December 22, 2006
Via Facsimile ((336) 232-9196) and U.S. Mail
John M. Cross, Esq.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
P.O. Box 26000
Greensboro, NC 27420
Re: South Street Financial Corporation
Schedule 13E-3
File No. 005-49027
Filed December 11, 2006
Preliminary Proxy Statement on Schedule 14A
Filed December 11, 2006
File No. 000-21083
Dear Mr. Cross:
We have reviewed your filings and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Schedule 13E-3
General
1. We note that you are purporting to create two classes of
securities out of what is currently a single class of common
stock,
for the purpose of taking the company private by causing each
"new"
class to be held by less than 750 shareholders of record. Please
provide a formal opinion of counsel, supported by appropriate
legal
analysis, that your common stock and your newly authorized
preferred
stock are separate classes of securities under North Carolina law.
The analysis should include a detailed discussion and comparison
of
each feature of your common stock and the preferred stock and why
the
rights of each class support the opinion of counsel. In your
response letter, provide your legal analysis as to why the common
stock and Series A preferred stock are truly separate classes for
purposes of determining eligibility to deregister under Section 12
of
the Securities Exchange Act of 1934. Please support your analysis
with citations to state statutory or case law, where appropriate.
We
may have further comments after reviewing the legal opinion and
your
response.
Item 3. Identity and Background of Filing Person
2. Please tell us why you need to qualify your disclosure in
subsection (c) "to [your] knowledge." What prevents you from
knowing
and disclosing this information? Please explain or delete the
qualifier.
Proxy Statement
General
3. Rule 14a-4(b)(1) requires you to separately break out on the
proxy
card each matter to be voted upon. Separate matters may be cross-
conditioned upon one another, such that one will not pass unless
the
other does. See the September 2004 interim supplement to the
Division of Corporation Finance`s Manual of Publicly Available
Telephone Interpretations (available on our Web site at
www.sec.gov).
Please revise to allow security holders to separately vote on the
authorization of the new series of preferred and the
reclassification
of the shares held by security holders who own less than 750
common
shares. For further guidance, please see SEC Release 34-31326
(October 16, 1992).
4. In connection with the foregoing comment, we note that the
Letter
to Participants in the ESOP includes an additional sub-proposal to
approve the grant of the 30-day put option to future preferred
stock
holders. Please provide us your analysis of whether this is a
separate matter that should be separately proposed to security
holders under Rule 14a-4(b)(1).
5. In connection with the 30-day put option that may be granted to
future preferred stock holders, please tell us what consideration
you
have given to the applicability of the tender offer provisions in
Section 13(e) of the Exchange Act and Rule 13e-4 and Regulation
14E.
Cover Page
6. On the cover page and in other prominent parts of the proxy
statement disclose that current security holders will receive no
consideration for their shares in this transaction(s) and will
lose
the benefits of holding Section 12 registered securities. This
revised disclosure should include a discussion of the impact on
shareholders of holding unregistered securities. Provide the same
disclosure in each place in the proxy statement where you discuss
what security holders will receive.
7. See our last comment. Highlight the fact that security holders
who receive preferred stock will lose voting rights on any matter
other than a change in control transaction and will also lose the
benefits of registration.
8. See our last two comments. In a similarly prominent manner,
disclose that shareholders who own less than 750 shares of common
stock and who will receive preferred stock in this transaction can
instead elect to receive cash for their shares by exercising
appraisal rights. This disclosure should be accompanied by a
brief
explanation of how to exercise dissenters` appraisal rights and
that
the company has determined that the fair value of each share of
common stock is $10. Also, to the extent known to you, disclose
whether a dissenting security holder will receive the fair value
payment prior to the time it may exercise the put option, assuming
that the option`s grant is approved by your security holders.
9. Please explain supplementally, with a view toward revised
disclosure, the disclosure that the board may determine whether a
security holder holds 750 or fewer shares of common stock. What
basis will the Board use to make this determination? Will that
basis
be different that looking a record holders?
10. Please revise the cover page of your proxy statement and the
form
of proxy to clearly identify it as being preliminary. See Rule
14a-
6(e)(1) of Regulation 14A.
Summary Term Sheet, page 2
11. We note your repeated references here and throughout the proxy
statement about the company "going dark." Please clarify the
meaning
of this phrase and tell us whether you are referring to the going
private transaction. Note that the concept of going dark is
generally understood to mean something different than a going
private transaction.
Questions and Answers, page 7
12. Please quantify the cost savings the Company will achieve
through
the going private transaction in the response to the question "Why
has the Board chosen this course of action?"
Special Factors
Background of the Transaction, page 10
13. We note that in the Introduction you state that "At this time,
it
is the Board`s assessment that the SEC and Congress do not intend
to
address this disproportionate impact on smaller public
companies..."
(emphasis added). Please tell us, with a view towards revised
disclosure, whether the Board considered the recent relief granted
to
small companies.
14. We note your Board received presentations from Howe Barnes on
July 14 and October 27, 2005. Note that each presentation,
discussion, or report held with or presented by Howe Barnes,
whether
oral or written, preliminary or final, is a separate report that
requires a reasonably detailed description meeting the
requirements
of Item 1015(b)(6) of Regulation M-A. Revise to summarize all the
presentations made by Howe Barnes.
Purposes of the Recapitalization, page 15
15. Please reconcile the estimated cost savings ($285,000) to the
amounts disclosed on page 11 ($93,000), page 31 and page 55.
Recommendation of the Board of Directors; Fairness of the
Recapitalization, page 18
16. Please revise your discussion generally to ensure you provide
a
fairness determination (substantive and procedural) with respect
to
each part of the going private transaction, including the
conversion
of securities and the Put Price.
17. Revise to provide disclosure responsive to Item 1014 of
Regulation M-A explaining why the board believes that an exchange
of
one share of preferred stock for one share of common stock is
substantively fair, given the different rights associated with the
preferred stock as compared to the common stock. Why is the ratio
appropriate? Your discussion should be detailed, and should
specifically address the rights associated with the preferred
stock.
18. Given that you state that there is no guarantee you will pay
dividends in the future and that the dividends payable to
preferred
security holders will not accumulate to future periods, revise
your
disclosure to explain why you view the grant of a dividend
preference
to constitute a positive factor for security holders receiving
shares
of preferred stock in the reclassification. Also, disclose
whether
you have historically paid dividends.
19. Please revise the discussions of "Current and Historical
Market
Prices," "Prior Stock Purchases" and "Earnings" to clarify how
your
analysis supports the fairness determination.
20. We note your indication in the "Going Concern Value"
disclosure
that the board reviewed and adopted Howe Barnes`s analysis. We
also
note the cross-reference to Howe Barnes`s disclosure in the "Net
Book
Value" and "Dividend Discount Analysis" discussions. If your
board
relied on the entire analysis of Howe Barnes to reach the fairness
determination, revise your disclosure to state that your board
adopted Howe Barnes`s analysis and discussion. See Question 20 of
Exchange Act Release No. 34-17719 (April 13, 1981), which states
that
a mere reference to an extract from the financial advisor`s report
will not be sufficient. Please revise accordingly.
21. Refer to the first full paragraph on page 22. Please revise
your
fairness determination disclosure to address whether the going
private transaction is fair to unaffiliated security holders.
22. Refer to the two paragraphs following the bullet points on
page
22. Clarify how the board made a determination of procedural
fairness even though the going private transaction does not
require
the approval of unaffiliated security holders, no unaffiliated
representative acting solely on behalf of the unaffiliated
security
holders was retained, and the board did not establish a committee
of
independent directors to approve the transaction. We note that
the
board, whose members will retain their common stock in this
transaction, structured the transaction and set the threshold for
converting shares of common stock into preferred stock.
23. Explain how the board was able to arrive at its determination
of
fairness in light of the fact that Howe Barnes`s opinion is not
qualified as to "unaffiliated" security holders and does not
distinguish between security holder who will retain their common
stock and those that will receive preferred stock.
Opinion of Financial Advisor, page 23
24. Refer to the disclosure at the top of page 24. Please
disclose
the amount of the fees paid to Howe Barnes. Refer to Item
1015(b)(4)
of Regulation M-A.
25. Please disclose the financial forecasts and projections
provided
to Howe Barnes.
26. Please explain the significance of the Historical Performance
of
the Thrift Equity Market and Historical Trading Price and Volume
analyses and their results in connection with Howe Barnes`s
ultimate
fairness determination. Please apply this comment also to the
results obtained in the Comparable Company and the
Recapitalization
Premium analyses.
27. With respect to the table on page 26, please disclose what
consideration Howe Barnes gave, in arriving at its fairness
opinion,
to the Price-Book Value and the Price/Tangible Book Value results
for
South Street being below all comparable measures.
28. Refer to the Comparable Company Analysis. It appears from the
disclosure in the first paragraph of page 26 that Howe Barnes also
conducted a comparable transaction analysis. If so, please
provide
the disclosure required by Item 1015(b) of Regulation M-A.
29. Please revise to disclose the names of the 12 peer companies
and
values underlying the pricing ratios used in the Comparable
Company
analysis.
30. Refer to the Dividend Discount Analysis. Please explain how
Howe
Barnes determined that discount rates of 11%-13% and earnings
multiples of 16.0x-20.0x were the most appropriate indicators of
value. Disclose the industry averages.
31. With respect to the Recapitalization Premium Analysis, please
disclose what measuring date Howe Barnes used in calculating the
premiums in the analyzed transactions.
General Effects of the Recapitalization, page 29
32. Please reconcile the amount of cash and cash equivalents at
September 30, 2006 of $18 million (page 32) to the available
capital
of $26 million on that same date disclosed on page 4.
Certain United States Federal Income Tax Consequences, page 33
33. We note the heading of this section refers to "certain" of the
material federal income tax consequences of the transaction.
Please
revise the heading of this section to refer to "material"
consequences.
Security Ownership of Officers, Directors and 5% Stockholders,
page
47
34. Please clarify in footnote 4 to the table on page 47, if true,
that the shares held by the ESOP are included in the line-item for
each trustee of the ESOP.
35. Please tell us, with a view toward revised disclosure, why the
individuals included in footnote 11 to the table on page 48 are
not
included in the table under their own line-items.
Selected Consolidated Pro Forma Financial Information, page 55
36. Please provide the pro forma ratio of earnings to fixed
charges.
See Item 1010(c)(6) of Regulation M-A.
Additional Information, page 60
37. Revise your disclosure to reflect the new address of the SEC
at
Station Place, 100 F Street, N.E., Washington, D.C. 20549.
Incorporation of Certain Documents by Reference, page 60
38. Note that Schedule 13E-3 does not specifically permit "forward
incorporation" of any documents filed under Sections 13(a), 13(c),
14
or 15(d) of the Exchange Act. Rather, if you make any such
filings
while this Offer is pending, you must amend the Schedule 13E-3 to
specifically incorporate them by reference.
Closing
As appropriate, please amend your filing in response to
these
comments. You may wish to provide us with marked copies of the
amendment to expedite our review. Please furnish a cover letter
with
your amendment that keys your responses to our comments and
provides
any requested supplemental information. Detailed cover letters
greatly facilitate our review. Please understand that we may have
additional comments after reviewing your amendment and responses
to
our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
Please direct any questions to me at (202) 551-3619. You
may
also contact me via facsimile at (202) 772-9203. Please send all
correspondence to us at the following ZIP code: 20549-3628.
Sincerely,
Daniel F. Duchovny
Special Counsel
Office of Mergers &
Acquisitions
John M. Cross, Esq.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
December 22, 2006
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
CORPORATION FINANCE