the holders of trust securities debentures:
- in an aggregate stated principal amount equal to the aggregate
stated liquidation amount of the trust securities;
27
<PAGE>
- with an interest rate identical to the distribution rate on
the trust securities; and
- with accrued and unpaid interest equal to accumulated and
unpaid distributions on the trust securities.
However, if the property trustee determines that the distribution is
not practical, then the holders of trust securities will be entitled to receive,
in lieu of debentures, a proportionate amount of the liquidation distribution.
The liquidation distribution will be the amount equal to the aggregate of the
liquidation amount plus accumulated and unpaid distributions to the date of
payment. If the liquidation distribution can be paid only in part because the
trust has insufficient assets available to pay in full the aggregate liquidation
distribution, then the amounts payable directly by the trust on the trust
securities will be paid to us, as the holder of the common securities, and the
holders of the capital securities on a proportional basis based on liquidation
amounts. However, if an event of default under the indenture has occurred and is
continuing, the capital securities will have a priority over the common
securities. See "--Subordination of Common Securities."
Under current United States federal income tax law and interpretations
and assuming that the trust is treated as a grantor trust, as is expected, a
distribution of the debentures should not be a taxable event to holders of the
capital securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or another circumstance, however, the distribution
could be a taxable event to holders of the capital securities. See "Federal
Income Tax Consequences--Receipt of Debentures or Cash Upon Liquidation of the
Trust." If we do not elect to redeem the debentures prior to maturity or to
liquidate the trust and distribute the debentures to holders of the capital
securities, the capital securities will remain outstanding until the repayment
of the debentures.
If we elect to dissolve the trust and thus cause the debentures to be
distributed to holders of the capital securities in liquidation of the trust, we
will continue to have the right to shorten the maturity of the debentures. See
"Description of the Debentures--General."
LIQUIDATION VALUE
The amount of the liquidation distribution payable on the capital
securities in the event of any liquidation of the trust is $25 per capital
security plus accumulated and unpaid distributions to the date of payment, which
may be in the form of a distribution of debentures having a liquidation value
and accrued interest of an equal amount. See "--Liquidation Distribution Upon
Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under
the trust agreement with respect to the capital securities:
- the occurrence of an event of default under the indenture (see
"Description of the Debentures--Debenture Events of Default");
- a default by the trust in the payment of any distribution when
it becomes due and payable, and continuation of the default
for a period of 30 days;
- a default by the trust in the payment of any redemption price
of any of the trust securities when it becomes due and
payable;
- a default in the performance, or breach, in any material
respect, of any covenant or warranty of the trustees in the
trust agreement, other than those defaults covered in the
previous two points, and continuation of the default or breach
for a period of 60 days after there has been given, by
registered or certified mail, to the trustee(s) by the holders
of at least 25% in aggregate liquidation amount of the
outstanding capital securities, a written notice specifying
the default or breach and
28
<PAGE>
requiring it to be remedied and stating that the notice is
a "Notice of Default" under the trust agreement; or
- the occurrence of events of bankruptcy or insolvency with
respect to the property trustee and our failure to appoint a
successor property trustee within 60 days.
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 the event of default to the holders of the capital securities, the
administrative trustees and to us, unless the event of default has been cured or
waived. Heartland Financial and the administrative trustees are required to file
annually with the property trustee a certificate as to whether or not they are
in compliance with all the conditions and covenants applicable to them under the
trust agreement.
If an event of default under the indenture has occurred and is
continuing, the capital securities will have preference over the common
securities upon termination of the trust. See "--Subordination of Common
Securities" and "--Liquidation Distribution Upon Termination." The existence of
an event of default under the trust agreement does not entitle the holders of
capital securities to accelerate the maturity thereof, unless the event of
default is caused by the occurrence of an event of default under the indenture
and both the indenture trustee and holders of at least 25% in principal amount
of the debentures fail to accelerate the maturity thereof.
REMOVAL OF THE TRUSTEES
Unless an event of default under the indenture has occurred and is
continuing, we may remove any trustee at any time. If an event of default under
the indenture has occurred and is continuing, only the holders of a majority in
liquidation amount of the outstanding capital securities may remove the property
trustee or the Delaware trustee. The holders of the capital securities have no
right to vote to appoint, remove or replace the administrative trustees. These
rights are vested exclusively with us 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 successor trustee accepts the appointment in
accordance with the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default under the indenture has occurred and is
continuing, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the trust property may
at the time be located, we will have the power to appoint at any time or times,
and upon written request of the property trustee will appoint, one or more
persons or entity either (1) to act as a co-trustee, jointly with the property
trustee, of all or any part of the trust property, or (2) to act as separate
trustee of any trust property. In either case these trustees will have the
powers that may be provided in the instrument of appointment, and will have
vested in them any property, title, right or power deemed necessary or
desirable, subject to the provisions of the trust agreement. In case an event of
default under the indenture has occurred and is continuing, the property trustee
alone will have power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, any person or successor to any of the trustees may be a
successor trustee to any of the trustees, including a successor resulting from a
merger or consolidation. However, any successor trustee must meet all of the
qualifications and eligibility standards to act as a trustee.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. The trust may, at our request, with the consent of the
administrative trustees and without the consent of the holders of the capital
securities, the property trustee or the Delaware trustee, undertake a
transaction listed above if the following conditions are met:
29
<PAGE>
- the successor entity either (a) expressly assumes all of the
obligations of the trust with respect to the capital
securities, or (b) substitutes for the capital securities
other securities having substantially the same terms as the
capital securities (referred to as "successor securities") so
long as the successor securities rank the same in priority as
the capital securities with respect to distributions and
payments upon liquidation, redemption and otherwise;
- we appoint a trustee of the successor entity possessing
substantially the same powers and duties as the property
trustee in its capacity as the holder of the debentures;
- the successor securities are listed or will be listed on any
national securities exchange or other organization on which
the capital securities are then listed;
- the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the
capital securities (including any successor securities) in any
material respect;
- the successor entity has a purpose substantially identical to
that of the trust;
- prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, we have received an opinion
from independent counsel that (a) any transaction of this kind
does not adversely affect the rights, preferences and
privileges of the holders of the capital securities (including
any successor securities) in any material respect, and (b)
following the transaction, neither the trust nor the successor
entity will be required to register as an "investment company"
under the Investment Company Act; and
- we own all of the common securities of the successor entity
and guarantee the obligations of the successor entity under
the successor securities at least to the extent provided by
the guarantee.
Notwithstanding the foregoing, the trust may not, except with the consent of
every holder of the capital securities, enter into any transaction of this kind
if the transaction would cause the trust or the successor entity not to be
classified as a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as described below and under "Description of the
Guarantee--Amendments and Assignment" and as otherwise required by the Trust
Indenture Act and the trust agreement, the holders of the capital securities
will have no voting rights.
The trust agreement may be amended from time to time by us and the
trustees, without the consent of the holders of the capital securities, in the
following circumstances:
- with respect to acceptance of appointment by a successor
trustee;
- 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, as
long as the amendment is not inconsistent with the other
provisions of the trust agreement and does not have a material
adverse effect on the interests of any holder of trust
securities; or
- to modify, eliminate or add to any provisions of the trust
agreement if necessary to ensure that the trust will be
classified for federal income tax purposes as a grantor trust
at all times that any trust securities are outstanding or to
ensure that the trust will not be required to register as an
"investment company" under the Investment Company Act.
30
<PAGE>
With the consent of the holders of a majority of the aggregate
liquidation amount of the outstanding trust securities, we and the trustees
may amend the trust agreement if the trustees receive an opinion of counsel
to the effect that the amendment or the exercise of any power granted to the
trustees in accordance with the amendment will not affect the trust's status
as a grantor trust for federal income tax purposes or the trust's exemption
from status as an "investment company" under the Investment Company Act.
However, without the consent of each holder of trust securities, the trust
agreement may not be amended to (a) 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 (b) restrict the right of a holder of trust
securities to institute suit for the enforcement of the payment on or after
that date.
As long as the property trustee holds any debentures, the trustees
will not:
- direct the time, method and place of conducting any proceeding
for any remedy available to the indenture trustee, or
executing any trust or power conferred on the property trustee
with respect to the debentures;
- waive any past default that is waivable under the indenture;
- exercise any right to rescind or annul a declaration that the
principal of all the debentures will be due and payable; or
- consent to any amendment or termination of the indenture or
the debentures, where the consent is required, without
obtaining the prior approval of the holders of a majority in
aggregate liquidation amount of all outstanding trust
securities. However, where a consent under the indenture
requires the consent of each holder of the affected
debentures, no consent will be given by the property trustee
without the prior consent of each holder of the trust
securities.
The trustees may not revoke any action previously authorized or approved by a
vote of the holders of the trust securities except by subsequent vote of the
holders of the trust securities. The property trustee will notify each holder of
trust securities of any notice of default with respect to the debentures. In
addition to obtaining the foregoing approvals of the holders of the trust
securities, prior to taking any of the foregoing actions the trustees must
obtain an opinion of counsel experienced in these matters to the effect that the
trust will not be classified as an association taxable as a corporation for
federal income tax purposes on account of the action.
Any required approval of holders of trust securities may be given at a
meeting of holders of the trust securities convened for the purpose or pursuant
to written consent. The property trustee will cause a notice of any meeting at
which holders of the trust securities are entitled to vote, or of any matter
upon which action by written consent of the holders is to be taken, to be given
to each holder of record of trust securities.
No vote or consent of the holders of capital securities will be
required for the trust to redeem and cancel its capital securities in
accordance with the trust agreement.
Notwithstanding the fact that holders of capital securities are
entitled to vote or consent under any of the circumstances described above, any
of the capital securities that are owned by Heartland Financial, the trustees or
any affiliate of Heartland Financial or any trustee, will, for purposes of the
vote or consent, be treated as if they were not outstanding.
GLOBAL CAPITAL SECURITIES
The capital securities will be represented by one or more global
capital securities registered in the name of The Depository Trust Company, New
York, New York ("DTC") or its nominee. A global capital security is a security
representing interests of more than one beneficial holder. Beneficial interests
in the global capital securities will be shown on, and transfers will be
effected only through, records maintained by participants. Participants are
brokers, dealers, or others with accounts with DTC. Except as described below,
capital
31
<PAGE>
securities in definitive form will not be issued in exchange for the global
capital securities. See "Book-Entry Issuance."
No global capital security may be exchanged for capital securities
registered in the names of persons other than DTC or its nominee unless:
- DTC notifies the indenture trustee that it is unwilling or
unable to continue as a depositary for the global capital
security and we are unable to locate a qualified successor
depositary;
- we execute and deliver to the indenture trustee a written
order stating that we elect to terminate the book-entry system
through DTC; or
- there shall have occurred and be continuing an event of
default under the indenture.
Any global capital security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for definitive certificates registered in the
names as DTC shall direct. It is expected that the instructions will be based
upon directions received by DTC with respect to ownership of beneficial
interests in the global capital security. If capital securities are issued in
definitive form, the capital securities will be in denominations of $25 and
integral multiples of $25 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
capital securities represented thereby, a global capital security may not be
transferred except as a whole by DTC to a nominee of DTC, by a nominee of DTC to
DTC or another nominee of DTC or by DTC or any nominee to a successor depositary
or any nominee of the successor.
Payments on global capital securities will be made to DTC, as the
depositary for the global capital securities. If the capital securities are
issued in definitive form, distributions will be payable, the transfer of the
capital securities will be registrable, and capital securities will be
exchangeable, for capital securities of other denominations of a like aggregate
liquidation amount, at the corporate office of the property trustee, or at the
offices of any paying agent or transfer agent appointed by the administrative
trustees. However, payment of any distribution may be made at the option of the
administrative trustees by check mailed to the address of record of the persons
entitled to the distribution or by wire transfer. In addition, if the capital
securities are issued in definitive form, the record dates for payment of
distributions will be the 15th day of the month in which the relevant
distribution date occurs. For a description of the terms of DTC arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Book-Entry Issuance."
Upon the issuance of one or more global capital securities, and the
deposit of the global capital security with or on behalf of DTC or its nominee,
DTC or its nominee will credit, on its book-entry registration and transfer
system, the respective aggregate liquidation amounts of the individual capital
securities represented by the global capital security to the accounts of persons
that have accounts with DTC. These accounts will be designated by the dealers,
underwriters or agents with respect to the capital securities. Ownership of
beneficial interests in a global capital security will be limited to persons or
entities with an account with DTC or who may hold interest through any person or
entity with an account that may hold interests through participants. With
respect to interests of any person or entity with an account with DTC, ownership
of beneficial interests in a global capital security 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 persons or entities
who hold interest in a global capital security through a participant, the
interest and any transfer of the interest will be shown on the participant's
records. The laws of some states require that certain purchasers of securities
take physical delivery of these securities in definitive form. These laws may
impair the ability to transfer beneficial interests in a global capital
security.
So long as DTC or another depositary, or its nominee, is the registered
owner of the global capital security, the depositary or the nominee, as the case
may be, will be considered the sole owner or holder of the capital securities
represented by the global capital security for all purposes under the trust
agreement. Except as
32
<PAGE>
described in this prospectus, owners of beneficial interests in a global
capital security will not be entitled to have any of the individual capital
securities represented by the global capital security registered in their
names, will not receive or be entitled to receive physical delivery of any
the capital securities in definitive form and will not be considered the
owners or holders of the capital securities under the trust agreement.
None of us, the property trustee, any paying agent or the securities
registrar for the capital 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 capital security representing the
capital securities or for maintaining, supervising or reviewing any records
relating to the beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of
the liquidation amount or distributions in respect of a global capital
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the
aggregate liquidation amount of the global capital security as shown on the
records of DTC or its nominee. We also expect that payments by participants
to owners of beneficial interests in the global capital security held through
the participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name." The payments will be
the responsibility of the participants. See "Book-Entry Issuance."
PAYMENT AND PAYING AGENCY
Payments in respect of the capital securities shall be made to DTC,
which shall credit the relevant accounts of participants on the applicable
distribution dates, or, if any of the capital securities are not held by DTC,
the payments shall be made by check mailed to the address of the holder as
listed on the register of holders of the capital securities. The paying agent
for the capital securities will initially be the property trustee and any
co-paying agent chosen by the property trustee and acceptable to us and the
administrative trustees. The paying agent for the capital securities may resign
as paying agent upon 30 days' written notice to the administrative trustees, the
property trustee and us. If the property trustee no longer is the paying agent
for the capital securities, the administrative trustees will appoint a successor
to act as paying agent. The successor must be a bank or trust company acceptable
to us and the property trustee.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as the registrar and the transfer agent
for the capital securities. Registration of transfers of capital securities will
be effected without charge by or on behalf of the trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The trust and its registrar and transfer agent will not be
required to register or cause to be registered the transfer of capital
securities after they have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, until the occurrence and continuance of an event
of default under the trust agreement, undertakes to perform only the duties set
forth in the trust agreement. After an event of default under the trust
agreement, the property trustee must exercise the same degree of care and skill
as a prudent person exercises or uses in the conduct of its own affairs. 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 capital securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred. If no event of default under the trust
agreement 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 capital
securities are entitled to vote upon, then the property trustee will take the
action directed in writing by us. If the property trustee is not so directed,
then it will take the action 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.
33
<PAGE>
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct
the affairs of and to operate the trust in such a way that:
- the trust will not be deemed to be an "investment company"
required to be registered under the Investment Company Act;
- the trust will not be classified as an association taxable as
a corporation for federal income tax purposes; and
- the debentures will be treated as indebtedness of Heartland
Financial for federal income tax purposes.
In this regard, we and the administrative trustees are authorized to take any
action not inconsistent with applicable law, the certificate of trust or the
trust agreement, that we and the administrative trustees determine to be
necessary or desirable for these purposes.
Holders of the capital securities have no preemptive or similar rights.
The trust agreement and the capital securities will be governed by Delaware law.
DESCRIPTION OF THE DEBENTURES
Concurrently with the issuance of the capital securities, the trust
will invest the proceeds from the sale of the trust securities in the debentures
issued by us. The debentures will be issued as unsecured debt under the
indenture between us and First Union, as trustee (the "indenture trustee"). The
indenture will be qualified under the Trust Indenture Act.
The following discussion is subject to, and is qualified in its
entirety by reference to, the indenture and to the Trust Indenture Act. We urge
prospective investors to read the form of the indenture, which is filed as an
exhibit to the registration statement of which this prospectus forms a part.
GENERAL
The debentures will be limited in aggregate principal amount to $25.78
million. This amount represents the sum of the aggregate stated liquidation
amounts of the trust securities. The debentures will bear interest at the annual
rate of 9.60% of the principal amount. The interest will be payable quarterly on
March 31, June 30, September 30 and December 31 of each year, beginning December
31, 1999, to the person in whose name each debenture is registered at the close
of business on the business day immediately preceding the day interest is due.
It is anticipated that, until the liquidation, if any, of the trust, the
debentures will be held in the name of the property trustee in trust for the
benefit of the holders of the trust securities.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. If any date on which interest
is payable on the debentures is not a business day, then payment of interest
will be made on the next day that is a business day without any additional
interest or other payment in respect of the delay. However, if the next business
day is in the next calendar year, payment of the interest will be made on the
immediately preceding business day. Accrued interest that is not paid on the
applicable interest payment date will bear additional interest on the amount due
at the annual rate of 9.60%, compounded quarterly. The term "interest," includes
quarterly interest payments, interest on quarterly interest payments not paid on
the applicable interest payment date and additional interest, as applicable.
34
<PAGE>
The debentures will mature on September 30, 2029, the stated maturity
date. We may shorten this date once at any time to any date not earlier than
September 30, 2004, subject to the prior approval of the Federal Reserve, if
required.
We will give notice to the indenture trustee and the holders of the
debentures, no more than 180 days and no less than 90 days prior to the
effectiveness of any change in the stated maturity date. We will not have the
right to redeem the debentures from the trust until after September 30, 2004,
except if a Tax Event, an Investment Company Event or a Capital Treatment Event
has occurred.
The debentures will be unsecured and will rank junior to all of our
senior and subordinated indebtedness. Because we are a holding company, our
right to participate in any distribution of assets of any of our subsidiaries,
upon any subsidiary's liquidation or reorganization or otherwise, and thus the
ability of holders of the debentures to benefit indirectly from any distribution
by a subsidiary, is subject to the prior claim of creditors of the subsidiary,
except to the extent that we may be recognized as a creditor of the subsidiary.
The debentures will, therefore, be effectively subordinated to all existing and
future liabilities of our subsidiaries, and holders of debentures should look
only to our assets for payment. The indenture does not limit our ability to
incur or issue secured or unsecured senior and junior debt. See
"--Subordination."
The indenture does not contain provisions that afford holders of the
debentures protection in the event of a highly leveraged transaction or other
similar transaction involving us, nor does it require us to maintain or achieve
any financial performance levels or to obtain or maintain any credit rating on
the debentures.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
As long as no event of default under the indenture has occurred and is
continuing, we have the right under the indenture to defer the payment of
interest on the debentures at any time for a period not exceeding 20 consecutive
quarters. However, no extension period may extend beyond the stated maturity of
the debentures or end on a date other than a date interest is normally due. At
the end of an extension period, we must pay all interest then accrued and
unpaid, together with interest thereon at the annual rate of 9.60%, compounded
quarterly. During an extension period, interest will continue to accrue and
holders of debentures, or the holders of capital securities if they are then
outstanding, will be required to accrue and recognize as income for federal
income tax purposes the accrued but unpaid interest amounts in the year in which
such amounts accrued. See "Federal Income Tax Consequences--Interest Payment
Period and Original Issue Discount."
During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect
to, any of our capital stock (other than the reclassification
of any class of capital stock into another class of capital
stock) or allow any of our subsidiaries to do the same with
respect to their capital stock (other than payment of
dividends or distributions to us);
- make or allow any of our subsidiaries to make any payment of
principal, interest or premium on, or repay, repurchase or
redeem any debt securities issued by us that rank equally with
or junior to the debentures;
- make or allow any of our subsidiaries to make any guarantee
payments with respect to any other guarantee by us of any
other debt securities of any of our subsidiaries if the
guarantee ranks equally with or junior to the debentures
(other than payments under the guarantee); or
- redeem, purchase or acquire less than all of the debentures or
any of the capital securities.
Prior to the termination of any extension period, so long as no event
of default under the indenture is continuing, we may further defer the payment
of interest subject to the above stated requirements. Upon the termination of
any extension period and the payment of all amounts then due, we may elect to
begin a new
35
<PAGE>
extension period at any time. We do not currently intend to exercise our
right to defer payments of interest on the debentures.
We must give the property trustee, the administrative trustees and
the indenture trustee notice of our election of an extension period at least
two business days prior to the earlier of (a) the next date on which
distributions on the trust securities would have been payable except for the
election to begin an extension period, or (b) the date we are required to
give notice of the record date, or the date the distributions are payable, to
the American Stock Exchange, or other applicable self-regulatory
organization, or to holders of the capital securities, but in any event at
least one business day prior to the record date.
Other than as described above, there is no limitation on the number
of times that we may elect to begin an extension period.
ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES
If the trust is required to pay any additional taxes, duties or
other governmental charges as a result of the occurrence of a Tax Event, we
will pay as additional amounts on the debentures any amounts which may be
required so that the net amounts received and retained by the trust after
paying any additional taxes, duties or other governmental charges will not be
less than the amounts the trust would have received had the additional taxes,
duties or other governmental charges not been imposed.
REDEMPTION OR EXCHANGE
Subject to prior approval of the Federal Reserve, if required, we may
redeem the debentures prior to maturity:
- on or after September 30, 2004, in whole at any time or in
part from time to time;
- in whole at any time within 90 days following the occurrence
of a Tax Event, an Investment Company Event or a Capital
Treatment Event; or
- at any time, to the extent of any capital securities we
repurchase.
In each case we will pay a redemption price equal to the accrued and unpaid
interest on the debentures so redeemed to the date fixed for redemption, plus
100% of the principal amount of the debentures.
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 debentures to be
redeemed at its registered address. Redemption of less than all outstanding
debentures must be effected proportionately, by lot or in any other manner
deemed to be fair by the indenture trustee. Unless we default in payment of the
redemption price for the debentures, on and after the redemption date interest
will no longer accrue on the debentures or the portions of the debentures called
for redemption.
The debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Capital Securities-Liquidation
Distribution Upon Termination," under certain circumstances and with the Federal
Reserve's approval, the debentures may be distributed to the holders of the
capital securities in liquidation of the trust after satisfaction of liabilities
to creditors of the trust. If this occurs, we will use our reasonable efforts to
list the debentures on the American Stock Exchange or other stock exchange or
national quotation system on which the capital securities are then listed, if
any. There can be no assurance as to the market price of any debentures that may
be distributed to the holders of capital securities.
36
<PAGE>
RESTRICTIONS ON PAYMENTS
We are restricted from making certain payments (as described below)
if we have chosen to defer payment of interest on the debentures, an event of
default has occurred and is continuing under the indenture or we are in
default with respect to our obligations under the guarantee.
If either of these events shall have occurred, we will not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect
to, any of our capital stock (other than the reclassification
of any class of our capital stock into another class of
capital stock) or allow any of our subsidiaries to do the same
with respect to their capital stock (other than payment of
dividends or distributions to us);
- make or allow any of our subsidiaries to make any payment of
principal, interest or premium on, or repay or repurchase or
redeem any of our debt securities that rank equally with or
junior to the debentures;
- make or allow any of our subsidiaries to make any guarantee
payments with respect to any guarantee by us of the debt
securities of any of our subsidiaries if the guarantee ranks
equally with or junior to the debentures (other than payments
under the guarantee); or
- redeem, purchase or acquire less than all of the debentures or
any of the capital securities.
SUBORDINATION
The debentures are subordinated and junior in right of payment to
all of our senior and subordinated debt (as defined below). 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
proceedings of Heartland Financial, the holders of our senior and
subordinated debt will first be entitled to receive payment in full of
principal and interest before the holders of debentures will be entitled to
receive or retain any payment in respect of the debentures.
If the maturity of any debentures is accelerated, the holders of all of
our senior and subordinated debt outstanding at the time of the acceleration
will also be entitled to first receive payment in full of all amounts due to
such holders, including any amounts due upon acceleration, before the holders of
the debentures will be entitled to receive or retain any payment in respect of
the principal of or interest on the debentures.
No payments of principal or interest on the debentures may be made if
there has occurred and is continuing a default in any payment with respect to
any of our senior or subordinated debt or an event of default with respect to
any of our senior or subordinated debt resulting in the acceleration of the
maturity of the senior or subordinated debt, or if any judicial proceeding is
pending with respect to any default.
The term "debt" means, with respect to any entity, whether recourse
is to all or a portion of the assets of the entity and whether or not
contingent:
- every obligation of the entity for money borrowed;
- every obligation of the entity evidenced by bonds, debentures,
notes or other similar instruments, including obligations
incurred in connection with the acquisition of property,
assets or businesses;
- every reimbursement obligation of the entity with respect to
letters of credit, bankers' acceptances or similar facilities
issued for the account of the entity;
37
<PAGE>
- every obligation of the entity issued or assumed as the
deferred purchase price of property or services, excluding
trade accounts payable or accrued liabilities arising in the
ordinary course of business;
- every capital lease obligation of the entity; and
- every obligation of the type referred to in the first five
points of another entity and all dividends of another entity
the payment of which, in either case, the first entity has
guaranteed or is responsible or liable, directly or
indirectly, as obligor or otherwise.
The term "senior debt" means the principal of and premium and interest,
including interest accruing on or after the filing of any petition in bankruptcy
or for reorganization relating to us, on debt, whether incurred on or prior to
the date of the indenture or incurred after the date. Senior debt also includes
all indebtedness, whether incurred on or prior to the date of the indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements. However, senior debt will not be deemed to include:
- any debt where it is provided in the instrument creating the
debt that the obligations are not superior in right of payment
to the debentures or to other debt which is equal with, or
subordinated to, the debentures;
- any of our debt that when incurred and without regard to any
election under the federal bankruptcy laws, was without
recourse to us;
- any debt of ours to any of our subsidiaries;
- any debt to any of our employees;
- any debt that by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course
of business to the extent that payments made to the holders of
the debt by the holders of the debentures as a result of the
subordination provisions of the indenture would be greater
than they otherwise would have been as a result of any
obligation of the holders to pay amounts over to the obligees
on the trade accounts payable or accrued liabilities arising
in the ordinary course of business as a result of
subordination provisions to which the debt is subject; and
- debt which constitutes subordinated debt.
The term "subordinated debt" means the principal of, premium and
interest, including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to us, on debt. Subordinated debt
includes debt incurred on or prior to the date of the indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other debt of ours, other than the debentures. However, subordinated debt
will not be deemed to include:
- any of our debt which when incurred and without regard to any
election under the federal bankruptcy laws was without
recourse to us;
- any debt of ours to any of our subsidiaries;
- any debt to any of our employees;
- any debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course
of business to the extent that payments made to the holders of
the debt by the holders of the debentures as a result of the
subordination provisions of the indenture would be
38
<PAGE>
greater than they otherwise would have been as a result of any
obligation of the holders to pay amounts over to the obligees
on the trade accounts payable or accrued liabilities arising
in the ordinary course of business as a result of
subordination provisions to which the debt is subject;
- debt which constitutes senior debt; and
- any debt of ours under debt securities (and guarantees in
respect of these debt securities) initially issued to any
trust, or a trustee of a trust, partnership or other entity
affiliated with us that is, directly or indirectly, our
financing vehicle in connection with the issuance by that
entity of preferred securities or other securities which are
intended to qualify for "Tier 1" capital treatment.
We expect from time to time to incur additional indebtedness, and
there is no limitation under the indenture on the amount we may incur. We had
consolidated senior and subordinated debt of approximately $195.4 million at
June 30, 1999. We also incurred additional indebtedness of $20.0 million
after this date under the loan agreement with The Northern Trust Company.
Although a portion of these amounts are expected to be repaid with a portion
of the proceeds from the sale of the debentures, additional senior or
subordinated debt can be expected to be incurred in the future.
PAYMENT AND PAYING AGENTS
Generally, payment of principal of and interest on the debentures
will be made at the office of the indenture trustee in Wilmington, Delaware.
However, we have the option to make payment of any interest by (a) check
mailed to the address of the person entitled to payment at the address listed
in the register of holders of the debentures, or (b) transfer to an account
maintained by the person entitled thereto as specified in the register of
holders of the debentures, provided that proper transfer instructions have
been received by the applicable record date. Payment of any interest on
debentures will be made to the person in whose name the debenture is
registered at the close of business on the regular record date for the
interest payment, except in the case of defaulted interest.
Any moneys deposited with the indenture trustee or any paying agent
for the debentures, or then held by us in trust, for the payment of the
principal of or interest on the debentures and remaining unclaimed for two
years after the principal or interest has become due and payable, will be
repaid to us on May 31 of each year. If we hold any of this money in trust,
then it will be discharged from the trust to us and the holder of the
debenture will thereafter look, as a general unsecured creditor, only to us
for payment.
REGISTRAR AND TRANSFER AGENT
The indenture trustee will act as the registrar and the transfer
agent for the debentures. Debentures 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
registrar. Provided that we maintain a transfer agent in Wilmington,
Delaware, we may rescind the designation of any transfer agent or approve a
change in the location through which any transfer agent acts. We may at any
time designate additional transfer agents with respect to the debentures.
If we redeem any of the debentures, neither we nor the indenture
trustee will be required to (a) issue, register the transfer of or exchange
debentures during a period beginning at the opening of business 15 days
before the day of selection for redemption of debentures and ending at the
close of business on the day of mailing of the relevant notice of redemption,
or (b) transfer or exchange any debentures so selected for redemption,
except, in the case of any debentures being redeemed in part, any portion not
to be redeemed.
MODIFICATION OF INDENTURE
We and the indenture trustee may, from time to time without the
consent of the holders of the debentures, amend, waive our rights under or
supplement the indenture for purposes which do not materially
39
<PAGE>
adversely affect the rights of the holders of the debentures. Other changes
may be made by us and the indenture trustee with the consent of the holders
of a majority in principal amount of the outstanding debentures. However,
without the consent of the holder of each outstanding debenture affected by
the proposed modification, no modification may:
- extend the maturity date of the debentures; or
- reduce the principal amount or the rate or extend the time of
payment of interest; or
- reduce the percentage of principal amount of debentures
required to amend the indenture.
As long as any of the capital securities remain outstanding, no modification of
the indenture may be made that requires the consent of the holders of the
debentures, no termination of the indenture may occur, and no waiver of any
event of default under the indenture may be effective, without the prior consent
of the holders of a majority of the aggregate liquidation amount of the capital
securities.
DEBENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following events
with respect to the debentures that has occurred and is continuing constitutes
an event of default under the indenture:
- our failure to pay any interest on the debentures for 30 days
after the due date, except where we have properly deferred the
interest payment;
- our failure to pay any principal on the debentures when due
whether at maturity, upon redemption or otherwise;
- our failure to observe or perform in any material respect
other covenants contained in the indenture for 90 days after
written notice to us from the indenture trustee or the holders
of at least 25% in aggregate outstanding principal amount of
the debentures; or
- our bankruptcy, insolvency or reorganization or dissolution of
the trust.
The holders of a majority of the aggregate outstanding principal
amount of the 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 at least 25% in aggregate
outstanding principal amount of the debentures, may declare the principal due
and payable immediately upon an event of default under the indenture. The
holders of a majority of the outstanding principal amount of the debentures
may annul the declaration and waive the default if the default has been cured
and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration, has been deposited with the
indenture trustee. The holders may not annul the declaration and waive a
default if the default is the non-payment of the principal of the debentures
which has become due solely by the acceleration. Should the holders of the
debentures fail to annul the declaration and waive the default, the holders
of at least 25% in aggregate liquidation amount of the capital securities
will have this right.
If an event of default under the indenture has occurred and is
continuing, the property trustee will have the right to declare the principal
of and the interest on the debentures, and any other amounts payable under
the indenture, to be immediately due and payable and to enforce its other
rights as a creditor with respect to the debentures.
We are required to file annually with the indenture trustee a
certificate as to whether or not we are in compliance with all of the
conditions and covenants applicable to us under the indenture.
40
<PAGE>
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE CAPITAL SECURITIES
If an event of default under the indenture has occurred and is
continuing and the event is attributable to the failure by us to pay interest
on or principal of the debentures on the date on which the payment is due and
payable, then a holder of capital securities may institute a direct action
against us to compel us to make the payment. We may not amend the indenture
to remove the foregoing right to bring a direct action without the prior
written consent of all of the holders of the capital securities. If the right
to bring a direct action is removed, the trust may become subject to the
reporting obligations under the Securities Exchange Act of 1934.
The holders of the capital securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the debentures unless there has been an event of
default under the trust agreement. See "Description of the Capital
Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity or convey
or transfer our properties and assets substantially as an entirety to any
entity, and no entity may be consolidated with or merged into us or sell,
convey, transfer or otherwise dispose of its properties and assets
substantially as an entirety to us, unless:
- if we consolidate with or merge into another person or convey
or transfer our properties and assets substantially as an
entirety to any person, the successor person is organized
under the laws of the United States or any State or the
District of Columbia, and the successor person expressly
assumes by supplemental indenture our obligations on the
debentures, or substitutes securities having substantially
similar terms;
- immediately after the transaction, no event of default under
the indenture, and no event which, after notice or lapse of
time, or both, would become an event of default under the
indenture, has occurred and is continuing; and
- other conditions as prescribed in the indenture are met.
SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect and we will be deemed
to have satisfied and discharged our obligations under the indenture when all
debentures not previously delivered to the indenture trustee for cancellation:
- have become due and payable;
- will become due and payable at their stated maturity within
one year or are to be called for redemption within one year,
and we deposit or cause to be deposited with the indenture
trustee funds, in trust, for the purpose and in an amount
sufficient to pay and discharge the entire indebtedness on the
debentures not previously delivered to the indenture trustee
for cancellation, for the principal and interest due to the
date of the deposit or to the stated maturity or redemption
date, as the case may be.
We may still be required to provide officers' certificates, opinions of
counsel and pay fees and expenses due after these events occur.
GOVERNING LAW
The indenture and the debentures will be governed by and construed in
accordance with the laws of the State of Delaware.
41
<PAGE>
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the
Trust Indenture Act. Subject to these provisions, the indenture trustee is
under no obligation to exercise any of the powers vested in it by the
indenture at the request of any holder of debentures, unless offered
reasonable indemnity by the holder against the costs, expenses and
liabilities which might be incurred. The indenture trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability
in the performance of its duties if the indenture trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it.
MISCELLANEOUS
We have agreed, pursuant to the indenture, for so long as capital
securities remain outstanding:
- to maintain directly or indirectly 100% ownership of the
common securities of the trust, except that certain successors
that are permitted pursuant to the indenture may succeed to
our ownership of the common securities;
- not to voluntarily terminate, wind up or liquidate the trust
without prior approval of the Federal Reserve, if required;
- to use our reasonable efforts to cause the trust (a) to remain
a business trust (and to avoid involuntary termination,
winding up or liquidation), except in connection with a
distribution of debentures, the redemption of all of the trust
securities of the trust or mergers, consolidations or
amalgamations, each as permitted by the trust agreement; and
(b) to otherwise continue not to be treated as an association
taxable as a corporation or partnership for federal income tax
purposes; and
- to use our reasonable efforts to cause each holder of trust
securities to be treated as owning an individual beneficial
interest in the debentures.
BOOK-ENTRY ISSUANCE
GENERAL
DTC will act as securities depositary for the capital securities and
may act as securities depositary for all of the debentures in the event of the
distribution of the debentures to the holders of capital securities. Except as
described, the capital securities will be issued only as registered securities
in the name of Cede & Co. (DTC's nominee). One or more global capital securities
will be issued for the capital securities and will be deposited with DTC.
DTC is a limited purpose trust company organized under 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 Section 17A of the Securities Exchange Act of 1934. DTC
holds securities that its participants deposit with DTC. DTC 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. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to indirect participants, such as securities brokers and dealers,
banks and trust companies that clear through or maintain custodial relationships
with direct participants, either directly or indirectly. The rules applicable to
DTC and its participants are on file with the SEC.
42
<PAGE>
Purchases of capital securities within the DTC system must be made
by or through direct participants, which will receive a credit for the
capital securities on DTC's records. The ownership interest of each actual
purchaser of each capital security ("beneficial owner") is in turn to be
recorded on the direct and indirect participant's records. Beneficial owners
will not receive written confirmation from DTC 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 capital securities. Transfers of ownership
interests in the capital securities 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 interest in
capital securities, except if use of the book-entry system for the capital
securities is discontinued.
DTC will have no knowledge of the actual beneficial owners of the
capital securities; DTC's records reflect only the identity of the direct
participants to whose accounts the capital securities 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.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that we believe to be accurate, but we
and the trust assume no responsibility for the accuracy thereof. Neither we
nor the trust have any responsibility for the performance by DTC or its
participants of their respective obligations as described in this prospectus
or under the rules and procedures governing their respective operations.
NOTICES AND VOTING
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
and indirect participants to 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 capital securities. If less than all of the capital securities
are being redeemed, the amount to be redeemed will be determined in
accordance with the trust agreement.
Although voting with respect to the capital securities is limited to
the holders of record of the capital securities, in those instances in which
a vote is required, neither DTC nor Cede & Co. will itself consent or vote
with respect to capital securities. Under its usual procedures, DTC would
mail an omnibus proxy to the property trustee as soon as possible after the
record date. The omnibus proxy assigns Cede & Co.'s consenting or voting
rights to those direct participants to whose accounts the capital securities
are credited on the record date.
DISTRIBUTION OF FUNDS
The property trustee will make distribution payments on the capital
securities to DTC. DTC's practice is to credit direct participants' accounts
on the relevant payment date in accordance with their respective holdings
shown on DTC's records unless DTC has reason to believe that it will not
receive payments on the payment date. Payments by participants to beneficial
owners will be governed by standing instructions and customary practices and
will be the responsibility of the participant and not of DTC, the property
trustee, the trust or us, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of distributions to DTC is the
responsibility of the property trustee, disbursement of the payments to
direct participants is the responsibility of DTC, and disbursements of the
payments to the beneficial owners is the responsibility of direct and
indirect participants.
43
<PAGE>
SUCCESSOR DEPOSITARIES AND TERMINATION OF BOOK-ENTRY SYSTEM
DTC may discontinue providing its services with respect to any of
the capital securities at any time by giving reasonable notice to the
property trustee and us. If no successor securities depositary is obtained,
definitive capital securities representing the capital securities are
required to be printed and delivered. We also have the option to discontinue
use of the system of book-entry transfers through DTC (or a successor
depositary). After an event of default under the indenture, the holders of a
majority in liquidation amount of capital securities may determine to
discontinue the system of book-entry transfers through DTC. In these events,
definitive certificates for the capital securities will be printed and
delivered.
DESCRIPTION OF THE GUARANTEE
The capital securities guarantee agreement will be executed and
delivered by us concurrently with the issuance of the capital securities for the
benefit of the holders of the capital securities. The guarantee agreement will
be qualified as an indenture under the Trust Indenture Act. First Union, the
guarantee trustee, will act as trustee for purposes of complying with the
provisions of the Trust Indenture Act, and will also hold the guarantee for the
benefit of the holders of the capital securities. Prospective investors are
urged to read the form of the guarantee agreement, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
GENERAL
We agree to pay in full on a subordinated basis, to the extent
described in the guarantee agreement, the guarantee payments (as defined
below) to the holders of the capital securities, as and when due, regardless
of any defense or counterclaim that the trust may have or assert other than
the defense of payment.
The following payments with respect to the capital securities are
called the "guarantee payments" and, to the extent not paid or made by the
trust and to the extent that the trust has funds available for those
distributions, will be subject to the guarantee:
- any accumulated and unpaid distributions required to be paid
on the capital securities;
- with respect to any capital securities called for redemption,
the redemption price; and
- upon a voluntary or involuntary dissolution, winding up or
liquidation of the trust (other than in connection with the
distribution of debentures to the holders of capital
securities or a redemption of all of the capital securities),
the lesser of:
(a) the amount of the liquidation distribution; and
(b) the amount of assets of the trust remaining available
for distribution to holders of capital securities in
liquidation of the trust.
We may satisfy our obligations to make a guarantee payment by making a direct
payment of the required amounts to the holders of the capital securities or
by causing the trust to pay the amounts to the holders.
The guarantee agreement is a guarantee, on a subordinated basis, of
the guarantee payments, but the guarantee only applies to the extent the
trust has funds available for those distributions. If we do not make interest
payments on the debentures purchased by the trust, the trust will not have
funds available to make the distributions and will not pay distributions on
the capital securities.
44
<PAGE>
STATUS OF THE GUARANTEE
The guarantee constitutes our unsecured obligation that ranks junior
in right of payment to all of our senior and subordinated debt in the same
manner as the debentures and senior to our capital stock. We expect to incur
additional indebtedness in the future, although we have no specific plans in
this regard presently, and neither the indenture nor the trust agreement
limits the amounts of the obligations that we may incur.
The guarantee constitutes a guarantee of payment and not of collection.
If we fail to make guarantee payments when required, holders of capital
securities may institute a legal proceeding directly against us to enforce their
rights under the guarantee without first instituting a legal proceeding against
any other person or entity.
The guarantee will not be discharged except by payment of the guarantee
payments in full to the extent not paid by the trust or upon distribution of the
debentures to the holders of the capital securities. Because we are a holding
company, our right to participate in any distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of that subsidiary, except to the
extent we may be recognized as a creditor of that subsidiary. Our obligations
under the guarantee, therefore, will be effectively subordinated to all existing
and future liabilities of our subsidiaries, and claimants should look only to
our assets for payments under the guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the capital securities, in which case no vote
will be required, the guarantee may be amended only with the prior approval of
the holders of a majority of the aggregate liquidation amount of the outstanding
capital securities. See "Description of the Capital Securities--Voting Rights;
Amendment of Trust Agreement."
EVENTS OF DEFAULT; REMEDIES
An event of default under the guarantee agreement will occur upon our
failure to make any required guarantee payments or to perform any other
obligations under the guarantee. The holders of a majority in aggregate
liquidation amount of the capital securities will 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 and may direct the exercise of
any power conferred upon the guarantee trustee under the guarantee agreement.
Any holder of capital securities may institute and prosecute a legal
proceeding directly against us to enforce its rights under the guarantee without
first instituting a legal proceeding against the trust, the guarantee trustee or
any other person or entity.
We are required to provide to the guarantee trustee annually a
certificate as to whether or not we are in compliance with all of the conditions
and covenants applicable to us under the guarantee agreement.
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 capital
securities;
- full payment of the amounts payable upon liquidation of the
trust; or
- distribution of the debentures to the holders of the capital
securities.
45
<PAGE>
If at any time any holder of the capital securities must restore payment of
any sums paid under the capital securities or the guarantee, the guarantee
will continue to be effective or will be reinstated with respect to such
amounts.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and
continuance of our default in performance of the guarantee, undertakes to
perform only those duties as are specifically set forth in the guarantee.
When an event of default has occurred and is continuing, the guarantee
trustee must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to
those provisions, 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 any capital securities unless it is offered reasonable indemnity against
the costs, expenses and liabilities that might be incurred thereby.
EXPENSE AGREEMENT
We will, pursuant to the Agreement as to Expenses and Liabilities
entered into by us and the trust under the trust agreement, irrevocably and
unconditionally guarantee to each person or entity to whom the trust becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
the trust, other than obligations of the trust to pay to the holders of the
capital securities or other similar interests in the trust of the amounts due
to the holders pursuant to the terms of the capital securities or other
similar interests, as the case may be. Third party creditors of the trust may
proceed directly against us under the expense agreement, regardless of
whether they had notice of the expense agreement.
GOVERNING LAW
The guarantee will be governed by the laws of the State of Delaware.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
We irrevocably guarantee, as and to the extent described in this
prospectus, payments of distributions and other amounts due on the capital
securities, to the extent the trust has funds available for the payment of
these amounts. We and the trust believe that, taken together, our obligations
under the debentures, the indenture, the trust agreement, the expense
agreement and the guarantee agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of payment
of distributions and other amounts due on the capital securities. No single
document standing alone or operating in conjunction with fewer than all of
the other documents constitutes a guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the obligations of the trust under
the capital securities.
If and to the extent that we do not make payments on the debentures,
the trust will not pay distributions or other amounts due on the capital
securities. The guarantee does not cover payment of distributions when the
trust does not have sufficient funds to pay the distributions. In this event,
the remedy of a holder of capital securities is to institute a legal
proceeding directly against us for enforcement of payment of the
distributions to the holder. Our obligations under the guarantee are
subordinated and junior in right of payment to all of our other indebtedness.
46
<PAGE>
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due
on the debentures, these payments will be sufficient to cover distributions
and other payments due on the capital securities, primarily because:
- the aggregate principal amount of the debentures will be equal
to the sum of the aggregate stated liquidation amount of the
trust securities;
- the interest rate and interest and other payment dates on the
debentures will match the distribution rate and distribution
and other payment dates for the capital securities;
- we will pay for any and all costs, expenses and liabilities of
the trust, except the obligations of the trust to pay to
holders of the capital securities the amounts due to the
holders pursuant to the terms of the capital securities; and
- the trust will not engage in any activity that is not
consistent with the limited purposes of the trust.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any capital security may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against the guarantee trustee, the trust or
any other person. A default or event of default under any of our senior or
subordinated debt would not constitute a default or event of default under
the trust agreement. In the event, however, of payment defaults under, or
acceleration of, our senior or subordinated debt, the subordination
provisions of the indenture provide that no payments may be made in respect
of the debentures until the obligations have been paid in full or any payment
default has been cured or waived. Failure to make required payments on the
debentures would constitute an event of default under the trust agreement.
LIMITED PURPOSE OF THE TRUST
The capital securities evidence preferred undivided beneficial
interests in the assets of the trust. The trust exists for the exclusive
purposes of issuing the trust securities, investing the proceeds thereof in
debentures and engaging in only those other activities necessary, advisable
or incidental thereto. A principal difference between the rights of a holder
of a capital security and the rights of a holder of a debenture is that a
holder of a debenture is entitled to receive from us the principal amount of
and interest accrued on debentures held, while a holder of capital securities
is entitled to receive distributions from the trust (or from us under the
guarantee) if and to the extent the trust has funds available for the payment
of the distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or
liquidation of the trust involving the liquidation of the debentures, the
holders of the capital securities will be entitled to receive, out of assets
held by the trust, the liquidation distribution in cash. See "Description of the
Capital Securities--Liquidation Distribution Upon Termination."
Upon our voluntary or involuntary liquidation or bankruptcy, the
property trustee, as holder of the debentures, would be a subordinated creditor
of ours. Therefore, the property trustee would be subordinated in right of
payment to all of our senior and subordinated debt, but is entitled to receive
payment in full of principal and interest before any of our stockholders receive
payments or distributions. Since we are the guarantor under the guarantee and
have agreed to pay for all costs, expenses and liabilities of the trust other
than the obligations of the trust to pay to holders of the capital securities
the amounts due to the holders pursuant to the terms of the capital securities,
the positions of a holder of the capital securities and a holder of the
debentures relative to our
47
<PAGE>
other creditors and to our stockholders in the event of liquidation or
bankruptcy are expected to be substantially the same.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of the material federal income tax
considerations that may be relevant to the purchasers of capital securities
represents the opinion of Barack Ferrazzano Kirschbaum Perlman & Nagelberg
counsel to Heartland Financial and the trust insofar as it relates to matters
of law and legal conclusions. The conclusions expressed herein are based upon
current provisions of the Internal Revenue Code of 1986, regulations
thereunder and current administrative rulings and court decisions, all of
which are subject to change at any time, with possible retroactive effect.
Subsequent changes may cause tax consequences to vary substantially from the
consequences described below. Furthermore, the authorities on which the
following summary is based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the purchase,
ownership and disposition of capital securities may differ from the treatment
described below.
No attempt has been made in the following discussion to comment on
all federal income tax matters affecting purchasers of capital securities.
Moreover, the discussion generally focuses on holders of capital securities
who are individual citizens or residents of the United States and who acquire
capital securities on their original issue at their offering price and hold
capital securities as capital assets. The discussion has only limited
application to dealers in securities, corporations, estates, trusts or
nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment, such as, for
example, banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies,
tax-exempt investors or persons that will hold the capital securities as a
position in a "straddle," as part of a "synthetic security" or "hedge," as
part of a "conversion transaction" or other integrated investment, or as
other than a capital asset. The following summary also does not address the
tax consequences to persons that have a functional currency other than the
U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of capital securities. Further, it does not include
any description of any alternative minimum tax consequences or the tax laws
of any state or local government or of any foreign government that may be
applicable to the capital securities. Accordingly, each prospective investor
should consult, and should rely exclusively on, the investor's own tax
advisors in analyzing the federal, state, local and foreign tax consequences
of the purchase, ownership or disposition of capital securities.
CLASSIFICATION OF THE DEBENTURES
In accordance with the opinion of Barack Ferrazzano Kirschbaum
Perlman & Nagelberg, we intend to take the position that the debentures will
be classified for federal income tax purposes as indebtedness of Heartland
Financial under current law, and, by acceptance of a capital security, each
holder covenants to treat the debentures as indebtedness and the capital
securities as evidence of an indirect beneficial ownership interest in the
debentures. No assurance can be given, however, that this position will not
be challenged by the Internal Revenue Service or, if challenged, that it will
not be successful. The remainder of this discussion assumes that the
debentures will be classified for federal income tax purposes as indebtedness
of Heartland Financial.
CLASSIFICATION OF THE TRUST
With respect to the capital securities, Barack Ferrazzano Kirschbaum
Perlman & Nagelberg, tax counsel for Heartland Financial and the trust, has
rendered its opinion generally to the effect that, under then current law and
assuming full compliance with the terms of the trust agreement and indenture,
the trust will be classified for federal income tax purposes as a grantor
trust and not as an association taxable as a corporation. Accordingly, for
federal income tax purposes, each holder of capital securities generally will
be treated as owning an undivided beneficial interest in the debentures, and
each holder will be required to include in its gross income
48
<PAGE>
any interest with respect to the debentures at the time such interest is
accrued or is received, in accordance with the holder's method of accounting.
If the debentures were determined to be subject to the original issue
discount ("OID") rules, each holder would instead be required to include in
its gross income any OID accrued with respect to its allocable share of the
debentures whether or not cash were actually distributed to the holder.
INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
United States persons (including cash basis taxpayers) that hold
debt instruments issued with OID must generally include such OID in income as
it accrues on a constant yield method even if there is not a corresponding
receipt of cash attributable to such income. A debt instrument such as the
debentures will generally be treated as issued with OID if the stated
interest on the instrument does not constitute "qualified stated interest."
Qualified stated interest is generally any one of a series of stated interest
payments on an instrument that are unconditionally payable at least annually
at a single fixed rate. In determining whether stated interest on an
instrument is unconditionally payable and thus constitutes qualified stated
interest, remote contingencies as to the timely payment of stated interest
are ignored. In the case of the debentures, we have concluded that the
likelihood of exercising our option to defer payments of interest is remote.
This is in part because we have a history of declaring dividends on our
common stock and we would be unable to continue making these dividends if we
deferred our payments under the debentures.
If the option to defer any payment of interest was determined not to be
"remote" or if Heartland Financial actually exercises its option to defer the
payment of interest, the debentures would be treated as issued with OID at the
time of issuance or at the time of such exercise, as the case may be, and all
stated interest would thereafter be treated as OID as long as the debentures
remained outstanding. In such event, all of a United States person's taxable
interest income in respect of the debentures would constitute OID that would
have to be included in income on a constant yield method before the receipt of
the cash attributable to such income, regardless of such person's method of tax
accounting, and actual distributions of stated interest would not be reported as
taxable income. Consequently, a holder of capital securities would be required
to include such OID in gross income even though Heartland Financial would not
make any actual cash payments during an Extension Period.
The above information is based on recently promulgated Treasury
Regulations, which have not been interpreted by any court decisions or
addressed in any ruling or other pronouncements of the IRS, and it is
possible that the IRS could take a position contrary to the conclusions
herein.
Because income on the capital securities will constitute interest,
corporate holders of capital securities will not be entitled to a
dividends-received deduction with respect to any income recognized with
respect to the capital securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of capital securities other than a holder who purchased the
capital securities upon original issuance may be considered to have acquired
their undivided interests in the debentures with "market discount" or
"acquisition premium" as these phrases are defined for federal income tax
purposes. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
capital securities.
RECEIPT OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under the circumstances described under "Description of the Capital
Securities--Redemption or Exchange" and "--Liquidation Distribution Upon
Termination," the debentures may be distributed to holders of capital
securities upon a liquidation of the trust. Under current federal income tax
law, such a distribution would be treated as a nontaxable event to the holder
and would result in the holder having an aggregate tax basis in the
debentures received in the liquidation equal to the holder's aggregate tax
basis in the capital securities immediately before the distribution. A
holder's holding period in debentures received in liquidation of the trust
would include the period for which the holder held the capital securities.
49
<PAGE>
If, however, a Tax Event occurs which results in the trust being
treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to holders of the capital securities. Under
certain circumstances described herein, the debentures may be redeemed for
cash and the proceeds of the redemption distributed to holders in redemption
of their capital securities. Under current law, such a redemption should, to
the extent that it constitutes a complete redemption, constitute a taxable
disposition of the redeemed capital securities, and a holder for federal
income tax purposes, should recognize gain or loss as if the holder sold the
capital securities for cash.
DISPOSITION OF CAPITAL SECURITIES
A holder that sells capital securities will recognize gain or loss
equal to the difference between the amount realized on the sale of the
capital securities and the holder's adjusted tax basis in the capital
securities. A holder's adjusted tax basis in the capital securities generally
will be its initial purchase price increased by OID previously includible in
the holder's gross income to the date of disposition and decreased by
payments received on the capital securities to the date of disposition. A
gain or loss of this kind will generally be a capital gain or loss and will
be a long-term capital gain or loss if the capital securities have been held
for more than one year at the time of sale.
The capital securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the
underlying debentures. A holder that disposes of its capital securities
between record dates for payments of distributions thereon will be required
to include accrued but unpaid interest on the debentures through the date of
disposition in income as ordinary income, and to add the amount to its
adjusted tax basis in its proportionate share of the underlying debentures
deemed disposed of. To the extent the selling price is less than the holder's
adjusted tax basis a holder will recognize a capital loss. The adjusted basis
would include, in the form of OID, all accrued but unpaid interest. Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for federal income tax purposes.
EFFECT OF POSSIBLE CHANGES IN TAX LAWS
Congress and the Clinton Administration have considered certain
proposed tax law changes in the past that would, among other things,
generally deny corporate issuers a deduction for interest in respect of
certain debt obligations if the debt obligations have a maximum term in
excess of 15 years and are not shown as indebtedness on the issuer's
applicable consolidated balance sheet. Other proposed tax law changes would
have denied interest deductions if the term was in excess of 20 years.
Although these proposed tax law changes have not been enacted into law, there
can be no assurance that tax law changes will not be reintroduced into future
legislation which, if enacted after the date hereof, may adversely affect the
federal income tax deductibility of interest payable on the debentures.
Accordingly, there can be no assurance that a Tax Event will not occur. A Tax
Event would permit us, upon approval of the Federal Reserve if then required
to cause a redemption of the capital securities before, as well as after,
September 30, 2004. See "Description of the Debentures--Redemption or
Exchange" and "Description of the Capital Securities--Redemption or
Exchange--Redemption upon a Tax Event, Investment Company Event or Capital
Treatment Event."
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of qualified stated interest, or, if applicable, OID,
accrued on the capital securities held of record by individual citizens or
residents of the United States, or certain trusts, estates and partnerships,
will be reported to the Internal Revenue Service on Forms 1099-INT, or, where
applicable, forms 1099-OID, which forms should be mailed to the holders by
January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the capital securities may be subject to a "backup" withholding
tax (currently at 31%) unless the holder complies with certain identification
and other requirements. Any amounts withheld under the backup withholding
rules will be allowed as a credit against the holder's federal income tax
liability, provided the required information is provided to the Internal
Revenue Service.
50
<PAGE>
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF CAPITAL SECURITIES. HOLDERS OF CAPITAL
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
OTHER TAX LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement
Income Security Act of 1974, or Section 4975 of the Internal Revenue Code,
generally may purchase capital securities, subject to the investing
fiduciary's determination that the investment in capital securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments
by the plan.
In any case, we and/or any of our 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 Internal Revenue Code) with respect to
certain plans. These plans generally include plans maintained or sponsored by,
or contributed to by, any such persons with respect to which we or any of our
affiliates are a fiduciary or plans for which we or any of our affiliates
provide services. The acquisition and ownership of capital securities by a plan
(or by an individual retirement arrangement or other plans described in Section
4975(e)(1) of the Internal Revenue Code) with respect to which we or any of our
affiliates are considered a party in interest or a disqualified person may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Internal Revenue Code, unless the capital securities are acquired pursuant
to and in accordance with an applicable exemption.
As a result, plans with respect to which we or any of our affiliates or
any of its affiliates is a party in interest or a disqualified person should not
acquire capital securities unless the capital 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 Internal Revenue Code proposing to acquire capital securities should consult
with their own counsel.
UNDERWRITING
Heartland Financial, the trust, and the underwriters named below have
entered into an underwriting agreement with respect to the capital securities.
The underwriters, and the amount of capital securities that each of them has
agreed to purchase, are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER CAPITAL SECURITIES
------------ ------------------
<S> <C>
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated........ 800,000
Howe Barnes Investments, Inc........................................... 200,000
------------
Total.......................................................... 1,000,000
------------
------------
</TABLE>
The underwriters have agreed to purchase the capital securities on a
firm-commitment basis. That means that they will purchase all of the capital
securities if they purchase any of them. If one underwriter defaults under the
underwriting agreement, the purchase commitment of the other underwriter may be
increased or the underwriting agreement may be terminated.
51
<PAGE>
The underwriters have agreed to purchase the capital securities at the
price stated on the cover page of this prospectus. Because the trust will use
the proceeds from the sale of the capital securities to purchase the debentures
from us, we have agreed to pay the underwriters the following fees:
<TABLE>
<CAPTION>
Underwriting Fees
----------------
<S> <C>
Per Capital Security............. $ 0.97
Total............................ $970,000
</TABLE>
In addition to the underwriting fees, we estimate that we will spend
approximately $170,000 for printing, depository and trustees' fees, legal and
accounting fees, and other expenses of the offering.
The underwriters will initially offer the capital securities to the
public at the price stated on the cover page. The underwriters may offer
capital securities to selected dealers at the public-offering price less a
concession of up to $0.50 per capital security. Those dealers may reallow a
discount not in excess of $0.30 per capital security to other brokers and
dealers. After the initial offering of the capital securities, the
underwriters may change the offering price, concession, discount and other
selling terms. Heartland Financial and the underwriters have agreed that up
to approximately 12% of the capital securities will be reserved for sale to
employees, officers or directors of, or other individuals or entities
affiliated with, Heartland Financial and its subsidiaries. Any reserved
capital securities which are not confirmed for purchase will be offered by
the underwriters to the general public on the same terms as the other capital
securities offered by this prospectus.
In connection with the offering, the underwriters and their affiliates
may engage in transactions, effected in accordance with Rule 104 of the SEC's
Regulation M, that are intended to stabilize, maintain or otherwise affect the
market price of the capital securities. These transactions may include
transactions in which the underwriters create a short position for their own
account by selling more capital securities than they are committed to purchase
from the trust. In such a case, to cover all or part of the short position, the
underwriters may purchase capital securities in the open market following
completion of the initial offering. The underwriters also may engage in
stabilizing transactions in which they bid for, and purchase, the capital
securities at a level above that which might otherwise prevail in the open
market for the purpose of preventing or retarding a decline in the market price
of the capital securities. Any of these transactions may result in the
maintenance of a price for the capital securities at a level above that which
might otherwise prevail in the open market. Neither Heartland Financial nor the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
market price of the capital securities. The underwriters are not required to
engage in any of these transactions. These transactions may be effected on the
American Stock Exchange, and, if commenced, may be discontinued at any time
without notice.
Heartland Financial and the trust have agreed to indemnify the
underwriters against liabilities arising from the offering of the capital
securities, including civil liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in
connection with those liabilities.
The underwriters have advised us that they do not intend to confirm any
sales of trust preferred securities to any discretionary accounts. The
underwriters will comply with Rule 2810 under the NASD Conduct Rules when they
offer and sell the trust preferred securities because the National Association
of Securities Dealers, Inc. may view the trust preferred securities as interests
in a direct participation. The underwriters and their affiliates may provide
investment banking services for us or our affiliates in the future for which
they would expect to receive customary fees and commissions.
52
<PAGE>
LEGAL MATTERS
Legal matters, including matters relating to federal income tax
considerations, for Heartland Financial and the trust will be passed upon by
Barack Ferrazzano Kirschbaum Perlman & Nagelberg, Chicago, Illinois, counsel to
Heartland Financial and the trust. Certain legal matters will be passed upon for
the underwriters by Silver, Freedman & Taff, L.L.P., Washington, D.C. Barack
Ferrazzano Kirschbaum Perlman & Nagelberg and Silver, Freedman & Taff, L.L.P.
may rely on the opinion of Richards, Layton & Finger, P.A. as to matters of
Delaware law.
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form S-3 filed
by Heartland Financial and the trust with the Securities and Exchange Commission
under the Securities Act, with respect to the capital securities, the debentures
and the guarantee. This prospectus does not contain all the information set
forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to Heartland Financial and the securities offered by this
prospectus, reference is made to the registration statement, including the
exhibits to the registration statement and documents incorporated by reference.
Statements contained in this prospectus concerning the provisions of such
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Securities and Exchange Commission.
We file periodic reports, proxy statements and other information
with the SEC. Our filings are available to the public over the Internet at
the SEC's web site. The address of that site is http://www.sec.gov. You may
also inspect and copy these materials at the public reference facilities of
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well
as at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 75
Park Place, Room 1400, New York, New York 10007. Copies of such material can
be obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information.
The trust is not currently subject to the information reporting
requirements of the Securities Exchange Act of 1934 and although the trust will
become subject to such requirements upon the effectiveness of the Registration
Statement, it is not expected that the trust will be required to file separate
reports under the Securities Exchange Act of 1934.
We have not included separate financial statements of the trust in this
prospectus. We do not consider that separate financial statements would be
material to holders of capital securities because we will own all of the trust's
voting securities, the trust has no independent operations and we guarantee the
payments on the capital securities to the extent described in this prospectus.
Each holder of the trust securities will receive a copy of our annual
report at the same time as we furnish the annual report to the holders of our
common stock.
EXPERTS
The consolidated financial statements of Heartland Financial and its
subsidiaries as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, are incorporated herein by reference
to the Company's Annual Report on Form 10-K for the year ended December 31,
1998. These consolidated financial statements have been incorporated herein by
reference in reliance upon the report of KPMG LLP, independent certified public
accountants, which is incorporated herein by reference, and upon the authority
of that firm as experts in accounting and auditing.
53
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
We "incorporate by reference" into this prospectus the information in
documents we file with the Securities and Exchange Commission, which means that
we can disclose important information to you through those documents. The
information incorporated by reference is an important part of this prospectus.
Some information contained in this prospectus updates the information
incorporated by reference and some information that we file subsequently with
the SEC will automatically update this prospectus. We incorporate by reference
the documents listed below:
(a) our Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, filed with the SEC on March
31, 1999;
(b) our Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, filed with the SEC on May 16,
1999;
(c) our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, filed with the SEC on August 16,
1999; and
(d) our Current Report on Form 8-K filed on August 26,
1999, relating to the acquisition of National
Bancshares, Inc.
We also incorporate by reference any filings we make with the SEC under
sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after
the initial filing of the registration statement that contains this prospectus
and before the time that all of the securities offered in this prospectus are
sold.
You may request a copy of these filings at no cost by contacting us at
the following address:
Heartland Financial USA, Inc.
1398 Central Avenue
Dubuque, Iowa 52001
Attn: Jacquie M. Manternach
(319) 589-2000
54
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1,000,000 CAPITAL SECURITIES
HEARTLAND FINANCIAL CAPITAL TRUST I
9.60% CUMULATIVE CAPITAL SECURITIES
(LIQUIDATION AMOUNT $25 PER CAPITAL SECURITY)
GUARANTEED AS DESCRIBED IN THIS PROSPECTUS BY
HEARTLAND FINANCIAL USA, INC.
-------------------
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
HOWE BARNES INVESTMENTS, INC.
-------------------
October 18, 1999
-------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
