SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
FULTON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania
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(State or other jurisdiction of
incorporation or organization)
6711 23-2195389
----------------------- ---------------------------- ------------------------- ----------------------
(Primary SIC Code Number) (I.R.S. Employer
Identification Number)
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
(717) 291-2411
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(Address and telephone number of registrant's principal executive offices)
Rufus A. Fulton, Jr., President and Chief Executive Officer
Fulton Financial Corporation
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
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(Name, address and telephone number of agent for service)
Copy To: Copy To:
Paul G. Mattaini, Esquire F. Douglas Raymond,III, Esquire
Barley, Snyder, Senft & Cohen, LLP Drinker Biddle & Reath, LLP
126 East King Street 1345 Chestnut Street
Lancaster, PA 17602-2893 Philadelphia, PA 19107-3496
(717) 299-5201 (610) 993-2233
Calculation of Registration Fee
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=================================================================================================================================================================
Proposed Proposed Amount
Title of each Amount Proposed Proposed Amount
class of to be maximum maximum of
class of securities registeredto be offering aggregate registration
to be registered registered price per unit* offering price* fee
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------
Common Stock 7,411,341 $53.25 $211,202,759.25 $64,000.84$65,178.76
$2.50 par value 7,391,822 $53.25 $215,089,902.75 64,000.84**
per share ==============================================================================----------
$1,177.92
=================================================================================
*Determined, in accordance with Rule 457(c) and (f), upon the basis of the
average of the high and low prices reported on the American Stock Exchange as of
November 26,24, 1997, of the 3,966,2494,039,247 shares of common stock (which includes
83,664 shares issuable upon exercise of outstanding options), $5.00 par value
per share, of Keystone Heritage Group, Inc., to be received in exchange for the
securities hereby registered.
**Previously paid with filing made on December 2, 1997.
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
__________, 1997January 14, 1998
Dear Shareholder:
You are cordially invited to a Special Meeting of Shareholders (the
"Meeting") of Keystone Heritage Group, Inc. ("KHG") to be held on
January 23,Tuesday, February 17, 1998, at ________ a.m.2:00 p.m., at _______________________________.Quality Inn Lebanon Valley, 625
Quentin Road, Lebanon, Pennsylvania.
At the Meeting, holders of all outstanding shares of Common Stock of KHG,
par value $5.00 per share (the "KHG Common Stock"), will be asked to consider
and vote upon a proposal to approve the merger (the "Merger") of KHG and Fulton
Financial Corporation ("FFC"), in accordance with the terms of the Merger
Agreement dated August 15, 1997, between KHG and FFC (the "Merger Agreement").
Pursuant to the Merger Agreement, each share of KHG Common Stock outstanding at
the effective date of the Merger will automatically be converted into the right
to receive 1.83 shares of FFC's Common Stock, and cash will be paid in lieu of
fractional shares. Consummation of the Merger is subject to certain conditions,
including the approval of the merger by various regulatory agencies and approval
of the KHG shareholders as described below.
The Board of Directors of KHG has unanimously approved and declared the
Merger advisable and recommends that the shareholders of KHG vote in favor of
the Merger Agreement.
It is very important that your shares be represented at the Meeting,
regardless of whether you plan to attend in person. The affirmative vote of
two-thirds of the outstanding shares of KHG Common Stock will be required to
approve the Merger Agreement. Consequently, your failure to vote would have the
same effect as a vote against the Merger. You are therefore urged to execute
and return the enclosed proxy card in the enclosed postage-paid envelope as soon
as possible to ensure your shares will be voted at the Meeting.
Sincerely yours,
Albert B. Murry
President and Chief
Executive Officer
Keystone Heritage Group, Inc.
555 Willow Street
Lebanon, Pennsylvania 17046
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held January 23,February 17, 1998
To the Shareholders of
Keystone Heritage Group, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Keystone
Heritage Group, Inc. ("KHG") will be held at _________________________________Quality Inn Lebanon Valley, 625
Quentin Road, Lebanon, Pennsylvania, on January 23,February 17, 1998, at _____ a.m.2:00 p.m. local
time, for the following purposes:
(1) To consider and vote upon a proposal to approve the merger (the
"Merger") of KHG and Fulton Financial Corporation ("FFC"), in accordance with
the terms of the Merger Agreement dated August 15, 1997 (the "Merger
Agreement"), between KHG and FFC (a copy of which, without exhibits or
schedules, is attached to the accompanying Proxy Statement/Prospectus as Exhibit
A). In the Merger, each of the outstanding shares of Common Stock of KHG, par
value $5.00 per share ("KHG Common Stock"), will automatically be converted into
the right to receive 1.83 shares of FCC's Common Stock. The Merger is more
fully described in the accompanying Proxy Statement/Prospectus; and
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof, including, without limitation, a
motion to adjourn or postpone the Meeting to another time and place for the
purpose of soliciting additional proxies in favor of the Merger Agreement or
otherwise.
The Board of Directors has fixed the close of business on _________, 1997,January 13, 1998,
as the record date (the "Record Date") for the Special Meeting. Only those
persons who are record holders of KHG Common Stock at such date will be entitled
to notice of, and to vote at, the Special Meeting and any adjournment thereof.
The attached Proxy Statement/Prospectus forms a part of this Notice and is
incorporated herein by reference.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES
OF KHG COMMON STOCK ENTITLED TO VOTE THEREON WILL BE REQUIRED TO ADOPT THE
MERGER AGREEMENT PROVIDING FOR THE MERGER OF KHG WITH FFC. WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING, THE BOARD OF DIRECTORS URGES YOU TO MARK,
SIGN, DATE AND RETURN AS SOON AS POSSIBLE THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE. GIVING THE PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU
ATTEND THE MEETING.
By order of the Board of Directors
Peggy Y. Layser
Secretary
Lebanon, Pennsylvania
______________, 1997January 14, 1998
PROXY STATEMENT/PROSPECTUS
--------------------------
FULTON FINANCIAL CORPORATION
ONE PENN SQUARE
P.O. BOX 4887
LANCASTER, PENNSYLVANIA 17604
(717) 291-2411
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KEYSTONE HERITAGE GROUP, INC.
555 WILLOW STREET
LEBANON, PENNSYLVANIA 17046
(717) 274-6800
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This Proxy Statement/Prospectus relates to (i) the Special Meeting of
Shareholders (the "Special Meeting") of Keystone Heritage Group, Inc. ("KHG") to
be held on January 23,February 17, 1998, and (ii) the issuance of up to 7,411,3417,391,822 shares of
the $2.50 par value common stock (the "FFC Common Stock") of Fulton Financial
Corporation ("FFC") to be issued in connection with, and conditioned upon, the
effectiveness of the merger of KHG with FFC (the "Merger"). Pursuant to the
Merger Agreement, each outstanding share of Common Stock of KHG, par value $5.00
per share (the "KHG Common Stock") will automatically be converted into the
right to receive 1.83 shares of FFC Common Stock. Assuming that 7,391,822
shares of FFC Common Stock are issued in the Merger, the shares to be issued in
exchange for the KHG Common Stock would represent approximately 18% of the
outstanding shares of FFC Common Stock as of December 31, 1997, on a pro forma
basis. The Merger is described more fully in this Proxy Statement/Prospectus.
----------------------------------
No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to any
person to exchange or sell, or a solicitation from any person of an offer to
exchange or purchase, the securities offered by this Proxy Statement/Prospectus,
or the solicitation of a proxy from any person, in any jurisdiction in which it
is unlawful to make such an offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of the securities to which this
Proxy Statement/Prospectus relates shall under any circumstances create any
implication that the information contained herein is correct at any time
subsequent to the date hereof.
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This Proxy Statement/Prospectus does not cover resales of shares of FFC
Common Stock issued to affiliates of KHG in connection with the Merger described
herein. No such person is authorized to make use of this Proxy
Statement/Prospectus in connection with any such resale.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------
THESE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
----------------------------------
The date of this Proxy Statement/Prospectus is _____________, 1997.January 8, 1998.
AVAILABLE INFORMATION
---------------------
FFC and KHG are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
FFC and KHG file periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such periodic reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Judicial Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and also at the Regional Offices of the SEC
located at Seven World Trade Center, Suite 1300, New York, New York 10048;
Curtis Center, 601 Walnut Street, Suite 1005E, Philadelphia, Pennsylvania 19106;
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may be obtained, at prescribed rates, by
delivering a request to the Public Reference Section of the SEC at Judicial
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC
maintains a web site (http://www.sec.gov) that contains periodic reports, proxy
and information statements and other information regarding companies which are
subject to the reporting requirements of the 1934 Act. FFC Common Stock is
listed on the Nasdaq Stock Market and material as to FFC can also be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006. KHG Common Stock is listed on the
American Stock Exchange and material as to KHG can be inspected at _____________
___________________________________________.the offices
at 86 Trinity Place, New York, New York 10006-1881.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONTAIN ALL OF THE INFORMATION SET
FORTH IN THE REGISTRATION STATEMENT AND THE RELATED EXHIBITS THAT FFC HAS FILED
WITH THE SEC (CERTAIN PARTS OF WHICH ARE OMITTED IN ACCORDANCE WITH THE RULES
AND REGULATIONS OF THE SEC), AND TO WHICH REFERENCE IS HEREBY MADE. THIS PROXY
STATEMENT/PROSPECTUS IS PART OF THE REGISTRATION STATEMENT AND SUCH REGISTRATION
STATEMENT, INCLUDING EXHIBITS, CAN BE INSPECTED AND COPIED AT THE PUBLIC
REFERENCE FACILITIES MAINTAINED BY THE SEC LISTED ABOVE. THIS PROXY
STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
WILLIAM R. COLMERY, SECRETARY, FULTON FINANCIAL CORPORATION, ONE PENN SQUARE,
P.0. BOX 4887, LANCASTER, PENNSYLVANIA 17604, TELEPHONE: (717) 291-2852. IN
ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY SUCH REQUEST SHOULD BE
MADE BY JANUARY 9,FEBRUARY 2, 1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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The following documents and information are hereby incorporated by reference
into this Proxy Statement/Prospectus:
1. FFC's Annual Report on Form 10-K for the year ended December 31, 1996;
2. FFC's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997; June 30, 1997; and September 30, 1997;
3. FFC's Current Reports on Form 8-K dated March 7, 1997 (as amended by
Form 8-K/A dated May 12, 1997); March 31, 1997; August 28, 1997; and September
15, 1997;
4. KHG's Annual Report on Form 10-K for the year ended December 31, 1996;
5. KHG's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997; June 30, 1997; and September 30, 1997; and
6. KHG's Current Report on Form 8-K dated September 10, 1997.
All documents filed by FFC and KHG pursuant to Sections 13(a), 13(c), 14, or
15(d) of the 1934 Act after the date of this Proxy Statement/Prospectus and
prior to the Special Meeting are hereby incorporated by reference into this
Proxy Statement/Prospectus and shall be deemed a part hereof from the date of
filing of each such document. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which is also
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement/Prospectus.
TABLE OF CONTENTS
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Page
SUMMARY .................................................................................................SUMMARY.................................................................... 1
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The KHG Special Meeting..........................................................................Meeting........................................... 1
Purpose of the Meeting...........................................................................Meeting............................................ 1
The Parties......................................................................................Parties....................................................... 1
Required Vote....................................................................................Vote..................................................... 2
Terms of the Merger..............................................................................Merger............................................... 3
Conversion and Exchange of Shares of KHG Common Stock............................................Stock............. 3
Reasons for the Merger...........................................................................Merger............................................ 3
Opinion of KHG's Financial Advisor...............................................................Advisor................................ 4
Management and Operations Following the Merger...................................................Merger.................... 5
Effective Date...................................................................................Date.................................................... 5
Termination of the Merger Agreement..............................................................Agreement............................... 6
Comparison of Shareholder Rights.................................................................Rights.................................. 6
Restrictions on Resales by Affiliates............................................................Affiliates............................. 6
Federal Income Tax Consequences..................................................................Consequences................................... 6
Accounting Treatment.............................................................................Treatment.............................................. 7
Limitations on Negotiations; Warrant Granted to FFC..............................................FFC............... 7
Conditions and Amendments........................................................................Amendments......................................... 8
Comparative Stock Prices.........................................................................Prices.......................................... 8
Selected Historical and Pro Forma Combined Per Share Data........................................Data......... 9
Selected Historical Financial Data...............................................................Data................................ 14
GENERAL INFORMATION--SPECIAL MEETING OF KHG SHAREHOLDERS.................................................SHAREHOLDERS................... 19
- --------------------------------------------------------
Introduction.....................................................................................Introduction...................................................... 19
Date, Time and Place of Special Meeting..........................................................Meeting........................... 19
Shareholders Entitled to Vote....................................................................Vote..................................... 19
Purpose of Meeting...............................................................................Meeting................................................ 19
Solicitation of Proxies..........................................................................Proxies........................................... 19
Quorum and Required Vote.........................................................................Vote.......................................... 19
Revocation and Voting of Proxies.................................................................Proxies.................................. 20
Shares Outstanding and Principal Holders Thereof.................................................Thereof.................. 20
Interests of Certain Persons in Matters To Be Acted Upon.........................................Upon.......... 20
Recommendation of the Board of Directors of KHG..................................................KHG................... 22
THE MERGER...............................................................................................MERGER................................................................. 23
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General Information..............................................................................Information............................................... 23
The Restructuring................................................................................Restructuring................................................. 23
Background of the Merger.........................................................................Merger.......................................... 23
Changes in the Banking Industry..................................................................Industry................................... 24
Benefits of the Merger to KHG and FFC............................................................FFC............................. 25
Opinion of Financial Advisor to KHG..............................................................KHG............................... 25
Recommendation of the Board of Directors of KHG..................................................KHG................... 28
Conversion and Exchange of Shares................................................................Shares................................. 29
Treatment of Outstanding Options................................................................. 30Options.................................. 31
Business Pending The Effective Date.............................................................. 30Date............................... 31
Conditions, Amendment and Termination............................................................ 32Termination............................. 33
Effective Date of the Merger..................................................................... 33Merger...................................... 34
Management and Operations Following the Merger...................................................Merger.................... 34
Federal Income Tax Consequences..................................................................Consequences................................... 35
Accounting Treatment.............................................................................Treatment.............................................. 36
Rights of Dissenting Shareholders................................................................ 36Shareholders................................. 37
Restrictions on Resale of FFC Common Stock Held By Affiliates of
KHG....................................................................................... 36KHG............................................................ 37
Warrant Agreement................................................................................Agreement................................................. 37
COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED SHAREHOLDER MATTERS...................................MATTERS..... 40
- ----------------------------------------------------------------------
Common Stock of FFC..............................................................................FFC............................................... 40
Common Stock of KHG..............................................................................KHG............................................... 40
i
PRO FORMA COMBINED FINANCIAL INFORMATION.................................................................INFORMATION................................... 41
- ----------------------------------------
Pro Forma Combined Balance Sheet (Unaudited)........................................................................... 42
Pro Forma Combined Condensed Statement of Income (Unaudited)..................................... 48...... 44
INFORMATION CONCERNING FULTON FINANCIAL CORPORATION AND DESCRIPTION OF FFC
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COMMON STOCK..................STOCK...................................................... 53
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General..........................................................................................------------
General........................................................... 53
Loan Policies and Portfolio Quality..............................................................Quality............................... 54
Computer System Adaptation for Year 2000.........................................................2000.......................... 54
Legal Proceedings................................................................................Proceedings................................................. 54
General Description of FFC Common Stock..........................................................Stock........................... 55
Dividends........................................................................................Dividends......................................................... 55
Dividend Reinvestment Plan.......................................................................Plan........................................ 56
Securities Laws..................................................................................Laws................................................... 56
Antitakeover Provisions..........................................................................Provisions........................................... 56
Indemnification..................................................................................Indemnification................................................... 58
Comparison of Shareholder Rights.................................................................Rights.................................. 58
INFORMATION CONCERNING KEYSTONE HERITAGE GROUP, INC......................................................INC........................ 60
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Description of Business and Property.............................................................Property.............................. 60
KHG Common Stock Market Price and Dividends......................................................Dividends....................... 60
Information About Directors and Executive Officers...............................................Officers................ 61
EXPERTS ................................................................................................. 62EXPERTS.................................................................... 63
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LEGAL MATTERS............................................................................................ 62MATTERS.............................................................. 63
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ADDITIONAL INFORMATION................................................................................... 62INFORMATION..................................................... 63
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OTHER MATTERS............................................................................................ 62MATTERS.............................................................. 63
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EXHIBITS
-
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Exhibit A - Merger Agreement ....................................................................Agreement...................................... A-1
Exhibit B - Opinion of Danielson Associates, Inc.................................................Inc.................. B-1
Exhibit C - Warrant Agreement and Warrant .......................................................Warrant......................... C-1
ii
SUMMARY
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The following is a summary of certain information set forth in this Proxy
Statement/Prospectus regarding the Merger between KHG and FFC. This summary is
provided for convenience only and does not set forth completely all material
features of the Merger. This summary should be read in conjunction with and is
qualified in its entirety by the more detailed information which is set forth
elsewhere in this Proxy Statement/Prospectus and the attached Exhibits or which
is incorporated herein by reference.
The KHG Special Meeting
-----------------------
A Special Meeting of the shareholders of KHG will be held on January 23,February 17,
1998, at _______ a.m.2:00 p.m., local time, at ____________________________________Quality Inn Lebanon Valley, 625 Quentin Road,
Lebanon, Pennsylvania. Only those shareholders of record at the close of
business on _____________, 1997,January 13, 1998, will be entitled to receive notice of and to vote
at the meeting. As of the record date,December 31, 1997, there were outstanding 3,966,2493,955,583 shares
of the common stock, par value $5.00 per share, of KHG ("KHG Common Stock"),
each of which is entitled to one vote. See GENERAL INFORMATION--SPECIAL MEETING
OF KHG SHAREHOLDERS.
Purpose of the Meeting
----------------------
The shareholders of KHG will be asked at the Special Meeting to consider
and vote upon a proposal to approve and adopt the Merger Agreement, dated August
15, 1997 (the "Merger Agreement") between FFC and KHG, under the terms of which
(i) KHG will be merged with and into FFC, (ii) FFC will survive the Merger, and
(iii) each of the outstanding shares of KHG Common Stock, par value $5.00 per
share, will be converted into 1.83 (the "Conversion Ratio") shares of the common
stock of FFC, par value $2.50 per share ("FFC Common Stock").
On February 28, 1997, FFC completed the previously announced acquisition of
The Woodstown National Bank & Trust Company ("WNB"), and on August 31, 1997, FFC
completed the previously announced acquisition of The Peoples Bank of Elkton
("PBE"). Each transaction was accounted for as a pooling of interest.interests. All of
the financial information contained herein has been restated to reflect the
financial conditions and results of operations of WNB and PBE. In addition, all
pro forma and FFC historical per share information have been adjusted to reflect
a ten percent stock dividend paid by FFC on June 13, 1997. See THE MERGER. The
Merger Agreement, without exhibits or schedules, is attached as Exhibit A to
this Proxy Statement/Prospectus.
The Parties
-----------
Fulton Financial Corporation: Fulton Financial Corporation is a
----------------------------
Pennsylvania business corporation and a registered bank holding company that
maintains its headquarters in Lancaster, Pennsylvania. As a bank holding
company, FFC engages in a general commercial and retail banking and trust
business, and also in related financial businesses, through its fifteen
directly-held bank and nonbank subsidiaries. FFC's bank subsidiaries currently
operate eighty-six banking offices in Pennsylvania, sixteen banking offices in
Maryland, seven banking offices in Delaware, and fourteen banking offices in New
Jersey. As of September 30, 1997, FFC had consolidated total assets of
approximately $4.4 billion.
The principal assets of FFC are the following eleven wholly-owned bank
subsidiaries, each of which is a bank whose deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"): (i) Fulton Bank, a Pennsylvania bank
and trust company which is not a member of the Federal Reserve System, (ii)
Farmers Trust Bank, a Pennsylvania bank and trust company which is a member of
the Federal Reserve System, (iii) Swineford National Bank, a national banking
association which is a member of the Federal Reserve System, (iv) Lafayette
Bank, a Pennsylvania bank and trust
1
company which is not a member of the Federal Reserve System, (v) FNB Bank,
National Association, a national banking association which is a member of the
Federal Reserve System, (vi) Great Valley Savings Bank, a Pennsylvania stock
savings bank which is not a member of the Federal Reserve System, (vii)
Hagerstown Trust Company, a Maryland trust company which is not a member of the
Federal Reserve System, (viii) Delaware National Bank, a national banking
association which is a member of the Federal Reserve System, (ix) The Bank of
Gloucester County, a New Jersey bank which is not a member of the Federal
Reserve System, (x) The Woodstown National Bank & Trust Company, a national
banking association which is a member of the Federal Reserve System, and (xi)
The Peoples Bank of Elkton, a Maryland bank which is not a member of the Federal
Reserve System. In addition, FFC has four wholly-owned nonbank direct
subsidiaries: (1) Fulton Financial Realty Company, which holds title to or
leases certain properties upon which facilities of Fulton Bank and Farmers Trust
Bank are located, (2) Fulton Life Insurance Company, which engages in the
business of reinsuring credit life, accident and health insurance that is
directly related to extensions of credit by FFC's bank subsidiaries, (3) Central
Pennsylvania Financial Corp., which holds certain limited partnership interests
in low and moderate income housing projects and certain subsidiaries which, in
turn, hold either interests in real estate (these subsidiaries are, for the most
part, inactive, in the process of liquidation and immaterial to FFC) or
securities, and (4) FFC Management, Inc., which holds certain securities.
The principal executive offices of FFC are located at One Penn Square, P.O.
Box 4887, Lancaster, Pennsylvania 17604, and FFC's telephone number is (717)
291-2411.
Keystone Heritage Group, Inc.: Keystone Heritage Group, Inc. ("KHG") is a
-----------------------------
Pennsylvania business corporation and one-bank holding company registered under
the Bank Holding Company Act of 1956, as amended, that maintains its
headquarters in Lebanon, Pennsylvania. KHG's sole banking subsidiary is Lebanon
Valley National Bank ("LVNB"), which is a national banking association and is a
member of the Federal Reserve System and whose deposits are insured by the FDIC.
As of September 30, 1997, KHG had total assets of approximately $646 million,
and LVNB held total deposits of approximately $548 million. In addition, KHG has
one direct, wholly-owned subsidiary, Keystone Heritage Life Insurance
Corporation ("KHLIC"), an Arizona insurance company which engages in the
business of reinsuring credit life, accident and health insurance that is
directly related to extensions of credit by LVNB.
The principal executive offices of KHG are located at 555 Willow Street,
Lebanon, Pennsylvania 17046, and KHG's telephone number is (717) 274-6800.
Required Vote
-------------
The affirmative vote of shareholders holding two-thirds of the issued and
outstanding shares of KHG Common Stock given at a duly convened meeting of the
shareholders of KHG is required in order to approve the Merger Agreement. As of
February,December 31, 1997, the directors and executive officers of KHG and their
affiliates owned beneficially approximately 223,376235,752 of the outstanding shares of
KHG Common Stock. It is anticipated that the executive officers and directors of
KHG will vote (in their respective capacities as shareholders of KHG) their
shares of KHG Common Stock in favor of the proposal to adopt the Merger
Agreement. As of September 30, 1997, the directors and executive officers of FFC
and their affiliates owned beneficially approximately 1,833 shares of KHG Common
Stock. FFC owns 2,666 shares of KHG Common Stock in its portfolio. See GENERAL
INFORMATION--SPECIAL MEETING OF KHG SHAREHOLDERS--Shares Outstanding and
Principal Holders Thereof; and INFORMATION CONCERNING KEYSTONE HERITAGE GROUP,
INC.
2
Terms of the Merger
-------------------
Under the terms of the Merger Agreement: (i) KHG will be merged with and
into FFC, (ii) FFC will survive the Merger, and (iii) each of the outstanding
shares of KHG Common Stock will be converted into 1.83 shares of FFC Common
Stock. KHG's shareholders will receive cash in lieu of fractional shares of FFC
Common Stock. See THE MERGER.
Conversion and Exchange of Shares of KHG Common Stock
-----------------------------------------------------
On the effective date of the Merger (the "Effective Date"), which is
expected to occur during the first or second quarter of 1998, each share of KHG
Common Stock then issued and outstanding will be converted into the right to
receive 1.83 shares of FFC Common Stock.
The Conversion Ratio is subject to adjustment in the event of a stock
dividend or similar transaction involving FFC Common Stock prior to the
Effective Date. No fractional shares of FFC Common Stock will be issued in
connection with the Merger. In lieu of the issuance of any fractional share to
which any former KHG shareholder would otherwise be entitled, each such former
shareholder of KHG will receive in cash an amount equal to the fair market value
of his or her fractional interest, which shall be determined by multiplying such
fraction by the Closing Market Price. The Closing Market Price is defined in the
Merger Agreement as the average of the per share closing bid and asked prices
for FFC Common Stock, rounded up to the nearest $.125, for the ten (10) trading
days immediately preceding the date which is two (2) business days before the
Effective Date of the Merger, as reported on the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). See THE MERGER.
Each former shareholder of KHG will be required to surrender to FFC the
certificates representing KHG Common Stock held by him or her in accordance with
the instructions which will be sent to him or her immediately following the
Effective Date. Upon proper surrender of his or her KHG Common Stock
certificates, each such former shareholder of KHG will be promptly issued a
stock certificate representing the whole number of shares of FFC Common Stock
into which such shareholder's shares of KHG Common Stock shall have been
converted, together with a check in the amount of any cash, without interest, to
which he or she is entitled in lieu of the issuance of a fractional share. FFC
may withhold dividends payable after the Effective Date to any former
shareholder of KHG who has received written instructions from FFC but has not at
that time surrendered his or her KHG Common Stock certificates. Any dividends so
withheld will be paid, without interest, to any such former shareholder of KHG
upon the proper surrender of his or her KHG Common Stock certificates. See THE
MERGER--Conversion and Exchange of Shares, and the Merger Agreement attached as
Exhibit A to this Proxy Statement/Prospectus. PLEASE DO NOT SEND ANY STOCK
CERTIFICATES AT THIS TIME.
Reasons for the Merger
----------------------
In early 1997, the Board of Directors of KHG determined to investigate
(i)
whether the interests of the shareholders of KHG were best served (i) by the
continuation of KHG as an independent institution, or (ii) by taking steps to
position KHG to be sold to another institution in two to three years, or (iii)
by seeking a sale of KHG to another institution immediately. The Board engaged
Danielson Associates Inc. ("Danielson Associates"), an investment banking firm
experienced in these matters, to evaluate the situation and to make a
recommendation to the Board.
Based on the subsequent recommendation of Danielson Associates, KHG's Board
of Directors concluded that, in the rapidly changing and increasingly
competitive market for financial services, it would be preferable to be part of
a larger banking organization with more resources and a wider range of products
and services than those which KHG currently offers or could
3
reasonably expect to offer in the near future. After exploring possible
acquisition candidates, the Board of Directors concluded that, of the possible
acquirers, FFC provided the best overall benefit to the KHG shareholders and to
the communities it serves and to its employees. Through the Merger, KHG believes
its resources and its services to customers and communities can be expanded on
an accelerated timetable as compared to reliance solely on internal growth.
KHG's Board of Directors believes that FFC's greater resources will provide
expanded services to its customers and the communities it serves. In particular,
KHG believes FFC's strong small business services will further enhance KHG's
reputation in this area.
From a financial perspective, the KHG directors concluded that FFC's strong
record of financial performance would give KHG shareholders a security issued by
a company with historically strong financial performance. The directors also
concluded that the premium offered by FFC over the market value of shares of KHG
Common Stock at the time the Merger Agreement was announced in August reflected
an appropriate recognition by FFC of the value of the KHG business. Based on the
agreed upon exchange ratio of 1.83 shares of FFC Common Stock for each share of
KHG Common Stock, and the market prices of KHG shares and FFC shares at August
14, 1997, each share of KHG would be exchanged for shares of FFC Common Stock
having a market value of $52.84. Immediately prior to the announcement of the
agreement, the market price for a share of KHG Common Stock was $36.75. This
represented a premium of 44% over the then market price. Since August 15, 1997,
the market price of KHG Common Stock has risen to reflect the FFC Merger
Agreement. Based on the market value of FFC Common Stock on December ___,31, 1997,
the shares of FFC Common Stock to be issued would have a value of $____$59.48 for
each share of KHG Common Stock.
The directors also evaluated the effect of the Merger on employees and the
communities served by KHG. As discussed elsewhere in this Proxy
Statement/Prospectus, FFC expects to continue to operate a majority of the
branches of LVNB (under its new name of Lebanon Valley Farmers Bank after merger
with Farmers Trust Bank, a subsidiary of FFC, or as branches of Fulton Bank,
another FFC subsidiary), and has agreed to use its best efforts to retain all
present full-time employees of LVNB.
Finally, in considering the Merger, KHG's Board of Directors considered,
among other things, the other terms of and the legal structure of the
transaction, and the opinion of its financial advisor that the transaction was
fair, from a financial point of view, to KHG shareholders. More information
about the matters considered by the board and about the analysis of Danielson
Associates is contained in THE MERGER--Background of the Merger; Changes in the
Banking Industry; Benefits of the Merger to KHG and FFC; Opinion of Financial
Adviser to KHG; and Recommendations of the KHG Board.
Based on these considerations, the Board of Directors of KHG approved the
Merger as in the best interests of the KHG shareholders, and recommends that
shareholders vote FOR the transaction.
Opinion of KHG's Financial Advisor
----------------------------------
KHG engaged Danielson Associates, Inc. ("Danielson Associates") to act as
its financial advisor for the purpose of evaluating the financial terms of the
Merger. Danielson Associates has delivered to KHG's Board of Directors an
opinion stating that as of the date of the opinion, the financial terms of the
Merger are fair to the shareholders of KHG from a financial point of view. A
copy of Danielson Associates' opinion is attached to this Proxy
Statement/Prospectus as Exhibit B and should be read
4
in its entirety with respect to the assumptions made and the other matters
considered by Danielson Associates in rendering its opinion. See THE MERGER--
Opinion of Financial Advisor to KHG.
Management and Operations Following the Merger
----------------------------------------------
Under the terms of the Merger Agreement, KHG will merge with and into FFC,
FFC will survive the Merger, and LVNB will become a wholly-owned banking
subsidiary of FFC. Simultaneously with the effectiveness of the Merger (or
shortly thereafter), FFC anticipates effecting the following transactions (the
"Restructuring"): (i) LVNB and Farmers Trust Bank ("Farmers"), a wholly-owned
FFC subsidiary, will merge; (ii) the surviving bank in such a merger, operating
under the name "Lebanon Valley Farmers Bank", would immediately transfer branch
offices of LVNB located in Dauphin and Lancaster Counties and the assets and
deposit liabilities related to such branch offices to Fulton Bank ("FB", another
wholly-owned FFC subsidiary); (iii) subject to regulatory considerations and/or
to the extent determined advisable by FFC, FFC may close or sell existing
branches of LVNB, Farmers, FB or other subsidiaries of FFC which may overlap
geographically with other branches of FFC's subsidiary banks. Lebanon Valley
Farmers Bank, as a wholly-owned FFC subsidiary, would operate all Lebanon County
branch offices now operated by LVNB and Farmers, and in addition, the Womelsdorf
and Pine Grove branches of LVNB; and (iv) Fulton Life Insurance Company ("FLIC")
and KHLIC will merge. FFC is filing applications for approval of the
Restructuring with the Federal Reserve Bank of Philadelphia, the Federal Deposit
Insurance Corporation, the Pennsylvania Banking Department and the Arizona
Insurance Department. See THE MERGER -- Management and Operations following the
Merger.
Following the Merger, the Board of Directors of FFC will consist of (i) the
same persons who are members of the Board of Directors of FFC immediately before
the Merger, each of whom will serve until his or her successor is elected and
has qualified, and (ii) two of KHG's current directors (designated, subject to
the reasonable approval of FFC, by vote of KHG's Board of Directors prior to the
Effective Date) who will be appointed to FFC's Board of Directors following the
Merger. It is currently anticipated that KHG's initial designees to FFC's Board
of Directors will be Charles V. Henry, III and Donald W. Lesher, Jr., current
directors of KHG.
For a period from the Effective Date through a date determined by FFC (not
to be before five years after the Effective Date), FFC shall offer appointments
to all present directors of LVNB to the board of directors of Lebanon Valley
Farmers Bank who indicate their desire to continue to serve.
Effective Date
--------------
The Merger will become effective on the filing of the Articles of Merger
with the Pennsylvania Department of State, or on such later date specified in
the Articles of Merger, and will occur as soon as reasonably practicable after
all applicable conditions to the consummation of the Merger have been met or
waived. FFC and KHG presently intend to consummate the Merger during the first
or second quarter of 1998, assuming that KHG's shareholders adopt the Merger
Agreement, all required regulatory approvals are obtained, all applicable
waiting periods have expired, and all other conditions have been met or waived
as of the closing of the Merger. See THE MERGER--Effective Date of the Merger.
5
Termination of the Merger Agreement
-----------------------------------
Either FFC or KHG may terminate the Merger Agreement and cancel the Merger
if (i) the other party has committed a material breach of any representation,
warranty or material failure to comply with any covenant set forth in the Merger
Agreement and such breach has not been cured within thirty (30) days after
receiving written notice thereof, or (ii) all applicable conditions have not
been satisfied by August 31, 1998. KHG may also terminate the Merger Agreement
if the Closing Market Price (as adjusted appropriately for events such as stock
dividend, etc. and assuming the Effective Date is thirty (30) days after receipt
of the last required approval) is both (a) less than or equal to $23.82 per
share (82.5% of the closing bid price of FFC Common Stock on August 14, 1997)
and (b) less than or equal to an amount per share equal to (i) $28.875 (the
closing bid price of FFC Common Stock on August 14, 1997) multiplied by (ii)
0.825 multiplied by (iii) the quotient obtained by dividing the average NASDAQ
Bank Index for the Price Determination Period by the NASDAQ Bank Index on August
14, 1997 (the "Market Test"). Thus, for example, assuming the average NASDAQ
Bank Index for the Price Determination Period reflects a decline of 10% from
August 14,1997, (a) would be $23.82 and (b) would be $21.44 ($28.875 x 0.825 x
0.90) and the Closing Market Price would be required to be $21.44 or lower for
KHG to terminate the Merger Agreement. FFC and KHG may also terminate the Merger
Agreement and cancel the Merger by mutual consent in writing. See THE MERGER--Conditions,MERGER--
Conditions, Amendment and Termination.
Comparison of Shareholder Rights
--------------------------------
Upon consummation of the Merger, the shareholders of KHG will become
shareholders of FFC. There are differences between the rights of holders of KHG
Common Stock and FFC Common Stock. These differences arise from differences
between the Articles of Incorporation and Bylaws of KHG and the Articles of
Incorporation and Bylaws of FFC. The material differences between KHG Common
Stock and FFC Common Stock include the following: (i) FFC has adopted a
Shareholder Rights Plan, which provides FFC's shareholders with certain stock-
related rights in the event of a hostile takeover, but may also have the effect
of discouraging such a takeover, while KHG has not adopted any such plan; (ii)
FFC Common Stock is registered under the 1934 Act and is traded on NASDAQ, while
KHG Common Stock is registered under the 1934 Act and is traded on the American
Stock Exchange; and (iii) the Articles of Incorporation of FFC provide for
substantial amounts of authorized but unissued capital stock, including a class
of preferred stock whose rights and privileges may be determined prior to
issuance by FFC's Board of Directors, while KHG authorized capital stock only
includes common stock. See INFORMATION CONCERNING FULTON FINANCIAL CORPORATION
AND DESCRIPTION OF FFC COMMON STOCK--Antitakeover Provisions; Comparison of
Shareholder Rights.
Restrictions on Resales by Affiliates
-------------------------------------
The resale of shares of FFC Common Stock received in connection with the
Merger by persons who are executive officers, directors or ten percent
shareholders of KHG will be subject to certain restrictions. See THE MERGER--
Restrictions on Resale of FFC Common Stock Held by Affiliates of KHG.
Federal Income Tax Consequences
-------------------------------
The Merger is structured to qualify as a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended. Accordingly, no
taxable gain or loss will be recognized by the shareholders of KHG upon their
receipt of FFC Common Stock in exchange for KHG Common Stock, except
6
to the extent that any shareholders of KHG receive cash in lieu of the issuance
of fractional shares of FFC Common Stock. An opinion has been provided by
Barley, Snyder, Senft & Cohen, LLP, counsel for FFC, confirming these and
certain other federal income tax consequences of the Merger. However, each
shareholder of KHG is urged to consult his or her own tax advisor concerning the
particular tax consequences of the Merger as they affect his or her individual
circumstances. See THE MERGER--Federal Income Tax Consequences.
Accounting Treatment
--------------------
Consummation of the Merger is subject to the condition that the Merger can
be treated as a pooling-of-interests for financial accounting purposes. FFC
currently intends to exercise its right to cancel the Merger if such condition
could not be satisfied. Neither FFC nor KHG is presently aware of any reason why
the Merger would not qualify for pooling-of-interests accounting treatment. See
THE MERGER--Accounting Treatment.
Limitations on Negotiations; Warrant Granted to FFC
---------------------------------------------------
The Merger Agreement provides that KHG shall not, nor shall it permit any
officer, director, employee, agent, consultant or representative to: (a)
solicit, initiate or encourage any proposal for a merger with or other
acquisition of KHG, or any material portion of its assets or properties, with or
by any person other than FFC; or (b) cooperate with, or furnish any non-public
information concerning KHG to, any person in connection with such a proposal;
provided, however, that the KHG Board of Directors shall be free to take such
action as the Board of Directors determines, in good faith and after
consultation with outside counsel, is not legally inconsistent with its
fiduciary duty.
Following the execution of the Merger Agreement, KHG and FFC entered into a
Warrant Agreement, dated August 15, 1997 (the "Warrant Agreement"), a copy of
which is attached hereto as Exhibit C. Pursuant to the Warrant Agreement, KHG
has issued to FFC a warrant (the "Warrant") to purchase an aggregate of up to
981,740 fully paid and non-assessable shares of KHG Common Stock, representing
approximately 19.9% of the issued and outstanding shares of the KHG Common Stock
after giving effect to the exercise of the Warrant, at a price per share equal
to $36.75, subject to adjustment as provided for in the Warrant Agreement and
the Warrant. The Warrant is exercisable only upon the occurrence of specified
events relating generally to the support by KHG of a proposal to acquire KHG by
a party other than FFC, an acquisition by a third party or group of 25% or more
of the outstanding shares of KHG Common Stock, or the failure of KHG's
shareholders to approve the Merger following the announcement by any party other
than FFC of an offer or proposal to acquire 25% or more of the outstanding
shares of KHG Common Stock, or to acquire, merge or consolidate with KHG, or to
purchase all or substantially all of LVNB's assets and, within ten business days
after such announcement, the Board of Directors of KHG either fails to recommend
against acceptance of such offer by KHG's shareholders or takes no position with
respect thereto. To the knowledge of KHG, no event giving rise to the right to
exercise the Warrant has occurred as of the date of this Proxy Statement/
Prospectus. The execution of the Warrant Agreement was required by FFC as a
condition to its execution of the Merger Agreement, and the effect of the
Warrant Agreement is to increase the likelihood that the Merger will occur by
making it more difficult and expensive for another party to acquire KHG. See THE
MERGER--Warrant Agreement.
The foregoing provisions may have the effect of discouraging competing
offers to acquire or merge with KHG.
7
Conditions and Amendments
-------------------------
Consummation of the Merger is subject to various conditions and
contingencies, including, among others, approval by the shareholders of KHG,
approval by the Federal Reserve Board, approval by the Pennsylvania Department
of Banking, notice to the Maryland State Bank Commissioner, and the absence of
an injunction issued by a court of competent jurisdiction enjoining the
performance by FFC or KHG of any of their obligations under the Merger
Agreement.
To the extent permitted by law, the Merger Agreement may be amended at any
time before the Effective Date by a written instrument duly authorized, executed
and delivered by FFC and KHG; provided, however, that any amendment to the
Conversion Ratio shall not take effect until such amendment has been approved,
adopted or ratified by the shareholders of KHG in accordance with applicable law
(other than pursuant to the terms of the Merger Agreement in the event of a
stock dividend or similar transaction by FFC). See THE MERGER--Conditions,
Amendment and Termination.
Comparative Stock Prices
------------------------
On August 14, 1997, the last trading day before public announcement of the
Merger Agreement, the per share closing bid price for FFC Common Stock was
$28.875 as reported on the NASDAQ National Market System ("NASDAQ"). Based on
such closing bid price for such date and the Conversion Ratio of 1.83 shares of
FFC Common Stock for each share of KHG Common Stock, the pro forma value of the
shares of FFC Common Stock to be received in exchange for each share of KHG
Common Stock was $52.84.
On August 14, 1997, the last trading day before public announcement of the
Merger Agreement, the per share closing bid price for KHG Common Stock was
$36.75 as reported on the American Stock Exchange.
The foregoing historical and pro forma equivalent per share market
information is summarized in the following table:
Pro Forma
Historical Equivalent
Price Per Share Price Per Share/1/
--------------- ---------------
FFC Common Stock
- ----------------
08/14/97 Bid Price $28.88 $ -
08/14/97 Asked Price $29.38 $ -
KHG Common Stock
- ----------------
08/14/97 Bid Price $36.75 $ 52.84
08/14/97 Asked Price $36.75 $ 53.76
- ------------------------------------
/1/ Based upon the product of the Conversion Ratio (1.83) and the closing bid
and asked prices of FFC Common Stock on August 14, 1997.
The closing bid and asked quotations on NASDAQ for FFC Common Stock on
______________,December 31, 1997, were $______$32.50 and $_______,$32.88, respectively, per share. Based on
such closing bid price for such date and the Conversion Ratio of 1.83 shares of
FFC Common Stock for each share of KHG Common Stock, the pro forma value of the
shares of FFC Common Stock to be received in exchange
8
for each share of KHG Common Stock was $________.$59.48. More detailed information
concerning comparative stock prices is set forth elsewhere in this Proxy
Statement/Prospectus. See COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED
SHAREHOLDER MATTERS.
Selected Historical and Pro Forma Combined Per Share Data
---------------------------------------------------------
The following tables set forth, at the dates and for the periods indicated,
financial information relating to FFC Common Stock and KHG Common Stock on a per
share historical and pro forma combined basis. The pro forma and equivalent per
share information is presented on the basis of an exchange ratio of 1.83 shares
of FFC Common Stock for each share of KHG Common Stock. On February 28, 1997,
FFC completed the previously announced acquisition of The Woodstown National
Bank & Trust Company ("WNB"), and on August 31, 1997, FFC completed the
previously announced acquisition of The Peoples Bank of Elkton ("PBE"). Each
transaction was accounted for as a pooling of interests. All of the financial
information contained herein has been restated to reflect the financial
condition and results of operations of WNB and PBE. In addition, all pro forma
and historical per share information have been adjusted to reflect a ten percent
stock dividend paid by FFC on June 13, 1997.
The information set forth in the tables below should be read in conjunction
with the pro forma combined financial information, including the notes thereto,
set forth elsewhere in this Proxy Statement/Prospectus, the financial statements
of FFC, including the notes thereto, which are incorporated herein by reference,
and the financial statements of KHG, including the notes thereto, which are
incorporated herein by reference. See PRO FORMA COMBINED FINANCIAL INFORMATION;
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.
9
Selected Historical and Pro Forma
Combined Per Share Data (A)
As of or for Nine Months Ended September 30
-------------------------------------------
FULTON FINANCIAL CORPORATION (FFC)
- --------------------------------------------------------------------- 1997 1996
---------------------------------------------------------
Historical Per Common Share:
- ---------------------------
Average Shares Outstanding 40,548,961 40,355,919
Book Value $11.28 $10.10NA
Cash Dividends $0.499 $0.441
Net Income from continuing operations $1.19 $1.02
FFC, KHG Combined Pro Forma Per Common Share:
- -------------------------------------------------------------------------------------------
Average Shares Outstanding 47,790,421 47,790,916
Book Value $10.98 $9.83NA
Cash Dividends $0.485 $0.425$0.499 $0.441
Net Income from continuing operations $1.17 $1.00
- -----------------
- ------------------
(A) The above combined pro forma per share equivalent information is based on
average shares outstanding during the period except for the book value per
share which is based on period end shares outstanding. The number of shares
in each case has been adjusted for stock dividends and stock splits by each
institution through the periods. See also the Pro forma Combined Financial
Statements and the Notes thereto beginning on page 42.
10
Selected Historical and Pro Forma Combined
Per Share Data (A)
FULTON FINANCIAL CORPORATION (FFC)
- ----------------------------------
As of or for the Year Ended December 31
--------------------------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
1993 1992
--------------------------------------------------------------------------------------------------------------------------------------------------------
Historical Per Common Share:
- ---------------------------
Average Shares Outstanding 40,371,748 40,333,127 40,085,339
39,748,350 39,355,667
Book Value $10.39 $9.58 $8.71 $8.19 $7.39NA NA
Cash Dividends $0.594 $0.502 $0.444
$0.405 $0.338Net Income From Operations:
Income Before Cumulative
Effect of Changes in
Accounting Principlesfrom Continuing Operations $1.38 $1.28 $1.16 $1.05 $0.78
Cumulative Effect of Changes
in Accounting Principles - - - ($0.09) -
Net Income $1.38 $1.28 $1.16 $0.96 $0.78
FFC, KHG Combined Pro Forma
- ---------------------------
Per Common Share:
----------------- ------------------
Average Shares Outstanding 47,784,756 47,773,026 47,518,098
47,176,078 46,757,184
Book Value $10.11 $9.32 $8.45 $7.96 $7.22NA NA
Cash Dividends $0.573 $0.484 $0.428 $0.395 $0.338$0.594 $0.502 $0.444
Net Income From Operations:
Income Before Cumulative
Effect of Changes in
Accounting Principlesfrom Continuing Operations $1.35 $1.24 $1.12 $1.00 $0.77
Cumulative Effect of
Changes in Accounting - - - ($0.07) -
Principles
Net Income $1.35 $1.24 $1.12 $0.92 $0.77
(A) The above combined pro forma per share information is based on average
shares outstanding during the period except for the book value per share
which is based on period end shares outstanding. The number of shares in
each case has been adjusted for stock dividends and stock splits by each
institution through the periods. See also the pro forma combined financial
statements and the notes thereto beginning on page 42.
11
Selected Historical and Pro Forma Combined Per Share Data (A)
As of or for the Nine Months Ended September 30
-----------------------------------------------------------------------------------------------------------
Keystone Heritage Group, Inc. (KHG) 1997 1996
- ----------------------------------- -----------------------------------------------------------------------------------------------------------
Historical Per Common Share:
Average Shares Outstanding 3,959,748 4,065,506
Book Value $16.99 $15.28NA
Cash Dividends $0.750 $0.621
Net Income from Continuing Operations $1.94 $1.55
KHG, FFC CombinedEquivalent Pro Formaforma Per Common Share:
Book Value $20.09 $17.99NA
Cash Dividends $0.89 $0.780.913 $0.807
Net Income from Continuing Operations $2.14 $1.82$1.83
(A) The above combined pro forma per-share equivalent information is based on
average shares outstanding during the period except for the book value per
share which is based on period end shares outstanding. The number of shares
in each case has been adjusted for stock dividends and stock splits by each
institution through the periods. The equivalent pro forma per common share
information is derived by applying the exchange ratio of 1.83 shares of FFC
$2.50 par value common stock for each share of KHG $5.00 par value common
stock to the FFC, KHG combined pro forma per common share information.
12
Selected Historical and Pro Forma Combined Per Share Data (A)
As of or for the Years Ended December 31
------------------------------------------------------------------------------------------------------------------------------------------------------
Keystone Heritage Group, Inc. 1996 1995 1994
1993 1992
- ----------------------------- ------------------------------------------------------------------------------------------------------------------------------
Historical Per Common Share:
Average Shares Outstanding 4,053,490 4,066,936 4,061,617
4,058,868 4,044,545
Book Value $15.65 $14.46 $12.83 $12.27 $11.51NA NA
Cash Dividends $0.841 $0.705 $0.633
$0.624 $0.624Net Income From Operations:
Income Before Cumulative Effect Of
Changes In Accounting Principlesfrom Continuing Operations $2.15 $1.88 $1.67
$1.29 $1.26
Cumulative Effect of Changes in
Accounting Principles - - - ($0.05) -
Net Income $2.15 $1.88 $1.67 $1.24 $1.26
KHG, FFC CombinedEquivalent Pro Formaforma Per Common Share:
Book Value $18.50 $17.05 $15.46 $14.56 $13.21NA NA
Cash Dividends $1.05 $0.89 $0.78 $0.72 $0.621.087 $0.919 $0.813
Net Income From Operations:
Income Before Cumulative Effect Of
Changes In Accounting Principlesfrom Continuing Operations $2.47 $2.27 $2.05 $1.81 $1.40
Cumulative Effect of Changes in
Accounting Principles - - - ($0.13) -
Net Income $2.47 $2.27 $2.05 $1.68 $1.40
(A) The above combined pro forma per-share equivalent information is based on
average shares outstanding during the period except for the book value per
share which is based on period end shares outstanding. The number of shares
in each case has been adjusted for stock dividends and stock splits by each
institution through the periods. The equivalent pro forma per common share
information is derived by applying the exchange ratio of 1.83 shares of FFC
$2.50 par value common stock for each share of KHG $5.00 par value common
stock to the FFC, KHG combined pro forma per common share information.
13
Selected Historical Financial Data
----------------------------------
The following tables present selected unaudited historical financial data
for FFC and KHG. The following information should be read in conjunction with
the pro forma combined financial information, including the notes thereto, set
forth elsewhere in this Proxy Statement/Prospectus, the financial statements of
FFC, including the notes thereto, which are incorporated herein by reference and
the financial statements of KHG, including the notes thereto, which are
incorporated herein by reference. See PRO FORMA COMBINED FINANCIAL INFORMATION;
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.
14
Fulton Financial Corporation
Selected Historical Financial Data
(In Thousands)
As of or for the Nine Months Ended September 30
------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------
Summary of Operations -------------------------------------------------------------------------1997 1996
- --------------------- 1997 1996
------------------------------------------------------------------------------------------------------------------------
Net interest income $135,526 $125,873$ 135,526 $ 125,873
Provision for loan losses 5,389 3,442
------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 130,137 122,431
Other income 30,838 25,266
Other expenses 90,988 88,744
Income taxes 21,703 17,666
------------------------------------------------------------------------------------------------------------------------
Net income $ 48,284 $ 41,287
========================================================================================================================
AVERAGE BALANCES
- -------------------------------------
Total assets 4,197,288 3,923,685
Investment securities 783,969 823,481
Loans and leases, net of unearned income 3,129,086 2,811,590
Deposits 3,449,856 3,267,484
Long-term debt 58,284 29,624
Shareholders' equity 435,424 397,391
ENDING BALANCES
- ---------------
Total assets 4,412,722 4,088,145
Long-term debt 56,613 23,074
15
Fulton Financial Corporation
Selected Historical Financial Data
(In Thousands)
As of or for the Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------
Summary of Operations
- ------------------------------------------------------------------------------------------------------
Summary of Operations
- ---------------------
Net interest income $169,672 $157,014 $144,984 $133,016 $123,010
Provision for loan losses 5,561 3,998 3,074 6,311 16,234
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 164,111 153,016 141,910 126,705 106,776
Other income 34,983 31,691 28,018 31,508 26,929
Other expenses 119,883 112,878 105,616 102,101 93,602
Income taxes 23,464 20,217 17,747 14,310 9,255
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 55,747 51,612 46,565 41,802 30,848
Cumulative effect of changes in
accounting principles 0 0 0 (3,457) (131)
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income $55,747 $51,612 $46,565 $38,345 $30,717
=======================================================================================================================================================================
AVERAGE BALANCES
- ----------------------------------------------
Total assets 3,960,409 3,706,137 3,385,613 3,165,658 3,039,765
Investment securities 807,131 819,718 867,761 880,392 772,197
Loans and leases, net of unearned income 2,854,139 2,612,420 2,255,614 2,050,988 1,957,994
Deposits 3,282,689 3,109,287 2,833,573 2,740,007 2,670,254
Long-term debt 31,407 34,643 20,750 12,761 15,636
Shareholders' equity 401,072 366,388 336,312 303,827 284,219
ENDING BALANCES
- ----------------------------------------------
Total assets 4,111,323 3,851,897 3,645,453 3,239,002 3,173,517
Long-term debt 51,560 37,689 30,283 16,051 16,764
16
Keystone Heritage Group, Inc.
Selected Historical Financial Data
(In Thousands)
As of or for the Nine Months Ended September 30
------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- -------------------------------
---------------------
Net interest income $20,167 $18,807
Provision for loan losses 0 0
------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 20,167 18,807
Other income 5,643 4,265
Other expenses 14,717 13,977
Income taxes 3,393 2,795
------------------------------------------------------------------------------------------------
Net income $7,700 $6,300
================================================================================================
AVERAGE BALANCES
- ----------------------------------------------------
Total assets 623,339 574,569
Investment securities 147,650 138,382
Loans and leases, net of unearned income 436,150 403,776
Deposits 532,408 485,357
Long-term debt 6,017 9,620
Shareholders' equity 63,992 60,342
ENDING BALANCES
- ----------------------------------------------------
Total assets 646,336 586,814
Long-term debt 3,388 4,417
17
Keystone Heritage Group, Inc.
Selected Historical Financial Data
(In Thousands)
As of or for the Year Ended December 31
----------------------------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ------------------------------------------------------
Net interest income $25,480 $24,163 $23,164 $21,886 $21,716
Provision for loan losses 0 0 300 2,400 3,600
----------------------------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 25,480 24,163 22,864 19,486 18,116
Other income 5,931 5,411 4,819 5,084 4,366
Other expenses 18,812 18,389 17,633 17,213 15,400
Income taxes 3,879 3,528 3,283 2,115 1,977
----------------------------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 8,720 7,657 6,767 5,242 5,105
Cumulative effect of changes in
accounting principles 0 0 0 (200) 0
----------------------------------------------------------------------------------------------------------------------------------------------------------
Net income $ 8,720 $ 7,657 $ 6,767 $ 5,042 $ 5,105
=====================================================================================$8,720 $7,657 $6,767 $5,042 $5,105
=====================================================================
AVERAGE BALANCES
- ------------------------------------------------------
Total assets 580,456 556,793 535,148 535,364 536,233
Investment securities 136,734 138,593 130,574 126,606 123,146
Loans and leases, net of unearned income 409,049 381,939 371,467 367,898 375,478
Deposits 491,503 471,256 451,885 456,420 462,813
Long-term debt 8,763 11,636 10,259 10,551 5,970
Shareholders' equity 60,738 55,300 50,910 47,689 45,108
ENDING BALANCES
- ------------------------------------------------------
Total assets 616,307 577,777 548,194 533,774 540,038
Long-term debt 6,438 14,009 9,926 10,325 10,371
18
GENERAL INFORMATION--SPECIALINFORMATION -- SPECIAL MEETING OF KHG SHAREHOLDERS
------------------------------------------------------------------------------------------------------------------
Introduction
- ------------
This Proxy Statement/Prospectus is being furnished to the holders of KHG
Common Stock in connection with the solicitation by KHG's Board of Directors of
proxies to be voted at the Special Meeting to be held on January 23, 1998. The
purpose of the meeting is to consider and vote upon a proposal adopted by the
Board of Directors of KHG to approve and adopt the Merger Agreement between FFC
and KHG, the terms of which are described herein.
All information set forth in this Proxy Statement/Prospectus which relates
to FFC has been provided or verified by FFC, and all information which relates
to KHG has been provided or verified by KHG.
Date, Time and Place of Special Meeting
- ---------------------------------------
The Special Meeting of the shareholders of KHG will be held on
January 23,February 17, 1998, at ______ a.m.2:00 p.m., local time, at ____________________________.Quality Inn Lebanon Valley, 625
Quentin Road, Lebanon, Pennsylvania.
Shareholders Entitled to Vote
- -----------------------------
The Board of Directors of KHG has fixed the close of business on
________,
1997,January 13, 1998, as the record date (the "Record Date") for the determination
of holders of KHG Common Stock entitled to receive notice of and to vote at the
Special Meeting.
Purpose of Meeting
- ------------------
The shareholders of KHG will be asked at the Special Meeting to consider and
vote upon: (i) a proposal to approve and adopt the Merger Agreement, and (ii)
such other matters as may properly be brought before the meeting and any
adjournments thereof, including without limitation, a motion to adjourn or
postpone the Special Meeting to another time and place for the purpose of
soliciting proxies in favor of the Merger Agreement or otherwise. A properly
signed and returned proxy which is voted against the Merger Agreement will not
be voted for a motion to adjourn or postpone the Special Meeting in order to
solicit additional votes to approve the Merger Agreement.
Solicitation of Proxies
- -----------------------
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies, in the accompanying form, by the Board of Directors of
KHG for use at the Special Meeting and at any adjournments thereof. The
expenses to be incurred in soliciting proxies will be borne by KHG. In addition
to the use of the mails, the directors, officers and employees of KHG may,
without additional compensation, solicit proxies personally or by telephone or
telegram.
Quorum and Required Vote
- ------------------------
Each share of KHG Common Stock is entitled to one vote on all matters
submitted to a vote of the shareholders. The holders of a majority of the
outstanding shares of KHG Common Stock, present either in person or by proxy,
will constitute a quorum for the transaction of business at the Special Meeting.
The inspectors of election will treat shares of KHG Common Stock represented by
a properly signed and returned proxy as present at the Special Meeting for
purposes of determining a quorum, without regard to whether the proxy is marked
as casting a vote or abstaining. Likewise, the inspectors of election will
treat shares of KHG Common Stock represented by "broker
19
non-votes" (i.e., shares of KHG Common Stock held in record name by brokers or
nominees as to which (i) instructions have not been received from the beneficial
owners or persons entitled to vote, (ii) the broker or nominee does not have
discretionary voting power under applicable rules of the National
19
Association of
Securities Dealers, Inc. or the instrument under which it serves in such
capacity, and (iii) over which the record holder has indicated on the proxy card
or otherwise notified KHG that it does not have authority to vote such shares on
that matter) as present for purposes of determining a quorum.
The affirmative vote of shareholders holding two-thirds of the issued and
outstanding shares of KHG Common Stock at the Special Meeting is required in
order to approve the Merger Agreement. Abstentions and broker non-votes will be
counted as shares of KHG Common Stock that are outstanding, but will not be
counted as votes in favor of adoption of the Merger Agreement. Consequently,
abstentions and broker non-votes will have the same effect as a vote against
adoption of the Merger Agreement.
Revocation and Voting of Proxies
- --------------------------------
The execution and return of the enclosed proxy form will not affect a
shareholder's right to attend the Special Meeting and to vote in person. Any
proxy given pursuant to this solicitation may be revoked at any time before the
proxy is voted at the Special Meeting, by (i) delivering notice of revocation or
a later-dated proxy to Albert B. Murry, President and Chief Executive Officer,
Keystone Heritage Group, Inc., 555 Willow Street, Lebanon, Pennsylvania 17046,
or (ii) appearing at the meeting and notifying the person in charge thereof that
the shareholder wishes to vote his or her shares of KHG Common Stock in person.
Unless revoked, any proxy given pursuant to this solicitation will be voted at
the Special Meeting in accordance with the instructions thereon of the
shareholder giving the proxy. In the absence of instructions, all proxies will
be voted FOR the proposal to approve the Merger Agreement between KHG and FFC.
Although the Board of Directors knows of no other business to be presented at
the Special Meeting, in the event that any other matters are properly brought
before the meeting and in the absence of instructions to the contrary, any proxy
given pursuant to this solicitation will be voted in accordance with the
recommendations of the Board of Directors of KHG.
Shares Outstanding and Principal Holders Thereof
- ------------------------------------------------
As of the close of business on the Record Date,December 31, 1997, KHG had outstanding
3,966,2493,955,583 shares of KHG Common Stock, which shares were held by ____1,350 holders of
record. KHG has no other stock issued or outstanding. There are 981,740 shares
of KHG Common Stock reserved for issuance upon exercise of the Warrant.
As of the Record Date,December 31, 1997, the directors and executive officers of KHG and
their affiliates owned beneficially a total of _________235,752 shares of KHG Common
Stock (representing approximately sevensix percent of such shares issued and
outstanding). The executive officers and each of the directors intend to vote
their shares in favor of the proposal to approve the Merger Agreement.
To the knowledge of KHG's management, as of the Record Date, no person owned
of record or beneficially more than five percent of the outstanding shares of
KHG Common Stock.
Interests of Certain Persons in Matters To Be Acted Upon
- --------------------------------------------------------
Except as described in this section, the directors and executive officers of
KHG have no substantial interest in the Merger, other than in their
20
capacity as shareholders of KHG. As shareholders, the directors and executive
officers of KHG will be entitled to receive FFC Common Stock in exchange for
their KHG Common Stock in the same proportion and on the same terms and of the
conditions as all other shareholders of KHG.
20
On the date of the Merger Agreement, KHG and its subsidiaries caused the
existing employment agreements with Albert B. Murry and Kurt A. Phillips (the
"KHG Senior Executives") to be terminated and entered into new employment
agreements (the "Employment Agreements") with the KHG Senior Executives. The
termination of the existing employment agreements and the replacement of such
agreements with the Employment Agreements shall become effective on the
Effective Date. KHG and its subsidiaries may not modify the terms of the
Employment Agreements without the prior written consent of FFC, and may not
create any new employment obligations related to the KHG Senior Executives.
Simultaneously with the effectiveness of the Merger, FFC anticipates
effecting a restructuring as follows: (i) LVNB and Farmers Trust Bank
("Farmers"), a wholly-owned FFC subsidiary, will merge; (ii) the surviving bank
in such merger, operating under the name "Lebanon Valley Farmers Bank", would
immediately transfer branch offices of LVNB located in Dauphin and Lancaster
Counties and the assets and deposit liabilities related to such branch offices
to Fulton Bank ("FB"), another wholly-owned FFC subsidiary; and (iii) subject to
regulatory considerations and/or to the extent determined advisable by FFC, FFC
may close or sell existing branches of LVNB, Farmers, FB or other subsidiaries
of FFC which may overlap geographically with other branches of FFC's subsidiary
banks. Lebanon Valley Farmers Bank, as a wholly-owned FFC subsidiary, would
operate all Lebanon County branch offices now operated by LVNB and Farmers, and,
in addition, the Womelsdorf and Pine Grove branches of LVNB.
In addition, FFC shall merge its wholly owned nonbanking subsidiary, Fulton
Life Insurance Company ("FLIC") with KHLIC.
For a period from the Effective Date through a date determined by FFC (not
to be before five years after the Effective Date), FFC shall (subject to the
right of FFC to terminate such obligations as a result of regulatory
considerations, safe and sound banking practices, or their fiduciary duties by
FFC's directors): Offer appointment to all present directors of LVNB to the
board of directors of Lebanon Valley Farmers Bank who indicate their desire to
serve (the "LVNB Continuing Directors"), provided, that (A) each non-employee
LVNB Continuing Director shall receive director's fees from Lebanon Valley
Farmers Bank in the form of an annual retainer of $9,000 and (B) each LVNB
Continuing Director shall be subject to FFC's mandatory retirement rules for
directors. KHG intends to dissolve the Pine Grove, Womelsdorf and Eastern
Lebanon County advisory committees. The Agricultural advisory committee of LVNB
would be retained by Lebanon Valley Farmers Bank. Albert B. Murry is to be
appointed chairman of the board and chief executive officer of Lebanon Valley
Farmers Bank. The LVNB Continuing Directors, in their exercise of their
fiduciary duty as to the best interests of LVNB and FFC, may, by a majority vote
of such directors, modify or waive any or all of the foregoing provisions.
FFC has agreed to appoint to FFC's Board of Directors on or promptly after
the Effective Date, two of KHG's current directors (designated, subject to the
reasonable approval of FFC, by vote of KHG's Board of Directors prior to the
Effective Date) to serve as directors of FFC. It is currently anticipated that
KHG's initial designees to FFC's Board will be Charles V. Henry, III, and Donald
W. Lesher, Jr., current directors of KHG. During the five-year period after the
Effective Date, the FFC Board of Directors shall nominate such designees for
election, and support their election, at each annual meting of shareholders of
FFC at which such designees' terms expires. During such period, in the event
either of such designees shall cease to serve
21
as a director of FFC, the LVNB Continuing Directors shall have the right to
designate one other person then serving on the Board of Directors of Lebanon
Valley Farmers Bank to serve as a director of FFC (subject to the reasonable
concurrence of FFC as to the person designated.)
21
FFC has agreed, following the Merger to cause KHG's subsidiaries and/or
Lebanon Valley Farmers Bank to use their best efforts (i) to retain each present
full-time employee of LVNB at such employee's current position (or, if offered
to and accepted by, an employee, a position for which the employee is qualified
with FFC or an FFC subsidiary bank at a salary commensurate with the position),
(ii) to pay compensation to each person who was employed by KHG as of the
Effective Date and who continues to be employed by KHG on and after the
Effective Date, that is at least equal to the aggregate compensation that such
person was receiving from KHG or one of its subsidiaries prior to the Effective
Date (unless there is a material change in the duties and responsibilities of
such employee), and (iii) to provide employee benefits to each such person who
is an employee, on and after the Effective Date, that are substantially
equivalent in the aggregate to the employee benefits that such person was
receiving from KHG or one of its subsidiaries prior to the Effective Date and
that are no less favorable than employee benefits afforded to similarly situated
employees of FFC and its subsidiaries.
Except as described above, the directors and officers of FFC do not have any
special interest in the Merger (other than in their capacity as shareholders of
FFC) and will not receive any special consideration or compensation in
connection with its consummation.
Recommendation of the Board of Directors of KHG
- -----------------------------------------------
For the reasons stated in this Proxy Statement/Prospectus, the Board of
Directors of KHG has unanimously approved the Merger Agreement and believes the
Merger is in the best interests of the shareholders of KHG. Accordingly, the
Board of Directors recommends that the shareholders vote in favor of the
proposal to approve the Merger Agreement. See THE MERGER--Background of the
Merger, Reasons for the Merger; Recommendation of the Board of Directors of KHG,
and Additional Reasons for the Merger.
Certain of the directors and officers of KHG have personal interests in the
consummation of the Merger in addition to their interests as shareholders of
KHG. See Interests of Certain Persons in Matters To Be Acted Upon.
22
THE MERGER
----------
General Information
- -------------------
The shareholders of KHG will be asked at the Special Meeting to consider and
vote upon a proposal to approve the Merger Agreement between FFC and KHG. Under
the Merger Agreement: (i) KHG will be merged with and into FFC, (ii) FFC will
survive the Merger, and (iii) each of the outstanding shares of KHG Common
Stock, par value $5.00 per share, will be converted into 1.83 shares of FFC
Common Stock. The wholly-owned subsidiaries of KHG, LVNB and KHLIC, will become
wholly-owned subsidiaries of FFC.
KHG is a Pennsylvania corporation and one-bank holding company. FFC is a
Pennsylvania corporation with eleven banking subsidiaries. Following the
Merger, KHG will cease to exist and FFC will continue to be a registered bank
holding company that is regulated by the Federal Reserve Board.
The precise terms and conditions of the Merger are set forth in the Merger
Agreement, which is attached as Exhibit A to this Proxy Statement/Prospectus and
is incorporated herein by reference. THE DISCUSSION WHICH FOLLOWS IS INTENDED
ONLY AS A SUMMARY OF CERTAIN TERMS OF THE MERGER AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT ATTACHED AS
EXHIBIT A TO THIS PROXY STATEMENT/PROSPECTUS.
The Restructuring
- -----------------
Simultaneously with the effectiveness of the Merger, FFC anticipates
effecting a restructuring as follows: (i) LVNB and Farmers, a wholly-owned FFC
subsidiary, will merge; (ii) the surviving bank in such merger, operating under
the name "Lebanon Valley Farmers Bank", would immediately transfer (A) branch
offices of LVNB located in Dauphin and Lancaster Counties and the assets and
deposit liabilities related to such branch offices to Fulton Bank ("FB"),
another wholly-owned FFC subsidiary, and (iii) subject to regulatory
considerations and/or to the extent determined advisable by FFC, FFC may close
or sell existing branches of LVNB, Farmers, FB or other subsidiaries of FFC
which may overlap geographically with other branches of FFC's subsidiary banks.
Lebanon Valley Farmers Bank, as a wholly-owned FFC subsidiary, would operate all
Lebanon County branch offices now operated by LVNB and Farmers, and, in
addition, the Womelsdorf and Pine Grove branches of LVNB. In addition, KHLIC
would merge with and into FLIC.
Background of the Merger
- ------------------------
In early 1997, the Board of Directors of KHG determined to investigate
whether the interests of the shareholders of KHG would be best served by the
continuation of KHG as an independent banking institution, or by taking steps to
position KHG for a sale to another institution in two to three years, or by
immediately seeking a sale of KHG to another institution. The Board engaged
Danielson Associates Inc. ("Danielson Associates"), an investment banking firm
experienced in these matters, to evaluate the situation and to make a
recommendation to the Board. Danielson Associates thereafter reported to the
Board its conclusion that the best interests of the shareholders would be served
by seeking an immediate sale.
Danielson Associates advised the Board that in its opinion, KHG would find
it increasingly difficult to prosper for the indefinite future in a market that
would become increasingly competitive, and in which competitors would have
substantially greater resources than KHG. Danielson Associates concluded that
KHG's 166-year history as a regional bank in southcentral Pennsylvania, and its
record of good financial performance, would not be enough in the new competitive
environment to sustain it as an independent institution. Danielson Associates
also advised the Board that in its opinion,
23
there was a significant risk that KHG would be less attractive as an acquisition
candidate in two to three years, because the number of institutions which might
be interested in a bank of KHG's size was expected to decline as consolidation
in the banking industry continued. Danielson Associates' recommendation was that
the best interests of the KHG shareholders would be served by pursuing an
immediate sale.
After careful consideration of the recommendation, the Board authorizedand Danielson
Associates to identify the most likelyidentified six possible acquirers eachbased on their likelihood of
which weresubmitting an offer and their capability of paying a fair price. Each of these
institutions was approached through an information memorandum as to theirits possible
interest in acquiring KHG. WithEach of the assistanceinstitutions solicited responded with an
offer; none of the offers received was a "cash offer." Danielson Associates
assisted the Board in analyzing and comparing the relative values and other
aspects of the offers. The directors determinedconcluded that the FFC offer, which
provided the highest value to the KHG Shareholders based on market prices, was
the most attractive offer had been received from FFC.offer. Negotiations were commenced, the financial and other
aspects of FFC were investigated, and an agreement was reached for the Merger
which was presented to the Board of Directors of KHG, together with a supporting
analysis and fairness opinion by Danielson Associates. The Merger Agreement was
approved by the Board at a meeting held on August 15, 1997.
Changes in the Banking Industry
- -------------------------------
Recent changes in federal and state banking laws and regulations have had a
major impact upon the banking industry in Pennsylvania and throughout the United
States. For example, due to changes in Pennsylvania law that became effective
in March, 1990, Pennsylvania banks may establish banking offices throughout the
state, and bank holding companies located in a number of other states may
acquire Pennsylvania banks. In response to these and other recent changes, many
mergers and consolidations involving Pennsylvania banks and bank holding
companies have occurred.
KHG and FFC believe that further merger activity within Pennsylvania and
other states is likely to occur in the future, resulting in increased
concentration levels in banking markets within Pennsylvania and other
significant changes in the competitive environment.
Under the Riegle-Neal Act, banks may also establish and operate a "de novo
branch" in any state that "opts-in" to de novo branching. Pennsylvania has
adopted a law permitting out-of-state banks to open de novo branches in
Pennsylvania, as long as the home state of each such bank would offer reciprocal
de novo branching opportunities to Pennsylvania banks. The Riegle-Neal Act
permits foreign banks to establish branches, either de novo or by merger, to the
same extent as similarly situated domestic banks. In other words, a foreign
bank may establish and operate interstate branches to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All of the foregoing changes made by
the Reigle-Neal Act are expected to intensify competition in local, regional and
national banking markets.
In addition, recent changes in federal banking laws have significantly
increased the severity and complexity of federal banking regulations, as well as
the costs that banks must incur in complying with those regulations. For
example, pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), the federal banking agencies have established guidelines for
real estate lending by FDIC-insured banks, including maximum loan-to-value
ratios for various types of real estate loans. FDICIA requires each
FDIC-
insured24
FDIC-insured bank to comply with a number of administrative standards (including
audit requirements) that are designed to enhance the bank's safety and
soundness. FDICIA also contains "Truth in Savings" provisions that require
extensive disclosures regarding the rates of interest paid and the fees charged
by FDIC-insured banks with respect to their deposit accounts. FDICIA further
provides greatly expanded authority to the federal banking agencies to impose
administrative enforcement sanctions (including cease-and-desist orders, civil
money penalties, and officer removal or
24
suspension orders) against FDIC-insured
banks that fail to maintain adequate capital levels or that engage in unsafe or
unsound banking practices. These changes in federal law have added
significantly to the cost and complexity of operating a bank.
Benefits of the Merger to KHG and FFC
- -------------------------------------
The benefits of the Merger to KHG include the retention of a majority of its
branches in its primary service area and greatly enhanced resources with which
to offer services to customers. In a competitive environment, the financial
resources of FFC are expected to improve KHG's ability to compete. In addition,
the undertaking of FFC to use its best efforts to offer employment to all full-
time employees of KHG, and the retention of the Senior Executives effective upon
the Merger will provide continuity of service to KHG customers and the
communities it serves.
For the KHG shareholders, the benefits of the Merger include the receipt of
a significant premium in the value of FFC Common Stock to be issued for each
share of KHG Common Stock over the market price for KHG Common Stock immediately
prior to the public announcement of the Merger, and an increase in their
effective dividend rate.rate (although there is no assurance that FFC will continue
to pay a dividend at its current rate). KHG shareholders will also indirectly
receive the benefits as FFC shareholders of the future efficiencies, benefits
and synergies to be realized from the combination with FFC, and will receive the
securities of an institution with a significant history of good performance.
The expected efficiencies include cost reductions made possible by becoming part
of a larger institution (achieved largely through the elimination of duplicative
corporate overhead, administrative functions and "back office" data processing
functions), and savings from the consolidation of branches with overlapping
service areas. The benefits include the greater capital base of FFC, the
sophistication of a larger institution, and the ability to continue to provide
customer service to KHG customers at substantially the same levels as when KHG
was an independent institution. There were no significant negative factors
related to the FFC offer that were considered by the KHG Board.
The Merger will benefit FFC by increasing FFC's current market presence in
Lebanon, Lancaster, Dauphin and Berks Counties in Pennsylvania. The Merger will
also extend FFC's market into Schuylkill County. In addition, FFC expects to
benefit from the agricultural lending expertise of KHG. Other than the
customary risks associated with any acquisition, the FFC Board did not identify
any specific risks in the acquisition of KHG.
As described above, the Boards of Directors of FFC and KHG have approved the
terms of the Merger Agreement. The Board of Directors of KHG believes that the
terms of the Merger are fair to and in the best interests of KHG and its
shareholders. KHG's Board of Directors also believes that the Merger will
enhance the ability of KHG's offices to satisfy the financial needs of their
customers and the communities which they serve.
Opinion of Financial Advisor to KHG
- -----------------------------------
KHG retained Danielson Associates to act as its financial advisor and to
render a fairness opinion in connection with the Merger. Danielson Associates
25
rendered its opinion to the Board of Directors of KHG that, based upon and
subject to the various considerations set forth herein, as of August 15, 1997
(the "August Opinion"), and as of the date of this Proxy Statement/Prospectus
(the "Proxy Opinion"), the financial terms of the Merger are fair, from a
financial point of view, to the holders of KHG Common Stock.
The full text of Danielson Associates' Proxy Opinion, which sets forth the
assumptions made, matters considered and limitations of the review undertaken,
is attached as Exhibit B to this Proxy Statement/Prospectus, is incorporated
herein by reference, and should be read in its entirety in connection with this
Proxy Statement/Prospectus. The summary of the opinion of Danielson Associates
set forth herein is qualified in its entirety by reference to the full text of
such opinion attached as Exhibit B to this Proxy Statement/Prospectus.
Danielson Associates was selected to act as KHG's financial advisor in
connection with the Merger based upon its qualifications, expertise and
experience. Danielson Associates has knowledge of, and experience with
surrounding banking markets as well as banking organizations operating in those
markets and was selected by KHG because of its knowledge of, experience with,
and reputation in the financial services industry. Danielson
25
Associates, as
part of its investment banking business, is engaged regularly in the valuation
of assets, securities and companies in connection with various types of asset
and security transactions, including mergers, acquisitions, private placements,
and valuations for various other purposes and in the determination of adequate
consideration in such transactions.
On August 15, 1997, KHG's Board of Directors approved and executed the
Merger Agreement. Prior to such approval, Danielson Associates delivered its
August Opinion to KHG's Board of Directors stating that, as of such date, the
financial terms of the Merger were fair to the shareholders of KHG from a
financial point of view. Danielson Associates reached the same opinion as of
the date of its Proxy Opinion. No limitations were imposed by KHG's Board of
Directors upon Danielson Associates with respect to the investigations made or
procedures followed by Danielson Associates in rendering the August Opinion or
the Proxy Opinion.
In rendering its Proxy Opinion, Danielson Associates: (i) reviewed the
historical financial performances, current financial positions and general
prospects of KHG and FFC; (ii) reviewed the Merger Agreement; (iii) reviewed and
analyzed the stock market performance of KHG and FFC; (iv) studied and analyzed
the consolidated financial and operating data of KHG and FFC; (v) considered the
terms and conditions of the proposed Merger as compared with the terms and
conditions of comparable bank and bank holding company mergers and acquisitions;
(vi) met and/or communicated with certain members of KHG's and FFC's senior
management to discuss their respective operations, historical financial
statements, and future prospects; (vii) reviewed this Proxy
Statement/Prospectus; and (viii) conducted such other financial analysis,
studies and investigations as Danielson Associates deemed appropriate.
In delivering its August Opinion and Proxy Opinion, Danielson Associates
assumed that in the course of obtaining the necessary regulatory and
governmental approvals for the Merger, no restriction will be imposed on FFC
that will have a material adverse effect on the contemplated benefits of the
Merger. Danielson Associates also assumed that there would not occur any change
in applicable law or regulation that would cause a material adverse change in
the prospects or operations of FFC after the Merger.
Danielson Associates relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by and discussed with it for purposes of its opinion. With respect to KHG's
financial forecasts reviewed by Danielson Associates in rendering its
26
opinion, Danielson Associates assumed that such financial forecasts were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of KHG as to the future financial performance of
KHG. Danielson Associates did not make an independent evaluation or appraisal of
the assets (including loans) or liabilities of KHG or FFC nor was it furnished
with any such appraisal. Danielson Associates also did not independently verify
and has relied on and assumed that all allowances for loan and lease losses set
forth in the balance sheets of KHG and FFC were adequate and complied fully with
applicable law, regulatory policy and sound banking practice as of the date of
such financial statements.
The following is a summary of selectedall material analyses prepared by Danielson
Associates and presented to KHG's Board in connection with the August Opinion
and analyzed by Danielson Associates in connection with the August and Proxy
Opinions. In connection with delivering its Proxy Opinion, Danielson Associates
updated certain analyses described above to reflect current market conditions
and events occurring since the date of the August Opinion. Such reviews and
updates led Danielson Associates to conclude that it was not necessary to change
the conclusions it had reached in connection with rendering the August Opinion.
26
Pro Forma Merger Analyses. Danielson Associates analyzed the changes in
-------------------------
the
------------------------- amount of earnings and book value of FFC on a pro forma basis as a result of
the Merger, and the issuance of FFC Common Stock having a value at August 14,
1997 of about $211.7 million for all of the outstanding shares of KHG Common
Stock. The analysis evaluated, among other things, possible dilution in earnings
and capital per share for FFC Common Stock.
Comparable Companies. Danielson Associates compared KHG's (a) tangible
--------------------
capital of 10.30% of assets as of June 30, 1997, (b) .28% of nonperforming
assets as of June 30, 1997, and (c) net operating income of 2.19% of average
assets for the trailing twelve month period ending March 31, 1997, with the
medians for selected Pennsylvania banks which Danielson Associates deemed
comparable. These banks included ACNB Corporation, Drovers Bancshares
Corporation, Franklin Financial Service Corporation, Hanover Bancorp, Inc.,
PennRock Financial Services Corporation and Sterling Financial Corporation.
Their medians were (a) tangible capital of 9.15% of assets, (b) .43% of assets
nonperforming, and (c) net operating income of 1.77% of average assets.
Danielson Associates also compared FFC's (a) stock price as of August 13,
1997, of 19.5 times earnings and 265% of book, (b) dividend yield based on
trailing four quarters as of June 30, 1997, and stock price as of August 13,
1997 of 2.13%, (c) tangible capital as of June 30, 1997 of 9.98% of assets, (d)
nonperforming assets as of June 30, 1997 equal to .65% of total assets, (e)
return on average assets during the trailing four quarters ended June 30, 1997
of 1.54% and (f) return on average equity during the same period of 14.84%, with
the medians for selected banks and bank holding companies that Danielson
Associates deemed to be comparable to FFC. The selected institutions included
BT Financial Corporation, F.N.B. Corporation, First Commonwealth Financial
Corporation, First Western Bancorp., Inc., Harleysville National Corporation,
JeffBanks, Inc., National Penn Bancshares, Inc., Omega Financial Corporation,
S&T Bancorp, Inc. and USBANCORP, Inc. The comparable medians were (a) stock
price of 16.1 times earnings and 202% of book, (b) dividend yield of 2.35%, (c)
tangible capital of 8.61% of assets, (d) .73% of assets nonperforming, (e)
return on average assets of 1.27% and (f) return on average equity of 14.04%.
Danielson Associates also compared other income, expense, and balance sheet
information of such companies with similar information about FFC.
Comparable Transaction Analysis. Danielson Associates compared the
-------------------------------
consideration to be paid in the merger to the latest twelve months earnings and
equity capital of KHG with earnings and capital multiples paid in
27
acquisitions of midAtlantic banks in 1996 and 1997 through the opinion date. Of
these, the most applicable recent transactions included Allied Irish Banks,
PLC/Dauphin Deposit Corporation, Wachovia Corporation/Jefferson Bancshares, Inc.
and Keystone Financial, Inc./Financial Trust Corp. At the time Danielson
Associates made its analysis, the consideration to be paid in the merger was
320% of KHG's June 30, 1997 book value and 20.8 (adjusted to exclude a one time
gain) times KHG's earnings for the trailing four quarters as of June 30, 1997.
This compares to the median multiples of 200% of book value and 22.0 times
earnings for the comparable acquisitions.
The transaction price also was compared to the prices paid for eight sales
involving banks from New York, New Jersey, Pennsylvania and the New England
region with assets over $100 million during 1997. The median comparable deal
prices in these transactions were 197% of book and 19.6 times earnings.
Other Analysis. In addition to performing the analyses summarized above,
--------------
Danielson Associates also considered the general market for bank and thrift
mergers, the historical financial performance of KHG and FFC, the deposit market
shares of both banks, and the general economic conditions and prospects of these
banks.
27
No company or transaction used in this composite analysis is identical to
KHG or FFC. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather it involves complex consideration and judgmentsjudgements concerning
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values of the company or
companies to which they are being compared.
The summary set forth above does not purport to be a complete description of
the analyses and procedures performed by Danielson Associates in the course of
arriving at its opinions. For its services as the financial advisor to KHG,
Danielson Associates is to be paid an estimateda fee equal to one-half of about $1,059,000.one percent of the
transaction value. Assuming a market price of FFC Common Stock of $32.50 per
share, which was the closing sale price on December 31, 1997, the fees payable
to Danielson Associates would be approximately $1,176,000.
The full text of the Proxy Opinion of Danielson Associates, which sets forth
assumptions made and matters considered, is attached hereto as Exhibit B. KHG's
shareholders are urged to read the Proxy Opinion in its entirety. Danielson
Associates' Proxy Opinion is directed only to the consideration to be received
by KHG's shareholders in the Merger and does not constitute a recommendation to
any holder of KHG Common Stock as to how such holder should vote at the KHG
Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION OF DANIELSON AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION,
WHICH IS SET FORTH IN EXHIBIT B TO THIS PROXY STATEMENT/PROSPECTUS.
Recommendation of the Board of Directors of KHG
- -----------------------------------------------
The Board of Directors of KHG considered the various factors described
above, which involved a review of the competitive environment; the impact of the
proposed Merger on the communities served by KHG and on the KHG employees; the
value being offered by FFC in relation to book value and earnings per share of
KHG and the financial condition, earnings, dividend yield and prospects of FFC;
and a comparison of the proposed financial terms with other recent comparable
transactions. The Board consulted with and sought the advice of Danielson
Associates and of its counsel. Among the factors the Board took into account in
reaching its decision to approve the Merger were (i) the historical and recent
market prices of shares of KHG Common Stock and
28
the fact that the Merger would enable the holders of such shares to realize a
significant premium over the prices at which such shares were trading
immediately before the public announcement of the Merger Agreement; (ii) the
historical and recent market prices of FFC Common Stock, as well as its
prominence as an industry leader; FFC's historical performance compared to the
historical performance of other competitors in the industry; the favorable
comparison of the long-term growth opportunity for KHG shareholders from a
Merger with FFC over a business combination with one of FFC's competitors; (iii)
the efficiencies, operating benefits and commercial and other synergies from the
Merger that would benefit KHG and its customers (see "Benefits of the Merger to
KHG and FFC" above for a discussion of these factors), and the prospect that KHG
shareholders would also benefit from such efficiencies, benefits and synergies
through their continued interest in the combined company; (iv) the efficiencies,
benefits and synergies resulting from the Merger would better meet the needs of
KHG's several constituencies than would combinations with other potential
suitors; (v) the benefits that the Merger would provide to the customers of both
KHG and FFC, including enhanced services and the benefits that can be provided
by a combined company with increased financial strength; (vi) the benefits
provided generally to the communities served by KHG by maintaining a majority of
KHG's existing branches; (vii) the intended tax treatment of the Merger as a
tax-free reorganization; (viii) the friendly and professional working
relationships that have existed between KHG and FFC; and (ix) the opinion of
Danielson Associates to the effect that the Merger is fair to the KHG
shareholders from a financial point of view.
The Board of Directors of KHG unanimously recommends that the holders of KHG
Common Stock vote "FOR" approval of the Merger Agreement and the Merger.
28
Conversion and Exchange of Shares
- ---------------------------------
On the Effective Date of the Merger, each share of KHG Common Stock then
issued and outstanding will automatically be converted into and become the right
to receive 1.83 shares (subject to adjustment for stock dividends, stock splits
and similar transactions) of FFC Common Stock.
No fractional shares of FFC Common Stock will be issued in connection with
the Merger. In lieu of the issuance of any fractional share to which he or she
would otherwise be entitled, each former shareholder of KHG will receive cash in
an amount equal to the fair market value of his or her fractional interest,
determined by multiplying such fractional interest by the Closing Market Price
of FFC Common Stock.
The Closing Market Price is defined in the Merger Agreement as the average
of the per share closing bid and asked prices for FFC Common Stock, rounded up
to the nearest $.125, for the ten (10) trading days immediately preceding the
date which is two (2) business days before the Effective Date (the "Price
Determination Period"), as reported on the NASDAQ National Market System. If
NASDAQ fails to report a closing bid price for FFC Common Stock for any trading
day during the Price Determination Period, the closing bid prices for that day
shall be equal to the average of the closing bid prices and the average of the
closing asked prices as quoted by F.J. Morrissey & Company, Inc. and by Ryan,
Beck & Co., or if these two firms are not then making a market in FFC Common
Stock, by two brokerage firms who are then making a market in FFC Common Stock
to be selected by FFC and approved by KHG.
As soon as practicable following the Effective Date, KHG shareholders will
exchange their KHG Common Stock certificates for FFC Common Stock certificates
in accordance with the procedures described below in this section. FFC and KHG
anticipate that the Effective Date will occur during the first or second quarter
of 1998, assuming no difficulties are encountered in
29
obtaining the required regulatory approvals and all other conditions to closing
are satisfied without unexpected delay.
Following the Effective Date, each former shareholder of KHG will be obliged
to surrender to FFC the KHG Common Stock certificates held by him or her.
Detailed instructions concerning the procedure for surrendering KHG Common Stock
certificates will be sent by Fulton Bank, acting as exchange agent (the
"Exchange Agent"), to each former shareholder of KHG on or promptly after the
Effective Date. Upon proper surrender of his or her KHG Common Stock
certificates, each former shareholder of KHG will be issued a stock certificate
representing the number of whole shares of FFC Common Stock into which his or
her shares of KHG Common Stock have been converted, together with a check in the
amount of any cash, without interest, to which he or she is entitled in lieu of
the issuance of any fractional share of FFC Common Stock. SHAREHOLDERS OF KHG
SHOULD NOT SURRENDER THEIR KHG COMMON STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE WRITTEN INSTRUCTIONS TO DO SO FROM THE EXCHANGE AGENT. PLEASE DO NOT
SEND ANY STOCK CERTIFICATES AT THIS TIME.
Following the Effective Date, and until properly surrendered, each KHG
Common Stock certificate will be deemed for all corporate purposes to represent
the number of whole shares of FFC Common Stock which the holder would be
entitled to receive upon its surrender and the corresponding number of rights
associated with the Shareholder Rights Plan dated June 20, 1989 between FFC and
Fulton Bank (the "Rights Plan"), except that FFC may withhold dividends payable
after the Effective Date to any former shareholder of KHG who has received
written instructions from FFC but has not at that time surrendered his or her
KHG Common Stock certificates. Any dividends so withheld will be paid, without
interest, to any such former shareholder of KHG upon the proper surrender of his
or her KHG Common Stock certificates.
29
All KHG Common Stock certificates must be surrendered to FFC within two
years after the Effective Date. In the event that any former shareholder of KHG
does not properly surrender his or her KHG Common Stock certificates within that
time, the shares of FFC Common Stock that would otherwise have been issued to
him or her may, at the option of FFC, be sold and the net proceeds of such sale,
together with the cash (if any) to which he or she is entitled in lieu of the
issuance of a fractional share and any previously accrued and unpaid dividends,
will be held in a non-interest bearing account for his or her benefit. From and
after any such sale, the sole right of such former shareholder of KHG will be
the right to collect such net proceeds, cash and accumulated dividends. Subject
to all applicable laws of escheat, such net proceeds, cash and accumulated
dividends will be paid to such former shareholder of KHG, without interest, upon
proper surrender of his or her KHG Common Stock certificates.
In the event that a former KHG shareholder is unable to surrender his or her
KHG Common Stock certificates due to loss or mutilation thereof, he or she may
make a constructive surrender by following procedures comparable to those
customarily followed by FFC in issuing replacement certificates to FFC
shareholders whose FFC Common Stock certificates have been lost or mutilated.
Instructions for making a constructive surrender of lost or mutilated KHG Common
Stock certificates will be included in the written instructions to be sent by
the Exchange Agent to former KHG shareholders after the Effective Date of the
Merger.
THE FOREGOING DISCUSSION RELATING TO THE CONVERSION AND EXCHANGE OF KHG
COMMON STOCK IS ONLY A SUMMARY WHICH IS PROVIDED FOR CONVENIENCE. THE FOREGOING
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY
BY, THE TERMS OF ARTICLE II OF THE MERGER AGREEMENT.
30
Treatment of Outstanding Options
- --------------------------------
As of October 31, 1997, there were KHG options outstanding to purchase
83,664 shares of KHG Common Stock. Under the terms of the Merger Agreement,
each holder of a KHG option that is outstanding at the Effective Date, has been
granted pursuant to the 1994 Stock Incentive Plan and the 1996 Independent
Directors Stock Option Plan (collectively the "KHG Stock Option Plans") and
would otherwise survive the Effective Date, will receive from FFC an option (an
"FFC Option") to acquire shares of FFC Common Stock. The number of shares of
FFC Common Stock which may be acquired pursuant to such FFC Option shall be
equal to the product of the number of shares of KHG Common Stock covered by the
KHG option multiplied by the Conversion Ratio, provided that any fractional
share of FFC Common Stock resulting from such multiplication shall be rounded to
the nearest whole share. The exercise price per share of FFC Common Stock shall
be equal to the exercise price per share of KHG Common Stock of such KHG option,
divided by the Conversion Ratio, provided that such exercise price shall be
rounded to the nearest whole cent. The duration and other terms of such KHG
option shall be unchanged except that all references to KHG shall be deemed
references to FFC, and each such FFC Option shall be exercisable at least until
the stated expiration date of the corresponding KHG option. FFC shall assume
such stock options as contemplated by Section 424(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and to the extent KHG options qualify as
incentive stock options under Section 422 of the Code, the FFC Options exchanged
therefor shall also so qualify. Subject to these terms and conditions, the KHG
Stock Option Plans and all options or other rights to acquire KHG Common Stock
issued thereunder shall terminate on the Effective Date.
Business Pending The Effective Date
- -----------------------------------------------------------------------
Pursuant to the Merger Agreement, KHG and its subsidiaries are required,
pending the Effective Date, to conduct their respective businesses in the
30
usual,
regular and ordinary manner and consistent with past practice. KHG and its
subsidiaries are also required to use their best efforts to preserve their
present business organizations, retain the services of their present officers
and employees, and maintain existing relationships with persons having business
dealings with them. In general, KHG and its subsidiaries may not take any
action outside the ordinary course of business without the prior written consent
of FFC.
Pending the Effective Date, KHG is not permitted to declare or pay a cash
dividend on the KHG Common Stock; provided, however, that KHG may declare and
pay a dividend of up to $.25 per share of KHG Common Stock on each of (i)
November 10, 1997 (which has already been paid); (ii) February 10, 1998,
provided that the Effective Date does not occur (or is not expected to occur) on
or before the record date for the dividend on the FFC Common Stock scheduled to
be paid on April 15, 1998; (iii) May 10, 1998, provided that the record date for
the dividend does not occur (or is not expected to occur) on or before the
record date for the dividend on the FFC Common Stock scheduled to be paid on
July 15, 1998; and (iv) August 10, 1998, provided that the Effective Date does
not occur (and is not expected to occur) on or before the record date for the
dividend on the FFC Common Stock scheduled to be paid on October 15, 1998 (it
being the intention of FFC and KHG that KHG be permitted to pay a dividend on
the KHG Common Stock on the dates indicated in subsections (ii), (iii) and (iv)
above only if the shareholders of KHG, upon becoming shareholders of FFC, would
not be entitled to receive a dividend on the FFC Common Stock on the payment
dates indicated in each such subsection.
Under the terms of the Merger Agreement, pending the Effective Date, unless
FFC otherwise consents in writing, KHG and its subsidiaries shall (i) use all
reasonable efforts to carry on their respective businesses in, and only in, the
ordinary course of business; (ii) to the extent consistent with
31
prudent business judgment, use all reasonable efforts to preserve their present
business organizations, to retain the services of their present officers and
employees, and to maintain their relationships with customers, suppliers and
others having business dealings with KHG or either of its subsidiaries; (iii)
maintain all of their structures, equipment and other real property and tangible
personal property in good repair, order and condition, except for ordinary wear
and tear and damage by unavoidable casualty; (iv) use all reasonable efforts to
preserve or collect all material claims and causes of action belonging to KHG or
any of its subsidiaries; (v) keep in full force and effect all insurance
policies now carried by KHG or either of its subsidiaries; (vi) perform in all
material respects each of their obligations under all material contracts to
which KHG or either of its subsidiaries are a party or by which any of them may
be bound or which relate to or affect their properties, assets and business;
(vii) maintain their books of account and other records in the ordinary course
of business; (viii) comply in all material respects with all statutes, laws,
ordinances, rules and regulations, decrees, orders, consent agreements,
memoranda of understanding and other federal, state, and local governmental
directives applicable to KHG or either of its subsidiaries and to the conduct of
their businesses; (ix) not amend KHG's or any of the KHG subsidiaries' Bylaws;
(x) not enter into or assume any material contract, incur any material liability
or obligation, or make any material commitment, except in the ordinary course of
business; (xi) not make any material acquisition or disposition of any
properties or assets or subject any of their properties or assets to any
material lien, claim, charge, or encumbrance of any kind whatsoever; (xii) not
knowingly take or permit to be taken any action which would constitute a breach
of any representation, warranty or covenant in the Merger Agreement; (xiii)
except as permitted otherwise in the Merger Agreement, not declare, set aside or
pay any dividend or make any other distribution in respect of KHG Common Stock;
(xiv) not authorize, purchase, redeem, issue (except upon the exercise of
outstanding options under the KHG Stock Option Plans) or sell (or grant options
or rights to purchase or sell) any shares of KHG Common Stock or any other
equity or 31
debt securities of KHG except to the extent necessary to follow
participants' investment directions under the KHG pension plans; (xv) not
increase the rate of compensation of, pay a bonus or severance compensation to,
establish or amend any KHG benefit plan except as required by law for, or enter
into or amend any employment obligation with, any officer, director, employee or
consultant of KHG or its subsidiaries, except that KHG or either of its
subsidiaries may grant reasonable salary increases and bonuses to their officers
and employees in the ordinary course of business to the extent consistent with
their past practice; (xvi) not enter into any related party transaction except
in the ordinary course of business consistent with past practice; (xvii) in
determining the additions to loan loss reserves and the loan write-offs,
writedowns and other adjustments that reasonably should be made by LVNB during
the fiscal year ending December 31, 1997, KHG and its subsidiaries shall consult
with FFC and shall act in accordance with generally accepted accounting
principles and KHG's and its subsidiaries' customary business practices; (xviii)
file with appropriate federal, state, local and other governmental agencies all
tax returns and other material reports required to be filed, pay in full or make
adequate provisions for the payment of all taxes, interest, penalties,
assessments or deficiencies shown to be due on tax returns or by any taxing
authorities and report all information on such returns truthfully, accurately
and completely; (xix) not renew any existing contract for services, goods,
equipment or the like or enter into, amend in any material respect or terminate
any contract or agreement (including without limitation any settlement agreement
with respect to litigation) that is or may reasonably be expected to have a
material adverse effect on KHG and its subsidiaries except in the ordinary
course of business consistent with past practice (provided that FFC may not
unreasonably withhold or delay its consent to such transactions); (xx) not make
any capital expenditures other than in the ordinary course of business or as
necessary to maintain existing assets in good repair; (xxi) not make application
for the opening or closing of any, or
32
open or close any, branches or automated banking facility, except for one
automated banking facility to be installed in Myerstown, Pennsylvania; (xxii)
not make any equity investment or commitment to make such an investment in real
estate or in any real estate development project, other than in connection with
foreclosures, settlements in lieu of foreclosure or troubled loan or debt
restructuring in the ordinary course of business consistent with customary
banking practice; or (xx) not take any other action similar to the foregoing
which would have the effect of frustrating the purposes of the Merger Agreement
or the Merger or cause the Merger not to qualify for pooling-of-interests
accounting treatment or as a tax-free reorganization under Section 368 of the
Internal Revenue Code.
The Merger Agreement provides that KHG shall not, nor shall it permit any
officer, director, employee, agent, consultant or representative to: (a)
solicit, initiate or encourage any proposal for a merger with or other
acquisition of KHG or either of its subsidiaries, or any material portion of its
assets or properties, with or by any person other than FFC; or (b) cooperate
with, or furnish any non-public information concerning KHG or either of its
subsidiaries, to, any person in connection with such a proposal; provided,
however, that the Board of Directors is free to take such action as the Board of
Directors determines, in good faith and after consultation with outside counsel,
is not legally inconsistent with its fiduciary duty. KHG is required to notify
FFC immediately if any discussions or negotiations are sought to be initiated,
any inquiry or proposals are made, or any such information is requested with
respect to an acquisition proposal or potential acquisition proposal or if any
such proposal is received or indicated to be forthcoming.
Conditions, Amendment and Termination
- -------------------------------------
The obligations of FFC and KHG to consummate the Merger are subject to a
number of conditions and contingencies set forth in the Merger Agreement,
32
including, without limitation, the following: (i) approval of the Merger by the
shareholders of KHG; (ii) approval of the Merger by the Federal Reserve Board,
the Federal Deposit Insurance Corporation (the "FDIC"), and the Pennsylvania
Department of Banking, delivery of notice of the Merger to the Office of the
Comptroller of the Currency, and delivery of notice of the Merger to the
Maryland State Bank Commissioner; (iii) the authorization for listing on NASDAQ
of the shares of the FFC Common Stock to be issued in the Merger; (iv) the
absence of an injunction issued by a court of competent jurisdiction enjoining
the performance by FFC or KHG of any of their obligations under the Merger
Agreement; (v) the receipt of a favorable opinion of counsel with respect to
certain federal income tax consequences relating to the Merger, which are
discussed below under THE MERGER--Federal Income Tax Consequences; (vi) the
continuing accuracy in all material respects of the representations, warranties
and covenants made by FFC and KHG in the Merger Agreement; (vii) the receipt by
FFC of satisfactory agreements from shareholders of KHG who are affiliates of
KHG or FFC regarding certain actions which could affect pooling-of-interests
accounting for the Merger; (viii) the receipt of opinions from counsel for KHG
and counsel for FCC regarding certain legal matters; (ix) the effectiveness of a
registration statement relating to the FFC Common Stock with the SEC; (x)
confirmation by FFC and its accountants that the Merger can be accounted for as
a pooling-of-interests for financial reporting purposes; (xi) all holders of KHG
options shall have delivered documentation reasonably satisfactory to FFC
canceling the KHG options in exchange for FFC Options; (xii) confirmation that,
since December 31, 1996, there has been no material and adverse change in the
condition (financial or otherwise), assets, liabilities, business or operations
or future prospects of KHG; (xiii) the Closing Market Price of FFC Common Stock
shall be either in excess of $23.82 per share or in excess of an amount per
share equal to (A) $28.875 (the closing bid price on August 14, 1997) multiplied
by (B) 0.825 multiplied by (C) the quotient obtained by dividing the average
NASDAQ Bank
33
Index for the price determination period by the NASDAQ Bank Index on August 14,
1997; (xiv) the delivery of certificates at the closing by officers of FFC and
KHG confirming satisfaction of certain of the foregoing conditions; (xv) FFC and
its counsel shall have determined that all applicable securities and antitrust
laws of the federal government and any state government having jurisdiction over
the transaction shall have been complied with; and (xvi) the existing employment
agreements between LVNB and the KHG Senior Executives shall have been terminated
and replaced with the Employment Agreements, effective as of the Effective Date.
To the extent permitted by law, the Merger Agreement may be amended by
mutual consent and any term or condition thereof may be waived by the party
entitled to its benefit at any time before the Effective Date, whether before or
after the approval of the Merger Agreement by KHG's shareholders and without
seeking further shareholder approval; provided, however, that the Conversion
Ratio may not be waived or amended and the delivery of the tax opinion referred
to above in subparagraph (v) may not be waived until such amendment or waiver
has been approved, adopted or ratified by the shareholders of KHG in accordance
with applicable law (other than pursuant to the terms of the Merger Agreement in
the event of a stock dividend or similar transaction by FFC).following
recirculation of an amended Proxy Statement/Prospectus.
The Merger Agreement may be terminated at any time prior to the Effective
Date by the mutual written consent of FFC and KHG. In addition, the Merger
Agreement may be terminated unilaterally by either FFC or KHG if (A) any
condition to the Merger has not been satisfied by August 31, 1998, or (B) the
other party has committed a material breach of any representation, warranty or
covenant contained in the Merger Agreement and has not cured such breach within
thirty (30) days after receiving written notice thereof.
Effective Date of the Merger
- ----------------------------
The Merger will become effective on the date of filing the Articles of
Merger with the Pennsylvania Department of State, or on such later date
33
specified in the Articles of Merger. FFC and KHG presently intend to consummate
the Merger during the first or second quarter of 1998, assuming that the Merger
has been approved by KHG's shareholders, all required regulatory approvals have
been obtained, and all other conditions to closing have been satisfied or waived
by that time. The Merger Agreement provides that the closing of the Merger
shall be held within thirty (30) days after the receipt of all required
regulatory approvals and the expiration of all applicable waiting periods. See
THE MERGER--Conditions, Amendment and Termination.
Management and Operations Following the Merger
- ----------------------------------------------
On the Effective Date, KHG will merge with and into FFC. FFC will survive
the Merger and the shareholders of KHG will become shareholders of FFC. LVNB
and KHLIC will become wholly-owned subsidiaries of FFC.
Simultaneously with the effectiveness of the Merger, FFC anticipates
effecting a restructuring as follows: (i) LVNB and Farmers Trust Bank
("Farmers"), a wholly-owned FFC subsidiary, will merge; (ii) the surviving bank
in such merger, operating under the name "Lebanon Valley Farmers Bank", would
immediately transfer branch offices of LVNB located in Dauphin and Lancaster
Counties and the assets and deposit liabilities related to such branch offices
to Fulton Bank ("FB"), another wholly-owned FFC subsidiary, and (iii) subject to
regulatory considerations and/or to the extent determined advisable by FFC, FFC
may close or sell existing branches of LVNB, Farmers, FB or other subsidiaries
of FFC which may overlap geographically with other branches of FFC's subsidiary
banks. Lebanon Valley Farmers Bank, as a wholly-owned FFC subsidiary, would
operate all Lebanon County branch offices
34
now operated by LVNB and Farmers, and, in addition, the Sinking Spring,
Womelsdorf and Pine Grove branches of LVNB.
In addition, KHLIC will be merged with Fulton Life Insurance Company
("FLIC"), a wholly-owned nonbanking subsidiary of FFC.
For a period from the Effective Date through a date determined by FFC (not
to be before five years after the Effective Date), FFC shall (subject to the
right of FFC to terminate such obligations as a result of regulatory
considerations, safe and sound banking practices, or the exercise of their
fiduciary duties by FFC's directors): Offer appointment to all present
directors of LVNB to the board of directors of Lebanon Valley Farmers Bank who
indicate their desire to serve (the "LVNB Continuing Directors"), provided, that
--------
(A) each non-employee LVNB Continuing Director shall receive director's fees
from Lebanon Valley Farmers Bank in the form of an annual retainer of $9,000 and
(B) each LVNB Continuing Director shall be subject to FFC's mandatory retirement
rules for directors. KHG intends to dissolve the Pine Grove, Womelsdorf and
Eastern Lebanon County advisory committees as of the Effective Date. The
Agricultural advisory committee of LVNB would be retained by Lebanon Valley
Farmers Bank. Albert B. Murry would be appointed chairman of the board and
chief executive officer of Lebanon Valley Farmers Bank. The LVNB Continuing
Directors, in their exercise of their fiduciary duty as to the best interests of
LVNB and FFC, may, by a majority vote of such directors, modify or waive any or
all of the foregoing provisions.
On the date of the Merger Agreement, KHG and its subsidiaries caused the
existing employment agreements with Albert B. Murry and Kurt A. Phillips (the
"KHG Senior Executives") to be terminated and entered into new employment
agreements (the "Employment Agreements") with the KHG Senior Executives. The
termination of the existing employment agreements and the Employment Agreements
shall become effective on the Effective Date. KHG and its subsidiaries may not
modify the terms of the Employment Agreements without the prior written consent
of FFC, and may not create any new employment obligations related to the KHG
Senior Executives.
34
FFC has agreed, following the Merger, to cause KHG to honor its employment
obligations and to honor its obligations under KHG's existing employee benefit
plans.
Federal Income Tax Consequences
- -------------------------------
The following is a summary of the material anticipated federal income tax
consequences of the Merger. This summary is based on the federal income tax
laws as now in effect and as currently interpreted; it does not take into
account possible changes in such laws or interpretations, including amendments
to applicable statutes or regulations or changes in judicial or administrative
rulings, some of which may have retroactive effect. This summary does not
purport to address all aspects of the possible federal income tax consequences
of the Merger. In particular, and without limiting the foregoing, this summary
does not address the federal income tax consequences of the Merger to
shareholders in light of their particular circumstances or status (for example,
as foreign persons, tax-exempt entities, dealers in securities, insurance
companies and corporations, among others). Nor does this summary address any
consequences of the Merger under any state, local, or foreign income tax laws.
Shareholders, therefore, are urged to consult their own tax advisors as to the
specific tax consequences to them of the Merger, including tax-return-reporting
requirements, the application and effect of federal, foreign, state, local, and
other tax laws, and the implications of any proposed changes in the tax laws.
35
Pursuant to the Merger Agreement, an opinion has been provided to KHG and
FFC by Barley, Snyder, Senft & Cohen, LLP, counsel for FFC, which states that,
for federal income tax purposes:
1. The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended;
2. No gain or loss will be recognized by FFC or KHG by reason of the
Merger;
3. The bases of the assets of KHG in the hands of FFC will be the same as
the bases of such assets in the hands of KHG immediately prior to the
Merger;
4. The holding period of the assets of KHG in the hands of FFC following
the Merger will include the period during which such assets were held by
KHG prior to the Merger;
5. No gain or loss will be recognized by the KHG shareholders on the
exchange of shares of KHG Common Stock solely for shares of FFC Common
Stock (including fractional shares); income, gain or loss will be
recognized, however, to each such shareholder upon the receipt of cash
by such shareholders on the exchange. The receipt of cash by KHG
shareholders will have the effect of treating the shareholder as having
received solely shares of FFC Common Stock in the reorganization
exchange and then having received a cash payment from FFC in a
hypothetical redemption of that number of shares of FFC Common Stock
equal in value to such cash payment. A KHG shareholder who receives cash
will therefore recognize capital gain or loss on the constructive
redemption of such shares in an amount equal to the difference between
the cash received and the adjusted basis in such shares;
6. The basis of the shares of FFC Common Stock to be received by KHG
shareholders pursuant to the Merger Agreement will be the same as the
basis in the shares of KHG Common Stock surrendered in the
35
reorganization exchange, decreased by the amount of cash received and
increased by the amount of any gain (and by the amount of any dividend
income) recognized on the exchange; and
7. The holding period of the shares of FFC Common Stock to be received by
the shareholders of KHG will include the period during which they held
the shares of KHG Common Stock surrendered, provided the shares of KHG
Common Stock are held as a capital asset on the date of the exchange.
THE FOREGOING IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER UNDER PRESENT LAW. EACH SHAREHOLDER OF
KHG IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE PARTICULAR TAX
CONSEQUENCES OF THE MERGER AS THEY AFFECT HIS OR HER INDIVIDUAL CIRCUMSTANCES,
INCLUDING THE IMPACT OF ANY APPLICABLE ESTATE, GIFT, STATE, LOCAL, FOREIGN OR
OTHER TAX.
Accounting Treatment
- --------------------
The Merger Agreement contemplates that the Merger will be treated as a
pooling-of-interests for financial accounting purposes. If FFC would be
required to purchase more than ten percent of the outstanding shares of KHG
Common Stock for cash or if other conditions arise which would prevent the
Merger from being treated as a pooling-of-interests for financial accounting
purposes, FFC has the right to terminate the Merger Agreement and to cancel
36
the Merger. FFC presently intends to exercise its right of termination if the
Merger could not be treated as a pooling-of-interests for financial accounting
purposes.
Although it has no intention of doing so, FFC could choose to waive its
right of termination and go forward with the proposed merger even if the merger
could not be treated as a pooling-of-interests for financial accounting
purposes. In that event, the following would occur: (i) the merger between KHG
and FFC would be treated as a purchase transaction under financial accounting
principles; (ii) FFC would file a post-effective amendment, presenting revised
financial disclosures and updated information, to the registration statement of
which this Proxy Statement/Prospectus is a part; and (iii) KHG's management
would resolicit proxies from KHG's shareholders.
Rights of Dissenting Shareholders
- ---------------------------------
Because KHG Common Stock is listed on a national securities exchange, the
holders of KHG Common Stock do not have dissenters rights in connection with the
Merger.
Restrictions on Resale of FFC Common Stock Held By Affiliates of KHG
- --------------------------------------------------------------------
The shares of FFC Common Stock to be issued upon consummation of the Merger
have been registered with the SEC under the Securities Act of 1933 (the "1933
Act") and, following the Merger, may be freely resold or otherwise transferred
by all former shareholders of KHG, except those former shareholders who are
deemed to be "affiliates" of KHG within the meaning of SEC Rules 144 and 145.
In general terms, any person who is an executive officer, director or ten
percent or greater shareholder of KHG at the time of the Special Meeting may be
deemed to be an affiliate of KHG for purposes of SEC Rules 144 and 145.
36
FFC Common Stock received by persons who are deemed to be affiliates of KHG
may be resold during the one year following the Effective Date only: (i) in
compliance with the provisions of SEC Rule 145(d), (ii) in compliance with the
provisions of another applicable exemption from the registration requirements of
the 1933 Act, or (iii) pursuant to an effective registration statement filed
with the SEC. In very general terms, SEC Rule 145(d) would permit an affiliate
of KHG to sell shares of FFC Common Stock received by him or her in connection
with the Merger in ordinary brokerage transactions, subject to certain
limitations on the number of shares of FFC Common Stock which may be sold during
any consecutive three-month period. After the one-year period, the affiliates
of KHG who are not affiliates of FFC may resell their shares without
restriction. Notwithstanding the foregoing, in order to comply with the SEC's
rules on pooling-of-interests accounting treatment, an affiliate of KHG (as a
general rule and subject to an exception in the case of certain de minimis
-- -------
sales) may not sell any shares of FFC Common Stock received by him or her in
exchange for his or her shares of KHG Common Stock until after the publication
of financial results covering at least thirty days of post-Merger combined
operations of FFC.
Under the terms of the Merger Agreement, each person who may be deemed to be
an affiliate of KHG is required, prior to the closing of the Merger, to deliver
to FFC an agreement, in form and substance satisfactory to FFC, acknowledging
and agreeing to abide by the limitations imposed by the 1933 Act and the rules
of the SEC thereunder regarding the sale or other disposition of the shares of
FFC Common Stock to be received by him or her pursuant to the Merger.
Warrant Agreement
- -----------------
37
Following the execution of the Merger Agreement, KHG and FFC executed a
Warrant Agreement, dated August 15, 1997 (the "Warrant Agreement"). A copy of
the Warrant Agreement is attached as Exhibit C to this Proxy
Statement/Prospectus. The following description of the Warrant Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Warrant Agreement, which is incorporated herein in its entirety.
Pursuant to the Warrant Agreement, KHG issued to FFC a warrant (the
"Warrant") to purchase from KHG up to 981,740 fully paid and non-assessable
shares of KHG Common Stock at a price per share equal to $36.75, subject to
adjustment as provided for in the Warrant Agreement (such exercise price, as so
adjusted, is referred to herein as the "Exercise Price"). The execution of the
Warrant Agreement was required by FFC as a condition to its execution of the
Merger Agreement, and the effect of the Warrant Agreement is to increase the
likelihood that the Merger will occur by making it more difficult and expensive
for another party to acquire KHG.
The Warrant may be exercised in whole or in part at any time or from time to
time on or after the occurrence of an Exercise Event (as defined below) until
termination of the Warrant Agreement. So long as the Warrant is owned by FFC,
it may be exercised for no more than the number of shares of KHG Common Stock
equal to 981,740 (subject to adjustment as described below) less the number of
shares of KHG Common Stock at the time owned by FFC.
Under the terms of the Warrant and the Warrant Agreement, FFC may exercise
the Warrant, without KHG's consent, upon or after the occurrence of any of the
following: (i) a knowing breach of any representation, warranty, or covenant
set forth in the Merger Agreement by KHG which would permit a termination of the
Merger Agreement by FFC pursuant to Section 8.1(b)(i) thereof following (A) the
occurrence of an event described in subparagraphs (iii) or (iv) below or (B) an
offer or filing described in subparagraph (v) below; (ii) the failure of KHG's
shareholders to approve the Merger Agreement at a meeting called for such
purpose if at the time of such meeting there has 37
been an announcement by any
person (other than FFC) of an offer or proposal to acquire 25% or more of the
Common Stock (before giving effect to any exercise of the Warrant), or to
acquire, merge or consolidate with KHG, or to purchase all or substantially all
of LVNB's assets (including without limitation any shares of LVNB or all or
substantially all of LVNB's assets) and, within ten business days after such
announcement, the Board of Directors of KHG either fails to recommend against
acceptance of such offer by KHG's shareholders or takes no position with respect
thereto; (iii) the acquisition by any person of beneficial ownership of 25% or
more of the KHG Common Stock (before giving effect to any exercise of the
Warrant); (iv) any person (other than FFC) shall have commenced a tender or
exchange offer, or shall have filed an application with an appropriate bank
regulatory authority with respect to a publicly announced offer, to purchase or
acquire securities of KHG such that, upon consummation of such offer, such
person would have beneficial ownership of 25% or more of the KHG Common Stock
and, within twelve months from such offer or filing, such person consummates an
acquisition of 25% or more of the KHG Common Stock; (v) KHG shall have entered
into an agreement, letter of intent, or other understanding with any person
(other than FFC) providing for such person (A) to acquire, merge, consolidate or
enter into a statutory share exchange with KHG or to purchase all or
substantially all of KHG's assets (including without limitation any shares of
LVNB or all or substantially all of LVNB's assets), (B) to negotiate with KHG
with respect to any of the events or transactions mentioned in the preceding
clause (A); or (vi) termination, or attempted termination, of the Merger
Agreement by KHG under Section 5.7 of the Merger Agreement (relating to the
exercise by the directors of KHG of their fiduciary duty) following receipt of a
written proposal to engage in an acquisition transaction from a third party.
38
The Warrant may be exercised by presentation and surrender thereof to KHG at
its principal office accompanied by (i) a written notice of exercise, (ii)
payment of the Exercise Price for the number of shares of KHG Common Stock
specified in such notice, and (iii) a certificate of the holder of the Warrant
(the "Holder") specifying the event or events which have occurred and which
entitle the Holder to exercise the Warrant. Upon such presentation and
surrender, KHG shall issue promptly to the Holder the number of shares of KHG
Common Stock to which the Holder is entitled. If the Warrant is exercised in
part, KHG will, upon surrender of the Warrant for cancellation, execute and
deliver a new Warrant entitling the Holder to purchase the balance of the shares
of KHG Common Stock issuable thereunder.
Generally, in the event of any change in the outstanding shares of KHG
Common Stock by reason of a stock dividend, stock split or stock
reclassification, the number and kind of shares or securities subject to the
Warrant and the Exercise Price shall be appropriately and equitably adjusted so
that the Holder shall receive upon exercise of the Warrant the number and class
of shares or other securities or property that the Holder would have received in
respect of the shares of KHG Common Stock that could have been purchased upon
exercise of the Warrant if the Warrant could have been and had been exercised
immediately prior to such event. If, at any time after the Warrant may be
exercised or sold by FFC, KHG has received a written request from FFC, KHG shall
prepare, file and keep effective and current any governmental approvals required
in connection with the Warrant and/or the shares of KHG Common Stock issued or
issuable upon exercise of the Warrant. All expenses incurred by KHG in complying
with such governmental approvals will be paid by KHG. FFC will pay all expenses
incurred by FFC in connection with such governmental approvals, including fees
and disbursements of its counsel and accountants, underwriting discounts and
commissions, and transfer taxes payable by FFC.
The Warrant and the rights conferred thereby will terminate (i) upon the
Effective Date, (ii) upon a valid termination of the Merger Agreement prior to
the occurrence of an Exercise Event, or (iii) to the extent the Warrant has 38
not
previously been exercised, sixty (60) days after the occurrence of an Exercise
Event.
Under the Warrant Agreement, FFC has the right to require KHG to repurchase
the Warrant or, in the event the Warrant has been exercised in whole or in part,
redeem the shares obtained upon such exercise within 60 days of an Exercise
Event. In the case of a repurchase of shares obtained upon exercise of the
Warrant, the redemption price per share (the "Redemption Price") is to be equal
to the highest of: (i) the Exercise Price, (ii) the highest price paid or
agreed to be paid for any share of Common Stock by an Acquiring Person (defined
as any person who or which is the beneficial owner of 25% or more of the KHG
Common Stock) during the one year period immediately preceding the date of
redemption, and (iii) in the event of a sale of all or substantially all of
KHG's assets: (x) the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of KHG as determined by a
recognized investment banking firm selected by FFC, divided by (y) the number of
shares of KHG Common Stock then outstanding. If the price paid consists in
whole or in part of securities or assets other than cash, the value of such
securities or assets shall be their then current market value as determined by a
recognized investment banking firm selected by FFC.
In the case of a repurchase of the Warrant, the redemption price is to be
equal to the product obtained by multiplying: (i) the number of shares of KHG
Common Stock represented by the portion of the Warrant that FFC is requiring KHG
to repurchase, times (ii) the excess of the Redemption Price over the Exercise
Price.
39
COMPARATIVE STOCK PRICES AND DIVIDENDS
--------------------------------------
AND RELATED SHAREHOLDER MATTERS
-------------------------------
Common Stock of FFC
- -------------------
FFC Common Stock is traded in the over-the-counter market and is listed on
NASDAQ under the symbol "FULT." The following table sets forth, for the periods
indicated, the high and low closing sale price for FFC Common Stock as reported
on NASDAQ and cash dividends paid per share.
Cash Dividends
1995 High Low Paid Per Share
- ---- ------ ---------- --- --------------
First Quarter $15.41 $14.27 $0.116
Second Quarter 15.91 14.84 0.125
Third Quarter 16.64 14.67 0.129
Fourth Quarter 18.80 16.12 0.132
1996
- ----
First Quarter 18.39 16.74 0.137
Second Quarter 18.86 17.05 0.152
Third Quarter 18.86 16.94 0.152
Fourth Quarter 19.55 17.50 0.153
1997
- ----
First Quarter 23.18 18.64 0.159
Second Quarter 28.00 22.27 0.170
Third Quarter 30.25 26.88 0.170
Fourth Quarter 32.50 28.00 0.170
On August 14, 1997, the last trading day before public announcement of the
Merger Agreement, the high and low quotations for FFC Common Stock were $28.875
and $28.875, respectively, and the closing bid price was $28.875 per share, as
reported on NASDAQ. On ________,December 31, 1997, the closing bid and asked quotations
for FFC Common Stock as reported on NASDAQ were $_____$32.50 and $_____,$32.88, respectively,
per share, and the closing sale price was $_____$32.50 per share. As of September 30,
1997, FFC Common Stock was held by 12,394 holders of record.
FFC has in the past paid regular quarterly cash dividends to its
shareholders on or about the 15th day of January, April, July and October of
each year.
Common Stock of KHG
- -------------------
KHG Common Stock is traded on the American Stock Exchange.
The table below reports the high and low closing sale price of KHG Common
Stock as reported on the American Stock Exchange during the periods indicated
and the cash dividends paid per share
Cash Dividends
1995 High Low Paid Per Share
- ---- ------ ---------- --- --------------
First Quarter $20.25 $17.63 $0.165
Second Quarter 19.79 17.21 0.18
Third Quarter 22.69 19.04 0.18
Fourth Quarter 23.91 22.50 0.18
Cash Dividends
40
Cash Dividends
1996 High Low Paid Per Share
- ---- ------ ---------- --- --------------
First Quarter $26.13 $22.50 $ 0.20$0.20
Second Quarter 23.88 20.13 0.20
Third Quarter 23.00 21.75 0.22
Fourth Quarter 23.63 21.88 0.22
1997
- ----
First Quarter 27.88 23.00 0.25
Second Quarter 31.50 26.13 0.25
Third Quarter 52.63 31.25 0.25
Fourth Quarter 55.75 49.00 0.25
As of the close of business on _______________,December 31, 1997, KHG's Common Stock was
held by approximately _____1,350 holders of record. KHG's ability to declare or pay
cash dividends prior to the Effective Date of the Merger is limited by the
Merger Agreement. See THE MERGER -- Business Pending the Effective Date.
PRO FORMA COMBINED
------------------
FINANCIAL INFORMATION
---------------------
The unaudited pro forma combined condensed balance sheet and the unaudited
pro forma combined condensed statements of income of FFC set forth below give
effect, using the pooling-of-interests method of accounting, to the proposed
acquisition of KHG (based upon an exchange ratio of 1.83 shares of FFC Common
Stock for each share of KHG Common Stock). The unaudited pro forma combined
condensed financial statements arebalance sheet is presented as though the Merger between FFC and KHG had occurred onwas
consummated as of September 30, 1997. The unaudited pro forma combined
condensed statements of income are presented as though the Merger was
consummated as of the beginning of the periods presented.
The unaudited pro forma financial information, including the notes thereto
set forth below, is not necessarily indicative of the financial condition or
results of operations of FFC as they would have been had the proposed
acquisition of KHG occurred during the periods presented or as they may be in
the future. The unaudited pro forma financial information set forth below
should be read in conjunction with the financial statements of FFC, including
the notes thereto, which are incorporated herein by reference, and the financial
statements of KHG, including the notes thereto, which are incorporated herein by
reference. See INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.
41
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
September 30, 1997
(Dollars in Thousands)
--------------------------------------------
(Dollars in Thousands)
--------------------------------------------
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
September 30, 1997
(Dollars in Thousands)
---------------------------------------------
(Dollars in Thousands)
-------------------------------------------------
Fulton
Financial Keystone Heritage Pro Forma
Corporation Group, Inc. Adjustments Combined
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $187,014 $21,274 $208,288
Interest Bearing Deposits 1,225 437 1,662
Federal Funds Sold -- 8,000 8,000
Mortgage Loans Held for Sale 1,502 1,418 2,920
Investment Securities:
Securities Held to Maturity 292,483 80,177 372,660
Securities Available for
Sale 574,221 63,576 (136)(B) 637,661
Loans 3,245,082 463,493 3,708,575
Less: Allowance for Loan
Losses (46,765) (8,633) (55,398)
Unearned Income (7,998) (1,568) (9,566)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Loans 3,190,319 453,292 0 3,643,611
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment 59,576 8,272 67,848
Accrued Interest Receivable 26,488 4,161 30,649
Other Assets 79,894 5,729 29(B) 85,652
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,412,722 $646,336 ($107) $5,058,951
====================================================================================================================================================================================
Liabilities
Deposits:
Non-Interest Bearing $542,895 $74,339 $617,234
Interest Bearing 3,062,109 473,695 3,535,804
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 3,605,004 548,034 0 4,153,038
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased 31,175 7,500 38,675
Securities Sold Under
Agreements to Repurchase 157,029 11,581 168,610
Demand Notes of U.S.
Treasury 5,792 -- 5,792
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings 193,996 19,081 0 213,077
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Accrued Interest Payable 28,557 5,416 33,973
Other Liabilities 70,317 3,186 73,503
Long-Term Debt 56,613 3,388 60,001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 3,954,487 579,105 0 4,533,592
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
42
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
September 30, 1997
(Dollars in Thousands)
--------------------------------------------
Fulton
Financial Keystone Heritage Pro Forma
Corporation Group, Inc. Adjustments Combined
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common Stock 101,572 20,358 (1,730)(2,261)(A) 120,200&(B) 119,669
Capital Surplus 293,010 22,078 1,730 (461)(A) 316,818&(B) 314,627
Retained Earnings 45,164 26,148 -- 71,312
Less: Treasury Stock -- (2,669) (53)(B) (2,722)2,669(A)&(B) --
Net Unrealized Holding Gain
on Securities 18,489 1,316 (54)(B) 19,751
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 458,235 67,231 (107) 525,359
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,412,722 $646,336 ($107) $5,058,951
=======================================================================================================================================================================
- ----------------------------------------------
Notes to Pro Forma Combined Balance Sheet:
(A) THE TRANSACTION CALLS FOR THE ISSUANCE OF FULTON FINANCIAL CORPORATION (FFC)
$2.50 PAR VALUE COMMON STOCK IN EXCHANGE FOR 100% OF THE 4,071,6833,955,583 ELIGIBLE
SHARES OF KEYSTONE HERITAGE GROUP, INC. (KHG) $5.00 PAR VALUE COMMON STOCK
ISSUED. KHG ELIGIBLE SHARES REFLECT THE ANTICIPATED CANCELLATION AND
RETIREMENT OF 113,434 TREASURY SHARES HELD BY KHG AS WELL AS THE 2,666
SHARES OF KHG HELD BY FFC AS OF THE STATEMENT DATE (4,071,683 ISSUED SHARES
OF KHG, LESS 113,434 TREASURY SHARES AND 2,666 KHG SHARES HELD BY FFC EQUALS
3,955,583 ELIGIBLE SHARES). THE EXCHANGE RATIO HAS BEEN SET AT 1.83 SHARES
OF FFC'S COMMON STOCK FOR EACH SHARE OF KHG'S ELIGIBLE COMMON STOCK ISSUED ON THE
EFFECTIVE DATE. KHG WILL MERGE WITH AND INTO FFC WITH FULTON FINANCIAL
CORPORATION SURVIVING THE MERGER. THIS EXCHANGE RATIO IS SUBJECT TO
ADJUSTMENT IN THE EVENT OF A STOCK DIVIDEND OR SIMILAR TRANSACTION INVOLVING
FFC COMMON STOCK PRIOR TO THE EFFECTIVE DATE.
(B) THIS PRO FORMA ADJUSTMENT REFLECT THE CLASSIFICATIONCANCELLATION AND RETIREMENT OF 2,666
SHARES OF KHG CURRENTLY OWNED BY FFC, AND CLASSIFIED AS AVAILABLE FOR SALE
(COST- $53 FMV - $136), AS TREASURY STOCK UPON CONVERSION TO SHARES OF FFC..
43
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1996
(Dollars in Thousands)
--------------------------------------------
Fulton
Financial Keystone Heritage Pro Forma
Corporation Group, Inc. Adjustments Combined
-----------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 180,691 $ 22,832 $ 203,523
Interest Bearing Deposits 2,077 181 2,258
Mortgage Loans Held for Sale 125 6,019 6,144
Investment Securities:
Securities Held to Maturity 429,138 91,652 520,790
Securities Available for
Sale, at fair value 349,092 62,596 (61)(b) 411,627
Loans 3,035,147 424,346 3,459,493
Less: Allowance for loan losses (44,792) (7,736) (52,528)
Unearned income (8,080) (1,812) (9,892)
-----------------------------------------------------------------------------------------
Net Loans 2,982,275 $ 414,798 0 3,397,073
-----------------------------------------------------------------------------------------
Premises and Equipment 57,900 8,132 66,032
Accrued Interest Receivable 27,044 3,677 30,721
Other Assets 82,981 6,420 3(b) 89,404
-----------------------------------------------------------------------------------------
TOTAL ASSETS $4,111,323 $616,307 $ (58) $4,727,572
=========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 543,628 $ 72,683 $ 616,311
Interest Bearing 2,824,326 454,150 3,278,476
-----------------------------------------------------------------------------------------
Total Deposits 3,367,954 526,833 0 3,894,787
-----------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased 63,825 63,825
Securities Sold Under
Agreements to Repurchase 139,670 12,478 152,148
Demand Notes of U.S. Treasury 5,544 5,544
-----------------------------------------------------------------------------------------
Total Short-Term Borrowings 209,039 12,478 0 221,517
-----------------------------------------------------------------------------------------
Accrued Interest Payable 20,667 5,184 25,851
Other Liabilities 42,546 3,135 45,681
Long-Term Debt 51,560 6,438 57,998
-----------------------------------------------------------------------------------------
Total Liabilities 3,691,766 554,068 0 4,245,834
-----------------------------------------------------------------------------------------
Shareholders' equity:
Common Stock 92,174 20,358 (1,730)(a) 110,802
Capital Surplus 217,833 22,078 1,730 (a) 241,641
Retained Earnings 100,160 21,418 121,578
Net unrealized holding gain
on securities 9,390 508 (5)(b) 9,893
Less: Treasury Stock, at cost 0 (2,123) (53)(b) (2,176)
-----------------------------------------------------------------------------------------
Total Shareholders' Equity 419,557 62,239 (58) 481,738
-----------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $4,111,323 $ 616,307 $ (58) $ 4,727,572
=========================================================================================
44
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1996
(Dollars in Thousands)
--------------------------------------------
Notes to Pro Forma combined Balance Sheets:
(a) These Adjustments to the capital accounts reflect the issuance
of FFC Common Stock, $2.50 par value per share for 100% of the
KHG Common Stock, $5.00 par value per share, issued. An
exchange ratio of 1.83 shares of FFC Common Stock for each
share of KHG's Common Stock was utilized in this illustration.
(b) This Adjustment reflects the classification of 2,666 shares of
KHG Common Stock currently owned by FFC, and classified as
Available for Sale (cost - $53, fmv - $61), as Treasury Stock
upon conversion to shares of FFC.
45
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1995
(Dollars in Thousands)
Fulton Keystone Heritage
Financial Group, Inc. Pro Forma
Corporation Adjustments Combined
---------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 165,691 $ 23,766 $189,457
Interest Bearing Deposits 4,443 246 4,689
Mortgage loans held for sale 613 378 991
Investment securities:
Securities held to maturity 560,293 86,885 647,178
Securities Available for
sale, at fair value 278,001 65,799 (61)(b) 343,739
Loans 2,731,889 393,461 3,125,350
Less: Allowance for Loan Losses (41,134) (8,025) (49,159)
Unearned income (9,327) (2,830) (12,157)
---------------------------------------------------------------------------------
Net Loans 2,681,428 382,606 0 3,064,034
---------------------------------------------------------------------------------
Premises and Equipment 52,041 7,933 59,974
Accrued Interest Receivable 27,744 3,844 31,588
Other Assets 81,643 6,320 3 (b) 87,966
---------------------------------------------------------------------------------
Total Assets $3,851,897 $ 577,777 $ (58) 4,429,616
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 474,755 $ 65,530 $ 540,285
Interest-bearing 2,742,451 422,387 3,164,838
---------------------------------------------------------------------------------
Total Deposits 3,217,206 487,917 3,705,123
---------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased 190 190
Securities Sold Under
Agreements to Repurchase 115,049 8,640 123,689
Demand Notes of U.S. Treasury 5,058 5,058
---------------------------------------------------------------------------------
Total Short Term Borrowing 120,297 8,640 0 128,937
---------------------------------------------------------------------------------
Accrued Interest Payable 20,302 5,284 25,586
Other Liabilities 70,137 3,048 73,185
Long-Term Debt 37,689 14,009 51,698
---------------------------------------------------------------------------------
Total Liabilities 3,465,631 518,898 0 3,984,529
---------------------------------------------------------------------------------
Shareholders' equity:
Common Stock 84,524 20,358 (1,730)(a) 103,152
Capital Surplus 170,618 22,078 1,730 (a) 194,426
Retained earnings 124,770 16,107 140,877
Net unrealized holding gain
on securities 8,542 336 (5)(b) 8,873
Less: Treasury Stock, at cost (2,188) (53)(b) (2,241)
---------------------------------------------------------------------------------
Total shareholders' equity $ 386,266 58,879 (58) 445,087
---------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $3,851,897 $ 577,777 $ (58) $4,429,616
=================================================================================
46
Fulton Financial Corporation
Pro Forma Combined Balance Sheet (Unaudited)
December 31, 1995
(Dollars in Thousands)
----------------------------------------------
Notes to Pro Forma combined Balance Sheets:
(a) These Adjustments to the capital accounts reflect the issuance
of FFC Common Stock, $2.50 par value per share for 100% of the
KHG Common Stock, $5.00 par value per share, issued. An
exchange ratio of 1.83 shares of FFC Common Stock for each
share of KHG's Common Stock was utilized in this illustration.
(b) This Adjustment reflects the classification of 2,666 shares of
KHG Common Stock currently owned by FFC, and classified as
Available for Sale (cost - $53, fmv - $61), as Treasury Stock
upon conversion to shares of FFC.
47
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
For the Nine Months Ended September 30, 1997
(Dollars in Thousands)
----------------------------------------------------------------------------------------------------------------------
Fulton Keystone Adjustments(a)
Financial Keystone Heritage Adjustments(a) Pro Forma
Corporation Group, Inc. Combined
----------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, Including Fees $ 201,066 $ 29,136 $ 230,202$201,066 $29,136 $230,202
Investment Securities:
Taxable 31,022 5,857 36,879
Tax-Exempt 2,021 569 2,590
Dividends 1,860 196 (2) 2,054
Federal Funds Sold 177 361 538
Interest-Bearing Deposits 53 13 66
----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 236,199 36,132 (2) 272,329
Interest Expense
Deposits 91,644 15,286 106,930
Short-Term Borrowings 6,390 401 6,791
Long-Term Debt 2,639 278 2,917
----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 100,673 15,965 0 116,638
----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 135,526 20,167 (2) 155,691
Provision for Loan Losses 5,389 -- 5,389
----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 130,137 20,167 (2) 150,302
----------------------------------------------------------------------------------------------------------------------------
Other Income
Trust Department 6,684 1,004 7,688
Service Charges on Deposit
Accounts 11,627 1,078 12,705
Other Service Charges and Fees 6,447 1,767 8,214
Gain on Sale of Mortgage Loans 875 664 1,539
Investment Securities Gains 5,205 512 5,717
Gain on Sale of Credit Card
Loans and Merchant Processing
Activity -- 618 618
----------------------------------------------------------------------------------------------------------------------------
30,838 5,643 0 36,481
----------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 49,078 8,211 57,289
Net Occupancy Expense 7,774 1,147 8,921
Equipment Expense 5,460 1,419 6,879
FDIC Assessment Expense 497 48 545
Special Services 5,043 605 5,648
Other 23,136 3,287 26,423
----------------------------------------------------------------------------------------------------------------------------
90,988 14,717 0 105,705
----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 69,987 11,093 (2) 81,078
Income Taxes 21,703 3,393 25,096
----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 48,284 $ 7,700 (2) $ 55,982
============================================================================================================================
Per-Share Data:
Net Income $ 1.19 $ 1.94 $ 1.17
Cash Dividends $ 0.499 $ 0.750 $ 0.485
Weighted Average Shares
Outstanding 40,548,961 3,959,748 (4,879) 47,790,421
- -----------------------------------------------
Note to Pro Forma Combined Income Statements
(a) This Adjustment represents the dividend income received by FFC on KHG
Common Stock held during the period. The pro forma weighted average shares
outstanding reflect the cancellation and retirement of the 2,666 average
shares of KHG Common Stock held by FFC during this period.
48
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
For the Nine Months Ended September 30, 1996
(Dollars in Thousands)
------------------------------------------------------------
Fulton Keystone Adjustments(a)
Financial Keystone Heritage Adjustments(a) Pro Forma
Corporation Group, Inc. Combined
------------------------------------------------------------------------------
Interest Income-------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 182,287 $ 27,096 $ 209,383$209,383
Investment Securities:
Taxable 31,377 5,429 36,806
Tax-Exempt 2,735 382 3,117
Dividends 1,537 159 (2) 1,694
Federal Funds Sold 589 143 732
Interest-Bearing Deposits 140 13 153
-------------------------------------------------------------------------------
TOTAL INTEREST INCOME 218,665 33,222 (2) 251,885
------------------------------------------------------------------------------
Interest Expense
Deposits 85,520 13,626 99,146
Short-Term Borrowings 5,842 369 6,211
Long-Term Debt 1,430 420 1,850
-------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 92,792 14,415 0 107,207
-------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 125,873 18,807 (2) 144,678
Provision for Loan Losses 3,442 3,442
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 122,431 18,807 (2) 141,236
Other Income
Trust Department 5,714 961 6,675
Service Charges on Deposit Accounts 10,392 978 11,370
Other Service Charges and Fees 6,309 1,624 7,933
Gain on Sale of Mortgage Loans 715 644 1,359
Investment Securities Gains 2,136 58 2,194
-------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 25,266 4,265 0 29,531
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 45,570 7,522 53,092
Net Occupancy Expense 7,537 967 8,504
Equipment Expense 4,662 1,500 6 6,162
FDIC Assessment Expense 3,243 2 3,245
Special Services 5,015 640 5,655
Other 22,717 3,346 26,063
-------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 88,744 13,977 0 102,721
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 58,953 9,095 (2) 68,046
Income Taxes 17,666 2,795 20,461
-------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 41,287 $ 6,300 $ (2) $ 47,585
=============================================================================================================================================================
Per Share Data:
Net Income $ 1.02 $ 1.55 $ 1.00
Cash Dividends $ 0.441 $ 0.621 $ 0.425
Weighted Average Shares Outstanding 40,355,919 4,065,506 (4,879) 47,790,916
- ----------------------------------------------------
Note to Pro Forma Combined Income Statements:
(a) This Adjustment represents the dividend income received by FFC on KHG
Common Stock held during the period. The pro forma weighted average shares
outstanding reflect the cancellation and retirement of the 2,666 average
shares of KHG Common Stock held by FFC during this period.
49
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
Year Ended December 31, 1996
(Dollars in Thousands)
------------------------------------------------------------
Fulton Keystone
Financial Heritage Adjustments (a) Pro Forma
Corporation Group, Inc. Combined
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 246,579 $ 36,725 $ 283,304
Investment Securities:
Taxable 41,653 7,193 48,846
Tax-exempt 3,607 530 4,137
Dividends 2,101 217 (2) 2,316
Federal Funds Sold 730 286 1,016
Interest-Bearing Deposits 179 23 202
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 294,849 44,974 (2) 339,821
Interest Expense
Deposits 114,614 18,490 133,104
Short-Term Borrowings 8,569 486 9,055
Long-Term Debt 1,994 518 2,512
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 125,177 19,494 0 144,671
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 169,672 25,480 (2) 195,150
Provision for Loan Losses 5,561 5,561
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 164,111 25,480 (2) 189,589
Other Income
Trust Department 7,872 1,310 9,182
Service Charges on Deposit
Accounts 14,164 1,331 15,495
Other Service Charges and Fees 8,619 2,271 10,890
Gain on Sale of Mortgage Loans 1,204 940 2,144
Investment Securities Gains 3,124 79 3,203
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
34,983 5,931 0 40,914
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 61,520 10,040 71,560
Net Occupancy Expenses 9,975 1,306 11,281
Equipment Expense 6,281 1,954 8,235
FDIC Assessment Expense 3,225 2 3,227
Special Services 6,764 882 7,646
Other 32,118 4,628 36,746
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
119,883 18,812 0 138,695
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 79,211 12,599 (2) 91,808
Income Taxes 23,464 3,879 27,343
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 55,747 $ 8,720 $ (2) $ 64,465
=================================================================================================================================================================
Per-Share Data:
Net Income $ 1.38 $ 2.15 $ 1.35$1.38 $2.15 $1.35
Cash Dividends $ 0.594 $ 0.841 $ 0.573$0.594 $0.841 $0.573
Weighted Average Shares
Outstanding 40,371,748 4,053,490 (4,879) 47,784,756
- --------------------------------------------
Note to Pro Forma Combined Income Statements:
(a) This Adjustment represents the dividend income received by FFC on KHG
Common Stock held during the period. The pro forma weighted average shares
outstanding reflect the cancellation and retirement of the 2,666 average
shares of KHG Common Stock held by FFC during this period.
50
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
Year Ended December 31, 1995
(Dollars in Thousands)
-------------------------------------------------------------------------------------------------------------------------
Fulton Keystone
Financial Heritage Adjustments (a) Pro Forma
Corporation Group, Inc. Combined
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 230,201 $ 34,946 $ 265,147
Investment Securities:
Taxable 35,722 7,104 42,826
Tax-exempt 5,166 447 5,613
Dividends 2,072 195 (1) 2,266
Federal Funds Sold 2,711 374 3,085
Interest-Bearing Deposits 272 165 437
-----------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 276,144 43,231 (1) 319,374
Interest Expense
Deposits 110,469 17,836 128,305
Short-Term Borrowings 6,428 466 6,894
Long-Term Debt 2,233 766 2,999
-----------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 119,130 19,068 0 138,198
-----------------------------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 157,014 24,163 (1) 181,176
Provision for Loan Losses 3,998 3,998
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 153,016 24,163 (1) 177,178
-------------------------------------------------------------------------
Other Income
Trust Department 7,435 1,277 8,712
Service Charges on Deposit
Accounts 11,787 1,292 13,079
Other Service Charges and Fees 8,159 2,507 10,666
Gain on Sale of Mortgage Loans 1,105 209 1,314
Investment Securities Gains 3,205 126 3,331
-----------------------------------------------------------------------------------------------------------------------------------------------------------
31,691 5,411 0 37,102
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 59,060 9,770 68,830
Net Occupancy Expense 9,431 1,256 10,687
Equipment Expense 5,805 1,934 7,739
FDIC Assessment Expense 3,778 539 4,317
Special Services 5,727 769 6,496
Other 29,077 4,121 33,198
-----------------------------------------------------------------------------------------------------------------------------------------------------------
112,878 18,389 0 131,267
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 71,829 11,185 (1) 83,013
Income Taxes 20,217 3,528 23,745
-----------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 51,612 $ 7,657 $ (1) $ 59,268
===========================================================================================================================================================
Per-Share Data:
Net Income $ 1.28 $ 1.88 $ 1.24$1.28 $1.88 $1.24
Cash Dividends $ 0.502$0.502 $0.705 $ 0.484$0.484
Weighted Average Shares
Outstanding 40,333,127 4,066,936 (2,594) 47,773,026
- -----------------------------------------
Note to Pro Forma Combined Income Statements:
(a) This Adjustment represents the dividend income received by FFC on KHG
Common Stock held during the period. The pro forma weighted average shares
outstanding reflect the cancellation and retirement of the 2,666 average
shares of KHG Common Stock held by FFC during this period.
51
Fulton Financial Corporation
Pro Forma Combined Condensed Statement of Income (Unaudited)
Year Ended December 31, 1994
(Dollars in Thousands)
------------------------------------------------------------
Fulton Keystone
Pro Forma
Financial Heritage Adjustments CombinedPro Forma
Corporation Group, Inc. -----------------------------------------------------------------------Combined
-------------------------------------------------------------------------
Interest Income
Loans, Including Fees $ 187,000 $ 30,822 $ 217,822
Investment Securities:
Taxable 35,312 5,943 41,255
Tax-Exempt 6,152 558 6,710
Dividends 1,495 161 1,656
Federal Funds Sold 1,196 115 1,311
Interest-Bearing Deposits 170 12 182
------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 231,325 37,611 0 268,936
Interest Expense
Deposits 79,863 13,277 93,040
Short-Term Borrowings 5,310 562 5,872
Long-Term Debt 1,268 608 1,876
------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 86,341 14,447 0 100,788
------------------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 144,984 23,164 0 168,148
Provision for Loan Losses 3,074 300 3,374
------------------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 141,910 22,864 0 164,774
------------------------------------------------------------------------------------------------------------------------------------------------
Other Income
Trust Department 7,063 1,289 8,352
Service Charges on Deposit
Accounts 11,073 1,209 12,282
Other Service Charges and
Fees 6,560 2,060 8,620
Gain on Sale of Mortgage
Loans 1,189 290 1,479
Investment Securities Gains 2,133 (29) 2,104
------------------------------------------------------------------------------------------------------------------------------------------------
28,018 4,819 0 32,837
------------------------------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and Employee Benefits 54,639 8,834 63,473
Net Occupancy Expense 8,239 1,237 9,476
Equipment Expense 6,014 1,871 7,885
FDIC Assessment Expense 6,206 1,016 7,222
Special Services 5,025 713 5,738
Other 25,493 3,962 29,455
------------------------------------------------------------------------------------------------------------------------------------------------
105,616 17,633 0 123,249
------------------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 64,312 10,050 0 74,362
Income Taxes 17,747 3,283 21,030
------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 46,565 $ 6,767 $ 0 $ 53,332
================================================================================================================================================
Per-Share Data:
Net Income $ 1.16 $ 1.67 $ 1.12
Cash Dividends $ 0.444 $ 0.633 $ 0.428
Weighted Average Shares
Outstanding 40,085,339 4,061,617 47,518,098
52
INFORMATION CONCERNING FULTON FINANCIAL CORPORATION
---------------------------------------------------
AND DESCRIPTION OF FFC COMMON STOCK
-----------------------------------
General
- -------
FFC is a Pennsylvania business corporation and a registered bank holding
company with its headquarters in Lancaster, Pennsylvania. As a bank holding
company, FFC engages in a general commercial and retail banking and trust
business, and also in related financial businesses, through its bank and nonbank
subsidiaries. FFC's subsidiary banks currently operate eighty-six banking
offices in Pennsylvania, sixteen banking offices in Maryland, seven banking
offices in Delaware, and fourteen banking offices in New Jersey. As of September
30, 1997, FFC had consolidated total assets of approximately $4.4 billion.
The principal assets of FFC are the following eleven wholly-owned bank
subsidiaries, each of which is insured by the FDIC: (i) Fulton Bank ("Fulton"),
a Pennsylvania bank and trust company which is not a member of the Federal
Reserve System, (ii) Farmers Trust Bank ("Farmers Trust"), a Pennsylvania bank
and trust company which is a member of the Federal Reserve System, (iii)
Swineford National Bank ("Swineford"), a national banking association which is a
member of the Federal Reserve System, (iv) Lafayette Bank ("Lafayette"), a
Pennsylvania bank and trust company which is not a member of the Federal Reserve
System, (v) FNB Bank, National Association ("FNB"), a national banking
association which is a member of the Federal Reserve System, (vi) Great Valley
Savings Bank ("Great Valley"), a Pennsylvania-chartered savings bank which is
not a member of the Federal Reserve System, (vii) Hagerstown Trust Company
("Hagerstown"), a Maryland trust company which is not a member of the Federal
Reserve System, (viii) Delaware National Bank ("Delaware National"), a national
banking association which is a member of the Federal Reserve System, (ix) The
Bank of Gloucester County ("Gloucester"), a New Jersey bank which is not a
member of the Federal Reserve System, (x) The Woodstown National Bank & Trust
Company ("Woodstown"), a national banking association which is a member of the
Federal Reserve System, and (xi) The Peoples Bank of Elkton ("Peoples"), a
Maryland bank which is not a member of the Federal Reserve System.
In addition, FFC has the following wholly-owned direct nonbank
subsidiaries: (i) Fulton Financial Realty Company, which holds title to or
leases certain properties on which facilities of Fulton and Farmers Trust are
located; (ii) Fulton Life Insurance Company, which engages in the business of
reinsuring credit life, accident and health insurance that is directly related
to extensions of credit by certain of FFC's bank subsidiaries; (iii) Central
Pennsylvania Financial Corp., which holds certain limited partnership interests
in low and moderate income housing projects and certain subsidiaries which in
turn hold either interests in real estate (these subsidiaries are, for the most
part, inactive, in the process of liquidation and immaterial to FFC) or
securities; and (iv) FFC Management, Inc., which owns certain securities.
As a registered bank holding company, FFC is subject to regulation under
the federal Bank Holding Company Act of 1956, as amended, and the rules adopted
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board") thereunder. Under applicable Federal Reserve Board policies, a bank
holding company such as FFC is expected to act as a source of financial strength
for each of its subsidiary banks and to commit resources to support each
subsidiary bank in circumstances when it might not do so absent such a policy.
Any capital loans made by a bank holding company to any of its subsidiary banks
would be subordinate in right of payment to the claims of depositors and certain
other creditors of such subsidiary banks.
53
The principal executive offices of FFC are located at One Penn Square, P.0.
Box 4887, Lancaster, Pennsylvania 17604, and its telephone number is (717) 291-
2411.
Loan Policies and Portfolio Quality
- -----------------------------------
FFC, through its bank subsidiaries, grants loans and makes other credit
facilities available to the general public. These extensions of credit are
structured to meet the varying needs of business, individual, and institutional
customers and include mortgages, lines of credit, term loans, leases and letters
of credit. This activity serves as a major source of revenue for FFC. However,
it also exposes FFC to potential losses upon borrower default. In order to
minimize the occurrence of loss, FFC's bank subsidiaries follow strict loan
underwriting and risk assessment policies. These policies emphasize the
financial strength and cash flow of the borrower rather than collateral value.
In the case of residential mortgage loans, FFC's underwriting policies conform
to guidelines of the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. Although collateral continues to play an important
part in lending decisions, it is not a substitute for a borrower's underlying
ability to pay. FFC's bank subsidiaries confine their lending to customers who
live, or which are based, in their respective market areas. By geographically
restricting the lending activities of each bank subsidiary, their respective
staffs can become more knowledgeable about local market conditions and can
thereby make better credit risk assessments and, therefore, more prudent lending
decisions. This superior knowledge of local economic conditions, when combined
with prudent underwriting standards, offsets and often surmounts the potential
risks arising from a geographic concentration of credits. Management believes
that FFC's loan customer base is reasonably diversified, because FFC's
subsidiary banks are located in and do business within a broad spectrum of local
communities and regional economies located in central and northeastern
Pennsylvania, western and northeastern Maryland, southern Delaware, and
southwestern New Jersey.
To counteract any problems with credit quality which do arise, FFC
maintains a proactive loan review function. This function, in combination with
the lending staff, attempts to identify deteriorating loans before they reach a
critical stage. This loan review policy not only protects FFC and its
subsidiaries from realizing greater loan losses but also, in many cases, assists
the borrower as well. Due to their underwriting criteria, FFC and its bank
subsidiaries have not made a determination to limit the availability of credit
to any segment of their customer base due to changes in general economic
conditions. FFC and its bank subsidiaries do take these conditions into
consideration when assessing individual credit risk, but each loan request is
evaluated individually.
Computer System Adaptation for Year 2000
- ----------------------------------------
FFC uses software and other computer-related technologies throughout its
business that will be affected by the date change in the year 2000. FFC has an
internal study currently in process to determine the full scope and related
costs to modify, update, or replace existing systems and software to ensure that
FFC will continue to meet its internal needs and those of its customers.
Although final cost estimates have yet to be determined, it is expectedmanagement believes
that thesesuch costs will resultnot have a material impact on FFC's results of operations
in an increase in expenses during 1998 and 1999.
Legal Proceedings
- -----------------
From time to time FFC and its subsidiaries are involved in routine
litigation matters that are incidental to the businesses carried on by such
54
entities. None of these matters is expected to have a material effect on FFC's
financial condition or operating results.
54
General Description of FFC Common Stock
- ---------------------------------------
The authorized capital of FFC consists exclusively of 200 million shares of
Common Stock, par value $2.50 per share, and 10 million shares of preferred
stock without par value. As of September 30, 1997, there were issued and
outstanding 40,628,608 shares of FFC Common Stock, which shares were held by
12,394 owners of record, and there were 851,654 shares issuable upon the
exercise of options. No shares of preferred stock have been issued by FFC. FFC
Common Stock is listed for quotation on the over-the-counter NASDAQ National
Market System under the symbol "FULT."
The holders of FFC Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders and may not cumulate their votes
for the election of directors. Each share of FFC Common Stock is entitled to
participate on an equal pro rata basis in dividends and other distributions. The
holders of FFC Common Stock do not have preemptive rights to subscribe for
additional shares that may be issued by FFC, and no share is entitled in any
manner to any preference over any other share. The shares of FFC Common Stock to
be issued to the shareholders of KHG pursuant to the Merger will be fully paid
and non-assessable and the holders thereof will not be subject to call or
assessment under Pennsylvania law. Fulton Bank serves as the transfer agent for
FFC.
On March 18, 1997, FFC's Board of Directors authorized the repurchase of up
to 80,000 shares of FFC Common Stock to be used in connection with the
acquisition of The Peoples Bank of Elkton or for any other proper corporate
purpose. This authorization expires on March 31, 1998. Through December 31,
1997, FFC has purchased 42,000 shares pursuant to this resolution. The amount of
shares authorized to be repurchased was below the 10% limitation related to
pooling-of-interests accounting treatment for both FFC's acquisition of The
Woodstown National Bank & Trust Company (issuance of 3,167,980 shares on
February 28, 1997 to effect this acquisition) and The Peoples Bank of Elkton
(issuance of 958,594 shares on August 31, 1997).
There are no other stock repurchase programs in place currently. FFC does,
from time to time, consider its ability to implement stock repurchase programs
while maintaining compliance with the requirements of pooling-of-interests
accounting treatment.
Dividends
- ---------
The holders of FFC Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. FFC has in the past paid quarterly cash dividends to its shareholders
on or about the 15th day of January, April, July and October of each year.
The ability of FFC to pay dividends to its shareholders is dependent
primarily upon the earnings and financial condition of Fulton, Farmers Trust,
Swineford, Lafayette, FNB, Great Valley, Hagerstown, Delaware National,
Gloucester, Woodstown, and Peoples. Funds for the payment of dividends on FFC
Common Stock are expected for the foreseeable future to be obtained primarily
from dividends paid to FFC by these eleven bank subsidiaries, including
LVNB/Farmers if the Merger is consummated, which dividends are subject to
certain statutory limitations.
Under applicable state and federal laws, the dividends that may be paid by
the bank subsidiaries of FFC without prior regulatory approval are subject to
certain prescribed limitations. As state banks chartered under the
55
Pennsylvania Banking Code of 1965, as amended, Fulton, Farmers Trust, Lafayette
and Great Valley may pay dividends only out of accumulated net earnings and may
not declare or pay any dividend requiring a reduction of the statutorily
required surplus of the institution. In the case of national banks such as
Swineford, FNB, Delaware National and Woodstown, the approval of the Office of
the Comptroller of the Currency ("OCC") is required under federal law if the
total of all dividends declared during any calendar year would exceed the net
profits (as defined) of the bank for the year, combined with its retained net
profits (as defined) for the two preceding calendar years. As commercial banks
organized under the laws of the state of Maryland, Hagerstown and Peoples may
only declare a cash dividend from their undivided profits or (with the prior
approval of the Maryland Bank Commissioner) from their surplus in excess of 100%
of their required capital stock, in each case after providing for due or accrued
expenses, losses, interest and taxes. In addition, if Hagerstown's or Peoples'
surplus becomes less than 100% of their respective required capital stock,
Hagerstown or Peoples may not declare or pay any cash dividends that exceed 90%
of their net earnings until their surplus becomes 100% of their required capital
stock. As a New Jersey bank, Gloucester may not declare or pay any dividend
which would impair its capital 55
stock or reduce its surplus to a level of less
than 50% of its capital stock or if the surplus is currently less than 50% of
the capital stock, the payment of such dividends would not reduce the surplus of
the bank. In addition to the foregoing statutory restrictions on dividends, the
Pennsylvania Department of Banking (with respect to all Pennsylvania state-charteredstate-
chartered banks), the FDIC (with respect to Pennsylvania state-chartered banks
that are not members of the Federal Reserve System, such as Fulton, Lafayette
and Great Valley), the FRB (with respect to Pennsylvania state-chartered banks
that are members of the Federal Reserve System, such as Farmers Trust), and the
OCC (with respect to national banks such as Swineford, FNB and Delaware
National), also have adopted minimum capital standards and have broad authority
to prohibit a bank from engaging in unsafe or unsound banking practices. The
payment of a dividend by a bank could, depending upon the financial condition of
the bank involved and other factors, be deemed to impair its capital or to be
such an unsafe or unsound practice.
Under the restrictions set forth above, the aggregate amount available for
the payment of dividends by the eleven bank subsidiaries of FFC was
approximately $141 million as of December 31, 1996.
Dividend Reinvestment Plan
- --------------------------
The holders of FFC Common Stock may elect to participate in the Fulton
Financial Corporation Dividend Reinvestment Plan (the "Dividend Reinvestment
Plan"), which is a plan administered by Fulton as the Plan Agent. Under the
Dividend Reinvestment Plan, dividends payable to participating shareholders are
paid to the Plan Agent and are used to purchase, on behalf of the participating
shareholders, additional shares of FFC Common Stock. Participating shareholders
may make additional voluntary cash payments, which are also used by the Plan
Agent to purchase, on behalf of such shareholders, additional shares of FFC
Common Stock. Shares of FFC Common Stock held for the account of participating
shareholders are voted by the Plan Agent in accordance with the instructions of
each participating shareholder as set forth in his or her proxy.
Securities Laws
- ---------------
FFC, as a business corporation, is subject to the registration and
prospectus delivery requirements of the 1933 Act and is also subject to similar
requirements under state securities laws. FFC Common Stock is registered with
the SEC under Section 12(g) of the 1934 Act, and FFC is subject to the periodic
reporting, proxy solicitation and insider trading requirements of the 1934 Act.
The executive officers, directors and ten
56
percent shareholders of FFC are subject to certain restrictions affecting their
right to sell shares of FFC Common Stock owned beneficially by them.
Specifically, each such person is subject to the beneficial ownership reporting
requirements and to the short-
swingshort-swing profit recapture provisions of Section 16 of
the 1934 Act and may sell shares of FFC Common Stock only: (i) in compliance
with the provisions of SEC Rule 144, (ii) in compliance with the provisions of
another applicable exemption from the registration requirements of the 1933 Act,
or (iii) pursuant to an effective registration statement filed with the SEC
under the 1933 Act.
Antitakeover Provisions
- -----------------------
The Articles of Incorporation and Bylaws of FFC include certain provisions
which may be considered to be "antitakeover" in nature, because they may have
the effect of discouraging or making more difficult the acquisition of control
over FFC by means of a hostile tender offer, exchange offer, proxy contest or
similar transaction. These provisions are intended to protect the shareholders
of FFC (including the present shareholders of KHG, who will become shareholders
of FFC following the Merger) by providing a
56
measure of assurance that FFC's
shareholders will be treated fairly in the event of an unsolicited takeover bid
and by preventing a successful takeover bidder from exercising its voting
control to the detriment of the other shareholders. However, the antitakeover
provisions set forth in the Articles of Incorporation and Bylaws of FFC, taken
as a whole, may discourage a hostile tender offer, exchange offer, proxy
solicitation or similar transaction relating to FFC Common Stock. To the extent
that these provisions actually discourage such a transaction, holders of FFC
Common Stock may not have an opportunity to dispose of part or all of their
stock at a higher price than that prevailing in the market. In addition, these
provisions make it more difficult to remove, and thereby may serve to entrench,
incumbent directors and officers of FFC, even if their removal would be regarded
by some shareholders as desirable.
The provisions in the Articles of Incorporation of FFC which may be
considered to be "antitakeover" in nature include the following: (i) a provision
that provides for substantial amounts of authorized but unissued capital stock,
including a class of preferred stock whose rights and privileges may be
determined prior to issuance by FFC's Board of Directors, (ii) a provision that
does not permit shareholders to cumulate their votes for the election of
directors, (iii) a provision that requires a greater than majority shareholder
vote in order to approve certain business combinations and other extraordinary
corporate transactions, (iv) a provision that establishes criteria to be applied
by the Board of Directors in evaluating an acquisition proposal, (v) a provision
that requires a greater than majority shareholder vote in order for the
shareholders to remove a director from office without cause, (vi) a provision
that prohibits the taking of any action by the shareholders without a meeting
and eliminates the right of shareholders to call a annual meeting, (vii) a
provision that limits the right of the shareholders to amend the Bylaws, and
(viii) a provision that requires, under certain circumstances, a greater than
majority shareholder vote in order to amend the Articles of Incorporation.
The provisions of the Bylaws of FFC which may be considered to be
"antitakeover" in nature include the following: (i) a provision that limits the
permissible number of directors, (ii) a provision that establishes a Board of
Directors divided into three classes, with members of each class elected for a
three-year term that is staggered with the terms of the members of the other two
classes, and (iii) a provision that requires advance written notice as a
precondition to the nomination of any person for election to the Board of
Directors, other than in the case of nominations made by existing management.
57
As a Pennsylvania business corporation and a corporation registered under
the Securities Exchange Act of 1934, FFC is subject to, and may take advantage
of the protections of, the antitakeover provisions of the Pennsylvania Business
Corporation Law of 1988, as amended ("BCL"). These antitakeover provisions,
which are designed to discourage the acquisition of control over a targeted
Pennsylvania business corporation, include: (i) a provision whereby the
directors of the corporation, in determining what is in the best interests of
the corporation, may consider factors other than the economic interests of the
shareholders, such as the effect of any action upon other constituencies,
including employees, suppliers, customers, creditors and the community in which
the corporation is located; (ii) a provision that permits shareholders to demand
that a controlling person pay to them the fair value of their shares in cash
upon a change in control; (iii) a provision that restricts certain business
combinations unless there is prior approval by the directors or a supermajority
of the shareholders; (iv) a provision permitting a corporation to adopt a
shareholders rights plan; (v) a provision denying the right to vote to a person
who acquires a specified percentage of stock ownership ("control shares") unless
those voting rights are restored by a vote of disinterested shareholders; and
(vi) a provision requiring a person who acquires control shares to disgorge to
the corporation all profits from the sale of equity 57
securities within eighteen
months thereafter. Corporations may elect to "opt out" of any or all of these
antitakeover provisions of the BCL. FFC has not elected to opt out of any of the
protections provided by the antitakeover statutes.
On June 20, 1989, FFC adopted a Shareholder Rights Plan (the "Rights
Plan"). The Rights Plan is intended to discourage unfair or financially
inadequate takeover proposals and abusive takeover practices and to encourage
third parties who may in the future be interested in acquiring FFC to negotiate
with FFC's Board of Directors. The Rights Plan may have the effect of
discouraging or making more difficult the acquisition of FFC by means of a
hostile tender offer, exchange offer or similar transaction. The Rights Plan is
similar to shareholder rights plans which have been adopted by many other bank
holding companies and business corporations and contains "flip-in" and "flip-over""flip-
over" provisions which are typically included in plans of this kind. Each share
of FFC Common Stock to be issued in connection with the Merger will be
accompanied by one right issued pursuant to the terms of the Rights Plan, which
right will initially, and until it becomes exercisable, trade with and be
represented by the FFC Common Stock certificates to be received by the
shareholders of KHG.
The management of FFC does not presently contemplate recommending to the
shareholders the adoption of any additional antitakeover provisions.
Indemnification
- ---------------
The Bylaws of FFC provide for indemnification of its directors, officers,
employees and agents to the fullest extent permitted under the laws of the
Commonwealth of Pennsylvania, provided that the person seeking indemnification
acted in good faith, in a manner he or she reasonably believed to be in the best
interests of FFC, and without willful misconduct or recklessness. FFC has
purchased insurance to indemnify its directors, officers, employees and agents
under certain circumstances.
58
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers or persons controlling FFC pursuant to the
foregoing provisions of FFC's Bylaws, FFC has been informed that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
1933 Act and is therefore unenforceable.
Comparison of Shareholder Rights
- --------------------------------
Upon consummation of the Merger, the shareholders of KHG will become
shareholders of FFC. There are differences between the rights of holders of KHG
Common Stock and FFC Common Stock. These differences arise out of differences
between the Articles of Incorporation and Bylaws of KHG and the Articles of
Incorporation and Bylaws of FFC. The most significant differences are: (1) FFC
has adopted a Shareholder Rights Plan, which provides FFC's shareholders with
certain stock-related rights in the event of a hostile takeover but may have the
effect of discouraging such a takeover (see the section above entitled
"Antitakeover Provisions"), while KHG has not adopted any such plan; (2) FFC's
Articles of Incorporation authorize the issuance of shares of preferred stock
with such rights and privileges as may be determined by FFC's Board of Directors
(although FFC currently has no plans to issue preferred stock), while KHG's
Articles of Incorporation do not authorize the issuance of any class of
preferred stock.
The Articles of Incorporation and Bylaws of FFC also include a number of
other provisions which are intended to protect the shareholders of FFC
(including the present shareholders of KHG, who will become shareholders of FFC
following the Merger) from abusive takeover practices and inadequate takeover
proposals, but which may be considered to be "antitakeover" in nature 58
and may
serve to entrench the current management of FFC. See INFORMATION CONCERNING
FULTON FINANCIAL CORPORATION AND DESCRIPTION OF FFC COMMON STOCK--
AntitakeoverSTOCK--Antitakeover
Provisions.
The material differences between KHG Common Stock and FFC Common Stock and
the rights of their respective holders are summarized in the following table:
===================================================================================================================================================================
KHG FFC
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Title Common Stock, $5.00 par Common Stock, $2.50 par
value per share value per share
- -----------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shares Authorized 10,000,000 200,000,000
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shares Issued & Outstanding 3,966,249 40,628,608
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Preemptive Rights No No
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Classification of Board of Board of Directors Board of Directors
Directors divided into 3 classes divided into 3 classes
with 3 year terms; with 3 year terms;
one-third of directors one-third of directors
elected each year elected each year
----------------------------------------------------------------------------------- --------------------------------------------------------------------------------
Voting: Election of Directors Non-cumulative Non-cumulative
Directors
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Voting: Other Matters One vote for each share One vote for each share
owned of record owned of record
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholder Rights Plan None Yes
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Dissenters' Rights Not generally available, Not generally available,
except by resolution of except by resolution
the Board of Directors of the Board of
Directors
the Board of Directors
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
59
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan Plan administered by Open market plan
Registrar Transfer administered by Fulton
Company provides for Bank as Plan Agent
both open market
purchases and company
purchases
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Market American Stock Exchange Listed for quotation on
NASDAQ National Market
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Registered under 1934 Act Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Limitation of Liability of Yes Yes
Directors for Monetary
Damages
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Indemnification of Yes Yes
Directors, Officers and
Employees
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Authorized Class of No Yes, which can be issued
Preferred Stock issued under terms and
conditions to be
determined by the Board
of Directors
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Control Share Statute Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Business Combination Statute Yes Yes
Statute
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Right of Shareholders to Yes No
call a Special Meeting
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Shareholder Inspection Rights General General
Rights
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------
Right of Shareholders to Yes No
act by Written Consent
===================================================================================================================================================================
5960
INFORMATION CONCERNING KEYSTONE HERITAGE GROUP, INC.
----------------------------------------------------
Description of Business and Property
- ------------------------------------
KHG is a Pennsylvania business corporation and registered bank holding
company which was organized in 1982. KHG is engaged in a general banking
business, including commercial and retail banking operations, through its bank
subsidiary, in Lebanon, Lancaster, Dauphin, Berks and Schuylkill Counties,
Pennsylvania. At September 30, 1997, KHG had total assets of approximately $646
million, shareholders equity of $67 million, total net loans of approximately
$462 million and employed 325 persons on a full-time equivalent basis. KHG's
sole bank subsidiary, LVNB, had total deposits of $548 million at September 30,
1997.
The broad range of retail and commercial banking services which LVNB offers
include checking accounts, savings programs, money-market accounts, certificates
of deposit, safe deposit facilities, consumer loans programs, revolving lines of
credit, overdraft checking and extended banking hours. These services are
primarily provided to consumers and small- to mid-sized companies within LVNB's
market area. LVNB focuses its lending services on commercial, agricultural,
consumer and real estate lending to local borrowers. LVNB attempts to establish
a total borrowing relationship with its customers, which may typically include a
commercial real estate loan, a business line of credit for working capital
needs, a mortgage loan for the borrower's residence, a consumer loan or a
revolving personal credit line.
KHG's service area consists of Lebanon, Lancaster, Dauphin, Berks and
Schuylkill Counties, Pennsylvania. KHG encounters vigorous competition for
market share in the communities it serves from bank holding companies, other
community banks, thrift institutions and other non-bank financial organizations.
KHG competes with banking and financial branching systems, some from out of
state, which are substantially larger and have greater financial resources than
KHG. There are approximately 113 banks, savings and loan and credit union
locations, including KHG, in the general market area serviced by KHG. The
largest of these institutions had assets of over $57.5 billion.
In addition to banks and other financial institutions, KHG competes for
deposits with various investment and depositary funds offered by non-banking
firms in the securities industry. There is also competition from major retail-
oriented firms who offer financial services similar to traditional services
through commercial banks without being subject to the same degree of regulation.
KHG Common Stock Market Price and Dividends
- -------------------------------------------
The Merger Agreement restricts the ability of KHG to declare or pay cash
dividends. However, the Merger Agreement permits KHG to declare and pay a
dividend of up to $.25 per share of KHG Common Stock on (i) November 10, 1997
(which has been paid), (ii) February 10, 1998, provided that the Effective Date
does not occur (or is not expected to occur) on or before the record date for
the dividend on the FFC Common Stock scheduled to be paid on April 15, 1998;
(iii) May 10, 1998, provided that the record date for the dividend does not
occur (or is expected to occur) on or before the record date for the dividend on
the FFC Common Stock scheduled to be paid on July 15, 1998; and (iv) August 10,
1998, provided that the Effective Date does not occur (or is not expected to
occur) on or before the record date for the dividend on the FFC Common Stock
scheduled to be paid on October 15, 1998 (it being the intent of FFC and KHG
that KHG be permitted to pay a dividend on the KHG Common Stock on the dates
indicated in subsections (ii), (iii) and (iv) above only if the shareholders of
KHG, upon becoming shareholders of FFC, would not be entitled to receive a
dividend on the FFC Common Stock on the payment dates indicated in such
subsections.
6061
KHG's Board of Directors authorized the repurchase of up to 203,584, or 5%
of the outstanding, shares of KHG Common Stock on June 10, 1997. KHG has
purchased 120,100 shares pursuant to this program. This repurchase program has
been inactive since the date of the Merger Agreement, and is expected to be
formally terminated at the next meeting of the KHG Board of Directors.
Information About Directors and Executive Officers
- --------------------------------------------------
Certain information concerning shares of KHG Common Stock owned
beneficially by each director of KHG and by all directors and executive officers
of KHG as a group, as of October 31, 1997, is set forth below:
====================================================================================================================================================
SHARES OF KHG COMMON STOCK PERCENT
BENEFICIALLY OWNED/(1)/ OF SHARES
NAME OF DIRECTOR OUTSTANDING
====================================================================================================================================================
Raymond M. Dorsch, Jr. 16,252 *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Harry J. Genesemer 78,009/(2)(7)/ 1.97
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Charles V. Henry, III 32,350/(3)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Wendie DiMatteo Holsinger 266/(7)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Bruce A. Johnson 7,037/(7)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Donald W. Lesher, Jr. 25,573 *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Albert B. Murry 9,668/(4)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Thomas I. Siegel 31,890/(5)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Brett H. Tennis 333/(7)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Mark Randolph Tice 17,797/(7)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
John E. Wengert 9,866 *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Executive Officer Who is
Not a Director
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Kurt A. Phillips 3,660/(6)/ *
- ----------------------------------------------------------------------------------------------------------------------------------------------------
All Executive Officers and 232,701 5.9
and
Directors as a Group
(12 persons)
- ----------------------------------------------------------------------------------------------------------------------------------------------------
* = Less than one
percent.
====================================================================================================================================================
- --------------------------------------------------------------------------------
/(1)/----------------------------------------------------------------------------
(1) Shares shown as beneficially owned are held of record by the person
indicated, or jointly with a spouse or children living in the same
household, or as trustee or guardian for minor children living in the same
household.
/(2)/(2) Includes 10,000 shares as to which Mr. Genesemer holds shared voting and
investment power.
/(3)/(3) Includes 1,476 shares as to which Mr. Henry holds shared voting and
investment power.
/(4)/(4) Includes 3,149 shares as to which Mr. Murry holds shared voting and
investment power. Excludes shares issuable pursuant to options for 26,934
shares which are currently exercisable.
/(5)/(5) Includes 250 shares as to which Mr. Siegel holds shared voting and
investment power.
/(6)/(6) Includes 71 shares as to which Mr. Phillips holds shared voting and
investment power. Excludes shares issuable pursuant to options for 16,000
shares which are currently exercisable.
/(7)/(7) Excludes options for 2,000 shares granted under the 1996 non-employee
Director Stock Option Plan, all of which are currently exercisable.
6162
EXPERTS
-------
The consolidated financial statements of FFC as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
which are included in FFC's Annual Report on Form 10-K for the year ended
December 31, 1996 and are incorporated by reference in this Proxy
Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The consolidated financial statements of KHG as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
which are included in KHG's 1996 and 1995 Annual ReportsReport to shareholders have been audited
by KPMG Peat Marwick LLP, independent certified public accountants, as indicated
in their reportsreport with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
-------------
The legality of the shares of FFC Common Stock to be issued in connection
with the Merger and certain other legal matters relating to the Merger will be
passed upon by the law firm of Barley, Snyder, Senft & Cohen, LLP, located in
Chambersburg, Harrisburg, Lancaster and York, Pennsylvania, which is acting as
counsel for FFC. John O. Shirk is a partner in the firm and is a member of the
Board of Directors of FFC. As of September 30, 1997, the partners and
associates of Barley, Snyder, Senft & Cohen, LLP owned beneficially and in the
aggregate approximately 27,520 shares of FFC Common Stock.
ADDITIONAL INFORMATION
----------------------
FFC has filed with the SEC a Registration Statement (No. 333-________)333-41335) with
respect to the shares of FFC Common Stock to be issued in connection with the
Merger. The Registration Statement contains certain additional information
which has been omitted from this Proxy Statement/Prospectus in accordance with
the rules and regulations of the SEC and may be examined at the offices of the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.20549, and may be
viewed at the website maintained by the SEC at www.sec.gov. Copies of the
Registration Statement may be obtained from the SEC upon payment of the
prescribed fee.
OTHER MATTERS
-------------
The Board of Directors of KHG knows of no other matters other than those
discussed in this Proxy Statement/Prospectus which will be presented at the
Special Meeting. However, if any other matters are properly brought before the
Special Meeting or any postponement or adjournment thereof, any proxy given
pursuant to this solicitation will be voted in accordance with the
recommendations of the Board of Directors of KHG.
6263
EXHIBIT A
MERGER AGREEMENT
----------------
MERGER AGREEMENT
BY AND BETWEEN
KEYSTONE HERITAGE GROUP, INC.
AND
FULTON FINANCIAL CORPORATION
TABLE OF CONTENTS
-----------------
Page
----
Page
----
ARTICLE I
PLAN OF MERGER
--------------
Section 1.1 Plan of Merger..............................................................................Merger ............................................... 2
- ----------- --------------
ARTICLE II
CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES
-------------------------------------------------------
Section 2.1 Conversion of Shares........................................................................Shares ......................................... 2
- ----------- --------------------
(a) General.....................................................................................General ..................................................... 2
-------
(b) Antidilution Provision......................................................................Provision ...................................... 2
----------------------
(c) No Fractional Shares........................................................................Shares ........................................ 2
--------------------
(d) Closing Market Price........................................................................Price ........................................ 3
--------------------
Section 2.2 Exchange of Stock Certificates..............................................................Certificates ............................... 3
- ----------- ------------------------------------------------------------------------
(a) Exchange Agent..............................................................................Agent .............................................. 3
--------------
(b) Surrender of Certificates...................................................................Certificates ................................... 3
-------------------------
(c) Dividend Withholding........................................................................Withholding ........................................ 4
--------------------
(d) Failure to Surrender Certificates...........................................................Certificates ........................... 4
---------------------------------
(e) Expenses....................................................................................Expenses .................................................... 4
--------
Section 2.3 Treatment of Outstanding KHG Options........................................................Options ......................... 4
- ----------- ------------------------------------
Section 2.4 Reservation of Shares.......................................................................Shares ........................................ 5
- ----------- ---------------------
Section 2.5 Taking Necessary Action.....................................................................Action ...................................... 6
- ----------- -----------------------
Section 2.6 Press Releases..............................................................................Releases ............................................... 6
- ----------- --------------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF KHG
-------------------------------------
Section 3.1 Authority...................................................................................Authority .................................................... 6
- ----------- ---------
Section 3.2 Organization and Standing...................................................................Standing .................................... 7
- ----------- -------------------------
Section 3.3 Subsidiaries................................................................................Subsidiaries ................................................. 7
- ----------- ------------
Section 3.4 Capitalization..............................................................................Capitalization ............................................... 7
- ----------- --------------
Section 3.5 Charter, Bylaws and Minute Books............................................................Books ............................. 8
- ----------- --------------------------------
Section 3.6 Financial Statements........................................................................Statements ......................................... 8
- ----------- --------------------
Section 3.7 Absence of Undisclosed Liabilities..........................................................Liabilities ........................... 8
- ----------- ----------------------------------
Section 3.8 Absence of Changes..........................................................................Changes ........................................... 9
- ----------- ------------------
Section 3.9 Dividends, Distributions and Stock Purchases................................................Purchases ................. 9
- ----------- --------------------------------------------
Section 3.10 Taxes......................................................................................Taxes ....................................................... 9
- ------------ -----
Section 3.11 Title to and Condition of Assets...........................................................Assets ............................ 9
- ------------ --------------------------------
Section 3.12 Contracts..................................................................................Contracts ................................................... 10
- ------------ ---------
Section 3.13 Litigation and Governmental Directives.....................................................Directives ...................... 10
- ------------ --------------------------------------
Section 3.14 Compliance with Laws; Governmental Authorizations..........................................Authorizations ........... 11
- ------------ -------------------------------------------------
Section 3.15 Insurance..................................................................................Insurance ................................................... 11
- ------------ ---------
Section 3.16 Financial Institutions Bonds...............................................................Bonds ................................ 12
- ------------ ----------------------------
Section 3.17 Labor Relations and Employment Agreements..................................................Agreements ................... 12
- ------------ -----------------------------------------
Section 3.18 Employee Benefit Plans.....................................................................Plans ...................................... 12
- ------------ ----------------------
Section 3.19 Related Party Transactions.................................................................Transactions .................................. 13
- ------------ --------------------------
Section 3.20 No Finder..................................................................................Finder ................................................... 13
- ------------ ---------
Section 3.21 Complete and Accurate Disclosure...........................................................Disclosure ............................ 13
- ------------ --------------------------------
Section 3.22 Environmental Matters......................................................................Matters ....................................... 14
- ------------ ---------------------
Section 3.23 Proxy Statement/Prospectus.................................................................Prospectus .................................. 14
- ------------ -----------------------------------------------------------------
Section 3.24 SEC Filings................................................................................Filings ................................................. 15
- ------------ -----------
Section 3.25 Reports....................................................................................Reports ..................................................... 15
- ------------ -------
Section 3.26 Loan Portfolio of the LVNB.................................................................LVNB .................................. 15
- ------------ --------------------------
Section 3.27 Investment Portfolio.......................................................................Portfolio ........................................ 16
- ------------ --------------------
Section 3.28 Regulatory Examinations....................................................................Examination ...................................... 16
- ------------ ---------------------------------------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FFC
-------------------------------------
Section 4.1 Authority...................................................................................Authority .................................................... 16
- ----------- ---------
Section 4.2 Organization and Standing...................................................................Standing .................................... 17
- ----------- -------------------------
Section 4.3 Capitalization..............................................................................Capitalization ............................................... 17
- ----------- --------------
Section 4.4 Articles of Incorporation and Bylaws........................................................Bylaws ......................... 17
- ----------- ------------------------------------
Section 4.5 Subsidiaries................................................................................Subsidiaries ................................................. 18
- ----------- ------------------------------------
Section 4.6 Financial Statements........................................................................Statements ......................................... 18
- ----------- --------------------
Section 4.7 Absence of Undisclosed Liabilities..........................................................Liabilities ........................... 18
- ----------- ----------------------------------
Section 4.8 Absence of Changes..........................................................................Changes ........................................... 19
- ----------- ------------------
Section 4.9 Litigation and Governmental Directives......................................................Directives ....................... 19
- ----------- --------------------------------------
Section 4.10 Compliance with Laws; Governmental Authorizations..........................................Authorizations ........... 19
- ------------ -------------------------------------------------
Section 4.11 Complete and Accurate Disclosure...........................................................Disclosure ............................ 19
- ------------ --------------------------------
Section 4.12 Labor Relations............................................................................Relations ............................................. 20
- ------------ ---------------
Section 4.13 Employee Benefits Plans....................................................................Plans ..................................... 20
- ------------ -----------------------
Section 4.14 Environmental Matters......................................................................Matters ....................................... 21
- ------------ ---------------------
Section 4.15 SEC Filings................................................................................Filings ................................................. 21
- ------------ -----------
Section 4.16 Proxy Statement/Prospectus.................................................................Prospectus .................................. 21
- ------------ --------------------------
Section 4.17 Accounting Treatment.......................................................................Treatment ........................................ 21
- ------------ --------------------
Section 4.18 Regulatory Approvals.......................................................................Approvals ........................................ 22
- ------------ --------------------
Section 4.19 No Finder..................................................................................Finder ................................................... 22
- ------------ ---------
Section 4.20 Taxes......................................................................................Taxes ....................................................... 22
- ------------ -----
Section 4.21 Title to and Condition of Assets...........................................................Assets ............................ 22
- ------------ --------------------------------
Section 4.22 Contracts..................................................................................Contracts ................................................... 23
- ------------ ---------
Section 4.23 Insurance..................................................................................Insurance ................................................... 23
- ------------ ---------
ARTICLE V
COVENANTS OF KHG
----------------
Section 5.1 Conduct of Business.........................................................................Business .......................................... 23
- ----------- -------------------
Section 5.2 Best Efforts................................................................................Efforts ................................................. 25
- ----------- ------------
Section 5.3 Access to Properties and Records............................................................Records ............................. 25
- ----------- --------------------------------
Section 5.4 Subsequent Financial Statements.............................................................Statements .............................. 26
- ----------- -------------------------------
Section 5.5 Update Schedules............................................................................Schedules ............................................. 26
- ----------- ----------------
Section 5.6 Notice......................................................................................Notice ....................................................... 26
- ----------- ------
Section 5.7 Other Proposals.............................................................................Proposals .............................................. 26
- ----------- ---------------
Section 5.8 Affiliate Letters...........................................................................Letters ............................................ 27
- ----------- -----------------
Section 5.9 No Purchases or Sales of FFC Common Stock During Price
Determination Period................. 27
- ----------- ---------------------------------------------------------------------------------------------------------------------------------
Determination Period ......................................... 27
--------------------
Section 5.10 Accounting Treatment.......................................................................Treatment ........................................ 27
- ------------ --------------------
Section 5.11 Dividends..................................................................................Dividends ................................................... 28
- ------------ ---------
ARTICLE VI
COVENANTS OF FFC
----------------
Section 6.1 Best Efforts................................................................................Efforts ................................................. 28
------------
(a) Applications for Regulatory Approval........................................................Approval ........................ 29
------------------------------------
(b) Registration Statement......................................................................Statement ...................................... 29
----------------------
(c) State Securities Laws.......................................................................Laws ....................................... 29
---------------------
(d) Stock Listing...............................................................................Listing ............................................... 29
-------------
(e) Adopt Amendments............................................................................Amendments ............................................ 29
----------------
Section 6.2 Access to Properties and Records............................................................Records ............................. 30
- ----------- --------------------------------
Section 6.3 Subsequent Financial Statements.............................................................Statements .............................. 30
- ----------- -------------------------------
Section 6.4 Update Schedules............................................................................Schedules ............................................. 30
- ----------- ----------------
Section 6.5 Notice......................................................................................Notice ....................................................... 30
- ----------- ------
Section 6.6 Employment Arrangements.....................................................................Arrangements ...................................... 30
- ----------- -----------------------
Section 6.7 No Purchase or Sales of FFC Common Stock During Price
Determination Period.................. 32
- ----------- -------------------------------------------------------------------------------------------------------------------------------
Determination Period.......................................... 32
--------------------
Section 6.8 Restructuring, Directors, Etc...............................................................Etc. ............................... 32
- ----------- -----------------------------------------------------------
Section 6.9 Appointment of FFC Directors................................................................Directors ................................. 33
- ----------- ----------------------------
ARTICLE VII
CONDITIONS PRECEDENT
--------------------
Section 7.1 Common Conditions...........................................................................Conditions ............................................ 33
- ----------- -----------------
(a) Stockholder Approval........................................................................Approval ........................................ 34
--------------------
(b) Regulatory Approvals........................................................................Approvals ........................................ 34
--------------------
(c) Stock Listing...............................................................................Listing ............................................... 34
-------------
(d) Tax Opinion.................................................................................Opinion ................................................. 34
-----------
(e) Registration Statement......................................................................Statement ...................................... 35
----------------------
(f) No Suits....................................................................................Suits .................................................... 36
--------
(g) Pooling.....................................................................................Pooling ..................................................... 36
-------
Section 7.2 Conditions Precedent to Obligations of FFC..................................................FFC ................... 36
- ----------- ------------------------------------------
(a) Accuracy of Representations and Warranties..................................................Warranties .................. 36
------------------------------------------
(b) Covenants Performed.........................................................................Performed ......................................... 36
-------------------
(c) Opinion of Counsel for KHG..................................................................KHG .................................. 36
--------------------------
(d) Affiliate Agreements........................................................................Agreements ........................................ 37
--------------------
(e) KHG Options.................................................................................Options ................................................. 37
-----------
(f) Decline in Market Price of FFC Common Stock.................................................Stock ................. 37
-------------------------------------------
(g) Accountants' Letter.........................................................................Letter ......................................... 37
-------------------
(h) Federal and State Securities and Antitrust Laws.............................................Laws ............. 38
-----------------------------------------------
(i) Environmental Matters.......................................................................Matters ....................................... 38
---------------------
(j) Closing Documents...........................................................................Documents ........................................... 38
-----------------
(k) Employment Agreements.......................................................................Agreements ....................................... 39
---------------------
Section 7.3 Conditions Precedent to the Obligations of KHG..............................................KHG ............... 39
- ----------- ----------------------------------------------
(a) Accuracy of Representations and Warranties..................................................Warranties .................. 39
------------------------------------------
(b) Covenants Performed.........................................................................Performed ......................................... 39
-------------------
(c) Opinion of Counsel for FFC..................................................................FFC .................................. 39
--------------------------
(d) FFC Options.................................................................................Options ................................................. 39
-----------
(e) Fairness Opinion............................................................................Opinion ............................................ 39
----------------
(f) Closing Documents...........................................................................Documents ........................................... 40
-----------------
(g) Employment Agreements....................................................................... 40
---------------------Agreements ....................................... 40
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 8.1 Termination.................................................................................Termination .................................................. 40
- ----------- -----------
(a) Mutual Consent..............................................................................Consent .............................................. 40
--------------
(b) Unilateral Action by FFC....................................................................FFC .................................... 40
------------------------
(c) Unilateral Action By KHG....................................................................KHG .................................... 40
------------------------
Section 8.2 Effect of Termination.......................................................................Termination ........................................ 41
- ----------- ---------------------
(a) Effect......................................................................................Effect ...................................................... 41
------
(b) Limited Liability...........................................................................Liability ........................................... 41
-----------------
(c) Confidentiality.............................................................................Confidentiality ............................................. 41
---------------
Section 8.3 Amendment...................................................................................Amendment .................................................... 41
- ----------- ---------
Section 8.4 Waiver......................................................................................Waiver ....................................................... 42
- ----------- ------
ARTICLE IX
CLOSING AND EFFECTIVE DATE
--------------------------
Section 9.1 Closing.....................................................................................Closing ...................................................... 42
- ----------- -------
Section 9.2 Effective Date..............................................................................Date ............................................... 42
- ----------- --------------
ARTICLE X
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
---------------------------------------------
Section 10.1 No Survival................................................................................Survival ................................................. 42
- ------------ -----------
ARTICLE XI
GENERAL PROVISIONS
------------------
Section 11.1 Expenses...................................................................................Expenses .................................................... 43
- ------------ --------
Section 11.2 Other Mergers and Acquisitions.............................................................Acquisitions .............................. 43
- ------------ ------------------------------
Section 11.3 Notices....................................................................................Notices ..................................................... 43
- ------------ -------
Section 11.4 Counterparts...............................................................................Counterparts ................................................ 44
- ------------ ------------
Section 11.5 Governing Law..............................................................................Law ............................................... 44
- ------------ -------------
Section 11.6 Parties in Interest........................................................................Interest ......................................... 44
- ------------ -------------------
Section 11.7 Entire Agreement...........................................................................Agreement ............................................ 44
- ------------ ----------------
Section 11.8 Materiality Standard.......................................................................Standard ........................................ 45
- ------------ --------------------
MERGER AGREEMENT
----------------
Merger Agreement made as of the 15th day of August, 1997, by and between
FULTON FINANCIAL CORPORATION, a Pennsylvania business corporation having its
administrative headquarters at One Penn Square, P. O. Box 4887, Lancaster,
Pennsylvania 17604 ("FFC"), and KEYSTONE HERITAGE GROUP, INC., a Pennsylvania
business corporation having its administrative headquarters at 555 Willow
Street, Lebanon, Pennsylvania 17046 ("KHG").
Background:
-----------
FFC is a bank holding company registered under the Bank Holding Company Act
of 1956, as amended (the "BHC Act"). KHG is a bank holding company registered
under the BHC Act. FFC and KHG wish to merge with each other. Subject to the
terms and conditions of this Agreement, the foregoing transaction will be
accomplished by means of a merger (the "Merger") in which (i) KHG will be merged
with and into FFC, (ii) FFC will survive the Merger, and (iii) all of the
outstanding shares of the common stock of KHG, $5.00 par value per share ("KHG
Common Stock"), will be converted into shares of the common stock of FFC, par
value $2.50 per share ("FFC Common Stock").
In addition, Lebanon Valley National Bank ("LVNB"), a national banking
association, and Keystone Heritage Life Insurance Corporation ("KHLIC"), a
Arizona insurance company, which are wholly-owned subsidiaries of KHG, will
become wholly-owned subsidiaries of FFC.
Simultaneously with the effectiveness of the Merger, FFC shall cause (i)
LVNB to merge with an existing bank subsidiary of FFC and (ii) the resulting
bank from such merger immediately to transfer certain of its branch offices to
other existing bank subsidiaries of FFC, all as more fully described in Section
6.8(a) herein (the "Restructuring").
Simultaneously with the execution of this Agreement, the parties are
entering into a Warrant Agreement of even date herewith (the "Warrant
Agreement"), which provides for the delivery by KHG of a warrant (the "Warrant")
entitling FFC to purchase shares of the KHG Common Stock in certain
circumstances.
WITNESSETH:
-----------
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and intending to be legally bound, the parties hereby agree as follows:
ARTICLE I
PLAN OF MERGER
--------------
Section 1.1 Plan of Merger. Subject to the terms and conditions of this
----------- --------------
Agreement, KHG shall merge with and into FFC in accordance with the Plan of
Merger substantially in the form of Exhibit C attached hereto.
---------
ARTICLE II
CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES
-------------------------------------------------------
Section 2.1 Conversion of Shares. On the Effective Date (as defined in
----------- --------------------
Section 10.2 herein) the shares of KHG Common Stock then outstanding shall be
converted into shares of FFC Common Stock, as follows:
(a) General: Subject to the provisions of Sections 2.1(b), 2.1(c) and
-------
2.1(d) herein, each share of KHG Common Stock issued and outstanding immediately
before the Effective Date shall, on the Effective Date, be converted into and
become, without any action on the part of the holder thereof, 1.83 (such number,
as it may be adjusted under Section 2.1(b) herein, the "Conversion Ratio")
shares of FFC Common Stock and the corresponding number of rights associated
with the Rights Agreement dated June 20, 1989 between FFC and Fulton Bank.
(b) Antidilution Provision: In the event that FFC shall at any time
----------------------
before the Effective Date: (i) issue a dividend in shares of FFC Common Stock,
(ii) combine the outstanding shares of FFC Common Stock into a smaller number of
shares, or (iii) subdivide the outstanding shares of FFC Common Stock into a
greater number of shares, then the Conversion Ratio shall be proportionately
adjusted (calculated to two decimal places), so that each KHG stockholder shall
receive on the Effective Date, in exchange for his shares of KHG Common Stock,
the number of shares of FFC Common Stock as would then have been owned by him if
the Effective Date had occurred before the record date of such event (For
example, if FFC were to declare a ten percent (10%) stock dividend after the
date of this Agreement and if the record date for that stock dividend were to
occur before the Effective Date, the Conversion Ratio would be adjusted from
1.83 shares to 2.01 shares).
(c) No Fractional Shares: No fractional shares of FFC Common Stock
--------------------
shall be issued in connection with the Merger. In lieu of the issuance of any
fractional share to which he would otherwise be entitled, each former
stockholder of KHG shall receive in cash an amount equal to the fair market
value of his fractional interest, which fair market value shall be determined by
multiplying such fraction by the Closing Market Price (as defined in Section
2.1(d) herein).
(d) Closing Market Price: For purposes of this Agreement, the Closing
--------------------
Market Price shall be the average of the per share closing bid and asked prices
for FFC Common Stock, rounded up to the nearest $.125, for the ten (10) trading
days immediately preceding the date which is two (2) business days before the
Effective Date, as reported on the National Market System of the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), the
foregoing period of ten (10) trading days being hereinafter sometimes referred
to as the "Price Determination Period" (For example, if February 28, 1998 were
to be the Effective Date, then the Price Determination Period would be February
11, 12, 13, 17, 18, 19, 20, 23, 24 and 25, 1998). In the event that NASDAQ
shall fail to report a closing bid price for FFC Common Stock for any trading
day during the Price Determination Period, the closing bid price for that day
shall be equal to the average of the closing bid prices and the average of the
closing asked prices as quoted: (i) by F. J. Morrissey & Company, Inc. and by
Ryan, Beck & Co.; or (ii) in the event that both of these firms are not then
making a market in FFC Common Stock, by two brokerage firms then making a market
in FFC Common Stock to be selected by FFC and approved by KHG.
Section 2.2 Exchange of Stock Certificates. KHG Common Stock certificates
----------- ------------------------------
shall be exchanged for FFC Common Stock certificates in accordance with the
following procedures:
(a) Exchange Agent: The transfer agent of FFC shall act as exchange
--------------
agent (the "Exchange Agent") to receive KHG Common Stock certificates from the
holders thereof and to exchange such stock certificates for FFC Common Stock
certificates and (if applicable) to pay cash for fractional shares of KHG Common
Stock pursuant to Section 2.1(c) herein. FCC shall cause the Exchange Agent on
or promptly after the Effective Date, to mail to each former stockholder of KHG
a notice specifying the procedures to be followed in surrendering such
stockholder's KHG Common Stock certificates.
(b) Surrender of Certificates: As promptly as possible after receipt
-------------------------
of the Exchange Agent's notice, each former stockholder of KHG shall surrender
his KHG Common Stock certificates to the Exchange Agent; provided, that if any
--------
former stockholder of KHG shall be unable to surrender his KHG Common Stock
certificates due to loss or mutilation thereof, he may make a constructive
surrender by following procedures comparable to those customarily used by FFC
for issuing replacement certificates to FFC shareholders whose FFC Common Stock
certificates have been lost or mutilated. Upon receiving a proper actual or
constructive surrender of KHG Common Stock certificates from a former KHG
stockholder, the Exchange Agent shall issue to such stockholder, in exchange
therefor, an FFC Common Stock certificate representing the whole number of
shares of FFC Common Stock into which such stockholder's shares of KHG Common
Stock have been converted in accordance with this Article II, together with a
check in the
amount of any cash to which such stockholder is entitled, pursuant to Section
2.1(c) herein, in lieu of the issuance of a fractional share.
(c) Dividend Withholding: Dividends, if any, payable by FFC after the
--------------------
Effective Date to any former stockholder of KHG who has not prior to the payment
date surrendered his KHG Common Stock certificates may, at the option of FFC, be
withheld. Any dividends so withheld shall be paid, without interest, to such
former stockholder of KHG upon proper surrender of his KHG Common Stock
certificates.
(d) Failure to Surrender Certificates: All KHG Common Stock
---------------------------------
certificates must be surrendered to the Exchange Agent within two (2) years
after the Effective Date. In the event that any former stockholder of KHG shall
not have properly surrendered his KHG Common Stock certificates within two (2)
years after the Effective Date, the shares of FFC Common Stock that would
otherwise have been issued to him may, at the option of FFC, be sold and the net
proceeds of such sale, together with the cash (if any) to which he is entitled
in lieu of the issuance of a fractional share and any previously accrued
dividends, shall be held by the Exchange Agent in a noninterest bearing account
for his benefit. From and after any such sale, the sole right of such former
stockholder of KHG shall be the right to collect such net proceeds, cash and
accumulated dividends. Subject to all applicable laws of escheat, such net
proceeds, cash and accumulated dividends shall be paid to such former
stockholder of KHG, without interest, upon proper surrender of his KHG Common
Stock certificates.
(e) Expenses: All costs and expenses associated with the foregoing
--------
surrender and exchange procedure shall be borne by FFC.
Section 2.3 Treatment of Outstanding KHG Options.
----------- ------------------------------------
(a) Each holder of an option (collectively, "KHG Options") to purchase
shares of KHG Common Stock that (i) is outstanding on the Effective Date, (ii)
has been granted pursuant to the 1994 Stock Incentive Plan and the 1996
Independent Directors Stock Option Plan (collectively, the "KHG Stock Option
Plans") and (iii) would otherwise survive the Effective Date shall be entitled
to receive, in cancellation of such KHG Option, an option to acquire shares of
FFC Common Stock on the terms set forth below (an "FFC Stock Option").
(b) An FFC Stock Option shall be a stock option to acquire shares of
FFC Common Stock with the following terms: (i) the number of shares of FFC
Common Stock which may be acquired pursuant to such FFC Stock Option shall be
equal to the product of the number of shares of KHG Common Stock covered by the
KHG Option multiplied by the Conversion Ratio, provided that any fractional
share of FFC Common Stock resulting from such multiplication shall be rounded to
the nearest whole share; (ii) the exercise price per share of FFC Common Stock
shall be equal to the exercise price per share of KHG Common Stock of such KHG
Option, divided by the Conversion Ratio, provided that such exercise price shall
be rounded to the nearest whole cent; (iii) the duration and other terms of such
KHG Option shall be unchanged except that all references to KHG shall be deemed
references to FFC, and that each such FFC Stock Option shall be fully
exercisable as of the Effective Date, and shall remain exercisable at least
until the stated expiration date of the corresponding KHG Option; (iv) FFC shall
assume such stock option as contemplated by Section 424(a) of the Internal
Revenue Code of 1986, as amended (the "Code"); and (v) to the extent KHG Options
qualify as incentive stock options under Section 422 of the Code, the FFC
Options exchanged therefor shall also so qualify. Subject to the foregoing, the
KHG Stock Option Plans and all options or other rights to acquire KHG Common
Stock issued thereunder shall terminate on the Effective Date.
(c) FFC shall not issue or pay for any fractional shares otherwise
issuable upon exercise of a FFC Stock Option. Prior to the Effective Time of
Merger, FFC shall reserve for issuance and, if not previously registered
pursuant to the Securities Act of 1933, as amended (the "1933 Act"), register,
the number of shares of FFC Common Stock necessary to satisfy FFC's obligations
with respect to the issuance of FFC Common Stock pursuant to the exercise of FFC
Stock Options.
(d) As of the Effective Date (to the extent required as determined by
FFC and KHG), FFC shall receive agreements from each holder of a KHG Option,
pursuant to which each such holder agrees to accept such FFC Options in exchange
for the cancellation of such KHG Options on the Effective Date.
Section 2.4 Reservation of Shares. FFC agrees that (i) prior to the
----------- ---------------------
Effective Date it will take appropriate action to reserve a sufficient number of
authorized but unissued shares of FFC Common Stock to be issued in accordance
with this Agreement, and (ii) on the Effective Date, FFC will issue shares of
FFC Common Stock to the extent set forth in, and in accordance with, this
Agreement.
Section 2.5 Taking Necessary Action. FFC and KHG shall take all such
----------- -----------------------
actions as may be reasonably necessary or appropriate in order to effectuate the
transactions contemplated hereby including, without limitation, providing
information necessary for preparation of any filings needed to obtain the
regulatory approvals required to consummate the Merger and the Restructuring. In
case at any time after the Effective Date any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest FFC with full
title to all properties, assets, rights, approvals, immunities and franchises of
KHG, the officers and directors of KHG, at the expense of FFC, shall take all
such necessary action.
Section 2.6 Press Releases. FFC and KHG agree that all press releases or
----------- --------------
other public communications relating to this Agreement or the transactions
contemplated hereby will require mutual approval by FFC and KHG, unless counsel
has advised any such party that such release or other public communication must
immediately be issued and the issuing party has not been able, despite its good
faith efforts, to obtain such approval.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF KHG
-------------------------------------
KHG represents and warrants to FFC, as of the date of this Agreement and as
of the date of the Closing (as defined in Section 9.1 herein), as follows:
Section 3.1 Authority. The execution and delivery of this Agreement, the
----------- ---------
Warrant Agreement and the Warrant and the performance of the transactions
contemplated herein and therein have been authorized by the Board of Directors
of KHG and, except for the approval of this Agreement by its stockholders, KHG
has taken all corporate action necessary on its part to authorize this
Agreement, the Warrant Agreement and the Warrant and the performance of the
transactions contemplated herein and therein. This Agreement, the Warrant
Agreement and the Warrant have been duly executed and delivered by KHG and,
assuming due authorization, execution and delivery by FFC, constitute valid and
binding obligations of KHG. The execution, delivery and performance of this
Agreement, the Warrant Agreement and the Warrant will not constitute a violation
or breach of or default under (i) the Articles of Incorporation or Bylaws of
KHG, (ii) the Articles of Association or Bylaws of LVNB, (iii) any statute,
rule, regulation, order, decree or directive of any governmental authority or
court applicable to KHG or LVNB, or (iv) any agreement, contract, memorandum of
understanding, indenture or other instrument to which KHG or LVNB is a party or
by which KHG or LVNB or any of their properties are bound.
Section 3.2 Organization and Standing. KHG is a business corporation that
----------- -------------------------
is duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. KHG is a bank holding company under the BHC Act,
and has full power and lawful authority to own and hold its properties and to
carry on its business as presently conducted. LVNB is a national banking
association that is duly organized, validly existing and in good standing under
the laws of the United States. LVNB is an insured bank under the provisions of
the Federal Deposit Insurance Act, as amended (the "FDI Act"), and is a member
of the Federal Reserve System. LVNB has full power and lawful authority to own
and hold its properties and to carry on its business as presently conducted.
KHLIC is an insurance company that is duly organized, validly existing and in
good standing under the laws of the State of Arizona. KHLIC has full power and
lawful authority to own and hold its properties and to carry on its business as
presently conducted.
Section 3.3 Subsidiaries. LVNB and KHLIC are wholly-owned direct
----------- ------------
subsidiaries of KHG. Except for LVNB and KHLIC (the "KHG Subsidiaries"), KHG
owns no subsidiaries, directly or indirectly.
Section 3.4 Capitalization. The authorized capital of KHG consists
----------- --------------
exclusively of 10,000,000 shares of KHG Common Stock. There are 3,951,583
shares of KHG Common Stock validly issued, outstanding, fully paid and non-
assessable, and 120,100 shares are held as treasury shares. In addition, 98,330
shares of KHG Common Stock are reserved for issuance upon the exercise of Stock
Options granted under KHG's Stock Option Plans and 981,740 shares of KHG Common
Stock are reserved for issuance upon exercise of the Warrant. Except for the
KHG Options and the Warrant, there are no outstanding obligations, options or
rights of any kind entitling other persons to acquire shares of KHG Common Stock
and there are no outstanding securities or other instruments of any kind that
are convertible into shares of KHG Common Stock. All outstanding shares of LVNB
Common Stock are owned beneficially and of record by KHG. There are no
outstanding obligations, options or rights of any kind entitling other persons
to acquire shares of LVNB Common Stock, and there are no outstanding securities
or instruments of any kind that are convertible into shares of LVNB Common
Stock. All outstanding shares of KHLIC Common Stock are owned beneficially and
of record by KHG. There are not outstanding obligations, options or rights of
any kind entitling other persons to acquire shares of KHLIC Common Stock, and
there are no outstanding securities or instruments of any kind that are
convertible into shares of KHLIC Common Stock. The Common Stock of LVNB and
KHLIC is sometimes collectively referred to herein as the "KHG Subsidiaries
Common Stock."
Section 3.5 Charter, Bylaws and Minute Books. The copies of the
Certificate
----------- --------------------------------
Certificate of Incorporation and Bylaws of KHG and the KHG Subsidiaries that
have been delivered to FFC are true, correct and complete. Except as previously
disclosed to FFC in writing, the minute books of KHG and the KHG Subsidiaries
that have been made available to FFC for inspection are true, correct and
complete in all material respects and accurately record the actions taken by the
Boards of Directors and stockholders of KHG and the KHG Subsidiaries at the
meetings documented in such minutes.
Section 3.6 Financial Statements. KHG has delivered to FFC the following
----------- --------------------
financial statements: Consolidated Balance Sheets at December 31, 1996 and 1995
and Consolidated Statements of Income, Consolidated Statements of Stockholders'
Equity, and Consolidated Statements of Cash Flows of KHG for the years ended
December 31, 1996, 1995 and 1994, certified by KPMG Peat Marwick LLP, and set
forth in the 1996 Annual Report to KHG's stockholders and a Consolidated Balance
Sheet of KHG at June 30, 1997 and Consolidated Statements of Income,
Consolidated Statements of Changes in Stockholders' Equity and Consolidated
Statements of Cash Flows of KHG for the six-month period ended June 30, 1997, as
filed with the Securities and Exchange Commission (the "SEC") in a Quarterly
Report on Form 10-Q (the aforementioned Consolidated Balance Sheet as of June
30, 1997 being hereinafter referred to as the "KHG Balance Sheet"). Each of the
foregoing financial statements fairly present the consolidated financial
condition, assets and liabilities, and results of operations of KHG and LVNB at
their respective dates and for the respective periods then ended and has been
prepared in accordance with generally accepted accounting principles
consistently applied, except as otherwise noted in a footnote thereto and except
for the omission of the notes from the financial statements applicable to any
interim period.
Section 3.7 Absence of Undisclosed Liabilities. Except as disclosed in
----------- ----------------------------------
Schedule 3.7, or as reflected, noted or adequately reserved against in the KHG
- ------------
Balance Sheet, as at June 30, 1997, KHG had no consolidated liabilities (whether
accrued, absolute, contingent or otherwise) which were required to be reflected,
noted or reserved against in the KHG Balance Sheet under generally accepted
accounting principles. Except as disclosed in Schedule 3.7, KHG and the KHG
------------
Subsidiaries have not incurred, since June 30, 1997, any such liability, other
than liabilities of the same nature as those set forth in the KHG Balance Sheet,
all of which have been reasonably incurred in the Ordinary Course of Business.
For purposes of this Agreement, the term "Ordinary Course of Business" shall
mean
the ordinary course of business consistent with KHG's and the KHG Subsidiaries'
customary business practices.
Section 3.8 Absence of Changes. Since June 30, 1997, KHG and the KHG
----------- ------------------
Subsidiaries have each conducted their businesses in the Ordinary Course of
Business and, except as disclosed in Schedule 3.8, neither KHG nor the KHG
------------
Subsidiaries have undergone any changes in its condition (financial or
otherwise), assets, liabilities, business or operations, other than changes in
the Ordinary Course of Business, which have been, in the aggregate, materially
adverse as to KHG and the KHG Subsidiaries.
Section 3.9 Dividends, Distributions and Stock Purchases. Except as
----------- --------------------------------------------
disclosed in Schedule 3.9, since July 1, 1997, KHG has not declared, set aside,
------------
made or paid any dividend or other distribution in respect of the KHG Common
Stock, or purchased, issued or sold any shares of KHG Common Stock or the KHG
Subsidiaries Common Stock.
Section 3.10 Taxes. KHG and the KHG Subsidiaries have filed all federal,
------------ -----
state, county, municipal and foreign tax returns, reports and declarations which
are required to be filed by them or either of them as of June 30, 1997. Except
as disclosed in Schedule 3.10: (i) KHG and the KHG Subsidiaries have paid all
-------------
taxes, penalties and interest which have become due pursuant thereto or which
became due pursuant to federal, state, county, municipal or foreign tax laws
applicable to the periods covered by the foregoing tax returns, (ii) neither KHG
nor the KHG Subsidiaries have received any notice of deficiency or assessment of
additional taxes, and no tax audits are in process; and (iii) the Internal
Revenue Service (the "IRS") has not commenced or given notice of an intention to
commence any examination or audit of the federal income tax returns of KHG for
any year through and including the year ended December 31, 1996. Except as
disclosed in Schedule 3.10, neither KHG nor the KHG Subsidiaries have granted
-------------
any waiver of any statute of limitations or otherwise agreed to any extension of
a period for the assessment of any federal, state, county, municipal or foreign
income tax. Except as disclosed in Schedule 3.10, the accruals and reserves
-------------
reflected in the KHG Balance Sheet are adequate to cover all taxes (including
interest and penalties, if any, thereon) that are payable or accrued as a result
of KHG's consolidated operations for all periods prior to the date of such
Balance Sheet.
Section 3.11 Title to and Condition of Assets. Except as disclosed in
------------ --------------------------------
Schedule 3.11, KHG or the KHG Subsidiaries have good and marketable title to all
- -------------
consolidated real and personal properties and assets reflected in the KHG
Balance Sheet or acquired subsequent to June 30, 1997 (other than property and
assets disposed of in the Ordinary Course of Business), free and clear of all
liens or encumbrances of any kind whatsoever; provided, however, that the
-------- -------
representations and warranties contained in this sentence do not cover liens or
encumbrances that: (i) are reflected in the KHG Balance Sheet or in Schedule
--------
3.11; (ii) represent liens of current taxes not yet due or which, if due, may be
- ----
paid without penalty, or which are being contested in good faith by appropriate
proceedings; and (iii) represent such imperfections of title, liens,
encumbrances, zoning requirements and easements, if any, as are not substantial
in character, amount or extent and do not materially detract from the value, or
interfere with the present use, of the properties and assets subject thereto.
The structures and other improvements to real estate, furniture, fixtures and
equipment reflected in the KHG Balance Sheet or acquired subsequent to June 30,
1997: (A) are in good operating condition and repair (ordinary wear and tear
excepted), and (B) comply in all material respects with all applicable laws,
ordinances and regulations, including without limitation all building codes,
zoning ordinances and other similar laws, except where any noncompliance would
not materially detract from the value, or interfere with the present use, of
such structures, improvements, furniture, fixtures and equipment. KHG and the
KHG Subsidiaries own or have the right to use all real and personal properties
and assets that are material to the conduct of their respective businesses as
presently conducted.
Section 3.12 Contracts. Each written or oral contract entered into by KHG
------------ ---------
or the KHG Subsidiaries (other than contracts with customers reasonably entered
into by KHG or KHG Subsidiaries in the Ordinary Course of Business) which
involves aggregate payments or receipts in excess of $100,000 per year,
including without limitation every employment contract, employee benefit plan,
agreement, lease, license, indenture, mortgage and other commitment to which
either KHG or the KHG Subsidiaries are a party or by which KHG or any of the KHG
Subsidiaries or any of their properties may be bound (collectively referred to
herein as "Material Contracts") is identified in Schedule 3.12. Except as
-------------
disclosed in Schedule 3.12, all Material Contracts are enforceable against KHG
-------------
or the KHG subsidiaries, as the case may be and , KHG or the KHG subsidiaries
have in all material respects performed all obligations required to be performed
by them to date and are not in default in any material respect and KHG is not
aware of any default by a third party under a Material Contract. Schedule 3.12
-------------
identifies all Material Contracts which require the consent or approval of third
parties to the execution and delivery of this Agreement or to the consummation
of the transactions contemplated herein.
Section 3.13 Litigation and Governmental Directives. Except as disclosed
in
------------ --------------------------------------
in Schedule 3.13, (i) there is no litigation, investigation or proceeding
-------------
pending,
- ------------- or to the knowledge of KHG or the KHG Subsidiaries threatened, that
involves KHG or the KHG Subsidiaries or any of their properties and that, if
determined adversely, would materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business, operations or future
prospects of KHG or the KHG Subsidiaries; (ii) there are no outstanding orders,
writs, injunctions, judgments, decrees, regulations, directives, consent
agreements or memoranda of understanding issued by any federal, state or local
court or governmental authority or arbitration tribunal issued against or with
the consent of KHG or the KHG Subsidiaries that materially and adversely affect
the condition (financial or otherwise), assets, liabilities, business,
operations or future prospects of KHG or the KHG Subsidiaries or that in any
manner restrict the right of KHG or the KHG Subsidiaries to carry on their
businesses as presently conducted taken as a whole; and (iii) neither KHG nor
the KHG Subsidiaries are aware of any fact or condition presently existing that
might give rise to any litigation, investigation or proceeding which, if
determined adversely to either KHG or the KHG Subsidiaries, would materially and
adversely affect the consolidated condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of KHG or the KHG
Subsidiaries or would restrict in any manner the right of KHG or the KHG
Subsidiaries to carry on their businesses as presently conducted taken as a
whole. All litigation (except for bankruptcy proceedings in which KHG or the
KHG Subsidiaries have filed proofs of claim) in which KHG or the KHG
Subsidiaries are involved as a plaintiff (other than routine collection and
foreclosure suits initiated in the Ordinary Course of Business) in which the
amount sought to be recovered is less than $50,000 is identified in Schedule
--------
3.13.
-------------- ----
Section 3.14 Compliance with Laws; Governmental Authorizations. Except as
------------ -------------------------------------------------
disclosed in Schedule 3.14 or where noncompliance would not have a material and
-------------
adverse effect upon the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of KHG or the KHG Subsidiaries: (i) KHG
and the KHG Subsidiaries are in compliance with all statutes, laws, ordinances,
rules, regulations, judgments, orders, decrees, directives, consent agreements,
memoranda of understanding, permits, concessions, grants, franchises, licenses,
and other governmental authorizations or approvals applicable to KHG or the KHG
Subsidiaries or to any of their properties; and (ii) all material permits,
concessions, grants, franchises, licenses and other governmental authorizations
and approvals necessary for the conduct of the business of KHG or the KHG
Subsidiaries as presently conducted have been duly obtained and are in full
force and effect, and there are no proceedings pending or threatened which may
result in the revocation, cancellation, suspension or materially adverse
modification of any thereof.
Section 3.15 Insurance. All policies of insurance relating to KHG's and
the
------------ ---------
the KHG Subsidiaries' operations (except for title insurance policies),
including without limitation all financial institutions bonds, held by or on
behalf of KHG or the KHG Subsidiaries are listed in Schedule 3.15. All such
-------------
policies of
------------- insurance are in full force and effect, and no notices of
cancellation have been received in connection therewith.
Section 3.16 Financial Institutions Bonds. Since January 1, 1993, LVNB has
------------ ----------------------------
continuously maintained in full force and effect one or more financial
institutions bonds listed in Schedule 3.16 insuring LVNB against acts of
-------------
dishonesty by each of its employees. No claim has been made under any such bond
and LVNB is not aware of any fact or condition presently existing which might
form the basis of a claim under any such bond. LVNB has received no notice that
its present financial institutions bond or bonds will not be renewed by its
carrier on substantially the same terms as those now in effect.
Section 3.17 Labor Relations and Employment Agreements. Neither KHG nor
any
------------ -----------------------------------------
any of the KHG Subsidiaries are a party to or bound by any collective bargaining
agreement. KHG and the KHG Subsidiaries enjoy good working relationships with
their employees, and there are no labor disputes pending, or to the knowledge of
KHG or the KHG Subsidiaries threatened, that might materially and adversely
affect the condition (financial or otherwise), assets, liabilities, business or
operations of KHG or LVNB. Except as disclosed in Schedule 3.17, neither KHG
-------------
nor any of the KHG Subsidiaries have any employment contract, severance
agreement, deferred compensation agreement, consulting agreement or similar
obligation (an "Employment Obligation") with any director, officer, employee,
agent or consultant. Except as disclosed in Schedule 3.17, as of the Effective
-------------
Date (as defined in Section 9.2 herein), neither KHG nor any of the KHG
Subsidiaries will have any liability for employee termination rights arising out
of any Employment Obligation.
Section 3.18 Employee Benefit Plans. All employee benefit plans, contracts
------------ ----------------------
or arrangements to which KHG or any of the KHG Subsidiaries are a party or by
which KHG or any of the KHG Subsidiaries are bound, including without limitation
all pension, retirement, deferred compensation, incentive, bonus, profit
sharing, stock purchase, stock option, life insurance, death or survivor's
benefit, health insurance, sickness, disability, medical, surgical, hospital,
severance, layoff or vacation plans, contracts or arrangements, are identified
in Schedule 3.18. The Lebanon Valley National Bank Pension Plan and the Lebanon
-------------
Valley National Bank Retirement Savings Plan (the "KHG Pension Plans") are
exempt from tax under Sections 401 and 501 of the Code, has been maintained and
operated in material compliance with all applicable provisions of the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). No
"prohibited transaction" (as such term is defined in the Code or in ERISA) has
occurred in respect of the KHG Pension Plans or any other employee benefit plan,
(all "employee benefit pension plans" and all "employee welfare benefit plans",
as those terms are defined in ERISA, of KHG or any of the KHG Subsidiaries being
collectively referred to herein as "KHG Benefit Plans" and individually as a
"KHG Benefit Plan"), to which KHG or any of the KHG Subsidiaries are a party or
by which KHG or any of the KHG Subsidiaries are bound. There have been no
material breaches of fiduciary duty by any fiduciary under or with respect to
the KHG Pension Plans or any other KHG Benefit Plan, and no claim is pending or
threatened with respect to any KHG Benefit Plan other than claims for benefits
made in the Ordinary Course of Business. Neither KHG nor any of the KHG
Subsidiaries have incurred any material liability for any tax imposed by Section
4975 of the Code or for any material penalty imposed by the Code or by ERISA
with respect to the KHG Pension Plans or any other KHG Benefit Plan. There has
not been any audit of any KHG Benefit Plan by the Department of Labor, the IRS
or the PBGC since 1990.
Section 3.19 Related Party Transactions. Except as disclosed in Schedule
------------ -------------------------- --------
3.19, neither KHG nor any of the KHG Subsidiaries have any contract, extension
- ----
of credit, business arrangement or other relationship of any kind with any of
the following persons: (i) any executive officer or director (including any
person who has served in such capacity since January 1, 1995) of KHG or any of
the KHG Subsidiaries; (ii) any stockholder owning five percent (5%) or more of
the outstanding KHG Common Stock; and (iii) any "associate" (as defined in Rule
405 under the 1933 Act) of the foregoing persons or any business in which any of
the foregoing persons is an officer, director, employee or five percent (5%) or
greater equity owner. Each such contract or extension of credit disclosed in
Schedule 3.19, except as otherwise specifically described therein, has been made
- -------------
in the Ordinary Course of Business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
arms' length transactions with other persons that do not involve more than a
normal risk of collectability or present other unfavorable features.
Section 3.20 No Finder. Except as disclosed in Schedule 3.20, neither KHG
------------ --------- -------------
nor any of the KHG Subsidiaries have paid or become obligated to pay any fee or
commission of any kind whatsoever to any broker, finder, advisor or other
intermediary for, on account of or in connection with the transactions
contemplated in this Agreement.
Section 3.21 Complete and Accurate Disclosure. Neither this Agreement
------------ --------------------------------
(insofar as it relates to KHG, the KHG Subsidiaries, KHG Common Stock, KHG
Subsidiaries Common Stock, and the involvement of KHG and the KHG Subsidiaries
in the transactions contemplated hereby) nor any financial statement, schedule
(including without limitation its Schedules to this Agreement), certificate, or
other statement or document delivered by KHG or the KHG Subsidiaries to FFC in
connection herewith contains any statement which, at the time and in light of
the circumstances under which it is made, is false or misleading with respect to
any material fact or omits to state any material fact necessary to make the
statements contained herein or therein not false or misleading.
Section 3.22 Environmental Matters. Except as disclosed in Schedule 3.22,
------------ --------------------- -------------
neither KHG nor any of the KHG Subsidiaries have any knowledge that any
environmental contaminant, pollutant, toxic or hazardous waste or other similar
substance has been generated, used, stored, processed, disposed of or discharged
onto any of the real estate now or previously owned or acquired (including
without limitation any real estate acquired by means of foreclosure or exercise
of any other creditor's right) or leased by KHG or any of the KHG Subsidiaries.
In particular, without limiting the generality of the foregoing sentence, except
as disclosed in Schedule 3.22, neither KHG nor any of the KHG Subsidiaries have
-------------
any knowledge that: (i) any materials containing asbestos have been used or
incorporated in any building or other structure or improvement located on any of
the real estate now or previously owned or acquired (including without
limitation any real estate acquired by means of foreclosure or exercise of any
other creditor's right) or leased by KHG or any of the KHG Subsidiaries; (ii)
any electrical transformers, fluorescent light fixtures with ballasts or other
equipment containing PCB's are or have been located on any of the real estate
now or previously owned or acquired (including without limitation any real
estate acquired by means of foreclosure or exercise of any other creditor's
right) or leased by KHG or any of the KHG Subsidiaries; or (iii) any underground
storage tanks for the storage of gasoline, petroleum products or other toxic or
hazardous wastes or similar substances are or have ever been located on any of
the real estate now or previously owned or acquired (including without
limitation any real estate acquired by means of foreclosure or exercise of any
other creditor's right) or leased by KHG or any of the KHG Subsidiaries.
Section 3.23 Proxy Statement/Prospectus. At the time the Proxy
------------ --------------------------
Statement/Prospectus (as defined in Section 6.1(b) herein) is mailed to the
stockholders of KHG and at all times subsequent to such mailing, up to and
including the Effective Date, the Proxy Statement/Prospectus (including any pre-
and post-effective amendments and supplements thereto), with respect to all
information relating to KHG, the KHG Subsidiaries, KHG Common Stock, the KHG
Subsidiaries Common Stock and all actions taken and statements made by KHG and
the KHG Subsidiaries in connection with the transactions contemplated herein
(except for information provided by FFC to KHG or the KHG Subsidiaries) will:
(i) comply in all material respects with applicable provisions of the 1933 Act,
and the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
applicable rules and regulations of the SEC thereunder; and (ii) not contain any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or omits to
state any material fact that is required to be stated therein or necessary in
order (A) to make the statements therein not false or misleading, or (B) to
correct any statement in an earlier communication with respect to the Proxy
Statement/Prospectus which has become false or misleading.
Section 3.24 SEC Filings. No registration statement, offering circular,
------------ -----------
proxy statement, schedule or report filed and not withdrawn by KHG with the SEC
under the 1933 Act or the 1934 Act, on the date of effectiveness (in the case of
any registration statement or offering circular) or on the date of filing (in
the case of any report or schedule) or on the date of mailing (in the case of
any proxy statement), contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
Section 3.25 Reports. KHG and LVNB have filed all material reports,
------------ -------
registrations and statements that are required to be filed with the Federal
Reserve Board (the "FRB"), the Federal Deposit Insurance Corporation (the
"FDIC"), the Office of the Comptroller of the Currency (the "OCC") and any other
applicable federal, state or local governmental or regulatory authorities and
such reports, registrations and statements referred to in this Section 3.25
were, as of their respective dates, in compliance in all material respects with
all of the statutes, rules and regulations enforced or promulgated by the
governmental or regulatory authority with which they were filed; provided,
however, that the failure to file any such report, registration, or statement or
the failure of any report, registration or statement to comply with the
applicable regulatory standard shall not be deemed to be a breach of the
foregoing representation unless such failure has or may have a material adverse
impact on KHG and the KHG Subsidiaries on a consolidated basis. KHG has
furnished FFC with, or made available to FFC, copies of all such filings made in
the last three fiscal years and in the period from January 1, 1997 through the
date of this Agreement. KHG is required to file reports with the SEC pursuant
to Section 12 of the 1934 Act, and has made all appropriate filings under the
1934 Act and the rules and regulations promulgated thereunder. The KHG Common
Stock is traded on the American Stock Exchange under the symbol "KHG."
Section 3.26 Loan Portfolio of the LVNB.
------------ --------------------------
(a) Attached hereto as Schedule 3.26 is a list of (w) all outstanding
-------------
commercial relationships, i.e. commercial loans, commercial loan commitments and
commercial letters of credit, of LVNB (x) all loans of LVNB classified by LVNB
or any regulatory authority as "Monitor," "Substandard," "Doubtful" or "Loss,"
(y) all commercial and mortgage loans of LVNB classified as "non-accrual," and
(z) all commercial loans of LVNB classified as "in substance foreclosed."
(b) LVNB has adequately reserved for or charged off loans in
accordance with applicable regulatory requirements and LVNB's reserve for loan
losses is adequate in all material respects.
Section 3.27 Investment Portfolio. Attached hereto as Schedule 3.27 is a
------------ -------------------- -------------
list of all securities held by KHG and LVNB for investment, showing the
principal amount, book value and market value of each security as of a recent
date, and of all short-term investments held by it as of June 30, 1997. These
securities are free and clear of all liens, pledges and encumbrances, except as
shown on Schedule 3.27.
-------------
Section 3.28 Regulatory Examinations.
------------ -----------------------
(a) Except for normal examinations conducted by a regulatory agency in
the regular course of the business of KHG or any of the KHG Subsidiaries, no
regulatory agency has initiated any proceeding or investigation into the
business or operations of KHG or any of the KHG Subsidiaries. Neither KHG nor
any of the KHG Subsidiaries have received any objection from any regulatory
agency to KHG's or the KHG Subsidiaries' response to any violation, criticism or
exception with respect to any report or statement relating to any examinations
of KHG and the KHG Subsidiaries which would have a materially adverse effect on
KHG and any of the KHG Subsidiaries on a consolidated basis.
(b) Neither KHG nor any of the KHG Subsidiaries are required to divest
any assets currently held by it or discontinue any activity currently conducted
as a result of the Federal Deposit Insurance Corporation Improvement Act of
1991, any regulations promulgated thereunder, or otherwise which would
have a materially adverse effect on KHG and any of the KHG Subsidiaries on a
consolidated basis.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FFC
-------------------------------------
FFC represents and warrants to KHG, as of the date of this Agreement and as
of the date of the Closing, as follows:
Section 4.1 Authority. The execution and delivery of this Agreement and
the
----------- ---------
the consummation of the transactions contemplated herein have been authorized by
the Board of Directors of FFC, and no other corporate action on the part of FFC
is necessary to authorize this Agreement or the consummation by FFC of the
transactions contemplated herein. This Agreement has been duly executed and
delivered by FFC and, assuming due authorization, execution and delivery by KHG,
constitutes a valid and binding obligation of FFC. The execution, delivery and
consummation of this Agreement will not constitute a violation or breach of or
default under the Articles of Incorporation or Bylaws of FFC or any statute,
rule, regulation, order, decree, directive, agreement, indenture or other
instrument to which FFC is a party or by which FFC or any of its properties are
bound.
Section 4.2 Organization and Standing. FFC is a business corporation that
----------- -------------------------
is duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. FFC is a registered bank holding company under
the BHC Act and has full power and lawful authority to own and hold its
properties and to carry on its present business.
Section 4.3 Capitalization. The authorized capital of FFC consists
----------- --------------
exclusively of 200,000,000 shares of FFC Common Stock and 10,000,000 shares of
preferred stock without par value (the "FFC Preferred Stock"). There was
39,627,648 shares of FFC Common Stock validly issued, outstanding, fully paid
and non-assessable and no shares are held as treasury shares. No shares of FFC
Preferred Stock have been issued as of the date of this Agreement, and FFC has
no present intention to issue any shares of FFC Preferred Stock. As of the date
of this Agreement, there are no outstanding obligations, options or rights of
any kind entitling other persons to acquire shares of FFC Common Stock or shares
of FFC Preferred Stock and there are no outstanding securities or other
instruments of any kind convertible into shares of FFC Common Stock or into
shares of FFC Preferred Stock, except as follows: (i) 888,506 shares of FFC
Common Stock were issuable upon the exercise of outstanding stock options
granted under the FFC Incentive Stock Option Plan and the FFC Employee Stock
Purchase Plan and (ii) there were outstanding 39,627,648 Rights representing the
right under certain circumstances to purchase shares of FFC Common Stock
pursuant to the terms of a Shareholder Rights Agreement, dated June 20, 1989,
entered into between FFC and Fulton Bank and (iii) shares of FFC Common Stock
reserved from time to time for issuance pursuant to FFC's Employee Stock
Purchase and Dividend Reinvestment Plans.
Section 4.4 Articles of Incorporation and Bylaws. The copies of the
----------- ------------------------------------
Articles of Incorporation, as amended, and of the Bylaws, as amended, of FFC
that have been delivered to KHG are true, correct and complete.
Section 4.5 Subsidiaries. Schedule 4.5 contains a list of all subsidiaries
----------- ------------ ------------
("Subsidiaries") which FFC owns, directly or indirectly. Except as otherwise
disclosed on Schedule 4.5: (i) FFC owns, directly or indirectly, all of the
------------
outstanding shares of capital stock of each Subsidiary, and (ii) as of the date
of this Agreement: (A) there are no outstanding obligations, options or rights
of any kind entitling persons (other than FFC or any Subsidiary) to acquire
shares of capital stock of any Subsidiary, and (B) there are no outstanding
securities or other instruments of any kind held by persons (other than FFC or
any Subsidiary) that are convertible into shares of capital stock of any
Subsidiary. Each Subsidiary is duly organized, validly existing and in good
standing under the laws of the jurisdiction pursuant to which it is
incorporated. Each Subsidiary has full power and lawful authority to own and
hold its properties and to carry on its business as presently conducted. Each
Subsidiary
which is a banking institution is an insured bank under the provisions of the
FDI Act.
Section 4.6 Financial Statements. FFC has delivered to KHG the following
----------- --------------------
financial statements: Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Shareholders' Equity, and Consolidated
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994,
certified by Arthur Andersen LLP and set forth in the Annual Report to the
shareholders of FFC for the year ended December 31, 1996 and Consolidated
Balance Sheets as of June 30, 1997, Consolidated Statements of Income for the
three-month and six-month periods ended June 30, 1997, and Consolidated
Statements of Cash Flows for the six months ended June 30, 1997 and 1996, as
filed with the SEC in a Quarterly Report on Form 10-Q (the Consolidated Balance
Sheet as of June 30, 1997 being hereinafter referred to as the "FFC Balance
Sheet"). Each of the foregoing financial statements fairly presents the
consolidated financial position, assets, liabilities and results of operations
of FFC at their respective dates and for the respective periods then ended and
has been prepared in accordance with generally accepted accounting principles
consistently applied, except as otherwise noted in a footnote thereto.
Section 4.7 Absence of Undisclosed Liabilities. Except as disclosed in
----------- ----------------------------------
Schedule 4.7 or as reflected, noted or adequately reserved against in the FFC
- ------------
Balance Sheet, at June 30, 1997 FFC had no material liabilities (whether
accrued, absolute, contingent or otherwise) which are required to be reflected,
noted or reserved against therein under generally accepted accounting principles
or which are in any case or in the aggregate material. Except as described in
Schedule 4.7, since June 30, 1997 FFC has not incurred any such liability other
- ------------
than liabilities of the same nature as those set forth in the FFC Balance Sheet,
all of which have been reasonably incurred in the ordinary course of business.
Section 4.8 Absence of Changes. Since June 30, 1997 there has not been any
----------- ------------------
material and adverse change in the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of FFC.
Section 4.9 Litigation and Governmental Directives. Except as disclosed in
----------- --------------------------------------
Schedule 4.9: (i) there is no litigation, investigation or proceeding pending,
- ------------
or to the knowledge of FFC threatened, that involves FFC or its properties and
that, if determined adversely to FFC, would materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business, operations or
future prospects of FFC; (ii) there are no outstanding orders, writs,
injunctions, judgments, decrees, regulations, directives, consent agreements or
memoranda of understanding issued by any federal, state or local court or
governmental authority or of any arbitration tribunal against FFC which
materially and adversely affect the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of FFC or restrict in any
manner the right of FFC to carry on its business as presently conducted; and
(iii) FFC is not aware of any fact or condition presently existing that might
give rise to any litigation, investigation or proceeding which, if determined
adversely to FFC, would materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business, operations or future prospects of
FFC or restrict in any manner the right of FFC to carry on its business as
presently conducted.
Section 4.10 Compliance with Laws; Governmental Authorizations. Except as
------------ -------------------------------------------------
disclosed in Schedule 4.10 or where noncompliance would not have a material and
-------------
adverse effect upon the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of FFC: (i) FFC and each of its
Subsidiaries are in compliance with all statutes, laws, ordinances, rules,
regulations, judgments, orders, decrees, directives, consent agreements,
memoranda of understanding, permits, concessions, grants, franchises, licenses,
and other governmental authorizations or approvals applicable to their
respective operations and properties; and (ii) all permits, concessions, grants,
franchises, licenses and other governmental authorizations and approvals
necessary for the conduct of the respective businesses of FFC and each of its
Subsidiaries as presently conducted have been duly obtained and are in full
force and effect, and there are not proceedings pending or threatened which may
result in the
revocation, cancellation, suspension or materially adverse modification of any
thereof.
Section 4.11 Complete and Accurate Disclosure. Neither this Agreement
------------ --------------------------------
(insofar as it relates to FFC, FFC Common Stock, and the involvement of FFC in
the transactions contemplated hereby) nor any financial statement, schedule
(including, without limitation, its Schedules to this Agreement), certificate or
other statement or document delivered by FFC to KHG in connection herewith
contains any statement which, at the time and under the circumstances under
which it is made, is false or misleading with respect to any material fact or
omits to state any material fact necessary to make the statements contained
herein or therein not false or misleading. In particular, without limiting the
generality of the foregoing sentence, the information provided and the
representations made by FFC to KHG in connection with the Registration Statement
(as defined in Section 6.1(b)), both at the time such information and
representations are provided and made and at the time of the Closing, will be
true and accurate in all material respects and will not contain any false or
misleading statement with respect to any material fact or omit to state any
material fact required to be stated therein or necessary in order (i) to make
the statements made not false or misleading, or (ii) to correct any statement
contained in an earlier communication with respect to such information or
representations which has become false or misleading.
Section 4.12 Labor Relations. Neither FFC nor any of its Subsidiaries is a
------------ ---------------
party to or bound by any collective bargaining agreement. FFC and each of its
Subsidiaries enjoy good working relationships with their employees, and there
are no labor disputes pending, or to the knowledge of FFC or any Subsidiary
threatened, that might materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business or operations of FFC.
Section 4.13 Employee Benefits Plans. FFC's contributory profit-sharing
------------ -----------------------
plan, defined benefits pension plan and 401(k) plan (hereinafter collectively
referred to as the "FFC Pension Plans") are exempt from tax under Sections 401
and 501 of the Code, have been maintained and operated in compliance with all
applicable provisions of the Code and ERISA, are not subject to any accumulated
funding deficiency within the meaning of ERISA and the regulations promulgated
thereunder, and do not have any outstanding liability to the PBGC. No
"prohibited transaction" or "reportable event" (as such terms are defined in the
Code or ERISA) has occurred with respect to the FFC Pension Plans or any other
employee benefit plan to which FFC or any of its subsidiaries are a party or by
which FFC or any of its subsidiaries are bound (each hereinafter called an "FFC
Benefit Plan"). There have been no breaches of fiduciary duty by any fiduciary
under or with respect to the FFC Pension Plans or any other FFC Benefit Plan,
and no claim is pending or threatened with respect to any FCC Benefit Plan other
than claims for benefits made in the Ordinary Course of Business. Neither FCC
or any of its subsidiaries have incurred any liability for any tax imposed by
Section 4975 of the Code or for any penalty imposed by the Code or by ERISA with
respect to the FFC Pension Plans or any other FFC Benefit Plan. There has not
been any audit of any FCC Benefit Plan by the Department of Labor, the IRS or
the PBGC since 1990.
Section 4.14 Environmental Matters. Except as disclosed in Schedule 4.14
or
------------ --------------------- -------------
or as reflected, noted or adequately reserved against in the FFC Balance Sheet,
FFC has no knowledge of any material liability relating to any environmental
contaminant, pollutant, toxic or hazardous waste or other similar substance that
has been used, generated, stored, processed, disposed of or discharged onto any
of the real estate now or previously owned or acquired (including without
limitation real estate acquired by means of foreclosure or other exercise of any
creditor's right) or leased by FFC and which is required to be reflected, noted
or adequately reserved against in FFC's consolidated financial statements under
generally accepted accounting principles.
Section 4.15 SEC Filings. No registration statement, offering circular,
------------ -----------
proxy statement, schedule or report filed and not withdrawn by FFC with the SEC
under the 1933 Act or the 1934 Act, on the date of effectiveness (in the
case of any registration statement or offering circular) or on the date of
filing (in the case of any report or schedule) or on the date of mailing (in the
case of any proxy statement), contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 4.16 Proxy Statement/Prospectus. At the time the Proxy
------------ --------------------------
Statement/Prospectus (as defined in Section 6.1(b)) is mailed to the
stockholders of KHG and at all times subsequent to such mailing, up to and
including the Effective Date, the Proxy Statement/Prospectus (including any pre-
and post-effective amendments and supplements thereto), with respect to all
information relating to FFC, FFC Common Stock, and actions taken and statements
made by FFC in connection with the transactions contemplated herein (other than
information provided by KHG or LVNB to FFC), will: (i) comply in all material
respects with applicable provisions of the 1933 Act and 1934 Act and the
pertinent rules and regulations thereunder; and (ii) not contain any statement
which, at the time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omits to state any
material fact that is required to be stated therein or necessary in order (A) to
make the statements therein not false or misleading, or (B) to correct any
statement in an earlier communication with respect to the Proxy
Statement/Prospectus which has become false or misleading.
Section 4.17 Accounting Treatment. To the best of FFC's knowledge after
------------ --------------------
reasonable investigation and consultation with its advisors, and subject to any
factors beyond FFC's control, the Merger will qualify for treatment as a
"pooling-of-interests" for accounting purposes.
Section 4.18 Regulatory Approvals. FFC is not aware of any reason why any
------------ --------------------
of the required regulatory approvals to be obtained in connection with the
Merger should not be granted by such regulatory authorities or why such
regulatory approvals should be conditioned on any requirement which would be a
significant impediment to FFC's ability to carry on its business.
Section 4.19 No Finder. FFC has not paid or become obligated to pay any
fee
------------ ---------
fee or commission of any kind whatsoever to any broker, finder, advisor or other
intermediary for, on account of, or in connection with the transactions
contemplated in this Agreement.
Section 4.20 Taxes. FFC has filed, or has received extension for filing,
------------ -----
all federal, state, county, municipal and foreign tax returns, reports and
declarations which are required to be filed by it as of June 30, 1997. To the
best of FFC's knowledge, (i) FFC has paid all taxes, penalties and interest
which have become due pursuant thereto or which became due pursuant to federal,
state, county, municipal or foreign tax laws applicable to the periods covered
by the foregoing tax returns, and (ii) FFC has not received any notice of
deficiency or assessment of additional taxes. To the best of FFC's knowledge,
the accruals and reserves reflected in the FFC Balance Sheet are adequate to
cover all material taxes (including interest and penalties, if any, thereon)
that are payable or accrued as a result of FFC's consolidated operations for all
periods prior to the date of such Balance Sheet.
Section 4.21 Title to and Condition of Assets. FFC has good and marketable
------------ --------------------------------
title to all consolidated real and personal properties and assets reflected in
the FFC Balance Sheet or acquired subsequent to June 30, 1997 (other than
property and assets disposed of in the Ordinary Course of Business), free and
clear of all liens or encumbrances of any kind whatsoever; provided, however,
-------- -------
that the representations and warranties contained in this sentence to not cover
liens or encumbrances that: (i) are reflected in the FFC Balance Sheet; (ii)
represent liens of current taxes not yet due or which, if due, may be paid
without penalty, or which are being contested in good faith by appropriate
proceedings; and (iii) represent such imperfections of title, liens,
encumbrances, zoning requirements and easements, if any, as are not substantial
in character, amount or extent and do not materially detract from the value, or
interfere with the present or proposed use, of the properties and assets subject
thereto.
Section 4.22 Contracts. To the best of FFC's knowledge, all FFC Material
------------ ---------
Contracts are enforceable against FFC, and FFC has in all material respects
performed all obligations required to be performed by it to date and is not in
default in any material respect. "FFC Material Contracts" shall be defined as
each written or oral contract entered into by FFC (other than contracts with
customers reasonably entered into by FFC in the Ordinary Course of Business)
which involves aggregate payments or receipts in excess of $100,000 per year,
including without limitation every employment contract, employee benefit plan,
agreement, lease, license, indenture, mortgage and other commitment to which
either FFC or FFC Subsidiaries are a party or by which FFC or any of the FFC
Subsidiaries or any of their properties may be bound.
Section 4.23 Insurance. To the best of FFC's knowledge, all policies of
------------ ---------
insurance covering operations of FFC which are, in the aggregate, material
(except for title insurance policies), including without limitation all
financial institutions bonds, held by or on behalf of FFC are in full force and
effect, and no notices of cancellation have been received in connection
therewith.
ARTICLE V
COVENANTS OF KHG
----------------
From the date of this Agreement until the Effective Date, KHG covenants and
agrees to do, and shall cause LVNB to do, the following:
Section 5.1 Conduct of Business. Except as otherwise consented to by FFC in
----------- -------------------
writing which consent will not be unreasonably withheld or delayed, KHG and the
KHG Subsidiaries shall: (i) use all reasonable efforts to carry on their
respective businesses in, and only in, the Ordinary Course of Business; (ii) to
the extent consistent with prudent business judgment, use all reasonable efforts
to preserve their present business organizations, to retain the services of
their present officers and employees, and to maintain their relationships with
customers, suppliers and others having business dealings with KHG or any of the
KHG Subsidiaries; (iii) maintain all of their structures, equipment and other
real property and tangible personal property in good repair, order and
condition, except for ordinary wear and tear and damage by unavoidable casualty;
(iv) to the extent consistent with prudent business judgment, use all reasonable
efforts to preserve or collect all material claims and causes of action
belonging to KHG or any of the KHG Subsidiaries; (v) to the extent consistent
with prudent business judgment, keep in full force and effect all insurance
policies now carried by KHG or any of the KHG Subsidiaries; (vi) to the extent
consistent with prudent business judgment, perform in all material respects each
of their obligations under all Material Contracts (as defined in Section 3.12
herein) to which KHG or any of the KHG Subsidiaries are a party or by which any
of them may be bound or which relate to or affect their properties, assets and
business; (vii) maintain their books of account and other records in the
Ordinary Course of Business; (viii) comply in all material respects with all
statutes, laws, ordinances, rules and regulations, decrees, orders, consent
agreements, memoranda of understanding and other federal, state, and local
governmental directives applicable to KHG or any of the KHG Subsidiaries and to
the conduct of their businesses; (ix) not amend KHG's or any of the KHG
Subsidiaries' Charter or Bylaws; (x) not enter into or assume any Material
Contract, incur any material liability or obligation, or make any material
commitment, except in the Ordinary Course of Business; (xi) not make any
material acquisition or disposition of any properties or assets or subject any
of their properties or assets to any material lien, claim, charge, or
encumbrance of any kind whatsoever; (xii) not knowingly take or permit to be
taken any action which would constitute a breach of any representation, warranty
or covenant set forth in this Agreement; (xiii) except as permitted in Section
5.11 herein, not declare, set aside or pay any dividend or make any other
distribution in respect of KHG Common Stock; (xiv) not authorize, purchase,
redeem, issue (except upon the exercise of outstanding options under the KHG
Stock Option Plans) or sell (or grant options or rights to purchase or sell) any
shares of KHG Common Stock or any other equity or debt securities of KHG except
to the extent necessary to follow participants' investment directions under the
KHG Pension Plans; (xv) not increase the rate of compensation of, pay a bonus or
severance compensation to, establish or amend any KHG Benefit Plan, except as
required by law (as defined in Section 3.18 herein) for, or enter into or amend
any Employment Obligation (as defined in Section 3.17 herein) with, any officer,
director, employee or consultant of KHG or any of the KHG Subsidiaries, except
that KHG and the KHG Subsidiaries may grant reasonable salary increases and
bonuses to their officers and employees in the Ordinary Course of Business to
the extent consistent with their past practice and may enter into the Employment
Agreements permitted by Section 5.12 herein; (xvi) not enter into any related
party transaction of the kind contemplated in Section 3.19 herein except in the
Ordinary Course of Business consistent with past practice (as disclosed on
Schedule 3.19); (xvii) in determining the additions to loan loss reserves and
- -------------
the loan write-offs, writedowns and other adjustments that reasonably should be
made by LVNB during the fiscal year ending December 31, 1997, KHG and the KHG
Subsidiaries shall consult with FFC and shall act in accordance with generally
accepted accounting principles and KHG's and the KHG Subsidiaries' customary
business practices; (xviii) file with appropriate federal, state, local and
other governmental agencies all tax returns and other material reports required
to be filed, pay in full or make adequate provisions for the payment of all
taxes, interest, penalties, assessments or deficiencies shown to be due on tax
returns or by any taxing authorities and report all information on such returns
truthfully, accurately and completely; (xix) not renew any existing contract for
services, goods, equipment or the like or enter into, amend in any material
respect or terminate any contract or agreement (including without limitation any
settlement agreement with respect to litigation) that is or may reasonably be
expected to have a material adverse effect on KHG and the KHG Subsidiaries
except in the Ordinary Course of Business consistent with past practice
(provided that FFC shall not unreasonably withhold or delay its consent to such
transactions); (xx) not make any capital expenditures other than in the Ordinary
Course of Business or as necessary to maintain existing assets in good repair;
(xxi) not make application for the opening or closing of any, or open or close
any, branches or automated banking facility, except for one automated banking
facility to be installed in Myerstown, Pennsylvania; (xxii) not make any equity
investment or commitment to make such an investment in real estate or in any
real estate development project, other than in connection with foreclosures,
settlements in lieu of foreclosure or troubled loan or debt restructuring in the
Ordinary Course of Business consistent with customary banking practice; or
(xxiii) not take any other action similar to the foregoing which would have the
effect of frustrating the purposes of this Agreement or the Merger or cause the
Merger not to qualify for pooling-of-interests accounting treatment (if
applicable) or as a tax-free reorganization under Section 368 of the Code.
Section 5.2 Best Efforts. KHG and the KHG Subsidiaries shall cooperate
with
----------- ------------
with FFC and shall use their best efforts to do or cause to be done all things
necessary or appropriate on its part in order to fulfill the conditions
precedent set forth in Article VII of this Agreement and to consummate the
transactions contemplated by this Agreement, including the Merger and
Restructuring. In particular, without limiting the generality of the foregoing
sentence, KHG and the KHG Subsidiaries shall: (i) cooperate with FFC in the
preparation of all required applications for regulatory approval of the
transactions contemplated by this Agreement and in the preparation of the
Registration Statement (as defined in Section 6.1(b)); (ii) call a meeting of
its stockholders and take, in good faith, all actions which are necessary or
appropriate on its part in order to secure the approval of this Agreement by its
stockholders at that meeting; and (iii) cooperate with FFC in making KHG's and
the KHG Subsidiaries' employees reasonably available for training by FFC at the
KHG Subsidiaries' facilities prior to the Effective Date, to the extent that
such training is deemed reasonably necessary by FFC to ensure that the KHG
Subsidiaries' facilities will be properly operated in accordance with FFC's
policies after the Merger.
Section 5.3 Access to Properties and Records. KHG and the KHG Subsidiaries
----------- --------------------------------
shall give to FFC and its authorized employees and representatives (including
without limitation its counsel, accountants, economic and environmental
consultants and other designated representatives) such access during normal
business hours to all properties, books, contracts, documents and records of KHG
and the KHG Subsidiaries as FFC may reasonably request, subject to the
obligation of FFC and its authorized employees and representatives to maintain
the confidentiality of all nonpublic information concerning KHG and the KHG
Subsidiaries obtained by reason of such access and subject to applicable law.
Section 5.4 Subsequent Financial Statements. Between the date of signing
of
----------- -------------------------------
of this Agreement and the Effective Date, KHG and the KHG Subsidiaries shall
promptly prepare and deliver to FFC as soon as practicable all internal monthly
and quarterly financial statements, all quarterly and annual reports to
stockholders and all reports to regulatory authorities prepared by or for either
KHG or any of the KHG Subsidiaries (which additional financial statements and
reports are hereinafter collectively referred to as the "Additional KHG
Financial Statements"). The representations and warranties set forth in
Sections 3.6, 3.7 and 3.8 shall apply to the Additional KHG Financial
Statements.
Section 5.5 Update Schedules. KHG or any of the KHG Subsidiaries shall
----------- ----------------
promptly disclose to FFC in writing any material change, addition, deletion or
other modification to the information set forth in its Schedules hereto.
Section 5.6 Notice. KHG or any of the KHG Subsidiaries shall promptly
----------- ------
notify FFC in writing of any actions, claims, investigations, proceedings or
other developments which, if pending or in existence on the date of this
Agreement, would have been required to be disclosed to FFC in order to ensure
the accuracy of the representations and warranties set forth in this Agreement
or which otherwise could materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business operations or future
prospects of KHG or any of the KHG Subsidiaries or restrict in any manner their
ability to carry on their respective businesses as presently conducted.
Section 5.7 Other Proposals. KHG or any of the KHG Subsidiaries shall not,
----------- ---------------
nor shall they permit any of their officers, directors, employees, agents,
consultants or other representatives to: (i) solicit, initiate or encourage any
proposal for a merger or other acquisition of KHG or any of the KHG
Subsidiaries, or any material portion of their properties or assets, with or by
any person other than FFC, or (ii) cooperate with, or furnish any nonpublic
information concerning KHG or any of the KHG Subsidiaries to, any person in
connection with such a proposal (an "Acquisition Proposal"); provided, however,
that the obligations of KHG or any of the KHG Subsidiaries and their directors
and other representatives under this Section 5.7 are subject to the limitation
that the Board of Directors shall be free to take such action as the Board of
Directors determines, in good faith, and after consultation with outside
counsel, it is not legally inconsistent with its fiduciary duty. KHG will
notify FFC immediately if any discussions or negotiations are sought to be
initiated, any inquiry or proposal is made, or any such information is
requested, with respect to an Acquisition Proposal or potential Acquisition
Proposal or if any Acquisition Proposal is received or indicated to be
forthcoming.
Section 5.8 Affiliate Letters. KHG shall deliver or cause to be delivered
----------- -----------------
to FFC, at or before the Closing, a letter from each of the officers and
directors of KHG (and shall use its best efforts to obtain and deliver such a
letter from each stockholder of KHG) who may be deemed to be an "affiliate" (as
that term is defined for purposes of Rules 145 and 405 promulgated by the SEC
under the 1933 Act) of KHG, in form and substance satisfactory to FFC, under the
terms of which each such officer, director or stockholder acknowledges and
agrees to abide by all limitations imposed by the 1933 Act and by all rules,
regulations and releases promulgated thereunder by the SEC with respect to the
sale or other disposition of the shares of FFC Common Stock to be received by
such person pursuant to this Agreement.
Section 5.9 No Purchases or Sales of FFC Common Stock During Price
----------- ------------------------------------------------------
Determination Period. KHG and the KHG Subsidiaries shall not, and shall use
- --------------------
their best efforts to ensure that their executive officers and directors do not,
and shall use their best efforts to ensure that each stockholder of KHG who may
be deemed an "affiliate" (as defined in SEC Rules 145 and 405) of KHG does not,
purchase or sell on NASDAQ, or submit a bid to purchase or an offer to sell on
NASDAQ, directly or indirectly, any shares of FFC Common Stock or any options,
rights or other securities convertible into shares of FFC Common Stock during
the Price Determination Period.
Section 5.10 Accounting Treatment. KHG acknowledges that FFC presently
------------ --------------------
intends to treat the business combination contemplated by this Agreement as a
"pooling-of-interests" for financial reporting purposes. KHG shall not take
(and shall use its best efforts not to permit any of the directors, officers,
employees, stockholders, agents, consultants or other representatives of KHG or
any of the KHG Subsidiaries to take) any action that would preclude FFC from
treating such business combination as a "pooling-of-interests" for financial
reporting purposes; provided however, that KHG may purchase shares of KHG Common
Stock in the ordinary course of business during the Price Determination Period
pursuant to KHG's dividend reinvestment plan.
Section 5.11 Dividends. KHG shall not declare or pay a cash dividend on
the
------------ ---------
the KHG Common Stock; provided, however, that KHG may declare and pay a dividend
of up to $.25 per share of KHG Common Stock on (i) November 10, 1997, (ii)
February 10, 1998, provided that the Effective Date does not occur (or is not
expected to occur) on or before the record date for the dividend on the FFC
Common Stock scheduled to be paid on April 15, 1998; (iii) May 10, 1998,
provided that the record date for the dividend does not occur (or is not
expected to occur) on or before the record date for the dividend on the FFC
Common Stock scheduled to be paid on July 15, 1998; and (iv) August 10, 1998,
provided that the Effective Date does not occur (or is not expected to occur) on
or before the record date for the dividend on the FFC Common Stock scheduled to
be paid on October 15, 1998 (it being the intent of FFC and KHG that KHG be
permitted to pay a dividend on the KHG Common Stock on the dates indicated in
subsections (ii), (iii) and (iv) above only if the shareholders of KHG, upon
becoming shareholders of FFC, would not be entitled to receive a dividend on the
FFC Common Stock on the payment dates indicated in such subsections.
Section 5.12 Agreements with Senior Employees. On the date of this
------------------------- --------------------------------
Agreement, KHG and the KHG Subsidiaries shall cause the existing employment
agreements with Albert B. Murry and Kurt A. Phillips (the "KHG Senior
Employees") to be terminated and enter into Employment Agreements in the forms
attached hereto as Exhibit B (the "Employment Agreements") with the KHG Senior
---------
Employees; provided, however, that neither the termination of such existing
employment agreements or the Employment Agreements shall become effective until
the Effective Date. Without prior written consent of FFC, KHG and the KHG
Subsidiaries shall not modify the terms of the Employment Agreements or any
other Employment Obligations (as defined in Section 3.17) related to the KHG
Senior Employees. Neither KHG or the KHG Subsidiaries shall create any new
Employment Obligation related to the KHG Senior Employees.
ARTICLE VI
COVENANTS OF FFC
----------------
From the date of this Agreement until the Effective Date, or until such
later date as may be expressly stipulated in any Section of this Article VI, FFC
covenants and agrees to do the following:
Section 6.1 Best Efforts. FFC shall cooperate with KHG and the KHG
----------------------- ------------
Subsidiaries and shall use its best efforts to do or cause to be done all things
necessary or appropriate on its part in order to fulfill the conditions
precedent set forth in Article VII of this Agreement and to consummate the
transactions contemplated by this Agreement, including the Merger and
Restructuring. In particular, without limiting the generality of the foregoing
sentence, FFC agrees to do the following:
(a) Applications for Regulatory Approval: FFC shall promptly prepare
------------------------------------
and file, with the cooperation and assistance of (and after review by) KHG and
its counsel and accountants, all required applications for regulatory approval
of the transactions contemplated by this Agreement, including without limitation
applications for approval under the BHC Act, the Pennsylvania Banking Code of
1965, as amended, the National Bank Act, as amended, and the Federal Deposit
Insurance Act, as amended.
(b) Registration Statement: FFC shall promptly prepare, with the
----------------------
cooperation and assistance of (and after review by) KHG and its counsel and
accountants, and file with the SEC a registration statement (the "Registration
Statement") for the purpose of registering the shares of FFC Common Stock to be
issued to stockholders of KHG under the provisions of this Agreement and a proxy
statement and prospectus which is prepared as a part thereof (the "Proxy
Statement/Prospectus") for the purpose of registering the shares of FFC's Common
Stock to be issued to the stockholders of KHG, and the soliciting of the proxies
of KHG's stockholders in favor of the Merger, under the provisions of this
Agreement. FFC may rely upon all information provided to it by KHG and LVNB in
this connection and FFC shall not be liable for any untrue statement of a
material fact or any omission to state a material fact in the Registration
Statement, or in the Proxy Statement/Prospectus, if such statement is made by
FFC in reliance upon any information provided to FFC by KHG or the KHG
Subsidiaries or by any of their officers, agents or representatives.
(c) State Securities Laws: FFC, with the cooperation and assistance
---------------------
of
--------------------- KHG and its counsel and accountants, shall promptly take all such actions as
may be necessary or appropriate in order to comply with all applicable
securities laws of any state having jurisdiction over the transactions
contemplated by this Agreement.
(d) Stock Listing: FFC, with the cooperation and assistance of KHG
-------------
and
------------- its counsel and accountants, shall promptly take all such actions as may be
necessary or appropriate in order to list the shares of FFC Common Stock to be
issued in the Merger on NASDAQ.
(e) Adopt Amendments: FFC shall not adopt any amendments to its
----------------
charter or bylaws or other organizational documents that would alter the terms
of FFC's Common Stock or could reasonably be expected to have a material adverse
effect on the ability of FFC to perform its obligations under this Agreement.
Section 6.2 Access to Properties and Records. FFC shall give to KHG and to
----------- --------------------------------
its authorized employees and representatives (including without limitation KHG's
counsel, accountants, economic and environmental consultants and other
designated representatives) such access during normal business hours to all
properties, books, contracts, documents and records of FFC as KHG may reasonably
request, subject to the obligation of KHG and its authorized employees and
representatives to maintain the confidentiality of all nonpublic information
concerning FFC obtained by reason of such access.
Section 6.3 Subsequent Financial Statements. Between the date of signing
of
----------- -------------------------------
of this Agreement and the Effective Date, FFC shall promptly prepare and deliver
to KHG as soon as practicable each Quarterly Report to FFC's shareholders and
any Annual Report to FFC's shareholders normally prepared by FFC. The
representations and warranties set forth in Sections 4.6, 4.7 and 4.8 herein
shall apply to the financial statements (hereinafter collectively referred to as
the "Additional FFC Financial Statements") set forth in the foregoing Quarterly
Reports and any Annual Report to FFC's shareholders.
Section 6.4 Update Schedules. FFC shall promptly disclose to KHG in
writing
----------- ----------------
writing any change, addition, deletion or other modification to the information
set forth in its Schedules to this Agreement.
Section 6.5 Notice. FFC shall promptly notify KHG in writing of any
----------- ------
actions, claims, investigations or other developments which, if pending or in
existence on the date of this Agreement, would have been required to be
disclosed to KHG in order to ensure the accuracy of the representations and
warranties set forth in this Agreement or which otherwise could materially and
adversely affect the condition (financial or otherwise), assets, liabilities,
business, operations or future prospects of FFC or restrict in any manner the
right of FFC to carry on its business as presently conducted.
Section 6.6 Employment Arrangements.
----------- -----------------------
(a) From and after the Effective Date (subject to the provisions of
subsection (c) below) and subject to the Employment Agreements contemplated by
Section 5.12 herein, FFC shall cause the KHG Subsidiaries and/or Lebanon Valley/
Farmers (as such term is defined in Section 6.8 below): (i) to satisfy each of
the Employment Obligations (as defined in Section 3.17 herein) and (ii) to
satisfy the KHG Subsidiaries' obligations under the KHG Benefit Plans.
(b) On and after the Effective Date and subject to the Employment
Agreements contemplated by Section 5.12 herein, (subject to the provisions of
subsection (c) below), FFC shall cause the KHG Subsidiaries and/or Lebanon
Valley/ Farmers to use their best efforts to retain each present full-time
employee of LVNB at such employee's current position (or, if offered to, and
accepted by, an employee, a position for which the employee is qualified with
FFC or an FFC subsidiary bank at a salary commensurate with the position), (ii)
pay compensation to each person who was employed as of the Effective Date and
who continues to be employed by KHG on and after the Effective Date, that is at
least equal to the aggregate compensation that such person was receiving from
KHG or the KHG Subsidiaries prior to the Effective Date (unless there is a
material change in the duties and responsibilities of such employee) and (iii)
provide employee benefits to each such person who is an employee, on and after
the Effective Date, that are substantially equivalent in the aggregate to the
employee benefits that such person was receiving as an employee from KHG or the
KHG Subsidiaries prior to the Effective Date and that are no less favorable than
employee benefits afforded to similarly situated employees of FFC and its
Subsidiaries. For vesting and eligibility purposes for employee benefits,
former LVNB employees shall receive credit for years of service with LVNB. With
respect to any welfare benefit plans to which such employees may become
eligible, FFC and its Subsidiaries shall cause such plans to provide credit for
any co-payments or deductibles by such employees and waive all pre-existing
condition exclusions and waiting periods.
(c) Notwithstanding anything herein to the contrary (including, without
limitation, the provisions of subsections (a) and (b) above), (i) FFC may, after
the Effective Date, discontinue and terminate the KHG Stock Option Plans in
accordance with Section 2.3, (ii) in the event that FFC causes the KHG
Subsidiaries and/or Lebanon Valley/Farmers to continue to employ officers or
employees of KHG and the KHG Subsidiaries as of the Effective Date, the KHG
Subsidiaries and/or Lebanon Valley/Farmers shall employ such persons on the
Effective Date, as "at will" employees subject to the continued satisfactory
performance of their respective duties, and (iii) in the event the KHG
Subsidiaries and/or Lebanon Valley/Farmers do not employ, or terminate the
employment (other than as a result of unsatisfactory performance of their
respective duties) of any officers or employees of KHG or any of the KHG
Subsidiaries as of the Effective Date, FFC shall cause the KHG Subsidiaries
and/or Lebanon Valley/Farmers to pay severance benefits to such employee as
follows: (A) in the event employment is terminated on or prior to the date which
is one year after the Effective Date, one week's salary plus an additional one
week's salary for each year of service with KHG or the KHG Subsidiaries, with a
maximum severance benefit of 26 weeks' salary and (B) in the event employment is
terminated thereafter, in accordance with the then existing severance policy of
Lebanon Valley/Farmers.
Section 6.7 No Purchase or Sales of FFC Common Stock During Price
----------- -----------------------------------------------------
Determination Period. Neither FFC nor any Subsidiary of FFC, nor any executive
- --------------------
officer or director of FFC or any Subsidiary of FFC, nor any shareholder of FFC
who may be deemed to be an "affiliate" (as that term is defined for purposes of
Rules 145 and 405 promulgated by the SEC under the 1933 Act) of FFC, shall
purchase or sell on NASDAQ, or submit a bid to purchase or an offer to sell on
NASDAQ, directly or indirectly, any shares of FFC Common Stock or any options,
rights or other securities convertible into shares of FFC Common Stock during
the Price Determination Period; provided, however, that FFC may purchase shares
-------- -------
of FFC Common Stock in the ordinary course of business during the Price
Determination Period pursuant to FFC's Benefit Plans or FFC's Dividend
Reinvestment Plan.
Section 6.8 Restructuring, Directors, Etc..
----------- ------------------------------
(a) Simultaneously with the effectiveness of the Merger FFC anticipates
effecting the Restructuring as follows: (i) LVNB and Farmers Trust Bank
("Farmers"), a wholly-owned FFC subsidiary, will merge; (ii) the surviving
bank in such merger ("Lebanon Valley/Farmers") would immediately transfer (A)
branch offices of LVNB located in Dauphin and Lancaster Counties and the assets
and deposit liabilities related to such branch offices to Fulton Bank ("FB"),
another wholly-owned FFC subsidiary, and (B) the Sinking Spring branch office of
LVNB and the assets and deposit liabilities related to such branch office to
Great Valley Savings Bank ("GVSB"), also a wholly-owned FFC subsidiary and (iii)
to the extent determined advisable by FFC, FFC may close existing branches of
LVNB, Farmers, FB, GVSB or other subsidiaries of FFC which may overlap
geographically with other branches of FFC's subsidiary banks. Lebanon
Valley/Farmers, as a wholly-owned FFC subsidiary, would operate all Lebanon
County branch offices now operated by LVNB and Farmers, and in addition, the
Womelsdorf and Pine Grove branch of LVNB, under a corporate name which would
reflect the identities of both Lebanon Valley and Farmers.
(b) For a period from the Effective Date through a date determined by
FFC (not to be before five (5) years after the Effective Date), FFC shall
(subject to the right of FFC and the KHG Continuing Directors to terminate such
obligations under this Section 6.8(a) under subsections (c) and (d) below):
Offer appointment to all present directors of LVNB to the board of directors of
Lebanon Valley/Farmers who indicate their desire to serve (the "LVNB Continuing
Directors"), provided, that (A) each non-employee LVNB Continuing Director shall
--------
receive director's fees from Lebanon Valley/Farmers in the form of an annual
retainer of $9,000 and (B) each LVNB Continuing Director shall be subject to
FFC's mandatory retirement rules for directors. Unless dissolved by KHG prior
to the Effective Date, the Pine Grove, Womelsdorf, Eastern Lebanon County and
Agricultural advisory committees of LVNB would be retained by Lebanon
Valley/Farmers and members of such committee would receive the same compensation
which they are presently receiving. Albert B. Murry would be appointed chairman
of the board and chief executive officer of Lebanon Valley/Farmers.
(c) FFC shall have the right to terminate its obligations under
subsection (b) of this Section 6.8 as a result of (i) regulatory considerations,
(ii) safe and sound banking practices, or (iii) the exercise of their fiduciary
duties by FFC's directors.
(d) Notwithstanding anything herein to the contrary, the LVNB
Continuing Directors, in their exercise of their fiduciary duty as to the best
interests of LVNB and FFC, may, by a majority vote of such directors, modify or
waive any or all of the foregoing provisions in subsection (b) of this Section
6.8.
Section 6.9 Appointment of FFC Directors.
----------- ----------------------------
FFC shall, on or promptly after the Effective Date, appoint to FFC's Board
of Directors two of KHG's current directors (designated, subject to the
reasonable approval of FFC, by vote of KHG's Board of Directors prior to the
Effective Date) to serve as directors of FFC. During the five-year period after
the Effective Date, the FFC Board of Directors shall nominate such designees for
election, and support their election, at each annual meeting of shareholders of
FFC at which such designees' terms expires. During such period, in the event
either of such designees shall cease to serve as a director of FFC, the LVNB
Continuing Directors shall have the right to designate one other person then
serving on the Board of Lebanon Valley/Farmers to serve as a director of FFC
(subject to the reasonable concurrence of FFC as to the person designated).
ARTICLE VII
CONDITIONS PRECEDENT
--------------------
Section 7.1 Common Conditions. The obligations of the parties to
consummate
----------- -----------------
consummate this Agreement shall be subject to the satisfaction of each of the
following common conditions prior to or as of the Closing, except to the extent
that any such condition shall have been waived in accordance with the provisions
of Section 8.4 herein:
(a) Stockholder Approval: This Agreement shall have been duly
--------------------
authorized, approved and adopted by the stockholders of KHG.
(b) Regulatory Approvals: The approval of each federal and state
--------------------
regulatory authority having jurisdiction over the transactions contemplated by
this Agreement (including the Merger and Restructuring), including without
limitation, the Federal Reserve Board, Pennsylvania Department of Banking, the
Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation, shall have been obtained and all applicable waiting and notice
periods shall have expired, subject to no terms or conditions which would (i)
require or could reasonably be expected to require (A) any divestiture by FFC of
a portion of the business of FFC, or any subsidiary of FFC or (B) any
divestiture by KHG or the KHG Subsidiaries of a portion of their businesses
which FFC in its good faith judgment believes will have a significant adverse
impact on the business or prospects of KHG or LVNB, as the case may be, or (ii)
impose any condition upon FFC, or any of its subsidiaries, which in FFC's good
faith judgment (x) would be materially burdensome to FFC and its subsidiaries
taken as a whole, (y) would significantly increase the costs incurred or that
will be incurred by FFC as a result of consummating the Merger or (z) would
prevent FFC from obtaining any material benefit contemplated by it to be
attained as a result of the Merger.
(c) Stock Listing. The shares of FFC Common Stock to be issued in the
-------------
Merger shall have been authorized for listing on NASDAQ.
(d) Tax Opinion. Each of FFC and KHG shall have received an opinion of
-----------
FFC's counsel, Barley, Snyder, Senft & Cohen, LLP, reasonably acceptable to FFC
and KHG, addressed to FFC and KHG, with respect to federal tax laws or
regulations, to the effect that:
(1) The Merger will constitute a reorganization within the meaning
of Section 368(a)(1)(A) of the Code;
(2) No gain or loss will be recognized by FFC, KHG or LVNB by
reason of the Merger;
(3) The bases of the assets of KHG in the hands of FFC will be the
same as the bases of such assets in the hands of KHG immediately prior to the
Merger;
(4) The holding period of the assets of KHG in the hands of FFC
will include the period during which such assets were held by KHG prior to the
Merger;
(5) A holder of KHG Common Stock who receives shares of FFC Common
Stock in exchange for his KHG Common Stock pursuant to the reorganization
(except with respect to each received in lieu of fractional shares of FFC Common
Stock deemed issued as described below) will not recognize any gain or loss upon
the exchange.
(6) A holder of KHG Common Stock who receives cash in lieu of a
fractional share of FFC Common Stock will be treated as if he received a
fractional share of FFC Common Stock pursuant to the reorganization and FFC then
redeemed such fractional share for the cash. The holder of KHG Common Stock
will recognize capital gain or loss on the constructive redemption of the
fractional share in an amount equal to the difference between the cash received
and the adjusted basis of the fractional share.
(7) The tax basis of the FFC Common Stock to be received by the
stockholders of KHG pursuant to the terms of this Agreement will include the
holding period of the KHG Common Stock surrendered in exchange therefor,
provided that such KHG Common Stock is held as a capital interest on the
Effective Date.
(8) The holding period of the shares of FFC Common Stock to be
received by the stockholders of KHG will include the period during which they
held the shares of KHG Common Stock surrendered, provided the shares of KHG
Common Stock are held as a capital asset on the date of the exchange.
(e) Registration Statement: The Registration Statement (as defined in
----------------------
Section 6.1(b), including any amendments thereto) shall have been declared
effective by the SEC; the information contained therein shall be true, complete
and correct in all material respects as of the date of mailing of the Proxy
Statement/Prospectus (as defined in Section 6.1(b)) to the stockholders of KHG;
regulatory clearance for the offering contemplated by the Registration Statement
(the "Offering") shall have been received from each federal and state regulatory
authority having jurisdiction over the Offering; and no stop order shall have
been issued and no proceedings shall have been instituted or threatened by any
federal or state regulatory authority to suspend or terminate the effectiveness
of the Registration Statement or the Offering.
(f) No Suits: No action, suit or proceeding shall be pending or
--------
threatened before any federal, state or local court or governmental authority or
before any arbitration tribunal which seeks to modify, enjoin or prohibit or
otherwise adversely and materially affect the transactions contemplated by this
Agreement; provided, however, that if FFC agrees to defend and indemnify KHG and
-------- -------
LVNB and their respective officers and directors with regard to any such action,
suit or proceeding pending or threatened against them or any of them, then such
pending or threatened action, suit or proceeding shall not be deemed to
constitute the failure of a condition precedent to the obligation of KHG to
consummate this Agreement.
(g) Pooling: FFC and KHG shall have been advised in writing by Arthur
-------
Anderson LLP on the Effective Date that the Merger should be treated as a
pooling transaction for financial accounting purposes.
Section 7.2 Conditions Precedent to Obligations of FFC. The obligations of
----------- ------------------------------------------
FFC to consummate this Agreement shall be subject to the satisfaction of each of
the following conditions prior to or as of the Closing, except to the extent
that any such condition shall have been waived by FFC in accordance with the
provisions of Section 8.4 herein:
(a) Accuracy of Representations and Warranties: All of the
------------------------------------------
representations and warranties of KHG as set forth in this Agreement, all of the
information contained in Schedules hereto and all KHG Closing Documents (as
defined in Section 7.2(j)) shall be true and correct in all material respects as
of the Closing as if made on such date (or on the date to which it relates in
the case of any representation or warranty which expressly relates to an earlier
date), except to the extent that any misrepresentations and breaches of warranty
at the Closing shall not in the aggregate be material to KHG and the KHG
Subsidiaries taken as a whole.
(b) Covenants Performed: KHG shall have performed or complied in all
-------------------
material respects with each of the covenants required by this Agreement to be
performed or complied with by it.
(c) Opinion of Counsel for KHG: FFC shall have received an opinion,
--------------------------
dated the Effective Date, from Drinker Biddle & Reath LLP, counsel to KHG, in
substantially the form of Exhibit C hereto. In rendering any such opinion, such
---------
counsel may require and, to the extent they deem necessary or appropriate may
rely upon, opinions of other counsel and upon representations made in
certificates of officers of KHG, FFC, affiliates of the foregoing, and others.
(d) Affiliate Agreements: Stockholders of KHG who are or will be
--------------------
affiliates of KHG or FFC for the purposes of Accounting Series Release No. 135
and the 1933 Act shall have entered into agreements with FFC, in form and
substance satisfactory to FFC, reasonably necessary to assure (i) the ability
of FFC to use pooling-of-interests accounting for the Merger; and (ii)
compliance with Rule 145 under the 1933 Act.
(e) KHG Options: All holders of KHG Options shall have delivered
-----------
documentation reasonably satisfactory to FFC canceling the KHG Options in
exchange for FFC Stock Options pursuant to Section 2.3 herein.
(f) Decline in Market Price of FFC Common Stock: The Closing Market
-------------------------------------------
Price (as adjusted appropriately for an event described in section 2.1(b) herein
and assuming the Effective Date is thirty (30) days after receipt of the last
required approval under Section 9.1 hereunder) shall be either (a) in excess of
$23.82 per share (82.5% of the closing bid price of FFC Common Stock on August
14, 1997) or (b) in excess of an amount per share equal to (i) $28.875 (the
closing bid price of FFC Common Stock on August 14, 1997) multiplied by (ii)
0.825 multiplied by (iii) the quotient obtained by dividing the average NASDAQ
Bank Index for the Price Determination Period by the NASDAQ Bank Index on August
14, 1997 (the "Market Test"). Thus, for example, assuming the average NASDAQ
Bank Index for the Price Determination Period reflects a decline of 10% from
August 14, 1997, (a) would be $23.82 and (b) would be $21.44 ($28.875 x 0.825 x
0.90) and the Closing Market Price would be required to be $21.44 or lower for
this condition precedent not to be satisfied or for KHG to terminate this
Agreement under Section 8.1(c)(iii) herein.
(g) Accountants' Letter: At its option, FFC shall have received a
-------------------
"comfort" letter from the independent certified public accountants for KHG,
dated (i) the effective date of the Registration Statement and (ii) the
Effective Date, in each case substantially to the effect that:
(1) it is a firm of independent accountants with respect to KHG
and its subsidiaries within the meaning of the 1933 Act and the rules and
regulations of the SEC thereunder;
(2) in its opinion the audited financial statements of KHG
examined by it and included in the Registration Statement comply as to form in
all material respects with the applicable requirements of the 1933 Act and the
applicable published rules and regulations of the SEC thereunder with respect to
registration statements on the form employed; and
(3) on the basis of specified procedures (which do not
constitute an examination in accordance with generally accepted audit
standards), consisting of a reading of the unaudited financial statements, if
any, of KHG included in such Registration Statement and of the latest available
unaudited financial statements of KHG, inquiries of officers responsible for
financial and accounting matters of KHG and a reading of the minutes of meetings
of stockholders and the Board of Directors of KHG, nothing has come to its
attention which causes it to believe: (i) that the financial statements, if any,
of KHG included in such Registration Statement do not comply in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder; and (ii) that any such unaudited
financial statements of KHG from which unaudited quarterly financial information
set forth in such Registration Statement has been derived, are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis consistent with that of the audited financial statements.
(h) Federal and State Securities and Antitrust Laws: FFC and its
-----------------------------------------------
counsel shall have determined to their satisfaction that, as of the Closing, all
applicable securities and antitrust laws of the federal government and of any
state government having jurisdiction over the transactions contemplated by this
Agreement shall have been complied with.
(i) Environmental Matters: No environmental problem of the kind
---------------------
contemplated in Section 3.22 and not disclosed in Schedule 3.22 shall have been
-------------
discovered which would, or which potentially could, materially and adversely
affect the condition (financial or otherwise), assets, liabilities, business or
operations of either KHG or LVNB.
(j) Closing Documents: KHG shall have delivered to FFC: (i) a
-----------------
certificate signed by KHG's President and Chief Executive Officer and by its
Secretary (or other officers reasonably acceptable to FFC) verifying that all of
the representations and warranties of KHG set forth in this Agreement are true
and correct in all material respects as of the Closing and that KHG has
performed in all material respects each of the covenants required to be
performed by it
under this Agreement; (ii) all consents and authorizations of landlords and
other persons that are necessary to permit this Agreement to be consummated
without violation of any lease or other agreement to which KHG or LVNB is a
party or by which they or any of their properties are bound; and (iii) such
other certificates and documents as FFC and its counsel may reasonably request
(all of the foregoing certificates and other documents being herein referred to
as the "KHG Closing Documents").
(k) Employment Agreements: The existing employment agreements between
---------------------
between
LVNB and the Senior Executives shall be terminated and replaced with the
Employment Agreements, effective as of the Effective Date.
Section 7.3 Conditions Precedent to the Obligations of KHG. The obligation
----------- ----------------------------------------------
of KHG to consummate this Agreement shall be subject to the satisfaction of each
of the following conditions prior to or as of the Closing, except to the extent
that any such condition shall have been waived by KHG in accordance with the
provisions of Section 8.4 herein:
(a) Accuracy of Representations and Warranties: All of the
------------------------------------------
representations and warranties of FFC as set forth in this Agreement, all of the
information contained in its Schedules hereto and all FFC Closing Documents (as
defined in Section 7.3(f) of this Agreement) shall be true and correct in all
material respects as of the Closing as if made on such date (or on the date to
which it relates in the case of any representation or warranty which expressly
relates to an earlier date), except to the extent that any misrepresentations
and breaches of warranty at the Closing shall not in the aggregate be material
to FFC and its subsidiaries taken as a whole.
(b) Covenants Performed: FFC shall have performed or complied in all
-------------------
all
material respects with each of the covenants required by this Agreement to be
performed or complied with by FFC.
(c) Opinion of Counsel for FFC: KHG shall have received an opinion
--------------------------
from Barley, Snyder, Senft & Cohen, LLP, counsel to FFC, dated the Effective
Date, in substantially the form of Exhibit F hereto. In rendering any such
---------
opinion, such counsel may require and, to the extent they deem necessary or
appropriate may rely upon, opinions of other counsel and upon representations
made in certificates of officers of FFC, KHG, affiliates of the foregoing, and
others.
(d) FFC Options: FFC Options shall be substituted in cancellation of
-----------
of
the KHG Options pursuant to Section 2.3 herein.
(e) Fairness Opinion: KHG shall have obtained from Danielson
----------------
Associates, Inc., or from another independent financial advisor selected by the
Board of Directors of KHG, an opinion dated within five (5) days of the Proxy
Statement/Prospectus to be furnished to the Board of Directors of KHG stating
that the terms of the acquisition contemplated by this Agreement are fair to the
stockholders of KHG from a financial point of view.
(f) Closing Documents: FFC shall have delivered to KHG: (i) a
-----------------
certificate signed by FFC's President and Chief Executive Officer (or other
officer reasonably acceptable to KHG) verifying that all of the representations
and warranties of FFC set forth in this Agreement are true and correct in all
material respects as of the Closing and that FFC has performed in all material
respects each of the covenants required to be performed by FFC; and (ii) such
other certificates and documents as KHG and its counsel may reasonably request
(all of the foregoing certificates and documents being herein referred to as the
"FFC Closing Documents").
(g) Employment Agreements: The existing employment agreements between
---------------------
between
LVNB and the Senior Executives shall be terminated and replaced with the
Employment Agreements, effective as of the Effective Date.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 8.1 Termination. This Agreement may be terminated at any time
----------- -----------
before the Effective Date (whether before or after the authorization, approval
and adoption of this Agreement by the stockholders of KHG) as follows:
(a) Mutual Consent: This Agreement may be terminated by mutual
--------------
consent of the parties upon the affirmative vote of a majority of each of the
Boards of Directors of KHG and FFC, followed by written notices given to the
other party.
(b) Unilateral Action by FFC: This Agreement may be terminated
------------------------
unilaterally by the affirmative vote of the Board of Directors of FFC, followed
by written notice given to KHG, if: (i) there has been a material breach by KHG
of any representation, warranty or material failure to comply with any covenant
set forth in this Agreement and such breach has not been cured within thirty
(30) days after written notice of such breach has been given by FFC to KHG; or
(ii) any condition precedent to FFC's obligations as set forth in Article VII of
this Agreement remains unsatisfied, through no fault of FFC, on August 31, 1998.
(c) Unilateral Action By KHG: This Agreement may be terminated
------------------------
unilaterally by the affirmative vote of a majority of the Board of Directors of
KHG, followed by written notice given to FFC, if: (i) there has been a material
breach by FFC of any representation, warranty or material failure to comply with
any covenant set forth in this Agreement and such breach has not been cured
within thirty (30) days after written notice of such breach has been given by
KHG to FFC; (ii) any condition precedent to KHG's obligations as set forth in
Article VII of this Agreement remains unsatisfied, through no fault of KHG, on
August 31, 1998 or (iii) the Market Test would not be met.
Section 8.2 Effect of Termination.
----------- ---------------------
(a) Effect. In the event of a permitted termination of this Agreement
------
Agreement
under Section 8.1 herein, the Agreement shall become null and void and the
transactions contemplated herein shall thereupon be abandoned, except that the
provisions relating to limited liability and confidentiality set forth in
Sections 8.2(b) and 8.2(c) herein shall survive such termination.
(b) Limited Liability. The termination of this Agreement in
-----------------
accordance with the terms of Section 8.1 herein shall create no liability on the
part of either party, or on the part of either party's directors, officers,
shareholders, agents or representatives, except that if this Agreement is
terminated by FFC by reason of a material breach by KHG, or if this Agreement is
terminated by KHG by reason of a material breach by FFC, and such breach
involves an intentional, willful or grossly negligent misrepresentation or
breach of covenant, the breaching party shall be liable to the nonbreaching
party for all costs and expenses reasonably incurred by the nonbreaching party
in connection with the preparation, execution and attempted consummation of this
Agreement, including the reasonable fees of its counsel, accountants,
consultants and other advisors and representatives.
(c) Confidentiality. In the event of a termination of this Agreement,
---------------
Agreement,
neither FFC nor KHG nor LVNB shall use or disclose to any other person any
confidential information obtained by it during the course of its investigation
of the other party or parties, except as may be necessary in order to establish
the liability of the other party or parties for breach as contemplated under
Section 8.2(b) herein.
Section 8.3 Amendment. To the extent permitted by law, this Agreement may
----------- ---------
be amended at any time before the Effective Date (whether before or after the
authorization, approval and adoption of this Agreement by the stockholders of
KHG), but only by a written instrument duly authorized, executed and delivered
by FFC and by KHG; provided, however, that any amendment to the provisions of
-------- -------
Section 2.1 herein relating to the consideration to be received by the former
stockholders of KHG in exchange for their shares of KHG Common Stock shall not
take effect until such amendment has been approved, adopted or ratified by the
stockholders of KHG in accordance with applicable Pennsylvania law.
Section 8.4 Waiver. Any term or condition of this Agreement may be waived,
----------- ------
to the extent permitted by applicable federal and state law, by the party or
parties entitled to the benefit thereof at any time before the Effective Date
(whether before or after the authorization, approval and adoption of this
Agreement by the stockholders of KHG) by a written instrument duly authorized,
executed and delivered by such party or parties.
ARTICLE IX
CLOSING AND EFFECTIVE DATE
--------------------------
Section 9.1 Closing. Provided that all conditions precedent set forth in
----------- -------
Article VII of this Agreement shall have been satisfied or shall have been
waived in accordance with Section 8.4 of this Agreement, the parties shall hold
a closing (the "Closing") at the offices of FFC at One Penn Square, Lancaster,
Pennsylvania, within thirty (30) days after the receipt of all required
regulatory and shareholder approvals and after the expiration of all applicable
waiting periods on a date to be agreed upon by the parties, at which time the
parties shall deliver the KHG Closing Documents, the FFC Closing Documents, the
opinions of counsel required by Sections 7.1(d), 7.2(c) and 7.3(c) herein, and
such other documents and instruments as may be necessary or appropriate to
effectuate the purposes of this Agreement.
Section 9.2 Effective Date. The merger of KHG with and into FFC shall
----------- --------------
become effective and this Agreement shall be consummated on the date (the
"Effective Date") of the filing of (or on such later date specified in such
document) Articles of Merger with the Department of State of the Commonwealth of
Pennsylvania.
ARTICLE X
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
---------------------------------------------
Section 10.1 No Survival. The representations and warranties of KHG and of
------------ -----------
FFC set forth in this Agreement shall expire and be terminated on the Effective
Date by consummation of this Agreement, and no such representation or warranty
shall thereafter survive.
ARTICLE XI
GENERAL PROVISIONS
------------------
Section 11.1 Expenses. Except as provided in Section 8.2(b) herein, each
------------ --------
party shall pay its own expenses incurred in connection with this Agreement and
the consummation of the transactions contemplated herein. For purposes of this
Section 11.1 herein, the cost of printing the Proxy Statement/Prospectus shall
be deemed to be an expense of FFC.
Section 11.2 Other Mergers and Acquisitions. Subject to the right of KHG
------------ ------------------------------
to refuse to consummate this Agreement pursuant to Section 8.1(c) herein by
reason of a material breach by FFC of the warranty and representation set forth
in Section 4.7 herein, nothing set forth in this Agreement shall be construed:
(i) to preclude FFC from acquiring, or to limit in any way the right of FFC to
acquire, prior to or following the Effective Date, the stock or assets of any
other financial services institution or other corporation or entity, whether by
issuance or exchange of FFC Common Stock or otherwise; (ii) to preclude FFC from
issuing, or to limit in any way the right of FFC to issue, prior to or following
the Effective Date, FFC Common Stock, FFC Preferred Stock or any other equity or
debt securities; or (iii) to preclude FFC from taking, or to limit in any way
the right of FFC to take, any other action not expressly and specifically
prohibited by the terms of this Agreement.
Section 11.3 Notices. All notices, claims, requests, demands and other
------------ -------
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly delivered if delivered
in person, transmitted by telegraph or facsimile machine (but only if receipt is
acknowledged in writing), or mailed by registered or certified mail, return
receipt requested, as follows:
(a) If to FFC, to:
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Fulton Financial Corporation
One Penn Square
P.O. Box 4887
Lancaster, Pennsylvania 17604
With a copy to:
Paul G. Mattaini, Esq.
Barley, Snyder, Senft & Cohen, LLP
126 East King Street
Lancaster, PA 17602
(b) If to KHG, to:
Albert B. Murry, President and Chief Executive Officer
Keystone Heritage Group, Inc.
555 Willow Street
Lebanon, PA 17046
With a copy to:
F. Douglas Raymond, III, Esquire
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Section 11.4 Counterparts. This Agreement may be executed simultaneously
------------ ------------
in several counterparts, each of which shall be deemed an original, but all such
counterparts together shall be deemed to be one and the same instrument.
Section 11.5 Governing Law. This Agreement shall be deemed to have been
------------ -------------
made in, and shall be governed by and construed in accordance with the
substantive laws of, the Commonwealth of Pennsylvania.
Section 11.6 Parties in Interest. This Agreement shall be binding upon and
------------ -------------------
inure to the benefit of the parties hereto and their respective successors,
assigns and legal representatives; provided, however, that neither party may
-------- -------
assign its rights or delegate its duties under this Agreement without the prior
written consent of the other party.
Section 11.7 Entire Agreement. This Agreement, together with the Warrant
------------ ----------------
Agreement and the Warrant being executed by the parties on the date hereof, sets
forth the entire understanding and agreement of the parties hereto and
supersedes any and all prior agreements, arrangements and understandings,
whether oral or written, relating to the subject matter hereof and thereof.
Section 11.8 Materiality Standard. For the purposes of this Agreement,
------------ --------------------
terms such as "material," "materially," "in any material respect," etc., as they
may apply to KHG or its subsidiaries, shall be measured with respect to KHG and
its subsidiaries on a consolidated basis.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized officers all as of the day and year first above written.
FULTON FINANCIAL CORPORATION
By: /s/Rufus A. Fulton, Jr.
------------------------------------------------------------------------------
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Attest: /s/William R. Colmery
----------------------------------------------------------------------
William R. Colmery, Secretary
KEYSTONE HERITAGE GROUP, INC.
By: /s/Albert B. Murry
------------------------------------------------------------------------------
Albert B. Murry, President and
Chief Executive Officer
Attest: /s/Peggy Y. Layser
----------------------------------------------------------------------
Peggy Y. Layser, Secretary
EXHIBIT B
Opinion of Danielson Associates, Inc.
-------------------------------------
DANIELSON ASSOCIATES, INC.
6110 Executive Boulevard
Suite 504
Rockville, Maryland 20852-3903
Tel: (301) 468-4884
Fax: (301) 468-0013
PITTSBURGH OFFICE
-----------------
TEL: (412)262-3207
November 16, 1997January 8, 1998
Board of Directors
Keystone Heritage Group, Inc.
555 Willow Street
Lebanon, Pennsylvania 17042
Dear Members of the Board:
Set forth herein is the updated opinion of Danielson Associates Inc.
("Danielson Associates") as to the "fairness" of the offer by Fulton Financial
Corporation ("Fulton") of Lancaster, Pennsylvania to acquire all of the common
stock of Keystone Heritage Group, Inc. ("Keystone Heritage") of Lebanon,
Pennsylvania. The "fair" sale value is defined as the price at which all of the
shares of Keystone Heritage's common stock would change hands between a willing
seller and a willing buyer, each having reasonable knowledge of the relevant
facts. In opining as to the "fairness" of the offer, it also must be determined
if the Fulton common stock that is to be exchanged for Keystone Heritage stock
is "fairly" valued.
In preparing the original opinion dated August 15, 1997, Keystone Heritage's
market was analyzed; its business and prospects were discussed with its
management; and its financial performance was compared with other Pennsylvania
banks. In addition, any unique characteristics also were considered.
This opinion was based partly on data supplied to Danielson Associates by
Keystone Heritage, but it relied on some public information all of which was
believed to be reliable, but neither the completeness nor accuracy of such
information could be guaranteed. In particular, the opinion assumed, based on
its management's representation, that there were no significant asset quality
problems beyond what was stated in recent reports to regulatory agencies and in
the monthly report to the directors.
In determining the "fair" sale value of Keystone Heritage, the primary
emphasis was on prices paid relative to earnings for Pennsylvania banks that had
similar financial, structural and market characteristics. These prices were
then related to assets and equity capital, also referred to as "book."
The "fair" market value of Fulton's common stock to be exchanged for
Keystone Heritage stock was determined by a comparison with other similar bank
holding companies and included no in person due diligence of Fulton. This
comparison showed Fulton stock to be valued consistent with the comparable
banks.
In the original opinion, based on the analysis of Keystone Heritage's recent
performance and its future potential, comparisons with similar transactions and
unique characteristics, it was determined that its "fair" sale value was between
$175 and $195 million, or $44.30 to $49.35 per share. Thus, Fulton's offer of
$211.7 million, or $52.85 per share, was a "fair" offer from a financial point
of view for Keystone Heritage and its shareholders.
Board of Directors
November 16, 1997January 8, 1998
Page Two
There has been no subsequent change in Fulton's performance and its stock is
trading at or above where it was at the time of the offer. Since the value of
the offer has not changed and there has been no subsequent negative change to
Fulton, this offer is still "fair" from a financial point of view to Keystone
Heritage and its shareholders.
Respectfully submitted,
/s/ Arnold G. Danielson
Arnold G. Danielson
Chairman
Danielson Associates Inc.
AGD:ld
Enclosure
EXHIBIT C
WARRANT AGREEMENT AND WARRANT
-----------------------------
WARRANT AGREEMENT
-----------------
THIS WARRANT AGREEMENT is made August 15, 1997 by and between Fulton
Financial Corporation, a Pennsylvania business corporation ("FFC") and Keystone
Heritage Group, Inc., a Pennsylvania business corporation ("KHG").
W I T N E S S E T H:
WHEREAS, FFC and KHG are, simultaneously with the execution of this
Agreement, entering into a Merger Agreement dated as of the date hereof (the
"Merger Agreement"); and
WHEREAS, as a condition to FFC's entry into the Merger Agreement and in
consideration of such entry, KHG has agreed to issue to FFC, on the terms and
conditions set forth herein, a warrant entitling FFC to purchase up to an
aggregate of 981,740 shares of KHG's common stock, $5.00 par value per share
(the "Common Stock");
NOW, THEREFORE, in consideration of the execution of the Merger Agreement
and the premises herein contained, and intending to be legally bound, FFC and
KHG agree as follows:
1. Issuance of Warrant. Concurrently with the execution of the Merger
-------------------
Agreement and this Agreement, KHG shall issue to FFC a warrant in the form
attached as Exhibit A hereto (the "Warrant", which term as used herein shall
include any warrant or warrants issued upon transfer or exchange of the original
Warrant) to purchase up to 981,740 shares of Common Stock, subject to adjustment
as provided in this Agreement and in the Warrant. The Warrant shall be
exercisable at a purchase price of $36.75 per share, subject to adjustment as
provided in the Warrant (the "Exercise Price"). So long as the Warrant is
outstanding and unexercised, KHG shall at all times maintain and reserve, free
from preemptive rights, such number of authorized but unissued shares of Common
Stock as may be necessary so that the Warrant may be exercised, without any
additional authorization of Common Stock, after giving effect to all other
options, warrants, convertible securities and other rights to acquire shares of
Common Stock. KHG represents and warrants that it has duly authorized the
execution and delivery of the Warrant and this Agreement and the issuance of
Common Stock upon exercise of the Warrant. KHG covenants that the shares of
Common Stock issuable upon exercise of the Warrant shall be, when so issued,
duly authorized, validly issued, fully paid and nonassessable and subject to no
preemptive rights. The Warrant and the shares of Common Stock to be issued upon
exercise of the Warrant are hereinafter collectively referred to, from time to
time, as the "Securities." So long as the Warrant is owned by FFC, the Warrant
will in no event be exercised for more than that number of shares of Common
Stock equal to 981,740 (subject to adjustment as provided in the Warrant) less
the number of shares of Common Stock at the time owned by FFC.
2. Assignment, Transfer, or Exercise of Warrant. FFC will not sell,
--------------------------------------------
assign, transfer or exercise the Warrant, in whole or in part, without the prior
written consent of KHG except upon or after the occurrence of any of the
following: (i) a knowing breach of any representation, warranty, or covenant
set forth in the Merger Agreement by KHG which would permit a termination of the
Merger Agreement by FFC pursuant to Section 8.1(b)(i) thereof following: (A)
the occurrence of an event described in subparagraphs (iii) or (iv) below or (B)
an offer or filing described in subparagraph (v) below; (ii) the failure of
KHG's shareholders to approve the Merger Agreement at a meeting called for such
purpose if at the time of such meeting there has been an announcement by any
Person (other than FFC) of an offer or proposal to acquire 25% or more of the
Common
Stock (before giving effect to any exercise of the Warrant), or to acquire,
merge or consolidate with KHG, or to purchase all or substantially all of KHG's
assets (including without limitation any shares of Lebanon Valley National Bank
("LVNB") or all or substantially all of LVNB's assets) and, within ten business
days after such announcement, the Board of Directors of KHG either fails to
recommend against acceptance of such offer by KHG's shareholders or takes no
position with respect thereto; (iii) the acquisition by any Person of Beneficial
Ownership of 25% or more of the Common Stock (before giving effect to any
exercise of the Warrant); (iv) any Person (other than FFC) shall have commenced
a tender or exchange offer, or shall have filed an application with an
appropriate bank regulatory authority with respect to a publicly announced
offer, to purchase or acquire securities of KHG such that, upon consummation of
such offer, such Person would have Beneficial Ownership of 25% or more of the
Common Stock (before giving effect to any exercise of the Warrant) and, within
12 months from such offer or filing, such person consummates an acquisition
described in subparagraph (iii) above; (v) KHG shall have entered into an
agreement, letter of intent, or other understanding with any Person (other than
FFC) providing for such Person (A) to acquire, merge, consolidate or enter into
a statutory share exchange with KHG or to purchase all or substantially all of
KHG's assets (including without limitation any shares of LVNB or all or
substantially all of LVNB's assets), or (B) to negotiate with KHG with respect
to any of the events or transactions mentioned in the preceding clause (A) or
(vi) termination, or attempted termination, of the Merger Agreement by KHG under
Section 5.7 of the Merger Agreement. As used in this Paragraph 2, the terms
"Beneficial Ownership" and "Person" shall have the respective meanings set forth
in Paragraph 7(f).
3. Registration Rights. If, at any time within two years after the Warrant
-------------------
may be exercised or sold, KHG shall receive a written request therefor from FFC,
KHG shall prepare and file a shelf registration statement (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
covering the Warrant and/or the Common Stock issued or issuable upon exercise of
the Warrant (the "Securities"), and shall use its best efforts to cause the
Registration Statement to become effective and remain current for such period
not in excess of 180 days from the day such registration statement first becomes
effective as may be reasonably necessary to affect such sale or other
disposition. Without the prior written consent of FFC, neither KHG nor any
other holder of securities of KHG may include such securities in the
Registration Statement.
4. Duties of KHG upon Registration. If and whenever KHG is required by the
-------------------------------
provisions of Paragraph 3 of this Agreement to effect the registration of any of
the Securities under the Securities Act, KHG shall:
(a) prepare and file with the Securities and Exchange Commission (the
"SEC") such amendments to the Registration Statement and supplements to the
prospectus contained therein as may be necessary to keep the Registration
Statement effective and current;
(b) furnish to FFC and to the underwriters of the Securities being
registered such reasonable number of copies of the Registration Statement,
the preliminary prospectus and final prospectus contained therein, and such
other documents as FFC or such underwriters may reasonably request in order
to facilitate the public offering of the Securities;
(c) use its best efforts to register or qualify the Securities covered
by the Registration Statement under the state securities or blue sky laws of
such jurisdictions as FFC or such underwriters may reasonably request;
(d) notify FFC, promptly after KHG shall receive notice thereof, of the
time when the Registration Statement has become effective or any supplement
or amendment to any prospectus forming a part of the Registration Statement
has been filed;
(e) notify FFC promptly of any request by the SEC for the amending or
supplementing of the Registration Statement or the prospectus contained
therein, or for additional information;
(f) prepare and file with the SEC, promptly upon the request of FFC,
any amendments or supplements to the Registration Statement or the
prospectus contained therein which, in the opinion of counsel for FFC, are
required under the Securities Act or the rules and regulations promulgated
by the SEC thereunder in connection with the public offering of the
Securities;
(g) prepare and promptly file with the SEC such amendments of or
supplements to the Registration Statement or the prospectus contained
therein as may be necessary to correct any statements or omissions if, at
the time when a prospectus relating to such Securities is required to be
delivered under the Securities Act, any event shall have occurred as the
result of which such prospectus as then in effect would include an untrue
statement of a material fact or would omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(h) advise FFC, promptly after KHG shall receive notice or obtain
knowledge of the issuance of any stop order by the SEC suspending the
effectiveness of the Registration Statement, or the initiation or
threatening of any proceeding for that purpose, and promptly use its best
efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued; and
(i) at the request of FFC, furnish on the date or dates provided for in
the underwriting agreement: (i) an opinion or opinions of counsel for KHG
for the purposes of such registration, addressed to the underwriters and to
FFC, covering such matters as such underwriters and FFC may reasonably
request and as are customarily covered by issuer's counsel at that time; and
(ii) a letter or letters from the independent accountants for KHG, addressed
to the underwriters and to FFC, covering such matters as such underwriters
or FFC may reasonably request, in which letters such accountants shall state
(without limiting the generality of the foregoing) that they are independent
accountants within the meaning of the Securities Act and that, in the
opinion of such accountants, the financial statements and other financial
data of KHG included in the Registration Statement or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act.
5. Expenses of Registration. With respect to the registration requested
------------------------
pursuant to Paragraph 3 of this Agreement, (a) KHG shall bear all registration,
filing and NASD fees, printing and engraving expenses, fees and disbursements of
its counsel and accountants and all legal fees and disbursements and other
expenses of KHG to comply with state securities or blue sky laws of any
jurisdictions in which the Securities to be offered are to be registered or
qualified; and (b) FFC shall bear all fees and disbursements of its counsel and
accountants, underwriting discounts and commissions, transfer taxes for FFC and
any other expenses incurred by FFC.
6. Indemnification. In connection with any Registration Statement or any
---------------
amendment or supplement thereto:
(a) KHG shall indemnify and hold harmless FFC, any underwriter (as
defined in the Securities Act) for FFC, and each person, if any, who
controls FFC or such underwriter (within the meaning of the Securities Act)
from and against any and all loss, damage, liability, cost or expense to
which FFC or any such underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such loss, damage,
liability, cost or expense arises out of or is caused by any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any prospectus or preliminary prospectus contained
therein or any amendment or supplement thereto, or arises out of or is based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that KHG will not be liable in any such case
-------- -------
to the extent that any such loss, damage, liability, cost or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with information
furnished by FFC, such underwriter or such controlling person in writing
specifically for use in the preparation thereof.
(b) FFC shall indemnify and hold harmless KHG, any underwriter (as
defined in the Securities Act), and each person, if any, who controls KHG or
such underwriter (within the meaning of the Securities Act) from and against
any and all loss, damage, liability, cost or expense to which KHG or any
such underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such loss, damage, liability, cost
or expense arises out of or is caused by any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
prospectus or preliminary prospectus contained therein or any amendment or
supplement thereto, or arises out of or is based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance
upon and in conformity with written information furnished by FFC
specifically for use in the preparation thereof.
(c) Promptly after receipt by any party which is entitled to be
indemnified, pursuant to the provisions of subparagraph (a) or (b) of this
Paragraph 6, of any claim in writing or of notice of the commencement of any
action involving the subject matter of the foregoing indemnity provisions,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party pursuant to the provisions of subparagraph
(a) or (b) of this Paragraph 6, promptly notify the indemnifying party of
the receipt of such claim or notice of the commencement of such action, but
the omission to so notify the indemnifying party will not relieve it from
any liability which it may otherwise have to any indemnified party
hereunder. In case any such action is brought against any indemnified party
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in and, to the extent
that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party; provided, however, that if the defendants in any action
-------- -------
include both the indemnified party or parties and the indemnifying party and
there is a conflict of interest which would prevent counsel for the
indemnifying party from also representing any indemnified party, such
indemnified party shall have the right to select separate counsel to
participate in the defense of such indemnified party. After notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party, pursuant to the provisions of subparagraph (a) or (b) of
this Paragraph 6, for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof, other than
reasonable costs of investigation, unless (i) such indemnified party shall
have employed separate counsel in accordance with the provisions of the
preceding sentence, (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after the notice of the commencement of the
action, or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party.
(d) If recovery is not available under the foregoing indemnification
provisions, for any reason other than as specified therein, any party
entitled to indemnification by the terms thereof shall be entitled to obtain
contribution with respect to its liabilities and expenses, except to the
extent that contribution is not permitted under Section 11(f) of the
Securities Act. In determining the amount of contribution to which the
respective parties are entitled there shall be considered the parties'
relative knowledge and access to information concerning the matter with
respect to which the claim was asserted, the opportunity to correct and/or
prevent any statement or omission, and any other equitable considerations
appropriate under the circumstances. FFC and KHG agree that it would not be
equitable if the amount of such contribution were determined by pro rata or
per capita allocation even if the underwriters and FFC as a group were
considered a single entity for such purpose.
7. Redemption and Repurchase Rights.
--------------------------------
(a) From and after the date on which any event described in Paragraph 2
of this Agreement occurs, the Holder as defined in the Warrant (which shall
include a former Holder), who has exercised the Warrant in whole or in part
shall have the right to require KHG to redeem some or all of the shares of
Common Stock for which the Warrant was exercised at a redemption price per
share (the "Redemption Price") equal to the highest of: (i) the Exercise
Price, (ii) the highest price paid or agreed to be paid for any share of
Common Stock by an Acquiring Person (as defined below) during the one year
period immediately preceding the date of redemption, and (iii) in the event
of a sale of all or substantially all of KHG's assets or all or
substantially all of LVNB's assets: (x) the sum of the price paid in such
sale for such assets and the current market value of the remaining assets of
KHG as determined by a recognized investment banking firm selected by such
Holder, divided by (y) the number of shares of Common Stock then
outstanding. If the price paid consists in whole or in part of securities
or assets other than cash, the value of such securities or assets shall be
their then current market value as determined by a recognized investment
banking firm selected by the Holder and reasonably acceptable to KHG.
(b) From and after the date on which any event described in Paragraph 2
of this Agreement occurs, the Holder as defined in the Warrant (which shall
include a former Holder), shall have the right to require KHG to repurchase
all or any portion of the Warrant at a price (the "Warrant Repurchase
Price") equal to the product obtained by multiplying: (i) the number of
shares of Common Stock represented by the portion of the Warrant that the
Holder is requiring KHG to repurchase, times (ii) the excess of the
Redemption Price over the Exercise Price.
(c) The Holder's right, pursuant to this Paragraph 7, to require KHG to
repurchase a portion or all of the Warrant, and/or to require KHG to redeem
some or all of the shares of Common Stock for which the Warrant was
exercised, shall expire on the close of business on the 60th day following
the occurrence of any event described in Paragraph 2.
(d) The Holder may exercise its right, pursuant to this Paragraph 7, to
require KHG to repurchase all or a portion of the Warrant, and/or to require
KHG to redeem some or all of the shares of Common Stock for which the
Warrant was exercised, by surrendering for such purpose to KHG, at its
principal office within the time period specified in the preceding
subparagraph, the Warrant and/or a certificate or certificates representing
the number of shares to be redeemed accompanied by a written notice stating
that it elects to require KHG to repurchase the Warrant or a portion thereof
and/or to redeem all or a specified number of such shares in accordance with
the provisions of this Paragraph 7. As promptly as practicable, and in any
event within five business days after the surrender of the Warrant and/or
such certificates and the receipt of such notice relating thereto, KHG shall
deliver or cause to be delivered to the Holder: (i) the applicable
Redemption Price (in immediately available funds) for the shares of Common
Stock which it is not then prohibited under applicable law or regulation
from redeeming, and/or (ii) the applicable Warrant Repurchase Price, and/or
(iii) if the Holder has given KHG notice that less
than the whole Warrant is to be repurchased and/or less than the full number
of shares of Common Stock evidenced by the surrendered certificate or
certificates are to be redeemed, a new certificate or certificates, of like
tenor, for the number of shares of Common Stock evidenced by such
surrendered certificate or certificates less the number shares of Common
Stock redeemed and/or a new Warrant reflecting the fact that only a portion
of the Warrant was repurchased.
(e) To the extent that KHG is prohibited under applicable law or
regulation, or as a result of administrative or judicial action, from
repurchasing the Warrant and/or redeeming the Common Stock as to which the
Holder has given notice of repurchase and/or redemption, KHG shall
immediately so notify the Holder and thereafter deliver or cause to be
delivered, from time to time to the Holder, the portion of the Warrant
Repurchase Price and/or the Redemption Price which it is no longer
prohibited from delivering, within five business days after the date on
which KHG is no longer so prohibited; provided, however, that to the extent
-------- -------
that KHG is at the time and after the expiration of 25 months, so prohibited
from delivering the Warrant Repurchase Price and/or the Redemption Price, in
full (and KHG hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals as promptly as practicable), KHG
shall deliver to the Holder a new Warrant (expiring one year after delivery)
evidencing the right of the Holder to purchase that number of shares of
Common Stock representing the portion of the Warrant which KHG is then so
prohibited from repurchasing, and/or KHG shall deliver to the Holder a
certificate for the shares of Common Stock which KHG is then so prohibited
from redeeming, and KHG shall have no further obligation to repurchase such
new Warrant or redeem such Common Stock; and provided further, that upon
--- -------- -------
receipt of such notice and until five days thereafter the Holder may revoke
its notice of repurchase of the Warrant and/or redemption of Common Stock by
written notice to KHG at its principal office stating that the Holder elects
to revoke its election to exercise its right to require KHG to repurchase
the Warrant and/or redeem the Common Stock, whereupon KHG will promptly
redeliver to the Holder the Warrant and/or the certificates representing
shares of Common Stock surrendered to KHG for purposes of such repurchase
and/or redemption, and KHG shall have no further obligation to repurchase
such Warrant and/or redeem such Common Stock.
(f) As used in this Agreement the following terms have the meanings
indicated:
(1) "Acquiring Person" shall mean any "Person" (hereinafter
defined) who or which is the "Beneficial Owner" (hereinafter defined) of
25% or more of the Common Stock;
(2) A "Person" shall mean any individual, firm, corporation or
other entity and shall also include any syndicate or group deemed to be
a "Person" by operation of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended;
(3) A Person shall be a "Beneficial Owner", and shall have
"Beneficial Ownership," of all securities:
(i) which such Person or any of its Affiliates (as
hereinafter defined) beneficially owns, directly or indirectly; and
(ii) which such Person or any of its Affiliates or Associates
has (1) the right to acquire (whether such right is exercisable
immediately or only after the passage of time or otherwise) pursuant
to any agreement, arrangement or understanding or upon the exercise
of conversion rights, exchange rights, warrants or options, or
otherwise, or (2) the right to vote pursuant to any proxy, power of
attorney, voting trust, agreement, arrangement or understanding; and
(4) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the regulations promulgated by
the SEC under the Securities and Exchange Act of 1934, as amended.
8. Remedies. Without limiting the foregoing or any remedies available to
--------
FFC, it is specifically acknowledged that FFC would not have an adequate remedy
at law for any breach of this Warrant Agreement and shall be entitled to
specific performance of KHG's obligations under, and injunctive relief against
any actual or threatened violation of the obligations of any Person subject to,
this Agreement.
9. Miscellaneous.
-------------
(a) The representations, warranties, and covenants of KHG set forth in
the Merger Agreement are hereby incorporated by reference in and made a part
of this Agreement, as if set forth in full herein.
(b) This Agreement, the Warrant and the Merger Agreement set forth the
entire understanding and agreement of the parties hereto and supersede any
and all prior agreements, arrangements and understandings, whether written
or oral, relating to the subject matter hereof and thereof. No amendment,
supplement, modification, waiver, or termination of this Agreement shall be
valid and binding unless executed in writing by both parties.
(c) This Agreement shall be deemed to have been made in, and shall be
governed by and interpreted in accordance with the substantive laws of, the
Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers as of the day and year first above
written.
FULTON FINANCIAL CORPORATION
By: /s/ Rufus A. Fulton, Jr.
--------------------------------------------------------------------------------------------
Rufus A. Fulton, Jr., President
and Chief Executive Officer
Attest: /s/ William R. Colmery
------------------------------------------------------------------------------------
William R. Colmery, Secretary
KEYSTONE HERITAGE GROUP, INC.
By: /s/ Albert B. Murry
--------------------------------------------------------------------------------------------
Albert B. Murry, President
and Chief Executive Officer
Attest: /s/ Peggy Y. Layser
------------------------------------------------------------------------------------
Peggy Y. Layser, Secretary
WARRANT
-------
to Purchase up to 981,740 Shares of the
Common Stock, No Par Value,
of
KEYSTONE HERITAGE GROUP, INC.
-----------------------------
This is to certify that, for value received, Fulton Financial Corporation
("FFC") or any permitted transferee (FFC or such transferee being hereinafter
called the "Holder") is entitled to purchase, subject to the provisions of this
Warrant, from Keystone Heritage Group, Inc., a Pennsylvania business corporation
("KHG"), at any time on or after the date hereof, an aggregate of up to 981,740
fully paid and non-assessable shares of common stock, no par value (the "Common
Stock"), of KHG at a price per share equal to $36.75, subject to adjustment as
herein provided (the "Exercise Price").
1. Exercise of Warrant. Subject to the provisions hereof and the
-------------------
limitations set forth in Paragraph 2 of a Warrant Agreement of even date
herewith by and between FFC and KHG (the "Warrant Agreement"), which Warrant
Agreement was entered into simultaneously with a Merger Agreement of even date
herewith between FFC and KHG (the "Merger Agreement"), this Warrant may be
exercised in whole or in part or sold, assigned or transferred at any time or
from time to time on or after the date hereof. This Warrant shall be exercised
by presentation and surrender hereof to KHG at the principal office of KHG,
accompanied by (i) a written notice of exercise, (ii) payment to KHG, for the
account of KHG, of the Exercise Price for the number of shares of Common Stock
specified in such notice, and (iii) a certificate of the Holder specifying the
event or events which have occurred and entitle the Holder to exercise this
Warrant. The Exercise Price for the number of shares of Common Stock specified
in the notice shall be payable in immediately available funds.
Upon such presentation and surrender, KHG shall issue promptly (and within
one business day if requested by the Holder) to the Holder or its assignee,
transferee or designee the number of shares of Common Stock to which the Holder
is entitled hereunder. KHG covenants and warrants that such shares of Common
Stock, when so issued, will be duly authorized, validly issued, fully paid and
non-assessable, and free and clear of all liens and encumbrances.
If this Warrant should be exercised in part only, KHG shall, upon surrender
of this Warrant for cancellation, execute and deliver a new Warrant evidencing
the rights of the Holder thereof to purchase the balance of the shares of Common
Stock issuable hereunder. Upon receipt by KHG of this Warrant, in proper form
for exercise, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of KHG may then be closed or that certificates representing
such shares of Common Stock shall not then be actually delivered to the Holder.
KHG shall pay all expenses, and any and all United States federal, state and
local taxes and other charges, that may be payable in connection with the
preparation, issue and delivery of stock certificates pursuant to this Paragraph
1 in the name of the Holder or its assignee, transferee or designee.
2. Reservation of Shares; Preservation of Rights of Holder.
-------------------------------------------------------
KHG shall at all times, while this Warrant is outstanding and unexercised,
maintain and reserve, free from preemptive rights, such number of authorized but
unissued shares of Common Stock as may be necessary so that this Warrant may be
exercised without any additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other rights
to acquire shares of Common Stock at the time outstanding. KHG further agrees
that (i) it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act or omission, avoid or seek to avoid the observance or performance of any of
the covenants, stipulations or conditions to be observed or performed hereunder
or under the Warrant Agreement by KHG, (ii) it will promptly take all action
(including (A) complying with all pre-merger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S)18a and the regulations
promulgated thereunder and (B) in the event that, under Section 3 of the Bank
Holding Company Act of 1956, as amended (12 U.S.C. (S)1842(a)(3)), or the Change
in Bank Control Act of 1978, as amended (12 U.S.C. (S)1817(j)), prior approval
of the Board of Governors of the Federal Reserve System (the "Board") is
necessary before this Warrant may be exercised, cooperating fully with the
Holder in preparing any and all such applications and providing such information
to the Board as the Board may require) in order to permit the Holder to exercise
this Warrant and KHG duly and effectively to issue shares of its Common Stock
hereunder, and (iii) it will promptly take all action necessary to protect the
rights of the Holder against dilution as provided herein.
3. Fractional Shares. KHG shall not be required to issue fractional shares
-----------------
of Common Stock upon exercise of this Warrant but shall pay for any fractional
shares in cash or by check at the Exercise Price.
4. Exchange or Loss of Warrant. This Warrant is exchangeable, without
---------------------------
expense, at the option of the Holder, upon presentation and surrender hereof at
the principal office of KHG for other warrants of different denominations
entitling the Holder to purchase in the aggregate the same number of shares of
Common Stock issuable hereunder. The term "Warrant" as used herein includes any
warrants for which this Warrant may be exchanged. Upon receipt by KHG of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, KHG will execute and deliver a new Warrant of like
tenor and date.
5. Repurchase. The Holder shall have the right to require KHG to
----------
repurchase all or any portion of this Warrant under the terms and conditions of
Paragraph 7 of the Warrant Agreement.
6. Adjustment. The number of shares of Common Stock issuable upon the
----------
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time as provided in this Paragraph 6.
(A) Stock Dividends, etc.
---------------------
(1) Stock Dividends. In case KHG shall pay or make a dividend or
---------------
other distribution on any class of capital stock of KHG in Common Stock, the
number of shares of Common Stock issuable upon exercise of this Warrant shall be
increased by multiplying such number of shares by a fraction of which the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the day immediately preceding the date of such distribution
and the numerator shall be the sum of such number of shares and the total number
of shares of Common Stock constituting such dividend or other distribution, such
increase to become effective immediately after the opening of business on the
day following such distribution.
(2) Subdivisions. In case outstanding shares of Common Stock shall
------------
be subdivided into a greater number of shares of Common Stock, the number of
shares of Common Stock issuable upon exercise of this Warrant at the opening of
business on the day following the day upon which such subdivision becomes
effective shall be proportionately increased, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller number
of shares of Common Stock, the number of shares of Common Stock issuable upon
exercise of this Warrant at the opening of business on the day following the day
upon which such combination becomes effective shall be proportionately
decreased, such increase or decrease, as the case may be, to become effective
immediately after the opening of business on the day following the date upon
which such subdivision or combination becomes effective.
(3) Reclassifications. The reclassification of Common Stock into
-----------------
securities (other than Common Stock) and/or cash and/or other consideration
shall be deemed to involve a subdivision or combination, as the case may be, of
the number of shares of Common Stock outstanding immediately prior to such
reclassification into the number or amount of securities and/or cash and/or
other consideration outstanding immediately thereafter and the effective date of
such reclassification shall be deemed to be "the day upon which such subdivision
becomes effective," or "the day upon which such combination becomes effective,"
as the case may be, within the meaning of clause (2) above.
(4) Optional Adjustments. KHG may make such increases in the number
--------------------
of shares of Common Stock issuable upon exercise of this Warrant, in addition to
those required by this subparagraph (A), as shall be determined by its Board of
Directors to be advisable in order to avoid taxation so far as practicable of
any dividend of stock or stock rights or any event treated as such for federal
income tax purposes to the recipients.
(5) Adjustment to Exercise Price. Whenever the number of shares of
----------------------------
Common Stock issuable upon exercise of this Warrant is adjusted as provided in
this Paragraph 6(A), the Exercise Price shall be adjusted by a fraction in which
the numerator is equal to the number of shares of Common Stock issuable prior to
the adjustment and the denominator is equal to the number of shares of Common
Stock issuable after the adjustment.
(B) Certain Sales of Common Stock.
-----------------------------
(1) Adjustment to Shares Issuable. If and whenever KHG sells or
-----------------------------
otherwise issues (other than under circumstances in which Paragraph 6(A)
applies) any shares of Common Stock, the number of shares of Common Stock
issuable upon exercise of this Warrant shall be increased by multiplying such
number of shares by a fraction, the denominator of which shall be the number
shares of Common Stock outstanding at the close of business on the day
immediately preceding the date of such sale or issuance and the numerator of
which shall be the sum of such number of shares and the total number of shares
constituting such sale or other issuance, such increase to become effective
immediately after the opening of business on the day following such sale or
issuance.
(2) Adjustment to Exercise Price. If and whenever KHG sells or
----------------------------
otherwise issues any shares of Common Stock (excluding any stock dividend or
other issuance not for consideration to which Paragraph 6(A) applies) for a
consideration per share which is less than the Exercise Price at the time of
such sale or other issuance, then in each such case the Exercise Price shall be
forthwith changed (but only if a reduction would result) to the price
(calculated to the nearest cent) determined by dividing: (i) an amount equal to
the sum of (aa) the number of shares of Common Stock outstanding immediately
prior to such issue or sale, multiplied by the then effective Exercise Price,
plus (bb) the total consideration, if any, received and deemed received by KHG
upon such issue or sale, by (ii) the total number of shares of Common Stock
outstanding immediately after such issue or sale.
(C) Definition. For purposes of this Paragraph 6, the term "Common
----------
Stock" shall include (1) any shares of KHG of any class or series which has no
preference or priority in the payment of dividends or in the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of KHG and which is not subject to redemption by KHG, and (2) any rights or
options to subscribe for or to purchase shares of Common Stock or any stock or
securities convertible into or exchangeable for shares of Common Stock (such
convertible or exchangeable stock or securities being hereinafter called
"Convertible Securities"), whether or not such rights or options or the right to
convert or exchange any such Convertible Securities are immediately exercisable.
For purposes of any adjustments made under Paragraph 6(A) or 6(B) as a result of
the distribution, sale or other issuance of rights or options or Convertible
Securities, the number of Shares of Common Stock outstanding after or as a
result of the occurrence of events described in Paragraph 6(A)(1) or 6(B)(1)
shall be calculated by assuming that all such rights, options or Convertible
Securities have been exercised for the maximum number of shares issuable
thereunder.
7. Notice. (A) Whenever the number of shares of Common Stock for which
------
this Warrant is exercisable is adjusted as provided in Paragraph 6, KHG shall
promptly compute such adjustment and mail to the Holder a certificate, signed by
the principal financial officer of KHG, setting forth the number of shares of
Common Stock for which this Warrant is exercisable as a result of such
adjustment having become effective.
(B) Upon the occurrence of any event which results in the Holder having
the right to require KHG to repurchase this Warrant, as provided in Paragraph 7
of the Warrant Agreement, KHG shall promptly notify the Holder of such event;
and KHG shall promptly compute the Warrant Repurchase Price and furnish to the
Holder a certificate, signed by the principal financial officer of KHG, setting
forth the Warrant Repurchase Price and the basis and computation thereof.
8. Rights of the Holder. (A) Without limiting the foregoing or any
--------------------
remedies available to the Holder, it is specifically acknowledged that the
Holder would not have an adequate remedy at law for any breach of the provisions
of this Warrant and shall be entitled to specific performance of KHG's
obligations under, and injunctive relief against any actual or threatened
violation of the obligations of any Person (as defined in Paragraph 7 of the
Warrant Agreement) subject to, this Warrant.
(B) The Holder shall not, by virtue of its status as Holder, be entitled
to any rights of a shareholder in KHG.
9. Termination. This Warrant and the rights conferred hereby shall
-----------
terminate (i) upon the Effective Date of the merger provided for in the Merger
Agreement, (ii) upon a valid termination of the Merger Agreement prior to the
occurrence of an event described in Paragraph 2 of the Warrant Agreement, or
(iii) to the extent this Warrant has not previously been exercised, 60 days
after the occurrence of an event described in Paragraph 2 of the Warrant
Agreement.
10. Governing Law. This Warrant shall be deemed to have been delivered in,
-------------
and shall be governed by and interpreted in accordance with the substantive laws
of, the Commonwealth of Pennsylvania.
Dated: August 15, 1997
KEYSTONE HERITAGE GROUP, INC.
By: /s/ Albert B. Murry
-------------------------------------------------------------------------------------------------
Albert B. Murry, President and
Chief Executive Officer
Attest: /s/ Peggy Y. Layser
-----------------------------------------------------------------------------------------
Peggy Y. Layser, Secretary
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
-----------------------------------------
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of
1988, as amended (BCL), 15 Pa. C.S. (S)(S) 1741-50, provides that a business
corporation shall have the power under certain circumstances to indemnify its
directors, officers, employees and agents against certain expenses incurred by
them in connection with any threatened, pending or completed action, suit or
proceeding. A copy of Subchapter D of Chapter 17 of the BCL is attached as
Exhibit 99(d) to this Registration Statement.
Article V of the Bylaws of Fulton Financial Corporation provides for the
indemnification of its directors, officers, employees and agents in accordance
with, and to the maximum extent permitted by, the provisions of Subchapter D of
Chapter 17 of the BCL. Article V of the Bylaws of Fulton Financial Corporation,
as set forth in Exhibit 3(b) to this Registration Statement, is hereby
incorporated by reference in response to this Item 20.
Fulton Financial Corporation has purchased insurance to indemnify its
directors, officers, employees and agents under certain circumstances.
For disclosure concerning the position of the Securities and Exchange
Commission on indemnification for liabilities arising under the Securities Act
of 1933, see the Section in the Proxy Statement/Prospectus (which is included in
Part I of this Registration Statement) entitled INFORMATION CONCERNING FULTON
FINANCIAL CORPORATION AND DESCRIPTION OF FFC COMMON STOCK -- Indemnification.
Item 21. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) Exhibits:
--------
Number Title
------ -----
2 Merger Agreement dated August 15, 1997, between Fulton
Financial Corporation and Keystone Heritage Group, Inc. --
Furnished as Exhibit A to the Proxy Statement/Prospectus
which is included in Part I of this Registration Statement
3(a) Articles of Incorporation of Fulton Financial Corporation --
Incorporated by reference to Exhibit (a)(i) of the Fulton
Financial Corporation Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1987; Articles of Amendment of Fulton
Financial Corporation
3(b) Bylaws of Fulton Financial Corporation -- Incorporated by
reference to Exhibit (a)(i) of the Fulton Financial
Corporation Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1989
4 Rights Agreement dated June 20, 1989, between Fulton
Financial Corporation and Fulton Bank -- Incorporated by
reference to Exhibit 1 of the Fulton Financial Corporation
Current Report on Form 8-K dated June 21, 1989
5 Opinion of Barley, Snyder, Senft & Cohen, LLP re: legality
8 Opinion of Barley, Snyder, Senft & Cohen, LLP re: tax matters
Number Title
------ -----
13 Annual Report on Form 10-K of Fulton Financial Corporation
for the Year Ending December 31, 1996 -- Incorporated by
reference in the Proxy Statement/Prospectus which is
included in Part I of this Registration Statement
21 Subsidiaries of Fulton Financial Corporation
23(a) Consent of Barley, Snyder, Senft & Cohen, LLP
23(b) Consent of Arthur Andersen LLP
23(c) Consent of KPMG Peat Marwick LLP
23(d) Consent of Danielson Associates, Inc.
23(e) Consent of Charles V. Henry, III
23(f) Consent of Donald W. Lesher, Jr.
24 Power of Attorney
99(a) Form of Proxy
99(b) Letter to Shareholders of Keystone Heritage Group, Inc.
99(c) Notice of Special Meeting of Shareholders of Keystone
Heritage Group, Inc.
99(d) Statute Relating to Indemnification
(b) Financial Statement Schedules:
-----------------------------
None required.
(c) Opinion of Financial Advisor:
----------------------------
Furnished as Exhibit B to the Proxy Statement/Prospectus which is included
in Part I of this Registration Statement.
Item 22. Undertakings.
------------
(a) The undersigned registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) above do not apply if the registration statement is on
Form S-3, Form S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows:
1. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
2. The registrant undertakes that every prospectus (i) that is filed
pursuant to the preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
The undersigned registrant hereby undertakes to supplement by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Lancaster,
Commonwealth of Pennsylvania as of November 18, 1997.on January 2, 1998.
FULTON FINANCIAL CORPORATION
Attest:/s/ /s/ William R. Colmery By:/s/ /s/ Rufus A. Fulton, Jr.
--------------------------- -------------------------------------------------------- ---------------------------------
William R. Colmery, Rufus A. Fulton, Jr., President
Secretary and Chief Executive Officer
(Corporate Seal)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
Signature Capacity Date
--------- -------- ----
* /s/Jeffrey G. Albertson Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Jeffrey G. Albertson)
Director January 2, 1998
- ----------------------------------------------------------------------------
(James R. Argires)
Director January 2, 1998
- ----------------------------------------------------------------------------
(Donald M. Bowman, Jr.)
* /s/ Thomas D. Caldwell, Jr. Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Thomas D. Caldwell, Jr.)
Senior Vice President November 18, 1997January 2, 1998
/s/ Beth Ann L. Chivinski and Controller
- ---------------------------------------------------------------------------- (Principal Accounting
(Beth Ann L. Chivinski) Officer)
* /s/ Harold D. Chubb Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Harold D. Chubb)
* /s/ William H. Clark, Jr. Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(William H. Clark, Jr.)
* /s/ Frederick B. Fichthorn Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Frederick B. Fichthorn)
* /s/ Patrick J. Freer Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Patrick J. Freer)
/s/ Rufus A. Fulton, Jr. President, Chief November 18, 1997January 2, 1998
- ---------------------------------------------------------------------------- Executive Officer and
(Rufus A. Fulton, Jr.) Director
(Principal Executive
Officer)
Signature Capacity Date
--------- -------- ----
* /s/ Eugene H. Gardner Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Eugene H. Gardner)
Chairman of the Board November 18, 1997January 2, 1998
* /s/ Robert D. Garner and Director
- ----------------------------------------------------------------------------
(Robert D. Garner)
* /s/ Daniel M. Heisey
- ------------------------------ Director November 18, 1997
- ----------------------------------------------January 2, 1998
(Daniel M. Heisey)
* /s/ J. Robert Hess Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(J. Robert Hess)
* /s/ Carolyn R. Holleran Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Carolyn R. Holleran)
* /s/ Clyde W. Horst Director November 18, 1997
- ----------------------------------------------------------------------------
(Clyde W. Horst)
* /s/ Samuel H. Jones, Jr. Director January 2, 1998
- ----------------------------------------------------------------------------
(Samuel H. Jones, Jr.)
* /s/ Bernard J. Metz, Sr. Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Bernard J. Metz, Sr.)
Executive Vice November 18, 1997January 2, 1998
President and Chief
/s/ Charles J. Nugent Financial Officer
- ---------------------------------------------------------------------------- (Principal Financial
(Charles J. Nugent) Officer)
* /s/ Arthur M. Peters, Jr. Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Arthur M. Peters, Jr.)
* /s/ Stuart H. Raub, Jr. Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Stuart H. Raub, Jr.)
* /s/ William E. Rusling Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(William E. Rusling)
* /s/ Mary Ann Russell Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Mary Ann Russell)
* /s/ John O. Shirk Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(John O. Shirk)
Executive Vice November 18, 1997January 2, 1998
/s/ R. Scott Smith President
- ----------------------------------------------------------------------------
(R. Scott Smith)
* /s/ James K. Sperry Executive Vice January 2, 1998
- ---------------------------------------------------------------------------- President and
(James K. Sperry) Director
Signature Capacity Date
--------- -------- ----
* /s/ Kenneth G. Stoudt Director November 18, 1997January 2, 1998
- ----------------------------------------------------------------------------
(Kenneth G. Stoudt)
* By: /s/ William R. Colmery
--------------------------------------------
William R. Colmery,
Attorney-in-fact
EXHIBIT INDEX
-------------
Required Exhibits
-----------------
Number Title
-
------ -----
2 Merger Agreement dated August 15, 1997, between
Fulton Financial Corporation and Keystone Heritage
Group, Inc. -- Furnished as Exhibit A to the Proxy
Statement/Prospectus which is included in Part I
of this Registration Statement
3(a) Articles of Incorporation of Fulton Financial
Corporation -- Incorporated by reference to
Exhibit (a)(i) of the Fulton Financial Corporation
Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1987; Articles of Amendment of
Fulton Financial Corporation
3(b) Bylaws of Fulton Financial Corporation --
Incorporated by reference to Exhibit (a)(i) of the
Fulton Financial Corporation Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1989
4 Rights Agreement dated June 20, 1989, between
Fulton Financial Corporation and Fulton Bank --
Incorporated by reference to Exhibit 1 of the
Fulton Financial Corporation Current Report on
Form 8-K dated June 21, 1989
5 Opinion of Barley, Snyder, Senft & Cohen, LLP re:
legality
8 Opinion of Barley, Snyder, Senft & Cohen, LLP re:
tax matters
13 Annual Report on Form 10-K for Fulton Financial
Corporation for the Year Ending December 31, 1996
-- Incorporated by reference in the Proxy
Statement/Prospectus which is included in Part I
of this Registration Statement
21 Subsidiaries of Fulton Financial Corporation
23(a) Consent of Barley, Snyder, Senft & Cohen, LLP
Number Title
-
------ -----
23(b) Consent of Arthur Andersen LLP
23(c) Consent of KPMG Peat Marwick LLP
23(d) Consent of Danielson Associates, Inc.
23(e) Consent of Charles V. Henry, III
23(f) Consent of Donald W. Lesher, Jr.
24 Power of Attorney
99(a) Form of Proxy
99(b) Letter to Shareholders of Keystone Heritage Group,
Inc.
99(c) Notice of Special Meeting of Shareholders of
Keystone Heritage Group, Inc.
99(d) Statute Relating to Indemnification