Exhibit 99.3.a
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[Fidelity Federal Bancorp Letterhead]
_______, 2004
Dear Shareholder,
Fidelity Federal Bancorp intends to engage in a transaction that will result in
termination of the registration of our common stock under the federal securities
laws. This will eliminate the significant expense required to comply with the
reporting and related requirements under these laws. Often referred to as a
"going private transaction," the transaction is a reverse split of our common
stock whereby each 30,000 shares of our common stock will be converted to one
share of our common stock, and holders of fractional shares would be entitled to
receive cash in lieu of fractional interests an amount equal to $1.85 per share
for each pre-split share that becomes a fractional interest. Shareholders owning
less than 30,000 shares will no longer be shareholders of the Company. The $1.85
per share price represents the fair value for a share of our common stock
determined by Professional Bank Services, our financial advisor.
Following the reverse stock split, the Company will effect a 2,500 for 1 forward
stock split for those shareholders who, following the reverse stock split,
continue to hold at least one whole share of Company common stock. The Company
does not intend to issue any fractional shares of stock as a result of the
forward stock split. Each shareholder who would otherwise be entitled to a
fractional share of common stock of the Company following the forward stock
split would be entitled to receive in cash in lieu of fractional interests an
amount equal to $22.20 per share for each pre-forward-split share that becomes a
fractional interest.
After careful consideration, the Board of Directors has concluded that the costs
associated with being a "public" company are not justified by the benefits. The
Board has reviewed the proposed transaction and considered its fairness to
unaffiliated stockholders who hold fewer than 30,000 shares as well as those
stockholders holding 30,000 or more shares. The Board also received a fairness
opinion from its financial advisor with regard to the per share cash amount to
be paid to the unaffiliated stockholders. After careful consideration, your
Board of Directors believes that transaction is in the best interests of the
Company and its stockholders.
Under Indiana law and the Articles of Incorporation of the Company, the Board of
Directors of the Company may amend the Company's Articles of Incorporation to
conduct both the reverse stock split and the forward stock split without the
approval of the shareholders. Therefore, the Company is not seeking shareholder
approval for these actions and no vote is sought in connection with these
actions. Under Indiana law, shareholders are not entitled to dissenters' rights
in connection with this type of going private transaction.
The attached document contains details on the proposed transaction and we urge
you to read it very carefully. Thank you for your continued support.
Donald R. Neel
President and Chief Executive Officer
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE TRANSACTION DESCRIBED HEREIN, PASSED
UPON THE MERITS OR FAIRNESS OF THE PROPOSED TRANSACTION OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL AND A CRIMINAL OFFENSE. NO PERSON IS AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS DOCUMENT OR
RELATED SCHEDULE 13E-3, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US.
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ii
TABLE OF CONTENTS
SUMMARY TERM SHEET.......................................................1
The Company...........................................................1
Reverse Stock Split...................................................1
Forward Stock Split...................................................2
Purposes for the Transaction..........................................2
Fairness of the Transaction and Fairness Opinion......................3
Potential Conflicts of Interest.......................................3
Effect on Market for Shares...........................................3
Shareholder Approval..................................................4
No Dissenters' Rights.................................................4
Stock Certificates....................................................4
Federal Tax Consequences..............................................4
Reservation...........................................................5
SUMMARY FINANCIAL INFORMATION............................................5
Summary Historical Financial Information..............................5
Selected Per Share Financial Information..............................7
Market Prices and Dividend Information................................8
Summary Pro Forma Financial Information...............................8
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS...............11
SPECIAL FACTORS.........................................................12
Background...........................................................12
Going Private Transaction; Effects...................................13
Purposes of the Transaction..........................................15
Fairness of the Transaction..........................................17
Fairness Opinion of Financial Advisor................................18
Potential Conflicts of Interest......................................25
Certain Effects of the Transaction...................................26
Warrants to Purchase Shares of Common Stock..........................28
Shareholder Approval.................................................28
Dissenters' Rights...................................................28
Conduct of Business Following Transaction............................28
Federal Tax Consequences.............................................29
Fees and Expenses....................................................30
Reservation..........................................................30
THE PARTIES.............................................................30
Fidelity Federal Bancorp.............................................31
Security Ownership of Management.....................................31
Officers and Directors...............................................31
Stock Plans of the Company...........................................31
Stock Buy Back Program...............................................31
WHERE YOU CAN FIND MORE INFORMATION.....................................31
DOCUMENTS INCORPORATED BY REFERENCE.....................................32
SUMMARY TERM SHEET
------------------
This summary term sheet highlights selected information from this disclosure
document about the proposed transaction. This summary term sheet may not contain
all of the information that is important to you. For a more complete description
of the transaction, you should carefully read this disclosure document and all
of its annexes. For your convenience, we have directed your attention to the
location in this disclosure document where you can find a more complete
discussion of each item listed below.
As used in this disclosure document, "the Company", "we", "ours" and "us" refer
to Fidelity Federal Bancorp, and the "transaction" refers to the reverse stock
split and the forward stock split, together with the related cash payments to
the shareholders in lieu of fractional shares of Company common stock.
The reverse stock split would be considered a "going private" transaction as
defined in Rule 13e-3 promulgated under the Securities Exchange Act of 1934
because it is intended to, and, if completed, will likely terminate the
registration of our common stock under Section 12(g) of the Exchange Act and
terminate our duty to file periodic reports with the Securities and Exchange
Commission ("SEC"). In connection with the reverse stock split, we have filed a
Rule 13e-3 Transaction Statement on Schedule 13e-3 with the SEC.
The Company
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Fidelity Federal Bancorp, incorporated in 1993 under the laws of the state of
Indiana, is a registered savings and loan holding company. The Company has its
principal executive offices at 18 N.W. Fourth Street, Evansville, Indiana 47708.
The Company's telephone number is (812) 424-0921. The Company's savings bank
subsidiary, United Fidelity Bank, fsb ("United") was organized in 1914 and is a
federally-chartered stock savings bank located in Evansville, Indiana. See "The
Parties -- Fidelity Federal Bancorp". Shares of the common stock of the Company
are currently traded on the NASDAQ system under the trading symbol FFED.
Reverse Stock Split
- -------------------
The reverse split will provide for the conversion and reclassification of each
30,000 outstanding shares of common stock into one share of common stock in a
reverse stock split. In the reverse stock split, the common stockholders will
receive one share of common stock for each 30,000 shares they hold immediately
prior to the effective date of the reverse stock split, and they will receive
cash in lieu of any fractional shares to which they would otherwise be entitled.
The cash payment for the common stock will be equal to $1.85 per pre-split
share. Please see "Special Factors -- Going Private Transaction; Effects -The
Reverse Stock Split" for a more detailed discussion.
1
Forward Stock Split
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Following the reverse stock split, the Company will effect a 2,500-for-1 forward
stock split for those shareholders who, following the reverse stock split,
continue to hold at least one whole share of Company common stock. The Company
does not intend to issue any fractional shares of stock as a result of the
forward stock split. Each shareholder who would otherwise be entitled to a
fractional share of common stock of the Company following the forward stock
split would be entitled to receive in cash in lieu of fractional interests an
amount equal to $22.20 per share for each pre-forward-split share that becomes a
fractional interest. See "Special Factors - Going Private Transaction; Effects -
The Forward Stock Split" for a more detailed discussion.
Effects of Reverse Split
- ------------------------
o The reverse split would reduce the number of holders of the common
stock of the Company to less than 300 and enable the Company to elect
to terminate the registration of its common stock pursuant to Section
12(g) of the Securities Exchange Act of 1934.
o As a result of the transaction, the common stock will no longer be
listed or traded on the NASDAQ system and it is expected that any
trading in the Company's common stock will occur only in privately
negotiated sales. The Company currently anticipates that it will use
its best efforts to cause its common stock to be listed on the OTC
Bulletin Board, although there can be no assurance that it will do so.
o Going private will significantly change the public disclosures of the
Company.
Purposes for the Transaction
The principal purposes of, and our reasons for, effecting the reverse stock
split are:
o to reduce the number of our stockholders of record to fewer then 300,
which will enable us to terminate the registration of our common stock
under the Exchange Act. This will mean that our duty to file periodic
reports with the SEC will be terminated, and we will no longer be
classified as an SEC reporting company;
o the cost savings of approximately $290,000 per year that we expect to
realize in the future as a result of the deregistration of our common
stock, along with not having to comply with most of the provisions of
the Sarbanes-Oxley Act of 2002;
o management's belief that it is necessary to realize every opportunity
to reduce overhead and focus our resources on achieving maximum
profitability and value of our stock;
2
o the additional savings in terms of management's and employees' time
that will no longer be spent preparing the periodic reports required
of publicly-traded companies under the Exchange Act and managing
stockholder relations and communications; and
o the fact that we have not realized many of the benefits normally
presumed to result from being a publicly traded company (such as the
development or existence of an active trading market for and liquidity
of our common stock, enhanced corporate image, and the ability to use
Company stock to attract, retain and incentivize employees) to the
very limited liquidity of our common stock.
See "Special Factors -Purposes of the Transaction".
Fairness of the Transaction and Fairness Opinion
The Board of Directors of the Company believes that the transaction is fair from
a financial point of view to the shareholders of the Company. The Company has
received a fairness opinion from Professional Bank Services, its financial
adviser, that the cash consideration to be received by the shareholders who are
paid cash for their fractional shares of Company common stock following the
reverse stock split and following the forward stock split is fair to such
shareholders as well as the remaining shareholders from a financial point of
view. The fairness opinion is attached as Annex A to this disclosure document
and we encourage you to read the opinion carefully in its entirety. See "Special
Factors - Fairness of the Transaction" and "Special Factors -- Fairness
Opinion".
Potential Conflicts of Interest
The executive officers and Directors of the Company may have interests in the
transaction that are different from your interests as a shareholder. See
"Special Factors -- Potential Conflicts of Interest"; "Special Factors --
Employee Stock Options" and "The Parties -- Security Ownership of Management".
Effect on Market for Shares
The common stock of the Company is currently traded on the NASDAQ system. We
anticipate that following the transaction the common stock will be delisted from
the NASDAQ system. This delisting, together with the reduction in public
information concerning the Company as a result of its no longer being required
to file reports under the Securities Exchange Act of 1934, will reduce the
liquidity of the common stock. The Company currently anticipates that it will
use its best efforts to cause its common stock to trade on the OTC Bulletin
Board, although there can be no assurance that it will do so. See "Special
Factors -- Certain Effects of the Transaction".
3
Shareholder Approval
The shareholders are not being asked to vote in connection with this
transaction.
Pursuant to Section 23-1-38-2 of the Indiana Code, shareholder approval is not
required for this type of going private transaction or for the amendments to the
Articles of Incorporation of the Company and no vote of the shareholders is
being sought. See "Special Factors -- Shareholder Approval".
No Dissenters' Rights
Under Indiana law, shareholders are not entitled to dissenters' rights in
connection with this type of going private transaction. See "Special Factors --
Dissenters' Rights".
Stock Certificates
You should not send your stock certificates to the Company now. Once the
transaction is completed, we will send instructions on how to receive any cash
payments you may be entitled to receive.
Federal Tax Consequences
The Company believes that there will be no material federal tax consequences to
you if you continue to be a shareholder of the Company and do not receive cash
for fractional shares following the consummation of the transaction. Except for
cash received, your basis in the shares you currently hold will carry forward as
your basis in the new shares you will receive after the forward stock split.
The Company believes that, if you receive cash in exchange for fractions of
shares of common stock following the reverse stock split, the transaction will
be treated as a taxable transaction for United States federal income tax
purposes. Generally shareholders receiving cash in the transaction will
recognize a gain or loss for United States federal income tax purposes based on
the difference between the tax basis of the shares of common stock held
immediately prior to the effective time of the reverse stock split and $1.85. If
shares of the common stock of the Company are held by a shareholder as capital
assets, gain or loss recognized by the shareholder will be capital gain or loss,
and will be long-term capital gain or loss if the shareholder's holding period
for the shares of common stock exceeds twelve months. Under present law,
long-term capital gains recognized by an individual shareholder will generally
be taxed at a maximum marginal federal tax rate of 15%, and long-term capital
gains recognized by a corporate shareholder will be taxed at a maximum marginal
federal tax rate of 35%. In addition, under present law, the ability to use
capital losses to offset ordinary income is generally limited for shareholders
that are individuals to the amount of capital gains recognized during a tax year
plus $3,000.
4
Tax matters are complicated and the tax consequences of the merger to each
shareholder will depend on the facts of that shareholder's situation. You are
urged to consult your tax advisor for a full understanding of the tax
consequences of the transaction to you. See "Special Factors -- Federal Tax
Consequences".
Reservation
The Company reserves the right to abandon the transaction any time before the
filing of the necessary amendment to the Articles of Incorporation with the
Indiana Secretary of State. The Company also reserves the right to abandon or
delay the transaction for any reason.
SUMMARY FINANCIAL INFORMATION
-----------------------------
Summary Historical Financial Information
The following summary of historical consolidated financial data was derived from
the Company's audited consolidated financial statements as of and for each of
the years ended December 31, 2002 and December 31, 2003 and from the Company's
unaudited interim consolidated financial statements for the three and nine
months ended September 30, 2004. The results of operations for the three and
nine months ended September 30, 2004 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2004 or any other
interim period. This financial information is only a summary and should be read
in conjunction with the audited consolidated financial statements of the Company
and the other financial information included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 and the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004, each filed by the
Company with the Securities and Exchange Commission ("SEC"), which information
is incorporated by reference into this disclosure document. See "Where You Can
Find More Information" and "Documents Incorporated by Reference".
5
(Dollars in thousands, except share and per share data)
Six Months
Selected Financial Data Qtr. End YTD December 31, December 31, December 31, December 31, Ended
as of: September 30, September 30, 2003 2002 2001 2000 December 31,
2004 2004 1999
Total Assets $201,842 $175,390 $132,290 $159,659 $166,466 $171,457
Interest-bearing deposits 1,296 1,263 2,369 14,605 14,718 22.911
Investment securities
available for sale 62,724 52,208 34,912 18,074 21,001 24,305
Loans, net 117,102 100,437 73,087 104,432 107,842 96,919
Deposits 131,615 120,680 106,791 120,155 126,944 135.016
Borrowings 16,317 8,077 10,586 12,317 13,939 14,465
Federal Home Loan Bank
advances 36,000 31,550 3,000 12,333 9,903 9,039
Stockholders' equity 16,171 13,367 9,588 11,895 8,775 5,427
Selected Operations Data
for the Year Ended:
Interest income $2,189 $6,280 $6,650 $9,034 $11,455 $12,100 $6,019
Interest expense 998 2,956 3,827 6,022 8,501 8,457 4,268
Net interest income 1,191 3,324 2,823 3,012 2,954 3,643 1,751
Provision for loan losses 134 343 13 (360) 1,349 670 1,345
Net interest income after
provision for loan losses 1,057 2,981 2,810 3,372 1,605 2,973 406
Non-interest income 579 1,940 3,878 3,507 3,933 1,816 1,001
Non-interest expense 1,523 4,712 6,694 9,927 5,698 7,314 5,148
Income (loss) from
continuing operations
before tax 113 209 (6) (3,048) (160) (2,525) (3,741)
Income tax expense
(benefit) (8) (87) (220) (641) (384) (1,369) (1,671)
Income (loss) from
continuing operations 121 296 214 (2,407) 224 (1,156) (2,070)
Loss from discontinued
operations before tax -- -- -- (1,537)
Income tax benefit -- -- -- 451
Los from discontinued
operations -- -- -- (1,988)
Net income (loss) $121 $296 $214 $(4,395) $224 $(1,156) $(2,070)
Selected Financial Ratios
Return on average assets 0.24 0.20 0.14% (2.75)% 0.14% (0.71)% (2.41)%
Return on stockholders'
equity 3.07 2.65 1.69 (36.82) 2.18 (16.14) (51.37)
Net Interest margin 2.60 2.52 2.15 2.18 2.03 2.49 2.24
Net interest spread 2.51 2.44 2.11 2.23 2.12 2.33 2.00
Tangible equity to assets
at year-end 8.01 6.87 8.52 8.48 8.42 6.78
Allowance for loan losses
to loans 0.73 0.73 1.13 2.01 1.75 2.04
Allowance for loan losses
to non-performing loans 86.71 49.33 91.48 55.90 222.27 179.96
Dividend payout ratio N/A N/A N/A N/A N/A N/A N/A
6
Selected Per Share Financial Information
- ----------------------------------------
The following table sets forth selected historical per share financial
information for the Company. The information presented below is derived from the
consolidated historical financial statements of the Company, including the
related notes thereto. You should read this table in conjunction with the
audited consolidated financial statements of the Company and the other financial
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003 and the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, each filed by the Company with the Securities
and Exchange Commission ("SEC"), which information is incorporated by reference
into this disclosure document. See "Where You Can Find More Information" and
"Documents Incorporated by Reference".
YTD
Per Share Data September 30, December 31, December 31, December 31, December 31, Six Months
2004 2003 2002 2001 2000 Ended December
31, 1999
Basic net income (loss)
from continuing
operations $0.03 $0.02 ($0.39) $0.14 ($0.29) $ (0.66)
Basic net loss from
discontinued operations (0.32)
Basic net income (loss) 0.03 0.02 (0.71) 0.04 (0.29) (0.66)
Diluted net income
(loss) from continuing
operations 0.03 0.02 (0.39) 0.04 (0.29) (0.66)
Diluted net loss from
discontinued operations (0.32)
Diluted net income
(loss) 0.03 0.02 (0.71) 0.04 (0.29) (0.66)
Cash dividends declared
Book value at year-end 1.47 1.39 1.42 1.99 1.90 1.72
Closing market price
(bid) at year-end 1.46 1.62 1.47 2.30 1.31 1.25
Number of average
common and common
equivalent 10,322,140 8,932,084 6,183,269 5,146,726 4,057,168 3,147,662
7
Market Prices and Dividend Information
- --------------------------------------
Shares of the common stock of the Company are currently traded on the NASDAQ
system under the trading symbol "FFED". The table below sets forth, for the
quarters indicated, the high and low bid prices as quoted on the NASDAQ system,
based on published financial sources, and the dividends paid. These quotations
reflect inter-dealer prices without mark-up, mark-down or commission and may not
represent actual transactions.
Period High Low
------ ---- ---
2004
First Quarter $2.11 $1.55
Second Quarter 2.05 1.37
Third Quarter 1.77 1.41
2003
First Quarter 1.75 1.21
Second Quarter 1.53 1.12
Third Quarter 1.75 1.25
Fourth Quarter 1.88 1.50
2002
First Quarter 3.15 2.30
Second Quarter 2.95 2.15
Third Quarter 2.50 1.75
Fourth Quarter 2.15 1.30
The Company has not paid any cash dividends on its common stock in 2004 and did
not pay any cash dividends on its common stock in 2003 or 2002. The Company's
dividend policy is to pay cash or distribute stock dividends when the Board of
Directors deems it to be appropriate, taking into account the Company's
operating results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deems relevant. The
Company does not anticipate paying any cash dividends in the foreseeable future.
Summary Pro Forma Financial Information
- ---------------------------------------
The following unaudited pro forma financial data assumes the transaction was
completed September 30, 2004. We have included the following selected unaudited
pro forma financial data solely for purposes of illustration. The pro forma
financial data does not necessarily indicate what the operating results or
financial position would have been if the transaction had been completed on
September 30, 2004. Furthermore, this data does not necessarily indicate what
the future operating results or financial position of the Company will be
following the transaction. The unaudited pro forma statement of operations data
includes adjustments to reflect assumed cost savings and other operational
efficiencies that management expects to realize as a result of the transaction
and certain future transaction related expenses. Although management believes
the amount of the projected cost savings and other operational efficiencies are
reasonable, there can be no assurance that the Company will actually recognize
these cost savings and operational efficiencies.
8
If the transaction had been completed on September 30, 2004, the effects would
be as follows:
Fidelity Federal Bancorp and
Subsidiaries
PROFORMA CONSOLIDATED BALANCE SHEET
(In thousands, except share date)
(Unaudited)
September 30, Proforma
2004 September 30,
2004
Assets
Cash and cash equivalents 2,278 2,243
Investment securities available for sale 62,724 62,724
Loans held for sale 10,500 10,500
Loans, net of allowance for loan losses of $783 and $737 106,602 106,602
Federal Home Loan Bank of Indianapolis stock 3,581 3,581
Premises and equipment, Interest receivable and other assets 16,157 16,157
Total assets 201,842 201,807
Liabilities
Deposits 131,615 131,615
Federal funds purchased 8,950 8,950
Federal Home Loan Bank advances 36,000 36,000
Borrowings 7,367 9,367
Other liabilities 1,739 1,739
Total liabilities 185,671 187,671
Stockholders' Equity
Preferred stock, no par or stated value
Authorized and unissued - 5,000,000 shares
Common stock, $1 stated value
Authorized - 15,000,000 shares
Issued and outstanding - 10,999,871 and 825,000 shares 11,000 825
Additional paid-in capital 17,728 25,868
Stock warrants 261 261
Retained earnings (12,643) (12,643)
Accumulated other comprehensive loss (175) (175)
Total stockholders' equity 16,171 14,136
Total liabilities and stockholders' equity 201,842 201,807
9
Fidelity Federal Bancorp and Subsidiaries
PROFORMA CONSOLIDATED BALANCE SHEET
(In thousands, except share date)
(Unaudited
Proforma
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
Interest Income
Loans receivable 4,562 4,562
Investment securities-taxable 1,535 1,535
Other interest income 183 183
-------------------------------------
Total interest income 6,280 6,280
-------------------------------------
Interest Expense
Deposits 1,902 1,902
Federal funds purchased 60 60
Federal Home Loan Bank advances 600 600
Borrowings 394 394
-------------------------------------
Total interest expense 2,956 2,956
-------------------------------------
Net Interest Income 3,324 3,324
Provision for loan losses 343 343
-------------------------------------
Net Interest Income After Provision for Loan Losses 2,981 2,981
-------------------------------------
Other Income
Service charges on deposit accounts 345 345
Net gains on loan sales 243 243
Letter of credit fees 369 369
Servicing fees on loans sold 251 251
Other income 732 732
-------------------------------------
Total other income 1,940 1,940
-------------------------------------
Other Expenses
Salaries and employee benefits 2,361 2,361
Net occupancy expenses 270 270
Equipment expenses 279 279
Data processing fees 380 380
Legal and professional fees 199 103
Advertising 241 241
Insurance 209 173
Other expense 773 733
-------------------------------------
Total other expenses 4,712 4,540
-------------------------------------
Income (Loss) Before Income Tax 209 382
Income tax benefit (87) (22)
-------------------------------------
Net Income (Loss) 296 404
=====================================
Basic Earnings (Loss) Per Share 0.03 0.04
Diluted Earnings (Loss) Per Share 0.03 0.04
Average Common and Common Equivalent
Shares Outstanding 10,322,140 10,322,140
10
Fidelity Federal Bancorp
Proforma Earning to Fixed Charges
Actual Proforma
Year Nine Months Nine Months
Ended Ended Ended
December 31, September 30, September 30,
2003 2004 2004
----------------------------------------------------
Earnings to Fixed Charges 1.00 1.07 1.13
Income (loss) before taxes $ (6) $ 209 $ 382
Fixed Charges:
Other Interest 941 1,054 1,054
Deposit Interest 2,886 1,902 1,902
----------------------------------------------------
$3,827 $2,956 $2,956
====================================================
Fidelity Federal Bancorp
Proforma Book Value Per Share
Proforma
September 30, September 30,
2004 2004
-------------------------------------------------------------
Current Equity $ 16,171,000 $ 14,136,000
Current Outstanding Shares 10,999,871 9,875,675
Book Value Per Share $ 1.47 $ 1.43
Note: The current shares outstanding for the proforma were adjusted for the
projected fractional shares only. The current outstanding shares were not
adjusted for the splits to assist the reader for comparison purposes.
CAUTIONARY STATEMENT REGARDING
------------------------------
FORWARD LOOKING STATEMENTS
--------------------------
11
This document contains certain statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Those statements may include
statements regarding the intent, belief or current expectations of the Company
or its officers with respect to (i) the Company's strategic plans and ability to
benefit from this transaction, (ii) the policies of the Company regarding
capital expenditures, dividends, financing and other matters, (iii) industry
trends affecting the Company's financial condition or results of operations,
(iv) the expenses associated with this transaction, and (v) the number of
shareholders following the transaction. Readers of this document are cautioned
that reliance on any forward-looking statement involves risks and uncertainties.
Although the Company believes that the assumptions on which the forward-looking
statements contained herein are based are reasonable, any of those assumptions
could prove to be inaccurate given the inherent uncertainties as to the
occurrence or nonoccurrence of future events. There can be no assurance that the
forward looking statements contained in this document will prove to be accurate.
The inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's objectives will be achieved.
SPECIAL FACTORS
---------------
Background
- ----------
The Company has given thorough consideration to whether or not it should engage
in a going private transaction and the Board of Directors considered the issue
on a variety of occasions. In a meeting on October 22, 2003, information on a
variety of going private options was distributed to the members of the Board of
Directors and throughout 2004 the Board continued to discuss the benefits and
costs of engaging in a going private transaction. The Board of Directors
considered other methods of going private, such as a sale, merger or tender
offer, but determined that the reverse stock split provided the most certainty
for the Company in achieving its stated goal relative to the cost required to
implement the plan. Ultimately, the Company has decided to engage in a going
private transaction for a number of reasons, foremost of which is to reduce the
corporate costs associated with being a "reporting company" under the Securities
Exchange Act of 1934.
On November 10, 2004, the Board of Directors met to further discuss the
Company's various strategic alternatives. At this meeting, the Board reviewed a
report prepared by a committee of independent directors and together with such
other information as it deemed relevant and material, determined that it would
be in the best interests of the Company and its stockholders to take steps to
eliminate the expenses that the Company currently incurs as an SEC reporting
company. The committee was comprised of Barry A. Schnakenburg, Paul E. Becker
and Michael A. Elliott, who have each been determined by the Company to the
"independent," as that term is defined under the NASDAQ listing standards.
In making its determination to proceed with the reverse stock split, the Board
of Directors considered two other going private alternatives as well as
remaining an SEC reporting company.
12
As discussed below, the Board rejected both the tender offer and open market
purchase alternatives to the reverse stock split as well as simply remaining an
SEC reporting company. For the reasons discussed below, the Board determined
that providing liquidity to some unaffiliated stockholders was fair to all the
stockholders considering the benefits to the Company of eliminating the expenses
incurred through being an SEC reporting company and relieving management of the
time necessary to meet regulatory responsibilities under federal securities
laws. The alternatives the board considered were:
o Issuer Tender Offer. The Board considered an issuer tender offer to
repurchase shares of our outstanding common stock. The results of an
issuer tender offer would be unpredictable, however, due to its
voluntary nature; thus, the board was uncertain as to whether this
alternative would result in a sufficient number of shares being
tendered. Moreover, federal regulations impose rules regarding the
treatment of stockholders in a tender offer, including pro-rata
acceptance of offers from stockholders, which make it difficult to
ensure that we would be able to significantly reduce the number of
stockholders of record. As a result, the Board rejected this
alternative.
o Open Market Purchase Program. The Board considered going private by
means of an open market purchasing program. The Board rejected an open
market purchasing program because it would be highly unlikely that
shares of common stock could be acquired by the Company from a
sufficient number of holders to accomplish the going private objective
in light of the fact that there is no active trading market for our
common stock.
o Maintaining the Status Quo. The Board considered maintaining the
status quo. In that case, we would continue to incur the expenses of
being an SEC reporting company without, in the opinion of the Board,
the commensurate benefits. Thus, the Board considered maintaining the
status quo not to be in the best interests of the Company and its
stockholders and rejected this alternative.
At this meeting, the board received the advice from its outside legal counsel,
Krieg DeVault LLP., and management on the various matters discussed. After much
discussion, the board (a) voted to seek stockholder approval of a 1 for 30,000
reverse stock split; (b) acknowledged the fairness opinion by Professional Bank
Services with respect to the consideration to be paid to stockholders as a
result of the reverse stock split, and (c) instructed management to work with
Krieg DeVault LLP to prepare the necessary filings and disclosure documents to
effect the reverse stock split.
Going Private Transaction; Effects
- ----------------------------------
The Company intends to engage in a going private transaction which will reduce
the number of holders of the common stock, no par value of the Company to less
than 300 and enable the Company to elect to terminate the registration of its
common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934.
As of August 31, 2004, there were 10,999,871 shares of the common stock of the
Company issued and outstanding, held by approximately 482 shareholders.
13
As a result of the reverse stock split, the common stock will no longer be
eligible for listing and trading on the NASDAQ system. The Company anticipates
that it will attempt to cause its common stock to be quoted on the OTC Bulletin
Board, although there is no assurance that the Company will cause this to occur.
It also is possible that trading in the Company's common stock may only occur in
privately negotiated transactions. Following the termination of the registration
of the Company's common stock the Company will no longer be subject to certain
provisions of the Securities Exchange Act of 1934. In particular, the Company's
obligations to publicly file annual and quarterly reports will cease. The rights
of the shareholders under Indiana law to receive reports or to inspect and make
extracts from the corporate books and records will be unaffected by the
transaction.
In order to accomplish the going private transaction, and to reduce the number
of shareholders to less than 300, there will be a 1-for-30,000 reverse stock
split of the common shares. Those shareholders who, immediately following the
reverse stock split, would hold only a fraction of a share of Company common
stock will be paid an amount, in cash, equal to $1.85 for each pre-split share
and will no longer be shareholders of the Company.
The amendment to the Articles of Incorporation will decrease the authorized
capital stock from 15,000,000 shares to 5,000,000 shares. The shares of common
stock acquired by the Company as a result of the reverse stock split will be
retired, which will reduce the number of outstanding shares.
Following the reverse stock split, the Company will conduct a 2,500 for 1
forward stock split for those shareholders who, immediately following the
reverse stock split, continue to hold at least one (1) whole share of Company
common stock. Each shareholder who would otherwise be entitled to a fractional
share of common stock of the Company following the forward stock split will in
lieu thereof be paid an amount, in cash, equal to $22.20 for each
pre-forward-split share. Except for fractional shares paid in cash, the
remaining shareholders will hold a fewer number of shares of Company common
stock as they held immediately prior to the reverse stock split.
The officers and directors of the Company at the effective time of the amendment
to the Articles of Incorporation effecting the reverse stock split and the
forward stock split will continue to serve as the officers and directors of the
Company immediately after the transaction is complete.
Because (1) the price to be paid in lieu of fractional shares to holders of
fewer than 30,000 shares of common stock will be $1.85 per share, (2) the number
of shares of common stock expected to be cashed out as a result of the reverse
stock split is estimated to be approximately $2.0 million, (3) the total cost to
us, including expenses, of effecting the reverse stock split is expected to be
approximately $25,000, and (4) at September 30, 2004, aggregate stockholders'
equity in the Company was approximately $16.2 million, or $1.47 per share, we
expect that, as a result of the reverse stock split, the book value per share of
common stock will be reduced to approximately $1.43 per share (pre-split) on a
pro forma basis. However, it is important to note that book value is an
accounting methodology based on the historical cost of our assets, and therefore
does not necessarily reflect the current value of the Company.
Based on information available to us relative to shareholder holdings, our cash
and cash
14
equivalents will be reduced by approximately $2.0 million at __________, 2004 to
approximately $_________ after the effectiveness of the reverse stock split. The
Company anticipates borrowing approximately $2.0 million to pay for the
fractional shares exchanged for cash in the transaction. The Company intends to
borrow money from an entity that is controlled by Bruce A. Cordingley, Gerald K.
Pedigo and Phillip J. Stoffregen, who are each a Director of the Company.
Purposes of the Transaction
- ---------------------------
Purposes of Going Private
-------------------------
The primary purpose of the reverse stock split is to eliminate the expenses and
management's time and effort related to our disclosure and reporting
requirements under the federal securities laws and related stockholder servicing
expense associated with being an SEC reporting company. If approved, the reverse
stock split will eliminate the expenses we incur as an SEC reporting company.
The reverse stock split also will enable our management and employees to devote
more time and effort to improving our operations by eliminating the time spent
by them in preparing periodic reports and managing stockholder relations.
Because our common stock is registered under Section 12 of the Exchange Act, we
are required to comply with the disclosure and reporting requirements under the
Exchange Act, as well as new requirements of the Sarbanes-Oxley Act of 2002. The
cost of complying with these requirements is expected to be substantial,
representing an estimated annual cost to us in the future of approximately
$290,000 per year, including legal and accounting fees, printing, postage, data
entry, stock transfer and other administrative expenses. In going private, we
expect to save most of those costs. In addition to the direct costs we incur,
our management and employees are required to devote substantial time and energy
to completing the periodic reports required of publicly-traded companies under
the Exchange Act. We believe these obligations have become more burdensome on
small SEC reporting companies like ours as a result of the recent enactment of
the Sarbanes-Oxley Act of 2002. In going private, we can eliminate many of those
indirect costs. Thus, in addition to the approximately $290,000 in annual future
direct savings we expect to realize following the reverse stock split, our
officers and employees will be able to focus more of their time and effort on
improving revenues and efficiencies.
The cost savings figures set forth above are only estimates. The actual savings
we realize from going private may be higher or lower than such estimates.
Estimates of the annual savings to be realized if the reverse stock split is
approved and consummated are based upon (i) the actual costs to us of the
services and disbursements in each of the categories listed above that were
reflected in our recent financial statements, and (ii) the allocation to each
category of management's estimates of the portion of the expenses and
disbursements in such category believed to be solely or primarily attributable
to our publicly reporting company status.
It is important to note that in addition to the annual estimated cost savings
referenced above, the consummation of the reverse stock split and subsequent
deregistration of our common stock would result in a significant one-time cost
savings due to our not being subject to the new internal control audit
requirements imposed by Section 404 of the Sarbanes-Oxley Act of 2002.
15
Preparing ourselves to be able to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 would require significant expenditures during the next fiscal year,
including costs related to computer software and hardware and fees to third
parties for compliance planning, assessment, documentation and testing. Such
costs are expected to exceed $75,000.
We expect the actual cost savings of being a non-reporting private company to be
much greater than simply eliminating the estimated historical out-of-pocket
costs. As a result of recent corporate governance scandals, the legislative and
litigation environment resulting from those scandals, the costs of being an SEC
reporting company in general, and the costs of our remaining an SEC reporting
company in particular, are expected to continue to increase in the near future.
Moreover, new legislation, such as the Sarbanes-Oxley Act of 2002, will likely
continue to have the effect of increasing the compliance burdens and potential
liabilities of being an SEC reporting company. Any new legislation will likely
continue to increase audit fees and other costs of compliance, such as
securities counsel fees, increase outside director fees, increase in our
director and officer insurance premiums and increase potential liability faced
by our officers and directors.
In some instances, management's cost savings expectations were based on
information provided or upon verifiable assumptions. For example, our auditors
have informed us, informally, that there will be a reduction in auditing fees if
we cease to be an SEC reporting company. In addition, the costs associated with
retaining legal counsel to assist with complying with the Exchange Act reporting
requirements will be eliminated if we no longer file reports with the SEC and
are otherwise not required to comply with the disclosure requirements that apply
to publicly reporting companies.
In addition to the expenses mentioned above, the Board of Directors believes the
Company receives little, if any, relative benefit from having its common stock
registered under the Exchange Act. Such benefits include:
o The ability to use Company stock to raise capital. Most capital has
been raised from insiders, thus minimizing the benefits of having our
stock registered on NASDAQ.
o Public companies often endeavor to use Company stock to attract,
retain and incentivize employees. Due to the limited liquidity of our
common stock, we have found limited success in using common stock in
such a manner.
o An enhanced company image often accompanies publicly reporting company
status. We have determined that due to our size and other factors, we
have not enjoyed an appreciable enhancement in Company image as a
result of our publicly reporting company status.
We had approximately 482 common stockholders of record as of August 31, 2004. Of
the record holders, approximately 458 owned less than 30,000 shares.
In light of the foregoing, the Board of Directors and management believe the
benefits associated with maintaining our status as an SEC reporting company are
substantially outweighed by the
16
costs, both financial and operational. The Board of Directors believes that it
is in the best interests of the Company to eliminate the administrative burden
and costs associated with maintaining our status as an SEC reporting company.
Reasons for the Structure of the Transaction
--------------------------------------------
The primary purpose of the reverse stock split is to reduce the number of
holders of the Company's common stock to less than 300 to enable the Company to
elect to terminate the registration of the common stock pursuant to Section
12(g) of the Securities Exchange Act of 1934 and become a private company. The
Board of Directors believes that a reverse stock split provides the most
certainty for the Company in achieving this purpose. The primary purpose of the
forward stock split is to establish a range for the stock price attractive to
retail investors, thus potentially improving the liquidity of the stock.
Fairness of the Transaction
- ---------------------------
The Board of Directors of the Company believes that the transaction is fair from
a financial point of view to the shareholders of the Company. The Board of
Directors has eight (8) members, seven (7) of whom are independent as that term
is defined under the NASDAQ listing standards. The transaction was approved
unanimously by all of the members the Board of Directors. The Company has also
received a fairness opinion from Professional Bank Services, its financial
adviser, that the cash consideration to be received by the shareholders in lieu
of fractional shares of stock is fair to such shareholders as well as the
remaining shareholders from a financial point of view.
The Board of Directors considered a number of factors in determining the
fairness of the transaction prior to its approval of the proposed transaction,
including the following:
o Liquidity for Remaining Shareholders. The Board of Directors recognizes the
loss of liquidity and a readily available market for its common stock as one of
its greatest concerns for approving the going private transaction. However, the
Board of Directors believes that the loss of liquidity is offset by the gain to
the Company in decreasing the Company's legal compliance costs and the other
benefits of the transaction described herein. The Company currently anticipates
that it will use its best efforts to cause its common stock to be listed on the
OTC Bulletin Board, although there can be no assurance that it will do so.
o Cashed Out Shareholders. One negative aspect of the transaction is the
inability of those shareholders who are cashed out to maintain an interest in
the future growth and progress of the Company with current holdings. The Board
of Directors believes that this factor is outweighed by the ability of any
shareholder who wishes to remain a shareholder to increase its holdings in the
Company to at least 30,000 shares of Company common stock prior to the
transaction by purchasing shares on the open market or otherwise acquiring
additional shares of common stock prior to the effective date of the reverse
stock split.
o Significant Savings to the Company Will Benefit the Company and Remaining
Shareholders. Following the transaction, the Board of Directors believes that
the Company and its remaining shareholders will benefit from the savings in
direct and indirect operating costs to
17
the Company resulting from the Company no longer being a public company.
o Fairness of Price. The Board of Directors believes that the price received by
the shareholders in lieu of fractional shares of common stock is fair from a
financial point of view to the shareholders of the Company. The Board of
Directors considered a number of factors in reaching this determination. In
particular, the Board considered current market price, historical market price,
and the various valuation methodologies provided by Professional Bank Services,
as described below.
o No Shareholder Vote. Under Indiana law, the Board of Directors of the Company
may amend the Articles of Incorporation of the Company to effect both the
reverse stock split and the forward stock split without the approval of the
shareholders. As such, the Company has not asked the shareholders to vote on the
transaction. Any shareholder who wishes to remain a shareholder of the Company
following the reverse stock split may increase their holdings of Company common
stock to at least 30,000 shares prior to the effective time of the reverse stock
split. Alternatively, any shareholder who wishes not to remain a shareholder
following the reverse stock split may decrease their holdings of Company common
stock to less than 30,000 shares prior to the effective time of the reverse
stock split. Because Indiana law expressly permits going private transactions
such as described herein without shareholder approval and because the
shareholders may increase or decrease their holdings of Company common stock
prior to the effective time of the reverse stock split, the Board of Directors
does not believe that the lack of a shareholder vote on the transaction effects
the fairness of the transaction to the shareholders.
o Fairness Opinion. The Board of Directors considered the various valuation
methodologies provided by Professional Bank Services, its financial advisor,
when determining the price to be paid in the transaction. Furthermore,
Professional Bank Services has delivered a fairness opinion to the Board of
Directors in which it concurs that $1.85 is fair to shareholders receiving cash
consideration as well as the remaining shareholders from a financial point of
view. See "Special Factors -- Fairness Opinion of Financial Advisor".
o No Unaffiliated Representative. No unaffiliated representative was retained to
act solely on behalf of the shareholders, although Professional Bank Services,
an entity not affiliated with the Company, has been retained to issue an opinion
on the fairness of the transaction from a financial point of view. See "Special
Factors -- Fairness Opinion of Financial Advisor".
After considering all of these factors, the Board of Directors believes that the
transaction and the process by which the transaction was approved are fair to
those shareholders receiving cash consideration as well as the remaining
shareholders.
Fairness Opinion of Financial Advisor
- -------------------------------------
Professional Bank Services, Inc. ("PBS") was engaged by Fidelity
Federal Bancorp, Evansville, Indiana (the "Company") to advise the Company's
Board of Directors as to the fairness of the consideration, from a financial
perspective, to be paid to those common shareholders receiving cash in a
proposed 1 for 30,000 share reverse stock split and going private
18
transaction (the "Going Private Transaction"). Under the terms of the proposed
Going Private Transaction, Company common shareholders owning less than 30,000
Company common shares will receive fair value in cash in exchange for their
shares of Company common stock. In the proposed Going Private Transaction, the
Company will pay $1.85 per Company share to those shareholders owning less than
30,000 Company shares. The full text of the fairness opinion is attached as
Annex A hereto
Professional Bank Services, Inc. is a bank consulting firm with offices
located throughout the United States. As part of its investment banking
business, PBS is regularly engaged in reviewing the fairness of financial
institution corporate transactions from a financial perspective and in the
valuation of financial institutions and other businesses and their securities in
connection with mergers, acquisitions, estate settlements, and other
transactions. Neither PBS nor any of its affiliates has a material financial
interest in the Company. PBS was selected to advise the Company's Board of
Directors based upon its familiarity with Indiana financial institutions and
knowledge of the banking industry as a whole.
PBS performed certain analyses described herein and presented the range
of values for the Company, resulting from such analyses, to the Board of
Directors of the Company in connection with its advice as to the fairness of the
consideration to be paid.
A Common Stock Fair Value Appraisal prepared by PBS was delivered to
the Board of Directors of the Company prior to its November 9, 2004 meeting. A
copy of the Common Stock Fair Value Appraisal, which includes a summary of the
assumptions made and information analyzed in deriving the Fairness Opinion, is
available for inspection and copying by interested shareholders at the principal
executive offices of the Company during its regular business hours.
In arriving at its fairness opinion, PBS reviewed certain publicly
available business and financial information relating to the Company. PBS
considered certain financial and stock market data of the Company and compared
that data with similar data for certain other publicly-held thrift holding
companies. PBS also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria that it
deemed relevant. In connection with its review, PBS did not independently verify
the foregoing information and relied on such information as being complete and
accurate in all material respects. Financial forecasts prepared by PBS were
based on assumptions believed by PBS to be reasonable and to reflect currently
available information. PBS did not make an independent evaluation or appraisal
of the assets of the Company.
In arriving at its fairness opinion, PBS reviewed and analyzed the
historical performance of the Company and its wholly owned subsidiary United
Fidelity Bank, FSB, Evansville, Indiana (the "Thrift"), including among other
things: (i) Audited consolidated financial statements for the Company for the
years ending December 31, 2001, 2002 and 2003; (ii) all Forms 10-Q, 10-K and 8-K
and other reports for 2003 and year to date 2004 filed by the Company with the
Securities and Exchange Commission (the "SEC"); (iii) September 30, 2004
internal Company consolidated financial statements; (iv) the 2003 Strategic Plan
of the Company's wholly owned subsidiary United Fidelity Bank, FSB (the
"Thrift"); (v) the Thrift's 2004 budget; (vi) various most recent month end
internal asset quality reports, loan production reports, cash flow and
19
Board of Directors earnings reports and funding and interest rate sensitivity
reports of the Company and the Thrift; and (vii) the historical common stock
trading activity of the Company.
PBS reviewed statistical data regarding the loan portfolio, securities
portfolio and other performance ratios and statistics. Financial projections
were prepared and analyzed as well as other financial studies, analyses and
investigations as deemed relevant for the purposes of the opinion. In review of
the aforementioned information, PBS took into account its assessment of general
market and financial conditions, its experience in other transactions, and its
knowledge of the banking industry generally.
In connection with rendering the fairness opinion and preparing its
written and oral presentation to the Company's Board of Directors, PBS performed
a variety of financial analyses, including those summarized herein. The summary
does not purport to be a complete description of the analyses performed by PBS
in this regard. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized below,
PBS believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. In performing its analyses, PBS made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the Company's control.
The analyses performed by PBS are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses.
As part of forming its opinion as to the cash fair value of the
Company's common shares and the fairness of the consideration to be paid from a
financial perspective, PBS employed evaluation methodologies and techniques that
were deemed appropriate considering the circumstances and purposes of the
evaluation. In order to determine the fair value of a common stock in relation
to the assets, earnings and equity of a company it requires a comprehensive
analysis of the company, its markets, future growth prospects and the micro and
macro economic environment in which it operates. The concept of fair value
requires explicit utilization and analysis of valuation methods normally
considered by analysts and the courts to determine fair value. The Transaction
Value Method of valuing a share of common stock is determined by examining a
limited number of transactions which are assumed to have occurred at arm's
length. The Asset Value Method is based on adjusted value of net assets. The
Adjusted Book Value Method evaluates prevailing market conditions for companies
by comparing the market price to book value ratios of comparable publicly traded
organizations to the subject company. The Investment Value Method relates
investor's perception of comparable publicly traded organizations by comparing
the market price to earnings per share of these organizations to the subject
company. The Earnings Value Method relates value to the earnings capacity of the
Company. In addition to the above valuation methodologies among others, PBS also
considered control premiums in its determination of fair value.
20
Transaction Value Method: The Transaction Value represents the price(s)
at which shares of common stock in the Company have exchanged hands between a
willing buyer and seller. As of November 9, 2004, the Company has 10,999,871
common shares outstanding. As of November 8, 2004 the Company's common shares
closed trading on the NASDAQ at $1.71 per share. Over the last thirty business
days ending on November 8, 2004, the Company had 98,900 of its common shares
trade on NASDAQ with closing prices between $1.43 and $1.95 per common share.
Over this period the average and median closing price of the Company's common
shares equals $1.59 and $1.57 per common share, respectively. Over the last
thirty trading days the Company's average daily trading volume as reported on
NASDAQ equals 3,297 shares and the weighted average closing price of the
Company's common shares over this period equals $1.61. In addition, the median
and average closing price of the Company's common shares since January 1, 2004
equals $1.70 and $1.74, respectively, and the weighted average closing price
during this period equals $1.75 per common share. Further, after the close of
the market on October 28, 2004, the Company announced the Office of Thrift
Supervision ("OTS") had terminated the Supervisory Agreement between the Thrift
and the OTS in its entirety. The Company's weighted average closing price since
October 28, 2004 equals $1.69 per common share and its median closing price
during this timeframe equals $1.70 per common share.
Asset Value Method: PBS analyzed and reviewed the Company's balance
sheet data as contained in the Company's internal September 30, 2004 unaudited
financial statements and September 30, 2004 form 8-K filed by the Company with
the SEC on October 14, 2004 to determine the amount of material adjustments
required to the stockholders' equity of the Company based on differences between
the market value of the Company's assets and their value reflected on the
Company's financial statements. PBS determined that one adjustment was
warranted. The only adjustment that PBS deemed warranted was a $4,300,000
downward adjustment for the Company's deferred tax asset related to the
Company's net loss carryovers. The adjusted net asset value of the Company was
determined to be $1.08 per share.
Adjusted Book Value Method and Investment Value Method: PBS compiled a
comparable peer group consisting of all non-mutual holding company thrifts
headquartered throughout the United States traded on the NASDAQ, AMEX or NYSE.
The selected comparable group consisted of thrifts which were not currently
under agreement to be acquired, and had total consolidated total assets between
$100 million and $350 million and a last twelve month ("LTM") core return on
average assets (ROAA) between 0.0% and 1.0%. In addition, the selected thrifts
were not headquartered in the states of California or Florida and for
comparability purposes only institutions which like the Company have December
fiscal year-ends were included in the peer group (the "Comparable Thrift
Group").
Comparable Thrift Group
- -----------------------
The following table provides summary analysis of the market
price-to-book value per share multiple and price to annualized year-to-date core
earnings per share multiple of the Comparable Thrift Group.
21
- --------------------------------------------------------------------------------------------
FIDELITY FEDERAL BANCORP COMPARABLE THRIFT GROUP
(As of November 8, 2004)
Price/ Price/
Ticker Company Name City State Book Core EPS
- --------------------------------------------------------------------------------------------
AABC Access Anytime Bancorp, Inc. Albuquerque NM 1.04 X 16.32 X
AMFC AMB Financial Corp. Munster IN 1.04 15.40
BRBI Blue River Bancshares, Inc. Shelbyville IN 1.12 88.00
ESBK Elmira Savings Bank, FSB Elmira NY 1.45 13.36
FBTC First BancTrust Corporation Paris IL 1.11 26.69
FFBI First Federal Bancshares, Inc. Colchester IL 1.28 37.13
FFHS First Franklin Corporation Cincinnati OH 1.39 45.23
GTPS Great American Bancorp, Inc. Champaign IL 1.08 14.83
GSLA GS Financial Corp. Metairie LA 0.74 27.75
HCFC Home City Financial Corporation Springfield OH 1.05 19.23
MCBF Monarch Community Bancorp, Inc. Coldwater MI 0.90 87.50
NEIB Northeast Indiana Bancorp, Inc. Huntington IN 1.19 19.29
SSFC South Street Financial Corp. Albemarle NC 1.13 35.96
STBI Sturgis Bancorp, Inc. Sturgis MI 1.41 26.00
UCBC Union Community Bancorp Crawfordsville IN 1.05 19.85
WEFC Wells Financial Corp. Wells MN 1.25 18.17
Median 1.12 22.93
- --------------------------------------------------------------------------------------------
Source: Financial information supplied by SNL Financial L.P. DataSource. Pricing
as of November 8, 2004
The application of the above median multiples to the Company's September 30,
2004 book value and annualized year-to-date core earnings per share resulted in
a value of $1.65 per common share under the Adjusted Book Value Method and $0.75
per share under the Investment Value Method.
Earnings Value Method: The Earnings Value Method relates fair value to
the future earnings and dividend capacity of a company. A discounted cash flow
analysis was performed by PBS pursuant to which a range of values of the Company
was determined by adding (i) the present value of an estimated future dividend
stream that the Company could generate over a five-year period and (ii) the
present value of the "terminal value" of the Company's earnings at the end of
the fifth year. The "terminal value" of the Company's earnings at the end of the
five-year period was determined by applying a multiple of 22.93 times the
Company's projected core earnings. The 22.93 multiple represents the median
multiple of core earnings of the Comparable Thrift Group.
22
Dividend streams and terminal values were discounted to present values
using a discount rate of 13.00%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of the Company's common stock. The
value of the Company's common stock determined by adding the present value of
the total cash flows, was $1.69 per share. In addition, using the five-year
projection as a base, a twenty-year projection was prepared assuming an annual
growth rate in assets of 7.0% in years one through five and 5.0% in years six
through twenty. Return on assets was projected to increase from 0.20% in year
one to 0.55% in year five and then increase five basis points per year to 1.25%
by year nineteen and remain constant at this level for the remainder of the
analysis. Dividends representing 35% of net income were assumed to be paid
beginning in year six. This long-term projection resulted in a value of $1.64
per common share.
Acquisition Comparable Method: PBS also considered an Acquisition
Comparable Method in its determination as to the fair value of the Company's
common shares as well as in forming its opinion as to the fairness of the
consideration to be paid in the proposed Going Private Transaction from a
financial point of view. None of the transactions analyzed involved a Going
Private Transaction similar to the Company's proposed transaction. All
acquisition pricing usually contains some element of the synergistic effect of
the combination of two companies. PBS is unaware of a method of completely
isolating or excluding these effects from the overall price. To somewhat
mitigate this concern, all of the acquirers contained in the Acquisition
Comparable Group were new holding companies formed by investor groups for the
purpose of acquiring the seller. These companies would typically be unable to
realize the degree of cost savings and synergies available in most transactions
where the acquirer is an existing financial institution. In PBS's opinion, it is
the cost savings and synergies in operations that allow acquirers to pay a
higher price than would otherwise be possible. In addition, PBS's analysis was
limited to bank and thrift acquisition transactions which like the Company's
proposed transaction were cash transactions. The analysis was also limited to
acquisition transactions announced since June 30, 2001 when transaction
accounting rules were changed. In addition, the analysis was further limited to
transactions throughout the United States excluding California, Florida and
Texas in which the seller's assets were under $500 million (the "Comparable
Acquisition Group").
PBS identified fifteen acquisition transactions that were most
comparable to the Company's proposed Going Private Transaction. The median
multiples of book value and earnings of the comparable acquisition transactions
were 1.36 and 17.50, respectively. The application of these multiples to the
Company resulted in $2.00 based on the multiple of book value and $0.57 based on
the multiple of earnings.
Summary of Methodologies: The following table presents a summary of the
previously derived methodologies.
23
- ------------------------------------------------------------------------------
Value Per Share Multiple of Book
- ------------------------------------------------------------------------------
Transaction Value $1.71 1.16X
Asset Value Method 1.08 0.73
Adjusted Book Value:
Comparable Thrift Group 1.65 1.12
Investment Value:
Comparable Thrift Group 0.75 0.51
Earnings Value:
Short Term 1.69 1.15
Long Term 1.64 1.12
Acquisition Comparables:
Multiple of Book Value 2.00 1.36
Multiple of Earnings 0.57 0.39
Average $1.39 0.94X
Median $1.65 1.12X
- ------------------------------------------------------------------------------
The average and median of the above values equal $1.39 and $1.65,
respectively, including the Asset Value Method and the Acquisition Comparable
Method. The Asset Value Method is more of a liquidation value and while
considered it was not included in PBS's opinion of value. In addition, due to
the Company's poor earnings performance, the values derived utilizing
comparative multiples of earnings produced ranges of value which were
significantly below the book value or potential liquidation value of the
Company, therefore while investors and acquirers will typically price an
individual financial institution stock, or a financial institution as a whole,
based on earnings and earnings growth potential PBS is of the opinion, and
market reality dictates, the value of bank and thrift stocks will not typically
decline to significantly below book value or liquidation value unless an
institution is in eminent danger of failure.
As previously discussed, all acquisition pricing usually contains some
element of the synergistic effect of the combination of two companies. PBS is
unaware of a method of completely isolating or excluding these effects from the
overall price. These cost savings and synergies in operations allow acquirers to
pay a higher price then would otherwise be possible. It is PBS's opinion that
the fair value of the Company, without the possibility of recognizing potential
cost savings through employee lay-offs, branch closings and savings from
consolidation of operations, would be less than the value indicated utilizing
the price to book value multiple of the Acquisition Comparable Method.
The values derived from the above market comparable methodologies
assumed that the Company's operating attributes equaled the median of the
Comparable Thrift Group and would also meet PBS's financial projections. In
determining the fair value of the Company's common shares PBS also considered
the following factors for difference in operating performance, dividends and
other performance characteristics of the Company:
o Premium to the Comparable Thrift Group Adjusted Book Value for lower
capitalization. As of the most recently reported period the median of
the Comparable Thrift Group's equity to asset ratio was 10.04%
compared to the Company's equity to asset ratio of 8.01%.
24
o Discount for financial performance below the Comparable Thrift Group.
A discount on the Company's common shares could be justified due to
its financial performance when compared to the Comparable Thrift
Group. For example, the median core return on average equity for the
Comparable Thrift Group year-to-date period equaled 5.18% compared to
2.27% for the Company. In addition, the Company's efficiency ratio
over the first nine months of 2004 equals 90.32% which is higher than
all the institutions in the Comparable Thrift Group and well above the
median efficiency ratio of the Comparable Thrift Group of 75.41%.
o Discount from the Community Thrift Group for a higher overall risk
profile. A discount on the Company's common shares could be justified
based on the overall risk characteristics of the Company as compared
to the Comparable Thrift Group. In PBS's opinion the Company's overall
risk profile is significantly above the Comparable Thrift Group. The
Company's increasing reliance on non-core funding, below peer equity
to asset ratio, significant exposure to indirect auto loans (which the
Company discontinued originating in September 2004) and multi-family
letters of credit coupled with a low level of earnings and high
efficiency ratio increases the risks associated with the Company and
its common stock as compared to the Comparable Thrift Group.
o Discount from the Community Thrift Group for lack of payment of
dividends. The Company currently does not pay cash dividends. On a
year to date basis, the median Community Thrift Group dividend payout
ratio equaled 50.70%.
Based on the foregoing and all other factors deemed relevant and assuming
accuracy and completeness of information provided by the Company, it was PBS's
opinion as an independent appraiser that the fair value of the Company's common
stock is $1.85 per common share taking into consideration potential control
premiums for the Company and without the application of any marketability
discounts. In addition, it is PBS's opinion, as investment bankers that the
$1.85 per common share to be paid to Company common shareholders owning less
than 30,000 Company common shares under the terms of the proposed Going Private
Transaction is fair to the those shareholders as well as to the remaining
unaffiliated shareholders from a financial perspective.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by the Company's shareholders owning less than
30,000 shares is fair from a financial perspective and does not constitute a
recommendation to the Company to effect the transaction. No limitations were
imposed on PBS regarding the scope of its investigation or otherwise by the
Company
Potential Conflicts of Interest
- -------------------------------
The executive officers and Directors of the Company may have interests in the
transaction that are different from the interests of the shareholders, or
relationships that may present conflicts of interest, including the following:
25
o as of August 31, 2004, all of the members of the Board of Directors and all of
the executive officers of the Company hold of record 71.5% or more shares of the
common stock of the Company;
o based upon current shareholdings, following the transaction, the only
Directors of the Company who will remain shareholders of the Company will be
Bruce A. Cordingley, Barry A. Schnakenburg and Donald R. Neel.
o each member of the Board of Directors and all of the executive officers hold
options to purchase the common stock of the Company which will, if unexercised,
continue to be outstanding following the going private transaction, subject to
adjustment;
o the Board of Directors considered the fact that each Director either was a
shareholder or an option holder and concluded that such fact alone did not cause
any one or more directors not to be a "disinterested director", as that term is
defined under Indiana law, and thereby unable to consider and act upon the
transaction in the best interests of the Company and its shareholders; and
o as a result of the transaction, those shareholders who own 30,000 or more
shares of common stock of the Company at the effective time of the amendment to
the Articles of Incorporation effecting the reverse stock split, including the
Directors and executive officers of the Company, will increase their percentage
ownership interest as a result of the transaction. For example, the ownership
percentage of the directors and executive officers as a group will increase from
71.5% to approximately 76.4% as a result of the reduction of the number of
shares of common stock outstanding by an estimated 1.1 million shares.
o the cash necessary to pay for the fractional share of Company stock will be
borrowed form an entity which is controlled by Bruce A. Cordingley, Phillip J.
Stoffregen and Gerald K. Pedigo, who are each a Director of the Company.
Certain Effects of the Transaction
- ----------------------------------
Impact on the Company
---------------------
Following the transaction the Company will have less than 300 shareholders and
will terminate the registration of its common stock and become a private
company. The Company will no longer be public, and will no longer be subject to
the reporting requirements of the Securities Exchange Act of 1934. Going private
will significantly change the public disclosures of the Company pursuant to the
Securities Exchange Act of 1934. The Company anticipates that following the
transaction it will continue to operate as it has done prior to the transaction.
The same officers and directors will continue in their roles as officers and
directors, and the Company does not anticipate any significant corporate events
in the near future. The Company anticipates that it will realize significant
direct and indirect lost savings as a result of going private.
Management estimates that this transaction will result in the retirement of
approximately 1.1
26
million shares at a cost of $1.85 per share, based upon 10,999,871 shares
outstanding immediately prior to the transaction. Including expenses for the
transaction, the Company estimates that the total cost of the transaction to the
Company will be approximately $2.08 million. The Company's shareholders' equity
and cash balance will be reduced accordingly.
Impact on Shareholders
----------------------
Shareholders holding less than 30,000 shares of common stock immediately prior
to the effective time of the reverse stock split will cease to be shareholders
of the Company. They will lose all rights associated with being a shareholder of
the Company, such as the rights to attend and vote at shareholder meetings and
receive dividends and distributions. These shareholders will be paid, in cash,
an amount equal to $1.85 for each pre-split share resulting in a fractional
share. Such shareholders will be liable for any applicable taxes, but will not
be required to pay brokerage fees. The Company will send a transmittal letter
explaining to such shareholders how they can surrender their share certificates
in exchange for cash payment.
Shareholders holding 30,000 or more shares of common stock immediately prior to
the effective time of the reverse stock split will continue to be shareholders
of the Company, but may receive cash in lieu of amounts held in excess of 30,000
shares, but less than 60,000 shares.
Shareholders who continue to be shareholders of the Company after the
transaction will:
o experience reduced liquidity of their shares of common stock. The common stock
will no longer be traded on the NASDAQ system and it is expected that any
trading in the Company's common stock will occur only in privately negotiated
transactions or on the OTC Bulletin Board; and
o not receive or have access to Company financial and other business information
as they would if the Company were a public reporting company, although such
shareholders will continue to have rights to receive certain records, financial
and other information of the Company under Indiana law.
Effect on Market for Shares
---------------------------
The common stock of the Company is currently traded on the NASDAQ system. We
anticipate that following the transaction the Company's common stock will be
delisted from the NASDAQ system. This delisting, together with the reduction in
public information concerning the Company as a result of its no longer being
required to file reports under the Securities Exchange Act of 1934, will reduce
the liquidity of the Company common stock. It is expected that any trading in
the common stock of the Company after the transaction may only occur in
privately negotiated sales. The Company currently anticipates that it will use
its best efforts to cause its common stock to be listed on the OTC Bulletin
Board, although there can be no assurance that it will do so.
Employee and Director Stock Options
-----------------------------------
27
The outstanding options to acquire shares of common stock of the Company held by
employees and Directors of the Company will continue to be outstanding after the
transaction. As of August 31, 2004, there were options outstanding to purchase
374,496 shares of the common stock of the Company. The options were granted to
directors and employees of the Company as incentive compensation for services to
the Company. Of those options, the Company expects 339,696 to be vested and
exercisable as of the date of the transaction. Holders of options not exercised
prior to the effective time of the amendment to the Articles of Incorporation
effecting the reverse stock split will hold stock options in the Company as a
private company with limited liquidity. When existing options are exercised, the
exercise will cover underlying fractional shares of common stock resulting from
the reverse stock split, but we will not issue fractional shares upon exercise
of an option. Instead, we will pay the optionee cash for any fractional shares
in an amount equal to the difference between the exercise price of the option
and the fair market value per share of the common stock as of the date of
exercise as determined by the board of directors, multiplied by the fraction of
a share represented by the option. Because any whole shares issued upon the
exercise of options will not be registered under the Securities Act, optionees
will be required to acquire such shares for investment purposes. They will
benefit from any future appreciation in the value of the Company after the
transaction and will assume the risk of any future downturns in the business of
the Company after the transaction.
Warrants to Purchase Shares of Common Stock
- -------------------------------------------
The outstanding warrants to acquire shares of common stock of the Company will
continue to be outstanding after the transaction. As of August 31, 2004, there
were warrants outstanding to purchase 527,753 shares of the common stock of the
Company. When existing warrants are exercised, the exercise will cover
underlying fractional shares of common stock resulting from the reverse stock
split, but we will not issue fractional shares upon exercise of a warrant.
Instead, we will pay the holder of the warrant cash for any fractional shares in
an amount equal to the difference between the exercise price of the warrant and
the fair market value per share of the common stock as of the date of exercise
as determined by the board of directors, multiplied by the fraction of a share
represented by the warrant. Because any whole shares issued upon the exercise of
warrants will not be registered under the Securities Act, holders of warrants
will be required to acquire such shares for investment purposes.
Shareholder Approval
- --------------------
Pursuant to Section 23-1-38-2 of the Indiana Code, shareholder approval is not
required for this type of going private transaction or for the amendments to the
Articles of Incorporation of the Company and no vote of the shareholders is
being sought.
Dissenters' Rights
- ------------------
Under Indiana law, shareholders are not entitled to dissenters' rights in
connection with this type of going private transaction. No provisions have been
made to grant shareholders access to counsel or appraisal services at the
expense of the Company.
Conduct of Business Following Transaction
- -----------------------------------------
28
The primary purpose of the transaction is to reduce the number of shareholders
to less than 300 to enable the Company to elect to terminate the registration of
its common stock pursuant to Section 12(g) of the Securities Exchange Act of
1934 and become a private company. Following the deregistration, the common
stock will no longer be quoted on the NASDAQ system and it is expected that any
trading in the Company's common stock will occur only in privately negotiated
transactions. Furthermore, the transaction and deregistration would result in
the Company no longer filing reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. The Company anticipates no other material
changes in the management or corporate structure of the Company.
Other than as described in this document, neither the Company nor its management
has any plans or proposals to effect any extraordinary corporate transaction,
such as a merger, reorganization or liquidation; to sell or transfer any
material amount of its assets; to change its board of directors or management;
to change materially its indebtedness or capitalization; or otherwise to effect
any material change in its corporate structure or business.
Federal Tax Consequences
- ------------------------
The following is a discussion of certain of the material United States federal
income tax consequences of the transaction to the shareholders of the Company
who are citizens or residents of the United States or that are domestic
corporations. The discussion below is for general information only and does not
address all aspects of federal income taxation that may affect particular
shareholders in light of their particular circumstances, that are generally
assumed to be known by investors or that may affect shareholders subject to
special treatment under federal income tax laws. The following discussion
assumes that shares of the common stock of the Company are held as capital
assets. In addition, no information is provided in this document with respect to
the tax consequences of the transaction under foreign, state or local laws.
The Company believes that there will be no material federal tax consequences for
those shareholders who continue to be shareholders of the Company following the
consummation of the transaction except for amounts received for fractional
shares. Their basis in their current shares (except for post-split fractional
shares) should carry forward as their basis in the new shares they will receive
after the forward stock split.
The Company believes that, for those shareholders who receive cash in exchange
for fractions of shares of common stock following the reverse stock split, the
transaction will be treated as a taxable transaction for federal income tax
purposes. Generally shareholders receiving cash in the transaction will
recognize a gain or loss for federal income tax purposes based on the difference
between the cost basis of such shareholder in the shares of common stock held
immediately prior to the effective time of the reverse stock split and the total
amount received for the shares of common stock. If shares of the common stock of
the Company are held by a shareholder as capital assets, gain or loss recognized
by the shareholder will be capital gain or loss, and will be long-term capital
gain or loss if the shareholder's holding period for the shares of common stock
exceeds twelve months. Under present law, long-term capital gains recognized by
an individual shareholder generally will be taxed at a maximum marginal federal
tax rate of 15%, and
29
long-term capital gains recognized by a corporate shareholder will be taxed at a
maximum marginal federal tax rate of 35%. In addition, under present law, the
ability to use capital losses to offset ordinary income is generally limited for
shareholders that are individuals to the amount of capital gains recognized
during a tax year plus $3,000.
Tax matters are complicated and the tax consequences of the transaction to each
shareholder will depend on the facts of that shareholder's situation. You are
urged to consult your tax advisor for a full understanding of the tax
consequences of the transaction to you. The foregoing summary of material
federal income tax consequences of the transaction to shareholders of the
Company is based upon the Internal Revenue Code, applicable Treasury Regulations
thereunder, rulings and pronouncements of the Internal Revenue Service and
judicial decisions now in effect, all of which are subject to change at any time
by legislative, judicial or administrative action. Any such changes may be
applied retroactively in a manner that could adversely affect such shareholders
and could affect the continuing validity of this summary. This summary does not
purport to discuss all aspects of United States federal income taxation that may
be relevant to each shareholder in light of their specific circumstances, or to
certain types of shareholders subject to special treatment under United States
federal income tax laws (for example, foreign persons, dealers in securities,
banks and other financial institutions and tax-exempt organizations). No ruling
from the IRS has been obtained (or will be sought) as to the United States
federal income tax consequences of the transaction.
Fees and Expenses
- -----------------
Management estimates approximately $2.0 million will be required to pay for the
fractional shares of the common stock exchanged for cash in the transaction. It
is expected that the actual amount paid to acquire the fractional shares will
differ from this estimated amount due to daily changes in the number of the
Company's shareholders who hold less than 30,000 shares of common stock. In
addition, expenses are projected to amount to $45,000 as follows: $25,000 for
legal fees; $10,000 for financial advisor fees; and $10,000 for accounting,
printing, mailing, stock transfer and other miscellaneous costs. Funds required
to implement the reverse stock split shall be derived from the Company's
existing working capital along with a loan in an approximate amount of $2.0
million.
The loan will be obtained form an entity which is controlled by Bruce A.
Cordingley, Phillip J. Stoffregen and Gerald K. Pedigo, who are each a Director
of the Company. The loan will be for a term of one year at an annual rate of
interest equal to the prime rate plus 2% and unsecured.
Reservation
- -----------
The Company reserves the right to abandon the transaction at any time before the
filing of the necessary amendments to the Articles of Incorporation effecting
the reverse stock split with the Indiana Secretary of State.
THE PARTIES
-----------
30
Fidelity Federal Bancorp
- ------------------------
"Item 1. Business" of the Company's Annual Report on Form 10-K for the year
ended December 31, 2003, filed by the Company with the SEC is hereby
incorporated by reference.
Security Ownership of Management
- --------------------------------
The section of the Company's Proxy Statement, dated March 29, 2004, filed by the
Company with the SEC, captioned "Security by Ownership of Management" is hereby
incorporated by reference.
Officers and Directors
- ----------------------
The section of the Company's Proxy Statement, dated March 29, 2004, filed by the
Company with the SEC, captioned "Information Concerning Nominees, Directors and
Executive Officers" is hereby incorporated by reference.
Stock Plans of the Company
- --------------------------
The sections of the Company's Proxy Statement, dated March 29, 2004, filed by
the Company with the SEC, captioned "1993 Directors' Stock Option Plan" and
"1995 Key Employees' Stock Option Plan" are hereby incorporated by reference.
Stock Buy Back Program
- ----------------------
The Company has not purchased any shares of the Company's common stock during
the last three years.
WHERE YOU CAN FIND MORE INFORMATION
-----------------------------------
The Company has filed a Schedule 13E-3 with the SEC regarding this transaction.
In addition, the Company files reports, proxy statements and other information
with the SEC under the Securities Exchange Act of 1934. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. You may
read and copy this information at the Public Reference Room of the SEC, 450
Fifth Street, N.W., Room 1024, Washington, D.C., 20549.
You may also obtain copies of this information by mail from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
at prescribed rates. The SEC also maintains an Internet World Wide Web site that
contains reports, information statements and other information about issuers,
including the Company, who file electronically with the SEC. The address of that
site is http://www.sec.gov.
We have not authorized anyone to give any information or make any representation
about the transaction that differs from, or adds to, the information in this
disclosure document or the Company documents that are publicly filed with the
SEC. Therefore, if anyone gives you different or additional information, you
should not rely on it.
31
The information contained in this disclosure document speaks only as of its
date, unless the information specifically indicates that another date applies.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The SEC allows the Company to "incorporate by reference" information in this
document. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this document, except
for any information that is superseded by information that is included directly
in this document or in any other subsequently filed document that also is
incorporated herein by reference.
32
This document incorporates by reference the documents listed below that we may
file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended.
- --------------------------------------------------------------------------------
Commissions Filings (File No. 000-22880) Filing Date/Period
- --------------------------------------------------------------------------------
Annual Report on Form 10-K Year ended December 31, 2003
- --------------------------------------------------------------------------------
Quarterly Report on Form 10-Q Quarter ended March 31, 2004
- --------------------------------------------------------------------------------
Quarterly Report on Form 10-Q Quarter ended June 30, 2004
- --------------------------------------------------------------------------------
Quarterly Report on Form 10-Q Quarter ended September 30, 2004
- --------------------------------------------------------------------------------
Proxy Statement March 29, 2004
- --------------------------------------------------------------------------------
33
ANNEX A
-------
Professional Bank Services, The 1000 Building
Incorporated 6200 Dutchman's Lane, Suite 305
Louisville, Kentucky 40205
Atlanta, Chicago,
Louisville, Nashville, 502 451-6633
Ocala 502 451-6755 (FAX)
800-523-4778 (WATS)
Consultants to the
Financial Industry
[LOGO OF PROFESSIONAL BANK SERVICES]
November 9, 2004
Board of Directors
Fidelity Federal Bancorp
18 North West Fourth Street
P.O. Box 1347
Evansville, Indiana 47706
To The Directorate:
You have requested a fair value appraisal of the common stock of Fidelity
Federal Bancorp, Evansville, Indiana (the "Company"). The purpose and intended
use of the appraisal is to determine the cash fair value of the Company's common
shares relative to fractional shares created by the Company's proposed reverse
stock split and going private transaction (the "Going Private Transaction"). In
addition, you have requested our opinion as investment bankers as to the
fairness of the cash value to be paid to the holders of those fractional shares
which will be exchanged as a result of the Going Private Transaction, as well as
to the remaining unaffiliated shareholders from a financial point of view. The
appraisal and our opinion are based on a review of the financial condition and
history of the Company, regulatory and audit reports, and other such summary
information available and deemed appropriate. The date of this appraisal is as
of November 9, 2004.
Professional Bank Services, Inc. ("PBS") has performed stock appraisals for
numerous financial institutions located throughout the United States. Our
knowledge of the financial industry evolves from an experienced staff and a
history as consultants and financial advisors to the banking industry. The
firm's wholly owned subsidiary, Investment Bank Services, Inc., is a registered
Broker/Dealer with the Securities and Exchange Commission.
For purposes of this appraisal and our opinion, we have reviewed and
analyzed the historical performance of the Company including among other things:
(i) Audited consolidated financial statements for the Company for the years
ending December 31, 2001, 2002 and 2003; (ii) all Forms 10-Q, 10-K and 8-K and
other reports for 2003 and year to date 2004 filed by the Company with the
Securities and Exchange Commission (the "SEC"); (iii) September 30, 2004
internal Company consolidated financial statements; (iv) the 2003 Strategic Plan
of the Company's wholly owned subsidiary United Fidelity FSB
Fidelity Federal Bancorp
November 9, 2004
Page Two
(the "Thrift"); (v) the Thrift's 2004 budget; (vi) various most recent month end
internal asset quality reports, loan production reports, cash flow and Board of
Directors earnings reports and funding and interest rate sensitivity reports of
the Company and the Thrift; and (vii) the historical common stock trading
activity of the Company.
Financial projections have been prepared and analyzed as well as other financial
studies, analyses and investigations as deemed relevant for the purposes of this
appraisal. In review of the aforementioned information, we have taken into
account our assessment of general market and financial conditions, our
experience in other transactions, and our knowledge of the banking industry
generally.
We have not compiled or audited the financial statements of the Company, nor
have we independently verified any of the information reviewed; we have relied
upon such information as being complete and accurate in all material respects.
We have not made an independent evaluation of the assets of the Company.
PBS, its officers, and its staff have no present business interest in the
Company. No benefits will accrue to PBS as a result of this review, other than
the professional fees previously agreed to by the Company. Fees paid to PBS for
the preparation of this review are neither dependent or contingent upon any
transaction or upon the results of the review.
Based on the foregoing, and all other factors deemed relevant and assuming
accuracy and completeness of information provided by the Company, it is our
opinion as an independent appraiser, that the fair value of the common stock of
the Company, as of the date of this letter, is $1.85 per common share.
In addition, based on the foregoing, and all other factors deemed relevant and
assuming accuracy and completeness of information provided by the Company, it is
our opinion, as investment bankers that the $1.85 per common share to be paid to
Company common shareholders owning less than 30,000 Company common shares under
the terms of the proposed Going Private Transaction is fair to the those
shareholders as well as to the remaining unaffiliated shareholders from a
financial perspective.
Very truly yours,
/s/ PROFESSIONAL BANK SERVICES, IN
PROFESSIONAL BANK SERVICES, IN