Rule 424(b)(3) Supplement
File No. 33-59711
THE SPARKS STATE BANK
SUPPLEMENT DATED JUNE 29, 1995 TO
PROSPECTUS AND PROXY STATEMENT DATED JUNE 7, 1995
On July 11, 1995, a Special Meeting of Stockholders (the "Special Meeting")
of The Sparks State Bank ("Sparks") will be held to consider and vote on the
proposed affiliation (the "Affiliation") of Sparks with Mercantile Bankshares
Corporation ("Mercshares") pursuant to the terms of the Agreement and Plan of
Affiliation dated December 15, 1994 between Mercshares and Sparks (the
"Affiliation Agreement"). In connection with the Special Meeting, a Prospectus
and Proxy Statement dated June 7, 1995 (the "Prospectus and Proxy Statement")
was forwarded to all Sparks stockholders on behalf of the Board of Directors of
Sparks (the "Sparks Board") to solicit proxies to be voted at the Special
Meeting. A copy of the Affiliation Agreement is provided as Annex A to the
Prospectus and Proxy Statement.
Three stockholders (the "Dissident Stockholders") of Sparks purporting to
own an aggregate of 2,164 shares of Common Stock (or less than 0.3% of the
outstanding shares) have filed suit in the Circuit Court for Baltimore County,
Maryland opposing the Affiliation. The suit is referred to on page 7 and
described on pages 33 and 34 of the Prospectus and Proxy Statement. The
complaint was amended after distribution of the Prospectus and Proxy Statement.
Among other allegations made by the Dissident Stockholders in the amended suit
is a claim that portions of the Prospectus and Proxy Statement contain
misleading statements or omissions. The following is the text of these
allegations made by the Dissident Stockholders and the responses by Sparks to
these allegations. You may judge them for yourselves.
Many of the allegations do not purport to challenge the accuracy of the
facts set forth in the Prospectus and Proxy Statement, but rather represent
conclusions drawn by the Dissident Stockholders from the information presented
in the Prospectus and Proxy Statement. While the information contained in the
Prospectus and Proxy Statement is detailed and comprehensive, we do not doubt
the ability of the Sparks stockholders to evaluate the elements of the
Affiliation that are important to them and to make an informed vote on the
Affiliation with Mercshares.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE AFFILIATION WITH
MERCSHARES AND IS SEEKING YOUR AFFIRMATIVE VOTE ON THE AFFILIATION AT THE
SPECIAL MEETING. PLEASE SUBMIT YOUR PROXY IF YOU HAVE NOT ALREADY DONE SO. THIS
WILL NOT DEPRIVE YOU OF YOUR RIGHT TO REVOKE YOUR PROXY AND VOTE IN PERSON AT
THE SPECIAL MEETING IF YOU CHOOSE TO DO SO.
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THE DISSIDENT STOCKHOLDERS' ALLEGATIONS
AND MANAGEMENT'S RESPONSES
DISSIDENT STOCKHOLDER ALLEGATION--a. The statement appearing on page 1 of
the Proxy (the letter to stockholders), that "... your annual dividend payments
would increase from $.83 per share to approximately $1.73 per share of Sparks
common stock now held by you ..." is misleading in that although these figures
are stated in terms of cash, the language does not qualify the statement as
being limited to cash, thus ignoring the 20% stock dividends paid to
shareholders in December, 1994 and December, 1993 and the 10% stock dividends
declared and issued [sic] paid to shareholders in December, 1992 and December,
1991. The value of these stock dividends, which plaintiffs and the Class would
have no basis to expect as Mercantile shareholders, when coupled with the cash
dividend paid to Sparks' shareholders means that Sparks' shareholders would get
only $1.73 per share instead of, e.g., the $8.19 value per share in 1993 and the
$9.25 value per share in 1994 they received in stock and cash dividends.
MANAGEMENT'S RESPONSE--The underlying facts are disclosed in the
financial statements in the Prospectus and Proxy Statement and in the
summary information on pages 10 and 11 thereof. For some years, the Sparks
Board has declared both cash dividends and stock dividends. During 1991,
1992, 1993, and 1994, Sparks declared cash dividends (as adjusted for stock
dividends) of $.40, $.63, $.69, and $.83, respectively, and stock dividends
of 10%, 10%, 20%, and 20%, respectively. During the same four year period,
Mercshares paid cash dividends (adjusted to give effect to the 2.33:1
exchange ratio in the Affiliation and for a stock dividend) of $1.34, $1.35,
$1.49, and $1.73, respectively, and effected a three-for-two stock split in
the form of a 50% stock dividend in 1993.
Unlike cash dividends, which represent a distribution to you of a
portion of the earnings of Sparks, stock dividends represent a
capitalization of a portion of the retained earnings of Sparks and a
division of your ownership interest in Sparks. After the payment of a stock
dividend, all of the stockholders have the same percentage ownership in
Sparks as they had before the payment of the stock dividend; however, this
ownership is just represented by a greater number of shares. The stock
dividends would not have increased the value of Sparks for purposes of an
affiliation.
DISSIDENT STOCKHOLDER ALLEGATION--b. The "Background to the Affiliation"
section of the Proxy beginning on page 14 provides the impression that the
Transaction was vigorously negotiated by Sparks while it appears from
undisclosed documents that Mercantile dictated the Transaction because of its
superior negotiating position by virtue of the Director defendants approaching
Mercantile and, with Mercantile's knowledge, failing to contact other
prospective suitors.
MANAGEMENT'S RESPONSE--Pages 14 and 15 of the Prospectus and Proxy
Statement contain the required disclosures concerning the history of the
negotiations, which Sparks believes to be accurate.
DISSIDENT STOCKHOLDER ALLEGATION--c. The statement appearing on the second
paragraph of page 15 of the Proxy that "[t]he counter offer also required that
the market value of Mercshares' Common Stock should not fall below $20.00 per
share" is extremely misleading in that it could reasonably create the impression
in the mind of a reader of the Proxy that the final agreement between Sparks and
Mercantile included such a "collar" provision. As the deal with Mercantile had
been struck prior to any communication by Sparks to Mercantile regarding a
"collar," such a provision was not included in any counteroffer made by Sparks,
was never part of the actual negotiations until after the fact, was refused by
Mercantile and was not made a part of the Affiliation Agreement. The Proxy also
fails to disclose that defendant Moore undermined Berwind's role in attempting
to negotiate a "collar."
MANAGEMENT'S RESPONSE--A discussion between Bradley G. Moore, President
of Sparks, and Edward K. Dunn, President of Mercshares, on or about November
10, 1994 began with the
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counteroffer authorized by the Sparks Board on November 9, 1994 which
included an exchange ratio of 2.9:1 (equivalent to 2.42:1 after the 20%
stock dividend declared by Sparks) and a "floor" value for Mercshares common
stock of $20 per share. After this was rejected by Mr. Dunn, the discussion
moved to an exchange ratio of 2.8:1 (equivalent to 2.33:1 after the 20%
stock dividend declared by Sparks) with no floor. When Berwind Financial
Group, L.P. ("Berwind") also tried to convey the counteroffer subsequently,
it was met with the same position that Mr. Dunn had already expressed to Mr.
Moore. The final exchange ratio of 2.8:1 had neither a "floor" nor a
"ceiling" nor "collars" (which term is properly used to describe an exchange
ratio with both a "floor" and a "ceiling").
DISSIDENT STOCKHOLDER ALLEGATION--d. The statement appearing on page 16
[actually page 15] of the Proxy that the Director defendants thought that the
ultimate price reached pursuant to the December 15, 1994 Agreement between
Sparks and Mercantile was a fair multiple of book value is inaccurate in that at
that time the multiple of book value was 1.7 times Sparks' book value while the
evidence disclosed in discovery indicates that the Director defendants thought
that a fair multiple of book value was 2 times Sparks' book value.
MANAGEMENT'S RESPONSE--While 2 times Sparks' book value was discussed by
Sparks' Board at the commencement of negotiations, the negotiations focused
on various exchange ratios (i.e., the number of shares that Mercshares would
issue for each share of Sparks stock). Ultimately, Mercshares' best offer
was an exchange ratio of 2.8:1 (equivalent to 2.33:1 after the 20% stock
dividend declared by Sparks), which the Sparks Board concluded was fair. The
Sparks Board also concluded that the Mercshares stock had excellent
prospects for appreciation from the December 14, 1994 market price.
DISSIDENT STOCKHOLDER ALLEGATION--e. The section appearing on page 16 of the
Proxy entitled "The Terms, Other Than The Financial Terms, And Structure Of The
Affiliation" is misleading in that it implies that there is a benefit to those
other than the Director defendants of the bank in having Sparks remain
autonomous. There is no evidence that this is the case. In fact, having this
unnecessary expense burden of an extra layer of management reduces the value of
the merged institution, a factor not disclosed to plaintiffs and the Class.
MANAGEMENT'S RESPONSE--As stated in the Prospectus and Proxy Statement,
the Sparks Board considered the benefits to customers and employees of
Sparks and to the communities served by Sparks, as well as the benefits to
Sparks stockholders, in deciding to recommend the Affiliation. A summary of
the performance of Mercshares, including that of its affiliated banks
(currently 20) operating with local boards of directors and management,
appears on page 10 of the Prospectus and Proxy Statement.
DISSIDENT STOCKHOLDER ALLEGATION--f. The section appearing on page 16 of the
Proxy entitled "Certain Other Considerations" does not disclose that the
considerations cited can be accomplished through affiliation with many other
institutions other than Mercantile, none of which were approached by Sparks or
the Director defendants. At least eleven such institutions were identified to
the Director defendants by Berwind.
MANAGEMENT'S RESPONSE--The appropriate function of "Certain Other
Considerations" was to disclose that the Sparks Board had considered whether
Mercshares could provide certain support for Sparks.
DISSIDENT STOCKHOLDER ALLEGATION--g. The section appearing on page 17
[actually page 16] of the Proxy entitled "Other Possible Alternatives" is
misleading in that it fails to state that the Director defendants did not
actually consider alternatives and that the Director defendants never actually
had any contact with any of the "other possible affiliation partners."
Additionally, this section does not state exactly what the Director defendants
did or did not do with regard to the "possible alternatives"
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and fails to state that the Director defendants had a fiduciary obligation to
consider and contact possible alternatives to Mercantile to ascertain and obtain
the highest available price.
MANAGEMENT'S RESPONSE--While the Sparks Board did not contact other
possible affiliation partners, it did evaluate possible affiliations with
other possible affiliation partners based in part on the advice of Berwind
and using the data available to the Sparks Board. Sparks believes that the
statement by the Dissident Stockholders represents a misstatement of the
fiduciary duties of the Sparks Board.
DISSIDENT STOCKHOLDER ALLEGATION--h. The statement appearing on page 17 of
the Proxy, at paragraph 4, inaccurately states that there were no limitations
imposed on Berwind. The fact that $86,865.00, or 63% of Berwind's compensation,
is contingent on consummation of the Transaction is a strong imposition of the
limitation that Berwind issue a product that supports the proposed Transaction.
Although the contingency nature of Berwind's compensation is stated at page 20
of the Proxy, it is stated in such a way that those of ordinary sophistication,
as the plaintiffs and many members of the Class are, would likely not understand
the impact of such a contingency arrangement, particularly having previously
read that no limitations were imposed on Berwind. In addition, Sparks further
limited the scope of Berwind's investigation in declining to instruct Berwind to
canvass the market, hold an auction and otherwise attempt to obtain a higher
price for plaintiffs and the Class. The Proxy further fails to disclose that the
Berwind fairness opinion was drafted, in part, by Sparks' attorney.
MANAGEMENT'S RESPONSE--There were no limitations imposed by the Sparks
Board on Berwind with respect to investigations made or procedures followed
by Berwind in rendering its fairness opinions. The full compensation
arrangements between Berwind and Sparks are disclosed, including the
contingent nature of a portion of the Berwind compensation.
Sparks' lawyers reviewed the Berwind fairness opinion and pointed out
several changes in terminology which would make it consistent with the
definitions used in the rest of the Prospectus and Proxy Statement (e.g.,
the term "affiliation" replaced the term "merger," and the term
"stockholder" replaced the term "shareholder.") They did not otherwise
participate in the drafting of the Berwind fairness opinion.
DISSIDENT STOCKHOLDER ALLEGATION--i. The Proxy fails to disclose a number of
deficiencies in the Berwind analysis. First, as indicated in the fifth paragraph
on page 17 of the Proxy, it is stated that Berwind "studied and analyzed the
consolidated financial and operating data of Sparks and Mercantile." What is not
stated is that this review was done on a pooling-of-assets arrangement basis and
not on a purchase accounting basis as is applicable to the Transaction. The
consequence of this discrepancy is that plaintiffs and members of the Class have
not been advised that there will be a charge of approximately $992,000.00 per
year to amortize good will over a 15-year period, which will adversely affect
the price-earnings ratio of the merged institution. Additionally, the statement
appearing in the fifth paragraph on page 17 of the Proxy that Berwind considered
the terms and conditions of the proposed affiliation as compared with the terms
and conditions of comparable bank mergers and acquisitions fails to disclose
that Berwind did not actually contact prospective purchasers and looked only
retrospectively at transactions which Berwind admits are not truly
representative of this Transaction or of what price might be available for
Sparks' stock in the marketplace. Moreover, there is a failure by the Proxy to
disclose that Sparks is an exceptional bank compared to its peer group and that
to compare it to the average transaction, as Berwind has done, is not fair to
plaintiffs and the Class.
MANAGEMENT'S RESPONSE--All business combinations are accounted for
either as a pooling-of-interests or as a purchase. The Affiliation was
analyzed by Berwind in December 1994 on the basis of a pooling-of-interests,
as this was the anticipated accounting treatment applicable to the
Affiliation at that time. Indeed Section 1.11(e) of the Affiliation
Agreement contemplates that the
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Affiliation would be accounted for as a pooling-of-interests. On that
accounting basis the Affiliation was found by Berwind to be fair from a
financial point of view.
An analysis done by Mercshares after execution of the Affiliation
Agreement indicated that the Affiliation should be accounted for as a
purchase. Accordingly, Berwind revised their analysis, and their fairness
opinion delivered in the Prospectus and Proxy Statement reflects the
revision in accounting treatment. On the purchase accounting basis the
Affiliation was also found by Berwind to be fair from a financial point of
view.
The effect of the change in accounting treatment from a
pooling-of-interests to a purchase is not material to the results of
Mercshares. As shown on page 53 of the Prospectus and Proxy Statement, the
annual charge to Mercshares' earnings of about $991,000 due to purchase
accounting adjustments is about 1% of Mercshares 1994 net income. The pro
forma adjustments for the Affiliation result in 1994 pro forma net income
per share of common stock of $1.84 compared to the historical results of
$1.88 (a change of about 2%). As shown on page 52 of the Prospectus and
Proxy Statement, the quarterly charge to Mercshares' earnings of about
$248,000 due to purchase accounting adjustments is about 1% of Mercshares
first quarter 1995 net income, and the pro forma adjustments for the
Affiliation result in first quarter 1995 pro forma net income per share of
common stock which is equal to the historical results. In accordance with
applicable accounting rules the pro forma results do not include any
adjustment for cost savings that the parties may achieve by the Affiliation.
Factual information pertinent to the quality of Sparks is given
throughout the Prospectus and Proxy Statement, including the comparative
information on pages 17 through 20.
DISSIDENT STOCKHOLDER ALLEGATION--j. The Proxy does not disclose that
Berwind's June, 1994 evaluation concluded that Mercantile's original offer of
2.7/1, which resulted in a higher multiple of Sparks' book value than the offer
that was ultimately accepted by Sparks, was at the low end of the fairness
scale.
MANAGEMENT'S RESPONSE--The original exchange ratio of 2.7:1 (equivalent
to 2.25:1 after the 20% stock dividend declared by Sparks) offered by
Mercshares was fair from a financial point of view, but was at the lower end
of the reference range. The Prospectus and Proxy Statement demonstrates at
page 15 that an exchange ratio of 2.7:1 was not acceptable to the Sparks
Board, and they were not satisfied with the exchange ratio until it was
raised by Mercshares (a process that required negotiation over a period of
months). As is explained in the Prospectus and Proxy Statement at pages 15
and 16, the "multiple of book value" was only one of the many material
factors considered by the Sparks Board in approving the Affiliation and
recommending the Affiliation to Sparks stockholders.
DISSIDENT STOCKHOLDER ALLEGATION--k. The Proxy at page 18 references a loan
loss reserve as a percentage of non-performing assets of 567.4% compared to
85.4% for Sparks' peer group. Upon information and belief, this 567.4% ratio is
unjustifiably high, and that if the reserves that are unnecessarily maintained
were added back into earnings, Sparks' book value would be higher than
disclosed, thus rendering the Transaction even more unfavorable to plaintiffs
and the Class than it already appears.
MANAGEMENT'S RESPONSE--The Sparks loan analysis begins at page 44 of the
Prospectus and Proxy Statement. The Sparks loan loss reserve stood at 1.53%
of loans net of deferred fees and costs at March 31, 1995, which is actually
somewhat low by peer group standards. Determination of a loan loss reserve
by management represents a provision against possible future losses and is
not necessarily a reflection of past performance. In the beginning of 1994
the additions to the loan loss reserve charged to earnings were reduced
reflecting the adequacy of the loan loss reserve and the low level of loan
losses being experienced by Sparks.
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DISSIDENT STOCKHOLDER ALLEGATION--l. As reflected on page 19, at paragraph
3, of the Proxy, the choice of basing the comparisons of the multiples of book
value of this transaction to other transactions on the Mercantile stock price of
May 23, 1995 of $24.00 has no basis. Although it is disclosed that the ultimate
price to be received by plaintiffs and the Class will fluctuate with the price
of Mercantile stock, a more appropriate price to use would be the December 14,
1995 [actually 1994] closing price of $19.25, the day prior to the announcement
of the Affiliation Agreement, when the market was unaffected by the
announcement. In fact, this is the date chosen for the Mercantile financial
analysis, which begins on page 51 of the Proxy.
MANAGEMENT'S RESPONSE--The dollar value of the Affiliation to the Sparks
stockholders at any date is dependent on the market price of Mercshares
common stock on that date. Since announcement of the Affiliation the market
price of Mercshares common stock has ranged between $18.875 and $24.125 per
share. The market price closed on June 28, 1995 at $22.50 per share. The
Proxy Statement and Prospectus does disclose, on pages 9 and 51 to 53, the
stock price of $19.25 on December 14, 1994 and that price was used as the
basis for the pro forma financial statements.
DISSIDENT STOCKHOLDER ALLEGATION--m. The statement appearing in the section
entitled "Pro Forma Contribution Analysis" on pages 19-20 that the December
Opinion contains information for the 12 months ending March 31, 1995 is
necessarily incorrect. There is no way for plaintiffs and the Class to know
whether this is the result of a typographical error, whether estimated data was
used, or whether there is some other explanation for the discrepancy.
MANAGEMENT'S RESPONSE--The reference to "the 12 month period ended March
31, 1995" at the top of page 20 of the Prospectus and Proxy Statement should
have been to "the 12 month period ended September 30, 1994 for the December
Opinion and the 12 month period ended March 31, 1995 for the Proxy Opinion."
DISSIDENT STOCKHOLDER ALLEGATION--n. Page 24 of the Proxy references that 75
is the current mandatory retirement age provided by Sparks' bylaws, but fails to
mention that Mercantile's mandatory retirement age is 70 and that the ability of
Sparks to have certain individuals remain eligible to serve as directors beyond
the age of 70 is a specially negotiated requirement of the agreement between
Sparks and Mercantile.
MANAGEMENT'S RESPONSE--The Prospectus and Proxy Statement at page 24
simply restates the provisions of Section 1.13 of the Affiliation Agreement.
Tenure for directors of Sparks following the Affiliation is not guaranteed
by Mercshares. Mercshares' only commitment is that a Sparks director, who is
over the age of 60 at December 15, 1994 (and several Sparks directors were
not 60 at that date), will not be terminated solely for age following the
Affiliation until such director is 75 years old. For those directors over
the age of 60 this is exactly the same arrangement under which the Sparks
Board now serves pursuant to By-Laws approved by all the Sparks stockholders
at the 1994 annual meeting. This provision assures Mercshares continuity of
management once the Affiliation is completed.
DISSIDENT STOCKHOLDER ALLEGATION--o. Throughout the Proxy, it is stated that
the affiliation is fair and in the best interest of plaintiffs and the Class and
that the consideration to be received is fair to plaintiffs and the Class from a
financial point of view. This representation fails to include a statement that
although the Transaction may be within the range of fair as compared to
transactions involving similar institutions, in light of the superior quality of
Sparks by virtue of its geographical location, its earnings quality and its
superior balance sheet structure, the Transaction is, at best, at the low end of
fair such that a better price is achievable.
MANAGEMENT'S RESPONSE--The Sparks Board believes that the consideration
to be received by the Sparks stockholders in the Affiliation is fair. The
Affiliation is recommended to the Sparks
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stockholders by the Sparks Board on the basis of all of the factors set
forth on pages 15 and 16 of the Prospectus and Proxy Statement.
DISSIDENT STOCKHOLDER ALLEGATION--p. The Proxy further fails to disclose
that the Director defendants knowingly breached their fiduciary obligation to
maximize the value of Sparks' shares for plaintiffs and the Class by approaching
only Mercantile as a potential combination partner. Upon information and belief,
Sparks' attorney, experienced in transactions of the sort addressed hereby and
knowledgeable of the fiduciary obligations of the sort owed by the Director
defendants to plaintiffs and the Class, advised the Director defendants of their
obligation to solicit other bidders and/or auction Sparks. Upon information and
belief, the Director defendants purposely disregarded this advice.
MANAGEMENT'S RESPONSE--It is believed that the Sparks Board fully
discharged its obligations. The allegation of the Dissident Stockholders
does not represent a correct characterization of the advice given by Sparks'
counsel to the Sparks Board.
Members of the Sparks Board and their family members represent the
largest concentration of Sparks common stock (177,097.27 shares or 22.96% of
the outstanding common stock). They would be the principal losers were the
value they are to receive for their Sparks common stock in the Affiliation
not fair from a financial point of view.
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