-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NbB1i5NDJSGalmQo495Rha3O0VpmyAOeQhor4Xe2C53IiljxqQQO31QTRVb3u4oZ O4BipKpXFypzguF1fklAUA== 0000926274-04-000312.txt : 20041216 0000926274-04-000312.hdr.sgml : 20041216 20041216164031 ACCESSION NUMBER: 0000926274-04-000312 CONFORMED SUBMISSION TYPE: SC 13E3/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20041216 DATE AS OF CHANGE: 20041216 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351894432 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 13E3/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-45583 FILM NUMBER: 041208720 BUSINESS ADDRESS: STREET 1: 700 S GREEN RIVER ROAD STREET 2: SUITE 2000 CITY: EVANSVILLE STATE: IN ZIP: 47715 BUSINESS PHONE: 8124692100 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY FEDERAL BANCORP CENTRAL INDEX KEY: 0000910492 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351894432 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 13E3/A BUSINESS ADDRESS: STREET 1: 700 S GREEN RIVER ROAD STREET 2: SUITE 2000 CITY: EVANSVILLE STATE: IN ZIP: 47715 BUSINESS PHONE: 8124692100 MAIL ADDRESS: STREET 1: 18 NW FOURTH ST STREET 2: PO BOX 1347 CITY: EVANSVILLE STATE: IN ZIP: 47706-1347 SC 13E3/A 1 ffb-13e3a1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 2 TO SCHEDULE 13E-3 RULE 13e-3 TRANSACTION STATEMENT (Pursuant to Section 13(e) of the Securities Exchange Act of 1934) FIDELITY FEDERAL BANCORP --------------------------------------- (Name of the Issuer) FIDELITY FEDERAL BANCORP --------------------------------------- (Name of Person(s) Filing Statement) COMMON STOCK, NO PAR VALUE PER SHARE --------------------------------------- (Title of Class of Securities) 315921106 --------------------------------------- (CUSIP Number of Class of Securities) FIDELITY FEDERAL BANCORP 18 NW Fourth Street Evansville, Indiana 47708 (317) 424-0921 WITH COPIES TO: Timothy M. Harden, Esq. John W. Tanselle, Esq Krieg DeVault LLP One Indiana Square, Suite 2800 Indianapolis, Indiana 46204 (317) 636-4341 -------------------------------------------------------------------- (Name, Address, and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Person(s) Filing Statement) This statement is filed in connection with (check the appropriate box): [ ] a. The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities Exchange Act of 1934. [ ] b. The filing of a registration statement under the Securities Act of 1933. [ ] c. A tender offer. [X] d. None of the above. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies. [X] Check the following box if this is a final amendment reporting the results of the transaction. CALCULATION OF FILING FEE TRANSACTION VALUATION (1) AMOUNT OF FILING FEE (2) - ------------------------------------------------------------------------------ $2,000,000.00 $ 400.00 (1) Pursuant to Rule 0-11(b) under the Securities Exchange Act of 1934, as amended, the value of the securities proposed to be acquired consists of the estimated $2,000,000.00 of cash to be paid in lieu of the issuance of fractional shares of common stock in the reverse stock split. (2) The amount of the filing fee, calculated in accordance with Rule 0-11 of the Securities Exchange Act of 1934, as amended, equals one-fiftieth of one percent of the cash to be paid in lieu of fractional shares. [X] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount previously paid: $ 400.00 --------------------------- Form or registration no.: Schedule 13E-3 --------------------------- Filing party: Fidelity Federal Bancorp --------------------------- Date filed: November 15, 2004 --------------------------- Table of Contents ITEM 1. SUMMARY TERM SHEET 1 ITEM 2. SUBJECT COMPANY INFORMATION 1 ITEM 3. IDENTITY AND BACKGROUND OF THE FILING PERSON 2 ITEM 4. TERMS OF THE TRANSACTION 2 ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS 3 ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS 3 ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS 3 ITEM 8. FAIRNESS OF THE TRANSACTION 3 ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS 3 ITEM 10. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION 3 ITEM 11. INTEREST IN SECURITIES OF THE SUBJECT COMPANY 4 ITEM 12. THE SOLICITATION OR RECOMMENDATION 4 ITEM 13. FINANCIAL INFORMATION 4 ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED 4 ITEM 15. ADDITIONAL INFORMATION 4 ITEM 16. EXHIBITS 4 -i- INTRODUCTION This Amendment No. 2 to Rule 13E-3 Transaction Statement (this "Schedule 13E-3") is being filed by Fidelity Federal Bancorp (the "Company") in connection with a proposed going private transaction, in which the Company will effect a 1-for-30,000 reverse stock split of its common stock, no par value. This Amendment No. 2 amends the Rule 13E-3 Transaction Statement filed by the Company with the Securities and Exchange Commission on November 15, 2004, as amended by Amendment No. 1 to Schedule 13E-3 filed by the Company with the Securities and Exchange Commission on November 17, 2004. In the reverse stock split, the holders of the Company's common stock will receive one share of common stock for each 30,000 shares they hold immediately prior to the effective date of the reverse stock split. Those shareholders who, immediately following the reverse stock split, would hold a fraction of a share of Company common stock will, in lieu thereof, be paid an amount, in cash, equal to $1.85 times such fraction of a share and will no longer be shareholders of the Company. Completion of the reverse stock split will result in the Company having less than 300 shareholders of its common stock, enabling it to elect to terminate the registration of its common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934. Following the reverse stock split, the Company will conduct a 2,500 for 1 forward stock split for those shareholders who, following the reverse stock split, continue to hold at least one whole share of Company common stock. Under Indiana law and the Articles of Incorporation of the Company, the Board of Directors of the Company may amend the Company's Articles of Incorporation to conduct both the reverse stock split and the forward stock split without the approval of the shareholders. Therefore, the Company is not seeking shareholder approval for these actions and no vote is sought in connection with these actions. The reverse stock split and the forward stock split will be conducted upon the terms and subject to the conditions set forth in the Company's going private disclosure document (the "Disclosure Document"). The information contained in the Disclosure Document, including all annexes thereto, is hereby expressly incorporated herein by reference. Capitalized terms used but not defined herein shall have the meanings given to them in the Disclosure Document. All references to subsections in the Items below are to the subsection of the applicable Item in Regulation M-A. ITEM 1. SUMMARY TERM SHEET. The information set forth in the Disclosure Document under the caption "Summary Term Sheet" is incorporated herein by reference. ITEM 2. SUBJECT COMPANY INFORMATION. (a) Name and Address. Fidelity Federal Bancorp is the subject company of this Schedule 13E-3. The principal office of the Company is located at 18 NW Fourth Street, Evansville, Indiana 47708, and the Company's telephone number is (812) 424-0921. (b) Securities. As of September 30, 2004, the Company had 10,999,871 shares of no par value common stock issued and outstanding. (c) Trading Market and Price. The information contained in the Disclosure Document under the caption "Summary Financial Information -- Market Prices and Dividend Information" is incorporated herein by reference. -1- (d) Dividends. The information contained in the Disclosure Document under the caption "Summary Financial Information -- Market Prices and Dividend Information" is hereby incorporated by reference. (e) Prior Public Offerings. None. (f) Prior Stock Purchases. None. ITEM 3. IDENTITY AND BACKGROUND OF THE FILING PERSON. (a) Name and Address. Fidelity Federal Bancorp, the subject company, is the filing person of this Schedule 13E-3. The Company's business address is 18 NW Fourth Street, Evansville, Indiana 47708, and the Company's telephone number is (812) 424-0921. The name of each director and executive officer of the Company is incorporated herein by reference to the section of the Company's Proxy Statement, filed with the United States Securities and Exchange Commission (the "SEC") on March 29, 2004 (the "2004 Proxy Statement"), captioned "Information Concerning Nominees, Directors and Executive Officers". The address of each of the directors and executive officers is 18 NW Fourth Street, Evansville, Indiana 47708. (b) Business and Background of Entities. Not applicable. (c) Business and Background of Natural Persons. (1) and (2) The name and business background of each director and executive officer of the Company is incorporated herein by reference to the section of the 2004 Proxy Statement captioned "Information Concerning Nominees, Directors and Executive Officers". The address of each of the directors and executive officers is 18 NW Fourth Street, Evansville, Indiana 47708. (3) During the last five years, neither the Company nor, to its knowledge, any of the directors or executive officers thereof has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (4) During the last five years, neither the Company nor, to its knowledge, any of the directors or executive officers of the Company was a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining such person from further violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of those laws. (5) All directors and executive officers of the Company are citizens of the United States of America. ITEM 4. TERMS OF THE TRANSACTION. (a) and (c) - (f) Material Terms; Different Terms; Appraisal Rights; Provisions for Unaffiliated Security Holders; and Eligibility for Listing or Trading. The information set forth in the Disclosure Document under the captions "Summary Term Sheet" and "Special Factors" is incorporated herein by reference. (f) Eligibility for Listing or Trading. Not Applicable. -2- ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. (a) - (c) Transactions; Significant Corporate Events; Negotiations or Contacts. The information set forth in the 2004 Proxy Statement under the caption "Certain Transactions and Other Matters Between Management and Fidelity" is incorporated herein by reference. (e) Agreements Involving the Subject Company's Securities. None. ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS. (b) and (c)(1) - (c)(8) Use of Securities Acquired and Plans. The information set forth in the Disclosure Document under the captions "Special Factors -- Going Private Transaction; Purposes" and "Special Factors -- Certain Effects of the Transaction" is incorporated herein by reference. ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS. (a) - (d) Purposes; Alternatives; Reasons; and Effects. The information set forth in the Disclosure Document under the captions "Summary Term Sheet -- Going Private Transaction; Purposes"; "Summary Term Sheet -- Reasons for the Transaction"; "Summary Term Sheet -- Effect on Market for Shares"; "Summary Term Sheet -- Federal Tax Consequences"; "Special Factors -- Going Private Transaction; Purposes"; "Special Factors -- Reasons for the Transaction"; and "Special Factors -- Certain Effects on the Transaction" is incorporated herein by reference. ITEM 8. FAIRNESS OF THE TRANSACTION. (a) - (e) Fairness; Factors Considered in Determining Fairness; Approval of Security Holders; Unaffiliated Representative; Approval of Directors. The information set forth in the Disclosure Document under the captions "Summary Term Sheet -- Fairness of the Transaction and Fairness Opinion"; "Summary Term Sheet -- Shareholder Approval"; "Special Factors -- Fairness of the Transaction"; and "Special Factors -- Fairness Opinion of Financial Advisor" is incorporated herein by reference. (f) Other Offers. Not Applicable. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS. (a) - (c) Reports; Opinion or Appraisal; Preparer and Summary of the Report, Opinion or Appraisal; Availability of Documents. The information set forth in the Disclosure Document under the captions "Summary Term Sheet -- Fairness of the Transaction and Fairness Opinion"; "Special Factors -- Fairness of the Transaction"; and "Special Factors -- Fairness Opinion of Financial Advisor" is incorporated herein by reference. The opinion of Professional Bank Services is attached as Annex A to the Disclosure Document and is incorporated herein by reference to the Disclosure Document. The opinion of Professional Bank Services will be made available at the Company's executive office during regular business hours for inspection and copying by any interested stockholder of the Company or representative who has been so designated in writing. ITEM 10. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) - (f) Sources of Funds; Conditions; Expenses; Borrowed Funds. The information set forth in -3- the Disclosure Document under the caption "Special Factors - Fees and Expenses" is incorporated herein by reference. ITEM 11. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) Securities Ownership. The information set forth in the 2004 Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Beneficial Ownership" is incorporated herein by reference. (b) Securities Transactions. None. ITEM 12. THE SOLICITATION OR RECOMMENDATION. (a) Intent to Tender or Vote in a Going-Private transaction. Not Applicable (e) Recommendation of Others. Not Applicable. ITEM 13. FINANCIAL INFORMATION. (a) Financial information. The Company's audited financial statements and unaudited interim financial statements required by Item 1010(a) of Regulation M-A are incorporated by reference into the Disclosure Document from the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and from the Company's Quarterly Reports on Form 10-Q for the quarter ended September 30, 2004. The information set forth under the caption "Selected Financial Data" in the Disclosure Document is incorporated herein by reference. (b) Pro forma information. The information set forth in the Disclosure Document under the caption "Summary Financial Information -- Summary Pro Forma Financial Information" is incorporated herein by reference. Information incorporated herein by reference to the Company's Annual Report on Form 10-K has been filed by the Company with the SEC as stated above. You may obtain copies of these reports, statements or other information that the Company files from the Public Reference Section of the SEC at 450 Fifth Street N.W., Washington D.C. 20549 at prescribed rates. Copies of such materials may also be accessed through the SEC's Internet site at www.sec.gov. ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED. (a) - (b) Solicitations or Recommendations; Employees or Corporate Assets. Not applicable. ITEM 15. ADDITIONAL INFORMATION. (b) Other material information. The information set forth in the Disclosure Document and each Appendix thereto is incorporated herein by reference. ITEM 16. EXHIBITS. (a) The Disclosure Document. -4- (b) Not applicable. (c) (1) The opinion of Professional Bank Services, dated November 9, 2004 attached as Annex A to the Disclosure Document. (c) (2) The Common Stock Fair Value Appraisal prepared by Professional Bank Services. * (d) Not applicable. (e) Not applicable. (f) Not applicable. (g) Not applicable. - -------- * Previously filed as Exhibit 16(a) to Amendment No. 1 to Schedule 13E-3 of the Company, filed with the SEC on November 17, 2004. -5- SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. By: /s/ Donald R. Neel ----------------------------- Title: President and CEO ----------------------------- Name: Donald R. Neel ----------------------------- Date: December 15, 2004 ----------------------------- -6- EX-99.3A 2 ex99-3a.txt Exhibit 99.3.a [Fidelity Federal Bancorp Letterhead] _______, 2004 Dear Shareholder, Fidelity Federal Bancorp intends to engage in a transaction that will result in termination of the registration of our common stock under the federal securities laws. This will eliminate the significant expense required to comply with the reporting and related requirements under these laws. Often referred to as a "going private transaction," the transaction is a reverse split of our common stock whereby each 30,000 shares of our common stock will be converted to one share of our common stock, and holders of fractional shares would be entitled to receive cash in lieu of fractional interests an amount equal to $1.85 per share for each pre-split share that becomes a fractional interest. Shareholders owning less than 30,000 shares will no longer be shareholders of the Company. The $1.85 per share price represents the fair value for a share of our common stock determined by Professional Bank Services, our financial advisor. Following the reverse stock split, the Company will effect a 2,500 for 1 forward stock split for those shareholders who, following the reverse stock split, continue to hold at least one whole share of Company common stock. After careful consideration, the Board of Directors has concluded that the costs associated with being a "public" company are not justified by the benefits. The Board has reviewed the proposed transaction and considered its fairness to unaffiliated stockholders who hold fewer than 30,000 shares as well as those stockholders holding 30,000 or more shares. The Board also received a fairness opinion from its financial advisor with regard to the per share cash amount to be paid to the unaffiliated stockholders. After careful consideration, your Board of Directors believes that transaction is in the best interests of the Company and its stockholders. Under Indiana law and the Articles of Incorporation of the Company, the Board of Directors of the Company may amend the Company's Articles of Incorporation to conduct both the reverse stock split and the forward stock split without the approval of the shareholders. Therefore, the Company is not seeking shareholder approval for these actions and no vote is sought in connection with these actions. Under Indiana law, shareholders are not entitled to dissenters' rights in connection with this type of going private transaction. The attached document contains details on the proposed transaction and we urge you to read it very carefully. Thank you for your continued support. Donald R. Neel President and Chief Executive Officer - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE TRANSACTION DESCRIBED HEREIN, PASSED UPON THE MERITS OR FAIRNESS OF THE PROPOSED TRANSACTION OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND A CRIMINAL OFFENSE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS DOCUMENT OR RELATED SCHEDULE 13E-3, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. - -------------------------------------------------------------------------------- ii TABLE OF CONTENTS SUMMARY TERM SHEET...........................................................1 The Company...............................................................1 Reverse Stock Split.......................................................1 Forward Stock Split.......................................................2 Purposes for the Transaction..............................................2 Fairness of the Transaction and Fairness Opinion..........................3 Potential Conflicts of Interest...........................................3 Effect on Market for Shares...............................................4 Shareholder Approval......................................................4 No Dissenters' Rights.....................................................4 Stock Certificates........................................................4 Federal Tax Consequences..................................................5 Reservation...............................................................5 SUMMARY FINANCIAL INFORMATION................................................5 Summary Historical Financial Information..................................5 Selected Per Share Financial Information..................................8 Market Prices and Dividend Information....................................9 Summary Pro Forma Financial Information...................................9 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS...................11 SPECIAL FACTORS.............................................................12 Background...............................................................12 Going Private Transaction; Effects.......................................14 Purposes of the Transaction..............................................15 Fairness of the Transaction..............................................17 Fairness Opinion of Financial Advisor....................................19 Potential Conflicts of Interest..........................................28 Certain Effects of the Transaction.......................................29 Warrants to Purchase Shares of Common Stock..............................31 Shareholder Approval.....................................................31 Dissenters' Rights.......................................................31 Conduct of Business Following Transaction................................31 Federal Tax Consequences.................................................32 Fees and Expenses........................................................33 Reservation..............................................................33 THE PARTIES.................................................................33 Fidelity Federal Bancorp.................................................33 Security Ownership of Management.........................................33 Officers and Directors...................................................34 Stock Plans of the Company...............................................34 Stock Buy Back Program...................................................34 WHERE YOU CAN FIND MORE INFORMATION.........................................34 DOCUMENTS INCORPORATED BY REFERENCE.........................................34 SUMMARY TERM SHEET ------------------ This summary term sheet highlights selected information from this disclosure document about the proposed transaction. This summary term sheet may not contain all of the information that is important to you. For a more complete description of the transaction, you should carefully read this disclosure document and all of its annexes. For your convenience, we have directed your attention to the location in this disclosure document where you can find a more complete discussion of each item listed below. As used in this disclosure document, "the Company", "we", "ours" and "us" refer to Fidelity Federal Bancorp, and the "transaction" refers to the reverse stock split and the forward stock split, together with the related cash payments to the shareholders in lieu of fractional shares of Company common stock. The reverse stock split would be considered a "going private" transaction as defined in Rule 13e-3 promulgated under the Securities Exchange Act of 1934 because it is intended to, and, if completed, will likely terminate the registration of our common stock under Section 12(g) of the Exchange Act and terminate our duty to file periodic reports with the Securities and Exchange Commission ("SEC"). In connection with the reverse stock split, we have filed a Rule 13e-3 Transaction Statement on Schedule 13e-3 with the SEC. The Company - ----------- Fidelity Federal Bancorp, incorporated in 1993 under the laws of the state of Indiana, is a registered savings and loan holding company. The Company has its principal executive offices at 18 N.W. Fourth Street, Evansville, Indiana 47708. The Company's telephone number is (812) 424-0921. The Company's savings bank subsidiary, United Fidelity Bank, fsb ("United") was organized in 1914 and is a federally-chartered stock savings bank located in Evansville, Indiana. See "The Parties -- Fidelity Federal Bancorp". Shares of the common stock of the Company are currently traded on the NASDAQ system under the trading symbol FFED. Reverse Stock Split - ------------------- The reverse split will provide for the conversion and reclassification of each 30,000 outstanding shares of common stock into one share of common stock in a reverse stock split. In the reverse stock split, the common stockholders will receive one share of common stock for each 30,000 shares they hold immediately prior to the effective date of the reverse stock split, and they will receive cash in lieu of any fractional shares to which they would otherwise be entitled. The cash payment for the common stock will be equal to $1.85 per pre-split share. Please see "Special Factors -- Going Private Transaction; Effects -The Reverse Stock Split" for a more detailed discussion. 1 Forward Stock Split - ------------------- Following the reverse stock split, the Company will effect a 2,500-for-1 forward stock split for those shareholders who, following the reverse stock split, continue to hold at least one whole share of Company common stock. The primary purpose of the forward stock split is to facilitate liquidity for those persons who remain shareholders following the reverse stock split. See "Special Factors - - Going Private Transaction; Effects - The Forward Stock Split" for a more detailed discussion. Effects of Reverse Split - ------------------------ o The reverse split would reduce the number of holders of the common stock of the Company to less than 300 and enable the Company to elect to terminate the registration of its common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934. o As a result of the transaction, the common stock will no longer be listed or traded on the NASDAQ system and it is expected that any trading in the Company's common stock will occur only in privately negotiated sales. The Company currently anticipates that it will use its best efforts to cause its common stock to be listed on the OTC Bulletin Board, although there can be no assurance that it will do so. o Going private will significantly change the public disclosures of the Company. Purposes for the Transaction The principal purposes of, and our reasons for, effecting the reverse stock split are: o to reduce the number of our stockholders of record to fewer then 300, which will enable us to terminate the registration of our common stock under the Exchange Act. This will mean that our duty to file periodic reports with the SEC will be terminated, and we will no longer be classified as an SEC reporting company; o the cost savings of approximately $290,000 per year that we expect to realize in the future as a result of the deregistration of our common stock, along with not having to comply with most of the provisions of the Sarbanes-Oxley Act of 2002; o management's belief that it is necessary to realize every opportunity to reduce overhead and focus our resources on achieving maximum profitability and value of our stock; o the additional savings in terms of management's and employees' time that will no longer be spent preparing the periodic reports required of publicly-traded companies under the Exchange Act and managing stockholder relations and communications; and 2 o the fact that we have not realized many of the benefits normally presumed to result from being a publicly traded company (such as the development or existence of an active trading market for and liquidity of our common stock, enhanced corporate image, and the ability to use Company stock to attract, retain and incentivize employees) to the very limited liquidity of our common stock. See "Special Factors -Purposes of the Transaction". Fairness of the Transaction and Fairness Opinion The Board of Directors of the Company believes that the transaction is fair from a financial point of view to the unaffiliated shareholders of the Company. The Company has received a fairness opinion from Professional Bank Services, its financial adviser, that the cash consideration to be received by the shareholders who are paid cash for their fractional shares of Company common stock following the reverse stock split and following the forward stock split is fair to such shareholders as well as the remaining unaffiliated shareholders from a financial point of view. The fairness opinion is attached as Annex A to this disclosure document and we encourage you to read the opinion carefully in its entirety. The 1 for 30,000 reverse stock split ratio was selected by the Board of Directors of the Company by calculating the highest ratio that could be used to reduce the Company's shareholders to less than 300. The Board of Directors believes that in order to maximize the cost savings value of the transaction to the Company, the ratio selected should be as high as possible, while still ensuring that the Company will be able to achieve its stated purpose of the transaction. The Company has not asked the shareholders to vote on the transaction. Under Indiana law, the Board of Directors of the Company may amend the Articles of Incorporation of the Company to effect both the reverse stock split and the forward stock split without the approval of the shareholders. Because of such specific authorization in the Indiana Code, the Board of Directors does not believe that the lack of a vote affects the fairness of the transaction to either the shareholders who are cashed out following the reverse stock split or who remain as unaffiliated shareholders. See "Special Factors -- Fairness of the Transaction" and "Special Factors -- Fairness Opinion". The full text of the Fairness Opinion of Professional Bank Services is available for inspection and copying at the principal executive offices of the Company at 18 NW Fourth Street, Evansville, Indiana 47708 during regular business hours by any shareholder of the Company or any representative of any such shareholder who has been so designated in writing. Potential Conflicts of Interest The executive officers and Directors of the Company may have interests in the transaction that are different from your interest as a shareholder, or relationships that may present conflicts of interest, including the following: o as of August 31, 2004, all of the members of the Board of Directors and all of the executive officers of the Company held of record 73.1%, on a fully diluted basis, or more shares 3 of the common stock of the Company; o each member of the Board of Directors and all of the executive officers hold options to purchase the common stock of the Company which will, if unexercised, continue to be outstanding following the going private transaction, subject to adjustment; and o as a result of the transaction, those shareholders who own 30,000 or more shares of common stock of the Company at the effective time of the amendment to the Articles of Incorporation effecting the reverse stock split, including certain of the Directors and executive officers of the Company, will increase their percentage ownership interest as a result of the transaction. See "Special Factors -- Potential Conflicts of Interest"; "Special Factors -- Employee Stock Options" and "The Parties -- Security Ownership of Management". Effect on Market for Shares The common stock of the Company is currently traded on the NASDAQ system. We anticipate that following the transaction the common stock will be delisted from the NASDAQ system. This delisting, together with the reduction in public information concerning the Company as a result of its no longer being required to file reports under the Securities Exchange Act of 1934, will reduce the liquidity of the common stock. The Company currently anticipates that it will use its best efforts to cause its common stock to trade on the OTC Bulletin Board, although there can be no assurance that it will do so. See "Special Factors -- Certain Effects of the Transaction". Shareholder Approval The shareholders are not being asked to vote in connection with this transaction. Pursuant to Section 23-1-38-2 of the Indiana Code, shareholder approval is not required for this type of going private transaction or for the amendments to the Articles of Incorporation of the Company and no vote of the shareholders is being sought. See "Special Factors -- Shareholder Approval". No Dissenters' Rights Under Indiana law, shareholders are not entitled to dissenters' rights in connection with this type of going private transaction. See "Special Factors -- Dissenters' Rights". Stock Certificates You should not send your stock certificates to the Company now. Once the transaction is completed, we will send instructions on how to receive any cash payments you may be entitled to receive. 4 Federal Tax Consequences The Company believes that there will be no material federal tax consequences to you if you continue to be a shareholder of the Company and do not receive cash for fractional shares following the consummation of the transaction. Except for cash received, your basis in the shares you currently hold will carry forward as your basis in the new shares you will receive after the forward stock split. The Company believes that, if you receive cash in exchange for fractions of shares of common stock following the reverse stock split, the transaction will be treated as a taxable transaction for United States federal income tax purposes. Generally shareholders receiving cash in the transaction will recognize a gain or loss for United States federal income tax purposes based on the difference between the tax basis of the shares of common stock held immediately prior to the effective time of the reverse stock split and $1.85. If shares of the common stock of the Company are held by a shareholder as capital assets, gain or loss recognized by the shareholder will be capital gain or loss, and will be long-term capital gain or loss if the shareholder's holding period for the shares of common stock exceeds twelve months. Under present law, long-term capital gains recognized by an individual shareholder will generally be taxed at a maximum marginal federal tax rate of 15%, and long-term capital gains recognized by a corporate shareholder will be taxed at a maximum marginal federal tax rate of 35%. In addition, under present law, the ability to use capital losses to offset ordinary income is generally limited for shareholders that are individuals to the amount of capital gains recognized during a tax year plus $3,000. Tax matters are complicated and the tax consequences of the merger to each shareholder will depend on the facts of that shareholder's situation. You are urged to consult your tax advisor for a full understanding of the tax consequences of the transaction to you. See "Special Factors -- Federal Tax Consequences". Reservation The Company reserves the right to abandon the transaction any time before the filing of the necessary amendment to the Articles of Incorporation with the Indiana Secretary of State. The Company also reserves the right to abandon or delay the transaction for any reason if the Board of Directors determines that such action would be in the best interest of the Company. The Company may, for example, abandon or delay the transaction if there is a material change in the condition of the Company or if the Board of Directors perceives that there has been a material change in the benefits or risks associated with the transaction. SUMMARY FINANCIAL INFORMATION ----------------------------- Summary Historical Financial Information - ---------------------------------------- The following summary of historical consolidated financial data was derived from 5 the Company's audited consolidated financial statements as of and for each of the years ended December 31, 2002 and December 31, 2003 and from the Company's unaudited interim consolidated financial statements for the three and nine months ended September 30, 2004. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004 or any other interim period. This financial information is only a summary and should be read in conjunction with the audited consolidated financial statements of the Company and the other financial information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, each filed by the Company with the Securities and Exchange Commission ("SEC"), which information is incorporated by reference into this disclosure document. See "Where You Can Find More Information" and "Documents Incorporated by Reference". 6
(Dollars in thousands, except share and per share data) Selected Financial Data Qtr. End YTD December 31, December 31, December 31, December 31, Six Months as of: September 30, September 30, 2003 2002 2001 2000 Ended December 2004 2004 31, 1999 Total Assets $201,842 $175,390 $132,290 $159,659 $166,466 $171,457 Interest-bearing deposits 1,296 1,263 2,369 14,605 14,718 22.911 Investment securities 62,724 52,208 34,912 18,074 21,001 24,305 available for sale Loans, net 117,102 100,437 73,087 104,432 107,842 96,919 Deposits 131,615 120,680 106,791 120,155 126,944 135.016 Borrowings 16,317 8,077 10,586 12,317 13,939 14,465 Federal Home Loan Bank 36,000 31,550 3,000 12,333 9,903 9,039 advances Stockholders' equity 16,171 13,367 9,588 11,895 8,775 5,427 Selected Operations Data for the Year Ended: Interest income $2,189 $6,280 $6,650 $9,034 $11,455 $12,100 $6,019 Interest expense 998 2,956 3,827 6,022 8,501 8,457 4,268 Net interest income 1,191 3,324 2,823 3,012 2,954 3,643 1,751 Provision for loan losses 134 343 13 (360) 1,349 670 1,345 Net interest income after provision for loan losses 1,057 2,981 2,810 3,372 1,605 2,973 406 Non-interest income 579 1,940 3,878 3,507 3,933 1,816 1,001 N on-interest expense 1,523 4,712 6,694 9,927 5,698 7,314 5,148 Income (loss) from continuing operations 113 209 (6) (3,048) (160) (2,525) (3,741) before tax Income tax expense (8) (87) (220) (641) (384) (1,369) (1,671) (benefit) Income (loss) from continuing operations 121 296 214 (2,407) 224 (1,156) (2,070) Loss from discontinued __ __ __ operations before tax (1,537) Income tax benefit __ __ __ 451 Los from discontinued operations __ __ __ (1,988) Net income (loss) $121 $296 $214 $(4,395) $224 $(1,156) $(2,070) Selected Financial Ratios Return on average assets 0.24 0.20 0.14% (2.75)% 0.14% (0.71)% (2.41)% Return on stockholders' 3.07 2.65 1.69 (36.82) 2.18 (16.14) (51.37) equity Net Interest margin 2.60 2.52 2.15 2.18 2.03 2.49 2.24 Net interest spread 2.51 2.44 2.11 2.23 2.12 2.33 2.00 Tangible equity to assets 8.01 6.87 8.52 8.48 8.42 6.78 at year-end Allowance for loan losses 0.73 0.73 1.13 2.01 1.75 2.04 to loans Allowance for loan losses 86.71 49.33 91.48 55.90 222.27 179.96 to non-performing loans Dividend payout ratio N/A N/A N/A N/A N/A N/A N/A
7 Selected Per Share Financial Information - ---------------------------------------- The following table sets forth selected historical per share financial information for the Company. The information presented below is derived from the consolidated historical financial statements of the Company, including the related notes thereto. You should read this table in conjunction with the audited consolidated financial statements of the Company and the other financial information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, each filed by the Company with the Securities and Exchange Commission ("SEC"), which information is incorporated by reference into this disclosure document. See "Where You Can Find More Information" and "Documents Incorporated by Reference".
Per Share Data YTD December 31, December 31, December 31, December 31, Six Months September 30, 2004 2003 2002 2001 2000 Ended December 31 1999 Basic net income (loss) from continuing $0.03 $0.02 ($0.39) $0.14 ($0.29) $ (0.66) operations Basic net loss from discontinued operations (0.32) Basic net income (loss) 0.03 0.02 (0.71) 0.04 (0.29) (0.66) Diluted net income (loss) from continuing 0.03 0.02 (0.39) 0.04 (0.29) (0.66) operations Diluted net loss from discontinued operations (0.32) Diluted net income 0.03 0.02 (0.71) 0.04 (0.29) (0.66) (loss) Cash dividends declared Book value at year-end 1.39 1.42 1.99 1.90 1.72 Closing market price (bid) at year- end 1.62 1.47 2.30 1.31 1.25 Number of average common and common 10,322,140 8,932,084 6,183,269 5,146,726 4,057,168 3,147,662 equivalent
8 Market Prices and Dividend Information - -------------------------------------- Shares of the common stock of the Company are currently traded on the NASDAQ system under the trading symbol "FFED". The table below sets forth, for the quarters indicated, the high and low bid prices as quoted on the NASDAQ system, based on published financial sources, and the dividends paid. These quotations reflect inter-dealer prices without mark-up, mark-down or commission and may not represent actual transactions. Period High Low ------ ---- --- 2004 First Quarter $2.11 $1.55 Second Quarter 2.05 1.37 Third Quarter 1.77 1.41 2003 First Quarter 1.75 1.21 Second Quarter 1.53 1.12 Third Quarter 1.75 1.25 Fourth Quarter 1.88 1.50 2002 First Quarter 3.15 2.30 Second Quarter 2.95 2.15 Third Quarter 2.50 1.75 Fourth Quarter 2.15 1.30 The Company has not paid any cash dividends on its common stock in 2004 and did not pay any cash dividends on its common stock in 2003 or 2002. The Company's dividend policy is to pay cash or distribute stock dividends when the Board of Directors deems it to be appropriate, taking into account the Company's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. The Company does not anticipate paying any cash dividends in the foreseeable future. Summary Pro Forma Financial Information - --------------------------------------- The following unaudited pro forma financial data assumes the transaction was completed September 30, 2004. We have included the following selected unaudited pro forma financial data solely for purposes of illustration. The pro forma financial data does not necessarily indicate what the operating results or financial position would have been if the transaction had been completed on September 30, 2004. Furthermore, this data does not necessarily indicate what the future operating results or financial position of the Company will be following the transaction. The unaudited pro forma statement of operations data includes adjustments to reflect assumed cost savings and other operational efficiencies that management expects to realize as a result of the transaction and certain future transaction related expenses. Although management believes the amount of the projected cost savings and other operational efficiencies are reasonable, there can be no assurance that the Company will actually recognize these cost savings and operational efficiencies. 9 If the transaction had been completed on September 30, 2004, the effects would be as follows: Fidelity Federal Bancorp and Subsidiaries PROFORMA CONSOLIDATED BALANCE SHEET (In thousands, except share date) (Unaudited)
September 30, Proforma 2004 September 30, 2004 Assets Cash and cash equivalents 2,278 2,243 Investment securities available for sale 62,724 62,724 Loans held for sale 10,500 10,500 Loans, net of allowance for loan losses of $783 and $737 106,602 106,602 Federal Home Loan Bank of Indianapolis stock 3,581 3,581 Premises and equipment, Interest receivable and other assets 16,157 16,157 -------- -------- Total assets 201,842 201,807 ======== ======== Liabilities Deposits 131,615 131,615 Federal funds purchased 8,950 8,950 Federal Home Loan Bank advances 36,000 36,000 Borrowings 7,367 9,367 Other liabilities 1,739 1,739 -------- -------- Total liabilities 185,671 187,671 Stockholders' Equity Preferred stock, no par or stated value Authorized and unissued - 5,000,000 shares Common stock, $1 stated value Authorized - 15,000,000 shares Issued and outstanding - 10,999,871 and 825,000 shares 11,000 825 Additional paid-in capital 17,728 25,868 Stock warrants 261 261 Retained earnings (12,643) (12,643) Accumulated other comprehensive loss (175) (175) -------- -------- Total stockholders' equity 16,171 14,136 Total liabilities and stockholders' equity 201,842 201,807 ======== ========
Fidelity Federal Bancorp and Subsidiaries PROFORMA CONSOLIDATED INCOME STATEMENT (In thousands, except share date) (Unaudited
Proforma Nine Months Ended Nine Months Ended September 30, 2004 September 30, 2004 Interest Income Loans receivable 4,562 4,562 Investment securities-taxable 1,535 1,535 Other interest income 183 183 ----------- ----------- Total interest income 6,280 6,280 ----------- ----------- Interest Expense Deposits 1,902 1,902 Federal funds purchased 60 60 Federal Home Loan Bank advances 600 600 Borrowings 394 394 ----------- ----------- Total interest expense 2,956 2,956 ----------- ----------- Net Interest Income 3,324 3,324 Provision for loan losses 343 343 ----------- ----------- Net Interest Income After Provision for Loan Losses 2,981 2,981 ----------- ----------- Other Income Service charges on deposit accounts 345 345 Net gains on loan sales 243 243 Letter of credit fees 369 369 Servicing fees on loans sold 251 251 Other income 732 732 ----------- ----------- Total other income 1,940 1,940 ----------- ----------- Other Expenses Salaries and employee benefits 2,361 2,361 Net occupancy expenses 270 270 Equipment expenses 279 279 Data processing fees 380 380 Legal and professional fees 199 103 Advertising 241 241 Insurance 209 173 Other expense 773 733 ----------- ----------- Total other expenses 4,712 4,540 ----------- ----------- Income (Loss) Before Income Tax 209 382 Income tax benefit (87) (22) ----------- ----------- Net Income (Loss) 296 404 =========== =========== Basic Earnings (Loss) Per Share 0.03 0.04 Diluted Earnings (Loss) Per Share 0.03 0.04 Average Common and Common Equivalent Shares Outstanding 10,322,140 10,322,140
10 Fidelity Bancorp Proforma Earning to Fixed Charges
Proforma Actual Nine Months Nine Months Year Ended Year Ended Year Ended Year Ended Year Ended Ended Ended December December December December December September 30, September 30, 31, 2003 31, 2002 31, 2001 31, 2000 31, 1999 2004 2004 Earnings to Fixed Charges 1.13 1.07 1.00 0.49 0.98 0.70 0.12 Income (loss) before taxes $ 382 $ 209 $ (6) $ (3,048) $ (160) $ (2,525) (3,741) Fixed Charges Other Interest 1,054 1,054 941 1,637 2,007 2,015 1,117 Deposit Interest 1,902 1,902 2,886 4,385 6,494 6,442 3,151 ---------------- --------------- ----------- ------------ ------------ ------------ ------------ $ 2,956 $ 2,956 $ 3,827 $ 6,022 $ 8,501 $ 8,457 $ 4,268 ================ =============== =========== ============ ============ ============ ============
Fidelity Federal Bancorp Proforma Book Value Per Share Proforma September 30, September 30, 2004 2004 ----------------------------------------------- Current Equity $ 16,171,000 $ 14,136,000 Current Outstanding Shares 10,999,871 9,875,675 Book Value Per Share $ 1.47 $ 1.43 Note: The current shares outstanding for the proforma were adjusted for the projected fractional shares only. The current outstanding shares were not adjusted for the splits to assist the reader for comparison purposes. CAUTIONARY STATEMENT REGARDING ------------------------------ FORWARD LOOKING STATEMENTS -------------------------- This document contains certain statements that are forward-looking statements. Those statements may include statements regarding the intent, belief or current expectations of the Company or its officers with respect to (i) the Company's strategic plans and ability to benefit from this transaction, (ii) the policies of the Company regarding capital expenditures, dividends, financing and other matters, (iii) industry trends affecting the Company's financial condition or 11 results of operations, (iv) the expenses associated with this transaction, and (v) the number of shareholders following the transaction. Readers of this document are cautioned that reliance on any forward-looking statement involves risks and uncertainties. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. There can be no assurance that the forward looking statements contained in this document will prove to be accurate. The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's objectives will be achieved. SPECIAL FACTORS --------------- Background - ---------- The Company has given thorough consideration to whether or not it should engage in a going private transaction and the Board of Directors considered the issue on a variety of occasions. In a meeting on October 22, 2003, upon the suggestion of Donald R. Neel, the Company's Chief Executive Officer, the Board of Directors determined that it should investigate the feasibility and advisability of engaging in a going private transaction. Information on a variety of going private options was distributed to the members of the Board of Directors at the October 23, 2003 meeting. Throughout 2004 the Board continued to discuss the potential benefits and costs of engaging in a going private transaction. Those discussions consistently focused on the cost of being a public filer and the potential savings to the Company if it were to go private. The Board of Directors has discussed the possibility of engaging in a going private transaction at every meeting of the Board since the 6 meetings of the Board of Directors since October 2003. At each Board meeting during the investigation period, the Board reviewed information provided by the Chief Executive Officer and Chief Financial Officer of the Company, including potential cost savings, analyses of cash required to pay out to fractional shareholders, number of shares and shareholders remaining under different split scenarios, and community perception. At the October 20, 2004 meeting, the Board appointed a committee of independent directors to review information presented to date. In addition, this committee was charged with reviewing the draft version of the Common Stock Fair Value Appraisal prepared by Professional Bank Services and making a recommendation to the full Board regarding the feasibility of completing a going-private transaction. The committee was comprised of Barry A. Schnakenburg, Paul E. Becker and Michael A. Elliott, who have each been determined by the Company to be "independent," as that term is defined under the NASDAQ listing standards. The Board of Directors considered other methods of going private, such as a sale, merger or tender offer, but determined that the reverse stock split provided the most certainty for the Company in achieving its stated goal relative to the cost required to implement the plan. Ultimately, the Company has decided to engage in a going private transaction for a number of reasons, foremost of which is to reduce the corporate costs associated with being a "reporting company" under the Securities Exchange Act of 1934. On November 9, 2004, the committee of independent directors discussed the draft version of the 12 Common Stock Fair Value Appraisal with Professional Bank Services. In that discussion, Professional Bank Services explained the basis for its conclusion that the transaction was fair to the shareholders who will be cashed out in the reverse stock split and to those who remain as unaffiliated shareholders. On November 10, 2004, the Board of Directors met to further discuss the Company's various strategic alternatives. At this meeting, the Board reviewed a report prepared by the committee of independent directors recommending that the Company engage in a going private transaction and together with such other information as it deemed relevant and material, determined that it would be in the best interests of the Company and its stockholders to take steps to eliminate the expenses that the Company currently incurs as an SEC reporting company. Professional Bank Service discussed the Common Stock Fair Value Appraisal with the Board of Directors at this meeting. In making its determination to proceed with the reverse stock split, the Board of Directors considered other going private alternatives as well as remaining an SEC reporting company. As discussed below, the Board rejected the other alternatives to the reverse stock split as well as simply remaining an SEC reporting company. For the reasons discussed below, the Board determined that providing liquidity to some unaffiliated stockholders was fair to all the stockholders considering the benefits to the Company of eliminating the expenses incurred through being an SEC reporting company and relieving management of the time necessary to meet regulatory responsibilities under federal securities laws. The alternatives the Board considered were: o Issuer Tender Offer. The Board considered an issuer tender offer to repurchase shares of our outstanding common stock. The results of an issuer tender offer would be unpredictable, however, due to its voluntary nature; thus, the Board was uncertain as to whether this alternative would result in a sufficient number of shares being tendered. Moreover, federal regulations impose rules regarding the treatment of stockholders in a tender offer, including pro-rata acceptance of offers from stockholders, which make it difficult to ensure that we would be able to significantly reduce the number of stockholders of record. As a result, the Board rejected this alternative. o Open Market Purchase Program. The Board considered going private by means of an open market purchasing program. The Board rejected an open market purchasing program because it would be highly unlikely that shares of common stock could be acquired by the Company from a sufficient number of holders to accomplish the going private objective in light of the fact that there is no active trading market for our common stock. o Maintaining the Status Quo. The Board considered maintaining the status quo. In that case, we would continue to incur the expenses of being an SEC reporting company without, in the opinion of the Board, the commensurate benefits. Thus, the Board considered maintaining the status quo not to be in the best interests of the Company and its stockholders and rejected this alternative. 13 o Sale of the Company. The Board did not consider selling the Company to be an appropriate alternative to a going private transaction. The Company has net operating loss carryforwards and tax credit carryforwards resulting in a deferred tax asset of approximately $6.2 million. These carryforwards would be virtually useless to a non-affiliated purchaser, and would be subtracted from equity of $16.2 million to determine by an acquirer to determine a value. Thus, net equity would be approximately $10 million, or approximately 38% less than GAAP equity. In addition to financial considerations noted above, the Board, as permitted under Indiana law, considered other factors such as the economic effect that a sale would have on depositors, employees, loan and other customers and creditors and the community in which the Company is located. The Board believes that a going private transaction will reduce the Company's expenses and allow management and the Board to focus its attention on activities which enhance shareholder value. At the November 10, 2004 meeting, the Board received the advice from legal counsel and management on the various matters discussed. After much discussion, the Board (a) acknowledged the fairness opinion by Professional Bank Services with respect to the consideration to be paid to stockholders as a result of the reverse stock split, and (b) instructed management to work with legal counsel to prepare the necessary filings and disclosure documents to effect the reverse stock split. During the discussions of the reverse stock split, Bruce Cordingley, Philip Stoffregen and Gerald Pedigo, who are each a Director of the Company, offered to cause an entity controlled by them to loan the money necessary to purchase the fractional shares of stock resulting from the reverse stock split to the Company. Messrs. Cordingley, Stoffregen and Pedigo participated in discussions about the transaction and the proposed loan but abstained form voting on the loan. The Company ultimately decided not to borrow the money necessary to purchase the fractional shares in the transaction from an entity controlled by Messrs. Cordingley, Stoffregen and Pedigo. Going Private Transaction; Effects - ---------------------------------- The Company intends to engage in a going private transaction which will reduce the number of holders of the common stock, no par value of the Company to less than 300 and enable the Company to elect to terminate the registration of its common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934. As of August 31, 2004, there were 10,999,871 shares of the common stock of the Company issued and outstanding, held by approximately 482 shareholders. As a result of the reverse stock split, the common stock will no longer be eligible for listing and trading on the NASDAQ system. The Company anticipates that it will attempt to cause its common stock to be quoted on the OTC Bulletin Board, although there is no assurance that the Company will cause this to occur. It also is possible that trading in the Company's common stock may only occur in privately negotiated transactions. Following the termination of the registration of the Company's common stock the Company will no longer be subject to certain provisions of the Securities Exchange Act of 1934. In particular, the Company's obligations to publicly file annual and quarterly reports will cease. The rights of the shareholders under 14 Indiana law to receive reports or to inspect and make extracts from the corporate books and records will be unaffected by the transaction. In order to accomplish the going private transaction, and to reduce the number of shareholders to less than 300, there will be a 1-for-30,000 reverse stock split of the common shares. Those shareholders who, immediately following the reverse stock split, would hold only a fraction of a share of Company common stock will be paid an amount, in cash, equal to $1.85 for each pre-split share and will no longer be shareholders of the Company. The amendment to the Articles of Incorporation will decrease the authorized capital stock from 15,000,000 shares to 5,000,000 shares. The shares of common stock acquired by the Company as a result of the reverse stock split will be retired, which will reduce the number of outstanding shares. Following the reverse stock split, the Company will conduct a 2,500 for 1 forward stock split for those shareholders who, immediately following the reverse stock split, continue to hold at least one (1) whole share of Company common stock. The purpose of the forward stock split is to facilitate liquidity for the remaining shareholders. The officers and directors of the Company at the effective time of the amendment to the Articles of Incorporation effecting the reverse stock split and the forward stock split will continue to serve as the officers and directors of the Company immediately after the transaction is complete. Because (1) the price to be paid in lieu of fractional shares to holders of fewer than 30,000 shares of common stock will be $1.85 per share, (2) the number of shares of common stock expected to be cashed out as a result of the reverse stock split is estimated to be approximately $2.0 million, (3) the total cost to us, including expenses, of effecting the reverse stock split is expected to be approximately $45,000, and (4) at September 30, 2004, aggregate stockholders' equity in the Company was approximately $16.2 million, or $1.47 per share, we expect that, as a result of the reverse stock split, the book value per share of common stock will be reduced to approximately $1.43 per share (pre-split) on a pro forma basis. However, it is important to note that book value is an accounting methodology based on the historical cost of our assets, and therefore does not necessarily reflect the current value of the Company. Purposes of the Transaction - --------------------------- Purposes of Going Private ------------------------- The primary purpose of the reverse stock split is to eliminate the expenses and management's time and effort related to our disclosure and reporting requirements under the federal securities laws and related stockholder servicing expense associated with being an SEC reporting company. If approved, the reverse stock split will eliminate the expenses we incur as an SEC reporting company. The reverse stock split also will enable our management and employees to devote more time and effort to improving our operations by eliminating the time spent by them in preparing periodic reports and managing stockholder relations. 15 Because our common stock is registered under Section 12 of the Exchange Act, we are required to comply with the disclosure and reporting requirements under the Exchange Act, as well as new requirements of the Sarbanes-Oxley Act of 2002. The cost of complying with these requirements is expected to be substantial, representing an estimated annual cost to us in the future of approximately $290,000 per year, including legal and accounting fees, printing, postage, data entry, stock transfer and other administrative expenses. In going private, we expect to save most of those costs. In addition to the direct costs we incur, our management and employees are required to devote substantial time and energy to completing the periodic reports required of publicly-traded companies under the Exchange Act. We believe these obligations have become more burdensome on small SEC reporting companies like ours as a result of the recent enactment of the Sarbanes-Oxley Act of 2002. In going private, we can eliminate many of those indirect costs. Thus, in addition to the approximately $290,000 in annual future direct savings we expect to realize following the reverse stock split, our officers and employees will be able to focus more of their time and effort on improving revenues and efficiencies. The cost savings figures set forth above are only estimates. The actual savings we realize from going private may be higher or lower than such estimates. Estimates of the annual savings to be realized if the reverse stock split is approved and consummated are based upon (i) the actual costs to us of the services and disbursements in each of the categories listed above that were reflected in our recent financial statements, and (ii) the allocation to each category of management's estimates of the portion of the expenses and disbursements in such category believed to be solely or primarily attributable to our publicly reporting company status. It is important to note that in addition to the annual estimated cost savings referenced above, the consummation of the reverse stock split and subsequent deregistration of our common stock would result in a significant one-time cost savings due to our not being subject to the new internal control audit requirements imposed by Section 404 of the Sarbanes-Oxley Act of 2002. Preparing ourselves to be able to comply with Section 404 of the Sarbanes-Oxley Act of 2002 would require significant expenditures during the next fiscal year, including costs related to computer software and hardware and fees to third parties for compliance planning, assessment, documentation and testing. Such costs are expected to exceed $75,000. We expect the actual cost savings of being a non-reporting private company to be much greater than simply eliminating the estimated historical out-of-pocket costs. As a result of recent corporate governance scandals, the legislative and litigation environment resulting from those scandals, the costs of being an SEC reporting company in general, and the costs of our remaining an SEC reporting company in particular, are expected to continue to increase in the near future. Moreover, new legislation, such as the Sarbanes-Oxley Act of 2002, will likely continue to have the effect of increasing the compliance burdens and potential liabilities of being an SEC reporting company. Any new legislation will likely continue to increase audit fees and other costs of compliance, such as securities counsel fees, increase outside director fees, increase in our director and officer insurance premiums and increase potential liability faced by our officers and directors. In some instances, management's cost savings expectations were based on information provided or upon verifiable assumptions. For example, our auditors have informed us, informally, that 16 there will be a reduction in auditing fees if we cease to be an SEC reporting company. In addition, the costs associated with retaining legal counsel to assist with complying with the Exchange Act reporting requirements will be eliminated if we no longer file reports with the SEC and are otherwise not required to comply with the disclosure requirements that apply to publicly reporting companies. In addition to the expenses mentioned above, the Board of Directors believes the Company receives little, if any, relative benefit from having its common stock registered under the Exchange Act. Such benefits include: o The ability to use Company stock to raise capital. Most capital has been raised from insiders, thus minimizing the benefits of having our stock registered on NASDAQ. o Public companies often endeavor to use Company stock to attract, retain and incentivize employees. Due to the limited liquidity of our common stock, we have found limited success in using common stock in such a manner. o An enhanced company image often accompanies publicly reporting company status. We have determined that due to our size and other factors, we have not enjoyed an appreciable enhancement in Company image as a result of our publicly reporting company status. We had approximately 482 common stockholders of record as of August 31, 2004. Of the record holders, approximately 458 owned less than 30,000 shares. In light of the foregoing, the Board of Directors and management believe the benefits associated with maintaining our status as an SEC reporting company are substantially outweighed by the costs, both financial and operational. The Board of Directors believes that it is in the best interests of the Company to eliminate the administrative burden and costs associated with maintaining our status as an SEC reporting company. Reasons for the Structure of the Transaction -------------------------------------------- The primary purpose of the reverse stock split is to reduce the number of holders of the Company's common stock to less than 300 to enable the Company to elect to terminate the registration of the common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934 and become a private company. The Board of Directors believes that a reverse stock split provides the most certainty for the Company in achieving this purpose. The primary purpose of the forward stock split is to establish a range for the stock price attractive to retail investors, thus potentially improving the liquidity of the stock. Fairness of the Transaction - --------------------------- The Board of Directors of the Company believes that the transaction is fair from a financial point of view to the unaffiliated shareholders of the Company. The Board of Directors has eight (8) members, seven (7) of whom are independent as that term is defined under the NASDAQ listing 17 standards. The transaction was approved unanimously by all of the members the Board of Directors. The Company has also received a fairness opinion from Professional Bank Services, its financial adviser, that the cash consideration to be received by the shareholders in lieu of fractional shares of stock is fair to such shareholders as well as the remaining unaffiliated shareholders from a financial point of view. The Board of Directors considered a number of factors in determining the fairness of the transaction prior to its approval of the proposed transaction, including the following: o Liquidity for Remaining Unaffiliated Shareholders. The Board of Directors recognizes the loss of liquidity and a readily available market for its common stock as one of its greatest concerns for approving the going private transaction. However, the Board of Directors believes that the loss of liquidity is offset by the gain to the Company in decreasing the Company's legal compliance costs and the other benefits of the transaction described herein. The Company currently anticipates that it will use its best efforts to cause its common stock to be listed on the OTC Bulletin Board, although there can be no assurance that it will do so. o Cashed Out Shareholders. One negative aspect of the transaction is the inability of those shareholders who are cashed out to maintain an interest in the future growth and progress of the Company with current holdings. The Board of Directors believes that this factor is outweighed by the ability of any shareholder who wishes to remain a shareholder to increase its holdings in the Company to at least 30,000 shares of Company common stock prior to the transaction by purchasing shares on the open market or otherwise acquiring additional shares of common stock prior to the effective date of the reverse stock split. o Significant Savings to the Company Will Benefit the Company and Remaining Unaffiliated Shareholders. Following the transaction, the Board of Directors believes that the Company and its remaining unaffiliated shareholders will benefit from the savings in direct and indirect operating costs to the Company resulting from the Company no longer being a public company. o Fairness of Price. The Board of Directors believes that the price received by the shareholders in lieu of fractional shares of common stock is fair from a financial point of view to the unaffiliated shareholders of the Company. The Board of Directors considered a number of factors in reaching this determination. In particular, the Board considered current market price, historical market price, and the various valuation methodologies provided by Professional Bank Services, as described below, including the net book value, going concern value, liquidation value, purchase prices paid in prior purchases. The Board of Directors and Professional Bank Services also considered the effect of the termination of the Supervisory Agreement with the Office of Thrift Supervision on the fairness of the Transaction. o No Shareholder Vote. Under Indiana law, the Board of Directors of the Company may amend the Articles of Incorporation of the Company to effect both the reverse stock split and the forward stock split without the approval of the shareholders. Because of such specific authorization in the Indiana Code, the Board of Directors does not believe that the lack of a vote affects the fairness of the transaction to either the shareholders who are cashed out or who 18 remain as unaffiliated shareholders. Accordingly, the Company has not asked the shareholders to vote on the transaction. Furthermore, any shareholder who wishes to remain a shareholder of the Company following the reverse stock split may increase their holdings of Company common stock to at least 30,000 shares prior to the effective time of the reverse stock split. Alternatively, any shareholder who wishes not to remain a shareholder following the reverse stock split may decrease their holdings of Company common stock to less than 30,000 shares prior to the effective time of the reverse stock split. o Fairness Opinion. The Board of Directors considered the various valuation methodologies provided by Professional Bank Services, its financial advisor, when determining the price to be paid in the transaction. Furthermore, Professional Bank Services has delivered a fairness opinion to the Board of Directors in which it concurs that $1.85 is fair to unaffiliated shareholders receiving cash consideration as well as the remaining unaffiliated shareholders from a financial point of view. See "Special Factors -- Fairness Opinion of Financial Advisor". o No Unaffiliated Representative. No unaffiliated representative was retained to act solely on behalf of the unaffiliated shareholders, although Professional Bank Services, an entity not affiliated with the Company, has been retained to issue an opinion on the fairness of the transaction from a financial point of view to those shareholders who are cashed out and who remain as unaffiliated shareholders following the reverse stock split. See "Special Factors - Fairness Opinion of Financial Advisor". o Determination of Reverse Split Ratio. The Board of Directors of the Company selected the 1 for 30,000 ratio for the reverse stock split by calculating the highest ratio that could be used to reliably reduce the shareholders to less than 300. The Board of Directors of the Company believes that in order to maximize the cost savings value of the transaction to the Company, the ratio should be as high as possible, while still ensuring that the Company would be able to achieve the stated purposes of the transaction. Based upon the information presented to the Board of Directors by management of the Company, the Board of Directors determined that a ratio of 1 for 30,000 is the highest ratio which allows the Company to reasonably believe that the reverse stock split will result in the Company having fewer than 300 shareholders. After considering all of these factors, the Board of Directors believes that the transaction and the process by which the transaction was approved are fair to those shareholders receiving cash consideration as well as the remaining unaffiliated shareholders. Fairness Opinion of Financial Advisor - ------------------------------------- Professional Bank Services, Inc. was engaged the Company to advise the Company's Board of Directors as to the fairness of the consideration, from a financial perspective, to be paid to those common shareholders receiving cash in a proposed 1 for 30,000 share reverse stock split and going private transaction and to those remaining unaffiliated shareholders. The scope of Professional Bank Services' authority was unlimited in this regard. Under the terms of the proposed Going Private Transaction, Company common shareholders owning less than 30,000 Company common shares will receive fair value in cash in exchange for their shares of Company common stock. In the proposed Going Private Transaction, the Company will pay $1.85 per 19 Company share to those shareholders owning less than 30,000 Company shares. The full text of the fairness opinion is attached as Annex A hereto. Professional Bank Services, Inc. is a bank consulting firm with offices located throughout the United States. As part of its investment banking business, PBS is regularly engaged in reviewing the fairness of financial institution corporate transactions from a financial perspective and in the valuation of financial institutions and other businesses and their securities in connection with mergers, acquisitions, estate settlements, and other transactions. Neither PBS nor any of its affiliates has a material financial interest in the Company. PBS was selected to advise the Company's Board of Directors based upon its familiarity with Indiana financial institutions and knowledge of the banking industry as a whole. PBS performed certain analyses described herein and presented the range of values for the Company, resulting from such analyses, to the Board of Directors of the Company in connection with its advice as to the fairness of the consideration to be paid. A Common Stock Fair Value Appraisal prepared by PBS was delivered to the Board of Directors of the Company prior to its November 9, 2004 meeting. The full text of the Fairness Opinion is attached as Annex A to this Disclosure Document and we encourage you to read the opinion in its entirety. The full text of the Fairness Opinion and the Common Stock Fair Value Appraisal is available for inspection and copying at the principal executive offices of the Company at 18 NW Fourth Street, Evansville, Indiana 47708 during the regular business hours of the Company by any interested shareholder of the Company or any representative of any such shareholder who has been so designated in writing. In arriving at its fairness opinion, PBS reviewed certain publicly available business and financial information relating to the Company. PBS considered certain financial and stock market data of the Company and compared that data with similar data for certain other publicly-held thrift holding companies. PBS also considered such other information, financial studies, analyses and investigations and financial, economic and market criteria that it deemed relevant. In connection with its review, PBS did not independently verify the foregoing information and relied on such information as being complete and accurate in all material respects. Financial forecasts prepared by PBS were based on assumptions believed by PBS to be reasonable and to reflect currently available information. PBS did not make an independent evaluation or appraisal of the assets of the Company. In arriving at its fairness opinion, PBS reviewed and analyzed the historical performance of the Company and its wholly owned subsidiary United Fidelity Bank, FSB, Evansville, Indiana (the "Thrift"), including among other things: (i) Audited consolidated financial statements for the Company for the years ending December 31, 2001, 2002 and 2003; (ii) all Forms 10-Q, 10-K and 8-K and other reports for 2003 and year to date 2004 filed by the Company with the Securities and Exchange Commission (the "SEC"); (iii) September 30, 2004 internal Company consolidated financial statements; (iv) the 2003 Strategic Plan of the Company's wholly owned subsidiary United Fidelity Bank, FSB (the "Thrift"); (v) the Thrift's 2004 budget; (vi) various most recent month end internal asset quality reports, loan production reports, cash flow and 20 Board of Directors earnings reports and funding and interest rate sensitivity reports of the Company and the Thrift; and (vii) the historical common stock trading activity of the Company. PBS reviewed statistical data regarding the loan portfolio, securities portfolio and other performance ratios and statistics. Financial projections were prepared and analyzed as well as other financial studies, analyses and investigations as deemed relevant for the purposes of the opinion. In review of the aforementioned information, PBS took into account its assessment of general market and financial conditions, its experience in other transactions, and its knowledge of the banking industry generally. In connection with rendering the fairness opinion and preparing its written and oral presentation to the Company's Board of Directors, PBS performed a variety of financial analyses, including those summarized herein. This summary does not purport to be a complete description of the analyses performed by PBS in this regard. A complete description of the analyses performed by PBS is contained in the Common Stock Fair Value Appraisal. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and therefore, such an opinion is not readily susceptible to summary description. Accordingly, notwithstanding the separate factors summarized below, PBS believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. In performing its analyses, PBS made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond the Company's control. The analyses performed by PBS are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. The material assumptions made by PBS regarding the industry, performance, macro and micro business and economic conditions, and the Company's business prospects include the following: o The macro economy will remain in a prolonged state of slow economic growth. o Investment returns in the US financial markets will remain similar to current levels. o Macro US interest rates and the shape of the yield curve will remain similar to current levels. o Due to stock market volatility, macro deposit growth will remain similar to that experienced over the 2003 to 2004 period. This trend is expected to continue into the foreseeable future. o Due to a lack of significant industry deposit growth and increasing competition between financial institutions, it is becoming increasingly difficult for financial institutions to generate true excess economic returns. o The Company has been unable to execute a consistent and profitable business plan. 21 o The Company has been unable to achieve the core deposit and asset base necessary to reach high levels of profitability. o Given the Company's historical low level of profitability and troubled operating history the potential benefit of being a public company is somewhat mitigated. o In addition, the Company is approximately 68% majority owned by a group of controlling shareholders who have indicated they would not support a proposal to sell the Company. This large controlling ownership interest also reduces the float and investor interest in the Company's common stock. o The cost burdens of remaining a registered company are significant and are expected to continue to escalate. o The potential cost savings from de-registering the Company's common shares will significantly increase the earnings per share and over time the book value per share and realizable investment value per share to those shareholders which retain their shares in the going private transaction. As part of forming its opinion as to the cash fair value of the Company's common shares and the fairness of the consideration to be paid from a financial perspective, PBS employed evaluation methodologies and techniques that were deemed appropriate considering the circumstances and purposes of the evaluation. In order to determine the fair value of a common stock in relation to the assets, earnings and equity of a company it requires a comprehensive analysis of the company, its markets, future growth prospects and the micro and macro economic environment in which it operates. The concept of fair value requires explicit utilization and analysis of valuation methods normally considered by analysts and the courts to determine fair value. The Transaction Value Method of valuing a share of common stock is determined by examining a limited number of transactions which are assumed to have occurred at arm's length. The Asset Value Method is based on adjusted value of net assets. The Adjusted Book Value Method evaluates prevailing market conditions for companies by comparing the market price to book value ratios of comparable publicly traded organizations to the subject company. The Investment Value Method relates investor's perception of comparable publicly traded organizations by comparing the market price to earnings per share of these organizations to the subject company. The Earnings Value Method relates value to the earnings capacity of the Company. In addition to the above valuation methodologies among others, PBS also considered control premiums in its determination of fair value. Transaction Value Method: The Transaction Value represents the price(s) at which shares of common stock in the Company have exchanged hands between a willing buyer and seller. As of November 9, 2004, the Company has 10,999,871 common shares outstanding. As of November 8, 2004 the Company's common shares closed trading on the NASDAQ at $1.71 per share. Over the last thirty business days ending on November 8, 2004, the Company had 98,900 of its common shares trade on NASDAQ with closing prices between $1.43 and $1.95 per common share. Over this period the average and median closing price of the Company's common shares 22 equals $1.59 and $1.57 per common share, respectively. Over the last thirty trading days the Company's average daily trading volume as reported on NASDAQ equals 3,297 shares and the weighted average closing price of the Company's common shares over this period equals $1.61. In addition, the median and average closing price of the Company's common shares since January 1, 2004 equals $1.70 and $1.74, respectively, and the weighted average closing price during this period equals $1.75 per common share. Further, after the close of the market on October 28, 2004, the Company announced the Office of Thrift Supervision ("OTS") had terminated the Supervisory Agreement between the Thrift and the OTS in its entirety. The Company's weighted average closing price since October 28, 2004 equals $1.69 per common share and its median closing price during this timeframe equals $1.70 per common share. Asset Value Method: PBS analyzed and reviewed the Company's balance sheet data as contained in the Company's internal September 30, 2004 unaudited financial statements and September 30, 2004 form 8-K filed by the Company with the SEC on October 14, 2004 to determine the amount of material adjustments required to the stockholders' equity of the Company based on differences between the market value of the Company's assets and their value reflected on the Company's financial statements. PBS determined that one adjustment was warranted. The only adjustment that PBS deemed warranted was a $4,300,000 downward adjustment for the Company's deferred tax asset related to the Company's net loss carryovers. The adjusted net asset value of the Company was determined to be $1.08 per share. Adjusted Book Value Method and Investment Value Method: PBS compiled a comparable peer group consisting of all non-mutual holding company thrifts headquartered throughout the United States traded on the NASDAQ, AMEX or NYSE. The selected comparable group consisted of thrifts which were not currently under agreement to be acquired, and had total consolidated total assets between $100 million and $350 million and a last twelve month ("LTM") core return on average assets (ROAA) between 0.0% and 1.0%. In addition, the selected thrifts were not headquartered in the states of California or Florida and for comparability purposes only institutions which like the Company have December fiscal year-ends were included in the peer group (the "Comparable Thrift Group"). Comparable Thrift Group - ----------------------- The following table provides summary analysis of the market price-to-book value per share multiple and price to annualized year-to-date core earnings per share multiple of the Comparable Thrift Group.
FIDELITY FEDERAL BANCORP COMPARABLE THRIFT GROUP (As of November 8, 2004) Price/ Price/ Ticker Company Name City State Book Core EPS - ---------------------------------------------------------------------------------------------------------------- AABC Access Anytime Bancorp, Inc. Albuquerque NM 1.04 X 16.32 X AMFC AMB Financial Corp. Munster IN 1.04 15.40 23 BRBI Blue River Bancshares, Inc. Shelbyville IN 1.12 88.00 ESBK Elmira Savings Bank, FSB Elmira NY 1.45 13.36 FBTC First BancTrust Corporation Paris IL 1.11 26.69 FFBI First Federal Bancshares, Inc. Colchester IL 1.28 37.13 FFHS First Franklin Corporation Cincinnati OH 1.39 45.23 GTPS Great American Bancorp, Inc. Champaign IL 1.08 14.83 GSLA GS Financial Corp. Metairie LA 0.74 27.75 HCFC Home City Financial Corporation Springfield OH 1.05 19.23 MCBF Monarch Community Bancorp, Inc. Coldwater MI 0.90 87.50 NEIB Northeast Indiana Bancorp, Inc. Huntington IN 1.19 19.29 SSFC South Street Financial Corp. Albemarle NC 1.13 35.96 STBI Sturgis Bancorp, Inc. Sturgis MI 1.41 26.00 UCBC Union Community Bancorp Crawfordsville IN 1.05 19.85 WEFC Wells Financial Corp. Wells MN 1.25 18.17 Median 1.12 22.93 - ----------------------------------------------------------------------------------------------------------------
Source: Financial information supplied by SNL Financial L.P. DataSource. Pricing as of November 8, 2004 The application of the above median multiples to the Company's September 30, 2004 book value and annualized year-to-date core earnings per share resulted in a value of $1.65 per common share under the Adjusted Book Value Method and $0.75 per share under the Investment Value Method. Earnings Value Method: As part of it's analysis to determine the fairness of the proposed going private transaction to those shareholders receiving cash as well as the remaining unaffiliated shareholders from a financial perspective PBS utilized an Earnings Method referenced in its opinion. The model assumes the Company will increase it's earnings over a five year period from $361,000 to $1,497,000 at which time an investor could sell shares at the Comparable Thrift Group current median multiple of core earnings per share of 22.93X. The following table demonstrates the financial projections prepared and utilized by PBS: 24
5 Year Summary Projected Data - ------------------------------------------------------------------------------------------------------------ Year Assets Net Income Dividends Equity - ------------------------------------------------------------------------------------------------------------ 1 $207,696 $415 $0 $16,586 2 222,234 556 0 17,142 3 237,791 832 0 17,974 4 254,436 1,145 0 19,119 5 272,247 1,497 0 20,617 - ------------------------------------------------------------------------------------------------------------
Financial Ratios - ------------------------------------------------------------------------------------------------------------ Year Return on Assets Return on Equity Equity/Assets - ------------------------------------------------------------------------------------------------------------ 1 0.20% 2.50% 7.99% 2 0.25 3.24 7.71 3 0.35 4.63 7.56 4 0.45 5.99 7.51 5 0.55 7.26 7.57 - ------------------------------------------------------------------------------------------------------------
PBS compared the resulting per share present value of $1.69 in the Earnings Method to a pro forma present value assuming 1,024,196 common shares were repurchased at a 4.80% cost of funds, which is the Company's current yield on earning assets, and realized cost savings generated from delisting will equal $290,000 per year pre-tax. Assuming an investor could sell Company shares at the same Comparable Thrift Group current median multiple of core earnings per share of 22.93X the resulting pro forma present value of the Company's remaining common shares equaled $2.05 per share. Based on the increase in earnings per share, book value per share over time, and increased present value per share of $2.05, PBS concluded that the going private transaction was fair to the remaining unaffiliated shareholders from a financial perspective. Acquisition Comparable Method: PBS also considered an Acquisition Comparable Method in its determination as to the fair value of the Company's common shares as well as in forming its opinion as to the fairness of the consideration to be paid in the proposed Going Private Transaction from a financial point of view. None of the transactions analyzed involved a Going Private Transaction similar to the Company's proposed transaction. All acquisition pricing usually contains some element of the synergistic effect of the combination of two companies. PBS is unaware of a method of completely isolating or excluding these effects from the overall price. To somewhat mitigate this concern, all of the acquirers contained in the Acquisition Comparable Group were new holding companies formed by investor groups for the purpose of acquiring the seller. These companies would typically be unable to realize the degree of cost savings and synergies available in most transactions where the acquirer is an existing financial institution. In PBS's opinion, it is the cost savings and synergies in operations that allow acquirers to pay a higher price than would otherwise be possible. In addition, PBS's analysis was limited to bank and thrift acquisition transactions which like the Company's proposed transaction were cash transactions. The analysis was also limited to acquisition transactions announced since June 30, 2001 when transaction accounting rules were changed. In addition, the analysis was further limited to transactions throughout the United States excluding California, Florida and 25 Texas in which the seller's assets were under $500 million (the "Comparable Acquisition Group"). PBS identified fifteen acquisition transactions that were most comparable to the Company's proposed Going Private Transaction. The median multiples of book value and earnings of the comparable acquisition transactions were 1.36 and 17.50, respectively. The application of these multiples to the Company resulted in $2.00 based on the multiple of book value and $0.57 based on the multiple of earnings. Summary of Methodologies: The following table presents a summary of the previously derived methodologies. - -------------------------------------------------------------------------- Value Per Share Multiple of Book - -------------------------------------------------------------------------- Transaction Value $1.71 1.16X Asset Value Method 1.08 0.73 Adjusted Book Value: Comparable Thrift Group 1.65 1.12 Investment Value: Comparable Thrift Group 0.75 0.51 Earnings Value: Short Term 1.69 1.15 Long Term 1.64 1.12 Acquisition Comparables: Multiple of Book Value 2.00 1.36 Multiple of Earnings 0.57 0.39 Average $1.39 0.94X Median $1.65 1.12X - -------------------------------------------------------------------------- The average and median of the above values equal $1.39 and $1.65, respectively, including the Asset Value Method and the Acquisition Comparable Method. The Asset Value Method is more of a liquidation value and while considered it was not included in PBS's opinion of value. In addition, due to the Company's poor earnings performance, the values derived utilizing comparative multiples of earnings produced ranges of value which were significantly below the book value or potential liquidation value of the Company, therefore while investors and acquirers will typically price an individual financial institution stock, or a financial institution as a whole, based on earnings and earnings growth potential PBS is of the opinion, and market reality dictates, the value of bank and thrift stocks will not typically decline to significantly below book value or liquidation value unless an institution is in eminent danger of failure. As previously discussed, all acquisition pricing usually contains some element of the synergistic effect of the combination of two companies. PBS is unaware of a method of completely isolating 26 or excluding these effects from the overall price. These cost savings and synergies in operations allow acquirers to pay a higher price then would otherwise be possible. It is PBS's opinion that the fair value of the Company, without the possibility of recognizing potential cost savings through employee lay-offs, branch closings and savings from consolidation of operations, would be less than the value indicated utilizing the price to book value multiple of the Acquisition Comparable Method. The values derived from the above market comparable methodologies assumed that the Company's operating attributes equaled the median of the Comparable Thrift Group and would also meet PBS's financial projections. In determining the fair value of the Company's common shares PBS also considered the following factors for difference in operating performance, dividends and other performance characteristics of the Company: o Premium to the Comparable Thrift Group Adjusted Book Value for lower capitalization. As of the most recently reported period the median of the Comparable Thrift Group's equity to asset ratio was 10.04% compared to the Company's equity to asset ratio of 8.01%. o Discount for financial performance below the Comparable Thrift Group. A discount on the Company's common shares could be justified due to its financial performance when compared to the Comparable Thrift Group. For example, the median core return on average equity for the Comparable Thrift Group year-to-date period equaled 5.18% compared to 2.27% for the Company. In addition, the Company's efficiency ratio over the first nine months of 2004 equals 90.32% which is higher than all the institutions in the Comparable Thrift Group and well above the median efficiency ratio of the Comparable Thrift Group of 75.41%. o Discount from the Community Thrift Group for a higher overall risk profile. A discount on the Company's common shares could be justified based on the overall risk characteristics of the Company as compared to the Comparable Thrift Group. In PBS's opinion the Company's overall risk profile is significantly above the Comparable Thrift Group. The Company's increasing reliance on non-core funding, below peer equity to asset ratio, significant exposure to indirect auto loans (which the Company discontinued originating in September 2004) and multi-family letters of credit coupled with a low level of earnings and high efficiency ratio increases the risks associated with the Company and its common stock as compared to the Comparable Thrift Group. o Discount from the Community Thrift Group for lack of payment of dividends. The Company currently does not pay cash dividends. On a year to date basis, the median Community Thrift Group dividend payout ratio equaled 50.70%. Based on the foregoing and all other factors deemed relevant and assuming accuracy and completeness of information provided by the Company, it was PBS's opinion as an independent appraiser that the fair value of the Company's common stock is $1.85 per common share taking into consideration potential control premiums for the Company and without the application of 27 any marketability discounts. In addition, it is PBS's opinion, as investment bankers that the $1.85 per common share to be paid to Company common shareholders owning less than 30,000 Company common shares under the terms of the proposed Going Private Transaction is fair to the those shareholders as well as to the remaining unaffiliated shareholders from a financial perspective. In forming its opinion as to the fairness of the $1.85 per share cash fair value to be paid to Company shareholders under the terms of the going private transaction, PBS, in addition to the factors described above, recognized the potentially positive impact of the Company's October 28, 2004 announcement of the termination of the Company's Supervisory Agreement with the Office of Thrift Supervision. It is PBS' opinion that the impact of the dissemination of this potentially positive information was absorbed by the markets on October 29, 2004 and November 1, 2004 when 17,600 shares and 20,400 shares, respectively, were reported traded on the NASDAQ. After the announcement of this information the Company's closing stock price increased from $1.50 on October 28, 2004 to $1.70 on November 1, 2004. In considering recent pricing and trading activity in the Company's stock PBS is of the opinion that utilizing any single days trading price or a single trade or a single day's intra-day high or low in a company's stock does not provide an accurate reflection of investor sentiment or true fundamental value or fair value. This is particularly true since the Company has only limited float and analyst coverage on its stock. However in its analysis PBS noted that the Company's November 8, 2004 closing price of $1.71 was above the weighted average closing price of the Company's common stock since it was released from its regulatory order as well as the 30 day and year-to-date median, average and weighted average closing prices. In addition, while the Company experienced a small number of trades in its common stock on November 5, 2004 and November 6, 2004 at prices above the $1.85 per share fair value determined by PBS, PBS is of the opinion that the relatively low trading volume on these days, coupled with the Company's restricted float in its common stock, does not provide an accurate reflection of the fair value of the Company's common shares particularly since the Company's share price declined again on November 8, 2004 to close at $1.71 per share. The Fairness Opinion is directed only to the question of whether the consideration to be received by the Company's shareholders owning less than 30,000 shares is fair from a financial perspective and does not constitute a recommendation to the Company to effect the transaction. No limitations were imposed on PBS regarding the scope of its investigation or otherwise by the Company Potential Conflicts of Interest - ------------------------------- The executive officers and Directors of the Company may have interests in the transaction that are different from the interests of the shareholders, or relationships that may present conflicts of interest, including the following: o as of August 31, 2004, all of the members of the Board of Directors and all of the executive officers of the Company held of record 73.1%, on a fully diluted basis, or more shares of the common stock of the Company; 28 o based upon current shareholdings, following the transaction, the beneficial ownership of certain of the Directors of the Company, including Bruce Cordingley, Gerald Pedigo and Phillip Stoffregen will increase; o each member of the Board of Directors and all of the executive officers hold options to purchase the common stock of the Company which will, if unexercised, continue to be outstanding following the going private transaction, subject to adjustment; o the Board of Directors considered the fact that each Director either was a shareholder or an option holder and concluded that such fact alone did not cause any one or more directors not to be a "disinterested director", as that term is defined under Indiana law, and thereby unable to consider and act upon the transaction in the best interests of the Company and its shareholders; and o as a result of the transaction, those shareholders who own 30,000 or more shares of common stock of the Company at the effective time of the amendment to the Articles of Incorporation effecting the reverse stock split, including the Directors and executive officers of the Company, will increase their percentage ownership interest as a result of the transaction. For example, the ownership percentage of the directors and executive officers as a group will increase from 73.1%, on a fully diluted basis, to approximately 76.4% as a result of the reduction of the number of shares of common stock outstanding by an estimated 1.1 million shares. Certain Effects of the Transaction - ---------------------------------- Impact on the Company --------------------- Following the transaction the Company will have less than 300 shareholders and will terminate the registration of its common stock and become a private company. The Company will no longer be public, and will no longer be subject to the reporting requirements of the Securities Exchange Act of 1934. Going private will significantly change the public disclosures of the Company pursuant to the Securities Exchange Act of 1934. The Company anticipates that following the transaction it will continue to operate as it has done prior to the transaction. The same officers and directors will continue in their roles as officers and directors, and the Company does not anticipate any significant corporate events in the near future. The Company anticipates that it will realize significant direct and indirect lost savings as a result of going private. Management estimates that this transaction will result in the retirement of approximately 1.1 million shares at a cost of $1.85 per share, based upon 10,999,871 shares outstanding immediately prior to the transaction. Including expenses for the transaction, the Company estimates that the total cost of the transaction to the Company will be approximately $2.08 million. The Company's shareholders' equity and cash balance will be reduced accordingly. Impact on Shareholders ---------------------- Shareholders holding less than 30,000 shares of common stock immediately prior to the effective time of the reverse stock split will cease to be shareholders of the Company. They will lose all 29 rights associated with being a shareholder of the Company, such as the rights to attend and vote at shareholder meetings and receive dividends and distributions. These shareholders will be paid, in cash, an amount equal to $1.85 for each pre-split share resulting in a fractional share. Such shareholders will be liable for any applicable taxes, but will not be required to pay brokerage fees. The Company will send a transmittal letter explaining to such shareholders how they can surrender their share certificates in exchange for cash payment. Shareholders holding 30,000 or more shares of common stock immediately prior to the effective time of the reverse stock split will continue to be shareholders of the Company, but may receive cash in lieu of amounts held in excess of 30,000 shares, but less than 60,000 shares. Shareholders who continue to be shareholders of the Company after the transaction will: o experience reduced liquidity of their shares of common stock. The common stock will no longer be traded on the NASDAQ system and it is expected that any trading in the Company's common stock will occur only in privately negotiated transactions or on the OTC Bulletin Board; and o not receive or have access to Company financial and other business information as they would if the Company were a public reporting company, although such shareholders will continue to have rights to receive certain records, financial and other information of the Company under Indiana law. Effect on Market for Shares --------------------------- The common stock of the Company is currently traded on the NASDAQ system. We anticipate that following the transaction the Company's common stock will be delisted from the NASDAQ system. This delisting, together with the reduction in public information concerning the Company as a result of its no longer being required to file reports under the Securities Exchange Act of 1934, will reduce the liquidity of the Company common stock. It is expected that any trading in the common stock of the Company after the transaction may only occur in privately negotiated sales. The Company currently anticipates that it will use its best efforts to cause its common stock to be listed on the OTC Bulletin Board, although there can be no assurance that it will do so. Employee and Director Stock Options ----------------------------------- The outstanding options to acquire shares of common stock of the Company held by employees and Directors of the Company will continue to be outstanding after the transaction. As of August 31, 2004, there were options outstanding to purchase 374,496 shares of the common stock of the Company. The options were granted to directors and employees of the Company as incentive compensation for services to the Company. Of those options, the Company expects 339,696 to be vested and exercisable as of the date of the transaction. Holders of options not exercised prior to the effective time of the amendment to the Articles of Incorporation effecting the reverse stock split will hold stock options in the Company as a private company with limited liquidity. When existing options are exercised, the exercise will cover underlying fractional shares of common 30 stock resulting from the reverse stock split, but we will not issue fractional shares upon exercise of an option. Instead, we will pay the optionee cash for any fractional shares in an amount equal to the difference between the exercise price of the option and the fair market value per share of the common stock as of the date of exercise as determined by the Board of Directors, multiplied by the fraction of a share represented by the option. Because any whole shares issued upon the exercise of options will not be registered under the Securities Act, optionees will be required to acquire such shares for investment purposes. They will benefit from any future appreciation in the value of the Company after the transaction and will assume the risk of any future downturns in the business of the Company after the transaction. Warrants to Purchase Shares of Common Stock - ------------------------------------------- The outstanding warrants to acquire shares of common stock of the Company will continue to be outstanding after the transaction. As of August 31, 2004, there were warrants outstanding to purchase 527,753 shares of the common stock of the Company. When existing warrants are exercised, the exercise will cover underlying fractional shares of common stock resulting from the reverse stock split, but we will not issue fractional shares upon exercise of a warrant. Instead, we will pay the holder of the warrant cash for any fractional shares in an amount equal to the difference between the exercise price of the warrant and the fair market value per share of the common stock as of the date of exercise as determined by the Board of Directors, multiplied by the fraction of a share represented by the warrant. Because any whole shares issued upon the exercise of warrants will not be registered under the Securities Act, holders of warrants will be required to acquire such shares for investment purposes. Shareholder Approval - -------------------- Pursuant to Section 23-1-38-2 of the Indiana Code, shareholder approval is not required for this type of going private transaction or for the amendments to the Articles of Incorporation of the Company and no vote of the shareholders is being sought. Dissenters' Rights - ------------------ Under Indiana law, shareholders are not entitled to dissenters' rights in connection with this type of going private transaction. No provisions have been made to grant shareholders access to counsel or appraisal services at the expense of the Company. Conduct of Business Following Transaction - ----------------------------------------- The primary purpose of the transaction is to reduce the number of shareholders to less than 300 to enable the Company to elect to terminate the registration of its common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934 and become a private company. Following the deregistration, the common stock will no longer be quoted on the NASDAQ system and it is expected that any trading in the Company's common stock will occur only in privately negotiated transactions. Furthermore, the transaction and deregistration would result in the Company no longer filing reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The Company anticipates no other material changes in the management or corporate structure of the Company. 31 Other than as described in this document, neither the Company nor its management has any plans or proposals to effect any extraordinary corporate transaction, such as a merger, reorganization or liquidation; to sell or transfer any material amount of its assets; to change its Board of Directors or management; to change materially its indebtedness or capitalization; or otherwise to effect any material change in its corporate structure or business. Federal Tax Consequences - ------------------------ The following is a discussion of certain of the material United States federal income tax consequences of the transaction to the shareholders of the Company who are citizens or residents of the United States or that are domestic corporations. The discussion below is for general information only and does not address all aspects of federal income taxation that may affect particular shareholders in light of their particular circumstances, that are generally assumed to be known by investors or that may affect shareholders subject to special treatment under federal income tax laws. The following discussion assumes that shares of the common stock of the Company are held as capital assets. In addition, no information is provided in this document with respect to the tax consequences of the transaction under foreign, state or local laws. The Company believes that there will be no material federal tax consequences for those shareholders who continue to be shareholders of the Company following the consummation of the transaction except for amounts received for fractional shares. Their basis in their current shares (except for post-split fractional shares) should carry forward as their basis in the new shares they will receive after the forward stock split. The Company believes that, for those shareholders who receive cash in exchange for fractions of shares of common stock following the reverse stock split, the transaction will be treated as a taxable transaction for federal income tax purposes. Generally shareholders receiving cash in the transaction will recognize a gain or loss for federal income tax purposes based on the difference between the cost basis of such shareholder in the shares of common stock held immediately prior to the effective time of the reverse stock split and the total amount received for the shares of common stock. If shares of the common stock of the Company are held by a shareholder as capital assets, gain or loss recognized by the shareholder will be capital gain or loss, and will be long-term capital gain or loss if the shareholder's holding period for the shares of common stock exceeds twelve months. Under present law, long-term capital gains recognized by an individual shareholder generally will be taxed at a maximum marginal federal tax rate of 15%, and long-term capital gains recognized by a corporate shareholder will be taxed at a maximum marginal federal tax rate of 35%. In addition, under present law, the ability to use capital losses to offset ordinary income is generally limited for shareholders that are individuals to the amount of capital gains recognized during a tax year plus $3,000. Tax matters are complicated and the tax consequences of the transaction to each shareholder will depend on the facts of that shareholder's situation. You are urged to consult your tax advisor for a full understanding of the tax consequences of the transaction to you. The foregoing summary of material federal income tax consequences of the transaction to shareholders of the Company is 32 based upon the Internal Revenue Code, applicable Treasury Regulations thereunder, rulings and pronouncements of the Internal Revenue Service and judicial decisions now in effect, all of which are subject to change at any time by legislative, judicial or administrative action. Any such changes may be applied retroactively in a manner that could adversely affect such shareholders and could affect the continuing validity of this summary. This summary does not purport to discuss all aspects of United States federal income taxation that may be relevant to each shareholder in light of their specific circumstances, or to certain types of shareholders subject to special treatment under United States federal income tax laws (for example, foreign persons, dealers in securities, banks and other financial institutions and tax-exempt organizations). No ruling from the IRS has been obtained (or will be sought) as to the United States federal income tax consequences of the transaction. Fees and Expenses - ----------------- Management estimates approximately $2.0 million will be required to pay for the fractional shares of the common stock exchanged for cash in the transaction. It is expected that the actual amount paid to acquire the fractional shares will differ from this estimated amount due to daily changes in the number of the Company's shareholders who hold less than 30,000 shares of common stock. In addition, expenses are projected to amount to $45,000 as follows: $25,000 for legal fees; $10,000 for financial advisor fees; and $10,000 for accounting, printing, mailing, stock transfer and other miscellaneous costs. Funds required to implement the reverse stock split shall be derived from the Company's existing working capital along with the proceeds of from the sale of the Company's Trust Preferred Securities. Reservation - ----------- The Company reserves the right to abandon the transaction at any time before the filing of the necessary amendments to the Articles of Incorporation effecting the reverse stock split with the Indiana Secretary of State if the Board of Directors determines that such action is in the best interest of the Company. The Company may, for example, abandon or delay the transaction if there is a material change in the condition of the Company or if the Board of Directors perceives that there has been a material change in the benefits or risks associated with the transaction. THE PARTIES ----------- Fidelity Federal Bancorp - ------------------------ "Item 1. Business" of the Company's Annual Report on Form 10-K for the year ended December 31, 2003, filed by the Company with the SEC is hereby incorporated by reference. Security Ownership of Management - -------------------------------- The section of the Company's Proxy Statement, dated March 29, 2004, filed by the Company with the SEC, captioned "Security by Ownership of Management" is hereby incorporated by reference. 33 Officers and Directors - ---------------------- The section of the Company's Proxy Statement, dated March 29, 2004, filed by the Company with the SEC, captioned "Information Concerning Nominees, Directors and Executive Officers" is hereby incorporated by reference. Stock Plans of the Company - -------------------------- The sections of the Company's Proxy Statement, dated March 29, 2004, filed by the Company with the SEC, captioned "1993 Directors' Stock Option Plan" and "1995 Key Employees' Stock Option Plan" are hereby incorporated by reference. Stock Buy Back Program - ---------------------- The Company has not purchased any shares of the Company's common stock during the last three years. WHERE YOU CAN FIND MORE INFORMATION ----------------------------------- The Company has filed a Schedule 13E-3 with the SEC regarding this transaction. In addition, the Company files reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. You may read and copy this information at the Public Reference Room of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C., 20549. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The SEC also maintains an Internet World Wide Web site that contains reports, information statements and other information about issuers, including the Company, who file electronically with the SEC. The address of that site is http://www.sec.gov. We have not authorized anyone to give any information or make any representation about the transaction that differs from, or adds to, the information in this disclosure document or the Company documents that are publicly filed with the SEC. Therefore, if anyone gives you different or additional information, you should not rely on it. The information contained in this disclosure document speaks only as of its date, unless the information specifically indicates that another date applies. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- The SEC allows the Company to "incorporate by reference" information in this document. This means that we can disclose important information to you by referring you to another document 34 This document incorporates by reference the documents listed below that we may file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended. ---------------------------------------------------------------------------- Commissions Filings (File No. 000-22880) Filing Date/Period ---------------------------------------------------------------------------- Annual Report on Form 10-K Year ended December 31, 2003 ---------------------------------------------------------------------------- Quarterly Report on Form 10-Q Quarter ended March 31, 2004 ---------------------------------------------------------------------------- Quarterly Report on Form 10-Q Quarter ended June 30, 2004 ---------------------------------------------------------------------------- Quarterly Report on Form 10-Q Quarter ended September 30, 2004 ---------------------------------------------------------------------------- Proxy Statement March 29, 2004 ---------------------------------------------------------------------------- 35 ANNEX A ------- Professional Bank Services, The 1000 Building Incorporated 6200 Dutchman's Lane, Suite 305 Louisville, Kentucky 40205 Atlanta, Chicago, Louisville, Nashville, 502 451-6633 Ocala 502 451-6755 (FAX) 800-523-4778 (WATS) Consultants to the Financial Industry [LOGO OF PROFESSIONAL BANK SERVICES] November 9, 2004 Board of Directors Fidelity Federal Bancorp 18 North West Fourth Street P.O. Box 1347 Evansville, Indiana 47706 To The Directorate: You have requested a fair value appraisal of the common stock of Fidelity Federal Bancorp, Evansville, Indiana (the "Company"). The purpose and intended use of the appraisal is to determine the cash fair value of the Company's common shares relative to fractional shares created by the Company's proposed reverse stock split and going private transaction (the "Going Private Transaction"). In addition, you have requested our opinion as investment bankers as to the fairness of the cash value to be paid to the holders of those fractional shares which will be exchanged as a result of the Going Private Transaction, as well as to the remaining unaffiliated shareholders from a financial point of view. The appraisal and our opinion are based on a review of the financial condition and history of the Company, regulatory and audit reports, and other such summary information available and deemed appropriate. The date of this appraisal is as of November 9, 2004. Professional Bank Services, Inc. ("PBS") has performed stock appraisals for numerous financial institutions located throughout the United States. Our knowledge of the financial industry evolves from an experienced staff and a history as consultants and financial advisors to the banking industry. The firm's wholly owned subsidiary, Investment Bank Services, Inc., is a registered Broker/Dealer with the Securities and Exchange Commission. For purposes of this appraisal and our opinion, we have reviewed and analyzed the historical performance of the Company including among other things: (i) Audited consolidated financial statements for the Company for the years ending December 31, 2001, 2002 and 2003; (ii) all Forms 10-Q, 10-K and 8-K and other reports for 2003 and year to date 2004 filed by the Company with the Securities and Exchange Commission (the "SEC"); (iii) September 30, 2004 internal Company consolidated financial statements; (iv) the 2003 Strategic Plan of the Company's wholly owned subsidiary United Fidelity FSB Fidelity Federal Bancorp November 9, 2004 Page Two (the "Thrift"); (v) the Thrift's 2004 budget; (vi) various most recent month end internal asset quality reports, loan production reports, cash flow and Board of Directors earnings reports and funding and interest rate sensitivity reports of the Company and the Thrift; and (vii) the historical common stock trading activity of the Company. Financial projections have been prepared and analyzed as well as other financial studies, analyses and investigations as deemed relevant for the purposes of this appraisal. In review of the aforementioned information, we have taken into account our assessment of general market and financial conditions, our experience in other transactions, and our knowledge of the banking industry generally. We have not compiled or audited the financial statements of the Company, nor have we independently verified any of the information reviewed; we have relied upon such information as being complete and accurate in all material respects. We have not made an independent evaluation of the assets of the Company. PBS, its officers, and its staff have no present business interest in the Company. No benefits will accrue to PBS as a result of this review, other than the professional fees previously agreed to by the Company. Fees paid to PBS for the preparation of this review are neither dependent or contingent upon any transaction or upon the results of the review. Based on the foregoing, and all other factors deemed relevant and assuming accuracy and completeness of information provided by the Company, it is our opinion as an independent appraiser, that the fair value of the common stock of the Company, as of the date of this letter, is $1.85 per common share. In addition, based on the foregoing, and all other factors deemed relevant and assuming accuracy and completeness of information provided by the Company, it is our opinion, as investment bankers that the $1.85 per common share to be paid to Company common shareholders owning less than 30,000 Company common shares under the terms of the proposed Going Private Transaction is fair to the those shareholders as well as to the remaining unaffiliated shareholders from a financial perspective. Very truly yours, /s/ PROFESSIONAL BANK SERVICES, IN PROFESSIONAL BANK SERVICES, IN -----END PRIVACY-ENHANCED MESSAGE-----