Filed pursuant to Rule 424(b)(3)
Registration Number 333-104103
THE COMMONWEALTH BANK
900 N. PARHAM ROAD
RICHMOND, VIRGINIA 23229
(804) 741-4600
April 9, 2003
Dear fellow shareholders:
You are cordially invited to attend a special meeting of shareholders of
The CommonWealth Bank ("CommonWealth") to be held at 3:00 p.m., local time, on
Wednesday, May 21, 2003 at the Retail Merchants Association of Greater Richmond,
5101 Monument Avenue, Richmond, Virginia. At the special meeting, you will be
asked to consider and vote upon a proposal to approve an agreement and plan of
merger pursuant to which CommonWealth will be merged with and into First
Community Bank, National Association ("First Community Bank").
If the merger agreement is approved and the merger is subsequently
completed, each outstanding share of CommonWealth common stock will be converted
into the right to receive:
- $30.50 in cash or
- a number of whole shares of common stock of First Community Bancshares,
Inc. ("First Community"), the holding company of First Community Bank,
determined by dividing $30.50 by the average closing price of First
Community common stock during a specified period preceding the merger,
plus cash in lieu of any fractional share interest.
You will have the opportunity to elect the form of consideration to be
received for your shares, subject to allocation procedures set forth in the
merger agreement which are intended to ensure that at least 50% and not more
than 60% of the outstanding shares of CommonWealth common stock will be
converted into the right to receive First Community common stock and the
remaining outstanding shares of CommonWealth common stock will be converted into
the right to receive cash.
The First Community common stock currently is traded on the Nasdaq National
Market under the symbol "FCBC." On April 8, 2003, the closing sale price of a
share of First Community common stock was $33.23.
The merger cannot be completed unless the holders of more than two-thirds
of the outstanding shares of CommonWealth common stock, voting in person or by
proxy, vote in favor of approval of the merger agreement at the special meeting.
Based on our reasons for the merger described herein, including the
fairness opinion issued by our financial advisor, Baxter, Fentriss & Co., our
board of directors believes that the merger is fair to you and in your best
interests. ACCORDINGLY OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
The accompanying document gives you detailed information about the special
meeting, the merger and related matters. We urge you to read this entire
document carefully, including the considerations discussed under "Risk Factors,"
beginning on page 12, and the annexes thereto, which include the merger
agreement.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please take the time to vote by completing and mailing the enclosed
proxy card. Failure to vote your shares at the special meeting will have the
same effect as a vote against the merger agreement.
We deeply appreciate your continuing loyalty and support, and we look
forward to seeing you at the special meeting.
Sincerely,
/s/ J.E. Causey Davis
J.E. Causey Davis
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE FIRST COMMUNITY COMMON STOCK TO BE
ISSUED IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF FIRST
COMMUNITY COMMON STOCK ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS
OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY ANY FEDERAL OR STATE
GOVERNMENTAL AGENCY.
This prospectus/proxy statement is dated April 9, 2003 and was first mailed
to shareholders of CommonWealth on or about April 14, 2003
THE COMMONWEALTH BANK
900 N. PARHAM ROAD
RICHMOND, VIRGINIA 23229
(804) 741-4600
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 21, 2003
---------------------
To the shareholders of The CommonWealth Bank:
We will hold a special meeting of shareholders of The CommonWealth Bank
("CommonWealth") at 3:00 p.m., local time, on Wednesday, May 21, 2003, at the
Retail Merchants Association of Greater Richmond, 5101 Monument Avenue,
Richmond, Virginia, for the following purposes:
1. to consider and vote upon a proposal to approve an agreement and plan of
merger, dated as of January 27, 2003 and amended as of February 25,
2003, among First Community Bancshares, Inc., First Community Bank,
National Association and CommonWealth, as described in the attached
document;
2. to consider and vote upon a proposal to adjourn the special meeting to a
later date or dates, if necessary, to permit further solicitation of
proxies if there are not sufficient votes at the time of the special
meeting to approve the merger agreement; and
3. to transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
We have fixed the close of business on April 8, 2003 as the record date for
the determination of shareholders entitled to notice of and to vote at the
special meeting. Only holders of CommonWealth common stock of record at the
close of business on that date will be entitled to notice of and to vote at the
special meeting or any adjournment or postponement of the special meeting.
OUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT IS IN THE
BEST INTERESTS OF COMMONWEALTH AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
Holders of CommonWealth common stock have the right to dissent from the
merger and assert dissenters' rights, provided the proper procedures of Article
15 of the Virginia Stock Corporation Act are followed. A copy of Article 15 is
attached as Annex III to the proxy statement/prospectus that accompanies this
notice.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please promptly complete, sign, date and return your proxy card in the
enclosed envelope. Failure to vote your shares by mail or in person at the
special meeting, will have the same effect as a vote against the merger
agreement.
By Order of the Board of Directors
/s/ J.E. Causey Davis
J.E. Causey Davis
President and Chief Executive Officer
Richmond, Virginia
April 9, 2003
REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about First Community Bancshares, Inc. ("First Community") from documents that
are not included in or delivered with this document. You can obtain documents
incorporated by reference in this document but not otherwise accompanying this
document by requesting them in writing or by telephone from First Community as
follows:
FIRST COMMUNITY BANCSHARES, INC.
ONE COMMUNITY PLACE
BLUEFIELD, VIRGINIA 24605
ATTENTION: ROBERT L. SCHUMACHER
(276) 326-9000
You will not be charged for any of these documents that you request. If you
would like to request documents, please do so by May 7, 2003 in order to receive
them before the special meeting.
For additional information regarding where you can find information about
First Community, please see "Where You Can Find More Information" beginning on
page 73.
i
TABLE OF CONTENTS
PAGE
-----
REFERENCES TO ADDITIONAL INFORMATION........................ i
QUESTIONS AND ANSWERS ABOUT VOTING PROCEDURES FOR THE
SPECIAL MEETING........................................... 1
SUMMARY..................................................... 2
RISK FACTORS................................................ 12
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 13
GENERAL INFORMATION......................................... 14
THE SPECIAL MEETING......................................... 15
Time, Date and Place...................................... 15
Matters to be Considered.................................. 15
Shares Outstanding and Entitled to Vote; Record Date...... 15
How to Vote Your Shares................................... 15
Vote Required............................................. 16
Solicitation of Proxies................................... 16
Recommendations of the CommonWealth Board of Directors.... 17
THE MERGER (PROPOSAL ONE)................................... 17
General................................................... 17
Background of the Merger.................................. 17
CommonWealth's Reasons for the Merger..................... 19
First Community's Reasons for the Merger.................. 19
Opinion of CommonWealth's Financial Advisor............... 20
Merger Consideration and Election and Exchange
Procedures............................................. 24
Procedures for Exchanging CommonWealth Common Stock
Certificates........................................... 27
Assumption of CommonWealth Stock Options.................. 28
Conditions to the Merger.................................. 28
Regulatory Approvals...................................... 30
Business Pending the Merger............................... 31
Board of Directors' Covenant to Recommend the Merger
Agreement.............................................. 32
No Solicitation........................................... 32
Representations and Warranties of the Parties............. 33
Effective Time of the Merger.............................. 33
Amendment of the Merger Agreement......................... 33
Termination of the Merger Agreement....................... 34
Interests of Certain Persons in the Merger................ 36
Certain Employee Matters.................................. 38
Resale of First Community Common Stock.................... 38
Federal Income Tax Consequences........................... 39
Accounting Treatment of the Merger........................ 41
Expenses of the Merger.................................... 42
Listing of the First Community Common Stock............... 42
Termination Fee........................................... 42
Shareholder Agreements.................................... 43
Dissenters' Rights........................................ 43
Operations of First Community After the Merger............ 45
MARKET FOR COMMON STOCK AND DIVIDENDS....................... 45
ii
PAGE
-----
INFORMATION ABOUT FIRST COMMUNITY........................... 47
General................................................... 47
Management and Additional Information..................... 47
INFORMATION ABOUT COMMONWEALTH.............................. 47
General................................................... 47
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 48
Properties................................................ 58
Executive Officers and Directors of CommonWealth.......... 58
Executive Compensation.................................... 59
Certain Beneficial Owners of CommonWealth Common Stock.... 60
Related Party Transactions................................ 61
Regulation................................................ 61
DESCRIPTION OF FIRST COMMUNITY CAPITAL STOCK................ 63
First Community Common Stock.............................. 64
First Community Preferred Stock........................... 64
Transfer Agent............................................ 64
COMPARISON OF THE RIGHTS OF SHAREHOLDERS.................... 64
Authorized Capital Stock.................................. 65
Issuance of Capital Stock................................. 65
Voting Rights............................................. 65
Number and Election of Directors.......................... 65
Removal of Directors...................................... 66
Vacancies of Directors.................................... 66
Discharge of Duties, Exculpation and Indemnification...... 67
Dividends and Other Distributions......................... 68
Amendments to Articles of Incorporation and Bylaws........ 68
Notice of Shareholder Meetings............................ 68
Special Meetings of Shareholders.......................... 69
Shareholder Nomination and Shareholder Proposals.......... 69
Shareholder Action Without a Meeting...................... 69
Mergers, Share Exchanges and Sales of Assets.............. 70
Interested Shareholder Statutes........................... 70
Control Share Statutes.................................... 70
Shareholders' Right of Dissent and Appraisal.............. 71
Liquidation Rights........................................ 71
Constituency Provisions................................... 71
ADJOURNMENT OF THE SPECIAL MEETING (PROPOSAL TWO)........... 72
LEGAL OPINION............................................... 72
EXPERTS..................................................... 72
PROPOSALS FOR THE 2003 ANNUAL MEETING....................... 73
WHERE YOU CAN FIND MORE INFORMATION......................... 73
INDEX TO COMMONWEALTH FINANCIAL STATEMENTS.................. F-1
Annexes:
Annex I Agreement and Plan of Merger, dated as of January 27, 2003
and amended as of February 25, 2003, among First Community
Bancshares, Inc., First Community Bank, National Association
and The CommonWealth Bank................................... Annex I-1
Annex II Opinion of Baxter, Fentriss & Co. .......................... Annex II-1
Annex III Sections 13.1-729 through 13.1-741 of the Virginia Stock
Corporation Act............................................. Annex III-1
iii
QUESTIONS AND ANSWERS
ABOUT VOTING PROCEDURES FOR THE SPECIAL MEETING
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this document, indicate on your proxy card
how you want your shares to be voted. Then sign, date and mail your proxy
card in the enclosed prepaid return envelope as soon as possible. This will
enable your shares to be represented and voted at the special meeting.
Q: WHY IS MY VOTE IMPORTANT?
A: The merger agreement must be approved by holders of more than two-thirds of
the outstanding shares of CommonWealth common stock. If you do not vote it
will have the same effect as a vote against the merger agreement.
Q: IF MY SHARES ARE HELD IN STREET NAME BY MY BROKER OR BANK, WILL MY BROKER
OR BANK AUTOMATICALLY VOTE MY SHARES FOR ME?
A: No. Your broker, bank or other nominee will not be able to vote shares held
by it in "street name" on your behalf without instructions from you. You
should instruct your broker, bank or other nominee to vote your shares,
following the directions your broker, bank or other nominee provides.
Q: WHAT IF I FAIL TO INSTRUCT MY BROKER OR BANK?
A: If you fail to instruct your broker, bank or other nominee to vote your
shares, it will have the same effect as a vote against the merger
agreement.
Q: CAN I ATTEND THE MEETING AND VOTE MY SHARES IN PERSON?
A: Yes. All shareholders are invited to attend the special meeting. However,
if you hold your shares in street name, you will need proof of ownership
(by means of a recent brokerage statement, letter from a bank or broker or
other means) to be admitted to the meeting. Shareholders of record can vote
in person at the special meeting. If your shares are held in street name,
then you are not the shareholder of record and you must ask your broker,
bank or other nominee how you can vote at the special meeting.
Q: CAN I CHANGE MY VOTE?
A: Yes. If you have not voted through your broker, bank or other nominee,
there are three ways you can change your vote after you have sent in your
proxy card.
- First, you may send a written notice to the secretary of CommonWealth
stating that you would like to revoke your proxy before the special
meeting.
- Second, you may complete and submit a new proxy card. Any earlier proxies
will be revoked automatically.
- Third, you may attend the special meeting and vote in person. Any earlier
proxy will be revoked. However, simply attending the special meeting
without voting will not revoke your proxy.
If you have instructed a broker, bank or other nominee to vote your shares,
you must follow directions you receive from your broker, bank or other nominee
to change your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. You should not send in your stock certificates at this time.
Instructions for surrendering your CommonWealth common stock certificates
in exchange for the merger consideration will be sent to you after we
complete the merger.
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: You should call William W. Ranson, Executive Vice President, Treasurer and
Chief Financial Officer, at CommonWealth at (804) 741-4600.
1
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document, including the merger
agreement and the other documents to which we have referred you. See "Where You
Can Find More Information" beginning on page 73. Page references are included in
this summary to direct you to a more complete description of the topics.
Throughout this document, "CommonWealth," "we" and "our" refers to The
CommonWealth Bank, "First Community" refers to First Community Bancshares, Inc.
and "First Community Bank" refers to First Community Bank, National Association,
First Community's banking subsidiary. Also, we refer to the merger between
CommonWealth and First Community Bank as the "merger," and the agreement and
plan of merger, dated as of January 27, 2003 and as amended as of February 25,
2003, among CommonWealth, First Community Bank and First Community as the
"merger agreement."
PARTIES TO THE PROPOSED MERGER (PAGE 47)
First Community. First Community is a registered bank holding company
incorporated under the laws of the State of Nevada and the parent company of
First Community Bank, a national bank that conducts commercial banking
operations within the states of Virginia, West Virginia and North Carolina.
United First Mortgage, Inc. ("UFM") is a wholly-owned subsidiary of First
Community Bank and serves as a wholesale and retail distribution channel for
First Community Bank's mortgage banking business segment. Stone Capital
Management, Inc., an asset management company, is also a wholly-owned subsidiary
of First Community Bank. First Community and its wholly-owned subsidiaries have
total assets of approximately $1.5 billion at December 31, 2002 and conduct
business through the 41 branches of First Community Bank and 11 mortgage
brokerage offices of UFM. Regulatory oversight of First Community is conducted
by the Board of Governors of the Federal Reserve System. First Community's
principal executive offices are located at One Community Place, Bluefield,
Virginia 24605 and its telephone number is (276) 326-9000.
First Community Bank. First Community Bank engages in a general commercial
and retail banking business through its branch facilities. It provides safe
deposit services and makes all types of loans, including commercial, mortgage
and personal loans. First Community Bank also provides trust services and its
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC").
First Community Bank is a member of the Federal Reserve System and is a member
of the Federal Home Loan Bank of Atlanta. Regulatory oversight of the Bank is
conducted by the Office of the Comptroller of the Currency.
CommonWealth. CommonWealth is a Virginia-chartered commercial bank which
conducts business from its headquarters in Richmond, Virginia and its four
full-service offices within the Richmond metropolitan area. CommonWealth
provides a wide range of banking services to individuals and businesses located
in the Richmond metropolitan area. CommonWealth had total assets of $134.1
million, total deposits of $107.3 million and total stockholders' equity of $8.3
million as of December 31, 2002. CommonWealth's executives offices are located
at 900 N. Parham Road, Richmond, Virginia 23229 and its telephone number is
(804) 741-4600.
THE MERGER (PAGE 17)
We have attached the merger agreement to this document as Annex I. Please
read the entire merger agreement. It is the legal document that governs the
merger. We propose a merger whereby CommonWealth will merge with and into First
Community Bank. We expect to complete the merger in the second quarter of 2003.
COMMONWEALTH SHAREHOLDERS WILL RECEIVE WHOLE SHARES OF FIRST COMMUNITY COMMON
STOCK AND/OR CASH FOR EACH SHARE OF COMMONWEALTH COMMON STOCK EXCHANGED PURSUANT
TO THE MERGER (PAGE 24)
If the merger of CommonWealth with and into First Community Bank is
completed, each outstanding share of CommonWealth common stock (subject to
certain exceptions) will be converted into the right to receive $30.50 in cash,
without interest, or a number of whole shares of First Community common stock
determined by
2
dividing $30.50 by the average of the closing price of the First Community
common stock during the 20 trading day period ending on the fifth business day
prior to the effective time of the merger, plus cash in lieu of any fractional
share interest. You will have the opportunity to elect one or the other form of
consideration to be received for all shares of CommonWealth common stock held by
you, subject to allocation procedures set forth in the merger agreement which
are intended to ensure that at least 50% and not more than 60% of the
outstanding shares of CommonWealth common stock will be converted into the right
to receive First Community common stock, with the remaining outstanding shares
of CommonWealth common stock to be converted into the right to receive cash.
WHEN AND HOW TO CHOOSE THE METHOD OF PAYMENT FOR YOUR SHARES (PAGE 24)
Shares of CommonWealth common stock will be exchanged for either First
Community common stock or cash as chosen by you, subject to the election and
allocation procedures discussed herein and described in detail in the merger
agreement. After the closing of the merger, you will be sent an election form on
which you may specify whether you wish to receive cash in exchange for all
shares of CommonWealth common stock held by you or First Community common stock
in exchange for all shares of CommonWealth common stock held by you, or that you
make "no election" as to whether you receive cash or First Community common
stock in payment for your CommonWealth shares.
Your choice will be honored to the extent possible, but because of the
overall limitation on the amount of cash and shares of First Community common
stock available, whether you receive the amount of cash or stock you request
will depend in part on how many other CommonWealth shareholders submit elections
and how many choose to receive cash and how many choose to receive stock.
Because at least 50% and not more than 60% of the outstanding shares of
CommonWealth common stock will be converted into the right to receive First
Community common stock and the remaining outstanding shares of CommonWealth
common stock will be converted into the right to receive cash, CommonWealth
shareholders may not receive exactly the form of consideration that they elect
and may receive a pro rata amount of cash and First Community common stock.
First Community will not issue fractional shares. Instead, CommonWealth
shareholders who receive First Community common stock will receive the value of
any fractional share interest in cash, based on the average closing sales prices
of a share of First Community common stock during a specified period preceding
consummation of the merger.
An election form and detailed instructions on how to choose your preferred
method of payment will be sent to you approximately five business days after the
effective time of the merger. You will then have 20 days in which to complete
the election form and return it as instructed with your stock certificates.
After the forms have been received and processed, you will be sent the cash
and/or First Community common stock to which you are entitled.
You will need to surrender your CommonWealth common stock certificates to
receive the appropriate merger consideration, but you should not send us any
certificates now. You will receive detailed instructions on how to exchange your
shares along with your election form.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 45)
Shares of First Community common stock currently trade on the Nasdaq
National Market under the symbol "FCBC." Prior to April 1, 2003, shares of First
Community common stock traded on the Nasdaq SmallCap Market under the same
symbol. Shares of Commonwealth common stock trade on the OTC Bulletin Board
under the symbol "CWBV.OB." On January 27, 2003, the last trading day preceding
public announcement of the proposed merger, the First Community common stock
closed at $28.31 per share and the CommonWealth common stock closed at $18.75
per share. On April 8, 2003, the First Community common stock closed at $33.23
per share and the CommonWealth common stock closed at $29.86 per share.
First Community cannot assure you that its stock price will continue to
trade at or above the prices shown above. You should obtain current stock price
quotations for the First Community common stock from a newspaper, via the
Internet or by calling your broker.
3
First Community currently pays a quarterly cash dividend to its
shareholders. During the first quarter of 2003, First Community paid a cash
dividend of $0.26 per share of First Community common stock. First Community
intends to continue to pay a quarterly cash dividend to its shareholders.
CommonWealth has never paid a cash dividend to its shareholders.
THE TAX CONSEQUENCES OF THE MERGER FOR COMMONWEALTH SHAREHOLDERS WILL BE
DEPENDENT ON THE MERGER CONSIDERATION RECEIVED (PAGE 39)
First Community and CommonWealth have received an opinion of counsel to the
effect that, based on certain facts, representations and assumptions, the merger
will be treated as a "reorganization" for federal income tax purposes.
Accordingly, you generally will not recognize any gain or loss on the conversion
of shares of CommonWealth common stock solely into shares of First Community
common stock. However, you generally will recognize gains if you receive cash in
exchange for your shares of CommonWealth common stock or instead of any
fractional share of First Community common stock that you would otherwise be
entitled to receive. The parties' obligation to complete the merger is
conditioned on their receipt of the same opinion, dated as of the effective date
of the merger, regarding the federal income tax treatment of the merger.
Tax matters are complicated, and the tax consequences of the merger to you
will depend upon the facts of your particular situation. In addition, you may be
subject to state, local or foreign tax laws that are not discussed herein.
Accordingly, we strongly urge you to consult your own tax advisor for a full
understanding of the tax consequences to you of the merger.
COMMONWEALTH'S FINANCIAL ADVISOR BELIEVES THAT THE MERGER CONSIDERATION IS FAIR
TO COMMONWEALTH SHAREHOLDERS (PAGE 20)
Among other factors considered in deciding to approve the merger, the
CommonWealth board of directors received the opinion of its financial advisor,
Baxter, Fentriss & Co., that, as of January 24, 2003 (the date on which the
CommonWealth board of directors approved the merger agreement), the merger
consideration was fair to the holders of CommonWealth common stock from a
financial point of view. This opinion was subsequently confirmed in writing as
of the date of this document. The opinion dated as of the date of this document
is included as Annex II. You should read this opinion completely to understand
the assumptions made, matters considered and limitations of the review
undertaken by Baxter, Fentriss & Co. in providing its opinion. Baxter, Fentriss
& Co.'s opinion is directed to the CommonWealth board of directors and does not
constitute a recommendation to any shareholder as to any matters relating to the
merger. CommonWealth agreed to pay Baxter, Fentriss & Co. a transaction fee
equal to 1.50% of the aggregate purchase price. Based on the $30.50 per share
cash acquisition purchase price and the $33.23 closing sale price of a share of
First Community common stock on the Nasdaq National Market on April 8, 2003, the
transaction fee would amount to approximately $329,537, $50,000 of which has
been paid as of the date of mailing of this prospectus/proxy statement.
OUR BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE MERGER (PAGE 19)
Based on CommonWealth's reasons for the merger described herein, including
the fairness opinion of Baxter, Fentriss & Co., the CommonWealth board of
directors believes that the merger is fair to you and in your best interests and
unanimously recommends that you vote "FOR" approval of the merger agreement.
DATE, TIME AND LOCATION OF THE SPECIAL MEETING (PAGE 15)
The special meeting will be held at 3:00 p.m., local time, on Wednesday,
May 21, 2003, at the Retail Merchants Association of Greater Richmond, 5101
Monument Avenue, Richmond, Virginia. At the special meeting, CommonWealth
shareholders will be asked to approve the merger agreement, to approve a
proposal to adjourn the special meeting if necessary to permit further
solicitation of proxies if there are not sufficient votes at the time of the
special meeting to approve the merger agreement and to act on any other matters
that may properly come before the special meeting.
4
RECORD DATE AND VOTING RIGHTS FOR THE SPECIAL MEETING (PAGE 15)
You are entitled to vote at the special meeting if you owned shares of
CommonWealth common stock as of the close of business on April 8, 2003. You will
have one vote at the special meeting for each share of CommonWealth common stock
that you owned on that date.
Shareholders of record may vote by mail or by attending the special meeting
and voting in person. Each proxy returned to CommonWealth (and not revoked) by a
holder of CommonWealth common stock will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated, the proxy will
be voted "FOR" approval of the merger agreement and "FOR" the proposal to
adjourn the special meeting if necessary to permit further solicitation of
proxies on the proposal to approve the merger agreement.
APPROVAL OF THE MERGER AGREEMENT REQUIRES A MORE THAN TWO-THIRDS VOTE BY
COMMONWEALTH SHAREHOLDERS (PAGE 16)
The affirmative vote of the holders of more than two-thirds of the
outstanding shares of CommonWealth common stock is necessary to approve the
merger agreement on behalf of CommonWealth. Not voting, or failing to instruct a
broker, bank or other nominee how to vote shares held in their name for you,
will have the same effect as voting against the merger agreement.
MANAGEMENT OF COMMONWEALTH OWNS SHARES WHICH MAY BE VOTED AT THE SPECIAL MEETING
(PAGES 43 AND 60)
The directors and executive officers of CommonWealth, who collectively own
approximately 13.4% of the outstanding shares of CommonWealth common stock as of
the record date for the special meeting, have entered into shareholder
agreements with First Community pursuant to which they have agreed to vote all
of their shares in favor of the merger agreement.
FIRST COMMUNITY AND COMMONWEALTH MUST MEET SEVERAL CONDITIONS TO COMPLETE THE
MERGER (PAGE 28)
Completion of the merger depends on meeting a number of conditions,
including the following:
- shareholders of CommonWealth must approve the merger agreement;
- First Community and CommonWealth must receive all required regulatory
approvals for the merger of CommonWealth into First Community Bank, and
any waiting periods required by law must have passed;
- there must be no law, injunction or order enacted or issued preventing
completion of the merger;
- First Community and CommonWealth must receive a legal opinion confirming
the tax-free nature of the merger;
- the First Community common stock to be issued in the merger must have
been approved for trading on the Nasdaq National Market (or on any
securities exchange on which the First Community common stock may then be
listed);
- the representations and warranties of each of First Community and
CommonWealth in the merger agreement must be accurate, subject to
exceptions that would not have a material adverse effect on First
Community or CommonWealth, respectively;
- First Community and CommonWealth must have complied in all material
respects with their respective covenants in the merger agreement;
- dissenting shares shall not represent 10% or more of the outstanding
CommonWealth common stock; and
- each director and executive officer of CommonWealth shall have entered
into a shareholder agreement with First Community.
5
Unless prohibited by law, either First Community or CommonWealth could
elect to waive a condition that has not been satisfied and complete the merger
anyway. The parties cannot be certain whether or when any of the conditions to
the merger will be satisfied, or waived where permissible, or that the merger
will be completed.
FIRST COMMUNITY AND COMMONWEALTH MUST OBTAIN REGULATORY APPROVALS TO COMPLETE
THE MERGER (PAGE 30)
To complete the merger, the parties need the prior approval of or waiver
from the Office of the Comptroller of the Currency of the United States and the
Bureau of Financial Institutions of the Virginia State Corporation Commission.
The U.S. Department of Justice is able to provide input into the approval
process of federal banking agencies and will have between 15 and 30 days
following any approval of a federal banking agency to challenge the approval on
antitrust grounds. First Community and CommonWealth have filed all necessary
applications and notices with the applicable regulatory agencies and have
received all required approvals.
FIRST COMMUNITY AND COMMONWEALTH MAY TERMINATE THE MERGER AGREEMENT (PAGE 34)
First Community and CommonWealth can mutually agree at any time to
terminate the merger agreement before completing the merger, even if
shareholders of CommonWealth have already voted to approve it.
Either company also can terminate the merger agreement:
- if any required regulatory approvals for consummation of the merger is
not obtained;
- if the merger is not completed by September 30, 2003;
- if the shareholders of CommonWealth do not approve the merger agreement;
or
- if the other company breaches any of its representations, warranties or
obligations under the merger agreement in a manner which would be
reasonably expected to have a material adverse effect on it and the
breach cannot be or has not been cured within 30 days of notice of the
breach.
In addition, First Community may terminate the merger agreement at any time
prior to the special meeting if the board of directors of CommonWealth withdraws
or modifies its recommendation to the CommonWealth shareholders that the merger
agreement be approved in any way which is adverse to First Community, or
breaches its covenants requiring the calling and holding of a meeting of
shareholders to consider the merger agreement and prohibiting the solicitation
of other offers. First Community also may terminate the merger agreement if a
third party commences a tender offer or exchange offer for 20% or more of the
outstanding CommonWealth common stock and the board of directors of CommonWealth
recommends that CommonWealth shareholders tender their shares in the offer or
otherwise fails to recommend that they reject the offer within a specified
period.
CommonWealth also may terminate the merger agreement at any time prior to
the special meeting in order to concurrently enter into an acquisition agreement
or similar agreement with respect to an unsolicited "superior proposal," as
defined in the merger agreement, which has been received and considered by
CommonWealth in compliance with the applicable terms of the merger agreement,
provided that CommonWealth has notified First Community at least five business
days in advance of any such action and given First Community the opportunity
during such period, if First Community elects, in its sole discretion, to make
an offer to CommonWealth that CommonWealth determines in good faith, after
consultation with its financial and legal advisors, is at least as favorable as
the superior proposal. A $1.0 million termination fee would be payable by
CommonWealth under these and certain other circumstances. See "The Merger -
Termination Fee," beginning on page 42.
In addition, CommonWealth may terminate the merger agreement if the average
closing price of the First Community common stock during a specified 20 trading
day period increases by more than 15% from $31.14 (i.e., to $35.81 per share).
If this occurs, First Community could voluntarily elect to increase the exchange
ratio, and thus issue more shares of First Community common stock, pursuant to a
formula set forth in the merger agreement. First Community is not required to
increase the exchange ratio, however, and it is possible under these
circumstances that the CommonWealth board of directors could conclude that
proceeding with the merger at the lower price, rather than exercising
CommonWealth's right to terminate the merger agreement, would still
6
be in the best interests of CommonWealth shareholders. Moreover, First Community
may terminate the merger agreement if the average closing price of the First
Community common stock during a specified 20 trading day period decreases by
more than 15% from $31.14 (i.e., to $26.47 per share). If this occurs,
CommonWealth shall have the option of either accepting a decrease in the
exchange ratio, and thus accepting less shares of First Community common stock,
pursuant to a formula set forth in the merger agreement, or agreeing to a
termination of the merger agreement. As of April 8, 2003, the closing price of
the First Community common stock was $33.23.
FIRST COMMUNITY AND COMMONWEALTH MAY AMEND AND EXTEND THE MERGER AGREEMENT (PAGE
33)
The parties may amend the merger agreement at any time before the merger
actually takes place, and may agree to extend the time within which any action
required by the merger agreement is to take place. No amendment may be made
after the special meeting without obtaining further approval by the shareholders
of CommonWealth.
COMMONWEALTH'S DIRECTORS AND EXECUTIVE OFFICERS HAVE SOME INTERESTS IN THE
MERGER THAT DIFFER FROM YOUR INTERESTS (PAGE 36)
CommonWealth's directors and executive officers have interests in the
merger as individuals which are in addition to, or different from, their
interests as shareholders of CommonWealth. These interests include, among other
things:
- an employment agreement which First Community Bank has proposed to enter
into with J.E. Causey Davis, president and chief executive officer of
CommonWealth, in connection with the closing of the merger, pursuant to
which Mr. Davis will be appointed Executive Vice President of First
Community Bank and Chief Executive Officer of the Eastern Virginia
Division of First Community Bank for a two-year period (that may be
extended) following the merger for an annual salary of not less than
$150,000;
- severance agreements which CommonWealth has entered into with two of its
executive officers which provide for the payment of current salary and
benefits for a period of 24 months following a "change in control" of
CommonWealth and a "termination of employment," each as defined in the
severance agreements;
- the appointment of one non-employee director of CommonWealth as a
director of First Community and the appointment of two non-employee
directors of Commonwealth as directors of First Community Bank; and
- First Community's agreement to honor indemnification obligations of
CommonWealth for a period of six years as well as to purchase liability
insurance for CommonWealth's directors and officers for three years
following the merger, subject to the terms of the merger agreement.
The board of directors of CommonWealth was aware of the foregoing interests
and considered them, among other matters, in approving the merger agreement and
the merger.
COMMONWEALTH IS PROHIBITED FROM SOLICITING OTHER OFFERS (PAGE 32)
CommonWealth has agreed that, while the merger is pending, it will not
initiate or, subject to some limited exceptions, engage in discussions with any
third party other than First Community regarding extraordinary transactions such
as a merger, business combination or sale of a material amount of assets or
capital stock.
THE MERGER WILL BE ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING (PAGE
41)
First Community will use the purchase method of accounting to account for
the merger. The total purchase price will be allocated to the assets acquired
and liabilities assumed, based on their fair values. To the extent that this
purchase price exceeds the fair value of the net tangible assets acquired at the
effective time of the merger, First Community will allocate the excess purchase
price to intangible assets, including goodwill. In accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
issued in
7
July 2001, the goodwill resulting from the merger will not be amortized to
expense; however, core deposit and other intangibles with definite useful lives
recorded by First Community in connection with the merger will be amortized to
expense in accordance with the new rules.
SHAREHOLDERS OF FIRST COMMUNITY AND COMMONWEALTH HAVE DIFFERENT RIGHTS (PAGE 64)
First Community is a Nevada corporation subject to the provisions of the
General Corporation Law of Nevada, and CommonWealth is a Virginia-chartered
commercial bank subject to the provisions of the Virginia Stock Corporation Act.
Upon consummation of the merger, shareholders of CommonWealth who receive shares
of First Community common stock in exchange for their shares of CommonWealth
common stock will become shareholders of First Community and their rights as
shareholders of First Community will be governed by First Community's articles
of incorporation and bylaws and the General Corporation Law of Nevada. The
rights of shareholders of First Community differ in certain respects from the
rights of shareholders of CommonWealth.
TERMINATION FEE (PAGE 42)
CommonWealth must pay First Community a termination fee of $1.0 million if
the merger agreement is terminated under specified circumstances. In addition,
if the merger agreement is terminated by either First Community or CommonWealth
due to a breach of a representation, warranty, covenant or undertaking, the
party committing such breach shall be liable for $350,000 to the other party.
COMMONWEALTH'S SHAREHOLDERS HAVE DISSENTERS' RIGHTS (PAGE 43)
Under Virginia law, holders of CommonWealth common stock have the right to
dissent from the merger and, if the merger is consummated and all requirements
of Virginia law are satisfied by holders seeking to exercise dissenters' rights,
to receive payment equal to the fair value of their shares of CommonWealth
common stock, determined in the manner set forth in Virginia law. The procedures
which must be followed in connection with the exercise of dissenters' rights by
dissenting shareholders are described herein under "-- Dissenters' Rights" and
in Sections 13.1-729 through 13.1-741 of the Virginia Stock Corporation Act, a
copy of which is attached as Annex III to this document. A shareholder seeking
to exercise dissenters' rights must deliver to CommonWealth, before the
shareholder vote on the merger agreement at the special meeting, a written
objection to the merger stating that he or she intends to demand payment for his
or her shares through the exercise of his or her statutory appraisal rights and
must not vote his or her shares in favor of approval of the merger agreement.
Failure to take any required step in connection with the exercise of such rights
may result in termination or waiver thereof.
THE SHARES OF FIRST COMMUNITY COMMON STOCK TO BE ISSUED IN THE MERGER WILL BE
LISTED ON NASDAQ (PAGE 42)
Pursuant to the merger agreement, the shares of First Community common
stock issued in connection with the merger will be listed on the Nasdaq National
Market or on any securities exchange on which the First Community common stock
may then be listed.
UNAUDITED COMPARATIVE PER SHARE AND SELECTED FINANCIAL DATA
The following tables show per share financial information reflecting the
merger of First Community and CommonWealth (which is referred to as "pro forma"
information) and summary historical data for each of First Community and
CommonWealth. The pro forma information assumes that the acquisition of
CommonWealth had been completed on the dates and at the beginning of the
earliest periods indicated.
First Community expects that the merger will result in certain one-time
reorganization and restructuring expenses. The pro forma income and dividends
data do not reflect any anticipated reorganization and restructuring expenses
resulting from the merger. It is also anticipated that the merger will provide
the combined company with certain financial benefits that include reduced
operating expenses and opportunities to earn more revenue. The pro forma
information does not reflect any of these anticipated cost savings or benefits.
Therefore, the pro forma information, while helpful in illustrating the
financial characteristics of the merger under one set of assumptions, does not
attempt to predict or suggest future results. The pro forma information also
does not
8
attempt to show how the combined company actually would have performed had First
Community and CommonWealth been combined throughout the indicated periods.
The summary historical financial data of CommonWealth has been derived from
its financial statements which are included herein. The summary historical
financial data of First Community has been derived from historical financial
information that First Community has included in prior filings with the
Securities and Exchange Commission. Historical financial information for First
Community can be found in its Annual Report on Form 10-K for the year ended
December 31, 2002. See "Where You Can Find More Information," beginning on page
73.
When you read the summary financial information provided in the following
tables, you also should read the more detailed financial information included in
the historical financial information for CommonWealth which are set forth herein
and for First Community which are included in the other documents of First
Community to which we refer. See "Where You Can Find More Information" beginning
on page 73.
UNAUDITED COMPARATIVE PER SHARE DATA FOR THE YEAR ENDED DECEMBER 31, 2002
FIRST COMMUNITY COMMONWEALTH
COMMON STOCK COMMON STOCK
--------------------------- --------------------------
PRO FORMA PRO FORMA
HISTORICAL COMBINED(1)(2) HISTORICAL EQUIVALENT(3)
---------- -------------- ---------- -------------
Net income per basic share............. $2.49 $ 2.46 $1.28 $ 2.34
Net income per diluted share........... 2.48 2.44 1.19 2.31
Dividends declared per share........... 1.00 1.00(4) -- .95
Book value per share................... 15.42 16.34 11.50 15.52
Tangible book value per share.......... 12.63 12.05 11.50 11.45
---------------
(1) Pro forma combined amounts give effect to the acquisition of 100% of the
outstanding shares of CommonWealth as though the acquisition had occurred at
the beginning of 2002. Under the terms of the agreement, CommonWealth
shareholders have the right to receive $30.50 in cash or a number of whole
shares of First Community common stock determined by dividing $30.50 by the
average closing price of First Community stock as set forth in the merger
agreement. At least 50%, but no more than 60%, of the CommonWealth stock
will be exchanged for First Community stock. The number of shares used in
the calculations assumes that 60% of the CommonWealth shares outstanding
during the respective period are converted into First Community shares at an
assumed exchange ratio of .95. The number used in the calculations also
takes into account the dilutive effect of outstanding CommonWealth stock
options. Under purchase accounting, CommonWealth's assets and liabilities
are required to be adjusted to their estimated fair values. The estimated
fair values adjustments utilized herein have been estimated by First
Community based upon available information set forth in CommonWealth's notes
to its financial statements included elsewhere herein. First Community
cannot be sure that such estimated fair values represent the fair values
that will ultimately be determined at the acquisition date.
(2) Pro forma amounts assume funding of 40% of the purchase price at First
Community's current incremental borrowing cost of 1.10%, net of tax.
(3) Pro forma equivalent amounts are calculated by multiplying the pro forma
combined amounts by an assumed exchange ratio of .95. This information is
presented to reflect that CommonWealth shareholders who receive shares of
First Community common stock in the merger will, based on the assumed
exchange ratio, receive more or less than one share of First Community
common stock for each share of CommonWealth common stock they own before the
merger.
(4) It is anticipated that the initial dividend rate will be equal to the
current dividend rate of First Community. Accordingly, pro forma combined
dividends per share of First Community common stock represent the historical
dividends per common share paid by First Community.
9
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST COMMUNITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
BALANCE SHEET SUMMARY (AT END OF
PERIOD):
Loans, net of unearned income.... $ 927,621 $ 904,496 $ 811,256 $ 704,096 $ 611,493
Loans held for sale.............. 66,364 65,532 11,570 -- --
Allowance for loan losses........ 14,410 13,952 12,303 11,900 11,404
Securities....................... 341,899 395,891 283,298 290,873 277,210
Total assets..................... 1,524,363 1,478,235 1,218,017 1,088,162 1,053,988
Deposits......................... 1,139,727 1,078,260 899,903 833,258 875,996
Other indebtedness............... 124,357 145,320 138,015 10,218 18,176
Stockholders' equity............. 152,462 133,041 120,682 103,488 101,719
SUMMARY OF EARNINGS:
Total interest income............ $ 96,204 $ 92,829 $ 85,958 $ 76,492 $ 81,213
Total interest expense........... 35,008 42,409 39,379 32,250 38,128
Provision for loan losses........ 4,208 5,134 3,986 2,893 6,250
Non-interest income.............. 20,049 20,275 12,492 10,732 11,182
Non-interest expense............. 42,269 38,025 30,968 27,457 28,752
Income tax expense............... 10,049 8,402 7,054 7,722 6,164
Net income....................... 24,719 19,134 17,063 16,852 13,101
PER SHARE DATA:
Basic earnings per common
share.......................... $ 2.49 $ 1.92 $ 1.78 $ 1.75 $ 1.35
Diluted earnings per common
share.......................... 2.48 1.92 1.78 1.75 1.35
Cash dividends................... 1.00 0.89 0.86 0.80 0.76
Book value at year-end........... 15.42 13.39 12.14 10.78 10.55
SELECTED RATIOS:
Return on average assets......... 1.68% 1.49% 1.51% 1.62% 1.24%
Return on average equity......... 17.16 14.80 15.70 16.23 13.02
Dividend payout.................. 40.16 46.35 48.31 45.71 56.30
Average equity to average
assets......................... 9.79 10.05 9.64 9.96 9.50
Risk based capital to risk
adjusted assets................ 13.33 12.10 12.93 13.22 13.25
Leverage ratio................... 8.10 7.93 8.37 8.25 7.37
10
SELECTED FINANCIAL DATA OF COMMONWEALTH
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- -------
BALANCE SHEET SUMMARY (AT END OF PERIOD):
Loans, net of unearned income............... $107,265 $71,261 $54,156 $34,541 $27,021
Loans held for sale......................... -- -- -- -- --
Allowance for loan losses................... 1,089 710 617 296 374
Securities.................................. 1,142 473 1,302 936 234
Total assets................................ 134,137 87,548 63,906 42,922 38,817
Deposits.................................... 107,292 75,462 56,528 36,085 32,247
Other indebtedness.......................... 17,541 4,300 -- -- --
Stockholders' equity........................ 8,278 7,348 6,789 6,505 6,036
SUMMARY OF EARNINGS:
Total interest income....................... $ 6,532 $ 5,609 $ 4,668 $ 3,105 $ 2,546
Total interest expense...................... 2,060 2,365 1,793 1,036 805
Provision for loan losses................... 487 288 372 130 146
Non-interest income......................... 581 491 366 424 441
Non-interest expense........................ 3,164 2,666 2,486 2,261 1,609
Income tax expense.......................... 480 221 131 -- 1
Net income.................................. 922 560 251 103 425
PER SHARE DATA:
Basic earnings per common share............. $ 1.28 $ 0.78 $ 0.35 $ 0.14 $ 0.73
Diluted earnings per common share........... 1.19 0.77 0.35 0.14 0.68
Cash dividends.............................. -- -- -- -- --
Book value at year-end...................... 11.50 10.22 9.44 9.09 9.02
SELECTED RATIOS:
Return on average assets.................... 0.85% 0.74% 0.46% 0.25% 1.12%
Return on average equity.................... 11.82 7.93 3.79 1.61 8.47
Dividend payout............................. -- -- -- -- --
Average equity to average assets............ 7.17 9.34 12.08 15.24 15.56
Risk based capital to risk adjusted
assets.................................... 10.12 12.12 13.36 18.81 20.66
Leverage ratio.............................. 6.45 8.14 12.29 15.32 15.64
11
RISK FACTORS
Upon completion of the merger, you will receive shares of First Community
common stock and/or cash in exchange for your shares of CommonWealth common
stock. Prior to deciding whether or not to approve the transaction and which
type of consideration to elect, you should be aware of and consider the
following risks and uncertainties that are applicable to the merger and First
Community, in addition to the other information contained in or incorporated by
reference into this document, including the matters addressed under the caption
"Cautionary Statement Concerning Forward-Looking Statements" beginning on page
13.
COMMONWEALTH SHAREHOLDERS MAY NOT RECEIVE THE FORM OF CONSIDERATION THEY ELECT
If the merger is completed, each outstanding share of CommonWealth common
stock (subject to certain exceptions) will be converted into the right to
receive $30.50 in cash, without interest, or a number of whole shares of First
Community common stock determined by dividing $30.50 by the average of the
closing price of the First Community common stock during the 20 trading day
period ending on the fifth business day prior to the effective time of the
merger, plus cash in lieu of any fractional share interest. CommonWealth
shareholders will have the opportunity to elect one or the other form of
consideration to be received for all shares of CommonWealth common stock held by
them; however, the right of a CommonWealth shareholder to receive all stock or
all cash for his, her or its shares is limited because the allocation procedures
set forth in the merger agreement are intended to ensure that at least 50% and
not more than 60% of the outstanding shares of CommonWealth common stock will be
converted into the right to receive First Community common stock, with the
remaining outstanding shares of CommonWealth common stock to be converted into
the right to receive cash. If holders of more than 60% or less than 50% of the
outstanding shares of CommonWealth common stock elect to receive First Community
common stock, the elections will be reallocated so that not more than 60% and
not less than 50% of the outstanding shares of CommonWealth common stock are
converted into shares of First Community common stock. Therefore, CommonWealth
shareholders may not receive exactly the form of consideration that they elect
and may receive a pro rata amount of cash and First Community common stock. A
detailed discussion of the consideration provisions of the merger agreement is
set forth under "The Merger -- Merger Consideration and Election and Exchange
Procedures," beginning on page 24. We recommend that shareholders carefully read
this discussion and the merger agreement attached hereto as Annex I.
THE VALUE OF THE STOCK CONSIDERATION WILL VARY WITH FLUCTUATIONS IN FIRST
COMMUNITY'S STOCK PRICE
Each share of CommonWealth common stock owned by CommonWealth shareholders
will be converted into the right to receive either cash, shares of First
Community common stock, or a mixture of cash and shares of First Community
common stock. The market price of the First Community common stock at the time
former shareholders of CommonWealth receive certificates evidencing shares of
First Community common stock following the election period to be conducted after
the merger is completed may be higher or lower than the market price at the date
of this document, on the date of the special meeting or on the date of the
merger. Changes in the price of the First Community common stock may result from
a variety of factors, including general market and economic conditions, changes
in the business, operations or prospects of First Community and regulatory
considerations. Accordingly, at the time of the special meeting, you will not
know the exact value of the stock consideration to be received or the exchange
ratio used to determine the number of any shares of First Community common stock
to be received when the merger is completed. In addition, there will be a time
period between the completion of the merger and the time at which former
CommonWealth shareholders receiving stock consideration actually receive
certificates evidencing First Community common stock, which will include the 20
day period during which CommonWealth shareholders will be able to make
cash/stock elections. Until stock certificates are received, CommonWealth
shareholders will not be able to sell their First Community shares in the open
market and, thus, will not be able to avoid losses resulting from any decline in
the trading price of the First Community common stock during this period.
12
THE TAX CONSEQUENCES OF THE MERGER FOR COMMONWEALTH SHAREHOLDERS WILL BE
DEPENDENT ON THE MERGER CONSIDERATION RECEIVED
The tax consequences of the merger to you will depend on the merger
consideration received by you. You generally will not recognize any gain or loss
on the conversion of shares of CommonWealth common stock solely into shares of
First Community common stock; however, you generally will be taxed if you
receive cash in exchange for your shares of CommonWealth common stock or instead
of any fractional share of First Community common stock that you would otherwise
be entitled to receive. For a detailed discussion of the tax consequences to you
of the merger, see "The Merger -- Federal Income Tax Consequences" beginning on
page 39.
DIRECTORS AND OFFICERS OF COMMONWEALTH HAVE INTERESTS IN THE MERGER THAT DIFFER
FROM THE INTERESTS OF SHAREHOLDERS
When considering the recommendation of CommonWealth's board of directors,
you should be aware that some executive officers and directors of CommonWealth
have interests in the merger that are somewhat different from your interests.
For example, certain executive officers and directors may continue to serve as
executives and directors of First Community and First Community Bank after the
merger. These arrangements may create potential conflicts of interest. These and
certain other additional interests of CommonWealth's directors and executive
officers may cause some of these persons to view the proposed transaction
differently than you view it, as a shareholder. See "The Merger -- Interests of
Certain Persons in the Merger" beginning on page 36.
FIRST COMMUNITY MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE MERGER
The success of the merger will depend on, among other things, First
Community's ability to realize anticipated cost savings and to combine the
businesses of First Community Bank and CommonWealth in a manner that does not
materially disrupt the existing customer relationships of CommonWealth or result
in decreased revenues resulting from any loss of customers and that permits
growth opportunities to occur. If First Community is not able to successfully
achieve these objectives, the anticipated benefits of the merger may not be
realized fully or at all or may take longer to realize than expected.
THE MARKET PRICE OF SHARES OF FIRST COMMUNITY COMMON STOCK MAY BE AFFECTED BY
FACTORS WHICH ARE DIFFERENT FROM THOSE AFFECTING SHARES OF COMMONWEALTH COMMON
STOCK
You may acquire shares of First Community common stock in connection with
the merger. Some of First Community's current businesses and markets differ from
those of CommonWealth and, accordingly, the results of operations of First
Community after the merger may be affected by factors different from those
currently affecting the results of operations of CommonWealth. For a discussion
of the businesses of First Community and CommonWealth and of certain factors to
consider in connection with those businesses, see "Information About
CommonWealth," beginning on page 47, "Information About First Community,"
beginning on page 47 and the documents incorporated by reference into this
document and referred to under "Where You Can Find More Information" beginning
on page 73.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document and the documents incorporated herein by reference contain
forward-looking statements by First Community, First Community Bank and
CommonWealth within the meaning of the federal securities laws. These
forward-looking statements include information about the financial condition,
results of operations and businesses of First Community and CommonWealth,
including statements relating to the estimated cost savings that will be
realized from the merger, the estimated impact on First Community's earnings per
share of the merger and the restructuring charges expected to be incurred in
connection with the merger. This document also includes forward-looking
statements about the consummation and anticipated timing of the merger, the
exchange ratio and the tax-free nature of the merger. In addition, any of the
words "believes," "expects," "anticipates," "estimates," "plans," "projects,"
"predicts" and similar expressions indicate forward-looking statements.
13
These forward-looking statements involve certain risks and uncertainties. Actual
results may differ materially from those contemplated by the forward-looking
statements due to, among others, the following factors:
- estimated cost savings from the merger or other proposed mergers may not
be fully realized within the expected time frame;
- deposit attrition, customer loss or revenue loss following the merger or
other proposed mergers may be greater than expected;
- competitive pressure among depository and other financial institutions
may increase significantly;
- costs or difficulties related to the integration of the businesses of
First Community and CommonWealth may be greater than expected;
- changes in the interest rate environment may reduce interest margins;
- general economic or business conditions, either nationally or in the
states or regions in which First Community does business, may be less
favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit;
- legislation or changes in regulatory requirements, including changes in
accounting standards, may adversely affect the businesses in which First
Community is engaged;
- adverse changes may occur in the securities markets; and
- competitors of First Community may have greater financial resources and
develop products and technology that enable those competitors to compete
more successfully than First Community.
Management of First Community and CommonWealth each believes that the
forward-looking statements about their respective company are reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results and shareholder values of First Community
following completion of the merger may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results and values are beyond First Community's and CommonWealth's ability to
control or predict.
GENERAL INFORMATION
This document constitutes a proxy statement and is being furnished to all
record holders of CommonWealth common stock in connection with the solicitation
of proxies by the board of directors of CommonWealth to be used at a special
meeting of shareholders of CommonWealth to be held on May 21, 2003 and any
adjournment or postponement of the special meeting. The purposes of the special
meeting are to consider and vote upon a proposal to approve the merger agreement
among First Community, First Community Bank and CommonWealth, which provides,
among other things, for the merger of CommonWealth with and into First Community
Bank, and a proposal to adjourn the special meeting to the extent necessary to
solicit additional votes on the merger agreement.
This document also constitutes a prospectus of First Community relating to
the First Community common stock to be issued to holders of CommonWealth common
stock upon completion of the merger. Based on (i) the number of shares of
CommonWealth common stock outstanding on the record date for the special
meeting, (ii) the number of shares of CommonWealth common stock issuable upon
the exercise of employee stock options outstanding on such date, (iii) an
assumed exchange ratio of .95 (which assumes an average share price of $32.00
for First Community common stock) and (iv) the conversion of 60% of the
outstanding shares of CommonWealth common stock into shares of First Community
common stock, a maximum of approximately 410,570 shares of First Community
common stock will be issuable upon completion of the merger. The actual total
number of shares of First Community common stock to be issued as well as the
actual amount of cash to be paid in the merger will depend on the number of
shares of CommonWealth common stock outstanding at the time of the merger and
the actual exchange ratio.
14
First Community has supplied all information contained or incorporated by
reference herein relating to First Community, and CommonWealth has supplied all
such information relating to CommonWealth.
THE SPECIAL MEETING
TIME, DATE AND PLACE
A special meeting of shareholders of CommonWealth will be held at 3:00
p.m., local time, on Wednesday, May 21, 2003 at the Retail Merchants Association
of Greater Richmond, 5101 Monument Avenue, Richmond, Virginia.
MATTERS TO BE CONSIDERED
The purposes of the special meeting are to consider and approve the merger
agreement, to consider and approve a proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies if there are not sufficient
votes at the time of the special meeting to approve the merger agreement and to
consider any other matters that may be properly submitted for a vote at the
special meeting. At this time, the CommonWealth board of directors is unaware of
any matters, other than as set forth in the preceding sentence, that may be
presented for action at the special meeting.
SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE
The close of business on April 8, 2003 has been fixed by CommonWealth as
the record date for the determination of holders of CommonWealth common stock
entitled to notice of and to vote at the special meeting and any adjournment or
postponement of the special meeting. At the close of business on the record
date, there were 720,299 shares of CommonWealth common stock outstanding and
entitled to vote. Each share of CommonWealth common stock entitles the holder to
one vote at the special meeting on all matters properly presented at the
meeting.
HOW TO VOTE YOUR SHARES
Shareholders of record may vote by mail or by attending the special meeting
and voting in person. If you choose to vote by mail, simply mark the enclosed
proxy card, date and sign it, and return it in the postage paid envelope
provided.
If your shares are held in the name of a bank, broker or other holder of
record, you will receive instructions from the holder of record that you must
follow in order for your shares to be voted. Also, please note that if the
holder of record of your shares is a broker, bank or other nominee and you wish
to vote at the special meeting, you must bring a letter from the broker, bank or
other nominee confirming that you are the beneficial owner of the shares.
Any shareholder executing a proxy may revoke it at any time before it is
voted by:
- delivering to CommonWealth prior to the special meeting a written notice
of revocation addressed to William W. Ranson, Executive Vice President,
Treasurer and Chief Financial Officer, The CommonWealth Bank, 900 North
Parham Road, Richmond, Virginia 23229;
- delivering to CommonWealth prior to the special meeting a properly
executed proxy with a later date; or
- attending the special meeting and voting in person.
Attendance at the special meeting will not, in and of itself, constitute
revocation of a proxy.
Each proxy returned to CommonWealth (and not revoked) by a holder of
CommonWealth common stock will be voted in accordance with the instructions
indicated thereon. If no instructions are indicated, the proxy will be voted
"FOR" approval of the merger agreement and "FOR" the proposal to adjourn the
special meeting if necessary to permit further solicitation of proxies on the
proposal to approve the merger agreement.
15
At this time, the CommonWealth board of directors is unaware of any
matters, other than set forth above, that may be presented for action at the
special meeting. If other matters are properly presented, however, the persons
named as proxies will vote in accordance with their judgment with respect to
such matters.
VOTE REQUIRED
A quorum, consisting of the holders of a majority of the issued and
outstanding shares of CommonWealth common stock, must be present in person or by
proxy before any action may be taken at the special meeting. Abstentions will be
treated as shares that are present for purposes of determining the presence of a
quorum but will not be counted in the voting on a proposal.
The affirmative vote of the holders of more than two-thirds of the
outstanding shares of CommonWealth common stock, voting in person or by proxy,
is necessary to approve the merger agreement on behalf of CommonWealth. The
affirmative vote of a majority of the votes cast on the matter at the special
meeting is required to approve the proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies on the proposal to approve
the merger agreement and any other matter properly submitted to shareholders for
their consideration at the special meeting.
Any "broker non-votes" submitted by brokers or nominees in connection with
the special meeting will not be counted for purposes of determining the number
of votes cast on a proposal but will be treated as present for quorum purposes.
"Broker non-votes" are shares held by brokers or nominees as to which voting
instructions have not been received from the beneficial owners or the persons
entitled to vote those shares and the broker or nominee does not have
discretionary voting power under the applicable New York Stock Exchange rules.
Under these rules, the proposals to approve the merger agreement and to adjourn
the special meeting are not items on which brokerage firms may vote in their
discretion on behalf of their clients if such clients have not furnished voting
instructions within ten days of the special meeting. Because the proposal to
approve the merger agreement is required to be approved by the holders of more
than two-thirds of the outstanding shares of CommonWealth common stock,
abstentions and broker "non-votes" will have the same effect as a vote against
the proposal to approve the merger agreement at the special meeting. And for the
same reason, the failure of a CommonWealth shareholder to vote by proxy or in
person at the special meeting will have the effect of a vote against this
proposal. Because of the vote required for the proposal to adjourn the special
meeting, abstentions and broker "non-votes" will have no effect on this
proposal.
The directors and executive officers of CommonWealth, who collectively own
approximately 13.4% of the outstanding shares of CommonWealth common stock as of
the record date for the special meeting, have entered into shareholder
agreements with First Community pursuant to which they have agreed to vote all
of their shares in favor of the merger agreement. See "Certain Beneficial Owners
of CommonWealth Common Stock" beginning on page 60 and "The Merger --
Shareholder Agreements" on page 43.
As of the close of business on the record date for the special meeting,
First Community beneficially owned 3,500 shares or 0.5% of the outstanding
shares of CommonWealth common stock. First Community intends to vote such shares
in favor of the merger agreement.
SOLICITATION OF PROXIES
CommonWealth will pay for the costs of mailing this document to its
shareholders, as well as all other costs incurred by it in connection with the
solicitation of proxies from its shareholders on behalf of its board of
directors, except that First Community and CommonWealth will share equally the
cost of printing this document. In addition to solicitation by mail, the
directors, officers and employees of CommonWealth and its subsidiaries may
solicit proxies from shareholders of CommonWealth in person or by telephone,
telegram, facsimile or other electronic methods without compensation other than
reimbursement for their actual expenses.
Arrangements also will be made with brokerage firms and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and CommonWealth will
reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
16
RECOMMENDATIONS OF THE COMMONWEALTH BOARD OF DIRECTORS
The CommonWealth board of directors has unanimously approved the merger
agreement and the transactions contemplated by the merger agreement. Based on
CommonWealth's reasons for the merger described in this document, including
Baxter, Fentriss & Co.'s fairness opinion, the board of directors of
CommonWealth believes that the merger is in the best interests of CommonWealth's
shareholders and unanimously recommends that you vote "FOR" approval of the
merger agreement. See "The Merger -- CommonWealth's Reasons for the Merger"
beginning on page 19. The CommonWealth board of directors also unanimously
recommends that you vote "FOR" approval of the proposal to adjourn the special
meeting if necessary to solicit additional proxies to vote in favor of the
merger agreement.
THE MERGER
(PROPOSAL ONE)
The following information describes the material aspects of the merger
agreement and the merger. This description does not purport to be complete and
is qualified in its entirety by reference to the annexes to this document,
including the merger agreement. You are urged to carefully read the annexes in
their entirety.
GENERAL
Under the terms and conditions set forth in the merger agreement,
CommonWealth will be merged with and into First Community Bank. At the effective
time of the merger, each share of common stock of CommonWealth, par value $4.00
per share, outstanding immediately before the effective time of the merger
(except as provided below) will, by virtue of the merger and without any action
on the part of a CommonWealth shareholder, be converted into the right to
receive $30.50 in cash, without interest, or a number of whole shares of First
Community common stock determined by dividing $30.50 by the average closing
price of the First Community common stock during the 20 trading day period
ending on the fifth business day prior to the effective time of the merger, plus
cash in lieu of any fractional share interest. CommonWealth shareholders will
have the opportunity to elect the form of consideration to be received for all
shares of CommonWealth common stock held by them, subject to allocation
procedures set forth in the merger agreement which are intended to ensure that
at least 50% and not more than 60% of the outstanding shares of CommonWealth
common stock will be converted into the right to receive First Community common
stock and the remaining outstanding shares of CommonWealth common stock will be
converted into the right to receive cash. Shares of CommonWealth common stock
held by CommonWealth shareholders who have elected dissenters' rights will not
be converted into the right to receive the merger consideration upon
consummation of the merger.
BACKGROUND OF THE MERGER
In the summer of 2001, CommonWealth was advised by Cherry, Bekaert &
Holland, L.L.P., CommonWealth's independent auditors, to consider enlisting the
services of a financial advisory firm. This advice came after CommonWealth had
received several unsolicited preliminary expressions of interest in combining
the bank with other institutions during 2000 and the first half of 2001, which
CommonWealth had elected not to pursue. In November 2001, Baxter, Fentriss & Co.
was retained as financial advisor to CommonWealth.
On March 12, 2002, Baxter, Fentriss & Co. presented to the board of
directors of CommonWealth a study of the economic and competitive conditions
regarding the banking industry in Richmond, Virginia, CommonWealth's market
area. Baxter, Fentriss & Co. noted the high growth rate of CommonWealth as
compared to other similarly situated community banks in the Richmond area, and
CommonWealth's need in the near future to raise a considerable amount of
additional capital in order to sustain and build on such growth. Baxter,
Fentriss & Co. also advised the board of directors that another way to increase
shareholder value would be through a business combination transaction, and that
a possible affiliation with another banking organization through such a
transaction should be considered by the board of directors in the future as a
strategic alternative to its independent growth plans.
17
The CommonWealth board of directors, at its meeting on May 23, 2002,
appointed a committee of two directors, Harold V. Groome, Jr. and Franklin P.
Hall, to explore the affiliation and merger opportunities available to
CommonWealth. On June 14, 2002, this committee directed Baxter, Fentriss & Co.
to assist in identifying financial institutions that would be interested in a
business combination with CommonWealth. At the direction of the committee,
Baxter, Fentriss & Co. initiated confidential discussions with numerous
financial institutions regarding their interest in merging with CommonWealth.
First Community was one of the financial institutions contacted by Baxter,
Fentriss & Co. First Community reviewed certain financial and other material on
CommonWealth prepared by Baxter, Fentriss & Co. and determined that a potential
transaction with CommonWealth would be of interest. First Community's senior
management then proceeded to prepare various financial analyses regarding a
potential transaction with CommonWealth. On October 10, 2002, First Community
presented to Baxter, Fentriss & Co. a preliminary indication of interest to
merge CommonWealth with and into First Community Bank.
On November 13, 2002, representatives of Baxter, Fentriss & Co. met with
Messrs. Groome and Hall, and submitted a presentation outlining the results of
Baxter, Fentriss & Co.'s confidential discussions with a number of financial
institutions, including First Community, identifying those institutions
interested in a potential merger transaction with CommonWealth. After thorough
discussion about the institutions and their interest in CommonWealth, the
committee instructed Baxter, Fentriss & Co. to contact the principal officers of
certain of the institutions to clarify any outstanding remaining issues and
report to CommonWealth's board of directors concerning all acquisition
proposals. Baxter, Fentriss & Co. contacted the financial institutions shortly
after the meeting with CommonWealth's committee.
On November 18, 2002, the CommonWealth board of directors held a meeting at
which representatives of Baxter, Fentriss & Co. summarized all initial merger
proposals that had been received. The CommonWealth board of directors considered
the proposals from each institution and evaluated them on the level and form of
consideration proposed, the specificity of the acquisition consideration
proposed, the context of the financial institution making the proposal and the
expected future operation of CommonWealth. After deliberating on the terms of
each proposal, the CommonWealth board of directors determined that the merger
proposal offered by First Community was sufficient enough to warrant further
discussions. The CommonWealth board of directors directed J.E. Causey Davis,
CommonWealth's President, and Baxter, Fentriss & Co. to proceed with due
diligence efforts and for Baxter, Fentriss & Co. to contact First Community
about negotiating a definitive merger agreement.
On November, 19, 2002, after First Community's senior management presented
its financial analyses on a merger transaction involving CommonWealth, First
Community's executive committee instructed senior management to proceed with a
merger proposal with respect to CommonWealth. On November 27, 2002, First
Community's counsel, Kelley Drye & Warren LLP, delivered to CommonWealth and its
outside counsel, LeClair Ryan, A Professional Corporation, a draft merger
agreement and other related documents. During December 2002 and January 2003,
CommonWealth and First Community, their respective counsels and Baxter, Fentriss
& Co. negotiated the terms of the merger agreement and related documents. The
CommonWealth board of directors met on December 19, 2002 and January 3 and 7,
2003, to review the proposed merger terms and draft merger agreement. At the
December 19 meeting, representatives of Baxter, Fentriss & Co. and LeClair Ryan
responded to questions from the CommonWealth board of directors concerning the
proposed merger and the draft merger agreement and related documents. First
Community and CommonWealth also conducted due diligence on their respective
institutions during December 2002 and January 2003.
On January 24, 2003, the CommonWealth board of directors held a meeting at
which Baxter, Fentriss & Co. and LeClair Ryan updated the directors as to the
negotiations with First Community. Baxter, Fentriss & Co. informed the board of
directors that First Community had completed its due diligence and had
reaffirmed its earlier merger consideration proposal. Baxter, Fentriss & Co.
then delivered its opinion that the merger consideration in the form as proposed
by First Community was fair to CommonWealth shareholders from a financial point
of view. Representatives of LeClair Ryan then reviewed the merger agreement and
related agreements that had been negotiated with First Community. Throughout the
presentations, representatives of
18
Baxter, Fentriss & Co. and LeClair Ryan responded to questions and comments from
the CommonWealth board of directors.
Following a thorough discussion of the terms of the merger agreement, the
structure of the transaction and other items related to the proposed merger,
each CommonWealth director determined that, based on his independent judgment,
the merger was in the best interests of CommonWealth and its shareholders,
approved the proposed merger agreement, subject to the satisfactory finalization
of the merger documents, and authorized Mr. Hall, as chairman of the board of
CommonWealth, to execute and deliver the merger documents on behalf of
CommonWealth.
On January 27, 2003, representatives of First Community and CommonWealth
met and the parties entered into the merger agreement. After the stock markets
closed on January 27, 2003, First Community and CommonWealth issued a joint
press release publicly announcing the proposed merger. On February 25, 2003,
First Community and CommonWealth entered into an amendment to the merger
agreement. As amended, the merger agreement will permit CommonWealth
shareholders to elect to have up to 50% of their outstanding shares converted
into the right to receive cash, instead of 40% as set forth in the original
agreement.
COMMONWEALTH'S REASONS FOR THE MERGER
The terms of the merger agreement, including the consideration to the paid
to CommonWealth shareholders, were the result of arms length negotiations. In
evaluating the proposal to affiliate with First Community, the CommonWealth
board of directors considered a number of factors, including the following:
- Information regarding the business, operations, earnings, financial
condition, management, earnings and prospects of CommonWealth and First
Community.
- The per share value of the merger consideration to CommonWealth's
shareholders.
- The belief that the terms of the merger are fair to and in the best
interest of the CommonWealth shareholders.
- The tax-free nature of the stock portion of the merger consideration to
CommonWealth shareholders.
- The fact that First Community common stock is publicly traded on Nasdaq,
therefore offering a more liquid investment for CommonWealth
shareholders.
- The historical dividends paid by First Community to its shareholders.
- First Community's historical record with respect to the employees and the
communities of the banks it has acquired.
- The opinion of Baxter, Fentriss & Co. that the merger consideration is
fair, from a financial point of view, to CommonWealth's shareholders.
The above discussion of the information and factors considered by the
CommonWealth board of directors is not intended to be exhaustive, but includes
the material factors the CommonWealth board of directors considered. In reaching
its determination to approve and recommend the merger, the CommonWealth board of
directors did not assign any relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors.
THE COMMONWEALTH BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF COMMONWEALTH AND ITS SHAREHOLDERS. ACCORDINGLY THE COMMONWEALTH
BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
FIRST COMMUNITY'S REASONS FOR THE MERGER
First Community entered into the merger agreement with CommonWealth
because, among other things, First Community believes the merger is consistent
with its expansion strategy in Eastern Virginia. The acquisition will expand
First Community Bank's commercial banking operations to the Richmond, Virginia
market area and
19
complement its existing mortgage banking and brokerage network which is
currently headquartered in Richmond. The CommonWealth franchise is a natural
extension of First Community's current operations in Virginia.
OPINION OF COMMONWEALTH'S FINANCIAL ADVISOR
Baxter, Fentriss & Co. has acted as financial advisor to CommonWealth in
connection with the merger. Baxter, Fentriss & Co. assisted CommonWealth in
identifying and negotiating with First Community and other prospective
acquirors. Baxter, Fentriss & Co. delivered to CommonWealth its opinion dated
January 24, 2003, that on the basis of matters referred to herein, the
consideration to be received by shareholders of CommonWealth is fair from a
financial point of view. Baxter, Fentriss & Co. has confirmed its January 24th
opinion by delivering to the board of directors of CommonWealth a written
opinion dated the date of this document. In rendering its opinion, Baxter,
Fentriss & Co. consulted with the management of CommonWealth and First
Community, and reviewed the merger agreement. Baxter, Fentriss & Co. also
reviewed certain publicly-available information on the parties and certain
additional materials made available by the management of the respective
companies.
In addition, Baxter, Fentriss & Co. discussed with CommonWealth's
management and First Community their respective businesses and outlook. No
limitations were imposed by CommonWealth's board of directors upon Baxter,
Fentriss & Co. with respect to the investigation made or procedures followed by
it in rendering its opinion. The full text of Baxter, Fentriss & Co.'s written
opinion is attached as Annex II to this prospectus/proxy statement and should be
read in its entirety with respect to the procedures followed, assumptions made,
matters considered, and qualifications and limitations on the review undertaken
by Baxter, Fentriss & Co.
Baxter, Fentriss & Co.'s opinion is directed to CommonWealth's board of
directors and is directed only to the fairness, from a financial point of view,
of the merger consideration to be received by shareholders of CommonWealth. It
does not address CommonWealth's underlying business decision to effect the
proposed merger, nor does it constitute a recommendation to any CommonWealth
shareholder as to how a shareholder should vote with respect to the merger at
the special meeting or as to any other matter.
Baxter, Fentriss & Co.'s opinion was one of many factors taken into
consideration by CommonWealth's board of directors in making its determination
to approve the merger. The opinion of Baxter, Fentriss & Co. does not address
the relative merits of the merger as compared to any alternative business
strategies that might exist for CommonWealth or the effect of any other business
combination in which CommonWealth might engage.
Baxter, Fentriss & Co., as part of its investment banking business, is
continually engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and valuations for
estate, corporate and other purposes. Baxter, Fentriss & Co. is a nationally
recognized advisor to firms in the financial services industry on mergers and
acquisitions. CommonWealth selected Baxter, Fentriss & Co. as its financial
advisor because Baxter, Fentriss & Co. is an investment banking firm focusing on
transactions involving community banks and thrifts and because of the firm's
extensive experience and expertise in transactions similar to the merger.
Baxter, Fentriss & Co. is not affiliated with CommonWealth or First Community.
Baxter, Fentriss & Co. has represented from time-to-time certain financial
institutions that have ultimately been merged with or acquired by First
Community. In addition, Baxter, Fentriss & Co. has been a depository customer of
CommonWealth since 1993 and received $7,500 from CommonWealth in connection with
a strategic evaluation requested by CommonWealth in November 2001.
In connection with rendering its opinion to CommonWealth's board of
directors, Baxter, Fentriss & Co. performed a variety of financial analyses. In
conducting its analyses and arriving at its opinion as expressed herein, Baxter,
Fentriss & Co. considered such financial and other factors as it deemed
appropriate under the circumstances including the following:
- the historical and current financial condition and results of operations
of CommonWealth and First Community, including interest income, interest
expense, noninterest income, noninterest expense, earnings, book value,
returns on assets and equity, and possible tax consequences resulting
from the transaction;
20
- the business prospects of CommonWealth and First Community;
- the economies of CommonWealth and First Community's respective market
areas; and
- the nature and terms of certain other acquisition transactions that it
believed to be relevant.
Baxter, Fentriss & Co. also considered its assessment of general economic,
market, financial and regulatory conditions and trends, as well as its knowledge
of the financial institutions industry, its experience in connection with
similar transactions, its knowledge of securities valuation generally, and its
knowledge of acquisition transactions in Virginia and throughout the United
States.
In connection with rendering its opinion, Baxter, Fentriss & Co. reviewed:
- the merger agreement;
- drafts of this prospectus/proxy statement;
- the annual reports to shareholders of CommonWealth for the years ended
December 31, 2000 and 2001, CommonWealth's September 30, 2002 call report
and CommonWealth's December 31, 2002 unaudited internal financial
statements, as well as certain current interim reports to shareholders
and regulatory agencies;
- the annual reports to shareholders of First Community for the years ended
December 31, 1999, 2000, and 2001, First Community's September 30, 2002
Form 10-Q, as well as certain current interim reports to shareholders and
regulatory agencies; and
- certain additional financial and operating information with respect to
the business, operations and prospects of CommonWealth and First
Community as it deemed appropriate.
Baxter, Fentriss & Co. also:
- held discussions with members of CommonWealth's and First Community's
senior management regarding the historical and current business
operation, financial condition and future prospects of their respective
companies;
- reviewed the historical market prices and trading activity for
CommonWealth's common stock and First Community's common stock, as
applicable, and compared them with those of certain publicly traded
companies that it deemed to be relevant;
- compared the results of operations of CommonWealth and First Community
with those of certain banking companies that it deemed to be relevant;
- analyzed the pro-forma financial impact of the merger on First Community;
and
- conducted such other studies, analyses, inquiries, and examinations as
Baxter, Fentriss & Co. deemed appropriate.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore, a
fairness opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the consideration to be provided to the holders of CommonWealth common
stock was to some extent a subjective one based on the experience and judgment
of Baxter, Fentriss & Co. and not merely the result of mathematical analysis of
financial data. Accordingly, notwithstanding the separate factors as summarized
below, Baxter, Fentriss & Co. believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. The ranges of valuations
resulting from any particular analysis described below should not be taken to be
Baxter, Fentriss & Co.'s view of the actual value of CommonWealth or First
Community.
In performing its analyses, Baxter, Fentriss & Co. made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of
21
CommonWealth and First Community. The analyses performed by Baxter, Fentriss &
Co. are not necessarily indicative of actual values or future results, which may
be significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold. In
rendering its opinion, Baxter, Fentriss & Co. assumed that, in the course of
obtaining the necessary regulatory approvals for the merger, no conditions will
be imposed that will have a material adverse effect on the contemplated benefits
of the merger, on a pro-forma basis, to First Community.
The following is a summary of selected analyses performed by Baxter,
Fentriss & Co. in connection with its opinion:
Stock Price History. Baxter, Fentriss & Co. analyzed the history of the
trading prices and volume for CommonWealth's and First Community's common stock
and compared them to other publicly traded banks in Virginia and to the price
offered by First Community. As of November 30, 2002, First Community traded at
$32.94, which was a price to earnings multiple of 13.90X and a price to book
multiple of 2.18X. This compared to corresponding average multiples for Virginia
banks of 16.18X price to earnings and 1.58X price to book. Such multiples are
deemed consistent with the pricing multiples for other such institutions.
Comparative Analysis. Baxter, Fentriss & Co. analyzed and compared the
price to earnings multiple, price-to-book multiple, price-to-assets, and
premium-on-deposits of First Community's offer to the yearly average of Virginia
publicly announced banking transaction pricing multiples over the past seven
years. The First Community merger pricing multiples were price-to-book 2.99X;
price-to-earnings 26.88X; price-to-assets 18.51%; and premium-on-deposits
15.38%. These pricing ratios reflect as purchase value the sum of all value paid
to common shareholders and value paid to option holders in excess of strike
price. For price-to-book multiple, the merger ranks as the second highest of 17
transactions since 2000, and for price-to-earnings the merger ranks as the
highest multiple since 2000. For premium-on-deposits the merger ranks as second
of 17 while for price-to-assets it ranks tenth of 17. In addition, the
transaction values exceed the Virginia average multiple for each ratio since
1996 except price-to-assets which reflects the lower capital to asset ratio that
CommonWealth had at the end of 2002.
Below is a table that summarizes the Virginia average pricing for
transactions since 1996.
VIRGINIA PUBLICLY ANNOUNCED TRANSACTIONS 1996-2002
-----------------------------------------------------
AVERAGES
------------------------------------------
YEAR P/B (X) P/E (X) P/A (%) PREM/DEP (%)
---- ------- ------- ------- ------------
1996-2002 2.26 20.65 22.72 17.03
1996 1.90 18.15 20.45 13.20
1997 2.53 21.98 23.95 20.83
1998 2.81 24.44 29.65 29.34
1999 2.19 21.27 21.43 15.72
2000 1.40 18.06 12.92 5.72
2001 2.33 19.75 24.41 11.77
2002 1.79 19.83 20.98 11.10
Discounted Cash Flow Analysis. Baxter, Fentriss & Co. performed a
discounted cash flow analysis to determine hypothetical present values for a
share of CommonWealth's common stock as a five and ten year investment. Under
this analysis, Baxter, Fentriss & Co. considered various scenarios for the
performance of CommonWealth's common stock using a range of growth rates from
eight percent (8%) to fourteen percent (14%) for CommonWealth's earnings. A
range of terminal values from sixteen to twenty times earnings was also used in
the analysis as well as a range of discount rates from twelve and a half percent
(12.5%) to fourteen and a half (14.5%). These ranges of growth rates, discount
rates, and terminal values were chosen based upon what Baxter, Fentriss & Co. in
its judgment, considered to be appropriate taking into account, among other
things, CommonWealth's past and current performance, the general level of
inflation, rates of return for fixed income and equity securities in the market
place generally and for companies of similar risk profiles. In all of the
scenarios
22
considered, the present value of CommonWealth's common stock was calculated at
less than the value of First Community's offer. Thus, Baxter, Fentriss & Co.
discounted cash flow analysis indicated that CommonWealth shareholders would be
in a better financial position by receiving the First Community common stock
offered in the merger rather than continuing to hold CommonWealth common stock.
Below is a table that summarizes the discounted cash flow analysis that
Baxter, Fentriss & Co. performed in forming its fairness opinion. The table uses
CommonWealth's December 31, 2002 financial data. An example of how to read the
table is as follows:
Using a discount rate of 12.5%, a terminal value of 16x, and growth rates
of 8% to 14%, the present value of CommonWealth's common stock is calculated to
be in the range of $14.91 to $19.54 assuming the shares are sold in five years.
The values in the range are less than the $30.50 which First Community has
offered, which means that under the assumptions of this particular scenario, a
holder of CommonWealth common stock would be better off taking First Community's
offer than holding CommonWealth common stock.
SUMMARY OF BAXTER, FENTRISS & CO. DISCOUNTED CASH FLOW ANALYSIS
DISCOUNT RATE OF 12.50% AND GROWTH RATES FROM 8% TO 14%
RANGE OF PRESENT VALUE CALCULATIONS
----------------------------------------------------
TERMINAL VALUE OF EARNINGS SELL SHARES IN FIVE YEARS SELL SHARES IN TEN YEARS
-------------------------- ------------------------- ------------------------
16X $14.91 to $19.54 $12.16 to $20.88
18X $16.78 to $21.98 $13.68 to $23.49
20X $18.64 to $24.43 $15.20 to $26.10
DISCOUNT RATE OF 13.50% AND GROWTH RATES FROM 8% TO 14%
RANGE OF PRESENT VALUE CALCULATIONS
----------------------------------------------------
TERMINAL VALUE OF EARNINGS SELL SHARES IN FIVE YEARS SELL SHARES IN TEN YEARS
-------------------------- ------------------------- ------------------------
16X $14.27 to $18.70 $11.13 to $19.11
18X $16.05 to $21.03 $12.52 to $21.50
20X $17.83 to $23.37 $13.91 to $23.89
DISCOUNT RATE OF 14.50% AND GROWTH RATES FROM 8% TO 14%
RANGE OF PRESENT VALUE CALCULATIONS
----------------------------------------------------
TERMINAL VALUE OF EARNINGS SELL SHARES IN FIVE YEARS SELL SHARES IN TEN YEARS
-------------------------- ------------------------- ------------------------
16X $13.65 to $17.89 $10.19 to $17.51
18X $15.36 to $20.13 $11.47 to $19.69
20X $17.07 to $22.37 $12.74 to $21.88
The discounted cash flow analysis is a widely used methodology. The results
of such methodology are highly dependent upon the numerous assumptions that must
be made and the results thereof are not necessarily indicative of actual values
or actual future results.
Pro forma Underlying Value of the First Community Shares Received. Baxter,
Fentriss & Co. performed an analysis that compares the underlying value of the
shares of First Community that shareholders of CommonWealth would receive as a
result of the merger. In this analysis, the book value per share of $11.50 as of
December 31, 2002 and earnings per share of $1.28 were compared to the
underlying book value, earnings, and dividends that each shareholder will
receive as a result of the merger. The analysis was performed using an assumed
exchange ratio of .9385. Using this exchange ratio, the restated pro forma
underlying book value represented by each CommonWealth share equates to $14.71,
an increase of 27.9%. The pro forma underlying value of CommonWealth's December
31, 2002 earnings per share equates to $2.20, an increase of 71.8%.
CommonWealth, at the time of the transaction announcement, was not issuing
dividends to common sharehold-
23
ers. On a pro forma basis as a result of the acquisition, each shareholder of
CommonWealth common stock would receive $1.00 in dividends for each share held.
Using publicly available information on CommonWealth and First Community
and applying the capital guidelines of banking regulators, Baxter, Fentriss &
Co.'s analysis indicated that the merger would not permanently dilute the
capital and earnings capacity of First Community and would, therefore, likely
not be opposed by the banking regulatory agencies from a capital perspective.
Furthermore, Baxter, Fentriss & Co. considered the likely market overlap and the
Federal Reserve Board guidelines with regard to market concentration and
concluded that possible antitrust issues do not exist.
Baxter, Fentriss & Co. has relied, without any independent verification,
upon the accuracy and completeness of all financial and other information
reviewed. Baxter, Fentriss & Co. has assumed that all estimates were reasonably
prepared by management, and reflect their best current judgments. Baxter,
Fentriss & Co. did not make an independent appraisal of the assets or
liabilities of either CommonWealth or First Community, and has not been
furnished such an appraisal.
No company or transaction used as a comparison in the above analysis is
identical to CommonWealth, First Community, or the merger. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies used for comparison in the above analysis.
Baxter, Fentriss & Co. will be paid (1) a transaction fee, equal to
approximately 1.50% of the aggregate consideration received by CommonWealth's
shareholders and (2) reasonable out-of-pocket expenses for its services.
CommonWealth has agreed to indemnify Baxter, Fentriss & Co. against certain
liabilities, including certain liabilities under federal securities laws.
MERGER CONSIDERATION AND ELECTION AND EXCHANGE PROCEDURES
Upon consummation of the merger, each outstanding share of CommonWealth
common stock (other than any dissenting shares) will be converted into the right
to receive $30.50 in cash, without interest, or shares of First Community common
stock, at the election of each CommonWealth shareholder and subject to the
election, allocation and pro ration procedures set forth in the merger agreement
and described below. See "--Merger Consideration," "-- Election Procedures" and
"-- Allocation Procedures" below. No fractional shares of First Community common
stock will be issued in connection with the merger. Instead, First Community
will make a cash payment to each CommonWealth shareholder who would otherwise
receive a fractional share.
THE FORM OF THE CONSIDERATION ULTIMATELY RECEIVED BY YOU WILL DEPEND UPON
THE ELECTION, ALLOCATION AND PRO RATION PROCEDURES DESCRIBED BELOW AND THE
CHOICES OF OTHER COMMONWEALTH SHAREHOLDERS. ACCORDINGLY, NO GUARANTEE CAN BE
GIVEN THAT YOUR CHOICE WILL BE HONORED.
In addition, because the tax consequences will be dependent on the form of
consideration received, you are urged to read carefully the information set
forth below under "-- Federal Income Tax Consequences" commencing on page 39.
Merger Consideration. The merger agreement provides that each share of
CommonWealth common stock outstanding immediately prior to the effective time of
the merger (except for dissenting shares) shall be converted into, and shall be
cancelled in exchange for, the right to receive either:
- the number of shares of First Community common stock which is equal to
the quotient (which is known as the exchange ratio) determined by
dividing $30.50 by the average share price of the First Community common
stock (which is referred to as the per share stock consideration), except
that cash will be paid for any remaining fractional shares, or
- cash in an amount equal to $30.50, without interest (which is referred to
as the per share cash consideration).
24
As described under "-- Elections" below, you will have the opportunity to
elect the form of consideration to be received for all shares of CommonWealth
common stock held by you, subject to allocation and pro ration procedures set
forth in the merger agreement which are intended to ensure that at least 50% and
not more than 60% of the outstanding shares of CommonWealth common stock will be
converted into the right to receive First Community common stock and the
remaining outstanding shares of CommonWealth common stock will be converted into
the right to receive cash.
For purposes of the merger agreement and determining the merger
consideration, the "average share price" of the First Community common stock
means the average of the closing sales prices of a share of First Community
common stock, as reported on the Nasdaq market on which the common stock then
trades, for the 20 trading-day period ending with the close of business on the
fifth business day preceding the effective time of the merger.
The value of the First Community common stock to be received by you will
depend on the market price of the First Community common stock prior to the
effective time of the merger. The market price of First Community common stock
is subject to change at all times based on the future financial condition and
operating results of First Community, future market conditions and other
factors. The market price of the First Community common stock at the effective
time of the merger or at the time that CommonWealth shareholders who receive
First Community common stock in the merger actually receive stock certificates
evidencing those shares may be higher or lower than recent prices. For further
information concerning the historical prices of the First Community common
stock, see "Market for Common Stock and Dividends" on page 45. You are urged to
obtain current market prices for the First Community common stock in connection
with voting your shares on the merger agreement at the special meeting and
making your election decision.
Elections. No later than five days after the effective time of the merger,
you will be sent an election form which will permit you:
- to elect to receive shares of First Community common stock in exchange
for all shares of CommonWealth common stock held by you, plus cash in
lieu of any fractional share interest,
- to elect to receive cash in exchange for all shares of CommonWealth
common stock held by you, or
- to indicate that you make no election with respect to the consideration
to be received by you in exchange for your shares of CommonWealth common
stock ("no-election shares").
The CommonWealth shares in these three categories are referred to below as
stock election shares, cash election shares and no-election shares.
If you either (i) do not submit a properly completed election form in a
timely fashion or (ii) revoke your election form prior to the deadline for the
submission of the election form and do not resubmit a properly completed
election form by the election form deadline, the shares of CommonWealth common
stock held by you will be designated no-election shares.
Election Procedures. All elections will be required to be made on an
election form. To make an effective election with respect to your shares of
CommonWealth common stock, you must, in accordance with the election form:
- properly complete and return the transmittal and election forms to be
provided to you to the exchange agent designated by First Community to
receive these materials,
- deliver the transmittal and election forms with your stock certificates
representing such shares (or an appropriate guarantee of delivery of such
certificates), and
- deliver with the transmittal and election forms any other required
documents prior to the deadline for returning these documents.
It is currently anticipated that the transmittal and election forms will be
mailed to you within five days after the merger is completed.
25
The deadline for surrendering all documentation required for an effective
election (the "election deadline date") will be set forth in the election
instructions and will be 20 days following the mailing of the letter of
transmittal and election form, although the date may be extended by mutual
agreement of First Community and CommonWealth.
YOU SHOULD NOT RETURN YOUR COMMONWEALTH STOCK CERTIFICATES WITH THE
ENCLOSED PROXY, AND STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO FIRST
COMMUNITY, COMMONWEALTH OR ANY OTHER PARTY UNTIL YOU HAVE RECEIVED THE
TRANSMITTAL AND ELECTION FORMS.
IF YOU HAVE A PARTICULAR PREFERENCE AS TO THE FORM OF CONSIDERATION TO BE
RECEIVED FOR YOUR SHARES OF COMMONWEALTH COMMON STOCK, YOU SHOULD MAKE AN
ELECTION BECAUSE SHARES AS TO WHICH AN ELECTION HAS BEEN MADE WILL BE GIVEN
PRIORITY IN ALLOCATING SUCH CONSIDERATION OVER SHARES AS TO WHICH NO ELECTION
WAS MADE. NEITHER THE COMMONWEALTH BOARD NOR ITS FINANCIAL ADVISOR MAKES ANY
RECOMMENDATION AS TO WHETHER SHAREHOLDERS SHOULD ELECT TO RECEIVE THE CASH
CONSIDERATION OR THE STOCK CONSIDERATION IN THE MERGER. YOU MUST MAKE YOUR OWN
DECISION WITH RESPECT TO SUCH ELECTION, BEARING IN MIND THE TAX CONSEQUENCES OF
THE ELECTION YOU CHOOSE. SEE "-- FEDERAL INCOME TAX CONSEQUENCES" BEGINNING ON
PAGE 39.
EVEN IF YOU HAVE NO PREFERENCE, IT IS SUGGESTED THAT YOU RETURN YOUR
TRANSMITTAL AND ELECTION FORMS, TOGETHER WITH YOUR STOCK CERTIFICATE(S), BY THE
ELECTION DEADLINE DATE INDICATING THAT YOU HAVE NO PREFERENCE, SO THAT YOU MAY
RECEIVE THE MERGER CONSIDERATION ALLOCABLE TO YOU PROMPTLY FOLLOWING COMPLETION
OF THE EXCHANGE PROCEDURES AFTER THE MERGER IS CONSUMMATED. SEE "-- PROCEDURES
FOR EXCHANGING COMMONWEALTH COMMON STOCK CERTIFICATES" BEGINNING ON PAGE 27.
Allocation Procedures. Your ability to receive all cash or all shares of
First Community common stock in exchange for your shares of CommonWealth common
stock in the merger is subject to allocation procedures which are designed to
ensure that at least 50% and not more than 60% of the total number of shares of
CommonWealth common stock issued and outstanding at the effective time of the
merger will be converted into shares of First Community common stock and the
remaining shares will be converted into cash in accordance with the terms of the
merger agreement.
It is unlikely that elections will be made in the exact proportions
provided for in the merger agreement. As a result, the merger agreement
describes procedures to be followed if CommonWealth shareholders in the
aggregate elect to receive more or less of the First Community common stock than
First Community has agreed to issue. These procedures are summarized below.
Pursuant to the merger agreement, the minimum cash consideration shall
amount to the product of the number of shares of CommonWealth common stock
outstanding immediately prior to the effective time of the merger times .4 times
$30.50. In addition, pursuant to the merger agreement, the maximum cash
consideration shall amount to the product of the number of shares of
CommonWealth common stock outstanding immediately prior to the effective time of
the merger times .5 times $30.50.
- If the cash elections total less than the minimum cash consideration, a
sufficient number of shares will be converted into cash election shares,
first from among the holders of no-election shares and then, if
necessary, from among the holders of stock election shares on a pro rata
basis, so that the total cash paid equals as closely as practicable the
minimum cash consideration. This pro ration will reflect the proportion
that the number of stock election shares of each holder of stock election
shares bears to the total number of stock election shares.
- If the cash elections total more than the maximum cash consideration, all
no-election shares will be converted to stock election shares and a
sufficient number of shares from among the holders of cash election
shares (excluding shares of CommonWealth common stock held by dissenting
shareholders) will be converted on a pro rata basis into stock election
shares, so that the total cash paid equals as closely as practicable the
maximum cash consideration. This pro ration will reflect the proportion
that the number of cash election shares of each holder of cash election
shares bears to the total number of cash election shares.
26
- If the cash elections total more than the minimum cash consideration but
less than the maximum cash consideration, a sufficient number of
no-election shares will be converted into cash election shares so that
the total cash paid equals as closely as practicable the maximum cash
consideration.
Upon consummation of the merger, any shares of CommonWealth common stock
that are held directly or indirectly by First Community, other than in a
fiduciary capacity or in satisfaction of a debt previously contracted, will be
canceled and retired and no payment will be made with respect to those shares
and such shares will not be considered for purposes of the foregoing allocation
procedures.
PROCEDURES FOR EXCHANGING COMMONWEALTH COMMON STOCK CERTIFICATES
CommonWealth shareholders who surrender their stock certificates and
complete transmittal and election forms prior to the election deadline date, or
any extension of such time period, will automatically receive the merger
consideration allocated to them as the result of the merger promptly following
completion of the allocation procedures. The exchange agent will complete the
allocation within ten business days after the election deadline date. Other
shareholders will receive the merger consideration allocated to them as soon as
practicable after their stock certificates have been surrendered with
appropriate documentation to the exchange agent or other steps have been taken
to surrender the evidence of their stock interest in CommonWealth in accordance
with the instructions accompanying the letter of transmittal form.
Within five business days after the completion of the merger, the exchange
agent (which will be selected by First Community) will mail to each holder of
record of shares of CommonWealth common stock a letter of transmittal and
instructions for use in making the election and effecting the surrender of the
certificates in exchange for the merger consideration allocated to them. Upon
surrender of a stock certificate for CommonWealth common stock for exchange and
cancellation to the exchange agent, together with a duly executed letter of
transmittal, the holder of such certificate will be entitled to receive such
merger consideration allocated to such holder and the certificate for
CommonWealth common stock so surrendered will be canceled. No interest will be
paid or accrued on any cash constituting merger consideration (including cash in
lieu of fractional shares).
No stock certificates representing fractional shares of First Community
common stock will be issued upon the surrender for exchange of CommonWealth
stock certificates. In lieu of the issuance of any such fractional share, First
Community will pay to each former shareholder of CommonWealth who otherwise
would be entitled to receive a fractional share of First Community common stock
an amount in cash determined by multiplying the fraction of a share of First
Community common stock which such holder would otherwise be entitled to receive
pursuant to the merger agreement by the average of the per share closing sales
prices of the First Community common stock for the twenty trading-day period
ending with the close of business on the fifth business day preceding the
merger.
If you receive shares of First Community common stock in the merger, you
will receive dividends on First Community common stock or other distributions
declared after the completion of the merger only if you have surrendered your
CommonWealth stock certificates. Only then will you be entitled to receive all
previously withheld dividends and distributions, without interest.
After completion of the merger, no transfers of CommonWealth common stock
issued and outstanding immediately prior to the completion of the merger will be
allowed. CommonWealth stock certificates that are presented for transfer after
the completion of the merger will be canceled and exchanged for the appropriate
merger consideration.
First Community will only issue a First Community stock certificate in a
name other than the name in which a surrendered CommonWealth stock certificate
is registered if you present the exchange agent with all documents required to
show and effect the unrecorded transfer of ownership of the shares of
CommonWealth common stock formerly represented by such CommonWealth stock
certificate, and show that you paid any applicable stock transfer taxes.
27
If your CommonWealth stock certificate has been lost, stolen or destroyed,
you may be required to deliver an affidavit and a lost certificate bond as a
condition to receiving any First Community stock certificate to which you may be
entitled.
ASSUMPTION OF COMMONWEALTH STOCK OPTIONS
At the effective time of the merger, each option to purchase shares of
CommonWealth common stock granted under CommonWealth's stock option plan which
is outstanding and unexercised immediately prior thereto will cease to represent
a right to acquire shares of CommonWealth common stock and will be converted
automatically into an option to purchase shares of First Community common stock,
and First Community will assume each CommonWealth stock option, in accordance
with the terms of the CommonWealth stock option plan and stock option agreement
by which it is evidenced, including without limitation all terms pertaining to
the acceleration and vesting of the holder's option exercise rights, except that
from and after the effective time of the merger:
- First Community and the compensation committee of the board of directors
of First Community shall be substituted for CommonWealth and the
CommonWealth board of directors or duly authorized board committee
administering the CommonWealth stock option plan;
- each CommonWealth stock option assumed by First Community will be
exercisable solely for shares of First Community common stock;
- the number of shares of First Community common stock subject to such
CommonWealth stock option will be equal to the number of shares of
CommonWealth common stock subject to such CommonWealth stock option
immediately before the effective time of the merger multiplied by the
exchange ratio, rounded down to the nearest share; and
- the per share exercise price under each such CommonWealth stock option
will be adjusted by dividing the per share exercise price under each such
CommonWealth stock option by the exchange ratio, rounded up to the
nearest cent.
Pursuant to the merger agreement, First Community agreed to register under
the Securities Act of 1933 the shares of First Community common stock issuable
upon exercise of the substitute stock options to be issued pursuant to the
merger agreement within fifteen business days after consummation of the merger.
CONDITIONS TO THE MERGER
Completion of the merger is subject to the satisfaction of certain
conditions set forth in the merger agreement, or the waiver of such conditions
by the party entitled to do so, at or before the closing date of the merger.
Each of the parties' obligation to consummate the merger under the merger
agreement is subject to the following conditions:
- the holders of more than two-thirds of the outstanding CommonWealth
common stock must have approved the merger agreement;
- all regulatory approvals required to consummate the merger by any
governmental authority must have been obtained and must remain in full
force and effect, all statutory waiting periods in respect thereof must
have expired, and no required approval may contain any condition,
restriction or requirement which First Community's board of directors
reasonably determines in good faith would, individually or in the
aggregate, materially reduce the benefits of the merger to such a degree
that First Community, in its good faith judgment, would not have entered
into the merger agreement had such conditions, restrictions or
requirements been known as of the date of the merger agreement;
- no statute, rule, regulation, judgment, decree, injunction or other order
may have been enacted, issued, promulgated, enforced or entered which
prohibits, restricts or makes illegal the consummation of the merger;
28
- the registration statement of First Community of which this document is a
part must have become effective under the Securities Act of 1933 and no
stop order suspending the effectiveness of such registration statement
shall have been issued and no proceedings for that purpose shall have
been initiated by the Securities and Exchange Commission and not
withdrawn;
- the shares of First Community common stock to be issued in connection
with the merger must have been approved for listing on the Nasdaq market
on which the First Community common stock may then be listed; and
- each of First Community and CommonWealth must have received an opinion of
Kelley Drye & Warren LLP to the effect that the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
In addition to the foregoing conditions, the obligation of First Community
to consummate the merger under the merger agreement is subject to the following
conditions, which may be waived by First Community:
- the representations and warranties of CommonWealth in the merger
agreement must be true and correct as of the date of the merger agreement
and as of the effective time of the merger, except as to any
representation or warranty which specifically relates to an earlier date
and except that the representations and warranties of CommonWealth will
be deemed true and correct unless the failure or failures of those
representations and warranties to be true and correct has had or is
reasonably likely to have a material adverse effect (as defined below) on
CommonWealth;
- CommonWealth must have performed in all material respects all obligations
required to be performed by it at or prior to consummation of the merger;
- First Community must have received a certificate from specified officers
of CommonWealth with respect to compliance with the foregoing conditions
to the obligations of First Community;
- dissenting shares shall not represent 10% or more of the outstanding
CommonWealth common stock;
- each director and executive officer of CommonWealth shall have entered
into a shareholder agreement with First Community (see "-- Shareholder
Agreements" beginning on page 43);
- Mr. Davis shall have entered into an employment agreement with First
Community Bank, the form of which has been agreed to by the parties;
- LeClair Ryan, A Professional Corporation, legal counsel to CommonWealth,
shall have delivered a legal opinion to First Community and First
Community Bank, the form of which has been agreed to by the parties; and
- First Community shall have received such certificates of CommonWealth's
officers or others and such other documents to evidence fulfillment of
the conditions to its obligations as First Community may reasonably
request.
In addition to the other conditions set forth above, the obligation of
CommonWealth to consummate the merger under the merger agreement is subject to
the following conditions, which may be waived by CommonWealth:
- the representations and warranties of First Community in the merger
agreement must be true and correct as of the date of the merger agreement
and as of the effective time of the merger, except as to any
representation or warranty which specifically relates to an earlier date
and except that the representations and warranties of First Community
will be deemed true and correct unless the failure or failures of those
representations and warranties to be true and correct has had or is
reasonably likely to have a material adverse effect (as defined below) on
First Community;
- First Community must have performed in all material respects all
obligations required to be performed by it at or prior to consummation of
the merger;
29
- CommonWealth must have received a certificate from specified officers of
First Community with respect to compliance with the foregoing conditions
to the obligations of CommonWealth;
- Kelley Drye & Warren LLP, legal counsel to First Community, shall have
delivered an opinion to CommonWealth, the form of which has been agreed
to by the parties; and
- CommonWealth shall have received such certificates of First Community's
officers or others and such other documents to evidence fulfillment of
the conditions to its obligations as CommonWealth may reasonably request.
Under the terms of the merger agreement, a material adverse effect on
either First Community or CommonWealth is defined to mean any effect that (1) is
material and adverse to the financial position, results of operations or
business of such entity and its subsidiaries taken as a whole or (2) would
materially impair the ability of such entity and its subsidiaries to perform
their respective obligations under the merger agreement or otherwise materially
impede the consummation of the merger. However, under the terms of the merger
agreement, none of the following would be deemed to constitute a material
adverse effect on any entity:
- changes in banking and similar laws of general applicability or
interpretations of them by governmental authorities;
- changes in United States generally accepted accounting principles or
regulatory accounting requirements applicable to banks or their holding
companies generally;
- changes in general economic conditions affecting banks and their holding
companies generally;
- modifications or changes to valuation policies and practices, or expenses
incurred, in connection with the transactions contemplated by the merger
agreement or restructuring charges taken in connection with them, in each
case in accordance with United States generally accepted accounting
principles; and
- with respect to CommonWealth only, the effects of any action or omission
taken with the prior consent of First Community or as otherwise
contemplated by the merger agreement.
REGULATORY APPROVALS
Consummation of the merger is subject to receipt of certain regulatory
approvals.
OCC. The parties currently intend to merge CommonWealth into First
Community Bank. The merger is subject to the prior approval of the Office of the
Comptroller of the Currency ("OCC") under the Bank Merger Act. First Community
Bank has obtained OCC approval for the merger. In reviewing applications under
the Bank Merger Act, the OCC strives to preserve the soundness of the national
banking system and to promote market structures conducive to competition and
responsive to community needs. The OCC considers:
- the effect of the transaction upon competition;
- the financial and managerial resources and future prospects of the
merging and resulting institutions;
- the performance of the applicants in helping to meet the credit needs of
the relevant communities, including low- and moderate-income
neighborhoods; and
- the convenience and needs of the community served.
The OCC will not approve a transaction:
- that would result in a monopoly or would be in furtherance of any
combination, conspiracy or attempt to monopolize the business of banking
in any part of the United States; or
- whose effect in any section of the United States may be to substantially
lessen competition, or tend to create a monopoly, or which in any other
manner would be in restraint of trade, unless the probable effects of the
transaction in meeting the convenience and needs of the community clearly
outweigh the anti-competitive effects of the transaction.
30
Any transaction approved by the OCC may not be completed until 30 days
after the OCC's approval, during which time the U.S. Department of Justice may
challenge such transaction on antitrust grounds. With the approval of the OCC
and the U.S. Department of Justice, the waiting period may be reduced to 15
days.
Federal Reserve Board. Section 225.12(d)(1) of the Federal Reserve Board's
Regulation Y provides that the approval of the Federal Reserve Board is not
required for the merger of a subsidiary bank of a bank holding company with
another bank, if the transaction requires the prior approval of a federal
supervisory agency, in this case the OCC, under the Bank Merger Act and certain
other requirements are met. Under this regulation, First Community is not
required to submit any formal application or notice to the Federal Reserve
Board. When the OCC receives an application under the Bank Merger Act, it sends
copies to the appropriate Federal Reserve Bank, and the Department of Justice
and the FDIC.
State Approvals. First Community has filed an application with and
received approval from the Bureau of Financial Institutions of the State
Corporation Commission of the Commonwealth of Virginia.
Status of Applications and Notices. First Community, First Community Bank
and CommonWealth have filed all required applications with applicable regulatory
authorities in connection with the merger. There can be no assurance that all
requisite approvals will be obtained, that such approvals will be received on a
timely basis or that such approvals will not impose conditions or requirements
which, individually or in the aggregate, would so materially reduce the economic
or business benefits of the transactions contemplated by the merger agreement to
First Community that had such condition or requirement been known, First
Community, in its reasonable judgment, would not have entered into the merger
agreement. If any such condition or requirement is imposed, First Community may
elect not to consummate the merger. See " - Conditions to the Merger" beginning
on page 28.
BUSINESS PENDING THE MERGER
The merger agreement contains certain covenants of the parties regarding
the conduct of their respective businesses pending consummation of the merger.
These covenants, which are contained in Article IV of the merger agreement
included as Annex I hereto, are briefly described below.
Pending consummation of the merger, CommonWealth may not, among other
things, take the following actions without the prior written consent of First
Community:
- conduct its business other than in the ordinary and usual course
consistent with past practice or fail to use reasonable best efforts to
preserve its business organization, keep available the present services
of its employees and preserve for itself and First Community the goodwill
of the customers of CommonWealth and its subsidiaries and others with
whom business relations exist;
- issue, sell or otherwise permit to become outstanding, or authorize the
creation of any additional shares of capital stock or rights to acquire
such stock, other than pursuant to stock options outstanding on the date
of the merger agreement and disclosed to First Community;
- declare any dividend on its capital stock;
- amend its articles of organization and bylaws (or equivalent documents);
- hire any person as an employee unless hired to fill a vacancy or if the
person's salary is less than $40,000 on an annual basis;
- take specified actions with respect to its business, including without
limitation enter into or amend an employment, consulting or severance
agreement with, or increase the rate of compensation of, its directors,
officers or employees; enter into, establish, adopt or amend any employee
benefit plan; purchase or sell assets or deposits; make capital
expenditures in excess of $10,000 individually or $50,000 in the
aggregate; change its methods of accounting; enter into, amend or modify
material contracts; settle litigation claims; enter into new businesses;
change its principal policies; enter into derivatives contracts; incur
indebtedness (other than various forms of short-term indebtedness); make
certain real estate
31
investments; make or modify loans outside of the ordinary course; or
acquire any debt security or equity other than federal funds or
short-term U.S. Government securities;
- take any action that would prevent or impede the merger from qualifying
as a reorganization under the Internal Revenue Code;
- take any action that would result in (1) any of the representations and
warranties of CommonWealth not being true and correct in any material
respect at or prior to the effective time of the merger, (2) any of the
conditions to consummation of the merger set forth in the merger
agreement not being satisfied or (3) a material violation of the merger
agreement, except in each case as may be required by applicable law and
regulation; or
- agree to do any of the foregoing.
The merger agreement also provides that pending consummation of the merger,
First Community may not, and will cause each subsidiary of First Community not
to, take the following actions without the prior written consent of
CommonWealth:
- take any action that would prevent or impede the merger from qualifying
as a reorganization under the Internal Revenue Code;
- take any action that would result in (1) any of the representations and
warranties of First Community not being true and correct in any material
respect at or prior to the effective time of the merger, (2) any of the
conditions to consummation of the merger set forth in the merger
agreement not being satisfied or (3) a material violation of the merger
agreement, except in each case as may be required by applicable law and
regulation; or
- agree to do any of the foregoing.
BOARD OF DIRECTORS' COVENANT TO RECOMMEND THE MERGER AGREEMENT
Pursuant to the merger agreement, the CommonWealth board of directors is
required to recommend that CommonWealth shareholders approve the merger
agreement at all times prior to and during the meeting of CommonWealth
shareholders at which the merger agreement is to be considered by them. However,
nothing in the merger agreement prevents the CommonWealth board of directors
from withholding, withdrawing, amending or modifying its recommendation if it
determines, after consultation with its outside counsel, that such action is
legally required in order for the directors of CommonWealth to comply with their
fiduciary duties to the CommonWealth shareholders under applicable law, provided
that any such action in connection with an "acquisition proposal" must comply
with the requirements described under "-- No Solicitation" below.
NO SOLICITATION
The merger agreement provides that CommonWealth shall not, and that
CommonWealth shall direct and use its reasonable best efforts to cause its
directors, officers, employees, agents and representatives not to, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries
or the making of any proposal or offer with respect to an "acquisition
proposal," which is defined to mean any proposal or offer with respect to a
merger, reorganization, share exchange, consolidation or similar transaction
involving CommonWealth, or any purchase of all, or substantially all, of the
assets of CommonWealth, or more than 10% of the outstanding equity securities of
CommonWealth (any such proposal or offer is hereinafter referred to as an
"acquisition proposal").
In the merger agreement, CommonWealth also agreed that it would not and
that it would direct and use its reasonable best efforts to cause its directors,
officers, employees, agents and representatives not to, directly or indirectly,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an acquisition
proposal, or otherwise knowingly facilitate any effort
32
or attempt to make or implement an acquisition proposal. However, nothing in the
merger agreement prevents CommonWealth or its board of directors from:
- complying with its disclosure obligations under federal or state law;
- providing information in response to a request therefor by a person who
has made an unsolicited bona fide written acquisition proposal if the
CommonWealth board of directors receives from the person so requesting
such information an executed confidentiality agreement;
- engaging in any negotiations or discussions with any person who has made
an unsolicited bona fide written acquisition proposal; or
- recommending such an acquisition proposal to the shareholders of
CommonWealth,
if and only to the extent that in each of the last three cases referred to
above, (1) the CommonWealth board of directors determines in good faith after
consultation with outside legal counsel that such action would be required in
order for its directors to comply with their respective fiduciary duties under
applicable law and (2) the CommonWealth board of directors determines in good
faith after consultation with its financial advisor that such acquisition
proposal, if accepted, is reasonably likely to be consummated, taking into
account all legal, financial and regulatory aspects of the proposal and the
person making the proposal and would, if consummated, result in a transaction
more favorable to CommonWealth's shareholders from a financial point of view
than the merger with First Community. An acquisition proposal which is received
and considered by CommonWealth in compliance with these requirements is referred
to as a "superior proposal." CommonWealth is required to notify First Community
immediately if any such inquiries, proposals or offers are received by, any such
information is requested from, or any such discussions or negotiations are
sought to be initiated or continued with, CommonWealth or any of its
representatives.
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
Pursuant to the merger agreement, First Community and CommonWealth made
certain customary representations and warranties relating to their respective
companies, subsidiaries, businesses and matters related to the merger. For
detailed information concerning these representations and warranties, reference
is made to Article V of the merger agreement included as Annex I hereto. Such
representations and warranties generally must remain accurate through the
completion of the merger unless the fact or facts that caused a breach of a
representation and warranty has not had or is not reasonably likely to have a
material adverse effect on the party making the representation and warranty. See
"-- Conditions to the Merger" beginning on page 28.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of articles of merger with
the Virginia State Corporation Commission pursuant to the Virginia Stock
Corporation Act and a notice of consummation is filed with the OCC pursuant to
OCC guidelines, unless a different date and time is specified as the effective
time in such documents. Articles of merger and notice of consummation will be
filed only after the satisfaction or waiver of all conditions to the merger set
forth in the merger agreement on a date selected by First Community after such
satisfaction or waiver, which is no later than the later of (A) five business
days after such satisfaction or waiver or (B) the first month end following such
satisfaction or waiver, or on such other date as First Community and
CommonWealth may mutually agree upon.
A closing will take place immediately prior to the effective time of the
merger or on such other date as First Community and CommonWealth may mutually
agree upon.
AMENDMENT OF THE MERGER AGREEMENT
To the extent permitted under applicable law, the merger agreement may be
amended or supplemented at any time by written agreement of the parties whether
before or after the approval of the shareholders of CommonWealth, except that
after shareholders of CommonWealth have approved the merger agreement no
33
amendment or supplement which by law requires further approval by the
shareholders of CommonWealth may be made without obtaining such approval.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated:
- by mutual consent of the parties;
- by a non-breaching party if the other party (1) breaches any covenants or
undertakings contained in the merger agreement or (2) breaches any
representations or warranties contained in the merger agreement, in each
case if such breach has not been cured within thirty days after notice
from the terminating party and which breach would be reasonably expected,
individually or in the aggregate with other breaches, to result in a
material adverse effect with respect to the breaching party;
- by either First Community or CommonWealth if the merger is not
consummated by September 30, 2003, unless the failure to consummate the
merger is due to a breach by (1) the party seeking such termination of
its obligations under the merger agreement or (2) any director or
executive officer of CommonWealth (to the extent CommonWealth is seeking
to terminate) through such director's or executive officer's breach of
his respective shareholder agreement;
- by either party if any required regulatory approvals for consummation of
the merger is not obtained;
- by either party if the shareholders of CommonWealth do not approve the
merger agreement at a meeting of the shareholders of CommonWealth duly
called for such purpose;
- by First Community, prior to the special meeting, if CommonWealth shall
have breached the covenants described under "-- No Solicitation" on page
32, the CommonWealth board of directors shall have failed to recommend
that the shareholders of CommonWealth approve the merger agreement or has
withdrawn, modified or changed such recommendation in a manner which is
adverse to First Community, or CommonWealth breaches its covenants
requiring the calling and holding of a meeting of shareholders to
consider the merger agreement;
- by First Community if a third party commences a tender offer or exchange
offer for 20% or more of the outstanding CommonWealth common stock and
the board of directors of CommonWealth recommends that CommonWealth
shareholders tender their shares in the offer or otherwise fails to
recommend that they reject the offer within a specified period; and
- by CommonWealth at any time prior to the special meeting in order to
concurrently enter into an acquisition agreement or similar agreement
with respect to an unsolicited "superior proposal," as defined in the
merger agreement and under "-- No Solicitation" beginning on page 32,
which has been received and considered by CommonWealth in compliance with
the applicable terms of the merger agreement, provided that CommonWealth
has notified First Community at least five business days in advance of
any such termination and given First Community the opportunity during
such period to make an offer at least as favorable as the superior
proposal, as determined by the CommonWealth board of directors.
CommonWealth also may terminate the merger agreement if during the five-day
period commencing on the date on which the last required governmental approval
of the merger is received and all statutory waiting periods have expired (which
date is referred to in this document and in the merger agreement as the
"determination date"), it so notifies First Community and the average daily per
share closing prices of the First Community common stock during the 20 trading
days ending five business days prior to the effective time of the merger (the
"First Community average price") is more than $35.81, or 115.0% of $31.14 (the
"First Community starting price"), the average of the closing prices of a share
of First Community common stock for the thirty-day period ending on January 15,
2003.
If the foregoing condition is applicable, CommonWealth has the right to
terminate the merger agreement, which would not require any action of
CommonWealth shareholders. The CommonWealth board of directors has made no
decision as to whether it would exercise its right to terminate the merger
agreement under such
34
circumstances. Any such decision would be made by the CommonWealth board of
directors in light of the circumstances existing at the time that the
CommonWealth board of directors has the opportunity to make such an election, if
any. Before making any determination to terminate the merger agreement, the
CommonWealth board of directors would consult with its financial and other
advisers and would consider all financial and other information it deemed
relevant to its decision. In this regard, the CommonWealth board of directors
would consider many of the same factors that it considered in determining
whether to approve and adopt the merger agreement, including the principal
factors discussed under "The Merger -- CommonWealth's Reasons for the Merger"
beginning on page 19. In particular, the CommonWealth board of directors may
analyze, among other factors, whether the then current consideration to be
received in the merger would deliver more value to CommonWealth shareholders
than the value that could be expected if CommonWealth were to continue as an
independent company, which would occur if the CommonWealth board of directors
were to exercise CommonWealth's right to abandon the merger and First Community
determined not to increase the exchange ratio. In addition, the CommonWealth
board of directors would consider whether, in light of market and other industry
conditions at the time of such decision, the exchange ratio remains fair from a
financial point of view to the holders of shares of CommonWealth common stock.
There can be no assurance that the CommonWealth board of directors would
exercise its right to terminate the merger agreement if each of the conditions
set forth above were applicable. If CommonWealth elected not to exercise its
right to terminate the merger agreement, the exchange ratio and the dollar value
of the consideration which the shareholders of CommonWealth would receive would
continue to be calculated as set forth in the merger agreement.
If CommonWealth elected to exercise its right to terminate the merger
agreement, it must give notice to First Community during the five-day period
commencing with the determination date. During the five-day period, First
Community has the option to increase the consideration payable to CommonWealth
shareholders by adjusting the exchange ratio in the manner described below.
First Community is under no obligation to adjust the exchange ratio and there
can be no assurance that First Community would elect to adjust the exchange
ratio if CommonWealth were to exercise its option to terminate the merger
agreement. Any such decision would be made by First Community in light of the
circumstances existing at the time First Community has the opportunity to make
such an election. If First Community elects to adjust the exchange ratio, it
must give CommonWealth prompt notice of that election and the adjusted exchange
ratio, in which case CommonWealth will not have any right to terminate the
merger agreement as a result of the circumstances described above.
The operation and effect of the provisions of the merger agreement dealing
with an increase in the market price of the First Community common stock may be
illustrated by the following two scenarios:
(1) One scenario is that the First Community average price is above the
First Community starting price of $31.14 but is not above $35.81. Under
such circumstances, the First Community average price would not be more
than 115% of the First Community starting price. As a result, there
would be no increase in the merger consideration and CommonWealth would
be obligated to consummate the merger (assuming all other conditions to
CommonWealth's obligations were satisfied or waived).
(2) A second scenario is that the First Community average price increases
to more than $35.81. Under such circumstances, CommonWealth would have
the right but not the obligation to terminate the merger agreement
unless First Community elected to increase the exchange ratio to the
number (rounded to the nearest one ten-thousandth) obtained by dividing
(A) $30.50 by (B) the product of $31.14 multiplied by 1.15.
First Community also may terminate the merger agreement if within five days
following the determination date, it notifies CommonWealth and the First
Community average price is less than $26.47, or 85.0% of $31.14, the First
Community starting price.
If the foregoing condition is applicable, First Community has the right to
terminate the merger agreement. If First Community elected not to exercise its
right to terminate the merger agreement, the exchange ratio and the dollar value
of the consideration which the shareholders of CommonWealth would receive would
continue to be calculated as set forth in the merger agreement.
35
If First Community elects to exercise its right to terminate the merger
agreement, it must give notice to CommonWealth during the five-day period
commencing with the determination date. During the five-day period, CommonWealth
has the option of decreasing the consideration payable to CommonWealth
shareholders by adjusting the exchange ratio in the manner described below. If
CommonWealth elects to adjust the exchange ratio, it must give First Community
prompt notice of that election and the adjusted exchange ratio, in which case
First Community will not have any right to terminate the merger agreement as a
result of the circumstances described above.
The operation and effect of the provisions of the merger agreement dealing
with a decline in the market price of the First Community common stock may be
illustrated by the following two scenarios:
(1) One scenario is that the First Community average price is below the
First Community starting price of $31.14 but is not less than $26.47.
Under such circumstances, the First Community closing price would not
be less than 85% of the First Community starting price. As a result,
there would be no decrease in the merger consideration and First
Community would be obligated to consummate the merger (assuming all
other conditions to CommonWealth's obligations were satisfied or
waived).
(2) A second scenario is that the First Community average price declines to
less than $26.47. Under such circumstances, First Community would have
the right but not the obligation to terminate the merger agreement
unless CommonWealth elected to decrease the exchange ratio to the
number (rounded to the nearest one ten-thousandth) obtained by dividing
(A) $30.50 by (B) the product of $31.14 multiplied by .85.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When you are considering the recommendation of CommonWealth's board of
directors with respect to approving the merger agreement and the merger, you
should be aware that CommonWealth directors and executive officers have
interests in the merger as individuals which are in addition to, or different
from, their interests as shareholders of CommonWealth. The CommonWealth board of
directors was aware of these factors and considered them, among other matters,
in approving the merger agreement and the merger. These interests are described
below.
Stock Options. The merger agreement provides that at the effective time of
the merger, each outstanding and unexercised option to purchase shares of
CommonWealth common stock granted pursuant to the CommonWealth stock option plan
will cease to represent the right to acquire shares of CommonWealth common stock
and will be converted into a right to acquire shares of First Community common
stock, with the same terms as previously in effect, except that the number of
shares subject to such converted options and the exercise price will be adjusted
to reflect the exchange ratio. See " - Assumption of CommonWealth Stock Options"
beginning on page 28. At the record date for the special meeting, the directors
and executive officers of CommonWealth as a group (seven persons) held options
to purchase an aggregate of 105,117 shares of CommonWealth common stock,
including options to purchase 35,625, 20,022 and 14,781 shares held by Messrs.
Davis, Bien and Ranson, respectively.
Agreements with Executive Officers of CommonWealth. Pursuant to the merger
agreement, First Community agreed to honor various employment and/or severance
agreements which have been entered into by CommonWealth, including the
agreements described below.
J.E. Causey Davis, president and chief executive officer and a director of
CommonWealth, has entered into an employment agreement with CommonWealth, dated
as of December 20, 1996. Under the agreement, Mr. Davis is currently paid a base
salary of $145,187 per year. The agreement is for an initial three year term,
which automatically extends for an additional one-year period on each January 1.
The agreement further provides that if Mr. Davis' employment is terminated
(which includes a reduction in pay or benefits, a change in duties or
responsibilities in the nature of a demotion, or a requirement to work at a
location more than 25 miles from Richmond) following a change in control (which
would include the consummation of the merger with First Community Bank), Mr.
Davis is entitled to receive his current salary for a period of three years
following the date of termination.
36
A condition to First Community's obligation to consummate the merger is
that Mr. Davis enter into an employment agreement with First Community Bank. The
proposed employment agreement provides that Mr. Davis relinquish all amounts due
him under his prior employment agreement, including any amounts that may
otherwise result from the consummation of the merger. The employment agreement
will have a term of two years with an option to extend for additional one-year
terms. Pursuant to such agreement, Mr. Davis shall become an Executive Vice
President and the Chief Executive Officer of the Eastern Virginia Region of
First Community Bank. Mr. Davis shall be paid a minimum base salary of $150,000
per year and shall be entitled to participate in various benefit plans of First
Community Bank. Mr. Davis is entitled to receive severance pay under certain
circumstances, including a termination for other than cause, disability or Mr.
Davis' death or a termination by Mr. Davis due to a breach of the agreement by
First Community Bank or due to certain adverse actions taken by First Community
Bank with respect to Mr. Davis.
CommonWealth has also entered into severance agreements with William D.
Bien and William W. Ranson. Each severance agreement provides severance pay
benefits to the officer if his employment is terminated under certain
circumstances following a change in control (which would include consummation of
the merger with First Community Bank). If there is such a change in control at
any time during the term of the agreement, and thereafter the officer's
employment was terminated either by CommonWealth or the acquiror for any reason
other than for cause (i.e., a continued and willful failure to perform duties or
conduct demonstrably and materially injurious to CommonWealth's success), or by
the officer following an assignment of duties inconsistent with senior officer
status, a material reduction in pay or benefits, a change in duties or
responsibilities in the nature of a demotion or a requirement to work at a
location more than 25 miles from Richmond, the officer generally would be
entitled to receive his current salary and the continuation of life, health,
disability and dental insurance benefits for a period of 24 months following the
date of termination.
Director of First Community. Pursuant to the merger agreement, First
Community agreed to take all action necessary to appoint or elect, effective
upon consummation of the merger, Harold V. Groome, Jr., a director of
CommonWealth, as a director of First Community.
Director of First Community Bank. Pursuant to the merger agreement, First
Community and First Community Bank agreed to take all action necessary to
appoint or elect, effective upon consummation of the merger, Harold V. Groome,
Jr. and Franklin P. Hall, directors of CommonWealth, as directors of First
Community Bank.
Indemnification and Insurance. CommonWealth's directors and officers are
entitled to continuing indemnification against certain liabilities by virtue of
provisions contained in CommonWealth's articles of incorporation and bylaws and
the merger agreement. Pursuant to the merger agreement, First Community agreed
for a period of six years to indemnify and hold harmless each present and former
director, officer and employee of CommonWealth determined as of the effective
time of the merger against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the effective time of the
merger, whether asserted or claimed prior to, at or after the effective time of
the merger, arising in whole or in part out of or pertaining to the fact that he
or she was a director, officer, employee, fiduciary or agent of CommonWealth or
is or was serving at the request of CommonWealth as a director, officer,
employee, fiduciary or agent of another corporation, partnership, joint venture,
trust or other enterprise, including without limitation matters related to the
negotiation, execution and performance of the merger agreement or the
consummation of any of the transactions contemplated by the merger agreement, to
the fullest extent to which such indemnified parties would be entitled under the
articles of incorporation and bylaws of CommonWealth, or any agreement,
arrangement or understanding disclosed by CommonWealth to First Community
pursuant to the merger agreement, in each case as in effect on the date of the
merger agreement.
Pursuant to the merger agreement, First Community agreed to purchase an
extended reporting period endorsement under CommonWealth's existing directors'
and officers' liability insurance policy for CommonWealth's directors and
officers or a substitute policy which shall provide such directors and officers
with coverage following the effective time of the merger for an additional three
years of not less than the existing coverage
37
under, and have other terms no materially less favorable on the whole to, the
insured persons than the directors' and officers' liability insurance coverage
presently maintained by CommonWealth, provided that First Community will not be
required to expend in any one year an amount in excess of the annual premiums
currently paid by CommonWealth for such insurance (the "Insurance Amount"), and
further provided that if First Community is unable to maintain or obtain the
insurance specified above as a result of the preceding provision, First
Community shall use its reasonable best efforts to obtain the most advantageous
coverage as is available for the Insurance Amount with respect to acts or
omissions occurring prior to the effective time of the merger by such directors
and officers in their capacities as such.
Other than as set forth above, no director or executive officer of
CommonWealth has any direct or indirect material interest in the merger, except
insofar as ownership of CommonWealth common stock might be deemed such an
interest. See "Information About CommonWealth -- Certain Beneficial Owners of
CommonWealth Common Stock" beginning on page 60.
CERTAIN EMPLOYEE MATTERS
The merger agreement contains certain agreements of the parties with
respect to various employee matters, which are briefly described below.
As soon as administratively practicable after the effective time of the
merger, First Community will take all reasonable action so that employees of
CommonWealth will be entitled to participate in the First Community employee
benefit plans of general applicability to the same extent as similarly-situated
employees of First Community and its subsidiaries. For purposes of determining
eligibility to participate in, the vesting of benefits and for all other
purposes, other than for accrual of pension benefits, under the First Community
employee benefit plans, First Community will recognize years of service with
CommonWealth to the same extent as such service was credited for such purpose by
CommonWealth.
If employees of CommonWealth or any of its subsidiaries become eligible to
participate in a medical, dental or health plan of First Community, First
Community will cause each such plan to:
- waive any preexisting condition limitations to the extent such conditions
are covered under the applicable medical, health or dental plans of First
Community,
- provide full credit under such plans for any deductibles, co-payment and
out-of-pocket expenses incurred by the employees and their beneficiaries
during the portion of the calendar year prior to such participation, and
- waive any waiting period limitation or evidence of insurability
requirement which would otherwise be applicable to such employee on or
after the effective time of the merger to the extent such employee had
satisfied any similar limitation or requirement under an analogous plan
prior to the effective time of the merger.
An employee of CommonWealth (other than an employee who is a party to an
employment or severance agreement) whose employment is terminated other than for
cause following the effective time of the merger, shall be entitled to receive
certain severance payments based upon the employee's years of service with
CommonWealth.
RESALE OF FIRST COMMUNITY COMMON STOCK
The First Community common stock issued pursuant to the merger will be
freely transferable under the Securities Act of 1933, except for shares issued
to any CommonWealth shareholder who may be deemed to be an affiliate of First
Community for purposes of Rule 144 promulgated under the Securities Act of 1933
or an affiliate of CommonWealth for purposes of Rule 145 promulgated under the
Securities Act of 1933. Affiliates will include persons (generally executive
officers, directors and 10% shareholders) who control, are controlled by or are
under common control with (1) First Community or CommonWealth at the time of the
special meeting or (2) First Community at or after the effective time of the
merger.
38
Rule 145 will restrict the sale of First Community common stock received in
the merger by affiliates and certain of their family members and related
interests. Generally speaking, during the year following the effective time of
the merger, those persons who are affiliates of CommonWealth at the time of the
special meeting, provided they are not affiliates of First Community at or
following the effective time of the merger, may publicly resell any First
Community common stock received by them in the merger, subject to certain
limitations as to, among other things, the amount of First Community common
stock sold by them in any three-month period and as to the manner of sale. After
the one-year period, such affiliates may resell their shares without such
restrictions so long as there is adequate current public information with
respect to First Community as required by Rule 144. Persons who are affiliates
of First Community after the effective time of the merger may publicly resell
the First Community common stock received by them in the merger subject to
similar limitations and subject to certain filing requirements specified in Rule
144. At the present time, it is anticipated that only three affiliates of
CommonWealth will become affiliates of First Community after the merger (i.e.,
the directors of CommonWealth who will become directors of First Community Bank
and Mr. Davis).
The ability of affiliates to resell shares of First Community common stock
received in the merger under Rules 144 or 145 as summarized herein generally
will be subject to First Community's having satisfied its reporting requirements
under the Securities Exchange Act of 1934 for specified periods prior to the
time of sale. Affiliates also would be permitted to resell First Community
common stock received in the merger pursuant to an effective registration
statement under the Securities Act of 1933 or another available exemption from
the Securities Act of 1933 registration requirements. Neither the registration
statement of which this prospectus/proxy statement is a part nor this
prospectus/proxy statement cover any resales of First Community common stock
received by persons who may be deemed to be affiliates of First Community or
CommonWealth in the merger.
CommonWealth has agreed in the merger agreement to use its reasonable best
efforts to cause each person who may be deemed to be an affiliate of it for
purposes of Rule 145 to deliver to First Community a letter agreement intended
to ensure compliance with the Securities Act of 1933.
FEDERAL INCOME TAX CONSEQUENCES
General. The following is a description of certain material federal income
tax consequences of the merger to shareholders of CommonWealth, which is based
upon the opinion of Kelley Drye & Warren LLP, legal counsel to First Community.
The federal income tax laws are complex and the tax consequences of the merger
may vary depending upon each shareholder's individual circumstances or tax
status. Accordingly, this description is not a complete description of all of
the consequences of the merger and, in particular, may not address federal
income tax considerations that may affect the treatment of shareholders subject
to special treatment under United States federal income tax law (including, for
example, foreign persons, financial institutions, dealers in securities, traders
in securities who elect to apply a mark-to-market method of accounting,
insurance companies, tax-exempt entities, holders who acquired their shares of
CommonWealth common stock pursuant to the exercise of an employee stock option
or right or otherwise as compensation and holders who hold CommonWealth common
stock as part of a "hedge," "straddle" or "conversion transaction"). In
addition, no opinion is expressed with respect to the tax consequences of the
merger under applicable foreign, state or local laws or under any federal tax
laws other than those pertaining to the income tax. This description is based on
laws, regulations, rulings and judicial decisions as in effect on the date of
this prospectus/proxy statement, without consideration of the particular facts
or circumstances of any holder of CommonWealth common stock. These authorities
are all subject to change and any such change may be made with retroactive
effect. No assurance can be given that, after any such change, this description
would not be different.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND UPON THE FACTS OF YOUR PARTICULAR SITUATION. ACCORDINGLY, WE
STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE PARTICULAR
FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES TO YOU OF THE
MERGER.
The Merger. The merger, when consummated in accordance with the terms of
the merger agreement, will constitute a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as
39
amended to the date of this prospectus/proxy statement (the "Code"), and,
accordingly, neither First Community nor CommonWealth will recognize any taxable
gain or loss as a result of the merger.
The federal income tax consequences of the merger to a CommonWealth
shareholder generally will depend on whether the shareholder receives cash,
First Community common stock or a combination thereof in exchange for the
shareholder's shares of CommonWealth common stock.
- A CommonWealth shareholder who receives solely First Community common
stock in exchange for all of such shareholder's shares of CommonWealth
common stock pursuant to the merger will not recognize gain or loss on
the exchange. However, if the shareholder receives cash in lieu of a
fractional share interest in First Community common stock, the
shareholder will be treated as having received a fractional share of
First Community common stock in the merger and having immediately
exchanged that fractional share for cash in a taxable redemption by First
Community. The shareholder's tax basis in the First Community common
stock actually received pursuant to the Merger will equal such
shareholder's tax basis in the shares of CommonWealth common stock being
exchanged, reduced by any amount allocable to a fractional share interest
of First Community common stock for which cash is received. The holding
period of First Community common stock received will include the holding
period of the shares of CommonWealth common stock being exchanged.
- A CommonWealth shareholder who receives solely cash in exchange for all
of such shareholder's shares of CommonWealth common stock pursuant to the
merger generally will recognize capital gain or loss in an amount equal
to the difference between the amount of cash received and the
shareholder's aggregate tax basis for such shares of CommonWealth common
stock, which gain or loss will be long-term capital gain or loss if such
shares of CommonWealth common stock were held for more than one year. If,
however, any such CommonWealth shareholder is treated under the Code as
the constructive owner of shares of CommonWealth common stock that are
exchanged for shares of First Community common stock in the merger or
owns shares of First Community common stock actually or constructively
after the merger, some or all of any gain realized by the shareholder may
not qualify for treatment as capital gain but instead may, to the extent
of CommonWealth's accumulated earnings and profits, be treated as receipt
of a dividend taxable at ordinary income rates. Under the constructive
ownership rules of the Code, a shareholder may be treated as owning stock
that is actually owned by another person or entity. CommonWealth
shareholders should consult their tax advisors as to the possibility that
all or a portion of any cash received in exchange for their shares of
CommonWealth common stock will be treated as a dividend.
- A CommonWealth shareholder who receives both First Community common stock
and cash consideration in exchange for all of his or her shares of
CommonWealth common stock generally will recognize gain, but not loss, to
the extent of the lesser of (a) the excess, if any, of (a) the sum of the
aggregate fair market value of the First Community common stock received
(including any fractional share of First Community common stock deemed to
be received and exchanged for cash) and the amount of cash received
(excluding any cash received in lieu of a fractional share of First
Community common stock) over (b) the shareholder's aggregate tax basis in
the shares of CommonWealth common stock exchanged in the merger; and (b)
the amount of cash received by such shareholder.
- Any gain recognized with respect to a block of CommonWealth shares will
generally be long-term capital gain if the shares of CommonWealth common
stock exchanged were held for more than one year. However, if the receipt
of cash in exchange for such block of CommonWealth shares is treated as
equivalent to the distribution of a dividend under the Code, such gain
will be treated as a dividend to the extent of such shareholder's ratable
share of the undistributed accumulated earnings and profits of
CommonWealth. CommonWealth shareholders should consult their tax advisors
as to the possibility that all or a portion of any cash received in
exchange for their CommonWealth common stock will be treated as a
dividend.
- Such shareholder's aggregate tax basis in the First Community common
stock received pursuant to the merger will equal such shareholder's
aggregate tax basis in the shares of CommonWealth common stock being
exchanged, reduced by any amount allocable to a fractional share interest
of First Community
40
common stock for which cash is received and by the amount of any cash
consideration received, and increased by the amount of taxable gain, if
any, recognized by such shareholder in the merger (including any portion
of such gain that is treated as a dividend).
Cash in Lieu of Fractional Shares. No fractional shares of First Community
common stock will be issued in the merger. A CommonWealth shareholder who
receives cash in lieu of a fractional share will be treated as having received
such fractional share pursuant to the merger and then as having exchanged such
fractional share for cash in a redemption by First Community. A CommonWealth
shareholder should generally recognize capital gain or loss on such a deemed
redemption of the fractional share in an amount determined by the excess of the
amount of cash received and the shareholder's tax basis in the fractional share.
Any capital gain or loss will be long-term capital gain or loss if the
CommonWealth common stock exchanged was held for more than one year.
Dissenting Shareholders. Holders of CommonWealth common stock who dissent
with respect to the merger, as discussed under "Dissenters' Rights" beginning on
page 43, and who receive cash in respect of their shares of CommonWealth common
stock generally will be treated in the same manner as a holder who exchanges his
or her shares of CommonWealth common stock solely for cash in accordance with
the above discussion.
Closing Opinion. It is a condition precedent to the obligations of First
Community and CommonWealth to effect the merger that they receive an opinion
from Kelley Drye & Warren LLP, dated as of the effective time of the merger,
that the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. Such opinion
will be based upon facts existing at the effective time of the merger, and in
rendering such opinion, counsel will require and rely upon facts,
representations and assumptions that will be provided by First Community, First
Community Bank, CommonWealth and others.
First Community and CommonWealth have not and will not seek any ruling from
the Internal Revenue Service regarding any matters relating to the merger, and
as a result there can be no assurance that the Internal Revenue Service will not
disagree with or challenge any of the conclusions described herein.
Backup Withholding. Non-corporate holders of CommonWealth common stock may
be subject to information reporting and backup withholding imposed at a rate of
30% on any cash payments they receive. CommonWealth shareholders will not be
subject to backup withholding, however, if they:
- furnish a correct taxpayer identification number and certify that they
are not subject to backup withholding on the substitute Form W-9 or
successor form included in the election form/letter of transmittal they
will receive; or
- are otherwise exempt from backup withholding.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or credit against a CommonWealth shareholder's United States federal
income tax liability, provided they furnish the required information to the
Internal Revenue Service.
Reporting Requirements. CommonWealth shareholders who receive First
Community common stock as a result of the merger will be required to retain
records pertaining to the merger and will be required to file with their United
States federal income tax return for the year in which the merger takes place a
statement setting forth certain facts relating to the merger.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for under the purchase method of accounting
under accounting principles generally accepted in the United States of America.
Under this method, CommonWealth's assets and liabilities as of the date of the
merger will be recorded at their respective estimated fair values. Any
difference between the purchase price for CommonWealth and the fair value of the
identifiable net tangible and intangible assets acquired will be recorded as
goodwill. In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," issued in July 2001, the goodwill
resulting from the merger will not be amortized to expense, but instead will be
reviewed for impairment at least annually and to the extent goodwill is
impaired, its carrying value will be written down to its implied fair value and
a charge will be made
41
to earnings. Core deposit and other intangibles with definite useful lives
recorded by First Community in connection with the merger will be amortized to
expense in accordance with the new rules. The financial statements of First
Community issued after the merger will reflect the results attributable to the
acquired operations of CommonWealth beginning on the date of completion of the
merger. The unaudited per share pro forma financial information contained herein
has been prepared using the purchase method of accounting. See "Summary --
Unaudited Comparative Per Share Data for the Year Ended December 31, 2002"
beginning on page 9.
EXPENSES OF THE MERGER
The merger agreement provides that each of CommonWealth and First Community
will bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated by the merger agreement, including fees and expenses
of its own financial consultants, accountants and counsel, except that expenses
of printing this document will be shared equally between First Community and
CommonWealth.
LISTING OF THE FIRST COMMUNITY COMMON STOCK
First Community has agreed to use its reasonable best efforts to cause the
shares of First Community common stock to be issued in the merger to be approved
for listing on the Nasdaq National Market before the completion of the merger,
subject to official notice of issuance.
TERMINATION FEE
The merger agreement provides that CommonWealth must pay First Community a
$1.0 million termination fee under the circumstances and in the manner described
below:
- if the merger agreement is terminated by First Community for any of the
reasons described in the sixth or seventh bullet points in the first
paragraph under "-- Termination of the Merger Agreement" on page 34 or by
CommonWealth for the reasons described in the last bullet point in such
section, CommonWealth must pay the termination fee to First Community
concurrently with the termination of the merger agreement); or
- if (x) the merger agreement is terminated by First Community pursuant to
the second bullet point in the first paragraph under "-- Termination of
the Merger Agreement" on page 34 or by either First Community or
CommonWealth because the shareholders of CommonWealth have not approved
the merger agreement as required, or by either First Community or
CommonWealth because the merger has not been consummated by September 30,
2003 (other than due to a breach by the terminating party), and in the
case of any termination referenced in such bullet point, an "acquisition
proposal" (as defined under "-- No Solicitation" on page 32) shall have
been publicly announced or otherwise communicated or made known to the
senior management or the board of directors of CommonWealth (or any
person shall have publicly announced, communicated or made known an
intention, whether or not conditional, to make an acquisition proposal)
at any time after the date of the merger agreement and prior to the time
that shareholders of CommonWealth vote on the merger agreement or the
date of termination of the merger agreement, as applicable and (y) within
18 months after such termination, CommonWealth enters into an agreement
with respect to an acquisition proposal or consummates a transaction
which is the subject of an acquisition proposal, then CommonWealth shall
pay to First Community the termination fee on the date of execution of
such agreement or consummation of a transaction which is the subject of
an acquisition proposal, as applicable, provided that if the date of
execution of such agreement is after 12 months but within 18 months after
such termination of the merger agreement, the termination fee shall be
payable by CommonWealth to First Community only upon consummation of a
transaction which is the subject of an acquisition proposal, regardless
whether such consummation occurs within 18 months after termination of
the merger agreement.
Any termination fee that becomes payable pursuant to the merger agreement
shall be paid by wire transfer of immediately available funds to an account
designated by First Community.
42
If CommonWealth fails to timely pay the termination fee to First Community,
CommonWealth will be obligated to pay the costs and expenses incurred by First
Community to collect such payment, together with interest.
If the merger agreement is terminated by either First Community or
CommonWealth due to a breach of a representation, warranty, covenant or
undertaking, the party committing such breach shall be liable for $350,000 to
the other party, without prejudice to the rights of First Community to receive
the $1.0 million termination fee set forth above. Under no circumstances,
however, shall First Community be able to collect more than $1.0 million as a
termination fee.
SHAREHOLDER AGREEMENTS
In connection with the execution of the merger agreement, each director and
executive officer of CommonWealth entered into a shareholder agreement with
First Community pursuant to which each director and executive officer agreed
that at any meeting of the shareholders of CommonWealth, or in connection with
any written consent of the shareholders of CommonWealth, the director and/or
officer shall:
- appear at such meeting or otherwise cause all shares of CommonWealth
common stock owned by him or her to be counted as present thereat for
purposes of calculating a quorum;
- vote (or cause to be voted), in person or by proxy, or deliver a written
consent (or cause a consent to be delivered) covering, all shares of
CommonWealth common stock beneficially owned by him or as to which he
has, directly or indirectly, the right to direct the voting:
- in favor of adoption and approval of the merger agreement and the
merger;
- against any action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or
agreement of CommonWealth contained in the merger agreement or of the
director contained in the shareholder agreement; and
- against any acquisition proposal (as defined in the merger agreement) or
any other action, agreement or transaction that is intended, or could
reasonably be expected, to materially impede, interfere or be
inconsistent with, delay, postpone, discourage or materially and
adversely affect consummation of the merger or the shareholder
agreement.
Pursuant to the shareholder agreement, each director also agreed not to,
directly or indirectly, sell, transfer, pledge, assign or otherwise dispose of,
or enter into any contract, option, commitment or other arrangement or
understanding with respect to the sale, transfer, pledge, assignment or other
disposition of, any of the shares of CommonWealth common stock owned by him
prior to the meeting at which shareholders of CommonWealth will consider the
merger agreement.
The shareholder agreements will remain in effect until the earlier of the
effective time of the merger or the termination of the merger agreement in
accordance with its terms.
DISSENTERS' RIGHTS
Holders of record of CommonWealth common stock who comply with the
procedures described below will be entitled to dissenters' rights under Article
15 of the Virginia Stock Corporation Act. Where appropriate, shareholders are
urged to consult with their legal counsel to determine the appropriate
procedures for the making of a notice of intent (as described below).
A VOTE IN FAVOR OF THE MERGER BY AN ELIGIBLE HOLDER WILL RESULT IN A WAIVER
OF SUCH ELIGIBLE HOLDER'S DISSENTERS' RIGHTS. FAILURE TO FOLLOW THE STEPS
REQUIRED BY ARTICLE 15 OF THE VIRGINIA STOCK CORPORATION ACT (DESCRIBED HEREIN)
FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
The following discussion is only a summary and does not purport to be a
complete statement of the law pertaining to dissenters' rights under the
Virginia Stock Corporation Act. The text of Article 15 of the Virginia Stock
Corporation Act is reprinted in its entirety as Annex III to this
prospectus/proxy statement. This summary is qualified in its entirety by a
reference to Article 15 of the Virginia Stock Corporation Act.
43
Under the Virginia Stock Corporation Act, eligible holders who follow the
procedures set forth in Article 15 of the Virginia Stock Corporation Act will be
entitled to receive payment of the "fair value" of such shares. Any eligible
holder who wishes to exercise dissenters' rights should review the following
discussion and Annex III carefully, because failure to comply in a timely and
proper manner with the procedures specified may result in the loss of
dissenters' rights under the Virginia Stock Corporation Act.
An eligible holder wishing to exercise dissenters' rights must deliver to
CommonWealth, prior to or at the shareholders' meeting (but in any event before
the vote is taken), a written notice of intent to demand payment for the
eligible holder's shares. An eligible holder delivering a notice of intent must
not vote his shares of common stock in favor of the merger or he will lose his
dissenters' rights. All notices of intent should be sent or delivered to
CommonWealth, 900 N. Parham Road, Richmond, Virginia 23229, Attention: William
W. Ranson, Executive Vice President, Treasurer and Chief Financial Officer.
Within ten days after the effective date of the merger, if the shareholders
approve the merger agreement, CommonWealth shall deliver a dissenter's notice in
writing to all dissenting holders. The dissenter's notice shall:
- state where the dissenting holder's payment demands shall be sent and
where and when stock certificates shall be deposited;
- set a date by which the surviving corporation must receive the payment
demand; and
- include such other information as required by the Virginia Stock
Corporation Act.
A dissenting holder to whom a notice is sent must demand payment within the
time specified in the dissenter's notice, deposit his stock certificates in
accordance with the terms of the dissenter's notice and make certain
certifications required by the Virginia Stock Corporation Act. If a dissenting
holder fails to take such actions, the dissenting holder will lose his
dissenters' rights.
Within 30 days of CommonWealth's receipt of a demand for payment from a
dissenting holder, CommonWealth must pay the dissenting holder CommonWealth's
estimate of the fair value of the dissenting holder's shares plus interest. With
any payment, CommonWealth must provide its most recent year-end and interim
financial statements, an explanation of how CommonWealth calculated the fair
value of the shares and interest, a statement of the dissenting holder's right
to continue to demand fair value for his shares and a copy of Article 15 of the
Virginia Stock Corporation Act. CommonWealth's payment obligation may be
enforced by a dissenting holder on an expedited basis in a Virginia circuit
court, if necessary.
A dissenting holder who is not satisfied with the amount paid or offered by
CommonWealth must notify CommonWealth of the dissenting holder's own estimate of
the fair value of his shares and the amount of interest due (less any amount
already received by the dissenting holder from CommonWealth). This notice must
be given in writing within 30 days of the date that CommonWealth made or offered
to make payment for the dissenting holder's shares.
If a dissenting holder's demand for payment remains unsettled, CommonWealth
is obligated to commence a proceeding to determine the fair value of the shares
and accrued interest within 60 days of the receipt of the dissenting holder's
payment demand. If CommonWealth fails to commence such proceeding in accordance
with the Virginia Stock Corporation Act, CommonWealth must pay the dissenting
holder the amount demanded by the dissenting holder. The appraisal proceeding
must be brought in a Virginia circuit court.
Dissenting holders considering seeking appraisal should be aware that the
fair value of their shares of common stock, as determined under Article 15 of
the Virginia Stock Corporation Act, could be more than, the same as, or less
than, the merger consideration that would be paid to them pursuant to the merger
agreement. The costs and expenses of the appraisal proceeding will be determined
by the court and assessed against CommonWealth unless the court determines that
the dissenting holder did not act in good faith in demanding payment of the fair
value of their shares, in which case, costs and expenses may be assessed against
the dissenting holder.
44
Dissenting holders will only be entitled to receive payment in accordance
with Article 15 of the Virginia Stock Corporation Act and will not be entitled
to vote their shares of common stock or exercise any other rights of a
shareholder. A dissenting holder may withdraw his demand only with the consent
of CommonWealth.
If any eligible holder who demands appraisal of his shares under Article 15
fails to perfect, or effectively withdraws or loses, his right to appraisal, as
provided in the Virginia Stock Corporation Act, the shares of CommonWealth stock
of such holder will be converted into the right to receive the merger
consideration in accordance with the merger agreement.
OPERATIONS OF FIRST COMMUNITY AFTER THE MERGER
For the remainder of 2003, First Community expects to achieve minimal
operational cost savings, revenue enhancements and other operating synergies
subsequent to the merger, which cost savings will be offset by core deposit
amortization expense created by the acquisition of CommonWealth that will
represent an incremental cost of $500,000 annually.
For 2004 and beyond, First Community expects operational cost savings,
revenue enhancements and other operating synergies from the merger with
CommonWealth. The cost savings and operating synergies are expected to amount to
approximately 7% of CommonWealth's current level of operating expenses and are
to be derived primarily from elimination of duplicate legal, accounting and
shareholder-related costs along with savings from the integration of back-office
operations. In addition, because CommonWealth will be merged with and into First
Community, the costs associated with CommonWealth operating as a publicly-held
entity also will be eliminated. Although First Community anticipates certain
cost savings, a portion of these savings will be offset by increased costs
associated with the application of First Community's employee benefit program to
the employees of CommonWealth.
First Community also anticipates that it will be able to increase revenues
from the CommonWealth franchise by cross-selling products and services to
CommonWealth customers that are currently not offered by CommonWealth (e.g.,
asset, trust and estate management, cash management and First Community Bank's
deposit overdraft protection program). First Community has not estimated these
revenue enhancements, however, and did not include them in its financial
analysis of the merger.
Because of the uncertainties inherent in merging two financial
institutions, changes in the regulatory environment and changes in economic
conditions, no assurances can be given that any particular level of cost
savings, revenue enhancements and other operating synergies will be realized,
that any such cost savings, revenue enhancements and other operating synergies
will be realized over the time period currently anticipated or that such cost
savings, revenue enhancements and other operating synergies will not be offset
to some degree by increases in other expenses, including expenses related to
integrating the two companies.
Based on the assumptions set forth above, First Community anticipates that
the acquisition of CommonWealth will decrease its earnings by $.02 to $.03 per
diluted share in 2003 and with no material dilution or accretion in 2004. No
assurances can be given that cost savings or any revenue enhancements will be
realized at any given time in the future.
MARKET FOR COMMON STOCK AND DIVIDENDS
The First Community common stock currently is traded on the Nasdaq National
Market under the symbol "FCBC." The CommonWealth common stock is traded on the
OTC Bulletin Board under the symbol "CWBV.OB."
As of December 31, 2002, there were 9,888,482 shares of First Community
common stock outstanding, which were held by approximately 3,350 holders of
record; and as of the record date for the special meeting, there were 720,299
shares of CommonWealth common stock outstanding, which were held by
approximately 350 holders of record. Such numbers of shareholders do not reflect
the number of individuals or institutional investors holding stock in nominee
name through banks, brokerage firms and others.
45
The following table sets forth during the periods indicated the high and
low sales prices of the First Community common stock and the CommonWealth common
stock as reported on the Nasdaq SmallCap Market (through March 31, 2003) and on
the Nasdaq National Market (beginning April 1, 2003) and OTC Bulletin Board and
the dividends declared per share of First Community common stock and
CommonWealth common stock.
FIRST COMMUNITY COMMONWEALTH
--------------------------- ---------------------------
DIVIDENDS DIVIDENDS
MARKET PRICE DECLARED MARKET PRICE DECLARED
--------------- PER --------------- PER
HIGH LOW SHARE HIGH LOW SHARE
------ ------ --------- ------ ------ ---------
2003
Second Quarter (through April
8)........................... $33.45 $32.97 $ -- $30.00 $29.86 $--
First Quarter.................. $33.55 $28.30 $0.26 $29.60 $18.00 $--
2002
First Quarter.................. $30.75 $25.36 $0.25 $12.40 $10.80 $--
Second Quarter................. 33.00 28.00 0.25 13.00 12.10 --
Third Quarter.................. 33.10 28.00 0.25 19.50 12.54 --
Fourth Quarter................. 33.33 29.17 0.25 19.00 16.65 --
2001
First Quarter.................. 18.88 17.13 0.21 9.57 6.875 --
Second Quarter................. 30.00 17.85 0.21 13.28 8.86 --
Third Quarter.................. 33.80 29.75 0.21 14.00 12.87 --
Fourth Quarter................. 31.60 23.75 0.26 13.875 12.05 --
The following table shows the closing price per share of the First
Community common stock and the CommonWealth common stock on (1) January 27,
2003, the last trading day preceding public announcement of the merger
agreement, and (2) April 8, 2003, the last full trading day for which closing
prices were available at the time of the printing of this document. The
historical prices for First Community common stock are as reported on the Nasdaq
SmallCap Market (through March 31, 2003) and on the Nasdaq National Market
(beginning April 1, 2003) and for CommonWealth common stock the OTC Bulletin
Board. The following table also includes the equivalent price per share of
CommonWealth common stock on those dates. The equivalent per share price
reflects the value of the First Community common stock which would be received
by CommonWealth shareholders who receive shares of First Community common stock
in the merger based on an assumed exchange ratio of .95 shares of First
Community common stock for each share of CommonWealth common stock.
HISTORICAL MARKET
VALUE PER SHARE EQUIVALENT MARKET
------------------------ VALUE
FIRST PER SHARE OF
DATE COMMUNITY COMMONWEALTH COMMONWEALTH(1)
---- --------- ------------ -----------------
January 27, 2003................................... $28.31 $18.75 $26.89
April 8, 2003...................................... $33.23 $29.86 $31.57
---------------
(1) The equivalent prices per share of CommonWealth common stock on the
indicated dates were determined by multiplying the assumed exchange ratio of
.95 by the closing price per share of the First Community common stock on
the indicated date. The actual exchange ratio will be determined by dividing
$30.50 by the average closing prices of the First Community common stock
during the 20 trading day period ending five business days preceding the
effective time of the merger.
Shareholders are advised to obtain current market quotations for the First
Community common stock and the CommonWealth common stock. The market price of
the First Community common stock at the effective time of the merger or at the
time shareholders of CommonWealth who receive First Community common stock in
the merger receive certificates evidencing such shares following the election
period to be conducted after the merger
46
is consummated may be higher or lower than the market price at the time the
merger agreement was executed, at the date of mailing of this document or at the
time of the special meeting.
INFORMATION ABOUT FIRST COMMUNITY
GENERAL
First Community. First Community is a bank holding company incorporated
under the laws of the State of Nevada and the parent company of First Community
Bank, a national bank that conducts commercial banking operations within the
states of Virginia, West Virginia and North Carolina. UFM is a wholly-owned
subsidiary of First Community Bank and serves as a wholesale and retail
distribution channel for First Community Bank's mortgage banking business
segment. Stone Capital Management, Inc., an asset management company, is also a
wholly-owned subsidiary of First Community Bank. First Community and its
wholly-owned subsidiaries had total assets of approximately $1.5 billion at
December 31, 2002 and conduct commercial and mortgage banking business through
the 41 branches of the Bank and 11 mortgage brokerage offices of UFM. First
Community's principal executive offices are located at One Community Place,
Bluefield, Virginia 24605. First Community's telephone number is (276) 326-9000.
First Community Bank. First Community Bank engages in a general commercial
and retail banking business through its branch facilities. It provides safe
deposit services and makes all types of loans, including commercial, mortgage
and personal loans. First Community Bank also provides trust services and its
deposits are insured by the FDIC. First Community Bank is a member of the
Federal Reserve System and is a member of the Federal Home Loan Bank of Atlanta.
Regulatory oversight of First Community Bank is conducted by the Office of the
Comptroller of the Currency. First Community Bank, through its wholly owned
subsidiary, UFM, provides for the origination and sale of mortgages to secondary
sources.
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to executive compensation, benefit plans,
voting securities and the principal holders thereof, certain relationships and
related transactions and other related matters as to First Community is
incorporated by reference or set forth in First Community's annual report on
Form 10-K for the year ended December 31, 2002, which is incorporated herein by
reference. Shareholders desiring a copy of such document may contact First
Community at its address or telephone number indicated under "Where You Can Find
More Information" beginning on page 73.
INFORMATION ABOUT COMMONWEALTH
GENERAL
CommonWealth is a Virginia-chartered commercial bank, which began business
in April 1986 and is headquartered in Chesterfield County, Virginia.
CommonWealth operates four retail banking offices, all in the Richmond
metropolitan area. CommonWealth had total assets of $134.1 million, total
deposits of $107.3 million and total stockholders' equity of $8.3 million as of
December 31, 2002. CommonWealth's executives offices are located at 900 N.
Parham Road, Richmond, Virginia 23229.
CommonWealth is a community-oriented bank that provides a range of
financial banking services to small and medium-sized businesses and individuals
within its market area. CommonWealth's lending activities include commercial,
consumer, construction, home equity and mortgage loans. CommonWealth offers a
variety of deposit options, including certificates of deposit, IRAs, money
market deposit accounts, savings accounts, personal and commercial demand
checking accounts and interest-bearing checking accounts.
CommonWealth's primary sources of revenue are interest income from its
lending activities and interest earned on its investment of money in federal
funds and securities. The major expenses of CommonWealth are interest on
deposits and general and administrative expenses such as salaries, employee
benefits, office occupancy and other related expenses.
47
CommonWealth is subject to regulation by the Board of Governors of the
Federal Reserve and the Bureau of Financial Institutions of the State
Corporation Commission of the Commonwealth of Virginia. CommonWealth's deposits
are insured by the FDIC up to a maximum of $100,000 for each insured depositor.
At February 28, 2003, CommonWealth had 39 employees. None of CommonWealth's
employees are represented by any collective bargaining unit and employee
relations are believed to be good. CommonWealth is not involved in any
litigation matters, either individually or in the aggregate, that are likely to
have a material adverse effect on its financial condition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion, which analyzes the major elements of
CommonWealth's financial condition and results of operations, should be read in
conjunction with the financial statements and the accompanying notes contained
elsewhere in this prospectus/proxy statement.
OVERVIEW
As of December 31, 2002, CommonWealth had total assets of $134.1 million,
net loans of $106.2 million, total deposits of $107.3 million and total
stockholders' equity of $8.3 million. CommonWealth had net income for the years
ended December 31, 2002 and 2001 of $922,000 and $560,000 respectively. Return
on average stockholders' equity was 11.82% and 7.93% for the years ended
December 31, 2002 and 2001, respectively. For the years ended December 31, 2002
and 2001, CommonWealth's return on average assets was 0.85% and 0.74%,
respectively. Basic earnings per share were $1.28 and $.78 for the above
respective years.
RESULTS OF OPERATIONS
NET INCOME
Net income for the year ended December 31, 2002 was $922,000, a 64.6%
increase over net income for 2001 of $560,000. The increase was due primarily to
CommonWealth's increase in earning assets coupled with a significant reduction
in the cost of interest-bearing liabilities.
NET INTEREST INCOME
The principal source of earnings of CommonWealth is net interest income.
Net interest income is the difference between interest and fees generated by
earning assets and interest expense paid to fund those assets. As such, net
interest income represents the gross profit from CommonWealth's lending,
investment and funding activities. Changes in net interest income result from
changes in volume and mix of these assets and liabilities, as well as changes in
the yield earned and rates paid.
For the year ended December 31, 2002, net interest income increased 37.8%,
from $3.2 million for 2001 to $4.5 million for 2002, despite a narrower net
interest margin than in 2001. Increases in the loan portfolio outstanding of 50%
and a reduction in CommonWealth's cost of funds contributed to the solid growth
in net interest income for 2002. Interest on loans and interest expense on
deposits represent the largest portion of total interest income and total
interest expense. Interest on loans increased $1.1 million or 20.6% over 2001.
Interest expense decreased $305,000 for a reduction of 12.9% from 2001.
NET INTEREST MARGIN
CommonWealth's net interest margin tightened from 4.57% in 2001 to 4.43% in
2002. The contraction resulted from a repricing of the earning asset portfolio
to lower rates while new loans are originated at a yield less than the average
portfolio. Average costs of deposits decreased from 4.67% for 2001 to 2.85% for
2002 as CommonWealth enjoyed the benefits of the Federal Reserve Bank's
reduction in short-term interest rates in 2001. The Wall Street Journal prime
rate declined from 9.5% on January 1, 2001 to 4.25% by the year's end.
CommonWealth has promoted loan products which are shorter in term and/or
have interest rates which adjust in accordance with a designated index. By
taking these steps, CommonWealth has negated much of the
48
impact of the declines in the prime rate. While CommonWealth's assets repriced
downward faster than its liabilities in 2001, volume growth in the loan
portfolio allowed CommonWealth's net interest margin to decrease by only 14
basis points between 2001 and 2002.
INTEREST-EARNING ASSETS
Through 2002, CommonWealth continued its strategy of building its asset
base through loan growth. As of December 31, 2002, average interest-earning
assets increased $29.8 million to $100.9 million, or 41.9%, compared with the
December 31, 2001 average interest-earning assets of $71.0 million. Loan
portfolio growth accounted for $28.1 million of the increase in interest-earning
assets.
INTEREST-BEARING LIABILITIES
For the year ended December 31, 2002, average interest-bearing liabilities
increased $22.1 million, or 43.4%, compared with the December 31, 2001 amount,
and were used to fund loan growth. During 2002, CommonWealth's strong loan
growth was supported with comparable deposit growth and advances from the
Federal Home Loan Bank ("FHLB") of Atlanta. On average, noninterest-bearing
deposits represented 30.3% of total deposits for 2002 and FHLB advances
represented 12.8% of interest-bearing liabilities.
49
The following table provides for each category of earning assets and
interest-bearing liabilities, the average amount outstanding, the interest
earned or incurred on such amounts, and the average rate earned or incurred for
the year ended December 31, 2002 and 2001. The tables also provide the average
rate earned on total earning assets, the average rate paid on total
interest-bearing liabilities, and the net interest margin on average total
earning assets for the same periods.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001
-------------------------------------- -------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
------------ ---------- ---------- ----------- ---------- ----------
ASSETS:
Interest-earning assets:
Securities...................... $ 767,541 $ 39,764 5.18% $ 644,385 $ 52,584 8.16%
Federal funds sold.............. 7,437,170 120,105 1.61 5,807,847 226,264 3.90
Loans (net of unearned
income)(1).................... 89,966,802 6,327,308 7.03 61,829,982 5,244,413 8.48
Interest-bearing deposits in
banks......................... 2,692,119 44,497 1.65 2,763,199 85,403 3.09
------------ ---------- ----------- ----------
Total interest-earning
assets..................... 100,863,632 6,531,674 6.48 71,045,414 5,608,664 7.89
------------ ---------- ---- ----------- ---------- ----
Noninterest-earning assets:
Cash and due from banks......... 5,821,763 3,306,873
Premises and equipment.......... 868,019 839,018
Other investments............... 1,312,796 606,128
Other assets.................... 839,539 590,857
Less: allowance for loan
losses........................ (916,651) (743,449)
------------ -----------
Total assets.................... $108,789,098 $75,644,841
============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing deposits:
Money market and NOW accounts... $ 26,175,008 $ 504,516 1.93% $18,289,160 $ 605,001 3.31%
Regular savings................. 2,203,384 27,145 1.23 1,545,689 36,157 2.34
Time deposits < $100,000........ 28,255,638 1,033,776 3.66 24,243,346 1,375,021 5.67
Time deposits > $100,000........ 6,892,439 243,707 3.54 4,750,488 262,242 5.52
------------ ---------- ----------- ----------
Total interest-bearing
deposits...................... 63,526,468 1,809,144 2.85 48,828,684 2,278,421 4.67
------------ ---------- ----------- ----------
FHLB advances................... 9,319,219 250,212 2.68 1,979,452 86,231 4.36
Fed funds borrowed.............. 28,263 592 2.09
------------ ----------
Total interest-bearing
liabilities................ 72,873,950 2,059,948 2.83 50,808,136 2,364,652 4.65
------------ ---------- ---- ----------- ---------- ----
Noninterest bearing liabilities:
Demand deposits............... 27,654,701 17,257,522
Other liabilities............. 459,222 517,465
------------ -----------
Total liabilities............... 100,987,873 68,583,122
Stockholders' equity............ 7,801,225 7,061,848
------------ -----------
Total liabilities and
stockholders' equity.......... $108,789,098 $75,644,970
============ ===========
Net interest income............. $4,471,726 $3,244,012
========== ==========
Interest rate spread(2)......... 3.65% 3.24%
==== ====
Interest expense as a percentage
of average earning assets..... 2.04% 3.33%
==== ====
Net interest margin(3).......... 4.43% 4.57%
==== ====
50
---------------
(1) Nonaccruing loans are included in average loans outstanding.
(2) Interest rate spread is the average yield earned on earning assets less the
average rate paid on interest-bearing liabilities.
(3) Net interest margin is net interest income expressed as a percentage of
average earning assets.
The following table describes the impact on CommonWealth's interest income
and expense resulting from changes in average balances and average rates for the
periods indicated. The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
DECEMBER 31,
-------------------------------------
2002 VS. 2001
-------------------------------------
INCREASE (DECREASE)
DUE TO CHANGES IN:
-------------------------------------
VOLUME RATE TOTAL
---------- ----------- ----------
Increase (decrease) in:
Interest-earning assets:
Securities................................. $ 54,517 $ (67,337) $ (12,820)
Federal funds sold......................... 343,785 (449,944) (106,159)
Loans net.................................. 3,020,959 (1,938,064) 1,082,895
Interest-bearing deposits in banks......... 12,796 (53,702) (40,906)
---------- ----------- ----------
Total interest income.................... 3,432,057 (2,509,047) 923,010
---------- ----------- ----------
Interest expense
Interest-bearing liabilities:
Money market and NOW....................... 63,684 (164,170) (100,486)
Regular savings............................ 8,558 (17,570) (9,012)
Time deposits < $100,000................... 114,807 (132,341) (17,534)
Time deposits > $100,000................... 80,669 (422,914) (342,245)
FHLB advances.............................. 577,303 (412,730) 164,573
---------- ----------- ----------
Total interest expense................... 845,021 (1,149,725) (304,704)
---------- ----------- ----------
Net interest earnings........................... $2,587,036 $(1,359,322) $1,227,714
========== =========== ==========
NONINTEREST INCOME
Noninterest income for the year ended December 31, 2002 amounted to
$581,000, an increase of $89,000 or 18.2%, compared to the 2001 level of
$491,000. Noninterest income is primarily generated through service fees on
deposit accounts, accounts receivable financing, increases in the cash surrender
value of bank owned life insurance and fees received for mortgage loan
originations.
NONINTEREST EXPENSES
Noninterest expenses increased 18.7% to $3.2 million for the year ended
December 31, 2002 from $2.7 million for the comparable period in 2001. As
economies of scale began to materialize, CommonWealth's efficiency ratio
(defined as non-interest expense divided by net interest income before
provisions for loan losses plus non-interest income) improved to 62.6% for 2002
versus 71.4% for 2001. Another method in evaluating efficiency is comparing
total operating expense as a percentage of average assets. This ratio improved
in 2002 by declining 61 basis points to 2.91% compared to 3.52% for 2001.
Salaries and employee benefits, which is a major factor in operating expenses,
continues to reflect efficiencies at 1.47% of average assets at December 31,
2002, compared to 1.83% of average assets at December 31, 2001.
51
ANALYSIS OF FINANCIAL CONDITION
ASSETS AND LOANS
At December 31, 2002, CommonWealth's total assets were $134.1 million, an
increase of $46.6 million or 53.2%, from total assets at December 31, 2001.
Asset growth was generated primarily through the loan portfolio. Average earning
assets represented 92.7% of average total assets at December 31, 2002.
Loans represent the largest component of earning assets. The loan portfolio
is predominately comprised of loans on a secured basis, which management
believes is diversified among the various loan segments. Because CommonWealth's
focus is providing community-based financial services, it generally does not
make loans outside its principal market region. During the twelve months ended
December 31, 2002, net loans have increased $35.6 million to $106.2 million, a
50.5% increase. Loan demand continues to be strong in CommonWealth's market. As
a consequence of lower interest rates, loan yields declined 145 basis points to
7.03% during the twelve month period ended December 31, 2002. While lower
interest rates reduced loan yields, this was more than offset by lower funding
costs. For the year ended December 31, 2002, CommonWealth has reduced its
funding costs 182 basis points to 2.83%.
The following table provides information on the composition of
CommonWealth's loan portfolio by type of loan on the dates indicated.
DECEMBER 31,
----------------------------------------------------------------
2002 2001
------------------------------- ------------------------------
PERCENT OF PERCENT OF
TOTAL GROSS TOTAL GROSS
AMOUNT LOANS AMOUNT LOANS
------------ ---------------- ----------- ----------------
Commercial and industrial.... $ 16,465,376 15.32% $13,888,976 19.45%
SBA loans purchased.......... 665,381 0.62 1,213,374 1.70
Real estate construction..... 17,739,007 16.51 11,333,493 15.87
Secured by real estate....... 70,632,561 65.74 42,879,053 60.05
Consumer installment......... 1,946,223 1.81 2,087,648 2.93
------------ ------ ----------- ------
Total gross loans.......... $107,448,548 100.00% $71,402,544 100.00%
====== ======
Less deferred loan fees...... 183,848 141,979
Less allowance for loan
losses..................... 1,089,330 709,716
------------ -----------
Total net loans............ $106,175,370 $70,550,849
============ ===========
The following table presents the maturities of loans for CommonWealth as of
December 31, 2002 by variable and fixed maturities.
DECEMBER 31, 2002
------------------------------------------------------
AFTER ONE
WITHIN ONE BUT WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
----------- ----------- ----------- ------------
Total loans..................... $28,693,860 $23,559,463 $55,011,377 $107,264,700
=========== =========== =========== ============
Loans maturing after one year
with:
Fixed interest rates.......... 7,062,225 12,428,187 19,490,412
Variable interest rates....... 16,497,238 42,583,190 59,080,428
----------- ----------- ------------
Total loans................ $23,559,463 $55,011,377 $ 78,570,840
=========== =========== ============
ASSET QUALITY
As of December 31, 2002, $570,000 of loans were on non-accrual status and
no loans had been acquired through foreclosure. CommonWealth had non-accrual
loans of $4,000 as of December 31, 2001 and $822,000 in loans 90 days past due
which were still accruing interest. There was no real estate acquired through
foreclosure
52
at December 31, 2001. The ratio of allowance for loan losses to loans, net of
unearned income and fees, was 1.02% at December 31, 2002 compared with 1.00% at
December 31, 2001.
CommonWealth places a loan on non-accrual status when a loan is
specifically determined to be impaired or when principal is past due for 90 days
or more, unless the debt is both well secured and in the process of being
collected.
The following table presents information of CommonWealth's asset quality at
the dates indicated.
DECEMBER 31,
-------------------
2002 2001
-------- --------
Nonaccrual loans............................................ $570,412 $ 4,090
Loans past due 90 days accruing interest.................... -- 821,788
Troubled debt restructuring................................. -- --
-------- --------
Total nonperforming loans................................. $570,412 $825,878
Other real estate owned:
Foreclosed properties..................................... -- --
Other real estate owned................................... -- --
-------- --------
Total nonperforming assets.................................. $570,412 $825,878
======== ========
Nonperforming assets to period-end total loans and other
real estate owned......................................... 0.53% 1.16%
======== ========
Foregone interest income on nonaccrual loans................ $ 33,000 $ 5,000
======== ========
Interest income recorded on nonaccrual loans during the
year...................................................... $ 14,120 --
======== ========
PROVISION/ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is a charge against earnings necessary to
maintain the allowance for loan losses at a level consistent with management's
evaluation of the credit quality and risk of the loan portfolio. CommonWealth
maintains an allowance which management believes represents a conservative
estimate of potential losses in CommonWealth's loan portfolio. To achieve this
goal, the loan loss provision must be sufficient to cover loans charged-off plus
the growth in the loan portfolio. In determining the adequacy of the allowance
for loan losses, management uses a methodology that specifically identifies and
reserves for higher risk loans. A general reserve is established for
non-specifically reserved loans. Loans in a non-accrual status and over 90 days
past due are considered in this evaluation, as well as other loans that may be a
potential loss.
The provision for loan losses for the year ended December 31, 2002 was
$487,000, an increase of $199,000 compared with the provision made for the year
ended December 31, 2001. The increased level of the provision reflects the
growth in the loan portfolio. Loans charged-off amounted to $293,000 in 2002, of
which $165,000 related to one borrower connected to CommonWealth's receivable
financing operation. Management anticipates that additional provisions will be
needed in future periods to ensure an adequate allowance for loan losses. Since
the amount of the provisions are largely dependent on loan growth, the level of
which is difficult to ascertain, management is unable to precisely determine the
amount of provisions that may ultimately be necessary.
53
The following table shows CommonWealth's loan loss and recovery experience
for the past two years.
DECEMBER 31,
--------------------------
2002 2001
------------ -----------
Balance, beginning of period.............................. $ 709,716 $ 617,377
------------ -----------
Loans charged-of:
Real estate............................................. -- --
Commercial.............................................. 290,378 222,194
Consumer installment.................................... 3,041 --
------------ -----------
Total loans charged-off................................... 293,419 222,194
------------ -----------
Recoveries of loans previously charged-off:
Real estate............................................. -- --
Commercial.............................................. 185,733 20,014
Consumer installment.................................... -- 6,219
------------ -----------
Total recoveries.......................................... 185,733 26,233
------------ -----------
Net loans recovered (charged-off)......................... (107,686) (195,961)
Provision for loan losses................................. 487,300 288,300
------------ -----------
Balance, end of period.................................... $ 1,089,330 $ 709,716
============ ===========
Average total loans....................................... $ 89,966,802 $61,829,982
============ ===========
Total loans (net of unearned income)...................... $107,264,700 $71,260,565
============ ===========
Net charge-offs (recoveries) to average loans............. 0.12% 0.32%
Provision for loan losses to average loans................ 0.54% 0.47%
Provision for loan losses to net charge-offs.............. 4.53 1.47
Allowance for loan losses to period-end loans............. 1.02% 1.00%
A breakdown of the allowance for loan losses for the past two years, along
with the percent of loans in each major category, is provided in the following
table. Management of CommonWealth does not believe that the allowance for loan
losses can be fragmented by category with any precision that would be useful to
investors. The breakdown of the allowance for loan losses is based primarily
upon factors discussed above in computing the allowance as a whole. Because all
of these factors are subject to change, the breakdown is not necessarily
indicative of the category of future losses.
DECEMBER 31,
-------------------------------------------
2002 2001
-------------------- --------------------
PERCENT OF PERCENT OF
LOANS LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Commercial and industrial.................... $ 514 15.32% $640 19.45%
SBA loans purchased.......................... 0.62 1.70
Real estate construction..................... 236 16.51 -- 15.87
Secured by real estate....................... 333 65.74 69 60.05
Consumer installment......................... 6 1.81 -- 2.93
------ ------ ---- ------
Total allowance for loan losses............ $1,089 100.00% $709 100.00%
====== ====== ==== ======
54
Management and the board of directors believe that the allowance at
December 31, 2002 was adequate relative to current levels of risk in the
portfolio. Continued loan growth will warrant additional provisions in the
future.
LIQUIDITY AND FUNDING SOURCES
Liquidity represents an institution's ability to meet present and future
financial obligations through the sale or maturity of existing assets or the
acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. CommonWealth's ability to obtain
deposits, borrow from the FHLB and purchase funds at favorable rates determines
its liability liquidity. As a result of CommonWealth's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that CommonWealth maintains overall liquidity that is
sufficient to satisfy its depositors' requirements and meets its customers'
credit needs.
INVESTMENT ACTIVITIES
CommonWealth had no investments at December 31, 2002 or December 31, 2001
except for investments required by law in the Federal Reserve Bank, the FHLB of
Atlanta and stock in correspondent bank for CommonWealth. CommonWealth utilizes
cash as much as possible. The average loan to average deposit ratio for 2002 was
98.7% and 93.6% for the year ended December 31, 2001.
DEPOSITS
CommonWealth's deposit base offers it a primary source of funds to support
asset growth. As of December 31, 2002, total deposits equaled $107.3 million and
represented 80.0% of total assets. The deposit base is comprised of $35.3
million in certificates of deposit, of which $8.7 million had balances greater
than $100,000, $25.8 million in money market and interest-bearing checking
accounts, $2.2 million in savings accounts and $44.0 million in
non-interest-bearing demand deposits. With certificates of deposit representing
32.9% of total deposits at December 31, 2002, the maturing and repricing of
these deposits is an important variable for CommonWealth's net interest margin.
CommonWealth experienced favorable changes in its cost of funds during
2002. Total deposits increased $31.8 million, or 42.2%, from December 31, 2001.
The expansion of the deposit base basically funded CommonWealth's substantial
loan growth for 2002. The average cost of deposits decreased to 2.85% for the
year ended December 31, 2002 from 4.67% for the year ended December 31, 2001.
Of particular note in 2002 was the $24.2 million increase in CommonWealth's
non-interest-bearing deposits. This reflects CommonWealth's strategy of
attracting low cost deposits and customers realizing the significant benefits
and value of banking with CommonWealth.
55
The average balance and rates for certain categories of deposits for the
two years ended December 31 are shown in the following table.
DECEMBER 31,
---------------------------------------------------------
2002 2001
--------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE BALANCE PAID RATE AVERAGE BALANCE PAID RATE
--------------- --------- --------------- ---------
Noninterest-bearing accounts........ $27,654,701 $17,257,522
----------- -----------
Interest-bearing liabilities:
Money market and NOW accounts..... 26,175,008 1.93% 18,289,160 3.31%
Savings deposits.................. 2,203,384 1.23 1,545,689 2.34
Time deposits $100,000 and over... 6,892,439 3.54 4,750,488 5.52
Other time deposits............... 28,255,638 3.66 24,243,346 5.67
----------- -----------
Total interest-bearing accounts... 63,526,469 2.85% 48,828,683 4.67%
----------- ==== ----------- ====
Total............................. $91,181,170 $66,086,205
=========== ===========
The following table sets forth the amount of CommonWealth's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2002.
DECEMBER 31, 2002
--------------------
AMOUNT PERCENT
---------- -------
Maturity Period
Three months or less........................................ $1,685,489 19.39%
Over three months to twelve months.......................... 6,274,937 72.19
One year through five years................................. 732,303 8.42
Over five years............................................. -- --
---------- ------
Total..................................................... $8,692,729 100.00%
---------- ------
SHORT-TERM AND LONG-TERM DEBT
CommonWealth uses advances from the FHLB of Atlanta to augment its deposit
activities. At December 31, 2002, CommonWealth's advances from the FHLB totaled
$17.5 million, an increase from $4.3 million at December 31, 2001.
Mortgage-related assets secure the advances. The average rate paid on advances
during 2002 was 2.68%, which was a reduction from 4.36% for the year ended
December 31, 2001.
The following table sets forth the contractual maturities of FHLB advances
by fixed and floating rate.
FIXED RATE FLOATING RATE TOTAL
---------- ------------- -----------
Due in 2003.................................... $5,000,000 $ -- $ 5,000,000
Due in 2004.................................... -- -- --
Due in 2005.................................... 900,000 -- 900,000
Due in 2006.................................... 390,894 -- 309,894
Due in 2007.................................... 1,250,000 10,000,000 11,250,000
---------- ----------- -----------
Total........................................ $7,540,894 $10,000,000 $17,540,894
========== =========== ===========
INTEREST RATE SENSITIVITY
Interest rate risk management is the process of managing the maturity and
repricing characteristics of CommonWealth's assets and liabilities in such a
manner that the downside risk associated with CommonWealth's earnings and
capital position are minimized. Measuring and monitoring interest rate risk is a
dynamic and
56
important process regularly performed by management. CommonWealth recognizes
that correlations and assumptions constantly change and that forecasted results
may vary from actual performance.
Management evaluates current interest rate sensitivity on a periodic basis.
As part of the evaluation, CommonWealth reviews the "static" gap position of the
organization. Business and pricing strategies are adjusted based upon
management's view of likely interest rate scenarios in conjunction with the
current balance sheet structure.
The following table illustrates the interest sensitivity gap position of
CommonWealth as of December 31, 2002. This table presents a position that
existed at one particular day, that changes continually and is not necessarily
indicative of CommonWealth's position at any other time.
DECEMBER 31, 2002
-------------------------------------------------------------------------------
91 DAYS- OVER
1-90 DAYS 1 YEAR 1-3 YEARS 3-5 YEARS 5-15 YEARS 15 YEARS TOTAL
--------- -------- --------- --------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (net).................... $44,054 $ 6,515 $ 6,179 $ 13,936 $32,312 $ 4,269 $107,265
Federal funds sold............. 12,504 -- -- -- -- -- 12,504
Interest-bearing bank
balances..................... 5,679 -- -- -- -- -- 5,679
Securities..................... 1,142 -- -- -- -- -- 1,142
------- -------- -------- -------- ------- -------- --------
Total earning assets....... $63,379 $ 6,515 $ 6,179 $ 13,936 $32,312 $ 4,269 $126,590
======= ======== ======== ======== ======= ======== ========
Interest sensitive Liabilities
Demand deposits................ $23,876 $ -- $ -- $ -- $ -- $ 20,106 $ 43,982
NOW and MMDA................... 25,803 -- -- -- -- -- 25,803
Savings........................ 2,248 -- -- -- -- -- 2,248
Time deposits $100,00 and
over......................... 1,686 6,275 632 100 -- -- 8,693
Other time deposits............ 6,328 17,688 2,112 438 -- -- 26,566
FHLB advances.................. 10,000 5,000 900 1,641 -- -- 17,541
------- -------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities................ $69,941 $ 28,963 $ 3,644 $ 2,179 $ -- $ 20,106 $124,833
======= ======== ======== ======== ======= ======== ========
Period gap..................... $(6,562) $(22,448) $ 2,535 $ 11,757 $32,312 $(15,837) $ 1,757
======= ======== ======== ======== ======= ======== ========
Cumulative gap................. $(6,562) $(29,010) $(26,475) $(14,718) $17,594 $ 1,757
======= ======== ======== ======== ======= ========
Ratio of cumulative gap total
earning assets............... (5.18)% (22.92)% (20.91)% (11.63)% 13.90% 1.39%
======= ======== ======== ======== ======= ========
CAPITAL RESOURCES
The adequacy of CommonWealth's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of its asset
and liability levels and is consistent with regulatory requirements and industry
standards. Management seeks to maintain a capital structure that assures an
adequate level to support anticipated asset growth and depositor needs. During
2002, average equity to average assets decreased from 9.34% at year-end 2001 to
7.17% at year-end 2002.
Total stockholders' equity at December 31, 2002 was $8.3 million, an
increase of $929,944 from December 31, 2001. The increase was primarily the
result of earnings retention.
CommonWealth is subject to certain requirements imposed by state and
federal banking statues and regulations as discussed below under "--
Regulation". These requirements, among other things, establish minimum levels of
capital, restrict the amount of dividends that may be distributed, and require
that CommonWealth maintain a minimum reserve balance. Quantitative measures
established by regulation to ensure capital adequacy require CommonWealth to
maintain minimum amounts and ratios (set forth in the table below) of total
capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to
average assets. Management
57
believes that as of December 31, 2002, CommonWealth meets all capital adequacy
requirements to which it is subject.
The table below provides information on CommonWealth's required and actual
capital components as of December 31, 2002.
DESIGNATIONS
MINIMUM REGULATORY CAPITAL REQUIRED
-----------------------------------
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
-------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Total Capital (to Risk Weighted Assets)...... $8,278 10.12% $7,398 8.00% $9,247 10.00%
Tier 1 Capital (to Risk Weighted Assets)..... 8,265 8.94 3,699 4.00 5,548 6.00
Tier 1 Capital (to Average Assets)........... 8,265 6.45 5,127 4.00 6,409 5.00
PROPERTIES
CommonWealth operates four retail banking offices in the Richmond
metropolitan area. Each location is a full-service facility offering a range of
deposit and loan products and other customer services. All have drive-in lanes
(except 8th & Main) and 24-hour automated teller machines.
The location of CommonWealth's four retail banking offices are:
- 9310 Midlothian Turnpike, Richmond, Virginia 23235 (Midlothian Office);
- 900 North Parham, Richmond, Virginia 23229 (Parham Office);
- 707 East Main Street, Richmond, Virginia 23219 (8th & Main Office); and
- 12410 Gayton Road, Richmond, Virginia 23233 (Gayton Office).
The Midlothian office was opened in April 1986. The Parham office was
opened in July 1996. The 8th & Main office and Gayton office were opened in
December 1998 and February 1999, respectively.
CommonWealth owns the building and leases the land at the Midlothian
office, owns the land and building at the Parham office and leases the 8th &
Main and Gayton offices. CommonWealth also leases space for administrative and
accounting functions at 906 North Parham, Richmond, Virginia 23229.
EXECUTIVE OFFICERS AND DIRECTORS OF COMMONWEALTH
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
J.E. Causey Davis..................... 67 President, Chief Executive Officer and
Director
William D. Bien....................... 47 Executive Vice President and Chief
Lending Officer
William W. Ranson..................... 54 Executive Vice President, Treasurer,
and Chief Financial Officer
Harold V. Groome, Jr. ................ 58 Director
Franklin P. Hall...................... 64 Chairman of the Board
Thomas Jefferson, III................. 66 Director
M. Pinson Neal, Jr., M.D. ............ 76 Director
J.E. Causey Davis. Mr. Davis has served as the President, Chief Executive
Officer and Director of CommonWealth since 1992. Subsequent to the merger, Mr.
Davis shall become an Executive Vice President and the Chief Executive Officer
of Eastern Virginia of First Community Bank.
William D. Bien. Mr. Bien has served as Executive Vice President and Chief
Lending Officer of CommonWealth since 1994.
58
William W. Ranson. Mr. Ranson has served as Executive Vice President,
Treasurer and Chief Financial Officer since 1995.
Harold V. Groome, Jr. Mr. Groome has served as director of CommonWealth
since 1986. After the merger, Mr. Groome shall become a director of First
Community and First Community Bank. Mr. Groome has served as the Chairman of
Groome Transportation, Inc., a ground transportation firm, since 1968.
Franklin P. Hall. Mr. Hall is a founder of CommonWealth and has served as
the Chairman of CommonWealth since 1986. After the merger, Mr. Hall shall become
a director of First Community Bank. Mr. Hall is an attorney and has served as a
partner of Hall & Hall, attorneys at law, a family law firm, since 1969. Since
1976, Mr. Hall has served as a member of the Virginia House of Delegates.
Thomas Jefferson, III. Mr. Jefferson has served as a director of
CommonWealth since 1993 and Chairman of the Executive Committee since 2000. Mr.
Jefferson is currently president of Jefferson-Jones, Inc. Realtors, a realty
firm, a firm he co-founded in 1973.
M. Pinson Neal, Jr., M.D. Dr. Neal has served as Vice Chairman of
CommonWealth since 1986 and as Chairman of the Audit Committee since 1986. Dr.
Neal currently serves as Emeritus Professor of Radiology at Virginia
Commonwealth University.
EXECUTIVE COMPENSATION
The following table sets forth salaries and bonuses paid during the last
three years to our Chief Executive Officer, the only executive officer of
CommonWealth whose total annual salary and bonus exceeds $100,000.
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
--------------------------- ---- -------- ------ --------------- ------------ ------------
J.E. Causey Davis,........ 2002 $145,187 $4,600 $4,356 -- --
President, Chief Executive 2001 133,842 7,200 4,015 12,500 --
Officer and Director 2000 126,412 -- 3,792 -- --
---------------
(1) Includes discretionary contributions to the 401(k) plan for Mr. Davis.
The following table provides information with respect to the value of
unexercised options held by Mr. Davis at December 31, 2002. Mr. Davis did not
exercise any stock options in 2002.
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/02 OPTIONS AT 12/31/02(1)
SHARES --------------------------- ---------------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
J.E. Causey Davis......... -- -- 35,625 -- $406,638 --
---------------
(1) Value of unexercised "in-the-money" options is the difference between the
fair market value of the securities underlying the options and the exercise
or base price of the options as of December 31, 2002.
Employment Agreements. CommonWealth entered into a written employment
agreement with J. E. Causey Davis, President and Chief Executive Officer, on
December 20, 1996. The agreement was for a three-year period, and has been
automatically extended for additional one-year terms on December 31st of each
year since 1999. This agreement will continue to be automatically extended for
one-year terms unless Mr. Davis or CommonWealth gives prior written notice not
to extend. Under this agreement, annual compensation for Mr. Davis is set at a
minimum of $120,000 and compensation for 2002 was $145,187. The agreement
provides that if CommonWealth terminates the employment of Mr. Davis "for cause"
(conduct involving willful misconduct or negligence) it shall have no further
obligation. If CommonWealth terminates the employment of Mr. Davis "without
cause," it shall continue to compensate him under the terms of the agreement for
a period of three
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years. If following a change in control of CommonWealth (defined as a change in
majority ownership, merger into another entity, or if substantially all of the
assets of CommonWealth are sold) Mr. Davis is terminated, his pay reduced, or he
is demoted or required to work in a location outside of Richmond, his current
base salary will be continued for a period of three years.
A condition to First Community's obligation to consummate the merger is
that Mr. Davis enter into an employment agreement with First Community Bank. The
employment agreement provides that Mr. Davis relinquish all amounts due him
under his prior employment agreement, including any amounts that may otherwise
result from the consummation of the merger. The proposed employment agreement
has a term of two years with an option to extend for additional one-year terms.
Pursuant to such agreement, Mr. Davis shall become an Executive Vice President
and the Chief Executive Officer of the Eastern Virginia Region of First
Community Bank. Mr. Davis shall be paid a minimum base salary of $150,000 per
year and shall be entitled to participate in various benefit plans of First
Community Bank. Mr. Davis is entitled to receive severance pay under certain
circumstances, including a termination for other than cause, disability or Mr.
Davis' death or a termination by Mr. Davis due to a breach of the agreement by
First Community Bank or due to certain adverse actions taken by First Community
Bank with respect to Mr. Davis.
CommonWealth has entered into severance agreements with William D. Bien and
William W. Ranson to provide additional compensation for two years in the event
of a change in control of CommonWealth which results in their termination. The
conditions are similar to the change in control provisions in the employment
agreement with Mr. Davis.
Stock Option Plan. In 1994, the shareholders of CommonWealth adopted a
stock option plan which provided for 60,000 shares of the common stock of
CommonWealth to be granted under the plan. The plan authorized the Board of
Directors to grant options to employees of CommonWealth. The plan was amended by
the shareholders in April 1997 to allow the granting of options to
CommonWealth's directors and in April 1999 the shareholders approved an
additional 75,000 shares for grant under the same terms, bringing the total
shares available for issuance under the plan to 135,000. Stock option grants are
made for a period of ten years at the greater of the last published book value
per share or market value.
There were 600 stock option grants during the year ended December 31, 2002.
None of CommonWealth's executive officers or directors were granted or exercised
any stock options during the year ended December 31, 2002.
CERTAIN BENEFICIAL OWNERS OF COMMONWEALTH COMMON STOCK
The following table sets forth certain information as of the record date
for the special meeting regarding (i) each person known by CommonWealth to own
beneficially more than 5% of CommonWealth's common stock, (ii) each director of
CommonWealth, (iii) the executive officer of CommonWealth named in the Summary
Compensation Table and (iv) all directors and executive officers of CommonWealth
as a group. Except as otherwise indicated in the footnotes to the table, the
beneficial owners have sole voting and investment power as to all shares
beneficially owned by them and may be reached at the principal executive offices
of CommonWealth.
PERCENT OF
NUMBER OF SHARES COMMONWEALTH COMMON
NAME AND ADDRESS OWNED STOCK OUTSTANDING(1)
---------------- ---------------- --------------------
J.E. Causey Davis(2)........................... 47,590 6.30%
Franklin P. Hall(3)............................ 39,748 5.43
Harold V. Groome, Jr.(4)....................... 34,125 4.69
Thomas Jefferson, III(5)....................... 25,156 3.45
M. Pinson Neal, Jr.(6)......................... 12,481 1.71
All directors and officers as a group (seven
persons)..................................... 201,256 24.38%
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---------------
* Less than 1%.
(1) Percentage of beneficial ownership is based on 720,299 shares of common
stock outstanding as of April 8, 2003 together with options that are
exercisable within 60 days of April 8, 2003 for each shareholder.
(2) Includes 81 shares held by spouse, Beverley H. Davis.
(3) Includes 875 shares held in IRA account for the benefit of spouse, Phoebe
Hall.
(4) Includes 750 shares held by Groome Transportation, Inc.
(5) Includes 4,375 shares held by Jefferson-Jones, Inc. Profit Sharing plan,
3,593 shares held by spouse, Anne Jefferson, and 1,250 shares held by
Jefferson Stock Fund.
(6) Includes 192 shares held by spouse, Gail Neal.
RELATED PARTY TRANSACTIONS
Except as described below, since January 1, 2001, CommonWealth has not been
a party to any transaction or series of transactions in which the amount
involved exceeds $60,000 and in which any director, executive officer, or holder
of more than 5% of CommonWealth common stock had or will have a direct or
indirect material interest.
CommonWealth does not currently make loans to directors or executive
officers with the exception of checking account overdraft loans in the amount
not exceeding $5,000 per individual or related interests. Total loans
outstanding were less than $250 as of December 31, 2002. These loans are made on
substantially the same terms as those prevailing at the time for comparable
loans with other persons and do not involve more than the normal risk of
collectibility and such loans are in compliance with their original terms.
CommonWealth's executive officers and directors, and their associates and
related interests have not entered into any other material interest in any
business transaction, either directly or indirectly, to which CommonWealth is or
was a party outside of the ordinary course of CommonWealth's business.
REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to CommonWealth. This regulatory framework primarily is
intended for the protection of depositors and the deposit insurance funds that
insure deposits of banks, and not for the protection of security holders. To the
extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to those provisions. A
change in these statutes, regulations or regulatory policies may have a material
effect on CommonWealth's business.
General. CommonWealth, as a Virginia chartered commercial bank which is a
member of the Federal Reserve System, is subject to regulation, supervision and
regular examination by the Bureau of Financial Institutions of the Virginia
State Corporation Commission and the Federal Reserve Board. The state and
federal banking laws and regulations administered by these agencies regulate,
among other things, the scope of CommonWealth's business, its investments, its
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans. There are periodic
examinations by the aforementioned regulatory authorities to test CommonWealth's
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which CommonWealth can
engage. Any change in such regulation, whether by the Federal Reserve Board, the
FDIC, Virginia or the U.S. Congress could have a material adverse impact on
CommonWealth and its operations.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising banks and in analyzing bank regulatory applications.
The Federal Reserve Board capital adequacy guidelines generally require banks to
maintain total capital equal to 8% of total risk-adjusted assets, with at least
one-half of that amount consisting of Tier I or core capital and up to one-half
of that amount consisting of Tier II or supplementary capital. Tier I capital
generally consists of the sum of common stockholders' equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind
and amount of such stocks which may be included as Tier I capital), less
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goodwill and, with certain exceptions, intangibles. Tier II capital generally
consists of hybrid capital instruments; perpetual preferred stock which is not
eligible to be included as Tier I capital; term subordinated debt and
intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by banks, including multi-family
residential and commercial real estate loans, commercial business loans and
consumer loans. Single-family residential first mortgage loans which are not
past-due (90 days or more) or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighting system, as are certain privately-issued mortgage-backed
securities representing indirect ownership of such loans. Off-balance sheet
items also are adjusted to take into account certain risk characteristics. At
December 31, 2002, CommonWealth's Tier I capital and total capital ratios were
8.94% and 10.12%, respectively.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires top-rated banks to maintain a minimum leverage capital ratio of
Tier I capital to total assets of 3.0%. Total assets for this purpose does not
include goodwill and any other intangible assets and investments that the
Federal Reserve Board determines should be deducted from Tier I capital. The
top-rated banks are those without any supervisory, financial or operational
weaknesses or deficiencies or those which are not experiencing or anticipating
significant growth. Other banks are expected to maintain Tier I leverage capital
ratios of at least 4.0% to 5.0% or more, depending on their overall condition.
CommonWealth's leverage ratio, at December 31, 2002, was 6.45%.
FDIC Insurance Assessments. The deposits of CommonWealth are insured up to
regulatory limits by the FDIC, and, accordingly, are subject to deposit
insurance assessments to maintain the Bank Insurance Fund ("BIF"), which is
administered by the FDIC. The FDIC has adopted regulations establishing a
permanent risk-related deposit insurance assessment system. Under this system,
the FDIC places each insured bank in one of nine risk categories based on (1)
the bank's capitalization and (2) supervisory evaluations provided to the FDIC
by the institution's primary federal regulator. Each insured bank's insurance
assessment rate is then determined by the risk category in which it is
classified by the FDIC. The annual insurance premiums on bank deposits insured
by the BIF currently vary between $0.00 per $100 of deposits for banks
classified in the highest capital and supervisory evaluation categories to $0.27
per $100 of deposits for banks classified in the lowest capital and supervisory
evaluation categories.
The FDIC may terminate the deposit insurance of any insured depository
institution, including CommonWealth, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of CommonWealth's deposit insurance.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Act,
as amended ("FDICIA"), among other things, requires the federal banking agencies
to take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." An FDIC-insured bank will
be "well capitalized" if it has a total capital ratio of 10.0% or greater, a
Tier 1 capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater
and is not subject to any order or written directive by any such regulatory
authority to meet and maintain a specific capital level for any capital measure.
A depository institution's capital tier will depend upon where its capital
levels compare to various relevant capital measures and certain other factors,
as established by regulation. As of December 31, 2002, CommonWealth had capital
levels that qualify it as being "well capitalized" under such regulations.
Community Reinvestment Act and the Fair Lending Laws. CommonWealth has a
responsibility under the Community Reinvestment Act and related regulations to
help meet the credit needs of its community, including
62
low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. An institution's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities and the denial of applications. In addition, an
institution's failure to comply with the Equal Credit Opportunity Act and the
Fair Housing Act could result in the applicable federal regulatory agencies
and/or the Department of Justice taking enforcement actions against the
institution. Based on its most recent examination, CommonWealth received a
satisfactory rating with respect to its performance pursuant to the Community
Reinvestment Act.
Activities and Investments of Insured State-Chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things:
- acquiring or retaining a majority interest in a subsidiary;
- acquiring up to 10% of the voting stock of a company that solely provides
or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and
- acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
In addition, an insured state-chartered bank may not, directly, or
indirectly through a subsidiary, engage as "principal" in any activity that is
not permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which the bank is a
member and that the bank is in compliance with applicable regulatory
requirements. Any insured state-chartered bank directly or indirectly engaged in
any activity that is not permitted for a national bank must cease the
impermissible activity.
Regulatory Enforcement Authority. Federal banking laws grant substantial
enforcement powers to federal banking regulators. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed
with regulatory authorities.
Federal Home Loan Bank System. CommonWealth is a member of the FHLB
system. Among other benefits, each FHLB serves as a reserve or central bank for
its members within its assigned region. Each FHLB is financed primarily from the
sale of consolidated obligations of the FHLB system. Each FHLB makes available
loans or advances to its members in compliance with the policies and procedures
established by the board of directors of the individual FHLB. As an FHLB member,
CommonWealth is required to own capital stock in the FHLB of Atlanta.
CommonWealth's required investment in FHLB stock, based on December 31, 2002
financial data, was $877,100. At December 31, 2002, CommonWealth had $877,100 of
FHLB of Atlanta stock.
DESCRIPTION OF FIRST COMMUNITY CAPITAL STOCK
First Community is authorized to issue up to 15,000,000 shares of First
Community common stock and up to 1,000,000 shares of preferred stock. The
capital stock of First Community does not represent or constitute a deposit
account and is not insured by the FDIC.
The following description of the First Community capital stock does not
purport to be complete and is qualified in all respects by reference to First
Community's articles of incorporation, as amended, and bylaws, the First
Community shareholder rights plan and the General Corporation Law of Nevada.
63
FIRST COMMUNITY COMMON STOCK
Each share of First Community common stock is entitled to one vote on all
matters submitted to a vote at any meeting of shareholders. Holders of First
Community common stock are entitled to receive dividends when, as, and if
declared by the First Community board of directors out of funds legally
available therefor and, upon liquidation, to receive pro rata all assets, if
any, of First Community available for distribution after the payment of
creditors. Holders of First Community common stock have no preemptive rights to
subscribe for any additional securities of any class that First Community may
issue, nor any conversion, redemption or sinking fund rights. Holders of First
Community common stock have no right to cumulate votes in the election of
directors. The rights and privileges of holders of First Community common stock
are subject to any preferences that the First Community board of directors may
set for any series of First Community preferred stock that First Community may
issue in the future.
FIRST COMMUNITY PREFERRED STOCK
Under First Community's articles of incorporation, First Community may
issue shares of First Community' preferred stock in one or more series, as may
be determined by the First Community's board of directors or a duly authorized
committee. The First Community's board of directors or committee may also
establish, from time to time, the number of shares to be included in each series
and may fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and may increase or decrease the number of shares of any series without any
further vote or action by the shareholders. Any First Community preferred stock
issued will rank senior to First Community common stock with respect to the
payment of dividends or amounts paid upon liquidation, dissolution or winding up
of First Community, or both. In addition, any shares of First Community
preferred stock may have class or series voting rights. Under certain
circumstances, the issuance of shares of First Community preferred stock, or
merely the existing authorization of the First Community board of directors to
issue shares of First Community preferred stock, may tend to discourage or
impede a merger or other change in control of First Community. The number of
shares of preferred stock to be issued, its par or face value, voting powers,
designations, preferences, interest rate, limitations, restrictions and relative
rights would be determined from time to time by resolution of the board of
directors of First Community. No shares of preferred stock are currently
outstanding.
TRANSFER AGENT
The transfer agent and registrar for the First Community common stock is
the Registrar and Transfer Company.
COMPARISON OF THE RIGHTS OF SHAREHOLDERS
When the merger becomes effective, shareholders of CommonWealth who receive
shares of First Community common stock in exchange for their shares of
CommonWealth common stock will become shareholders of First Community. The
following is a summary of material differences between the rights of holders of
First Community common stock and holders of CommonWealth common stock. Since
First Community is organized under the laws of the State of Nevada and
CommonWealth is organized under the laws of the Commonwealth of Virginia,
differences in the rights of holders of First Community common stock and those
of holders of CommonWealth common stock arise from differing provisions of the
General Corporation Law of Nevada and the Virginia Stock Corporation Act in
addition to differing provisions of their respective articles of incorporation
and bylaws.
The following summary does not purport to be a complete statement of the
provisions affecting, and differences between, the rights of holders of First
Community common stock and holders of CommonWealth common stock. This summary is
intended to provide a general overview of the differences in shareholders'
rights defined by Nevada law, Virginia law and the governing corporate
instruments of First Community and CommonWealth, or other known material
differences.
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AUTHORIZED CAPITAL STOCK
First Community. First Community's authorized capital stock consists of
15,000,000 shares of First Community common stock and 1,000,000 shares of First
Community preferred stock. First Community's articles of incorporation authorize
First Community's board of directors to issue shares of First Community
preferred stock in one or more series and to fix the designation, powers,
preferences, and rights of the shares of First Community preferred stock in each
series. As of April 8, 2003, there were 9,831,092 shares of First Community
common stock outstanding. No shares of First Community preferred stock were
issued and outstanding as of that date.
CommonWealth. CommonWealth's authorized capital stock consists solely of
3,000,000 shares of CommonWealth common stock, par value $4.00 per share.
CommonWealth's articles of incorporation do not authorize the issuance of shares
of preferred stock. As of April 8, 2003, there were 720,299 shares of
CommonWealth common stock outstanding.
ISSUANCE OF CAPITAL STOCK
First Community. Under the articles of incorporation of First Community
and the General Corporation Law of Nevada, First Community may issue shares of
First Community capital stock and rights or options for the purchase of shares
of capital stock of First Community on such terms and for such consideration as
may be determined by the First Community board of directors. Neither the General
Corporation Law of Nevada nor First Community's articles of incorporation and
bylaws require shareholder approval of any such actions. However, First
Community is subject to the requirements of the National Association of
Securities Dealers, Inc., which generally require corporations, such as First
Community, with securities which are traded on the Nasdaq National Market, to
obtain shareholder approval of certain issuances of common stock and most stock
compensation plans for directors, officers and key employees. First Community
also may elect to seek shareholder approval of stock-related compensation plans
in certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations. Holders of
First Community capital stock do not have preemptive rights with respect to any
shares of First Community capital stock which may be issued.
CommonWealth. Under the Virginia Stock Corporation Act, CommonWealth may
issue shares of CommonWealth common stock and rights or options for the purchase
of shares of common stock of CommonWealth on such terms and for such
consideration as may be determined by the CommonWealth board of directors.
Neither the Virginia Stock Corporation Act nor CommonWealth's articles of
incorporation and bylaws require shareholder approval of any such actions.
CommonWealth may, however, elect to seek shareholder approval of stock-related
compensation plans in certain instances in order to qualify such plans for
favorable federal income tax and securities laws treatment under current laws
and regulations. Holders of CommonWealth common stock do not have preemptive
rights with respect to any shares of CommonWealth common stock which may be
issued.
VOTING RIGHTS
First Community. Each holder of First Community common stock is entitled
to one vote for each share held of record and may not cumulate votes.
CommonWealth. Each holder of CommonWealth common stock is entitled to one
vote for each share held of record and may not cumulate votes.
NUMBER AND ELECTION OF DIRECTORS
First Community. Nevada law states that although changes in the number of
directors in general must be approved by the holders of a majority of the
outstanding shares, the board of directors may fix the exact number of directors
within a stated range set forth in the articles of incorporation or bylaws, if
the stated ranges have been approved by the shareholders. First Community's
articles of incorporation provide that the number of directors shall be
determined in accordance with its bylaws. First Community's bylaws provide for a
board of
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directors having not less than seven nor more than 12 members as determined from
time to time by resolution of the board of directors. Currently, First
Community's board of directors consists of 10 directors.
Nevada law requires at least one-fourth of the directors to be elected
annually. First Community's board of directors is divided into three classes,
with directors serving staggered three-year terms.
CommonWealth. Virginia law provides that the board of directors of a
Virginia corporation shall consist of a number of individuals specified or fixed
in accordance with the bylaws of the corporation or, if not specified or fixed
in accordance with the bylaws, then a number specified or fixed in accordance
with the articles of incorporation of the corporation. CommonWealth's articles
of incorporation and bylaws provide for a board of directors of not less than
five nor more than 12 as fixed from time to time by resolution of the
CommonWealth board of directors. Currently, CommonWealth's board of directors
consists of 5 directors. Virginia law provides that a corporation's board of
directors may be divided into two or three classes with staggered terms of
office. The CommonWealth board of directors is divided into three classes, with
directors serving staggered three-year terms.
REMOVAL OF DIRECTORS
First Community. Under Nevada law, a director of a Nevada corporation may
be removed by the holders of two-thirds of the shares entitled to vote thereon,
unless the articles of incorporation of the corporation provide for a greater
percentage. Nevada law does not distinguish between removal for cause and
without cause. Under First Community's articles of incorporation and bylaws,
First Community directors may be removed only for cause and only by the
affirmative vote of the holders of more than two-thirds of the common stock of
First Community then outstanding and entitled to vote thereon.
CommonWealth. Under Virginia law, except as otherwise provided in a
corporation's articles of incorporation, a director may be removed from office,
with or without cause, by the holders of a majority of the shares entitled to
vote in the election of directors. CommonWealth's articles of incorporation and
bylaws are silent as to removal of directors.
VACANCIES OF DIRECTORS
First Community. Under Nevada law, the board of directors or the
shareholders may fill any vacancy on the board of directors, other than one
created by removal of a director elected by a voting group of shareholders. If a
vacancy is created by removal of a director elected by a voting group of
shareholders, the board of directors, the majority of the remaining directors
elected by such voting group of shareholders, or the shareholders belonging to
such voting group may fill such vacancy. If the number of directors remaining is
less than a quorum, the majority of the remaining directors may fill such
vacancy. Under First Community's articles of incorporation, all vacancies on the
board of directors are filled by the vote of a majority of the directors then in
office, whether or not a quorum. Each director so chosen shall hold office until
the expiration of the term of the class to which his position has been assigned.
CommonWealth. Under Virginia law, unless a corporation's articles of
incorporation provide otherwise, vacancies, including a vacancy resulting from
an increase in the number of directors, may be filled by a plurality of the
votes cast by the shares entitled to vote in the election at a meeting at which
a quorum is present or by a majority of the directors remaining in office, even
though less than a quorum. If the board of directors fills a vacancy, the
director's term expires at the next shareholders' meeting at which directors are
elected even if the corporation has a classified board of directors with
staggered terms and the new director is filling an unexpired term with more than
one year remaining. Virginia law also provides that a decrease in the number of
directors does not shorten an incumbent director's term. CommonWealth's bylaws
provide that vacancies, including a vacancy resulting from an increase in the
number of directors, shall be filled by a majority of the directors remaining in
office, even though less than a quorum. In the event of an increase in the
number of directors, the vacancy may be filled only until the next annual
meeting of shareholders, at which time the vacancy shall be filled by vote of
the shareholders.
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DISCHARGE OF DUTIES, EXCULPATION AND INDEMNIFICATION
First Community. Nevada law requires that a director of a Nevada
corporation discharge his or her duties as a director in good faith and with the
view to the interest of the corporation. Directors are presumed to act in good
faith, on an informed basis and with a view to the interests of the corporation.
First Community's bylaws require indemnification of First Community's directors
and officers and any person serving as such for another corporation at First
Community's request, against costs and expenses at any time reasonably incurred
by the director or officer arising out of or in connection with any claim,
action, suit or proceeding, civil or criminal, against him or to which he may be
made a party by reason of his being or having been such director or officer
except in relation to matters as to which he shall be adjudged in such action,
suit or proceeding to be liable for gross negligence or willful misconduct in
the performance of his duty to First Community. If, in the judgment of the board
of directors of First Community, a settlement of any claim, action, suit or
proceeding so arising be deemed in the best interests of First Community, any
such director or officer shall be reimbursed for any amounts paid by him in
effecting such settlement and reasonable expenses incurred in connection
therewith.
First Community's articles of incorporation state that a director of First
Community shall not be liable to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director except (i) for any
breach of the director's duty of loyalty, (ii) for acts which involve
intentional misconduct, fraud or a knowing violation of law, (iii) for the
payment of any distribution in violation of Nevada law, or (iv) for any
transaction from which the director derived an improper personal benefit.
CommonWealth. Virginia law requires that a director of a Virginia
corporation discharge his or her duties as a director in accordance with his or
her good faith business judgment of the best interests of the corporation.
CommonWealth's articles of incorporation provide that CommonWealth shall have
the power to indemnify its officers, directors and agents to the extent allowed
under Virginia law. Under Virginia law, a corporation may indemnify any person
made a party to a proceeding because he is or was a director or officer against
liability incurred in the proceeding if he acted in good faith and in a manner
he believed to be in or not opposed to the best interests of the corporation,
and in the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful, except that a corporation may not indemnify a
director or officer if either (i) the director or officer has been adjudged to
be liable to the corporation, or (ii) in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
Virginia law provides that any indemnification for a director or officer,
unless ordered by a court, is subject to a determination that the director or
officer has met the applicable standard of conduct. The determination will be
made by either (i) a majority vote of a quorum of the directors who are not
parties to such proceeding, (ii) if there is not a quorum of such directors, by
majority vote of a committee, consisting of two or more directors who are not
parties to such proceeding, duly designated by the directors, (iii) by special
legal counsel, or (iv) by the shareholders.
Under Virginia law, a corporation may advance expenses before the final
disposition of a proceeding if (i) the director or officer furnishes a written
statement of his good faith belief that he has met the proper standard of
conduct, (ii) he undertakes to repay the amount if it is ultimately determined
that the director or officer is not entitled to indemnification and (iii) a
determination made on the facts then known would not preclude indemnification.
In addition, to the extent that a director or officer has been successful on the
merits or otherwise in defense of the proceeding, the director or officer must
be indemnified against reasonable expenses incurred by him in connection with
that proceeding. Moreover, to the extent provided in the articles of
incorporation or an amendment to the bylaws approved by shareholders, a
corporation may eliminate a director's or an officer's personal liability for
monetary damages in any proceeding brought by or in the right of a corporation
or brought by or on behalf of shareholders, except for liability resulting from
such director's or officer's willful misconduct or a knowing violation of
criminal law or of any federal or state securities law. CommonWealth's articles
of incorporation do not provide for the limitation of director or officer
liability.
67
DIVIDENDS AND OTHER DISTRIBUTIONS
First Community. Nevada law prohibits a corporation from making any
distributions to shareholders, including the payment of cash dividends, that
would render it insolvent or unable to meet its obligations as they become due
in the ordinary course of business. First Community is not subject to any other
express regulatory restrictions on payments of dividends and other
distributions. The ability of First Community to pay distributions to the
holders of its common stock will depend, however, to a large extent upon the
amount of dividends First Community Bank, which is subject to restrictions
imposed by bank regulatory authorities, pays to First Community. In addition,
the Federal Reserve could oppose a distribution by First Community if it
determined that such a distribution would harm First Community's ability to
support First Community Bank. There can be no assurances that dividends will be
paid in the future. The declaration, payment and amount of any such future
dividends would depend on business conditions, operating results, capital,
reserve requirements and the consideration of other relevant factors by the
board of directors of First Community.
CommonWealth. Virginia law provides that a corporation may make
distributions to its shareholders, unless, after giving effect to the
distribution, the corporation would not be able to pay its debts as they become
due in the usual course of business, or the corporation's total assets would be
less than the sum of its total liabilities plus the amount that would be needed,
if the corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon the dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. In
addition, bank regulatory authorities may restrict payments if the payment of
dividends would be an unsafe or unsound banking practice. To date, CommonWealth
has not paid dividends to its shareholders.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
First Community. Nevada law provides generally that a Nevada corporation's
articles of incorporation may be amended only upon approval by a majority of the
voting power, or in the case of amendments which would alter the preferences or
rights of any class of shares, upon additional approval by a majority of the
voting power of each class affected by the amendment. First Community's articles
of incorporation impose a greater requirement, the affirmative vote of more than
two-thirds of the outstanding shares entitled to vote, to approve an amendment
that would amend, alter or repeal the provisions of the articles of
incorporation or bylaws relating to classification and staggered terms of First
Community's board of directors, removal of directors or any requirement for a
supermajority vote on such an amendment. First Community's articles of
incorporation authorize First Community's board of directors to amend First
Community's bylaws at any time by vote of a majority of the board of directors
at a meeting called for that purpose.
CommonWealth. Under Virginia law, unless a Virginia corporation's articles
of incorporation provide for a greater or lesser vote, amendments of the
articles of incorporation must be approved by each voting group entitled to vote
on the proposed amendment by more than two-thirds of all the votes entitled to
be cast by that voting group. However, the vote specified in the articles of
incorporation may not be reduced to less than a majority of all votes cast by
the voting group at a meeting at which a quorum of the voting group exists.
CommonWealth's articles of incorporation are silent as the vote required to
amend the articles of incorporation and thus more than a two-thirds vote is
required to amend the articles of incorporation.
Under Virginia law, a corporation's shareholders or board of directors may
amend or repeal bylaws, except to the extent that the corporation's articles of
incorporation or Virginia law reserve the power exclusively to the shareholders.
A corporation's shareholders may amend or repeal bylaws even though the bylaws
may also be amended or repealed by its board of directors. CommonWealth's bylaws
provide that they may be amended or repealed by the board of directors.
NOTICE OF SHAREHOLDER MEETINGS
First Community. First Community's bylaws provide that a written notice of
the place, day and time, and in the case of a special meeting, the purpose, of
the meeting must be given to each shareholder entitled to vote at the meeting
not less than 10 days nor more than 60 days prior to the meeting.
68
CommonWealth. Under Virginia law, notice of a shareholders' meeting must
be given not less than 10 nor more than 60 days before the meeting, except that
notice of a shareholders' meeting to act on an amendment to the articles of
incorporation, a plan of merger, share exchange, a proposed sale of all or
substantially all of the corporation's assets or a dissolution of the
corporation must not be given less than 25 nor more than 60 days before the
meeting. CommonWealth's bylaws provide that written notice of the date, time,
place and purpose or purposes of every meeting of shareholders must be given not
less than 10 nor more than 60 days before the date of the meeting.
SPECIAL MEETINGS OF SHAREHOLDERS
First Community. Under Nevada law, meetings of shareholders are to be
called as provided by the bylaws. Pursuant to First Community's bylaws, the
board of directors of First Community may call special meetings of the
shareholders of First Community at any time.
CommonWealth. Special meetings of the shareholders of CommonWealth may be
called at any time by CommonWealth's chairman of the board, president or by the
board of directors.
SHAREHOLDER NOMINATION AND SHAREHOLDER PROPOSALS
First Community. First Community's bylaws establish advance notice
procedures for the nomination, other than by or on behalf of First Community, of
candidates for election as directors. First Community's bylaws provide that a
shareholder wishing to nominate a person as a candidate for election to the
board of directors of First Community must submit the nomination in writing to
the Secretary of First Community at least 30 days before any meeting of
shareholders calling for the election of directors; provided, however, that if
less than 30 days notice of the meeting is given to shareholders, such notice of
nomination shall be mailed or delivered to the Secretary of the Corporation no
later than the close of business on the seventh day following the day on which
the notice of the meeting was mailed. Nominations not made in accordance with
the foregoing provisions may be ruled out of order by the presiding officer or
the chairman of the meeting.
In accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, shareholder proposals intended to be included in
the proxy statement and presented at a regularly scheduled annual meeting must
be received by First Community at least 120 days before the anniversary of the
date that the previous year's proxy statement was first mailed to shareholders.
As provided in the Exchange Act rules, if the annual meeting date has been
changed by more than 30 days from the date of the prior year's meeting, or for
special meetings, the proposal must be submitted within a reasonable time before
First Community begins to print and mail its proxy materials.
CommonWealth. Neither CommonWealth's articles of incorporation nor its
bylaws specify advance notice requirements for the submission of shareholder
proposals. However, in accordance with Rule 14a-8 of the Exchange Act,
shareholder proposals intended to be included in the proxy statement and
presented at a regularly scheduled annual meeting must be received by
CommonWealth at least 120 days before the anniversary of the date that the
previous year's proxy statement was first mailed to shareholders. As provided in
the Exchange Act rules, if the annual meeting date has been changed by more than
30 days from the date of the prior year's meeting, or for special meetings, the
proposal must be submitted within a reasonable time before CommonWealth begins
to print and mail its proxy materials.
SHAREHOLDER ACTION WITHOUT A MEETING
First Community. Under Nevada law, any action required or permitted to be
taken at a shareholders meeting may be taken without a meeting pursuant to the
written consent of the holders of the number of shares of voting stock that
would have been required to effect the action at an actual meeting of
shareholders.
CommonWealth. Virginia law provides that any action which may be
authorized or taken at a meeting of shareholders may be authorized or taken
without a meeting by unanimous written consent of the shareholders who would be
entitled to vote on the action.
69
MERGERS, SHARE EXCHANGES AND SALES OF ASSETS
First Community. Nevada law generally requires that any merger, share
exchange or sale of all, or substantially all, of the assets of a corporation
other than in the ordinary course of business must be approved by a majority of
the voting power or if shareholders are entitled to vote as a class, by a
majority of all votes by each class and representing a majority of all votes
entitled to be voted. Approval of a merger by the shareholders of the surviving
corporation is not required in certain instances, however, including a merger in
which the number of voting shares outstanding immediately after the merger, plus
the number of voting shares issuable as a result of the merger, does not exceed
by more than 20 percent the number of voting shares outstanding immediately
before the merger.
CommonWealth. Under Virginia law, unless a Virginia corporation's articles
of incorporation provide for a greater or lesser vote, a plan of merger or share
exchange must be approved by each voting group entitled to vote on the proposed
amendment by more than two-thirds of all the votes entitled to be cast by that
voting group. However, the vote specified in the articles of incorporation may
not be reduced to less than a majority of all votes cast by the voting group at
a meeting at which a quorum of the voting group exists. CommonWealth's articles
of incorporation and bylaws are silent as to the vote required, thus a
two-thirds vote is required to approve the merger with First Community Bank.
INTERESTED SHAREHOLDER STATUTES
First Community. First Community has opted out of the "interested
shareholder" statutes of Nevada law. However, First Community's articles of
incorporation contain their own interested shareholder provisions which requires
the approval of the holders of more than 85 percent of First Community's
outstanding stock to authorize business combinations with any party that owns in
excess of 15% of First Community's outstanding stock, unless approved by the
directors not affiliated with such shareholders, or unless certain consideration
and disclosure criteria are satisfied.
CommonWealth. CommonWealth's articles of incorporation and bylaws are
silent regarding acquisitions involving interested shareholders. However, under
the Virginia anti-takeover law regulating "affiliated transactions," material
acquisition transactions between a Virginia corporation and any holder of more
than 10% of any class of its outstanding voting shares are required to be
approved by the holders of at least two-thirds of the remaining voting shares.
Affiliated transactions subject to this approval requirement include mergers,
share exchanges, material dispositions of corporate assets not in the ordinary
course of business, any dissolution of the corporation proposed by or on behalf
of a 10% holder or any reclassification, including reverse stock splits,
recapitalization or merger of the corporation with its subsidiaries, that
increases the percentage of voting shares owned beneficially by a 10% holder by
more than five percent.
CONTROL SHARE STATUTES
First Community. First Community is subject to the Nevada anti-takeover
law regulating "control share acquisitions." Under Nevada law, a person that
acquires or offers to acquire ownership of "control shares" of a corporation
(defined as shares obtained pursuant to a transaction in which an acquiring
person reaches the 20%, 33% or majority ownership levels) has the right to vote
those shares, and shares acquired within the previous 90 days, only to the
extent granted by a resolution of the shareholders approved at a special or
annual meeting, unless otherwise provided in the articles of incorporation or
bylaws in effect on the tenth day following the control acquisition. The
corporation must, within 50 days after delivery of certain information by the
acquiring person, hold a special meeting to consider a resolution authorizing
voting rights for the control shares, unless the acquiring person consents in
writing to holding a meeting after 50 days. Unless the corporation's articles of
incorporation provide otherwise, a resolution granting voting rights must be
approved by a majority vote. The corporation may adopt a provision in its
articles of incorporation or bylaws allowing mandatory redemption of the control
shares if the acquiring party fails to make certain disclosures within ten days
of acquiring the control shares, or the control shares are not accorded full
voting rights at the meeting held for such purpose. Unless the articles of
incorporation or bylaws of the corporation provide otherwise, if the acquiring
party has acquired a majority (or larger) stake, and been accorded full voting
rights, any holder that did not vote in favor of granting
70
voting rights is entitled to put his or her shares to the corporation for "fair
value" (defined as the highest price paid by the acquiring party for control
shares). A corporation may impose stricter requirements than those established
by this statute through a charter or bylaw amendment or by resolution. The
provisions relating to the acquisition of control shares of a Nevada corporation
do not apply to an acquisition of stock in good faith, without an intention to
avoid the statutory requirements, including acquisitions.
CommonWealth. CommonWealth is subject to the Virginia anti-takeover law
regulating "control share acquisitions." Under that Virginia statute, shares
acquired in a control share acquisition (defined as shares obtained pursuant to
a transaction in which an acquiring person reaches the 20%, 33% or majority
ownership level) have no voting rights unless granted by a majority vote of all
outstanding shares other than those held by the acquiring person or any officer
or employee director of the corporation, or the articles of incorporation or
bylaws of the corporation provide that this statute does not apply to
acquisitions of its shares. An acquiring person that owns five percent or more
of the corporation's voting stock may require that a special meeting of the
shareholders be held, within 50 days of the acquiring person's request, to
consider the grant of voting rights to the shares acquired in the control share
acquisition. If voting rights are not granted and the corporation's articles of
incorporation or bylaws permit, the acquiring person's shares may be repurchased
by the corporation, at its option, at a price per share equal to the acquiring
person's cost. Virginia law grants dissenters' rights to any shareholder who
objects to a control share acquisition that is approved by a vote of
disinterested shareholders and that gives the acquiring person control of a
majority of the corporation's voting shares.
SHAREHOLDERS' RIGHT OF DISSENT AND APPRAISAL
First Community. The holders of First Community common stock do not have
dissenters rights under Nevada law because its stock is held of record by more
than 2,000 shareholders.
CommonWealth. For a discussion of the dissenters' rights under Virginia
law, please refer to the section entitled "The Merger - Dissenters' Rights" and
to Sections 13.1-729 through 13.1-741 of the Virginia Stock Corporation Act, a
copy of which is attached as Annex III to this document.
LIQUIDATION RIGHTS
First Community. In the event of the liquidation, dissolution or winding
up of the affairs of First Community, holders of outstanding shares of First
Community's common stock are entitled to share, in proportion to their
respective interests, in First Community's assets and funds remaining after
payment, or provision for payment, of all debts and other liabilities of First
Community, including any issued and outstanding preferred stock.
Because First Community is a bank holding company, its rights, the rights
of its creditors and of its shareholders, including the holders of the shares of
any First Community's preferred stock that may be issued, to participate in the
assets of any subsidiary upon the latter's liquidation or recapitalization may
be subject to the prior claims of the subsidiary's creditors, except to the
extent that First Community may itself be a creditor with recognized claims
against the subsidiary.
CommonWealth. In the event of liquidation, dissolution or winding up of
the affairs of CommonWealth, holders of outstanding shares of CommonWealth's
common stock are entitled to share, in proportion to their respective interests,
in CommonWealth's assets and funds remaining after payment, or provision for
payment, of all debts and other liabilities of CommonWealth, including any
issued and outstanding preferred stock.
CONSTITUENCY PROVISIONS
First Community. Nevada law contains a provision that provides that
directors and officers of a corporation, in exercising their respective powers
with a view to the interests of the corporation, may consider, in addition to
the interests of the common shareholders of a corporation, any of the following:
the interests of the corporation's employees, suppliers, creditors and
customers; the economy of the state of Nevada and the nation; the interests of
the community and of society; and the long-term as well as short-term interests
of the corporation and its shareholders, including the possibility that these
interests may best be served by the continued
71
independence of the corporation. Nevada law further provides that directors and
officers are not required to consider the effect of a proposed corporate action
upon any particular group having an interest in the corporation as a dominant
factor.
CommonWealth. CommonWealth's articles of incorporation state that its
board of directors, when evaluating any offer of a party or entity to (a) make a
tender or exchange offer for any equity security of CommonWealth, (b) merge or
consolidate CommonWealth with another corporation or bank, (c) purchase or
otherwise acquire any or substantially all of the property and assets of
CommonWealth, or (d) engage in any transaction similar to, or having similar
effects as, any of the foregoing transactions, shall, in connection with the
exercise of its judgment in determining what is in the best interest of the
CommonWealth and its shareholders, give due consideration to all relevant
factors, including, without limitation, the social and economic effects of the
proposed transaction on the depositors, employees, suppliers, customers and
other constituents of CommonWealth and on the communities in which CommonWealth
operates or is located, the business reputation of the party or entity involved,
and the board of directors' evaluation of the value of CommonWealth in a freely
negotiated sale and of the future prospects of the CommonWealth as an
independent entity.
ADJOURNMENT OF THE SPECIAL MEETING
(PROPOSAL TWO)
In the event that there are not sufficient votes to constitute a quorum or
approve the merger agreement at the time of the special meeting, the merger
agreement could not be approved unless the meeting was adjourned to a later date
or dates in order to permit further solicitation of proxies. In order to allow
proxies that have been received by CommonWealth at the time of the special
meeting to be voted for an adjournment, if necessary, CommonWealth has submitted
the question of adjournment to its shareholders as a separate matter for their
consideration. The board of directors of CommonWealth unanimously recommends
that shareholders vote "FOR" the adjournment proposal. If it is necessary to
adjourn the special meeting, no notice of the adjourned meeting is required to
be given to shareholders, other than an announcement at the special meeting of
the place, date and time to which the special meeting is adjourned.
LEGAL OPINION
The validity of the First Community common stock to be issued in the merger
will be passed upon for First Community by Kelley Drye & Warren LLP, Vienna,
Virginia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of First Community incorporated by reference in its annual
report on form 10-K for the year ended December 31, 2002, as set forth in their
report, which is incorporated by reference in this prospectus/proxy statement
and elsewhere in the registration statement. The consolidated financial
statements of First Community are incorporated by reference in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
The financial statements of Commonwealth as of December 31, 2002 and 2001,
and for each of the two years in the period ended December 31, 2002 included in
this prospectus/proxy statement have been audited by Cherry, Bekaert & Holland,
L.L.P., independent auditors, as stated in their report appearing herein and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
72
PROPOSALS FOR THE 2003 ANNUAL MEETING
Pursuant to Rule 14a-8 under the Exchange Act, the deadline for the
submission of proposals by shareholders for inclusion in the proxy statement and
form of proxy to be used by CommonWealth in connection with the next annual
meeting of shareholders of CommonWealth, which will be held only if the merger
is not consummated before the time of such meeting, was no later than January 1,
2003.
WHERE YOU CAN FIND MORE INFORMATION
First Community files annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission, or
the Commission. You may read and copy any reports, proxy statements or other
information filed by First Community at the Commission's public reference room
in Washington, D.C., which is located at the following address: Public Reference
Room, Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549.
You can request copies of these documents, upon payment of a duplicating
fee, by writing to the Commission. Please call the Commission at 1-800-SEC-0330
for further information on the operation of the Commission's public reference
rooms. First Community's Commission filings are also available to the public
from document retrieval services and at the Commission's Internet website
(http://www.sec.gov).
First Community has filed with the Commission a registration statement on
Form S-4 under the Securities Act and the rules and regulations thereunder. This
document is a part of that registration statement. As permitted by the
Commission's rules, this document does not contain all of the information you
can find in the registration statement. The registration statement is available
for inspection and copying as set forth above.
The Commission allows First Community to "incorporate by reference" into
this document, which means that First Community can disclose important
information to you by referring you to another document filed separately with
the Commission. The information incorporated by reference is considered to be
part of this document, except for any information superseded by information
contained in later filed documents incorporated by reference in this document.
First Community incorporates by reference the respective documents filed by them
with the Commission listed below and any future filings made by it with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to
the election deadline date.
FIRST COMMUNITY SEC FILINGS (FILE NO. 000-19297) PERIOD/DATE
------------------------------------------------ ------------------------------------
Annual Report on Form 10-K Year ended December 31, 2002
Current Reports on Form 8-K January 16, 2003, January 27, 2003,
January 28, 2003, February 26, 2003,
March 4, 2003, March 25, 2003, March
26, 2003 and March 28, 2003
You may request a copy of documents incorporated by reference in this
document but not otherwise accompanying this document, at no cost, by writing or
telephoning First Community at the following addresses:
FIRST COMMUNITY BANCSHARES, INC.
ONE COMMUNITY PLACE
BLUEFIELD, VIRGINIA 24605
ATTENTION: ROBERT L. SCHUMACHER
(276) 326-9000
To obtain timely delivery, you should request desired information no later
than ten business days prior to the date of the special meeting, or by May 7,
2003.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT. FIRST COMMUNITY HAS NOT AUTHORIZED ANYONE ELSE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THAT WHICH IS CONTAINED IN
THIS DOCUMENT. MOREOVER, FIRST COMMUNITY IS NOT MAKING AN OFFER TO SELL OR
SOLICITING AN OFFER TO BUY ANY SECURITIES OTHER THAN THE FIRST COMMUNITY COMMON
STOCK TO BE ISSUED BY FIRST COMMUNITY IN THE MERGER, AND NEITHER FIRST COMMUNITY
NOR COMMONWEALTH IS MAKING AN OFFER OF SUCH SECURITIES IN ANY STATE WHERE THE
OFFER IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS DOCUMENT SPEAKS ONLY
AS OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE
APPLIES.
73
INDEX TO COMMONWEALTH FINANCIAL STATEMENTS
FOR YEARS ENDED
DECEMBER 31, 2002 AND 2001
CONTENTS
PAGE
----------
Report of Independent Certified Public Accountants.......... F-2
Balance Sheets.............................................. F-3
Statements of Income........................................ F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
F-1
CBH logo
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
and Stockholders
The CommonWealth Bank
Richmond, Virginia
We have audited the accompanying balance sheets of The CommonWealth Bank as
of December 31, 2002 and 2001, and the related statements of income,
stockholders' equity, and cash flows for the years ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The CommonWealth Bank as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
January 27, 2003, except for Note 2, as to which the date is
February 25, 2003
F-2
THE COMMONWEALTH BANK
BALANCE SHEETS
DECEMBER 31,
--------------------------
2002 2001
------------ -----------
ASSETS
CURRENT ASSETS
Cash and due from banks................................... $ 10,938,941 $10,036,856
Federal funds sold........................................ 12,504,000 3,689,000
------------ -----------
Total cash and cash equivalents........................ 23,442,941 13,725,856
Restricted securities (at cost)........................... 1,141,500 473,400
Other investments......................................... 1,393,900 1,235,000
Loans, net................................................ 106,175,370 70,550,849
Land...................................................... 125,000 125,000
Premises and equipment, net............................... 706,642 724,642
Accrued interest receivable............................... 413,625 341,111
Deferred Tax Asset........................................ 406,214 226,214
Prepaid expenses and other assets......................... 331,671 146,346
------------ -----------
TOTAL ASSETS...................................... $134,136,863 $87,548,418
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits.................................................. $107,292,235 $75,462,406
Accrued interest payable.................................. 152,646 188,389
FHLB Advances............................................. 17,540,894 4,300,000
Other liabilities......................................... 872,694 249,173
------------ -----------
TOTAL LIABILITIES................................. 125,858,469 80,199,968
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock $4 par value authorized, 3,000,000 shares
issued and outstanding, 720,049 shares and 719,175
shares at December 31, 2002 and 2001 respectively...... 2,880,196 2,876,700
Paid-in-capital........................................... 4,116,292 4,111,616
Retained Earnings......................................... 1,281,906 360,134
------------ -----------
TOTAL STOCKHOLDERS' EQUITY........................ 8,278,394 7,348,450
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $134,136,863 $87,548,418
============ ===========
See notes to financial statements.
F-3
THE COMMONWEALTH BANK
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans..................................................... $6,327,308 $5,244,413
Federal funds sold........................................ 120,105 226,264
Interest bearing deposits................................. 44,497 85,403
Government agencies....................................... -- 30,740
Corporate notes and stocks................................ 39,764 21,844
---------- ----------
TOTAL INTEREST AND DIVIDEND INCOME................ 6,531,674 5,608,664
INTEREST EXPENSE
Deposits.................................................. 1,809,736 2,278,421
FHLB interest............................................. 250,212 86,231
---------- ----------
TOTAL INTEREST EXPENSE............................ 2,059,948 2,364,652
NET INTEREST INCOME............................... 4,471,726 3,244,012
PROVISION FOR CREDIT LOSSES................................. 487,300 288,300
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES.......................................... 3,984,426 2,955,712
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts....................... 134,906 121,017
Late charges on loan accounts............................. 47,108 39,319
Receivable financing...................................... 145,679 135,250
Other..................................................... 253,167 195,913
---------- ----------
TOTAL NONINTEREST INCOME.......................... 580,860 491,499
NONINTEREST EXPENSES
Salaries and employee benefits............................ 1,594,762 1,387,293
Occupancy................................................. 233,686 208,585
Data processing........................................... 197,674 180,282
Depreciation and amortization............................. 211,708 228,116
Legal and professional.................................... 61,828 25,381
Equipment repairs and maintenance......................... 84,584 70,515
Bank franchise tax........................................ 58,180 54,791
Bank supplies............................................. 45,962 35,110
Other..................................................... 675,130 476,188
---------- ----------
TOTAL NONINTEREST EXPENSES........................ 3,163,514 2,666,261
---------- ----------
NET INCOME BEFORE TAXES........................... 1,401,772 780,950
Provision for income taxes................................ 480,000 221,000
---------- ----------
NET INCOME........................................ $ 921,772 $ 559,950
========== ==========
NET INCOME PER SHARE
Basic..................................................... $ 1.28 $ 0.78
========== ==========
Fully diluted............................................. $ 1.19 $ 0.77
========== ==========
See notes to financial statements.
F-4
THE COMMONWEALTH BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER TOTAL
OF COMMON PAID-IN RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS EQUITY
-------- ---------- ---------- ---------- -------------
BALANCE AT JANUARY 1, 2001........ 719,175 $2,876,700 $4,111,616 $ (199,816) $6,788,500
Net income...................... -- -- -- 559,950 559,950
-------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2001...... 719,175 2,876,700 4,111,616 360,134 7,348,450
Net income...................... -- -- -- 921,772 921,772
Option exercise................. 874 3,496 4,676 -- 8,172
-------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2002...... $720,049 $2,880,196 $4,116,292 $1,281,906 $8,278,394
======== ========== ========== ========== ==========
See notes to financial statements.
F-5
THE COMMONWEALTH BANK
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income................................................ $ 921,772 $ 559,950
Adjustments to reconcile net income to cash provided by
provided by operating activities
Depreciation and amortization.......................... 211,708 228,116
Provision for loan losses............................ 487,300 368,320
(Increase) decrease in accrued interest receivable... (72,514) (7,674)
(Increase) decrease in prepaid expenses and other
assets.............................................. (185,325) 38,496
(Increase) decrease in deferred tax assets........... (180,000) (226,214)
Increase (decrease) in accrued interest payable...... (35,743) (28,850)
Increase (decrease) in other liabilities............. 623,521 (123,796)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 1,770,719 808,348
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities of securities held-to-maturity... -- 984,479
Purchases of restricted equity securities.............. (668,100) (156,100)
Purchases of premises and equipment.................... (193,708) (287,571)
Proceeds from sale of other real estate owned.......... -- 70,679
Purchase of other investments.......................... (158,900) (1,235,000)
Net increase in loans.................................. (36,111,821) (17,380,463)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES............. (37,132,529) (18,003,976)
------------ ------------
FINANCING ACTIVITIES
Net increase in demand savings and money market
accounts............................................... 27,639,175 12,218,915
Net increase in certificates of deposit................... 4,190,654 6,715,712
Increase in FHLB advances................................. 13,240,894 4,300,000
Proceeds from issuance of common stock.................... 8,172 --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 45,078,895 23,234,627
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 9,717,085 6,038,999
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 13,725,856 7,686,857
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 23,442,941 $ 13,725,856
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the year............................. $ 2,119,107 $ 2,393,502
============ ============
See notes to financial statements.
F-6
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The CommonWealth Bank (the "Bank") is a state chartered commercial bank
located in Richmond, Virginia. The Bank opened for business in April 1986 and
operates four retail banking offices. The Bank is subject to regulation by the
Board of Governors of the Federal Reserve and the Bureau of Financial
Institutions of the State Corporation Commission of the Commonwealth of
Virginia. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to a maximum of $100,000 for each insured depositor. The
accounting and reporting policies of the Bank conform to generally accepted
accounting principles and general practices within the financial services
industry. The following is a summary of the more significant of those policies:
Cash equivalents -- Cash equivalents include short-term highly liquid
investments with maturities of three months or less at date of purchase,
including Federal funds sold.
Securities -- Debt securities that are purchased with the positive intent
and ability to hold to maturity or call date are classified as held-to-maturity.
They are carried and reported at amortized cost. The amortization of premium and
accretion of discount are recognized as adjustments to interest income using the
interest method. Debt and equity securities classified as available-for-sale are
those needed to meet liquidity needs, provide portfolio restructuring, or to
minimize interest rate market risk. They are carried at their market value, with
unrealized gains and losses excluded from income and reported net of tax effect
as a separate component of stockholders' equity. Gains or losses on disposition
of securities are computed on the specific identification of the cost of each
security.
Loans and allowance for credit losses -- Loans are concentrated to
borrowers in the Richmond metropolitan area and are stated at the amount of
unpaid principal reduced by an allowance for credit losses. Interest on loans is
calculated by using the simple interest method on daily balances on the
principal amount outstanding. The accrual of interest on loans is discontinued
when, in the opinion of management, there is an indication that the borrower may
be unable to meet payments as they become due. The Bank defers loan origination
and commitment fees, net of certain direct loan origination costs, and the net
deferred fees are amortized into interest income over the lives of the related
loans as yield adjustments.
The allowance for loan losses is an amount management believes will be
adequate to absorb losses on existing loans that may become uncollectible.
Management determines the adequacy of the allowance based upon reviews of
individual credits, delinquencies, current economic conditions, the risk
characteristics of the various categories of loans, recent loan loss experience
and other pertinent factors. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance for loan losses based on their judgments
about information available at the time of the examination.
Loan sales -- The Bank periodically generates additional funds for lending
by selling participating interests in loans. Gains or losses on such sales are
recognized at the time of sale and are determined by the difference between the
net sales proceeds and the unpaid balance of the loans sold adjusted for any
yield differential, servicing fees and servicing cost applicable to future year.
Loan servicing rights -- Loan servicing fees, retained upon the sale of
loan participations, are capitalized by allocating the proceeds of sale of the
loans, between the present value of the servicing fees and the cost of the
loans. The present value of the servicing fees are amortized over the period of
net servicing income, using the interest method with average life assumptions
using current industry trends.
F-7
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Bank premises and equipment -- Premises and equipment are stated at cost
less accumulated depreciation and amortization. For financial reporting
purposes, provisions for depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the individual assets or
the terms of the related leases, if shorter, for leasehold improvements.
Accelerated depreciation methods are used for income tax purposes. Expenditures
for betterments and major renewals are capitalized and ordinary maintenance and
repairs are charged to operations as incurred.
Income taxes -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
Advertising costs -- The Bank expenses all costs of advertising as
incurred. Advertising expense amounted to $81,667 in 2002 and $92,798 in 2001,
and is included in noninterest expenses on the Statement of Income.
Use of estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowance for
losses on loans may change in the near term.
Stock Split -- The common stock of The CommonWealth Bank split on a five
shares for four shares basis for all stockholders of record as of June 10, 2002.
The remaining fractional shares, if any, of each stockholder were sold in the
open market and the net proceeds were distributed to the stockholder of such
fractional share by Bank check on July 10, 2002. The number of shares and per
share amounts have all been retroactively adjusted to reflect this split.
Reclassification -- Certain reclassifications have been made in the prior
year's financial statements to conform to the 2002 presentation.
NOTE 2 -- AGREEMENT AND PLAN OF MERGER
On January 27, 2003, the Bank entered into an Agreement and Plan of Merger
with First Community Bank, National Association, a wholly owned subsidiary of
First Community Bancshares, Inc. ("FCBS"). On February 25, 2003, the parties
amended the merger agreement.
Under the terms of the merger agreement, each share of the Bank common
stock issued and outstanding immediately prior to the merger shall become and be
converted into the right to receive either $30.50 in cash or a number of whole
shares of FCBS's common stock, determined by dividing $30.50 by the average
closing price of FCBS's common stock during a specified period preceding the
merger, plus cash in lieu of any fractional share interest, subject to election
and allocation procedures set forth in the merger agreement. This is intended to
ensure that not more than 60% and not less than 50% of the value of
consideration will be in the form of FCBS
F-8
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- AGREEMENT AND PLAN OF MERGER -- (CONTINUED)
common stock and the remaining consideration will be in the form of cash. The
merger is expected to close during the second quarter of the calendar year 2003,
pending the receipt of all required regulatory approvals and the approval of the
Bank's shareholders.
NOTE 3 -- LOANS
Loans receivable are summarized as follows:
2002 2001
------------ -----------
Commercial and industrial................................. $ 16,465,376 $13,888,976
SBA loans purchased....................................... 665,381 1,213,374
Secured by real estate.................................... 70,632,561 42,879,053
Consumer installment...................................... 1,946,223 2,087,648
Construction.............................................. 17,739,007 11,333,493
------------ -----------
107,448,548 71,402,544
Less
Allowance for credit losses............................. 1,089,330 709,716
Deferred loan fees, net................................. 183,848 141,979
------------ -----------
$106,175,370 $70,550,849
============ ===========
Loans on which the accrual of interest has been discontinued or whose terms
have been renegotiated amounted to $570,412 and $4,000 at December 31, 2002 and
2001, respectively. Specific allowances for these loans amounted to $84,000 for
2002 and $4,000 for 2001. The Bank is not committed to lend additional funds to
debtors whose loans have been modified.
A summary of the allowance for loan losses is as follows:
2002 2001
---------- --------
Balance, beginning of year.................................. $ 709,716 $617,377
Provision charged to expense................................ 487,300 288,300
Recoveries.................................................. 185,733 26,233
Charge-offs................................................. (293,419) (222,194)
---------- --------
Balance, end of year........................................ $1,089,330 $709,716
========== ========
The Bank makes loans guaranteed by the U.S. Small Business Administration
("SBA"). With SBA guarantees, which amount to 75%-90% of the loan balances, the
Bank was able to offer business loans to start up companies and for expansion of
existing firms. In these cases, without SBA guarantee, the Bank would have been
unable to offer a loan to the business, or if offered would have required much
more restricted terms.
The SBA guaranteed portion of the loan may be sold in the secondary market
at virtually the same time the loan is funded. The gains on sales are reported
in the year of sale, since all such loans are sold without recourse. There were
no loans sold during 2002 or 2001.
There were no loans held for resale at December 31, 2002 and 2001.
F-9
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LOANS -- (CONTINUED)
A summary of the capitalized loan servicing fees is as follows:
2002 2001
------- -------
Balance, beginning of year.................................. $20,199 $43,574
Amortization of servicing fees.............................. (6,763) (23,375)
------- -------
Balance, end of year........................................ $13,436 $20,199
======= =======
The Bank services loans for the SBA and other financial institutions which
are not included in the accompanying financial statements. The servicing
portfolio amounted to $4,455,001 and $5,219,749 and respectively at December 31,
2002 and 2001, and consisted primarily of commercial and construction loan
participations. There were no gains reported from sales of servicing rights, net
of related expenses, in 2002 or 2001.
NOTE 4 -- LAND, PREMISES AND EQUIPMENT
Land, premises and equipment are summarized as follows:
2002 2001
---------- ----------
Land........................................................ $ 125,000 $ 125,000
========== ==========
PREMISES AND EQUIPMENT:
Building.................................................... $ 447,968 $ 447,968
Furniture, fixtures and equipment........................... 1,298,203 1,270,972
Leasehold improvements...................................... 233,207 230,505
Computer Software........................................... 194,669 154,013
Conversion Costs............................................ 77,888 77,888
---------- ----------
2,251,935 2,181,346
Less accumulated depreciation and amortization.............. 1,545,293 1,456,704
---------- ----------
$ 706,642 $ 724,642
========== ==========
Accumulated depreciation and amortization at December 31 was as follows:
2002 2001
---------- ----------
Building.................................................... $ 177,831 $ 169,498
Furniture, fixtures and equipment........................... 980,765 970,877
Leasehold improvements...................................... 205,052 184,715
Computer Software........................................... 156,750 122,296
Conversion Costs............................................ 24,895 9,318
---------- ----------
$1,545,293 $1,456,704
========== ==========
Depreciation and amortization expense amounted to $211,708 and $228,116 for
the years ended December 31, 2002 and 2001, respectively.
F-10
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- DEPOSITS
Major categories of deposits at December 31, 2002 and 2001 follow:
2002 2001
--------------------------- --------------------------
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------ ------------ ----------- ------------
Noninterest-bearing deposits
Demand deposits................ $ 43,982,409 --% $19,794,321 --%
Interest-bearing deposits
Money market and NOW
accounts.................... 25,802,672 1.47% 22,840,629 2.15%
Savings deposits............... 2,248,208 0.75% 1,759,164 1.75%
Certificate of deposits
Less than $100,000.......... 26,566,217 3.11% 24,849,847 4.70%
$100,000 or more............ 8,692,729 3.10% 6,218,445 4.64%
------------ ---- ----------- ----
$107,292,235 $75,462,406
============ ===========
Time deposits will mature as follows:
2003................................... $31,976,753
2004................................... 1,583,949
2005................................... 1,160,626
2006................................... 138,560
2007................................... 399,058
-----------
$35,258,946
===========
The weighted average rate on interest-bearing deposit accounts was
approximately 2.85% in 2002 and 4.66% in 2001.
The aggregate amount of deposits exceeding $100,000 was $57,895,957 and
$30,592,135 at December 31, 2002 and 2001, respectively.
NOTE 6 -- OTHER BORROWINGS
The Bank's long-term debt consists of advances from the Federal Home Loan
Bank of Atlanta, which are secured by mortgage-related assets totaling
$45,309,719. At December 31, 2002, the Bank's fixed-rate long-term debt totals
$7,540,894 and matures through May 2, 2007. The interest rate on the fixed-rate
note payable ranges from 1.390% to 5.010%. At December 31, 2001, the Bank's
fixed-rate long-term debt totals $4,300,000 and matures through December 11,
2006. The interest rate on the fixed-rate note payable ranges from 3.980% to
5.010%.
At December 31, 2002, the Bank's floating-rate long-term debt totals
$10,000,000 and matures through May 27, 2007. The interest rate on floating-rate
long-term debt ranged from 1.410% to 1.778% during 2002.
F-11
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- OTHER BORROWINGS -- (CONTINUED)
The contractual maturities of long-term debt are as follows:
2002
----------------------------------------
FIXED RATE FLOATING RATE TOTAL
---------- ------------- -----------
Due in 2003.................................... $5,000,000 $ -- $ 5,000,000
Due in 2004.................................... -- -- --
Due in 2005.................................... 900,000 -- 900,000
Due in 2006.................................... 390,894 -- 390,894
Due in 2007.................................... 1,250,000 10,000,000 11,250,000
---------- ----------- -----------
$7,540,894 $10,000,000 $17,540,894
========== =========== ===========
NOTE 7 -- INCOME TAXES
Income tax expense attributable to income before income tax expense is
summarized as follows:
DECEMBER 31
-------------------
2002 2001
-------- --------
Current federal income tax expense.......................... $660,000 $258,846
Deferred federal income tax expense (benefit)............... (180,000) (37,846)
-------- --------
Total..................................................... $480,000 $221,000
======== ========
The following is a reconciliation of the expected tax expense with the
reported expense for the years ended December 31, 2002 and 2001:
2002 2001
--------------------- ---------------------
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
-------- ---------- -------- ----------
Expected tax expense at statutory rate...... $476,602 34% $265,523 34%
Realization of deferred tax asset valuation
allowance................................. -- -- (34,610) (4)
Permanent non-deductible expenses........... 3,398 -- (9,913) (2)
-------- -- -------- --
$480,000 34% $221,000 28%
======== == ======== ==
F-12
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001, are summarized below:
2002 2001
-------- --------
Deferred tax assets
Deferred compensation..................................... $119,995 $ 30,556
Allowance for credit losses............................... 295,071 192,058
Depreciation.............................................. 5,963 10,856
-------- --------
421,029 233,470
-------- --------
Deferred tax liabilities
Excess servicing.......................................... 14,815 7,256
-------- --------
14,815 7,256
-------- --------
Net deferred tax asset...................................... $406,214 $226,214
======== ========
NOTE 8 -- EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, or resulted in the issuance of common stock that then shared
in the earnings of the entity.
The basic and diluted earnings per share calculation are as follows:
2002 2001
-------- --------
Numerator:
(a) Net income available to Shareholders...................... $921,772 $559,950
Denominator:
Weighted-average shares outstanding....................... 719,473 719,175
-------- --------
(b) Basic EPS weighted average shares outstanding............. 719,473 719,175
Effect of dilutive securities:
Incremental shares attributable to Stock Option Plan and
warrants issued........................................... 57,506 6,450
-------- --------
(c) Diluted EPS weighted-average shares outstanding........... $776,979 $725,625
======== ========
Basic earnings per share.................................. $ 1.28 $ 0.78
======== ========
Diluted earnings per share................................ $ 1.19 $ 0.77
======== ========
NOTE 9 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business the Bank is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the
F-13
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- (CONTINUED)
amount recognized on the statement of financial condition. Financial instruments
with off-balance-sheet risk are summarized as follows:
2002 2001
----------- -----------
Commitments to extend credit............................... $ 8,813,813 $ 8,090,150
Standby letters of credit.................................. $ 948,081 $ 1,129,628
Unused commercial lines of credit.......................... $14,711,845 $11,194,812
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, unused
lines of credit and standby letters of credit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit and unused lines of credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include personal property, commercial property, residential property, land
and accounts receivable.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Bank leases land and office space under operating leases, which expire
at various dates through December 31, 2018. Total rental expense from operating
leases amounted to approximately $172,782 in 2002 and $145,541 in 2001. The Bank
has the option to terminate the leases upon written notice and payment of the
balance of rents due and penalties, if applicable.
2003.................................... $ 155,801
2004.................................... 128,895
2005.................................... 125,236
2006.................................... 122,778
2007.................................... 131,110
Thereafter.............................. 1,324,572
----------
$1,988,392
==========
NOTE 11 -- REGULATORY MATTERS
The Bank is subject to certain requirements imposed by state and federal
banking statues and regulations. These requirements, among other things,
establish minimum levels of capital, restrict the amount of dividends that may
be distributed, and require that the Bank maintain a minimum reserve balance.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total capital and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that as of December 31, 2002, the Bank
meets all capital adequacy requirements to which it is subject.
F-14
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- REGULATORY MATTERS -- (CONTINUED)
An institution is considered well capitalized if it significantly exceeds
the required leverage and risk-based capital ratios. If an institution meets the
required minimum capital measures, but does not qualify as well capitalized, it
is categorized as adequately capitalized. As of December 31, 2002, the most
recent notification from the Federal Reserve Bank, in accordance with the prompt
corrective action guidelines established by Section 38 of the Federal Deposit
Insurance Corporation Act of 1991, the institution is considered adequately
capitalized. This designation, however, is not the sole criterion for
determining capital adequacy. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
DESIGNATIONS
MINIMUM REGULATORY CAPITAL REQUIRED
---------------------------------------
COMMONWEALTH BANK ADEQUATELY WELL
ACTUAL CAPITAL RATIOS CAPITALIZED CAPITALIZED
---------------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------- ---------- ----- ---------- -----
As of December 31, 2002
Total capital (to risk weighted
assets)........................ $8,278,000 10.12% $7,397,520 8% $9,246,900 10%
Tier I capital (to risk weighted
assets)........................ 8,265,000 8.94% 3,698,760 4% 5,548,140 6%
Tier I capital (to average
assets)........................ 8,265,000 6.45% 5,127,160 4% 6,408,950 5%
As of December 31, 2001
Total capital (to risk weighted
assets)........................ $8,038,965 12.12% $5,306,080 8% $6,632,600 10%
Tier I capital (to risk weighted
assets)........................ 7,328,000 11.05% 2,653,040 4% 3,979,560 6%
Tier I capital (to average
assets)........................ 7,328,000 8.12% 3,611,560 4% 4,514,450 5%
NOTE 12 -- DIVIDENDS
The Bank is subject to certain regulatory restrictions pertaining to the
amount of dividends that it may pay. The Federal Reserve restricts, without
prior approval, the total dividend payments of a member bank in any calendar
year to the Bank's net income of that year, as defined, combined with its
retained net income of the preceding two calendar years, less any required
transfers to surplus. At December 31, 2002 and 2001, retained earnings which are
free of such restrictions amounted to approximately $1,732,964.
NOTE 13 -- STOCK OPTION PLAN
During 1994, the Bank stockholders approved a stock option plan for its
employees. The plan reserved 75,000 shares of common stock for grant and
provides that the terms of each award be determined by the Board of Directors.
In April 1999, the stockholders approved an additional 93,750 shares for grant
under the same terms, bringing the total to 168,750 shares of common stock for
grant.
The Bank has issued stock options to certain officers and employees. These
options are accounted for under the provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation. As permitted by Statement No. 123, the
Bank has elected to continue using the measurement method prescribed in
Accounting Principles Board Opinion No. 25 and, accordingly, Statement No. 123
has no effect on the Bank's financial position or results of operations.
Because the Bank had adopted the disclosure only provisions of Statement
No. 123, no compensation cost has been recognized for the stock options plan.
Had compensation cost for the Bank's stock option plan been determined based on
the fair value at the grant date of the awards consistent with the provisions of
Statement
F-15
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- STOCK OPTION PLAN -- (CONTINUED)
No. 123, the Bank's net earnings and earnings per share would have decreased to
the pro forma amounts indicated below:
2002 2001
---------------------------- ----------------------------
AS REPORTED PROFORMA UNDER AS REPORTED PROFORMA UNDER
UNDER SFAS UNDER SFAS
APB NO. 25 NO. 123 APB NO. 25 NO. 123
----------- -------------- ----------- --------------
Net income..................... $921,772 $918,361 $559,950 $495,555
Earnings per share:
Basic.......................... $ 1.28 $ 1.28 $ 0.78 $ 0.69
Diluted........................ 1.19 1.18 0.77 0.60
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002 and 2001. Dividend yield of 0% for both
years, expected volatility of 44.81% and 20%, respectively, risk-free interest
rates of 3.82% and 5.00%, respectively, and expected lives of 10 years for the
options.
Under the terms of the plan, the exercise price of each share of stock
covered by the options granted shall be equal to the greater of the fair value
or the book value as defined. For the years ended December 31, 2002 and 2001,
stock option activity was as follows:
WEIGHTED AVERAGE
OPTION PRICE NUMBER
PER SHARE OF SHARES
---------------- ---------
Balance at December 31, 2000................................ $6.87 72,654
Granted..................................................... 9.44 53,125
Forfeited................................................... 8.64 (875)
-------
Balance at December 31, 2001................................ 7.95 124,904
Granted..................................................... 16.75 600
Exercised................................................... 9.35 (874)
-------
Balance at December 31, 2002................................ 7.90 124,630
=======
The following table summarizes information concerning currently outstanding
and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
$ 4.71 - $8.00 68,308 3.66 $6.74 68,308 $6.74
$9.09 - $17.25 56,322 8.12 9.50 56,322 9.50
------- -------
124,630 124,630
======= =======
NOTE 14 -- OTHER EMPLOYEE BENEFIT PLANS
During 1994, the Bank instituted a contributory thrift plan through the
Virginia Bankers Association, covering all eligible full time employees.
Participants may make contributions to the plan during the year, with certain
limitations. The Bank contributes to the plan an amount equal to one-half of the
first six percent contributed (maximum of three percent). Expenses amounted to
$26,906 in 2002 and $23,327 in 2001.
F-16
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- OTHER EMPLOYEE BENEFIT PLANS -- (CONTINUED)
During 1998, the Bank instituted two deferred compensation plans, the
Directors' Deferred Compensation Plan and the Executive Deferred Compensation
Plan. Both plans are administered by the Bank as the "Plan Administrator". Day
to day administration is handled by the Virginia Bankers Association. Both plans
are non-qualified, restricted to Directors and Executive Officers respectively.
The participants may elect to defer any or all of their fees, salary and bonus.
Elections generally must be made prior to the beginning of the calendar year for
which the deferral contributions will be made. However in the event that an
officer or director becomes eligible to participate on a date other than the
first day of a calendar year, the Administrator will permit such an individual
to file a deferral election within 30 days after becoming eligible to
participate.
The participants are 100% vested upon acceptance to the plans, and employer
contributions to the plans are not permitted. The participant elects the form of
and duration of benefit payments. All payments must begin when the participant
attains the retirement age of 70 as set forth in the plan.
During 2001, the Bank entered into a deferred compensation arrangement with
members of the Board of Directors and an Executive Officer. Amounts accrued for
the years 2002 and 2001 were approximately $183,555 and $22,150. This
arrangement is partially funded by life insurance.
NOTE 15 -- MARKET CONCENTRATION
The Bank has a diversified loan portfolio consisting of commercial, real
estate and consumer (installment) loans as set forth in Note 3 above. Generally,
the loans are collateralized by assets of the borrowing customer. Substantially
all of the Bank's customers are residents of or operate business ventures in its
market consisting primarily of the Richmond metropolitan area. Therefore, a
substantial portion of its debtors' ability to honor their contracts is
influenced by the economic conditions in this market area.
NOTE 16 -- DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments requires the Bank to disclose estimated fair
values of its financial instruments.
The following methods and assumptions were used to estimate the approximate
fair value of each class of financial instrument for which it is practicable to
estimate fair value.
Cash and due from banks and federal funds sold -- The carrying amount is a
reasonable estimate of fair value.
Securities -- The fair value of securities, except certain state and
municipal securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair value of
certain state and municipal securities is not readily available through market
sources other than dealer quotations, so fair value estimates are based on
quoted market prices of similar instruments, adjusted for differences between
the quoted instruments and the instruments being valued.
Loans -- Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as commercial,
real estate -residential, real estate -- other, loans to individuals and other
loans. Each loan category is further segmented into fixed and adjustable rate
interest terms.
The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan, as well as
estimates for prepayments. The estimate of maturity is based on the Bank's
historical experience with repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and lending
conditions.
F-17
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Deposits -- The fair values of noninterest-bearing demand deposits,
interest-bearing demand deposits and savings deposits are equal to their
carrying amounts since the amounts are payable on demand. The fair value of
fixed maturity time deposits and certificates of deposit is estimated by
discounting scheduled cash flows through maturity using interest rates currently
offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit -- The only
amounts recorded for commitments to extend credit and standby letters of credit
are the deferred fees arising from these unrecognized financial instruments.
These deferred fees are not material at December 31, 2001 and 2000, and as such,
the related fair values have not been estimated.
2002 2001
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets:
Cash and cash
equivalents............. $ 23,442,941 $ 23,442,941 $ 13,725,856 $ 13,725,856
Equity
securities -- restricted... 1,141,500 1,141,500 473,400 473,400
Loans, net................. 106,175,370 106,291,112 70,550,849 70,637,208
Interest receivable........ 413,625 413,625 341,111 341,111
------------ ------------ ------------ ------------
Total financial
assets................ $131,173,436 $131,289,178 $ 85,091,216 $ 85,177,448
============ ============ ============ ============
Financial liabilities:
Deposits................... $107,292,235 $107,704,993 $ 75,462,406 $ 75,754,448
Accrued expenses........... 872,694 872,694 249,173 249,173
FHLB advances.............. 17,540,894 17,586,500 4,300,000 4,300,000
Unrecognized financial
instruments:
Commitments to extend
credit.................. 8,813,813 8,813,813 8,090,150 8,090,150
Standby letters of
credit.................. 948,081 948,081 1,129,628 1,219,628
Unused commercial lines of
credit.................. 14,711,845 14,711,845 11,194,812 11,194,812
------------ ------------ ------------ ------------
Total financial
liabilities........... $150,179,562 $150,637,926 $100,426,169 $100,808,211
============ ============ ============ ============
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-balance-sheet and
off-balance-sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Significant assets that are not considered
financial assets include deferred income taxes and bank premises and equipment;
a significant liability that is not considered a financial liability is accrued
post-retirement benefits. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
F-18
THE COMMONWEALTH BANK
ANNEX I
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 27, 2003
AMONG
FIRST COMMUNITY BANCSHARES, INC.,
FIRST COMMUNITY BANK, NATIONAL ASSOCIATION
AND
THE COMMONWEALTH BANK
TABLE OF CONTENTS
PAGE
----
ARTICLE I CERTAIN DEFINITIONS......................................... 1
1.01 Certain Definitions......................................... 1
ARTICLE II THE MERGER.................................................. 6
2.01 The Merger.................................................. 6
2.02 Effective Date and Effective Time; Closing.................. 6
ARTICLE III CONSIDERATION; ELECTION AND EXCHANGE PROCEDURES............. 7
3.01 Conversion of Shares........................................ 7
3.02 Election Procedures......................................... 7
3.03 Exchange Procedures......................................... 9
3.04 Rights as Shareholders; Stock Transfers..................... 11
3.05 No Fractional Shares........................................ 11
3.06 Dissenting Shares........................................... 11
3.07 Anti-Dilution Provisions.................................... 11
3.08 Withholding Rights.......................................... 11
3.09 CommonWealth Bank Options................................... 11
ARTICLE IV ACTIONS PENDING ACQUISITION................................. 12
4.01 Forbearances of CommonWealth Bank........................... 12
4.02 Forbearances of Parent...................................... 14
ARTICLE V REPRESENTATIONS AND WARRANTIES.............................. 14
5.01 Disclosure Schedules........................................ 14
5.02 Standard.................................................... 15
5.03 Representations and Warranties of CommonWealth Bank......... 15
Representations and Warranties of Parent and First Community
5.04 Bank........................................................ 23
ARTICLE VI COVENANTS................................................... 27
6.01 Reasonable Best Efforts..................................... 27
6.02 Shareholder Approval........................................ 27
6.03 Registration Statement...................................... 27
6.04 Regulatory Filings.......................................... 28
6.05 Press Releases.............................................. 28
6.06 Access; Information......................................... 28
6.07 Affiliates.................................................. 29
6.08 Acquisition Proposals....................................... 29
6.09 Certain Policies............................................ 30
6.10 Nasdaq Listing.............................................. 30
6.11 Indemnification............................................. 30
6.12 Benefit Plans............................................... 31
6.13 Parent Board and First Community Bank Board................. 32
6.14 Notification of Certain Matters............................. 32
I-i
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER.................... 32
Conditions to Each Party's Obligation to Effect the
7.01 Merger...................................................... 32
7.02 Conditions to Obligation of CommonWealth Bank............... 33
Conditions to Obligations of Parent and First Community
7.03 Bank........................................................ 33
ARTICLE VIII TERMINATION................................................. 34
8.01 Termination................................................. 34
8.02 Effect of Termination and Abandonment....................... 35
ARTICLE IX MISCELLANEOUS............................................... 37
9.01 Survival.................................................... 37
9.02 Waiver; Amendment........................................... 37
9.03 Counterparts................................................ 37
9.04 Governing Law............................................... 37
9.05 Expenses.................................................... 37
9.06 Notices..................................................... 37
9.07 Entire Understanding; No Third Party Beneficiaries.......... 38
9.08 Severability................................................ 38
9.09 Enforcement of the Agreement................................ 38
9.10 Interpretation.............................................. 38
9.11 Assignment.................................................. 38
9.12 Alternative Structure....................................... 39
ANNEX A Form of Shareholder Agreement
ANNEX B Form of Affiliate Letter
Employment Agreement Between First Community Bank and J.E.
ANNEX C Causey Davis
Matters to be Covered by Opinion of Counsel to Parent and
ANNEX D First Community Bank
Matters to be Covered by Opinion of Counsel to CommonWealth
ANNEX E Bank
I-ii
AGREEMENT AND PLAN OF MERGER, dated as of January 27, 2003 (this
"Agreement"), among First Community Bancshares, Inc. ("Parent"), First Community
Bank, National Association ("First Community Bank") and The CommonWealth Bank
("CommonWealth Bank").
RECITALS
A. CommonWealth Bank. CommonWealth Bank is a Virginia-chartered
commercial bank, having its principal place of business in Richmond, Virginia.
B. Parent. Parent is a Nevada corporation, having its principal place of
business in Bluefield, Virginia.
C. First Community Bank. First Community Bank is a national bank, having
its principal place of business in Bluefield, Virginia.
D. Intention of the Parties. It is the intention of the parties to this
Agreement that the Merger provided for herein be treated as a "reorganization"
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code").
E. Board Action. The respective Boards of Directors of each of Parent,
First Community Bank and CommonWealth Bank have determined that it is in the
best interests of their respective companies and their stockholders to
consummate the Merger provided for herein.
F. Shareholder Agreements. As a material inducement to Parent and First
Community Bank to enter into this Agreement, and simultaneously with the
execution of this Agreement, each Shareholder (as defined herein) is entering
into an agreement, in the form of Annex A hereto (collectively, the "Shareholder
Agreements") pursuant to which they have agreed, among other things, to vote
their shares of CommonWealth Bank Common Stock (as defined herein) in favor of
this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.01 Certain Definitions. The following terms are used in this Agreement
with the meanings set forth below:
"Acquisition Proposal" has the meaning set forth in Section 6.08.
"Affiliate Letter" has the meaning set forth in Section 6.07.
"Aggregate Cash Consideration" has the meaning set forth in Section
3.01(b)(2)(i).
"Agreement" means this Agreement, as amended or modified from time to
time in accordance with Section 9.02.
"Articles of Merger" has the meaning set forth in Section 2.02(a).
"Average Share Price" has the meaning set forth in Section
3.01(b)(2)(ii).
"Bank Insurance Fund" means the Bank Insurance Fund maintained by the
FDIC.
"Bank Secrecy Act" means the Bank Secrecy Act of 1970, as amended.
"Benefit Plans" has the meaning set forth in Section 5.03(m).
"Bureau" means the Bureau of Financial Institutions of the State
Corporation Commission of the Commonwealth of Virginia.
Annex I-1
"Business Day" means Monday through Friday of each week, except a legal
holiday recognized as such by the U. S. Government or any day on which
banking institutions in the Commonwealth of Virginia are authorized or
obligated to close.
"Capital Change" has the meaning set forth in Section 3.07.
"Cash Election Shares" has the meaning set forth in Section 3.02(a).
"Certificate" means any certificate which immediately prior to the
Effective Time represented shares of CommonWealth Bank Common Stock.
"Closing" and "Closing Date" have the meanings set forth in Section
2.02(b).
"Code" has the meaning set forth in the recitals to this Agreement.
"CommonWealth Bank" has the meaning set forth in the preamble to this
Agreement.
"CommonWealth Bank Affiliates" has the meaning set forth in Section
6.07.
"CommonWealth Bank Articles" means the Articles of Incorporation of
CommonWealth Bank, as amended.
"CommonWealth Bank Board" means the Board of Directors of CommonWealth
Bank.
"CommonWealth Bank Bylaws" means the By-laws of CommonWealth Bank, as
amended.
"CommonWealth Bank Common Stock" means the common stock, $4.00 par value
per share, of CommonWealth Bank.
"CommonWealth Bank Group" means any "affiliated group" (as defined in
Section 1504(a) of the Code without regard to the limitations contained in
Section 1504(b) of the Code) that includes CommonWealth Bank or any
predecessor of or any successor to CommonWealth Bank (or to another such
predecessor or successor).
"CommonWealth Bank Loan Property" has the meaning set forth in Section
5.03(o)(i).
"CommonWealth Bank Meeting" has the meaning set forth in Section 6.02.
"CommonWealth Bank Options" means the options to acquire CommonWealth
Bank Common Stock issued under the CommonWealth Bank Stock Option Plan.
"CommonWealth Bank Regulatory Authorities" has the meaning set forth in
Section 5.03(i).
"CommonWealth Bank Stock Option Plan" means The CommonWealth Bank
Amended and Restated Stock Option Plan.
"Community Reinvestment Act" means the Community Reinvestment Act of
1977, as amended.
"DOL" has the meaning set forth in Section 5.03(m)(i).
"Derivatives Contract" has the meaning set forth in Section 5.03(q).
"Determination Date" means the date on which the last required approval
of a Governmental Authority is obtained with respect to the Transaction,
all statutory waiting periods in respect thereof have expired and all other
conditions to the consummation of the Merger specified in Article VII
hereof (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing) have been
satisfied or waived.
"Disclosure Schedule" has the meaning set forth in Section 5.01.
"Dissenting Shares" has the meaning set forth in Section 3.06.
"Effective Date" has the meaning set forth in Section 2.02(a).
"Effective Time" has the meaning set forth in Section 2.02(a).
Annex I-2
"Election Deadline" has the meaning set forth in Section 3.02(b).
"Employees" has the meaning set forth in Section 5.03(m).
"Environmental Laws" has the meaning set forth in Section 5.03(o).
"Equal Credit Opportunity Act" means the Equal Credit Opportunity Act,
as amended.
"Equity Investment" means (i) an Equity Security; and (ii) an ownership
interest in any company or other entity, any membership interest that
includes a voting right in any company or other entity, any interest in
real estate; and any investment or transaction which in substance falls
into any of these categories even though it may be structured as some other
form of investment or transaction.
"Equity Security" means any stock (other than adjustable-rate preferred
stock, money market (auction rate) preferred stock or other instrument
determined by the OCC to have the character of debt securities),
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or subscription,
transferable share, investment contract, or voting-trust certificate; any
security convertible into such a security; any security carrying any
warrant or right to subscribe to or purchase any such security; and any
certificate of interest or participation in, temporary or interim
certificate for, or receipt for any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 5.03(m)(iii).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Exchange Agent" has the meaning set forth in Section 3.02(a).
"Exchange Ratio" has the meaning set forth in Section 3.01(b)(1)(i),
subject to adjustment pursuant to Sections 3.02(f), 3.07, 8.01(i) and
8.01(j).
"Fair Housing Act" means the Fair Housing Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve Act" means the Federal Reserve Act, as amended.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"First Community Bank" has the meaning set forth in the preamble to this
Agreement.
"First Community Bank Articles" means the Articles of Association of
First Community Bank, as amended.
"First Community Bank Board" means the Board of Directors of First
Community Bank.
"First Community Bank Bylaws" means the Bylaws of First Community Bank,
as amended.
"First Community Bank Common Stock" means the common stock, $1,200.00
par value per share, of First Community Bank.
"GAAP" means accounting principles generally accepted in the United
States of America.
"Governmental Authority" means any federal, state or local court,
administrative agency or commission or other governmental authority or
instrumentality.
"Hazardous Substance" has the meaning set forth in Section 5.03(o).
"Indemnified Parties" and "Indemnifying Party" have the meanings set
forth in Section 6.11(a).
"Insurance Amount" has the meaning set forth in Section 6.11(c).
"Insurance Policies" has the meaning set forth in Section 5.03(w).
Annex I-3
"IRS" has the meaning set forth in Section 5.03(m)(i).
"Liens" means any charge, mortgage, pledge, security interest,
restriction, claim, lien or encumbrance.
"Loans" has the meaning set forth in Section 4.01(r).
"Material Adverse Effect" means, with respect to Parent or CommonWealth
Bank any effect that (i) is material and adverse to the financial position,
results of operations or business of Parent and its Subsidiaries taken as a
whole or CommonWealth Bank, as the case may be, or (ii) would materially
impair the ability of any of Parent and its Subsidiaries or CommonWealth
Bank to perform their respective obligations under this Agreement or
otherwise materially impede the consummation of the Transaction; provided,
however, that Material Adverse Effect shall not be deemed to include the
impact of (a) changes in banking and similar laws of general applicability
or interpretations thereof by Governmental Authorities, (b) changes in GAAP
or regulatory accounting requirements applicable to banks and their holding
companies generally, (c) changes in general economic conditions affecting
banks and their holding companies generally, (d) any modifications or
changes to valuation policies and practices, or expenses incurred, in
connection with the Transaction or restructuring charges taken in
connection with the Transaction, in each case in accordance with GAAP, and
(e) with respect to CommonWealth Bank, the effects of any action or
omission taken with the prior consent of Parent or as otherwise
contemplated by the Agreement.
"Material Contracts" has the meaning set forth in Section 5.03(k)(i).
"Merger" has the meaning set forth in Section 2.01(a).
"Merger Consideration" means the number of whole shares of Parent Common
Stock, plus cash in lieu of any fractional share interest, and/or the
amount of cash into which shares of CommonWealth Bank Common Stock shall be
converted pursuant to the provisions of Article III.
"Nasdaq" means The Nasdaq Stock Market, Inc.'s SmallCap Market or such
other securities exchange on which the Parent Common Stock may be listed.
"National Bank Act" means the National Bank Act, as amended.
"National Labor Relations Act" means the National Labor Relations Act,
as amended.
"No-Election Shares" has the meaning set forth in Section 3.02(a).
"Notice of Consummation" has the meaning set forth in Section 2.02(a).
"OCC" means the Office of the Comptroller of the Currency.
"OREO" means other real estate owned.
"Parent" has the meaning set forth in the preamble to this Agreement.
"Parent Benefit Plans" has the meaning set forth in Section 6.12(a).
"Parent Board" means the Board of Directors of the Parent.
"Parent Common Stock" means the common stock, $1.00 par value per share,
of Parent.
"Parent Preferred Stock" means the preferred stock of Parent.
"Parent Regulatory Authorities" has the meaning set forth in Section
5.04(k).
"Pension Plan" has the meaning set forth in Section 5.03(m)(ii).
"Person" means any individual, bank, corporation, partnership,
association, joint-stock company, business trust, limited liability company
or unincorporated organization.
"Per Share Cash Consideration" has the meaning set forth in Section
3.01(b)(1)(ii).
"Per Share Stock Consideration" has the meaning set forth in Section
3.01(b)(1)(i).
Annex I-4
"Previously Disclosed" by a party shall mean information set forth in a
section of its Disclosure Schedule corresponding to the section of this
Agreement where such term is used.
"Proxy Statement" has the meaning set forth in Section 6.03(a).
"Reallocated Cash Shares " has the meaning set forth in Section
3.02(d)(i)(3).
"Reallocated Stock Shares" has the meaning set forth in Section
3.02(d)(ii)(2).
"Registration Statement" has the meaning set forth in Section 6.03(a).
"Rights" means, with respect to any Person, warrants, options, rights,
convertible securities and other arrangements or commitments which obligate
the Person to issue or dispose of any of its capital stock or other
ownership interests.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Securities Documents" has the meaning set forth in Sections 5.03(g) and
5.04(g) in the case of CommonWealth Bank and Parent, respectively.
"Shareholder Agreements" has the meaning set forth in the recitals to
this Agreement.
"Shareholders" means each director and executive officer of CommonWealth
Bank.
"Starting Price" means $31.14, the average of the closing sales price of
a share of Parent Common Stock, as reported on Nasdaq (as reported by an
authoritative source), for the 30 trading-day period ending with the close
of business on January 15, 2003.
"Stock Election Shares" has the meaning set forth in Section 3.02(a).
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
those terms in Rule l-02 of Regulation S-X of the SEC.
"Superior Proposal" has the meaning set forth in Section 6.08.
"Surviving Corporation" has the meaning set forth in Section 2.01(a).
"Tax" and "Taxes" mean all federal, state, local or foreign income,
gross income, gains, gross receipts, sales, use, ad valorem, goods and
services, capital, production, transfer, franchise, windfall profits,
license, withholding, payroll, employment, disability, employer health,
excise, estimated, severance, stamp, occupation, property, environmental,
custom duties, unemployment or other taxes of any kind whatsoever, together
with any interest, additions or penalties thereto and any interest in
respect of such interest and penalties.
"Tax Returns" means any return, declaration or other report (including
elections, declarations, schedules, estimates and information returns) with
respect to any Taxes.
"Termination Fee" has the meaning set forth in Section 8.02(b).
"Transaction" means the Merger and any other transaction contemplated by
this Agreement.
"Treasury Stock" means shares of Parent Common Stock held by Parent or
any of its Subsidiaries, other than in a fiduciary (including custodial or
agency) capacity or as a result of debts previously contracted in good
faith.
"VSCA" means the Virginia Stock Corporation Act.
Annex I-5
ARTICLE II
THE MERGER
2.01 The Merger.
(a) The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time, CommonWealth Bank shall merge with and into First Community
Bank in accordance with the applicable provisions of federal law and the VSCA
(the "Merger"), the separate corporate existence of CommonWealth Bank shall
cease and First Community Bank shall survive and continue to exist as a national
bank (First Community Bank, as the surviving corporation in the Merger,
sometimes being referred to herein as the "Surviving Corporation").
(b) Name. The name of the Surviving Corporation shall be "First Community
Bank, National Association'
(c) Articles and Bylaws. The articles of association and bylaws of First
Community Bank immediately after the Merger shall be the First Community Bank
Articles and the First Community Bank Bylaws as in effect immediately prior to
the Merger.
(d) Directors and Executive Officers of the Surviving Corporation. The
directors of the Surviving Corporation immediately after the Merger shall be the
directors of First Community Bank immediately prior to the Merger plus the two
persons appointed or elected as directors pursuant to Section 6.13 hereof, each
of whom shall serve until such time as their successors shall be duly elected
and qualified. The executive officers of the Surviving Corporation immediately
after the Merger shall be the executive officers of First Community Bank
immediately prior to the Merger, each of whom shall serve until such time as
their successors shall be duly elected and qualified.
(e) Authorized Capital Stock. The authorized capital stock of the
Surviving Corporation upon consummation of the Merger shall be as set forth in
the First Community Bank Articles immediately prior to the Merger.
(f) Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in accordance with federal law and regulation and the VSCA.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
CommonWealth Bank shall vest in the Surviving Corporation, and all debts,
liabilities, obligations, restrictions, disabilities and duties of CommonWealth
Bank shall become the debts, liabilities, obligations, restrictions,
disabilities and duties of the Surviving Corporation.
(g) Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider that any further assignments or assurances
in law or any other acts are necessary or desirable to (i) vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation its right, title
or interest in, to or under any of the rights, properties or assets of
CommonWealth Bank acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger, or (ii) otherwise carry out the
purposes of this Agreement, CommonWealth Bank, and its proper officers and
directors, shall be deemed to have granted to the Surviving Corporation an
irrevocable power of attorney to execute and deliver all such proper deeds,
assignments and assurances in law and to do all acts necessary or proper to
vest, perfect or confirm title to and possession of such rights, properties or
assets in the Surviving Corporation and otherwise to carry out the purposes of
this Agreement, and the proper officers and directors of the Surviving
Corporation are fully authorized in the name of the Surviving Corporation or
otherwise to take any and all such action.
2.02 Effective Date and Effective Time; Closing.
(a) Subject to the satisfaction or waiver of the conditions set forth in
Article VII (other than those conditions that by their nature are to be
satisfied at the consummation of the Merger, but subject to the fulfillment or
waiver of those conditions), the parties shall cause articles of merger relating
to the Merger (the "Articles of Merger") to be filed with the Virginia State
Corporation Commission pursuant to Section 13.1-720 of the VSCA and the notice
of consummation (the "Notice of Consummation") to be filed with the OCC pursuant
to OCC guidelines
Annex I-6
on (i) a date selected by Parent after such satisfaction or waiver which is no
later than the later of (A) five Business Days after such satisfaction or waiver
or (B) the first month end following such satisfaction or waiver, or (ii) such
other date to which the parties may mutually agree in writing. The Merger
provided for herein shall become effective upon such filings or on such date as
may be specified therein. The date of such filings or such later effective date
is herein called the "Effective Date." The "Effective Time" of the Merger shall
be the time of such filings or as set forth in such filings.
(b) A closing (the "Closing") shall take place immediately prior to the
Effective Time at 10:00 a.m., Eastern Time, at the principal offices of Parent
in Bluefield, Virginia, or at such other place, at such other time, or on such
other date as the parties may mutually agree upon (such date, the "Closing
Date"). At the Closing, there shall be delivered to Parent and CommonWealth Bank
the opinions, certificates and other documents required to be delivered under
Article VII hereof.
ARTICLE III
CONSIDERATION; ELECTION AND EXCHANGE PROCEDURES
3.01 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of a holder of shares of CommonWealth Bank
Common Stock:
(a) Each share of Parent Common Stock and First Community Bank Common Stock
that is issued and outstanding immediately prior to the Effective Time shall
remain issued and outstanding and shall be unchanged by the Merger.
(b) (1) Subject to Sections 3.02, 3.05, 3.06, 3.07, 8.01(i) and 8.01(j),
each share of CommonWealth Bank Common Stock issued and outstanding immediately
prior to the Effective Time shall be converted into, and shall be canceled in
exchange for, the right to receive, at the election of the holder thereof:
(i) the number of shares of Parent Common Stock which is equal to the
quotient (the "Exchange Ratio") (rounded to the nearest one ten-thousandth)
determined by dividing (x) $30.50 by (y) the Average Share Price of the
Parent Common Stock (the "Per Share Stock Consideration"), or
(ii) a cash amount equal to $30.50 per share of CommonWealth Bank
Common Stock (the "Per Share Cash Consideration").
(2) For purposes of this Agreement:
(i) the "Aggregate Cash Consideration" shall amount to the product of
the number of shares of CommonWealth Bank Common Stock outstanding
immediately prior to the Effective Time times .4 times $30.50; and
(ii) the "Average Share Price" of the Parent Common Stock shall mean
the average of the closing sales price of a share of Parent Common Stock,
as reported on Nasdaq (as reported by an authoritative source), for the 20
trading-day period ending with the close of business on the fifth Business
Day preceding the Effective Time.
3.02 Election Procedures.
(a) Parent shall designate an exchange agent to act as agent (the "Exchange
Agent") for purposes of conducting the election procedure and the exchange
procedure described in Sections 3.01 and 3.02. Provided that CommonWealth Bank
has delivered, or caused to be delivered, to the Exchange Agent all information
which is necessary for the Exchange Agent to perform its obligations as
specified herein, the Exchange Agent shall, no later than five (5) Business Days
after the Effective Date, mail or make available to each holder of record of a
Certificate or Certificates (i) a notice and letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates theretofore representing shares of CommonWealth Bank Common Stock
shall pass, only upon proper delivery of the Certificates to the Exchange Agent)
advising such holder of the effectiveness of the Merger and the procedure for
surrendering to the Exchange Agent such Certificate or Certificates in exchange
for the consideration set forth in Section 3.01(b) hereof deliverable in
Annex I-7
respect thereof pursuant to this Agreement and (ii) an election form in such
form as Parent and CommonWealth Bank shall mutually agree (the "Election Form").
Each Election Form shall permit the holder (or in the case of nominee record
holders, the beneficial owner through proper instructions and documentation) (i)
to elect to receive Parent Common Stock with respect to all of such holder's
CommonWealth Bank Common Stock as hereinabove provided (the "Stock Election
Shares"), (ii) to elect to receive cash with respect to all of such holder's
CommonWealth Bank Common Stock as hereinabove provided (the "Cash Election
Shares"), or (iii) to indicate that such holder makes no such election with
respect to such holder's shares of CommonWealth Bank Common Stock (the
"No-Election Shares"). Nominee record holders who hold CommonWealth Bank Common
Stock on behalf of multiple beneficial owners shall indicate how many of the
shares held by them are Stock Election Shares, Cash Election Shares and
No-Election Shares. If a shareholder either (i) does not submit a properly
completed Election Form in a timely fashion or (ii) revokes an Election Form
prior to the Election Deadline and does not resubmit a properly completed
Election Form prior to the Election Deadline, the shares of CommonWealth Bank
Common Stock held by such shareholder shall be designated No-Election Shares.
Any Dissenting Shares shall be deemed to be Cash Election Shares and, with
respect to such shares, the holders thereof shall in no event be classified as
holders of Reallocated Stock Shares.
(b) The term "Election Deadline" shall mean 5:00 p.m., Eastern Time, on the
20th day following but not including the date of mailing of the Election Form or
such other date as Parent and CommonWealth Bank shall mutually agree upon.
(c) Any election to receive Parent Common Stock or cash shall have been
properly made only if the Exchange Agent shall have actually received a properly
completed Election Form by the Election Deadline. An Election Form will be
properly completed only if accompanied by Certificates representing all shares
of CommonWealth Bank Common Stock covered thereby, subject to the provisions of
paragraph (c) of Section 3.03. Any Election Form may be revoked or changed by
the person submitting such Election Form to the Exchange Agent by written notice
to the Exchange Agent only if such written notice is actually received by the
Exchange Agent at or prior to the Election Deadline. The Certificate or
Certificates representing CommonWealth Bank Common Stock relating to any revoked
Election Form shall be promptly returned without charge to the person submitting
the Election Form to the Exchange Agent. The Exchange Agent shall have
reasonable discretion to determine when any election, modification or revocation
is received, whether any such election, modification or revocation has been
properly made and to disregard immaterial defects in any Election Form, and any
good faith decisions of the Exchange Agent regarding such matters shall be
binding and conclusive. Neither Parent nor the Exchange Agent shall be under any
obligation to notify any person of any defect in an Election Form.
(d) Within ten (10) Business Days after the Election Deadline, the Exchange
Agent shall effect the allocation among holders of CommonWealth Bank Common
Stock of rights to receive Parent Common Stock or cash in the Merger in
accordance with the Election Forms as follows:
(i) If the number of Cash Election Shares times the Per Share Cash
Consideration is less than the Aggregate Cash Consideration, then:
(1) all Cash Election Shares (subject to Section 3.06 with respect to
Dissenting Shares) shall be converted into the right to receive cash,
(2) No-Election Shares shall then be deemed to be Cash Election
Shares to the extent necessary to have the total number of Cash Election
Shares times the Per Share Cash Consideration equal the Aggregate Cash
Consideration. If less than all of the No-Election Shares need to be
treated as Cash Election Shares, then the Exchange Agent shall select
which No-Election Shares shall be treated as Cash Election Shares in
such manner as the Exchange Agent shall determine, and all remaining No-
Election Shares shall thereafter be treated as Stock Election Shares,
(3) If all of the No-Election Shares are treated as Cash Election
Shares under the preceding subsection and the total number of Cash
Election Shares times the Per Share Cash Consideration is less than the
Aggregate Cash Consideration, then the Exchange Agent shall convert on a
pro rata basis as described below in Section 3.02(e) a sufficient number
of Stock Election Shares into Cash Election
Annex I-8
Shares ("Reallocated Cash Shares") such that the sum of the number of
Cash Election Shares plus the number of Reallocated Cash Shares times
the Per Share Cash Consideration equals the Aggregate Cash
Consideration, and all Reallocated Cash Shares will be converted into
the right to receive cash, and
(4) the Stock Election Shares which are not Reallocated Cash Shares
shall be converted into the right to receive Parent Common Stock.
(ii) If the number of Cash Election Shares times the Per Share Cash
Consideration is greater than the Aggregate Cash Consideration, then:
(1) all Stock Election Shares and all No-Election Shares shall be
converted into the right to receive Parent Common Stock,
(2) the Exchange Agent shall convert on a pro rata basis as described
below in Section 3.02(e) a sufficient number of Cash Election Shares
(excluding any Dissenting Shares) ("Reallocated Stock Shares") such that
the number of remaining Cash Election Shares (including Dissenting
Shares) times the Per Share Cash Consideration equals the Aggregate Cash
Consideration, and all Reallocated Stock Shares shall be converted into
the right to receive Parent Common Stock, and
(3) the Cash Election Shares (subject to Section 3.06 with respect to
Dissenting Shares) which are not Reallocated Stock Shares shall be
converted into the right to receive cash.
(iii) If the number of Cash Election Shares times the Per Share Cash
Consideration is equal to the Aggregate Cash Consideration, then
subparagraphs (d)(i) and (ii) above shall not apply and all No-Election
Shares and all Stock Election Shares will be converted into the right to
receive Parent Common Stock.
(e) In the event that the Exchange Agent is required pursuant to Section
3.02(d)(i)(3) to convert some Stock Election Shares into Reallocated Cash
Shares, each holder of Stock Election Shares shall be allocated a pro rata
portion of the total Reallocated Cash Shares. In the event the Exchange Agent is
required pursuant to Section 3.02(d)(ii)(2) to convert some Cash Election Shares
into Reallocated Stock Shares, each holder of Cash Election Shares shall be
allocated a pro rata portion of the total Reallocated Stock Shares.
(f) If at the time of the Closing, the aggregate value of the shares of
Parent Common Stock to be exchanged for shares of CommonWealth Bank Common Stock
is less than fifty percent (50%) of the aggregate value of the Merger
Consideration, then Parent shall direct the Exchange Agent to convert a minimum
number of No-Election Shares and, to the extent necessary a minimum number of
Cash Election Shares, into Stock Election Shares so that the aggregate value of
the shares of Parent Common Stock exchanged for shares of CommonWealth Bank
Common Stock (other than cash in lieu of fractional shares) constitutes fifty
percent (50%) of the aggregate value of the Merger Consideration. For purposes
of this Section 3.02(f) only, the value of a share of Parent Common Stock will
be the value as of the time of the Closing as determined for federal income tax
purposes.
3.03 Exchange Procedures.
(a) At the Effective Time, for the benefit of the holders of Certificates,
(i) Parent shall deliver to the Exchange Agent certificates evidencing the
number of shares of Parent Common Stock issuable and (ii) Parent shall deliver,
or cause First Community Bank to deliver, to the Exchange Agent, the Aggregate
Cash Consideration payable pursuant to this Article III in exchange for
Certificates representing outstanding shares of CommonWealth Bank Common Stock.
The Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the shares of Parent Common Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account of
the persons entitled thereto.
(b) After completion of the allocation referred to in paragraph (d) of
Section 3.02, each holder of an outstanding Certificate or Certificates who has
surrendered such Certificate or Certificates to the Exchange Agent will, upon
acceptance thereof by the Exchange Agent, be entitled to a certificate or
certificates representing the number of whole shares of Parent Common Stock
and/or the amount of cash into which the aggregate number
Annex I-9
of shares of CommonWealth Bank Common Stock previously represented by such
Certificate or Certificates surrendered shall have been converted pursuant to
this Agreement and, if such holder's shares of CommonWealth Bank Common Stock
have been converted into Parent Common Stock, any other distribution theretofore
paid with respect to Parent Common Stock issuable in the Merger, in each case
without interest. The Exchange Agent shall accept such Certificates upon
compliance with such reasonable terms and conditions as the Exchange Agent may
impose to effect an orderly exchange thereof in accordance with normal exchange
practices. Each outstanding Certificate which prior to the Effective Time
represented CommonWealth Bank Common Stock and which is not surrendered to the
Exchange Agent in accordance with the procedures provided for herein shall,
except as otherwise herein provided, until duly surrendered to the Exchange
Agent be deemed to evidence ownership of the number of shares of Parent Common
Stock or the right to receive the amount of cash into which such CommonWealth
Bank Common Stock shall have been converted. After the Effective Time, there
shall be no further transfer on the records of CommonWealth Bank of Certificates
representing shares of CommonWealth Bank Common Stock and if such Certificates
are presented to CommonWealth Bank for transfer, they shall be cancelled against
delivery of certificates for Parent Common Stock or cash as hereinabove
provided. No dividends which have been declared will be remitted to any person
entitled to receive shares of Parent Common Stock under Section 3.02 until such
person surrenders the Certificate or Certificates representing CommonWealth Bank
Common Stock, at which time such dividends shall be remitted to such person,
without interest.
(c) The Exchange Agent and Parent, as the case may be, shall not be
obligated to deliver cash and/or a certificate or certificates representing
shares of Parent Common Stock to which a holder of CommonWealth Bank Common
Stock would otherwise be entitled as a result of the Merger until such holder
surrenders the Certificate or Certificates representing the shares of
CommonWealth Bank Common Stock for exchange as provided in this Section 3.03,
or, in default thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond in an amount as may be reasonably required in each case by Parent.
If any certificates evidencing shares of Parent Common Stock are to be issued in
a name other than that in which the Certificate evidencing CommonWealth Bank
Common Stock surrendered in exchange therefore is registered, it shall be a
condition of the issuance thereof that the Certificate so surrendered shall be
properly endorsed or accompanied by an executed form of assignment separate from
the Certificate and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a certificate for shares of Parent Common
Stock in any name other than that of the registered holder of the Certificate
surrendered or otherwise establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
(d) Any portion of the shares of Parent Common Stock and cash delivered to
the Exchange Agent by Parent pursuant to Section 3.03(a) that remains unclaimed
by the stockholders of CommonWealth Bank for six months after the Effective Time
(as well as any proceeds from any investment thereof) shall be delivered by the
Exchange Agent to Parent. Any stockholders of CommonWealth Bank who have not
theretofore complied with Section 3.03(b) shall thereafter look only to Parent
for the consideration deliverable in respect of each share of CommonWealth Bank
Common Stock such shareholder holds as determined pursuant to this Agreement
without any interest thereon. If outstanding Certificates for shares of
CommonWealth Bank Common Stock are not surrendered or the payment for them is
not claimed prior to the date on which such shares of Parent Common Stock or
cash would otherwise escheat to or become the property of any governmental unit
or agency, the unclaimed items shall, to the extent permitted by abandoned
property and any other applicable law, become the property of Parent (and to the
extent not in its possession shall be delivered to it), free and clear of all
claims or interest of any person previously entitled to such property. Neither
the Exchange Agent nor any party to this Agreement shall be liable to any holder
of stock represented by any Certificate for any consideration paid to a public
official pursuant to applicable abandoned property, escheat or similar laws.
Parent and the Exchange Agent shall be entitled to rely upon the stock transfer
books of CommonWealth Bank to establish the identity of those persons entitled
to receive the consideration specified in this Agreement, which books shall be
conclusive with respect thereto. In the event of a dispute with respect to
ownership of stock represented by any Certificate, Parent and the Exchange Agent
shall be entitled to deposit any consideration represented thereby in escrow
with an independent third party and thereafter be relieved with respect to any
claims thereto.
Annex I-10
(e) Notwithstanding anything in this Agreement to the contrary,
Certificates surrendered for exchange by any CommonWealth Bank Affiliate shall
not be exchanged for certificates representing shares of Parent Common Stock to
which such CommonWealth Bank Affiliate may be entitled pursuant to the terms of
this Agreement until Parent has received a written agreement from such person as
specified in Section 6.07.
3.04 Rights as Shareholders; Stock Transfers. At the Effective Time,
holders of CommonWealth Bank Common Stock shall cease to be, and shall have no
rights as, stockholders of CommonWealth Bank other than to receive the
consideration provided under this Article III. After the Effective Time, there
shall be no transfers on the stock transfer books of CommonWealth Bank or the
Surviving Corporation of shares of CommonWealth Bank Common Stock.
3.05 No Fractional Shares. Notwithstanding any other provision of this
Agreement, neither certificates nor scrip for fractional shares of Parent Common
Stock shall be issued in the Merger. Each holder of CommonWealth Bank Common
Stock who otherwise would have been entitled to a fraction of a share of Parent
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive in lieu thereof cash (without interest) in an amount
determined by multiplying the fractional share interest to which such holder
would otherwise be entitled by the Average Share Price of the Parent Common
Stock, rounded to the nearest whole cent. No such holder shall be entitled to
dividends, voting rights or any other rights in respect of any fractional share.
3.06 Dissenting Shares. Each outstanding share of CommonWealth Bank
Common Stock the holder of which has perfected his right to dissent under the
VSCA and has not effectively withdrawn or lost such right as of the Effective
Time (the "Dissenting Shares") shall not be converted into or represent a right
to receive shares of Parent Common Stock or cash hereunder, and the holder
thereof shall be entitled only to such rights as are granted by the VSCA.
CommonWealth Bank shall give Parent prompt notice upon receipt by CommonWealth
Bank of any such written demands for payment of the fair value of such shares of
CommonWealth Bank Common Stock and of withdrawals of such demands and any other
instruments provided pursuant to the VSCA. If any holder of Dissenting Shares
shall fail to perfect or shall have effectively withdrawn or lost the right to
dissent at or prior to the Effective Time and shall have delivered a properly
completed Election Form to the Exchange Agent by the Election Deadline, the
Dissenting Shares held by such holder shall be converted into a right to receive
Parent Common Stock and/or cash in accordance with the applicable provisions of
this Agreement; and if any such holder of Dissenting Shares shall not have
delivered a properly completed Election Form to the Exchange Agent by the
Election Deadline, the Dissenting Shares held by such holder shall be designated
No-Election Shares. If any holder of Dissenting Shares shall have effectively
withdrawn or lost the right to dissent (through failure to perfect or otherwise)
after the Effective Time, the Dissenting Shares held by such holder shall be
converted on a share by share basis into either the right to receive Parent
Common Stock and/or cash in accordance with the applicable provisions of this
Agreement as Parent or the Exchange Agent shall determine. Any payments made in
respect of Dissenting Shares shall be made by the Surviving Corporation.
3.07 Anti-Dilution Provisions. If, between the date hereof and the
Effective Time, the shares of Parent Common Stock shall be changed into a
different number or class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
a stock dividend thereon shall be declared with a record date within said period
(a "Capital Change"), the Exchange Ratio shall be adjusted accordingly.
3.08 Withholding Rights. Parent (through the Exchange Agent, if
applicable) shall be entitled to deduct and withhold from any amounts otherwise
payable pursuant to this Agreement to any holder of shares of CommonWealth Bank
Common Stock such amounts as Parent is required under the Code or any state,
local or foreign tax law or regulation thereunder to deduct and withhold with
respect to the making of such payment. Any amounts so withheld shall be treated
for all purposes of this Agreement as having been paid to the holder of
CommonWealth Bank Common Stock in respect of which such deduction and
withholding was made by Parent.
3.09 CommonWealth Bank Options.
(a) At the Effective Time, each vested CommonWealth Bank Option which is
then outstanding shall cease to represent a right to acquire shares of
CommonWealth Bank Common Stock and shall be converted
Annex I-11
automatically into an option to purchase shares of Parent Common Stock, and
Parent shall assume each CommonWealth Bank Option, in accordance with the terms
of the CommonWealth Bank Stock Option Plan and stock option or other agreement
by which it is evidenced, except that from and after the Effective Time, (i)
Parent and the Compensation Committee of its Board of Directors shall be
substituted for CommonWealth Bank and the committee of the Board of Directors of
CommonWealth Bank (including, if applicable, the entire Board of Directors of
CommonWealth Bank) administering such CommonWealth Bank Stock Option Plan, (ii)
each CommonWealth Bank Option assumed by Parent may be exercised solely for
shares of Parent Common Stock, (iii) the number of shares of Parent Common Stock
subject to such CommonWealth Bank Option shall be equal to the number of shares
of CommonWealth Bank Common Stock subject to such CommonWealth Bank Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
provided that any fractional shares of Parent Common Stock resulting from such
multiplication shall be rounded down to the nearest share, and (iv) the per
share exercise price under each such CommonWealth Bank Option shall be adjusted
by dividing the per share exercise price under each such CommonWealth Bank
Option by the Exchange Ratio, provided that such exercise price shall be rounded
up to the nearest cent. Notwithstanding clauses (iii) and (iv) of the preceding
sentence, each CommonWealth Bank Option which is an "incentive stock option"
shall be adjusted as required by Section 424 of the Code, and the regulations
promulgated thereunder, so as not to constitute a modification, extension or
renewal of the option within the meaning of Section 424(h) of the Code. Parent
and CommonWealth Bank agree to take all necessary steps to effect the foregoing
provisions of this Section 3.09(a).
(b) Within fifteen Business Days after the Effective Time, Parent shall
file a registration statement on Form S-3 or Form S-8, as the case may be (or
any successor or other appropriate forms), with respect to the shares of Parent
Common Stock subject to the options referred to in paragraph (a) of this Section
3.09 and shall use its reasonable efforts to maintain the current status of the
prospectus or prospectuses contained therein for so long as such options remain
outstanding in the case of a Form S-8 or, in the case of a Form S-3, until the
shares subject to such options may be sold without a further holding period
under Rule 144 under the Securities Act.
ARTICLE IV
ACTIONS PENDING ACQUISITION
4.01 Forbearances of CommonWealth Bank. From the date hereof until the
Effective Time, except as expressly contemplated or permitted by this Agreement
or as Previously Disclosed, without the prior written consent of Parent,
CommonWealth Bank will not:
(a) Ordinary Course. Conduct its business other than in the ordinary and
usual course consistent with past practice or fail to use reasonable best
efforts to preserve its business organization, keep available the present
services of its employees and preserve for itself and Parent the goodwill of the
customers of CommonWealth Bank and others with whom business relations exist.
(b) Capital Stock. Other than pursuant to Rights set forth on Schedule
4.01(b) of CommonWealth Bank's Disclosure Schedule and outstanding on the date
hereof, (i) issue, sell or otherwise permit to become outstanding, or authorize
the creation of, any additional shares of stock or any Rights or (ii) permit any
additional shares of stock to become subject to grants of employee or director
stock options or other Rights.
(c) Dividends; Etc. (i) Make, declare, pay or set aside for payment any
dividend on or in respect of, or declare or make any distribution on any shares
of CommonWealth Bank Stock or (ii) directly or indirectly adjust, split,
combine, redeem, reclassify, purchase or otherwise acquire, any shares of its
capital stock.
(d) Compensation; Employment Agreements; Etc. Enter into or amend or renew
any employment, consulting, severance or similar agreements or arrangements with
any director, officer or employee of CommonWealth Bank or grant any salary or
wage increase or increase any employee benefit (including incentive or bonus
payments), except (i) for normal individual increases in compensation to
employees in the ordinary course of business consistent with past practice,
provided that no such increase shall result in an annual adjustment of more than
5%, (ii) for other changes that are required by applicable law, (iii) to satisfy
contractual obligations existing as of the date hereof and set forth in Schedule
4.01(d) of CommonWealth Bank's Disclosure Schedule and (iv) for grants of awards
to newly-hired employees consistent with past practice.
Annex I-12
(e) Hiring. Hire any person as an employee of CommonWealth Bank or
promote any employee, except (i) to satisfy contractual obligations existing as
of the date hereof and set forth on Schedule 4.01(e) of CommonWealth Bank's
Disclosure Schedule and (ii) persons hired to fill any vacancies arising after
the date hereof and whose employment is terminable at the will of CommonWealth
Bank other than any person to be hired who would have a base salary, including
any guaranteed bonus or any similar bonus, considered on an annual basis of more
than $40,000.
(f) Benefit Plans. Enter into, establish, adopt or amend, or make any
contributions to (except (i) as may be required by applicable law or (ii) to
satisfy contractual obligations existing as of the date hereof and set forth on
Schedule 4.01(f) of CommonWealth Bank's Disclosure Schedule), any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement (or
similar arrangement) related thereto, in respect of any director, officer or
employee of CommonWealth Bank or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder.
(g) Dispositions. Sell, transfer, mortgage, encumber or otherwise dispose
of or discontinue any of its assets, deposits, business or properties except in
the ordinary course of business consistent with past practice and in a
transaction that, together with all other such transactions, is not material to
CommonWealth Bank.
(h) Acquisitions. Acquire (other than by way of foreclosures or
acquisitions of control in a bona fide fiduciary capacity or in satisfaction of
debts previously contracted in good faith, in each case in the ordinary and
usual course of business consistent with past practice) all or any portion of
the assets, business, deposits or properties of any other entity.
(i) Capital Expenditures. Make any capital expenditures other than
capital expenditures in the ordinary course of business consistent with past
practice in amounts not exceeding $10,000 individually or $50,000 in the
aggregate.
(j) Governing Documents. Amend the CommonWealth Bank Articles or the
CommonWealth Bank Bylaws.
(k) Accounting Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by changes in
laws or regulations or GAAP.
(l) Contracts. Except in the ordinary course of business consistent with
past practice or as otherwise permitted under this Section 4.01, enter into or
terminate any Material Contract or amend or modify in any material respect any
of its existing Material Contracts.
(m) Claims. Enter into any settlement or similar agreement with respect
to any action, suit, proceeding, order or investigation to which CommonWealth
Bank is or becomes a party after the date of this Agreement, which settlement,
agreement or action involves payment by CommonWealth Bank of an amount which
exceeds $10,000 and/or would impose any material restriction on the business of
CommonWealth Bank or create precedent for claims that are reasonably likely to
be material to CommonWealth Bank.
(n) Banking Operations. Enter into any new material line of business;
change its material lending, investment, underwriting, risk and asset liability
management and other material banking and operating policies, except as required
by applicable law, regulation or policies imposed by any Governmental Authority;
or file any application or make any contract with respect to branching or site
location or branching or site relocation.
(o) Derivatives Contracts. Enter into any Derivatives Contract.
(p) Indebtedness. Incur any indebtedness for borrowed money (other than
deposits, federal funds purchased, cash management accounts, Federal Home Loan
Bank borrowings that mature within one year and securities sold under agreements
to repurchase that mature within one year, in each case in the ordinary course
of business consistent with past practice) or assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other Person, other than in the ordinary course of business consistent with past
practice.
Annex I-13
(q) Investment Securities. Acquire (other than by way of foreclosures or
acquisitions in a bona fide fiduciary capacity or in satisfaction of debts
previously contracted in good faith, in each case in the ordinary course of
business consistent with past practice) any debt security or Equity Investment
other than federal funds or United States Government securities or United States
Government agency securities, in each case with a term of one (1) year or less.
(r) Loans. Make, renew or otherwise modify any loan, loan commitment,
letter of credit or other extension of credit (collectively, "Loans") other than
in the ordinary course of business consistent with past practice, provided that
any commercial business loan, multi-family residential loan, or commercial real
estate loan that is originated, renewed or modified cannot have a principal
balance in excess of $200,000 without Parent's written consent.
(s) Investments in Real Estate. Make any investment or commitment to
invest in real estate or in any real estate development project (other than by
way of foreclosure or acquisitions in a bona fide fiduciary capacity or in
satisfaction of a debt previously contracted in good faith, in each case in the
ordinary course of business consistent with past practice).
(t) Adverse Actions. (i) Take any action that would, or is reasonably
likely to, prevent or impede the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code or (ii) take any action that is
intended or is reasonably likely to result in (x) any of its representations and
warranties set forth in this Agreement being or becoming untrue in any material
respect at any time at or prior to the Effective Time, (y) any of the conditions
to the Merger set forth in Article VII not being satisfied or (z) a material
violation of any provision of this Agreement except as may be required by
applicable law or regulation.
(u) Commitments. Enter into any contract with respect to, or otherwise
agree or commit to do, any of the foregoing.
4.02 Forbearances of Parent. From the date hereof until the Effective
Time, except as expressly contemplated or permitted by this Agreement, without
the prior written consent of CommonWealth Bank, Parent will not, and will cause
each of its Subsidiaries not to:
(a) Adverse Actions. Take any action that would, or is reasonably likely
to, prevent or impede the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code or (ii) take any action that is intended
or is reasonably likely to result in (x) any of its representations and
warranties set forth in this Agreement being or becoming untrue in any material
respect at any time at or prior to the Effective Time, (y) any of the conditions
to the Merger set forth in Article VII not being satisfied or (z) a material
violation of any provision of this Agreement, except as may be required by
applicable law or regulation.
(b) Commitments. Enter into any contract with respect to, or otherwise
agree or commit to do, any of the foregoing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 Disclosure Schedules. On or prior to the date hereof, Parent has
delivered to CommonWealth Bank a schedule and CommonWealth Bank has delivered to
Parent a schedule (respectively, its "Disclosure Schedule") setting forth, among
other things, items the disclosure of which is necessary or appropriate either
in response to an express disclosure requirement contained in a provision hereof
or as an exception to one or more representations or warranties contained in
Section 5.03 or 5.04 or to one or more of its covenants contained in Article IV;
provided, however, that (a) no such item is required to be set forth in a
Disclosure Schedule as an exception to a representation or warranty if its
absence would not be reasonably likely to result in the related representation
or warranty being deemed untrue or incorrect under the standard established by
Section 5.02 and (b) the mere inclusion of an item in a Disclosure Schedule as
an exception to a representation or warranty shall not be deemed an admission by
a party that such item represents a material exception or fact, event or
circumstance or that, absent such inclusion in the Disclosure Schedule, such
item is or would be reasonably likely to result in a Material Adverse Effect.
Annex I-14
5.02 Standard. No representation or warranty of CommonWealth Bank on the
one hand or Parent and First Community Bank on the other hand contained in
Sections 5.03 or 5.04, respectively, shall be deemed untrue or incorrect, and no
party hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, event or circumstance unless such
fact, circumstance or event, individually or taken together with all other
facts, events or circumstances inconsistent with any representation or warranty
contained in Section 5.03 or 5.04, has had or is reasonably likely to have a
Material Adverse Effect on the party making such representation or warranty.
5.03 Representations and Warranties of CommonWealth Bank. Subject to
Sections 5.01 and 5.02, CommonWealth Bank hereby represents and warrants to
Parent:
(a) Organization, Standing and Authority. CommonWealth Bank is duly
organized, validly existing and in good standing as a Virginia-chartered bank
under the laws of the Commonwealth of Virginia. CommonWealth Bank is duly
qualified to do business and is in good standing in each jurisdiction where its
ownership or leasing of property or assets or the conduct of its business
requires it to be so qualified. CommonWealth Bank has in effect all federal,
state, local and foreign governmental authorizations necessary for it to own or
lease its properties and assets and to carry on its business as now conducted.
The deposit accounts of CommonWealth Bank are insured by the Bank Insurance Fund
in the manner and to the maximum extent provided by applicable law, and
CommonWealth Bank has paid all deposit insurance premiums and assessments
required by applicable laws and regulations.
(b) CommonWealth Bank Capital Stock. The authorized capital stock of
CommonWealth Bank consists solely of 3,000,000 shares of CommonWealth Bank
Common Stock, of which 720,049 shares are issued and outstanding as of the date
hereof. As of the date hereof, no shares of CommonWealth Bank Common Stock were
held in treasury by CommonWealth Bank or otherwise directly or indirectly owned
by CommonWealth Bank. The outstanding shares of CommonWealth Bank Common Stock
have been duly authorized and validly issued and are fully paid and
non-assessable, and none of the outstanding shares of CommonWealth Bank Common
Stock have been issued in violation of the preemptive rights of any Person.
Section 5.03(b) of CommonWealth Bank's Disclosure Schedule sets forth for each
CommonWealth Bank Stock Option, the name of the grantee, the date of the grant,
the type of grant, the status of the option grant as qualified or non-qualified
under Section 422 of the Code, the number of shares of CommonWealth Bank Common
Stock subject to each option, the number of shares of CommonWealth Bank Common
Stock subject to options that are currently exercisable and the exercise price
per share. Except as set forth in the preceding sentence, there are no shares of
CommonWealth Bank Common Stock reserved for issuance, CommonWealth Bank does not
have any Rights issued or outstanding with respect to CommonWealth Bank Common
Stock and CommonWealth Bank does not have any commitment to authorize, issue or
sell any CommonWealth Bank Common Stock or Rights.
(c) No Subsidiaries.
(i) CommonWealth Bank does not own beneficially, directly or
indirectly, any Subsidiary.
(ii) Except for securities and other interests held in a fiduciary
capacity and beneficially owned by third parties or taken in
consideration of debts previously contracted, CommonWealth Bank does not
own beneficially, directly or indirectly, any equity securities or
similar interests of any Person or any interest in a partnership or
joint venture of any kind.
(d) Corporate Power. CommonWealth Bank has the corporate power and
authority to carry on its business as it is now being conducted and to own all
its properties and assets; and CommonWealth Bank has the corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the Transaction, subject to receipt of all necessary approvals
of Governmental Authorities and the approval of CommonWealth Bank's stockholders
of this Agreement.
(e) Corporate Authority. Subject to the approval of this Agreement by the
holders of the outstanding CommonWealth Bank Common Stock, this Agreement and
the Transaction have been authorized by all necessary corporate action of
CommonWealth Bank and the CommonWealth Bank Board on or prior to the date
hereof. CommonWealth Bank has duly executed and delivered this Agreement and,
assuming due authorization, execution and delivery by Parent and First Community
Bank, this Agreement is a valid and legally binding
Annex I-15
obligation of CommonWealth Bank, enforceable in accordance with its terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles).
(f) Regulatory Approvals; No Defaults.
(i) No consents or approvals of, or waivers by, or filings or
registrations with, any Governmental Authority or with any third party
are required to be made or obtained by CommonWealth Bank in connection
with the execution, delivery or performance by CommonWealth Bank of this
Agreement or to consummate the Transaction, except as Previously
Disclosed and except for (A) filings of applications or notices with,
and approvals or waivers by, the Federal Reserve Board, the OCC and the
Bureau, as required, (B) filings with the SEC and state securities
authorities, as applicable, in connection with the submission of this
Agreement for the approval of the holders of CommonWealth Bank Common
Stock and the issuance of Parent Common Stock in the Merger, (C) the
filing of Articles of Merger with the Virginia State Corporation
Commission pursuant to the VSCA and the filing of a Notice of
Consummation with the OCC pursuant to OCC guidelines and (D) the
approval of this Agreement by the holders of the outstanding shares of
CommonWealth Bank Common Stock. As of the date hereof, CommonWealth Bank
is not aware of any reason why the approvals set forth above and
referred to in Section 7.01(b) will not be received in a timely manner
and without the imposition of a condition, restriction or requirement of
the type described in Section 7.01(b).
(ii) Subject to receipt, or the making, of the consents, approvals,
waivers and filings referred to in the preceding paragraph and the
expiration of related waiting periods, the execution, delivery and
performance of this Agreement by CommonWealth Bank and the consummation
of the Transaction do not and will not (A) constitute a breach or
violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination under, any law,
rule or regulation or any judgment, decree, order, governmental permit
or license, or agreement, indenture or instrument of CommonWealth Bank
or to which CommonWealth Bank or any of its properties is subject or
bound, (B) constitute a breach or violation of, or a default under, the
CommonWealth Bank Articles or the CommonWealth Bank Bylaws or (C)
require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement,
indenture or instrument.
(g) Financial Reports; Undisclosed Liabilities.
(i) CommonWealth Bank's Annual Reports on Form 10-KSB for the fiscal
years ended December 31, 2001, December 31, 2000 and December 31, 1999
and all other reports, registration statements, definitive proxy
statements or information statements filed or to be filed by it
subsequent to December 31, 1999 with the Federal Reserve Board
(collectively, CommonWealth Bank's "Securities Documents"), as of the
date filed or to be filed and as amended prior to the date hereof, (A)
complied or will comply in all material respects as to form with the
applicable regulations of the Federal Reserve Board as the case may be
and (B) did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
information as of a later date shall be deemed to modify information as
of an earlier date; and each of the balance sheets contained in any such
Securities Documents (including the related notes and schedules thereto)
fairly presents, or will fairly present, the financial position of
CommonWealth Bank as of its date, and each of the statements of income
and changes in stockholders' equity and cash flows or equivalent
statements in such Securities Documents (including any related notes and
schedules thereto) fairly presents, or will fairly present, the results
of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of CommonWealth Bank for the periods to which
they relate, in each case in accordance with GAAP consistently applied
during the periods involved, except in each case as may be noted
therein.
Annex I-16
(ii) Except as Previously Disclosed, since September 30, 2002,
CommonWealth Bank has not incurred any liability other than in the
ordinary course of business consistent with past practice (excluding the
incurrence of expenses related to this Agreement and the Transaction).
(iii) Since September 30, 2002, (A) CommonWealth Bank has conducted
its businesses in the ordinary and usual course consistent with past
practice (excluding the incurrence of expenses related to this Agreement
and the Transaction), (B) except as Previously Disclosed, CommonWealth
Bank has not taken nor permitted any of the actions set forth in Section
4.01 hereof between September 30, 2002 and the date hereof (except with
respect to Sections 4.01(r) and (u), where the relevant period is
between November 30, 2002 and the date hereof) and (C) no event has
occurred or circumstance arisen that, individually or taken together
with all other facts, circumstances and events (described in any
paragraph of this Section 5.03 or otherwise), is reasonably likely to
have a Material Adverse Effect with respect to CommonWealth Bank.
(iv) No agreement pursuant to which any loans or other assets have
been or shall be sold by CommonWealth Bank entitled the buyer of such
loans or other assets, unless there is material breach of a
representation or covenant by CommonWealth Bank, to cause CommonWealth
Bank to repurchase such loan or other asset or the buyer to pursue any
other form of recourse against CommonWealth Bank. Since December 31,
1999, no cash, stock or other dividend or any other distribution with
respect to the CommonWealth Bank Common Stock has been declared, set
aside or paid. No shares of CommonWealth Bank Common Stock have been
purchased, redeemed or otherwise acquired, directly or indirectly, by
CommonWealth Bank since September 30, 2002, and no agreements have been
made to do the foregoing.
(h) Litigation. No litigation, claim or other proceeding before any court
or governmental agency is pending against CommonWealth Bank and, to CommonWealth
Bank's knowledge, no such litigation, claim or other proceeding has been
threatened and there are no facts which could reasonably give rise to such
litigation, claim or other proceeding. CommonWealth Bank is not a party to any
order, judgment or decree which has or could reasonably be expected to have a
Material Adverse Effect with respect to CommonWealth Bank.
(i) Regulatory Matters.
(i) Neither CommonWealth Bank nor any of its properties is a party to
or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or
similar submission to, or extraordinary supervisory letter from, any
federal or state governmental agency or authority charged with the
supervision or regulation of financial institutions or issuers of
securities or engaged in the insurance of deposits or the supervision or
regulation of it (collectively, the "CommonWealth Bank Regulatory
Authorities"). CommonWealth Bank has paid all assessments made or
imposed by any CommonWealth Bank Regulatory Authority.
(ii) CommonWealth Bank has not been advised by, nor does it have any
knowledge of facts which could give rise to an advisory notice by, any
CommonWealth Bank Regulatory Authority that such CommonWealth Bank
Regulatory Authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such
order, decree, agreement, memorandum of understanding, commitment
letter, supervisory letter or similar submission.
(j) Compliance With Laws. CommonWealth Bank:
(i) is in material compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment
Act, the Home Mortgage Disclosure Act, the Bank Secrecy Act and all
other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit it
Annex I-17
to own or lease its properties and to conduct its business as presently
conducted; all such permits, licenses, certificates of authority, orders
and approvals are in full force and effect and, to CommonWealth Bank's
knowledge, no suspension or cancellation of any of them is threatened;
and
(iii) has received, since December 31, 1999, no notification or
communication from any Governmental Authority (A) asserting that
CommonWealth Bank is not in compliance with any of the statutes,
regulations or ordinances which such Governmental Authority enforces or
(B) threatening to revoke any license, franchise, permit or governmental
authorization (nor, to CommonWealth Bank's knowledge, do any grounds for
any of the foregoing exist).
(k) Material Contracts; Defaults.
(i) Except for documents listed as exhibits to CommonWealth Bank's
Securities Documents or as Previously Disclosed, CommonWealth Bank is
not a party to, bound by or subject to any agreement, contract,
arrangement, commitment or understanding (whether written or oral) (i)
with respect to the employment of any directors, officers, employees or
consultants, (ii) which would entitle any present or former director,
officer, employee or agent of CommonWealth Bank to indemnification from
CommonWealth Bank, (iii) which is a material contract (as defined in
Item 601(b)(10) of Regulation S-K of the SEC) to be performed after the
date of this Agreement that has not been filed or incorporated by
reference in CommonWealth Bank's Securities Documents, (iv) which is a
consulting agreement (including data processing, software programming
and licensing contracts) not terminable on 60 days or less notice and
involving the payment of more than $50,000 per annum or (v) which
materially restricts the conduct of any business by CommonWealth Bank
(collectively, "Material Contracts"). CommonWealth Bank has Previously
Disclosed and made available to Parent true and correct copies of each
such document.
(ii) CommonWealth Bank is not in material default under any contract,
agreement, commitment, arrangement, lease, insurance policy or other
instrument to which it is a party, by which its assets, business, or
operations may be bound or affected, or under which it or its assets,
business, or operations receives benefits, and there has not occurred
any event that, with the lapse of time or the giving of notice or both,
would constitute such a default. No power of attorney or similar
authorization given directly or indirectly by CommonWealth Bank is
currently outstanding.
(l) No Brokers. No action has been taken by CommonWealth Bank that would
give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the Transaction,
excluding a Previously Disclosed fee to be paid to Baxter, Fentriss & Co.
(m) Employee Benefit Plans.
(i) All benefit and compensation plans, contracts, policies or
arrangements covering current or former employees of CommonWealth Bank
(the "Employees") and current or former directors of CommonWealth Bank
including, but not limited to, "employee benefit plans" within the
meaning of Section 3(3) of ERISA, and deferred compensation, stock
option, stock purchase, stock appreciation rights, stock based,
incentive and bonus plans (the "Benefit Plans"), are Previously
Disclosed in the Disclosure Schedule. True and complete copies of (A)
all Benefit Plans including, but not limited to, any trust instruments
and insurance contracts forming a part of any Benefit Plans and all
amendments thereto; (B) the most recent annual report (Form 5500),
together with all schedules, as required, filed with the Internal
Revenue Service ("IRS") or Department of Labor (the "DOL"), as
applicable, and any financial statements and opinions required by
Section 103(e)(3) of ERISA with respect to each Benefit Plan; (C) for
each Benefit Plan which is a "top-hat" plan, a copy of filings with the
DOL; (D) the most recent determination letter issued by the IRS for each
Benefit Plan; (E) the most recent summary plan description and any
modifications for each Benefit Plan; (F) the most recent actuarial
report, if any relating to each Benefit Plan, and (G) the most recent
actuarial valuation, study or estimate of any retiree medical and life
insurance benefits plan or supplemental retirement benefits plan, have
been provided or made available to Parent.
Annex I-18
(ii) Each Benefit Plan has been administered to date in all material
respects in accordance with the applicable provisions of ERISA, the Code
and applicable law and with the terms and provisions of all documents,
contracts or agreements pursuant to which such Benefit Plan is
maintained. Each Benefit Plan which is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and
which is intended to be qualified under Section 401(a) of the Code, has
received a favorable determination letter from the Internal Revenue
Service, and CommonWealth Bank is not aware of any circumstances likely
to result in revocation of any such favorable determination letter or
the loss of the qualification of such Pension Plan under Section 401(a)
of the Code. CommonWealth Bank has not received any correspondence or
written or verbal notice from the IRS, DOL, any other governmental
agency, any participant in or beneficiary of, a Benefit Plan, or any
agent representing any of the foregoing that brings into question the
qualification of any such Benefit Plan. There is no material pending or,
to CommonWealth Bank's knowledge, threatened litigation relating to the
Benefit Plans. CommonWealth Bank has not engaged in a transaction with
respect to any Benefit Plan or Pension Plan that, assuming the taxable
period of such transaction expired as of the date hereof, could subject
CommonWealth Bank to a tax or penalty imposed by either Section 4975 of
the Code or Section 502(i) of ERISA in an amount which would be
material. There are no matters pending before the IRS, DOL or other
governmental agency with respect to any Benefit Plan.
(iii) No liability under Subtitle C or D of Title IV of ERISA has
been or is expected to be incurred by CommonWealth Bank with respect to
any ongoing, frozen or terminated "single-employer plan," within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by it or the single-employer plan of any entity which is
considered one employer with CommonWealth Bank under Section 4001 of
ERISA or Section 414 of the Code (an "ERISA Affiliate"). CommonWealth
Bank has not incurred, and does not expect to incur, any withdrawal
liability with respect to a multiemployer plan under Subtitle E of Title
IV of ERISA (regardless of whether based on contributions of an ERISA
Affiliate). No notice of a "reportable event," within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan or by
any ERISA Affiliate within the 12-month period ending on the date hereof
or will be required to be filed in connection with the Transaction.
(iv) All contributions required to be made under the terms of any
Benefit Plan have been timely made or have been reflected on the
financial statements of CommonWealth Bank included in CommonWealth
Bank's Securities Documents. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA and no ERISA Affiliate has an
outstanding funding waiver. CommonWealth Bank has not provided, and is
not required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code.
(v) CommonWealth Bank has no obligations for retiree health and life
benefits under any Benefit Plan, other than coverage as may be required
under Section 4980B of the Code or Part 6 of Title I of ERISA, or under
the continuation of coverage provisions of the laws of any state or
locality. CommonWealth Bank may amend or terminate any such Benefit Plan
at any time without incurring any liability thereunder. No event or
condition exists with respect to a Benefit Plan that could subject
CommonWealth Bank to a material tax under Section 4980B of the Code.
(vi) None of the execution of this Agreement, shareholder approval of
this Agreement or consummation of the Transaction will (A) except as
Previously Disclosed, entitle any employees of CommonWealth Bank to
severance pay or any increase in severance pay upon any termination of
employment after the date hereof, (B) accelerate the time of payment or
vesting or trigger any payment or funding (through a grantor trust or
otherwise) of compensation or benefits under, increase the amount
payable or trigger any other material obligation pursuant to, any of the
Benefit Plans, (C) result in any breach or violation of, or a default
under, any of the Benefit Plans or (D) result in any payment that would
be a "parachute payment" to a "disqualified individual" as those terms
are defined in
Annex I-19
Section 280G of the Code, without regard to whether such payment is
reasonable compensation for personal services performed or to be
performed in the future.
(vii) All required reports and descriptions (including but not
limited to Form 5500 annual reports and required attachments, Forms
1099-R, summary annual reports, Forms PBGC-1 and summary plan
descriptions) have been filed or distributed appropriately with respect
to each Benefit Plan. All required tax filings with respect to each
Benefit Plan have been made, and any taxes due in connection with such
filings have been paid.
(n) Labor Matters. CommonWealth Bank is not a party to and is not bound by
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is CommonWealth Bank
the subject of a proceeding asserting that it has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or seeking to
compel CommonWealth Bank to bargain with any labor organization as to wages or
conditions of employment, nor is there any strike or other labor dispute
involving it pending or, to CommonWealth Bank's knowledge, threatened, nor is
CommonWealth Bank aware of any activity involving its employees seeking to
certify a collective bargaining unit or engaging in other organizational
activity.
(o) Environmental Matters.
(i) CommonWealth Bank is in compliance with applicable Environmental
Laws; (ii) to CommonWealth Bank's knowledge, no real property (including
buildings or other structures) currently or formerly owned or operated
by CommonWealth Bank, or any property in which CommonWealth Bank has
held a security interest, Lien or a fiduciary or management role
("CommonWealth Bank Loan Property"), has been contaminated with, or has
had any release of, any Hazardous Substance except in compliance with
Environmental Laws; (iii) CommonWealth Bank could not be deemed the
owner or operator of, nor has it participated in the management
regarding Hazardous Substances of, any CommonWealth Bank Loan Property
which has been contaminated with, or has had any release of, any
Hazardous Substance except in compliance with Environmental Laws; (iv)
CommonWealth Bank has no liability for any Hazardous Substance disposal
or contamination on any third party property; (v) CommonWealth Bank has
not received any notice, demand letter, claim or request for information
alleging any violation of, or liability under, any Environmental Law;
(vi) CommonWealth Bank is not subject to any order, decree, injunction
or other agreement with any Governmental Authority or any third party
relating to any Environmental Law; (vii) to CommonWealth Bank's
knowledge, there are no circumstances or conditions (including the
presence of asbestos, underground storage tanks, lead products,
polychlorinated biphenyls, prior manufacturing operations, dry-cleaning,
or automotive services) involving CommonWealth Bank, any currently or
formerly owned or operated property, or any CommonWealth Bank Loan
Property, that could reasonably be expected to result in any claims,
liability or investigations against CommonWealth Bank, result in any
restrictions on the ownership, use, or transfer of any property pursuant
to any Environmental Law, or adversely affect the value of any
CommonWealth Bank Loan Property; and (viii) CommonWealth Bank has
Previously Disclosed and made available to Parent copies of all
environmental reports or studies, sampling data, correspondence and
filings in its possession or reasonably available to it relating to
CommonWealth Bank and any currently or formerly owned or operated
property.
As used herein, the term "Environmental Laws" means any federal,
state or local law, regulation, order, decree, permit, authorization,
opinion or agency requirement relating to: (A) the protection or
restoration of the environment, health, safety, or natural resources,
(B) the handling, use, presence, disposal, release or threatened release
of any Hazardous Substance or (C) wetlands, indoor air, pollution,
contamination or any injury or threat of injury to persons or property
in connection with any Hazardous Substance; and the term "Hazardous
Substance" means any substance that is: (A) listed, classified or
regulated pursuant to any Environmental Law, (B) any petroleum product
or by-product, asbestos-containing material, lead-containing paint or
plumbing, polychlorinated biphenyls, radioactive materials or radon or
(C) any other substance which is the subject of regulatory action by any
Governmental Authority in connection with any Environmental Law.
Annex I-20
(p) Tax Matters.
(i) (A) All Tax Returns that are required to be filed on or before
the Effective Date (taking into account any extensions of time within
which to file which have not expired) by or with respect to the
CommonWealth Bank Group have been or will be timely filed on or before
the Effective Date, (B) all such Tax Returns are or will be true and
complete in all material respects, (C) all Taxes shown to be due on the
Tax Returns referred to in clause (A) have been or will be timely paid
in full, (D) the Tax Returns referred to in clause (A) have been
examined by the Internal Revenue Service or the appropriate Tax
authority or the period for assessment of the Taxes in respect of which
such Tax Returns were required to be filed has expired, (E) all
deficiencies asserted or assessments made as a result of examinations
conducted by any taxing authority have been paid in full, (F) no
material issues that have been raised by the relevant taxing authority
in connection with the examination of any of the Tax Returns referred to
in clause (A) are currently pending and (G) no member of the
CommonWealth Bank Group has waived any statutes of limitation with
respect to any Taxes of CommonWealth Bank.
(ii) CommonWealth Bank has made available to Parent true and correct
copies of the United States federal income Tax Returns filed by
CommonWealth Bank for each of the three most recent fiscal years for
which such returns have been filed.
(iii) CommonWealth Bank has no liability with respect to income,
franchise or similar Taxes that accrued on or before the end of the most
recent period covered by CommonWealth Bank's Securities Documents filed
prior to the date hereof in excess of the amounts accrued or subject to
a reserve with respect thereto that are reflected in the financial
statements included in CommonWealth Bank's Securities Documents filed on
or prior to the date hereof.
(iv) CommonWealth Bank is not a party to any Tax allocation or
sharing agreement, is not nor has it been a member of an affiliated
group filing consolidated or combined Tax Returns (other than a group
the common parent of which is or was CommonWealth Bank) and does not
otherwise has any liability for the Taxes of any Person (other than
CommonWealth Bank).
(v) No closing agreements, private letter rulings, technical advice
memoranda or similar agreements or rulings have been entered into or
issued by any taxing authority with respect to CommonWealth Bank.
(vi) CommonWealth Bank does not maintain any compensation plans,
programs or arrangements the payments under which would not reasonably
be expected to be deductible as a result of the limitations under
Section 162(m) of the Code and the regulations issued thereunder.
(vii) As of the date hereof, CommonWealth Bank has no reason to
believe that any conditions exist that might prevent or impede the
Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
(viii) (A) No Tax is required to be withheld pursuant to Section 1445
of the Code as a result of the Transaction and (B) all Taxes that
CommonWealth Bank is or was required by law to withhold or collect have
been duly withheld or collected and, to the extent required by
applicable law, have been paid to the proper Governmental Authority or
other Person.
(q) Risk Management Instruments. CommonWealth Bank is not a party and has
not agreed to enter into an exchange traded or over-the-counter equity, interest
rate, foreign exchange or other swap, forward, future, option, cap, floor or
collar or any other contract that is not included on its balance sheet and is a
derivatives contract (including various combinations thereof) (each, a
"Derivatives Contract") nor does CommonWealth Bank own securities that (i) are
referred to generically as "structured notes," "high risk mortgage derivatives,"
"capped floating rate notes" or "capped floating rate mortgage derivatives" or
(ii) are likely to have changes in value as a result of interest or exchange
rate changes that significantly exceed normal changes in value attributable to
interest or exchange rate changes.
Annex I-21
(r) Loans; Nonperforming and Classified Assets.
(i) Each Loan on the books and records of CommonWealth Bank was made
and has been serviced in all material respects in accordance with
customary lending standards in the ordinary course of business, is
evidenced in all material respects by appropriate and sufficient
documentation and, to the knowledge of CommonWealth Bank, constitutes
the legal, valid and binding obligation of the obligor named therein,
subject to bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating
to or affecting creditor's rights or by general equity principles.
(ii) CommonWealth Bank has Previously Disclosed as to CommonWealth
Bank as of the latest practicable date: (A) any written or, to
CommonWealth Bank's knowledge, oral Loan under the terms of which the
obligor is 60 or more days delinquent in payment of principal or
interest, or to CommonWealth Bank's knowledge, in default of any other
material provision thereof; (B) each Loan which has been classified as
"substandard," "doubtful," "loss" or "special mention" (or words of
similar import) by CommonWealth Bank or an applicable regulatory
authority (it being understood that no representation is being made that
the Federal Reserve Board or the Bureau would agree with the loan
classifications established by CommonWealth Bank); (C) a listing of the
OREO acquired by foreclosure or by deed-in-lieu thereof, including the
book value thereof; and (D) each Loan with any director, executive
officer or five percent or greater shareholder of CommonWealth Bank, or
to the best knowledge of CommonWealth Bank, any Person controlling,
controlled by or under common control with any of the foregoing.
(s) Properties. All real and personal property owned by CommonWealth Bank
or presently used by it in its business is in an adequate condition (ordinary
wear and tear excepted) and is sufficient to carry on its business in the
ordinary course of business consistent with its past practices. CommonWealth
Bank has good and marketable title free and clear of all Liens to all of the
material properties and assets, real and personal, reflected on the balance
sheet of CommonWealth Bank as of September 30, 2002 included in CommonWealth
Bank's Securities Documents or acquired after such date, other than properties
sold by CommonWealth Bank in the ordinary course of business, except (i) Liens
for current taxes and assessments not yet due or payable (ii) pledges to secure
deposits and other Liens incurred in the ordinary course of its banking
business, (iii) such imperfections of title, easements and encumbrances, if any,
as are not material in character, amount or extent and (iv) as reflected on the
balance sheet of CommonWealth Bank as of September 30, 2002 included in
CommonWealth Bank's Securities Documents. All real and personal property which
is material to CommonWealth Bank's business and leased or licensed by
CommonWealth Bank is held pursuant to leases or licenses which are valid and
enforceable in accordance with their respective terms and such leases will not
terminate or lapse prior to the Effective Time.
(t) Intellectual Property. CommonWealth Bank owns or possesses valid and
binding licenses and other rights to use without payment of any material amount
all material patents, copyrights, trade secrets, trade names, service marks and
trademarks used in its businesses, all of which have been Previously Disclosed
by CommonWealth Bank, and CommonWealth Bank has not received any notice of
conflict with respect thereto that asserts the right of others. CommonWealth
Bank has performed in all material respects all the obligations required to be
performed by it and is not in default under any contract, agreement, arrangement
or commitment relating to any of the foregoing.
(u) Fiduciary Accounts. CommonWealth Bank has properly administered all
accounts for which it acts as a fiduciary, including but not limited to accounts
for which it serves as a trustee, agent, custodian, personal representative,
guardian, conservator or investment advisor, in accordance with the terms of the
governing documents and applicable laws and regulations. Neither CommonWealth
Bank, nor any of its directors, officers or employees, has committed any breach
of trust with respect to any fiduciary account and the records for each such
fiduciary account are true and correct and accurately reflect the assets of such
fiduciary account.
(v) Books and Records. The books and records of CommonWealth Bank are
being maintained in material compliance with applicable legal and accounting
requirements, and such books and records accurately reflect in all material
respects all dealings and transactions in respect of the business, assets,
liabilities and affairs of CommonWealth Bank.
Annex I-22
(w) Insurance. CommonWealth Bank has Previously Disclosed all of the
material insurance policies, binders, or bonds currently maintained by
CommonWealth Bank ("Insurance Policies"). CommonWealth Bank is insured with
reputable insurers against such risks and in such amounts as the management of
CommonWealth Bank reasonably has determined to be prudent in accordance with
industry practices. All the Insurance Policies are in full force and effect;
CommonWealth Bank is not in material default thereunder; and all claims
thereunder have been filed in due and timely fashion.
(x) Allowance For Loan Losses. CommonWealth Bank's allowance for loan
losses is, and shall be as of the Effective Date, in compliance with
CommonWealth Bank's existing methodology for determining the adequacy of its
allowance for loan losses as well as the standards established by applicable
Governmental Authorities and the Financial Accounting Standards Board and is and
shall be adequate under all such standards.
(y) Transactions With Affiliates. All "covered transactions" between
CommonWealth Bank and an "affiliate" within the meaning of Sections 23A and 23B
of the Federal Reserve Act have been in compliance with such provisions.
(z) Required Vote; Antitakeover Provisions; Company Rights Agreement.
(i) The affirmative vote of the holders of two-thirds of the issued
and outstanding shares of CommonWealth Bank is necessary to approve this
Agreement and the Transaction on behalf of CommonWealth Bank. No other
vote of the stockholders of CommonWealth Bank is required by law, the
CommonWealth Bank Articles, the CommonWealth Bank Bylaws or otherwise to
approve this Agreement and the Transaction.
(ii) Based on the representation and warranty of Parent contained in
Section 5.04(m), no "control share acquisition," "business combination
moratorium," "fair price" or other form of antitakeover statute or
regulation is applicable to this Agreement or the Transaction.
(aa) Fairness Opinion. The CommonWealth Bank Board has received the
written opinion of Baxter, Fentriss & Co., to the effect that as of the date
hereof the Merger Consideration is fair to the holders of CommonWealth Bank
Common Stock from a financial point of view.
(bb) Transactions in Securities.
(i) All offers and sales of CommonWealth Bank Common Stock by
CommonWealth Bank were at all relevant times exempt from or complied
with the registration requirements of the Securities Act.
(ii) Neither CommonWealth Bank nor, to CommonWealth Bank's knowledge,
(a) any director or executive officer of CommonWealth Bank, (b) any
person related to any such director or officer by blood, marriage or
adoption and residing in the same household and (c) any person who has
been knowingly provided material nonpublic information by any one or
more of these persons, has purchased or sold, or caused to be purchased
or sold, any shares of CommonWealth Bank Common Stock or other
securities issued by CommonWealth Bank (i) during any period when
CommonWealth Bank was in possession of material nonpublic information or
(ii) in violation of any applicable provision of the Exchange Act.
(cc) Disclosure. The representations and warranties contained in this
Section 5.03, when considered as a whole, do not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements and information contained in this Section 5.03 not misleading.
5.04 Representations and Warranties of Parent and First Community
Bank. Subject to Sections 5.01 and 5.02, Parent and First Community Bank hereby
represent and warrant to CommonWealth Bank as follows:
(a) Organization, Standing and Authority. Parent is duly organized,
validly existing and in good standing under the laws of the State of Nevada.
Parent is duly qualified to do business and is in good standing in each
jurisdiction where its ownership or leasing of property or assets or the conduct
of its business requires it to be so qualified. Parent has in effect all
federal, state, local and foreign governmental authorizations necessary for it
to own or lease its properties and assets and to carry on its business as it is
now conducted.
Annex I-23
(b) Parent Stock.
(i) As of the date hereof, the authorized capital stock of Parent
consists solely of 15,000,000 shares of Parent Common Stock, of which
9,888,482 shares were issued and outstanding as of the date hereof, and
1,000,000 shares of Parent Preferred Stock, of which no shares were
issued and outstanding as of the date hereof. The outstanding shares of
Parent Common Stock have been duly authorized and validly issued and are
fully paid and non-assessable, and none of the shares of Parent Common
Stock have been issued in violation of the preemptive rights of any
Person. As of the date hereof, except as Previously Disclosed, there are
no Rights authorized, issued or outstanding with respect to the capital
stock of Parent, except for shares of Parent Common Stock issuable
pursuant to the Parent Benefits Plans and by virtue of this Agreement.
(ii) The shares of Parent Common Stock to be issued in exchange for
shares of CommonWealth Bank Common Stock in the Merger, when issued in
accordance with the terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and the issuance thereof is
not subject to any preemptive right.
(c) First Community Bank.
(i) First Community Bank has been duly organized and is validly
existing in good standing under the laws of the United States and is
duly qualified to do business and is in good standing in the
jurisdictions where its ownership or leasing of property or the conduct
of its business requires it to be so qualified. First Community Bank is
duly licensed by the OCC and its deposits are insured by the FDIC in the
manner and to the maximum extent provided by law.
(ii) As of the date hereof, (A) Parent owns, directly or indirectly,
all the issued and outstanding equity securities of First Community
Bank, (B) no equity securities of First Community Bank are or may become
required to be issued (other than to Parent) by reason of any Right or
otherwise, (C) there are no contracts, commitments, understandings or
arrangements by which First Community Bank is or may be bound to sell or
otherwise transfer any of its equity securities (other than to Parent or
any of its wholly-owned Subsidiaries) and (D) there are no contracts,
commitments, understandings, or arrangements relating to Parent's right
to vote or to dispose of such securities.
(d) Corporate Power. Each of Parent and First Community Bank has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets. Parent has the corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the Transaction, subject to the receipt of all
necessary approvals of Governmental Authorities.
(e) Corporate Authority. This Agreement and the Transaction have been
authorized by all necessary corporate action of Parent, the Parent Board, First
Community Bank and the First Community Bank Board. This Agreement has been duly
executed and delivered by Parent and First Community Bank and, assuming due
authorization, execution and delivery by CommonWealth Bank, this Agreement is a
valid and legally binding agreement of Parent and First Community Bank
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles).
(f) Regulatory Approvals; No Defaults.
(i) No consents or approvals of, or waivers by, or filings or
registrations with, any Governmental Authority or with any third party
are required to be made or obtained by Parent or any of its Subsidiaries
in connection with the execution, delivery or performance by Parent and
First Community Bank of this Agreement or to consummate the Transaction,
except for (A) filings of applications or notices with and approvals or
waivers by the Federal Reserve Board, the OCC and the Bureau, as
required, (B) filings with the SEC and state securities authorities, as
applicable, in connection with the submission of this Agreement for the
approval of the holders of CommonWealth Bank Common Stock and the
issuance of Parent Common Stock in the Merger, (C) the approval of the
listing on Nasdaq of the Parent Common Stock to be issued in the Merger
and (D) the filing of Articles of Merger with the
Annex I-24
Virginia State Corporation Commission pursuant to the VSCA and the
filing of a Notice of Consummation with the OCC pursuant to OCC
guidelines. As of the date hereof, Parent is not aware of any reason why
the approvals set forth above and referred to in Section 7.01(b) will
not be received in a timely manner and without the imposition of a
condition, restriction or requirement of the type described in Section
7.01(b).
(ii) Subject to receipt, or the making, of the consents, approvals,
waivers and filings referred to in the preceding paragraph and
expiration of the related waiting periods, the execution, delivery and
performance of this Agreement by Parent and First Community Bank and the
consummation of the Transaction do not and will not (A) constitute a
breach or violation of, or a default under, or give rise to any Lien,
any acceleration of remedies or any right of termination under, any law,
rule or regulation or any judgment, decree, order, governmental permit
or license, or agreement, indenture or instrument of Parent or of any of
its Subsidiaries or to which Parent or any of its Subsidiaries or
properties is subject or bound, (B) constitute a breach or violation of,
or a default under, the articles of incorporation or bylaws (or similar
governing documents) of Parent or any of its Subsidiaries or (C) require
any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license, agreement, indenture or
instrument.
(g) Financial Reports and Securities Documents; Material Adverse Effect.
(i) Parent's Annual Report on Form 10-K for the year ended December
31, 2001 and all other reports, registration statements, definitive
proxy statements or information statements filed or to be filed by it
subsequent to December 31, 1999 under the Securities Act, or under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act in the form filed
or to be filed (collectively, Parent's "Securities Documents") with the
SEC, as of the date filed or to be filed, (A) complied or will comply in
all material respects as to form with the applicable requirements under
the Securities Act or the Exchange Act, as the case may be and (B) did
not and will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that information as of a
later date shall be deemed to modify information as of an earlier date;
and each of the consolidated balance sheets contained in or incorporated
by reference into any such Securities Document (including the related
notes and schedules thereto) fairly presents, or will fairly present,
the consolidated financial position of Parent and its Subsidiaries as of
its date, and each of the consolidated statements of income and changes
in stockholders' equity and cash flows or equivalent statements in such
Securities Documents (including any related notes and schedules thereto)
fairly presents, or will fairly present, the consolidated results of
operations, changes in stockholders' equity and cash flows, as the case
may be, of Parent and its Subsidiaries for the periods to which they
relate, in each case in accordance with GAAP consistently applied during
the periods involved, except in each case as may be noted therein.
(ii) Since September 30, 2002, no event has occurred or circumstance
arisen that, individually or taken together with all other facts,
circumstances and events (described in any paragraph of this Section
5.04 or otherwise), is reasonably likely to have a Material Adverse
Effect with respect to Parent.
(h) Litigation. No litigation, claim or other proceeding before any court
or governmental agency is pending against Parent or its Subsidiaries and, to
Parent's knowledge, no such litigation, claim or other proceeding has been
threatened and there are no facts which could reasonably give rise to such
litigation, claim or other proceeding. Neither Parent nor any of its
Subsidiaries is a party to any order, judgment or decree which has or could
reasonably be expected to have a Material Adverse Effect with respect to Parent.
(i) No Brokers. No action has been taken by Parent or its Subsidiaries
that would give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the Transaction,
except a fee to be paid to Ryan, Beck & Co., Inc.
Annex I-25
(j) Tax Matters. As of the date hereof, Parent does not have any reason to
believe that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code.
(k) Regulatory Matters.
(i) Neither Parent nor any of its Subsidiaries nor any of any of
their respective properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, or extraordinary
supervisory letter from, any federal or state governmental agency or
authority charged with the supervision or regulation of financial
institutions or issuers of securities or engaged in the insurance of
deposits or the supervision or regulation of it (collectively, the
"Parent Regulatory Authorities"). Parent and its Subsidiaries have paid
all assessments made or imposed by any Parent Regulatory Authority.
(ii) Neither Parent nor any its Subsidiaries has been advised by, and
does not have any knowledge of facts which could give rise to an
advisory notice by, any Parent Regulatory Authority that such Parent
Regulatory Authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such
order, decree, agreement, memorandum of understanding, commitment
letter, supervisory letter or similar submission.
(l) Compliance With Laws. Each of Parent and its Subsidiaries:
(i) is in material compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment
Act, the Home Mortgage Disclosure Act, the Bank Secrecy Act and all
other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to
own or lease their properties and to conduct their businesses as
presently conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to
Parent's knowledge, no suspension or cancellation of any of them is
threatened; and
(iii) has received, since December 31, 1999, no notification or
communication from any Governmental Authority (A) asserting that Parent
or any of its Subsidiaries is not in compliance with any of the
statutes, regulations or ordinances which such Governmental Authority
enforces or (B) threatening to revoke any license, franchise, permit or
governmental authorization (nor, to Parent's knowledge, do any grounds
for any of the foregoing exist).
(m) Ownership of CommonWealth Bank Common Stock. Except as Previously
Disclosed, none of Parent or any of its Subsidiaries, or to Parent's knowledge,
any of its other affiliates or associates (as such terms are defined under the
Exchange Act), owns beneficially or of record, directly or indirectly, or is a
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, shares of CommonWealth Bank (other
than shares held in a fiduciary capacity that are beneficially owned by third
parties or as a result of debts previously contracted).
(n) Financial Ability. On the Effective Date and through the date of
payment of the Aggregate Cash Consideration by Parent, Parent or First Community
Bank will have all funds necessary to consummate the Merger and pay the
Aggregate Cash Consideration to holders of CommonWealth Bank Common Stock
pursuant to Sections 3.01 and 3.02 hereof. Each of Parent and First Community
Bank is, and immediately following completion of the Transaction will be, in
compliance with all capital requirements applicable to it.
(o) Disclosure. The representations and warranties contained in this
Section 5.04, when considered as a whole, do not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements and information contained in this Section 5.04 not misleading.
Annex I-26
ARTICLE VI
COVENANTS
6.01 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of CommonWealth Bank, Parent and First Community Bank agrees to
use its reasonable best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
desirable, or advisable under applicable laws, so as to permit consummation of
the Transaction as promptly as practicable and otherwise to enable consummation
of the Transaction, including the satisfaction of the conditions set forth in
Article VII hereof, and shall cooperate fully with the other party hereto to
that end.
6.02 Shareholder Approval. CommonWealth Bank agrees to take, in accordance
with applicable law and the CommonWealth Bank Articles and the CommonWealth Bank
Bylaws, all action necessary to convene as soon as reasonably practicable a
special meeting of its stockholders to consider and vote upon the approval of
this Agreement and any other matters required to be approved by CommonWealth
Bank's stockholders for consummation of the Transaction (including any
adjournment or postponement, the "Commonwealth Bank Meeting"). Except with the
prior approval of Parent, no other matters shall be submitted for the approval
of the CommonWealth Bank stockholders at the CommonWealth Bank Meeting. The
CommonWealth Bank Board shall at all times prior to and during such meeting
recommend such approval and shall take all reasonable lawful action to solicit
such approval by its stockholders; provided that nothing in this Agreement shall
prevent the CommonWealth Bank Board from withholding, withdrawing, amending or
modifying its recommendation if the CommonWealth Bank Board determines, after
consultation with its outside counsel, that such action is legally required in
order for the directors to comply with their fiduciary duties to the
CommonWealth Bank stockholders under applicable law; provided, further, that
Section 6.08 shall govern the withholding, withdrawing, amending or modifying of
such recommendation in the circumstances described therein.
6.03 Registration Statement.
(a) Parent agrees to prepare a registration statement on Form S-4 or other
applicable form (the "Registration Statement") to be filed by Parent with the
SEC in connection with the issuance of Parent Common Stock in the Merger
(including the proxy statement and prospectus and other proxy solicitation
materials of CommonWealth Bank constituting a part thereof (the "Proxy
Statement") and all related documents). CommonWealth Bank shall prepare and
furnish such information relating to it and its directors, officers and
stockholders as may be reasonably required in connection with the above
referenced documents based on its knowledge of and access to the information
required for said documents, and CommonWealth Bank, and its legal, financial and
accounting advisors, shall have the right to review in advance such Registration
Statement prior to its filing. CommonWealth Bank agrees to cooperate with Parent
and Parent's counsel and accountants in requesting and obtaining appropriate
opinions, consents and letters from its financial advisor and independent
auditor in connection with the Registration Statement and the Proxy Statement.
Provided that CommonWealth Bank has cooperated as described above, Parent agrees
to file, or cause to be filed, the Registration Statement and the Proxy
Statement with the SEC as promptly as reasonably practicable. Each of
CommonWealth Bank and Parent agrees to use its reasonable best efforts to cause
the Registration Statement to be declared effective under the Securities Act as
promptly as reasonably practicable after the filing thereof. Parent also agrees
to use its reasonable best efforts to obtain all necessary state securities law
or "Blue Sky" permits and approvals required to carry out the transactions
contemplated by this Agreement. After the Registration Statement is declared
effective under the Securities Act, CommonWealth Bank shall promptly mail at its
expense the Proxy Statement to its stockholders.
(b) Each of CommonWealth Bank and Parent agrees that none of the
information supplied or to be supplied by it for inclusion or incorporation by
reference in (i) the Registration Statement shall, at the time the Registration
Statement and each amendment or supplement thereto, if any, becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading and (ii) the Proxy Statement and any
amendment or supplement thereto shall, at the date(s) of mailing to stockholders
and at the time of the CommonWealth Bank Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. Each of
CommonWealth Bank and Parent further agrees that if such party shall become
aware prior to the Effective Date of any
Annex I-27
information furnished by such party that would cause any of the statements in
the Registration Statement or the Proxy Statement to be false or misleading with
respect to any material fact, or to omit to state any material fact necessary to
make the statements therein not false or misleading, to promptly inform the
other parties thereof and to take the necessary steps to correct the
Registration Statement or the Proxy Statement.
(c) Parent agrees to advise CommonWealth Bank, promptly after Parent
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of Parent Common Stock for
offering or sale in any jurisdiction, of the initiation or, to the extent Parent
is aware thereof, threat of any proceeding for any such purpose, or of any
request by the SEC for the amendment or supplement of the Registration Statement
or for additional information.
6.04 Regulatory Filings.
(a) Each of Parent, First Community Bank and CommonWealth Bank shall
cooperate and use their respective reasonable best efforts to prepare all
documentation, to effect all filings and to obtain all permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary to consummate the Transaction; and any initial filings with
Governmental Authorities shall be made by Parent as soon as reasonably
practicable after the execution hereof. Each of Parent and CommonWealth Bank
shall have the right to review in advance, and to the extent practicable each
shall consult with the other, in each case subject to applicable laws relating
to the exchange of information, with respect to all written information
submitted to any third party or any Governmental Authority in connection with
the Transaction. In exercising the foregoing right, each of such parties agrees
to act reasonably and as promptly as practicable. Each party hereto agrees that
it shall consult with the other parties hereto with respect to the obtaining of
all permits, consents, approvals, waivers and authorizations of all third
parties and Governmental Authorities necessary or advisable to consummate the
Transaction, and each party shall keep the other parties apprised of the status
of material matters relating to completion of the Transaction.
(b) Each party agrees, upon request, to furnish the other parties with all
information concerning itself, its Subsidiaries (if applicable), directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with any filing, notice or application made by or on
behalf of such other parties or any of their Subsidiaries (if applicable) to any
third party or Governmental Authority.
6.05 Press Releases. CommonWealth Bank and Parent shall consult with each
other before issuing any press release with respect to the Transaction or this
Agreement and shall not issue any such press release or make any such public
statements without the prior consent of the other party, which shall not be
unreasonably withheld; provided, however, that a party may, without the prior
consent of the other party (but after such consultation, to the extent
practicable under the circumstances), issue such press release or make such
public statements as may upon the advice of outside counsel be required by law
or the rules or regulations of Nasdaq. CommonWealth Bank and Parent shall
cooperate to develop all public announcement materials and make appropriate
management available at presentations related to the Transaction as reasonably
requested by the other party.
6.06 Access; Information.
(a) CommonWealth Bank agrees that upon reasonable notice and subject to
applicable laws relating to the exchange of information, it shall afford Parent
and Parent's officers, employees, counsel, accountants and other authorized
representatives such access during normal business hours throughout the period
prior to the Effective Time to the books, records (including, without
limitation, Tax Returns and work papers of independent auditors), properties and
personnel of CommonWealth Bank and to such other information relating to
CommonWealth Bank as Parent may reasonably request and, during such period, it
shall furnish promptly to Parent all information concerning the business,
properties and personnel of CommonWealth Bank as Parent may reasonably request.
(b) Parent agrees that upon reasonable notice and subject to applicable
laws relating to the exchange of information, it shall afford CommonWealth Bank
and its authorized representatives such access to Parent's personnel as
CommonWealth Bank may reasonably request.
Annex I-28
(c) Each party agrees that it will not, and will cause its representatives
not to, use any information obtained pursuant to this Section 6.06 (as well as
any other information obtained prior to the date hereof in connection with the
entering into of this Agreement) for any purpose unrelated to the consummation
of the Transaction. Subject to the requirements of law, each party shall keep
confidential, and shall cause its representatives to keep confidential, all
information and documents obtained pursuant to this Section 6.06 (as well as any
other information obtained prior to the date hereof in connection with the
entering into of this Agreement) unless such information (i) was already known
to such party, (ii) becomes available to such party from other sources not known
by such party to be bound by a confidentiality obligation, (iii) is disclosed
with the prior written approval of the party to which such information pertains
or (iv) is or becomes readily ascertainable from publicly available sources. In
the event that this Agreement is terminated or the Transaction shall otherwise
fail to be consummated, each party shall promptly cause all copies of documents
or extracts thereof containing information and data as to another party hereto
to be returned to the party which furnished the same. No investigation by any
party of the business and affairs of any other party shall affect or be deemed
to modify or waive any representation, warranty, covenant or agreement in this
Agreement, or the conditions to any party's obligation to consummate the
Transaction.
6.07 Affiliates. CommonWealth Bank shall use its reasonable best efforts
to identify those persons who may be deemed to be "affiliates" of CommonWealth
Bank within the meaning of Rule 145 promulgated by the SEC under the Securities
Act (the "Company Affiliates") and to cause each person so identified to deliver
to Parent as soon as practicable, and in any event prior to the date of
CommonWealth Bank Meeting, a written agreement to comply with the requirements
of Rule 145 under the Securities Act in connection with the sale or other
transfer of Parent Common Stock received in the Merger, which agreement shall be
in the form attached hereto as Annex B (the "Affiliate Letter").
6.08 Acquisition Proposals. CommonWealth Bank agrees that it shall not,
and that it shall direct and use its reasonable best efforts to cause its
directors, officers, employees, agents and representatives not to, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries
or the making of any proposal or offer with respect to a merger, reorganization,
share exchange, consolidation or similar transaction involving CommonWealth
Bank, or any purchase of all or substantially all of the assets of CommonWealth
Bank or more than 10% of the outstanding equity securities of CommonWealth Bank
(any such proposal or offer being hereinafter referred to as an "Acquisition
Proposal"). CommonWealth Bank further agrees that it shall not, and that it
shall direct and use its reasonable best efforts to cause its directors,
officers, employees, agents and representatives not to, directly or indirectly,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any Person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; provided, however, that nothing contained in this
Agreement shall prevent the CommonWealth Bank or the CommonWealth Bank Board
from (A) complying with its disclosure obligations under federal or state law;
(B) providing information in response to a request therefor by a Person who has
made an unsolicited bona fide written Acquisition Proposal if the CommonWealth
Bank Board receives from the Person so requesting such information an executed
confidentiality agreement; (C) engaging in any negotiations or discussions with
any Person who has made an unsolicited bona fide written Acquisition Proposal or
(D) recommending such an Acquisition Proposal to the stockholders of
CommonWealth Bank, if and only to the extent that, in each such case referred to
in clause (B), (C) or (D) above, (i) the CommonWealth Bank Board determines in
good faith (after consultation with outside legal counsel) that such action
would be required in order for its directors to comply with their respective
fiduciary duties under applicable law and (ii) the CommonWealth Bank Board
determines in good faith (after consultation with its financial advisor) that
such Acquisition Proposal, if accepted, is reasonably likely to be consummated,
taking into account all legal, financial and regulatory aspects of the proposal
and the Person making the proposal and would, if consummated, result in a
transaction more favorable to CommonWealth Bank's stockholders from a financial
point of view than the Merger. An Acquisition Proposal which is received and
considered by the CommonWealth Bank in compliance with this Section 6.08 and
which meets the requirements set forth in clause (D) of the preceding sentence
is herein referred to as a "Superior Proposal." CommonWealth Bank agrees that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposals. CommonWealth Bank agrees that it will notify
Parent if any such inquiries, proposals or offers are received by, any such
information is requested from, or any
Annex I-29
such discussions or negotiations are sought to be initiated or continued with,
CommonWealth Bank or any of its representatives.
6.09 Certain Policies. Prior to the Effective Date, CommonWealth Bank
shall, consistent with GAAP, the rules and regulations of the SEC and applicable
banking laws and regulations, modify or change its loan, OREO, accrual, reserve,
tax, litigation and real estate valuation policies and practices (including loan
classifications and levels of reserves) so as to be applied on a basis that is
consistent with that of Parent; provided, however, that no such modifications or
changes need be made prior to the satisfaction of the conditions set forth in
Section 7.01(b); and further provided that in any event, no accrual or reserve
made by CommonWealth Bank pursuant to this Section 6.09 shall constitute or be
deemed to be a breach, violation of or failure to satisfy any representation,
warranty, covenant, agreement, condition or other provision of this Agreement or
otherwise be considered in determining whether any such breach, violation or
failure to satisfy shall have occurred. The recording of any such adjustments
shall not be deemed to imply any misstatement of previously furnished financial
statements or information and shall not be construed as concurrence of
CommonWealth Bank or its management with any such adjustments.
6.10 Nasdaq Listing. Parent agrees to use its reasonable best efforts to
list, prior to the Effective Date, on the Nasdaq the shares of Parent Common
Stock to be issued in connection with the Merger.
6.11 Indemnification.
(a) From and after the Effective Time through the sixth anniversary of the
Effective Time, Parent (the "Indemnifying Party") shall indemnify and hold
harmless each present and former director, officer and employee of CommonWealth
Bank, determined as of the Effective Time (the "Indemnified Parties") against
any costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, arising in whole or in part out of or pertaining to
the fact that he or she was a director, officer, employee, fiduciary or agent of
CommonWealth Bank or is or was serving at the request of CommonWealth Bank as a
director, officer, employee, fiduciary or agent of another corporation,
partnership, joint venture, trust or other enterprise, including without
limitation matters related to the negotiation, execution and performance of this
Agreement or consummation of the Transaction, to the fullest extent which such
Indemnified Parties would be entitled under the CommonWealth Bank Articles and
the CommonWealth Bank Bylaws, or any agreement, arrangement or understanding
which has been Previously Disclosed by CommonWealth Bank pursuant to this
Section, in each case as in effect on the date hereof.
(b) Any Indemnified Party wishing to claim indemnification under this
Section 6.11, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not actually prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and the
Indemnifying Party shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if the
Indemnifying Party elects not to assume such defense or counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
interest between the Indemnifying Party and the Indemnified Parties, the
Indemnified Parties may retain counsel which is reasonably satisfactory to the
Indemnifying Party, and the Indemnifying Party shall pay, promptly as statements
therefor are received, the reasonable fees and expenses of such counsel for the
Indemnified Parties (which may not exceed one firm in any jurisdiction), (ii)
the Indemnified Parties will cooperate in the defense of any such matter, (iii)
the Indemnifying Party shall not be liable for any settlement effected without
its prior written consent and (iv) the Indemnifying Party shall have no
obligation hereunder in the event that a federal or state banking agency or a
court of competent jurisdiction shall determine that indemnification of an
Indemnified Party in the manner contemplated hereby is prohibited by applicable
laws and regulations.
(c) Prior to Effective Time, Parent shall cause the persons serving as
directors and officers of CommonWealth Bank immediately prior to the Effective
Time to be covered by the directors' and officers' liability
Annex I-30
insurance policy maintained by CommonWealth Bank for a period of three years
after the Effective Time (provided that Parent may substitute therefore policies
of at least the same coverage and amounts containing terms and conditions which
are not materially less advantageous than such policy or single premium tail
coverage with policy limits equal to CommonWealth Bank's existing coverage
limits) with respect to acts or omissions occurring prior to the Effective Time
which were committed by such directors and officers in their capacities as such,
provided that in no event shall Parent be required to expend for any one year an
amount in excess of the annual premium currently paid by CommonWealth Bank for
such insurance (the "Insurance Amount"), and further provided that if Parent is
unable to maintain or obtain the insurance called for by this Section 6.11(c) as
a result of the preceding provision, Parent shall use its reasonable best
efforts to obtain the most advantageous coverage as is available for the
Insurance Amount.
(d) If Parent or any of its successors or assigns shall consolidate with or
merge into any other entity and shall not be the continuing or surviving entity
of such consolidation or merger or shall transfer all or substantially all of
its assets to any other entity, then and in each case, proper provision shall be
made so that the successors and assigns of Parent shall assume the obligations
set forth in this Section 6.11.
6.12 Benefit Plans.
(a) As soon as administratively practicable after the Effective Time,
Parent shall take all reasonable action so that employees of CommonWealth Bank
shall be entitled to participate in each employee benefit plan, program or
arrangement of Parent of general applicability (the "Parent Benefit Plans") to
the same extent as similarly-situated employees of Parent and its Subsidiaries
(it being understood that inclusion of the employees of CommonWealth Bank in the
Parent Benefit Plans may occur at different times with respect to different
plans), provided, however, that nothing contained herein shall require Parent or
any of its Subsidiaries to make any grants to any former employee of
CommonWealth Bank under any discretionary equity compensation plan of Parent.
Parent shall cause each Parent Benefit Plan in which employees of CommonWealth
Bank are eligible to participate to recognize, for purposes of determining
eligibility to participate in, the vesting of benefits and for all other
purposes (but not for accrual of pension benefits) under the Parent Benefit
Plans, the service of such employees with CommonWealth Bank to the same extent
as such service was credited for such purpose by CommonWealth Bank, provided,
however, that such service shall not be recognized to the extent that such
recognition would result in a duplication of benefits. Nothing herein shall
limit the ability of Parent to amend or terminate any of CommonWealth Bank's
Benefit Plans in accordance with their terms at any time.
(b) At and following the Effective Time, Parent shall honor, and the
Surviving Corporation shall continue to be obligated to perform, in accordance
with their terms, all benefit obligations to, and contractual rights of, current
and former employees of CommonWealth Bank existing as of the Effective Date, as
well as all employment, severance, deferred compensation, split dollar,
supplemental retirement or "change-in-control" agreements, plans or policies of
CommonWealth Bank which are Previously Disclosed, subject in each case as the
same may be modified or terminated with respect to certain executive officers of
CommonWealth Bank pursuant to an employment or change-in-control agreement. The
severance or termination payments which are payable pursuant to such agreements,
plans or policies of CommonWealth Bank (which have been quantified in reasonable
detail) have been Previously Disclosed.
(c) At such time as employees of CommonWealth Bank become eligible to
participate in a medical, dental or health plan of Parent or its Subsidiaries,
Parent shall cause each such plan to (i) waive any preexisting condition
limitations to the extent such conditions covered under the applicable medical,
health or dental plans of Parent, (ii) provide full credit for under such plans
any deductibles, co-payment and out-of-pocket expenses incurred by the employees
and their beneficiaries during the portion of the calendar year prior to such
participation and (iii) waive any waiting period limitation or evidence of
insurability requirement which would otherwise be applicable to such employee on
or after the Effective Time to the extent such employee had satisfied any
similar limitation or requirement under an analogous Plan prior to the Effective
Time.
(d) Effective as of the Effective Time, J.E. Causey Davis shall have
entered into an employment agreement with First Community Bank, the form of
which is set forth as Annex C hereto.
Annex I-31
(e) An employee of CommonWealth Bank (other than an employee who is party
to an employment agreement or a severance agreement) whose employment is
involuntarily terminated other than for cause following the Effective Time shall
be entitled to receive severance payments as Previously Disclosed.
6.13 Parent Board and First Community Bank Board. Parent agrees to take
all action necessary to appoint or elect, effective as of the Effective Time,
Harold V. Groome, Jr. to the Parent Board, and Parent and First Community Bank
agree to take all action necessary to appoint or elect, effective as of the
Effective Time, Harold V. Groome, Jr. and Franklin P. Hall to the First
Community Bank Board.
6.14 Notification of Certain Matters. Each of CommonWealth Bank and Parent
shall give prompt notice to the other of any fact, event or circumstance known
to it that (i) is reasonably likely, individually or taken together with all
other facts, events and circumstances known to it, to result in any Material
Adverse Effect with respect to it or (ii) would cause or constitute a material
breach of any of its representations, warranties, covenants or agreements
contained herein.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each of the parties hereto to consummate the Merger is
subject to the fulfillment or, to the extent permitted by applicable law,
written waiver by the parties hereto prior to the Closing Date of each of the
following conditions:
(a) Shareholder Approval. This Agreement shall have been duly approved by
the requisite vote of the holders of outstanding shares of CommonWealth Bank
Common Stock.
(b) Regulatory Approvals. All regulatory approvals required to consummate
the Transaction shall have been obtained and shall remain in full force and
effect and all statutory waiting periods in respect thereof shall have expired
and no such approvals shall contain any conditions, restrictions or requirements
which the Parent Board reasonably determines in good faith would, individually
or in the aggregate, materially reduce the benefits of the Transaction to such a
degree that Parent would not have entered into this Agreement had such
conditions, restrictions or requirements been known at the date hereof.
(c) No Injunction. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, judgment, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and prohibits consummation of the
Transaction.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated by the SEC and not
withdrawn.
(e) Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing on the Nasdaq.
(f) Tax Opinion. Each of Parent and CommonWealth Bank shall have received
the written opinion of Kelley Drye & Warren LLP, in form and substance
reasonably satisfactory to both CommonWealth Bank and Parent, dated as of the
Effective Date, substantially to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated for Federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code. In rendering such opinion, such counsel may
require and rely upon representations and covenants, including those contained
in certificates of officers of Parent, CommonWealth Bank and others, reasonably
satisfactory in form and substance to such counsel.
Annex I-32
7.02 Conditions to Obligation of CommonWealth Bank. The obligation of
CommonWealth Bank to consummate the Merger is also subject to the fulfillment or
written waiver by CommonWealth Bank prior to the Closing Date of each of the
following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent and First Community Bank set forth in this Agreement, subject in all
cases to the standard set forth in Section 5.02, shall be true and correct as of
the date of this Agreement and as of the Effective Date as though made on and as
of the Effective Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other date shall be true
and correct as of such date), and CommonWealth Bank shall have received a
certificate, dated the Effective Date, signed on behalf of Parent and First
Community Bank by the Chief Executive Officer and the Chief Financial Officer of
both Parent and First Community Bank to such effect.
(b) Performance of Obligations of Parent and First Community Bank. Parent
and First Community Bank shall have performed in all material respects all
obligations required to be performed by them under this Agreement at or prior to
the Effective Time, and CommonWealth Bank shall have received a certificate,
dated the Effective Date, signed on behalf of Parent and First Community Bank by
the Chief Executive Officer and the Chief Financial Officer of both Parent and
First Community Bank to such effect.
(c) Legal Opinion. CommonWealth Bank shall have received an opinion of
Kelley Drye & Warren LLP, dated the date of the Closing, that addresses the
matters set forth in Annex D hereto.
(d) Other Actions. Parent and First Community Bank shall have furnished
CommonWealth Bank with such certificates of its respective officers or others
and such other documents to evidence fulfillment of the conditions set forth in
Sections 7.01 and 7.02 as CommonWealth Bank may reasonably request.
7.03 Conditions to Obligations of Parent and First Community Bank. The
obligations of Parent and First Community Bank to consummate the Merger are also
subject to the fulfillment or written waiver by Parent prior to the Closing Date
of each of the following conditions:
(a) Representations and Warranties. The representations and warranties of
CommonWealth Bank set forth in this Agreement, subject in all cases to the
standard set forth in Section 5.02, shall be true and correct as of the date of
this Agreement and as of the Effective Date as though made on and as of the
Effective Date (except that representations and warranties that by their terms
speak as of the date of this Agreement or some other date shall be true and
correct as of such date), and Parent shall have received a certificate, dated
the Effective Date, signed on behalf of CommonWealth Bank by the Chief Executive
Officer and the Chief Financial Officer of CommonWealth Bank to such effect.
(b) Performance of Obligations of Company. CommonWealth Bank shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and Parent shall have
received a certificate, dated the Effective Date, signed on behalf of
CommonWealth Bank by the Chief Executive Officer and the Chief Financial Officer
of CommonWealth Bank to such effect.
(c) Shareholder Agreements. Shareholder Agreements, substantially in the
form attached as Annex A hereto, shall have been executed and delivered by each
director and executive officer of CommonWealth Bank in connection with
CommonWealth Bank's execution and delivery of this Agreement.
(d) Employment Agreement. J.E. Causey Davis shall have executed the
employment agreement required by Section 6.12(d) hereof.
(e) Dissenting Shares. Dissenting Shares shall not represent 10% or more
of the outstanding shares of CommonWealth Bank Common Stock.
(f) Legal Opinion. Parent and First Community Bank shall have received an
opinion of LeClair Ryan, A Professional Corporation, dated the date of the
Closing, that addresses the matters set forth in Annex E.
(g) Other Actions. CommonWealth Bank shall have furnished Parent with such
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in Sections 7.01 and 7.03 as Parent may
reasonably request.
Annex I-33
ARTICLE VIII
TERMINATION
8.01 Termination. This Agreement may be terminated, and the Transaction
may be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the mutual
consent of Parent, First Community Bank and CommonWealth Bank if the Board of
Directors of each so determines by vote of a majority of the members of its
entire Board.
(b) Breach. At any time prior to the Effective Time, by Parent and First
Community Bank on the one hand or CommonWealth Bank on the other hand, if their
Board of Directors so determines by vote of a majority of the members of their
entire Board, in the event of: (i) a breach by Parent and First Community Bank
on the one hand or CommonWealth Bank on the other hand, as the case may be, of
any representation or warranty contained herein (subject to the standard set
forth in Section 5.02), which breach cannot be or has not been cured within 30
days after the giving of written notice to the breaching party or parties of
such breach; or (ii) a breach by Parent and First Community Bank on the one hand
or CommonWealth Bank on the other hand, as the case may be, of any of the
covenants or agreements contained herein, which breach cannot be or has not been
cured within 30 days after the giving of written notice to the breaching party
or parties of such breach, which breach (whether under (i) or (ii)) would be
reasonably expected, individually or in the aggregate with other breaches, to
result in a Material Adverse Effect with respect to Parent or CommonWealth Bank,
as the case may be.
(c) Delay. At any time prior to the Effective Time, by Parent and First
Community Bank on the one hand or CommonWealth Bank on the other hand, if their
Board of Directors so determines by vote of a majority of the members of their
entire Board, in the event that the Transaction is not consummated by September
30, 2003, except to the extent that the failure of the Merger then to be
consummated arises out of or results from the knowing action or inaction of (i)
the party seeking to terminate pursuant to this Section 8.01(c) or (ii) any of
the Shareholders (if CommonWealth Bank is the party seeking to terminate), which
action or inaction is in violation of its obligations under this Agreement or,
in the case of the Shareholders, his, her or its obligations under the relevant
Shareholder Agreement.
(d) No Regulatory Approval. By Parent and First Community Bank on the one
hand or CommonWealth Bank on the other hand, if their Board of Directors so
determines by a vote of a majority of the members of their entire Board, in the
event the approval of any Governmental Authority required for consummation of
the Merger and the other transactions contemplated by this Agreement shall have
been denied by final nonappealable action of such Governmental Authority or an
application therefor shall have been permanently withdrawn at the request of a
Governmental Authority.
(e) No Shareholder Approval. By either Parent and First Community Bank on
the one hand or CommonWealth Bank on the other hand, if any approval of the
stockholders of CommonWealth Bank contemplated by this Agreement shall not have
been obtained by reason of the failure to obtain the required vote at the
CommonWealth Bank Meeting.
(f) Failure to Recommend. At any time prior to CommonWealth Bank Meeting,
by Parent and First Community Bank if (i) CommonWealth Bank shall have breached
Section 6.08, (ii) the CommonWealth Bank Board shall have failed to make its
recommendation referred to in Section 6.02, withdrawn such recommendation or
modified or changed such recommendation in a manner adverse in any respect to
the interests of Parent and First Community Bank or (iii) CommonWealth Bank
shall have materially breached its obligations under Section 6.02 by failing to
call, give notice of, convene and hold the CommonWealth Bank Meeting in
accordance with Section 6.02.
(g) Certain Tender or Exchange Offers. By Parent if a tender offer or
exchange offer for 20% or more of the outstanding shares of CommonWealth Bank
Common Stock is commenced (other than by Parent or a Subsidiary thereof), and
the CommonWealth Bank Board recommends that the stockholders of CommonWealth
Bank tender their shares in such tender or exchange offer or otherwise fails to
recommend that such stockholders reject such tender offer or exchange offer
within the ten-Business Day period specified in Rule 14e-2(a) under the Exchange
Act.
Annex I-34
(h) Superior Proposal. At any time prior to the CommonWealth Bank Meeting,
by CommonWealth Bank in order to concurrently enter into an acquisition
agreement or similar agreement (each, an "Acquisition Agreement") with respect
to a Superior Proposal which has been received and considered by CommonWealth
Bank and the CommonWealth Bank Board in compliance with Section 6.08 hereof,
provided, however, that this Agreement may be terminated by CommonWealth Bank
pursuant to this Section 8.01(h) only after the fifth Business Day following
CommonWealth Bank's provision of written notice to Parent advising Parent that
the CommonWealth Bank Board is prepared to accept a Superior Proposal, and only
if, during such five-Business Day period, Parent does not, in its sole
discretion, make an offer to CommonWealth Bank that the CommonWealth Bank Board
determines in good faith, after consultation with its financial and legal
advisors, is at least as favorable as the Superior Proposal.
(i) Decrease in Average Share Price. By Parent and First Community Bank,
at any time during the five-day period commencing with the Determination Date,
if the Average Share Price shall be less than 85.0% of the Starting Price (as
the same may be adjusted to reflect any Capital Change), subject, however, to
the following three sentences. If Parent and First Community Bank elect to
exercise their termination right pursuant to the immediately preceding sentence,
they shall give written notice to CommonWealth Bank (provided that such notice
of election to terminate may be withdrawn at any time within the aforementioned
five-day period). During the five-day period commencing with its receipt of such
notice, CommonWealth Bank shall have the option of decreasing the consideration
to be received by the holders of CommonWealth Bank Common Stock hereunder by
adjusting the Exchange Ratio to equal a number equal to the quotient (rounded to
the nearest one ten-thousandth), the numerator of which is $30.50 and the
denominator of which is the product of the Starting Price and .85. If
CommonWealth Bank makes an election contemplated by the preceding sentence
within such five-day period, it shall give prompt written notice to Parent and
First Community Bank of such election and the revised Exchange Ratio, whereupon
no termination shall have occurred pursuant to this Section 8.01(i) and this
Agreement shall remain in effect in accordance with its terms (except as the
Exchange Ratio shall have been so modified), and any references in this
Agreement to "Exchange Ratio" shall thereafter be deemed to refer to the
Exchange Ratio as adjusted pursuant to this Section 8.01(i).
(j) Increase in Average Share Price. By CommonWealth Bank, at any time
during the five-day period commencing with the Determination Date, if the
Average Share Price shall be greater than 115.0% of the Starting Price (as the
same may be adjusted to reflect any Capital Change), subject, however, to the
following three sentences. If CommonWealth Bank elects to exercise its
termination right pursuant to the immediately preceding sentence, it shall give
written notice to Parent (provided that such notice of election to terminate may
be withdrawn at any time within the aforementioned five-day period). During the
five-day period commencing with its receipt of such notice, Parent shall have
the option of increasing the consideration to be received by the holders of
CommonWealth Bank Common Stock hereunder by adjusting the Exchange Ratio to
equal a number equal to the quotient (rounded to the nearest one
ten-thousandth), the numerator of which is $30.50 and the denominator of which
is the product of the Starting Price and 1.15. If Parent makes an election
contemplated by the preceding sentence within such five-day period, it shall
give prompt written notice to CommonWealth Bank of such election and the revised
Exchange Ratio, whereupon no termination shall have occurred pursuant to this
Section 8.01(j) and this Agreement shall remain in effect in accordance with its
terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to "Exchange Ratio" shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this Section 8.01(j).
8.02 Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article VIII, no party to this Agreement shall have
any liability or further obligation to any other party hereunder except as set
forth in this Section 8.02 and Section 9.01.
(b) If this Agreement is terminated by either Parent or CommonWealth Bank
due to a breach of a representation, warranty, covenant or undertaking, the
party committing such breach shall be liable for $350,000 to the other party,
without prejudice to any other rights or remedies as may be available to Parent
under Section 8.02(c) below, provided however that to the extent Parent is
entitled to be paid both the $350,000 fee set
Annex I-35
forth in this Section 8.02(b) as well as the Termination Fee set forth in
Section 8.2(c) below, in no event will the amount payable to Parent pursuant to
Sections 8.02(b) and (c) exceed $1.0 million.
(c) In recognition of the efforts, expenses and other opportunities
foregone by Parent while structuring and pursuing the Merger, the parties hereto
agree that CommonWealth Bank shall pay Parent the sum of $1.0 million (the
"Termination Fee") if this Agreement is terminated as follows:
(i) if this Agreement is terminated by Parent pursuant to Section
8.01(f) or (g) or by CommonWealth Bank pursuant to Section 8.01(h), in
either of which case payment shall be made to Parent concurrently with
the termination of this Agreement; or
(ii) if (x) this Agreement is terminated by (A) Parent pursuant to
Section 8.01(b), (B) by either Parent or CommonWealth Bank pursuant to
Section 8.01(c) or (C) by either Parent or CommonWealth Bank pursuant to
Section 8.01(e), and in the case of any termination pursuant to clause
(A), (B) or (C), an Acquisition Proposal shall have been publicly
announced or otherwise communicated or made known to the senior
management of CommonWealth Bank or the CommonWealth Bank Board (or any
Person shall have publicly announced, communicated or made known an
intention, whether or not conditional, to make an Acquisition Proposal)
at any time after the date of this Agreement and prior to the taking of
the vote of the stockholders of CommonWealth Bank contemplated by this
Agreement at the CommonWealth Bank Meeting, in the case of clause (C),
or the date of termination, in the case of clause (A) or (B), and (y)
within 18 months after such termination CommonWealth Bank enters into an
agreement with respect to an Acquisition Proposal or consummates a
transaction which is the subject of an Acquisition Proposal, then
CommonWealth Bank shall pay to Parent the Termination Fee on the date of
execution of such agreement or consummation of a transaction which is
the subject of an Acquisition Proposal, provided that if the date of
execution of such agreement is after 12 months but within 18 months
after such termination of this Agreement, the Termination Fee shall be
payable by CommonWealth Bank to Parent only upon consummation of a
transaction which is the subject of an Acquisition Proposal, regardless
whether such consummation occurs within 18 months after termination of
this Agreement.
Any amount that becomes payable pursuant to this Section 8.02(c) shall be paid
by wire transfer of immediately available funds to an account designated by
Parent.
(d) CommonWealth Bank and Parent agree that the agreement contained in
paragraph (c) of this Section 8.02 is an integral part of the transactions
contemplated by this Agreement, that without such agreement Parent would not
have entered into this Agreement and that such amounts do not constitute a
penalty or liquidated damages in the event of a breach of this Agreement by
CommonWealth Bank. If CommonWealth Bank fails to pay Parent the amounts due
under paragraph (c) above within the time periods specified therein,
CommonWealth Bank shall pay the costs and expenses (including reasonable legal
fees and expenses) incurred by Parent in connection with any action in which
Parent prevails, including the filing of any lawsuit, taken to collect payment
of such amounts, together with interest on the amount of any such unpaid amounts
at the prime lending rate prevailing during such period as published in The Wall
Street Journal, calculated on a daily basis from the date such amounts were
required to be paid until the date of actual payment.
Annex I-36
ARTICLE IX
MISCELLANEOUS
9.01 Survival. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time (other than
agreements or covenants contained herein that by their express terms are to be
performed after the Effective Time) or the termination of this Agreement if this
Agreement is terminated prior to the Effective Time (other than Sections
6.06(c), 8.02 and, excepting Section 9.12 hereof, this Article IX, which shall
survive any such termination). Notwithstanding anything in the foregoing to the
contrary, no representations, warranties, agreements and covenants contained in
this Agreement shall be deemed to be terminated or extinguished so as to deprive
a party hereto or any of its affiliates of any defense at law or in equity which
otherwise would be available against the claims of any Person, including without
limitation any shareholder or former shareholder.
9.02 Waiver; Amendment. Prior to the Effective Time, any provision of this
Agreement may be (i) waived, by the party benefited by the provision or (ii)
amended or modified at any time, by an agreement in writing among the parties
hereto executed in the same manner as this Agreement, except that after the
CommonWealth Bank Meeting no amendment shall be made which by law requires
further approval by the stockholders of CommonWealth Bank without obtaining such
approval.
9.03 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04 Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of Nevada applicable to contracts made
and to be performed entirely within such State.
9.05 Expenses. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby,
including fees and expenses of its own financial consultants, accountants and
counsel and, in the case of Parent, the registration fee to be paid to the SEC
in connection with the Registration Statement, except that expenses of printing
the Proxy Statement shall be shared equally between CommonWealth Bank and
Parent, and provided further that nothing contained herein shall limit either
party's rights to recover any liabilities or damages arising out of the other
party's willful breach of any provision of this Agreement.
9.06 Notices. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
If to CommonWealth Bank to:
The CommonWealth Bank
900 N. Parham Road
Richmond, Virginia 23229
Attention: J.E. Causey Davis,
President and Chief Executive Officer
Fax:
With a copy to:
LeClair Ryan, A Professional Corporation
Eleventh Floor
707 East Main Street
Richmond, Virginia 23219
Attention: George P. Whitley, Esq.
Fax: (804) 783-7628
Annex I-37
If to Parent or First Community Bank to:
First Community Bancshares, Inc.
One Community Place
Bluefield, Virginia 24605
Attention: John M. Mendez, President
and Chief Executive Officer
Fax: (276) 326-9010
With a copy to:
Kelley Drye & Warren LLP
8000 Towers Crescent Drive
Suite 1200
Vienna, Virginia 22182
Attention: Norman B. Antin, Esq.
Jeffrey D. Haas, Esq.
Fax: (703) 918-2450
9.07 Entire Understanding; No Third Party Beneficiaries. This Agreement
and the Shareholder Agreements represent the entire understanding of the parties
hereto and thereto with reference to the Transaction, and this Agreement and the
Shareholder Agreements supersede any and all other oral or written agreements
heretofore made. Except for the Indemnified Parties' right to enforce Parent's
obligation under Section 6.11, which are expressly intended to be for the
irrevocable benefit of, and shall be enforceable by, each Indemnified Party and
his or her heirs and representatives, nothing in this Agreement, expressed or
implied, is intended to confer upon any Person, other than the parties hereto or
their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
9.08 Severability. Except to the extent that application of this Section
9.08 would have a Material Adverse Effect on CommonWealth Bank or Parent, any
term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable. In all such cases, the parties shall use their reasonable best
efforts to substitute a valid, legal and enforceable provision which, insofar as
practicable, implements the original purposes and intents of this Agreement.
9.09 Enforcement of the Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
9.10 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of, or
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and are not part of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." Whenever the words "as of the date
hereof" are used in this Agreement, they shall be deemed to mean the day and
year first above written (January 27, 2003).
9.11 Assignment. No party may assign either this Agreement or any of its
rights, interests or obligations hereunder without the prior written approval of
the other parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
Annex I-38
9.12 Alternative Structure. Notwithstanding any provision of this
Agreement to the contrary, Parent may at any time modify the structure of the
acquisition of CommonWealth Bank set forth herein, subject to the prior written
consent of CommonWealth Bank, which consent shall not be unreasonably withheld
or delayed, provided that (i) the Merger Consideration to be paid to the holders
of CommonWealth Bank Common Stock is not thereby changed in kind or reduced in
amount as a result of such modification, (ii) such modification will not
adversely affect the tax treatment to CommonWealth Bank's stockholders as a
result of receiving the Merger Consideration and (iii) such modification will
not materially delay or jeopardize receipt of any required approvals of
Governmental Authorities.
[SIGNATURE PAGE TO FOLLOW]
Annex I-39
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
FIRST COMMUNITY BANCSHARES, INC.
By: /s/ JOHN M. MENDEZ
------------------------------------
Name: John M. Mendez
Title: President and Chief
Executive Officer
FIRST COMMUNITY BANK, NATIONAL
ASSOCIATION
By: /s/ JOHN M. MENDEZ
------------------------------------
Name: John M. Mendez
Title: Executive Vice President
THE COMMONWEALTH BANK
By: /s/ FRANKLIN P. HALL
------------------------------------
Name: Franklin P. Hall
Title: Chairman of the Board
Annex I-40
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of February 25,
2003 (the "Amendment"), by and among FIRST COMMUNITY BANCSHARES, INC.
("Parent"), FIRST COMMUNITY BANK, NATIONAL ASSOCIATION ("First Community Bank"),
and THE COMMONWEALTH BANK ("CommonWealth Bank," and together with Parent and
First Community Bank, the "Parties"). Capitalized terms not otherwise defined
herein shall have the meaning as set forth in the original Agreement.
WHEREAS, the Parties entered into an Agreement and Plan of Merger, dated as
of January 27, 2003 (the "Agreement");
WHEREAS, the Parties hereto wish to modify and amend the Agreement as set
forth herein.
NOW, THEREFORE, in consideration of the premises, covenants and agreements
hereinafter set forth, the Parties hereto agree as follows:
SECTION 1. AMENDMENT OF SECTION 1.01 OF THE AGREEMENT.
The definition of "Maximum Cash Consideration" is hereby added to Section
1.01 of the Agreement to read as follows:
"Maximum Cash Consideration" has the meaning set forth in Section
3.01(b)(2)(iii).
SECTION 2. AMENDMENT TO SECTION 3.01 OF THE AGREEMENT.
Subsection (2) of subsection (b) of Section 3.01 of the Agreement is
amended to read in its entirety as follows:
(2) For purposes of this Agreement:
(i) the "Aggregate Cash Consideration" shall amount to the product of
the number of shares of CommonWealth Bank Common Stock outstanding
immediately prior to the Effective Time times .4 times $30.50;
(ii) the "Average Share Price" of the Parent Common Stock shall mean
the average of the closing sales price of a share of Parent Common
Stock, as reported on Nasdaq (as reported by an authoritative source),
for the 20 trading-day period ending with the close of business on the
fifth Business Day preceding the Effective Time; and
(iii) the "Maximum Cash Consideration" shall amount to the product of
the number of shares of CommonWealth Bank Common Stock outstanding
immediately prior to the Effective Time times .5 times $30.50.
SECTION 3. AMENDMENT OF SECTION 3.02 OF THE AGREEMENT.
Subsections (ii) and (iii) of subsection (d) of Section 3.02 of the
Agreement are amended and restated in their entirety and a new subsection (iv)
is added, in each case to read as follows:
(ii) If the number of Cash Election Shares times the Per Share Cash
Consideration is greater than the Maximum Cash Consideration, then:
(1) all Stock Election Shares and all No-Election Shares shall be
converted into the right to receive Parent Common Stock,
(2) the Exchange Agent shall convert on a pro rata basis as
described below in Section 3.02(e) a sufficient number of Cash
Election Shares (excluding any Dissenting Shares) ("Reallocated Stock
Shares") such that the number of remaining Cash Election Shares
(including Dissenting Shares) times the Per Share Cash Consideration
equals the Maximum Cash Consideration, and all Reallocated Stock
Shares shall be converted into the right to receive Parent Common
Stock, and
Annex I-41
(3) the Cash Election Shares (subject to Section 3.06 with
respect to Dissenting Shares) which are not Reallocated Stock Shares
shall be converted into the right to receive cash.
(iii) If the number of Cash Election Shares times the Per Share Cash
Consideration is equal to the Aggregate Cash Consideration, then
subparagraphs (d)(i) and (ii) above shall not apply and all Cash
Election Shares (subject to Section 3.06 with respect to Dissenting
Shares) shall be converted into the right to receive cash and all
No-Election Shares and all Stock Election Shares will be converted into
the right to receive Parent Common Stock.
(iv) If the number of the Cash Election Shares times the Per Share
Cash Consideration is greater than the Aggregate Cash Consideration but
less than the Maximum Cash Consideration, then:
(1) all Cash Election Shares (subject to Section 3.06 with
respect to Dissenting Shares) shall be converted into the right to
receive cash,
(2) all Stock Election Shares shall be converted into the right
to receive Parent Common Stock,
(3) the Exchange Agent shall convert a sufficient number of
No-Election Shares into Reallocated Cash Shares such that the sum of
the number of Cash Election Shares plus the number of Reallocated
Cash Shares times the Per Share Cash Consideration equals the Maximum
Cash Consideration, and
(4) the No-Election Shares which are not Reallocated Cash Shares
shall be converted into the right to receive Parent Common Stock.
SECTION 4. MISCELLANEOUS.
(a) The Agreement is incorporated herein by reference.
(b) Except as otherwise set forth herein, the Agreement, as amended hereby,
shall remain in full force and effect and the Parties shall have all the rights
and remedies provided thereunder with the same force and effect as if the
Agreement were restated herein in its entirety.
(c) The provisions hereof shall be binding upon and inure to the benefit of
the Parties and their respective executors, heirs, personal representatives,
successors and assigns.
(d) This Amendment may be executed and delivered in several counterparts
with the intention that all such counterparts, when taken together, constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
FIRST COMMUNITY BANCSHARES, INC. FIRST COMMUNITY BANK, NATIONAL ASSOCIATION
By: /s/ John M. Mendez By: /s/ John M. Mendez
---------------------------------------- ----------------------------------------
Name: John M. Mendez Name: John M. Mendez
Title: President and Chief Executive Title: Executive Vice President
Officer
THE COMMONWEALTH BANK
By: /s/ Franklin P. Hall
----------------------------------------
Name: Franklin P. Hall
Title: Chairman of the Board
Annex I-42
ANNEX II
April 9, 2003
The Board of Directors
The CommonWealth Bank
900 N. Parham Road
Richmond, VA 23229
Dear Members of the Board:
The CommonWealth Bank, Richmond, Virginia ("CommonWealth"), and First
Community Bancshares, Inc., Bluefield, Virginia ("First Community") have entered
into an agreement providing for the acquisition of CommonWealth by First
Community ("Acquisition"). The terms of the Acquisition are set forth in the
Agreement and Plan of Merger ("Agreement") dated January 27, 2003 and amended
February 25, 2003.
The terms of the Acquisition provide that, with the possible exception of
those shares as to which dissenter's rights may be perfected, each share of
CommonWealth common stock, $4.00 par value, will be exchanged for the right to
receive either $30.50 in cash or a number of whole shares of First Community's
common stock determined by dividing $30.50 by the average closing price of the
Company's common stock during a specified period preceding the acquisition, plus
cash in lieu of any fractional share interest, subject to election and
allocation procedures set forth in the acquisition agreement which are intended
to ensure that not less than 50% and not more than 60% of the value of
consideration will be in the form of company common stock with the remaining
consideration to be in the form of cash (the "Consideration").
You have asked our opinion as to whether the Consideration is fair to the
respective shareholders of CommonWealth from a financial point of view.
In rendering our opinion, we have evaluated the consolidated financial
statements of CommonWealth and First Community available to us from published
sources. In addition, we have, among other things: (a) to the extent deemed
relevant, analyzed selected public information of certain other financial
institutions and compared CommonWealth and First Community from a financial
point of view to the other financial institutions; (b) compared the terms of the
Acquisition with the terms of certain other comparable transactions to the
extent information concerning such acquisitions was publicly available; (c)
reviewed the Agreement and related documents; (d) reviewed the historical market
price of CommonWealth's common stock and First Community's common stock; and (e)
made such other analyses and examinations as we deemed necessary. We also met
with various senior officers of CommonWealth and First Community to discuss the
foregoing as well as other matters that may be relevant.
We have not independently verified the financial and other information
concerning CommonWealth or First Community or other data which we have
considered in our review. We have assumed the accuracy and completeness of all
such information; however, we have no reason to believe that such information is
not accurate and complete. Our conclusion is rendered on the basis of securities
market conditions prevailing as of the date hereof and on the conditions and
prospects, financial and otherwise, of CommonWealth and First Community as they
exist and are known to us as of .
We have acted as financial advisor to CommonWealth and in connection with
the Acquisition will receive from CommonWealth a fee for our services, a
significant portion of which is contingent upon the consummation of the
Acquisition.
It is understood that this opinion may be included in its entirety in any
communication by CommonWealth or the Board of Directors to the shareholders of
CommonWealth. The opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we
are of the opinion that the Consideration is fair to the shareholders of
CommonWealth from a financial point of view.
Sincerely,
Baxter, Fentriss and Co.
Annex II-1
ANNEX III
VIRGINIA STOCK
CORPORATION ACT
ARTICLE 15.
DISSENTERS' RIGHTS.
SECTION 13.1-729. DEFINITIONS. -- In this article:
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Corporation" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from corporate
action under Section 13.1-730 and who exercises that right when and in the
manner required by Sections 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
"Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with a corporation.
"Shareholder" means the record shareholder or the beneficial shareholder.
SECTION 13.1-730. RIGHT TO DISSENT.
A. A shareholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of, any of the following corporate
actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by Section 13.1-718
or the articles of incorporation and the shareholder is entitled to vote on
the merger or (ii) if the corporation is a subsidiary that is merged with
its parent under Section 13.1-719;
2. Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on
the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that
such dissenter's rights shall not apply in the case of (i) a sale or
exchange pursuant to court order, or (ii) a sale for cash pursuant to a
plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
Annex III-1
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests
and cash in lieu of fractional shares (i) of the surviving or acquiring
corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date fixed
to determine the shareholders entitled to receive notice of and to vote
at the meeting at which the plan of merger or share exchange is to be
acted on, were either listed subject to notice of issuance on a national
securities exchange or held of record by at least 2,000 record
shareholders or members; or
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is
not approved by a majority of "disinterested directors" as such terms are
defined in Section 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
E. Notwithstanding any other provision of this article, no shareholder of a
corporation located in a county having a county manager form of government and
which is exempt from income taxation under Section 501 (c) or Section 528 of the
Internal Revenue Code and no part of whose income inures or may inure to the
benefit of any private share holder or individual shall be entitled to dissent
and obtain payment for his shares under this article.
SECTION 13.1-731. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
A. A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
Annex III-2
SECTION 13.1-732. NOTICE OF DISSENTERS' RIGHTS.
A. If proposed corporate action creating dissenters' rights under Section
13.1-730 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under Section 13.1-730
is taken without a vote of shareholders, the corporation, during the ten-day
period after the effectuation of such corporate action, shall notify in writing
all record shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in Section 13.1-734.
SECTION 13.1-733. NOTICE OF INTENT TO DEMAND PAYMENT.
A. If proposed corporate action creating dissenters' rights under Section
13.1-730 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (i) shall deliver to the corporation before
the vote is taken written notice of his intent to demand payment for his shares
if the proposed action is effectuated and (ii) shall not vote such shares in
favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for his shares under this article.
SECTION 13.1-734. DISSENTERS' NOTICE.
A. If proposed corporate action creating dissenters' rights under Section
13.1-730 is authorized at a shareholders' meeting, the corporation, during the
ten-day period after the effectuation of such corporate action, shall deliver a
dissenters' notice in writing to all shareholders who satisfied the requirements
of Section 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before or after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
SECTION 13.1-735. DUTY TO DEMAND PAYMENT.
A. A shareholder sent a dissenters' notice described in Section 13.1-734
shall demand payment, certify that he acquired beneficial ownership of the
shares before or after the date required to be set forth in the dissenters'
notice pursuant to subdivision 3 of subsection B of Section 13.1-734, and, in
the case of certificated shares, deposit his certificates in accordance with the
terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of this
section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
Annex III-3
SECTION 13.1-736. SHARE RESTRICTIONS.
A. The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that these
rights are canceled or modified by the taking of the proposed corporate action.
SECTION 13.1-737. PAYMENT.
A. Except as provided in Section 13.1-738, within thirty days after receipt
of a payment demand made pursuant to Section 13.1-735, the corporation shall pay
the dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of the
shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under Section
13.1-739; and
4. A copy of this article.
SECTION 13.1-738. AFTER-ACQUIRED SHARES.
A. A corporation may elect to withhold payment required by Section 13.1-737
from a dissenter unless he was the beneficial owner of the shares on the date of
the first publication by news media or the first announcement to shareholders
generally, whichever is earlier, of the terms of the proposed corporate action,
as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under Section 13.1-739.
SECTION 13.1-739. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
A. A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
his estimate (less any payment under Section 13.1-737), or reject the
corporation's offer under Section 13.1-738 and demand payment of the fair value
of his shares and interest due, if the dissenter believes that the amount paid
under Section 13.1-737 or offered under Section 13.1-738 is less than the fair
value of his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection A of this
section within thirty days after the corporation made or offered payment for his
shares.
Annex III-4
SECTION 13.1-740. COURT ACTION.
A. If a demand for payment under Section 13.1-739 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the circuit court in the city or county described in
subsection B of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents of
this Commonwealth, whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this article. If the court determines that such
shareholder has not complied with the provisions of this article, he shall be
dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. The court may appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment
(i) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation or (ii) for
the fair value, plus accrued interest, of his after-acquired shares for which
the corporation elected to withhold payment under Section 13.1-738.
SECTION 13.1-741. COURT COSTS AND COUNSEL FEES.
A. The court in an appraisal proceeding commenced under Section 13.1-740
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters did not act in good faith in demanding
payment under Section 13.1-739.
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of Sections 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed did not act in good faith with respect to the rights provided
by this article.
C. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
D. In a proceeding commenced under subsection A of Section 13.1-737 the
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
Annex III-5