SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[X] Preliminary Proxy Statement
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COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-12
ESSEX BANCORP, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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Essex Bancorp, Inc. Gene D. Ross
Corporate Offices President and
Interstate Corporate Center Chief Executive Officer
Building #9
Suite 200
Norfolk, Virginia 23502
(757) 893-1300
[LOGO]ESSEX
BANCORP, INC.
June ___, 2001
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Meeting") of Essex Bancorp, Inc. (the "Company"), the holding company for Essex
Savings Bank, F.S.B. (the "Bank"), which will be held at Interstate Corporate
Center, Building #11, 1st Floor Conference Room, Norfolk, Virginia, on July
___, 2001 at 1:00 p.m.
The attached Notice of the Meeting and Proxy Statement describe the business to
be transacted at the Meeting. At the Meeting, you will be asked to consider and
vote upon a proposal to approve the merger of the Company into Essex Acquisition
Corp. ("Essex Acquisition"), a wholly owned subsidiary of the Company. If this
merger is approved:
. each share of the Company's Common Stock (the "Common Stock") (other than
shares held by dissenting stockholders) will be exchanged for $1.45 in
cash(the "Cash Consideration"). The total Cash Consideration to be paid to
all the holders of Common Stock will be $1,537,931, of which approximately
$5,183 will be paid to directors and executive officers of the Company.
. The Company will cease to exist as an independent company and Essex
Acquisition will be the surviving company in the Merger; and
. all of the equity interests in the Company will be owned by the existing
holders of the Company's preferred stock (the "Preferred Stock") and
outstanding warrants to purchase Common Stock ("Warrants"). Two of the
Company's directors are among the holders of the Preferred Stock and
Warrants and will together own approximately 12.08% of the common stock of
Essex Acquisition after the Merger. None of the Company's executive
officers will own any stock of Essex Acquisition.
A special committee of directors of the Company (the "Special Committee"),
consisting of the two directors who do not hold Preferred Stock or Warrants,
reviewed and considered the terms of the Merger, and unanimously recommended
the approval of the Merger to the Board of Directors. The Board of Directors
unanimously approved the Merger Agreement and believes that the terms of the
Merger are in the best interests of the Company and its stockholders and fair to
the Company's unaffiliated common stockholders. The Board of Directors
recommends that you vote FOR approval of the Merger Agreement.
The directors and officers of the Company have material financial conflicts of
interest that each shareholder should take into account in deciding whether to
approve the Merger, including the following:
. The two directors who do not serve on the Special Committee will together
hold approximately 12.08% of the common stock of Essex Acquisition after
the Merger.
. The two directors who served on the Special Committee will not own any
common stock of Essex Acquisition after the Merger, but will receive a
total of $3,388 in exchange for their shares of Common Stock, as well as a
total of $8,518 in additional payments to liquidate their outstanding stock
options. These directors have also received $10,000 each for their services
as members of the Special Committee.
. The directors and certain executive officers will continue to be
compensated by Essex Acquisition for their services after the Merger. These
conflicts of interest are described in more detail in the Proxy Statement.
See "The Proposed Merger--Conflicts of Interest." Notwithstanding these
conflicts of interests, the Company did not retain an independent and
disinterested third party to represent the unaffiliated holders of the
Common Stock.
Under Delaware law, the approval of the Merger at the Meeting will require the
affirmative vote of holders of a majority of the outstanding shares of Common
Stock entitled to vote at the Meeting. However, even if the holders of the
Common Stock approve the Merger, the Company and Essex Acquisition may not
complete the Merger if any one of several conditions to closing the Merger is
not satisfied. These conditions include:
. The occurrence of litigation or government action challenging the Merger;
. The failure of Essex Acquisition to receive the bank financing that it
needs to fund the Merger;
. The failure of the owners of either class of Preferred Stock to approve the
Merger; or
. The exercise of dissenters' rights by common shareholders. The Merger
Agreement gives either party the right to terminate the agreement if any
shareholder exercises dissenters' rights. However, it is not expected that
such an exercise would prevent the Merger from being completed unless the
number of shareholders exercising dissenters' rights is so material that
the Company believes it would be unlikely to be able to fund the costs of
the Merger.
For further discussion of the closing conditions and the financing of the
Merger, see "The Proposed Merger - The Merger Agreement" and - "Source of
Funds".
YOUR VOTE IS IMPORTANT. You are urged to sign, date and mail the enclosed Proxy
Card promptly in the postage-paid envelope provided. If your shares are held by
a brokerage firm on your behalf, you may also vote by Internet at
www.proxyvote.com or by phone using the toll-free number 1-800-454-8683. If you
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attend the Meeting, you may vote in person even if you have already mailed in
your Proxy Card or otherwise voted before the Meeting.
The enclosed Notice of Meeting and Proxy Statement provide you with a summary of
the Merger and additional information about the parties involved and their
interests in the Merger. I encourage you to read and consider carefully the
information contained in the Proxy Statement. Please read these materials
carefully. In addition, you may obtain information about the Company from
documents that we have filed with the Securities and Exchange Commission,
including the Company's Schedule 13e-3 Transaction Statement.
If you do not vote in favor of the Merger Agreement, you will have the right to
dissent and to seek appraisal of the fair market value of your shares of Common
Stock if the Merger is consummated. To do so, however, you must properly
perfect your appraisal rights under Delaware law in accordance with the
procedures described beginning on page 33 of the accompanying Proxy Statement.
Whether or not you plan to attend the Meeting, you are urged to read the
enclosed material carefully and complete, sign and promptly return the enclosed
proxy to assure that your shares will be voted at the Meeting. If you attend
the Meeting, you may revoke your proxy and vote in person if you choose, even if
you have returned your Proxy Card.
On behalf of the Board of Directors and all of the employees of the Company and
the Bank, I wish to thank you for your continued support.
Sincerely,
Gene D. Ross
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Merger, passed upon the merits or
fairness of the Merger or passed upon the adequacy or accuracy of the disclosure
in the Proxy Statement. Any representation to the contrary is a criminal
offense.
This Proxy Statement and the accompanying form of proxy are first being mailed
to stockholders on or about June ___, 2001.
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For further information about
the Annual Meeting, please
call 1-757-893-1326.
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PRELIMINARY COPY
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ESSEX
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BANCORP, INC.
Interstate Corporate Center
Building #9
Suite 200
Norfolk, Virginia 23502
(757) 893-1326
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on__________, July -__, 2001
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Meeting")
of Essex Bancorp, Inc. (the "Company") will be held at Interstate Corporate
Center, Building #11, 1st Floor Conference Room, Norfolk, VA, on______________,
July ___, 2001, at 1:00 p.m.
A Proxy Statement and a Proxy Card for the Meeting are enclosed. The Meeting is
for the purpose of considering and voting upon the following matters:
1. A proposal to approve an Agreement and Plan of Merger pursuant to
which the Company will be merged with and into Essex Acquisition Corp.
("Essex Acquisition"), a newly-formed Virginia corporation that is a
wholly owned subsidiary of the Company and each outstanding share of
the Company's Common Stock (other than shares held by stockholders who
have properly perfected their dissenters' rights) will be exchanged
for the right to receive $1.45 in cash, without interest (the "Cash
Consideration"). A copy of the Restated Agreement and Plan of Merger
dated as of May 1, 2001 is attached as Appendix A to and is described
in the accompanying Proxy Statement.
2. The approval of adjournments of the Meeting in order to allow the
Company to continue to solicit proxies from holders of Common Stock
who have not cast a vote by proxy with respect to the proposed Merger,
or whose proxies have not been voted in favor of the Merger.
3. Such other matters as may properly come before the Meeting, or any
adjournment thereof. The Board of Directors is not aware of any other
business to come before the meeting.
The Board of Directors has established June , 2001 as the record date for the
determination of stockholders entitled to notice of and to vote at the Meeting
and at any adjournments thereof. Only record holders of the Common Stock as of
the close of business on that date will be entitled to vote at the Meeting or
any adjournment thereof. A list of stockholders entitled to vote at the Meeting
will be available at Essex Bancorp, Inc., Interstate Corporate Center, Building
#9, Suite 200, Norfolk, Virginia 23502, for a period of ten days prior to the
Meeting and also will be available for inspection at the Meeting itself.
EACH STOCKHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE MEETING, IS REQUESTED TO
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. STOCKHOLDERS WHOSE SHARES ARE HELD IN THE NAME OF THEIR
BROKERAGE FIRM MAY ALSO VOTE BY INTERNET AT www.proxyvote.com OR BY PHONE USING
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THE TOLL-FREE NUMBER 1-800-454-8683. ANY PROXY GIVEN BY A STOCKHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. A PROXY MAY BE REVOKED BY FILING
WITH THE SECRETARY OF THE COMPANY A WRITTEN REVOCATION OR A DULY EXECUTED PROXY
BEARING A LATER DATE. ANY STOCKHOLDER PRESENT AT THE MEETING MAY REVOKE HIS OR
HER PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE MEETING.
HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR NAME,
YOU WILL NEED ADDITIONAL DOCUMENTATION FROM THE RECORD HOLDER OF YOUR SHARES TO
VOTE PERSONALLY AT THE MEETING.
By Order of the Board of Directors
Jennifer L. DeAngelo
Norfolk, Virginia Corporate Secretary
June ___, 2001 Essex Bancorp, Inc.
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM AT THE MEETING. A
SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.
TABLE OF CONTENTS
Page
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SUMMARY TERM SHEET............................................................................ 1
WHO CAN HELP ANSWER YOUR QUESTIONS?........................................................... 8
INFORMATION ABOUT THE MEETING................................................................. 9
Voting at the Meeting........................................................................ 9
Revocation of Proxies........................................................................ 9
Solicitation of Proxies...................................................................... 9
Record Date, Quorum and Required Vote........................................................ 10
THE PROPOSED MERGER........................................................................... 10
The Company.................................................................................. 10
Background of the Merger..................................................................... 11
Recommendation of the Special Committee and Board of Directors; Reasons for the Merger....... 17
Opinion of RP Financial...................................................................... 20
Certain Effects of the Merger................................................................ 27
Interests of Certain Persons in the Merger; Conflicts of Interest............................ 27
Federal Income Tax Consequences.............................................................. 28
Source of Funds.............................................................................. 30
Effective Time of the Merger and Payment for Shares.......................................... 30
Treatment of Stock Options and Warrants...................................................... 30
Stock Options.............................................................................. 30
Warrants................................................................................... 31
The Merger Agreement......................................................................... 31
Pro Forma Financial Information.............................................................. 32
Conduct of the Business of the Company if the Merger is Not Consummated...................... 32
Exchange of Securities....................................................................... 32
Transfer of Shares........................................................................... 33
Regulatory Approvals......................................................................... 33
Expenses of the Merger....................................................................... 33
Rights of Dissenting Shareholders............................................................ 33
Conduct of The Company's Business After The Merger........................................... 35
OTHER INFORMATION ABOUT THE COMPANY........................................................... 35
Summary Consolidated Financial Data Of The Company........................................... 35
Market Prices Of Common Stock And Dividends.................................................. 36
Securities Ownership of Certain Beneficial Owners............................................ 37
Securities Ownership of Management......................................................... 37
Securities Ownership of Certain Beneficial Owners.......................................... 38
Information With Respect to Continuing Directors............................................. 39
Meetings of the Board and Committees of the Board.......................................... 41
Directors Fees............................................................................. 41
Audit Committee Report....................................................................... 41
Executive Compensation....................................................................... 43
Summary Compensation Table................................................................. 43
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values.. 44
Employment and Other Executive Services Agreements and Plans................................. 44
Employment Agreement....................................................................... 44
Other Executive Services Agreement......................................................... 45
Supplemental Executive Retirement Plan..................................................... 45
Transactions With Certain Related Persons.................................................... 46
Compliance With Section 16(a) of the Exchange Act............................................ 46
Independent Accountants...................................................................... 46
Audit Fees................................................................................. 46
Financial Information Systems Design and Implementation Fees............................... 46
i
All Other Fees............................................................................. 47
OTHER MATTERS THAT MAY BE CONSIDERED AT THE MEETING........................................... 47
STOCKHOLDER PROPOSALS......................................................................... 47
ADDITIONAL INFORMATION........................................................................ 47
Appendix A AGREEMENT AND PLAN OF MERGER....................................................... 49
Appendix B FAIRNESS OPINION OF RP FINANCIAL................................................... 56
Appendix C DISSENTERS' RIGHTS PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW.............. 62
Appendix D AUDIT COMMITTEE CHARTER............................................................ 66
ii
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ESSEX
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BANCORP, INC.
Interstate Corporate Center
Building #9
Suite 200
Norfolk, Virginia 23502
(757) 893-1326
SUMMARY TERM SHEET
This summary term sheet highlights selected information from this Proxy
Statement but may not contain all of the information that is important to you.
To better understand the merger and for a more complete description of the terms
of the merger, you should carefully read this entire Proxy Statement and its
appendices and the other documents to which we refer. The actual terms of the
merger are contained in the merger agreement included in this Proxy Statement as
Appendix A.
1. WHEN AND WHERE IS THE MEETING?
The meeting will take place on July ___, 2001, at 1:00 p.m., Eastern Time,
at Interstate Corporate Center, Building #11, 1/st/ Floor Conference Room,
Norfolk, Virginia. See "Information About the Meeting."
2. WHAT WILL BE VOTED ON AT THE MEETING?
At the meeting:
. our common stockholders will vote upon a proposal to approve the merger.
. if necessary, the stockholders may be asked to consider adjourning the
meeting in order for the Company to continue to solicit proxies from
stockholders who have not yet voted or who have not voted in favor of
the merger.
. the stockholders will transact other business that may come before the
meeting.
See "Information About the Meeting--Voting at the Meeting."
3. WHAT IS THE PROPOSED MERGER?
We currently have one class of publicly-traded common stock and two classes
of preferred stock.
If the merger occurs:
. The public ownership of our common stock will end and all of the stock
of Essex Acquisition will be owned by current holders of our preferred
stock and warrants.
. The Company will no longer exist as a separate company when it merges
into its subsidiary, Essex Acquisition.
. The public holders of the common stock will receive $1.45 in cash for
each of their shares.
See "The Proposed Merger--Recommendation of the Special Committee and Board
of Directors; Reasons for the Merger".
4. WHAT EFFECTS WILL RESULT FROM THE MERGER?
As a result of the Merger:
. All of Essex Acquisition's common stock will be owned by the current
holders of our preferred stock and warrants, whose will receive all of
the common stock of Essex Acquisition.
. None of the executive officers of the Company will have any equity
interest in Essex Acquisition.
. The Common Stock will cease to be outstanding.
. After the merger, the business of the Company will be continued by Essex
Acquisition. The current holders of preferred stock and warrants will be
the only owners of that company, and will be beneficiaries of any future
earnings and growth. Of course, they will also bear the entire risk of
any future losses.
5. WHAT WILL I RECEIVE IN THE MERGER?
You will receive $1.45 in cash for each share of common stock that you own
immediately prior to the Merger.
The $1.45 cash price reflects a small premium of $0.05 over the closing
market price of $1.40 on January 29, 2001, the last trading day before we
publicly announced the Merger and a premium of $0.2727 per share over the
average closing price forthe 22 trading day period prior to the announcement of
the merger. . See "Other Information About the Company--Market Prices Of Common
Stock And Dividends."
6. HOW DOES THE PRICE THAT I WILL RECEIVE FOR MY COMMON STOCK COMPARE TO THE
HISTORICAL MARKET PRICES FOR THE STOCK?
Although the $1.45 price you will receive for your shares represents a
premium of $0.2727 over the average closing price for the 22-day trading period
before we announced the proposed merger, the market price for the Common Stock
has exceeded $1.45 at some point during each calendar quarter since January 1,
1999. See "Other Information About The Company - Market Prices of Common Stock
and Dividends." The board of directors considered this fact, but also recognized
that on a rolling 22 trading days average basis (which approximates a month of
trading), the closing price of the common stock never exceeded $1.45 per share
during the six months immediately before the announcement of the merger.
Notwithstanding the higher prices at some points during the six months prior to
the announcement, and since January 1, 1999, the board of directors concluded
that given the volatility of the common stock, the 22 day average prices were
more meaningful than the higher daily closing market prices. See "The Proposed
Merger - Recommendation of the Special Committee and the Board of Directors;
Reasons for the Merger"; and "-Recommendation of Other Filing Persons."
7. DO I HAVE SPECIAL RIGHTS IF I OPPOSE THE MERGER?
Yes. The Board of Directors believes that the $1.45 price is fair, but each
stockholder who does not vote in favor of the merger may dissent and seek a
judicial appraisal of the his or her shares of stock if the merger is completed.
This option will be available, only if the stockholder complies with all the
appropriate legal requirements . See "Dissenters' Rights Provisions of the
Delaware General Corporation Law" attached as Appendix C. These requirements are
also summarized in the section "The Proposed Merger-Rights of Dissenting
Shareholders." The appraised value of a share of common stock could be more or
less than $1.45.
8. WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
We are working to complete all aspects of the merger as quickly as
possible. If the stockholders approve the merger at the meeting, we expect the
merger to be completed on the day of the meeting, or shortly after that date.
See "The Proposed Merger--Effective Time of the Merger and Payment for Shares."
2
9. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
The common stockholders may have income tax liability because they will
receive cash for their shares. Your gain or loss per share will be the
difference between $1.45 and your basis in your shares. You should consult your
tax advisor for a full understanding of the tax consequences of the merger. See
"The Proposed Merger--Material Federal Income Tax Consequences."
10. WHAT ARE THE REASONS FOR THE MERGER?
The board of directors of the company and the special committee appointed
by the board to consider the merger concluded that the merger is in the best
interests of all of the stockholders of the Company, including the unaffiliated
holders of the common stock. The board of directors and the special committee
considered several factors, including:
. More than $9.3 million in unpaid dividends on our two classes of
preferred stock have accrued since 1995 through the end of 2000, and
those dividends will continue to accrue for the foreseeable future. For
this reason, it is likely that the current negative book value per
common share of the common stock, which was $(2.34) at December 31,
2000, will continue to deteriorate.
. There is an extremely limited trading market for the common stock, and
no substantial likelihood that the investment community will take a
sufficient interest in the common stock so that the liquidity will
improve.
. The fact that we have a class of common stock and almost 8 million
outstanding warrants for additional shares of common stock, together
with two classes of preferred stock, presents a complicated equity
structure that makes it difficult for us to attract investors or
potential strategic partners.
. The fact that despite a variety of efforts to put together a strategic
transaction that would result in a positive return to the holders of the
common stock, we have failed to attract any significant interest in a
transaction.
. The large number of outstanding warrants, which may be exercised at a
price less than the market price for the common stock, substantially
impairs the liquidity of our common stockholders. If a significant
number of these warrants were exercised, the already limited trading
market for the common stock could be adversely affected by the
substantial increase in the number of shares of common stock
outstanding.
. Because of regulatory restrictions applicable to our bank subsidiary, we
have fully leveraged our capital base, and cannot grow the business of
the bank in a manner that would allow us to generate sufficient income
to both pay the accruing dividends on the preferred stock and create
additional value for common stockholders.
. Our continued status as a publicly-traded company requires us to spend a
substantial amount of time and money on the reporting and other
requirements associated with being a public company.
See "The Proposed Merger--Recommendation of the Special Committee and Board of
Directors; Reasons for the Merger."
11. WHAT ARE THE CONDITIONS TO COMPLETING THE MERGER?
The completion of the merger is subject to several conditions, including
the following:
. approval of the merger by the holders of common stock,
3
. the absence of any injunction, statute, regulation or proceeding that
prevents or challenges the completion of the merger,
. the availability to the Company of sufficient funds to pay all amounts
payable as a result of the merger,
. the approval of the merger by the holders of a majority of each class of
the our preferred stock
. the absence of any material exercises of the outstanding warrants before
the merger is completed, and
. the failure of the holders of a material number of shares of the common
stock and preferred stock to exercise their dissenters' rights
See "The Proposed Merger--The Merger Agreement." We are not aware of any
factors that would cause the failure of any of the closing conditions.
12. HOW WILL THE COMPANY FINANCE THE MERGER?
The funds required to complete the merger and to pay related fees and
expenses are to be provided from the proceeds of a loan expected to be made to
Essex Acquisition by Centura Bank . Centura Bank has agreed to loan up to $2
million to Essex Acquisition to allow Essex Acquisition to pay the costs
associated with the Merger, including the $1.45 price for the common stock
(which will total $1,537,931 if no dissenters' rights are exercised), the cash
payments to be made with respect to the stock options, and the expenses of the
merger. Centura Bank's obligation to fund this loan is subject to several
conditions:
. the approval of the merger by our shareholders,
. the delivery by RP Financial of its fairness opinion, and
. a pledge by Essex Acquisition of at least 51% of the shares held by
Essex Acquisition in its bank subsidiary.
Essex Acquisition would be obligated to repay the loan at an interest rate
equal to the prime rate minus 1/4%, over a five year period. See "The Proposed
Merger--Source of Funds."
13. HAS THE BOARD OF DIRECTORS RECOMMENDED THAT I VOTE FOR THE MERGER
AGREEMENT?
Yes. Your board of directors believes that the Merger is both procedurally
and substantially fair to, and in the best interests of, the Company and its
unaffiliated common stockholders. The board's special committee, which
consisted of two directors who are not preferred stock holders or warrant
holders, evaluated the merits of the merger and recommended the cash price to be
paid to the common stockholders. The special committee unanimously recommended
the $1.45 per share price and unanimously recommended that the board of
directors approve the Merger. The board then unanimously approved the merger.
4
The members of the special committee and the board of directors were
subject to financial conflicts of interests, but did not retain any independent
or disinterested third party to represent our unaffiliated shareholders in
considering the merger. For further information about how the special committee
and the board of directors arrived at their conclusions and the independent
opinion that the special committee and the board of directors received from
their financial advisor, see "The Proposed Merger--Recommendation of the Special
Committee and Board of Directors; Reasons for the Merger."
14. DID THE BOARD AND THE SPECIAL COMMITTEE RETAIN A FINANCIAL ADVISOR?
Yes. The special committee retained RP Financial, LC. as its financial
advisor to help evaluate of the merger. RP Financial delivered its opinion to
the effect that the terms of the Merger are fair, from a financial point of
view, to the unaffiliated holders of common stock.
RP Financial's original opinion was dated March 23, 2001, and RP Financial
has since delivered an updated fairness opinion as of the date of this proxy
statement. RP Financial does not intend to further update its opinion through
the date of the meeting unless requested to do so by the company. RP Financial
will receive total fees of approximately $50,000 for its merger-related
services. In addition, RP Financial will receive an additional fee of $7,500 in
connection with a valuation of the warrants that was conducted in order to
arrive at a recommended value for the warrants. See "The Proposed Merger--
Opinion of RP Financial."
RP Financial's fairness opinion is based on analyses that contain estimates
and valuation ranges, and does not necessarily indicate actual values or predict
future results or values.
We have attached as Appendix B to this Proxy Statement the full text of the
final opinion of RP Financial. This opinion sets forth assumptions made, matters
considered and limitations on the review undertaken in connection with the
opinion. YOU SHOULD READ THIS OPINION.
15. DOES THE TRANSACTION INVOLVE ANY CONFLICTS OF INTEREST?
Yes. In considering the recommendations of the special committee and the
board, you should be aware that certain directors and officers have interests
that may conflict with your interests as stockholders or that are different from
your interests:
. After the merger, the preferred stock holders and warrant holders will
own all of the common stock of Essex Acquisition. Harry F. Radcliffe and
Robert G. Hecht, who are the two directors of the Company who are not
members of the special committee, will own 10.07% and 2.01%,
respectively, of the outstanding shares of Essex Acquisition after the
merger. Messrs. Radcliffe and Hecht will also receive cash payments
equal to a total of $11.25 to compensate them for surrendering their
outstanding stock options.
. The two members of the special committee do not hold a material number
of shares of Common Stock. Together they own 2,335 shares of common
stock and options to acquire an additional 42,800 shares of common
stock, 41,450 of which are exercisable at prices less than $1.45 per
share. They will be entitled to receive a cash payment of $8,518 in
exchange for their options,in addition to the $3,388 they will receive
for their outstanding shares of common stock.
. The members of the special committee are each receiving a fee of $10,000
for their services as members of the committee. In addition, Mr. Ross,
who is a member of the special committee and the President and Chief
Executive Officer of the Company, will continue to be employed by Essex
Acquisition pursuant to an employment agreement that guarantees him a
minimum level of compensation. See "Other Information About the
Company -Employment and Other Executive Services Agreements and Plans -
Employment Agreements". The members of the board will continue to be
board members of Essex Acquisition, and will continue to receive
directors fees for attendance at board and committee meetings. These
fees are payable to the non-employee directors, and for the year ending
December 31, 2000, amounted to a total of $34,350.
5
See "The Proposed Merger--Interests of Certain Persons in the Merger; Conflicts
of Interest."
Because each of these conflicting interests caused the members of the special
committee and other members of the board of directors to have financial
interests that are different from those of the unaffiliated holders of common
stock, it is possible that the recommendations of the special committee and the
board of directors with respect to the merger may have been influenced by
economic interests not shared by the common shareholders as a whole.
16. WHO IS ENTITLED TO VOTE?
Only stockholders of record at the close of business on May ___, 2001,
which is the "Record Date," are entitled to notice of, and to vote at, the
meeting. However, all holders of common stock at the time the merger is
completed will be entitled to receive a cash payment of $1.45 per share (unless
the holders are pursuing their rights to dissent and have their shares
appraised).
17. WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT?
The merger must be approved by the holders of a majority of the outstanding
shares of common stock. In addition, contemporaneously with the meeting, the
written consent of a majority of each class of the preferred stock holders will
be sought.
18. WHAT DO I NEED TO DO NOW?
First, read this proxy statement carefully. Then, you should complete, sign
and mail your proxy card in the enclosed return envelope as soon as possible. If
your shares are held by a broker as nominee, you should receive a proxy card
from your broker. That card will contain a control number, and you may use that
number to vote on the Internet at www.proxyvote.com or by phone by calling the
-----------------
toll-free number 1-800-454-8683. See "Information About the Meeting--Voting at
the Meeting."
19. MAY I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD OR
OTHERWISE VOTED?
Yes. To change your vote you can:
. send in a later-dated, signed proxy card or a written revocation before
the meeting, or
. attend the meeting and give oral notice of your intention to vote in
person.
You should be aware that simply attending the meeting will not in and of
itself constitute a revocation of your proxy. See "Information About the
Meeting-Revocation of Proxies."
20. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. If the merger is completed, you will receive written instructions about
how to exchange your shares of common stock for your cash payment. See "The
Proposed Merger--Effective Time of the Merger and Payment for Shares."
21. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker will vote your shares only if you provide written instructions
on how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. See "Information
About the Meeting."
6
22. WHAT WILL HAPPEN TO THE COMPANY'S OUTSTANDING PREFERRED STOCK AND WARRANTS?
The preferred stock and warrants will be exchanged for common stock of
Essex Acquisition, as follows:
. The holders of shares of our Series B and Series C preferred stock will
each receive 1.061679 shares and 1.061639 shares, respectively, of
common stock of Essex Acquisition in exchange for each share of
preferred stock that they own.
. The preferred stock holders also have 7,949,000 warrants to purchase
additional shares of common stock, each exercisable at a price of $.9375
per share. Each warrant will be exchanged for the right to receive
0.013993 shares of common stock of Essex Acquisition. This exchange
ratio was determined based on a valuation of the warrants conducted by
RP Financial.
. After the merger, the holders of the preferred stock and warrants will
own all of the shares of common stock of Essex Acquisition. The holders
of the preferred stock will no longer be entitled to receive dividends
on the preferred stock, and the number of shares of common stock of
Essex Acquisition that they receive in the merger will reflect their
accrued but unpaid dividends through the merger.
See "The Proposed Merger--Treatment of Stock Options and Warrants," and "--
Exchange of Securities."
23. WHAT WILL HAPPEN TO THE COMPANY'S STOCK OPTIONS?
The Company has options for a total of 173,800 shares of common stock
outstanding, 134,350 of which are exercisable at prices less than $1.45 per
share (at prices ranging from $0.9375 to $1.4375). The holders of these options
will each be entitled to a cash payment representing the difference between the
exercise price on the options and the $1.45 per share price being paid to common
stockholders. The total cash payment that will be due to optionholders is
expected to total $20,429. See "The Proposed Merger--Treatment of Stock Options
and Warrants."
24. HAVE OTHER PARTIES CONSIDERED THE FAIRNESS OF THE MERGER?
Yes. As described in this Proxy Statement, in addition to the
consideration of the Merger by the board of directors and the special committee
of the board, the fairness of the merger has been separately considered by each
of Essex Acquisition and by Messrs. Radcliffe and Hecht, the two directors of
the company who also hold preferred stock and warrants. Together, they will own
slightly more than 12% of the common stock of Essex Acquisition after the
merger.
Because Essex Acquisition is a subsidiary of the Company that has an
identical board of directors to the Company and because Mr. Radcliffe and Mr.
Hecht are directors of the Company, each of these persons received and
considered the identical information about the merger that was made available to
the board of directors and special committee. Essex Acquisition's reasons for
pursuing the merger are identical to those of the Company, and are fully
disclosed elsewhere in this Proxy Statement.
Mr. Radcliffe and Mr. Hecht, in their capacity as directors of the Company
and Essex Acquisition, have also concluded that the pursuit of the merger is
appropriate because of the various factors discussed in this proxy statement.
In addition, in their individual capacities, Mr. Radcliffe and Mr. Hecht
concluded that the merger should be pursued at this time because they recognize
that as holders of preferred stock, they will continue to benefit, to the
detriment of the owners of common stock, as the negative book value of the
Company's common stock continues to grow because of the continuing accumulation
of dividends on the preferred stock.
Each of Essex Acquisition, Mr. Radcliffe and Mr. Hecht has also concluded
that the proposed merger is both substantively and procedurally fair to the
unaffiliated holders of common stock. Their belief as to substantive fairness
takes into account the considerations described above, and the fact that the
recommended price of $1.45 is near the top of the range of the only valuation
method that yielded any positive value for the common stock. As to
7
procedural fairness, each of them has taken into account the fact that no
independent and unaffiliated representative was engaged to represent the
interests of the common shareholders, but has concluded that the manner in which
the merger would take place is nonetheless procedurally fair. They based this
conclusion on the thoroughness of the evaluation methodology used by RP
Financial, and on the facts that any shareholder that does not wish to accept
the proposed cash price will be entitled to dissent from the transaction, and
that the extremely low number of shares of common stock held by affiliates of
the Company means that the unaffiliated shareholders will have the power to
decide whether or not to proceed with the merger without the influence of a
large voting block held by interested shareholders.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have any questions concerning the Merger or the Meeting, if you
would like additional copies of the Proxy Statement or if you will need special
assistance at the Meeting, please call the Company at 1-757-893-1326. The
summary information provided above in "question and answer" format is for your
convenience only and is merely a brief description of material information
contained in this Proxy Statement. YOU SHOULD CAREFULLY READ THIS PROXY
STATEMENT (INCLUDING THE APPENDICES) IN ITS ENTIRETY.
8
Essex Bancorp, Inc.
Interstate Corporate Center
Building #9
Suite 200
Norfolk, Virginia 23502
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
July ___, 2001
INFORMATION ABOUT THE MEETING
This Proxy Statement is being furnished to stockholders of Essex Bancorp, Inc.
(the "Company"), in connection with the solicitation by its Board of Directors
of proxies to be used at the Annual Meeting of Stockholders (the "Meeting") to
be held at Interstate Corporate Center, Building #11, 1st Floor Conference Room,
Norfolk, Virginia, at 1:00 p.m. on Thursday, July ___, 2001, and at any
adjournments thereof. The 2000 Annual Report to Stockholders, including the
consolidated financial statements for the year ended December 31, 2000,
accompanies this Proxy Statement, which is first being mailed to stockholders on
or about June ___, 2001.
Voting at the Meeting
Regardless of the number of shares of Common Stock of the Company (the "Common
Stock") owned, it is important that stockholders be represented by proxy or
present in person at the Meeting. Stockholders are requested to vote by
completing the enclosed Proxy Card and returning it signed and dated in the
enclosed postage-paid envelope. Stockholders are urged to indicate their vote
in the spaces provided on the Proxy Card. Stockholders whose shares are held by
brokerage firms on their behalf may also vote on the Internet at
www.proxyvote.com or by phone using the toll-free telephone number 1-800-454-
8683. Proxies solicited by the Board of Directors of the Company will be voted
in accordance with directions given in the Proxy Card (or by the Internet or
phone, if applicable). Because none of the directors of the Company has a term
of office that expires in 2001, the approval of the proposed merger (the
"Merger") of the Company into Essex Acquisition Corp. ("Essex Acquisition") and
the approval of adjournments of the Meeting, if needed, are the only matters
presently scheduled to be considered by the stockholders at the Meeting. Where
no instructions are indicated, proxies will be voted FOR the approval of the
Merger and FOR adjournment, if applicable.
The Board of Directors knows of no additional matters that will be presented for
consideration at the Meeting. Execution of a proxy, however, confers on the
designated proxy holders discretionary authority to vote the shares in
accordance with their best judgment on such other business, if any, that may
properly come before the Meeting or any adjournments thereof.
Revocation of Proxies
A proxy may be revoked at any time prior to its exercise by filing written
notice of revocation with the Secretary of the Company, by delivering to the
Company a duly executed proxy bearing a later date, or by attending the Meeting,
filing a notice of revocation with the Secretary and voting in person. However,
if you are a stockholder whose shares are not registered in your name, you will
need additional documentation from the record holder of your shares to vote
personally at the Meeting.
Solicitation of Proxies
The cost of solicitation of proxies in the form enclosed will be borne by the
Company. Proxies may also be solicited personally or by telephone, online at
www.proxyvote.com, or by directors, officers, and regular employees of the
Company or Essex Savings Bank, F.S.B. (the "Bank"), without additional cost to
the Company or the Bank. The Company has retained Regan & Associates, Inc. to
act, on behalf of the Company, as proxy solicitor for the
9
Meeting. The Company has agreed to pay Regan & Associates, Inc. a fee of
$10,000, including their expenses, to assist in the solicitation of proxies. The
Company will also request persons, firms and corporations holding shares in
their names, or in the name of their nominees, which are beneficially owned by
others, to send proxy material to and obtain proxies from such beneficial
owners, and will reimburse such holders for their reasonable expenses in doing
so.
Record Date, Quorum and Required Vote
The securities that may be voted at the Meeting consist of shares of Common
Stock, with each share entitling its owner to one vote on all matters to be
voted on at the Meeting, except as described below.
The close of business on June ___, 2001 has been established by the Board of
Directors as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Meeting, and any
adjournments thereof. The total number of shares of Common Stock outstanding on
the Record Date was 1,060,642.
The presence, in person or by proxy, of at least a majority of the total number
of shares of Common Stock entitled to vote is necessary to constitute a quorum
at the Meeting. The Meeting may be adjourned in order to permit the further
solicitation of proxies if there are not sufficient votes for a quorum at the
time of the Meeting or for such other purposes as may be considered proper. The
affirmative vote of the majority of the outstanding shares of Common Stock will
be required to approve the Merger, and the affirmative vote of the majority of
the shares voting on an action will be required to take any other action at the
Meeting, including the approval of any adjournment. The Company has not imposed
a separate requirement that the Merger be approved by a majority of the
"unaffiliated" holders of the Common Stock. Because the holders of the Preferred
Stock and Warrants are not known to hold any shares of the Common Stock, and
because the directors and executive officers of the Company in the aggregate
hold 4,146 shares, or less than 0.4% of the outstanding shares of the Common
Stock, the Company does not believe that the difference between approval by
"unaffiliated" shareholders and approval by the shareholders as a whole is
material. The Company will treat shares of Common Stock represented by proxies
that reflect abstentions as shares that are present and entitled to vote for the
purpose of determining the presence of a quorum at the Meeting and for the
purpose of determining the outcome of any question submitted to the stockholders
for a vote. The inspectors of election will treat "broker non-votes" (i.e.,
shares held by brokers that are represented at a meeting but with respect to
which the broker does not have discretionary authority to vote) as shares that
are present and entitled to vote for purposes of establishing a quorum. For the
purposes of determining the outcome of any question as to which the broker has
physically indicated on the proxy that it does not have discretionary authority
to vote, these shares will be treated as not present and not entitled to vote
with respect to that question, even though those shares are considered entitled
to vote for quorum purposes and may be entitled to vote on other questions
(although the Board of Directors knows of no other matter that is expected to be
presented at the Meeting). Accordingly, abstentions and broker non-votes will
have the same effect as votes against the approval and adoption of the Merger
Agreement.
For discussion of the circumstances under which the Company might seek to
adjourn the Meeting in order to solicit additional proxies in favor of the
Merger, see "The Proposed Merger - Adjournment of the Meeting."
HOLDERS OF COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING COMMON
STOCK WITH THEIR PROXY CARD. IF THE MERGER IS CONSUMMATED, HOLDERS OF COMMON
STOCK WILL RECEIVE WRITTEN INSTRUCTIONS ON HOW TO EXCHANGE THEIR SHARES FOR THE
CASH CONSIDERATION.
THE PROPOSED MERGER
The Company and the Merger
The Company is a Delaware corporation that is the holding company for the Bank,
a federally-chartered savings bank that operates (i) five retail branches
located in North Carolina and Virginia and (ii) Essex First, a division that
engages in the origination and sale of residential mortgage loans, the
origination of residential construction loans to individuals and builders, and
the participation in residential construction, acquisition and development and
lot loans. The Company's other principal operating subsidiary is Essex Home
Mortgage Servicing Corporation, a wholly-
10
owned subsidiary of the Bank that is engaged primarily in the servicing of
mortgage loans owned by the Bank, governmental agencies and third party
investors. At December 31, 2000, the Company had total assets of $307.7 million,
total liabilities of $285.8 million, including total deposits of $242.6 million,
and total shareholders' equity of $21.9 million.
If the Merger is completed, the Company will merge into Essex Acquisition and
will cease to exist as a separate entity. The holders of the Common Stock will
be entitled to receive Cash Consideration for their shares, but will not have
any continuing ownership interest in the business of the Company. Essex
Acquisition will be owned entirely by the existing holders of the Preferred
Stock and Warrants, who will be solely entitled to any benefit of the continuing
operations of the Company, as conducted by Essex Acquisition after the Merger.
The Company will no longer be publicly traded, and none of the holders of the
Common Stock will be able to acquire an interest in the Company in the public
market.
Background of the Merger
In September, 1995, the Company and the Bank merged with Home Bancorp, Inc.
("Home Bancorp") and its wholly-owned subsidiary Home Savings Bank, FSB (the
"Home Acquisition"). In exchange for all of the outstanding stock of Home
Bancorp, the stockholders of Home Bancorp received 2,250,000 shares of two
classes of non-voting perpetual Preferred Stock of the Company with an aggregate
redemption and liquidation value of $15.0 million, and Warrants to purchase
7,949,000 shares of the Company's Common Stock at a price of $0.9375 per share,
which was the price of the Common Stock as of June 30, 1995. The Warrants became
exercisable in September 1998, and will expire in September 2005.
Since 1995 and through December 31, 2000, a total of $9,341,896 in accrued but
undeclared and unpaid dividends have accrued on the Preferred Stock. The Company
has been unable to pay the Preferred Stock dividends because the Company's
earnings and regulatory capital requirements have not allowed it to do so. For
this reason, as of December 31, 2000, the aggregate of the liquidation value and
the accrued but unpaid dividends on the Preferred Stock was $24,349,396. Because
the total stockholders' equity of the Company as of December 31, 2000 was
$21,867,252, this resulted in a negative book value per share of Common Stock at
December 31, 2000 of $(2.34).
The Company's negative book value per common share as of December 31, 2000
improved substantially from the book value per common share as of December 31,
1999 of $(3.97), due to the substantial utilization of the Company's remaining
tax loss carryforwards during 2000. Before the utilization of the tax loss
carryforwards during the fiscal years ended December 31, 1999 and December 31,
2000, the Company's earnings per common share on an operating basis, which takes
into account the preferred stock dividends, totaled negative $(1.12) and
$(0.92), respectively. Although the utilization of the tax loss carryforwards
resulted in positive earnings per common share on a reported basis for the most
recent two years, the Company anticipates that future tax benefits will be
limited. Accordingly, the Company anticipates that earnings per common share on
an operating basis will remain negative for the foreseeable future and that the
negative book value per share will continue to decline as the accrued preferred
stock dividends increase at a compounded rate. The table below reflects the
amount of cumulative dividends on the Preferred Stock at the end of each fiscal
year since issuance in 1995, and the scheduled dividends over the next five
fiscal years. In order to avoid further deterioration in the book value per
common share, the Company would be required to generate earnings in excess of
the scheduled Preferred Stock dividends, a scenario that is considered unlikely
by the Board of Directors.
Annual Amount of Dividends Cumulative Dividends
12/31/95 $ 368,022.46 $ 368,022.46
12/31/96 1,446,866.78 1,814,889.24
12/31/97 1,635,489.03 3,450,378.27
12/31/98 1,789,726.88 5,240,105.15
12/31/99 1,958,526.62 7,198,631.77
12/31/00 2,143,264.39 9,341,896.16
12/31/01 $2,345,446.47 $11,687,342.63
12/31/02 2,566,721.62 14,254,064.25
11
12/31/03 2,808,894.53 17,062,958.78
12/31/04 3,073,940.60 20,136,899.38
12/31/05 3,364,022.12 23,500,921.50
At the time the Company agreed to the Home Acquisition, the Bank was subject to
imminent seizure by federal thrift regulators. Although the Home Acquisition
recapitalized the Company and the Bank, the Company continued to experience
operating losses after that 1995 transaction that threatened the Bank's ability
to maintain compliance with regulatory capital requirements. Therefore, shortly
after the Home Acquisition, the Board of Directors began to evaluate alternative
strategies to implement in the short-term to maintain compliance with regulatory
capital requirements as well as achieve core profitability.
The Board of Directors approved a downsizing strategy in 1996 that included the
sale of branch deposits and office facilities at nine branch offices during 1996
and 1997 to various purchasers, sales of loans and securities to third parties
to provide liquidity for the branch sales and writing off the goodwill that was
acquired in connection with the Home Acquisition. Certain of these branches were
considered by the Company to be either marginally profitable or unprofitable due
to their smaller deposit size, limited loan origination capacity, markets served
and/or other factors. The sale of these branches reduced the Bank's required
capital levels and improved future earnings potential because goodwill
amortization expense sharply declined and the Bank's remaining branches were
more profitable. In the absence of the downsizing strategy, the Bank may have
been subject to further regulatory enforcement action, including but not limited
to conservatorship or receivership, which would have severely curtailed or
eliminated any returns to the holders of the Preferred Stock or Common Stock.
Since the Home Acquisition, the Board of Directors of the Company and the Bank
have continuously engaged in long-term strategic planning with the overall
objectives of improving the financial strength and performance of the Company
and the Bank and generating positive returns for the holders of the Preferred
Stock and Common Stock. Following the branch sale transactions, the Bank turned
its focus to operational strategies designed to increase profitability
including, but not limited to, increasing net interest margin, improving asset
quality, increasing non-interest income, reducing operating expenses and
utilizing the tax benefits provided by the Company's substantial tax loss
carryforwards. Specifically, these strategies have included:
. increasing interest income through raising the proportion of higher
yielding loans held in portfolio, including construction/permanent
loans and builder lines of credit, and reducing the level of non-
earning assets, particularly non-performing loans and foreclosed real
estate;
. reducing interest expense through a reduction of higher interest cost
certificates of deposit ("CDs") in favor of a higher proportion of
lower cost transaction accounts, which also generate fee income;
. increasing the portfolio of loans serviced for others, particularly
loans sub-serviced for other investors, to raise the level of non-
interest income and more fully utilize the Bank's existing loan
servicing expertise;
. reducing the operating expense ratio by leveraging excess capital
through (1) emphasizing deposit growth and wholesale funding to
support loan growth while maintaining compliance with required capital
levels and (2) operating more efficiently, including re-engineering
back office operations, relocating administrative offices to less
expensive office space and more effectively using technology for
customer access and internal operations;
. cross-selling existing customers with a broadened array of products
and services; and,
. recognizing the value of the significant tax benefits attributable to
the Company's net operating loss carryforwards, which became available
as core earnings grew, particularly during the last two years.
Following the branch sale transactions, the Company sought to maximize the
leverage of the Bank's capital, and thereby increasing earnings, through growth.
At the current regulatory capital levels, the Bank maintains a small cushion
over what is required to maintain its "well-capitalized" regulatory capital
levels, and without raising
12
additional capital, future growth is restricted to the ability to retain
additional earnings. The ability to raise additional capital has been adversely
impacted by the preference position of the Preferred Stock, the accumulated
dividends on the Preferred Stock, the significant potential dilution of the
Warrants, the negative book value and negative operating earnings per common
share and the weak market conditions for thrift offerings over the past two
years. The Board believes an additional common stock offering in such prevailing
markets would have presented considerable dilution to the existing holders of
the Common Stock because these factors coupled with the size of the offering
would have required a steep price discount from the prevailing market price of
the Common Stock. At the same time, the leveraged capital position of the
Company restricts the ability of the Company to pay the accumulated dividends to
the holders of the Preferred Stock, because such payments would reduce capital.
Notwithstanding the success of the Company in reversing its operating losses and
substantially increasing the Bank's earnings capacity over the past several
years, the pretax income of the Company has not exceeded the amount of
additional dividends accruing on the Preferred Stock each year. In view of the
Company's inability to pay any of the accruing dividends to the holders of the
Preferred Stock since 1995 and the negative book value per common share and the
negative earnings per common share on an operating basis in recent years, the
Board of Directors has continuously evaluated alternative strategies to provide
returns to holders of both the Preferred Stock and the Common Stock. These
efforts have taken place at regular and special board meetings and particularly
at the Board of Directors' annual strategic planning retreats. Additionally, the
Company has from time to time attempted to gauge the interest of prospective
merger partners, including both in-state and out-of-state financial institutions
and non-banking institutions.
The December 1997 Board of Directors planning retreat focused on selling the
existing Preferred Stock to a third party financial institution or non-banking
company that could effectively utilize the Company's then substantial tax loss
carryforwards and that would ultimately merge with the Company. This strategy
was designed to provide liquidity to the holders of the Preferred Stock in the
short term and provide positive returns and liquidity for the holders of the
Common Stock in the longer term. Throughout 1998, the Company contacted a number
of substantial banking and non-banking entities regarding this strategy and had
serious discussions with one banking entity. The Company and the interested
banking entity could not come to terms because the interested banking entity's
low price indication would have led to a steep discount on the Preferred Stock
redemption value and no residual value for the holders of the Common Stock. The
limited interest in this transaction appeared to be primarily attributable to
the Company's continuing operating losses at the time.
The October 1998 Board of Directors planning retreat focused on the possibility
of conducting a public offering of Common Stock in order to refund the Preferred
Stock and accumulated dividends either in part or in whole. The viability of a
refunding offering was considered to be a reasonable option to pursue in view of
the improving financial condition and the recent attainment of core
profitability of the Company, coupled with the strong stock market conditions
for financial institutions in general. During 1999, the Company made formal
presentations to several investment banking firms specializing in financial
institution securities to discuss the prospects and potential terms of such an
offering. In general, the investment banking firms indicated that a successful
offering would require a longer core earnings track record and the ability to
show strong earnings growth and shareholder returns on a pro forma basis. Most
of the investment banking firms indicated no interest in underwriting an
offering at that time, in part due to the considerable weakening of the market
for financial institution stocks in 1999. Two firms suggested the possibility of
a merger of the Company with other financial institutions or an equity
investment by investor groups, but those prospects never materialized. The Board
of Directors also considered other refunding instruments, including the issuance
of debt, but these alternatives were not considered viable in view of the
potentially higher cost of debt, the anticipated annual debt service
requirements (which would not likely have an arrearage option like the preferred
stock) and the limited ability to count debt as capital for regulatory capital
purposes.
The October 1999 Board of Directors planning retreat focused on the prospects of
a "going-private" transaction as well as the strategies considered in previous
years. The Company commenced an evaluation of the merits of a going-private
transaction as well as the various structural, financial, tax, regulatory,
legal, securities and financing aspects of going private. Due to the unique
characteristics of the Company, including its capital structure, the Warrants
and the tax loss carryforwards, and the complexities of going private, this
evaluation required several months and multiple meetings with various
professional advisors. During 2000, the Board of Directors determined
13
to concurrently conduct a limited solicitation of interest in the Company, and
engaged a financial advisor to coordinate that effort.
In July 2000, the Company hired a financial advisor to solicit interest in a
strategic merger with the Company that might enable the Company to provide a
return to both the Preferred Stock holders and the common stockholders. The
Company and its financial advisor targeted fourteen financial institutions in
Virginia and neighboring states, including regional financial institutions. No
offers were presented to the Company as a result of these efforts. From time to
time in recent years, the Company had previously scheduled other meetings and
made other telephone inquiries to certain of these fourteen institutions that it
believed might have an interest in engaging in a strategic transaction with the
Company, including possible acquisitions of the Company or contractual strategic
relationships that would allow the Company to expand its operations. Each of
these inquiries was initiated by the Company and not by any third party, and
none resulted in any serious negotiations about a potential strategic
transaction. Moreover, since the announcement of the proposed Merger, there have
been no inquiries from prospective acquirors. The universe of prospective
purchasers became limited by financial institution modernization legislation in
1999, which effectively precluded non-financial entities from acquiring
financial institutions. The Company and its financial advisor believe this lack
of interest by financial institutions, in spite of the Bank's profitability and
successful mortgage banking and mortgage servicing operations, is a reflection
of the fact that the Company's small size, geographically dispersed retail
branch network and unwieldy capital structure makes it difficult to engage in
any transaction. Because the starting point for any transaction is the Company's
responsibility to satisfy its obligations to the Preferred Stock holders,
management of the Company believes that it is extremely unlikely that the
Company could consummate a transaction that would result in a material return to
the common stockholders.
In December 2000, the Board of Directors of the Company held its annual
strategic planning retreat in Williamsburg, Virginia. At that meeting, the Board
evaluated a presentation from management, developed with the assistance of RP
Financial, regarding the strategic alternatives available to the Company,
including:
. The sale of the Company and its assets to one or more acquirors. The
Board recognized the fact that since 1995 no bona fide offers or
serious indications of interest have been presented by prospective
acquirors, even though the list of prospective acquirors included some
of the most financially capable financial institutions operating in
the region;
. The liquidation of the Company. The Board concluded that there was
considerable risk associated with a liquidation process because (1)
the Company's required disclosure of material transactions as a public
company might undermine the ability to obtain market value, (2) the
total proceeds of a liquidation might be insufficient to provide
residual value for the holders of the Common Stock, (3) there is
marginal, if any, appreciation in the Company's underlying assets, (4)
the liquidation process would probably require an extended period of
time to complete, thus delaying the timing of potential shareholder
returns, if any, (5) it is very unusual for publicly-traded thrifts or
banks to liquidate, and in recent years the few liquidations of well-
capitalized financial institutions that have occurred have typically
involved either mutual or closely-held stock institutions, and (6) the
numerous liquidations of financial institutions conducted or directed
by the federal banking agencies frequently resulted in material
discounts to book value;
. The raising of additional capital through public or private placements
of equity securities. The Board concluded that any offering would be
highly dilutive to existing holders of Common Stock and that the
potential pro forma returns to the new common shareholders would not
likely be very attractive; and
. The completion of a "going-private" transaction in which the existing
holders of the Common Stock would receive a cash payment and the
capital structure of the Company would be restructured. The Board
concluded that this option would be likely to provide a cash return
for the holders of the Common Stock, simplify the capital structure of
the Company by removing certain of the features that have made the
Company unattractive in the past, and increase the potential to
generate returns for the holders of the Preferred Stock.
14
Based on the discussions at this retreat, the Board of Directors directed Gene
D. Ross, the President and Chief Executive Officer of the Company, to prepare a
report for the Board of Directors regarding the going-private alternative.
Subsequent to the retreat, Mr. Ross consulted with RP Financial and the
Company's professional advisors regarding the possible structure of the going-
private transaction, the tax implications of such a transaction on the Company
and its various classes of stockholders, and the possible valuation of the cash
consideration that might be paid to the holders of Common Stock. At its meeting
on February 1, 2001, the Board of Directors of the Company received
presentations from Mr. Ross and RP Financial regarding the possibility of a
going-private transaction. This report also included advice from Willcox &
Savage, P.C., the Company's counsel at the time, regarding the legal
implications of and structuring considerations in a going-private transaction,
preliminary advice from the Company's tax accountants PricewaterhouseCoopers
LLP, regarding the tax consequences of a going-private merger, and a preliminary
valuation report from RP Financial. The preliminary valuation report contains
substantially the same types of valuation analyses used by RP Financial in
preparing its final valuation report delivered to the Special Committee on March
23, 2001. That valuation analysis included RP Financial's assessment of the
valuation of the Common Stock based on the same considerations described below
under "- Opinion of RP Financial."
Because the Board of Directors of the Company contains only four directors, and
two of those directors are holders of Preferred Stock and Warrants who would be
significant holders of the outstanding equity of Essex Acquisition following a
transaction such as the Merger, the Board of Directors determined that it was
advisable to appoint a special committee of the Board consisting of the two
directors who are not Preferred Stock holders or Warrant holders (the "Special
Committee"). The Special Committee was charged to act on behalf of, and in the
interests of, the stockholders to evaluate the merits of the Merger, and to make
a recommendation to the full Board on whether to approve any such transaction.
In light of the fact that the Board has only one non-employee director who is
not a Preferred Stock holder, the Board decided to appoint Mr. Ross to serve on
the Special Committee notwithstanding his status as an employee. Mr. Ross and
Mr. Roscoe D. Lacy, Jr. were then appointed by the full Board of Directors to
serve as members of the Special Committee and were authorized to retain a
financial advisor, a legal advisor and any other advisors that they deemed
appropriate to assist them in carrying out their responsibilities. The Special
Committee and its advisors were given access to information and materials
regarding the Company, including its books, records, projections and financial
statements deemed necessary by the Special Committee for its review.
At a meeting following the Board of Directors meeting on February 1, 2001, the
Special Committee met to consider the engagement of its legal advisor and an
independent financial advisor. The Special Committee acknowledged and agreed
that the purpose of the Special Committee was to act in the interests of the
stockholders of the Company. The Special Committee discussed the possible
retention of RP Financial as independent financial advisor and Morrison & Hecker
L.L.P. as legal advisor to the Company in connection with the proposed Merger.
The members noted the impressive credentials of RP Financial, the fact that RP
Financial is well qualified to conduct the necessary evaluation of the fairness
of the proposed transaction, and the fact that RP Financial had worked with the
Company from time to time since 1996. The Special Committee also reviewed the
legal credentials and experience of Morrison & Hecker in working with special
committees of boards of directors. The members agreed to request engagement
letters from both professional advisors. On February 5, 2001, the Special
Committee met with Morrison & Hecker and engaged them as its legal counsel to
advise the members on their responsibilities and duties. RP Financial was also
engaged on that date.
The scope of RP Financial's engagement included the development of a preliminary
and final range of value of the Common Stock and the issuance of a fairness
opinion regarding the fairness of the Cash Consideration established by the
Board of Directors. In this regard, RP Financial met several times with the
Special Committee to make presentations regarding its preliminary and final
findings, and met with the Board of Directors in connection with the Board's
consideration of the recommendations of the Special Committee. Under the terms
of its engagement, RP Financial was obligated to issue its fairness opinion at
the time of the Board's approval of the Merger, as well as concurrently with the
mailing of this Proxy Statement. The fairness opinion of RP Financial is
required to address the fairness of the transaction to the unaffiliated holders
of the Common Stock from a financial point of view.
15
RP Financial had been previously retained by the Company to advise it regarding
strategic issues, and had received $17,500 in fees from the Company for its
previous services since January 1, 1999. RP Financial has also been engaged by
the Board of Directors to provide a valuation of the Warrants in connection with
the Merger, for a total fee of $7,500, plus the reimbursement of certain out-of-
pocket expenses. In spite of RP Financial's previous involvement with the
Company, the Special Committee determined that in light of RP Financial's
experience in the financial institutions industry and its knowledge of the
Company, RP Financial was an appropriate firm to evaluate the merits of the
proposed Merger. The Special Committee determined that RP Financial's previous
representation of the Company would not compromise its independence as an
advisor to the Special Committee. For a further discussion of RP Financial's
qualifications, see "-Opinion of RP Financial" below. In connection with
performing their due diligence on the Company, the Company provided RP Financial
with additional requested information regarding the Company. This information,
which was made available to RP Financial at the offices of the Company on March
5, 2001, included publicly available filings of the Company with the Securities
and Exchange Commission, internally prepared financial statements, a business
plan and financial projection for the 2001 fiscal year, minutes of board
meetings of the Company and its bank subsidiary, copies of the financial
packages made available to members of the Board of Directors for recent board
meetings, and reports regarding the regulatory status of the Company and its
bank subsidiary.
A representative of RP Financial met subsequently with the Special Committee on
March 5, 2001. At that meeting, RP Financial asked questions regarding the
Company's operations and history and reported on their findings to date and
progress in deriving a value for the Warrants. RP Financial provided a status
report regarding its engagement, including its update of RP Financial's February
1, 2001 presentation to the Board of Directors, and further discussed the
various valuation methodologies and considerations related to the preparation of
RP Financial's final report.
A meeting of the Special Committee was held with the Special Committee's special
counsel, Morrison & Hecker, in Washington, D.C. on March 21, 2001 to consider
the final report presented by a representative of RP Financial. The Special
Committee concluded the meeting by agreeing to study the information developed
by RP Financial and to confer by conference call on March 23, 2001. During the
March 23, 2001 meeting, the Special Committee determined that the analysis of RP
Financial, including its analysis of relative value, was reasonable and believed
that RP Financial's conclusion that the Cash Consideration to be offered to the
unaffiliated public stockholders is fair to such stockholders from a financial
point of view was reasonable based on the facts and analyses presented. The
Special Committee discussed the assumptions behind and results of the various
valuation approaches used by RP Financial. The detailed analysis of RP Financial
contained in the written report delivered by RP Financial at the March 23, 2001
meeting is further described below. See "-Opinion of RP Financial." As discussed
below, several of these valuations resulted in a conclusion that the Common
Stock did not have a measurable economic value, and the maximum range of value
for the Common Stock, based on the "premium paid" approach, was $1.37 to $1.46.
The premium over the significant negative book value of the Common Stock and the
potential future performance of the Company were further discussed and analyzed
at length at both the March 21 and March 23 meetings. The Special Committee
considered the value of the Company's assets and recognized that in connection
with a liquidation of the Company that the possible liquidation value per share
of Common Stock would likely result in a payment to common stockholders, if any,
of substantially less than the $1.45 per share to be paid in the Merger. The
Special Committee also considered the requirements for the holders of the Common
Stock to approve the Merger at the Meeting, the fact that almost all of the
Common Stock is held by shareholders unaffiliated with the Preferred Stock
holders, Warrant holders and management of the Company, and the availability of
dissenters' rights to holders of the Common Stock, and concluded that the Merger
is also procedurally fair to the unaffiliated holders of the Common Stock. The
Special Committee determined that a separate requirement that the Merger be
approved by a majority of the "unaffiliated" holders of the Common Stock was not
necessary because the holders of the Preferred Stock and Warrants are not known
to hold any shares of the Common Stock, and because the directors and executive
officers of the Company in the aggregate hold less than 0.5% of the outstanding
shares of the Common Stock. After a careful deliberation, the Special Committee
unanimously determined that the proposed Merger was in the best interests of the
Company and the holders of Common Stock and recommended the transaction to the
Company's Board of Directors, with a proposed cash payment to the holders of
Common Stock of $1.45, which was near the top of the range suggested by RP
Financial.
On March 29, 2001, the Merger Agreement was presented to the full Board of
Directors of the Company for its approval and, based on the recommendation of
the Special Committee, the Board of Directors of the Company
16
unanimously voted to approve the Merger Agreement. In addition, the Board of
Directors of the Company determined that the Merger was fair, from both a
financial and procedural point of view, to the unaffiliated common stockholders
and voted to recommend to the stockholders that they approve the Merger.
Recommendation of the Special Committee and Board of Directors; Reasons for the
Merger
The Company's reason for carrying out the Merger is to provide the public
holders of the Company's Common Stock with the opportunity to receive a fair
price for their shares. The Board of Directors has unanimously determined that
the terms of the Merger are substantively and procedurally fair to, and in the
best interests of, all the stockholders, including the stockholders that are not
affiliates of the Company. The Merger Agreement was unanimously approved by the
Board, including the three members of the Board who are not employees of the
Company, and the Board recommends that stockholders vote for the proposal to
approve and adopt the Merger Agreement.
The Company has been advised by each of its directors and executive officers
that he intends to vote all of his or her shares of Common Stock in favor of the
proposal to approve and adopt the Merger Agreement. However, as of the record
date for the Meeting, the directors and executive officers of the Company
beneficially own only 4,146 shares of the Common Stock, amounting to less than
0.4% of the total outstanding shares of Common Stock.
In making its unanimous determination that the terms of the Merger are fair to,
and in the best interests of, the unaffiliated holders of the Common Stock, to
approve the Merger Agreement and to recommend that stockholders approve and
adopt the Merger Agreement, the Board considered:
. the opinion of RP Financial that the consideration to be received in
the Merger by the holders of the Common Stock is fair, from a
financial point of view, to such holders (see "--Opinion of RP
Financial");
. the determination by the Special Committee that the terms of the
Merger are substantively and procedurally fair to, and in the best
interests of, the unaffiliated holders of the Common Stock and the
recommendation by the Special Committee that the Board approve and
adopt the Merger Agreement and that the Board recommend to the
Company's stockholders that they approve and adopt the Merger
Agreement; and
. the factors considered by the Special Committee in its deliberations
described below.
In connection with its consideration of the determination by the Special
Committee, and as part of its determination with respect to the fairness of the
consideration to be received by the holders of the Common Stock in the Merger,
the Board adopted the conclusions and underlying reasoning of the Special
Committee, based upon the view of the Board that the conclusions and factors
considered by the Special Committee were reasonable.
The Special Committee considered the following factors, which constitute the
material factors considered by the Special Committee in making its own
determination that the terms of the Merger are both substantively and
procedurally fair to, and in the best interests of, the unaffiliated holders of
the Common Stock and its decision to recommend that the Board of Directors
approve and adopt the Merger Agreement and recommend to the Company's
stockholders that they approve and adopt the Merger Agreement:
. The opinion of RP Financial that the consideration of $1.45 per share
in cash is fair from a financial point of view to the unaffiliated
holders of the Common Stock. The Special Committee and the Board of
Directors reviewed the independent financial analyses performed by RP
Financial and found them to be reasonable and believed that RP
Financial's conclusion that the price to be paid in the Merger was
fair from a financial point of view to the unaffiliated holders of the
Common Stock was a reasonable conclusion based on the analyses
performed. The Special Committee did not perform any independent
analysis of the factors described in the RP Financial report or of
other factors not considered by RP Financial, but also took into
account the earlier evaluations of strategic options by the Board of
Directors discussed above.
17
. More than $9.9 million in unpaid dividends on the Company's two
classes of Preferred Stock have accrued since 1995 through the date of
the Special Committee's recommendation, and those dividends will
continue to accrue and cumulate for the foreseeable future. Given the
substantial amount of those dividends, the Company projects that the
negative book value per share of the Common Stock will increase for
the foreseeable future, and that even given improvements in the
Company's profitability, the operating earnings per share of Common
Stock of the Company will also continue to be negative for the
foreseeable future.
. The Special Committee reviewed current and historical market prices
for the Company's shares, the declining per share price of the Common
Stock prior to the time of the public announcement of the proposed
Merger, the possibility that the price would remain depressed or
continue to decline and the premium that $1.45 per share offered over
such price. The Special Committee also concluded that the Cash
Consideration represented a premium over the market price of the
Common Stock one week prior to the February 1, 2001 announcement of
the proposed Merger, one month prior to that date, three months prior
to that date, and over the 22-day trading period (approximately one
month) immediately preceding the February 1, 2001 announcement. The
Special Committee also considered the premium that the $1.45
consideration represented relative to the negative book value per
common share and the negative earnings per common share on an
operating basis.
. The Special Committee was aware that during the three and six months
prior to the announcement of the Merger, there were three and thirteen
days respectively, for which the closing market price of the Common
Stock exceeded $1.45 per share. However, they also took into account
the fact that at no point during the six months prior to the
announcement of the Merger did the average closing price for any
rolling 22 trading day period (approximately one month) exceed $1.45.
The Special Committee concluded that given the typically low daily
trading volume of the Common Stock, and the high volatility of the
stock on such low volume, the 22 day average trading price
calculations were more meaningful than the occasionally higher daily
closing prices. The Special Committee also considered the fact that
since January 1, 1999, the Common Stock had closed as high as $3.6875
per share on March 4, 1999 and as low as $0.875 per share on December
20, 2000. See "Other Information About the Company - Market Price of
Common Stock and Dividends."
. The Board of Directors and management of the Company have considered
alternative ways to allow the holders of the Common Stock to realize
value for their shares, and have concluded that there is not material
interest in any restructuring or other strategic transaction that
would result in a positive return to the holders of the Common Stock.
. The conclusion that the limited liquidity of the Common Stock in the
public market is not likely to improve. The extremely small market
capitalization of the Company, among other reasons, has left the
Company without any significant financial analysts covering the
Company, and given the increasing negative book value per share of the
Common Stock, it is not likely that the investment community will
become sufficiently interested in the Common Stock so that the
liquidity in the Common Stock would improve. In addition, because the
Company has outstanding 7,949,000 Warrants to purchase Common Stock,
all of which are presently exercisable at a price per share less than
the recently prevailing market prices for the Common Stock, any
improvement in the market prospects for the Common Stock would likely
be accompanied by exercises of the Warrants that would tend to
mitigate the effects of any improvement.
. Although the Company's income is generated through the operations of
the Bank and its subsidiaries, the Bank has leveraged its available
capital to an extent that will prevent it from substantially
increasing its asset base in order to generate additional earnings
that might allow the Company to achieve earnings in excess of the
accumulating dividends on the Preferred Stock.
. The belief that the Company can be more profitable as a private
company that does not have to comply with the typical costs associated
with being a public reporting company. Significant cost savings will
result from no longer having the requirement to file periodic reports
with the Securities and Exchange
18
Commission, all of which take considerable management time and have to
be reviewed by the Company's legal counsel and independent
accountants. These reporting requirements also have significant
printing costs associated with them. The costs of auditing the books
and records of the Company will also be reduced as a private entity.
. The fact that even though the Company had not retained an unaffiliated
representative to act solely on behalf of the unaffiliated holders of
the Common Stock for the purposes of negotiating the terms of the
Merger, the Company had retained RP Financial to render a fairness
opinion with respect to the Merger, and RP Financial's analyses
thoroughly examined all the appropriate valuation methods for the
Common Stock .
. The requirement that the Merger be approved by a majority vote of the
holders of Common Stock, and the fact that because no material amount
of Common Stock is held by holders of the Preferred Stock or Warrants
or by management of the Company, the unaffiliated holders will have
the ability to approve or disapprove the Merger.
. The availability of appraisal rights under Delaware law for
stockholders of the Company who believe that the terms of the Merger
are unfair, which rights are described under "--Rights of Dissenting
Shareholders."
The factors discussed above were all considered to be positive factors in the
Special Committee's decision to recommend that the Board of Directors approve
the Merger.
The Special Committee also considered the following negative factors:
. the expectation that the Merger will be a taxable transaction for
holders of Common Stock;
. the fact that the holders of the Common Stock will have no ongoing
equity participation in the Company following the Merger;
. the fact that in the event of a sale of the Company in the future, the
holders of Common Stock will not be able to participate in any premium
that might result from such a sale.
The Special Committee considered the value of the Company's assets and the book
value per share of Common Stock. The Special Committee specifically looked at
the negative book value per common share of $(2.34) as of December 31, 2000. The
Special Committee recognized that in connection with a sale of the Company, the
Company would not be likely to receive proceeds sufficient to pay its redemption
and accrued dividend obligations with respect to the Preferred Stock, and would
therefore not be able to return any value to the common stockholders.
In connection with its advice with respect to the Merger, RP Financial discussed
with the Special Committee information it had considered and a number of
statistical analyses performed by it. To assist in the discussion, RP Financial
showed the Special Committee a written report, reflecting a portion of such
information and analyses (the "Report"). The Report was one of a variety of
factors considered by the Special Committee. The Report included statistics
regarding the Company's historical stock prices and operating information of,
and certain selected ratios, multiples and other data with respect to, the
Company and other selected financial institution holding companies; information
regarding certain selected multiples, control premiums and other characteristics
of certain recent mergers and acquisitions of public companies in the financial
industry; the characteristics of going-private transactions for financial
institutions and non-banking companies; and projections obtained from management
of the Company with respect to the Company's future, results of operations and
financial condition. These analyses were based on various assumptions as to the
future performance and financial condition of the Company as well as various
discount rates and multiples. See "--Opinion of RP Financial."
The Special Committee recognized that consummation of the Merger will deprive
the holders of the Common Stock of the opportunity to participate in any future
growth of the Company and, accordingly, gave consideration to the Company's
results of operations and the Company's future prospects in reaching its
determination to recommend
19
approval and adoption of the Merger Agreement. The Special Committee was also
aware that certain directors of the Company have a conflict of interest in
connection with the Merger because as current Preferred Stock holders they will
have a substantial equity investment in the Company following the Merger. See
"--Interests of Certain Persons in the Merger; Conflicts of Interest". These
factors were considered negative factors in the Special Committee's decision to
recommend that the Board of Directors approve the Merger. However, in the
Special Committee's view, these factors were substantially outweighed by the
positive factors discussed above.
Based upon its consideration of all of the factors described above, the Special
Committee arrived at its determination that the terms of the Merger are
substantively and procedurally fair to, and in the best interests of, the
unaffiliated holders of the Common Stock and that the Board of Directors should
recommend that the stockholders of the Company approve and adopt the Merger
Agreement.
In view of the circumstances and the wide variety of factors considered in
connection with its evaluation of the Merger, neither the Board of Directors nor
the Special Committee found it practicable to assign relative weights to the
factors considered in reaching its decision.
As mentioned above, Mr. Ross is an employee of the Company. No member of the
Special Committee is a party to any arrangement to acquire any equity interest
in the Company or Essex Acquisition. The members of the Special Committee will
be paid a fee of $10,000 each for their services, regardless of whether the
Merger is consummated. See "--Interests of Certain Persons in the Merger;
Conflicts of Interest."
Opinion of RP Financial
The Special Committee retained RP Financial in February 2001 to render its
opinion with respect to the fairness of the Merger from a financial point of
view to the unaffiliated holders of the Common Stock. In requesting RP
Financial's advice and opinion, the Special Committee did not give any special
instructions to RP Financial, nor did it impose any limitations upon the scope
of the investigation that RP Financial might wish to conduct to enable it to
give its opinion. RP Financial has delivered its written opinion to the Special
Committee, dated March 23, 2001. In the opinion of RP Financial, based upon and
subject to the matters set forth in its written opinion, and as of the date
thereof, the Cash Consideration to be received by the unaffiliated holders of
the Common Stock of the Company in the Merger is fair to the holders of the
Common Stock from a financial point of view. The opinion of RP Financial is
directed toward the consideration to be received by the holders of the Common
Stock and does not constitute a recommendation to any stockholder to vote in
favor of the proposal to approve and adopt the Merger Agreement. A copy of RP
Financial's opinion is set forth as Appendix B to this Proxy Statement and
should be read in its entirety by stockholders of the Company. RP Financial has
consented to the inclusion and description of its written opinion in this Proxy
Statement.
RP Financial was selected by the Special Committee to act as its financial
advisor because of RP Financial's expertise in the valuation of businesses and
their securities for a variety of purposes, including its expertise in
connection with mergers and acquisitions. RP Financial is a financial consulting
firm that, among other things, specializes in the fair market valuation of the
equity and debt securities issued by financial institutions and their subsidiary
companies. RP Financial has been approved as a qualified financial institution
appraisal firm by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation, and numerous state banking agencies. The principals and
staff of RP Financial have served as fair market appraisers and consultants for
over 500 financial institutions pursuant to initial and secondary offerings
(including rights offerings), business combinations, mutual-to-stock
conversions, mutual holding company formations, employee stock ownership plans
and stock option plans, audited financial statement disclosure and other
purposes. RP Financial has also provided valuations and fairness opinions in
other going-private transactions. Neither RP Financial nor its employees have
any present or contemplated future interest in the common stock, preferred stock
or warrants of the Company or Essex Acquisition or their principals or any other
interest that might tend to prevent RP Financial from rendering a fair and
unbiased opinion.
RP Financial was engaged by the Company on February 5, 2001, pursuant to terms
set forth in an engagement letter ("Engagement Letter"). RP Financial estimates
that it will receive from the Company total professional fees of approximately
$50,000 for this engagement, of which approximately $35,000 has been paid to
date, plus reimbursement of certain out-of-pocket expenses, for its services in
connection with the Merger. In addition, the
20
Company has agreed to indemnify and hold harmless, to the fullest extent
permitted by law, RP Financial, any affiliates of RP Financial, and the
respective directors, officers, agents and employees of RP Financial or their
successors and assigns who act for or on behalf of RP Financial in connection
with the services called for under the Engagement Letter from and against any
and all losses, claims, damages and liabilities actually incurred by RP
Financial and attributable to: (i) an untrue statement or alleged untrue
statement of material fact contained in information furnished to RP Financial by
the Company, (ii) an omission or alleged omission of a material fact from the
information made available to RP Financial by the Company, or (iii) any willful
or negligent action or omission to act by the Company or its officers,
directors, employees or agents. The Company is not under any obligation to
indemnify or hold harmless RP Financial if a court of competent jurisdiction
determines that RP Financial was negligent or acted in bad faith with respect to
any actions or omissions of RP Financial related to a matter for which
indemnification is sought under the Engagement Letter. Any time devoted by
employees of RP Financial to situations for which indemnification is provided
under the Engagement Letter is an indemnifiable cost payable by the Company at
the normal hourly professional rate chargeable by such employee. The Company is
required to pay for or reimburse the reasonable expenses, including attorney's
fees, incurred by RP Financial in advance of the final disposition of any
proceeding within thirty days of the receipt of such request if RP Financial
furnishes the Company: (i) a written statement of RP Financial's good faith
belief that it is entitled to indemnification; and (ii) a written undertaking to
repay the advance if it ultimately is determined in a final adjudication of such
proceeding that it or he is not entitled to such indemnification.
The Company also engaged RP Financial to render a valuation regarding the
Warrants. This valuation was used by the Board of Directors to determine the
received amount of stock of Essex Acquisition that holders of the Warrants would
receive in the Merger, and RP Financial is to be paid a total fee of $7,500 for
performing this valuation.
In rendering its opinion, RP Financial reviewed the following materials: (1) the
various documents relating to the Merger, including the Merger Agreement, the
commitment letter received by the Company from Centura Bank relating to the
financing of the Merger, the latest draft of this Proxy Statement and related
proxy materials, and a tax memorandum prepared by PricewaterhouseCoopers LLP
regarding the tax implications of the Merger; (2) financial and other
information of the Company with regard to balance sheet and off-balance sheet
composition, profitability, interest rates, volumes, maturities, trends, credit
risks, interest rate risk, liquidity risk and operations, including audited
financial statements for the five fiscal years ended December 31, 2000 and
unaudited financial statements for the first two months of 2001, stockholder
regulatory and internal financial reports for the most recent five fiscal years,
including quarterly and annual reports, filings with the Securities and Exchange
Commission and press releases, annual proxy statements of the Company for the
most recent five years, and various other internal documents, including, but not
limited to, minutes of the meetings of the boards of directors of the Company
and the Bank, regulatory reports, schedules of employee and director stock
options, and schedules relating to the dividends payable on the Preferred Stock
over the next five years; (3) comments to RP Financial by the Board of
Directors, Special Committee and management of the Company regarding the
Company's past and current business, operations, financial condition and future
prospects; (4) business plans for the Company and its subsidiaries for the 2001
fiscal year, including financial projections, taking into account the pro forma
impact of the Merger; (5) the net operating tax loss carryforward positions of
the Company; (6) the redemption value and accumulated dividends of the Preferred
Stock, and the Company's expectations that its earnings will continue to be
inadequate to cover the annual dividends for both series of Preferred Stock; (7)
the terms of the Warrants, including the pro forma impact and the resulting
voting control of the Company that would result if the currently exercisable
Warrants were to be partially or fully exercised; and (8) the price history of
the Common Stock, including the closing price and daily volume for the Common
Stock on the American Stock Exchange from 1999 through the February 1, 2001
announcement of the proposed Merger, and through the date of the fairness
opinion. RP Financial also considered the financial terms of recent "going-
private" transactions and other selected transactions that RP Financial deemed
relevant, to the extent publicly available, and the current market environment
generally and the banking environment in particular, and such other information,
financial studies, analyses and investigations of financial, economic and market
criteria as RP Financial considered relevant.
The financial projections of the Company, inclusive of its subsidiaries, that
were considered by RP Financial were based on the Company's financial statements
as of December 31, 2000, and incorporated the Company's business plan and budget
for 2001, adjusted to exclude the pro forma impact of the Merger. For the
purposes of these projections, the Company's annual asset growth rate was
assumed to average approximately 7.5% per year, its loan growth rate was assumed
to average 8.0% per year and to be funded primarily by deposit growth, and its
deposit
21
growth was assumed to be equal to 13% in 2001 (as borrowings are assumed to be
repaid) and to fall to 8.5% per year for subsequent periods. The projections
were prepared assuming constant interest rates, no significant change in the
Company's risk profile or loan loss reserve policy, and a constant effective tax
rate of approximately 45%. Non-interest income and operating expense growth of
the Company were assumed to be 21% and 19% in 2001, respectively, and were
assumed to fall to 10% and 6% for subsequent periods. The projections assumed
that the Company would not pay any cash dividends, engage in any stock
repurchases, or be subject to any changes in capitalization, including the
exercise of stock options or warrants. The projections also assumed no
significant change in the Company's regulatory or competitive environment.
Based on these assumptions, RP Financial considered the following projections at
the end of the five (5) year period.
Actual Projected
At or for the Year At or for the Year
------------------ -------------------
Ended Ended
----- -----
December 31, 2000 December 31, 2005
----------------- -------------------
(Dollars in Millions, Except Per Share)
Total Assets $ 307.7 $ 443.1
Loans 266.9 392.8
Deposits 242.6 381.3
Total Equity 21.9 27.8
Preferred Stock 15.0 15.0
Accumulated Preferred Dividends 9.3 23.5
Common Equity (2.5) (10.7)
Net Income 3.9 (1) 1.9
Operating Earnings Available to Common Shareholders (1.5)(2) (1.6)
Operating Earnings Per Common Share $ (0.92) $ (1.47)
Book Value Per Common Share $ (2.34) $(10.12)
(1) Includes the benefit of the substantial utilization of the Company's
remaining tax loss carryforwards but excludes the preferred stock
dividends.
(2) Excludes the benefit of the substantial utilization of the Company's
remaining tax loss carryforwards but includes the preferred stock
dividends.
Based on its analysis, RP Financial's opinion as delivered to the Special
Committee on March 23, 2001 concluded that based on a "premium paid" analysis in
which RP Financial evaluated price premiums paid in other stock transactions
involving public banking and other companies, the estimated value of the Common
Stock ranges from $1.37 to $1.46 per share. The "premiums paid" analysis
examined the range of premiums paid over market price for other publicly-traded
banking and non-banking companies in transactions where the acquiring companies
purchased large amounts of common stock in tender offer transactions such as
mergers and acquisitions, "dutch tender" auctions and going private
transactions. In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning the
Company furnished by the Company to RP Financial for review for purposes of its
opinion, as well as publicly-available information regarding public companies
and the market and competitive environment for financial institutions. RP
Financial did not perform or obtain any independent appraisals or evaluations of
the assets and liabilities and potential and/or contingent liabilities of the
Company. The Special Committee recommended to the Board of Directors and the
Board of Directors approved the actual amount of Cash Consideration of $1.45 per
share after taking into account this valuation range. The specific amount of the
Cash Consideration was not recommended by RP Financial.
The discussion above outlines all the material factors considered by RP
Financial in preparing its opinion, and there were no specific factors that were
considered by RP Financial that did not support its fairness opinion. RP
Financial expresses no opinion on matters of a legal, tax or accounting nature
or the ability of the Merger as set forth in the Merger Agreement to be
consummated.
22
RP Financial's opinion was based solely upon the information available to it and
the economic, market and other circumstances as they existed as of March 23,
2001. RP Financial has delivered an updated fairness opinion concurrently with
the date of this Proxy Statement, and that opinion reflects no material changes
from RP Financial's March 23, 2001 opinion. RP Financial does not intend to
furnish additional fairness opinions prior to the completion of the Merger
unless separately engaged to do so by the Company. Events occurring after the
date of this Proxy Statement but before the completion of the Merger, such as a
substantial change in the market for the Common Stock, positive or negative
changes with regard to the Company's business or regulatory climate or changes
in the premiums paid in other similar transactions that would tend to affect the
"premiums paid" analysis conducted by RP Financial, could materially affect the
assumptions used in preparing the opinion.
In connection with rendering its opinion dated March 23, 2001, RP Financial
performed a variety of financial analyses that are summarized below. Although
the evaluation of the fairness, from a financial point of view, of the Cash
Consideration was to some extent subjective based on the experience and judgment
of RP Financial, and not merely the result of mathematical analyses of financial
data, RP Financial relied, in part, on the financial analyses summarized below
in its determinations. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial analyses or summary
description. RP Financial believes its analyses must be considered as a whole
and that selecting portions of such analyses and factors considered by RP
Financial without considering all such analyses and factors could create an
incomplete view of the process underlying RP Financial's opinion. In its
analyses, RP Financial took into account its assessment of general business,
market, financial and economic conditions, industry performance and other
matters, many of which are beyond the control of the Company, as well as RP
Financial's experience in securities valuation and merger transactions. With
respect to the comparable transactions analysis described below, no public
company utilized as a comparison is identical to the Company and such analyses
necessarily involve complex considerations and judgments concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the values of the companies concerned. The
analyses were prepared solely for purposes of RP Financial providing its opinion
as to the fairness of the Cash Consideration and do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually may
be sold. Any estimates contained in RP Financial's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates.
Discounted Cash Flow Analysis. In applying a discounted cash flow analysis,
-----------------------------
RP Financial typically estimates the present value of both future dividends over
a five year period and a terminal value at the end of the fifth year, reflecting
alternative strategies in comparison to a continuation of a company's recent
operating strategy, growth and profitability. Pricing multiples are then applied
to year five per share data, such as price/earnings, price/book and
price/revenues to determine the terminal value range, and such multiples are
typically derived from market data, particularly the pricing multiples of
comparable companies. The cash flows are then discounted to present value based
on an appropriate discount rate, taking into consideration the earnings
capitalization rate of similar companies, the treasury yield curve (i.e., the
risk-free rate) and perceived investment risks in the particular company subject
to valuation, with higher discount rates applied to those companies with a
higher risk profile. The application of the discounted cash flow approach to
the Company suggested that the Common Stock would be worth less at the end of
the fifth year absent a material capital restructuring transaction. Even
assuming annual asset growth of 7.5% per year, and a tripling of projected
earnings of the Company over the five-year period, the effect of the cumulative
dividends on the Preferred Stock is such that the negative book value per share
of Common Stock would grow to more than negative $10 by the end of the fifth
year, and earnings per share of Common Stock on an operating basis would
continue to remain negative. Tabular information showing the deterioration in
book value per share of Common Stock at the end of the five year period is
shown in the projections table included above. Based on this continued
deterioration of book value per share of Common Stock, the discounted cash flow
approach indicated no positive value for the Common Stock.
Peer Group Analysis. In applying a peer group analysis, RP Financial
-------------------
compares the financial market performance of a company, based on various
financial measures, to two peer groups of publicly-traded thrifts. With respect
to the Company, the two peer groups selected by RP Financial included (1)
profitable thrifts with assets between $250 million and $1 billion,
equity/assets ratios under 10%, and with a mortgage banking emphasis and (2)
profitable thrift institutions with assets between $250 million and $500
million, equity/assets ratios under 10% and located regionally (including
thrifts located in the mid-Atlantic and southeastern states). The peer group
selected by RP Financial included 10 companies in the mortgage banking peer
group and 13 companies in the regional peer group. RP Financial compared these
peer group companies to the Company on the basis of their capitalization,
23
profitability, asset quality, risk profile, loan servicing, market pricing
ratios and common stock dividends. In summary, relative to the Company, the peer
groups were more highly capitalized, maintained similar profitability and risk
profiles, were less active in mortgage loan servicing for others and had higher
non-performing assets. In contrast to the peer groups, the Company had negative
operating earnings per common share and negative book value per common share,
and the Company's market value was substantially discounted relative to both
peer groups as measured relative to assets. Unlike the peer groups, the
Company's price/earnings and price/book ratios were not meaningful. The majority
of the peer group members were paying dividends to common shareholders, whereas
the Company is not in a position to pay dividends to common shareholders and has
not even been able to meet its dividend obligations on the Preferred Stock. RP
Financial applied the median pricing multiples of the two peer groups relative
to the Company's per share data to determine the value of the Company's Common
Stock. Specifically, RP Financial applied the peer group's median pricing
multiples for earnings, book value and assets, relative to the Company's
earnings per common share (adjusted for the tax loss carryforwards), book value
per common share and assets per share and weighted the resulting values, if any,
as follows: earnings approach, 60%; book value approach, 30%; and, assets
approach, 10%. Accordingly, RP Financial derived a weighted average per share
valuation of $.80 based on the mortgage banking peer group and $.81 based on the
regional banking peer group, before appropriate discounts to account for the
Company's less favorable financial and common shareholder characteristics.
However, RP Financial believes that this pricing comparison was less meaningful
than other analyses conducted given the negative book value and negative
operating earnings per share of the Common Stock.
The following table sets out the median characteristics of the financial
measures considered by RP Financial in evaluating the two peer groups.
Thrift Emphasizing Regional Thrift
Mortgage Banking Peer Group (2)
Peer Group (1) --------------
--------------
(Dollars in Millions)
Financial Characteristics as of December 31, 2000 (Medians)
- -----------------------------------------------------------
Total Assets $ 473 $ 292
Loans Serviced for Others $ 103 $ 1
Equity/Assets 6.99% 8.44%
Return on Average Assets 0.70% 0.56%
Return on Average Equity 10.03% 9.18%
Non-Performing Assets/Assets 0.40% 0.62%
Reserves/Loans 0.87% 0.85%
Trading Pricing Characteristics as of March 9, 2001 (Medians)
- -------------------------------------------------------------
Market Value $ 35 $ 23
Price/Book 105.70% 88.33%
Price/Earnings 9.70x 11.46x
Price/Assets 6.97% 6.66%
(1) Comprised of 10 publicly-traded thrifts with assets between $250
million and $1 billion, equity/assets less than 10% and profitable
with an emphasis on originating 1-4 family residential mortgage loans
for sale in the secondary market and servicing 1-4 family residential
mortgage loans for others.
(2) Comprised of 13 publicly-traded thrifts headquartered in the mid-
Atlantic and southeast with assets between $250 and $500 million,
equity/assets less than 10% and profitable.
Comparable Transactions Analysis. RP Financial evaluated the pricing range
--------------------------------
of the Company in a hypothetical merger transaction based on the pricing of
comparable merger transactions. RP Financial evaluated acquisitions involving
all publicly-traded thrift institutions and thrift institution holding companies
(excluding mutual holding companies, strategic mergers and mergers of equals)
for the period 1998 through the date of the opinion and for the period 2000
through the date of the opinion, giving greater weight to the more recent
period. The acquisition candidates in these two groups were generally better
capitalized and more profitable than the Company and had positive earnings per
share and book value per share. RP Financial applied the median pricing
multiples of
24
the two groups of thrift acquisitions relative to the Company's earnings
(adjusted for the tax loss carryforwards), book value and core deposits per
share to determine the value of the Company's common stock. RP Financial
weighted the resulting values, if any, as follows: earnings approach, 55%; book
value approach, 30%; and, tangible book premium to core deposits approach, 15%.
Accordingly, the indicated values, before appropriate discounts to account for
the less favorable financial and shareholder characteristics of the Company
relative to the two acquisition groups, were $2.53 per share for the more
historical group and $1.20 per share for the more recent group. RP Financial
concluded that this analysis produced a less meaningful valuation than other
approaches given the Company's negative book value and negative operating
earnings per share of Common Stock. RP Financial also considered that this
analysis was less meaningful because the Company's concerted efforts to attract
prospective acquirers had produced no bona fide offers or indications of
interest.
The following table sets out the median characteristics of the financial
measures considered by RP Financial in evaluating the two groups of thrift
acquisitions.
Thrift Acquisitions Thrift Acquisitions
1998-Present (1) 2000-Present (1)
---------------- ----------------
(Dollars in Millions)
Seller Financial Characteristics (Medians)
- ------------------------------------------
Total Assets $ 296 $ 255
Equity/Assets 11.85% 10.96%
Return on Average Assets 0.86% 0.79%
Return on Average Equity 7.57% 6.60%
Non-Performing Assets/Assets 0.32% 0.21%
Reserves/Non-Performing Loans 116.66% 102.98%
Acquisitions Pricing Characteristics (Medians)
- ----------------------------------------------
Price/Book 148.08% 124.78%
Price/Tangible Book 151.07% 130.27%
Price/Earnings 23.06x 18.52x
Price/Assets 20.23% 16.01%
Tangible Book Value Premium/Core Deposits 11.35% 6.89%
(1) Based on announcement date. Excludes strategic mergers/mergers of equals
and acquisitions of mutual holding companies.
Premiums Paid Approach. In using a premiums paid approach, RP Financial
----------------------
evaluated three different types of transactions in which price premiums were
paid relative to the pre-transaction prevailing market prices for the stock
acquired in the transactions. In this regard, RP Financial evaluated premiums
paid in three types of transactions: acquisitions of banks and thrifts, "Dutch
tender" auctions and going-private transactions of publicly-traded financial
institutions and non-banking companies. RP Financial considered this approach
as meaningful, because the Company's Common Stock has been traded on the
American Stock Exchange since 1989, although there has been relatively small
volume. RP Financial noted that notwithstanding the fact that the Company has a
substantial negative book value per share of Common Stock, as well as negative
earnings per common share on an operating basis, the market price of the stock
may serve as a basis of establishing value in the going-private transaction. RP
Financial has indicated that in applying the premiums paid approach, it is not
possible to ignore the fact that, irrespective of the negative book value and
operating earnings per share of the Company, the market has chosen to place a
value on shares of Common Stock. No downward adjustment was applied by RP
Financial in the premiums paid approach for the Company's negative book value
per common share or negative operating earnings per common share.
The premiums paid analysis used by RP Financial looked at several types of
comparable transactions in order to establish a range of premiums paid in those
transactions that might be applied to the market value of the Common Stock
immediately preceding the announcement of the proposed Merger. RP Financial
looked at three
25
types of transactions: acquisitions of publicly traded banks and thrifts from
1998 to January 31, 2001, excluding mergers of equals and strategic mergers as
well as acquisitions of thrifts in mutual holding company form; going-private
transactions involving publicly traded banks and thrifts since January 1, 1998;
going-private transactions of non-banking companies since January 1, 2000; and
"Dutch tender" auctions involving stock repurchases by financial institutions
since January 1, 1998. Based on the premium paid analysis, RP Financial
calculated medium premiums of 25.00% for acquisitions involving the publicly
traded bank group, 26.56% for acquisitions involving the publicly traded thrift
group, 17.10% for going-private transactions of publicly traded banks and
thrifts, and 14.89% for Dutch auction transactions involving publicly-traded
banks and thrifts. The range of premiums for going-private transactions
involving publicly-traded banks and thrifts since January 1, 1998 was 7.7% to
59.9%. RP Financial considered the median and range of premiums paid in going-
private transactions for 2000 through the date of its opinion for non-banking
companies in which the continuing shareholders had at least 50% to 90% prior
voting and/or equity control. The transactions involving at least 50% prior
control by the continuing shareholders indicated trading price premiums of up to
263% with a median of 48.56%, and transactions involving at least 90% prior
control by the continuing shareholders indicated trading price premiums of up to
106% with a median of 41.2%. RP Financial compared these premium ranges with the
average closing price of $1.1773 of the Common Stock for the 22 trading days
immediately preceding the meeting of the Board of Directors on February 1, 2001
(following which the Company publicly announced its intention to pursue the
going-private transaction), and established a valuation range for the Common
Stock. RP Financial applied the premium to the 22 day trading average given the
volatility of the stock price on a daily basis and the limited trading activity.
RP Financial considered the Company's trading activity following the February 1,
2001 announcement of the proposed Merger, but gave less weight to the 22 day
average prior to the issuance of RP Financial's fairness opinion dated March 23,
2001 because the trading activity was probably influenced by the prior
announcement of the preliminary terms of the proposed Merger. RP Financial gave
less weight to the premium data for the non-banking companies pursuing going-
private transactions due to a variety of reasons, including, but not limited to,
wide differences in lines of business, relevant valuation measures applicable to
companies with different lines of business, and external factors affecting
companies in different industries such as competitive factors, regulatory and
legislative factors, technological factors and investment community perception.
The valuation range is based on an indicated premium of 16% to 24% over the
average price of the Common Stock for the 22 day trading period prior to the
February 1, 2001 announcement of the proposed Merger, resulting in a valuation
range with a low of $1.37 per share of Common Stock and a high of $1.46 per
share of Common Stock. RP Financial confirmed this recommended valuation range
in considering the average closing price of $1.2259 for the Company's Common
Stock for the 22-day period prior to the issuance of RP Financial's fairness
opinion.
The following information sets out the median premiums paid in the various
categories of transactions considered by RP Financial in conducting the premiums
paid analysis. The date through which RP Financial took other acquisitions into
account was ________, 2001.
Medians (1)
-----------
Publicly-Traded Bank Acquisitions 1998 to Date(2) 25.00%
Publicly-Traded Thrift Acquisitions 1998 to Date(2) 26.56%
Going Private Transactions 1998 to Date
Involving Publicly-Traded Banks & Thrifts 1998 to Date(3) 17.10%
Involving Publicly-Traded Nonbanking Companies 2000 to Date (4)
w/continuing shareholders with control * 50% 48.56%
w/continuing shareholders with control * 90% 41.20%
Dutch Tender Auctions by Publicly-Traded Banks & Thrifts 1998-Present(5) 14.89%
* MORE THAN
26
(1) Based on transaction price relative to trading price one day prior to
announcement of transaction.
(2) Excludes mutual holding companies, mergers of equals and strategic merger
transactions. Includes 155 bank transactions and 131 thrift transactions.
(3) Includes 5 transactions.
(4) Includes 32 nonbanking companies. Excludes limited partnerships, real
estate investment trusts, foreign-based companies and mutual funds.
(5) Includes 19 transactions.
Certain Effects of the Merger
As a result of the Merger, all of the common stock of Essex Acquisition will be
beneficially owned by the current holders of Preferred Stock and Warrants; the
Company's common stockholders will have no further interest in the Company
except their right to receive the Cash Consideration.
In addition, the Common Stock will no longer be traded on the American Stock
Exchange and price quotations with respect to sales of shares in the public
market will no longer be available. The registration of the Common Stock under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
terminated, and this termination will eliminate the Company's obligation to file
periodic financial and other information with the Securities and Exchange
Commission and will make most other provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b) and the requirements of
furnishing a proxy or information statement in connection with stockholders'
meetings, no longer applicable.
The receipt of the Cash Consideration pursuant to the Merger will be a taxable
transaction. See "--Federal Income Tax Consequences."
Financial Interests of Certain Persons in the Merger; Conflicts of Interest
In considering the recommendation of the Board with respect to the Merger, the
common stockholders should be aware that the directors of the Company have
financial interests in connection with the Merger that present them with actual
or potential conflicts of interest. The Special Committee and the Board were
aware of their conflicts and considered them among the other matters described
under "--Recommendation of the Special Committee and Board of Directors; Reasons
for the Merger." Messrs. Radcliffe and Hecht, the two directors who do not
serve on the Special Committee, will hold 10.07% and 2.01%, respectively of the
common stock of Essex Acquisition to be outstanding after the Merger, which they
will receive in exchange for their Preferred Stock (including cumulative
dividends) and Warrants. Messrs. Radcliffe and Hecht will also receive a total
of $11.25 in exchange for their stock options.
Messrs. Lacy and Ross, members of the Special Committee, own 250 and 2,085
shares of Common Stock, respectively, and will receive a total of $363 and
$3,023 in exchange for their shares of Common Stock if the Merger is
consummated. In addition, as of April 30, 2001, Mr. Lacy has options to acquire
1,450 shares for less than $1.45 (at prices ranging from $0.9375 to $1.4375 per
share) and Mr. Ross holds options to acquire 40,000 shares of Common Stock, with
an exercise price of $1.25. These options will entitle Messrs. Lacy and Ross to
an additional payment of $518 and $8,000, respectively, representing the
difference between their exercise price for the options and the Cash
Consideration. Mr. Ross is benefited by the ability provided by the Merger to
liquidate his options for a cash payment because those options would not
otherwise become exercisable until September, 2002, and because given the
limited liquidity of the Common Stock he might not have been able to liquidate
the Common Stock that he would receive after exercising options at a price equal
to or greater than $1.45. See "--Treatment of Stock Options and Warrants."
Messrs. Lacy and Ross will also be paid $10,000 each by the Company in
consideration of their services as members of the Special Committee, whether or
not the Merger is completed.
The members of the Board of Directors of the Company will also benefit from the
continuation of certain benefits they receive as a consequence of their status
as directors and, in the case of the Mr. Ross, as an employee of the Company.
The Merger will permit Mr. Ross to continue as the President and Chief Executive
Officer of Essex Acquisition after the Merger, and he will continue to be
entitled to the benefits provided under his employment agreement, which provides
him with compensation and other benefits. See "Other Information About the
Company - Employment and Other Executive Service Agreements and Plans -
Employment Agreement." The three non-employee directors of the Company receive
fees for their attendance at meetings of the Board of Directors and board
27
committees, and will continue to receive those fees from Essex Acquisition after
the Merger. For the year ending December 31, 2000, those fees totaled $34,350,
and the amount of those fees was increased by the Board of Directors effective
January 1, 2001. See "Other Information About the Company -- Information with
Respect to Continuing Directors - Directors Fees."
Although the members of the Special Committee and the Board of Directors believe
that they took their conflicting interests into account in arriving at the
recommendations with respect to the Merger, the financial interests of those
persons differ substantially from the interests of the unaffiliated holders of
the Common Stock. For example, because the directors will continue to receive
compensation from Essex Acquisition following the Merger, the directors have
continuing financial interests following the consummation of the Merger that
might not have existed had the Company pursued a different transaction as an
alternative to the Merger.
Material Federal Income Tax Consequences
The following discussion summarizes the material federal income tax
considerations relevant to the Merger. This discussion is based on currently
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to the holders of Common Stock as described herein. Special tax
consequences not described below may be applicable to particular classes of
taxpayers, including financial institutions, broker-dealers, persons who are not
citizens or residents of the United States or who are foreign corporations,
foreign partnerships or foreign estates or trusts as to the United States and
holders who acquired their stock through the exercise of an employee stock
option or otherwise as compensation.
THIS TAX DISCUSSION IS BASED UPON PRESENT LAW. THE COMPANY DID NOT OBTAIN A TAX
OPINION REGARDING THE INCOME TAX CONSEQUENCES OF THE MERGER. EACH HOLDER OF
COMMON STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECT
OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS, THE POSSIBLE EFFECT OF CHANGES IN
SUCH TAX LAWS, AND THE BASIS OF THE HOLDER IN THE COMMON STOCK.
The receipt of the Cash Consideration by holders of Common Stock will be a
taxable transaction for federal income tax purposes. Each holder's gain or loss
per share will be equal to the difference between $1.45 and the holder's basis
per share in the Common Stock. Such gain or loss generally will be a capital
gain or loss provided that the holder held the Common Stock as a capital asset.
Capital gain or loss will be treated as long-term capital gain or loss if the
holder held the Common Stock for more than one year, and will be treated as
short-term capital gain or loss if the holder held the Common Stock for one year
or less.
A holder of Common Stock may be subject to backup withholding at the rate of 31%
with respect to the Cash Consideration received, unless the holder: (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (ii) provides a correct taxpayer identification
number ("TIN"), and otherwise complies with applicable requirements of the
backup withholding rules. To prevent the possibility of backup federal income
tax withholding, each holder must provide the Company or its agent with his or
her correct TIN by completing a Form W-9 or Substitute Form W-9. A holder of
Common Stock who does not provide the Company with his or her correct TIN may be
subject to penalties imposed by the Internal Revenue Service (the "IRS"), as
well as backup withholding. The Company (or its agent) will report to the
holders of Common Stock and the IRS the amount of any "reportable payments," as
defined in Section 3406 of the Code, and the amount of tax, if any, withheld
with respect thereto.
The receipt of cash by holders of options to purchase the Common Stock will be a
taxable transaction for federal income tax purposes, and each option holder's
gain will be equal to the cash payment received. The Company has concluded that
it should not recognize gain or loss for tax purposes as a result of the Merger.
The Company has also concluded that the holders of the Preferred Stock or the
Warrants should not recognize gain or loss for tax purposes as a result of the
Merger. However, neither the Company nor the holders of the Preferred Stock or
the Warrants have obtained a tax opinion to this effect.
28
Recommendations of Other Filing Persons
Each of Essex Acquisition and Messrs. Radcliffe and Hecht have
independently considered the appropriateness of proceeding with the Merger at
this time, as well as the substantive fairness of the terms of Merger and
procedural fairness of the manner in which the Merger is being pursued.
Essex Acquisition. Essex Acquisition is a newly-formed and wholly-owned
------------------
subsidiary of the Company and its board of directors is identical to the Board
of the Directors of the Company. Because it is a wholly-owned subsidiary of the
Company, its interests are not divergent from the interests of the Company, and
in considering the Merger, the board of directors of Essex Acquisition
considered the identical factors and reached the identical conclusions reached
by the Board and described at length in this Proxy Statement. Essex
Acquisition concluded that the Merger should be pursued at this time because of
the various factors described above, see "-Recommendation of the Special
Committee and Board of Directors; Reasons for the Merger," and has determined
that the Cash Consideration proposed to be paid to the holders of the Common
Stock is fair to the unaffiliated holders of the Common Stock from a financial
point of view. This determination as to the substantive fairness of the Cash
Consideration is also based on, the same considerations adopted by the Board of
Directors of the Company.
As to procedural fairness, the Board of Directors of Essex Acquisition
considered the fact that the Company did not retain an independent and
unaffiliated party to advise and represent the holders of the Common Stock.
However, the Board of Directors of Essex Acquisition believes that other
procedural safeguards exist for the holders of the Common Stock, and that given
these safeguards, the transaction is also procedurally fair to the unaffiliated
shareholders. These safeguards include the fact that the Merger can not be
approved without a majority vote of all of the outstanding shares of Common
Stock, and that the affiliates of the Company control less than 0.4% of the
votes required to approve the Merger, and that any shareholder that is not
satisfied with the Cash Consideration retains the ability to dissent from the
Merger and obtain a separate valuation of its shares.
Messrs. Radcliffe and Hecht. Messrs. Radcliffe and Hecht considered the
----------------------------
appropriateness of the Merger and the substantive and procedural fairness of the
Merger not only in their capacity as members of the boards of directors of the
Company and Essex Acquisition, but also in their individual capacities as
holders of Preferred Stock and Warrants. Following the Merger, Messrs.
Radcliffe and Hecht will together own approximately 12.08% of Essex Acquisition,
and will therefore be able to share in any continuing benefits arising out of
the ownership of the business heretofore conducted by the Company. Both Mr.
Radcliffe and Mr. Hecht attempted to keep this divergent interest in mind in
determining whether the proposed merger is both substantively and procedurally
fair to the unaffiliated holders of the Common Stock.
Mr. Radcliffe and Mr. Hecht determined that proceeding with the Merger at
this time is appropriate because any further delay in consummating the Merger
will have the effect of allowing the book value per share of the Common Stock to
continue to deteriorate because of the continually accumulating dividends on the
Preferred Stock. In evaluating the substantive fairness of the Merger, Messrs.
Radcliffe and Hecht considered all of the information made available to them in
their director capacities, including the valuation reports prepared by RP
Financial, and the deliberations and conclusions reached by the Special
Committee. Based on the same factors that they considered in their capacities
as members of the Board of Directors, they reached the identical conclusions
reached by the Board based on the same factors described elsewhere in the Proxy
Statement. See "-Recommendation of the Special Committee and Board of
Directors; Reasons for the Merger." They considered the fact that the Cash
Consideration represents a per share valuation near the top of the range
suggested by RP Financial's "premiums paid" analysis, and that each of the other
valuation methods considered by RP Financial yielded no value for the Common
Stock. Accordingly, Messrs. Radcliffe and Hecht determined that the terms of
the proposed Merger are substantively fair to the unaffiliated holders of the
Common Stock.
As to procedural fairness, Messrs. Radcliffe and Hecht also considered the
fact that the Company did not retain an independent and unaffiliated party to
advise and represent the holders of the Common Stock. However, Messrs.
Radcliffe and Hecht believe that other procedural safeguards exist for the
holders of the Common Stock, and that given these safeguards, the transaction is
also procedurally fair to the unaffiliated shareholders. These safeguards
include the fact that the Merger cannot be approved without a majority vote of
all of the outstanding shares of Common Stock, and that the affiliates of the
Company control less than 0.4% of the votes required to approve the Merger, and
that any shareholder that is not satisfied with the Cash Consideration retains
the ability to dissent from the Merger and obtain a separate valuation of its
shares.
29
Source of Funds
The aggregate consideration payable in the Merger, together with transaction
costs and fees, is approximately $1.8 million, including payouts both to the
holders of the Common Stock and to holders of options to purchase the Common
Stock. Essex Acquisition intends to finance the Merger through a loan of up to
$2.0 million to be received by Essex Acquisition from Centura Bank. Centura Bank
has entered into a loan agreement with Essex Acquisition with respect to this
loan. . The terms of the loan include a floating interest rate based on the
prime rate less 0.25%, a non-refundable commitment fee of 0.5% on the funds
actually borrowed by Essex Acquisition, quarterly interest payments by Essex
Acquisition for the initial twelve (12) months followed by quarterly payments of
principal and interest with a final payment date at the end of five years, and a
pledge by Essex Acquisition of a majority of its shares of the common stock of
the Bank. The principal conditions to the obligation of Centura Bank to make the
loan include the receipt by the Company of a non-objection letter regarding the
loan from the Office of Thrift Supervision, the Company's primary federal
regulator, the provision by RP Financial of the fairness opinion described
above, and the approval of the Merger by the shareholders of the Company.
Possible Adjournment of the Meeting
In addition to be being asked to vote on whether to approve the Merger
Agreement, the holders of the Common Stock are also being asked to grant a proxy
meeting giving the proxy holders the authority to vote their shares in favor of
an adjournment of the Meeting. Although the Company has attempted to allow
sufficient time for the holders of the Common Stock to submit their proxies to
the Company, the Company historically has had minimal shareholder participation
in its annual meetings, and is concerned that an adjournment of the Meeting
might be necessary in order to give the Company and its proxy solicitor the
opportunity to solicit additional proxies. Because approval of the Merger
requires the affirmative vote of a majority of the outstanding shares of Common
Stock, a holder of Common Stock that votes for adjournments of the Meeting will
be giving the Company the ability to solicit additional proxies from
shareholders who have not yet voted, and to attempt to obtain additional proxies
in favor of the Merger from shareholders who have voted against the Merger. The
Company does not know whether an adjournment will be necessary, and will not
seek an adjournment if sufficient number of proxies in favor of the Merger have
been received on or prior to the date of the Meeting.
Effective Time of the Merger and Payment for Shares
The effective time at the Merger will take place (the "Effective Time") will
occur as soon as practicable after the Meeting, subject to approval of the
Merger Agreement at the Meeting and satisfaction or waiver of the terms and
conditions of the Merger Agreement. It is currently expected that the Merger
will take place within several business days of the Meeting. Detailed
instructions with regard to the surrender of stock certificates, together with a
letter of transmittal, will be forwarded to stockholders by the Company's
transfer agent, Continental Stock Transfer & Trust Company (the "Payment
Agent"), promptly following the Effective Time. Stockholders should not submit
their stock certificates to the Payment Agent until they have received such
materials. The Payment Agent will send payment of the Cash Consideration to
stockholders as promptly as practicable following receipt by the Payment Agent
of their stock certificates and other required documents. No interest will be
paid or accrued on the cash payable upon the surrender of stock certificates.
See "--Exchange of Securities." Shareholders should not send any stock
certificates to the Company or the Payment Agent at this time.
Treatment of Stock Options and Warrants
Stock Options
The Company shall pay to each holder of an option which has been granted by
the Company to purchase shares of the Company's Common Stock, and which is
outstanding and exercisable but unexercised immediately prior to the Effective
Time, an amount in cash computed by multiplying (i) any positive difference
obtained by subtracting from (x) the per share amount of the Cash Consideration
the (y) per share exercise price applicable to such option, by (ii) the number
of shares of the Company's Common Stock subject to such option, subject, with
30
respect to each such holder, to the receipt by the Company of an acknowledgment
from such holder that such payment shall constitute consideration for the
termination and cancellation of such option (and the related stock appreciation
right). The Company shall make such payments at the Effective Time. The Company
agrees to take or cause to be taken all action necessary so that each such
option outstanding immediately after the Effective Time as a result of the
failure of the holder thereof to deliver the acknowledgment described in the
preceding sentence shall be exchanged for the right to receive the amount
described in the preceding sentence. Based on the Cash Consideration, the total
payments to be made by the Company with respect to stock options are expected to
be $20,429.
Warrants
The Company has 7,949,000 Warrants outstanding, all of which are
exercisable at an exercise price of $0.9375 per share. All of the Warrants are
held by holders that also are holders of Preferred Stock (although not in the
same proportions as they hold Preferred Stock), and the Company anticipates that
no material exercises of the Warrants will occur prior to the Effective Time.
Given tax considerations and the limited equity available to the Company to pay
the Cash Consideration, any significant exercise of the Warrants prior to the
Effective Time may cause the Company to determine that it cannot consummate the
Merger.
RP Financial's analysis of the Merger included a calculation of the value
of the Warrants. Because of the large number of Warrants outstanding, RP
Financial concluded that the exercise of the Warrants would have such a negative
impact on the liquidity of the Common Stock in the market that the Warrants
should be significantly discounted. Because the number of exercisable Warrants
is more than seven times the total number of shares of Common Stock presently
outstanding, and because the trading volume of the Common Stock is already
extremely limited, any substantial exercise of Warrants would be likely to make
it even more difficult for holders of the Common Stock to find buyers for those
shares in the market. Each Warrant permitting a holder to acquire a share of
Common Stock will be exchanged in the Merger for 0.013993 shares of common stock
of Essex Acquisition, and all of the Warrants in the aggregate will be exchanged
for a total of 111,231 shares of common stock of Essex Acquisition,
representing 4.4% of the total common stock of Essex Acquisition outstanding
after the Merger.
The Merger Agreement
Because Essex Acquisition is a wholly-owned subsidiary of the Company and the
Merger does not involve the acquisition of any interest in the Company or in
Essex Acquisition by any person that is not already a holder of equity of the
Company, the Merger Agreement does not represent an arm's-length negotiation
between two independent parties. For this reason, the Merger Agreement is a
fairly simple document, and is terminable at the election of the Board of
Directors of the Company.
As noted above, the Company expects that the Effective Time of the Merger will
take place promptly following the approval of the Merger at the Meeting.
However, the Company may not be able to consummate the Merger if any of the
following conditions exist:
. Essex Acquisition becomes subject to any order, decree or injunction
of the court or agency of competent jurisdiction that enjoins or
prohibits the consummation of the Merger,
. The Office of Thrift Supervision shall not have approved the rebuttal
of control applications filed by two holders of the Preferred Stock.
The two largest holders of the common stock of Essex Acquisition after
completion of the Merger are making filings with the offices of the
Office of Thrift Supervision requesting that the Office of Thrift
Supervision confirm that they will not be deemed to "control" the
Company or its bank subsidiary by virtue of the completion of the
Merger.
. The Company fails to receive funding for the costs of the Merger,
including the aggregate Cash Consideration, from Centura Bank or
another lender.
. The holders of either class of Preferred Stock fail to approve the
Merger.
31
. The holders of the Warrants shall have exercised any material number
of the Warrants prior to the Effective Time.
. The holders of a material number of shares of the Common Stock and
Preferred Stock exercise their dissenters' rights with respect to the
Merger, such that the Company determines it may not have sufficient
proceeds available to make cash payments to the dissenting
shareholders.
Pro Forma Financial Information
Pro forma financial information has not been included in this proxy solicitation
because the holders of Common Stock are receiving cash consideration only and
will not retain or receive a continuing interest in the Company's business after
the Merger.
Conduct of the Business of the Company if the Merger is Not Consummated
If the Merger is not consummated, the Board of Directors expects that the
Company will continue to conduct its business as it was conducted prior to the
Meeting. However, as noted above, because the amount of dividends accruing on
the Preferred Stock increases each year because of the cumulative effect of
unpaid dividends, the Company does not presently anticipate that it will be able
to generate sufficient net profits in the near term to prevent continued
accretion of negative book value of the Common Stock. For this reason, the
Board of Directors believes that if the Merger is not completed and a similar
going-private transaction is proposed in the future, the consideration available
to the holders of the Common Stock in that future transaction would likely be
less than the Cash Consideration.
Exchange of Securities
At the Effective Time, subject to the terms, conditions and procedures set forth
in the Merger Agreement, each share of Common Stock issued and outstanding
immediately prior to the Effective Time (other than the shares of Common Stock
held by shareholders who have exercised their appraisal rights under the
Delaware General Corporation Law ("DGCL")) will, by virtue of the Merger, be
automatically exchanged for the right to receive the Cash Consideration. Each
holder of a stock certificate formerly representing such shares will after the
Effective Time cease to have any rights with respect to such shares other than
the right to receive the Cash Consideration for such shares upon surrender of
the stock certificate. Shares of the Series B and Series C Preferred Stock of
the Company will each be exchanged for 1.061679 shares and 1.061639 shares,
respectively, of the common stock of Essex Acquisition. Outstanding Warrants to
acquire Common Stock will each be exchanged for 0.013993 shares of common stock
of Essex Acquisition.
No interest will be paid or accrued on the amount payable upon the surrender of
any stock certificate. Payment to be made to a person other than the registered
holder of the stock certificate surrendered is conditioned upon the stock
certificate so surrendered being properly endorsed and otherwise in proper form
for transfer, as determined by the Payment Agent. Further, the person requesting
such payment will be required to pay any transfer or other taxes required by
reason of the payment to a person other than the registered holder of the stock
certificate surrendered or establish to the satisfaction of the Payment Agent
that such tax has been paid or is not payable. Eighteen months following the
Effective Time, Essex Acquisition may require the Payment Agent to deliver to it
any funds (including any interest received with respect thereto) made available
to the Payment Agent which have not been disbursed to holders of stock
certificates formerly representing shares of Common Stock outstanding prior to
the Effective Time. After such time holders of the Common Stock certificates
will be entitled to look to Essex Acquisition only as general creditors with
respect to cash payable upon due surrender of their stock certificates.
Notwithstanding the foregoing, neither the Payment Agent nor any party to the
Merger Agreement will be liable to any holder of stock certificates formerly
representing shares of Common Stock for any amount paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
32
Transfer of Shares
Shares of Common Stock will not be transferred on the stock transfer books at or
after the Effective Time. If certificates representing such shares are presented
to the Company after the Effective Time, such shares will be canceled and
exchanged for the Cash Consideration.
Regulatory Approvals
No federal or state regulatory approvals are required to be obtained by the
Company or Essex Acquisition, nor must any regulatory requirements be complied
with, in connection with the consummation of the Merger by any party to the
Merger Agreement, except for (i) the requirements of the DGCL in connection with
stockholder approvals and consummation of the Merger and (ii) the requirements
of the federal securities laws. However, certain holders of the Preferred Stock
will make regulatory filings with the Office of Thrift Supervision, which has
regulatory authority over the Company and the Bank, in order to rebut any
presumption of control that would arise because of their level of holdings of
the common stock of Essex Acquisition following the Merger. The approval of
these filings is a condition of the Merger.
Expenses of the Merger
Assuming the Merger is consummated, the estimated costs and fees in connection
with the Merger and the related transactions, which will be paid by the Company,
are as follows:
Cost or Fee Estimated Amount
----------- ----------------
Financial advisory fees $ 57,500
Legal fees 108,000
Accounting and tax fees 16,000
Bank financing fee 13,000
Printing and mailing fees 35,000
Regulatory filing fees 9,000
Proxy Solicitation fees 10,000
Special Committee fees 20,000
Miscellaneous 33,200
--------
Total $302,000
Rights of Dissenting Shareholders
Under the DGCL, record holders of shares of Common Stock who follow the
procedures set forth in Section 262 and who have not voted in favor of the
Merger Agreement will be entitled to have their shares of Common Stock appraised
by the Court of Chancery of the State of Delaware and to receive payment of the
"fair value" of such shares together with a fair rate of interest, if any, as
determined by such court. The "fair value" as determined by the Delaware court
is exclusive of any element of value arising from the accomplishment or
expectation of the Merger. The following is a summary of certain of the
provisions of Section 262 of the DGCL and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached hereto as
Appendix C.
Under Section 262, where a merger agreement is to be submitted for approval and
adoption at a meeting of stockholders, as in the case of the Meeting, not less
than 20 calendar days prior to the meeting the Company must notify each of the
holders of Common Stock at the close of business on the Record Date that such
appraisal rights are available and include in each such notice a copy of Section
262. This Proxy Statement constitutes such notice.
Any stockholder wishing to exercise appraisal rights should review the following
discussion and Appendix C carefully because failure to timely and properly
comply with the procedures specified in Section 262 will result in the loss of
appraisal rights under the DGCL.
33
A holder of shares of Common Stock wishing to exercise appraisal rights must
deliver to the Company, before the vote on the approval and adoption of the
Merger Agreement at the Meeting, a written demand for appraisal of such holder's
shares of Common Stock. Such demand will be sufficient if it reasonably informs
the Company of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against the
Merger Agreement will not constitute such a demand. In addition, a holder of
shares of Common Stock wishing to exercise appraisal rights must hold of record
such shares on the date the written demand for appraisal is made and must
continue to hold such shares through the Effective Time.
Only a holder of record of shares of Common Stock is entitled to assert
appraisal rights for the shares of Common Stock registered in that holder's
name. A demand for appraisal should be executed by or on behalf of the holder of
record fully and correctly, as the holder's name appears on the stock
certificates. Holders of Common Stock who hold their shares in brokerage
accounts or other nominee forms and wish to exercise appraisal rights should
consult with their brokers to determine the appropriate procedures for the
making of a demand for appraisal by such nominee. All written demands for
appraisal of Common Stock should be sent or delivered to the Secretary of the
Company, so as to be received before the vote on the approval and adoption of
the Merger Agreement at the Meeting.
If the shares of Common Stock are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, execution of the demand should be made
in that capacity, and if the shares of Common Stock are owned of record by more
than one person, as in a joint tenancy or tenancy in common, the demand should
be executed by or on behalf of all joint owners. An authorized agent, including
one or more joint owners, may execute a demand for appraisal on behalf of a
holder of record; however, the agent must identify the record owner or owners
and expressly disclose the fact that, in executing the demand, the agent is
agent for such owner or owners. A record holder such as a broker holding Common
Stock as nominee for several beneficial owners may exercise appraisal rights
with respect to the Common Stock held for one or more beneficial owners while
not exercising such rights with respect to the Common Stock held for other
beneficial owners; in such case, the written demand should set forth the number
of shares as to which appraisal is sought and where no number of shares is
expressly mentioned the demand will be presumed to cover all Common Stock held
in the name of the record owner.
Within 10 calendar days after the Effective Time, Essex Acquisition, as the
surviving company in the Merger, must send a notice as to the effectiveness of
the Merger to each person who has satisfied the appropriate provisions of
Section 262 and who has not voted in favor of the Merger Agreement. Within 120
calendar days after the Effective Time, Essex Acquisition, or any stockholder
entitled to appraisal rights under Section 262 and who has complied with the
foregoing procedures, may file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of the shares of all such
stockholders. Essex Acquisition is not under any obligation, and has no present
intention, to file a petition with respect to the appraisal of the fair value of
the shares of Common Stock. Accordingly, it is the obligation of the
stockholders to initiate all necessary action to perfect their appraisal rights
within the time prescribed in Section 262.
Within 120 calendar days after the Effective Time, any stockholder of record who
has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from Essex Acquisition a statement
setting forth the aggregate number of shares of Common Stock with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such statement must be mailed within 10 calendar days
after a written request therefor has been received by Essex Acquisition.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the stockholders
entitled to appraisal rights and will appraise the "fair value" of the shares of
Common Stock, exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. Holders considering
seeking appraisal should be aware that the fair value of their shares of Common
Stock as determined under Section 262 could be more than, the same as or less
than the amount per share that they would otherwise receive if they did not seek
appraisal of their shares of Common Stock. The Delaware Supreme Court has stated
that "proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual circumstances,
may or may not be a dissenter's exclusive remedy. The Court will also determine
the amount of interest, if any, to be paid upon the amounts to be received by
34
persons whose shares of Common Stock have been appraised. The costs of the
action may be determined by the Court and taxed upon the parties as the Court
deems equitable. The Court may also order that all or a portion of the expenses
incurred by any holder of shares of Common Stock in connection with an
appraisal, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts used in the appraisal proceeding, be charged pro
rata against the value of all the shares of Common Stock entitled to appraisal.
The Court may require stockholders who have demanded an appraisal and who hold
Common Stock represented by certificates to submit their certificates of Common
Stock to the Court for notation thereon of the pendency of the appraisal
proceedings. If any stockholder fails to comply with such direction, the Court
may dismiss the proceedings as to such stockholder.
Any stockholder who has duly demanded an appraisal in compliance with Section
262 will not, after the Effective Time, be entitled to vote the shares of Common
Stock subject to such demand for any purpose or be entitled to the payment of
dividends or other distributions on those shares (except dividends or other
distributions payable to holders of record of shares of Common Stock as of a
date prior to the Effective Time).
If any stockholder who demands appraisal of shares under Section 262 fails to
perfect, or effectively withdraws or loses, the right to appraisal, as provided
in the DGCL, the shares of Common Stock of such holder will be exchanged for the
right to receive the Cash Consideration in accordance with the Merger Agreement,
without interest. A stockholder will fail to perfect, or effectively lose, the
right to appraisal if no petition for appraisal is filed within 120 calendar
days after the Effective Time. A stockholder may withdraw a demand for appraisal
by delivering to the Company (or after the Effective Time, Essex Acquisition) a
written withdrawal of the demand for appraisal and acceptance of the Merger,
except that any such attempt to withdraw made more than 60 calendar days after
the Effective Time will require the written approval of Essex Acquisition. Once
a petition for appraisal has been filed, such appraisal proceeding may not be
dismissed as to any stockholder without the approval of the Court.
Conduct of The Company's Business After The Merger'
Following the Merger, the Company anticipates that it will continue to conduct
its business as it was conducted immediately prior to the Merger. Although the
Company believes that the consummation of the Merger may improve its prospects
for raising additional capital or engaging in strategic transactions, no
offering of securities or transaction is specifically contemplated, and no
active discussions have been held with any third party regarding such an
offering or transaction.
OTHER INFORMATION ABOUT THE COMPANY
Summary Consolidated Financial Data Of The Company
The following table presents summary historical consolidated financial data of
the Company as of and for each of the two fiscal years in the period ended
December 31, 2000. This data has been derived from consolidated financial
statements of the Company incorporated by reference in this proxy statement.
The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, accompanying
notes and other financial information included in the Company's annual report on
Form 10-KSB and quarterly report on Form 10-QSB incorporated by reference in
--
this proxy statement. See "Additional Information."
At Or For The Year At or For The Three Months
------------------
Ended December 31, Ended March 31,
------------------
(Unaudited)
(Dollars In Thousands, Except Per Share)
2000 1999 2001 2000
---- ----
BALANCE SHEET DATA:
35
Total Assets $307,722 $277,739 $308,683 $288,597
Net Loans 265,855 238,882 268,844 251,952
Deposits 242,596 212,209 253,182 212,344
Federal Home Loan Bank Advances 41,000 44,600 31,000 54,450
Shareholders' Equity 21,867 17,995 22,064 18,174
Book Value Per Common Share (1) (2.34) (3.97) (2.69) (4.29)
OPERATIONS DATA:
Interest Income $ 22,202 $ 17,458 $ 5,830 $ 5,107
Interest Expense 14,559 11,184 3,915 3,298
Net Interest Income 7,643 6,274 1,915 1,809
Provision for Loan Losses 740 149 131 100
Noninterest Income 3,115 3,331 804 595
Noninterest Expenses 8,850 8,685 2,268 2,001
Income Before Benefit From 1,168 771 320 303
Income Taxes
Net Income 3,872 2,160 197 179
Basic and Diluted Income Available
to Common Shareholders (2) 1,729 202 (372) (340)
Income Per Common Share (3):
Basic 1.63 0.19 (0.35) (0.32)
Diluted 1.08 0.07 (0.35) (0.32)
Operating Loss Per Common Share (0.92) (1.12) (0.23) (0.20)
(1) The Company's book value per common share is computed by deducting from
total shareholders' equity the $15.0 million Preferred Stock redemption
value and the $9.3 million and $7.2 million of cumulative but undeclared
Preferred Stock dividends at December 31, 2000 and 1999, respectively, and
the $9.9 million and $7.7 million of cumulative but undeclared Preferred
Stock dividends at March 31, 2001 and 2000, respectively. The result for
each period is then divided by total common shares outstanding of 1,060,642
at December 31, 2000 and 1999. This calculation of book value does not
assume the exercise of any potential shares of Common Stock, such as
Warrants and options.
(2) The Company's basic and diluted income available to common shareholders is
computed based upon net income adjusted for cumulative but undeclared
Preferred Stock dividends of $2.1 million and $2.0 million for the years
ended December 31, 2000 and 1999, respectively, and $569,900 and $519,000
for the three months ended March 31, 2001 and 2000, respectively.
(3) Basic income per share is computed based on income available to common
shareholders divided by the average number of shares of Common Stock
outstanding for each period. Potential shares of Common Stock are dilutive
for all periods presented and diluted income per share is computed under the
treasury stock method.
Market Prices Of Common Stock And Dividends
The Common Stock is traded on the American Stock Exchange (symbol: ESX). The
following table sets forth, for the periods indicated, the high and low prices
of the Company's Common Stock as provided by the American Stock Exchange:
Common Stock Common Stock
High Low
---- ---
1999
36
First Quarter..................................... $ 3.750 $ 1.375
Second Quarter.................................... 3.000 2.0625
Third Quarter..................................... 2.125 1.250
Fourth Quarter.................................... 2.0625 1.125
2000
First Quarter..................................... $ 3.000 $ 1.125
Second Quarter.................................... 2.125 1.125
Third Quarter..................................... 1.750 1.125
Fourth Quarter.................................... 2.125 0.875
2001
First Quarter..................................... $ 1.625 $ 1.000
Second Quarter (through April 30, 2001)........... 1.450 1.100
On January 31, 2001, the last trading day prior to the public announcement of
the proposed Merger, the high, low and closing sales price per share of Common
Stock were $1.62, $1.40 and $1.40, respectively. On June___, 2001, the last
trading day prior to the printing of this Proxy Statement, the closing price per
share of Common Stock was $______.
At April 30, 2001, there were 1,060,642 shares of Common Stock outstanding.
The Company has not paid any cash dividends on its Common Stock during the past
two years.
Securities Ownership of Certain Beneficial Owners
Securities Ownership of Management
The following table sets forth the amount of the Company's Common Stock
beneficially owned by each director, by certain executive officers, and by all
directors and executive officers of the Company as a group as of April 30, 2001.
The indicated number of shares of Common Stock beneficially owned includes
shares that may be acquired through the exercise of stock options or Warrants
that are or become exercisable within 60 days of April 30, 2001. The numbers
and percentages of shares owned by several of the individuals may appear to be
inconsistent with the total number of shares of Common Stock now outstanding
because as to each individual that holds stock options or Warrants, the
calculations assume that the individual has exercised all of his options or
warrants, but that no other holder of options or warrants has done so. The
actual number of shares of outstanding Common Stock beneficially owned by each
individual, excluding shares that relate to stock options or Warrants, is shown
in the footnotes to the table. The last two columns of the table also show the
amount and percentage of the common stock of Essex Acquisition that each of the
listed persons would own after the Merger, assuming that no holder of Preferred
Stock exercises dissenters' rights and no holder of Warrants exercises the
Warrants prior to the Merger. Each of the individuals listed below has agreed
not to exercise any of their outstanding stock options or Warrants prior to the
consummation of the Merger.
Name and Address of Beneficial Owner Amount and Nature Percent of Amount of Percent of
- ------------------------------------ ----------------- ---------- ----------
of Beneficial Class Before Beneficial Essex
------------- ------------ -----
Ownership Before Merger Ownership of Acquisition
---------------- ------ -----------
Merger Essex Common
------ ------
Acquisition Stock After
-----------
After Merger Merger
------
Robert G. Hecht 146,489/(1)/ 12.14%/(2)/ 50,181 2.01%
2077 Blairmont Drive
37
Pittsburgh, PA 15241
Roscoe D. Lacy, Jr. 3,050/(3)/ *
563 Gaulberry Street
Elizabeth City, NC 27909
Harry F. Radcliffe 1,354,657/(4)/ 56.09%/(2)/ 251,787 10.07%
40 Wiggins Lane
Uniontown, PA 15401
Gene D. Ross 2,085/(5)/ * --
3273 Stapleford Chase
Virginia Beach, VA 23452
Earl C. McPherson 963/(5)/ * --
5901 Morgan Glen Drive
Glen Allen, VA 23060
All directors and named executive officers 1,507,244 58.70%/(6)/ 301,868 12.08%
as a group (5 persons)
__________________________________________________
* Less than 1%
(1) Includes 2,250 shares that Mr. Hecht has the right to acquire through the
exercise of stock options and 144,239 shares that he has the right to
acquire through the exercise of Warrants directly owned. Mr. Hechts owns no
outstanding shares of Common Stock.
(2) The individual percentages are calculated by adding to the actual number of
presently outstanding shares the number of shares that could be obtained
within 60 days by exercising the options and Warrants held by each director,
but excluding Warrants and options held by all other persons. If all such
Warrants and options were included in the calculation, Mr. Hecht's
percentage would be 1.63%, and Mr. Radcliffe's percentage would be 15.03%.
(3) Includes 2,800 shares that Mr. Lacy has the right to acquire through the
exercise of stock options, and 250 shares of outstanding Common Stock.
(4) Includes 2,250 shares that Mr. Radcliffe has the right to acquire through
the exercise of stock options; 548,093 shares that he has the right to
acquire through the exercise of Warrants directly owned; 123,061 shares that
Fort Pitt Capital Management Corp. may acquire through the exercise of
Warrants over which Mr. Radcliffe holds sole investment and/or voting power;
666,853 shares that First Home Bancorp Liquidating Trust may acquire through
the exercise of Warrants over which Mr. Radcliffe holds investment and/or
voting power; and 14,400 shares that Catherine Radcliffe may acquire through
the exercise of Warrants over which Mr. Radcliffe holds investment and/or
voting power. Mr. Radcliffe owns no outstanding shares of Common Stock.
(5) Messrs. Ross and McPherson hold 2085 and 963 outstanding Shares of Common
Stock, respectively, all of which were acquired through the Company's
Employee Stock Purchase Plan.
(6) Includes Warrants and options held by directors, but excluding Warrants and
options held by all other persons. If all Warrants and options exercisable
within 60 days were included in the percentage calculation, the total
percentage would be 16.72%.
Securities Ownership of Certain Beneficial Owners
The following table sets forth the amount of the Company's Common
Stock beneficially owned by each person whose beneficial ownership of the
Company's Common Stock exceeded 5% as of April 30, 2001. The indicated number of
shares of Common Stock beneficially owned includes shares that may be acquired
through the exercise of stock options or Warrants that are or become exercisable
within sixty (60) days of April 30, 2001. The numbers and percentages of shares
owned by several of the individuals may appear to be inconsistent with the total
38
number of shares of Common Stock now outstanding because as to each individual
that holds stock options or Warrants, the calculations assume the individual has
exercised all of his options or warrants, but that no other holder of options or
warrants has done so. The actual number of shares of outstanding Common Stock
beneficially owned by each individual, excluding shares that relate to stock
options or Warrants, is shown in the footnotes to the table. The last two
columns of the table also show the amount and percentage of the common stock of
Essex Acquisition that each of the listed persons would own after the Merger,
assuming that no holder of Preferred Stock exercises dissenters' rights and no
holder of Warrants exercises the Warrants prior to the Merger. Each of the
individuals listed below has agreed not to exercise any of their outstanding
stock options or Warrants prior to the consummation of the Merger.
Name and Address of Beneficial Owner Amount and Nature Percent of Amount of Percent of
- ------------------------------------ ----------------- ---------- --------- ----------
of Beneficial Class Before Beneficial Essex
------------- ------------ ---------- -----
Ownership Before Merger Ownership of Acquisition
---------------- ------ ------------ -----------
Merger Essex Common
------ ----- ------
Acquisition Stock After
----------- -----------
After Merger Merger
------------ ------
Robert G. Hecht 146,489/(1)/ 12.14%/(2)/ 50,181 2.01%
2077 Blairmont Drive
Pittsburgh, PA 15241
Harry F. Radcliffe 1,354,657/(3)/ 56.09%/(2)/ 251,787 10.07%
40 Wiggins Lane
Uniontown, PA 15401
Timothy G. Ewing 1,628,872/(4)/ 60.56%/(2)/ 548,349 21.85%
Value Partners, Ltd.
4514 Cole Avenue, Suite 808
Dallas, TX 75205
___________________________________________________
(1) Includes 2,250 shares that Mr. Hecht has the right to acquire through the
exercise of stock options and 144,239 shares that he has the right to
acquire through the exercise of Warrants directly owned. Mr. Hecht owns no
outstanding shares of Common Stock.
(2) The individual percentages are calculated by adding to the actual number of
presently outstanding shares the number of shares that could be obtained
within 60 days by exercising the options and Warrants held by each named
beneficial owner, but excluding Warrants and options held by all other
persons. If all such Warrants and options were included in the calculation,
Mr. Hecht's percentage would be 1.63%, Mr. Radcliffe's percentage would be
15.03%, and Mr. Ewing's percentage would be 18.08%.
(3) Includes 2,250 shares that Mr. Radcliffe has the right to acquire through
the exercise of stock options; 548,093 shares that he has the right to
acquire through the exercise of Warrants directly owned; 123,061 shares that
Fort Pitt Capital Management Corp. may acquire through the exercise of
Warrants over which Mr. Radcliffe holds sole investment and/or voting power;
666,853 shares that First Home Bancorp Liquidating Trust may acquire through
the exercise of Warrants over which Mr. Radcliffe holds investment and/or
voting power; and 14,400 shares that Catherine Radcliffe may acquire through
the exercise of Warrants over which Mr. Radcliffe holds investment and/or
voting power, Mr. Radcliffe owns no outstanding shares of Common Stock.
(4) Includes Warrants to acquire 49,939 shares held in a SARASEP IRA of which
Mr. Ewing is the beneficiary and, therefore, has the right to acquire
through the exercise of Warrants; and includes 1,578,933 shares that Value
Partners, Ltd. may acquire through the exercise of Warrants over which Mr.
Ewing holds investment and/or voting power. Mr. Ewing owns no outstanding
shares of Common Stock.
Information With Respect to Continuing Directors
Pursuant to its bylaws, the number of directors of the Company is set at four
unless otherwise designated by the Board of Directors.
39
The Board of Directors of the Company is divided into three classes serving
staggered three-year terms. The terms of office of Roscoe D. Lacy, Jr. and
Robert G. Hecht expire in 2002, and the terms of Harry F. Radcliffe and Gene D.
Ross expire in 2003. Each of the staggered terms expire at the annual meetings
of the stockholders of the Company. There are no directors of the Company
presently elected to the Board with a term expiring in 2001. Accordingly, no
election for directors is scheduled to be held at the Meeting.
The following table sets forth certain information regarding the Board of
Directors of the Company. The information provided in this section with regard
to the continuing directors of the Company is not expected to change materially
following the Merger, because the directors of the Company will also be the
directors of Essex Acquisition following the Merger, and the directors of Essex
Acquisition will be entitled to receive directors fees from Essex Acquisition on
the same basis that they are presently received from the Company.
Name Age/(1)/ Position Held Director Since Term Expires
---- -------- ------------- -------------- ------------
Roscoe D. Lacy, Jr. 60 Director 1984/(2)/ 2002
Robert G. Hecht 60 Director 1995 2002
Harry F. Radcliffe 50 Director 1995 2003
Gene D. Ross 55 Chairman, President and Chief 1992/(2)/ 2003
Executive Officer
_____________________________
(1) As of April 23, 2001.
(2) Reflects year in which director became a director of the Company's
predecessor entities. All references herein to the Company are deemed to
include the Company's predecessor entities.
Set forth below is additional information with respect to the directors of the
Company:
Harry F. Radcliffe. Mr. Radcliffe became a director of the Company on September
15, 1995 and also serves as a director of the Bank. He was most recently the
President and Chief Executive Officer of Fort Pitt Capital Management,
Pittsburgh, Pennsylvania, a private investment management company, and was the
President and Chief Executive Officer of First Home Bancorp, Inc., a publicly-
held savings institution holding company until its sale in April 1996. He is a
director of Hawthorne Financial Corporation, Los Angeles, California, a savings
institution holding company which is traded on the Nasdaq National Market, and
First Fidelity Bancorp, Irvine, California, a privately held thrift and loan
holding company. He has also been a director of Miami Computer Supply, Inc.
since 1996. From 1989 to 1993, Mr. Radcliffe was the President and Chief
Executive Officer of First South Savings Association, a Pennsylvania-chartered
stock savings association located in Pittsburgh, Pennsylvania. Mr. Radcliffe
received his degree in economics from Ohio Wesleyan University.
Gene D. Ross. Mr. Ross was President and Chief Executive Officer ("CEO") of the
Company's predecessors from May 1992 until their merger with the Company in
1995, and has been the President and CEO of the Company since its organization
in August 1994. Mr. Ross also serves as a director and CEO and President of the
Bank and various other subsidiaries of the Company. Prior to joining the
Company in 1992, Mr. Ross was President and CEO of Southern Federal Savings and
Loan Association of Georgia. He was hired in a turnaround capacity to seek
strategies for the recapitalization of the institution. From October 1990
through November 1991, Mr. Ross served as an independent consultant and Regional
Director of the Ralph Edgar Group, Inc., a Resolution Trust Corporation asset
management contractor. In March 1988, Mr. Ross joined First Liberty Financial
Corp. in Atlanta, Georgia, a $1.2 billion publicly-traded thrift holding
company, as President and Chief Operating Officer. Mr. Ross played a key role
in negotiating the sale of First Liberty's Atlanta-based thrift franchise.
Prior to March 1988, Mr. Ross was President and CEO of The Empire Savings
Building and Loan Association in Denver, Colorado. During his tenure, Mr. Ross
oversaw the reorganization and repositioning of the $2 billion thrift until its
sale to an out-of-state financial institution. Previously, Mr. Ross held audit
manager positions with two nationally recognized certified public accounting
firms. Mr. Ross is a Certified Public Accountant and has a Bachelor of Arts and
Sciences from Florida State University.
Robert G. Hecht. Mr. Hecht became a director of the Company on September 15,
1995 and also serves as a director of the Bank. Mr. Hecht is Chief Executive
Officer of Trumbull Corporation, a highway construction company in
40
Pittsburgh, Pennsylvania, and an Executive Vice President of P.J. Dick
Incorporated, a building construction firm also located in Pittsburgh,
Pennsylvania. He has also served as Vice Chairman and a director for Miami
Computer Supply, Inc. since 1996 and serves as President of Lindy Incorporated
of Pittsburgh, Pennsylvania and President/CEO of SynAggs of South Park,
Pennsylvania. Mr. Hecht served as a director of First Home Bancorp, Inc., a
privately-held savings institution holding company in Pittsburgh, Pennsylvania,
until its sale in April 1996.
Roscoe D. Lacy, Jr. Mr. Lacy is Vice President and General Manager for Miles
Jennings Industrial Supply Co., Inc., an industrial supply company located in
Elizabeth City, North Carolina. Mr. Lacy became a director of the Company in
1984 and has been a director of the Bank and one of its predecessor institutions
since 1980. Mr. Lacy also served as a director of the Company's former Florida
savings bank until its merger with and into the Bank in May 1993.
Meetings of the Board and Committees of the Board
During 2000, the Board of Directors of the Company held a total of twelve
(12) regular meetings for the year. The Board of Directors of the Bank and the
Company have established various committees, including the Audit, Executive
Compensation, and Strategic Evaluation Committees. Each of the directors of the
Company attended 100% of the Company's board meetings and the meetings of board
committees on which such director served.
The Audit Committee is comprised of directors Lacy, Hecht, and Radcliffe
and is chaired by Mr. Lacy. This Committee meets periodically with the Bank's
internal auditor, and periodically with the Company's and the Bank's external
auditors, and reports to the Board of Directors and to senior management on the
Company's and the Bank's financial condition and internal auditing practices and
procedures. During the year ended December 31, 2000, the Audit Committee met
four times. See "--Audit Committee Report" below.
The Executive Compensation Committee (the "Compensation Committee")
consists of directors Lacy, Hecht and Radcliffe. The Compensation Committee
meets periodically to evaluate the compensation and fringe benefits of the
Company's and the Bank's directors, officers, and employees. During the year
ended December 31, 2000, the Compensation Committee met two times.
Directors Fees
During the year ended December 31, 2000, each non-employee director of the
Company received a fee of $350 for each joint board meeting of the Company and
the Bank that they attended and $350 for any separate board committee meeting
that they attended. Additionally, an annual retainer fee of $5,500 was paid to
non-employee directors in quarterly increments. Effective January 1, 2001, the
Board of Directors approved a change in board meeting fees to $400 per meeting
and a change in the annual retainer fee to $6,500. Committee fees will remain
the same.
Audit Committee Report
Effective January 31, 2000, the Securities and Exchange Commission ("SEC")
adopted new rules and amendments to current rules relating to the disclosure of
information about companies' audit committees. In large part, the new rules are
based upon recommendations by the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees. The new rules require that, for
all votes of stockholders occurring after December 15, 2000, the Proxy Statement
must contain a report of the audit committee addressing several issues
identified in the rules. In addition, the SEC recommends that audit committees
adopt written charters.
The Audit Committee of the Board of Directors (the "Audit Committee") is
composed of three independent directors and operates under a written charter
adopted by the Board of Directors in 1999. That charter is attached to this
Proxy Statement as Appendix D. The members of the Audit Committee are Roscoe D.
Lacy, Jr. (Chair), Robert G. Hecht, and Harry F. Radcliffe. The Board of
Directors has determined that each of the three members is independent as set
forth under NASDAQ's Independent Director and Audit Committee listing standards
as amended on December 14, 1999, and able to read and understand fundamental
financial statements. The Audit Committee
41
has also determined that at least one member of the Audit Committee has past
employment experience in finance and accounting.
The Audit Committee is responsible for providing independent objective oversight
of the Company's accounting functions and internal controls. It oversees the
Company's financial reporting process on behalf of the Board of Directors,
reviews the Company's financial disclosures and meets privately, if necessary,
with the Company's independent auditors to discuss its internal accounting
control policies and procedures. The Audit Committee reports on these meetings
to the Board of Directors. The Audit Committee also considers and recommends
the selection of the Company's independent auditors, reviews the performance of
the independent auditors in the annual audit and in assignments unrelated to the
audit, and reviews the independent auditors' fees. The Audit Committee met four
times during 2000.
During 2000, the Audit Committee recommended to the Board of Directors the
appointment of KPMG LLP to replace PricewaterhouseCoopers LLP as its independent
auditor for the fiscal year ending December 31, 2000. The Audit Committee has
reviewed and discussed with management the Company's audited financial
statements for the year ending December 31, 2000. It has also discussed with
KPMG LLP the matters required to be discussed by the Statement on Auditing
Standards No. 61 (SAS 61 - Communication with Audit Committees). The Audit
Committee has received the written disclosures and the letter from KPMG LLP
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) that relates to its independence with the
Company and its subsidiaries, and has discussed this information with them.
Based upon the Audit Committee's discussions with management and KPMG LLP, and
the Audit Committee's review of the representations of management and the
independent accountants, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in the Company's
annual report on Form 10-KSB for the year ending December 31, 2000, for filing
with the SEC.
THE AUDIT COMMITTEE
Roscoe D. Lacy, Jr., Chairman
Robert G. Hecht
Harry F. Radcliffe
42
Executive Compensation
The following table sets forth a summary of certain information concerning the
compensation paid by the Company and its subsidiaries for services rendered in
all capacities during the periods indicated to Gene D. Ross, President and Chief
Executive Officer of the Company and the Bank, and Earl C. McPherson, President
and Chief Executive Officer of Essex First Mortgage, a division of the Bank.
Messrs. Ross and McPherson were the only executive officers whose salary and
bonus compensation during 2000 exceeded $100,000.
Summary Compensation Table
=============================================================================================================================
Long Term Compensation
----------------------
Awards Payouts
------------------------------------------
Securities
Name and Principal Restricted Underlying LTIP All Other
Position Year Salary Bonus Stock Awards Options/SARs Payouts Compensation/(2)/
=============================================================================================================================
Gene D. Ross 2000 $211,961/(1)/ $17,000 -- -- -- $18,938
Chief Executive Officer 1999 $203,175/(1)/ $ 9,000 -- 40,000 -- $14,299
of the Company and the 1998 $194,088/(1)/ N/A -- -- -- $13,933
Bank
- ---------------------------------------------------------------------------------------------------------------------------
Earl C. McPherson
President and CEO of 2000 $120,000 $10,000 -- -- -- $11,840
Essex First Mortgage, a 1999 $115,100 $ 5,200 -- 25,000 -- $ 9,045
division of the Bank and 1998 $109,620 N/A -- -- -- $ 8,649
Executive Vice President
of the Bank
- --------------------------------------------------------------------------------------------------====================
(1) Salary includes payouts for unused vacation.
(2) Represents the Company's accrued expense under the Essex Savings Bank,
F.S.B. Supplemental Executive Retirement Plan ("SERP"), the Company's
matching contribution to the Essex Bancorp, Inc. 401(k) Retirement Savings
Plan, and imputed income on group-term life insurance. Interest on the SERP
accrues at a return equal to the interest rate on a one-year certificate of
deposit. For the year ended December 31, 2000, the SERP expenses, 401(k)
contribution and imputed income on life insurance were $15,994, $2,254 and
$690, respectively, for Mr. Ross and $9,136, $2,254 and $450, respectively,
for Mr. McPherson. Effective December 1, 1998, the SERP was amended to
modify the vesting schedule so that each year's contribution following 1998
(and income thereon) will be subject to a three year vesting provision. A
member must complete all three years of service to avoid forfeiture of
Company contributions made after December 31, 1998. However, pursuant to an
amendment effective January 1, 1999, Messrs. Ross and McPherson are fully
vested in their SERP accounts at all times.
43
The following table provides information on the value of unexercised stock
options/SARs held at December 31, 2000 by Messrs. Ross and McPherson:
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
- ---------------------------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying
Unexercised Stock
Options/SARs at Value of
End of Fiscal Year Unexercised In-the-
Shares Acquired ------------------ Money Stock
or Value Exercisable/ Options/SARs at
Name Exercised (#) Realized ($)/(1)/ Unexercisable End of Fiscal Year
- ---- ------------- ----------------- ------------------
- ---------------------------------------------------------------------------------------------------------------------------
Gene D. Ross -0- -0- 0/40,000/(1)/ -0-/(2)/
- ---------------------------------------------------------------------------------------------------------------------------
Earl C. McPherson -0- -0- 0/25,000/(1)/ -0-/(2)/
- ---------------------------------------------------------------------------------------------------------------------------
_____________________________
(1) The stock options and SARs held by Messrs. Ross and McPherson vest over a
three-year period becoming exercisable on September 10, 2002 and expiring on
September 10, 2009. These options may become exercisable earlier than such
dates upon a "change of control" as defined in the Second Amendment to the
Employee Stock Option Plan, or upon the grantee's retirement, disability or
death. SARs may be issued in tandem with options granted under the Plan and
have been issued in conjunction with the options listed in this table.
These SARs entitle the holder to receive, without any payment to the
Company, either cash or shares of Common Stock, or a combination thereof, in
an amount, or having a fair market value determined as of the date of
exercise, equal to the excess of the fair market value per share on the date
of exercise of the SARs over the price of the related option. SARs become
exercisable only in the event of a change in control as defined in the
Second Amendment to the Option Plan.
(2) The stock options and SARs held by Messrs. Ross and McPherson carry an
exercise price of $1.25 per share. As of December 31, 2000, no stock
options and SARs held by Messrs. Ross and McPherson were in-the-money.
Employment and Other Executive Services Agreements and Plans
Employment Agreement
Gene D. Ross is subject to a Restated Employment Agreement (the "Employment
Agreement") with the Company, Essex Home Mortgage Servicing Corporation, and the
Bank (the "Employers"). The Employers approved the Employment Agreement
effective January 1, 1998 and amended it on October 1, 1999. The Employment
Agreement provides for the employment of Mr. Ross as the President and Chief
Executive Officer of each of the Employers, and is renewable year-to-year by the
Boards of Directors of each of the Employers. The respective Boards of
Directors have renewed the Employment Agreement through December 31, 2001. Mr.
Ross is presently entitled to base salary at the rate of $215,000 per year, as
well as to bonuses established from time to time by the Board of Directors of
the Company based on standards of financial performance. The Employment
Agreement is terminable for cause by the Boards of Directors of the Company or
any of the Company's subsidiaries. For purposes of the Employment Agreement,
"cause" includes personal dishonesty, gross incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than non-material violations) or final cease and desist order, or a material
breach of any provisions of the Employment Agreement. In the event of a
termination for cause, Mr. Ross will be paid only his salary and vacation pay
accrued and prorated to the date of termination. The Employment Agreement is
also terminable without cause by the Board of Directors of the Company or any of
its subsidiaries upon 45 days advance written notice. In the event of a
termination without cause, Mr. Ross will be paid his salary and vacation pay
through the date of termination, plus the severance benefit described below.
The Employment
44
Agreement also provides for the indemnification of Mr. Ross for losses and
expenses arising out of the performance of his duties under the Employment
Agreement, to the extent permitted by applicable corporate law and Federal
regulations.
The Employment Agreement provides for a lump sum payment within thirty (30)
days of a Change in Control of an amount equal to two hundred percent (200%) of
his highest rate of annual salary in effect during the period commencing on May
1, 1997 and ending on the date of a change in control. Mr. Ross is also a party
to a separate Change in Control Agreement with the Company, which was amended
effective October 1, 1999. For this purpose, a "Change in Control" shall occur
if and only if after October 1, 1999 a "person" or "group" (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), directly or
indirectly, first becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934) of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the then
outstanding securities of the Company. The Company would also be obligated to
make a "gross-up" payment to Mr. Ross in the amount necessary to pay any excise
taxes imposed on the change in control payments under Section 499 of the
Internal Revenue Code. The Employment Agreement also provides that upon
termination of Mr. Ross without cause prior to a Change in Control (including
non-renewal of his agreement by the Company), Mr. Ross will be entitled to a
lump sum payment within thirty (30) days of termination of an amount equal to
one hundred and fifty percent (150%) of his highest rate of annual salary in
effect during the period commencing on May 1, 1997 and ending on the date of his
termination. In the event of Mr. Ross' termination without cause following a
Change in Control, however, he will only be entitled to the Change in Control
payment. In either event, termination without cause or a Change in Control, Mr.
Ross would be entitled to continuing health and medical insurance, disability
insurance and life insurance coverage for periods not exceeding two (2) years on
the same basis as was in effect immediately prior to the effective date of
termination or Change in Control, as appropriate. Mr. Ross's Employment
Agreement was amended in April 2001 to make clear that the Merger would not
constitute a "Change in Control" under that agreement.
Other Executive Services Agreement
As of January 1, 1998, the Bank entered into a restated Executive Services
Agreement with Earl C. McPherson. The agreement was amended effective January
1, 1999 and October 1, 1999. Mr. McPherson is also the beneficiary of a Change
in Control Agreement with the Company. Mr. McPherson's agreements are
substantially similar to Mr. Ross's. In the event of termination of his
agreement or employment without cause prior to a Change in Control, Mr.
McPherson would be entitled to a lump sum payment equal to one hundred fifty
percent (150%) of his highest rate of annual salary in effect during the period
commencing on May 1, 1997 and ending on the date of his termination. The
agreement also provides for a lump sum payment within thirty (30) days of a
Change in Control of an amount equal to two hundred percent (200%) of his
highest rate of annual salary in effect during the period commencing on May 1,
1997 and ending on the date of a Change in Control. Mr. McPherson's Executive
Services Agreement was amended in April 2001 to make clear that the Merger would
not constitute a "Change in Control" under that agreement.
Supplemental Executive Retirement Plan
The Bank maintains the Essex Savings Bank, F.S.B. Supplemental Executive
Retirement Plan ("SERP") for certain of the highly compensated officers of the
Bank and its subsidiaries. The present participants in the Plan include Messrs.
Ross, McPherson, and three other officers. The SERP was implemented in 1993 for
the purpose of attracting and retaining key management personnel. The SERP is a
non-qualified deferred compensation plan.
Except as described below with respect to Messrs. Ross and McPherson, each
SERP participant who is continuously employed by the Bank or its subsidiaries
for an entire calendar year is credited under the SERP for that calendar year
with a pension credit of five percent of such participant's compensation for the
year and such profit-sharing credit, if any, as the Compensation Committee of
the Board of Directors of the Bank determines, not in excess of five percent of
such participant's compensation for the calendar year. Amounts credited to the
bookkeeping accounts of participants under the SERP remain general assets of the
Bank and are not funded through a separate trust or other investment vehicle.
Each participant's account under the SERP is also credited annually with a
deemed investment rate of return equal to the interest rate in effect on the
last day of the prior plan year on a one-year certificate of deposit issued by
the Bank.
45
Participants in the SERP fully vest upon death, permanent disability or
retirement at or after age 65 or upon any earlier change in control, as
described in the SERP. In the event of a termination of a participant's
employment prior to death, permanent disability, attainment of age 65 or a
change in control, the participant's vested interest in his account under the
SERP is based upon his completed years of employment with the Bank or its
subsidiaries after 1992. As of the fiscal year end 1997, all SERP accruals have
fully vested. Effective December 1, 1998, the SERP was amended so that each
year's accrual for plan years after 1998 and the deemed investment rate of
return thereon will vest only if the participant remains an employee of the Bank
through December 31, 2001. However, pursuant to an amendment dated October 27,
1999, Messrs. Ross and McPherson are fully vested on their SERP accounts at all
times. All amounts payable under the SERP are payable in a lump sum. Amounts
accrued under the SERP are not taxable to participants, or deductible to the
Bank, until paid. During the year ended December 31, 2000, the Company accrued
$37,326 of expense pursuant to the SERP.
Transactions With Certain Related Persons
In the ordinary course of business, the Bank and its subsidiaries have made
loans, and may continue to make loans in the future, to non-executive officers
and employees. Under the Bank's policy, such loans are made on substantially
the same terms, including interest rates and collateral, as are available to the
general public. Other than on an exception basis requiring Board of Directors'
approval, the Bank's policy does not permit the Company's or the Bank's
directors or executive officers to borrow from the Bank or its subsidiaries.
Furthermore, management of the Company does not believe that any director or
officer or affiliate of the Company, or any record or beneficial owner of more
than five percent of the Common Stock of the Company, or any associate of any
such director, officer, affiliate or stockholder, is a party adverse to the
Company or any of its subsidiaries or has a material interest adverse to the
Company or any of its subsidiaries in any material proceeding.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's executive officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the American Stock Exchange. Executive officers and
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Based on the information that the Company received from its executive
officers and directors, none of the Company's executive officers or directors
made any filings of Section 16(a) forms during the year ended December 31, 2000
that were not timely.
Independent Accountants
KPMG LLP served as independent public accountants for the Company and its
subsidiaries for 2000. A representative of KPMG LLP is expected to be present
at the annual meeting for the purpose of making a statement should he so desire
and to respond to appropriate questions.
Audit Fees
The aggregate fees for professional services rendered by KPMG LLP for the
audit of the Company's annual financial statements for the year ending December
31, 2000, and the review of the condensed financial statements included in the
Company's third quarter report on Form 10-QSB filed with the SEC during 2000
were $71,700. KPMG LLP was not retained and hence did not commence their
engagement until the third quarter of 2000.
Financial Information Systems Design and Implementation Fees
The Company did not obtain any services from KPMG LLP during the year
ending December 31, 2000 related to financial information systems design or
implementation.
46
All Other Fees
Aggregate fees, exclusive of the fees disclosed above relating to financial
statement audit services, for other services rendered by KPMG LLP for 2000 were
$11,050. These other services included fees for tax services, statutory audits
and audits of employee benefit plans. The Audit Committee of the Board of
Directors considered whether the provision of these services is compatible with
maintaining the independence of KPMG LLP.
The Board of Directors has not yet made a determination regarding the selection
of independent accountants for the year ending December 31, 2001. Under the
Company's Certificate of Incorporation and Bylaws, stockholders are not required
to ratify or confirm the selection of independent accountants made by the Board
of Directors.
OTHER MATTERS THAT MAY BE CONSIDERED AT THE MEETING
The Board of Directors knows of no business which will be presented for
consideration at the Meeting other than as stated in the Notice of Annual
Meeting of Stockholders. If, however, other matters are properly brought before
the Meeting, it is the intention of the persons named in the accompanying proxy
to vote the shares represented thereby on such matters in accordance with their
best judgment.
Whether or not you intend to be present at the Meeting, you are urged to return
your proxy promptly. If you are present at the Meeting and wish to vote your
shares in person, your proxy may be revoked by voting at the Meeting.
STOCKHOLDER PROPOSALS
If the Merger is consummated, there will be no public stockholders of the
Company and no public participation in any future meetings of stockholders of
the Company. However, if the Merger is not consummated, the Company's public
stockholders will continue to be entitled to attend and participate in the
Company's stockholder meetings. In such an event, if a stockholder wishes to
submit a proposal for consideration by the stockholders of the Company at the
2002 Annual Meeting of Stockholders (the "2002 Annual Meeting"), then in order
for the proposal to be includible in the proxy statement for the 2002 Annual
Meeting, such proposal must be received by the Secretary of the Company no later
than March 21, 2002.
The Bylaws of the Company provide a procedure for certain business to be brought
before the annual meetings of the Company's stockholders, and such proposals may
be properly brought before the meeting even if they are not includible in the
proxy statement for the meeting, so long as the proposing stockholder complies
with the advance notice provisions of the Bylaws. If held, the 2002 Annual
Meeting is scheduled to be held on June 19, 2002. If written notice of business
proposed to be brought before the 2002 Annual Meeting is given to the Secretary
of the Company, delivered or mailed to and received at the principal executive
offices of the Company not later than March 21, 2002, such business may be
brought before the 2002 Annual Meeting. Information regarding the contents of
the required notice to the Company is to be found in the Company's Bylaws, which
are available from the Company upon request.
Stockholders are also permitted to submit nominations of candidates for the
Board of Directors. If a stockholder wishes to nominate a candidate to stand
for election as a director at the 2002 Annual Meeting, the nomination shall be
made by written notice to the Secretary of the Company, which must be delivered
or mailed to and received at the principal executive offices of the Company not
later than March 21, 2002. The requirements regarding the form and content of
the stockholder nominations for directors are also set forth in the Company's
Bylaws.
ADDITIONAL INFORMATION
The Company files reports, proxy statements, and other information with the SEC.
You can read and copy these reports, proxy statements, and other information
concerning the Company at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC maintains an internet site at
www.sec.gov that contains reports, proxy and information statements and other
information about issuers that file electronically with the SEC, including the
Company.
47
Pursuant to the requirements of Section 13(e) and Rule 13e-3 of the Exchange
Act, the Company has filed a Schedule 13e-3 with the SEC with respect to the
Merger. As permitted by SEC rules, this Proxy Statement does not contain all of
the information you can find in the Schedule 13e-3 or in the exhibits to the
Schedule 13e-3. You can obtain this additional information and a complete
Schedule 13e-3 from the SEC as indicated above, or from the Company.
The SEC allows the Company to "incorporate by reference" the information it
files with the SEC. This permits the Company to disclose important information
to you by referring to these filed documents. The information incorporated by
reference is deemed to be a part of this Proxy Statement, except for any
information superseded by information in this Proxy Statement. The information
incorporated by reference is an important part of this Proxy Statement, and
information that the Company files later with the SEC will automatically update
and supersede this information. The Company incorporates by reference into this
Proxy Statement the following documents:
. our Annual Report on Form 10-KSB for the year ended December 31, 2000,
filed with the SEC on March 30, 2001
. any future filings made with the SEC under Sections 13(a), 13(c), 14
or 15(d) under the Securities Exchange Act of 1934 until the date of
the Meeting.
You may request a copy of these filings (other than exhibits which are not
specifically incorporated by reference herein) at no cost by writing or
telephoning us at the following address:
Investor Relations
Essex Bancorp, Inc.
Interstate Corporate Center
Building #9, Suite 200
Norfolk, Virginia 23502
(757) 893-1326
If you would like to request documents from the Company, please do so by June
11, 2001 to receive them before the Meeting.
You should rely only on the information contained or incorporated by reference
in this Proxy Statement to vote on the Merger Agreement. The Company has not
authorized anyone else to provide you with different information. You should
not assume that the information in this Proxy Statement is accurate as of any
date other than June ___, 2001.
By Order of the Board of Directors
Jennifer L. DeAngelo
Corporate Secretary
Essex Bancorp, Inc.
Norfolk, Virginia
June __, 2001
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND PROMPTLY RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
48
Appendix A
AGREEMENT AND PLAN OF MERGER
49
RESTATED AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of May ___, 2001 (the
"Agreement"), is by and between ESSEX BANCORP, INC., a Delaware corporation (the
"Company"), and ESSEX ACQUISITION CORP., a Virginia corporation wholly-owned by
the Company ("Essex Acquisition").
WITNESSETH:
WHEREAS, the Board of Directors of the Company, upon the recommendation of
the special committee established to consider the transaction contemplated by
this Agreement (the "Special Committee"), has determined that it is in the best
interests of the Company and its stockholders for the Company to effect a
recapitalization of its capital structure through the merger of the Company with
and into Essex Acquisition, with Essex Acquisition as the surviving corporation
(the "Merger"), a result of which will be the elimination of the public
ownership of all of the common stock of the Company;
WHEREAS, the Board of Directors of Essex Acquisition has unanimously
approved the Merger and deems it in the best interests of its sole shareholder;
WHEREAS, as of the date of this Agreement, the authorized capital stock of
the Company is as follows: (a) 20,000,000 shares of common stock, par value
$.01 per share (the "Company Common Stock), of which 1,060,642 shares are issued
and outstanding; and (b) 10,000,000 shares of preferred stock, par value $.01
per share (the "Company Preferred Stock") (the Company Common Stock and the
Company Preferred Stock are, together, the "Company Stock"), consisting of (i)
2,250,000 shares designated as Cumulative Perpetual Preferred Stock, Series B
(the "Series B Preferred Stock") of which 2,125,000 shares are issued and
outstanding, and (ii) 125,000 shares designated as Cumulative Perpetual
Preferred Stock, Series C (the "Series C Preferred Stock"), of which 125,000
shares are issued and outstanding;
WHEREAS, as of the date of this Agreement, the authorized capital stock of
Essex Acquisition consists of 5,000,000 shares of common stock, par value $.01
per share (the "Essex Acquisition Common Stock"), of which 100 shares are issued
and outstanding and owned by the Company; and
WHEREAS, the Company and Essex Acquisition previously entered into this
Agreement as of March 29, 2001, and desire to restate it to set forth the terms
and conditions of the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein contained and for other good and valuable consideration, and intending to
be legally bound, the parties hereto agree as follows:
1. MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.3
----------
below), the Company shall be merged with and into Essex Acquisition under the
terms of this Agreement and in accordance with the provisions of the Delaware
General Corporation Law (the "Delaware Act") and the Virginia Stock Corporation
Act (the "Virginia Act"), and the separate existence of the Company shall cease
and Essex Acquisition shall continue as the surviving corporation (the
"Surviving Corporation") in accordance with the provisions of the Virginia Act.
1.2 Effects of the Merger.
---------------------
a. Generally. The Merger shall have the effects as provided
---------
under the Delaware Act and the Virginia Act and other applicable law.
50
b. Articles of Incorporation and Bylaws. The Articles of
------------------------------------
Incorporation of Essex Acquisition as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation. The Bylaws of Essex Acquisition as in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporation.
c. Board of Directors; Officers. At the Effective Time, the
----------------------------
Board of Directors of the Surviving Corporation shall be identical to the Board
of Directors of Essex Acquisition and the officers of the Surviving Corporation
shall be identical to the officers of Essex Acquisition, in each case until
their respective successors have been duly elected or appointed and qualified
and subject to the Articles of Incorporation and Bylaws of the Surviving
Corporation.
1.3 Effective Time. As soon as practicable following the
--------------
satisfaction or waiver of the conditions set forth in Article 3 of this
Agreement, the parties shall file with the Office of the Secretary of State of
the State of Delaware a Certificate of Merger and with the State Corporation
Commission of the Commonwealth of Virginia Articles of Merger (such Certificate
and Articles of Merger are, collectively, the "Merger Documents") executed in
accordance with the relevant provisions of the Delaware Act and the Virginia
Act, respectively. The Merger shall become effective at such time as the Merger
Documents are duly filed with the Office of the Secretary of State of the State
of Delaware and the State Corporation Commission of the Commonwealth of
Virginia, as applicable, or at such other time as is permissible in accordance
with the Delaware Act and the Virginia Act and as the Company and Essex
Acquisition shall agree and as specified in the Merger Documents (the time the
Merger becomes effective is the "Effective Time").
2. EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS.
2.1 Exchange of Company Preferred Stock. At the Effective Time,
-----------------------------------
each share of Company Preferred Stock issued and outstanding immediately prior
to the Effective Time (other than Dissenting Shares, as defined in Section 2.6
below), including the right to receive all accrued but undeclared and unpaid
dividends thereon, shall, by virtue of the Merger and without any action on the
part of the holder thereof, cease to be an issued and outstanding share of
Company Preferred Stock and shall automatically become and be exchanged for (a)
in the case of the Series B Preferred Stock, 1.061679 fully paid and non-
assessable shares of Essex Acquisition Common Stock, and (b) in the case of the
Series C Preferred Stock, 1.061639 fully paid and non-assessable shares of Essex
Acquisition Common Stock, provided, however, that fractional shares shall not be
issued in connection with the Merger, and if any exchange would result in the
issuance of a fractional share to a holder of Company Preferred Stock, the
number of shares of Essex Acquisition Common Stock issuable upon the exchange of
the applicable Company Preferred Stock shall be rounded up to the next highest
whole share of Essex Acquisition Common Stock.
2.1 Cancellation of Company Common Stock. At the Effective Time,
------------------------------------
each share of Company Common Stock issued and outstanding immediately prior to
the Effective Time (other than Dissenting Shares) shall, by virtue of the Merger
and without any action on the part of the holder thereof, cease to be an issued
and outstanding share of Company Common Stock and shall automatically become and
be exchanged for the right to receive a cash payment in the amount of $1.45,
without interest (the "Common Stock Consideration").
2.3 Treatment of Options and Warrants.
---------------------------------
a. Options to Purchase Company Common Stock. At the Effective
----------------------------------------
Time, each option to purchase shares of Company Common Stock ("Options") issued
and outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be exchanged
for the right to receive a cash payment in an amount equal to any positive
difference obtained by subtracting (i) the per share exercise price applicable
to such Option from (ii) the per share amount of the Common Stock Consideration
----
(such positive amount, if any, the "Option Consideration"), provided, however,
that if that at the Effective Time the per share exercise price applicable to an
Option is greater than the per share amount of the
-------
51
Common Stock Consideration, such Option shall be immediately cancelled and shall
cease to exist and the holder(s) thereof shall not be entitled to any
consideration in respect thereof or to any further rights with respect thereto.
b. Warrants to Purchase Company Common Stock. At the Effective
-----------------------------------------
Time, each warrant permitting the holder thereof to purchase shares of Company
Common Stock ("Warrants") issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, cease to be an issued and outstanding Warrant and shall
automatically become and be exchanged for 0.013993 fully paid and non-assessable
shares of Essex Acquisition Common Stock, provided, however, that fractional
shares shall not be issued in connection with the Merger, and if any exchange
would result in the issuance of a fractional share to a Warrant holder, the
number of shares of Essex Acquisition Common Stock issuable upon the exchange of
the applicable Warrant(s) shall be rounded up to the next highest whole share of
Essex Acquisition Common Stock.
2.4 Cancellation of Essex Acquisition Common Stock. At the
----------------------------------------------
Effective Time, each share of Essex Acquisition Common Stock issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, cease to be an
issued and outstanding share of Essex Acquisition Common Stock and shall be
surrendered to Essex Acquisition for cancellation and cancelled, and no
additional shares of Essex Acquisition Common Stock or any other consideration
shall be issued or paid therefor.
2.5 Exchange of Certificates.
------------------------
a. Payment Agent. Prior to the Effective Time, the Company
-------------
shall appoint a payment agent (the "Payment Agent") to act as the Company's
agent for the (i) issuance of Essex Acquisition Common Stock to holders of
Company Preferred Stock and Warrants, and (ii) payment of Common Stock
Consideration and Option Consideration (collectively, "Cash Consideration") to
holders of Company Common Stock and Options, respectively.
b. Company Preferred Stock and Warrants. After the Effective
------------------------------------
Time, holders of a certificate or certificates theretofore evidencing issued and
outstanding shares of Company Preferred Stock or Warrants shall be required to
exchange such certificates for one or more certificates representing the number
of shares of Essex Acquisition Common Stock for which such shares or Warrants
were exchanged by virtue of the Merger. As soon as practicable after the
Effective Time, the Payment Agent shall mail to the holders of record of
certificates that immediately prior to the Effective Time represented
outstanding shares of Company Preferred Stock or Warrants, letters of
transmittal (which will specify that delivery will be effected, and risk of loss
and title to such certificates will pass, only upon proper delivery of such
certificates to the Payment Agent and shall be in such form and have such other
provisions as the Payment Agent may reasonably specify), and instructions for
use in effecting the surrender of the certificates representing such shares of
Preferred Stock and Warrants in exchange for the shares of Essex Acquisition
Common Stock deliverable in respect thereof as a result of the Merger. Upon
surrender to the Payment Agent of a certificate or certificates formerly
representing shares of Company Preferred Stock or Warrants and acceptance
thereof by the Payment Agent, the holder thereof shall be entitled to receive a
certificate or certificates representing the shares of Essex Acquisition Common
Stock for which such shares of Preferred Stock or Warrants, formerly represented
by such surrendered certificate or certificates, shall have been exchanged at
the Effective Time pursuant to the Merger.
c. Company Common Stock and Options. After the Effective Time,
--------------------------------
holders of a certificate or certificates theretofore evidencing issued and
outstanding shares of Company Common Stock shall be required to surrender such
certificates for payment in an amount equal to the aggregate Common Stock
Consideration payable in respect of such Company Common Stock so surrendered for
cancellation in connection with the Merger. As soon as practicable after the
Effective Time, the Payment Agent shall mail to the holders of record of
certificates that immediately prior to the Effective Time represented
outstanding shares of Company Common Stock, a letter of transmittal (which will
specify that delivery will be effected, and risk of loss and title to such
certificates will pass, only upon proper delivery of such certificates to the
Payment Agent and shall be in such form and have such other provisions as the
Payment Agent may reasonably specify), and instructions for use in effecting the
surrender of the certificates representing such shares of Company Common Stock
in exchange for the
52
Common Stock Consideration payable to such holders in respect thereof as a
result of the Merger. Upon surrender to the Payment Agent of a certificate or
certificates formerly representing shares of Company Common Stock and acceptance
thereof by the Payment Agent, the holder thereof shall be entitled to receive
payment in an amount equal to the Common Stock Consideration payable in respect
of such shares of Company Common Stock formerly represented by such surrendered
certificate or certificates. The Payment Agent shall also deliver to all holders
of Options entitled to Option Consideration under the terms of Section 2.3(a)
above payment in an amount equal to the aggregate amount of Option Consideration
payable in respect of such Options upon receipt by the Payment Agent of an
acknowledgement from each such Option holder that payment of the Option
Consideration applicable to such holder's Options shall constitute full
consideration for the termination and cancellation of the Options.
d. Procedure. The Payment Agent shall accept certificates in
---------
respect of Company Stock and Warrants upon compliance with such reasonable terms
and conditions as the Payment Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. After the Effective Time,
there shall be no further transfer on the records of the Company of certificates
representing shares of Company Stock or Warrants and if such certificates are
presented to the Company for transfer, they shall be canceled against delivery
of (i) certificates representing shares of Essex Acquisition Common Stock
allocable to the shares of Company Preferred Stock or Warrants represented by
such certificate or certificates or (ii) the Common Stock Consideration payable
in respect of shares of Company Common Stock represented by such certificate or
certificates. If any certificate representing shares of Essex Acquisition Common
Stock is to be issued, or any Common Stock Consideration is to be paid, to a
name other than that in which the certificate for the Company Preferred Stock,
Warrants or Company Common Stock, respectively, surrendered for exchange is
registered, it shall be a condition of such exchange that the certificates so
surrendered shall be properly endorsed, with signature guaranteed, or otherwise
in proper form for transfer and that the person requesting such exchange shall
pay to the Company any transfer or other taxes required by reason of the
issuance of certificates in or payment of Common Stock Consideration to a name
other than that of the registered holder of the certificates surrendered, or
establish to the satisfaction of the Company that such tax has been paid or is
not applicable.
e. Tax Matters. The Company and the Payment Agent shall be
-----------
entitled to deduct and withhold from the Cash Consideration otherwise payable
pursuant to this Agreement to any holder of Company Common Stock or Options such
amounts as the Company or the Payment Agent is required to deduct and withhold
with respect to the making of such payment under the United States Internal
Revenue Code of 1986, as amended, or any provision of state, local or foreign
tax law applicable to the making of such payment. To the extent that amounts are
so withheld by the Company or the Payment Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holders of
the Company Common Stock or Options in respect of which such deduction and
withholding was made by the Company or the Payment Agent.
f. No Liability. No party to this Agreement shall be liable to
------------
any person or entity in respect of any amounts paid or delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
g. Lost Certificates. In the event any certificate or
-----------------
certificates formerly representing Company Stock or Warrants shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such certificate or certificates to be lost, stolen or
destroyed, and if required by the Surviving Corporation and the Payment Agent,
the posting by such person of a bond in such amount as the Surviving Corporation
may reasonably require as indemnity against any claim that may be made against
it with respect to such certificate, the Payment Agent will issue in exchange
for such lost, stolen or destroyed certificate the consideration deliverable in
respect thereof as determined in accordance with this Article 2.
2.6 Dissenting Shares. Notwithstanding anything in this Agreement
-----------------
to the contrary, no share of Company Stock, the holder of which shall not have
voted shares in favor of the Merger and shall have properly complied with the
provisions of Section 262 of the Delaware Act as to appraisal rights (a
"Dissenting Share"), shall be deemed exchanged for and to represent the right to
receive the Essex Acquisition Common Stock or Common Stock Consideration, as
applicable, hereunder; and the holders of Dissenting Shares, if any, shall be
entitled to payment, solely from the Surviving Corporation, of the appraised
value of such Dissenting Shares to the extent
53
permitted by and in accordance with the provisions of Section 262 of the
Delaware Act; provided, however, that (i) if any holder of Dissenting Shares
shall, under the circumstances permitted by the Delaware Act, subsequently
deliver a written withdrawal of his or her demand for appraisal of such
Dissenting Shares, (ii) if any holder of Dissenting Shares fails to establish
his or her entitlement to rights to payment as provided in such Section 262 or
(iii) if neither any holder of Dissenting Shares nor the Surviving Corporation
has filed a petition demanding a determination of the value of all Dissenting
Shares within the time provided in such Section 262, such holder or holders (as
the case may be) shall forfeit such right to payment for such Dissenting Shares
pursuant to such Section 262 and each such Dissenting Share shall thereupon be
deemed to be exchanged for the right to receive the consideration applicable to
the exchange or cancellation, as applicable, of such Company Stock.
3. CONDITIONS.
The obligations of the parties hereto to consummate the Merger
and the other transactions contemplated hereby are subject to the satisfaction
of each of the following conditions:
3.1 Board Approval. The Boards of Directors of each of the
--------------
Company and Essex Acquisition shall not have revoked their approval and
authorization of this Agreement and the transactions contemplated hereby.
3.2 Shareholder Approval. The Merger, this Agreement and the
--------------------
transactions contemplated hereby shall have been duly approved by the requisite
vote of the holders of each of the Company Common Stock, the Series B Preferred
Stock and the Series C Preferred Stock, voting as separate voting groups. In
addition, the Merger, this Agreement and the transactions contemplated hereby
shall have been duly approved and adopted by the Company as the sole holder of
Essex Acquisition Common Stock.
3.3 No Injunction or Proceeding. No preliminary or permanent
---------------------------
injunction, temporary restraining order or other decree of a court, legislature
or other agency or instrumentality of federal, state or local government (a
"Governmental Entity") shall be in effect, no statute, rule or regulation shall
have been enacted by a Governmental Entity and no action, suit or proceeding by
any Governmental Entity shall have been instituted or threatened, which
prohibits the consummation of the Merger or challenges in any material respect
the transactions contemplated hereby.
3.4 Consents. Other than filing the Merger Documents, all
--------
consents, approvals and authorizations of and filings with Governmental Entities
required for the consummation of the transactions contemplated hereby shall have
been obtained or effected and/or filed.
3.5 Other Approvals. All other consents and approvals and the
---------------
satisfaction of all other requirements that are necessary, in the opinion of the
Company and its counsel, for the consummation of the Merger and other
transactions contemplated by this Agreement shall have been obtained.
3.6 Financing. Essex Acquisition shall have obtained
---------
financing for the payment of all amounts payable as a result of the Merger
(including all fees and expenses incurred in connection therewith), upon terms
satisfactory to Essex Acquisition in its sole discretion.
3.7 Exercise of Warrants or Dissenter's Rights. Neither party
------------------------------------------
shall have elected, in its sole discretion, to terminate this Agreement
following the exercise of any of the Warrants or the exercise by any holder of
Company Stock of its rights under Section 262 of the Delaware Act.
4. TERMINATION; AMENDMENT
4.1 Termination of Agreement. This Agreement may be
------------------------
terminated by the Company at any time prior to the Effective Time if for any
reason consummation of the transactions contemplated hereby is inadvisable in
the sole discretion of the Company's Board of Directors. Such termination shall
be effected by the
54
written notice of the Company to Essex Acquisition. Upon the giving of such
notice, this Agreement shall be terminated and there shall be no liability
hereunder or on account of such termination on the part of the Company or Essex
Acquisition or their respective directors, officers, employees, agents or
stockholders.
4.2 Amendment. This Agreement may be amended or modified at
---------
any time by mutual written agreement of the parties (a) in any respect prior to
the approval hereof by the shareholders of the Company entitled to vote hereon,
and (b) in any respect subsequent to such approval, provided that any such
amendment or modification subsequent to such approval shall not (i) change the
method of exchanging (x) the issued and outstanding Company Preferred Stock and
Warrants into shares of Essex Acquisition Common Stock or (y) the issued and
outstanding Company Common Stock and Options into the applicable Cash
Consideration, (ii) alter or change the amount of the Common Stock Consideration
or the Option Consideration, (iii) alter or change any provision of the Articles
of Incorporation of the Surviving Corporation that would require the approval of
its shareholders, or (iv) otherwise take any action that could have a material
adverse effect on the shareholders of the Company.
5. MISCELLANEOUS
5.1 Successors. This Agreement shall be binding on the
----------
successors of each of the Company and Essex Acquisition.
5.2 Counterparts. This Agreement may be executed in one or
------------
more counterparts and by each party on a separate counterpart, each of which
shall be deemed to be an original and all of which, taken together, shall
constitute one and the same instrument .
5.3 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Virginia, without
regard to the conflicts of laws or principles thereof.
5.4 No Third Party Beneficiaries. Except as provided in
----------------------------
Section 2.5, nothing in this Agreement is intended to confer upon any person or
entity not a party to this Agreement any rights or remedies under or by reason
of this Agreement.
IN WITNESS WHEREOF, the Boards of Directors of each of the parties hereto have
approved this Agreement and the duly authorized officers of each have executed
this Agreement on their behalf as of the day and year first above written.
ESSEX BANCORP, INC.
By:___________________________________
Gene D. Ross
President and Chief Executive Officer
ESSEX ACQUISITION CORP.
By:___________________________________
Gene D. Ross
President and Chief Executive Officer
55
Appendix B
FAIRNESS OPINION OF RP FINANCIAL
56
RP FINANCIAL, LC
- --------------------------------------------
Financial Services Industry Consultants
March 23, 2001
Special Committee to the Board of Directors
Essex Bancorp, Inc.
Interstate Corporate Center
Building 9, Suite 200
Norfolk, Virginia 23502
Members of the Special Committee:
You have requested RP Financial, LC. ("RP Financial") to provide you with
its opinion as to the fairness from a financial point of view of the
consideration to be paid to the current common holders of the common stock
("Common Stock") of Essex Bancorp, Inc., Norfolk, Virginia ("Essex" or the
"Company"), the holding company for Essex Savings Bank, F.S.B. (the "Bank"), in
connection with the merger transaction described below.
Description of Merger
- ---------------------
In this regard, Essex will enter into an Agreement and Plan of Merger (the
"Merger Agreement") with Essex Acquisition Corp. ("Essex Acquisition"), a newly-
formed wholly-owned subsidiary of the Company, whereby Essex Acquisition will
exchange all of the outstanding shares of the Company's Common Stock for cash
concurrent with the merger of the Company into Essex Acquisition (the "Merger").
The Bank will become a subsidiary of Essex Acquisition. This letter incorporates
by reference the proxy statement for the Merger and the Merger Agreement.
Following the Merger, the holders of the Common Stock will no longer have an
interest in the Company and the holders of the two series of preferred stock
("Preferred Stock"), Series B and Series C, and outstanding warrants to purchase
Common Stock ("Warrants") will own all of the equity interests in Essex
Acquisition, which will be the surviving company in the Merger. The Common Stock
ownership of Essex Acquisition will be based on the redemption value and
accumulated dividends of the both series of Preferred Stock and the value of the
Warrants determined as of February 1, 2001. The holders of the Series B and C
Preferred Stock will be issued new shares of Common Stock of Essex Acquisition
and the Warrants will be exchanged for new shares of Common Stock of Essex
Acquisition. Accordingly, the Merger will eliminate the public ownership of the
Company's Common Stock and will result in a "going private" transaction whereby
the common stock ownership of Essex Acquisition will be closely held by the
current holders of the Series B and C Preferred Stock and Warrants. As a result,
the Common Stock will no longer be traded on the American Stock Exchange, price
quotations with respect to sales of shares in the public market will no longer
be available and the Common Stock will no longer be registered under the
Securities Exchange Act of 1934, as amended. Following the Merger, Essex
Acquisition will be renamed Essex Bancorp, Inc. The effective time of the Merger
(the "Effective Time") is expected to occur as soon as practicable after the
meeting of shareholders approving the Merger and satisfaction and waiver of
terms and conditions of the Merger Agreement, following which the holders of the
Common Stock will receive a cash payment, as described below.
The Company intends to finance the Merger through a loan of up to $2
million, representing the anticipated aggregate consideration to be paid to the
holders of the Company's Common Stock plus related fees and expenses, according
to a letter setting forth terms for providing financing from Centura Bank dated
February 20, 2001.
Summary Description of Merger Consideration
- -------------------------------------------
At the Effective Time, all of the outstanding shares of Essex Common Stock
will be converted into the right to receive cash in an amount equal to $1.45 per
share ("Cash Consideration"). As of the date of this letter, Essex had a total
of 1,060,642 common shares outstanding.
________________________________________________________________________________
Washington Headquarters
Rosslyn Center Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210 Fax No.: (703) 528-1788
Arlington,VA 22209 E-Mail: mail@rpfinancial.com
57
The Company's granted employee and director stock options will be exchanged
for cash equal to the amount by which the Cash Consideration exceeds the
exercise price of such options, if any. Out of the money employee and director
stock options will not be eligible to receive any Cash Consideration. Payment
received, if any, will constitute consideration for the termination and
cancellation of all options and related stock appreciation rights. As of the
date of this letter, there were: 172,500 employee stock options with a weighted
average exercise price of approximately $1.42, of which 132,000 were in the
money with a weighted average exercise price of approximately $1.30, and 7,300
director stock options with a weighted average exercise price of $1.99, of which
2,350 were in the money with a weighted average exercise price of approximately
$1.22.
The Company has 7,949,000 Warrants outstanding, all of which are
exercisable into Essex Common Stock at a price of $0.9375 per share, and all of
the Warrants are owned by the holders of the Preferred Stock. Given tax
considerations and the limited equity available to the Company to pay the Cash
Consideration, any significant exercise of the Warrants prior to the Effective
Time may cause the Company to determine that it cannot consummate the Merger and
thus terminate the Merger Agreement. Further, because of the large number of
Warrants outstanding, any significant exercise of the Warrants prior to the
Effective Time may adversely impact the level of the Cash Consideration per
share.
RP Financial Background and Experience
- --------------------------------------
RP Financial, as part of its financial institution valuation, consulting
and merger advisory practice, is regularly engaged in the valuation of financial
institution securities in connection with mergers and acquisitions of commercial
banks and thrift institutions, initial and secondary offerings by commercial
banks and thrift institutions, mutual-to-stock conversions of thrift
institutions, and business valuations for other corporate purposes for financial
institutions including the valuation of equity and debt securities, stock-based
benefit plans and going private transactions. As specialists in the securities
of financial institutions, RP Financial has experience in, and knowledge of, the
Virginia and Mid-Atlantic markets for thrift and bank securities and financial
institutions operating in Virginia.
In the past, RP Financial has provided consulting and planning services to
Essex and has received customary fees for such services. Neither RP Financial
nor its members have any past or present ownership in any debt or equity
securities of Essex or any future ownership in any debt or equity securities of
Essex Acquisition. RP Financial will receive a fee from Essex for rendering this
opinion, a substantial portion of which is contingent upon the consummation of
the Merger. RP Financial will also receive a fee for the valuation of the
Warrants to assist the Special Committee in setting the conversion ratio of the
Warrants of the Company for Common Stock in Essex Acquisition. In addition,
Essex has agreed to indemnify RP Financial for certain liabilities arising out
of this financial advisory engagement. RP Financial has not been engaged by
Essex Acquisition. RP Financial is not a broker/dealer and thus does not engage
in the trading of securities for any company, including Essex, for its own
account or for others.
RP Financial's opinion does not address Essex's underlying business
decision to effect the Merger. At the direction of the Special Committee, RP
Financial has not been asked to, nor does RP Financial offer, any opinion as to
the material terms of the Merger Agreement or the form of the Merger. RP
Financial was not engaged to solicit third party indications of interest in the
possible acquisition of Essex in part or in whole.
Materials Reviewed and Considered
- ---------------------------------
In rendering this fairness opinion, RP Financial reviewed the following
material:
(1) the various documents pertaining to the Merger, including -
(a) the Merger Agreement,
(b) the term letter from Centura Bank, dated February 20, 2001
pertaining to the financing of the Merger,
(c) the latest draft of the shareholder proxy materials,
58
(d) the tax memorandum prepared by PricewaterhouseCoopers, dated
January 31, 2001;
(2) financial and other information of Essex, all with regard to balance
and off-balance sheet composition, profitability, interest rates,
volumes, maturities, trends, credit risk, interest rate risk,
liquidity risk and operations -
(a) audited financial statements for five fiscal years ended December
31, 2000 and unaudited financial statements for the first two
months of 2001,
(b) stockholder, regulatory and internal financial reports and for
the last five fiscal years, including quarterly and annual
reports, filings with the Securities and Exchange Commission,
including Form 10-K and Form 10-Q, and press releases,
(c) the annual proxy statements for the last five years,
(d) various other internal documents, including, but not limited to,
minutes of the Board of Directors for the Company and the Bank,
regulatory reports, the employee and directors stock options
schedule and the preferred dividends schedule assuming the
dividends continue to accumulate and earn interest over the next
five years.
(3) Comments by the Essex Board, Special Committee and management
regarding past and current business, operations, financial condition,
and future prospects;
(4) The Board approved business plan for Essex and subsidiaries for fiscal
year 2001, including financial projections, incorporating the pro
forma impact of the Merger;
(5) The net operating tax loss carryforward position of Essex and the
strategic implications historically, currently and prospectively to
realize the full benefit;
(6) The redemption value and accumulated dividends of Essex's Series B and
Series C preferred stock, and Essex's expectations that earnings will
continue to be inadequate to cover the annual dividends for both
series of Preferred Stock;
(7) The terms of the 7,949,000 Warrants outstanding, including the pro
forma impact and the resulting voting control of Essex's Common Stock
if the currently exercisable Warrants were to be partially or fully
exercised; and
(8) The Common Stock price history of Essex, including the closing price
and daily volume for Essex's stock on the American Stock Exchange from
1999 up to the February 1, 2001 announcement of the Merger and up to
the date of this opinion.
RP Financial considered the absence of interest by third party financial
institutions and other financial intermediaries in pursuing a merger with, or an
acquisition of, Essex over the past five years, even with the assistance
provided by a third party financial advisor in 2000 who conducted a targeted
canvassing of financially capable in-market and out-of-market financial
institutions. RP Financial also considered the alternative strategies evaluated
and/or pursued by Essex over the last five years to provide returns to the
holders of the Preferred Stock and the Common Stock, including: (1) a secondary
offering of common stock to partially or fully refund the Preferred Stock; (2)
strategic affiliations with banking and non-banking entities whereby such third
parties would purchase the existing Preferred Stock or newly issued shares of
Common Stock; and (3) going private through a Merger whereby the holders of the
Common Stock would receive cash consideration and the holders of the Preferred
Stock and Warrants would become the holders of the Common Stock following the
Merger. RP Financial also considered the economic and demographic
characteristics in the local market area, the interest rate environment and the
potential impact of the regulatory, legislative and economic environments on
operations for Essex and the public perception of the savings institution
industry.
In evaluating the Merger, and specifically the Cash Consideration to be
paid to the current holders of the outstanding shares of the Company's Common
Stock, RP Financial also considered:
(1) Essex's financial and trading characteristics relative to publicly-
traded thrifts, including a peer group of regionally based publicly-
traded thrifts and a peer group of similarly sized thrifts with an
emphasis in mortgage banking and servicing of loans for others;
59
(2) the financial terms of completed and pending acquisitions of
comparable savings institutions both regionally and nationally from
1998 to present, including the pricing ratios relative to earnings per
common share, book value per common share, assets per share and the
tangible book value premium relative to core deposits;
(3) the trading price premium paid in the acquisitions of publicly-traded
savings institutions and commercial banks 1998 to present;
(4) the trading price premium paid in going private transactions involving
publicly-traded banks and thrifts since the end of 1999;
(5) the trading price premium paid in going private transactions 2000 to
date of non-financial institutions in which the controlling/continuing
shareholders owned 50% or more and 90% or more of the voting stock or
equity;
(6) the trading price premium paid in "Dutch auction" tender offers
conducted by banks and thrifts 1998 to present; and
(7) discounted cash flow analyses pertaining to Essex reflecting future
prospects, before consideration of the Merger, which are expected to
lead to further erosion of the negative book value per common share
despite anticipated balance sheet growth and profitability.
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Essex furnished by management to RP Financial for review, as well as publicly-
available information regarding other financial institutions and economic and
demographic data. Essex did not restrict RP Financial as to the material it was
permitted to review. RP Financial further relied upon the assurances of Essex's
management that it is unaware of any facts that would make the information
provided to RP Financial incomplete or misleading in any material respect. With
respect to projected financial and operating data provided by Essex, RP
Financial has assumed that they were reasonably prepared and reflect the best
currently available estimates and judgment of the management and staff of Essex
relating to the future financial and operational performance and business
prospects of Essex and its subsidiaries. RP Financial did not perform or obtain
any independent appraisals or evaluations of the assets and liabilities and
potential and/or contingent liabilities of Essex. It is the understanding of RP
Financial from Essex that there have not been any prior formal valuations of the
Company's Common Stock during the past five years.
RP Financial expresses no opinion on matters of a legal, regulatory, tax or
accounting nature or the ability of the Merger as currently structured. In
rendering this opinion, RP Financial assumed that, in the course of obtaining
the necessary regulatory and governmental approvals for the Merger, there will
be no restriction imposed on Essex or Essex Acquisition that will have a
material adverse effect on the ability of the Merger to be consummated as
currently structured and that the Merger will comply with applicable federal and
state laws. RP Financial has also assumed that the draft proxy materials and
Merger Agreement reviewed in connection with the preparation of this letter will
conform in all material respects to the final proxy materials and Merger
Agreement.
Opinion
- -------
It is understood that this letter is directed to the Special Committee of
the Board of Directors of Essex in its consideration of the Merger Agreement,
and does not constitute a recommendation to any current common stockholder of
Essex as to any action that such common stockholder should take in connection
with the Merger Agreement, or otherwise. Furthermore, this letter is not
directed to the holders of the Series B and C preferred stock and Warrants. RP
Financial's opinion does not address Essex's or Essex Acquisition's respective
underlying business decisions to effect the Merger. It is understood that RP
Financial's opinion does not address whether Essex Acquisition or any other
party would be willing to pay consideration in excess of the Cash Consideration
for the outstanding shares of Common Stock.
It is understood that this opinion is based on market conditions and other
circumstances existing on the date hereof.
It is understood that this opinion may be included in its entirety in any
communication by Essex or its Special Committee of the Board of Directors to the
holders of the Common Stock of Essex. It is also understood that this opinion
may be included in its entirety in any regulatory filing by Essex and that RP
Financial consents to
60
the summary of the opinion in the proxy materials of Essex, and any amendments
thereto. Except as described above, this opinion may not be summarized,
excerpted from or otherwise publicly referred to without RP Financial's prior
written consent.
Based upon and subject to the foregoing, and other such matters considered
relevant, it is RP Financial's opinion that, as of the date hereof, the Cash
Consideration to be received by the current holders of the outstanding shares of
Essex's Common Stock in the Merger is fair to such shareholders from a financial
point of view.
Respectfully submitted,
RP FINANCIAL, LC.
/s/ RP Financial, LC.
61
Appendix C
DISSENTERS' RIGHTS PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW'
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds
such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who
has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to (S) 228 of this title shall
be entitled to an appraisal by the Court of Chancery of the fair value
of the stockholder's shares of stock under the circumstances described
in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of
a nonstock corporation; and the words "depository receipt" mean a
receipt or other instrument issued by a depository representing an
interest in one or more shares, or fractions thereof, solely of stock
of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to (S) 251 (other than a merger
effected pursuant to (S) 251(g) of this title), (S) 252, (S) 254, (S)
257, (S) 258, (S) 263 or (S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at
the record date fixed to determine the stockholders entitled to
receive notice of and to vote at the meeting of stockholders to
act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger
if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in
subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of
merger or consolidation pursuant to (S)(S) 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository
receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security
on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
62
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b.
of this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under (S) 253 of this
title is not owned by the parent corporation immediately prior to
the merger, appraisal rights shall be available for the shares of
the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the
certificate of incorporation contains such a provision, the procedures
of this section, including those set forth in subsections (d) and (e)
of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20
days prior to the meeting, shall notify each of its stockholders
who was such on the record date for such meeting with respect to
shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the
taking of the vote on the merger or consolidation, a written
demand for appraisal of such stockholder's shares. Such demand
will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such stockholder's shares. A
proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger
or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228
or (S) 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or
within ten days thereafter, shall notify each of the holders of
any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall
be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger
or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving
or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the
corporation of the identity of the
63
stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation
shall send such a second notice to all such holders on or within
10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger
or consolidation and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the
office of the Register in Chancery in which the petition was filed a
duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery,
if so ordered by the Court, shall give notice of the time and place
fixed for the hearing of such petition by registered or certified mail
to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall
also be given by 1 or more publications at least 1 week before the day
of the hearing, in a newspaper of general circulation published in the
City of Wilmington, Delaware or such publication as the Court deems
advisable. The forms of the notices by mail and by publication shall
be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of
64
the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of
the merger or consolidation, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account all
relevant factors. In determining the fair rate of interest, the Court
may consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application
by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in
its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted such stockholder's certificates of stock to the Register in
Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such stockholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or
of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a
portion of the expenses incurred by any stockholder in connection with
the appraisal proceeding, including, without limitation, reasonable
attorney's fees and the fees and expenses of experts, to be charged
pro rata against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock
for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however,
that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written
withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval
of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
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Appendix D
AUDIT COMMITTEE CHARTER
ESSEX BANCORP, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
I. PURPOSE
The primary function of the Audit Committee (the "Committee") is to assist
the Board of Directors (the "Board") in fulfilling its oversight
responsibilities for: the financial reports and other financial information
provided by Essex Bancorp, Inc. and its subsidiaries ("Essex" or the "Company")
to any governmental body or the public; the Company's systems of internal
controls regarding finance, accounting, legal compliance and ethics that
management and the Board have established; and the Company's auditing,
accounting and financial reporting processes generally. Consistent with this
function, the Committee should encourage continuous improvement of, and should
foster adherence to, the Company's policies, procedures and practices at all
levels.
In discharging its oversight role, the Committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities and personnel of the Company and has the power to retain
outside counsel, auditors or other specialists for this purpose. The Board and
the Committee are in place to represent the Company's shareholders; accordingly,
the independent auditors and the internal auditor are ultimately accountable to
the Board and the Committee.
The Committee's primary responsibilities and duties are to:
. Serve as an independent and objective party to monitor the Company's
financial reporting process and systems of internal control.
. Review and appraise the audit efforts of the Company's independent auditors
and Internal Audit Department.
. Provide an open avenue of communication among the independent auditors,
financial and senior management, the Internal Audit Department, and the
Board.
The Committee will primarily fulfill these responsibilities by carrying out the
activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Committee shall be comprised of three or more directors as determined
by the Board, each of whom shall be independent directors, and free from any
relationship that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the Committee. All
members of the Committee shall have a working familiarity with basic finance and
accounting practices, and at least one member of the Committee shall have
accounting or related financial management expertise. Committee members may
enhance their familiarity with finance and accounting by participating in
educational programs conducted by the Company, an outside consultant, or
professional organizations.
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board or until their successors shall be duly
elected and qualified. Unless a Chair is elected by the full Board, the members
of the Committee may designate a Chair by majority vote of the full committee
membership.
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III. MEETINGS
The Committee shall convene at least four times annually, or more
frequently as circumstances dictate. As part of its job to foster open
communication, the Committee should meet at least annually with management, the
internal auditor, and the independent auditors in separate executive sessions to
discuss any matters that the Committee or each of these groups believe should be
discussed privately. In addition, the Committee, or at least its Chair, should
meet or talk with the independent auditors and management quarterly to review
the Company's financials consistent with IV.4 below.
The Committee shall maintain minutes of meetings and periodically report to
the Board on significant results of the foregoing activities.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties, the Committee shall:
Documents/Reports Review
1. Review and update this Charter periodically, at least annually, as
conditions dictate.
2. Review the Company's annual and quarterly financial statements and filings
under the securities laws, press releases reporting earnings for quarterly
or annual periods, reports by independent auditors on financial statements,
compliance and other matters and any other reports or documents which the
Committee deems appropriate in fulfilling its responsibilities.
3. Review the regular internal reports to management prepared by the Internal
Audit Department and management's response.
4. Review with financial management and the independent auditors the 10-Q
prior to its filing or prior to the release of earnings. The Chair of the
Committee may represent the entire Committee for purposes of this review.
Independent Auditors
5. Review the performance, effectiveness, and independence of the auditors and
annually recommend to the Board the appointment of the independent auditors
or approve any discharge of auditors when circumstances warrant. The
independent auditors are ultimately accountable to the Committee and the
Board.
6. Approve the fees and other significant compensation to be paid to the
independent auditors.
7. On an annual basis, review and discuss with the independent auditors all
significant relationships the independent auditors have with the Company to
determine the auditors' independence, and obtain from the independent
auditors the written disclosures and the letter from the independent
auditors required (ISB Standard No. 1) confirming the auditors'
independence.
8. Periodically consult with the independent auditors out of the presence of
management about internal controls and the fullness and accuracy of Essex's
financial statements.
9. After the completion of the annual examination, and prior to releasing the
year-end earnings, review with management and the independent auditors the
Company's reported results of operations and financial condition, and
discuss certain matters required to be communicated to Audit Committees in
accordance with AICPA SAS 61.
67
Internal Audit Department
10. Jointly with management and the internal auditor, review the budget, scope
of audit plan, changes in the plan, activities, organizational structure,
staffing, and qualifications of the Internal Audit Department, as needed.
11. Review and have veto power over the appointment and dismissal of the
internal auditor.
12. Consider and review, with management and the internal auditor, the Internal
Audit Department's charter.
Financial Reporting Processes
13. Review the reports of the independent auditors and the internal auditor
relative to the integrity of Essex's financial reporting processes, both
internal and external.
14. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
15. Consider and approve, if appropriate, major changes to the Company's
auditing and accounting principles and practices as suggested by the
independent auditors, management, or the Internal Audit Department.
16. Establish regular and separate systems of reporting to the Committee by
each of management, the independent auditors and the internal auditor
regarding any significant judgments made in management's preparation of the
financial statements and the view of each as to the appropriateness of such
judgments.
17. Following completion of the annual audit, review separately with each of
management, the independent auditors and the Internal Audit Department any
significant difficulties encountered during the course of the audit,
including any restrictions on the scope of work or access to required
information.
18. Review any significant disagreement among management and the independent
auditors or the Internal Audit Department in connection with the
preparation of the financial statements.
Process Improvement
19. Review with the independent auditors, the Internal Audit Department, and
management the extent to which changes or improvements in financial or
accounting practices, as approved by the Committee, have been implemented.
(This review should be conducted at an appropriate time subsequent to
implementation of changes or improvements, as decided by the Committee.)
20. Review with the Internal Audit Department, independent auditors, and
management any recommendations for improvement in internal controls,
administrative procedures, accounting and reporting policies and practices,
and other areas. Obtain and review management's responses to such
recommendations.
Ethical and Legal Compliance
21. Establish, review, and update periodically the Code of Conduct for All
Employees (the "Code") and ensure that management has established a system
to enforce this Code.
22. Review management's monitoring of the Company's compliance with the Code,
and ensure that management has the proper review system in place to ensure
Essex's compliance with applicable laws and regulations.
23. Review reports of compliance issued by the Internal Audit Department,
independent auditors, or examiners and review management's responses to
matters noted in such reports.
24. Review, with the Company's management, legal compliance matters including
corporate securities trading policies.
68
25. Review, with the Company's management, any legal matter that could have a
significant impact on the Company's financial statements.
26. Perform any other activities consistent with this Charter, the Company's
By-laws, and governing law, as the Committee or the Board deems necessary
or appropriate.
27. Appoint or retain outside legal counsel, auditors or specialists, as deemed
necessary for purposes of fulfilling the Audit Committee's duties as
contemplated in this Charter.
Audit Committee Report
28. Provide a report in the Company's proxy statement, as required by the SEC
rule, Item 306(a)(4), stating whether:
(a) The Committee has reviewed and discussed the audited financial
statements with management;
(b) The Committee has discussed with the independent auditors the matters
required to be discussed by AICPA SAS 61;
(c) The Committee has received the written disclosures and the letter from
the independent auditors required (ISB Standard No. 1) and has
discussed with the auditors the auditor's independence; and
(d) Based on the review and discussions referred to in paragraphs 28 (a)-
(c) above, it is recommended to the Board that the financial
statements be included in the Annual Report on Form 10-K for the last
fiscal year for filing with the SEC.
Approved: 26 May 2000
69
PRELIMINARY COPY
ESSEX BANCORP, INC.
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ESSEX BANCORP,
INC., FOR USE ONLY AT THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON July
____, 2001 AND ANY ADJOURNMENT THEREOF.
The undersigned hereby acknowledges prior receipt of the Notice of the Annual
Meeting of Stockholders (the "Meeting") and the Proxy Statement describing the
matters set forth below, and indicating the date, time and place of the Meeting,
and hereby appoints the Board of Directors of Essex Bancorp, Inc. (the
"Company"), or any of them, as proxy, each with full power of substitution to
represent the undersigned at the Meeting, and at any adjournment or adjournments
thereof, and thereat to act with respect to all votes that the undersigned would
be entitled to cast, if then personally present on the matters referred to on
the reverse side in the manner specified.
This Proxy, if executed, will be voted as directed, but, if no instructions are
specified, this Proxy will be voted FOR each of the proposals listed. Please
date and sign this Proxy on the reverse side and return it in the enclosed
envelope. This Proxy must be received by the Company no later than July ___,
2001.
This Proxy is revocable and the undersigned may revoke it at any time prior to
the Meeting by giving written notice of such revocation to the Secretary of the
Company. Should the undersigned be present and want to vote in person at the
Meeting, or any adjournment thereof, the undersigned may revoke this Proxy by
giving written notice of such revocation to the Secretary of the Company on a
form provided at the Meeting.
(Continued and to be signed on the reverse side)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF PROPOSAL 1 AND PROPOSAL
2.
FOR AGAINST ABSTAIN
[_] [_] [_]
1. Approval and
Adoption of the
Agreement and Plan
of Merger.
2. Approval of adjournments of the Meeting.
3. To vote, in its discretion, upon any other matters that may properly come
before the Meeting or any adjournment thereof. The Board is not aware of any
other matters that will come before the Meeting.
Date: _________________________
Signature(s) _______________________________________________
Signature(s) _______________________________________________
Please date this Proxy and sign your name exactly as your name appears above.
Joint accounts need only one signature, but all stockholders should sign if
possible. When signing as attorney, executor, administrator, trustee, guardian
or similar position, please add your full title as such to your signature. If a
corporation, please sign the full corporate name by president or an authorized
officer. If a partnership, please sign in partnership name by authorized person.
PLEASE RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PAID ENVELOPE.