Exhibit 99.3.a
[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, Inc., 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.
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
SUMMARY TERM SHEET.......................................................2
The Company...........................................................2
Reverse Stock Split...................................................2
Forward Stock Split...................................................3
Effects of Reverse Split..............................................3
Purposes for the Transaction..........................................3
Fairness of the Transaction and Fairness Opinion......................4
Potential Conflicts of Interest.......................................5
Effect on Market for Shares...........................................6
Shareholder Approval..................................................6
No Dissenters' Rights.................................................6
Stock Certificates....................................................6
Federal Tax Consequences..............................................6
Fees and Expenses.....................................................7
Reservation...........................................................7
SUMMARY FINANCIAL INFORMATION............................................7
Summary Historical Financial Information..............................7
Selected Per Share Financial Information..............................9
Market Prices and Dividend Information................................9
Summary Pro Forma Financial Information..............................10
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS...............13
SPECIAL FACTORS.........................................................14
Background...........................................................14
Going Private Transaction; Effects...................................16
Purposes of the Transaction..........................................17
Fairness of the Transaction..........................................19
Fairness Opinion of Financial Advisor................................21
Potential Conflicts of Interest......................................30
Certain Effects of the Transaction...................................33
Warrants to Purchase Shares of Common Stock..........................34
Shareholder Approval.................................................35
Dissenters' Rights...................................................35
Conduct of Business Following Transaction............................35
Federal Tax Consequences.............................................35
Fees and Expenses....................................................36
Reservation..........................................................37
THE PARTIES.............................................................38
Fidelity Federal Bancorp.............................................38
Security Ownership of Management.....................................38
Officers and Directors...............................................38
Other Parties........................................................38
Stock Plans of the Company...........................................38
Stock Buy Back Program...............................................38
Transactions.........................................................39
Significant Corporate Events.........................................40
Agreements Involving Company Stock...................................40
WHERE YOU CAN FIND MORE INFORMATION.....................................41
DOCUMENTS INCORPORATED BY REFERENCE.....................................42
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
- -----------
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.
2
Forward Stock Split
- -------------------
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 primary
purpose of the forward stock split is to facilitate liquidity for those persons
who remain shareholders following the reverse stock split. 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;
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
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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 unaffiliated shareholders of the Company. The
Company has received a fairness opinion from Professional Bank Services, Inc.
("PBS"), 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 unaffiliated 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.
PBS was engaged by the Company pursuant to an engagement letter (the "Engagement
Letter"), dated August 24, 2004, to advise the Company's Board of Directors as
to the fair cash value for the Company's common stock relative to the
transaction and to provide an opinion to the Company as to the fairness of the
consideration, from a financial perspective, to be paid to those shareholders
receiving cash in the proposed 1 for 30,000 share reverse stock split and going
private transaction and to those remaining unaffiliated shareholders.
For three years prior to the engagement of PBS by the Company for the purposes
described above, PBS has performed a quarterly loan review for the Company's
wholly-owned subsidiary United Fidelity Bank, fsb. The fees paid to PBS for such
loan review have not exceeded $45,000 in any year. Otherwise, neither the
Company nor any of its affiliates had any material relationship with PBS prior
to the Engagement Letter, nor, to the knowledge of the Company is any other
relationship with PBS contemplated by the Company or any of its affiliates.
Under the terms of the Engagement Letter, the Company agreed to pay PBS based
upon PBS' customary hourly rates, an amount not to exceed $10,000.
The 1 for 30,000 reverse stock split ratio was selected by the Board of
Directors of the Company by calculating the highest ratio that could be used to
reduce the Company's shareholders to less than 300. The Board of Directors
believes that in order to maximize the cost savings value of the transaction to
the Company, the ratio selected should be as high as possible, while still
ensuring that the Company will be able to achieve its stated purpose of the
transaction.
The Company has not asked the shareholders to vote on the transaction. 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. Because of such
specific authorization in the Indiana Code, the Board of Directors does not
believe that the lack of a vote affects the fairness of the transaction to
either the shareholders who are cashed out following the reverse stock split or
who remain as unaffiliated shareholders.
4
See "Special Factors -- Fairness of the Transaction" and "Special Factors --
Fairness Opinion". The full text of the Fairness Opinion of PBS is available for
inspection and copying at the principal executive offices of the Company at 18
NW Fourth Street, Evansville, Indiana 47708 during regular business hours by any
shareholder of the Company or any representative of any such shareholder who has
been so designated in writing.
Potential Conflicts of Interest
- -------------------------------
The executive officers and Directors of the Company as well as certain other
persons may have interests in the transaction that are different from your
interest as a shareholder, or relationships that may present conflicts of
interest, including the following:
o following the reverse stock split, the executive officers and Directors of the
Company will own approximately 78.48% of the outstanding shares of the Company
stock, which represents an increase of 6.91% from the approximate 71.57% which
they held as of December 31, 2004;
o each of the Directors and all of the executive officers of the Company 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 if, following the reverse stock split, the Directors and executive officers of
the Company were to exercise all of their currently outstanding options to
acquire Company stock, they would hold approximately 79.76% of the then
outstanding common stock of the Company;
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
certain of the Directors and executive officers of the Company, will increase
their percentage ownership interest as a result of the transaction; and
o Bruce A. Cordingley, Gerald K. Pedigo and Phillip J. Stoffregen and certain
entities which they are affiliated with, namely Pedcor Financial, LLC and Pedcor
Bancorp own 8,165,230 shares, or approximately 71.32%, on a fully diluted basis,
of the common stock of the Company.
See "Special Factors -- Potential Conflicts of Interest"; "Special Factors --
Employee Stock Options" and "The Parties -- Security Ownership of Management"
and "The Parties - Other Persons".
5
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".
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
6
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.
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".
Fees and Expenses
- -----------------
The approximately $2.05 million necessary to pay for all of the fractional
shares of common stock exchanged for cash in the transaction and the expenses
relating to the transaction will come from the working capital of the Company
and from the sale of Trust Preferred Securities ("TruPS") on December 16, 2004.
The Company realized net proceeds of approximately $2,965,000 from the issuance
and sale of TruPS to Citigroup Global Markets, Inc. (the "Citigroup Financing")
pursuant to a Purchase Agreement, dated December 2, 2004. The TruPS are
guaranteed by the Company. The TruPS are non-voting and not convertible into
common shares of the Company. The Company does not have any other plans for
financing the transaction. See "Special Factors -- Fees and Expenses".
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 if the Board of Directors determines that
such action would be in the best interest of the Company. The Company may, for
example, abandon or delay the transaction if there is a material change in the
condition of the Company or if the Board of Directors perceives that there has
been a material change in the benefits or risks associated with the transaction.
See "Special Factors -- Reservation".
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
7
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".
(Dollars in thousands, except share and per share data)
Selected Financial Data Qtr. End YTD December 31, December 31, December 31, December 31, Six Months
as of: September 30, September 30, 2003 2002 2001 2000 Ended December
2004 2004 31, 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 62,724 52,208 34,912 18,074 21,001 24,305
available for sale
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 36,000 31,550 3,000 12,333 9,903 9,039
advances
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
N on-interest expense 1,523 4,712 6,694 9,927 5,698 7,314 5,148
Income (loss) from
continuing operations 113 209 (6) (3,048) (160) (2,525) (3,741)
before tax
Income tax expense (8) (87) (220) (641) (384) (1,369) (1,671)
(benefit)
Income (loss) from
continuing operations 121 296 214 (2,407) 224 (1,156) (2,070)
8
Loss from discontinued
operations before tax -- -- -- (1,537)
Income tax benefit -- -- -- 451
Loss 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' 3.07 2.65 1.69 (36.82) 2.18 (16.14) (51.37)
equity
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 8.01 6.87 8.52 8.48 8.42 6.78
at year-end
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
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".
9
Per Share Data YTD December 31, December 31, December 31, December 31, Six Months Ended
September 30, 2003 2002 2001 2000 December 31 1999
2004
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 0.03 0.02 (0.39) 0.04 (0.29) (0.66)
operations
Diluted net loss from
discontinued operations (0.32)
Diluted net income 0.03 0.02 (0.71) 0.04 (0.29) (0.66)
(loss)
Cash dividends declared
Book value at year-end 1.39 1.42 1.99 1.90 1.72
Closing market price
(bid) at year-end 1.62 1.47 2.30 1.31 1.25
Number of average
common and common 10,322,140 8,932,084 6,183,269 5,146,726 4,057,168 3,147,662
equivalent
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.
10
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.
If the transaction had been completed on September 30, 2004, the effects would
be as follows:
11
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
======== ========
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Fidelity Federal Bancorp and Subsidiaries
PROFORMA CONSOLIDATED INCOME STATEMENT
(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
13
Fidelity Bancorp
Proforma Earning to Fixed Charges
Proforma Actual
Nine Months Nine Months Year Ended Year Ended Year Ended Year Ended Year Ended
Ended Ended September December 31, December 31, December 31, December 31, December 31,
September 30, 30, 2004 2003 2002 2001 2000 1999
2004
Earnings to
Fixed Charges 1.13 1.07 1.00 0.49 0.98 0.70 0.12
Income (loss)
before taxes $ 382 $ 209 $ (6) $ (3,048) $ (160) $ (2,525) (3,741)
Fixed Charges
Other Interest 1,054 1,054 941 1,637 2,007 2,015 1,117
Deposit Interest 1,902 1,902 2,886 4,385 6,494 6,442 3,151
-----------------------------------------------------------------------------------------------------------
$ 2,956 $ 2,956 $ 3,827 $ 6,022 $ 8,501 $ 8,457 $ 4,268
===========================================================================================================
Fidelity Federal Bancorp
Proforma Book Value Per Share
Proforma
September 30, 2004 September 30, 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
--------------------------
This document contains certain statements that are forward-looking statements.
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
14
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, upon the suggestion
of Donald R. Neel, the Company's Chief Executive Officer, the Board of Directors
determined that it should investigate the feasibility and advisability of
engaging in a going private transaction. Information on a variety of going
private options was distributed to the members of the Board of Directors at the
October 23, 2003 meeting. Throughout 2004 the Board continued to discuss the
potential benefits and costs of engaging in a going private transaction. Those
discussions consistently focused on the cost of being a public filer and the
potential savings to the Company if it were to go private. The Board of
Directors has discussed the possibility of engaging in a going private
transaction at each of the six meeting of the Board of Directors since October
2003.
At each Board meeting during this period, the Board reviewed information
provided by the Chief Executive Officer and Chief Financial Officer of the
Company, including potential cost savings, analyses of cash pay out required to
shareholders, number of shares and shareholders remaining under different split
scenarios, and community perception. At the October 20, 2004 meeting, the Board
appointed a committee of independent directors to review information presented
to date. The committee was charged with reviewing the draft version of the
Common Stock Fair Value Appraisal prepared by PBS and making a recommendation to
the full Board regarding the feasibility of completing a going-private
transaction. The committee was comprised of Barry A. Schnakenburg, Paul E.
Becker and Michael A. Elliott, who have each been determined by the Company to
be "independent," as that term is defined under the NASDAQ listing standards.
"Independent" in this context means that the members of the committee are not
officers or employees of the Company or any of its subsidiaries nor do they have
any relationship with the Company or any of its subsidiaries, which, in the
opinion of the Company's board of directors, would interfere with their exercise
of independent judgment in carrying out their responsibilities as directors of
the Company.
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.
15
On November 9, 2004, the committee of independent directors discussed the draft
version of the Common Stock Fair Value Appraisal with PBS. In that discussion,
PBS explained the basis for its conclusion that the transaction was fair to the
shareholders who will be cashed out in the reverse stock split and to those who
remain as unaffiliated shareholders.
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 the committee of independent directors recommending that the
Company engage in a going private transaction 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. Professional Bank Service discussed the Common Stock Fair Value
Appraisal with the Board of Directors at this meeting.
In making its determination to proceed with the reverse stock split, the Board
of Directors considered other going private alternatives as well as remaining an
SEC reporting company. As discussed below, the Board rejected the other
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.
16
o Sale of the Company. The Board did not consider selling the Company to
be an appropriate alternative to a going private transaction. The
Company has net operating loss carryforwards and tax credit
carryforwards resulting in a deferred tax asset of approximately $6.2
million. These carryforwards would be virtually useless to a
non-affiliated purchaser, and would be subtracted from equity of $16.2
million to determine by an acquirer to determine a value. Thus, net
equity would be approximately $10 million, or approximately 38% less
than GAAP equity.
In addition to financial considerations noted above, the Board, as
permitted under Indiana law, considered other factors such as the
economic effect that a sale would have on depositors, employees, loan
and other customers and creditors and the community in which the
Company is located. The Board believes that a going private
transaction will reduce the Company's expenses and allow management
and the Board to focus its attention on activities which enhance
shareholder value.
At the November 10, 2004 meeting, the Board received the advice from legal
counsel and management on the various matters discussed. After much discussion,
the Board (a) acknowledged the fairness opinion by PBS with respect to the
consideration to be paid to stockholders as a result of the reverse stock split,
and (b) instructed management to work with legal counsel 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.
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.
17
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. The purpose of the forward stock split is to facilitate liquidity
for the remaining shareholders.
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 $45,000, 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.
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
18
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. 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:
19
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 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 unaffiliated shareholders of the Company. The
Board of Directors has eight members, seven 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 PBS, 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 unaffiliated
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:
20
o Liquidity for Remaining Unaffiliated 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
Unaffiliated Shareholders. Following the transaction, the Board of Directors
believes that the Company and its remaining unaffiliated shareholders will
benefit from the savings in direct and indirect operating costs to 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 unaffiliated 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
PBS, as described below, including the net book value, going concern value,
liquidation value, purchase prices paid in prior purchases. The Board of
Directors and PBS also considered the effect of the termination of the
Supervisory Agreement with the Office of Thrift Supervision on the fairness of
the Transaction.
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. Because of such specific authorization in the Indiana Code, the
Board of Directors does not believe that the lack of a vote affects the fairness
of the transaction to either the shareholders who are cashed out or who remain
as unaffiliated shareholders. Accordingly, the Company has not asked the
shareholders to vote on the transaction. Furthermore, 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.
21
o Fairness Opinion. The Board of Directors considered the various valuation
methodologies provided by PBS, its financial advisor, when determining the price
to be paid in the transaction. Furthermore, PBS has delivered a fairness opinion
to the Board of Directors in which it concurs that $1.85 is fair to unaffiliated
shareholders receiving cash consideration as well as the remaining unaffiliated
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 unaffiliated shareholders, although PBS, 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 to those shareholders
who are cashed out and who remain as unaffiliated shareholders following the
reverse stock split. See "Special Factors - Fairness Opinion of Financial
Advisor".
o Determination of Reverse Split Ratio. The Board of Directors of the Company
selected the 1 for 30,000 ratio for the reverse stock split by calculating the
highest ratio that could be used to reliably reduce the shareholders to less
than 300. The Board of Directors of the Company believes that in order to
maximize the cost savings value of the transaction to the Company, the ratio
should be as high as possible, while still ensuring that the Company would be
able to achieve the stated purposes of the transaction. Based upon the
information presented to the Board of Directors by management of the Company,
the Board of Directors determined that a ratio of 1 for 30,000 is the highest
ratio which allows the Company to reasonably believe that the reverse stock
split will result in the Company having fewer than 300 shareholders.
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
unaffiliated shareholders.
Fairness Opinion of Financial Advisor
- -------------------------------------
PBS was engaged by the Company pursuant to an engagement letter dated August 24,
2004, to advise the Company's Board of Directors as to the fair cash value for
the Company's common stock relative to the transaction. The board engaged PBS
based upon its general reputation in the industry. PBS' engagement also required
it to provide an opinion to the Company as to the fairness of the consideration,
from a financial perspective, to be paid to those common shareholders receiving
cash in the proposed 1 for 30,000 share reverse stock split and going private
transaction and to those remaining unaffiliated shareholders. The scope of PBS'
authority was unlimited in this regard. The Company did not impose any
limitation on PBS in its determination of the fair cash value for the Company's
common stock relative to the transaction or its formulation of an opinion with
respect to the fairness of the consideration, from a financial perspective, to
be paid to those common shareholders receiving cash in the reverse stock and the
remaining unaffiliated shareholders.
For three years prior to the engagement of PBS by the Company for the purposes
described above, PBS has performed a quarterly loan review for the Company's
wholly-owned subsidiary United Fidelity Bank, fsb. The fees paid to PBS for such
loan review have not exceeded $45,000
22
in any year. Otherwise, neither the Company nor any of its affiliates had any
material relationship with PBS prior to the Engagement Letter, nor, to the
knowledge of the Company is any other relationship with PBS contemplated by the
Company or any of its affiliates. Under the terms of the Engagement Letter, the
Company agreed to pay PBS based upon PBS' customary hourly rates, an amount not
to exceed $10,000.
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.
PBS, 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. The full text
of the Fairness Opinion is attached as Annex A to this Disclosure Document and
we encourage you to read the opinion in its entirety. The full text of the
Fairness Opinion and the Common Stock Fair Value Appraisal is available for
inspection and copying at the principal executive offices of the Company at 18
NW Fourth Street, Evansville, Indiana 47708 during the regular business hours of
the Company by any interested shareholder of the Company or any representative
of any such shareholder who has been so designated in writing.
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.
23
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 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. This summary does not
purport to be a complete description of the analyses performed by PBS in this
regard. A complete description of the analyses performed by PBS is contained in
the Common Stock Fair Value Appraisal. 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.
The material assumptions made by PBS regarding the industry, performance, macro
and micro business and economic conditions, and the Company's business prospects
include the following:
o The macro economy will remain in a prolonged state of slow economic
growth.
o Investment returns in the US financial markets will remain similar to
current levels.
o Macro US interest rates and the shape of the yield curve will remain
similar to current levels.
24
o Due to stock market volatility, macro deposit growth will remain
similar to that experienced over the 2003 to 2004 period. This trend
is expected to continue into the foreseeable future.
o Due to a lack of significant industry deposit growth and increasing
competition between financial institutions, it is becoming
increasingly difficult for financial institutions to generate true
excess economic returns.
o The Company has been unable to execute a consistent and profitable
business plan.
o The Company has been unable to achieve the core deposit and asset base
necessary to reach high levels of profitability.
o Given the Company's historical low level of profitability and troubled
operating history the potential benefit of being a public company is
somewhat mitigated.
o In addition, the Company is approximately 68% majority owned by a
group of controlling shareholders who have indicated they would not
support a proposal to sell the Company. This large controlling
ownership interest also reduces the float and investor interest in the
Company's common stock.
o The cost burdens of remaining a registered company are significant and
are expected to continue to escalate.
o The potential cost savings from de-registering the Company's common
shares will significantly increase the earnings per share and over
time the book value per share and realizable investment value per
share to those shareholders which retain their shares in the going
private transaction.
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
25
to the above valuation methodologies among others, PBS also considered control
premiums in its determination of fair value.
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.
26
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, Albuquerque NM 1.04 X 16.32 X
Inc.
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, Colchester IL 1.28 37.13
Inc.
FFHS First Franklin Corporation Cincinnati OH 1.39 45.23
GTPS Great American Bancorp, Champaign IL 1.08 14.83
Inc.
GSLA GS Financial Corp. Metairie LA 0.74 27.75
HCFC Home City Financial Springfield OH 1.05 19.23
Corporation
MCBF Monarch Community Bancorp, Coldwater MI 0.90 87.50
Inc.
NEIB Northeast Indiana Bancorp, Huntington IN 1.19 19.29
Inc.
SSFC South Street Financial Albemarle NC 1.13 35.96
Corp.
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: As part of it's analysis to determine the fairness of the
proposed going private transaction to those shareholders receiving cash as well
as the remaining unaffiliated shareholders from a financial perspective PBS
utilized an Earnings Method referenced in its opinion. The model assumes the
Company will increase it's earnings over a five year period from $361,000 to
$1,497,000 at which time an investor could sell shares at the Comparable Thrift
Group current median multiple of core earnings per share of 22.93X. The
following table demonstrates the financial projections prepared and utilized by
PBS:
27
5 Year Summary Projected Data
Year Assets Net Income Dividends Equity
- -------------------------------------------------------------------------
1 $207,696 $415 $0 $16,586
2 222,234 556 0 17,142
3 237,791 832 0 17,974
4 254,436 1,145 0 19,119
5 272,247 1,497 0 20,617
Financial Ratios
Year Return on Assets Return on Equity Equity/Assets
- ------------------------------------------------------------------------
1 0.20% 2.50% 7.99%
2 0.25 3.24 7.71
3 0.35 4.63 7.56
4 0.45 5.99 7.51
5 0.55 7.26 7.57
PBS compared the resulting per share present value of $1.69 in the Earnings
Method to a pro forma present value assuming 1,024,196 common shares were
repurchased at a 4.80% cost of funds, which is the Company's current yield on
earning assets, and realized cost savings generated from delisting will equal
$290,000 per year pre-tax. Assuming an investor could sell Company shares at the
same Comparable Thrift Group current median multiple of core earnings per share
of 22.93X the resulting pro forma present value of the Company's remaining
common shares equaled $2.05 per share. Based on the increase in earnings per
share, book value per share over time, and increased present value per share of
$2.05, PBS concluded that the going private transaction was fair to the
remaining unaffiliated shareholders from a financial perspective.
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
28
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.
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.
29
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%.
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%.
30
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.
In forming its opinion as to the fairness of the $1.85 per share cash fair value
to be paid to Company shareholders under the terms of the going private
transaction, PBS, in addition to the factors described above, recognized the
potentially positive impact of the Company's October 28, 2004 announcement of
the termination of the Company's Supervisory Agreement with the Office of Thrift
Supervision. It is PBS' opinion that the impact of the dissemination of this
potentially positive information was absorbed by the markets on October 29, 2004
and November 1, 2004 when 17,600 shares and 20,400 shares, respectively, were
reported traded on the NASDAQ. After the announcement of this information the
Company's closing stock price increased from $1.50 on October 28, 2004 to $1.70
on November 1, 2004. In considering recent pricing and trading activity in the
Company's stock PBS is of the opinion that utilizing any single days trading
price or a single trade or a single day's intra-day high or low in a company's
stock does not provide an accurate reflection of investor sentiment or true
fundamental value or fair value. This is particularly true since the Company has
only limited float and analyst coverage on its stock. However in its analysis
PBS noted that the Company's November 8, 2004 closing price of $1.71 was above
the weighted average closing price of the Company's common stock since it was
released from its regulatory order as well as the 30 day and year-to-date
median, average and weighted average closing prices. In addition, while the
Company experienced a small number of trades in its common stock on November 5,
2004 and November 6, 2004 at prices above the $1.85 per share fair value
determined by PBS, PBS is of the opinion that the relatively low trading volume
on these days, coupled with the Company's restricted float in its common stock,
does not provide an accurate reflection of the fair value of the Company's
common shares particularly since the Company's share price declined again on
November 8, 2004 to close at $1.71 per share.
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:
31
o following the reverse stock split, the executive officers and Directors of the
Company will own approximately 78.48% of the outstanding shares of the Company
stock, which represents an increase of 6.91% from the approximate 71.57% which
they held as of December 31, 2004;
o each of Directors and all of the executive officers of the Company 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 if, following the reverse stock split, the Directors and executive officers of
the Company were to exercise all of their currently outstanding options to
acquire Company stock, they would hold approximately 79.76% of the then
outstanding common stock of the Company;
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
73.10%, on a fully diluted basis, to approximately 79.76% as a result of the
reduction of the number of shares of common stock outstanding by an estimated
1.1 million shares.
Certain entities which are affiliated with Bruce A. Cordingley, Gerald K. Pedigo
and Phillip J. Stoffregen, namely Pedcor Financial, LLC and Pedcor Bancorp, own
a significant number of the shares of common stock of the Company. Accordingly,
they may have an interest in the transaction which differs from that of the
other shareholders. A description of Messrs. Cordingley, Pedigo and Stoffregen's
ownership interest in each of the entities and the entities' ownership interest
in the Company follows:
Mr. Cordingley may be deemed to beneficially own in the aggregate 8,143,830
shares of the common stock of the Company, representing approximately 71.26% of
the outstanding shares of common stock. Of such shares, Mr. Cordingley has sole
voting and dispositive power with respect to 21,863 shares, and shared voting
and dispositive power with respect to 8,143,830 shares as a result of the
following relationships:
o 7,710,682 shares owned by Pedcor Financial, LLC, of which Mr.
Cordingley is the President and 31.122% owner; and
o 386,619 shares and 24,666 shares which Pedcor Financial, LLC and
Pedcor Bancorp, respectively, have the right to acquire upon exercise
of warrants acquired pursuant to Fidelity Federal Bancorp's 2002
Rights Offering.
32
The above includes 16,600 shares which Mr. Cordingley has the right to acquire
upon exercise of stock options granted under Fidelity Federal Bancorp's 1993
Director's Stock Option Plan.
Mr. Pedigo may be deemed to beneficially own in the aggregate 8,131,767 shares
of the common stock of the Company, representing approximately 71.20% of the
outstanding shares of common stock. Of such shares, Mr. Pedigo has sole voting
and dispositive power with respect to 9,800 shares, and shared voting and
dispositive power with respect to 8,131,767 shares as a result of the following
relationships:
o 7,710,682 shares owned by Pedcor Financial, LLC, of which Mr. Pedigo
is the Chairman and 31.122% owner; and
o 386,619 shares and 24,666 shares which Pedcor Financial, LLC and
Pedcor Bancorp, respectively, have the right to acquire upon exercise
of warrants acquired pursuant to Fidelity Federal Bancorp's 2002
Rights Offering.
The above includes 9,800 shares which Mr. Pedigo has the right to acquire upon
exercise of stock options granted under Fidelity Federal Bancorp's 1993
Director's Stock Option Plan.
Mr. Stoffregen may be deemed to beneficially own in the aggregate 8,133,567
shares of the common stock of the Company, representing approximately 71.20% of
the outstanding shares of common stock. Of such shares, Mr. Stoffregen has sole
voting and dispositive power with respect to 11,600 shares, and shared voting
and dispositive power with respect to 8,133,567 shares as a result of the
following relationships:
o 7,710,682 shares owned by Pedcor Financial, LLC, of which Mr.
Stoffregen is the Executive Vice President and 31.122% owner; and
o 386,619 shares and 24,666 shares which Pedcor Financial, LLC and
Pedcor Bancorp, respectively, have the right to acquire upon exercise
of warrants acquired pursuant to Fidelity Federal Bancorp's 2002
Rights Offering.
The above includes 11,600 shares which Mr. Stoffregen has the right to acquire
upon exercise of stock options granted under Fidelity Federal Bancorp's 1993
Director's Stock Option Plan.
Pedcor Financial, LLC may be deemed to beneficially own in the aggregate
8,097,301 shares of the common stock of the Company, representing approximately
71.11% of the outstanding shares of common stock. Of such shares, Pedcor
Financial, LLC has sole voting and dispositive power with respect to all of such
shares, and shared voting and dispositive power with respect to none of such
shares.
The above includes 386,619 shares which Pedcor Financial, LLC has the right to
acquire upon exercise of warrants acquired pursuant to Fidelity Federal
Bancorp's 2002 Rights Offering.
Pedcor Bancorp may be deemed to beneficially own in the aggregate 24,666 shares
of the common stock of the Company, representing approximately .22% of the
outstanding shares of common stock. Of such shares, Pedcor Bancorp has sole
voting and dispositive power with
33
respect to all of such shares, and shared voting and dispositive power with
respect to none of such shares.
The above includes 24,666 shares which Pedcor Bancorp has the right to acquire
upon exercise of warrants acquired pursuant to Fidelity Federal Bancorp's 2002
Rights Offering.
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 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
34
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
-----------------------------------
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
35
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
- -----------------------------------------
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
36
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 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
37
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.
The approximately $2.05 million necessary to pay for all of the fractional
shares of common stock exchanged for cash in the transaction and the expenses
relating to the transaction will come from the working capital of the Company
and from the sale of Trust Preferred Securities ("TruPS") on December 16, 2004.
The Company realized net proceeds of approximately $2,965,000 from the issuance
and sale of TruPS to Citigroup Global Markets, Inc. (the "Citigroup Financing")
pursuant to a Purchase Agreement, dated December 2, 2004. The Company
understands that the Citigroup Global Markets, Inc., as the initial purchaser,
intends to transfer the TruPS to a pooled trust preferred entity or to such
other purchaser as it determines. In this regard, however, Citigroup Global
Markets, Inc., as the initial purchaser, represented in the Purchase Agreement
that it was aware that the TruPS had not and will not be registered under the
Securities Act of 1933 (the "Securities Act") and may not be offered or sold in
the United States of America or to certain U.S. persons except in accordance
with the provisions of Rule 903 under Regulation S under the Securities Act or
pursuant to an exemptions from the registration requirements of the Securities
Act. The Company does not currently have any other plans for financing the
transaction.
TruPS are hybrid securities, which may be considered equity for regulatory
purposes and debt for tax purposes. TruPS are accounted for on the Company's
balance sheet as long-term debt obligations. To issue the TruPS, the Company
formed a special purpose trust, Fidelity Federal Bancorp Statutory Trust I-2004
(the "Trust"). The Trust then issued and sold 3,000 of Floating Rate TruPS,
having a liquidation amount of $1,000 per capital security (the "Capital
Securities") and bearing a per annum rate of interest, reset quarterly, equal to
LIBOR plus 2.25%.
The Trust used the entire proceeds from the sale of the TruPS and the entire
proceeds of the sale of its initial equity from the Company to purchase
$3,093,000 in principal amount of Floating Rate Junior Subordinated Debt
Securities of the Company (the "Subordinated Debt Securities"). The Subordinated
Debt Securities were issued pursuant to an Indenture dated December 16, 2004
between the Company and Wells Fargo Bank, National Association, as trustee. The
Subordinated Debt Securities are the sole asset of the Trust. The Subordinated
Debt Securities have an interest rate, and the dividend payment which mirror the
current rate of the TruPS. The Subordinated Debt Securities have a maturity of
30 years and are due in 2034, but are redeemable by the Company after 5 years.
The TruPS are guaranteed by the Company. The TruPS are non-voting and not
convertible into common shares of the Company.
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 if the Board of
Directors determines that such action is in the best interest of the Company.
The Company may, for example, abandon or delay the transaction if
38
there is a material change in the condition of the Company or if the Board of
Directors perceives that there has been a material change in the benefits or
risks associated with the transaction.
THE PARTIES
-----------
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 captioned "Security by Ownership of Management" of the Proxy
Statement filed by the Company with the SEC on March 29, 2004 (the "2004 Proxy
Statement") is hereby incorporated by reference.
Officers and Directors
- ----------------------
The section of the 2004 Proxy Statement captioned "Information Concerning
Nominees, Directors and Executive Officers" is hereby incorporated by reference.
Other Parties
- -------------
Pedcor Financial, LLC (f/k/a Pedcor Holdings, LLC), organized March 28, 2000, an
Indiana limited liability company, is a registered thrift holding company under
Federal banking laws. Its principal business address and business telephone
number is One Pedcor Square, 770 3rd Avenue SW, Carmel, Indiana 46032, (317)
587-0320. The executive officers, directors and principal owners of Pedcor
Financial, LLC are Bruce A. Cordingley, Gerald K. Pedigo and Phillip J.
Stoffregen.
Pedcor Bancorp, incorporated February 15, 1996, an Indiana corporation, is a
registered bank holding company under Federal banking laws. Its principal
business address and business telephone number is One Pedcor Square, 770 3rd
Avenue SW, Carmel, Indiana 46032, (317) 587-0320. The executive officers,
directors and principal owners of Pedcor Bancorp are Bruce A. Cordingley, Gerald
K. Pedigo and Phillip J. Stoffregen.
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.
39
Transactions
- ------------
The following briefly describes the nature and approximate dollar amount of
certain transactions that occurred during the past two years between the Company
or its affiliates and other persons which are deemed to be affiliates of the
Company. Messrs. Cordingley, Pedigo and Stoffregen are affiliated with and
control Pedcor Financial, LLC and Pedcor Bancorp.
o The information set forth in the Proxy Statement of the Company filed
with the SEC on April 1, 2003 and in the 2004 Proxy Statement under
the caption "Certain Transactions and Other Matters between Management
and Fidelity" is incorporated herein by reference.
o On December 17, 2004, Barry A Schnakenburg and certain entities which
Mr. Schnakenburg is affiliated with sold an aggregate amount of
207,000 shares of common stock of the Company to Pedcor Financial, LLC
at the price of $1.85 per share, which is an aggregate amount of
approximately $382,950.
o On December 6, 2004, Messrs. Cordingley, Pedigo and Stoffregen and
Denise Cordingley (Bruce A. Cordingley's wife) sold an aggregate
amount of 545,506 shares of Company common stock to Pedcor Financial,
LLC at the price of $1.85 per share, which is an aggregate amount of
approximately $1,009,186.
o On July 7, 2004, Messrs. Cordingley, Stoffregen and Pedigo each
transferred 43,190 shares (an aggregate amount of 129,570 shares) of
Company stock to Pedcor Financial, LLC in exchange for 110,761 shares
(an aggregate of 332,283 shares) of Pedcor Financial, LLC stock, and
Pedcor Bancorp transferred 197,379 shares of Fidelity Federal Bancorp
stock to Pedcor Financial, LLC in exchange for 506,181 shares of
Pedcor Financial, LLC stock. The exchanges were performed on the basis
of Pedcor Financial, LLC's March 31, 2004 book value of $.62 per share
and Fidelity Federal Bancorp's market value of $1.59 per share.
o On March 31, 2004, Pedcor Financial, LLC acquired 939,227 shares of
Company stock at the price of $1.81 per share, which is an aggregate
amount of approximately $1,700,000, pursuant to the exercise of rights
issued to all of the shareholders of the Company as part of a pro rata
rights offering. On May 14, 2004, Pedcor Financial, LLC exercised
rights to acquire an additional 252,042 share of Company stock at the
price of $1.81 per share, which is an aggregate amount of
approximately $456,196, also pursuant to the rights offering.
o On March 31, 2004, Pedcor Bancorp acquired 55,249 shares of Company
stock at the price of $1.81 per share, which is an aggregate amount of
$100,000, pursuant to the exercise of rights issued to all of the
shareholders of the Company as part of a pro rata rights offering.
40
o On March 31, 2004, Bruce A. Cordingley acquired 44,200 shares of
Company stock at the price of $1.81 per share, which is an aggregate
amount of approximately $80,002, pursuant to the exercise of rights
issued to all of the shareholders of the Company as part of a pro rata
rights offering.
o On March 31, 2004, Phillip J. Stoffregen acquired 53,462 shares of
Company stock at the price of $1.81 per share, which is an aggregate
amount of approximately $96,766, pursuant to the exercise of rights
issued to all of the shareholders of the Company as part of a pro rata
rights offering.
o On March 31, 2003, Pedcor Holdings, LLC (n/k/a Pedcor Financial, LLC)
acquired 2,625,000 shares of Company stock at the price of $1.44 per
share, which is an aggregate amount of approximately $3,780,000,
pursuant to the exercise of a stock option issued in May of 2000.
o On March 31, 2003, Pedcor Bancorp acquired 152,777 shares of Company
stock at the price of $1.44 per share, which is an aggregate amount of
approximately $219,999, pursuant to the exercise of previously issued
stock option.
o On January 7, 2003, Pedcor Holdings, LLC transferred a portion of a
stock option, representing the right to acquire 100,000 shares of
Company stock, to Gerald K. Pedigo for no consideration.
o On January 7, 2003, Gerald K. Pedigo acquired 100,000 shares of
Company stock at the price of $1.53 per share, which is an aggregate
amount of approximately $153,000, pursuant to the exercise of a stock
option.
Significant Corporate Events
- ----------------------------
Other than as described in this Disclosure Document or the documents
incorporated herein by reference, there has not, during the past two years, been
any negotiations, transactions or material contracts between the Company
(including its subsidiaries) and any of its executive officers or Directors, or
Pedcor Financial, LLC or Pedcor Bancorp concerning any merger, consolidation,
acquisition, tender offer or other acquisition of any class of the Company's
securities, election of the Company's Directors, or the sale or transfer of a
material amount of assets of the Company.
Agreements Involving Company Stock
- ----------------------------------
The only agreements, arrangements, or understandings, whether or not legally
enforceable, of which the Company is aware, between the Company or any executive
officer, Director or person controlling the Company are as follows:
Based solely upon information set forth in a Schedule 13D filed by such person
on December 20, 2004, Pedcor Financial, LLC pledged 748,110 of its shares of
Company common stock to the Bank of Evansville as collateral security for its
obligations. The Company is unaware of the terms of the pledge.
41
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.
The information contained in this disclosure document speaks only as of its
date, unless the information specifically indicates that another date applies.
42
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.
This document incorporates by reference the documents listed below that we have
filed 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
Proxy Statement April 1, 2003
43
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, INC.
PROFESSIONAL BANK SERVICES, INC.