UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
STATE OF FRANKLIN BANCSHARES, INC.
(Name of Registrant as Specified in Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
i
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing party:
Date filed:
ii
Subject to Completion dated June 22, 2005
STATE OF FRANKLIN BANCSHARES, INC.
1907 North Roan Street
Johnson City, Tennessee 37601
_______ __, 2005
To the Shareholders of
STATE OF FRANKLIN BANCSHARES, INC.
You are cordially invited to attend the annual meeting of shareholders of
State of Franklin Bancshares, Inc., which will be held at our offices at 1907
North Roan Street, Johnson City, Tennessee, on ________ , ___ __, 2005, at 11:00
a.m., Eastern Time.
At the meeting, you will be asked to:
o approve the Agreement and Plan of Merger dated as of April 13, 2005,
by and between State of Franklin and State of Franklin Merger Corp., a
Tennessee corporation and State of Franklin's wholly owned subsidiary
("Merger Corp."), pursuant to which Merger Corp. will merge with State
of Franklin, with State of Franklin being the surviving corporation
(the "Going Private Merger"), and each of the transactions
contemplated thereby, including, without limitation, the Going Private
Merger;
o elect four directors to serve until the 2008 annual meeting of
shareholders;
o ratify the appointment of Baylor and Backus as our independent
accountants and auditors for 2005; and
o transact other business that properly comes before the meeting or any
adjournment of the meeting.
The first proposal relates to a corporate reorganization approved by our
Board of Directors which will enable State of Franklin to become a private
company. As a result of this "Going Private Merger":
o all shareholders who beneficially own (including certain family
ownership as specially defined herein) 3,000 or fewer shares of common
stock will receive a cash payment for such shares in the amount of
$25.25 per share; and
o shareholders who beneficially own (including certain family ownership)
more than 3,000 shares of common stock will retain such shares.
The Going Private Merger will be accomplished by State of Franklin engaging
in a merger transaction with Merger Corp. As a result of this Going Private
Merger, State of Franklin will substantially reduce its total number of
shareholders, which will permit it to deregister its shares of common stock
under the Securities Exchange Act of 1934, as amended, and become a privately
held company, which will allow it to eliminate costly public reporting and
burdensome regulation. Before we undertake the Going Private Merger, our
shareholders must vote and approve it.
We have enclosed a notice of the annual meeting of shareholders, a proxy
statement, and a form of proxy. The matters listed in the notice of annual
meeting, including the Going Private Merger, are more fully described in the
proxy statement. We have also enclosed a copy of our Annual Report for the year
ended December 31, 2004 and our Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2005.
It is important that your shares are represented and voted at the meeting,
regardless of the size of your holdings. Accordingly, we would appreciate your
completing the enclosed form of proxy whether or not you plan to attend the
meeting. If you are present at the meeting and wish to vote your shares
personally, your form of proxy can be revoked upon
iii
your request prior to balloting. If you wish to vote personally at the meeting,
but your shares are held in the name of a broker, trust, bank or other nominee,
you should bring with you a form of proxy or letter from the broker, trustee,
bank or nominee confirming your beneficial ownership of the shares.
We urge you to return your form of proxy by mailing it in the enclosed
postage-paid envelope to be received no later than 5:00 p.m. on _______ __,
2005.
Upon request, we will provide to you, without charge, any exhibits to our
annual report on Form 10-KSB for the year ended December 31, 2004 or to our
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005, as filed
with the SEC. Requests should be directed to Becky Mominee, Secretary, by mail
to State of Franklin Bancshares, Inc., 1907 North Roan Street, Johnson City,
Tennessee 37601, or by telephone to (423) 926-3300.
Sincerely yours,
CHARLES E. ALLEN, JR. RANDAL R. GREENE
Chairman President
and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the transaction described herein;
passed upon the merits or fairness of the transaction; or passed upon the
adequacy of the disclosure in this proxy statement. Any representation to the
contrary is a criminal offense.
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STATE OF FRANKLIN BANCSHARES, INC.
1907 North Roan Street
Johnson City, Tennessee 37601
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held _______ __, 2005
The regular annual meeting of shareholders of State of Franklin Bancshares,
Inc. will be held at our offices at 1907 North Roan Street, Johnson City,
Tennessee, on ________, _______ __, 2005, at 11:00 a.m., Eastern Time, for the
following purposes:
1. Approval of Going Private Transaction. To approve the Agreement and
Plan of Merger dated as of April 13, 2005, by and between State of
Franklin and State of Franklin Merger Corp., a Tennessee corporation
and State of Franklin's wholly owned subsidiary ("Merger Corp."),
pursuant to which Merger Corp. will merge with State of Franklin, with
State of Franklin being the surviving corporation (the "Going Private
Merger"), and each of the transactions contemplated thereby,
including, without limitation, the Going Private Merger.
2. Election of Directors. To elect four directors to serve until the 2008
annual meeting of shareholders or until their successors have been
duly elected and qualified.
3. Ratification of Auditors. To ratify the appointment of Baylor and
Backus as our independent accountants and auditors for 2005.
4. Other Business. To transact such other business as may properly come
before the meeting or any adjournment of the meeting.
Shareholders of record at the close of business on ________ __, 2005, are
entitled to notice of and to vote on all matters presented at the annual meeting
of shareholders. On that day 1,481,462 shares of common stock were outstanding.
Each share entitles the holder to one vote.
By Order of the Board of Directors
BECKY MOMINEE
Secretary
_______ __, 2005
YOUR VOTE IS IMPORTANT
Whether or not you expect to attend the meeting and regardless
of the number of shares you own, please mark,sign, date and
return the enclosed form of proxy as promptly as possible
in the enclosed envelope. You may nevertheless vote in person if
you attend the annual meeting.
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Table of Contents
Page
Information about the Annual Meeting...........................................1
Summary Term Sheet Regarding the Going Private Merger..........................3
The Merger Agreement.....................................................3
Vote Required for the Going Private Merger...............................3
Effects of the Going Private Merger......................................4
Reasons for the Going Private Merger.....................................4
Disadvantages of the Going Private Merger................................4
Background of the Going Private Merger Proposal..........................4
Material U. S. Federal Income Tax Consequences of the
Going Private Merger...................................................4
Dissenters Rights in the Going Private Merger............................4
Opinion of Financial Advisor.............................................5
Sources of Funds; Financing of the Going Private Merger..................5
Recommendation of the Boards of Directors of State of Franklin
and Merger Corp. and Their Directors and Executive Officers
Regarding the Going Private Merger.....................................5
Effects of Going Private Merger on Officers, Directors and
Affiliates of State of Franklin........................................5
Effect of Going Private Merger Proposal on State of Franklin
Shareholders...........................................................5
Interests of Officers and Directors in the Going Private Merger..........6
Shares Held in Street Name...............................................6
Summary Financial Information............................................7
Summary Historical Consolidated Financial Information................7
Summary Unaudited Pro Forma Consolidated Financial Information.......8
Selected Per Share Financial Information.............................9
Per Share Market Price..............................................10
Statement Regarding Forward-Looking Information...............................11
Proposal 1 -- Approval of Merger Agreement....................................11
Special Factors...............................................................11
Background of the Going Private Merger Proposal.........................11
Reasons for the Going Private Merger....................................14
Effects of the Going Private Merger.....................................16
Recommendation of the Board of Directors; Fairness of the Going
Private Merger Proposal...............................................19
Determination of Fairness of Merger Corp. and Other State of
Franklin Affiliates...................................................22
Opinion of Financial Advisor............................................22
The Merger Transaction........................................................29
Fees and Expenses of the Going Private Merger...........................29
Material U.S. Federal Income Tax Consequences of the Going
Private Merger........................................................29
Source and Amount of Funds for the Going Private Merger.................31
Conduct of State of Franklin's Business after the Going
Private Merger........................................................31
Directors and Executive Officers of State of Franklin and
Merger Corp...........................................................32
Dissenter's Rights......................................................33
Interests of Officers and Directors in the Going Private Merger.........35
Regulatory Requirements for the Going Private Merger....................36
The Merger Agreement..........................................................37
Proposal 2 -- Election of Directors...........................................41
Information about the Board of Directors......................................42
Proposal 3 -- Ratification of Appointment of Independent Auditors.............44
State of Franklin Stock Ownership.............................................45
Executive Compensation........................................................46
Report of Audit Committee of the Board of Directors...........................48
Audit Fees....................................................................49
Section 16(a) Beneficial Ownership Reporting Compliance.......................49
Transactions with Executive Officers, Directors and Others....................49
Other Matters.................................................................49
Cost of Solicitation..........................................................50
Shareholder Proposals.........................................................50
Where You Can Find More Information...........................................50
Additional Documents and Other Information Incorporated by Reference..........50
Index to Financial Statements.................................................51
Annex A -- Agreement and Plan of Merger......................................A-1
Annex B -- Opinion of Alex Sheshunoff & Co. Regarding Common Stock...........B-1
Annex C -- Sections 48-21-101 through 48-23-302 of Tennessee Business
Corporation Act............................................................C-1
Annex D -- Valuation Letter of Alex Sheshunoff & Co. dated
February 3, 2005...........................................................D-1
vi
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
Your vote is very important. For this reason, the Board is requesting that,
if you are not able to attend the annual meeting of shareholders, you allow your
common stock to be represented at the meeting by the proxies named in the
enclosed proxy card. This proxy statement and the form of proxy are being sent
to you in connection with this request and are being mailed to all shareholders
beginning on _______ __, 2005.
Information About the Annual Meeting
When is the annual meeting?
_________, ________ __, 2005, 11:00 a.m. Eastern Time.
Where will the annual meeting be held?
State of Franklin Savings Bank, 1907 North Roan Street, Johnson City,
Tennessee.
What items will be voted upon at the annual meeting?
You will be voting upon the following matters:
1. Approval of Going Private Transaction. To approve the Agreement and
Plan of Merger dated as of April 13, 2005, by and between State of
Franklin and State of Franklin Merger Corp., a Tennessee corporation
("Merger Corp."), pursuant to which Merger Corp. will merge with State
of Franklin, with State of Franklin being the surviving corporation
(the "Going Private Merger"), and each of the transactions
contemplated thereby, including, without limitation, the Going Private
Merger.
2. Election of Directors. To elect four directors to serve until the 2008
annual meeting of shareholders or until their successors have been
duly elected and qualified.
3. Ratification of Auditors. To ratify the appointment of Baylor and
Backus as our independent accountants and auditors for 2005
4. Other Business. To transact such other business as may properly come
before the meeting or any adjournment of the meeting.
Who can vote?
You are entitled to vote your common stock if our records show that you
held your shares as of the close of business on the record date, ________ __,
2005. Each shareholder is entitled to one vote for each share of common stock
held on that date. On _________ __, 2005 there were 1,481,462 shares of common
stock outstanding and entitled to vote.
How do I vote by proxy?
If you sign, date and return your signed proxy card before the annual
meeting, we will vote your shares as you direct. For the election of directors,
you may vote for (1) all of the nominees, (2) none of the nominees, or (3) all
of the nominees except those you designate. For the approval of the Going
Private Merger and the ratification of the appointment of our auditors, you may
vote "For" or "Against" or you may "Abstain" from voting.
1
If you return your signed proxy card but do not specify how you want to
vote your shares, we will vote them
o "For" the approval of the Going Private Merger;
o "For" the election of all of our nominees for director; and
o "For" the ratification of the appointment of Baylor and Backus as our
independent auditors.
The Board knows of no other business to be presented at the annual meeting.
If any matters other than those set forth above are properly brought before the
annual meeting, the individuals named in your proxy card may vote your shares in
accordance with their best judgment.
How do I change or revoke my proxy?
You can change or revoke your proxy at any time before it is voted at the
annual meeting by:
(1) submitting another proxy with a more recent date than that of the
proxy first given;
(2) attending the annual meeting and voting in person; or
(3) sending written notice of revocation to our corporate secretary, Becky
Mominee.
How many votes are required?
If a quorum is present at the annual meeting,
o the director nominees will be elected by a plurality of the votes cast
in person or by proxy at the meeting; and
o the approval of the Going Private Merger will require the affirmative
vote of a majority of the outstanding shares of State of Franklin
common stock
o the ratification of the appointment of the independent auditors and
all other matters submitted to shareholders will require the
affirmative vote of a majority of the votes cast in person or by proxy
at the meeting.
You should note that the officers and directors of State of Franklin have agreed
to vote their shares in favor of the merger and that they beneficially own in
the aggregate 38.34% of the outstanding shares of common stock. Accordingly, if
holders of only an additional 11.67% of the outstanding stock vote in favor of
the proposal, the proposal will be approved.
What constitutes a "quorum" for the meeting?
A majority of the outstanding shares, present or represented by proxy,
constitutes a quorum. A quorum is necessary to conduct business at the annual
meeting. You are part of the quorum if you have voted by proxy. Abstentions,
broker non-votes and votes withheld from director nominees count as "shares
present" at the meeting for purposes of determining a quorum. However,
abstentions and broker non-votes do not count in the voting results. A broker
non-vote occurs when a broker or other nominee who holds shares for another does
not vote on a particular item because the nominee does not have discretionary
authority for that item and has not received instructions from the owner of the
shares.
2
Summary Term Sheet Regarding the Going Private Merger
The following summary term sheet highlights information from this proxy
statement about our proposed going private merger and the meeting. This Summary
Term Sheet may not contain all of the information that is important to you. To
better understand, and for a more complete description of the Going Private
Merger on which you will vote, you should carefully read this entire document
and all of its annexes before you vote. For your convenience, we have directed
your attention in parentheses to the locations in this proxy statement where you
can find a more complete discussion of each item listed below.
The Merger Agreement (Page 37)
On April 13, 2005, we signed the merger agreement, pursuant to which Merger
Corp., a newly-formed Tennessee corporation, proposes to merge with and into
State of Franklin. Under the terms of the merger agreement, if the Going Private
Merger is completed:
o State of Franklin shareholders beneficially owning (including certain
family ownership) 3,000 or fewer shares of State of Franklin common
stock as of the effective date of the Going Private Merger will
receive a cash payment of $25.25 per share, unless they perfect
dissenters rights.
o State of Franklin shareholders beneficially owning (including certain
family ownership) more than 3,000 shares of common stock as of the
effective date of the Going Private Merger will continue to hold such
shares of State of Franklin, unless they perfect dissenters rights.
For purposes of determining beneficial ownership, shares owned by one of more
family members who are lineal descendants of a common ancestor (and their
spouses or former spouses), provided that the common ancestor is not more than
six generations removed from the youngest generation of shareholders, will be
aggregated in calculating total beneficial ownership. Each shareholder may
provide information about any family ownership group to be aggregated for
ownership purposes in the letter of transmittal provided by State of Franklin
after the effective date of the Going Private Merger. For example, lineal
descendants for this definition includes an individual plus his or her children,
his or her grandchildren, his or her great-grandchildren, his or her great-great
grandchildren, and his or her great-great-great grandchildren and their spouses
or former spouses, all of which could be aggregated as part of a family, and
treated as a single shareholder, unless an individual shareholders elects not to
be treated as part of the family. An individual shareholder may elect not to be
treated as part of the family ownership group by giving notice to State for
Franklin in writing before the effective date of the Going Private Merger. This
family ownership is also defined in detail in Section 1361(c)(2) of the Internal
Revenue Code, relating to SubChapter S corporations.
Vote Required for the Going Private Merger (Page 2)
Approval of the merger agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of State of Franklin common
stock. You should note that the officers and directors of State of Franklin have
agreed to vote their shares in favor of the merger and that they beneficially
own in the aggregate 38.34% of the outstanding shares of common stock.
Accordingly, if holders of only an additional 11.67% of the outstanding stock
vote in favor of the proposal, the proposal will be approved.
Effects of the Going Private Merger (Page 14)
As a result of the Going Private Merger:
o State of Franklin will immediately deregister its shares of common
stock under the Securities Exchange Act of 1934, as amended (the
"Exchange Act");
o cashed-out holders of State of Franklin common stock will no longer
have an interest in, or be a shareholder of, State of Franklin and,
therefore, they will not be able to participate in its future earnings
and growth, if any;
o the number of record shareholders of common stock of State of Franklin
will be reduced from approximately 1,200 to approximately 250 and the
number of outstanding shares of State of Franklin common stock will be
decreased from 1,481,462 to approximately 965,000;
3
o the percentage of ownership of common stock of State of Franklin
beneficially held by its officers and directors of State of Franklin,
as a group, as of May 31, 2005 will increase from 38.34% to
approximately 53.54%;
o the aggregate shareholders' equity of State of Franklin as of December
31, 2004, would be reduced from $26.3 million on a historical basis to
approximately $13.2 million on a pro forma basis;
o the book value per share of common stock of State of Franklin as of
December 31, 2004, would be reduced from approximately $17.93 per
share on a historical basis to approximately $13.65 per share on a pro
forma basis; and
o diluted net income per share of common stock of State of Franklin
(including non-recurring income and expenses) for the year ended
December 31, 2004, would increase from $1.86 on a historical basis to
$2.68 on a pro forma basis.
Reasons for the Going Private Merger (Page 14)
Our primary reason for the Going Private Merger is that it will enable us
to, and we will, deregister our shares of common stock under the Exchange Act.
As a result, we will no longer incur the costs and regulatory burden of
maintaining such registration.
Disadvantages of the Going Private Merger (Page 18)
The following are disadvantages of the Going Private Merger:
o Decreased access to information. If the Going Private Merger and the
deregistration of common stock is effected, State of Franklin will no
longer be subject to the periodic reporting requirements and the proxy
rules of the Exchange Act. Similarly, executive officers, directors
and other affiliates would no longer be subject to many of the
reporting requirements and restrictions of the Exchange Act, including
without limitation the reporting and short-swing profit provisions of
Section 16.
o Decreased liquidity. The liquidity of the shares of common stock held
by remaining shareholders may be adversely affected by the Going
Private Merger.
Background of the Going Private Merger Proposal (Page 11)
Please see "Background of the Going Private Merger Proposal" for a
discussion of the events leading up to the signing of the merger agreement.
Material U.S. Federal Income Tax Consequences of the Going Private Merger (Page
29)
The receipt of cash by shareholders in the Going Private Merger will create
either taxable income or taxable loss for federal income tax purposes depending
on a shareholder's tax basis in his or her shares of common stock.
Tax matters are very complicated and the tax consequences to you will depend on
your own situation. To review the material tax consequences in greater detail,
please read the discussion under "Material U.S. Federal Income Tax Consequences
of the Going Private Merger."
Dissenters Rights in the Going Private Merger (Page 33)
Under Tennessee law, you are entitled to dissent from the Going Private
Merger and you may have dissenters rights in connection with the Going Private
Merger. To exercise your dissenters rights, you must comply with all procedural
4
requirements of Sections 48-23-101 through 48-23-302 of the Tennessee Business
Corporation Act. A description of these sections of the Tennessee Business
Corporation Act is provided in "Approval of the Merger Agreement - Dissenters
Rights" and the full text of the sections is attached as Annex C to this
document. Failure to take any steps required by Tennessee law may result in a
termination or waiver of your dissenters rights.
Opinion of Financial Advisor (Page 22)
Alex Sheshunoff & Co. Investment Banking, LP ("Sheshunoff") has delivered
to the Board of Directors of State of Franklin its opinion, dated April 6, 2005,
to the effect that, the price per share of $25.25 to be paid to the shareholders
of State of Franklin who are being cashed out is fair from a financial point of
view. You should carefully read the discussion under "Recommendation of the
Board of Directors; Fairness of the Going Private Merger Proposal."
Sources of Funds; Financing of the Going Private Merger (Page 31)
We estimate that the total funds required for the payment of the
consideration to cashed-out holders of our common stock and to pay fees and
expenses relating to the Going Private Merger will be approximately $13.0
million. These amounts will be paid using $8.0 million of cash on hand from a
trust preferred stock offering completed in 2001 and a $5.0 million dividend
from the Bank to State of Franklin.
Recommendation of the Boards of Directors of State of Franklin and Merger Corp.
and Their Directors and Executive Officers Regarding the Going Private Merger
(Page 5)
The Boards of Directors of State of Franklin and Merger Corp. and their
directors and executive officers, individually, believe that the merger
agreement is fair to and in the best interests of State of Franklin and its
shareholders, including both affiliated and unaffiliated shareholders, and
unanimously recommend that shareholders of State of Franklin vote "FOR" the
approval of the merger agreement. As used in this proxy statement, the term
"affiliated shareholder" means any shareholder who is a director or executive
officer of State of Franklin or the beneficial owner of 10% or more of State of
Franklin's outstanding common stock, and the term "unaffiliated shareholder"
means any shareholder other than an affiliated shareholder. State of Franklin's
directors and executive officers have indicated that they will vote all of their
shares of State of Franklin stock in favor of the merger agreement. As of May
31, 2005, the directors and executive officers of State of Franklin beneficially
owned a total of 675,552 shares of State of Franklin common stock, or
approximately 38.34% of the total votes eligible to be cast at the meeting. See
"State of Franklin Stock Ownership." No other shareholders have disclosed to
State of Franklin how they intend to vote on this matter. You should be aware
that if holders of only an additional 11.67% of the outstanding shares vote in
favor of the Going Private Merger, the proposal will be approved.
Effect of the Going Private Merger Proposal on State of Franklin Shareholders
(Page 14)
Shareholders with 3,000 or fewer shares of common stock.
If the Going Private Merger Proposal is implemented and you are a
cashed-out common stock holder (i.e., a shareholder beneficially owning
(including certain family ownership) 3,000 or fewer shares of State of Franklin
common stock as of the effective time of the Going Private Merger):
o You will receive cash equal to $25.25 for each share you hold, unless
you perfect dissenters rights.
o After the Going Private Merger, you will have no further interest in
State of Franklin with respect to your cashed-out shares, and you will
no longer be entitled to vote as a shareholder or share in the assets,
earnings, or profits, if any, of State of Franklin. Your only right
will be to receive cash for these shares.
o You will likely not have to pay any service charges or brokerage
commissions in connection with the Going Private Merger. However, if
you own your shares through a brokerage account, your broker may
charge a brokerage fee in connection with the Going Private Merger.
o All amounts owed to you will be subject to applicable federal and
state income taxes and state abandoned property laws.
5
o You will not receive any interest on cash payments owed to you as a
result of the Going Private Merger.
o You will receive a transmittal letter from State of Franklin as soon
as practicable after the Effective Time. The letter of transmittal
will contain instructions on how to surrender your existing
certificate(s), if applicable, to State of Franklin for your cash
payment. You will not receive your cash payment until you surrender
your outstanding certificate(s), if applicable, in accordance with the
instructions provided to you by State of Franklin, together with a
completed and executed copy of the letter of transmittal. Please do
not send your certificates until you receive your letter of
transmittal.
Shareholders with more than 3,000 shares of common stock.
If you beneficially own (including certain family ownership) more than
3,000 shares of State of Franklin's common stock as of the effective time of the
Going Private Merger, you will continue to hold your shares of State of Franklin
common stock after the Going Private Merger, unless you perfect dissenters
rights.
Interests of Officers and Directors in the Going Private Merger (Page 35)
o the percentage of beneficial ownership of common stock of State of
Franklin (including the effect of fully vested and exercisable stock
options) held by its officers and directors as a group will increase
from 38.34% of the common stock of State of Franklin to approximately
53.54%, a majority ownership, based on their securities holdings as of
May 31, 2005;
o the collective book value as of December 31, 2004, of the shares of
State of Franklin common stock held by State of Franklin's officers
and directors, as a group (including the effect of fully vested and
exercisable stock options), would decrease from approximately $11.9
million on a historical basis to approximately $9.0 million on a pro
forma basis;
o the collective pro rata interest of State of Franklin's officers and
directors, as a group, in the net income of State of Franklin for the
year ended December 31, 2004, would increase from approximately $0.70
per share on a historical basis (based on the number of shares
beneficially owned by such officers and directors including the effect
of fully vested and exercisable stock options, as of the record date)
to a pro rata interest of approximately $1.41 per share on a pro forma
basis (based on the number of shares which State of Franklin
anticipates such officers and directors to beneficially own
immediately after the Going Private Merger including the effect of
fully vested and exercisable stock options).
o The Going Private Merger will not result in any new employment
arrangements or agreements with the current officers of State of
Franklin and will not trigger any change of control provisions in
existing agreements.
o Since none of the directors and officers of State of Franklin will be
cashed out in the Going Private Merger, they will, therefore, share in
the future growth and profits of State of Franklin while unaffiliated
shareholders who are cashed out will not.
For a description of the assumptions State of Franklin used in determining the
numbers of shares and related percentages that State of Franklin expects to be
held by current officers and directors immediately after the Going Private
Merger, please see the footnotes under "State of Franklin Stock Ownership."
Shares Held in Street Name (Page 37)
Any shares owned in street name by a third party for your benefit, but
excluding shares owned by this third party for other persons will be added to
the number of any shares you may hold directly in record name in determining the
number of shares you beneficially own. You will be entitled to retain your
shares of State of Franklin common stock in the Going Private Merger only if you
certify to State of Franklin that the total number of shares of common stock you
beneficially own (including certain family ownership) (whether of record or in
street name) is 3,000 or more. The merger agreement has detailed provisions
regarding the treatment of shares held in street name. Please read the
discussion under "The Merger Agreement - Conversion of Shares in the Going
Private Merger" for a description of these provisions as well as the terms of
the merger agreement.
6
Summary Financial Information
Summary Historical Consolidated Financial Information
The following summary historical consolidated financial information of
State of Franklin for the fiscal years ended December 31, 2004 and 2003 was
derived from the audited consolidated financial statements of State of Franklin.
This financial information is only a summary and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition or Plan of
Operation" and the consolidated financial statements of State of Franklin and
the notes thereto included in our Annual Report on Form 10-KSB for the year
ended December 31, 2004.
For the years ended December 31
Consolidated Income Statement Data: 2004 2003
- ----------------------------------- ---- ----
Total Interest Income $14,616,045 $14,219,039
Total Interest Expense 6,381,533 6,636,955
Net Interest Income 8,234,512 7,582,084
Income Before Income Taxes 3,504,480 3,403,875
Income Tax Expense 656,321 758,430
Net Income 2,848,159 2,645,445
Per Share Information:
- ---------------------
Basic Income per Common Share $2.04 $1.90
Diluted Income per Common Share $1.86 $1.77
Dividends per Common Share $0.00 $0.00
Weighted Avg Diluted Shares
Outstanding 1,529,781 1,494,308
Consolidated Balance Sheet Data:
- -------------------------------
Total Assets 296,706,179 $292,054,038
Shareholders' Equity 26,273,533 24,490,957
Bank Tier 1 Capital 33,337,000 31,351,000
Consolidated Ratio of Earnings to Fixed Charges:
Excluding Interest on
Deposits -17.67% -58.56%
Including Interest on
Deposits 170.68% 192.81%
For the purpose of computing the ratio of earnings to fixed charges, "earnings"
consist of the basic income applicable to common shareholders before income
taxes plus fixed charges. "Fixed charges" consist of interest expense on
short-term and long-term debt.
7
Summary Unaudited Pro Forma Consolidated Financial Information
The following summary unaudited pro forma consolidated income statement
data and per share information of State of Franklin for the year ended December
31, 2004 give effect to the Going Private Merger as if it had occurred on
January 1, 2004, and the unaudited pro forma consolidated income statement data
and per share information for the year ended December 31, 2003, give effect to
the Going Private Merger as if it had occurred on January 1, 2003. You should
read the summary unaudited pro forma financial information in conjunction with
the Unaudited Pro Forma Consolidated Financial Statements and the related
assumptions and notes included elsewhere in this proxy statement. As described
in such assumptions, the pro forma financial data assumes that 500,000 shares of
State of Franklin common stock are cashed-out in connection with the Going
Private Merger and the expenses of the transaction. The pro forma information
set forth below is not necessarily indicative of what State of Franklin's actual
financial position or results of operations would have been had the Going
Private Merger been consummated as of the above referenced dates or of the
financial position or results of operations that may be reported by State of
Franklin in the future.
PRO FORMA CONSOLIDATED INCOME STATEMENT DATA:
2004 2003
---- ----
Total Interest Income 14,470,777 14,086,251
Total Interest Expense 6,381,533 6,636,955
Net Interest Income 8,089,244 7,449,296
Income Before Income Taxes 3,359,212 3,271,087
Income Tax Expense 601,119 707,970
Net Income 2,758,593 2,563,116
Basic Income applicable to common
shareholders 2,758,593 2,563,116
PRO FORMA PER SHARE INFORMATION:
Basic Income per Common Share $3.07 $2.88
Diluted Income per Common Share $2.68 $2.58
Dividends per Common Share $0.00 $0.00
Weighted Avg Diluted Shares Outstanding 1,029,781 994,308
PRO FORMA CONSOLIDATED BALANCE SHEET DATA:
Total Assets 283,706,179 279,054,038
Shareholders' Equity 13,183,467 11,408,628
Bank Tier 1 Capital 17,578,000 15,212,000
8
Selected Per Share Financial Information
The following table sets forth selected historical per share financial
information for State of Franklin and unaudited pro forma per share financial
information for State of Franklin giving effect to the Going Private Merger as
if they had been consummated as of December 31, 2004, in the case of book value
information, and as of the beginning of the respective reporting periods, in the
case of income statement information. The information presented below is derived
from (i) the consolidated historical financial statements of State of Franklin,
including the related notes, and (ii) the Unaudited Pro Forma Consolidated
Financial Statements, including the assumptions and related notes, contained
elsewhere in this proxy statement. You should read this table together with the
unaudited Pro Forma Consolidated Financial Statements and the related
assumptions and notes included elsewhere in this proxy statement and the
consolidated financial statements of State of Franklin and the related notes
included in our Annual Report on Form 10KS-B for the year ended December 31,
2004. As described in the assumptions to the Unaudited Pro Forma Consolidated
Financial Statements, the pro forma per share information assumes that 500,000
shares of State of Franklin common stock are cashed-out in connection with the
Going Private Merger and the expenses of the transaction. The pro forma
information set forth below is not necessarily indicative of what State of
Franklin's actual financial position or results of operations would have been
had the Going Private Merger been consummated as of the above referenced dates
or of the financial position or results of operations that may be reported by
State of Franklin in the future.
Historical: 2004 2003
---- ----
Income per common share:
Basic $2.04 $1.90
Diluted $1.86 $1.77
Dividends per common share $0.00 $0.00
Book Value per common share(1) $17.93 $16.71
Pro Forma:
Income per common share(2):
Basic $3.07 $2.88
Diluted $2.68 $2.58
Dividends per common share $0.00 $0.00
Book Value per common share(3) $13.65 $11.82
- ---------------------
(1) Historical book value per common share is computed by dividing shareholders'
equity at December 31, 2004 by the number of common shares outstanding at each
date.
(2) Pro forma earnings per common share is computed by dividing the pro forma
net income by the historical weighted average shares outstanding for the
respective periods less the 500,000 shares of State of Franklin common stock
assumed to be acquired for cash in the Going Private Merger.
(3) Pro forma book value per common share is computed by dividing pro forma
shareholders' equity at December 31, 2004, by the number of common shares
outstanding at each date, less the 500,000 shares of State of Franklin common
stock assumed to be acquired for cash in the Going Private Merger.
9
Per Share Market Price
There is no current public market for the State of Franklin common stock
and after the Going Private Merger, there will continue to be no public market
for the common stock. State of Franklin's common stock is not currently listed
on any exchange. Trades do occur from time to time in the over-the-counter
bulletin board. The chart below is based on management's information regarding
transactions of which it is aware which occur from time to time.
High Low
------ -----
Year ended December 31, 2004:
First quarter........................................ $20.00 $20.00
Second quarter....................................... $22.00 $20.00
Third quarter........................................ $22.00 $22.00
Fourth quarter....................................... $25.00 $22.00
Year ended December 31, 2003:
First quarter........................................ $18.00 $18.00
Second quarter....................................... $20.00 $18.00
Third quarter........................................ $20.00 $19.50
Fourth quarter....................................... $22.50 $20.00
The last sale price of common stock know to management that occurred prior to
the public announcement of the transaction was $22.00 per share on January 5,
2005. State of Franklin has not declared or paid a dividend on its common stock
during any of the time periods set forth above.
During the past two years the executive officers and directors have have
purchased a total of 13,572 shares of State of Franklin common stock at purchase
prices ranging from $18.00 to $22.00 per share. Average prices paid for shares
of common stock by the officers and directors during the last two years during
each quarter and the number of shares they purchased are as follows:
Purchaser Shares Purchased
--------- ----------------
2003 (1)
First Quarter ($18.00)............Charles E. Allen, Jr. 1,800
Second quarter ($19.02)...........Charles E. Allen, Jr. 470
Kenneth E. Cutshall 1,300
Alan R. Hubbard 1,000
Third quarter ($20.00)............Charles E. Allen, Jr. 1,352
Kenneth E. Cutshall 800
Alan R. Hubbard 1,000
Fourth quarter ($20.72)...........Charles E. Allen, Jr. 100
Kenneth E. Cutshall 250
Donald R. Jeanes 900
2004(1)
First quarter ($20.00)............Charles E. Allen, Jr. 2,600
Second quarter ($22.00)...........Kenneth E. Cutshall 1,100
Third quarter($22.00).............Alan R. Hubbard 200
Fourth quarter($22.00)............Charles E. Allen, Jr. 200
Alan R. Hubbard 500
- ---------------------
(1) The average price per share paid during the quarter is in parentheses.
During the past 60 days, the only director or executive officer of State of
Franklin or Merger Corp. to engage in a transaction involving the common stock
of State of Franklin was Kenneth E. Cutshall, who purchased shares on four
occasions: 600 on April 12, 2005; 500 on April 29, 2005; 200 on May 4, 2005 and
800 on June 16, 2005; all at a price of $25.25 per share.
10
Statement Regarding Forward-Looking Information
"Forward-looking statements" are those statements that describe our beliefs
and expectations about the future. We have identified forward-looking statements
by using words such as, "anticipate," "believe," "could," "estimate," "may,"
"expect," and "intend." Although we believe these expectations are reasonable,
our operations involve a number of risks and uncertainties, including those
described in this proxy statement and other documents filed with the Securities
and Exchange Commission. These types of statements may prove to be incorrect.
Further, the safe harbor provisions of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act do
not apply to the Going Private Merger.
PROPOSAL 1 -- Approval of the Merger Agreement
SPECIAL FACTORS
Background of the Going Private Merger Proposal
Of State of Franklin's approximately 1,200 current record common stock
holders, approximately 950, or approximately 80%, beneficially own (including
certain family ownership) 3,000 or fewer shares. Collectively, the approximately
950 record holders of common stock who beneficially own (including certain
family ownership) 3,000 or fewer shares own an aggregate of approximately
500,000 shares of common stock, representing approximately 34% of State of
Franklin's outstanding shares of common stock. The Board of Directors and State
of Franklin's management are of the view that the recurring expense and burden
of maintaining so many relatively small shareholder accounts, coupled with the
costs and regulatory burden associated with maintaining registration of State of
Franklin's common stock under Section 12 of the Exchange Act, is not cost
efficient for State of Franklin.
The common stock of State of Franklin is not listed on any national
securities exchange and, to the knowledge of the Board of State of Franklin,
there are no market makers in State of Franklin common stock. Accordingly, there
is very limited trading of the common stock, which may be due, in part, to the
relatively few number of holders owning State of Franklin common stock.
Approximately 38.34% of State of Franklin common stock is beneficially owned or
controlled by the executive officers and directors of State of Franklin,
including approximately 12.61% of such stock held by the Employee Stock
Ownership Plan. This limited trading market has not allowed State of Franklin
shareholders to recognize the primary benefit which should be available to
shareholders of a publicly traded company, which is the ability to buy and sell
stock in a liquid market in which accurate and timely pricing information is
readily available.
Although State of Franklin shareholders are provided some benefit due to
State of Franklin being a publicly traded company, the Board of State of
Franklin has determined that compliance with increasingly stringent reporting
and auditing requirements provides many disadvantages to off-set this benefit.
As a "reporting company" under the Exchange Act, State of Franklin is obligated
to prepare and file with the SEC annual reports on Form 10-KSB, quarterly
reports on Form 10-QSB, current reports on Form 8-K and proxy statements that
comply with Section 14 of the Exchange Act, in addition to other reports and
forms from time to time. In the wake of the Enron and WorldCom scandals, State
of Franklin is subject to increased and constantly changing regulatory
requirements under the Sarbanes-Oxley Act of 2002. Compliance with these SEC
reporting and audit requirements and increased regulatory restrictions diverts
the time of senior management and financial staff from other business of State
of Franklin. Also, as a result of these increased and changing legislative
requirements, outside legal, auditing and accounting costs continue to rise and
are anticipated to continue to rise in the future.
The time that State of Franklin management spends on preparation of
required reports and compliance with the new SEC regulations could be more
productively spent on other business matters that bear a more direct
relationship to State of Franklin's operations and profitability. State of
Franklin believes that becoming a private company will enhance State of
Franklin's operating flexibility and resources to focus upon the long-range
plans for State of Franklin and the needs of its customers. Also, due to State
of Franklin's status as a bank holding company which owns a state chartered
savings bank, it will continue to be extensively regulated under other federal
and state laws. State of Franklin will continue to be subject to periodic
reporting requirements and inspections from certain regulatory agencies,
including the Federal Deposit Insurance Corporation, the Board of Governors of
the Federal Reserve and the Department of Financial Institutions of the State of
Tennessee.
11
Additionally, all of the community bank competitors of State of Franklin in
our market area are not publicly-reporting companies as none are subject to the
Exchange Act. We believe this is a competitive disadvantage in light of the
increased expenses we incur as a reporting company.
The Board of Directors determined that more than 3,000 shares of common
stock was an appropriate threshold to remain a shareholder after the Going
Private Merger. Although State of Franklin could have accomplished this "going
private" transaction utilizing a slightly lower threshold than 3,000 shares of
common stock, the Board chose the 3,000 share threshold for several reasons.
State of Franklin's Board believes that it is necessary to reduce State of
Franklin's number of common stock record holders to ensure that it is initially
set at a number substantially under 300 so that State of Franklin, as a
privately held Tennessee corporation, does not become subject to the Exchange
Act reporting requirements as a result of future small transactions which would
expand the shareholder base. The Board believes that reducing the number of
shareholders to approximately 250 record holders assures the reduction of the
recurring expense of maintaining so many relatively small shareholder accounts.
In making this determination, the Board of Directors considered other means
of achieving the same result but rejected these alternatives because the Board
believed that the Going Private Merger Proposal would be simpler and less
costly. These alternatives were:
o A tender offer at a similar price per share. The Board was uncertain as to
whether this alternative would result in shares being tendered by a
sufficient number of record shareholders so as to accomplish the going
private objective and reducing recurring costs. The Board found it unlikely
that many holders of small numbers of shares would make the effort to
tender their shares. The tender offer could be more costly than the Going
Private Merger in that it is likely not to be successful and an additional
transaction would be required to accomplish the reduction in the number of
shareholders.
o A reverse stock split. This alternative would accomplish the objective of
reducing the number of record shareholders, assuming approval of the
reverse stock split by State of Franklin's shareholders. In a reverse stock
split, State of Franklin would acquire the interests of the cashed-out
shareholders by means of an amendment to State of Franklin's Charter to
reduce the number of issued and outstanding shares of common stock such
that the cashed-out shareholders would own less than one full share of
State of Franklin common stock. State of Franklin would then distribute
cash for the resulting fractional share interests. A reverse stock split
would likely be more costly as it would require an additional transaction
to accomplish a forward split at the conclusion of the reverse stock split
and would involve more expense related to the reissuance of stock
certificates to remaining shareholders.
Although a reverse stock split and a merger transaction likely would
achieve the same results of eliminating record shareholders, the Board
chose to engage in a merger transaction because the Board believed that the
merger transaction would be a simpler way to reduce State of Franklin's
total number of shareholders and become a privately held company. If State
of Franklin had engaged in a reverse stock split, all shareholders who
owned 3,000 or fewer shares of common stock would have owned less than one
share after the reverse stock split was completed. Then, State of Franklin
would have repurchased all fractional shares from shareholders owning less
than one full share. The result of this would be similar to a freeze-out
merger in that all shareholders who own 3,000 or fewer shares of common
stock before the transaction would have received cash for their shares.
However, in order for those shareholders who owned more than 3,000 shares
of common stock before the transaction to continue to own their same number
of shares after the transaction, State of Franklin would have to engage in
a forward stock split immediately following its reverse stock split.
Although a reverse stock split immediately followed by a forward stock
split would have the same effect as a merger transaction, the Board elected
to structure the transaction as a merger because it was the less complex
alternative.
o Sale of the company. The Board of Directors believes the sale of State of
Franklin would not be in the best interests of the shareholders, its
customers, employees and community. State of Franklin has successfully
served its target market by diligently pursuing its community bank business
model. Our locally based management has been able to serve our customer
base successfully and profitably and we have managed to steadily increase
our assets through controlled growth. At this time we do not feel it in the
best interests of our shareholders to abandon this model. As a result we
have not solicited nor have we received any unsolicited third party bids or
firm offers and we have not engaged in any specific discussions with
potential purchasers.
12
The Going Private Merger Proposal is being made at this time because the
sooner the proposal can be implemented, the sooner State of Franklin can cease
to incur the expenses and burdens of public reporting and the sooner
shareholders who are entitled to receive cash in the merger can make use of such
cash payments. After consideration of the various alternatives described above,
the Board determined that the Going Private Merger Proposal was the best choice
for the shareholders and State of Franklin. Significantly, State of Franklin
estimates that following the proposed Going Private Merger, it will have
approximately 250 holders of record of common stock, comfortably below the
minimum of 300 shareholders of record requiring registration under federal
securities laws.
The Sarbanes-Oxley Act provisions became applicable to State of Franklin
commencing with its enactment in July 2002, which provisions resulted in
increased costs and increased regulatory burden on State of Franklin's
management. During 2003 and 2004 the estimated burden and costs to State of
Franklin of being a public company and complying with the Sarbanes-Oxley Act is
estimated at $150,000 annually. For the years beginning 2005 and thereafter, the
additional estimated burden and costs associated with the regulatory
requirements of Section 404 of the Sarbanes-Oxley Act is approximately $150,000
annually, for a total estimated burden and costs of approximately $300,000
beginning in late 2005.
From time to time during 2004, Chairman Charles E. Allen, Jr., had read
articles in various banking industry publications and in the general press
related to the effect on community banks of compliance with the Sarbanes-Oxley
Act. He and President Randal R. Greene had discussed this information and
attended a seminar focusing on alternatives available to community banks in
light of the compliance burden. Due to the significant annual cost of being a
public company and the increasing burden and cost anticipated in the future,
management recommended from a financial standpoint that the Board consider the
option of going private. Based on the recommendation of State of Franklin's
management, the Board determined to consider the possibility of becoming a
private company. The Board did not elect to form a special committee to
consider, structure and later approve the Going Private Merger because all the
members of the Board are interested parties because they will continue as
shareholders of State of Franklin after the completion of the Going Private
Merger.
On December 17, 2004, the Board, at its regular meeting, discussed this
matter, State of Franklin's securities counsel was present and led the
discussion and presented information concerning the going private process and
various issues and considerations related to that process. Securities counsel
reviewed the alternative means of effectuating a going private transaction as
well as the fiduciary duties of the Board of Directors. Securities counsel also
discussed applicable corporate and securities law matters applicable to a going
private transaction, including the dissenters rights of shareholders. At this
meeting the Board considered the alternative means of reducing the number of
shareholders to a level which would permit it to suspend its SEC reporting
obligations. The Board also considered the direct and indirect costs to State of
Franklin of remaining a reporting company. At the conclusion of that meeting,
the Board agreed to explore further a possible Going Private Merger, including
the engagement of a financial advisor for the transaction. On January 10, 2005,
the Board engaged Sheshunoff to advise the Board in connection with the
potential transaction.
The Board did not pursue a possible sale to or merger with a third party in
connection with addressing these issues. Such a sale or merger would involve a
strategic change of direction for State of Franklin, which the Board does not
believe is appropriate in dealing with a non-strategic issue involving
administrative costs and regulatory burdens. The Board believes that the current
proper course of action for State of Franklin is to continue to operate as an
independent community bank and to work to achieve its potential as a competitive
community bank in its market area. The Board believes that the proposed Going
Private Merger is consistent with this strategic objective.
At its regular meeting on March 23, 2005, the Board discussed in detail the
valuation letter, dated February 3, 2005, which Sheshunoff had submitted to
management. This valuation letter is attached to this proxy statement as Annex
D. The Board reviewed the letter and the Board believed the valuation was within
the range of reasonableness for purposes of financing a potential transaction.
The Board, based on its review of the letter and its attached schedule, decided
not to request a formal written report from Sheshunoff, even though the letter
proposed that Sheshunoff subsequently would prepare a formal written report. The
Board resolved to continue to pursue a going private transaction, subject to
determining the final cash-out price and the total amount of equity involved.
The Board approved a preliminary time schedule submitted by its securities
counsel for the going private transaction and authorized its counsel to draft
the necessary proxy statement and related documents to be filed with the SEC.
13
At its April 6, 2005 special meeting, the Board met to consider the merger
agreement. Securities counsel and representatives of Sheshunoff participated in
the meeting. Sheshunoff provided general background on the overall performance
of financial institutions over the last three years. Sheshunofff also reviewed
and compared certain pricing ratios and selected financial data for State of
Franklin and for the indexes of publicly traded financial institutions in the
Southeastern United States.
Sheshunoff presented the Board with information regarding
(i) trading history, including volume and prices of State of Franklin's
common stock,
(ii) peer group analyses of trading prices and underlying values with
respect to State of Franklin's common stock,
(iii) dividend discount valuations of the common stock, and
(iv) summary information regarding premiums paid by other companies in
connection with going private transactions. The information presented to
the Board by Sheshunoff regarding this financial analysis is described more
fully below in the section entitled "Opinion of Financial Advisor."
Sheshunoff reviewed in detail with the Board the financial aspects of the
proposed transaction, including Sheshunoff's valuation letter dated February 3,
2005, which stated Sheshunoff's determination of fair value of $25.25 per share
for the common stock of State of Franklin. In addition, securities counsel
reviewed in detail with the Board the definitive merger agreement and all
related documents, copies of which were delivered to each director before the
date of the meeting. Following extensive review and discussion, the Board
unanimously approved the merger agreement and authorized and directed management
to execute and deliver the merger agreement and related documents. In addition,
the Board resolved to cash-out the common stock in the Going Private Merger, for
all holders of 3,000 or fewer shares, and at a price per share of $25.25.
Sheshunoff delivered its opinion that the merger consideration of $25.25 per
share was fair to all State of Franklin shareholders from a financial point of
view. The Board considered this opinion carefully as well as Sheshunoff's
experience, qualifications and interest in the proposed transaction. The Board
determined that the cost of cashing-out the common stock and the related fees
and expenses of the Going Private Merger would be funded from $8.0 million of
cash on hand from a trust preferred stock offering completed in 2001 and a $5.0
million dividend from the Bank to State of Franklin.
Reasons for the Going Private Merger
State of Franklin's primary reason for the Going Private Merger is to
cash-out the equity interests in State of Franklin of the approximately 950
record and beneficial holders of common stock that, as of the effective time of
the Going Private Merger, own 3,000 or fewer shares of common stock at a price
determined to be fair by the entire Board of Directors. This will reduce the
number of holders of common stock of record of State of Franklin to
approximately 250 persons and relieve State of Franklin from the administrative
burden, cost and regulatory burden associated with filing reports and otherwise
complying with the requirements of registration under the Exchange Act. This
will be accomplished by State of Franklin deregistering its common stock under
the Exchange Act. See "Background of the Going Private Merger Proposal" and
"Effects of the Going Private Merger" for a discussion regarding the burden of
registration of the State of Franklin common stock and the intended benefits to
State of Franklin of the Going Private Merger Proposal. If the Going Private
Merger is implemented, the officers and directors of State of Franklin (and
other holders of more than 3,000 shares of common stock) will increase their
percentage ownership of common stock of State of Franklin.
The Going Private Merger will provide those shareholders with 3,000 or
fewer shares of common stock with a cost-effective way to cash-out their
investments, because State of Franklin will pay all transaction costs in
connection with the Going Private Merger. Although State of Franklin intends to
pay all transaction costs in connection with the Going Private Merger,
shareholders still may be charged a brokerage fee by their broker in connection
with the Going Private Merger. Moreover, State of Franklin will benefit from
substantial future cost savings as a result of the Going Private Merger, as more
fully described below.
In addition, the Going Private Merger will be a possible step toward State
of Franklin's being able to make a future election for tax purposes to be taxed
as a partnership under the provisions of SubChapter S, specifically Section 1361
of the Internal Revenue Code. SubChapter S status, which has been elected by
over 2,100 financial institutions in the United States
14
as reported by the SubChapter S Registry published by the American Bar
Association, provides for no taxation at the company or bank level, with taxable
income, losses and other taxable attributes allocated directly to shareholders.
A SubChapter S election may only be made with the consent of the company and of
all persons who are the shareholders of the company. This determination would be
made in the future by the Board of Directors of State of Franklin and all of the
then shareholders based upon State of Franklin's financial condition, capital
adequacy and other factors.
The Board believes that the disadvantages of having State of Franklin
continue to be a public company outweigh any advantages. The Board has no
present intention to raise capital through sales of securities in a public
offering in the future or to acquire other business entities using stock as the
consideration for any such acquisition. Accordingly, State of Franklin is not
likely to make use of any advantage (for raising capital, effecting acquisitions
or other purposes) of its status as a public company.
State of Franklin incurs direct and indirect costs associated with
compliance with the SEC's filing and reporting requirements imposed on public
companies. State of Franklin incurs substantial indirect costs as a result of,
among other things, the executive time expended to prepare and review such
filings. Since State of Franklin has relatively few executive personnel, these
indirect costs can be substantial. State of Franklin's direct and indirect costs
related to being a public company are estimated to approximate $300,000 annually
as follows:
Independent accountants $175,000
SEC counsel 25,000
Printing, mailing and other internal/external expenses 100,000
-------
Total $300,000
=======
In light of these costs, the Board believes that it is in the best
interests of State of Franklin and its shareholders to eliminate the
administrative burden and costs and regulatory burden associated with being a
public company.
Although many of these factors have existed for some time, State of
Franklin began to consider the Going Private Merger during calendar year 2004,
and based upon an analysis of its options, risks and expenses relating to
remaining a public company, which is detailed in this proxy statement, approved
the Going Private Merger Proposal. Another reason the Board approved the Going
Private Merger Proposal is the continued illiquidity of the State of Franklin
stock. You should read the discussion in the section above entitled "Background
of the Going Private Merger Proposal" for more information relating to the
background of the Going Private Merger Proposal and State of Franklin's reasons
for the Going Private Merger Proposal.
The Board has determined that the Going Private Merger Proposal is the most
expeditious and economical way of liquidating the holdings of shareholders
having small share positions and changing State of Franklin's status from that
of a public company to that of a privately-held, non-reporting company. You
should read the discussion under "Recommendation of the Board of Directors;
Fairness of the Going Private Merger Proposal" for more information regarding
the Board's reasons for the Going Private Merger Proposal.
The Going Private Merger Proposal, if approved, will have divergent effects
depending on whether you beneficially own (including certain family ownership)
more than 3,000 shares of State of Franklin common stock or 3,000 or fewer
shares of common stock as of the Effective Time. You should read the discussions
under "Effects of the Going Private Merger," "Recommendation of the Board of
Directors; Fairness of the Going Private Merger Proposal"; and "The Merger
Transaction" for more information regarding the effects of the Going Private
Merger.
The Going Private Merger is structured to be a "going private" transaction
as defined in Rule 13e-3 promulgated under the Exchange Act because it is
intended to, and, if completed, will make State of Franklin eligible to
terminate its reporting requirements under Section 12(g) of the Exchange Act.
State of Franklin intends to deregister its shares of common stock under the
Exchange Act immediately following the effective time of the Going Private
Merger. In connection with the Going Private Merger Proposal, State of Franklin
and Merger Corp. have filed a Rule 13e-3 Transaction Statement on Schedule 13E-3
with the SEC . Effects of the Going Private Merger
15
Effects of the Going Private Merger
Effects on State of Franklin
The Going Private Merger will have various effects on State of Franklin, as
described below.
Reduction in the Number of Shareholders and Effect on the Number of Outstanding
Shares
State of Franklin believes that the Going Private Merger will reduce its
number of record common stock holders to from approximately 1,200 to 250. After
the completion of the Going Private Merger and the private placement offering,
the number of outstanding shares of common stock will be approximately 965,000
compared to 1,481,462 outstanding shares of common stock immediately before the
Going Private Merger.
Transfer of Book Value
Because
(i) the price to be paid to holders who beneficially own (including certain
family ownership) 3,000 or fewer shares of common stock will be $25.25 per
share;
(ii) the number of shares of common stock expected to be cashed-out as a
result of the Going Private Merger is estimated to be approximately 500,000;
(iii) the total cost to State of Franklin (including expenses) of effecting
the Going Private Merger is expected to be approximately $13.0 million; and
(iv) at December 31, 2004, aggregate shareholders' equity in State of
Franklin was approximately $23.6 million, or $17.93 per share, State of Franklin
expects that, as a result of the Going Private Merger:
o aggregate shareholders' equity of State of Franklin as of December 31,
2004, would be reduced from approximately $26.3 million on a
historical basis to approximately $13.2 million on a pro forma basis;
o the book value per share of common stock as of December 31, 2004,
would be reduced from approximately $17.93 per share on a historical
basis to approximately $13.65 per share on a pro forma basis;
Becoming a Privately Held Company
The common stock of State of Franklin is currently registered under the
Exchange Act. The Exchange Act registration may be suspended by State of
Franklin if its common stock is no longer held of record by 300 or more
shareholders. Elimination of registration of the common stock of State of
Franklin under the Exchange Act would substantially reduce the information
required to be furnished to the shareholders of State of Franklin and to the SEC
and would make certain provisions of the Exchange Act, such as the short-swing
profit recovery provisions of Section 16(b), proxy statement disclosure in
connection with shareholder meetings and the related requirement of an annual
report to shareholders, no longer applicable to it. Accordingly, State of
Franklin estimates it will eliminate costs and expenses associated with
continued Exchange Act registration, which it estimates to be approximately
$300,000 on an annual basis.
With respect to the executive officers and directors of State of Franklin,
once the Going Private Merger is completed and State of Franklin deregisters its
common stock:
o executive officers, directors and other affiliates would no longer be
subject to many of the reporting requirements and restrictions of the
Exchange Act, including, without limitation, the reporting and
short-swing profit provisions of Section 16, and
o executive officers and directors of State of Franklin may be deprived
of the ability to dispose of their shares of common stock in
accordance with Rule 144 under the Securities Act.
16
Effect on Market for Shares.
There is no current public market for the State of Franklin common stock
and after the Going Private Merger, there will continue to be no public market
for the common stock. State of Franklin's common stock is not currently listed
on any exchange. Trades do occur from time to time in the over-the-counter
bulletin board.
Financial Effects of the Going Private Merger; Financing of the Going Private
Merger.
State of Franklin expects that the Going Private Merger will not have any
material adverse effect on the capital adequacy, liquidity, results of
operations or cash flow of State of Franklin. Because State of Franklin does not
currently know the actual number of shares which will be cashed-out in the Going
Private Merger, State of Franklin does not know the total amount of cash to be
paid to common shareholders by State of Franklin in the Going Private Merger,
but State of Franklin estimates it to be approximately $12.6 million. You should
read the discussion under "The Merger Transaction - Fees and Expenses for the
Going Private Merger" for a description of the fees and expenses State of
Franklin expects to incur in connection with the Going Private Merger.
State of Franklin expects to be able to finance the cash amount to be paid
to common shareholders in the Going Private Merger from $8.0 million of cash on
hand from a trust preferred stock offering completed in 2001 and a $5.0 million
dividend from the Bank to State of Franklin.
Effects on Officers and Directors of State of Franklin.
As a result of the Going Private Merger, State of Franklin expects that
(a) the percentage of beneficial ownership of common stock of State of Franklin
(including the effect of fully vested and exercisable stock options) held by its
officers and directors as a group will increase from 38.34% of the common stock
of State of Franklin to approximately 53.54% based on their securities holdings
as of May 31, 2005;
(b) the collective book value as of December 31, 2004, of the shares of State of
Franklin common stock held by State of Franklin's officers and directors, as a
group (including the effect of fully vested and exercisable stock options),
would decrease from approximately $11.9 million on a historical basis to
approximately $9.0 million on a pro forma basis; and
(c) the collective pro rata interest of State of Franklin's officers and
directors, as a group, in the net income of State of Franklin for the year ended
December 31, 2004, would increase from approximately $0.70 per share on a
historical basis (based on the number of shares beneficially owned by such
officers and directors including the effect of fully vested and exercisable
stock options, as of the record date) to a pro rata interest of approximately
$1.41 per share on a pro forma basis (based on the number of shares which State
of Franklin anticipates such officers and directors to beneficially own
immediately after the Going Private Merger including the effect of fully vested
and exercisable stock options).
(d) Since none of the directors and officers of State of Franklin will be cashed
out in the Going Private Merger they will, therefore, share in the future growth
and profits of State of Franklin while unaffiliated shareholders who are cashed
out will not.
For a description of the assumptions State of Franklin used in determining the
numbers of shares and related percentages that State of Franklin expects to be
held by current officers and directors immediately after the Going Private
Merger, please see the footnotes under "State of Franklin Stock Ownership."
Effects on Unaffiliated Shareholders.
The Going Private Merger will have various effects on shareholders who are
not affiliates of State of Franklin, as described below. The effects of the
Going Private Merger to an unaffiliated shareholder will vary based on whether
or not the unaffiliated shareholder's shares will be cashed-out in the Going
Private Merger. Unaffiliated shareholders beneficially owning (including certain
family ownership) 3,000 or fewer shares of common stock immediately before the
effective time of the Going Private Merger will, upon consummation of the Going
Private Merger:
17
o receive $25.25 per share in cash, unless they perfect dissenters
rights;
o no longer have any equity interest in State of Franklin and therefore
will not participate in its future potential earnings or growth, if
any;
o not be able to acquire an equity interest in State of Franklin unless
they purchase shares from existing shareholders, other than upon the
exercise of stock options; and
o be required to pay federal and, if applicable, state and local income
taxes on the cash gain, if any, received in the Going Private Merger;
or, alternatively, may have a tax loss that can be used to offset
capital gains or taxable income in future periods.
Potential disadvatages on unaffiliated State of Franklin shareholders who
remain as shareholders if the Going Private Merger is effected include:
o Decreased access to information. If the Going Private Merger and the
deregistration of common stock is effected, State of Franklin will no
longer be subject to the periodic reporting requirements and the proxy
rules of the Exchange Act. Similarly, executive officers, directors
and other affiliates would no longer be subject to many of the
reporting requirements and restrictions of the Exchange Act, including
without limitation the reporting and short-swing profit provisions of
Section 16.
o Decreased liquidity. The liquidity of the shares of common stock held
by unaffiliated shareholders may be adversely affected by the Going
Private Merger.
Effect on Shareholders of the Going Private Merger
If approved at the annual meeting, the Going Private Merger will affect
State of Franklin shareholders as follows after completion:
Shareholder as of Effective Time of the Going Private Merger Net Effect After Going Private Merger
- ------------------------------------------------------------- -------------------------------------
Shareholders beneficially owning (including certain family Shares of common stock will be retained
ownership) more than 3,000 shares of State of Franklin
common stock
Shareholders beneficially owning (including certain family Shares of common
stock will be cashed-out at a price ownership) 3,000 or fewer shares of State of
Franklin common stock of $25.25 per share
As described under "Approval of the Merger Agreement - Conversion of Shares
in the Going Private Merger," the merger agreement contains specific provisions
regarding the treatment of shares held in nominee form, or "street name". In
determining the number of shares held beneficially in street name by any
shareholder, State of Franklin may, in its discretion, rely on "no objection"
lists provided by any nominee holder. Further, after the effective time of the
Going Private Merger, State of Franklin will deliver to each shareholder who
would appear to be entitled to receive cash in the Going Private Merger in
consideration for his or her shares, a letter of transmittal requesting certain
information from such shareholder and requiring the shareholder to certify as to
the number of shares actually beneficially owned (including certain family
ownership), whether in registered form or in street name. Letters of transmittal
will be delivered to any shareholder who (a) beneficially owns of record 3,000
or fewer shares of common stock or (b) according to records made available to
State of Franklin from the nominee holder for any shares held in street name,
holds 3,000 or fewer shares of common stock in street name or holds shares in
street name and with respect to which State of Franklin is not provided by the
nominee holder the number of shares so held.
Shareholders who retain their shares of common stock will be issued new
share certificates for shares of restricted common stock. These new share
certificates will be affixed with a restrictive legend to the effect that such
shares have not been registered with the SEC and may not be transferred without
such registration or in reliance on an exemption from such registration.
18
In general, the Going Private Merger can be illustrated by the following
examples:
Hypothetical Scenario Result
- --------------------- ------
Ms. Smith is a registered shareholder who holds 1,000 shares Ms. Smith's 1,000 shares of common stock will be canceled
of State of Franklin common stock in certificate form at the and converted into the right to receive cash in the amount
effective time of the Going Private Merger. Ms. Smith holds of $25.25 per share.
no other shares
- ------------------------------------------------------------- --------------------------------------------------------------
Mr. Brown holds 1,000 shares of State of Franklin common Mr. Brown's 1,000 shares of common stock will be cancelled
stock in his individual brokerage account as of the effective and converted into the right to receive cash in the amount
time of the Going Private Merger. Mr. Brown holds no other of $25.25 per share.
- ------------------------------------------------------------- --------------------------------------------------------------
Mr. Jones is a registered shareholder who holds 2,000 shares If either State of Franklin or Mr. Jones can establish to State
of State of Franklin common stock in certificate form and of Franklin's satisfaction that he in fact holds more than
1,500 shares of common stock in his individual brokerage 3,000 shares, Mr. Jones' 3,500 shares will remain
account as of the effective time of the Going Private Merger. outstanding after the Going Private Merger. Otherwise,
Mr. Jones holds no other shares. State of Franklin will presume that all of the shares of
common stock are held by a holder of 3,000 or fewer shares of
common stock and were therefore converted into the right to
receive cash in an amount equal to $25.25 per share. However,
Mr. Jones will be able to rebut the presumption that his shares
were cashed out in the Going Private Merger by certifying
in the letter of transmittalsent to him after the effective time
of the Going Private Merger that he holds more than 3,000
shares of common stock and providing State of Franklin such
other information as it may request to verify that fact.
(Note: If either Ms.Smith or Mr.Brown wants to continue
his or her investment in State of Franklin, she or he can
acquire at least 2,001 shares of State of Franklin common
stock (preferably in his or her record account so as to make
it more readily apparent that he or she holds more than 3,000
shares). Such acquisition should be completed by
___________ __, 2005 so that it is registered on the books of
State of Franklin before the effective time of the Going Private
Merger.
- ------------------------------------------------------------ --------------------------------------------------------------
Recommendation of the Board of Directors; Fairness of the Going Private Merger
Proposal
The Board believes that the Going Private Merger Proposal, taken as a
whole, is fair to, and in the best interests of, State of Franklin and its
shareholders, including unaffiliated shareholders and both shareholders who will
receive cash in the Going Private Merger and those who will continue to hold
their shares of common stock of State of Franklin after the Going Private
Merger. The Board also believes that the process by which the transaction is to
be approved is fair. The Board recommends that the shareholders vote for
approval of the Going Private Merger Proposal. Each member of the Board and each
officer of State of Franklin who owns shares of stock have advised State of
Franklin that he intends to vote his shares in favor of the Going Private Merger
Proposal. As of May 31, 2005, the directors and officers of State of Franklin
beneficially
19
owned a total of 675,552 shares of State of Franklin common stock or
approximately 38.34% of the total shares entitled to vote at the Meeting.
Accordingly, if holders of only an additional 11.67% vote in favor of the Going
Private Merger Proposal, the Proposal will be approved. No other shareholders
have disclosed to State of Franklin how they intend to vote on the Going Private
Merger Proposal.
The Board has retained for itself the absolute authority to reject (and not
implement) the Going Private Merger Proposal (even after approval by
shareholders) if it determines that the Going Private Merger Proposal is not
then in the best interests of State of Franklin and its shareholders. Such a
determination by the Board would likely be limited to the occurrence of an event
that would have a material adverse effect on the financial condition or results
of operations of State of Franklin. The Board does not anticipate the occurrence
of any such event.
The Board has unanimously approved the Going Private Merger Proposal. The
Board considered a number of factors in determining to approve the merger
agreement. State of Franklin's primary reason for the Going Private Merger is to
enable it to deregister its shares of common stock under the Exchange Act. The
Board considered the views of management relating to cost savings to be achieved
by no longer being a public company. State of Franklin's management determined
that cost savings of approximately $300,000 per year could be achieved if State
of Franklin becomes a private company, including indirect savings resulting from
reductions in the time and effort currently required of management to comply
with the reporting and other requirements associated with registration of the
common stock under the Exchange Act. The Board also considered the
administrative and regulatory burden of being a public company, particularly the
provisions of the recently enacted Sarbanes Oxley Act. Similarly, the Board also
considered the decrease in the expense associated with a high number of
shareholders holding relatively small positions in its common stock after the
Going Private Merger. The Board also considered the effect that becoming private
would have on the market for the common stock and the ability of shareholders to
buy and sell shares. However, the Board determined that, even as a
publicly-traded corporation, there is a very limited market for the shares of
State of Franklin's common stock, especially for sales of large blocks of
shares, and that State of Franklin's shareholders derive little benefit from
State of Franklin's status as a publicly-held corporation. The Board determined
that the cost savings and reduced administrative and regulatory burden on
management to be achieved by becoming a private company outweighed any potential
disadvantages from becoming a private company.
The Board considered several alternative transactions to accomplish the
proposed going-private transaction but ultimately approved the Going Private
Merger Proposal. Please read the discussion above entitled "Background of the
Going Private Merger Proposal" for a description of these alternatives
considered by the Board.
The Board considered numerous factors, discussed below, in reaching its
conclusion as to the fairness of the Going Private Merger Proposal to our
shareholders, including both affiliated and unaffiliated shareholders. The Board
also engaged the services of an independent financial advisor to provide a
valuation of State of Franklin's stock as well as to render a fairness opinion
regarding the transaction. The Board did not assign any specific weights to the
factors listed below. Moreover, in their considerations individual directors may
have given differing weights to different factors.
o Historical Market Prices of State of Franklin's Common Stock. State of
Franklin's common stock is not listed or quoted on any exchange.
Trades do occur from time to time in the over-the-counter bulletin
board. Management is aware of other transactions in our stock which
occur from time to time. In addition an annual independent valuation
of the common stock of State of Franklin is conducted by an outside
consultant for purposes of valuing the common stock for the Employee
Stock Ownership Plan. Based on the trading data of which management is
aware including public, electronic sources, there were 24,365 shares
traded at a weighted average price of $21.75 in 2004. The stock traded
on 30 days out of 252 trading days. The total number of shares traded
over the year represents 1.8% of the total shares outstanding. The
last sales price of common stock known to management that occurred
prior to the public announcement of the transaction was $22.00 per
share on January 5, 2005. You should read the discussion under
"Summary Financial Information -- Per Share Market Price" for more
information about our stock prices.
o Net Book Value. As of December 31, 2004, the book value per share of
outstanding common stock was approximately $17.93. Although book value
was a factor that was considered by the Board among others in
determining the consideration to be paid to cashed-out shareholders in
the Going Private Merger, the Board determined that it was not
directly relevant in that book value approximates a liquidation value
and liquidation is generally not a viable alternative for a financial
institution. However, the Board noted that the per share cash price of
$25.25 payable in the Going Private Merger reflected a multiple of
over 1.40x State of Franklin's December 31, 2004, book value per
share.
20
o Independent Valuation. The Board engaged Sheshunoff to render a
valuation of State of Franklin's common stock. Sheshunoff's valuation
indicated that as of December 31, 2004, the fair value of State of
Franklin's common stock was $25.25 per share. The Board elected to pay
common stock holders $25.25 per share, consistent with the fair value
determined by Sheshunoff. Please see Annex D attached to this proxy
statement.
o Going Concern Valuation. Due to the nature of their operations,
financial institutions cannot be liquidated in an efficient manner;
accordingly, the Board considered the Sheshunoff analysis of State of
Franklin as a going concern. For more information .please see the
section below entitled "Opinion of Financial Advisor."
o Opinion of Financial Advisor. The Board considered the opinion of
Sheshunoff rendered to the Board on April 6, 2005 to the effect that,
as of the date of such opinion and based upon and subject to certain
matters stated in such opinion, the cash consideration of $25.25 per
share of common stock to be paid in the Going Private Merger is fair,
from a financial point of view, to the shareholders of State of
Franklin, including unaffiliated shareholders and both shareholders
who will receive cash in the Going Private Merger and those who will
continue to hold shares of common stock after the Going Private
Merger. The Board also reviewed and considered the financial analyses
presented to the Board in connection with such opinion and adopted the
financial advisor's conclusions and analyses as its own. You should
read the discussion under "Opinion of Financial Advisor" and Annex B
to this proxy statement for more information relating to this opinion
and the related financial analyses.
o Opportunity to Liquidate Shares of Common Stock. The Board considered
the opportunity the Going Private Merger Proposal presents for
shareholders owning 3,000 or fewer shares of common stock to liquidate
their holdings without paying commissions or transaction costs, except
any applicable brokerage fees if the shares are held in a brokerage
account, particularly given the relatively illiquid market for shares
of State of Franklin's common stock.
In connection with its deliberations, the Board did not consider, and did
not request that its financial advisor evaluate, State of Franklin's liquidation
value. As noted above, financial institutions cannot be liquidated in an
efficient manner. The Board did not view State of Franklin's liquidation value
to be a relevant measure of valuation, given that the merger consideration
significantly exceeded the book value per share of State of Franklin, and it was
the Board's view that State of Franklin is more valuable as a going concern than
its net book value per share of $17.93 as of December 31, 2004. However, book
value per share is a historical accounting number, and an evaluation of
liquidation value could produce a higher valuation than book value per share.
No firm offers, of which the Board is aware, have been made during the
preceding two years for (i) the merger or consolidation of State of Franklin
into or with such person, (ii) the sale or other transfer of all or any
substantial part of the assets of State of Franklin, or (iii) the purchase of a
number of shares of common stock that would enable the holder to exercise
control of State of Franklin. After consideration of all this information, the
Board determined that a fair price to be paid to cashed-out holders of common
stock in the Going Private Merger is $25.25 per share.
The Going Private Merger is not structured so that approval of at least a
majority of unaffiliated shareholders is required. The Board determined that any
such voting requirement would usurp the power of the holders of at least a
majority of State of Franklin's voting power represented at the meeting to
consider and approve the merger agreement as provided under Tennessee law, State
of Franklin's charter documents and the terms of the merger agreement. The Board
also considered such a provision unnecessary in light of the right of
shareholders, whether affiliated or unaffiliated, to dissent from the Going
Private Merger and receive cash for their shares. No independent committee of
the Board has reviewed the fairness of the Going Private Merger Proposal. No
unaffiliated representative acting solely on behalf of the shareholders for the
purpose of negotiating the terms of the Going Private Merger Proposal was
retained by State of Franklin or by a majority of directors who are not
employees of State of Franklin. State of Franklin has not made any provision in
connection with the Going Private Merger to grant unaffiliated shareholders
access to State of Franklin's corporate files or to obtain counsel or appraisal
services at State of Franklin's expense. With respect to unaffiliated
shareholders' access to State of Franklin's corporate files, the Board
determined that this proxy statement, together with State of Franklin's other
filings with the SEC and the regulatory filings by
21
State of Franklin and State of Franklin Bank to their banking regulators,
provide adequate information for unaffiliated shareholders to make an informed
decision with respect to the Going Private Merger Proposal.
The Board also considered the fact that under Tennessee corporate law, and
subject to certain conditions set forth under Tennessee law, shareholders have
the right to review State of Franklin's relevant books and records of account.
Additionally, the Board considered the Going Private Merger is procedurally fair
based on the fact that shareholders who are being cashed out are entitled to
dissenters' rights under Tennessee corporate law. After consideration of the
factors described above, including the procedural rights of shareholders to
dissent, the Board believes that the transaction is fair notwithstanding the
absence of such an unaffiliated shareholder approval requirement, independent
committee or unaffiliated representative.
As a result of this analysis outlined above, the Board believes that the
transaction is substantively and procedurally fair to unaffiliated shareholders.
Determination of Fairness of Merger Corp. and Other State of Franklin Affiliates
Merger Corp. and its directors and officers and the officers and directors
of the Company, Charles E. Allen, Jr., Randal R. Greene, Charles E. Allen, Sr.,
Vance W. Cheek, Kenneth E. Cutshall, Stephen K. Gross, Alan R. Hubbard, Donald
R. Jeanes, Cameron E. Perry, Verrill M. Norwood, Richard S. Venable and Henry
Jack Williams, M.D. are considered to be filing persons for purposes of this
transaction. Merger Corp. was organized for the sole purpose of facilitating the
merger. See "Proposal 2 -- Election of Directors" and "State of Franklin Stock
Ownership" for more information regarding these persons.
Each of these filing persons believes that the terms and conditions of the
merger and the purchase of shares from shareholders who hold 3,000 or fewer
shares of State of Franklin are advisable, substantively fair to, and otherwise
in the best interest of, the unaffiliated and affiliated shareholders of State
of Franklin. In reaching this conclusion, these filing persons relied upon the
factors considered by and the analyses and conclusions of State of Franklin's
Board of Directors and adopted these factors, analyses and conclusions as their
own.
Opinion of Financial Advisor
The State of Franklin board of directors engaged Sheshunoff to provide an
opinion to the board as to the fairness of the $25.25, which we refer to in this
section as the "Cash Price," to be paid for each share of State of Franklin's
common stock in the Going Private Merger. We refer to Sheshunoff's opinion in
this section as the "Opinion." Sheshunoff was selected to issue the opinion
based on the company's reputation in banking valuation and familiarity with the
banking industry. As part of its investment banking business, Sheshunoff is
regularly engaged in the valuation of securities in connection with mergers and
acquisitions and valuations for estate, corporate and other purposes. The State
of Franklin board of directors placed no limitations on the scope of Sheshunoff
s analysis.
The full text of the Opinion which sets forth, among other things,
assumptions made, procedures followed, matters considered, and limitations on
the review undertaken, is attached as Annex B to this proxy statement. The
shareholders of State of Franklin are urged to read Sheshunoff's Opinion
carefully and in its entirety. The Opinion outlines the procedures followed,
assumptions made, matters considered and qualifications and limitations on the
review undertaken by Sheshunoff in rendering the Opinion. The description of the
Opinion set forth below is qualified in its entirety by reference to the
Opinion.
The Opinion speaks only as of its date. The Opinion is addressed to the
State of Franklin board of directors and addresses only the fairness of the Cash
Price to be paid to State of Franklin shareholders. The Opinion does not address
the underlying business decision to engage in the Going Private Merger and does
not constitute a recommendation to any State of Franklin shareholder as to how
such shareholder should vote at the annual shareholders meeting of State of
Franklin.
Pursuant to an engagement letter dated January 10, 2005 between State of
Franklin and Sheshunoff, State of Franklin agreed to pay Sheshunoff a
professional fee of $25,000. State of Franklin has also agreed to indemnify and
hold harmless Sheshunoff and its officers and employees against certain
liabilities in connection with its services under
22
the engagement letter, except for liabilities resulting from the negligence,
violation of law or regulation or bad faith of Sheshunoff or any matter for
which Sheshunoff may have strict liability. Over the past two years, Sheshunoff
has received $6,000 in fees for other services provided to State of Franklin.
The following is a summary of Sheshunoff's Opinion and its analysis of the
fairness, from a financial point of view, of the Cash Price to be paid to State
of Franklin shareholders in the Going Private Merger.
In arriving at the Opinion regarding the fairness of the Cash Price,
Sheshunoff:
o Reviewed a draft of the proxy dated as of April 6, 2005;
o Reviewed the Report of Income and Statement of Financial Condition as
filed with the Federal Deposit Insurance Corporation for State of
Franklin. for the years ending December 31, 2000 through 2003 and for
the four most recent quarters ending December 31, 2004;
o Reviewed Consolidated Audited Balance Sheet and Income Statement
information as of December 31, 2004;
o Conducted conversations with State of Franklin's executive officers
regarding its recent and projected financial performance;
o Compared State of Franklin's recent operating results and pricing
multiples with those of certain other publicly traded banks in
Kentucky, North Carolina, Tennessee, and Virginia;
o Analyzed the net present value of the after-tax cash flows State of
Franklin could produce through December 31, 2009, based on assumptions
provided by management;
o Reviewed the recent trading of State of Franklin common stock for the
twelve-month period ended December 31, 2004; and
o Performed such other analyses and considered and reviewed such other
information regarding general economic conditions, banking industry
trends, and available local market demographics as it deemed
appropriate.
In connection with its review, Sheshunoff relied upon and assumed the
accuracy and completeness of all of the foregoing information provided to it or
that is publicly available, and Sheshunoff did not assume any responsibility for
independent verification of such information. Sheshunoff assumed that internal
confidential financial projections provided by State of Franklin were reasonably
prepared reflecting the best currently available estimates and judgments of the
future financial performance of State of Franklin and did not independently
verify the validity of such assumptions. Sheshunoff did not make any independent
evaluation or appraisal of the assets or liabilities of State of Franklin nor
was Sheshunoff furnished with any such appraisals. Sheshunoff did not examine
any individual loan files of State of Franklin. Sheshunoff is not an expert in
the evaluation of loan portfolios for the purposes of assessing the adequacy of
the allowance for losses with respect thereto and has assumed that such
allowance is, in the aggregate, adequate to cover such losses. The Opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to Sheshunoff as of December 31, 2004.
In rendering the Opinion, Sheshunoff performed a variety of financial
analyses. The preparation of an opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Consequently, the
Opinion is not readily susceptible to partial analysis or summary description.
Moreover, the evaluation of fairness, from a financial point of view, of the
Cash Price is to some extent subjective, based on the experience and judgment of
Sheshunoff, and not merely the result of mathematical analysis of financial
data. Accordingly, notwithstanding the separate factors summarized below,
Sheshunoff 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. The ranges of valuations resulting
from any particular analysis described below should not be taken to be
Sheshunoff's view of the actual value of State of Franklin.
23
In performing its analyses, Sheshunoff made numerous assumptions with
respect to industry performance, business, and economic conditions and other
matters, many of which are beyond the control of State of Franklin. The analyses
performed by Sheshunoff are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses, nor are they appraisals. In addition, Sheshunoff's analyses
should not be viewed as determinative of the opinion of the State of Franklin
board of directors or the management of State of Franklin. with respect to the
value of State of Franklin.
Sheshunoff's appraisal included an analysis of:
(1) State of Franklin's financial performance and condition as reflected in
its financial statements for the five years ending December 31, 2000 through
2004;
(2) management's projection of State of Franklin's asset growth, return on
assets, dividends and net worth for five years;
(3) the composition of State of Franklin's shareholder base and any
concentration of ownership in State of Franklin's common stock;
(4) recent financial market conditions for bank and financial institution
stocks;
(5) general economic conditions and changes in economic conditions; and
(6) the competitive environment in State of Franklin's immediate market
area.
Sheshunoff used two approaches for analyzing the financial performance and
condition of State of Franklin, the market value of State of Franklin, and
consequently the fairness, from a financial point of view, of the proposed per
share Cash Price. They were:
o The income approach using a discounted cash flow analysis (DCF)
methodology ; and
o The market approach based on an analysis of recent trading prices for
comparable banks located in Kentucky, North Carolina, Tennessee, and
Virginia
o The income approach quantifies the present value of future economic
benefits by capitalizing or discounting the cash flow of a business.
This approach considers projected dividends, earnings, dividend paying
capacity, and future residual value. There are several components
required to estimate value using the income approach, outlined as
follows:
o An estimate of the cash flow to be discounted: In valuing a financial
institution, three indicators of cash flow can be used: projected
earnings, projected dividends, and dividend paying capacity.
o The time period for which cash flow estimates are prepared: Because
future projections are uncertain, an appraiser typically relies on
projections for five years. The purpose of projections is to reach a
time period where a "normalized" cash flow is achieved. If the current
period cash flow is a reliable proxy for future estimated cash flows,
then current period cash flows can be capitalized to estimate value
under the income approach.
o A discount rate that reflects risks associated with the investment:
Discount rates are generally estimated by three methods: (1) the
capital asset pricing model; (2) build-up methods; and (3) comparative
yields on similar investments.
o The residual value of the cash flow: Residual value can contribute the
majority of the value in the income approach. Residual value is
difficult to measure because of uncertainty regarding future growth,
earnings, and book value.
24
The income approach is an effective method for valuing an interest in a
business as a going concern. Sheshunoff used a multi-period DCF model to
estimate the value of the shares through the income approach. In building the
DCF model, Sheshunoff used management's financial projections for State of
Franklin over the next five years.
The market approach estimates the value of an interest in a private company
by comparing it to similar companies that have securities that are publicly
traded on an organized exchange. An estimate of value can be determined by
comparing the financial condition of the subject company against the financial
characteristics and pricing information of the comparable companies.
The market approach works particularly well for financial institutions.
There is readily available information on both acquisitions of financial
institutions as well as publicly traded financial institutions. In addition,
much of this information is in standardized form. Comparisons can be made
between institutions in all asset size ranges and for almost every balance sheet
and income statement category. There are a relatively large number of publicly
traded financial institutions in all parts of the country except for the very
smallest asset sizes (less than $100 million in assets).
The accuracy and reliability of the market comparable approach depends
upon: (1) the match of the company with the selected comparable companies, (2)
adjustments for any significant financial and geographic differences, and (3)
selection of pricing multiples that recognize these differences between the
comparable companies and the subject company. Unless the company being valued
has average or median level performance characteristics, selecting the average
or median pricing multiples of the comparable group is not appropriate and will
produce unreliable results.
The cost or asset-based approach estimates a value by adjusting the
reported values of assets and liabilities to their market values. Due to the
nature of their operations, financial institutions cannot be liquidated in an
efficient manner. Voluntary liquidations of financial institutions are extremely
rare. More commonly if a financial institution is liquidated, it is due to being
taken over by the regulatory authorities. In such cases investors generally lose
their entire investment in the institution. Sheshunoff valued State of Franklin
as a going-concern and not as a liquidation. Therefore, this approach was not
used as it is not an effective method to value financial institutions.
Standard of Value
Sheshunoff reviewed the Cash Price under a fair value standard. Sheshunoff,
which has offices in Texas, discussed the appropriate value standard under
Tennessee law with State of Franklin's outside legal counsel, Baker, Donelson,
Bearman, Caldwell & Berkowitz, P.C., who advised Sheshunoff that in Tennessee
fair value is the appropriate standard for transactions such as the Going
Private Merger. This Tennessee counsel advised Sheshunoff that an appropriate
description of fair value under Tennessee law for the determination of the Cash
Price would be a pro-rata interest in State of Franklin as a going concern
without a discount for lack of marketability or minority interest and without a
specific transaction acquisition premium.
Discounted Cash Flow Analysis ("DCF")
DCF analysis involves the estimation of the current or present value of
expected future cash flows for a firm or asset, based on an estimate of the risk
to those cash flows, the growth rate of the cash flows, and the time period and
pattern on which those cash flows will be received. The basic premise of DCF
analysis is that the economic value of a firm or asset is based on the expected
cash flows that can be generated by that firm or asset. Financial institutions
are highly regulated with regard to their financial soundness and
capitalization. As such they are limited as to dividend policy and
capitalization levels. Therefore, Sheshunoff discounted projected optimum
dividend paying capacity that State of Franklin could reasonably generate to
arrive at an appropriate value for State of Franklin.
Management provided projections of net income and dividends over a
five-year period. State of Franklin does not publicly disclose its internal
management projections of the type utilized by Sheshunoff in connection with
Sheshunoff's role as financial advisor to State of Franklin. Therefore, those
projections cannot be assumed to have been prepared with a view towards public
disclosure. The projections were based upon numerous variables and assumptions
that are inherently uncertain, including, among others, factors relative to the
general economic and competitive conditions facing State of
25
Franklin. Accordingly, actual results could vary significantly from those set
forth in the respective projections. Based on these projections, State of
Franklin's future cash flows were determined by estimating State of Franklin's
optimum dividend-paying capacity. Earnings in excess of that which is necessary
to maintain a particular equity to asset ratio are considered dividends payable
by a company in a given year and represent the cash flow upon which the
going-concern value of a company as a whole is measured. Discounting the optimum
dividend-paying capacity of a company produces a going-concern value and
presumes control of a company dividend policy. For its analysis, Sheshunoff
assumed a target capital ratio of 7% as a reasonable capitalization level.
Sheshunoff used the mid-year convention method in order to determine the
net present value factors it would use. The mid-year convention method better
reflects the fact that cash flows are earned continuously over the course of the
year.
The discount rate must reflect the risk of uncertainty associated with
the cash flows, and a rate of return investors require from similar investments
with similar risks. In determining the discount rate, Sheshunoff used the
capital asset pricing model. The capital asset pricing model develops a rate of
return as follows:
Risk free rate + (Equity Risk Premium x Beta)
Sheshunoff used the treasury constant rate for the twenty-year U.S.
Treasury yield as the benchmark risk-free rate at 4.88% as of December 31, 2004.
To determine the appropriate equity risk premium Sheshunoff multiplied the
market equity risk premium by the industry beta. Beta is a measure of systematic
risk or volatility. For a specific security, it measures the return of that
security relative to the return of a market benchmark such as the S&P 500. A
beta of one implies that a security will produce a return similar to the market.
Betas that are less than one imply returns lower than the market in a rising
price environment and greater than the market in a falling price environment.
For this analysis, Sheshunoff used a beta of 0.125, which was derived by
averaging the betas of all publicly traded banks with total assets under $500
million.
Sheshunoff used an equity risk premium of 7.20%, which is the historic
average annual difference between the yield on the long-term U.S. Treasury Bond,
and the total returns on stocks of large companies as calculated by Ibbotson
Associates, in its Stocks, Bonds, Bills and Inflation 2004 Yearbook
("Ibbotson").
Sheshunoff also considered adjustments to the risk-free rate and equity
risk premium due to the small size of State of Franklin's market value and
characteristics specific to State of Franklin. A size premium is required for
companies with small market capitalizations, and was determined to be 5.10%,
based on data compiled by Ibbotson.
An investment in any single company is more risky than an investment in a
basket of diversified large publicly traded companies. The equity risk premium
and the size premium measure the risk of this basket of large publicly traded
stocks versus a risk free return. To measure the risk of an investment in a
single company a company specific risk premium must be included in the
calculation of the discount rate. Given State of Franklin's level of
profitability and the risks inherent in sustaining this level for long periods
of time, the company-specific risk premium was determined to be 1.00%. In total,
this method produces a discount rate of 11.88%, rounded to 12%, as shown below:
Discount Rate
-------------
Risk-Free Rate (20 Year T-Bond Yield) 4.88%
Equity Risk Premium (7.20% x beta of 0.125) 0.90%
Size Premium 5.10%
Company Specific Premium 1.00%
-----
Total 11.88%
Rounded Discount Rate 12.00%
26
The residual value measures the net present value of future economic
benefits State of Franklin may produce at the end of the forecast period.
Sheshunoff estimated residual value by capitalizing sixth period earnings using
the following formula:
Residual Value = Projected Earnings x (1 + Growth Rate)/(Discount Rate - Growth
Rate)
The growth rate used must reflect the assumption that the earnings stream
will be in perpetuity. Because over the long term it is difficult for any
company to grow at a rate higher than inflation plus population growth, the long
term annual growth rate may be lower than the growth rates used in the early
years of the projections or even those experienced by State of Franklin in
recent years. Sheshunoff estimated the residual value assuming a long-term
growth rate of 4%, which Sheshunoff believes represents the long-term annual
growth rate of State of Franklin.
Discounting the projected optimum dividend paying capacity and residual
value of State of Franklin by 12% produces an estimated present value of $30.2
million or $19.53 per share based on 1,545,986 diluted shares outstanding.
Comparable Company Analysis
The second approach used in addressing the issue of fair value, from a
financial point of view, is analysis of comparable publicly traded banks in
Kentucky, North Carolina, Tennessee, and Virginia. Sheshunoff performed an
analysis of trading prices for a selected group of banking organizations in
Kentucky, North Carolina, Tennessee, and Virginia with comparable
characteristics to State of Franklin. The group consisted of 13 banks in
Kentucky, North Carolina, Tennessee, and Virginia with total assets between
$227.2 million and $525 million as of December 31, 2004, which we refer to as
the "Guideline Companies." Financial institutions that are broadly categorized
as thrifts were excluded from this list.
To select pricing multiples for State of Franklin, Sheshunoff compared its
performance to that of the Guideline Companies. The following discussion
summarizes the rationale for selection of pricing multiples for State of
Franklin and the following tables display summary pricing multiples and
financial characteristics of the Guideline Companies compared to State of
Franklin.
o Size - State of Franklin is smaller than the median or average size of
the Guideline Companies. Typically, larger companies have more
favorable pricing multiples and have more investor interest in their
shares than smaller companies. Therefore, size indicates lower pricing
multiples for State of Franklin compared to the median and average of
the Guideline Companies.
o Profitability - State of Franklin's ROAA is lower than the median and
average of the Guideline Companies and its ROAE is higher than the
median and lower than the average of the Guideline Companies. These
are based on net income excluding the extraordinary item. ROAA and
ROAE are commonly used to measure the profitability of a business.
Profitability is an important factor in the analysis of the value of a
financial institution. Profitability considerations imply lower
pricing multiples for State of Franklin compared to the median and
average of the Guideline Companies.
o Growth - State of Franklin's asset growth is lower than the median and
average of the Guideline Companies and its core income growth is lower
than the median and average of the Guideline Companies. Management is
predicting average asset growth of less than 4% over the next five
years with moderate variation of the growth rate between years. Growth
prospects indicate lower pricing multiples for State of Franklin
compared to the median and average of the Guideline Companies.
o Asset Quality - State of Franklin's non-performing assets to total
assets ratio is higher than the median or average of the Guideline
Companies. State of Franklin's loan loss reserve to total loans ratio
is higher than the median and average level of the Guideline
Companies. Asset quality concerns suggest lower pricing multiples for
State of Franklin compared to the median and average of the Guideline
Companies.
o Liquidity - State of Franklin's loan to deposit ratio is lower than
the median and average levels of the Guideline Companies. In general,
the more liquid an institution is the lower its overall profitability.
Therefore, liquidity indicates lower pricing multiples for State of
Franklin compared to the median and average of the Guideline
Companies.
27
o Leverage - State of Franklin's capital level as a percentage of total
assets is slightly lower than the Guideline Companies at the average
and median. State of Franklin is well above regulatory minimums.
Leverage factors suggest similar pricing multiples for State of
Franklin compared to the median and average of the Guideline
Companies.
The analysis yielded trading multiples for the group relative to:
Price/Book(x) Price/Tangible Price/LTM Price/Assets Price/Deposits
Equity (x) Earnings
- ------------------------------------------ ----------------- ------------------ --------------- -------------- ----------------
Minimum 1.30 1.30 12.61 11.12 14.88
- ------------------------------------------ ----------------- ------------------ --------------- -------------- ----------------
Maximum 2.37 2.49 39.13 22.70 32.64
- ------------------------------------------ ----------------- ------------------ --------------- -------------- ----------------
Median 1.75 2.03 22.17 16.58 20.24
- ------------------------------------------ ----------------- ------------------ --------------- -------------- ----------------
Cash Price (assumes $25.25 per share) 1.51 1.51 13.69 12.86 17.59
- ------------------------------------------ ----------------- ------------------ --------------- -------------- ----------------
No bank used in the comparable analyses is identical to State of Franklin
or the Going Private Merger. Accordingly, an analysis of the comparisons
involves complex considerations and judgments concerning differences in
financial and operating characteristics of State of Franklin and the comparable
companies. Mathematical analysis (such as determining the average or median) is
not in itself a meaningful method of using comparable transaction data or
comparable bank data.
Sheshunoff analyzed the trading volume in State of Franklin's stock for the
twelve months preceding the valuation date. Based on the trading data provided
by management of State of Franklin and from public, electronic sources, there
were 24,635 shares traded at a weighted average price of $21.75 in 2004. The
stock traded on 30 days out of 252 days of trading. The total number of shares
traded over the year represents 1.8% of the total shares outstanding.
Based on the results of the various analyses described above, Sheshunoff
concluded that the per share Cash Price to be received by State of Franklin
shareholders pursuant to the Going Private Merger is fair from a financial point
of view.
28
The Merger Transaction
Fees and Expenses of the Going Private Merger
State of Franklin estimates that Going Private Merger and other related
fees and expenses, consisting primarily of SEC filing fees, fees and expenses of
investment bankers, attorneys and accountants and other related charges, will
total approximately $375,000, assuming the transactions are completed. This
amount consists of the following estimated fees:
Description Amount
Advisory fees and expenses $ 30,000
Legal fees and expenses 90,000
Accounting fees and expenses 20,000
SEC filing fee 2,500
Printing, solicitation and mailing costs 30,000
Transfer Agent fee 10,000
Miscellaneous 192,500
-------
Total $375,000
=======
Material U.S. Federal Income Tax Consequences of the Going Private Merger
Summarized below are the material federal income tax consequences to State
of Franklin and its shareholders resulting from the Going Private Merger. This
summary is based on existing U.S. federal income tax law, which may change, even
retroactively. This summary does not discuss all aspects of federal income
taxation, which may be important to you in light of your individual
circumstances. Many shareholders (such as financial institutions, insurance
companies, broker-dealers, tax-exempt organizations, and foreign persons) may be
subject to special tax rules. Other shareholders may also be subject to special
tax rules, including but not limited to shareholders who received State of
Franklin common stock as compensation for services or pursuant to the exercise
of an employee stock option, or shareholders who have held, or will hold, stock
as part of a straddle, hedging, or conversion transaction for federal income tax
purposes. In addition, this summary does not discuss any state, local, foreign,
or other tax considerations.
This summary assumes that you are one of the following:
(1) a citizen or resident of the United States;
(2) a corporation or other entity taxable as a corporation created or
organized under U.S. law (federal or state);
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its sources;
(4) a trust if a U.S. court is able to exercise primary supervision over
administration of the trust and one or more U.S. persons have
authority to control all substantial decisions of the trust; or
(5) any other person whose worldwide income and gain is otherwise subject
to U.S. federal income taxation on a net basis.
This summary also assumes that you have held and will continue to hold your
shares as capital assets for investment purposes under the Internal Revenue Code
of 1986, as amended.
For federal income tax purposes, it is intended that neither State of
Franklin nor Merger Corp. will recognize gain or loss for federal or state
income tax purposes as a result of the Going Private Merger.
Shareholders are encouraged to consult their own tax advisor as to the
particular federal, state, local and other tax consequences, in light of their
specific circumstances.
Federal Income Tax Consequences to Shareholders Who Are Not Cashed-Out in
the Going Private Merger
If you (1) continue to hold State of Franklin common stock immediately
after the Going Private Merger, and (2) you receive no cash as a result of the
Going Private Merger,
29
you will not recognize any gain or loss in the Going Private Merger and you will
have the same adjusted tax basis and holding period in your State of Franklin
common stock as you had immediately before the Going Private Merger. Since each
of the directors of State of Franklin beneficially owns in excess of 3,000
shares of common stock, and it is anticipated that each director will continue
to hold State of Franklin common stock immediately after the Going Private
Merger and will receive no cash as a result of the Going Private Merger, it is
anticipated that no director will recognize gain or loss in the Going Private
Merger.
Federal Income Tax Consequences to Shareholders Who Receive Cash in the Going
Private Merger
If you receive cash as a result of the Going Private Merger, your tax
consequences will depend on whether you or a person or entity related to you (as
determined by the Internal Revenue Code) continues to hold shares or is treated
as continuing to hold shares of State of Franklin common stock after the Going
Private Merger, as explained below. If you (1) receive cash in exchange for
State of Franklin common stock as a result of the Going Private Merger, (2) do
not continue to hold shares, and (3) are not related to any person or entity
which holds State of Franklin common stock immediately after the Going Private
Merger, or are not otherwise treated as continuing to hold shares of State of
Franklin common stock after the Going Private Merger, you will recognize a
capital gain or loss. The amount of capital gain or loss you recognize will
equal the difference between the cash you receive for your cashed-out stock and
your aggregate adjusted tax basis in such stock.
In some instances you may be entitled to receive cash in the Going Private
Merger for shares you hold in one capacity but continue to hold shares you hold
in another capacity. For instance, if you own shares in your own name and hold
other shares jointly with another person, the joint holdings would not be
combined with your individual holdings for purposes of the Going Private Merger.
As a result, in some instances the shares you hold in one capacity might be
cashed out in the Going Private Merger while the shares you hold in another
capacity remain outstanding. However, in that situation you would be deemed for
federal income tax purposes both to have received cash in the Going Private
Merger and to continue to hold shares after the Going Private Merger.
If you both receive cash as a result of the Going Private Merger and are
considered to or actually continue to hold State of Franklin common stock after
the Going Private Merger for federal income tax purposes, you generally will
recognize gain, but may not be able to recognize loss, in an amount equal to the
difference between the cash received in the Going Private Merger and the
adjusted tax basis in the cashed-out shares.
If you receive cash and are considered to or actually continue to hold
stock, any gain recognized in the Going Private Merger will be treated, for
federal income tax purposes, as capital gain, provided that your receipt of cash
either (1) is not essentially equivalent to a dividend with respect to you as
determined under Section 302(b)(1) of the Internal Revenue Code, or (2) is a
substantially disproportionate redemption of stock with respect to you as
determined under Section 302(b)(2) of the Internal Revenue Code. If your gain is
not treated as capital gain under any of these tests, the gain will be treated
as ordinary dividend income to you to the extent of your ratable share of State
of Franklin's undistributed earnings and profits, then as a tax-free return of
capital to the extent of your aggregate adjusted tax basis in your shares, and
any remaining gain will be treated as a capital gain.
If you are related to a person or entity who holds State of Franklin common
stock immediately after the Going Private Merger (as determined by the Internal
Revenue Code) you will be treated as owning shares actually or constructively
owned by such individuals or entities. Because of your deemed ownership of State
of Franklin common stock, your receipt of cash in exchange for State of Franklin
common stock may be treated first as ordinary dividend income to the extent of
your ratable share of State of Franklin's undistributed earnings and profits,
then as a tax-free return of capital to the extent of your aggregate adjusted
tax basis in your shares, and any remaining amount will be treated as capital
gain. If you are related to a person or entity who holds State of Franklin
common stock immediately after the Going Private Merger, a waiver of the family
attribution rules is available under Section 302(c)(2) of the Internal Revenue
Code which will allow the transaction to be treated as a sale. The waiver is
permitted if the shareholder (1) retains no interest in State of Franklin after
the Going Private Merger (including any proprietary interest as well as interest
as officer, director or employee of State of Franklin), other than an interest
as a creditor; (2) does not acquire any such interest (other than stock acquired
by bequest or inheritance) within ten (10) years from the date of the
distribution; and (3) agrees to notify the Internal Revenue Service of the
acquisition of any such interest within the ten (10) year period. There are
additional restrictions that apply to such waiver.
30
If you or a person or entity related to you continues to hold State of
Franklin common stock immediately after the Going Private Merger, you are urged
to consult your tax advisor as to the particular federal, state, local, foreign,
and other tax consequences of the transaction, in light of your specific
circumstances.
Capital Gain and Loss
For individuals, net capital gain (defined generally as your total capital
gains in excess of capital losses for the year) recognized upon the sale of
capital assets that have been held for more than 12 months generally will be
subject to tax at a rate not to exceed 15%. Net capital gain recognized from the
sale of capital assets that have been held for 12 months or less will continue
to be subject to tax at ordinary income tax rates. In addition, capital gain
recognized by a corporate taxpayer will continue to be subject to tax at the
ordinary income tax rates applicable to corporations.
There are limitations on the deductibility of capital losses. In general,
the capital losses of individuals may only be deducted to the extent of the
individual's capital gains plus $3,000 each year. Any capital loss of an
individual which is not deductible by reason of the foregoing limitation may be
carried forward to subsequent years. In the case of corporations, capital losses
may only be deducted to the extent of capital gains. Any capital loss of a
corporation which is not deductible by reason of the foregoing limitation may be
carried back three years and carried forward five years.
Backup Withholding
Shareholders will be required to provide their social security or other
taxpayer identification numbers (or, in some instances, additional information)
in connection with the Going Private Merger to avoid backup withholding
requirements that might otherwise apply. The letter of transmittal will require
each shareholder to deliver such information when the common stock certificates
are surrendered following the effective date of the Going Private Merger.
Failure to provide such information may result in backup withholding.
As explained above, the amounts paid to you as a result of the Going Private
Merger may result in dividend income, capital gain income, some combination of
dividend and capital gain income, or capital loss to you depending on your
individual circumstances. The U.S. federal income tax discussion set forth above
is based upon present law, which is subject to change possibly with retroactive
effect. You should consult your tax advisor as to the particular federal, state,
local and other tax consequences of the transaction, in light of your specific
circumstances.
Source and Amount of Funds for the Going Private Merger
State of Franklin will fund the Going Private Merger with $8.0 million of
cash on hand from a trust preferred stock offering completed in 2001 and a $5.0
million special cash dividend declared by the Bank's Board of Directors and paid
by the Bank to State of Franklin. After the special cash dividend, the Bank's
equity will be approximately $ 21.0 million, and the Bank will continue to be
"well capitalized" for bank regulatory purposes.
Conduct of State of Franklin's Business after the Going Private Merger
State of Franklin expects its business and operations to continue as they
are currently being conducted after the Going Private Merger, and, except as
disclosed below, the Going Private Merger is not anticipated to have any effect
upon the conduct of such business. State of Franklin believes the going private
transaction is consistent with State of Franklin's vision of maintaining an
independent banking strategy. If the Going Private Merger is consummated,
persons owning 3,000 or fewer shares of common stock at the effective time of
the Going Private Merger will no longer have any equity interest in, and will
not be shareholders of, State of Franklin and therefore will not participate in
its future potential or earnings and growth, if any. Instead, each such owner of
State of Franklin common stock will have the right to receive $25.25 per share
in cash, without interest.
31
If the Going Private Merger Proposal is effected, State of Franklin
believes that, based on State of Franklin's shareholder records, approximately
250 shareholders of record will remain. In addition, as of May 31, 2005
individuals who are currently members of the Board of Directors and of
management of State of Franklin beneficially own approximately 38.34% of the
common stock and will beneficially own approximately 53.54% of the common stock
after the Going Private Merger. See "State of Franklin Ownership." As a result
of the Going Private Merger, State of Franklin plans to become a privately-held
company by deregistering its shares of common stock under the Exchange Act. As a
result, State of Franklin will be relieved of the obligation to comply with the
proxy rules of Regulation 14A under Section 14 of the Exchange Act, and its
officers and directors and shareholders owning more than 10% of the common stock
will be relieved of certain other reporting obligations under the Exchange Act.
You should read the discussion under "--The Effects of the Going Private Merger
" for more discussion regarding the effects of State of Franklin becoming a
privately held company. State of Franklin estimates that becoming a privately
held company will save State of Franklin approximately $300,000 per year in
legal, accounting and other expenses. This figure also includes various internal
allocated resources, principally salaries of employees responsible for
performing the necessary work to comply with the regulatory guidelines, which
funds otherwise may be employed for accretive purposes.
State of Franklin believes that there are significant advantages to it in
effecting the Going Private Merger Proposal and "going private" and State of
Franklin plans to avail itself of any opportunities it may have as a private
company, including, but not limited to, making any public or private equity
offerings, or entering into any other arrangement or transaction as it may deem
appropriate. Management does not presently have an intent to enter into any
transaction involving a merger or sale of State of Franklin nor is management
currently in negotiations with respect to any such transaction. Management
believes that State of Franklin can continue to be an effective community bank
in its local market area, and management and the Board are committed to pursuing
that strategy.
Other than as described in this proxy statement, neither State of Franklin
nor its management has any current 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.
Directors and Executive Officers of State of Franklin and Merger Corp.
The directors and executive officers of State of Franklin and Merger Corp.
are the same individuals. Information regarding these individuals can be found
below in the section entitled "Proposal 2 -- Election of Directors." The
principal executive offices of both State of Franklin and Merger Corp. are
located at 1907 North Roan Street, Johnson City, Tennessee 37604. The telephone
number for both State of Franklin and Merger Corp. is (423) 232-4400.
All of these individuals are citizens of the United States. During the past
five years, none of the above individuals was convicted in a criminal proceeding
or was a party to any judicial or administrative proceeding (excluding traffic
violations or similar misdemeanors) that resulted in a judgment, decree or final
order enjoining him from future violations of, or prohibiting activities subject
to, federal or state securities laws or a finding of any violation of federal or
state securities laws.
32
Dissenters Rights
Any shareholder of State of Franklin entitled to vote on the Going Private
Merger has the right to receive payment of the fair value of his shares of State
of Franklin common stock upon compliance with Sections 48-23-202 and 48-23-204
of the TBCA. A shareholder may not dissent as to less than all of the shares
that he beneficially owns. A nominee or fiduciary may not dissent on behalf of
any beneficial owner as to less than all of the shares of such beneficial owner
held of record by such nominee or fiduciary. A beneficial owner asserting
dissenters rights to shares held on his behalf must submit to State of Franklin
the record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters rights. Any State of Franklin
shareholder intending to enforce this right must not vote in favor of the Going
Private Merger and must file as written notice of his intent to demand payment
for his shares (the "Objection Notice") with the Corporate Secretary of State of
Franklin either before the State of Franklin meeting or before the vote is taken
at the meeting. The Objection Notice must state that the shareholder intends to
demand payment for his shares of State of Franklin common stock if the Going
Private Merger is effected. A vote against approval of the Going Private Merger
will not, in and of itself, constitute an Objection Notice satisfying the
requirements of Section 48-23-202 of the TBCA. A failure to vote will not
constitute a waiver of dissenters rights as long as the requirements of Sections
48-23-101 through 48-23-302 of the TBCA are complied with. However, any
shareholder who executes a proxy card and who desires to effect his dissenters
rights must mark the proxy card "Against" the proposal relating to the Going
Private Merger because if the proxy card is left blank, it will be voted "For"
the proposal relating to the Going Private Merger.
If the Going Private Merger is approved by State of Franklin's shareholders
at the meeting, each shareholder who has filed an Objection Notice will be
notified by State of Franklin of such approval within 10 days of the meeting
(the "Dissenters' Notice"). The Dissenters' Notice will
(i) state where dissenting shareholders must (a) send the Payment Demand
(as defined below) and where and when they must (b) deposit their State of
Franklin common stock certificates ,
(ii) inform holders of uncertified shares of State of Franklin common stock
of the extent of any restrictions on the transferability of such shares,
(iii) be accompanied by a form for demanding payment that includes the date
of the first announcement to the news media or to shareholders of the terms of
the proposed Going Private Merger,
(iv) set a date by which State of Franklin must receive the Payment Demand,
which may not be fewer than 1 or more than 2 months after the date the
Dissenters' Notice is delivered, and
(v) be accompanied by a copy of Sections 48-23-101 through 48-23-302 of the
TBCA.
Within the time prescribed in the Dissenters' Notice, a shareholder
electing to dissent must make a demand for payment (the "Payment Demand"),
certify whether he acquired beneficial ownership of the shares of State of
Franklin common stock before April 7, 2005, (the date of the first public
announcement of the principal terms of the Going Private Merger), and deposit
his certificates in accordance with the terms of the Dissenters' Notice. Upon
filing the Payment Demand and depositing the certificates, the shareholder will
retain all other rights of a shareholder until these rights are cancelled or
modified by consummation of the Merger. A Payment Demand may not be withdrawn
unless State of Franklin consents.
Failure to comply with these procedures will cause the shareholder to lose
his dissenters rights to payment for the shares. Consequently, any State of
Franklin shareholder who desires to exercise his rights to payment for his
shares is urged to consult his legal adviser before attempting to exercise such
rights.
As soon as the Going Private Merger is consummated, or upon receipt of a
Payment Demand, State of Franklin shall, pursuant to Section 48-23-206, pay to
each dissenting shareholder who has complied with the requirements of Section
48-23-204 of the TBCA the amount that State of Franklin estimates to be the fair
value of the shares of State of Franklin common stock, plus accrued interest.
Section 48-23-206 of the TBCA requires the payment to be accompanied by
33
(i) certain of State of Franklin's financial statements,
(ii) a statement of State of Franklin's estimate of fair value of the
shares and explanation of how the interest was calculated,
(iii) notification of rights to demand payment, and
(iv) a copy of Sections 48-23-101 through 48-23-302 of the TBCA.
As authorized by Section 48-23-208, State of Franklin intends to delay any
payments with respect to any shares (the "after-acquired shares") held by a
dissenting shareholder which were not held by such shareholder on April 7, 2005,
the date of the first public announcement of the terms of the Going Private
Merger. When payments are so withheld, Sections 48-23208(b) and 48-23-209(a)
will require State of Franklin, after the Merger, to send to the holder of the
after-acquired shares an offer to pay the holder an amount equal to State of
Franklin's estimate of their fair value plus accrued interest, together with an
explanation of the calculation of interest and a statement of the holder's right
to demand payment under Section 48-23-209.
If the Going Private Merger is not consummated within two months after the
date set for demanding payment and depositing certificates, State of Franklin
shall return the deposited certificates and release the transfer restrictions
imposed on uncertificated shares. If, after returning deposited certificates and
releasing transfer restrictions, the Going Private Merger is consummated, State
of Franklin must send a new Dissenters' Notice and repeat the payment demand
procedure.
If the dissenting shareholder believes that the amount paid by State of
Franklin pursuant to Section 48-23-206 or offered under Section 48-23-208 is
less than the fair value of his shares or that the interest due is calculated
incorrectly, or if State of Franklin fails to make payment (or, if the Merger
has not consummated, State of Franklin does not return the deposited
Certificates or release the transfer restrictions imposed on uncertificated
shares) within two months after the date set in the Dissenters' Notice, then the
dissenting shareholder may, within one month after (i) State of Franklin made or
offered payment for the shares or failed to pay for the shares or (ii) State of
Franklin failed to return deposited certificates or release restrictions on
uncertificated shares timely, notify State of Franklin in writing of his own
estimate of the fair value of such shares (including interest due) and demand
payment of such estimate (less any payment previously received). Failure to
notify State of Franklin in writing of a demand for payment within one month
after State of Franklin made or offered payment for such shares will constitute
a waiver of the right to demand payment.
If State of Franklin and the dissenting shareholder cannot agree on a fair
price two months after State of Franklin receives such a demand for payment, the
statute provides that State of Franklin will institute judicial proceedings in a
court of record with equity jurisdiction in Washington County, Tennessee, (the
"Court") to fix (i) the fair value of the shares immediately before consummation
of the Going Private Merger, excluding any appreciation or depreciation in
anticipation of the Going Private Merger, and (ii) the accrued interest. The
"fair value" of the State of Franklin common stock could be more than, the same
as, or less than $25.25 per share. State of Franklin must make all dissenters
whose demands remain unsettled parties to the proceeding and all such parties
must be served with a copy of the petition. The Court may, in its discretion,
appoint an appraiser to receive evidence and recommend a decision on the
question of fair value. The Court is required to issue a judgment for the
amount, if any, by which the fair value of the shares, as determined by the
Court, plus interest, exceeds the amount paid by State of Franklin or for the
fair value, plus accrued interest, of his after-acquired shares for which State
of Franklin elected to withhold payment. If State of Franklin does not institute
such proceeding within such two month period, State of Franklin shall pay each
dissenting shareholder whose demand remains unsettled the respective amount
demanded by each shareholder.
The Court will assess the costs and expenses of such proceeding (including
reasonable compensation for and the expenses of the appraiser by excluding fees
and expenses of counsel and experts) against State of Franklin, except that the
Court may assess such costs and expenses as it deems appropriate against any or
all of the dissenting shareholders if it finds that their demand for additional
payment was arbitrary, vexatious or otherwise not in good faith. The Court may
assess fees and expenses of counsel and experts in amounts the Court finds
equitable: (1) against State of Franklin if the Court finds that State of
Franklin did not substantially comply with the relevant requirements of the TBCA
or (ii) against either State of Franklin or any dissenting shareholder, if the
Court finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith. If the Court finds that the
services of counsel for any dissenter were of substantial benefit to other
dissenters and that the fees of such counsel should be assessed against State of
Franklin, the Court may award reasonable fees to such counsel to be paid out of
amounts awarded to benefited dissenters.
34
The foregoing summary of the applicable provisions of Sections 48-23-101
through 48-23-302 of the TBCA is not intended to be a complete statement of such
provisions, and is qualified in its entirety by reference to such sections,
which are included as Annex "C" hereof.
Interests of Officers and Directors in the Going Private Merger
We refer you to the information under the heading "State of Franklin Stock
Ownership" for information regarding our officers and directors and their stock
ownership in State of Franklin. As a result of the Going Private Merger, State
of Franklin expects that
(a) the percentage of beneficial ownership of common stock of State of Franklin
(including the effect of fully vested and exercisable common stock warrants and
stock options) held by current officers and directors of as a group will be
53.547% compared to 38.34% before the effective time of the Going Private
Merger, based on their equity holdings as of May 31, 2005,
(b) the book value as of December 31, 2004, of the shares of State of Franklin
common stock held by State of Franklin's officers and directors, as a group
(including the effect of fully vested and exercisable stock options), would
decrease from $17.93 on a historical basis to approximately $13.65 on a pro
forma basis, and
(c) the pro rata interest of State of Franklin's officers and directors, as a
group, in the net income of State of Franklin for the year ended December 31,
2004, would increase from approximately $0.70 per share on a historical basis
(based on the number of shares beneficially owned by such officers and directors
including the effect of fully vested and exercisable stock options as of the
record date) to a pro rata interest of approximately $1.41 per share on a pro
forma basis (based on the number of shares State of Franklin anticipates such
officers and directors to beneficially own including the effect of fully vested
and exercisable stock options immediately after the Going Private Merger). For a
description of the assumptions State of Franklin used in determining the numbers
of shares and related percentages that State of Franklin expects to be held by
current officers and directors immediately after the Going Private Merger,
please see footnotes under "State of Franklin Stock Ownership."
The following table sets forth the interests of the directors and executive
officers in State of Franklin's net book value and net earnings in both dollar
amounts and percentages before and after the Going Private Merger (dollars in
thousands).
35
Net Book Value Net Income before Net Income after
before Going Net Book Value after Going Private Going Private
Private Merger Going Private Merger Merger Merger
-------------- ------ ------ ------
$ % $ % $ % $ %
- - - - - - - -
Charles E. Allen, Jr....... 3,837 14.60 2,585 21.34 416 14.60 561 21.34
Charles E. Allen, Sr. M.D... 689 2.62 528 3.94 75 2.62 104 3.94
Vance W. Cheek............. 276 1.05 212 1.58 30 1.05 42 1.58
Kenneth E. Cutshall, M.D... 1,062 4.04 814 6.08 115 4.04 160 6.08
Randal R. Greene........... 2,667 10.15 2,004 14.96 289 10.15 394 14.96
Stephen K. Gross........... 590 2.25 452 3.38 64 2.25 89 3.38
Alan R. Hubbard............ 180 0.69 138 1.03 20 0.69 27 1.03
Donald R. Jeanes........... 300 1.14 230 1.72 33 1.14 45 1.72
Verrill M. Norwood, Jr..... 813 3.09 623 4.65 88 3.09 122 4.65
Cameron E. Perry........... 320 1.22 246 1.84 35 1.22 48 1.84
Richard S. Venable......... 397 1.51 304 2.27 43 1.51 60 2.27
Henry Jack Williams, M.D. 1,105 4.55 916 6.84 130 4.55 180 6.84
Directors and executive
officers as a group (12
persons)................... 10,074 38.34 7,172 53.54 1,092 38.34 1,408 53.54
- -------------------
(1) Based upon the book value of State of Franklin of $26,273,533 as of
December 31, 2004.
(2) Based upon the book value of State of Franklin, which is anticipated to
reduce to approximately $13,396,956 on a pro forma basis following the
Going Private Merger.
(3) Based upon the diluted net income of State of Franklin (including
non-recurring income and expenses) of $2,848,159 for the year ended
December 31, 2004.
(4) Based upon the diluted net income of State of Franklin (including
non-recurring income and expenses) which is anticipated to increase to
$2,630,318.
Regulatory Requirements for the Going Private Merger
In connection with the Going Private Merger and deregistration of State of
Franklin's common stock under the Exchange Act, State of Franklin will be
required to make a number of filings with and obtain a number of approvals from
various federal and state governmental agencies, including:
o a director who will own more than 10% of the voting shares of State of
Franklin as a result of the Going Private Merger must receive approval from
the Federal Reserve Bank of Atlanta as a condition to the effectuation of
the Going Private Merger;
o filing of articles of merger with the Secretary of State of the State of
Tennessee in accordance with the Tennessee Business Corporation Act after
the approval of the merger agreement by State of Franklin's shareholders;
o complying with federal and state securities laws, including State of
Franklin's filing, before the date of this proxy statement, of a Rule 13e-3
Transaction Statement on Schedule 13E-3 with the Securities and Exchange
Commission; and
o filing a Form 15 with the Securities and Exchange Commission to deregister
the shares of common stock of State of Franklin after the effective time of
the Going Private Merger.
36
The Merger Agreement
This section is a summary of the material terms of the merger agreement
with respect to the Going Private Merger, a copy of which is attached as Annex A
to this document. Because this is a summary, it does not include all of the
information that may be important to you. You should read the entire merger
agreement and this proxy statement and related annexes before deciding how to
vote at the Meeting.
The Going Private Merger
Merger Corp. was formed to effectuate the Going Private Merger. According
to the terms of the merger agreement, State of Franklin will be merged with
Merger Corp., with State of Franklin surviving. The merger will occur following
the approval of the merger agreement by the State of Franklin shareholders and
the satisfaction of other conditions to the Going Private Merger.
Conversion of Shares in the Going Private Merger
The merger agreement provides that, at the effective time of the Going
Private Merger (the "Effective Time") and subject to the exercise of dissenters
rights: (a) all outstanding shares of State of Franklin stock, whether Record
Shares (as defined below) or Street Shares (as defined below), held of record by
a Holder (as defined below) beneficially owning (as defined below) 3,000 or
fewer shares of State of Franklin stock immediately before the Effective Time
shall, without any action on the part of the holder thereof, be canceled and
converted into the right to receive cash equal to $25.25 per share; provided,
however, that State of Franklin may presume that all Street Shares are held by
Holders holding 3,000 or fewer shares immediately before the Effective Time
unless State of Franklin or a beneficial owner of Street Shares is able to
demonstrate to State of Franklin's satisfaction that such shares are held
beneficially by a Holder holding more than 3,000 shares immediately before the
Effective Time, in which event such Shares shall remain outstanding with all
rights, privileges, and powers existing immediately before the Effective Time;
(b) all outstanding shares of State of Franklin common stock other than those
described in (a), shall remain outstanding and held by the same holders; and (c)
the outstanding shares of Merger Corp. shall, without any action on the part of
the holder thereof, be canceled.
For purposes of the merger agreement:
o the term "Record Shares" means shares of State of Franklin stock other than
Street Shares, and any Record Share shall be deemed to be held by the
registered holder thereof as reflected on the books of State of Franklin;
o the term "Street Shares" means shares of State of Franklin stock held of
record in street name, and any Street Share shall be deemed to be held by
the beneficial owner thereof as reflected on the books of the nominee
holder thereof;
o the term "Holder" means a) any record holder or holders of Record Shares
who would be deemed, under Rule 12g5-1 under the Exchange Act as described
below, to be a single "person" for purposes of determining the number of
record shareholders of State of Franklin, and b) any other person or
persons who would be deemed to be a "Holder" under the above clause if the
shares it holds beneficially in street name were held of record by such
person or persons.
o The term "beneficially owned" means (i) beneficially owned as that term is
defined in the Securities Exchange Act of 1934, as amended and (ii) shares
owned by one of more family members who are lineal descendants of a common
ancestor (and their spouses or former spouses), provided that the common
ancestor is not more than six generations removed from the youngest
generation of shareholders), which family ownership is defined in Section
1361(c)(2) of the Internal Revenue Code, relating to SubChapter S
corporations.
The merger agreement provides that State of Franklin (along with any other
person or entity to which it may delegate or assign any responsibility or task
with respect thereto) shall have full discretion and exclusive authority
(subject to its right and power to so delegate or assign such authority) to:
o make such inquiries, whether of any shareholder(s) or otherwise, as it
may deem appropriate for purposes of the above provisions, and
37
o resolve and determine, in its sole discretion, all ambiguities, questions
of fact and interpretive and other matters relating to such provisions,
including, without limitation, any questions as to the number of Shares
held by any Holder immediately before the effective time of the Going
Private Merger. All such determinations by State of Franklin shall be final
and binding on all parties, and no person or entity shall have any recourse
against State of Franklin or any other person or entity with respect to
such determinations.
For purposes of the above provisions, State of Franklin may in its sole
discretion, but shall not have any obligation to do so,
o presume that any shares of State of Franklin common stock held in a
discrete account (whether record or beneficial) are held by a person
distinct from any other person, notwithstanding that the registered or
beneficial holder of a separate discrete account has the same or a similar
name as the holder of a separate discrete account; and
o aggregate the shares held (whether of record or beneficially) by any person
or persons that State of Franklin determines to constitute a single Holder
for purposes of determining the number of shares held by such Holder.
Rule 12g5-1 under the Exchange Act provides that, for the purpose of determining
whether an issuer is subject to the registration provisions of the Exchange Act,
securities shall be deemed to be "held of record" by each person who is
identified as the owner of such securities on records of security holders
maintained by or on behalf of the issuer, subject to the following:
o In any case where the records of security holders have not been maintained
in accordance with accepted practice, any additional person who would be
identified as such an owner on such records if they had been maintained in
accordance with accepted practice shall be included as a holder of record.
o Securities identified as held of record by a corporation, a partnership, a
trust whether or not the trustees are named, or other organization shall be
included as so held by one person.
o Securities identified as held of record by one or more persons as trustees,
executors, guardians, and custodians or in other fiduciary capacities with
respect to a single trust, estate or account shall be included as held of
record by one person.
o Securities held by two or more persons as co-owners shall be included as
held by one person.
o Each outstanding unregistered or bearer certificate shall be included as
held of record by a separate person, except to the extent that the issuer
can establish that, if such securities were registered, they would be held
of record, under the provisions of this rule, by a lesser number of
persons.
o Securities registered in substantially similar names where the issuer has
reason to believe because of the address or other indications that such
names represent the same person, may be included as held of record by one
person.
Rule 12g5-1 further provides in pertinent part that, notwithstanding the
foregoing provisions:
o Securities held, to the knowledge of the issuer, subject to a voting trust,
deposit agreement or similar arrangement shall be included as held of
record by the record holders of the voting trust certificates, certificates
of deposit, receipts or similar evidences of interest in such securities;
provided however, that the issuer may rely in good faith on such
information as is received in response to its request from a non-affiliated
issuer of the certificates or evidences of interest.
o If the issuer knows or has reason to know that the form of holding
securities of record is used primarily to circumvent the provisions of
Section 12(g) or 15(d) of the Exchange Act, the beneficial owners of such
securities shall be deemed to be the record owners of such securities.
38
Exchange of Certificates
Soon after the Going Private Merger becomes effective, State of Franklin
will mail to each shareholder who may be entitled to a cash payment pursuant to
the Going Private Merger a letter of transmittal and instructions explaining how
to exchange their stock certificates for cash, as applicable. Upon surrender to
State of Franklin of valid share certificates and properly completed letters of
transmittal, along with such other documents as State of Franklin may reasonably
require, cashed-out holders of common stock will be entitled to receive $25.25
in cash per share. Until surrendered in this manner, each stock certificate
representing cashed-out shares will represent only the right to receive the cash
consideration payable in the Going Private Merger. No service charges will be
payable by shareholders in connection with the exchange of certificates or the
payment of cash pursuant to the merger agreement, all expenses of which will be
borne by State of Franklin. Service charges payable in the event of a lost
certificate will be borne by the shareholder.
If you will continue to hold your shares of State of Franklin common stock
after the Going Private Merger, you should not surrender your shares upon the
consummation of the Going Private Merger.
You should not send your stock certificate now. You should send them only
after you receive a letter of transmittal from State of Franklin. Letters of
transmittal will be mailed soon after the Going Private Merger is completed.
Timing of Closing
If the merger agreement is approved by the State of Franklin shareholders,
the Going Private Merger closing will take place as soon as practicable after
the annual meeting, provided that all other conditions to the closing have been
satisfied or waived. On the date the Going Private Merger closes, articles of
merger will be filed with the Secretary of State of the State of Tennessee. The
Going Private Merger will become effective when the certificate of merger has
been duly filed with the Secretary of State of the State of Tennessee.
Directors and Officers
The merger agreement provides that the directors and officers of State of
Franklin, immediately before the effective time of the Going Private Merger,
shall be the directors and officers of State of Franklin, as the surviving
corporation, immediately after the Going Private Merger.
Charter and Bylaws
The merger agreement provides that the Charter and Bylaws of State of
Franklin in effect immediately before the effective time of the Going Private
Merger shall be the Charter and Bylaws of State of Franklin as the surviving
corporation, immediately after the Going Private Merger.
Representations and Warranties
The merger agreement contains customary representations and warranties made
by State of Franklin and Merger Corp. regarding various matters, including
representations as to the enforceability of the merger agreement.
Conditions to the Completion of the Going Private Merger
The obligations of State of Franklin and Merger Corp. to complete the Going
Private Merger are subject to the satisfaction or waiver of all of the following
conditions, among others:
o approval of the merger agreement by the holders of a majority of the
outstanding shares of State of Franklin common stock; and
o no litigation is pending regarding the Going Private Merger.
39
Termination of Merger Agreement
The merger agreement may be terminated by the Board of Directors of either
State of Franklin or Merger Corp. at any time before the effective time of the
Going Private Merger.
The Board of Directors believes that the Going Private Merger is in the
best interests of State of Franklin and its shareholders and recommends a vote
"FOR" approval of the Going Private Merger.
40
Proposal 2 -- Election of Directors
The Board has nominated the following persons to serve as directors:
Three-year term: Randal R. Greene Cameron E. Perry
Kenneth E. Cutshall, M.D. Henry Jack Williams, M.D.
We do not anticipate that any of these nominees will be unavailable for
election but, if such a situation arises, the proxy will be voted in accordance
with the best judgment of the named proxies unless you have directed otherwise.
The remaining members of the Board listed below will continue as members of the
Board until their respective terms expire, as indicated below.
Information about the four individuals nominated as directors and the
remaining members of the Board is provided below. Shares of common stock
represented by proxy cards returned to us will be voted for the nominees listed
below unless you specify otherwise. Election of directors requires the
affirmative vote of the holders of a plurality of the shares of common stock
represented at the annual meeting.
Nominees for Election
(Terms Expiring 2008)
Director, Year First Elected As Director and Age Principal Occupation, Business and Directorships
Business Address
- --------------------------------------------- --- ------------------------------------------------
Randal R. Greene, 1996 .................... 45 President of State of Franklin; President and Chief
1907 North Roan St. Executive Officer of State of Franklin Savings Bank
Johnson City, TN 37604
Kenneth E. Cutshall, M.D., 1996 ........... 44 Physician
1907 North Roan St., Suite 407
Johnson City, TN 37604
Cameron E. Perry, 1996..................... 75 Banker, retired
1907 North Roan St.
Johnson City, TN 37604
Henry Jack Williams, M.D., 1996............ 68 Physician, retired
1907 North Roan St.,
Johnson City, TN 37604
The Board recommends a vote "FOR" the election of the nominees listed above.
Incumbent Directors
(Terms Expiring 2006)
Director, Year First Elected As Director Age Principal Occupation, Business and Directorships
- ---------------------------------------- --- ------------------------------------------------
Charles E. Allen, Sr., M.D., 1996 ......... 74 Physician, retired
1907 North Roan St.
Johnson City, TN 37604
Alan R. Hubbard, 2001 ..................... 60 Businessman, retired
1907 North Roan St.
Johnson City, TN 37604
Donald R. Jeanes, 1996..................... 59 President of Milligan College
PO Box 1
Milligan Collee, TN 37682
Richard S. Venable, 1996................... 60 Owner and President of RSV Inc., Sullivan County Mayor
3411 Highway 126 since 2002
Blountville, TN 37617
41
Incumbent Directors
(Terms Expiring 2007)
Director, Year First Elected As Director Age Principal Occupation, Business and Directorships
- ---------------------------------------- --- ------------------------------------------------
Charles E. Allen, Jr., 1996 ............... 44 Chairman of the Board and Chief Executive Officer of
1907 North Roan St. State of Franklin; Chairman of the Board and Chief
Johnson City, TN 37604 Financial Officer of State of Franklin Savings Bank
Stephen K. Gross, 1996 .................... 58 Chief Financial Officer and owner of Microporous
PO Box 1333 Products, LP
Johnson City, TN 37605
Verrill M. Norwood, Jr., 1996.............. 73 Environmental consultant, retired
1907 North Roan St.
Johnson City, TN 37604
Vance W. Cheek, 1996....................... 81 Banker, retired
1907 North Roan St.
Johnson City, TN 37604
Except for Mr. Hubbard, all of these persons have served as directors of
State of Franklin Savings Bank since 1996 and as our directors since our
formation in May 1998. Charles E. Allen, Sr., M.D., is the father of Charles E.
Allen, Jr. Verrill M. Norwood, Jr., is the father-in-law of Randal R. Greene.
None of our directors is a director or executive officer of another bank holding
company, bank, savings and loan association, or credit union. The principal
occupations and employments of the persons listed above are for the past five
years.
- --------------------------------------------------------------------------------
Information about the Board of Directors
Role of the Board
Pursuant to Tennessee law, our business, property and affairs are managed
under the direction of our Board. The Board has responsibility for establishing
broad corporate policies and for our overall performance and direction, but is
not involved in day-to-day operations. Members of the Board keep informed of our
business by participating in Board and committee meetings, by reviewing analyses
and reports sent to them regularly, and through discussions with our executive
officers.
42
Board Structure
Our bylaws provide that the Board shall consist of no fewer than five nor
more than 25 members. The Board is currently limited to 12 members by Board
resolution. The directors are divided into three classes, each of which is equal
in number. The directors in each class hold office for staggered terms of three
years each. Staggered terms make it more difficult for shareholders, including
those holding a majority of our common stock, to force an immediate change in
the composition of a majority of the board of directors. Since the terms of only
one-third of the incumbent directors expire each year, two annual meetings of
shareholders would be required to change a majority of the directors, provided
that no directors resigned, were removed, or died during their terms of office
and the vacancies created thereby were not filled by an affirmative vote of
majority of the board of directors.
2004 Board Meetings
During 2004, the Board held 7 meetings. Our directors also serve as
directors of State of Franklin Savings Bank. The board of directors of State of
Franklin Savings Bank held 12 meetings in 2004. During 2004, no director
attended less than 75% of the meetings held by the Board or by any committee on
which he served.
Board Committees
The Board has two committees: the Audit Committee and the Nominating
Committee.
The Audit Committee, consisting of directors Perry, Cheek, Gross, Jeanes
and Allen, Sr., is responsible for the review and evaluation of our internal
controls and accounting procedures. It also periodically reviews audit reports
with our independent auditors and recommends the annual appointment of auditors.
The Audit Committee met 6 times during 2004. The Board has adopted a written
charter for the Audit Committee. For more information about the Audit Committee,
please see the section called "Report of the Audit Committee of the Board of
Directors."
The entire Board acts as Nominating Committee for the nomination of members
of the Board. The Board has not adopted a Nominating Committee Charter. The
Board met one time in its capacity as the Nominating Committee during 2004. The
Board does not believe a separate nominating committee is necessary because of
our size and because a majority of the Board is independent. The Board has no
set procedures or policy on the selection of nominees or evaluation of
shareholder recommendations as it has historically considered these issues on a
case-by-case basis. The Board will consider shareholder recommendations for
director nominees that are properly received in accordance with our bylaws and
the applicable rules and regulations of the Securities and Exchange Commission.
For more information, please see the section entitled "When are the 2006
shareholder proposals due?" above.
Director Compensation
Each director receives a quarterly retainer of $1,615, as well as a $1,350
quarterly retainer from the Savings Bank and $300 for each Board meeting he
attends. Each director also receives a $150 fee for each Committee meeting he
attends.
Director Attendance at Annual Meetings
It is our practice to invite the directors to attend our annual meeting of
shareholders. For the last two years, all members of the Board attended the
annual meeting.
Shareholder Communications with the Board
Shareholders desiring to communicate with the Board should e-mail their
communications to board@sofb.com. The communications will be reviewed by an
independent member of the Board who will make a determination as to how to
proceed.
43
Proposal 3 -- Ratification of Appointment of Independent Auditors
The Board has confirmed the appointment by the Audit Committee of Baylor
and Backus as our independent accountants and auditors engaged for 2005. Baylor
and Backus has served as our independent accountants and auditors for the year
ended December 31, 2004. Representatives of the firm will be present at the
annual meeting, will have an opportunity to make a statement if they so desire,
and are expected to be available to respond to appropriate questions by
shareholders.
The affirmative vote of the holders of a majority of the outstanding shares
of common stock present or represented at the annual meeting, if a quorum
exists, entitled to vote at the annual meeting is required to ratify the
appointment of Baylor and Backus as our independent accountants and auditors for
2005.
The Board recommends a vote "FOR" ratification of the appointment of Baylor
and Backus as our independent accountants and auditors for 2005.
44
State of Franklin Stock Ownership
The following table sets forth certain information regarding the ownership
of the common stock as of May 31, 2005, for (i) each person who owns more than
5% of the common stock, (ii) each director and the executive officers who are
listed in the executive compensation tables in this proxy statement, and (iii)
all executive officers and directors as a group.
Percent of
Amount and Nature Class after
of Beneficial Ownership Percent Going Private
Name of Beneficial Owner (Number of Shares) of Class(1) Merger (1)
------------------------ ------------------ ----------- ----------
Charles E. Allen, Jr.(2)(3)....................................... 231,443 14.60 21.34
Charles E. Allen, Sr., M.D.(4).................................... 39,169 2.62 3.94
Vance W. Cheek(5)................................................. 15,669 1.05 1.58
Kenneth E. Cutshall, M.D.(4)...................................... 60,380 4.04 6.08
Randal R. Greene(3)(10)........................................... 157,929 10.15 14.96
Stephen K. Gross(6)............................................... 33,488 2.25 3.38
Alan R.Hubbard(7)................................................. 10,200 * 1.03
Donald R. Jeanes(4)............................................... 17,069 1.14 1.72
Verrill M. Norwood, Jr.(8)........................................ 46,169 3.09 4.65
Cameron E. Perry(5)............................................... 18,169 1.22 1.84
Richard S. Venable(4)............................................. 22,569 1.51 2.27
Henry Jack Williams, M.D.(4)...................................... 67,939 4.55 6.84
Directors and executive officers as a group (12 persons)(9)....... 675,5528 38.34 53.54
State of Franklin Savings Bank Employee Stock Ownership Plan...... 186,829 12.61 19.04
- ------------
* Less than 1%
(1) Unless otherwise indicated, beneficial ownership consists of sole voting
and investing power based on 1,481,462 shares issued and outstanding on May
31, 2005. Options to purchase 280,353 shares are exercisable or become
exercisable within 60 days of May 31, 2005. These shares issuable under
options are deemed to be outstanding for the purpose of computing the
percentage of outstanding shares owned by each person to whom a portion of
these options relate but are not deemed to be outstanding for the purpose
of computing the percentage owned by any other person.
(2) Includes 103,249 shares issuable within 60 days of May 31, 2004 upon the
exercise of options.
(3) Includes 44,641 shares held by the State of Franklin Savings Bank Employee
Stock Ownership Plan for which Mr. Allen and Mr. Greene serve as
co-trustees.
(4) Includes 12,169 shares issuable within 60 days of May 31, 2005 upon the
exercise of options.
(5) Includes 8,169 shares issuable within 60 days of May 31, 2005 upon the
exercise of options.
(6) Includes 9,169 shares issuable within 60 days of May 31, 2005 upon the
exercise of options.
(7) Includes 5,500 shares issuable within 60 days of May 31, 2005 upon the
exercise of options.
(8) Includes 11,169 shares issuable within 60 days of May 31, 2005 upon the
exercise of options.
(9) Includes 280,353 shares issuable upon the exercise of options granted under
the Stock Incentive Plan and 44,641 shares held by the State of Franklin
Savings Bank Employee Stock Ownership Plan.
(10) Includes 74,083 shares issuable within 60 days of May 31, 2005 upon the
exercise of options.
45
Executive Compensation
The following table sets forth the aggregate cash compensation we paid to
our Chairman and Chief Executive Officer and our President. We did not pay any
other executive officer cash compensation in excess of $100,000 for the years
ended December 31, 2004, 2003 and 2002.
Summary Compensation Table
Long Term
Annual Compensation Compensation
Salary ($) Securities Underlying
Name and Position Year Bonus($)(1) ) Options/SARs(#)
----------------- ---- -------------- ---------------
Charles E. Allen, Jr............................ 2004 227,853 (2) 18,779 (2)
Chairman and Chief Executive Officer 2003 211,636 (3) 18,896 (3)
2002 253,177 (4) (5) 25,117 (4)
Randal R. Greene................................ 2004 174,600 31,666 (6) 1,712 (6)
President 2003 168,000 35,280 --
2002 160,000 40,000 --
(1) Salary and bonus amounts reflect amounts earned during the stated fiscal
year, even if paid in the subsequent fiscal year. All amounts have been
restated to reflect this position.
(2) Does not include $56,963 in cash compensation in lieu of which Mr. Allen
elected to receive stock options to purchase 18,779 shares. The options
were granted for 2004.
(3) Does not include $52,909 in cash compensation in lieu of which Mr. Allen
elected to receive stock options to purchase 18,896 shares. The options
were granted for 2003.
(4) Does not include $63,294 in cash compensation in lieu of which Mr. Allen
elected to receive stock options to purchase 25,117 shares. The options
were granted for 2002.
(5) Mr. Allen elected to receive stock options to purchase 15,823 shares of
common stock in lieu of his 2001 bonus of $39,875. The options were granted
on March 15, 2002.
(6) Does not include $4,999 in cash compensation in lieu of which Mr. Greene
elected to receive stock options to purchase 1,712 shares. The options were
granted for 2004.
Option Grants in Last Fiscal Year
% of total options
Number of shares granted to employees Exercise Expiration
Name underlying options in fiscal year price ($/sh) Date
---- ------------------ -------------- ----------- ----
Charles E. Allen, Jr.(1)....... 3,553 91.6% 20.00 2014
7,659 91.6% 22.00 2014
7,567 91.6% 25.25 2015
Randal R. Greene (2)........... 1,712 8.4% 25.25 2015
(1) Mr. Allen elected to receive stock options in lieu of a portion of his cash
compensation in 2004.
(2) Mr. Greene elected to receive stock options in lieu of a portion of his
cash compensation in 2004.
46
Aggregated Option/SAR Exercises in Last Fiscal Year And Fiscal Year-End
Option/SAR Values
The following table discloses information regarding stock options held at
the end of or exercised in the year 2004 for each of the executive officers.
Shares Securities underlying Value of unexercised
acquired on Value unexercised options in-the-money options
Name exercise(1) realized (1) at December 31, 2004 at December 31, 2004 (2)
---- ----------- ------------ -------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Charles E. Allen, Jr. --- --- 88,632 56,498 $ 918,558 $247,702
Randal R. Greene .... --- --- 70,379 3,704 $820,417 $ 34,260
- -----------------
(1) As of December 31, 2004, no options have been exercised by the executive
officers under the Stock Incentive Plan.
(2) Based on the appraised value of $22.75 per share of our common stock as of
December 31, 2004.
Equity Compensation Plan Information
The table below includes information with respect to shares subject to
outstanding options granted under our equity compensation plans.
(A) (B) (C)
Number of Number of securities
securities to be Weighted remaining available for
issued upon average future issuance under
exercise of exercise price equity compensation plans
outstanding of outstanding (excluding securities
Plan Category options options reflected in Column A)
------------- ------- ------- --------------------------
Equity compensation plans approved by
shareholders.............................. 349,234 $13.38 150,766
Equity compensation plans not approved by
shareholders.............................. --0-- --0--
47
Report of the Audit Committee of the Board of Directors
The Audit Committee is composed of five directors: Perry, Cheek, Gross,
Jeanes and Allen, Sr. Although our common stock is not listed on the New York
Stock Exchange, we have adopted the definition of an "independent director"
provided in the NYSE rules. Under this definition, all of the members of the
Audit Committee are independent directors except for Charles E. Allen, Sr.,
M.D., who is the father of Charles E. Allen, Jr., our Chairman of the Board.
The functions of the Audit Committee include:
o recommending to the Board the appointment of independent auditors;
o approving the scope of audits and other services to be performed by the
independent and internal auditors; and
o reviewing the results of internal and external audits, the accounting
principles applied in financial reporting and the adequacy of financial and
operational controls.
The Audit Committee reviews our financial reporting process on behalf of
the Board. Management has the primary responsibility for the financial
statements and the reporting process, including the system of internal controls.
In this context, the Audit Committee has met and held discussions with
management and Baylor and Backus, the independent auditors for the year ended
December 31, 2004. Management represented to the Audit Committee that our
financial statements were prepared in accordance with generally accepted
accounting principles, and the Audit Committee has reviewed and discussed the
financial statements with management and with the independent auditors. The
Audit Committee also discussed with the independent auditors matters required to
be discussed by Statement on Auditing Standards No. 61 (Communication With Audit
Committees).
In addition, the Audit Committee has discussed with Baylor and Backus the
auditor's independence from us and our management, including matters in the
written disclosures and letters provided by Baylor and Backus to the Audit
Committee as required by the Independence Standards Board Standard No. 1
(Independence Discussions With Audit Committees).
The Audit Committee has also discussed with the internal and independent
auditors the overall scope and plans for their respective audits. The Audit
Committee has met with the internal and independent auditors, with and without
management present, to discuss the results of their examinations, the
evaluations of our internal controls, and the overall quality of our financial
reporting.
The Audit Committee has determined that the fees we paid to Baylor and
Backus do not interfere with the independence of Baylor and Backus. Further, in
reliance upon the reviews and discussions referred to above, the Audit Committee
recommended to the Board, and the Board has approved, that the audited financial
statements be included in our Annual Report on Form 10-KSB for the year ended
December 31, 2004, for filing with the SEC. The Audit Committee and the Board
also have recommended, subject to shareholder approval, the selection of Baylor
and Backus as our independent auditors for the upcoming year.
Members of the Audit Committee:
Charles E. Allen, Sr., M.D.
Vance W. Cheek
Stephen K. Gross
Donald R. Jeanes
Cameron E. Perry
48
Audit Fees
The table below sets out the fees we paid to Baylor and Backus, our
principal independent auditors, for 2003 and 2004.
2003 2004
------- -------
Audit fees............................................ $38,000 40,000
Audit-related fees.................................... 0 0
Tax fees.............................................. 4,000 4,000
All other fees........................................ 0 0
------- -
Total..................... $ 42,000 $44,000
======= ======
Section 16(a) Beneficial Ownership Reporting Compliance
The federal securities laws require our directors and executive officers,
and persons who beneficially own more than 10% of a registered class of our
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of any of our securities. To our knowledge, based solely
on review of the copies of these reports furnished to us and representations by
reporting persons, all of our officers, directors and greater than 10%
beneficial owners made all filings required in a timely manner in 2004.
Transactions with Executive Officers, Directors and Others
We have had and expect to have in the future banking and other business
transactions in the ordinary course of our banking business with directors,
officers, and 10% beneficial owners of our common stock and their affiliates,
including members of their families, or corporations, partnerships, or other
organizations in which the officers or directors have a controlling interest, on
substantially the same terms (including price, or interest rates and collateral)
as those prevailing at the time for comparable transactions with unrelated
parties. Any of these banking transactions will not involve more than the normal
risk of collectability nor present other unfavorable features to us or State of
Franklin Savings Bank.
State of Franklin Savings Bank leases office space from a partnership,
Allen and Allen. Charles E. Allen, Jr., the Chairman of our Board and Charles E.
Allen, Sr., M.D., a director, are principals in Allen and Allen. The 3,000
square foot building houses the Browns Mill Road branch. The annual rent is $13.
49 per square foot or $40,470. This amount includes taxes, insurance and
maintenance. Also, State of Franklin Real Estate, Inc. leases a 4,000 square
foot suite with road frontage from Allen and Allen at $13.49 per square foot and
an additional 2,500 square foot suite for $6.00 per square foot. These amounts
includes taxes, insurance and maintenance.
Other Matters
The Board, at the time of the preparation of this proxy statement, knows of
no business to come before the annual meeting other than that referred to
herein. If any other business should come before the annual meeting, the persons
named in the enclosed proxy will have discretionary authority to vote all
proxies in accordance with their best judgment.
Cost of Solicitation
We will pay the cost of preparing, printing and mailing material in
connection with this solicitation of proxies. In addition to solicitation by
mail, our regular employees and paid solicitors may make solicitations
personally and by telephone or otherwise. We will, upon request, reimburse
brokerage firms, banks and others for their reasonable out-of-pocket expenses in
forwarding proxy material to beneficial owners of stock or otherwise in
connection with this solicitation of proxies. We have retained the Illinois
Stock Transfer Company to assist in the solicitation for a fee of approximately
$5,000 plus reasonable out-of-pocket expenses.
49
Shareholder Proposals
Proposals by shareholders to be considered for inclusion in the proxy
materials solicited by the directors for the annual meeting in 2006 must be
received by the Corporate Secretary, 1907 North Roan Street, Johnson City,
Tennessee 37604, no later than December 20, 2005. The use of certified mail,
return receipt requested, is advised. To be eligible for inclusion, a proposal
must also comply with Rule 14a-8 and all other applicable provisions of
Regulation 14A under the Securities Exchange Act of 1934. Please note, however,
should the Going Private Merger be approved and completed prior to next year's
annual meeting, this discussion related to shareholder proposals will no longer
be applicable.
Where You Can Find More Information
We file reports, proxy statements and other information with the SEC under
the Exchange Act. Copies of these reports, proxy statements and other
information can be obtained by mail at prescribed rates from the Public
Reference Section of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549, or by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
website, located at www.sec.gov, which contains reports, proxy and information
statements and other information regarding State of Franklin, including the
reports, proxy statements and other information incorporated by reference herein
as more fully described below.
State of Franklin and Merger Corp. and the members of the Board of
Directors of each have jointly filed a Schedule 13E-3 under the Exchange Act in
connection with the Going Private Merger. You may inspect and copy the Schedule
13E-3 at the SEC as described above or may obtain it electronically from the
SEC's website at www.sec.gov. This document does not contain all of the
information contained in the Schedule 13E-3 because certain parts have been
omitted in accordance with the rules and regulations of the SEC.
Additional Documents and Other Information Incorporated by Reference
The SEC allows State of Franklin to incorporate by reference information
into 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.
As required by the Exchange Act, we currently file annual and quarterly
reports with the SEC. Our annual report on Form 10-KSB for the year ended
December 31, 2004, includes financial statements and schedules and is
incorporated herein by reference. Our most recent quarterly report on Form
10-QSB for the three months ended March 31, 2005 also includes financial
statements and schedules that are incorporated herein by reference. We are
delivering copies of these documents that are incorporated by reference to
shareholders in connection with this proxy statement. They contain important
information about State of Franklin and its financial condition.
o Annual Report on Form 10-KSB for the year ended December 31, 2004; and
o Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005.
50
Index to Financial Statements
Unaudited Pro Forma Consolidated Financial Statements F-1
Pro Forma Consolidated Balance Sheet (Unaudited) F-2
Pro Form Consolidated Income Statement (Unaudited) F-4
51
Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated balance sheet as of December
31, 2004 and the unaudited pro forma consolidated income statements for the
years ended December 31, 2004 and 2003, give effect to the following:
o We have assumed that the Going Private Merger occurred as of December 31,
2004, for purposes of the consolidated balance sheet as of December 31,
2004, and as of January 1, 2004 and January 1, 2003, for the consolidated
income statements for the years ended December 31, 2004 and 2003,
respectively.
o We have assumed that a total of 500,000 shares of common stock are
cashed-out in the Going Private Merger at a price of $25.25 per share for a
total of $12.6 million. Additionally, we have assumed that we have incurred
or will incur $375,000 in expenses related to the transactions.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements and accompanying footnotes of State of
Franklin included in our 2004 Annual Report to Shareholders.
F-1
Pro Forma Consolidated Balance Sheet (Unaudited)
December 31, 2004
December 31, December 31,
2004 - Unaudited 2003 - Unaudited
---------------- ----------------
ASSETS
Cash and Due from Banks $ 5,564,907 3,764,363
Federal Funds Sold 1,130,000 12,040,000
Short-Term Interest Bearing Deposits 279,711 3,336,670
-------- ---------
Total Cash and Cash Equivalents 6,974,618 19,141,033
Investments - HTM 49,702,867 34,031,676
Investments - AFS 48,650,416 63,375,496
Loans Held for Sale 374,700 413,179
Loans and Leases Receivable 164,458,145 150,646,605
Less: Allowance for Loan and Lease Losses (1,601,332) (1,870,279)
Loans and Leases Receivable, Net 162,856,813 148,776,326
Accrued Interest Receivable, Net 1,490,634 1,366,640
Land, Buildings & Equip at Cost Less Accum Depr
of $2,643,828 in 2004 and $2,091,874 in 2003 7,468,710 6,218,358
Prepaid Expense and Accounts Receivable 175,816 108,260
Deferred Tax Assets 1,727,642 1,141,342
FHLB Stock 2,453,300 2,354,800
Intrieve Stock 815,009 815,009
Other Real Estate Owned 891,413 1,152,919
Other Assets 124,241 159,000
-------- -------
Total Assets $ 283,706,179 279,054,038
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest-Free Deposits $ 15,371,046 12,114,590
Interest-Bearing Deposits 198,784,547 209,877,896
Advances by Borrowers for Taxes and Insurance 110,328 103,632
Accrued Interest on Deposits 136,476 141,757
Accounts Payable and Accrued Expenses 725,652 487,049
Repurchase Agreements 1,024,608 536,419
FHLB Long-Term Advances 46,180,671 36,210,071
Deferred Credits on REO 189,384 173,996
-------- -------
Total Liabilities 262,522,712 259,645,410
Guaranteed Preferred Beneficial Interest
In Subordinated Debentures 8,000,000 8,000,000
Stockholders' Equity:
Common Stock, $1.00 Par Value 965,512 965,512
Paid-in Capital 1,751,461 1,751,461
Accumulated Other Comprehensive Income (2,005,925) (797,592)
Retained Earnings 13,114,666 10,274,242
Less: Employee Stock Ownership Plan (642,247) (784,995)
--------- ---------
Total Stockholders' Equity 13,183,467 11,408,628
Total Liabilities and Stockholders' Equity $ 283,706,179 279,054,038
F-2
Pro Forma Consolidated Income Statement
December 31, December 31,
Interest Income: 2004 - Unaudited 2003 - Unaudited
---------------- ----------------
Interest and Fees on Loans 9,797,116 10,431,443
Other Interest Income 4,673,661 3,654,808
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income 14,470,777 14,086,251
- --------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on Deposits 3,867,267 4,437,703
Interest on Agreements to Repurchase 7,200 9,612
Interest on Short-Term Debt 1,252 411
Interest on Long-Term Debt 2,044,809 1,755,364
Interest on Trust Preferred Subordinated Debentures 461,005 433,863
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 6,381,533 6,636,953
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for Loan Loss 8,089,244 7,449,298
Provision for Loan Losses 62,000 (444,548)
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Loss 8,151,244 7,004,750
- --------------------------------------------------------------------------------------------------------------------
Other Income:
Other Fees and Service Charges 559,804 540,166
Net Gain on Loans Sold 347,017 820,419
Realized Gain on Securities - 460
Real Estate Sales Commission Income 416,077 290,014
Insurance Commission Income 55,916 80,139
Rental Income, Net 80,101 85,070
- --------------------------------------------------------------------------------------------------------------------
Total Other Income 1,458,915 1,816,268
- --------------------------------------------------------------------------------------------------------------------
Other Expenses:
Compensation and Related Benefits 2,978,393 2,729,560
Occupancy Expenses 502,572 462,727
Furniture and Equipment Expense 452,015 383,880
Advertising 330,698 194,490
Data Processing Expense 605,693 529,743
Other 1,381,576 1,249,531
- --------------------------------------------------------------------------------------------------------------------
Total Other Expenses 6,250,947 5,549,931
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Tax 3,359,212 3,271,087
Provision for Income Taxes (601,119) (707,970)
- ---------------------------------------------------------------------------------------------------------------------
Net Income 2,758,093 2,563,116
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION:
Basic Income per Common Share $3.07 $2.88
Diluted Income per Common Share $2.68 $2.58
Weighted Avg Basic Shares
Outstanding 898,191 888,782
Weighted Avg Diluted Shares
Outstanding 1,029,781 994,308
F-3
ANNEX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger effective as of April 13, 2005 (this
"Agreement"), is entered into by and between State of Franklin Bancshares, Inc.,
a Tennessee corporation (the "Company"), and State of Franklin Merger Corp., a
Tennessee corporation (the "Merger Corp.").
WITNESSETH
WHEREAS, the Company is a corporation duly incorporated and validly
existing under the laws of the State of Tennessee having its principal office at
1907 North Roan Street, Johnson City, Tennessee 37604, with authorized capital
stock consisting of 10,000,000 shares of common stock, $1.00 par value per share
(the "Common Stock"), of which 1,481,462 shares are issued and outstanding,
WHEREAS, there are issued and outstanding options to acquire 356,513 shares
of Common Stock granted under the Company's Stock Option Plan (the "Options");
WHEREAS, Merger Corp. is a corporation duly organized and validly existing
under the laws of the State of Tennessee having its principal office at 1907
North Roan Street, Johnson City, Tennessee 37604, with authorized capital stock
consisting of 1,000 shares of common stock, $1.00 par value per share (the
"Merger Corp. Stock"), of which 100 shares are issued and outstanding; and
WHEREAS, the boards of directors of the Company and Merger Corp. have
approved the terms and conditions of this Agreement pursuant to which Merger
Corp. will be merged with and into the Company (the "Merger") with the Company
surviving the Merger.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants and undertakings contained herein, and for such other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties to this Agreement hereby agree as follows:
ARTICLE I
MERGER
1.01. General. At the Effective Time (as defined in Article VIII below) of the
Merger and pursuant to the provisions of this Agreement, the corporate existence
of Merger Corp. will be merged with and into the Company (hereinafter referred
to as the "Surviving Corporation" whenever reference is made to it as of the
Effective Time or thereafter) and continued in the Surviving Corporation, and
the Surviving Corporation shall be deemed to be a continuation of the entities
and identities of Merger Corp. and the Company.
1.02. Name and Organization. The name of the Surviving Corporation shall remain
and thereafter be "State of Franklin Bancshares, Inc." The Charter and Bylaws of
the Company in effect at the Effective Time shall remain as the Charter and
Bylaws of the Surviving Corporation until changed as provided therein or by law.
The established offices and facilities of the Company shall remain the
established offices and facilities of the Surviving Corporation. The registered
office and registered agent of the Company shall remain the registered office
and registered agent of the Surviving Corporation.
1.03. Rights and Interests. At the Effective Time, all rights, franchises, and
interests of the Company and Merger Corp., respectively, in and to every type of
property shall be transferred to and vested in the Surviving Corporation by
virtue of the Merger without any deed or other transfer. At the Effective Time,
the Surviving Corporation, without any order or other action on the part of any
court or otherwise, shall hold and enjoy all rights of property, franchises, and
interests, including appointments, powers, designations, and nominations, and
all other rights and interests as trustee, executor, administrator, agent,
transfer agent, registrar of stocks and bonds, administrator of estates,
assignee, and receiver, and in every other fiduciary and agency capacity in the
same manner and to the same extent as such rights, franchises, and interests
were held or enjoyed by the Company and Merger Corp., respectively, immediately
before the Effective Time.
A-1
1.04. Liabilities and Obligations. Except as otherwise provided herein, the
Surviving Corporation shall be liable for all liabilities of the Company and
Merger Corp. All debts, liabilities, obligations, and contracts of the Company
and Merger Corp., matured or unmatured, whether accrued, absolute, contingent,
or otherwise, and whether or not reflected or reserved against on the balance
sheets, books of account, or records of the Company or Merger Corp., as the case
may be, shall be those of, and are hereby expressly assumed by, the Surviving
Corporation and shall not be released or impaired by the Merger. All rights of
creditors and other obligees and all liens on property of either the Company or
Merger Corp. shall be preserved unimpaired.
1.05. Directors and Officers. The directors and officers of the Surviving
Corporation at the Effective Time shall be those persons who were directors and
officers, respectively, of the Company immediately before the Effective Time.
The committees of the Board of Directors of the Surviving Corporation at the
Effective Time shall be the same as, and shall be composed of the same persons
who were serving on, the committees appointed by the Board of Directors of the
Company as they existed immediately before the Effective Time.
1.06. Adoption. Unless contrary to the laws of the State of Tennessee or the
United States of America or other applicable laws, all corporate acts, plans,
policies, applications, agreements, orders, registrations, licenses, approvals,
and authorizations of the Company and Merger Corp., their respective
shareholders, boards of directors, committees elected or appointed by their
boards of directors or officers, and agents that were valid and effective
immediately before the Effective Time shall be taken for all purposes at and
after the Effective Time as the acts, plans, policies, applications, agreements,
orders, registrations, licenses, approvals, and authorizations of the Surviving
Corporation and shall be effective and binding thereon as the same were with
respect to the Company and Merger Corp. immediately before the Effective Time.
ARTICLE II
TERMS OF THE MERGER
2.01. General. The manner of exchanging and converting the issued and
outstanding shares of Common Stock and Merger Corp. Stock and of treating the
Options and Warrants shall be as hereinafter provided in this Article II.
2.02. Conversion and Cancellation of Common Stock; Treatment of Options. At the
Effective Time,
(a) all outstanding shares of Common Stock (other than shares of Common Stock,
the holders of which exercise and perfect dissenters rights as set forth in
Section 2.04), whether Record Shares (as hereinafter defined), or Street Shares
(as hereinafter defined), held by a Holder (as hereinafter defined) beneficially
owning (as hereinafter defined) 3,000 or fewer shares of Common Stock
immediately before the Effective Time shall, without any action on the part of
the holder thereof, be canceled and converted into the right to receive cash
equal to $25.25 per share of Common Stock (the "Common Stock Merger
Consideration"); provided, however, that the Company may presume that all Street
Shares are held by Holders holding 3,000 or fewer shares of Common Stock
immediately before the Effective Time unless either the Company or a beneficial
owner of Street Shares are able to demonstrate to the Company's satisfaction
that such shares are held beneficially by a Holder holding more than 3,000
shares of Common Stock immediately before the Effective Time, in which event
such shares shall remain outstanding with all rights, privileges, and powers
existing immediately before the Effective Time;
(b) all outstanding shares of Common Stock other than those described in
paragraph (a) as being converted into the right to receive the Common Stock
Merger Consideration shall remain outstanding with all rights, privileges, and
powers existing immediately before the Effective Time;
(c) the outstanding shares of Merger Corp. Stock shall, without any action on
the part of the holder thereof, be canceled; and
(d) the outstanding Options shall, without any action on the part of the holders
thereof, remain outstanding without any change in their terms and conditions.
A-2
In no event shall any Holder holding, of record or beneficially, immediately
before the Effective Time more than 3,000 shares of Common Stock (including any
combination of Record Shares and Street Shares) in the aggregate be entitled to
receive any Common Stock Merger Consideration with respect to the shares of
Common Stock so held. It shall be a condition precedent to the right of any
Holder to receive the Common Stock Merger Consideration, if any, payable with
respect to the shares of Common Stock held by such Holder that such Holder
certify to the Company in the letter of transmittal delivered by the Company as
described in Section 2.03 that such Holder held, of record or beneficially,
immediately before the Effective Time 3,000 or fewer shares of Common Stock
(including any combination of Record Shares and Street Shares) in the aggregate.
For purposes hereof:
(1) the term "Record Shares" shall mean shares of Common Stock other than Street
Shares, and any Record Share shall be deemed to be held by the registered holder
thereof as reflected on the books of the Company;
(2) the term "Street Shares" shall mean shares of Common Stock held of record in
street name, and any Street Share shall be deemed to be held by the beneficial
owner thereof as reflected on the books of the nominee holder thereof;
(3) the term "Holder" shall mean (i) any record holder or holders of Record
Shares who would be deemed, under Rule 12g5-1 promulgated under the Securities
Exchange Act of 1934, as amended, to be a single "person" for purposes of
determining the number of record shareholders of the Company, and (ii) any other
person or persons who would be deemed to be a "Holder" under clause (i) above if
the shares of Common Stock such person holds beneficially in street name were
held of record by such person or persons; and
(4) the term "Cash-Out Shares" shall mean any shares of Common Stock that are
converted into the right to receive the Common Stock Merger Consideration
pursuant to this Section 2.02.
(5) the term "beneficially owned" means (i) beneficially owned as that term is
defined in the Securities Exchange Act of 1934, as amended and (ii) shares owned
by one of more family members who are lineal descendants of a common ancestor
(and their spouses or former spouses), provided that the common ancestor is not
more than six generations removed from the youngest generation of shareholders),
which family ownership is defined in Section 1361(c)(2) of the Internal Revenue
Code, relating to SubChapter S corporations.
The Company (along with any other person or entity to which it may delegate or
assign any responsibility or task with respect thereto) shall have full
discretion and exclusive authority (subject to its right and power to so
delegate or assign such authority) to (i) make such inquiries, whether of any
shareholder(s) or otherwise, as it maydeem appropriate for purposes of this
Section 2.02 and (ii) resolve and determine, in its sole discretion, all
ambiguities, questions of fact and interpretive and other matters relating to
this Section 2.02, including, without limitation, any questions as to the number
of shares of Common Stock held by any Holder immediately before the Effective
Time. All determinations by the Company under this Section 2.02 shall be final
and binding on all parties, and no person or entity shall have any recourse
against the Company or any other person or entity with respect thereto.
For purposes of this Section 2.02, the Company may in its sole discretion, but
shall not have any obligation to do so, (i) presume that any shares of Common
Stock held in a discrete account (whether record or beneficial) are held by a
person distinct from any other person, notwithstanding that the registered or
beneficial holder of a separate discrete account has the same or a similar name
as the holder of a separate discrete account; and (ii) aggregate the shares of
Common Stock held (whether of record or beneficially) by any person or persons
that the Company determines to constitute a single Holder for purposes of
determining the number of shares of Common Stock held by such Holder.
2.03. Exchange of Certificates.
(a) Payment Procedure. Promptly after the Effective Time, the Surviving
Corporation will mail to each holder of a certificate or certificates which
immediately before the Effective Time evidenced outstanding shares of Common
Stock that appear, based on information available to the Company, may have been
converted into the right to receive the Common Stock Merger Consideration (other
than shares as to which rights of dissent have been perfected as provided in
Section 2.04)
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("Certificates"), a letter of transmittal (which shall contain the certification
described in Section 2.02 and such other matters as the Surviving Corporation
may determine and shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Surviving Corporation) and instructions to effect the
surrender of the Certificates in exchange for the Common Stock Merger
Consideration payable with respect to such Certificates. Upon surrender of a
Certificate for cancellation to the Surviving Corporation, together with such
letter of transmittal, duly completed and executed and containing the
certification contemplated by Section 2.02, and such other customary documents
as may be required pursuant to such instructions, the holder of such Certificate
shall, subject to the provisions of Section 2.02, be entitled to receive in
exchange therefor the Common Stock Merger Consideration payable with respect to
the shares formerly represented by such Certificate and the Certificate so
surrendered shall forthwith be canceled. If there is a transfer of ownership of
shares of Common Stock which is not registered in the share transfer records of
the Company, the Common Stock Merger Consideration payable in respect thereof
may be paid or issued to the transferee if the Certificate representing such
shares is presented to the Surviving Corporation, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid.
(b) Abandoned Property Laws. The Surviving Corporation shall not be liable to
any holder of a Certificate for any cash properly delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
2.04. Dissenters Rights of Shareholders. Shareholders may dissent from the
Merger and exercise their dissenters rights pursuant to and subject to the
provisions of Sections 48-23-101 through 48-23-302 of the Tennessee Business
Corporation Act.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company hereby represents, warrants, and covenants to and with Merger Corp.
as of the date of this Agreement and as of the Closing Date (as defined in
Article VIII below) as follows:
3.01. Organization. The Company is a corporation duly incorporated, validly
existing, and in good standing under the laws of the State of Tennessee. The
Company has the corporate power to carry on its business as is presently being
conducted and is qualified to do business in every jurisdiction in which the
character and location of the assets owned by it or the nature of the business
transacted by it requires qualification.
3.02. Governmental Authorizations. The Company is in compliance in all material
respects with all applicable federal, state, and local laws, rules, regulations,
and orders, including, without limitation, those imposing taxes. The approval,
execution, delivery, and performance of this Agreement, and the consummation of
the transactions contemplated hereby, subject to the receipt of the consents and
approvals described in Section 6.03 below, will not violate in any material
respect any provision of, or constitute a default under, any applicable law,
rule, or regulation of any governmental agency or instrumentality, either
domestic or foreign, applicable to the Company.
3.03. No Conflict with Other Instruments. The consummation of the Merger in
accordance with the terms, conditions, and provisions of this Agreement will not
conflict with, or result in a breach of, any term, condition, or provision of,
or constitute a default under, any indenture, mortgage, deed of trust, or other
material agreement or instrument to which the Company is a party, and will not
conflict with any provisions of the Charter or Bylaws of the Company or any of
its subsidiaries, and will not constitute an event that with the lapse of time
or action by a third party could result in any default under any of the
foregoing, or result in the creation of any lien, charge, or encumbrance upon
any of the assets or properties of the Company or upon the Common Stock.
3.04. No Conflict with Judgments or Decrees. The consummation of the Merger in
accordance with the terms, conditions, and provisions of this Agreement will not
conflict with, or result in a breach of, any term, condition, or provision of
any judgment, order, injunction, decree, writ, or ruling of any court or
tribunal, either domestic or foreign, to which the Company is a party or is
subject.
3.05. Approval of Agreement. The board of directors of the Company has approved
this Agreement and the transactions contemplated hereby and has authorized the
execution and delivery of this Agreement by the Company. The Company has full
corporate power, authority, and legal right to enter into this Agreement.
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3.06. Capital Stock. The authorized capital stock of the Company consists solely
of Common Stock and Preferred Stock [review charter]. All of the issued and
outstanding shares of Common Stock are validly issued, fully paid,
non-assessable and not issued in violation of the preemptive rights of any
shareholder. There are no shares Preferred Stock issued and outstanding. In
addition, the outstanding Options are validly issued.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF MERGER CORP.
Merger Corp. hereby represents, warrants, and covenants to and with the Company
as of the date of this Agreement and as of the Closing Date (as defined in
Article VIII below) as follows:
4.01. Organization. Merger Corp. is duly incorporated, validly existing, and in
good standing under the laws of the State of Tennessee. Merger Corp. has the
corporate power and authority to carry on its business as is presently being
conducted and is qualified to do business in every jurisdiction in which the
character and location of the assets owned by it or the nature of the businesses
conducted by it requires qualification.
4.02. Capital Stock. The authorized capital stock of Merger Corp. consists
solely of the Merger Corp. Stock, of which 100 shares are currently issued and
held by the Company. There are no outstanding subscriptions, warrants, options,
or rights of any kind to acquire from Merger Corp. any shares of Merger Corp.
Stock, other equity securities, or debt securities.
4.03. Subsidiaries or Affiliates. Merger Corp. does not own of record or
beneficially, and is not obligated to acquire any capital stock, other equity
securities, debt securities, or other interest of or in any corporation,
government, or other entity. Between the date hereof and the Effective Time,
Merger Corp. will not create or acquire any subsidiaries without the prior
written consent of the Company.
4.04. Approval of Agreement. The Board of Directors of Merger Corp. has approved
this Agreement and the transactions contemplated hereby and has authorized the
execution and delivery by Merger Corp. of this Agreement. Merger Corp. has full
corporate power, authority, and legal right to enter into this Agreement and,
upon appropriate vote of the shareholders of Merger Corp., to approve this
Agreement and consummate the transactions contemplated hereby.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF MERGER CORP.
The obligations of Merger Corp. to consummate the Merger shall be subject to the
satisfaction on or before the Closing Date of all of the following conditions,
except as Merger Corp. may waive such conditions in writing:
5.01. Litigation. On the Closing Date, there shall not be pending or threatened
litigation in any court or any proceeding by any governmental commission, board,
or agency with a view to seeking, or in which it is sought, to restrain or
prohibit consummation of the Merger, or in which it is sought to obtain
divestiture, rescission, or damages in connection with the Merger or the
consummation of the Merger, and to the knowledge of any of the parties hereto,
no investigation by any governmental agency shall be pending or threatened that
might result in any such suit, action, or other proceeding.
5.02. Representations and Warranties. All representations and warranties of the
Company contained in this Agreement, other than any representations and
warranties as to future events, shall be true in all material respects on and as
of the Closing Date as if such representations and warranties were made on and
as of the Closing Date, and the Company shall have performed all agreements and
covenants required by this Agreement to be performed by it on or before the
Closing Date.
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ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the Merger shall be subject to the
satisfaction on or before the Closing Date of all the following conditions,
except as the Company may waive such conditions in writing:
6.01. Litigation. On the Closing Date, there shall not be pending or threatened
litigation in any court or any proceeding by any governmental commission, board,
or agency with a view to seeking, or in which it is sought, to restrain or
prohibit consummation of the Merger, or in which it is sought to obtain
divestiture, rescission, or damages in connection with the Merger or the
consummation of the Merger, and to the knowledge of any of the parties hereto,
no investigation by any governmental agency shall be pending or threatened that
might result in any such suit, action, or other proceeding.
6.02. Representations and Warranties. All representations and warranties of the
Merger Corp. contained in this Agreement, other than any representations and
warranties as to future events, shall be true in all material respects on and as
of the Closing Date as if such representations and warranties were made on and
as of the Closing Date, and the Company shall have performed all agreements and
covenants required by this Agreement to be performed by it on or before the
Closing Date.
6.03. Shareholder Approval. This Agreement shall have been approved by a vote of
the holders of not less than a majority of the outstanding shares of Common
Stock and by the holders of not less than a majority of the outstanding shares
of Merger Corp. Stock.
ARTICLE VII
EXPENSES
Costs and expenses relating to the negotiation and drafting of this Agreement
and the transactions contemplated hereby shall be borne and paid by the Company.
ARTICLE VIII
CLOSING DATE; EFFECTIVE TIME
The closing of this Agreement and the transactions contemplated hereby shall be
held on the Closing Date (as defined in this Article VIII) at such time and
place as the parties hereto may mutually agree upon. The "Closing Date" shall be
such date as the Presidents of the Company and Merger Corp., respectively, may
agree upon. Subject to the terms and upon satisfaction on or before the Closing
Date of all requirements of law and conditions specified in this Agreement, the
Company and Merger Corp. shall, at the Closing Date, execute, acknowledge, and
deliver such other documents and instruments and take such further action as may
be necessary or appropriate to consummate the Merger. The "Effective Time" is
the date on which the Merger is effective, which shall be on the date specified
in the certificate of merger to be issued by the Secretary of State of the State
of Tennessee, and if no date is specified in such certificate, then the
Effective Time shall be the time of the opening of business on the date the
certificate of merger is recorded by the Secretary of State of the State of
Tennessee.
ARTICLE IX
AMENDMENTS
This Agreement may be amended only by written agreement duly authorized by the
boards of directors of the parties hereto before the Closing Date.
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ARTICLE X
TERMINATION
This Agreement may be terminated by either the Company or Merger Corp. at any
time before the Effective Time. If this Agreement is terminated, this Agreement
shall become void and shall have no effect and create no liability on the part
of any of the parties hereto or their respective directors, officers, or
shareholders.
ARTICLE XI
NOTICES
All notices, requests, demands, and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given at the time
either personally delivered or sent by registered or certified mail, postage
prepaid, as follows:
If to the Company or Merger Corp., at:
1907 North Roan Street
Johnson City, Tennessee 37604
Attention: Charles E. Allen, Jr., Chairman of the Board
ARTICLE XII
MISCELLANEOUS
12.01. Further Assurances. Each party hereto agrees to perform any further acts
and to execute and deliver any further documents that may be reasonably
necessary to carry out the provisions of this Agreement.
12.02. Severability. If any of the provisions, or portions thereof, of this
Agreement are held to be illegal, unenforceable, or invalid by any court of
competent jurisdiction, the legality, enforceability, and validity of the
remaining provisions, or portions thereof, shall not be affected thereby, and,
in lieu of the illegal, unenforceable, or invalid provision, or portion thereof,
there shall be added a new legal, enforceable, and valid provision as similar in
scope and effect as is necessary to effectuate the results intended by the
deleted provision or portion.
12.03. Construction. Whenever used herein, the singular number shall include the
plural, and the plural number shall include the singular.
12.04. Gender. Any references herein to the masculine gender, or to the
masculine form of any noun, adjective, or possessive, shall be construed to
include the feminine or neuter gender and form, and vice versa.
12.05. Headings. The headings contained in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning of any of the
provisions contained herein.
12.06. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
12.07. Governing Law. This Agreement has shall be governed by the laws of the
State of Tennessee, without giving effect to the conflict of laws rules thereof
or of any other state.
12.08. Court Costs and Attorneys' Fees. If any action at law or in equity,
including an action for declaratory relief, is brought to enforce or interpret
the provisions of this Agreement, the prevailing party shall be entitled to
recover costs of court and reasonable attorneys' fees from the other party or
parties to such action, which fees may be set by the court in the trial of such
action or may be enforced in a separate action brought for that purpose, and
which fees shall be in addition to any other relief that may be awarded.
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12.09. Inurement. Subject to any restrictions against transfer or assignment as
may be contained herein, the provisions of this Agreement shall inure to the
benefit of, and shall be binding on, the assigns and successors in interest of
each of the parties hereto.
12.10. Waivers. No waiver of any provision or condition of this Agreement shall
be valid unless executed in writing and signed by the party to be bound thereby,
and then only to the extent specified in such waiver. No waiver of any provision
or condition of this Agreement shall be construed as a waiver of any other
provision or condition of this Agreement, and no present waiver of any provision
or condition of this Agreement shall be construed as a future waiver of such
provision or condition.
12.11. Entire Agreement. This Agreement contains the entire understanding
between the parties hereto concerning the subject matter contained herein. There
are no representations, agreements, arrangements, or understandings, oral or
written, between or among the parties hereto relating to the subject matter of
this Agreement that are not fully expressed herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by as
of the date first written above.
STATE OF FRANKLIN BANCSHARES, INC.
By: /s/ Charles E. Allen, Jr.
Title: Chairman of the Board
STATE OF FRANKLIN MERGER CORP.
(In organization)
By: /s/ Charles E. Allen, Jr.
Title: Chairman of the Board
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ANNEX B
ALEX SHESHUNOFF & CO. OPINION
April 6, 2005
Board of Directors
State of Franklin Bancshares, Inc.
1907 North Roan Street
Johnson City, Tennessee 37601
Members of the Board:
State of Franklin Bancshares, Inc. ("SFB") has entered into an Agreement and
Plan of Merger dated April 6, 2005 (the "Plan"), which provides for the
reorganization of SFB with State of Franklin Merger Corp. (the "Merger Corp").
SFB will be the surviving corporation. Pursuant to the Plan, shareholders owning
3000 or fewer shares of SFB common stock and certain other non-qualifying
shareholders shall receive a cash payment of $25.25 per share from SFB ("Cash
Price") for each share owned. Shareholders owning more than 3000 shares of SFB
common stock that execute the required documents will continue as shareholders
of SFB. The Cash Price was independently determined by SFB's Board of Directors.
The Board of Directors of SFB requested Alex Sheshunoff & Co Investment Banking,
L.P.'s ("Sheshunoff") opinion as to the fairness, from a financial point of
view, to SFB's current common stockholders of the Cash Price to be paid in the
Reorganization. Sheshunoff was not requested to opine as to, and our opinion
does not in any manner address, SFB's underlying business decision to proceed
with the Reorganization.
In connection with our opinion, we have, among other things:
o Reviewed a draft of the proxy dated as of April 6, 2005;
o Reviewed Report of Income and Statement of Condition as filed with the
Federal Deposit Insurance Corporation for State of Franklin Bancshares,
Inc. for the years ending December 31, 2000 through 2003 and for the four
most recent quarters ended December 31, 2004;
o Reviewed Consolidated Audited Balance Sheet and Income Statement
information as of December 31, 2004;
o Conducted conversations with State of Franklin Bancshares, Inc.'s executive
officers regarding its recent and projected financial performance;
o Compared State of Franklin Bancshares, Inc.'s recent operating results and
pricing multiples with those of certain other publicly traded banks in
Kentucky, North Carolina, Tennessee, and Virginia;
o Analyzed the net present value of the after-tax cash flows State of
Franklin Bancshares, Inc. could produce through December 31, 2009, based on
assumptions provided by management;
o Reviewed the recent trading of State of Franklin Bancshares, Inc. common
stock for the twelve-month period ended December 31, 2004; and
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o Performed such other analyses and considered and reviewed such other
information as it deemed appropriate.
For the purposes of this opinion, we assumed and relied upon, without
independent verification, the accuracy and completeness of the information
provided to us by SFB's management. In addition, where appropriate, we relied
upon publicly available information that we believe to be reliable, accurate,
and complete; however, we cannot guarantee the reliability, accuracy, or
completeness of any such publicly available information.
We did not make an independent evaluation of the assets or liabilities of SFB,
nor have we been furnished with any such appraisals. We did not perform an
on-site review of SFB or its operations. We are not experts in the evaluation of
loan portfolios and did not make any independent review of either SFB's loan
portfolio or the adequacy of SFB's loan and lease loss reserves. Based on
representations of SFB's management, we assumed the reserves for loan and lease
losses are adequate to cover known and anticipated losses.
We have assumed that all required regulatory approvals will be received in a
timely fashion and without any conditions or requirements that could adversely
affect the Reorganization or SFB's ability to make the Cash Price payments.
Our opinion is necessarily based on economic, market, and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We assumed that there are no material changes in
SFB's assets, financial condition, results of operations, business or prospects
since the date of its last financial statement reviewed by us, and that
off-balance sheet activities will not materially impact the future financial
position or results of operations of SFB. We assumed the Reorganization will be
completed as set forth in the Plan and that no material changes will be made in
the Plan nor will restrictions be imposed by regulatory or other parties on the
terms of the Plan.
Our opinion is limited to the fairness of the Cash Price, from a financial point
of view, to the holders of SFB's common stock. This letter and the opinion
expressed herein do not constitute a recommendation to any stockholder as to any
approval of the Reorganization or the Plan. It is understood that this letter is
for the information of the Board of Directors of SFB and may not be used for any
other purpose without our prior written consent, except that this opinion and
supporting documentation may be included in any proxy statement or similar
communication to SFB's shareholders provided that this opinion and supporting
documentation are included in their entirety. The supporting documentation
contained in the proxy statement relating to this opinion should be read in
conjunction with this opinion. That documentation describes the analyses we
undertook and the assumptions we made in preparing this opinion. SFB's Board of
Directors retained Sheshunoff to consider the Cash Price and issue this opinion
based upon our reputation in banking valuations and familiarity with the banking
business. SFB's Board of Directors placed no limit on the scope of our analysis.
Based on the foregoing and such other matters we have deemed relevant, it is our
opinion, as of the date hereof, that the Cash Price to be received by some SFB
shareholders pursuant to the Reorganization is fair to the current shareholders
of SFB, from a financial point of view. Very truly yours,
/s/ R. A. Place
ALEX SHESHUNOFF & CO. INVESTMENT BANKING, L.P.
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ANNEX C
DISSENTERS RIGHTS STATUTE
WEST'S TENNESSEE CODE
TITLE 48. CORPORATIONS AND ASSOCIATIONS
CHAPTER 23. BUSINESS CORPORATIONS--DISSENTERS' RIGHTS
PART 1--RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
48-23-101. Definitions. -- As used in this chapter, unless the context otherwise
requires:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 48-23-102 and who exercises that right when and in
the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
48-23-102. Right to dissent. -- (a) A shareholder is entitled to dissent from,
and obtain payment of the fair value of the shareholder's shares in the event
of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a party:
(A) If shareholder approval is required for the merger by ss. 48-21-104 or
the charter and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its parent under
ss. 48-21-105;
(2) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale;
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(4) An amendment of the charter that materially and adversely affects
rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any matter, or to
cumulate votes, other than a limitation by dilution through issuance of shares
or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the shareholder to a fraction of
a share, if the fractional share is to be acquired for cash under ss. 48-16-104;
or
(5) Any corporate action taken pursuant to a shareholder vote to the extent
the charter, bylaws, or a resolution of the board of directors provides that
voting or nonvoting shareholders are entitled to dissent and obtain payment for
their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under ss. 6 of the Securities Exchange Act of
1934, as amended, or is a "national market system security," as defined in rules
promulgated pursuant to the Securities Exchange Act of 1934, as amended.
48-23-103. Dissent by nominees and beneficial owners. -- (a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the record shareholder's name only if the record shareholder
dissents with respect to all shares beneficially owned by any one (1) person and
notifies the corporation in writing of the name and address of each person on
whose behalf the record shareholder asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which the partial dissenter dissents and the partial dissenter's other shares
were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares of
any one (1) or more classes held on the beneficial shareholder's behalf only if
the beneficial shareholder:
(1) Submits to the corporation the record shareholder's written consent to
the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
(2) Does so with respect to all shares of the same class of which the
person is the beneficial shareholder or over which the person has power to
direct the vote.
PART 2--PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
48-23-201. Notice of dissenters' rights. -- (a) If proposed corporate action
creating dissenters' rights under ss. 48-23-102 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under this chapter and be
accompanied by a copy of this chapter.
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(b) If corporate action creating dissenters' rights under ss. 48-23-102 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in ss. 48-23-203.
(c) A corporation's failure to give notice pursuant to this section will
not invalidate the corporate action.
48-23-202. Notice of intent to demand payment. -- (a) If proposed corporate
action creating dissenters' rights under ss. 48-23-102 is submitted to a vote at
a shareholders' meeting, a shareholder who wishes to assert dissenters' rights
must:
(1) Deliver to the corporation, before the vote is taken, written notice of
the shareholder's intent to demand payment for the shareholder's shares if the
proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed action. No
such written notice of intent to demand payment is required of any shareholder
to whom the corporation failed to provide the notice required by ss. 48-23-201.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
48-23-203. Dissenters' notice. -- (a) If proposed corporate action creating
dissenters' rights under ss. 48-23-102 is authorized at a shareholders' meeting,
the corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of ss. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the principal terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person asserting dissenters' rights acquired
beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than one (1) nor more than two (2) months after the
date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation has not
previously sent a copy of this chapter to the shareholder pursuant to ss.
48-23-201.
48-23-204. Duty to demand payment. -- (a) A shareholder sent a dissenters'
notice described in ss. 48-23-203 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to ss. 48-23-203(b)(3), and
deposit the shareholder's certificates in accordance with the terms of the
notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are cancelled or modified by the effectuation of
the proposed corporate action.
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(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn unless
the corporation with which it was filed, or the surviving corporation, consents
thereto.
48-23-205. Share restrictions. -- (a) The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is effectuated or the restrictions released
under ss. 48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
48-23-206. Payment. -- (a) Except as provided in ss. 48-23-208, as soon as the
proposed corporate action is effectuated, or upon receipt of a payment demand,
whichever is later, the corporation shall pay each dissenter who complied with
ss. 48-23-204 the amount the corporation estimates to be the fair value of each
dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under ss.
48-23-209; and
(5) A copy of this chapter if the corporation has not previously sent a
copy of this chapter to the shareholder pursuant to ss. 48-23-201 or ss.
48-23-203.
48-23-207. Failure to take action. -- (a) If the corporation does not effectuate
the proposed action that gave rise to the dissenters' rights within two (2)
months after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under ss. 48-23-203 and repeat the payment demand
procedure.
48-23-208. After-acquired shares. -- (a) A corporation may elect to withhold
payment required by ss. 48-23-206 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the principal terms of the proposed corporate action.
C-4
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under ss.
48-23-209.
48-23-209. Procedure if shareholder dissatisfied with payment or offer. -- (a) A
dissenter may notify the corporation in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and amount of interest due, and
demand payment of the dissenter's estimate (less any payment under ss.
48-23-206), or reject the corporation's offer under ss. 48-23-208 and demand
payment of the fair value of the dissenter's shares and interest due, if:
(1) The dissenter believes that the amount paid under ss. 48-23-206 or
offered under ss. 48-23-208 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under ss. 48-23-206 within two
(2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within two (2) months after the date set for
demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under this
section unless the dissenter notifies the corporation of the dissenter's demand
in writing under subsection (a) within one (1) month after the corporation made
or offered payment for the dissenter's shares.
PART 3--JUDICIAL APPRAISAL OF SHARES
48-23-301. Court action. -- (a) If a demand for payment under ss. 48-23-209
remains unsettled, the corporation shall commence a proceeding within two (2)
months after receiving the payment demand and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the two-month period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus accrued interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ss. 48-23-208.
48-23-302. Court costs and counsel fees. -- (a) The court in an appraisal
proceeding commenced under ss. 48-23-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under ss. 48-23-209.
C-5
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable against:
(1) The corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith with respect to the rights
provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefited.
C-6
ANNEX D
VALUATION LETTER OF ALEX SHESHUNOFF & CO.
February 3, 2005
CONFIDENTIAL
Mr. Charles Allen
Chairman and CEO
State of Franklin Bancshares, Inc.
1907 North Roan Street
P.O. Box 940 Johnson City, TN 37605
Dear Mr. Allen:
Alex Sheshunoff & Co. Investment Banking was engaged to provide a formal
valuation report as to the fair value of the common stock issued by State of
Franklin Bancshares, Inc. (Company) as of December 31, 2004. This valuation is
to be used to assist the Board of Directors in setting a cash price to be paid
in connection with the involuntary cash-out of certain shareholders as part of
the Company's possible going private transaction. Per your request for a
preliminary indication as to the opinion to be contained in our formal valuation
report, attached are schedules prepared as part of our valuation process in
which the fair market value is estimated to be $25.25 per share.
The market and income approaches were used in deriving this value. The market
approach is based on a comparison of the Company to guideline companies. The
income approach used multi-year discounts of relevant expected cash flows that
were developed from financial projections provided by management. The formal
report will contain a more detailed discussion of the valuation approaches,
assumptions, and conclusions.
This letter and the attached summary should be read in conjunction with our
formal report, which will follow. The analysis and conclusions presented here
are limited by the assumptions and conditions that are stated in our report.
This preliminary indication of value is provided solely for the confidential,
internal use by the Board of Directors. This letter and the related schedules
should not be provided to any regulatory agency without the formal report.
Sincerely,
Richard A. Place
Director
D-1
EXHIBIT
Valuation Summary
State of Franklin Bancshares, Inc.
December 31, 2004
Summary Financials as of December 31, 2004: (Millions)
- ------------------------------------------- ----------
Tangible Assets $303.2
Tangible Common Equity $25.7
Net Income - 2004 $2.8
Projected Net Income - 2005 $2.6
Market Approach
Price/Tangible Book Valuation at estimated price/tangible book ratio:
o Tangible Book Value of $25.7 million x Price/Book Multiple of 1.50x $38.6
o 7.00% Equity of $21.2 million x Multiple of 1.50x + Excess Equity of $4.5 million $36.4
Price/Earnings Valuation at estimated price/earnings ratio:
o LTM Net Income as of December 31, 2004 of $2.8 million x P/E 13.0x $37.0
o Projected 2005 Net Income of $2.6 million x P/E 13.0x $33.3
Discounted Cash Flow Method (Discount Rate of 12.0%)
o Optimum Equity Flows $30.2
ESTIMATED VALUE (Millions) $39.0
Market Value
COMPARATIVE MULTIPLES Multiples Multiples
- --------------------- --------- ---------
Common Book 1.74x 1.51x
Tangible Common Book 2.03x 1.51x
7.00% Book 2.26x 1.62x
Last Twelve Months Net Income 22.17x 13.69x
Projected Net Income - 2005 NA 15.24x
Total Assets 16.58% 12.86%
PER SHARE VALUATION AND DISCOUNTS
Estimated Value $39,000,000
Shares Outstanding 1,545,986
VALUE PER SHARE $25.23
ROUNDED TO: $25.25
================
PROXY
State of Franklin Bancshares, Inc.
1907 North Roan Street
Johnson City, Tennessee 37601
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
The undersigned appoints each of Charles E. Allen, Jr., Randal R. Greene
and Becky Mominee, or any of them, with full power of substitution and
revocation as Proxy, to vote all shares of stock standing in my name on the
books of State of Franklin Bancshares, Inc. (the "Company") at the close of
business on ________ __, 2005, which the undersigned would be entitled to vote
if personally present at the Annual Meeting of Shareholders of the Company to be
held at our offices at 1907 North Roan Street, Johnson City, Tennessee, on
________, _______ __, 2005, at 11:00 a.m., Eastern Time, and at any and all
adjournments, upon the matters set forth in the Notice of the meeting. The Proxy
is further authorized to vote according to the recommendation of management as
to any other matters which may come before the meeting. At the time of
preparation of the Proxy Statement, the Board of Directors knows of no business
to come before the meeting other than that referred to in the Proxy Statement.
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN BELOW AND WHEN NO INSTRUCTIONS ARE GIVEN WILL BE VOTED FOR
THE PROPOSALS DESCRIBED IN THE ACCOMPANYING NOTICE OF ANNUAL MEETING AND PROXY
STATEMENT AND ON THIS PROXY.
- --------------------------------------------------------------------------------
(1) Approval of Going Private Transaction.
[ ] For [ ] Against [ ] Abstain
(2) Election of four directors to serve until the 2008 annual meeting of
shareholders or until their successors have been duly elected and
qualified.
[ ] FOR all nominees listed below (except as indicated to the
contrary below).
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
Randal R. Greene Cameron E. Perry
Kenneth E. Cutshall, M.D. Henry Jack Williams, M.D.
Instruction: To withhold authority to vote for any individual
nominee, write such nominee's name in the space provided below.
------------------------------------------------------------------
(3) Ratification of Auditors.
[ ] For [ ] Against [ ] Abstain
The undersigned hereby acknowledges receipt of the Notice of the Annual
Meeting of Shareholders of State of Franklin Bancshares, Inc. and the related
Proxy Statement.
Dated: , 2005 Signed:
----------- -----------------------------------------
[Label to be placed here] Signed:
-----------------------------------------
Shareholder should sign here exactly as
shown on the label affixed hereto.
Administrator, Trustee, or Guardian,
please give full title. If more than
one Trustee, all should sign. All Joint
Owners should sign.
Please indicate if you plan to attend the Annual Meeting of Shareholders.
[ ] Yes [ ] No
PLEASE COMPLETE, SIGN, DATE AND RETURN
THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE TO:
Illinois Stock Transfer Company
209 West Jackson Boulevard, Suite 903
Chicago, Illinois 60606