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Case 1:10-cv-01285-VW1/C Document 20 Filed 09/15/10 Page 1 of 54
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA ,-_7
MATTHEW P. AMOS, CHRISTINE A.
AMOS, ROBERT A. ABEL, PAMELA
MOBIUS ARMSTRONG, DAVID L.
ENGLEHART, DONALD A. ERNEY,
TIMOTHY P. FARRELL, KEVIN M.
FINN, DAWSON E. FLINCHBAUGH,
CAROLE A. FOWLER, PATRICIA A.
HELM, BRUCE G. HOLRAN, RONALD
N. HUGHMANICK, JANET C.
NACLERIO, EDWARD R. NORFORD,
RONALD L. PROUGH, WILLIAM J.
REGAN, LOUIS M. ROBINSON, BRUCE
A. SMITH, CHARLOTTE SPITZ, ROBERT:
M. TROXELL, JANET M. WESTCOTT,
CURT H. ZIMMERMANN, RICHARD
ZLOGAR, JEFFREY S. NICKUM,
Plaintiffs,
v.
FRANKLIN FINANCIAL SERVICES
CORPORATION; LOWELL R. GATES;
LINDA LEE GATES; NICHOLAS J.
DUNPHY; WILLIAM T. HABACIVICH;
CHARLES J. HENRY, ANDREW W.
KOHR; and SUSAN A. RUSSELL,
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JUDGE WILLIAM W. CALD~'EL L,..
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Filed by ECF
JURY TRIAL DEMANDED
Defendants.
FIRST AMENDED COMPLAINT
The above-identified plaintiffs, by and through their attorney, Michael A. Farnan,
hereby allege as follows:
Nature of the Action
This is a civil action for, inter alia, violations of the Racketeer Influence
and Corrupt Organizations (RICO) Act (18 USC §1961 et seq.), conversion, fraud in A
Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 2 of 54
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the inducement, breach of fiduciary duty, unjust enrichment, waste of corporate assets,
and conspiracy.
The Parties
2. The following plaintiffs were non-defendant shareholders of Community
Financial, Inc. (CFI) before the dissolution of CFI as a result of its acquisition by
Franklin Financial:
a. Matthew P. Amos, who resides in Harrisburg, Pennsylvania;
b. Christine A. Amos, who resides in Harrisburg, Pennsylvania;
c. Robert A. Abel, who resides in Enola, Pennsylvania;
d. Pamela Mobius Armstrong, who resides in Clarence, New York;
e. David L. Englehart, who resides in Harrisburg, Pennsylvania;
f. Donald A. Erney, who resides in Harrisburg, Pennsylvania;
g. Timothy P. Farrell, who resides in Williamsburg, Virginia;
h. Kevin M. Finn, who resides in Middletown, Pennsylvania;
i. Dawson E. Flinchbaugh, who resides in Camp Hill, Pennsylvania;
j. Carole A. Fowler, who resides in Mill Hall, Pennsylvania;
k. Patricia A. Helm, who resides in Palmyra, Pennsylvania;
1. Bruce G. Holran, who resides in Elizabethtown, Pennsylvania for part of
the year and part of the year in Lake Clear, New York;
m. Ronald N. Hughmanick, who resides in Camp Hill, Pennsylvania;
n. Janet C. Naclerio, who resides in Emigrant, Montana;
o. Edward R. Norford, who resides in Camp Hill, Pennsylvania;
p. Ronald L. Prough, who resides in Williamsburg, Virginia;
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q. William J. Regan, who resides in Hummelstown, Pennsylvania;
r. Louis M. Robinson, who resides in Harrisburg, Pennsylvania;
s. Bruce A. Smith, who resides in Mechanicsburg, Pennsylvania;
t. Charlotte Spitz, who resides in Harrisburg, Pennsylvania;
u. Robert M. Troxell, who resides in Lancaster, Pennsylvania;
v. Janet M. Westcott, who resides in Cape May Point, New Jersey;
w. Curt H. Zimmermann, who resides in Dillsburg, Pennsylvania;
x. Richard Zlogar, who resides in Harrisburg, Pennsylvania; and
y. Jeffrey S. Nickum, who resides in Harrisburg, Pennsylvania.
3. Community Financial, Inc. (CFI), is the holding company of Community
Trust Company (CTC), which was acquired by Franklin Financial Services Corporation
in 2008.
4. Defendant Franklin Financial Services Corp. (Franklin Financial) operates
as a holding company for Farmers and Merchants Trust Company of Chambersburg,
Franklin County, Pennsylvania, that provides commercial, retail banking and trust
services in Pennsylvania. Franklin Financial Services Corporation acquired CFI by
merger agreement dated August 8, 2008, wherein CFI was merged with and into
Franklin Financial, in a cash out merger, and Franklin Financial became the successor
corporation to CFI. Franklin Financial is a "person" as defined at 18 U.S.C. § 1961(3).
5. Defendant Lowell R. Gates is an attorney who has served as corporate
legal counsel, shareholder, president, director, and Chairman of the Board of Directors
of CFI at various times relevant to this matter. He is a "person" as defined at 18 U.S.C.
§ 1961(3).
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6. Defendant Linda Lee Gates was a shareholder in CFI who benefited
financially from the actions of her husband, Defendant Lowell Gates, as more fully set
forth below. She is a "person" as defined at 18 U.S.C. §1961(3).
7. Defendant William T. Habacivch was a shareholder and director of CFI.
He is a "person" as defined at 18 U.S.C. § 1961(3).
8. Defendant Susan A. Russell was president and chief executive officer of
CFI at various times relevant to this lawsuit. She is a "person" as defined at I8 U.S.C.
§ 1961(3).
9. Defendant Nicholas J. Dunphy was a shareholder and director of CF[. He
is a "person" as defined at 18 U.S.C. § 1961(3).
10. Defendant Charles J. Henry was a shareholder and director of CFI. He is a
"person" as defined at 18 U.S.C. § 1961(3).
11. Defendant Andrew W. Kohr was a shareholder and director of CFI. He is
a "person" as defined at 18 U.S.C. § 1961(3).
Jurisdiction and Venue
12. The U.S. District Court for the Middle District of Pennsylvania has
jurisdiction pursuant to 28 U.S.C. § 1331 because several claims arise under the laws of
the United States and 28 U.S.C. §1332 because the amount in controversy exceeds
$75,000 and at least five plaintiffs reside outside of the Commonwealth of
Pennsylvania; and over pendant state-law claims herein pursuant to supplemental
jurisdiction, 28 U.S.C. § 1367(a). See also 18 U.S.C. §1964(c). Venue is proper in this
judicial district pursuant to 28 U.S.C. §§1391(b) and (d).
The Scheme
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13. The defendants, including Franklin Financial, Defendant Lowell Gates
who served as Chairman of the Board of Community Financial, Inc.; his wife
Defendant Linda Gates; Defendant Susan Russell, who served as CFI President; and the
other defendants who were board members of CFI at various times relevant to this
litigation, constitute an "enterprise" whose actions affected interstate commerce as
defined at Section 1961(4) of Title 18 of the United States Code known as the Federal
Racketeer Influenced and Corrupt Organizations (RICO) statute (18 U.S. § 1961(4)
which defines a RICO "enterprise" as "any individual, partnership, corporation,
association, or other legal entity, and any union or group of individuals associated in
fact although not a legal entity.")
14. Generally, the scheme involved Defendants Lowell Gates, Dunphy,
Habacivich, Henry, Kohr, and Russell leading non-defendant shareholders, including
plaintiffs, to believe that their business was sound. Then, through an insider loan
agreement with board members and management, those individual defendants received
stock at its book value at change of control of CFI to Defendant Franklin Financial as
well as interest on the loan. Those defendants oversaw the diminution of assets,
profited to the detriment of the plaintiffs and other non-defendant shareholders by
receipt at or near the very last day of CFI's existence of more than 1.3 million shares of
CFI that effectively diluted the value of the shares of the plaintiffs and other non-
defendant shareholders, who had collectively owned approximately 100,000 shares or
roughly a little less than one-half of the company before the stock dilution. Defendant
Franklin Financial benefited from the sweetheart deal of obtaining a company with
more than $70 million in assets under management, reaping estimated annual returns of
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$700,000, and a $500,000 corporate headquarters for a mere $1,130,000. In addition,
Defendant Franklin Financial stated in the August 8, 2008 Proxy Statement, set forth at
Exhibit D, and incorporated fully herein, that it had conducted a full due diligence
review of CFI and CTC prior to the merger, and, upon information and belief, through
this review was made fully aware of, and was fully complicit in the scheme. Franklin
Financial further assumed successor liability for all actions by CFI and CTC and the
individual defendants, for all actions occurring prior to the Effective Date of the
merger.
15. The individual defendants, with the express approval of Franklin
Financial, worked in conspiracy to convert property rightfully belonging to the
plaintiffs and other non-defendant shareholders, for the defendants' own benefit and
enrichment. According to the Proxy Statement, set forth at Exhibit D, and incorporated
fully herein, Franklin Financial was deeply involved and fully participated in all aspects
of the scheme, including but not limited to assuming control of all payment to former
CFI shareholder after the Merger. At page 28 of the Proxy Statement, it is clearly stated
that Franklin Financial would calculate and determine the amount of money which each
former CFI shareholder shall receive as part of the transaction, and would receive and
hold all CFI stock certificates for cash payment. Franklin Financial further informed
CFI shareholders that it would provide a Liquidating Trust in the event of an increase in
payment to CFI shareholders over the $2.79 cents per share set forth as the Merger
Agreement. See Exhibit D.
16. Plaintiffs and other shareholders were thwarted from identifying the illicit
scheme through efforts by the individual defendants to deny access to shareholders lists,
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such as in the Helm litigation, and financial information of CFI, such as by the letter of
Defendant Russell to Plaintiff Matthew Amos refusing to provide financial information
pertaining to CTC. Exhibits A & B.
17. Plaintiff Matthew Amos desperately tried to ascertain the end-game of the
defendants, whose hostility toward him and contempt for other non-defendant
shareholders percolated just below the surface, by hastily filing a derivative action in
the Court of Common Pleas of Cumberland County in late August 2008. Eventually,
that action was dismissed well before Plaintiff Amos could figure out the defendants'
elaborate scheme.
18. Again, unbeknownst to plaintiffs and undisclosed to the all shareholders,
Defendants Lowell Gates as well as his wife Linda Lee Gates, William T. Habacivch,
Susan A. Russell, Nicholas J. Dunphy, Charles J. Henry, and Andrew W. Kohr,
(collectively the "Individual Defendants") conspired to concoct and enact a scheme to
profit themselves, at the expense of other non-defendant shareholders, including the
plaintiffs in this lawsuit, by their deliberate and systematic mismanagement of CFI.
Defendant Lowell Gates had a previous relationship with Franklin Financial, which was
the Administrator of the multi-million dollar estate of deceased family members of
Lowell Gates. Franklin Financial provided the final but essential component of the
scheme by becoming the vehicle by which it and the individual defendants benefitted at
the expense of the plaintiffs and other shareholders, who received pennies per share in a
payout orchestrated and overseen by Franklin Financial after the effective date of the
change of control to Franklin Financial.
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19. The individual defendants loaned $200,000 to CFI in 2005 in exchange for
repayment with interest or the ability to convert shares of stock based on the "book
value per share ... on the closing date of the change in control." CFI 2005 Annual
Report, Note 4.
20. From that moment on, the individual defendants had every incentive to
drive down the book value of CFI so that they could convert the notes "on the closing
date of a change in control" at bargain prices and dilute the interests of all the other
shareholders, including the plaintiffs to this lawsuit.
21. Then, sometime before mid 2008, Defendant Gates and the other
individual defendants conspired with Franklin Financial to enter into a merger
agreement. This merger agreement resulted in receipt of approximately $1.13 million
from Franklin Financial which was supposed to be dispersed based on the number of
shares owned of CFI. Defendant Lowell Gates and the other individual defendants
aggressively took steps to diminish CFI assets further during this timeframe in order to
reduce the "book value" of shares before the date of the acquisition of CFI (i.e., change
of control), so that they could dilute the value of all other shareholders' shares,
including the plaintiffs' shares, by acquiring acquiring roughly 1.3 million shares at or
about the change of control date themselves and dividing the $1.13 million according to
the number of shares owned by each shareholder. At p. 29 of the Proxy Statement, set
forth at Exhibit D, and incorporated fully herein, Franklin Financial explicitly
prohibited CFI officials from issuing, selling or authorizing additional stock or issuing
or granting options or similar rights with respect to CFI's capital stock, or any securities
convertible into capital stock, without written consent of Franklin Financial. In
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addition, Franklin Financial explicitly prohibited CFI from entering into, or amending
any new change of control agreement with any director or officer, without the written
consent of Franklin Financial. And, Franklin Financial assumed full successor liability
of CFI and CTC as a result of the cash-out merger. See Exhibit D.
History
22. In the early 1990s, Defendant Lowell R. Gates created anon-profit
Pennsylvania corporation called Community Trust Company of Pennsylvania (CTCP).
23. Thereafter, by letter dated August 26, 1992, the Pennsylvania Department
of Banking (PDB) informed Defendant Gates, the sole shareholder and who acted as
President, Chief Executive Officer (CEO), and Chairman of the Board of CTCP, that a
non-profit fiduciary could not use the term "Trust" in its name.
24. Acting as, among other roles, corporate counsel, Defendant Lowell Gates
then created a new legal entity, to which he transferred CTCP's assets, called
Pennsylvania Fiduciary and Estate Services, Inc. (PENNFES), a Pennsylvania
corporation, which incorporated on or about September 3, 1992.
25. Defendant Gates was the sole shareholder until on or about October 31,
1996 and from 1992 to 1998, acted as corporate counsel, President, CEO, Chairman of
the Board, and secretary of PENNFES.
26. PENNFES acted as anon-profit fiduciary until October 11, ]998, when
Defendant Lowell Gates converted it to a trust corporation called Community Trust
Company (CTC) regulated by the Pennsylvania Department of Banking.
27. The Pennsylvania Department of Banking (PDB) required an initial
capitalization and maintenance of $1 million for CTC to be chartered and to operate.
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28. Defendant Lowell Gates and his wife, Defendant Linda Lee Gates,
acquired 2500 shares of CTC stock and Defendant Lowell Gates received an additional
21,600 shares as a result of the conversion of shares of PENNFES in 1998. Defendant
Linda Lee Gates acquired an additional 1600 shares of CTC stock. In addition, through
Defendant Lowell Gates, warrants were acquired for a total of 27,700 shares of CTC
stock owned by the couple with a value of a little more than $550,000, at an Internal
Revenue Service 5498 reported value of $20 per share.
29. Community Trust Company (CTC) was established under the laws of the
Commonwealth of Pennsylvania in 1998 to provide trust services to persons in and out
of the Commonwealth of Pennsylvania.
Creation of Community Financial, Inc.
30. In 2000, at Defendant Lowell Gates' direction, a holding company known
as Community Financial, Inc. (CFI), was formed, and all CTC shares were converted in
kind to CFI shares. During this time frame, the Pennsylvania Department of Banking
placed CTC under a Memorandum of Understanding (MOU) for failing to maintain the
$1 million in capitalization required to maintain its charter.
31. CTC became awholly-owned subsidiary of CFI, which held all CTC's
common stock.
32. CTC and CFI engaged in interstate commerce.
33. CFI continued to grow in value as investors placed large sums of money in
trust with CTC, CFI's wholly owned subsidiary. In fact, according to the "Proxy
Statement for the Merger Between Community Financial, Inc. and Franklin Financial
Services Corporation" correction letter dated September 3, 2008, CFI had in excess of
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$70 million in assets under management and fee income of nearly $700,000.00 for the
year ended December 31, 2007. Exhibit D.
34. CFI management recapitalized the $1 million in shareholders' equity
utilizing a second private securities offering in 2002. This offering indicated that
management, including Defendant Lowell Gates, would maintain capitalization at the
$1 million amount. Defendant Linda Gates acquired an additional 45,000 shares at $8
per share for $360,000 bringing his total shares after exercising warrants to 72,700
shares of CFI stock.
35. Without informing plaintiffs, Defendant Lowell Gates plotted a cynical
method of enriching himself and the other defendants, by following a theory known as
"Creative Destruction," developed by German economist Joseph Schumpeter, whom
Defendant Lowell Gates referenced in the CFI 2002 Annual Report. Under this
economic theory, profits can be obtained from the financial failure of a business
concern. With this state of mind, Defendant Lowell Gates and other individual
defendants, including his CFI Board members and management, who are defendants
here, began to deceive CFI non-defendant shareholders like plaintiffs into believing that
Defendant Lowell Gates and the other defendants were fulfilling their corporate
fiduciary responsibilities while actually overseeing the destruction of CFI using a
sophisticated scheme. At that time, nobody but the defendants knew of the defendants'
plan to engage in "Creative Destruction" to profit obscenely from the downfall of CFI
by eventually selling the company to co-conspirator Franklin Financial at a price
calculated to ensure the individual defendants either substantially covered their losses
or reaped colossal gains and the purchasing co-conspirator Franklin Financial would
Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 12 of 54
obtain control of a company with more than $70 million in assets under management
with substantial tax benefits due to losses for a little more than $1 million.
36. Beginning sometime in the mid-2000s, Defendant Lowell Gates and the
other defendants set about systematically to gain control of the Board of Directors
through control of a voting block on the Board, involving the other defendants.
Defendant Russell was the perfect patsy for the scheme, doing as instructed with no
questions asked. The group controlled. by Defendant Lowell Gates had succeeded in
ousting Plaintiff Matthew Amos as a Director. Defendant Lowell Gates surrounded
himself with co-conspirators willing to further his scheme of "Creative Destruction"
unobstructed by any opposition. In the years following, Defendant Lowell Gates
oversaw and plotted a sure and steady decline in the fortunes of CFI, while falsely
representing to non-defendant shareholders, including the plaintiffs, that every effort
was being made to make CFI profitable. In so acting, he and the other defendant board
members and management violated their fiduciary duties to CFI and its shareholders,
including plaintiffs. The former CFI board members and managers involved in that
scheme are defendants in this action.
37. Defendant Lowell Gates and other individual defendants, who were board
members and management of CFI, defied PDB "Minimum Capital Requirements," by
allowing capitalization to drop below the $1 million threshold required by law at around
2002.
38. In a private placement memorandum dated May 5, 1998, CTC officials
had represented to non-defendant shareholders that the PDB required CTC to maintain
capitalization in excess of $1 million.
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Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 13 of 54
39. The Private Offering Prospectus dated June 14, 2002, similarly cited the
PDB's "mandate" that CTC maintain capitalization of $1 million.
40. According to CTC officials, CTC was required to show capitalization of
$1 million at the time CTC filed quarterly call reports. One of the accounting schemes
used by Defendant Lowell Gates and the other individual defendants, who constituted at
various times CFI's Board of Directors and management, was the use of "intercompany
receivables" to artificially inflate stated shareholder equity to misrepresent CTC as
complying with the PDB capitalization requirements. CFI's annual reports read that
inter-company receivables were included as assets on CTC's balance sheets but were
characterized as "eliminations" when the consolidated report was compiled.
Importantly, only CTC was required to file a quarterly call report with the PDB, not
CFI or any other affiliated companies.
41. By letter dated Apri125, 2006, from Defendant Susan A. Russell, CTC
President and Chief Operating Officer, to a request by Plaintiff Matthew P. Amos made
through legal counsel for the call reports, Defendant Russell declined to provide the call
reports pursuant to Section 1508 of the Pennsylvania Business Corporation Law (15
Pa.C.S. §1508) because "your client is not a shareholder of Community Trust
Company...." In her words, "[t]he Integrity Bank line of credit is an obligation of
Community Trust Company, not an obligation of Community Financial, Inc." In doing
so, Defendant Russell utilized a shell game to hide the illicit conduct of the defendants
by refusing to disclose financial transactions and regulatory capitalization compliance
information to CFI non-defendant shareholders, who had capitalized CTC, regarding
the activities of CFI's wholly-owned subsidiary, CTC. Exhibit A.
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42. Using an Integrity Bank line of credit to further mislead plaintiffs and
other non-defendant shareholders and the Pennsylvania Department of Banking (PDB)
into believing CTC was solvent and compliant with PDB requirements, Defendant
Lowell Gates, working through his enterprise, straddled the line between corporate
fiduciary duty and PDB regulatory compliance, effectively challenging non-defendant
shareholders, who rightly expected directors to act in the fiduciary best interest of the
company, and PDB regulators, who rightly expected trust companies to comply with
applicable laws and regulations, to take adverse action.
43. Initially, CFI was authorized to issue 2,000,000 shares of common stock
with par value of $1.00 per share, and 500,000 shares of preferred stock, par value
$1.00 per share.
44. At or around 1998, shares in CTC/CFI were sold at $20 per share.
45. The holders of CFI common stock would be entitled to one (1) vote per
share.
46. In 2002, CFI had a stock offering again to raise capitalization of CTC
above $1 million to conform to the capitalization requirements of the Pennsylvania
Department of Banking.
47. CFI non-defendant shareholders, including the plaintiffs, were not given
preemptive rights to acquire any securities subsequently issued by CFI.
48. CFI directors and management, including Defendant Lowell Gates and the
individual defendants, gave themselves authority to raise additional capital and make
acquisitions through the issuance of CFI common stock without necessitating CFI
shareholder approval.
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49. Defendant Lowell Gates and the other individual defendants, who were
CFI directors and management, acting in conspiracy with all defendants, actively
attempted to hide from CFI non-defendant shareholders, including plaintiffs, the facts
of CTC's deterioration from being afinancially-sound corporate entity by blocking
efforts to obtain information the defendants deemed to be information relating to CTC,
CFI's wholly-owned subsidiary. See Exhibit A.
50. Shareholders infused more than $1 million of capital in CTC at or around
1998 prior to CTC becoming the wholly-owned subsidiary of CFI.
51. A second offering issued at or around 2002 again raised capitalization
above $1 million to satisfy the requirements of the Pennsylvania Department of
Banking. At this time, shares were sold for $8 per share.
52. As of August 13, 2004, at 4:30 p.m. the total number of shares of CFI was
201,071, with the individual defendants, who were directors and former directors, an
officer and a relative, owning or controlling 97,536 shares, or 48.508 percent of the
total shares.
53. As of September 19, 2005 at 4:30 p.m .the total number of shares of CFI
was 201,071, with the individual defendants, who were directors and a former director,
an officer and a relative, owning or controlling 97,536 shares, or 48.508 percent of the
total shares.
54. As of December 31, 2005, the total number of shares increased to 206,071,
with the afore-referenced individual defendants owning or controlling 102,536, or
49.76%, after a loan was issued to the company by certain individual defendants.
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55. As of August 24, 2006, the total number of shares remained at 206,071,
with individual defendants owning or controlling 102,536 shares, or 49.76 percent.
56. As of December 31, 2006, the total number of shares increased to 208,571
as a result of Defendant Lowell Gates exercising 2500 warrants at $20 per share, when
shares obviously were not worth anything close to that. In fact, CFI represented to the
Internal Revenue Service that the price per share was $13.88 as of December 31, 2006.
Defendant Gates exercised his warrants at the higher price so that the individual
defendants now owned or controlled 105,036 shares, or 50.36 %, and those co-
conspirators would have voting control of the company.
57. As of September 7, 2007, the total number of shares was 208,571, with
individual defendants owning 105,036 shares, or 50.36 percent, enabling them to
control the direction of the company, including effectuating the merger with Franklin
Financial and ensuring the demise of CFI.
58. CFI had 208,571 shares of stock issued, including Lowell Gates and his
wife (76,800 shares), William T. Habasivich (14,000 shares), Susan Russell (2,126
shares), Nicholas Dunphy (9,110 shares), Charles Henry (1,500 shares), and Andrew
Kohr (1,500 shares). The total number of shares owned or controlled by these
individual defendants at that time was 105,036, a majority interest collectively.
59. CFI's articles of incorporation authorize 2,000,000 shares of common
stock and 500,000 shares of preferred stock. The CFI board of directors, who are
individual defendants in this action, gave themselves the authority to raise additional
capital and make acquisitions through the issuance of CFI common stock without
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further approval by CFI shareholders. Series A Capital notes with change of control
provisions are not mentioned in either the articles of incorporation or the CFI by-laws.
60. In the proxy statement issued in anticipation of the proposed acquisition of
CFI by Franklin Financial in 2008, the following statement was buried in a litany of
other statements:
RISKS REGARDING CFI COMMON STOCK
CFI can issue common stock and preferred stock without your approval,
diluting your proportional ownership interest.
CFI's Articles of Incorporation authorize it to issue 2,000,000 shares of common
stock and 500,000 shares of preferred stock. As of August 1, 2008, CFI has no
shares of preferred stock outstanding, and has 208,571 shares of common stock
issued and outstanding.
61. The CFI proxy statement near the time of the merger with Franklin
Financial dated August 8, 2008, estimated that CFI shareholders would have received
$2.79 per share if the effective date of the merger had occurred on July 1, 2008. Exhibit
D. Many non-defendant shareholders voted to approve the sale of CFI based on that
information. The defendants thus utilized the classic "bait and switch" fraudulent sales
technique.
62. According to Defendant Franklin Financial, that estimate was based upon
the CFI book value of $212,053 as of June 30, 2008 and the assumption that all Series
A Capital Notes would be converted to CFI common stock. Exhibit C.
63. After June 30, 2008, CFI incurred additional operating losses orchestrated
by the defendants, who controlled CFI, and, as a result, reported a CFI book value of
$31,514 in its audited financial statements as of October 31, 2008. Exhibit C. The
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value of CFI diminished rather precipitously in just four months as the defendants
engaged in "Creative Destruction."
64.
65. Based on the book value as of October 31, 2008, CFI's book value per
share became $.15 and resulted in the issuance of 1,366,380 of new shares to the
individual defendants, who were engaging in their scheme of first destroying the value
of the company and then defrauding other non-defendant shareholders, including
plaintiffs, by diluting the value of their shares and acquiring a huge amount of
additional shares at the lower value. Exhibit C. Using this chicanery, the individual
defendants claimed more than 1,470,000 shares compared to the total non-defendant
shareholders' shares of 103,535. In effect, the individual defendants went from owning
just over 50 percent of CFI to claiming more than 93 percent of the shares essentially by
a stroke of a pen, enabling them to either substantially cover their losses or reap
obscene profits at the time of the merger.
66. The individual defendants, including the aforementioned six shareholders,
consisting of an officer and board-members, controlled CFI to the detriment of the
plaintiffs and other non-defendant shareholders by breaching their fiduciary duty owed
to the plaintiffs and other non-defendant shareholders and CFI by engaging in their
scheme of "Creative Destruction" to waste CFI assets. One of the individual defendants
is the wife of the former chairman of the board and mastermind of the scheme.
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Case 1:10-cv-01285-VW1/C Document 20 Filed 09/15/10 Page 19 of 54
67. In a transaction consummated on or about November 29, 2008, Franklin
Financial acquired CFI for $1,130,000, of which approximately 62 non-defendant
shareholders received less than 7 percent of the proceeds of the sale.
68. The conclusions stated herein were derived from utilizing financial
planning expertise and "reverse engineering" the sale. As a result of the transaction,
CFI non-defendant shareholders received approximately $.71 per share, which would
reflect a total number of shares issued of approximately 1,574,951 shares, assuming the
sale price of $1.13 million. The number of shares at the moment of sale, 1,574,951, is
roughly seven and half times more than the 208,571 shares that existed prior to the
"change of control" transaction on or about the last day of CFI's existence.
69. The individual defendants who converted their notes obtained stock
presuming a value of $.15 per share but approximately thirty (30) days received a
payout on their interest from Franklin Financial at the rate of $.71 per share, which is
more than a tripling of the value in approximately athirty-day period. Meanwhile, the
plaintiffs and other shareholders, many of whom voted in favor of the deal before the
payouts were finally calculated, saw the value of their stock drop from approximately
$2.79 in June 2008 to $.71 in October 2008.
70. Assuming 208,571 CFI shares that existed on June 30, 2008 that were
worth approximately $.71 at the time of the sale to Franklin Financial in 2008, which
include the individual defendants' original share ownership prior to their receipt of a
massive number of shares which defrauded the plaintiffs and other non-defendant
shareholders by diluting stock value, those shareholders existing on June 30, 2008
received and thus had to divide approximately $150,000 for those shares.
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7l . The approximately 62 non-defendant shareholders, including the
plaintiffs, who collectively owned 103,535 shares on June 30, 2008, divided less than
$75,000 between them.
72. By contrast, Defendants Lowell Gates and his wife, Habacivich, Russell,
Dunphy, Henry, and Kohr, divided approximately $1,050,000, as the result of the afore-
described scheme to defraud the non-defendant shareholders, including plaintiffs.
73. Defendants Lowell Gates, Habacivich, Russell, Dunphy, Henry, and Kohr,
all of whom were members of the board of directors or officers, along with Defendant
Linda Gates, divided approximately $1,050,000 largely as a result of the last-minute
dilution of CFI stock by the defendants acting in conspiracy.
74. The individual defendants intentionally breached their fiduciary duty by
driving down the value of CFI in its last days before the merger with Franklin Financial
to $.l 5 per share, so that they could receive a massive amount of stock at the change of
control and thus benefit by receiving an unjust portion of the $1,130,000 purchase price
of CFI and leave the plaintiffs and other non-defendant shareholders "holding the bag."
This was "Creative Destruction" in practice.
75. For that to occur, the individual defendants issued to themselves 1,366,380
shares at the last minute on the closing date of the change in control relying on insider
knowledge as board members and President of CFI.
76. In addition, Franklin Financial oversaw, approved of and participated in
the destruction of the value CF[ without objecting, even though it had agreed to pay
$1,130,000 at a time when the book value of the company was worth $1.02 per share
but ultimately received a company whose book value was $.15 per share. Defendant
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Franklin Financial had, for several months prior to the merger date, been actively
involved in overseeing and reviewing the internal operations of CFI, including, but not
limited to, as part of its due diligence. Upon information and belief, Franklin Financial
had been closely connected to the individual defendants for far more than a year prior to
that date, and possibily as early as 2004, when Franklin Financial began administering
the multi-million dollar estate of the deceased aunt and uncle of Lowell Gates.
77. The following chart illustrates the reported market value of shares of CFI
stock from at or about its inception in 1998 to its acquisition by Franklin Financial
according to CFI Annual Reports and other CFI corporate sources:
Valuation Date 12/31/1998 $20.00 (IRS, Reported price per share)
12/31/1999 $20.00 (IRS, Reported price per share)
12/31/2000 $20.00 (IRS, Reported price per share)
12/31/2001 $8.04 (IRS, Reported price per share)
12/31/2002 $8.03 (IRS, Reported price per share)
12/31/2003 $11.93 (IRS, Reported price per share)
12/31/2004 $13.88 (IRS, Reported price per share)
12/31/2005 $13.88 (IRS, Reported price per share)
12/31 /2006 $13.88 (IRS, Reported price per share)
12/31/2007 $13.88 (IRS, Reported price per share)
6/30/2008 $13.88 (IRS, Reported price per share)
12/31/2008 $.71748 (IRS, Reported price per share)
78. The precipitous decline in share value was the result of defendants'
scheme to engage in "Creative Destruction," by devaluing CFI, wasting assets, and
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diluting shares so as to defraud the unsuspecting non-defendant CFI shareholders,
including the plaintiffs, many of whom were elderly, of the value of their shares.
79. CFI was controlled by the individual defendants, who engaged in an
enterprise to defraud plaintiffs and other non-defendant shareholders. The defendants
issued additional stock to themselves, who were engaged in this enterprise, that resulted
in the dilution of book value per share of CFI common stock.
80. In CFI's 2007 Annual Report, which was issued in September 2008 during
the merger process, it states the following:
During 2005, Community Trust Company, as part of its capital plan, issued non-
negotiable Series A Capital Notes to certain directors of the Corporation. Proceeds from
the issuance totaled $200,000. The notes bear interest at 6% per annum commencing
December 31, 2007. Interest expense of $6,000 was paid on June 30, 2008.
The Notes are unsecured. As an incentive to participate in the issuance, each note holder
was issued 250 shares of Community Financial, Inc. stock for every $10,000 lent to the
corporation. The Notes also have change in control provisions that allow note
holders to convert their notes into Community Financial stock. The number of
shares to be issued would be based on the book value per share of the Company on
the closing date of a change in control.
(Emphasis added.) CFI 2008 Proxy statement Exhibit 5-8 & 9. This scheme worked
because individual defendants actively destroyed the company in its last days to reduce
the book value of shares and Defendant Franklin Financial went along with this scheme
by not only failing to object but actually participating in the scheme by using CFI assets
to pay the costs associated with the transaction.
81. The following chart illustrates the "unadjusted book value (unaudited)" of
shares of CFI stock from at or about its inception in 1998 to its acquisition by Franklin
Financial:
Valuation Date 12/31/1998 $10.13
12/31 / 1999 $10.10
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12/31/2000 $9.43
12/31 /2001 $6.61
12/31/2002 $5.12
12/31/2003 $4.03
12/31/2004 $3.43
12/31/2005 $3.36
12/31/2006 $3.32
9/30/2007 $2.77
12/31 /2007 $1.68
6/30/2008 $1.02
10/31/2008 $.15
It was the value as of October 31, 2008 that was used to calculate the price per share
issued to Defendant Lowell Gates and the other individual defendants, who participated
in an illicit scheme to defraud the non-defendant shareholders, including the plaintiffs,
by diluting the value of all other investors.
82. It is believed and therefore averred that the following defendants were
members of CFI's Board of Directors and lenders under the scheme referenced in the
preceding paragraphs:
a. Andrew Kohr ($10,000)
b. Charles Henry ($20,000)
c. Nicholas Dunphy ($50,000)
d. Lowell Gates ($60,000)
e. William Habasivich ($50,000)
f. Susan Russell ($10,000)
83. It is believed and therefore averred that the dollar amounts in the
parenthetical in the preceding paragraph represents the amount of the "loan" issued to
CFI by each defendant as part of the scheme to defraud the other non-defendant
shareholders, including the plaintiffs.
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84. The $1,130,000 price of CFI minus the roughly $150,000 paid to
shareholders including the defendants owning or controlling the 208,571 shares that
existed in June 30, 2008 leaves a difference of approximately $980,000.
85. It is believed and therefore alleged that Defendants Lowell Gates and his
wife, Habacivich, Russell, Dunphy, Henry, and Kohr, received approximately $980,000
through the above-described scheme. The non-defendant shareholders, including the
plaintiffs, who were largely responsible for CFI meeting the $1 million capitalization
requirement of the Pennsylvania Department of Banking in 1998 and 2002 by infusing
collectively hundreds of thousands of dollars, divided about $75,000.
86. This dilution of shares was part of a scheme to defraud plaintiffs and other
non-defendant shareholders, who did not benefit from this inside deal available only to
Defendants Lowell Gates and his wife, Habacivich, Russell, Dunphy, Henry, and Kohr.
Those defendants benefited from insider knowledge and sweetheart deals at the expense
of other non-defendant shareholders, including the plaintiffs.
87. It is further believed and therefore alleged that Defendant Susan Russell,
former President of CFI, also received some of the approximately $980,000 proceeds of
this transactional scheme as a reward for her active participation and approval of the
scheme and her willingness to breach her fiduciary duties as President of CFI to the
corporation and thus its other non-defendant shareholders, such as plaintiffs. This
scheme benefited a select few shareholders, who owned and controlled shares and who
are also defendants in this case.
88. To maximize the value of their interest, it was critical for the individual
defendants to ensure that the value of CFI diminished in the weeks leading up to the
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finalization of the acquisition by Franklin Financial to enable them to acquire more
shares at a lower "book value per share .... on the closing date of a change in control,"
as set forth above. This was the essence of the "Creative Destruction," a scheme
formulated and executed against plaintiffs and other non-defendant shareholders.
According to the Proxy Statement, at p. 29, CFI could not engage in any activity
outside a good faith effort to preserve its business organization intact, without the
express written consent of Franklin Financial. Exhibit D.
Pattern of Racketeering Activity
89. In or around August 2001, Gates entered into a transaction with Mary K.
Solenberger, wherein he transferred the proceeds of her Individual Retirement Accounts
(IRA) to an irrevocable trust administered by CTC which resulted in litigation for
damages and punitive damages by Solenberger's estate's executors alleging that
Defendant Lowell
"Gates' conduct was motivated by a desire to benefit himself financially by
allowing his trust company [CTC] to control Decedent's funds, and thereby earn
fees. In addition, Gates' conduct in this case reflects a pattern of self-dealing
conduct whereby Gates encourages clients to transfer money to his trust
company [CTC] without advising them of the unfavorable tax consequences
associated with the transfer."
Solenberger v. Gates, No. 03-2005 (Cumberland County CCP), Amended Complaint
¶26. It is believed and therefore averred that that case settled with a substantial payout to
the Solenberger estate. Although CTC was not a defendant in that litigation, Defendant
Lowell Gates used CTC to engage in fraudulent acts. It is believed and therefore averred
that Defendant Lowell Gates in conjunction with some or all of the individual defendants
utilized the mails and/or telephone to effect this fraud upon Mary Solenberger and/or her
estate in violation of 18 U.S.C. §§1341, 1343.
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90. In 2003, another client of Defendant Lowell Gates, Marie Magaro, sued
Defendant Lowell Gates, his law firm, and CTC for more than $1 million in damages,
because Defendant Lowell Gates' self-serving legal advice resulted in Ms. Magaro
executing a prohibited transaction with her individual retirement account (IRA) under
Internal Revenue Service (IRS) rules.
91. According to Magaro's expert witness, the then-President of CTC Kerry
L. McLaughlin investigated and disclosed the problem with the [RA to Ms. Magaro,
and the CTC board members. As a result, McLaughlin was summarily fired by
Defendant Lowell Gates on January 9, 2003. According to the documents filed in the
Magaro lawsuit, by letter of January 12, 2003, Defendant Gates proposed acover-up of
the prohibited transaction from the tax authorities, a clear example of mail fraud, wire
fraud, obstruction of justice, money laundering, bank fraud, and monetary transaction
fraud in violation of 18 U.S.C. §§1341, 1343, 1503, 1951, 1956.
92. According to documents filed in the Magaro lawsuit, "CTC allowed itself
to be browbeaten [by Gates] into making improper loans without any documentation or
authority whatsoever. ... CTC did not have procedures in place to deal with issues
where Mr. Gates was involved in a conflict between CTC's interest and a customer's
interests. ... CTC was grossly negligent...." Spencer opinion dated April 17, 2006, p.
14, 15. These and other similar legal matters led to a reduction in CTC's capitalization
below the $1 million threshold and led to the Pennsylvania Department of Banking's
decision to place CTC under a Memorandum of Understanding. Costs and expenses
from this legal matter led to the reduction in capitalization of CTC.
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93. In response to a request for lawsuit information, CFI provided a litany of
cases filed against the company, including the Matter of the Gabriella Ami Eisen
Special Needs Trust Dated January 9, 1998. It is believed that Gabriella Ami Eisen,
who was born with serious birth defects, received money as a result of litigation
stemming from the nuclear reactor incident in 1979 known for the location of the power
plant at Three Mile Island. The money was placed at CTC to be held in a special needs
trust for the benefit of Gabriella Eisen. When Gabriella Eisen was institutionalized, her
mother was no longer eligible to continue to receive payments for Gabriella's care. It is
believed and therefore averred that at or around 2000 or 2001, Defendant Gates
authorized distribution from the trust for Gabriella's mother, contrary to the intent of
the trust, using the mails, telephones, and/or emails, which would constitute mail and/or
wire and/or bank fraud, as well as possibly embezzlement of pension and/or welfare
funds, or unlawful welfare fund payments. See 18 U.S.C. §§664, 1341, 1343, 1954. It
is believed that this distribution led to litigation against Defendant Gates and CTC that
resulted in a substantial payout to compensate the trust fund for illicit payments under
the terms of the trust. It is believed and therefore averred that this matter was
referenced in the CFI 2008 Annual Report proxy as an out-of--court sealed settlement
involving payment of $175,000. Costs and expenses from this legal matter led to the
reduction in book value and capitalization of CTC.
94. Throughout this period, PDB regulators repeatedly charged CTC fees as a
result of repeated failures to comply with banking laws and regulations. The repeated
failures led to the fees assessed by PDB to be much higher than they would have been if
the defendants were not repeatedly defying regulators. These PDB regulatory
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compliance reviews contributed to the devaluation of CTC. As set forth more fully
above, the individual defendants used intercompany receivables wired to CFI to
camouflage the failure of CFI to maintain required capitalization in violation of 18
U.S.C.§1343.
95. On September 25, 2005, CTC was held in civil contempt by Judge Mary
McLaughlin of the U.S. District Court for the Eastern District of Pennsylvania for
repeatedly failing to follow the Court's orders directing CTC to produce documents
responsive to a U.S. Department of Labor subpoena, investigating violations of the
Employee Retirement Income Security Act (ERISA). This decision for contempt was
subsequently overturned on a technicality. Chao v. CTC, 2005 U.S. Dist. LEXIS 21380
(September 26, 2005). CTC was defended in that litigation by a member of Defendant
Lowell Gates' law firm. According to more recent decisions, Defendant Lowell Gates
was designated as the lead attorney. See Chao v. Community Trust Company, 2008
U.S. Dist. 48770 (June 25, 2008) and Chao v. Community Trust Company, 2008 U.S.
Dist. 89091 (October 31, 2008). Once again, costs and expenses from this legal matter
led to the reduction in capitalization and directly benefitted Defendant Lowell Gates in
the form of legal fees paid to himself and his law firm, a clear conflict of interest and an
example of self-dealing. It is believed and therefore averred that Defendant Lowell
Gates in conjunction with some or all of the individual defendants utilized the mails
and/or telephone to engage in this predicate act. 18 U.S.C. §§1341, 1343.
96. When Plaintiff Patricia A. Helm, also a shareholder in CFI, sought to
obtain the addresses of other shareholders in 2007 to investigate the management of
CFI pursuant to 15 Pa.C.S. §1508, she was denied the information until after she filed a
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lawsuit. In his decision to award attorneys' fees to Ms. Helm, the Honorable M.L.
"Skip" Ebert, Jr., of the Court of Common Pleas of Cumberland County determined
that CFI management, including Defendant Russell, also a defendant in the Helm case,
acted in "bad faith" and in a "vexatious" manner before awarding attorneys' fees "as a
legal sanction for forcing [Ms. Helm] to litigate to obtain very simple, fundamental
information to which she had a clear legal right." Helm v. CFI, et al., No. 07-2122
(Cumberland County CCP), opinion p. 7. This refusal to provide Ms. Helm the
information to which she was clearly entitled in contravention of Pennsylvania law
constitutes a predicate act under the RICO statute. Working with other shareholders,
Plaintiff Helm diligently sought to inform all shareholders that CFI was being
mismanaged and systematically destroyed. Costs and expenses, including payment of
attorneys' fees, from this legal matter led to the further reduction in book value and
capitalization of CFI. Because the mails, fax machines, emails and telephones were
used, this is another example of mail and wire fraud in violation of 18 U.S.C. §§ 1341,
1343. Exhibit B.
97. In 2006, Defendant Gates exercised 2500 warrants at $20 per share, when
that same year he represented to the Internal Revenue Service that the price per share
was $13.88 as of December 31, 2006. In doing so, the defendants engaged in tax fraud
using the mail, which constitutes mail fraud in violation of 18 U.S.C. §1341 .
98. The loan agreement as set forth above, wherein in exchange for a loan of
$200,000, the individual defendants received either repayment with interest or the
ability to convert to stock that led to a windfall of approximately $1 million in violation
of 18 U.S.C. §§891-894.
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Franklin Financial's Involvement
99. Defendant Franklin Financial was fully complicit in the conspiracy and the
predicate acts, as it engaged in due diligence and thus knew or should have known of
this strategy, effectively ratified the previous actions of the individual defendants, and
then obtained a company with more than $70 million in assets under management and
approximately $500,000 in yearly returns and a $500,000 corporate headquarters for the
bargain price of $1.13 million, more than ninety-percent of which went to a fraction of
privileged shareholders. The shareholders receiving the windfall were precisely those
who masterminded the scheme, particularly Defendant Lowell Gates and the other
individual defendants.
100. Franklin Financial understood that the individual defendants benefitted to
the detriment of the plaintiffs and other non-defendant shareholders. Franklin Financial
was complicit in the scheme to cheat the plaintiffs and other non-defendant
shareholders, as evidenced by the fact that it followed through with the acquisition of
the company whose book value and capitalization was plummeting. Franklin
Financial's due diligence, and Franklin Financial's clear control of the merger process,
before and after the merger date, establishes that Franklin Financial understood and
participated in the scheme to cheat the plaintiffs and other non-defendant shareholders.
In addition, Franklin Financial clearly controlled all stock options after the merger, and
before the notes were converted. The Proxy Agreement shows, at p. 29, Franklin
Financial demanded that CFI agree that it would not authorize additional stock or stock
options, or grant similar rights with respect to its capital stock without the express
written consent of Franklin Financial.
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101. It is believed and therefore averred that at or about 2004 Franklin
Financial became the administrators of the multimillion dollar estate left by the aunt
and uncle of Defendant Lowell Gates, which may explain Franklin Financial's
willingness to overlook the actions of the individual defendants to diminish the value of
CFI in the months leading up to the acquisition of CFI. Upon information and belief,
through this personal relationship with Defendant Lowell Gates, up to and including the
emergence of Franklin Financial as the sole candidate for the merger with CFI, Franklin
Financial was aware, informed, and participated in the scheme to cheat the plaintiffs
and non-defendant shareholders. In addition, according to the Proxy Statement,
Franklin Financial was one of only two prospective purchasers of CFI, and the other
was not named. Upon information and belief, Franklin Financial's previous long-term
financial relationship with one of the individual defendants, Lowell Gates, which was
not disclosed in the merger documents, constituted a scheme to allow Franklin
Financial to profit at the expense of the non-defendant shareholders.
102. In addition, it is believed and therefore averred that Franklin Financial
benefited from assuming the federal long-term corporate tax loss carry-forward by CFI
of approximately $300,000 as a result of Franklin Financial's complicity in this scheme
to defraud the non-defendant shareholders, including the plaintiffs.
103. Defendant Franklin Financial participated fully in the conspiracy, and
never objected as CFI was allowed to be devalued. Defendant Lowell Gates and the
individual defendants, as co-conspirators with Franklin Financial, profited greatly from
their illicit conduct, including, inter alia, unjust enrichment, conversion, fraud, and
breach of fiduciary duty set forth above, and divided more than $1,050,000 among
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themselves alone at the final sale of CFI. Their profits are even more shocking when
compared to the losses to the non-defendant shareholders who did not have insider
knowledge of and participation in the scheme.
104. The remaining non-defendant shareholders, approximately sixty-two (62)
in all, divided the remaining proceeds of the sale of CFI, amounting to approximately
$75,000 for individual investments of hundreds of thousands of dollars.
105. Defendant Franklin Financial, which profited by obtaining ownership in
CFI, a company with more than $70 million in assets under management and a
$500,000 corporate headquarters for approximately $1.13 million, never objected to the
individual defendants' destruction of CFI assets leading up to the final transaction and
indeed conspired with the other individual defendants to ensure that Franklin Financial
would achieve ownership of CFI at a bargain basement price of $1.13 million.
106. Franklin Financial fully joined the unholy alliance, never objected as
CFI's value was diminished because of the sweetheart deal it received in the purchase
of CFI, profited from CFI devaluation, and was thus complicit in this scheme. Profiting
in the destruction of a business is the essence of the theory of "Creative Destruction"
adopted by Defendant Lowell Gates and the other Individual Defendants in the
mismanagement of CFI.
107. Defendant Gates' enterprise to defraud the plaintiffs and other non-
defendant shareholders was accomplished by engaging in "racketeering activity" as set
forth above and defined by the RICO statute at 18 U.S.C. § 1961(1) to include the
following:
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a. Mail Fraud (18 U.S.C. § 1341) -Defendants, for the purpose of executing
their scheme to defraud and obtain money by false and fraudulent
purposes, representations and promises placed in the mail, post office, or
other authorized depository for mail, matter to be delivered by the U.S.
Postal Service and took or received therefrom items such as letters to
shareholders, the proxy statement, annual reports of CFI, and other such
documents used to further their illicit enterprise to defraud the plaintiffs
and other non-defendant shareholders. To wit, the defendants utilized the
U.S. Mail Service over several years to further their scheme of "Creative
Destruction" designed to devalue and dilute shareholder equity so that the
value of CFI would be greatly reduced on the day of the "change of
control" to Franklin Financial. Franklin Financial utilized the U.S. Mail
over at least one year as part of its due diligence before entering into a
merger agreement with CFI, and in connection with the change of control
of CFI. Franklin Financial further utilized the U.S. Mail in its
communications with one or more of the individual defendants in
connection with the eventual purpose of purchasing CFI, since at least
2004 and up to and after the merger, including but not limited to
Defendant Lowell Gates.
b. Wire Fraud (18 U.S.C. § 1343) -Defendants for the purpose of executing
their scheme to defraud and obtain money by false and fraudulent
purposes, representations and promises used the telephone, facsimile
machine, electronic mail, or other wire communication device to further
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their illicit enterprise to defraud the plaintiffs and other non-defendant
shareholders. To wit, the defendants utilized wire communications over
several years to further their scheme of "Creative Destruction" designed to
devalue and dilute shareholder equity so that the value of CFI would be
greatly reduced on the day of the "change of control" to Franklin
Financial. Franklin Financial utilized the telephone, facsimile machine,
electronic mail, or other wire communication device as part of its
solicitation of CFI, and due diligence before entering into a merger
agreement with CFI, and in connection with the change of control of CFI.
Franklin Financial utilized the telephone, facsimile machine, electronic
mail, or other wire communication device in its communications with one
or more of the individual defendants in connection with the eventual
purpose of purchasing CFI, since approximately 2004 up to and after the
merger, including but not limited to Defendant Lowell Gates.
108. Defendants used the U.S. Mail, telephones, facsimile machines, electronic
mail, and other such communication devices to engage in the following unlawful
activity:
a. The scheme to defraud plaintiffs and other non-defendant shareholders by
diluting the value of stock in CFI at the last minute before the purchase by
Franklin Financial to reap obscene and illicit profit at the expense of
plaintiffs and other non-defendant shareholders who were bona fide
purchasers in good faith, as set forth above.
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b. The refusal to provide the names and addresses of other non-defendant
shareholders in violation of 15 Pa.C.S. §1508, as set forth in the legal
opinion of the Honorable M.L. Ebert, Judge, Court of Common Pleas of
Cumberland County, in the Helm v. CFI, et al. No. 07-2122, which is
attached as Exhibit B.
c. The scheme by Defendant Lowell Gates to personally benefit from use of
the corporate assets and goodwill of CTC and CFI, which depleted the
assets of CTC by subjecting to litigation for mistakes, malpractice,
malfeasance and conflict of interest perpetrated by Defendant Gates and
involving CTC, as set forth above.
d. Defendant Lowell Gates and other defendants directing Mary Solenberger
in an inappropriate and self-serving manner to take distribution of her IRA
so that the proceeds could be placed in a CTC trust to expand its assets
under management, rather than benefit the client, as set forth above.
e. Defendant Lowell Gates and other defendants illicitly advising Marie
Magaro to divest money from an IRA in contravention of the requirements
of the Internal Revenue Code and then seeking to cover up the same.
£ Illicitly allowing money intended to be held in trust for the benefit of a
severely disabled child to be used for purposes contrary to the trust leading
to a significant settlement to the trust, as set forth above.
g. Engaging in violations of Employee Retirement Income Security Act
(ERISA), as set forth above.
109. Plaintiffs demand a jury trial.
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COUNTI
RACKETEER INFLUENCE AND CORRUPT ORGANIZATIONS ACT (RICO)
Section 1962(c)
Plaintiffs v. All Defendants
110. Paragraphs 1 through 109 are incorporated herein by reference as if set
forth in full.
l 11. The defendants formed an enterprise for the purpose of defrauding
plaintiffs and other non-defendant shareholders and their actions affected interstate
commerce. The defendants are associated by the aforementioned scheme to engage in
"Creative Destruction" and by their management and control of CFI's affairs by way of
their membership on the board of directors, their position as officer, by their position as
corporate legal counsel, and by Franklin Financial's complicity and control in the
devaluation of corporate assets without objection after agreeing to the sale price of CFI,
including controlling the entire transaction after the merger was approved by the
shareholders, which resulted in direct damage to each of the plaintiffs herein.
112. The defendants engaged in at least two predicate acts for a racketeering
offense including mail fraud, wire fraud, tax fraud, and bank fraud, as set forth above.
113. The defendants intentionally misrepresented the value of CFI to non-
defendant shareholders, including the plaintiffs.
114. The defendants knowingly participated in and furthered the scheme
through numerous acts of mail, wire, tax and banking fraud. Specifically, defendants,
having devised a scheme or artifice to defraud, or for obtaining money or other property
by means of false or fraudulent pretenses, representations or promises, for the purpose
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Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 37 of 54
of executing such scheme or artifice or attempting to do so, placed in a post office or
other authorized depository for mail, the numerous letters, packages or other items to be
sent or delivered by U.S. Postal Service, or by private or commercial interstate carrier,
including, but not limited to, each CFI Annual Report, the Proxy Statements of Franklin
Financial, letters to shareholders, and requests for additional capitalization. Franklin
Financial engaged in mail correspondence with the individual defendants involving
each of the predicate acts, and as part of the scheme to defraud the plaintiffs.
115. The acts set forth above constitute a pattern of racketeering activity
pursuant to 18 U.S.C. §1962(c).
116. The defendants have directly and indirectly conducted and participated in
the conduct of the enterprise's affairs through the pattern of racketeering activity
described in more detail above, in violation of 18 U.S.C. §1962(c). This scheme could
not have occurred without the participation of the individual defendants and Franklin
Financial, which was complicit in the efforts to diminish the value of CFI so more stock
could be obtained by the defendants at a lower value and thus dilute the value of the
plaintiffs' and other shareholders' shares and increase the portion of CFI's sale price
provided to the individual defendants. Franklin Financial controlled and dictated the
actions of CFI, and influenced the acts of the individual defendants, leading up to the
merger, and participated fully in the pattern of racketeering activity, by conducting due
diligence, and requiring that all actions taken by CFI and the individual defendants
leading up to the change of control be authorized in writing by Franklin Financial, as set
forth in the Proxy Statement.
37
Case 1:10-cv-01285-VWVC Document 20 Filed 09/15/10 Page 38 of 54
117. As a direct and proximate result of defendants' racketeering activities and
violations of 18 U.S.C. §1962(c) described above, the plaintiffs have been injured in an
amount equal to at least their individual investments in CFI and its predecessor
companies that defendants converted as well as the profits, if any, distributed to the
defendants in connection with the illicit scheme set forth above.
1 18. In addition, as a direct and proximate result of defendants' racketeering
activities and violations of 18 U.S.C. §1962 described above, plaintiffs in their
individual capacities have been injured in their business and property in an amount
equal to at least their investment as well as any profits derived therefrom.
119. The defendants conspired to engage in said racketeering activities set forth
above.
120. The defendants invested income derived from said racketeering activities,
acquired control in CFI through a pattern of racketeering activity, conducted the affairs
of CFI through a pattern of racketeering activity, and conspired to do all of the above.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendants as follows:
a. Order defendants to return plaintiffs' investment and any profit derived
therefrom to the plaintiffs;
b. Award each plaintiffs compensatory damages in an amount to be
determined at trial totaling more than $80,000 for each
plaintiff;
c. Award each plaintiff treble damages;
d. Award plaintiffs their attorneys' fees and costs, and
38
' Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 39 of 54
e. Award such other and further relief as the Court deems just and proper.
COUNT II
RICO § 19620
Plaintiffs v. All Defendants
121. Paragraphs 1 through 120 are incorporated herein by reference as if set
forth in full.
122. CFI was an enterprise whose activities affected interstate commerce.
123. Defendants acquired and maintained interests in and control of the
enterprise through a pattern of racketeering activity described in more detail above,
including Franklin Financial's acquisition of CFI - a company with more than $70
million in assets under management and a corporate headquarters valued at $500,000 --
for approximately $1.13 million as well as payment to the defendants of more than $1
million and distribution to the plaintiffs and the other more than 60 non-defendant
shareholders, of approximately $75,000 of the sale price of CFI.
124. The racketeering activity described above constitutes a pattern of
racketeering activity pursuant to 18 U.S.C. §1961(5).
125. Defendants have directly and indirectly acquired and maintained interests
in and control of CFI through the pattern of racketeering activity described above, in
violation of 18 U.S.C. §1962(b).
126. As a direct and proximate result of the defendants' racketeering activities
and violations of 18 U.S.C. § 1962(b), the plaintiffs have been injured in their business
and property in an amount equal to their investment, any profits derived therefrom, and
the decreased value of CFI.
39
Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 40 of 54
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendants as follows:
a. Order defendants to return plaintiffs' investment and any profit derived
therefrom to them;
b. Order defendants to restore the value of CFI as a result of defendants'
diluting and devaluing the value of CFI;
c. Award the plaintiffs compensatory damages in an amount to be
determined at trial, totaling more than $80,000 for each
plaintiff;
d. Award each plaintiff treble damages;
e. Award plaintiffs their attorneys' fees and costs, and
f. Award such other and further relief as the Court deems just and proper.
COUNT III
RICO §1962(D~
Plaintiffs v. All Defendants
127. Paragraphs 1 through 126 are incorporated herein by reference as if set
forth in full.
128. As set forth above, defendants agreed and conspired to violate 18 U.S.C.
§ § 1962(b) and (c).
129. The defendants have intentionally conspired and agreed to acquire and
maintain interests in and control of an interstate enterprise through a pattern of
racketeering activity.
40
' Case 1:10-cv-01285-VW1IC Document 20 Filed 09/15/10 Page 41 of 54
130. The defendants have intentionally conspired and agreed to conduct and
participate in the conduct of the affairs of the enterprise through a pattern of
racketeering activity.
l 31. The defendants knew that their predicate acts were part of a pattern of
racketeering activity and agreed to the commission of those acts to further the schemes
described above. Even Franklin Financial, which may have joined the conspiracy later
than others, engaged in due diligence prior to the purchase and thus was keenly aware
of the various predicate acts and by choosing to enter into the merger agreement
effectively ratified such acts for the purposes of establishing a conspiracy as set forth
herein. Franklin Financial was aware of and was part of the conspiracy to engage in the
the devaluation of the shares of CFI as well as the dilution scheme to benefit the
individual defendant shareholders as well as Franklin Financial, by effecting the sale of
CFI at a relatively cheap price. In addition, Franklin Financial had a previous
relationship with at least one of the individual defendants, Lowell Gates, and, according
to the Proxy Statement, Franklin Financial was only one of two alleged prospective
purchasers, and as the alleged other purchaser was not named, it is alleged upon
information and belief, that Franklin Financial conspired with the individual defendants
even before the proposed merger. The defendants' conduct constitutes a conspiracy to
violate 18 U.S.C. §§1962(b) and (c), in violation of 18 U.S.C. §1962(d).
132. As a direct and proximate result of defendants' conspiracy, the overt acts
taken in furtherance of that conspiracy, and in violation of 18 U.S.C. §1962(d), the
plaintiffs have been injured in their business and property in an amount equal to their
41
' ~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 42 of 54
investment, any profits derived therefrom, and the decreased value of CFI in the years
preceding the purchase by Franklin Financial.
133. The defendants obtained or caused to be obtained or transferred shares in
CFI using false or fraudulent information, including insider information.
134. The defendants engaged in deceptive business practices that caused the
plaintiffs and other non-defendant shareholders to acquire shares in CFI without
knowing the true value of their investment and without foreseeing defendants' scheme
to devalue and dilute shares at the last minute to benefit substantially from said illicit
scheme set forth above.
135. In furtherance of said deception, the defendants made or caused to be
made false or misleading statements on financial reports and other such documents.
136. As a result of said deceptions, investors including the plaintiffs lost
money.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendants as follows:
a. Order defendants to return plaintiffs' investment and any profit derived
therefrom;
b. Order defendants to restore the value of CFI as a result of defendants'
diluting and devaluing the value of CFI;
c. Award each plaintiffs compensatory damages in an amount to be
determined at trial which totals more than $80,000 for each
plaintiff;
d. Award each plaintiff treble damages;
42
' Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 43 of 54
e. Award plaintiffs their attorneys' fees and costs, and
f. Award such other and further relief as the Court deems just and proper.
COUNT IV
CONVERSION/iJNJUST ENRICHMENT
Plaintiffs v. All Defendants
137. Paragraphs 1 through 136 are incorporated herein by reference as if set
forth in full.
138. The defendants acquired possession and control over the property of the
other non-defendant shareholders, including the property of the plaintiffs, and interfered
with that property, through an elaborate and premeditated scheme to ensure that the
defendants benefitted financially from the purchase of CFI by Franklin Financial to the
financial detriment of the plaintiffs and the other non-defendant shareholders, and was
made without the consent of the plaintiffs and non-defendant shareholders and without
lawful justification.
139. The plaintiffs were the rightful and legal owner over substantially more of
CFI than was reflected in the money they received as a result of CFI's sale to Franklin
Financial.
140. The defendants received and retained the property of the plaintiffs and
other non-defendant shareholders knowing that it rightfully belonged to the non-
defendant shareholders, without justification; and, that the defendants were unjustly
enriched.
141. The defendants intentionally obtained and withheld property of the
plaintiffs and other non-defendant shareholders by deception.
43
' Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 44 of 54
142. The defendants created and reinforced a false impression regarding the
value of the shares in CFI.
143. The defendants prevented the plaintiffs and other non-defendant
shareholders from acquiring information which would affect their judgment of the
merger and their willingness to see the merger consummated.
144. The plaintiffs and other non-defendant shareholders were intentionally led
to believe that they would receive more than $2 per share of CFI when there was a
shareholder vote on the sale at or around September 2008.
145. The defendants, individually and in concert, failed to correct a false
impression which they previously created or reinforced, or which they knew to be
influencing another to whom they stood in a fiduciary or confidential relationship.
146. Defendant specifically Franklin Financial controlled the entire merger
process, including keeping and holding the share certificates of all plaintiff
shareholders, calculating the payout, and controlling all post-merger payments and
values, and thereby deprived all plaintiffs of their right in their property, and interfered
therefrom without the plaintiff shareholder's consent and without legal justification.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendants, and further:
a. Order defendants to return plaintiffs' investment and any profit derived
therefrom to him;
b. Order defendants to restore the value of CFI as a result of defendants'
diluting and devaluing the value of CFI;
44
' Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 45 of 54
c. Award plaintiffs compensatory damages in an amount to be determined
totaling more than $80,000 for each plaintiff;
d. Award each plaintiffs punitive damages;
e. Award plaintiffs pre judgment and post judgment interest on its damages
at the maximum legal rate and full extent permitted by law;
f. Award plaintiffs exemplary damages;
g. Award plaintiffs attorneys fees and costs; and
h. Award plaintiffs any such other and further relief as the Court may deem
just and proper.
COUNT V
BREACH OF FIDUCIARY DUTY
15 Pa.C.S. §512; 15 Pa.C.S. §1712
Plaintiffs v. Defendants Lowell Gates, Habacivich, Dunphy Henry Kohr and Russell
147. Paragraphs 1 through 146 are incorporated herein by reference as if set
forth in full.
148. Each of the individual defendants stood in a fiduciary relationship to each
of the non-defendant shareholders, including plaintiffs, either as a director, officer, or
legal counsel to CFI.
149. It is believed and therefore averred that the actions of the defendants,
including their refusal to resolve the Helm litigation short of final adverse judgment by
a court of law and an award of attorneys' fees to Plaintiff Patricia Helm (Exhibit B),
constituted a breach of their fiduciary duty because the individual defendants acted in
bad faith and could not reasonably consider their actions to be in the best interests of the
corporation.
45
Case 1:10-cv-01285-VWVC Document 20 Filed 09/15/10 Page 46 of 54
l 50. As such, the defendants were obligated to act in good faith in the best
interests of the corporation to benefit all shareholders, including plaintiffs.
151. Defendants further did not act in a manner consistent with ordinary
prudence under the circumstances.
152. Pennsylvania Corporations Law sets forth in pertinent part that "[a]
director of a domestic corporation shall stand in a fiduciary relation to the corporation
and shall perform his duties as a director, ... in a manner he reasonably believes to be
in the best interests of the corporation and with such care, including reasonable inquiry,
skill and diligence, as a person of ordinary prudence would use under similar
circumstances." 15 Pa.C.S. §§512(a), 1712(a).
153. The facts as set forth above demonstrate that the Defendants Lowell Gates,
Habacivich, Dunphy, Henry and Kohr, who were members of the board of directors of
CFI at various times, breached their fiduciary duties to CFI and its other non-defendant
shareholders, including the plaintiffs herein, and acted in a manner that could not be
reasonably considered in the best interests of the corporation when they engaged in
conduct designed to devalue stock to benefit themselves ultimately.
154. The actions of the aforementioned defendant directors of CFI as set forth
more fully above were not in good faith and failed to demonstrate reasonable inquiry,
skill, and diligence as a person of ordinary prudence would use under similar
circumstances.
155. Pennsylvania Corporations Law also sets forth in pertinent part that "an
officer shall perform [her] duties as an officer in good faith, in a manner [she]
reasonably believes to be in the best interests of the corporation and with such care,
46
' ~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 47 of 54
including reasonable inquiry, skill and diligence, as a person of ordinary prudence
would use under similar circumstances." 15 Pa.C.S. §§512(c), 1712(c).
156. The actions as set forth above demonstrate that Defendant Russell, former
President of CFI, were not taken in good faith nor in a manner that could. reasonably be
considered to be in the best interests of CFI and thus its non-defendant shareholders,
including plaintiffs.
157. In addition, the actions as set forth above demonstrate that Defendant
Russell failed to act with such care, including reasonable inquiry, skill and diligence, as
a person of ordinary prudence would act under similar circumstances to benefit the
corporation and thus its non-defendant shareholders, including plaintiffs.
158. Defendant directors and officer(s) acted in a manner contrary to the best
interests of CFI and its non-defendant shareholders, including the plaintiffs, in an effort
to benefit themselves and not the company or its non-defendant shareholders, such as
plaintiffs.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against these defendants, and further:
a. Order these defendants to return plaintiffs' investment and any profit
derived therefrom to each plaintiffs;
b. Order these defendants to restore the value of CFI as a result of
defendants' diluting and devaluing the value of CFI;
c. Award each plaintiff compensatory damages in an amount to be
determined at trial totaling more than $80,000 for each
plaintiff;
47
' ~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 48 of 54
R
d. Award each plaintiff punitive damages;
e. Award plaintiffs pre judgment and post judgment interest on its damages
at the maximum legal rate and full extent permitted by law;
f. Award plaintiffs exemplary damages;
g. Award plaintiffs attorneys fees and costs; and
h. Award plaintiffs any such other and further relief as the Court may deem
just and proper.
COUNT VI
FRAUD/WASTE OF CORPORATE ASSETS
Plaintiffs v. Defendants Lowell Gates, Habacivich, Dunphy. Henry, Kohr, and Russell
159. Paragraphs 1 through 158 are incorporated herein by reference as if set
forth in full
160. The defendants represented to the non-defendant shareholders, like
plaintiffs, that they owned stock with a certain value.
161. These terms were memorialized in capitalization agreements in 1998 and
in 2002 as well as in various annual reports, letters, and other corporate documents.
162. At the time of such representations, defendants acting in conspiracy knew
and planned to take actions before "the closing date of a change in control" to diminish
significantly the value of the non-defendant shareholders' investments, such as
plaintiffs' investments.
1.63. Defendants expended corporate assets in a manner that could not be
reasonably considered in the best interests of CFI in an intentional effort to minimize
CFI's "book value" so that at the last minute the individual defendants could obtain a
48
~ ~ ~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 49 of 54
massive amount of stock at a reduced rate and thus dilute the interests of other non-
defendant shareholders, including plaintiffs.
164. The representations regarding the share values made by the defendants,
either individually or in concert, were false when made and made with the knowledge
of their falsity and the intent to induce non-defendant shareholders to invest in CFI.
165. The plaintiffs and other non-defendant shareholders acted in reliance of
these misrepresentations and suffered injury as a result of the material false
representations made by the defendants without being properly compensated.
166. The aforesaid false representations by the defendants were made
intentionally and thereby warrant imposition of exemplary damages against the
defendants in addition to any other damages awarded to the plaintiffs.
167. As set forth more fully above, the individual defendants engaged in an
intentional deception made for personal gain or to damage the other non-defendant
shareholders, including plaintiffs.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendants, and further:
a. Order defendants to return plaintiffs' investment and any profit derived
therefrom to each plaintiffs;
b. Order defendants to restore the value of CFI that was lost to plaintiffs as a
result of defendants' diluting and devaluing the value of CFI;
c. Award each plaintiffs compensatory damages in an amount to be
determined at trial totaling more than $80,000 for each
plaintiff;
49
~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 50 of 54
d. Award each plaintiffs punitive damages;
e. Award plaintiffs pre judgment and post judgment interest on his damages
at the maximum legal rate and full extent permitted by law;
f. Award plaintiffs exemplary damages;
g. Award plaintiffs attorneys fees and costs; and
h. Award plaintiffs any such other and further relief as the Court may deem
just and proper.
COUNT VII
CONSPIRACY
168. Paragraphs 1 through 167 are incorporated herein by reference as if set
forth in full.
169. The defendants entered into an agreement to commit each of the foregoing
violations of law.
l 70. Each of the defendants willingly participated in some or more of the
actions leading to the claims set forth above
171. Each of the defendants willingly participated in some or all of the
aforementioned offenses.
172. The defendants engaged in overt acts in furtherance of each of the
aforementioned offenses.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendants, and further:
a. Order defendants to return plaintiffs' investment and any profit derived
therefrom to each plaintiffs;
50
~ ~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 51 of 54
b. Order defendants to restore the value of CFI as a result of defendants'
diluting and devaluing the value of CFI;
c. Award each plaintiff compensatory damages in an amount to be
determined at trial totaling more than $80,000 for each
plaintiff;
d. Award each plaintiff punitive damages;
e. Award plaintiffs pre judgment and post judgment interest on its damages
at the maximum legal rate and full extent permitted by law;
f. Award plaintiffs exemplary damages;
g. Award plaintiffs attorneys fees and costs; and
h. Award plaintiffs any such other and further relief as the Court may deem
just and proper.
COUNT VIII
SUCCESSOR LIABILITY AGAINST FRANKLIN FINANCIAL
l 73. Paragraphs 1 through 172 are incorporated herein by reference as if set
forth in full.
174. Franklin Financial acquired CFI and CTC through the terms set forth in
the Proxy Agreement.
175. At page 19 of the Proxy Statement, it is clearly stated that CFI would be
merged "with and into" Franklin Financial, and at page 3, it states "with Franklin
Financial as the surviving company to that merger."
176. At page 27 of the Proxy Statement, it is clearly set forth that Franklin
Financial will receive all property, rights, powers, duties, obligations, debts and
liabilities of CFI and CTC.
51
s ~
~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 52 of 54
177. According to the Proxy Agreement ,Franklin Financial assumed full
successor liability to the actions of CFI and CTC, and their officials.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendant Franklin Financial, on the basis of its successor
liability, and further:
a. Order defendant Franklin Financial to return plaintiffs' investment and
any profit derived therefrom to each plaintiff;
b. Order defendant Franklin Financial to restore the value of CFI as a result
of defendants' diluting and devaluing the value of CFI;
c. Award each plaintiff compensatory damages in an amount to be
determined at trial totaling more than $80,000 for each
plaintiff;
d. Award each plaintiff punitive damages;
e. Award plaintiffs pre judgment and post judgment interest on its damages
at the maximum legal rate and full extent permitted by law;
f. Award plaintiffs exemplary damages;
g. Award plaintiffs attorneys fees and costs; and
h. Award plaintiffs any such other and further relief as the Court may deem
just and proper.
COUNT IX
VIOLATION OF UCC AGAINST FRANKLIN FINANCIAL
(13 Pa. C.S. §8501, et. Seq.)
178. Paragraphs 1 through 177 are incorporated herein by reference as if set
forth in full.
52
• >
~ Case 1:10-cv-01285-WWC Document 20 Filed 09/15/10 Page 53 of 54
179. After the merger with CFI, Franklin Financial assumed control and
responsibility of receiving the share certificates of CFI shareholder non-defendants, in
exhange for cash payments.
180. Upon information and belief, Franklin Financial did not receive value for
receipt of the share certificates, and had notice of, and participated in, the scheme and
conspiracy of all defendants herein.
181. Franklin Financial violated the Pennsylvania UCC provisions, including
13 Pa. C.S. § 8501, et seq., and non-defendant plaintiffs herein remained holders of
entitlement interests in their CFI share certificates.
182. Franklin Financial is responsible for compensating non-defendant
plaintiffs for the full amount of their entitlement interest in CFI shares which were
tendered to Franklin Financial pursuant to the merger.
WHEREFORE, plaintiffs respectfully request that the Court enter judgment in
their favor and against the defendant Franklin Financial, on the basis of its successor
liability, and further:
a. Order defendant Franklin Financial to return plaintiffs' investment and
any profit derived therefrom to each plaintiffs;
b. Order defendant Franklin Financial to restore the value of CFI as a result
of defendants' diluting and devaluing the value of CFI;
c. Award each plaintiffs compensatory damages in an amount to be
determined at trial totaling more than $80,000 for each
plaintiff;
d. Award each plaintiffs punitive damages;
53
`!R R
~ Case 1:10-cv-01285-VW1/C Document 20 Filed 09/15/10 Page 54 of 54
e. Award plaintiffs pre judgment and post judgment interest on its damages
at the maximum legal rate and full extent permitted by law;
f. Award plaintiffs exemplary damages;
g. Award plaintiffs attorneys fees and costs; and
h. Award plaintiffs any such other and further relief as the Court may deem
just and proper.
JURY TRIAL DEMANDED
Respectfully submitted,
THE FARNAN LAW OFFICE
By: s/ Michael A. Farnan
Michael A. Farnan
PA ID No. 69158
mfarnanna,farnanlawoffice.com
3710 Forbes Ave, 3`d Floor
Pittsburgh, PA 15222
Tel: (412) 592-7737
Fax: (412)202-4383
Counsel for Plaintiffs
Dated: September 15, 2010
54
Case 1:10-cv-01285-WWC Document 20-2 Filed 09/15/2010 Page 1 of 6
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0ai 14; 2806 19: 29 7177637x57 WILLIA~S
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A~p~~ TO ~ iIOS DCi`
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Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 1 of 13
Exhibit B
' ~ Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 2 of 13
PATRICIA A. HELM, IN THE COURT OF COMMON PLF.A~
Plaintiff CtJM16SRLAND COUNTY, PENNSYLVANIA
N0.07-2122
v. .
CO~I~~'UNITY FINNANCLAG, Il~iC.; CIVIL ACTION - BQUTFY
5USAN A Ri>S,Sffi~:, LOWBZ.L
R GATES,
,~' . . J
O>RD~ QI!'t,~l`JYtT
AND 1aOW, Bus 18'~ day of Au~uat, 2008, upon cow of Defmdmts' Mo~iaon
fb~r S~uury J and PlSiatiR's t:~oaa-Moon fog Smmmaty Je~onmt,
1T IS ~Y 0)RDEBRD AND D~C!'ED tbsct the De~'domds~ta' Matiaen for
~; ~ -.
S~moumsory Je~oaaco~ is DZNIIirD smd Plaantiff: Cross-Motu far Spry Ju~dp~emrt is
GRANTED. A hao®g shall be acduedoled to date the res~asblmeas of tegat &~as
. ionc~+ed by Plsintiff tp prosec+aba this msste+r.
By the Cow
~~
M. L. Ebert, h., J.
Micbs~ !-. Fs:aan
. Atto®sy for Plaiuti$
100 FIfD Avt~se, Snits 504
Pittab~agh, PA I S2Z2
,~ . `-
Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 3 of 13
i James D. Flawet, Jr., Esquire
Jam B. La®pi,
Attaraeya for ~
Saida, Flower Jt Lia~bsy
26 Went l~ig6 S~teCt
Carlisle, PA 1710
~~ -.
•..~ _
2
' Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 4 of 13
j PATRICU'- A. I~LM, IN 'THEE CpUN'PY, PENNSYLVANIA
Plaintiff CUl1'~
N0.07-2122
v. .
CE)M~UNTTY FINANCIAL., iNC-; CIVIL ACTION - BQUITY .
SUSAN A. RUSSELL ~-
R GATES,
BSSRT, J , Ash 16, ZOOt
~r• ~Tr OpFA~
ss
} P P A, ~, ~ baen a sbsaahold~ of co~tm-ty Financial, ~• ~'~
since 1998. She bed made as invest of ~p,000.40 aced is lid u the owaer of 1000 slra~
of CEI sboclc. P~ffhas ~ civil action i~t egtuty against Defmdati~is, (~, wpm A.
Rvme11, Preodent aced Chief Facoot~e ~~ of ~, ~ Lovroll R Elates, E~eirman of tine
g~ ~ CpI, pot m li Pa. C.S. § 1508, to obtain a biat of ab~arabai~idas, tbair addt~a, ~
that "P l• ~°~''~0' Plaintiff wets to have atto~rey's foes, Doerr, and
app ia~aarad ~ litigate this action paid by tbo Defmwdants.
Pa~ylvania laru that a sha~rabpldeR hes a tight ro inspect aced obtain share regiarer
in~rmatioa a ~~ v~~ did netting 5orth the ptiapeae for the ragn~est. 1S Pa C.S.
§ 1508(b). In cedar to daaY ~ e ~+~, rl~ beardea of proof;$ on the cortporation to eetab4~
~ ~ ~ eaeizs ~ won of dais information for an im~er purpose. 1 S Pa. C.S.
Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 5 of 13
1 § i 508(c}. Furthermore. the court may "award such other or further relief as the covert deems just
amt proper." !d
The current issue in this case atoms firosn the Plaintiffs e$orts to obtain shareholder
infornn~ion that she argues she was entitled to under 1 S Pa. C.S. $1508. On February 23, 2007,
the Plaintiff sect a letter to Susan Ressetl, President sad Chief ~~ Officer of CFI. At the
vary top of Chia one psige ~tDer in bold , utmderlinal, soro the w~ o`V~ Dersss~ fa
~~~~
to maTra copies of extracts from CFI's share rogiatetr, books and teoords of accs~ 8~
spaaficafly stated "I hereby state thtut my reason for making this demand is in ordea to iafosm
myself of sigtori~cant m~fosmsaioo rola4mg m matbmrs of earporate financial condiZio~ and
• govemence ao I may propa'IY my tigitta sad protect my mtiereats as a corporate
- shardwlder."
•-
In respos~ae to this dmaaod, Sus~aoa Russell, Preaider~t and CEO of GFI reapondedby letter
dated February 2B, 2007. She aclmowledgeB in the sulsj eat 1me of her letter float abe is
responding to a `Weri6ed Dess~d for ~eedaa e# Co~puam Riaoords Panstadt M ~ 1~8
(6) ~[ 11u a>,s Carparate tas• of 1188." Praaid~tut Rwseu aid not provide the records
rrgnessad by Ms. Helm and stated that corporate counsel advised ~ tthat the t~aoarda will not be
made available because "apeci6c Proper ptsrpoae €or such infoarmatiasi has not been eatabbiah~l."
President Rnasell went aft to state that sEre is "disapptai~ed in die oontinned mettaads emgbyed
by a certain gong of bidets to w~h yon belong whec~y y~r have cantittoed to raQneat
the acme information without establishing lea purpoae•" Brut iar this declstative agent,
presiderrt Russell's letter presents no Proof o f arty ~'oPa PmPase ~ certainly the statement
~ - cannot be said to ~ the corporation's burden in proving an improper Purpose.
._
2
' Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 6 of 13
~, j 0n March 8, 2007, Plaintiffagain wrote President Russell voicing lxr disappointment
with the company's failure to comply with hoer request along with the simple question'~vv
thr'eat~g Can a request for an apdaterl Shareholder's list be?" Ms. Helm received ere teeponse
to this letter and wrote to President Russell again on March~2, 2007, again dam~mdiins that slit
be albwed to come to CFI within S days and "obtain a copy of tbie shareholder list."
1n response ~ this letter, Ms. Halm received a letter from Attorney John B. Lamps of dte
from Saidis, Flower sad I.nrdsay who waa corporate sad regulatiaty counsel for CFI. The letter
in~ted the Pree~t ltmsdl had roqueanxl that At'DOnoay Lanlpi reP1Y m Ads. H~aa's most
recast rogoeat. M'r. Lamps wrote "Ms. ILitsadl roquastal me to write to yon to ~cpkm the
r~aan to ~v_Y~.sa~ to sa inanectioa to amp as ddiasated in your
March 8, 2807, letter to Ads. RvsseIl. Mr. Lamps went onto state
~ - `R'ba r+eaaoaa is simgIy stated: ca
- is add
Over the years, y~ bsvo rY ddivemd dams~ads,
arul hsaslt statemes~ to CFI t or its advisors impugning
the integrity of (~Z msaagaaneat, in ganaal, and AdL Lowell
Gates, the Cl`1(~irman, is pseticstlar. his quite obvious in
ra~diog tltu eo~espamdeac~ tlua you 1~ ~ animus against
Ad: C>a>tea sad wimt to atab®rass ate, perhaps, mace 1ti~m
t~acially. That is y+~ pwrpoee m obtaco~tg tltis iedormation.
You want to eo~tie y+onr ~ writing ag~st
Mr. Goes by ~~ to the c;FY stockboldva. These
is ~ at>~r o~lusion mac can ba reached by as observant."
Finally, Plaintiff filed a conaplaiiat ua equity on Apri116, 2047, pursuant to l S Pa C.S.
§li(}8 aslQng the coast m aompet CFI to comply with b~ sharabotder's request sad provide her
with the following corpanrabe records: "a list of sharehoiders, their resgoctive amount of shin,
fora! member of outstaadiag shares mtd ~ sharetiotder's addresses." After ignoring her rogtusss
- - -' far mom. on May 2, 2807, only 16 days after Sling the connpiaiat, counsel far CFI provided
3
' ~ Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 7 of 13
P
,t ._
. ~ the shareholder information that Plaintiffha-d requested. The response consisted of a one
sentence tra~astnittal letter and ~ sheet of paper listing the requested shareholder information.
The eccompanyiag letter did not address the issue of attorney's costs and foes.
0n Mey 4, 20Q7, du lkfondaats filed a 4 page answer to the Plaintiff s complaint in
which they again aveaed that the Plaintiffs request was irnpropar and that it was Daly nude to
"continua a mailing campaign of t sad personal vaadetta on bnbslf of harseif and
otheis." 1a the final paragraph of their aaaswer, a8er motttbs of arhat his Court finds deLtying
and stahbornly reeisrant condaca, the Defea~da~t simply state that tthee oaqursbod taibmoatiaa lies
beau suq~plied to the Plaiati$ Amy as of lb[ay 4, 2fl07, Defer~em~ts Daly request to the
Court was than it dmy arty awaod of attorney's f~ or costs to the Plait
At ArguaQent Court and in their respective briefs, both patties basicauy admit flat the
Daly isaua m !~ decided as a mattes of law is wlacther Plaintiff is e~itled to atto®ey's fees sad
other costs asmaated month the litigation.
According to Pa it.C.P. No.1035.2, after the proper pleadings have oocurral, a party
may move i+os'summary judgment is two lnstaaca:
(l) R~heaevac there is no genuime imue of any materisl ~ as to a necessary
elemaat of the Daces of a~an ac avbich coin be established by additional
discovery or eapert t+aport, or
(2) If. a$er tba oamplatZOa of disoovary relevant oo the motion, ineiudigg the
pcod~tion of~pert rOpotti. an adverse petty who will boar the burden of pt+oof at
trial lies f3iied to produces wiwda~e of facto aaamotial do the ~ of action or
which in a jwry trial would require the issues m be submitted to a jury.
S~+ judgment is proper where the plaadiz-gs, depositions, soswers to
-. ) ~ mtarogatonos, adnriseioos and affidavits on file demonstrate ths< there exists na genuiaa issue of
4
Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 8 of 13
~. % material fact and that the moving party is entitled to judgment as a matter of law. Pa,It.CP.
1035.2(1), Weim~ v. Amy Mo Co., 718 A.2d 305 (Pa. Super. 1998)- The purpose
of summary judgment is to avoid u~aaeccessary trials and to eliminate the waste of time and
resources of both litigants where a trial would be a useless fonmalihl• ~v. Cam' 8
Service Carter. Inc., 578 A.2d 8 (Pa. Super. 1990), a~pea! den~d 58S A.2d 468 (Pa 1991}_
Summary jaelg~oent is meant to e~inafie the waste of time and reaoueas of bath litigants and
the Douala is eases where a trial vvaiid simply be a useless fo~aiity. ~.~ 567 A.2d
691 {Pa Super 1989). Bah pscoies admit that the only issue !e be decided is a ge~aetLOe- of law.
lbno gne~tion is whedtea Plauoaaff is entitled to attatnty's fees aed other coats ~soctaled with this
litigation, The psacties agree oa the basic facts: per' made aesresal raqumts Sor ~
i~matition and Defendants die not provide her with this n until attar sbe f lea suit m
Tlu Court fmda the Plaindff p~ropedy made bar ~aesc uad~ac l S Pi C.S. §1so8 in
orde m "exm9ci$e my riglda and protect my interest as a corporate ahanholelea." tHelm tatter
dated2123/07). Such a request, ~S by a 76 y~eac old se~ool tGaci~ar who had madee a
520,000.00 iav~eatmeut W parciuae 1,000 abarea of CIZ, is net imreaaonabte. Tt will be noted that
in examining the shamkto~er won Parovlded by the company aRer the laRrsuit was
initiated, there are Daly 6s sbamholaQrs in CFl and ply 2s have abamhoidin~ greater than
Ms. ~Ie:lm. 4rax the Defer were is receipt of I3elm's ~opa request, ~ Dew had
the burdeat of ptovuog that the request was i~+oper. 15 Pa.CS. §1508(c},171 A.2d 788 (Pa
1961). Mea:ely static or speeWatir~ that ~ ~eSt was for as itaprope~sr purpose doe ~t
prove that her request was improper.
j._.
~ } :-
Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 9 of 13
Indeed it has beta held that a roquest to obtain stoddzolder lists for tba pmp~ of
contacting and biadin eogether other stockholders to inflneeue actiton at a stockholders tneet~g
~ a spa ~- v I71 A2d 788 {Pa.1961).
Plaintiff is not m lilc~e tbus of the Board of CFI. If CFI had Proof that Plainti$
was inmpugoiag the ' of noaaageanent ar intended to finamciatiy ~3~ or emberraes
G'haimnan ~. t~ was to accept the biuden of proof tegtmad of them by the PAC
and, prove Plamotiff's imprope pmepose. While it's true that Defer ~
ietfOrma~on to the PLitedff amreial times in previotm yes, Daftadtunt Rnasell admsttod that tise
infonmat>boa bad abangad since it had boas last provided to Plaintiff i,~,~- Thu single pct tbat
CFI's vexatious aces of ingera~ptr motive evaporated within 16 days of the filing of the
suit, ahowa theet they ~ m ream they could not prove ~ e• T~ thou
consisted of a ogee aerdenoe letter and amue short of paper ~8 tbt abautboldeaa' io•
'This minimal eSort to supply Ma. Halm with a rcapam~ae can hardly be considered toady or
oaeroees to the ccuparation.
The st~1e does naR ~::k:~iy rognste cozperrations to pay ~~Y's f~ assaceated with
coeut to obtain as arcder to compel ieaspecs~ of corporate rocat+ds. Th~a
P
statute does give the Court the won m award "such other or l relief as the Court
deems just and pt+oper." 1 S Pa. C.S. § 1508(c). The Defendants make ~e that since
§ 1506 of the Peamsytvamia Asmciad~ Code ( PAC) is silt m regard to tbs
awaYdiag of the atboaney's fees, and d-at FY's ~ are specifically a~eatioood in §1580 of
the PAC, (Costs and ~ of Valuation ~~ of the PAC, them it mast follow clot
attor~y's fps should cot be awarded in litigation involving § 1 SQ6. It goes without saying that
a request fur valuation of a corporate under § 1580 is a much nacre time consum~og and
• Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 10 of 13
expensive imdettaldng than a simple request for a fist of shareholder information R'~~ CO°~
of one page. The Courts have indicated that There is a distinction betareca~ a smekbolders's right
to a general inspection of books and rxords and a request for an inspectiom or a cc~yof a
si~reholdzr's list Courts tend to be more letyieaat with requests for stockl~lder thtm
general inapectioos of books and records. v 171 A.2d
788 (Pa.1961}. Accordim~gly, this Court does not accept the argitm~t that the nacre failure to
speC~y mezdian ~~g °f ~e attorney's fees in ~ 1580 of itie PArC prohibits such a~a
award To do so would reodet nacaatiingless the wads "or award such other a relief as
tin Court deems just and propel' 1S Pa.C.S.A. § 15{}8 (c}.
Ptom a public policy staudpeimd, the Comm that Defmdaans abeoutd pay the
rwwaoaible at~ey's fees and vests directly 'sacutred by Plaintiff is comttt®.c~g and littgatmg
~ • - • a }awsait to vbtaaa the ~ ~ shy as a shaareholder, pa+opeaiy had a lagialative r'tgM to
rive. u~r 1S Pa C.S. §1508(b). This lawsuit would not have bees aecessmry but for
' actic®s in witbhoid;Og the sltazedwldcr information until Plaiattffhad
personal legal o~nsas m obtain Court iuten-aotian- ~ would be deeeRed from
to obtain corporate mformatian to which they are PAY eatitle~d if this Corot avme to
allow cotporatia®e to pmoisact 1mB~on whenever sharohpi~ sought to obtain ahareitoldar list
information 'Ibis ComR does ~ ibat requirin8 the D~ndants in .a to pay. tlu
rile atooraey'a fees and costs incurred by Plaintiff is a just sado~ef remedy. This
Court is aIIownng Plaimdff ~ recover attorney's fees and costs from the Defendants as a
sanction for forcing her do titiig~ to obtain very simple, fundameatat information m which she
had a clear legal right.
. Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 11 of 13
~ By way of analogy, Petmsylvaaia discovery practsce provides sane insight" ln,nany
ways dse provisions of Section 1508 of the PAC are nothing ~ thsa a sP~ "chscovery"
rule created by the legislature bat use by corporate shsa~eholders. in civil litigation's Party is
tequdred to respond to legitimate discovery requests, which oRm- include a request for
production sad iospocting of doamnents. if a party fails to provide discoverable iaformation, a
court a~ay saactioa tiua offeadmg Ply Pa.R.C.P. 4019 (a) (1) (~ti)• lateaes~lY, i£ a party
fails to provider docmooerts, Pa.RC.P. 409 (c) (5) shows the Corot to make "such order arith
regard m the m make discoveary as is just." 'This langas~ge ~ remarkably similar to that of
Section 1508 (c) of the PAC, wldch is a proceediag far the amfaircesD~ent of msp~tron by a
al~hold~, the Courtt may `fin its discretion... award each oflmr or flarther rdief as the Court
deems ~ and proper " In civil discovery cases, cooaset fees iaeiurrd es a direct resalt of a
l - - discovery violate may be imposed ae a ssnetioa. ~ e v ~n•
j~j 6S5 A.2d 112 (Pa Super 1994). A failure to produce documents may be a
?pis m aarard atixuaey's €ees where a party's failure bo produce is the remit of intraosi~t
any, ;~::Maca.~ v, ~eerw 521 A.2d 942, (Pa. Super 1987}.
DViu1e nefttber party was abk m piovida any Peaasylwnia case ~rectiy on point, tltc
Delaware race of v. . X91 A.2d 1(Dcl. Ch 20Q0) is
insttuctiver. 5eetion 220 of the Delaware ~~ Corporation Law entitled "Inspection of Boob
~ g~~~ ~ a provision similar tQ section 1548 (c) of the PAC. The Delaware statute
allows for a sibcldtolder to inspect ~ copy ~° corporafion's "stocldedgex, list of its slockholdeas,
sad other books ~ records for soy primer p~po~• " Additionally, it specifically status that if
the corporation refa~ea to permit the naspect~on-- a Court of Chancery shall hear the case and shall
1 -
Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 12 of 13
be permitted to "award such other or further relief as the Court may deem jug or proper." 8 Del.
C. §220 (c).
In the ~~~ case, a Court, sitting in equity, iaterpret~ this section to allow the
Payment of attorney's ~ against a party who was determined ro have acted in b~. $ith. in that
case, McGowan, who was director and 18.?b% ~ of Einptess Fan~ainme~ ~., made
what the Coact described ~ a rehtively simply and strai~tfarward request far doamn®ta. Tyre
corpocatiea delayed a rye fin 16 months f~ciag Mc:G~an ~ file a Sectiau 220
request fOr inn of bo~cs cad mcords. McGowan' filed a motiaai flu summary jud~eat
and the ~rparafi~ immediately provided the infoarmation raqu+ested. Ctn tbsxe facts wheae the
Court $ads that the b®g peaty acted in bad faith b ~poaiag due request far ate,
"attorney's fora may be awarded if it is shower that the Deferxhmt's conduct forced the Phcintiff
,' } ._ to 61e avit to aecu4e a clearly defined ~ ostsbli~ed right." ~aGavean v. B:u
~, '191 A.2d I at 4 (DeL Ch. 2000)
is t'lria calm, Ms. Helm had a "cleady defused and e~ablislsed right" to the stockholder
itsfaomation list. the De~daats' actions is faiting to eamQly with the request for a staeicholdor
list fo4ood the Plair-ti$ ~ file sni#. Accordingly, this Crnat farda that the Denis aced in
"bad faith" and. t#erefore an subject to the sanction of paying rode attomey's fees. The
Court deems such relief in this case as "just and proper.,'
Accordingly, the following ender shall be enocrad:
AND NOW, this ISQ` day of Aagust, 2008, upon conaideratiorz of Defendants' Motion
for Summary Judgment and Plaintiff's Cross-Motion for Summary Judgment,
~-
9
Case 1:10-cv-01285-WWC Document 20-3 Filed 09/15/2010 Page 13 of 13
j IT IS $~ ORT1ERgD AND biRECfED that the Defendants' Motion for
Summary Judgment is DENIEb and Plaintiff's Cross-Motion for Sncam~Y Jud~enr is
GRA1V'fED. A heariag shall be scheduled to detezmine the reasonableness of legaG fees
incurred by Plaintiff to prosecute tins matter.
sy the Coart,
~~
M. L. Jr., r•
. A» ~>~
Att~y ~Pmi~
1 qQ Ft>Di Avenue, Suite 504
Pithbaugb, PA 11222
James D. Fhr9tre~t, Jr., Faquire
~ ~ _ Jain B. Ysmp-, Bpmt+e
1 r Atlo~ys,l;OrDe~eod~m~s
Sadie, Flout di: Liodsiy
2b West 1~t Stta~
CaKlia[c, PA 17143
IQ
Case 1:10-cv-01285-WWC Document 20-4 Filed 09/15/2010 Page 1 of 2
Exhibit C
~. - ~ Case 1:10-cv-01285-WWC Document ~2E~=~} Filed
.. ~ .
.-
December 18, 2008
Mr. Robert Abel
2303 Claridge Coact
Enola, PA 17025
Dear Mr. Abel:
Thank you for your inquiry about the calculation of the Community Financial, inc. (CFI)
share price.
The CFi proxy statcmezit dated August 8, 2~8 estimated that CFI stoalrholders would
have received 52.79 per share if the e~Ctive date of the merger had occtinced on July 1,
2008. This estimate was based upon the CFI book value of $212,053 as of June 30, 2008
and the asstamption that all Series A Capital Notes would be convected to CFI comYnon
stock.
Siiicae 3urre 30, 200&, CFI incurred additional operating losxs and, as a result, reported a
>;oolf value of 531,514 in its audited financial statements as of October 31, 2008. Based
on the October 3 I, 2008 book value, CFI had a book valve per share of 5.1 S.
Prior to the magesc, all of the Series A Capital Note holders elected to convert the notes
into shares of CFI. Yn accordance with die tams of the notes, the number of shares into
which the tortes could be converted was determined by dividing the amounts owed on the
notes by the book value per share as of the month end (October 31, 2008) prior to the
Bt~ective Date (November 29, 2008) of the merger. CFI owed the note holders a total of
$204,957 as of October 31, 2008. Dividing this amount by the book valve per shah
(5.15) resulted in the a~ ce o~ f 1,366 380 naw+ shams and total shares outstanding of
I,574,Si51. with a fixed purchase price o ,T3t~;l~the firms Per share price payable to
CFI stockholders was 5.717483.
1 twpe that this answers your questions. Please feet free to contact me at 717-261-3535 if
you have any other questions regarding this transaction.
-~ Sincerely,
Mark R. Holler
Chief Financial Officer
117.264-6118 888-264-8116 P.O. Box X10 C~mUe-abur8, PA 17201-6010
~INA.MCfA! $QI.t1?IONS.., FROaI PEOPLE YOU KNOW
Case 1:10-cv-01285-VW11C Document 20-5
•~~~ert & Iayes~~~
4 ~r
~ ~
.,
y t
W
M A•
N
COMMUNITY
TRUST
Filed 09/15/2010 Page 1 of 160
August 8, 2008
MERGER PROPOSAL -YOUR VOTE IS VERY IMPORTANT
To the Stockholders of Community Financial, Inc.:
This proxy statement relates to the proposed merger of Franklin Financial Services Corporation ("Franklin'
and Community Financial, Ina ("CFI's and the related merger of Cmrununity Trust Company ("Community
Trust"}with and into Farmers and Merchants Trust Co~any of <liambersburg ("FBtM Trust'. This document is
being distributed by CFI to you in connection with a special meeting of the stockholders that has been called to
vote on the merger. This document contains important information about the merger and you should read it
carefully.
As a result of the merger, each share of CFI common stock held by you will be converted into the right to
receive cash. Based upon the book vahu per share of CFI common stock as of June 30, 2008, and if the Effective
Date of the Mager had occurred on Iuly 1, 2008, you would have received $2.79 per share. The exact amount of
cash per share that you will receive will be determined after the holders of outstanding Series A Capital Notes (the
"Capital Notes"} have converted the Capital Notes into shares of CFI common stock. This conversion is based
upon the book value per share of CFI eommon stock on the month-aid day prior to the effective date of the
merger. Furd~ore, the book value per share for the six months ended June 30, 2008 is not necessarily
indicative of the results to be expected for the fiill year or the morrth-end period prior to the effective date of
merger. 'These is also a potential distribution of cash to you, on a pro rata basis, from an Adjustment Account after
the effective chte of the merger. The cash yarn receive will be generally recognized as a gain or loss for ineoane tax
Purposes. For a more cxunplete descxiptian of the tax consequences associated with the merger, see "Terms of the
Merger -Certain Federal Income Tax Consequences."
You have "dissenters' rights" as described in this document, see "Dissenters' Rights of CFI Stockholders" and
Exhibit 3, to this document.
Sincerely,
Sawa A. Russell Lowell R. Gates
Pre~deat and Chief Chairman of the Board
Exeartlve Officer
Neither the Securities and Ezchange Commia~oa, any state secarffies commission, the Penasylvaaia
Department of Banking 8or any federal banking aapervisory agezicy 6sa approved or d~approved this
proxy statement, or determined if tMa prozy statement ~ accurate or inadequate. Any representation to the
contrary is a criminal offense.
For a description of the Risk Factors associated wits the merger, See "Risk Factors."
This Proxy Statement is dated Angnst $, 2008, and was Srst mailed to CFI stockholders on or about August
8, 2008.
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 2 of 160
THIS PAGE INTENTIONALLY
LEFT BLANK
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 3 of 160
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COMMUNITY NOTICE OF SPECIAL MEETYNG OF STOCKHOLDERS
TRUST
DATE: September 9, 2008
T11VIE: 9:00 A.M.
PLACE: Radisson Penn Harris Hotel 8t Convention Center
I l50 Camp Hil! Bypass
Camp Hill, PA 1701 l
MATTERS TO BE VOTED ON:
I. Approval of the Agreement and Plan of Merger ("Plan of Merger"), between Franklin Financial
Services Corporation and Community Financial, Inc., dated as of June 26, 2008, which provides for, among
other things, the merger of Community Financial, Inc. ("CFI") with and into Franklin Financial Services
Corporation ("Franklin"); the merger of Community Taust Company ("Community Trust's with and into
Farmers and Merchants Trust Company of Chambersburg ("F&M Trust" ); and the right of CFI stockholders
to receive cash for each share of CFI common stock that they hold and the right to a potential distribution in
cash, on a pro rata basis, from an Adjustment Account after the Effective Date of the merger;
2. Approval of the adjourament of the special meeting, if necessary, to solicit additional proxies, in the
event that there are not sufficient votes at the time of the special meeting to approve the Plan of Merger; and
3. Any other matters that may property come before the special meeting.
Abstentions and broker non-votes will be counted as shares preset for the purpose of determining the
presence of a quorum. However, abstentions and broker non votes will not be counted against the Plan of
Merges. CFI stockholders have the right under Pennsylvania law to dissent from the Plan of Merger and the
transactions contemplated thereby. See the section in the proxy statement entitled: "Terms of the Plan of
Merger -Dissenters' Rights of CFI Stockholders," and Exhibit 3, Statutory Provisions Relating to Dissenters'
Rights.
The CFI board of directors has fixed the close of business on August 1, 2008, as the record date for
determining stockholders entitled to notice of, and to vote at, the special meoting. The CFI board of directors
recommends that you vote "FOR" approval and adoption of the Plan of Merger and approval of the proposal
to adjourn the special meeting. The directors of CFI, who collectively hold approximately 43.65% of the
outstanding shares of CFI common stock, have agreed in writing to vote ih favor of the Plan of Merger.
Your vote is important regardless of the number of shares you o»m. The a,,~'rrmative vote of the holders of at
least a majority of fire outstanding shares of CFI common stock entitled to vote is required to approve and
adopt the Plan of Merger.
IF YOU PLAN TO ATTEND:
Please note that space limitations make it necessary to limit attendance to stockholders. If you wish
to attend, please indicate your wish by checkintq the box that appears on the foam of proxy.
121
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 4 of 160
Whether or not you plan to attend the special meeting, the CFl board of directors urges you to complete, sign,
date and return the enclosed form of proxy as soon as possible in the enclosed postage-paid envelope. This
will not prevent you from voting in person at the special meeting, but will assure that your vote is counted, if
you are unable to attend, and will help us avoid added solicitation costs. If you are a stockholder whose
shares are registered in "street name", you will need additional documentation from your broker in order to
vote personally at the special meeting.
By Order of the Board of Directors,
assn A. Russell
President and Chief Executive Officer
Camp Hill, Pennsylvania
August 8, 2008
iv
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 5 of 160
TABLE OF CONTENTS
Pace
NOTICE OF SPECIAL MEETIlVG OF STOCKHOLDERS .................................................. III
QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING .....................1
QUESTIONS AND ANSWERS ABOUT THE MERGER .........................................................3
WHERE YOU CAN FI1~tD MORE INFORMATION ...............................................................6
SUMMARY ..................................................................................................................7
MARKET PRICE INFORMATION . .............................................11
....................................
SELECTED HISTORICAL FINANCIAL. DATA OF COMMUNITY FINANCIAL, INC ...............12
RISK FACTORS ............................................................................................................13
Risks Regarding CFI Common Stock .....................................................................................I 3
Risks Regarding the Business of CFI .................. ............................................ ......................14
A WARNING ABOUT FORWARD LOOKING STATEMENTS ..............................................16
THE CFI SPECIAL STOCKHOLDERS MEETIlVG ................................................................17
........................................................................................................................17
Record Date; Stock Fartitled to Vote; Quorum ............................................................................17
..........................................................
Number of Votes .........:............ .............................17
Votes d ..............................................................................................................17
Voting of Proxies ............................................................................................................17
Submitting Proxies ............ ..........................................................................................17
Revoking Proxies .........................................................................................................................................17
Other Matters ..................................................................................................................18
Solicitation of pr,~es ......................................................................................................18
PROPOSAL I -THE MERGER ............... ........................................................................19
General ........................................................................................................................19
Background aad Reasons for the Merger ...........................................................................................................19
Baclrgrriund ...............................................................................................................19
........................................................... .........................................................................21
Reasons ....................
Rocrnmmendaotion ofthe CFI Board of Directors ........................................................................22
Opinion of CFI's Financial Advisar ......................................................................................22
Compensation of CFI's Financial Advisor .............................................................................. 27
Terms of the Plea of Merger .............................................................. . ...............................27
Structure of the Merger ...............................................................................................27
Calculation of Cash Consideration to be Paid to CFI Stockholders .............................................28
E~`ective Date ...........................................................................................................28
Representations and yi'arranties .......................................................................................29
Conduct of Busi»esss Pending the E,~`ective Date ..................................................................29
Conditions to the Mergers ............................................................................................ 30
Amendment; iFaiver ...................................................................................................30
Termination ...............................................................................................................31
Termination Fees .........................................................................................................31
No Solicitation of Other Transactions .. . ............................................................................. 32
Expenses ...................................................................................................................32
Regulator' ApProvals ....................................................................................................32
FINANCIAL I1V1'ERE.STS OF DIRECTORS AND OFFICERS IN THE MERGER ...................... 34
Stock Ownership of CFI Directors and Executive O,,Qicers .........................................................34
Capital Notes ................................................................................... . ..........................34
Indemnification and Insurance .........................................................................................34
Employment Arrangement for Susan A. Russell ......................................................................34
Voting Agreernents ......................................................................................................34
v
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 6 of 160
Paae
CERTAIN FEDERAL INCOME TAX CCONSEQUF.IVCES ....................................................36
Cash Received At E,~ective Date .................................................................................................................36
Cash Received From Adjustment Account ...................................................................................................36
.............................................36
..
'
ithholding ....................................................................................
Backup A
DISSENTERS' RIGHTS OF CFI STOCKHOLDERS ..................»...........
..........................
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...................»...........................38
.................................................38
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......................................38
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Failure to Com ....................................... 38
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Fair Yalue of Shares
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.........................
aymen
of
Estimation by Dissenting Stockholders of Fair Yalue of Shares ................................................ 39
Valuation Prroceedings ................................................................................................ 39
Costs and Expenses ...................................................................................................... 40
INFORMATION ABOUT CFI ......................................................................................... 41
Busutess ..................................................................................................................41
Board of Directors ..............................................................., ......................................41
Executives O,~cers ..... ~ ................................................................................................. 42
Legal Proceedings ......................................................................................................42
Recent Regulatory Dev~elopments ....................................................................................42
INFORMATION ABOUT FItANKi.IIV FINANCIAL SERVICES ..............................................43
CORPORATION ............................................................................................................. 43
PROPOSAL II - ADdOURNMENT ....................................................................................44
vi
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 7 of 160
LIST OF EI~~][TS
Exhibit 2 Agreement and Plan of Merger between Franklin Financial Services Corporation and Community
Financial, Inc., dated June 26, 2008
Exhibit 2 Opinion of Boenning & Scattergood, Inc.
Exhibit 3 Statutes Regarding Dissenters' Rights
Exhibit 4 Community Financial, Inc. Annual Financial Report for the year ended
December 31,2007 with Independent Auditor's Report
Exhibit 5 Community Financial, Inc. Financial Statements for the six months ended
June 30, 2408 (Unaudited}
vu
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 8 of 160
QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING
Q: Why Gave I received these materials?
A: This proxy statement and the enclosed form of proxy were sent to you because you are a stockholder of
CFI and the board of directors of CFI is soliciting your proxy to vote at its special meeting of stockholders to be
held on September 9, 2008. You are cordially invited to attend the special meeting and are requested to vote on
the prop~als described in this proxy statement. CFi intends to mail this proxy statement and accompanying proxy
card on or about August 8, 2008, to all stoelCholders entitled to vote at the special meeting.
Q: Who is entitled to vote at the Special Meeting?
A: Stockholders of record as of the close of business on August 1, 2008 will be entitled to vote at the special
meeting of CFI.
Q: Whst am I voting on?
A: You are being asked to vote to:
• approve the terms of the Plan of Merger; and
• approve, if necessary, any adjournment of the special meeting to solicit additional proxies in favor of
the Plan of Merger.
Q: How do I vote?
A: For each of the matters to be voted on, you may vote "FOR" or "AGAIldST" or abstain from voting.
If you are a stoc.lcholder of record, you may vote in person at the special meeting, or you may vote by proxy
using the enclosed form of proxy. Whether m not you plan to attend the special meeting, you are ~ to vote by
proxy to ea4ure your vote is counted You may still attend the sp~xial meeting and vale in person if you have
already voted by proxy
• To volt in person, come to the special meeting and you will be given a ballot when you arrive.
• To vote using the form of proxy, simply complete, sign and date the enclosed form of proxy and return
it promptly in the envelope provided. If you return your signed proxy your shares wdl be voted as you
direct.
If you are a beneficial owner of shares regiatcred in the name of your broker, bank, or other agent, you should
have received a form of proxy and voting insWtxians with these proxy materials from that organization rather than
from CFI. In order to vote, complete and mail the form of proxy to ensure that your vote is coamtod. To vote in
person at the special meeting, You must obtain a valid proxy from your broker, bank, or other agent. Follow the
instructions from your broker or bank included with these proxy materials, or contact your broker or bank to
request a proxy form.
Q: How many votes do I have?
A: Each share of common stock of CFI is entitled to one vote with respect to each matter to be voted on at the
special meeting.
Q: What constitutes a quoram for purposes of the special meetings?
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 9 of 160
A: A quorum of stockholders is necessary to hold a valid meeting. The presence at the special meeting in
person or by proxy of the holdeis of a majority of the voting power of all outstanding shares of common stock
entitled to vote shall constitute a quorum for the transaction of business. Proxies marked as abstaining (including
proxies containing broker non-votes) on aay matter to be actcd upon by stockholders will be treated as present at
the meeting for purposes of determining a quorum but will not be counted as vates cast on such matters. If there is
no quorum, a majority of the votes present at the meeting may adjourn the meeting to another date.
2
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 10 of 160
QUESTIONS AND ANSWERS ABOUT THE MERGER
This question and answer summary highlights selected information contained in other sections of this proxy
statement. To understand the merger more fully, you should carefully read this entire proxy statement, including
all exhibits and financial statements.
Q: What am I being asked to vote oa?
A: You are being asked to vote on the Plan of Merger which, if approved, will result, among other things, in
Community Financial, Inc. ("CFT') being merged with and into Franklin Financial Services Corporation
{"Franklin', with Franklin as the surviving company to that merger (the "Company Merger"), and, in Conntxinity
Tnist Company, ("Community Trust"), awholly-owned subsidiary of CFI, being merged with and into Farmers
and Merchants Trust Compar-y of Chambersburg ("F&M Trust's, a wholly-owned subsidiary of Franklin, with
F&M Trust as the surviving entity to that merger (the "Subsidiary Merger").
Q: Wirat will 6appea if CFI stockholders approve the Play of Merger?
A: ff CFI stockholders approve the Plan of Merger, CFI will merge with Franklin and Community Trust will
merge into F&M Trust. These mergers are to take place during the fourth quarter of 2008 after receipt of required
regulatory approvals.
Q: U the Plan of Merger is approved what is the consideration to CFI stockholders?
A: If you, as a CFI stockholder, do not exercise dissenters' rights, you will receive an amount in cash per each
share of CFI common stock that you hold. If the effective date of the merger would have been 7uly 1, 2008, for
example, the cash amount per share of CFI common stock that you would have received would have been $2.79.
This number is based upon the book value per share of CFI comrnwi stock as of 3une 30, 2008. The exact amount
of cash that you will receive will be determined after the holders of Capital Notes have convernd their Capital
Notes into CFI commmn stock prior to the Effective Date of the Merger. The number of shares subject tD this
canveasion will be based upon the book value per share of CFI common stock on the rnorrth-end day prior to the
Effective Date of the Merger. Furthermore, the book value pa share far the six months ended June 30, 2008 is not
necess~ily indicative of the results to be expected fa the fully year or until the month-end period prior to the
Effective Date of the Merger. In addition, there is the potential for you to receive an additional cash payment for
your shares of CFI common stock from an Adjusbaaent Account after the Effective Date of the . Any cash
PaY~ ~ Y~ ir+om the Adjustment Account depends on whether the trustee administering this account will
receive any funds from a mist upon the death of the beneficiary thereof. Please read the sections entitled "RISK
FACTORS -Risks Regarding the Merger" and "PROPOSAL I -THE MERGER -Terms of the Plan of Merger -
Calculations far Cash Consideration to be Paid to CFI Stockholders" and the Plan of Merger, inchxlod as Exhibit
1, for additional infcamatian.
Q: IDo CFI stockholders have dissenters' bights in the merger?
A: Yes. Under Pennsylvania law, holders of CFI shares of common stock have the right to dissent from this
Plan of Merger and the merger of CFI with and into Franklin and to receive a payment in cash far the `Pair value"
of their shares of common stock, as deterrmned by an appraisal process. This "fair value" may be mare or less
than the cash value of CFI shares of common stock that CFI stockholders would receive in this merger. If you
dissent, you will receive a cash payment for the "fair value" of your shares. To protect your dissenters' rights a
CFI stockholder must follow precisely the required statutory procedures. See, the section entitled "PROPOSAL I
- THE MERGER -Dissenters' Rights of CFI Stockholders" at page [38] and Exhibit 3, which is incorporated by
reference, for additional information.
3
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 11 of 160
Q: Why are CFI And Franklin combining their operations?
A: CFI and Franklin's respective managements believe that their respective stockholders will benefit from this
merger of their operations because the business potential for the combined companies exceeds what CFI could
individually accomplish and offers Franklin an additional trust service platform to market its products and services
in the West Shore market area. CFI and Franklin's respective managements believe that their similar and
complementary trust products and services in their respective markets will contribute to enhanced future
performance. Please read the sections entitled, "PROPOSAL I - TIC MERGER -Background and Reasons for
the Merger," for additional information.
Q: Should I send in my certificates now?
A: No. You should not send your CFI stock certificates in the envelope provided for use in returning your
proxy. You will be sent written instructions from Franklin for exchanging your stock certificates for cash, only if
the merger is approved and completed.
Q: What happens if I do not return my prory?
A: If you fail to execute and return your proxy, it will have the same effect as voting against the merger.
Q: What risks should I rnasider before I vote on the Plan of Merger?
A: The risks that you should consider in deciding how to vote a~n the Plan of Merger are explained in the
section of this proxy statement entitled "RISK FACTORS". You are urged to read this section, as well as the rest
of this proxy statement before deciding how to vote.
Q: How do I vote?
A: Just indicate on your form of pmxy how you want to vote. Sign and mail your proxy in the enclosed
envelope as soon as possible so that your shares will be represented at the special stockholders' meeting.
Alternatively, you may attend the meeting and vote in person.
If you sign and send in your proxy and do not indicate how you want to vote, your proxy will be voted in favor
of the Plan of Merger, and the adjournment proposal. If you do not sign and send in your proxy or you abstain
from voting, it will have the effect of voting against the Plan of Merger
You may attend the meeting and vote your shares in person, rather than voting by proxy. In addition, you may
withdraw your proxy up to and including the day of the applicable stockholders' meeting by following the
directions heroin and either change your vote or attend the meeting and vote in person.
Q: If my shares are held in my broker's name, will my broker vote them for me?
A: No. Your broker can only vote yow shares of CFI common stock, as applicable, if you provide instructions
on how to vote them. You should, therefore, instruct your broker on how to vole your shares by following the
directions your broker provides when forwarding these proxy materials to you. If you do not provide voting
instructions to your broker, your broker will not be able to vote yow shares. This will have the effect of not voting
in favor of the Plan of Merges, and the ~journment proposal.
Q: How do CFI's directors plan to vote?
4
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 12 of 160
A: All of CFI's directors have committed to vote their shares in favor of the Plan of Merger. CFI's directors
collectively hold, as of August 1, 2008, 91,036 shares, or approximately 43.65 % of CFI common stock entitled to
vote. The affirmative vote of a majority of CFI's issued and outstanding shares of common stock entitled to vote is
needed to approve the Plan of Merges.
Q: Who can help answer my other questions`!
A: If you want to ask any additional questions about the merger of our two companies, you should contact
Susan A. Russell, President and Chief Executivc Officer of CFI, 3907 Market Street, Camp Hill, Pennsylvania,
17001, telephone (7l?) 731-9b04.
5
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 13 of 160
WHERE YOU CAN FIND MORE INFORMATION
Franklin files annual, quarterly and periodic reports, proxy statements and other information with the
Securities and Exchange Commission (often referred to as the SEC). You may obtain copies of any of these
documents at the SEC's Pnblic Reference Room at 100 F Street, N.E., Washington, D.C. 20549, on official
business days during the hours of 10:00 a.m. to 3:00 p.m. Please call the SEC at 1-800-SEC-0330 for information
on the operation of the public reference room. In addition, Franklin files reports and other information with the
SEC electronically, and the SEC maintains an Internet site location at httn://www.sec.srov containing this
information.
For copies of Franklin's recant annual and quarterly reports to stockholders, you may also write or call:
Cathy Angle, Secrerffi-y
Franklin Financial Corporation Services
20 South Main Street
Chambersburg, Pennsylvania, 17201
(717) 261-3545
Because CFI has fewer than 500 stockholders of record, it is not required to file periodic reports with the SEC.
CFI, however, has historically provided its stockholders with annual reports including its audited financial
statements and other bus~ss and financial information. To obtain free copies of recent annual reports, please
write or call:
Susan A. Russell
President and Chief Executive Officer
Community Trust Company
3907 Market Street
Camp Hill, PA 17011
(717)731-9604
6
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 14 of 160
SUIVIIVIA.RY
This summary only highlights material information from this proxy statement. You should carefully read this
entire proxy statement, including the exhibits. These will give you a more complete description of the transaction.
General
This proxy statement relates to the special meeting of CFI stockholders who will be asked to approve the
proposed merger of CFI and Franklin, and the related merger of these cognpatries' wholly-owned subsidiaries,
pursuant to which Community Trust will merge with F&M Trust.
Parties to the Merger (pages 41 sad 43)
Community Financial, lnc.
3907 Market Street
Camp Hill, PA 17011
(717)731-9604
CFI is a Pennsylvania business corporation, headquartered in Camp Hill, Pennsylvania. CFI has as a subsidiary,
Community Trust and thr+ottgh this subsidiary, serves grimatily persons and trusts located in Cumberland and
Dauphin Counties and portions of Franklin, Perry and York Counties, Pennsylvania.
Please read the section entitled "INFORMATION ABOUT CFI" (page 41) for additional information about CFI
and Community Trust.
Franklin Financial Services Corporation
20 South Main Street
Chambersburg, PA 17201.0819
(717) 264-6916
Franklin is a registered financial holding company under the Bank Holding Company Act of 1956, as amended.
Franklin conducts substamially all of its business thmugh its ditcct banking subsidiary, Fd~tM Trust, which is
wholly-owned. Other direct subsidiaries of the Corporation include Franklin Financial Prnpaties Corp. and
Franklin Future Fund Inc. F8tM Trust, established in 1906, is afull-service, Pennsylvania-chartered commercial
bank and feast company, which is not a member of the Federal Re~n-e System. F&M Trust operates twenty-four
community banking offices in Frankin, Cumben•Isad, Fulton and Huntingdon Counties, Pennsylvania, and engages
in genteaal ceaomercial, retail bankdng and trust sexvices normally aasociate~d with community banks and its deposits
are insured (up to applicable limits) by the Federal Deposit Iaetu~ance Corporation (the "FDIC'. F&M Trust offers
a wide variety of banking services to businesses, individuals, and mental entities. These sexvices include, but
are not necessarily limited to, accepting and maintaining chexking, savings, and time deposit acco~mts, providing
investment and frost services, making loans and providing safe deposit facilities. Franklin Financial Properties
Corp. is a "qualified real estate subsidiary" established to hold real estate amts used by FBtM Tntst in its banking
operations. Franklin Future Fund Inc is a non-bank investment company that makes venture capital investments
within Franklin's primary market area.
Please read the section entitled "INFORMATION ABOUT FRANKLIN FINANCIAL SERVICES
CORPORATION" (age 43) for additional information about Franklin and F&M Trust.
Speria! S1eMkholders' Meetings (Page 17)
CFI will hold its special stockholders' meeting at the Radisson Penn Hams Hotel & Convention Center, I 1 SO
Camp Hill Bypass, Camp Hill, PA 17011 on September 9, 2008, at 9:00 a.m. (local time). At the special
stockholders' meeting you will be asked to consider and vote on the approval of the Plan of Meager, approval to
adjourn, if necessary, and any other matters that may properly come befos+e the meeting. You may vote at the CFI
special stockholders' mexting if you owned shares of CFI stock at the close of business on the record date, which is
August 1, 2008. On that date, CFI had 208,571 shares of common stock issued and outstanding and cntitiexl to be
7
Case 1:10-cv-01285-WWC Document 20-5 Filed 09!15/2010 Page 15 of 160
voted. Approval of the Plan of Merger and the merger of CFI and Franklin requires the affirmative vote of a
majority of the shares of CFI common voted. Approval of the Plan of Merger and the merger of CFI and Franklin
requires the affirmative vote of a majority of the shares of CFi common stock outstanding on the record date. The
affirmative vote of a majority of the votes cast is required for the approval of the proposal EA adjourn, if necessary,
and any other matters that may properly come before the meeting. A majority of the issued and outstanding CFI
shares must be presem in person or by proxy for any vote on the Plan of Merger. Please read the section entitled
"THE CFI SPECIAL STOCKHOLDERS' MEETING" {page 17) for additional information.
The Merger {Page 19)
The merger will result iri CFI being merged out of existence and into Franklin and in Community Trust being
merged with and into F&M Trust. The merger will not occur without the approval of the stockholders' of CFI.
There are also other customary conditions which must be met in order for the merger to be completed. Please read
the sections emitted "PROPOSAL I -THE MERGER -Terms of the Plan of Merger -Structure of the Merger" and
"Regulatory Approvals" (page 32) for additional information.
The Snbddiary Merger (Page 27)
At or around the same date and time as the effective date and time of the merger of CFI with and into Franklin,
CFI's subsidiary, Community Trust will, merge with and into Franklin's bank subsidiary, FBtM Trust. If the
proposed merger of CFI and Franklin is terminated for any reason, then the proposed subsidiary merger would be
simultaneously terminated.
The Plan of Merger (Page 27)
The Plan of Merger is the legal document that contains the merger's terms and governs CFI's, Franklin's,
Community Trust's, and FBtM Trust's merger processes. Please read the entire Plan of Merger which is attached to
this proxy statemart as Exhibit 1. Also, please read the section artitled "PROPOSAL I -THE MERGER- Terms of
the Plan of Merger" (page 27) for additional information.
Consideration to be Paid to CFI Stockholders (Page 28)
When the merger is completed, CFI stockholders will be paid in cash for their shares of CFI common stock and
have the right to receive a potential additional cash payment from an Adjustment Account to be maintained at FBtIvi
Trust after the Effective Date of the merger.
Regulatory Approvals (Page 32)
CFI and Franklin have {or will) file applications with the Federal Deposit Insurance Corporation and the
Pennsylvania Deparmdent of Banking for the merger and the Subsidiary Merger. CFI and Franklin have no reason to
believe that the applications will not be approved. Please read the section entitled - "PROPOSAL I -TILE
MERGER -Terms of the Plan of Merger -Regulatory Approvals" (page 27} for additional information..
Votes ReQnired; Secnrhies Hdd by Insiders (Page 17)
Approval of the Plan of Merger requires the affirmative vote of a majority of the issued and outstanding shares
of CFI's common stock on the record date which would be a minimum of 104,286 shares. Approval of the proposal
to adjourn requires the affirmative vote of a majority of the shares cast at the meeting. Your failure to vote in person
or by proxy, or to abstain from voting, will have the same effect as voting against the Plan of Merger. Please read
the sections entitled "THE CFI SPECIAL STOCKHOLDERS' MEETING" (page 17) for additional information.
As of August 1, 2008, directors and executive officers own approximately 91,036 shares, or 43.65%, of
CFI's outstanding shares. CFI's directors have entered into separate agreements iri which they have agreed, among
other things, to vote "FOR" approvat of the Plan of Merger. Please read the section entitled "PROPOSAL i -THE
MEGER -Financial Interests of Directors and Officers in the Merger" (page 34) for additional information.
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 16 of 160
Opinion of CFI's Financial Advisors (Page 22)
In deciding to approve the Plan of Merger, CFI's board of directors considered among other things, the opinion
of Scanning & Scattergood, Inc., CFI's financial advisor, regarding the fairness, from a financial point of view, of
this meager to CFI's stockholders. The financial advisor determined that the Plan of Merger is fair to CFI's
stockholders from a financial standpoint. The financial advisor's written opinion is attached as Exhibit 2. You
should read it carefiilly to understand the assumptions made, matters considered and limitations of the review
undertaken by the advisors in providing their opinions. Please read the section entitled - "PROPOSAL I -THE
MERGER -Opinion of CFI's Financial Advisor" (page 19) for additional information.
Recommendation of CFI's Board of Directors (Page 22)
Oa 3une 26, 2008, CFI's board of directors unanimously approved the Plan of Merger and the Subsidiary
Merger. Accordingly, they unanimously recomme~ a vote `FOR" the proposal to approve the Plan of Merger.
The conclusions of CFI's board of directors regarding the merger are based upon a number of factors. Please read
the sections entitled "PROPOSAL I -THE MERGER -CFI Background and Reasons f~ the Merger" (age 19).
CFI's directors collectively hold, as of the record date for the special stockholders' meeting, 91,036 shares, or
approximately 43.65 % of CFI's common stock eligible to vote. All of CFI's directors have committed to vote their
shares in favor of the Flan of Merger.
Eachange of CFI Share Certificates (Page 2'n
After completing this merger, holders of CFI stock certificates will need to exchange those certificates for cash.
Shortly after completing the merger, Franklin's exchange agent will ~d CFI's stockholders detailed instructions on
how to exchange their shams. Please do not send any stock certificates until you receive these instructions. Please
read the section entitled "PROPOSAL I -THE MERGER -Terms of the Plan of Merger - Cakvlation of Cash
Consideration to be Paid to CFI Stockholders" (page 28) for additional information.
Conditmns to Cloning the Merger (Page 29)
In addition to stockholder approval, CFI's and Franklin's obligations to close the merger depend on other
conditions being max prior to the completion of the merger. Please read the section entitled "PROPOSAL I -THE
MERGER -Terms of the Plan of Merger - Conditions to the Merger" {page 30) for additional information.
Closing the Merger (Page 28}
If the stockholders approval is received as planned, and if the other conditions to the Plan of Merger have either
been met or waived, CFI and Franklin anticipate that their merger and the Subsidiary Merger will close during the
fourth quarter of 2008. However, neither CFI nor Franklin can assure you whether or when these mergers will
actually close. Please read the section entitled `PROPOSAL I -THE MERGER -Terms of the Plan of Merger -
Effective Date" (page 28) for additional information.
Termination of this Plan of Merger (Page 31)
CFI and Franklin can mutually agree to terminate or extend the Plan of Merger. Either CFI or Franklin can
terminate the Plan of Merger in the event of a material breach by the other or upon the occurrence of certain other
events.
CFI and Franklin have agreed that in the event the Plan of Merger is terminated because of a material breach,
the non-breaching party will be entitled to receive up to $56,500 fiom the breaching party. CFI and Franklin have
also agreed that in the event the Plan of Merger is terminated because of an acquisition event involving CFI,
Franklin will be entitled to receive $113,000 from CFI. Please read the sections entitled "PROPOSAL I -THE
MERGER -Terms of the Plan of Merger -Termination" (page 31 }and "Termination Fees" {page 31) for additional
information.
Federal Income Taa Consequences (Page 3~
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The following summary assumes that CFI stockholders hold their CFI common stock as a capital asset.
Generally, CFI stockholders will recognize gain or loss on the exchange of they shares for cash.
For a more complete discussion of the federalvncome tax consequences of the merger of CFI and Franklin, you
should carefully read the discussion in the section entitled "PROPOSAL I -TAE MERGER -Certain Federal
Income Tax Consequences" (page 36) of this proxy statement. Further, you are encouraged to consult your tax
advisor because tax matters can be complicated, and the tax consequences of this merger to you will depend upon
your own situation. You should also consult your tax advisor concerning all state, local and foreign tax
consequences of this merger.
Ltterest of CFI's Management (Page 34)
The directors and certain officers of CFI have interests in this merger as directors and officers that are different
than the CFI stockholders. For example, Huse interests include, among other things, the provisions of the Plan of
Merger that provide for indemnification of such persons and coverage for them under a directors' and officers'
liability insurance policy. Ple~e read the Section entitled "Financial Iaterests of Directors and Officers in the
Merger" (page 34) for additional information.
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MARKET PRICE INFORMATION
CFI common stock does not trade on any established basis. As of August 1, 2008, there were 208,571 shares of
CFI common stock outstanding which were held by approximately 82 stockholders of record. The number of
stockholders of record does not reflect the number of individuals or institutional investors who may hold CFl
common stock in nominee name through banks, brokerage firms and others.
The following table shows, for the periods indicated, prices per share of CFI common stock for sales known to
CFI management to have taken place:
2008
First Quarter .......................................Nave
Second Quarter ....................................None
2007
First Quarter ............................................ None
Second Quarter ........................................ None
Third Quarter ...... .................................... None
Fourth Quarter ......................................... None
2006
First Quarter ............................................ None
Second Quarter ........................................ None
Thud Quarter .....................................:.... $ 3.36
Fourth Qu~ter ......................................... $20.00(1)
(i) Represents the exercise of stock purchase warrants at a $20.00 per share stn'tce price.
Other than the exercise of the about-described stock purchase warrants, the last sale of CFI common stock
known to management on June 26, 2008, the last full trading day before the public annoturceanart of the execution
of the Plan of Merger, and on July 31, 2008, the latest practicable trading day before the date of this document, was
on 3uiy 13, 2006, for $3.36 per share.
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SELECTED ffiSTORICAL FINANCIAL DATA OF CO1VI]VIUNITY FINANCIAL, IIVC.
The following is a summary of consolidated financial information with respect to Community Financial, Inc. as of and for
the fiscal years ended December 31, 2007, 2006, 2005, 2004, and 2003 and for the six morales ended June 30, 2008. This
annual information is derived from, and should be read in conjunction with CFI's consolidated financial statemems a~ the
accompanying notes in CFI's audited annual reports. The infornmtion from the quarters is derived from noaudited statements.
In the opinion of management of Community Financial, Inc., all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of results for or as of the periods indicated, have been made.
COMMUNITY FINANCIAL. INC.
SELECTED CONSOLIDATED pI~TCIAL SLT1~tARy
AS OF DECEMBER 31 AND FOR TAE YEARS ENDFLD AS OF JUNE 3®.2008
2007 2006 2005 2004 2003 ~OQ$
INCOME STATEMENT
DATA:
Total Income S 699,373 5818,800 5832,516 S 679,916 S 488,947 S 288,042
Tetal Expeases 51,040,929 S866,038 583092 S 830,373 S 700,696 S 431,480
Net Income (Loss) S (340,919) S(47,238) S 2,124 5(150,447) S (211,749) S (143,438)
PER SHARE DATA:
Earnings (Lass)
Per Stiare (]) S (1.63) S (0.23) S OAl S (0.75) S (1.07) S (0.68)
Book ValHe Per Share S 1.68 S 3.32 S 3.36 5 3.43 S 4.03 S 1.02
Shares Outstanding 208,571 208,571 206,071 201,071 197,445 208,571
(1) Based upon shares eiatstanding
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RISK FACTORS
In addition to the other information included in this proxy statement, you are urged to carefully consider the
following factors which contain all known material risks, before making a decision to approve the Plan of Merger.
Rinks Regarding the Merger
CFI and Franklin maybe unable to consummate their proposed merger.
CFI's and Franklin's proposed merger, described in more detail later in this document, is anticipated to close in
the fourth quarter of 2008, but must be approved by CFI's stockholders before it can be finalized. Consummation of
this merger (and the Subsidiary Merger) is also subject to the receipt of requirod regulatory approvals and the
satisfaction of other customary closing conditions. If these mergers are not completed for any reason, CFI's stock
price may further decline to the extent that the current market price reflects the assumption by investors that these
mergers will be completed, or because of the costs incurred by CFI in connection with this merger.
You may not know in advance the wrlue of the cash eonsideradon. you wt7l be endued to receive.
The Plan of Merger provides that each share of CFI common stock shall be converted into cash. However, we
cannot predict the per share pricx of CFI common stock at the effective time of the merger. Please read the section
entitled - "PROPOSAL I - TIC MERGER -Terms of the Plan of Merger -Calculation of Consideration to be Paid
to CFI Stockholders." (pagc 28} for additional information.
You wiU recognize gain or loss oa the exchange of your shahs of CFI common stock for cash.
CFI stockholders would generally recognize gain ar loss on each share of CFI common stock surrendered in the
merger in exchange for cash in the amoum of the difference between your basis in such share and the cash they
receive.
Uncertainty regar~xg this merger may result in the loss of the employees and customers of Contntunity Trust
prior to dee eotxpletion of the merger.
Employees of Community Trust may experience uncextaiaty about their future role with the combined
companies. Uncertainty regarding the Subsidiary Merger may cause customers of Commnnity Trust to withdraw
their business prior to the cotnpietion of the Subsidy Merger. Any loss of Community Trust's customers could
have a material adverse effect on Community Trust's respective business, regardless of whether or not this merger is
ultimately completed.
Risks Regarding CFI Common Stock
CFI can issue coerArote stock acrd preferred stock without your approves diluting your proportional
owneralilp interest
CFI's Articles of Incorporation authorize it to issue 2,000,000 shares of common stock and 500,000 shares of
preferred stock. As of August 1, 2008, CFI has no shares of preferred stock outstanding, and has 208,571 shares of
common stock issued and outstanding.
The price of CFI common stack may further decrease, preventing you from selling your shares at a profit
The market price of CFI common stock could further decrease and prevent you from selling yew shares at a
profit. The market price of CFI common stock has decreased in recent years. Fluctuations may occw, among other
reasons, due to:
• operating results;
• market demand;
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• announcements by competitors;
• economic changes;
• general market conditions; and
• legislative and regulatory changes.
The tradmg price of CFI common stock may continue to fluctuate in response to these factors and others, many
of which are beyond CFI's control. We strongly urge you to consider the likelihood of these market fluctuations
before deciding whether to vote for the Plan. of Merges. Please read the sections entitled "Market Price Information"
(page Z 1) for additional information regarding the trading prices of CFI common stock.
Tkere is no Public Market for CFI common stack.
Your holding of CFI common stock is an illiquid investment and will continue to be an illiquid investment if the
Plan of Merger is not consummated. There is no established market for CFI common stock. As a holder of such
shares, you will need to seek a private buyer of your shares if you want to sell them.
CFI can not Pay Cash Dividends.
CFI has operated at a loss for several years and is unable to pay any cash dividends in the foreseeable future.
CFI's firture growth and the realization of net income to generate dividends is limited if it is not able to raise
additional capital.
Risks Regarding the lBnainess of CFI
Memorandum of Understanding
CFI is under a Memorandum of Understanding with the Pennsylvania Department of Banking which regains
CFI to maintain marlcesabk sectnities, cash and cash equivalents in an amount of $1,000,000 ~ more. According to
the Department of Banking, CFI is not in compliance with this regulatory requirement and would need to raise
additional capital to meet and maintain this requiremart or face the likelihood that the Deparlmart of Banking would
order the company to cease operations, revoke its charter, and sell its assets.
CFI cosipetes against larger trust companies
Large competitors aggressively solicit customers within the Community Trust market area by advertising
through direct mail, electronic media and other means. Many competitors have been in business longer, leave
established atstomer bases and are substantially larger. These competing trust companies offer services, including
international banking services, that Community Trust can only offer through correspondents, if at a11. Additionally,
these competitors have greater capital resrnuces and, consequently, a wider stray of products and services.
Carrtnt haul Eing laws and regulations s,A'ect activities.
Community Trust is subject to extensive regulation. Supervision, regulation and examination of banks and trust
companies are intended primarily to protect account holders, rather than stockholders. The Department of Banking
establishes capital and other financial requiremarts and approves acquiritions or other changes of control of
financial institutions. CFI's ability to establish new facilities or make acquisitions requires approval from the
Departmart of Banking. Changes in legislation and regulations will contimie to have a significant imp~t on the
trust industry. Although some of the legislative and regulatory changes may benefit CFI, others may further
increase its costs of doing business and indirectly assist its competitors who are not subject to similar regulation.
Economic conditions either nationally or locally in areas in wlricb operations are concentrated may adversely
a~'ict business.
Deterioration in local, regional, national or global economic conditions could cause CFI to experience a
reduction in the amount of assets under management, which would adversely affect income. Unlike larger
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institutions that are more geographically diversified, CFI provides services locally, specifically, within Cumberland
and Dauphin Counties, Pennsylvania. Therefore, CFI is particulazly vulnerable to adverse local economic
conditions.
CFI relies on management and other key personnel and the loss of any of them may adversely a, jjfect our
operations
CFI is and will continue to be dependent upon the services of its respective executive management team. In
addition, it will continue to depend on its ability to retain and recruit key officers. The unexpected lass of services
of any key management personnel or officer, could have an adverse effect on the business and financial condition of
CFI because of skills, laa~owledge of the market, years of trust industry experience and the difficulty of promptly
finding qualified replacement personnel.
In the event that employment of the CFI President is terminated in the future without cause, under the terms of
her employment agreement, Ms. Russell would be entitled to receive continued salary at the rate then in effect for a
period of time following termination.
Failure to implement sew technologies is our operations may adversely as'ect osr growth or profits
Advances in technology increasingly affect the market for financial services, including trust services. The ability
of CFI to compete successfiilly in its market may depend on the extent to which it is able to exploit such
technological changes. However, we may not be able to properly or timely anticipate or implement such
technologies or properly train our staff to use such technologies. Further, the added cost of technology for small
institutions such as CFI adversely affects its respective profitability. Any failure to adapt to new technologies could
adversely affect its respective business, financial condition or operating results.
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A WARNIlVG ABOUT FORWARD LOOKING STATEMENTS
Certain statements contained in this proxy statement, including without limitation, statements containing the
words "believes," "anticipates," "intends," "expects," and words of similar import, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act's and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"}. These forward looking
statements, inchrding among others those found in those sections entitled "QUESTIONS AND ANSWERS ABOUT
THE MERGER," "SUMMARY," "RISK FACTORS," and "PROPOSAI, I -THE MERGER" involve known and
unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the
combined companies to be materially different from any future results, performance or achievements expressed or
implied by such forward-looking statements.
In particular, we have made statements in this document regarding an improved ability to compete with larger
competitors, and the operation of the combined companies.
In addition to the risks discussed in the section entity "RISK FACTORS," the following factors may also
affect the accuracy of forward Iooking statements in this proxy statement:
• The effect of changing regional and national economic conditions, especially as they may affect the demand for
management, trust and asset services;
• The effects of trade, monetary and fiscal policies and laws;
• Stock, bond market and monetary fluctuations;
• Changes in federal and state banking and financial services laws and regulations;
• Entry of competitors in the market with greater financial resources;
• Competitors in our market area of similar size, with similar business plansand/or offering similar services;
• The ability to develop competitive new products and services and the acceptance of those products and services
by targeted customers and, when required, regulators;
• The ability to securely and effectively implement new technology (including Internet services) for both the
delivery of services and internal operations;
• Tire willingness of customers to substitute competitors' products and services;
• Unanticipated regulatory or judicial proceedings;
• The loss of significant customers;
• The risk and cost resulting from the opening of one or more new offices and adding employees;
• The loss of executives or key employees;
• Other internal and external developments that could materially impact our operational and financial
performance.
Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.
CFI disclaims any obligation to update any such factors or to publicly announce the results of any revisions fA any of
the forward-looking statements contained in this proxy statement to reflect future events or developments.
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THE CFI SPECIAL STOCKHOLDERS' MEETING
General
CFI will hold its special stockholders' meeting on September 9, 2008 at 9:00 a.m., at the Radisson Penn Harris
Hotel 8t Convention Center, 1 l 50 Camp Hill Bypass, Camp Hill, PA 1701 ] . At the special stockholders' matting
you will be asked to consider and vote on the approval of the Plan of Merger, the approval of a motion to adjourn,
and any other matters that may properly come before the meeting.
Record Date; Stock Entitled to Vote; Quorum
Only holders of record of CFI common stock at the close of business on August 1, 2008, the record date for CFI
special stockholders' meeting, sre entitled to receive notice of and to vote at the special stockholders' meting. On
the record date, CFI had 208,571 shares of its common stock issued, outstanding and eligible to vote at the special
stockholders' meeting. A majority of the shares of CFI common stoclt issued and outstanding and entitled to vote
on the record date must be represented in person or by proxy at tbe special stockholders' meeting in order for a
quorum to be present for purposes of transacting business. In the event that a quorum is not present, it is expected
that the special stockholders' meeting will be adjourned or postponed to solicit additional proxies.
Number of Votes
Each such stockholder is entitled to cast one vote for each share hcld in that stockholder's name on the books of
CFI as of the record date on any matter submitted to the vote of the stockholders.
Votes Retlulred
Approval of the Plan of Merger and the merger of CFI with and into Franklin requires the affirmative vote of a
majority of the shares of CFI common stock issued and outstanding on the record date. As of the record date, CFI's
directors and executive officers owned 91,036 shares, representing approximately 43.65%, of CFI's issued and
outstanding shares of common stock entitled to vote. These pers~s will vote for the approval of the Plan of
Merger.
A majority of the votes cast is required to approve the proposal to adjourn.
Votfng of Prories
SubaYiaing Prnxies
CFI stockholders may vote their shares in person by attending the special stockholdcrs' meeting or they may
vote their shares by proxy. In order to vote by proxy, CFI stockholders must complete the enclosed foam of proxy,
sign ate date it and mail it in the enclosed postage pre paid envelope.
If a written form of proxy is signed by a stockholder and returned without instructions, the shares represented by
the proxy will be voted "FOR" approval of the Plan of Merger; and "FOR" the proposal to adjourn. CFI
stockholders whose shares are held in "street name" (i.e., in the name of a broker, bank or other record holder) must
either direct the record holder of their shares as to how to vote their shares or obtain a proxy from the record holder
to vote at the CFI special stockholders' meeting.
It is important that you follow the directions provided by your broker regarding instructions on how to vote your
shares. Your failure to instruct your broker on how to vote your shares v~rill have the same effect as voting against
the Plan of Merger.
Revokeng Proxees
CFI stockholders of record may revoke their proxies at any time before the time their proxies are voted at the
CFI special stockholders' meeting. Proxies may be revoked by written notice, including by telegram or telecopy, to
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the Corporate Secretary of CFI, by a later-dated proxy signed and returned by mail or by attending the special
stockholders' meeting and voting in person. Attendance at the special stockholders' meeting will not, in and of
itself, constitute a revocation of a proxy. Instead, CFI stockholders who wish to revoke their proxies must inform
CFI's Corporate Secretary at the special stockholders' meeting, prior to the vote, that he or she wants to revoke his
or her proxy and vote in person. Written notices of proxy revocations must be sent so that they will be received
before the taking of the vote at CFI's special stockholders' meeting as follows:
Community Trust Company/Community Financial, Inc.
3907 Mazket Street
Camp Hill, PA 1701 ]
Attention: Corporate Secretary/Special Meeting
Telecopier: (717) 737-7834
The presence, in person or by properly executed proxy, of the holders of a majority of CFI's outstanding shares
entitled to vote is necessary to constitute a quorum at the special stockholders' meeting. Abstentions and broker
nonvotes wiU be counted in determiaiag whether a quorum is present. Under the applicable rules of the National
Association of Securities Dealers, Inc., brokers or members who hold shares in street name far customers who are
the beneficial owners of CFi common stock are prohr`bited from giving a proxy to vote those shares regarding
approval of the Plan of Merger, in the absence of specific instructions from beneficial owner. These are referred to
as "broker nonvotes" Abstentions and broker nonvotes will not be counted as a vote "FOR" or "AGAIN51"' the
Plan of Merger at the CFI special stockholders' meeting or any other matter presented at that meeting. However,
abstentions and broker nonvotes will have the same effect as a vote "AGAINST" the Plan of Merger.
Other Matters
In addition to voting for approval of the Plan of Merger, and the proposal to adjourn, any other matters that are
properly presented at the special stockholders' meeting will be acted upon. CFI's manageme~ does not presently
know of any other matters to be presented at the CFI's special stockholders' meeting other than those set forth in
this prrncy statement. If other matters carne before the special stockholders' meeting, the persons named in the
accompanying proxy intend to vote acxording to the recommendations of CFI's board of directors. Additional
informmation with respect to the proposal to adjourn is set forth herein in the section entity "PROPOSAL II -
Adjournment " for additional information.
Solicitaetion of Praries
CFI's board of directors is soliciting proxies for the CFI special stockholders' meeting. CFI will pay for the cost
of solicitation of proxies. In addition to solicitation by mail, CFI's directors, officers and employees may also solicit
proxies farm stockholders by telephone, facsimile, telegram or in person. If CFI's management deems it advisable,
the services of individuals ar canrpanies that are not regularly employed by CFI may be used in eonjtmetio® with the
solicitation of proxies. Arrangements will also be made with brokerage houses and other custodians, nominees and
fiduciaries to send the proxy materials to beneficial owners. CFI will, upon request, reimburse those brokerage
houses and custodians for their reasonable expenses in so doing.
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PROPOSAL I -THE MERGER
The following information describes the material terms and provisions of our proposed merger. This
description is not complete. We qualify this discussion in its entirety by. reference to the Plan of Merger, which we
incorporate by reference in this proxy statement A copy of the Plan of Merger is attached to this document as
Exhibit 1. Except for its status as the contractual document between the parties with respect to the provisions
described therein, it is not irrtendtd m provide factual information about the parties. The representations and
warranties contained in t/u Plan of Merger were made only fur the purposes of such agreement and as of specific
dates, were solely for the benefit of the parties to such agreement, and may be subject to llmitadons agreed to by
the cond-cting parties, including being grrali'fred by disdosures between the parties. These representations and
warranties may have been made for the purposes of aQocating contractua! risk between the parties to this
agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable
to the contracting pardes Hurt differ from those applicable to investors Accordingly, they s/wrdd not be relied on
by you as statements of faceaal information. We urge you to read the fuQ text of the Plan of Merger carefully.
General
The Plan of Merger provides that:
• Community Financial, Inc. will merge with and into Franklin Financial Services Corporation with Franklin
Financial Services Corporation as the surviving commpany to that merger;
• Community Trust Company will merge with and into Farmers and Merchants Trust Company of Chambersburg
with Farmers and Merchants Trust Company of Chambersburg as the surviving company to that merger;
• CFI stockholders will receive fram Franklin c~ for each share of CFI conomon stock that they hold on the
effective date of these mergers. As of June 30, 2008, on a pro forma basis, that cash would have been $ per
share of CFI common stock. In addition, CFI stockholders would share, on a pro rata bass, in any cash proceeds
that may be deposited in an Adjustment Account over a 10-year period from a trust in the event the beneficiary
would die during that period of time;
• After the re.pective mergers, the combined eirtities will operate under the Articles and Bylaws and be managed
by the respective directors and officers of Franklin Financial Services Corporation and Farmers and Mercharns Trust
Company of Chambersburg;
• In consideration for the terms of post-merger employment offered to her by F&M Trust, Susan A. Russell, the
President and Chief Executive Officer of Community Financial, Inc. and Community Trost Company, has agreed,
effective on the date of the merger dosing, that her Executive Employment Agreement, dated March 16, 2004 with
Community Trust Company, Community Fitancial, Inc., Community Realty Inc., and Community Insurance, Inc.
shall be terminated, and Ms. Russell waives, effective as of such effective date, all rights, claims and benefits held or
entitled to under such Executive Employment Agreement.
CFI Background and Reasons for the Merger
Background
On April 13, 2007, tbe board of directors of Canurtunity Trust received a letter from the Department of Banking
stating that Community Trust had to have by December 31, 2007, at least $1 million in cash, cash equivalents and
readily marketable sectuities or the Department of Banking would take enfarccment action. (This new mandate was
an enlargement of the capital requirement at the time of the conversion of Community Trust u-to a regulated
Pennsylvania-chartered nan-depository trust company, which requirement was $1 million in capital calculated under
generally accepted accounting principles ("GAAP"). It has been Community Trust's and CFI's position that
Community Trust had at least $1 million in capital as calculated under GAAP.)
On May 16, 2407, management discussed with legal counsel whether the Department of Banking would relax its
new capital mandate and extend its deadline for compliance.
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From June 8'~ through August, 2007, the CFI management pursued corporate borrowing opportunities with
several local financial institutions.
On July 7, 2007, the CFI board of directors, at a special Board meeting, discussed a strategic capital plan to
reorganize the company by collapsing the subsidiaries; selling the real estate on a lease-back basis; and borrowing
money at the CFI level to contribute the Ioan proceeds into Community Trust as additional capital.
On July 26, 2007, in a subsequent discussion with the Department of Banking, the Department declined to relax
this capital requirement and extend the deadline. Absent this relief, the board of directors had to contemplate the sale
of tbe company to a better capitalized institution.
On August 21, 2007, the CFI board of directors authorized Susan A. Russell, the President and Chief Executive
Officer, to solicit proposals from investment banking firms regarding the ale of CFI, Community Trust, and the CFI
subsidiaries.
On September 5, 2007, Ms. Russell informed the Department of Banking of the intent of the CFI board of
directors to engage an investment banking fum to solicit offers to purchase the company.
On September 6, 2007, the CFI board of directors reviewed proposals from investment banking firms and voted
to engage Boerwing 8t Scattergood, Inc. to act as an exclusive financial advisor in connection with a business
combination with another financial institution and to retain, John B. Lampi, Esquire, of Saidis, Flower 8c Lindsay,
Carlisle, FA, to act as legal counsel with respect to any business combination transaction.
On September 7, 2007, CFI executed an engagement letter with Boenning ~ Scattergood, Inc.
On October 18, 2007, the CFI board of directors voted to move forward again and try to obtain a bonrowing for
new capital for Community Trust in order for the Memorandum of Understanding to be lifted by the Department of
Banking and in order for the company to become a more attractive acquisition candidate. At this meeting, the CFI
board of directors also discussed this strategy with representatives of Boenning & Scattergood, Inc. as well as the
process to be implemented by Boenning & Scattergood, Inc. to seek a purchaser of the company.
On December 18, 2007, the CFI board of directors voted to proceed with the sale of the company without
pursuing any fiuther borrowing and discussed with Boenning & Scattergood, Inc. prospective purchasers that its
representatives should contact.
On or about January 25, 2008, representatives of Boenning 8c Scattergood, Inc. began to contact prospective
purchasers of the company.
On February 21, 2008, the CFI board of directors reviewed with representatives of Boenning 8t. Scattergood,
Inc. those indications of interest received from prospective purchasers of the company. The CFI board of directors
agreed to a due diligence review of the company by two financial institutions.
On March 15, 2008, Franklin management and its agents and representatives conducted a due diligence review
of CFI and Community Trust.
On April 18, 2008, Franklin submitted to Boenning & Scattergood, Inc. anon-binding letter of interest which
contained the salient features of tbe Plan of Merger and CFI accepted tbe terms therein on Apri124, 2008.
On June 26, 2008, CFI board of directors held a meeting to review with Boenning & Scattergood, Inc. and legal
counsel the Plan of Merger and its Exhibits, attached to this proxy statement as Exhibit 1. Legal counsel reviewed
the tenors and conditions of the Plan of Merger, copies of which were delivered to the members of the CFI board of
directors prior to this meeting.
Also, at this mceting, representatives of Boenning & Scattergood, Inc. submitted a fairness opinion, a copy of
which is attached to this proxy statement as Exhibit 2. Moreover, Boenning &c Scattergood, Inc. presented
information which included, among other things, valuation and financial data; a description of the process which led
to the Franklin proposal; a pro forma analysis of the merger with Franklin; and, an explanation of its fairness
20
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opinion. Boenning 8t Scattergood, Inc. related that the financial terms for this transaction were fair, from a financial
point of view, to the CFI stockholders.
At the meeting on June 2b, 2008, the CFI board of directors approved the Plan of Merger with Franklin and
directed management to take those steps that would be necessary, including holding a special meeting of
stockholders, to consummate the Flan of Merger.
On June 26, 2008, the Franklin boazd of directors also approved the Plan of Merger. CFI and Franklin publicly
announced the transaction before markets opened on June 27, 2008.
Reasons
At its meeting held on June 26, 2008, the CFI board of directors determined that the terms of the Plan of Merger
and the mergers of the two companies and their subsidiaries were in the best interests of CFI and its stockholders.
In the course of reaching this decision to approve the Plan of Merger, the CFl board of directors consulted with
Boenniug bt Scattergood, Inc,, its financial advisor, and John B. Lampi, Esquire, of tbe firm of Saidis, Flower &
Lindsay, its legal counsel. The board of directors considered, among other things, the factors described above and
the following:
• Its understanding of CFI's business, operations, financial condition, earnings and prospects and of
Franklin's business, operations, financial condition, earnings and prospects, including the
geographic market in South Central Pennsylvania in which the two companies and their subsidiaries
operate;
• Its understanding of the current and prospective operating environment fm CFI and Franklin,
including regional and local economic conditions; the competitive nature of the business for trust
and asset management services generally and the continuing consolidation of the ~
and the in banlang °stry ;
creasing expenses for health care insurance and for regulatory mandated compliance
(especially with respect to the capital requirement}; and the likely effects of these factors on CFI in
light of, and in the absence of, s business combination with Franklin;
• The opinion of Boenning & Scattergood, Inc. that the cash consideration for a share of CF1 common
stock in the Plan of Merger was fair to CFI's stockholders from a financial point of view;
• The factor that the terntination fees provisions in the Plan of Merger could have the effect of
discouraging a superior proposai for a business combination between CFI and a third Party;
The possrble negative impact this merger with Franklin would have on various canstrtuencies of
CFI, including potential job Loss among Community Trust employees;
• Franklin's operating philosophy as aommmunity-oriented financial services company with a strong
customer focus is compatible with CFI's operating philosophy;
• The review by the CFI board of directors with its legal counsel of the structure and teams of the Plan
of Merger;
• The complemernary nature of the respective customer bates, business products and skills of CFI and
Franklin that could result in opportunities to obtain synergies as products are cross-marketed and
distributed over broader customer bases and best practices are compared and applied across
businesses;
• The Iikelihood that the required regulatory approvals to complete the transaction will be obtained;
• The historical and current market prices of CFI common stock;
• The inability of Community Trust to generate a high enough level of assets under management to
meet its operating expenses during this economic slow down and generate net income on a
consistent basis;
• The inability of CFI to obtain affordable borrowing to infuse additional capital into Community
Trust in order to lift the Memorandum of Understanding;
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• The requirement of the Department of Banking to maintain at least $1,000,00 in liquid assets,
which would require CFI to raise additional capital in this difficult economic environment; and
• The benefit to CFI stockholders to be able to exit their investment in CFI and exchange their shares
for cash without the costs of any brokerage fees.
The foregoing discussion of the factors considered by the CFI hoard of directors in evaluating the Plan of
Merger is not intended to be exhaustive, but, rather, includes alt material factors considered by the CFI board of
directors. In reaching its decision to approve the Plan of Merger, the CFI board of directors did not quantify or
assign relative weights to the factors considered, and individual directors may have given different weights to
different factors. The CFI board of directors considered all of the above factors as a whole, and on an overall basis
considered them to be favorable to, and support, its determination to enter into the Plan of Merger.
Recommendation of the CFI Board of Directors
The CFI board of directors has approved the Plan of Merger which calls for the mergers of CFI and Franklin and
of Community Trnst and FBtM Trust, and believes that this proposed merger of the two companies is in the best
inteaests of CFI and its stockholders. Accordingly, the CFI board of directors recommends that CFI stockholders
vote "FOR" approval, adoption and ratification of the Plan of Merger.
Opinion of CFI's Financial Advisor
Pursuant to an engagement letter dated as of September 7, 2007, CFI retained Boenning to act as its
exha>sive financial advisor in co~ection with CFI's consideration of a possible business oombination. In
connection with the merger with Franklin, CFI's board requested Boenning to render its opinion as to the
fairness of the merger consideration to the holders of CFI common stock from a financial point of view. At
the June 26, 2008, meeting at which CFI's board considered the Plan of Merger, Boenning rendered its
written opinion to the board that the merger consideration was fair to the holders of CFI common stock
from a financial point of view (the "Opinion").
The full text of Boenning's Opinion, which sets forth the assumptions made, matters considered and
limitations of the review undertaken, is attached as Exhibit 2 to this document, is incorporated herein by
reference, and should be read in its entirety in connection with this document. The summary of the opinion
of Boenning set forth below is qualified in its entirety by reference to the full text of the Opinion attached
as Exhibit 2 to this docinnent.
Boenning was selected to act as CFI's financial advisor in connection with a potential business
combination based upon its qualifications, expertise, reputation and experience. Boenning has knowledge
of, and cxperience with the Pennsylvania and surrounding markets, as well as financial services
organizations operating in those markets, and was selected by CFI because of its knowledge ofy experience
with, and reputation in the financial services industry. Boentiing, as part of its investment banking
business, is engaged regularly in the vah~ation of assets, securities and companies in connection with
various types of asset and securities transactions, including mergers, acquisitions, public offerings, private
placements, and valuations for various other purposes and in the determination of adequate c~rtsideration
in such transactions. In the ordinary course of its business as abroker-dealer, Boenning may, from time to
time, purchase securities from, and sell securities to, CFI and Franklin.
On June 26, 2008, CFI's board of directors approved the Plan of Merger. Prior to the approval, Boenning
delivered its Opinion to CFI's Board stating that, as of such date, the merger consideration pursuant to the
merger agreement was fair to the shareholders of CFI from a financial point of view. The full text of the
Opinion which sets forth assumptions made, matters considered and limits on the review undertaken is
attached as Exhibit 2 to this document.
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No limitations were imposed by CFI's board of directors upon Boenning with respect to the investigations
made or procedures followed by Boenning in rendering the Opinion.
In arriving at its opinion, Boenning, among other things:
reviewed the Plan of Merger;
• reviewed and analyzed the stock market performance of CFI;
• studied and analyzed the consolidated financial and operating data of CFI and Franklin;
• considered the terms and conditions of the merger between CFI and Franklin as compared with the
terms and conditions of other mergers and acquisitions which Boenning deemed comparablc;
• met and/or communicated with certain members of CFI's and Franklin's senior management to
discuss their respective operations, historical financial statements, and future prospects;
• compared the financial performance of CFI and the prices and trading activity of the stocks of CFI
with those of certain other companies and their securities which Boenning deemed comparable;
• discussed the strategic objectives of the merger and the plans for the combined company with senior
executives of CFI and Franklin;
• participated in discussions and negotiations among representatives of CFI and Franklin and their
advisors; and
• conducted such other financial analyses, studies and investigations as it deemed appropriate.
In connection with rendering its Opinion, Boenning assumed that in the course of obtaining the necessary
regulatory and governmental approvals for the merger, no restriction will be imposed on Franklin or CFI
that would have a material adverse effect on the contemplated benefit of the merger. Boeawing also
assumed that there will not occur any change in applicable law or regulation that would cause a material
adverse change in the prospects or operations of Franklin after the merger.
Boenning relied, without independent verification, upon the accuracy and completeness of all of the
financial and other information reviewed by and discussed with it for purposes of its opinions. With
respect to CFI's financial forecasts and other information reviewed by Boenning in rendering its opinions,
Boenning assumed that such information was reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of CFI and Franklin as to their most likely future
performance and the cost savings and other potential synergies (including the amount, timing and
achievability thereof) anticipated to result from the merger. Boenning did not make an independent
evaluation or appraisal of the assets or liabilities of CFI or Franklin nor was it furnished with any such
appraisal. In addition, Boenning did not review client files of either CFI or Franklin.
The following is a summary of the material analyses prepared by Boenning and presented to CFI's Board
in connection with the Opinion.
Summary of Transaction. Boenning calculated the implied pricing and valuation multiples based upon the
offer price of between $1.13 and $1.25 million in cash. The range of value reflects contingent
consideration that may be payable to CFI Stockholders as described within the Plan of Merger. Based on
CFI's last twelve months revenue and net income for the period ended March 31, 2008, common
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shareholders' equity, and assets held under management (ALrM), the key valuation s~atrshcs were as
follows:
Aggregate Consideration 1 1.13 -1.25
million
Aggregate Consideration /Last Tweh~e Months Net NM
Income2
Aggregate Consideration /Last Twelve Months Revenue 1.7 - 1.9
Aggregate Consideration /Common Shareholders' Equity 3.8 - 4.3
Consideration Per Common Share / AUM3 1.6-1.7
Includes the implied value to option holders in excess of their exercise price.
CFI was unprofitable for the last twelve months. "NM" stands for not meaningful.
AL1M stands for assets under management.
Comparable Companies Analysis. Boenning compared selected publicly available financial, operating and
stock market data for CFI with those of a peer group in order to compare CFI's historical financial and
operating performance with the peers and examine the Merger consideration offered by Franklin relative to
the market valuations of the peers. The peers consisted of two groups: (i) a `Bank" peer group comprised
of both SEC reporting institutions which had (a) assets less than $1 billion and (b) trust revenues greater
than 20.0 of their total revenues, and (ii) an "Asset Management Firm" peer group comprised of SEC
reporting asset management firms with assets less than $ ] billion as of March 31, 2008.
The companies in the "Bank" peer group were:
Encore Bancshares, Inc. {"EBTX'~;
Bryn Mawr Bank Corporation ("BMTC");
Cambridge Bancorp ("CATC");
Alerus Financial Corporation ("ALRS");
Baker Boyer Bancorp ("BBBK'~;
Nashville Bank and Trust Company ("NVTB"); and
T Bancshares, Inc. ("TBNC"}.
The companies in the "Asset Management Firm" peer group were:
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Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 32 of 160
Waddell & Reed Financial, Inc. ("WDR");
Federated Investors, Inc. ("FD");
Eaton Vance Corp. ("EV"}
GAMCO Investors, Inc. ("GBL");
Diamond Hill Investment Group, Inc.
("DHIL");
Epoch Holding Corporation ("EPHC'~;
U.S. Global Investors, Inc. ("GROW ~; and
Westwood Holdings Getup, Inc. ("WHG").
The results of these comparisons based on March 31, 2008, or later if available, financial information and
stock price data as of June 18, 2008, are set forth in the following table.
Asset Mana~en~t I~frm
Bank Peer Peer
t~I Mediaa Median
~ ~- ~~)
Assets $ .85 $ 718.8 $ 332.2
Assets Under Management $ 71.7 $ 795.4 $ 28,570.0
Trust Revea~ue /Total
Revarue 98.1 % 27.1 % N!A
Rehm oa Average Assets (33.8) % I.1 % 22.3
Return on Average Equity (74.9) % 13.3 % 31.0
Common Ecryity Market
gyp, $ N!A $ 110.7 $ 1,205.8
Price to:
Book Value Per Common x x 6.3 x
Share N!A 1.3
Tang. Book Value Per Common x x 7.8 x
Share N!A 15
Assets N/pl % 14.3 % NIA
LTMi Earnings Per Common Share N!A x 17.3 x 21.7 x
Assets Under Management (AUM) N!A x N/A x 4.2 x
LTMI Revenue NIA x 2 9 x 4.5 x
Dividend Yield NIA % 2.36 % 1.40
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LTM stands for the latest twelve months.
No company, however, used in this analysis is identical to CFI. Accordingly, an analysis of the result of
the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and other factors that would affect
the public trading values of the companies or company to which they are being compared.
Comparable Transactions Analysis. Boenning also compared the value to be paid to CFI common
shareholders by Franklin to that of its latest twelve months' revenues and assets under management with
multiples paid in recent acquisitions of asset management firms and trust companies that Boenning
deemed comparable. The transactions deemed comparable by Boenning included publicly disclosed asset
management firm acquisitions announced after April 1, 2003. This analysis was conducted in order to
compare the merger consideration offered by Franklin to comparable merger transactions. The results of
these comparisons are set forth in the following table.
a er ~ nev neat
Teas- Vsiue AUM Revenges Valae i Vslud
aeMoas (miplons) (n~llioas) (oialoas) AIJM' Revenue
Median Results 43 5.0 399.b I.8 1.4 4.2 x
Franklin/ N/A 1.13 - 71.7 .7 l .b - 1.7 - x
Community 1.25 1.7 I.9
Trust
LTM stands for latest twelve months.
AUM stands for assets under management.
No company or transaction, however, used in this analysis is identical to CFI, Franklin or the transaction.
Accordingly, an analysis of the result of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating characteristics of the
companies and other factors that would affect the public tr~ling values of the companies or company to
which they are being compared.
Liquidation Analysis . Boenning prepared an analysis based on CFI's March 31, 2008, financial data to
reflect potential proceeds to the its stockholders in the event the company ceased operations and was
liquidated. The assumptions assumed in the analysis included (i) that CFI recovered $ l 20,000 of an off-
balance sheet receivable as described in the company's audited financial statements, (ii) the company's
real estate market value was worth $500,000 per a recent appraisal that was conducted on the premises,
(iii} that the company's Series A capital notes were converted into common stock, and (iv) that no costs
(legal, severance, etc.) were incurred in the liquidation. Based on this analysis, proceeds available to
stockholders approximated $784,000 versus proceeds available to shareholders in the merger with Franklin
of between $1.13 to $1.25 million.
In connection with rendering its Opinion, Boenning performed what it deemed were the material finanaal
analyses. Although the evaluation of the fairness, from a finanaal point of view, of the merger
consideration in the Meager was to some extent a subjective one based on the experience and judgment of
Boenning and not merely the result of mathematical analysis of financial data, Boenning principally relied
on the previously discussed financial valuation methodologies in its determinations. Boenning believes its
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analyses must be considered as a whole and that selecting portions of such analyses and factors considered
by Boenning without considering all such analyses and factors could create an incomplete view of the
process underlying Boenning's opinion. In its analyses, Boenning made numerous assumptions with
respect to business, market, monetary and economic conditions, industry performance and other matters,
many of which are beyond CFI and Franklin's control. Any estimates contained in Boenning's analyses
are not necessari]y indicative of future results or values, which may be significantly more or less favorable
than such estimates.
In reaching its opinion as to fairness, none of the analyses or factors considered by Boenning was assigned
any particular weighting by Boenning. As a result of its consideration of the aggregate of all factors
present and analyses performed, Boenning reached the conclusion, and opinion, that the merger
consideration pursuant to the Plan of Merger was fair to the stockholders of CFI from a financial point of
view.
Boenning's Opinion was based. solely upon the information available to it and the economic, market and
other circumstances as they existed as of the date its Opinion was delivered; events occaarring after the
date of its Opinion could materially affect the assumptions used in preparing its Opinion. Boenning has not
undertaken to reaffirm and revise its Opition or otherwise comment upon any events occurring after the
date of the Opinion.
The full text of the Boenning Opinion, dated as of June 26, 2048 which sets forth assumptions made and
matters considered, is attached as Exhibit 2 to this document. CFI's stockholders are urged to read the
Opinion in its entirety. Boenriing's Opinion is directed only to the merger consideration pursuant to the
Plan of Merger from a financial point of view, is for the information of the board of directors of CFI, and
does not address any other aspect of the merger nor does it constitute a recommendation to any holder of
CFI common stock as to how such holder should vote at the CFI special meeting.
The foregoing provides only a summary of the analyses performed in the Opinion of Boenning and is
qualified in its entirety by reference to the full text of that opinion, which is set forth in Exhibit 2 to this
document.
Compemstiox of CFI's Financial Advisor
CFI and Boenning entered into an agreement relating to the services to be provided by Boenning in
connection with the merger. CFI agreed to pay Boeaming a cash fee of $5,000 upon execution of the
engagement agreement. In addition, concurrently with the execution of a definitive agreement, CFI agreed
to pay Boettning a cash fee of $30,000 for rendering its fairness opinion. Upon closing of a transaction,
CFI also agreed to pay Boerming a cash fee equal to the greaser of (i) 2% of the market value of the
aggregate consideration offered in exchange for the outstanding shares of CFI common stock in the merger
up to $2 million, plus 7% of such consideration over $2 million, or (ii) $40,000. Pursuant to the Boenning
engagement agreement, as amended, CFI also agreed to reimburse Boenning for reasonable out-of-pocket
expenses incurred in connection with its retention and to indemnify it against certain liabilities.
Terms of the Plan of Merger
Structure of the Merger
Upon the effective date of the merger and the Subsidiary Merger, (referred to as the "Effective Date" in this
document), CFI will be merged with and into Franklin and Community Trust will be merged with and iunto FBtM
Trust. The separate existences of CFI and Community Trust will cease. All Property, rights, powers, duties,
obligations, delis and liabilities of CFI will automatically be transferred to Franklin, as the surviving
company to that merger, and, all property, rights, powers, duties, obligations, debts and liabilities of Community
Trust (including Community Trust's duties as a fiduciary) will automatically be deemed transferred to F&M Trust,
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Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 35 of 160
as the surviving company (and corporate fiduciary) in the Subsidiary Merger. Franklin and F&M Trust will
continue to be governed by their respective articles of incorporation and bylaws as in effect immediately prior to
their respective mergers and be managed by their respective directors and officers.
Calculation of Caste Coersideratlon to be Paid to CFI Stockholders
Each share of CFI common stock that a CFI stockholder holds on the Effective Date will be converted into cash.
Each of the holders of the Capital Notes has given the company a written notice of his/her intent to convert to CFI
common stock. The number of shares to be issued subject to the conversion of the Capital Notes will be based on
the book value per share of CFI common stock on the month-end day prior to the Effective Date of the Merger. See,
also, Note 4 to CFI's 2007 annual report at Exhibit 4 to this document. The holders of Capital Notes must give
notice of their intent to convert their Capital Notes into CFI common stock within 10 days of the Effective Date.
Based upon the book value per share of CFI common stock as of June 30, 2008, and if the Effective Date of the
Mager was July 1, 2008, the pro forma cash amount to be distributed for each share of CFI common stock
outstanding (including the shahs issued as a result of the conversion of the Capital Notes into common stock) would
have been $2.79. However, the book value per share for the six months ended June 30, 2008 is not necessarily
indicative of the results to be expected for the full year es the month-end period prior to the Effective Date of the
Merger. If Community Trust has a net loss from continuing operations for the period from July 1, 2008 to the
Effective Date of the Merger, the cash consideration per CFI share will, in alI probability, be less than the above
June 30 pro forma number; and, cosrversely, if Community Trust has net income from continuing operations during
this same time period, the cash consideration per share could be greater than the above June 30 pro forma number.
Furthermore, CFI stockholders may receive additional cash for their shares, on a pro rata basis, from an
Adjush~nt Account to be funded from a trust if the beneficiary of such trust dies within 10 years of the Effective
Date g~i there are sufficient funds remaining in the trust. The trustee is directed to remit up to $120,000 after the
death of the beneficiary to Community Trust ~ its successes, if such funds remain in the true. The Plan of Merger
establishes an "Adjustment Account" at Section 4.12, which provides that Community Trust shall, prior to the
Effective Date, assign its right, title and interest in and to the trust proceeds to a newly established liquidating trust.
Each holder of CFI common stock shall be granted anon-transferable beneficial interest in the liquidating trust in
proportiwn to such stockholder's overall ownership interest in CFI at the time of the grant. The liquidating trust will
be admin9stered by F&M Trust, as trustee, for a period of 10 years from the Effective Date; after which time period,
this account will terminate and form CFI stockholders will not be entitled to any fiuther cash distributions.
However, if proceeds are received by the liquidating trust prior to its termination on the 10'~ anniversary of the
Effective Date, such proceeds shall be distributed to farmer CFI stockholders as beneficial imerest holders in the
liquidating trust and the trust shall proceed to terminate.
As promptly as reasonably practicable following the Effective Date (and in any case not later than five days
thereafter), Frerelclin's Exchange Agent (which will probably be FBtM Truest) will mail es deliver to each GFI
stockholder who was a record holder immediately prior to the Effective Date, a form of letter of transmittal which
shall c~rrtain instructions for use in effecting the surrender of your CFI stock certificates fes the cash payment. The
letter of transmittal shall specify that delivery of the CFI stock certificates shall be effected and risk of loss and title
to these stock certificates shall pass only upon proper delivery of such certificates to the Exchange Agent. No
interest shall be paid for any cash delivered.
Any CFI shares and any cash for the payment of such shares that remain unclaimed as of the first anmiversary of
the Effective Date gray, to the extent permitted by law, be delivered by the Exchange Agerrt to Franklin. )n such
event, a holder of CFI stock certificates who has not exchanged them for cash, without interest, must look
exclusively to Franklin. The Exchange Agent and Franklin shall not be liable to a holder of a CFI stock certificate
for any cash delivered to a public official pursuant to applicable abandoned property, escheat es similar laws.
EJjFective Date
The merger of CFI and Franklin will take effect when all conditions, including stockholder and regulatory
approvals, have been fulfilled or waived, es as soon as practicable thereafter as CFI and Franklin may mutually
select. Regulatory approvals can not be waived. Simultaneously with the effective date of the CFI and Franklin
merger, the Subsidiary Merger will also become effective. We currently expect to close the transactions during the
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fourth quarter of 2008.
Representations and Warranties
The Plan of Merger contains customary representations and warranties relating to, among other things:
• Organization, standing and authority of CFI and Franklin and their respective subsidiaries;
• Capital structures of CFI and Franklin;
• Valid corporate power and authority to conduct current business and enter into the Plan of Merger and
related obligations;
• Consents or approvals of regulatory authorities or third parties necessary to complete the merger;
• Consistency and accuracy of financial statements with accounting principles generally accepted in the
United States and the rules and regulations of any other applicable regulatory authority;
• Absence of undisclosed material pending or tbreatared litigation;
• Timeliness of all regulatory filings and absence of regulatory orders;
• Compliance with applicable laws and regulations;
• Disclosure of material contracts;
• Absence of undisclosed brokers' or finders' fees;
• Disclosure of retirement and other employee plans and matters relating to the Employee Retirement Income
Security Act of 1974;
• Absence of labor agreements or disputes;
• Absence of material arvironmental violations, actions or liabilities;
• Filing of tax returns and payment of taxes;
• Absence of certain risk management instruments;
• Maintenance of adequate insurance and disclosure of insuuance contracts;
• Disclosure of applicable takeover laws and provisions;
• Availability of funds necessary to complete the contemplated transaction;
• Disclosure of transactions with affiliates;
• Quality of title to properties;
• Disclosure of termination benefits for employees, officers and directors;
• Disclosure of intellectual property rights;
• Proper administration of fiduciary accounts;
• Accuracy of books and records;
• Absence of restrictions on investment securities;
• Receipt of fairness minion;
• Absarce of material adverse changes, since March 31, 2008; and
• Absence of untrue or omission of material facts.
Conduct of Bxsiness Pending the Effective Rate
In the Plan of Merger, CFI agrees to use its reasonable good faith efforts to preserve its business organization
intact, to maintain good relationships with employees, and to preserve the goodwill of customers and others with
whom it does business.
In addition, CFI agrees to conduct its business and to engage in transactions only in the ordinary course of
business, consistent with past practice, except as otherwise required by the Plan of Merger or consented to by
Franklin. CFI also agrees in the Plan of Merger that it will not, without the written consent of Franklin:
Issue, sell or authorize additional stock or issue or grant options or similar rights with respect to its capital
stock or any securities convertible into its capital stock;
Declare, set aside or pay any dividend or other distribution in respect of its capital stock;
Enter into, amend or renew any employment, consulting, change in control, severance or similar agreements
with any director, officer or employee or grant any wage increases or increase to employee benefits except
in the ordinary course of business or otherwise previously disclosed to the other party;
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• Establish any new, or make contributions to any, benefit plans except as required by law or under the terms
of the plans;
• Sell, transfer, mortgage, encumber or otherwise dispose of any assets, deposits, business or properties except
in
• the ordinary course of business;
• Acquire assets, business, deposits or properties of any other entity except in the ordinary course of business;
• Make capita] expenditures in excess of $20,000;
• Change its articles of incorporation or bylaws;
• Change accounting methods except as required by law or generally accepted accounting principals;
• Enter into or modify any material contracts;
• Settle any law suits in an amount in excess of $10,000;
• Change its business lines;
• Incur or prepay any indebtedness except in the ordinary course of business;
• Acquire or restructure any debt or investment securities except in the ordinary course of business; and
• Agree to do any of the foregoing.
CFI also agrees in the Plan of Merger that it will not, without the written consent of Franklin:
• Take any action that would result in any representation or warranty from becoming untrue, prevent any of the
closing conditions from occurring, or result in a material violation of the Plan of Merger; and
• Take any action that would adversely affect or materially delay the ability of either CFI or Franklin from
obtaining any regulatory approvals or to perform their covenants or agreements under the Plan of Merger.
Conditioxs to the Mergers
Obligations to complete the merger of CFI and Franklin and the Subsidiary Merger are subject to various
conditions, including the following:
• The Plan of Merger shall have been duly approved and adopted by the CFI stockholders;
• All necessary governmental approvals for the contemplated mergers shall have been obtained,
and aU statutory waiting periods shall have expired, and no such approvals shall contain terms
that board of directors of Franklin believe would reduce the benefit of the merger; and
• These shall not be any order, decree or injunction in effect preventing the completion of the
Plan of Merger or related transactions.
In addition to the foregoing, CFI's and Franklin's obligations to close the Plan of Merger are each conditioned on:
• The accuracy in all material respects, as of June 26, 2008 and as of the Effective Date, of the
representations and wartat-tics of each company;
• Each company's performance in atl material respects of all obligations required to be performed
under the Plan of Merger;
• Receipt of an executed Voting Agreement from each director of CFI. See, Exhibit 2 of the Plan
of Merger;
• . Ido material adverse changes to each of the party's business; and
• Other conditions that are customary for transactions of this type contemplated by the Plan of
Merger.
Amendment; Waiver
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The Plan of Merger may be amended or modified or any condition waived by the written agreement of the
parties, except when the approval of the stockholders of CFI is required by law.
Termination
The Plan of Merger may be terminated at any time prior to the Effective Date by the mutual consent of CFI and
Franklin.
The Plan of Merger may also be terminated by either party if
• The other party, in any material respect, breaches any representation, warranty, covenant or
other obligation contained in the Plan of Merger, and the breach remains uncured 30 days alter
written notice of the breach is given to the breaching party and the breach would reasonably be
expected to cause a material adverse effect on the other party;
• The closing on the Plan of Merger does not occur by December 31, 2008, provided that the right
to terminate the Plan of Merger shall not be available to a party, if such party has breached is
any material respect its obligations and covenants in any manner that, shall have proximately
and substamially caused the delay in the closing,
• Any regulatory authority whose approval or consent is required for completion of the
contemplated mergers under the Plan of Merger issues a final non-appealable denial or the
application for approval is permanently withdrawn at the request of a regulatory authority;
• CFI's stockholders do not approve the Plan of Merger;
• CFI eats into a letter of intent, agreement, plan or similar instrument with a view to being
acquired by, or effecting a business combination with, a third party;
• After receipt of written advice of legal counsel that failure to do so would constitute a breach of
fiduciary duty by CFI's directors, CFI enters into a letter of latent, agreement, plan or similar
instrument with a view to being acquired by, or effecting a business combination with, a third
party; m.
• CFI's board of dit+ec~ors:
o fails to recommend that its stockholders vote for the Plan of Merger;
o fails to hold a stockholder meeting at which proxy votes are solicited to appgrove the Plan of
Merger;
o fails to notify Franklin that it is soliciting, or negotiating for, a superior proposal to being
acquired by, or effecting a business combination with, a third party;
o endorses a proposal by a third party to be acquired by, or combine with, such third party;
o fails to approve the Subsidiary Merger; or
o fails to approve the Subsidiary Plan of Merger by the Effective Date.
Termireatiott Fees
CFI and Franklin have also agreed that:
• If a party terminates the Plan of Merger because the other party has committed a breach of any
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representation, covenant or agreement which breach has not been cured within 30 days after written
notice is sent to the breaching party and such breach would cause a material adverse effect on the non-
breaching party, then such breaching party would pay the other party $56,050 as a termination fee; or
CFI terminates the Plan of Merger because it has entered into a letter of intent, agreement, plan or
similar agreement with a view to being acquired by, or effecting a business combination with, a third
party, then CFI would pay Franklin $113,000 as a termination fee.
No Solicitation of Other Transactions
CFI agrees that it will not, and will not allow others under its control to, directly or indirectly:
• Initiate, solicit, encourage or take any other action to facilitate, any acquisition proposals or inquiries
with respect to, or the making of any acquisition proposal;
• Participate in any discussions or negotiations, furnish any information to, or approve, recommend or
enter into any agreement relating to any acquisition proposal; or
• Agree to or endorse any acquisition proposal or inquiry described above;
Unless CFI believes, after receipt of written advice from its legal counsel, that failure to do so would violate its
board of directors' fiduciary duties.
CFI has also agreed to notify Franklin promptly, if any acquisition proposal or inquiry described above is received
by it from any third party and permit the other party to have an opportunity to adjust its offer.
Expenses
Each party will bear expenses incurred by it in connection with the Plan of Merger.
Regulatory Approvals
Completion of the Plan of Merger and the Subsidiary Merger is subject to the prior receipt of all consents or
approvals of, and the provision of all notices to, federal and state authorities required to complete the mergers of CFI and
Franklin and Community Trust and F&M Trust.
The parties agreed to use their reasonable best efforts to obtain all regulatory approvals required to complete the
Plan of Merger and the Subsidiary Merger. These approvals include consent or approval fin the Federal Deposit
Insurance Corporation ("FDIC"), and the Pennsylvania Department of Banking. The mergers of the companies and their
subsidiaries cannot proceed in the absence of such consents or approvals.
The parties filed (or wsll file) applications with the FDIC and the Pennsylvania Department of Banlaing requesting
approval of the merger of Community Trust and FBcM Trust and the merger of CFI with Fraakfin, as applicable. In
determining whether to approve the Subsidiary Merger, the FDIC will, among other things, determine whether the
merger would create an undue market concentration in the areas served by both of these companies or otherwise foster
any anti-competitive effects in the provision of products and services to persons who reside in tluse companies' market
areas. In dete irn~.g whether to approve the merger, the Pennsylvania Department of Banking will consider, among
other things, whether the Subsidiary Merger would be prejudicial to the interests of the creditors, beneficiaries of
fiduciary accounts or stockholders of the companies involved.
The Pennsylvania Deparmnent of Banking can also consent or object to the merger of CFI and Franklin.
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CFI and Franklin aze not aware of auy material governmental approvals or actions that are required to complete
the Plan of Merger and the Subsidiary Merger, except as described in this document. If any other approval or action
is required, the parties will use their best efforts to obtain such approval or action.
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FINANCIAL INTERESTS 4F DIRECTORS AND OFFICERS IN TBE MERGER
Stock Ownership of CFI Directors and Executive Officers
As of August 1, 2008, the record date for the special meeting of CFI stockholders, the CFI directors and
executive officers beneficially held 91,036 shares, representing 43.65% of the outstanding shares of CFI common
stock.
Capital Notes
The following CFI directors are holders of the Capital Notes: Lowell R. Gates, Susan A. Russell, Andrew W.
Kohn, Charles J. Henry and Nicholas E. Dunphy, Jr. These directors have stated in writing their intent to convert
these Capital Notes into CFI common stock.
Inden~nificatioA and Insurance
Franklin has agreed for six years after the Effective Date to indemnify the directors and officers of CFI and
Community Trust against all costs, expenses (including reasonable attorneys' fees), judgments, losses, claims,
damages or liabilities arising out of actions occurring prior to the Effective Date, to the fullest extent permitted
under Franklin's Articles of Iaccuporation, Bylaws, and applicable law.
Franklin has also agreed that for six years after the Effective Date, Franklin will, at its expense, maintain
directors' and officers' liability insurance for the former directors and officers of CFI and Community Trust with
respect to matters occurring at or prior to the Effective Date. The insurance coverage is to be based on conditions
and terms substantially comparable to the directors' and officers' liability policy of Franklin as of the Effective
Date, so long as the policy can be obtained at a cost not in excess of I50'~o of tbe rate for such directors' and
officers' liability insurance tail policy, in effect as of the Effective Date. hn the event Franklin is unable to obtain a
directors' and officers' liability insurance tail policy at a cost not in excess of 150% of such rate, Franklin shall
obtain a directors' and officers' liability insurance tail policy with the maximum coverage reasonably available for a
cost that is equal to 150% of that rate.
Etnployneewt Arrangenie~tt for Susan A. RusseQ
Susan A. Russell is the President and Chief Executive Officer of CFI and Community Trust and is under a
written employment agreement. Her current employment agreement contains a provision that would grant her a
severance payme~ and other benefits, if she were terminated as a result of a change in control of CFI. At the
Effective Date, she agreed to release Franlin, as successor to CFI, from the obligations under her employment
agreement and in return received a written setter from F&M Trust offering her employment and delineating her
salary and other benefits which she has accepted.
Voting Agreements
As a condition to entering into the Plan of Merger, directors of CFI entered into an agreement, pursuant to which
the director agreed to vote all of his or her shares of CFI common stock, in favor of the Plan of Merger. A form of
voting agreement is at Ex}ubit 2 to the Plan of Meager. The voting agreement may have the effect of discouraging
persons from making a proposal for an acquisition transaction involving CFI. The following is a brief summary of
the material provisions of the voting agreement:
Those directors agreed, among other things, to vote, or cause to be voted, in person or by proxy, all of their
common stock as to which they have or share voting power, or act as trustee over a voting mist, individually or
jointly with other persons, and will use their reasonable best efforts to cause any other shares of common stock over
which they share voting power, to be voted for approval and adoption of the Plan of Merger and the transactions
contemplated thereby; and
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These directors agreed not to sell, transfer, or otherwise dispose of their common stock. Further, the
CFI directors agreed not to exercise any CFI stock options or warrants that they may hold to purchase
common stock.
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The following discussion addresses the material United States federal income tax consequences of the merger of
CFI and Franklin to a CFI stockholder who holds shares of CFI common stock as a capital asset. This discussion is
based upon the Internal Revenue Code of 1986, as amended, Treasury regulations promulgated under the Internal
Revenue Code, judicial authorities, published positions of the Internal Revenue Service and other applicable
authorities, all as in effect on the date of this discussion and all of which are subject to change (possibly with
retroactive effect) and to deffering interpretations. This discussion does not address all aspects of United States
federal income taxation that may be relevant to CFI stockholders in light of their particular circumstances and does
not address aspects of United States federal income taxation that may be applicable to CFI stockholders subject to
special treatment under the Internal Revenue Code {including banks, tax-exempt organizations, insurance
companies, dealers in securities, traders in securities that elect to use amark-to-market method of accounting,
investors in pass-through entities, CFI stockholders who hold shares of CFI common stock as part of a hedge,
straddle or conversion transaction, CFI stockholders who acquired their shares of CFI common stock pursuant to the
exercise of employee stock options or otherwise as compensation, and CFI stockholders who are not "United States
persons" as defined in section 7701(a}(30) of the Internal Revenue Code}. In addition, the discussion does not
address any aspect of state, local or foreign taxation. No assurance can be given that the Internal Revenue Service
would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth below.
CFI stockholders are arged to consult their taz advisors with respect to the particWar United States
federal, state, local anti #oreign taz consequences of the Plan of Merger to them.
The merger of CFI with and into Franklin shall not constitute a reorganization under Section 368(x) of the
Internal Revenue Code. The discus~on below sets forth the material United State income tax consequences of the
merger of CFI and Franklin to CFI stockholders.
Cash Received At E,Q~edive Date
Cash r~eceiv~ed by a CFI stockholder for a share of CFI common stock generally will be treated as received in
redemption of the share, and gain or loss generally will be recognized based on the difference between the amount
of cash received for the share and the proration of the stockholder's aggregate adjusted tax basis of the shares of CFI
common stock surrendered that is allocable to the share. The gain or loss generally will be long-team capital gain or
loss if the holding period for the shares of CFI common stock is more than one year. However, the cash received
maybe treated as a dividend under certain circumstances. See "Possible treatment of cash as a dividend" below.
Cash Received Frnra Adj~eent Account
As explained above, prior to the Effective Date a liquidating mist will be established, certain contingent assets
in the form of a $120,000 contingent receivable will be assigned to the trust, and beneficial interests in the trust will
be distributed to the CFI stockholders on a pro rata basis. Based upon the timing of any payments from the trust and
the likelihood that no distnbutions may be made, it is recommended that no value is assigned to the beneficial
interests at the time of the grant. Accordingly, cash received by a CFI stockholder as a beneficial interest holder in
the liquidating trust established pursuant to Section 4.12 of the Plan of Merger generally will be treated as ordinary
income to the beneficial holder.
Backup H'itliholding
A CFI stockholder receiving cash for a share may be subject to backup withholding at a rate of 28% if the
stockholder is a nan-corporate United States person and (1) fails to provide an accurate taxpayer identification
number; (2) has been notified by the Internal Revenue Service thaE he/she has failed to report all interest or
dividends required to be shown on his/her federal income tax returns; or (3) is certain circumstances, fails to comply
with applicable certification requirements. Amounts withheld under the backup withholding rules will be allowed as
a refund or credit against a stockholder's United States federal income tax liability provided that the stockholder
furnishes the required information to the Internal Revenue Service.
36
'This di~i~~:-+iAlit~C~ cor~kY~~cl~~c ®~~iL~l~ UiFl
income tax consequences of the Plan of Merger. In addition this discussion does not address tax consequences that
may vary with, or aze contingent on, individual circumstances. It also does not address any federal estate tax or
state, local or foreign tax consequences of the Plan of Merger. Tax matters are very complicated, and the tax
consequences of the Plan of Merger to a CFI stockholder will depend upon the facts of his or her particular situation.
Accordingly, we strongly urge you to consult with a tax advisor to determine the particular tax consequences to you
of the Plan of Merger.
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DISSENTERS' RIGHTS OF CFI STOCKHOLDERS
CFI stockholders have rights to dissent from the Plan of Merger and obtain the fair value of their respective
shares in cash as determined by an appraisal process in accordance with the procedures under Subchapter D of
Chapter 15 of the Pennsylvania Business Corporation Law of 1988. A summary of the rights of dissenting
stockholders follows. This summary is qualified in its entirety by reference to Exhibit 3 of this document, which
sets forth the applicable dissenters' rights provisions under Pennsylvania law.
IF YOU ARE CONSIDERING EXERCISING YOUR DISSENTERS' RIGHTS, YOU SHOULD READ
CAREFULLY THE SUMMARY BELOW AND THE FULL TEXT OF THE LAW, SET FORTH IN
EXHIBIT 3 OF THIS DOCUMENT.
In the discussion of dissenters' rights, the teen "fair value" means the value of a share of CFI common stock
immediately before the day of the Effective Date, taking into account all relevant factors, but excluding any
appreciation or depreciation in anticipation of the merger of CFI and Franklin.
Before the E,~ectlve Date
If you are a CFI stockholder, send any written notice or demand required in order to exercise your dissenters'
rights to: Susan A. Russell, President and Chief Executive Officer, Community Trust Company/Community
Financial, Inc, 3907 Market Street, Camp Hill, PA 17011.
After the E,fyective Date
CFl stockholders should send any written notice or demand required in order to exercise your dissenters' rights
to: Cathy Angle, Secretary, Franklin Financial Services Corporation, 20 South Main Street, Chambersburg, PA
17201.
Notice of Inrentio>, to Dissent
If you wish to dissent from the Plan of Merger, you must do the following:
• Prior to the vote on the Plan of Merger by CFI stockholders at the special meeting, file a written notice
of your intention to deanand payment of the fair value of your shares of common stock if the Plan of
Merger is completed;
• Make no change in your benefice/ ownership of connmon stock after you give notice of your intention
to demand fair value of your shares of common stock; and
• Not vote in favor of the Plan of Merger at the special meeting.
Simply providing a proxy against or voting against the proposed Plan of Merger at the special meeting of
stockholders will not constitute notice of your intention to dissent.
Notice to band Payneent
If the Plan of Merger is approved by the required vote of CFI stockholders, CFI will mail a notice to all those
stockholders who gave notice of their intention to demand payment of the fair value of their shares and who did not
vote for approval of the Flan of Merger. The notice will state where and when you must deliver a written demand
for payment and where you must deposit your stock certificate in or~r to obtain payment. The notice will include a
form for demanding payment and a copy of the relevant provisions of Pennsylvania law. The time set far receipt of
the demand for payment and deposit of stock certificates will be not less then 30 days from the date of mailing of the
notice.
Failure to Co~xply nth Regsired Steps M Dissent
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YOU MUST TAKE EACH STEP IN THE INDICATED ORDER AND l[N STRICT COMPLIANCE
WITH PENNSYLVANIA LAW IN ORDER TO MAINTAIN YOUR DISSENTERS' RIGHTS. IF YOU
FAIL TO FOLLOW THESE STEPS, YOU WJlI1. LOSE THE RIGHT TO DISSENT AND YOU WILL
RECEIVE THE SAME CONSIDERATION AS THOSE STOCKHOLDERS WHO DO NOT DISSENT.
Payment of Fair Value of Shares
Promptly after the Effective Date, or upon timely receipt of demand for payment if the closing of the Plan of
Merger has already taken place, Franklin will send dissenting stockholders, who have deposited their stock
certificates, the amount that Franklin estimates to be the fair value of their common stock. The remittance or notice
will be accompanied by:
A closing balance sheet and statement of income of CFI for the fiscal year ending not more than l6
months before the date of renuttance or notice, together with the latest available interim financial
statements;
• A statement of Franklin's estimate of the fair value of your common stock; and
• A notice of the right of the dissenting stockholder to demand supplemental payment, accompanied by a
copy of the relevant provisions of Pennsylvania law.
Estimate b3' Dissenting Stockholders of Fair Value of Shares
If a dissenting stockholder believes that the amount stated or remitted by Franklin is less than the fair vahie of
his or her common stock, the dissenting stockholder must send his or her estimate of the fair vahu (deemed a
demand for the deficiency) of the common stock to Franklin within 30 days after Franklin mails its nmittsnce. If
the dissenting stockholder does not file his or her estimate of fair value within 30 days after the mailing by Franklin
of its remittance, the dissenting stockholder will be entitled to no more than the amount remitted by Franklin.
Valuation Proceedings
If any demands for payment remain unsettled within 60 days after the latest to occur of:
• The Effective Date;
• Timely receipt by Franklin of any demands for payment; or
• Timely receipt by Franklin of any estimates by dissenters of the fair value,
Then, Franklin may file an application, in the Court of Common Pleas of Franklin County, Pennsylvania
requesting that the court determine the fair value of the common stock. If this happens, all disseuting stockholders,
no matter where they reside, whose demands have not been settled; will become parries to the pmoeediag. In
addition, a copy of the application will be delivered to each dissenting stockholder.
If Franklin were to fail to file the application, than any dissenting stockholder, on behalf of all dissenting
stockholders who have made a demand and who have not settled their claim against Franklin, may file an
application in the name of Franklin at any time within the 30-day period after the expiration of the 60-day period
and r+eque~ that the Court of Common Pleas of Franklin County, Pennsylvania determine the fair value of the
shares. The fair value determined by the Court of Common Pleas of Franklin County, Pennsylvania may, but need
not, equal the dissenting stockholders' estimates of fair value. If no dissenter files an application, then each
dissenting stockholder entitled to do so shall be paid no more than Franklm's estimate of the fair value of the
common stock, and may bring an action to recover any amount not previously renutted, plus interest at a rate the
Court of Common Pleas of Franklin County, Pennsylvania fords fair and equitable.
Franklin intends to negotiate in good faith with any dissenting stockholder. If, after negotiation, a claim cannot
be settled, then Franklin will file an application requesting that the fair value of the common stock be determined by
the Court of Common Pleas of Franklin County, Pennsylvania.
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Costs and Expenses
The costs and expenses of any valuation proceedings performed by the Court of Common Pleas of Franklin
County, Pennsylvania, including the reasonable compensation and expenses of any appraiser appointed by such
court to recommend a decision on the issue of fair value, will be determined by such court and assessed against
Franklin, except that any part of the costs and expenses may be apportioned and assessed by such court against any
or all of the dissenting stockholders who are parties and whose action in demanding supplemental payment is
dilatory, obdurate, arbitrary, vexatious or in bad faith, in the opinion of such court.
Stockholders wishing to exercise their dissenters' rights should consult their own counscl to ensure that they
fully and properly comply with application requirements.
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INFORMATION ABOUT CFI
Business
Community Financial, Inc. was established in 2000 as the bolding company for Community Trust. CFI has two
other subsidiaries:
• Community Realty, Inc. which owns the l .l acre property and facility at 3907 Mazket Street that
Community Trust operates as its headquarters, and place of business; and
• Community Insurance, Inc. which was established to facilitate the sale of insurance products at some
future date.
Community Trust is an independent, Pennsylvania state-chartered, non-depository trust company which was
originally founded in 1992. Community Trust serves individuals, families and businesscs in South Central
Pennsylvania. As of June 30, 2008, Community Trust had $ million of assets under
management from over accounts. For the year ended December 3i, 2007, Community Trust
recorded total fee income of approximately $699,373 with an average fee of approximately 81 basis points on assets
under management.
Community Trust offers a wide range of trust services inmluding, Revocable and Irrevocable Trusts, Asset
Protections Trusts, Grantor Retained Income Trust (GRIT), Life Insurance (dynasty) Trust, Charitable Remainder
Trusts, Trusts for Minors, By-pass or Credit Shelter Trusts, Marital Trusts, QTIP (Qualified Terminable Interest
Property) Trusts aad Trusts and estate settlement. Community Trust provides professional investment managemart,
services to non-trust clients for qualified and non-qualified accounts as well as provide income and expwse rocord
keeping and tax preparation services for its trust and estate clients. Community Trust provides additional fiduciary
services including executor, power of attorney,'custodian, surrogate and other financial services such as disbursing
agent, qualified intermediary and escrow agent. Community Trust's quality service and products have effectively
cultivated strong relationships with its clicnt base that helps drive a consistart level of fee income for the
Community Trust year after year. As of June 30, 2008, the average account size for Community Trust was
approximately $
Board of Directors
The following table sets forth the current members of tbe Board of Directors of Community Financial, Inc.,
hislher age, hisJher position with Community Financial, Inc. and the beneficial o~vncrship of corumon stock of
Community Financial, Inc. by each person. These persons are also directors of Community Trust. Share
information is state as of August 1, 2008:
Name Business Experience Including Amount Beneficial Percentage of
Age Principal Occupation for the Pat of Stock Ownership Outstanding
Director Since Five Years Stock Owned (%)
Nicholas E. Dunphy, Jr.
Age 45 Owner of Caddy Shack Restaurant 9,114
2002
Lowell R. Gates, Esquire Chairman of the Board- Community
Age 48 Financial, Inc. & Community 76,800
1992* Trust Com~ny; Shareholder, Partner
and Attorney -Gates, Halbruner & Hatch, PC;
Board of Directors; Integrity Bank
4.37
36.82
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Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 49 of 160
Charles J. Henry, CPA
Age 44 Certified Public Accountant -
2003 McKonly & Asbury, LLP
Andrew W. Kohn
Age 53
2003
Commercial Real Estate Sales
NAUCIR
Susan A. Russell
Age 54
2003
1,500
1,500
President & Chief Executive Officer 2,126
-Community Financial, Inc. -
Community Trust Company
0.72
0.72
1.04
*Indicates that this Director was a member of the Community Trust Company Board of Directors prior to the
formation of the Community Financial, Inc. holding company.
Executive Of,~ecers
Title Name
Chairman Lowell R Gates, Esquire
President & Chief Susan A. Russell
Executive Officer
Treasurer Charles 3. Henry, CPA
Secretary Nicholas E. Dunphy, Jr.
Legal Proceedings
CFI and Community Trust are not parties to any legal proceedings that could have any significant effect upon
CFI's financial condition or income. In addition, CFI and Community Trust are not parties to suy legal proceedings
under any federal and state arvironmental laws.
Regulatory Matters
The Department of Banking issued to Community Trust a revised Memorandum of Understanding ("MOU'~,
dated January 22, 2004 and updated and revised on March 27, 2006 and November 6, 2007, as a result of lack of
sufficient capital in case, cash equivalents and readily marketable secnrities. The MOU requires that Community
Trust maintain at least $1 million in readily marketable securities, cash and cash equivalents at the time it files its
quarterly reports on condition.
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INFORMATION ABOUT FRANKLIN FIlVANCIAL SERVICES CORPORATION
Franidin Financial Services Corporation is a registered financial holding company under tbe Bank Holding
Company Act of 1956, as amended, with its headquarters in Chambersburg, Franklin County, Pennsylvania.
Franklin's principal operating subsidiary is Farmers and Merchants Trust Company of Chambersburg, a
Pennsylvania-chartered commercial back and trust company ("F&M Trust"} regulated by the FDIC and the
Pennsylvania Department of Banking.
F&M Trust, established in 1906, is afull-service, commercial bank and trust company, which is not a member
of the Federal Reserve System. F&M Trust operates twenty-four community banking offices in Franklin,
Cumberland, Fulton and Huntingdon Counties, Pennsylvania, and engages in general commaroial, retail bankmg and
trust services normally associated with community banks and its deposits are iasured {up to applicable limits) by the
FDIC. F&M Trust offers a wide variety of banking services to businesses, individuals, and governmartal entities.
These services include, but are sot necessarily limited to, accepting and maintaining checking, savings, and time
deposit accounts, providing investment and trust services, making loans and providing safe deposit facilities.
F&M Trust's investment and Trust Services Deparmoent offers all of the personal and corporate trust services
normally associated with trust departments of area beaks including: estate planing and administration, corporate
and personal trust fund.maoageinent, pension, profit sharing aad other employee benefit funds management, and
custodial services. FBtM Trust's Personal Investment Center sells mutual funds, aimuities and selected insurance
products.
Additional information regarding Franklin may be obtained via Franklin's filings with the Securities Exchange
Commission, which are publicly available aai the SEC's website at www.sec.¢ov.
43
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PROPOSAL II - ADJOiJRNMENT
In the event that CFI does not have sufficient votes for a quorunn or to approve and adopt the Plan of Merger at
its special meeting, CFI intends to adjourn the meeting to permit fiuther solicitation of proxies. CFI can only use
proxies received by it at the time of the special meeting to vote for adjournment, if necessary, by submitting the
question of adjournment to its stockholders as a separate matter for consideration.
The CFI board of directors recommends that you mark your form of proxy in favor of the adjournment proposal
so that your proxy may be used to vote for adjownment, if necessary. If you properly executed yow proxy but did
not mark how you would like to vote on the proposal, CFI will consider that you voted in favor of the adjournment
proposal, unless yow proxy indicates otherwise. If CF[ adjourns the special meeting, CFI will not give notice of the
time and place of the adjourned meeting other than by an announcement of such time and place at the special
meeting.
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THIS PAGE INTENTIONALLY
LEFT BLANK
45
Case 1:10-cv-01285-VWVC Document 20-5
EXHIBIT 1.
Filed 09/15/2010 Page 53 of 160
AGREEMENT AND PLAN OF MERGER
between
FRANKLIN FINAI3CIAL SERVICES CORPORATION
and
CO1~'IMUNI'I'Y FINANCIAL, INC.
June 26, 2008
1-1
Case 1:10-cv-01285-VW11C Document 20-5 Filed 09/15/2010 Page 54 of 160
BACKGROUND ................
.................1
AGREEMENT ..................... ....
AR'T'ICLE I -THE MERGERS .................................................................
.....................
Section 1.01-Definitions .........................................
Section 1.02 -The Merger .............................................................
Scction 1.03 -Satisfaction of Series A Capital Notes ....................
...........................................
Section 1.04 -The Subsidiary Merger ...................... I
.....
......................9
......................14
......................14
ARTICLE II -REPRESENTATIONS AND WARRANTIES OF COMMUNITY •••.••.• 14
Section 2.OI -Organization .................................................................................15
Section 2.02 -Capitalization ..................................................................... .17
Section 2.03 - Authority; No Violation ...............................................••••••••••••"",18
Section 2.04 -Consents ........................................................................................18
Section 2.05 -Financial Statements .................................................................... 19
Section 2.06 -Taxes .............................................................................................19
Section 2.07 - No Material Adverse Effect ............................
Section 2.08 -Contracts ....................................................................................... 21
Section 2.09 -Ownership of Property; insurance Coverage ...............................
Section 2.10 -Legal Proce~ings ....... ............................................... 21
Section 2.11 -Compliance With Applicable Law ............................................... 22
Section 2.12 - ERISA ........................................................................................... 23
Section 2.13 - Bmkers, Finders ax-d Financial Advisors; Fairness Opinion .......
Section 2.14 -Environmental Matters .....••••••••••••••••••••••••••••:~ ..............................24
Section 2.15 -Related Party Transactions ............................ . 24
Section 2.16 -Schedule of Termination Benefits ...............................................
Section 2.17- Takeover Laws ............................................................................. 25
Section 2.18 -Labor and Employment Matters ..................................................
Section 2.19 -Anti-Money Laundering .25
and Customer Information Security .............................................
Section 2.20 -Regulatory Capital ......................................................................... 26
Section 2.21 -Community Trust Accounts ........................................................... 26
Section 2.22 -Quality of Representations ..........................................................
ARTICLE TIT -REPRESENTATIONS AND WARRANTIES OF FRANKLIN ..... • • • • •. 26
Section 3.01-Organization ................................................................................. 27
Section 3.02 -Authority; No Violation ...............................................................
Section 3.03 -Consents ................................................................ 28
........................
Section 3.04 - No Material Adverse Effect .......................................................... 28
Section 3.05 -Legal Proceedings ......................................................................... 28
Section 3.06 -Compliance With Applicable Law ...............................................28
Section 3.07 -Information to be Supplied ........................................................... 29
Section 3.08 - Securities Documents ................................................................... 29
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Section 3.09 Quality of Representations ............................................ ............... 29
....................
ARTICLE IV -COVENANTS OF THE PARTIES .................................... 29
• .......................... 29
Section 4.O1 - Conduct of Community's Business ....................
.......................................
Section 4.02 -Access; Confidentiality .......................... 33
at Matters and Consents .......................... 33
Section 4.03 -Regal ory ...................... . 34
Section 4.04 - Taking of Necessary Action ......................................................... 34
Section 4.05 -Certain Agreements .................................................................... ~ . 36
Section 4.06 - No Other Bids and Related Matters .............................................
Section 4.07 - MOU .............................................................................................. 37
Section 4.08 -Duty to Advise; Duty to Update Disclosure Schedule ................
Section 4.09 - (~rrent Information ..................................................................•--. 38
Section 4.10 -Undertakings by Franklin and Community .................................
Section 4.11- Employee Benefits and Termination Benefits .............................. 41
Section 4.12 -Adjustment Account ...........................................................••••••"':43
Section 4.13 -Certain Releases ...........................................................................
ARTICLE V -CONDITIONS .........................................................................................43
Section 5.01 -Conditions to Community's Obligations under this Agreement ..
Section 5.02 - Conditions to Franklin's Obligations under this Ageement......... 44
ARTICLE VI -TERMINA'T'ION, WAIVER AND AMENDMENT ..............................4b
Section 6.01- Ternnination .................................................................................. 47
Section 6.02 -Effect of Ternnination ..................................................................
ARTICLE VII -MISCELLANEOUS .....................................................
Section 7.01-Expenses and Other Fees .......................................
resentations and Warranties
l of Re
iv
S ......................•.47
...........••••••••••".49
.......................
p
a
urv
Sedion 7.02 -Non-
Scction 7.03 -Amendment, Extension and Waiver .............................................50
Scetion 7.04 -Entire Agceement .......................................................................... 50
Section 7.05 - No Assignment .............................................................................. 50
................................................................
i
ces .......................
Section 7.06 -Not
.......................... . 51
........................
Section 7.07 -Captions .....................................
Section ?.08 -Counterparts .........................................................
l . Sl
......................... 51
g Law ...................................................
Section 7. 0 - Governin ........................ 51
EXHIBITS:
Exhibit 1 -Form of Subsidiary Plan of Merger
Exhibit 2 -Form of Voting Agreement
Exhibit 3 -Form of Opinion of Franklin Counsel
Exhibit 4 -Form of Opinion of Community Counsel
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AGREEMENT AND PLAN OF MER ER
THIS AGREEMENT AND PLAN OF MERGER, dated as of June 26, 2008, is made bya
and between FRAI`TKLIN FINANCIAL SERVICES CORPORATION ("Franklin"),
Pennsylvania corporation having its principal place of business in Chambersburg, Pennsylvania,
and CO1V1M[JNITY FINANCIAL, 1NC. ("Community', a Pennsylvania corporation having its
principal place of business in Camp Hill, Pennsyh-ania.
BACKGROUND
1. Franklin and Community desire for Community to merge with and into Franklin,
with Fr~klin ~rviving such merger, in accordance with the laws of tine Commonwealth of
Pennsylvania and the plan of merger Set forth h~•
2. In connection with the Merger, Franklin desires to merge Community Trust
company ("Community Trust" ), a Pennsylvania trust company and wholly-owned subsidiary of
Community, with and into Farmers and Merchants Trust Company of Chambersburg ("F&M
Trust', a Pennsylvania bank and trust company and wholly-owned subsidiary of Frarilclin, with
F&M Trust surviving such merger in accordance with the Subsidiary Plan of Merger (as
hereinafter defined).
3. Franklin and Community desire to provide the terms and conditions governing the
transactions contemplated herein.
A[REEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual covenants,
agreements, representations and warranties herein contained, the parties hereto, intending to be
legally bound, do hereby agree as follows:
ARTICLE I
THE MERGERS
Section 1.O1 - ~• ~ ~~ in this Agreement, the following terms shall have the
indicated meanings (such meanings to be equally applicable to both the singular and plural forms
of the terms defined):
Acquisition Proms has the meaning given that term in
Section 4.06 of this Agreement.
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Affiliate means, with respect to any Person, any other
Person who directly, or indirectly, through one or more
intermediaries, controls, or is controlled by, or isthund~ ~? Ty of
control with, such Person and, without limiting g
the foregoing, includes any executive officer or director of such
person and any Affiliate of such executive officer or director.
A_i~r~ means this Agreement and Plan amendment
together with the exhibits referenced herein, and any
or supplement hereto.
Anvlications means the applications for regulatory approval
which are required in connection with the transactions
contemplated hereby.
Articles of Merger means the articles of merger to be
executed by Franklin and Community and to be filed in the PDS in
accordance with the laws of the Commonwealth of Pennsylvania.
BHC Act means the Bank Holding Company Act of 1956,
as amended.
BCL means the Pennsylvania Business Corporation Law of
1988, as amended.
Business Dav means
required or authorized to
Pennsylvania.
any day on which banks are not
close in the Commonwealth of
Client means any person or entity that at the relevant time
is utilizing or has committed to utilize the sernces of Community
Trust in connection with the Community Trust Accounts, which
services have not been fully performed as of the Closing Date. For
Purposes hereof Clients shall include persons or entities that are
successors to Clients.
client Aaree~nent or Client As~reements means the
agreements or instrpments entered into by Community Trust
establishing or governing a fiduciary or agcy or other
relationship with respect to a Community Trust Account, which are
in effect on the date hereof.
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Closing Date means the date designated as the Closing
Date by Franklin, in its sole discretion, upon not less than five {5)
days prior written native to be given to Community within ten (10}
days a$er the last condition precedent (other than the delivery of
certificates or other instruments or documents to be delivered at
closing) pursuant to this Agreement has been fulfilled or waived
(including the expiration of any applicable waiting period}, or such
other date upon which Franklin and Community shall agree.
C~unity means Community Financial, Inc., a
Pennsylvania corporation.
Community C 'cafes means the certificates representing
shares of Community Common Stock.
Community Common Stock means the common stock of
Community descarbed in Section 2.02(a).
Communi Dis losure_ Schedule means a disclosure
schedule delivered by Community to Franklin. pursuant to this
Agreement.
Community ERISA Affiliate ~ the meaning give to that
term in Section 2.12.
Commu~tty F' cis means (i) the annual audited
financial statements of Community as of December 31, 2047 and
for the three years emled December 31, 2007, including the notes
thereto, and any audited financial statements, including the notes
thereto, for any subsequent calendar year, and (ii) the unaudited
interim financial 'statements, including the notes thereof, of
Community as of each calendar quarter thereafter, in each case
under (i) or (ii) as delivered to Franklin by Community.
Community ReQUlats~n+ means the reports, and
accompanying schedules, of Community or Community Trust, as
the case may be, filed with any Regulatory Authority for each
applicable period from December 31, 2007 through the Closing
Date.
Co uni Subsidiaries means (i) Community Trust and
(ii) any corporation, partnership, limited liability company,
business trust, other association or joint venture, 50% or more of
the capital stock or equity interests of which are owned, either
directly or indirectly, by Community, except any association the
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stock or equity of which is held in the ordinary course of the
fiduciary and agency services activities of Commur-itY Trust.
Communi Trust means Community Trust Company, a
Pennsylvania trust company.
Comm 'ly T~vst Accounts means those accounts
established with and app~g on the books of Community Trust,
and with respect to which Community Trust acts as fiduciary,
agent, investment manager, custodian, or in any other role, which
accounts include, but are not limited to, trust, investment
management and custodial accounts.
Custodial Assets means all fiords, investments and other
properties of any kind (including deposits, agreements, bills, notes,
securities, demands, wntracts and rights) that are administered,
utilized, held as collateral or held for the benefit of others by
Community Trust as agent or fiduciary pursuant to, or in
connection with the Community Trust Accounts.
Disclosure Schedule means the Franklin Disclosure
Schedule and/or the Community Disclosure Schedule, as the
context shall require.
Dissenting Community Shares_ has the meaning given to
that term in Section 1.02(e)(iv}.
effective Date mesas the date specified in the Articles of
Merger which may be the same as the Closing Date.
Effective Time means the tone specified in the Articles of
Merger for the effectiveness of the Merger, or, if no time is
specified, the time of filing the Articles of Merger.
Environmental Law means any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree,
injunction or agreement with any Regulatory Authority relating to
(i) the protection, preservation or restoration of the environment
(including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil,
plant and animal life or any other natural resource}, and/or (ii) the
use, storage, recycling, treatment, generation, transportation,
prong, handling, labeling, Production, release or disposal of
any substance presently listed, defined, designated or classified as
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hazardous, toxic, radioactive or dangerous, or otherwise regulated,
whether by type or by quantity, including any material containing
any such substance as a component.
ERISA means the Employee Retirement income Security
Act of 1974, as amended.
Ex Act means the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated from time
to time thereunder.
F,xcbaYtge Agent shall have the meaning given that term in
Section 1.02(f)(i).
Exd~anQe Fund shall have the meaning given that term in
Section 1.02(f)(ii).
F st means Farmers and Merchants Trust Company
of Chambersburg, a Penmsylvania bank and trier company.
FDA means the Federal Deposit Insurance Act, as
amended.
FDIC means the Federal Deposit Insurance Corporation.
FLSA means the Fair Labor Standards Act of 1938.
Federal Reserve Board means the Board of Governors of
the Federal Reserve System.
F in means Franklin Financial Services Corporation, a
Pennsylvania corporation-
Franilclin Disdo~g Scheele means a disclosure schedule
delivered by Franklin to Community pursuant to this Agreement.
Franklin Regplatorv RevQrts means the reports, a~
accompanying schedules, of Franklin or F&M Trust, as the case
may be, filed with the Federal Reserve Board, the FDIC or the
PDB from December 31, 2007 through the Closing Date.
Franklin Subsidiaries means (i) FBtM Trust and (ii) any
corporation, partnership, limited liability company, business trust,
other association or joint venture, SO'/~ or more of the capital stock
or equity interests of which are owned, either directly or indirectly,
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by Franklin, except any association the stock of which is held in
the ordinary course of the lending or fiduciary services activities of
a bank.
GAAP means generally accepted accounting principles as
in effect at the relevant date.
IRC means the Internal Revenue Code of 1986, as
amended.
IR means the Internal Revenue Service.
Labor and Einolovment Law means any federal, state,
local, ar foreign law, statute, ordinance, executive order, rule,
regulation, code, consent, order, judgment, decree, injunction or
any agreement with any regulatory authority relating to
(i) employment discximiriation or affirmative action, (ii) labor
relations, (iii) employee compensation or benefits, (iv) safety and
health, (v) wrongful or retaliatory discharge, and/or (vi) any other
aspect of the employment r~ationshsp. Such laws shall include,
but not be limited to, Title VII of the Civil Rights Act of 1964 as
amended, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, the Family and Medical Leave
pct, the Employe Retirement Income Security Act, the
Occupational Safety and Health Act, the Fav Labor Standards Act,
the Fair Credit Collection Act, the Worker Adjustment and
Retraining Notification Act, Executive Order 11246, the Employee
Polygraph Protection Act, the Equal Pay Act, the National Lalmr
Relations Act, the Older Wacker Benefit Pmtec~ion Act, the
Rehabilitation Act, the Vietnam Era Veterans Readjustment
Assistance Act, as well as any and all state fair employment
practices laws, any and all state labor relations laws, any and all
state wage and hour laws, any and all state wage payment and
collection laws, any and all state statutes regardin8 wrongful or
retaliatory discharge, and federal and state common law regarding
employment discrimination or affirmative action, labor relations,
employee compensation or benefits, safety and health and/or
wrongful or retaliatory discharge and/or related tort claims.
Law shall mean any law (including common law),
constitution, statute, treaty, regulation, rule, ordinance, opinion,
release, ruling, order, injunction, writ, decree or award of any
national, federal, state, local or other government or political
subdivision or any agency, authority, bureau, commission,
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department or instrumentality thereof, or of any court, tribunal or
arbitrator.
Letter A Bement has the meaning given that term in
Section 4.10(a}(i) of this Agreement.
Material Adverse Eft shall mean, with respect to any
Party or a referenced Subsidiary of a Party, any effect that is
material and adverse to its assets, financial condition, results of
operations or prospects on a consolidated basis; provided,
however, that Material Adverse Effect shall not be dcemed to
include; (a) any change in the value of the respective investment
and loan portfolios of a Party resulting from a change in interest
rates generally; (b} any change occurring after the date hereof in
any federal or state law, rule or regulation or in GAAP, which
change affecxs financial institutions generally; (C} reasonable
~,pens~ (plus reasonable legal fees, cost and expense ~~ ~
any litigation arising as a result of the Meager)
connection with tins Agreement and the transactions contemplated
hereby; (d} actions or omissions of a Party (or any of its
Subsidiaries) taken with the prior informed written consent of the
other Party in contemplation of th o atransacti heaeto ncaused, in
hey; (e) any effect with respect chemges in
whole or in substantial part, by the other Party; and {f)
economic conditions affecting financial institutions g®erally,
except to the extent such chaaxges disptoportionately affect a Party.
M~ means the merger of Comrnurrity with and into
Franklin, with Franklin surviving such Merger, as contemplated by
this Agreement.
Mer~r_ nsiderat~io has the meaning given that term in
Section 1.02(e)(iii).
MOU means that certain Memorandum of Understanding
dated January 22, 2004 and updated March 27, 2006 and
November 6, 2007, by and between the Pennsylvania Department
of Banking and Community Trust.
means Franklin, or Community, as the context shall
require-
PDB means the Department of Banking of the
Commonwealth of Pennsylvania.
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PDS means the Department of State of the Commonwealth
of Pennsylvania.
Person means any individual, corporation, partnership,
limited liability company, limited liability partn~R Jost
venture, association, bust or "group" (as that term is defined in
Section 13(d)(3} of the Exchange Act).
Prox S ~ t means the proxy statement, together with
any supplements thereto, to be transmitted to holders of
Community Comnnon Stock in connection with the transactions
contemplated by this Agreement.
Re ato greerr-ent .has the meaning given to that term
in Sections 2.11(b) and 3.07(b).
R~ Authority means any banking agency or
department of any federal or state government, including without
1unitation the Federal Reserve Board, the FDIC, the PDB or the
respective staffs thereof.
~tiahts means warrants, options, rights, convertible
securities and other capital stock equivalents winch obligate an
entity to issue its securities•
SEC means the Securities and Exchange Commission.
S , , trities Act means the Securities Act of 1933, as
amended, and the rules and regulations promulgated from time to
time thereunder.
~~ 'ties Documents means all registration statements,
schedules, statements, fors, reports, proxy materials, and other
documents required to be filed under the Secunrties Laws.
Securities Laws means the Securities Act and the Exchange
pct and the rules and regulations promulgated from time to time
thereunder.
Series A C 'tai Notes means the 2005 Series A Capital
Notes issued by Community Trust and held by certain of its current
and former directors, in the aggregate principal amount of
$200,000.00, bearing interest at the stated rate of b.0% per annum,
and payable semi-annually
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Subsidi means any corporation, partnership, limited
liability company, business trust, other association or joint venture,
50% or more of the capital stock or equity interests of which is
owned, either directly or indirectly, by another entity, except any
association the stock of which is held in the ordinary course of the
lending or fiduciary services activities of a bank or trust company.
Subsidiary Merger means the merger of Community Trust
with and into F&M Trust, with F&M Trust surviving the merger',
as contemplated by Section 1.04 of this Agreement.
Subsidiary Plan of Mere means the plan of merge to be
entered into between Community Trust and F&M Trust pursuant to
this Agreement, providing for the merger of Community Trust with
and into F&M Trust, with F&M Trust surviving such merger,
substantially in the form attached hereto as Exhibit 1.
S,~viving ~rvoration shall have the meaning given that
term in Section 1.02(b) of this Agreement.
Section 1 A2 -The Mme.
{a) 1 in • 'The closing will take place at the offices of Rhoads & Sinon
LLP, counsel to Franklin, in Harrisburg, Pennsylvania, on the Closing Date or at such other
place, and at such time, as are agreed to by the parties hereto; provided, in any case, that all
conditions to closing set forth in Article V (other than the delivery of certificates, opinions and
other instruments and documents to be delivered at the closing} have been satisfied or waived at
or prior to the Closing Date. On the Closing Date, Franklin and Community shall cause the
Articles of Merger to be duly executed and filed with the PDS.
(b) The Merger. Subject to the terms and conditions of this Agreement, on
the Effective Date: Community shall merge with and into Franklin; the separate existence of
Community shall Deese; Franklin shall be the surviving corporation in the Merger (Franklin, as
the surviving corporation in the Merger, is sometimes referred to herein as the "Surviving
Corporation"); an+d all of the properly (real, Personal and mixed), rights, powers and duties and
obligations of Community shall be taken and deemed to be transferred to and vested in Franklin,
as the Surviving Corporation and Franld~shall thereafter be the responsibility of F lranklin, a111m
duties of each of Community
acxordance with the applicable Laws.
(c) Frankhin's Articles 4f I~cotj~or~tt'on and Bylaws. On and after the
Effective Date, the articles of incorporation and the bylaws of Franklin, as in effect immediately
prior to the Effective Date, shall automatically be and remain the articles of incorporation and
bylaws of Franklin, as the Surviving Corporation in the Merger, until thereafter altered, amended
or repealed.
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(d) E3oard o Directors and Officers of the Surviving Corporation.
(i) On the Effective Date, the directors of Franklin and
F&M Trust duly elected and holding office immediately prior to
the Effective Date shall continue to be the directors of Franklin and
F&M Trust, as the surviving entities. Each such director shall hold
office until his or her successor is elected and qualified or
otherwise in accordance with a~licable law, and each respective
institution's articles of incorporation and bylaws.
(ii) On the Effective Date, the officers of Franklin and
F&M Trust duly elected and holding office immediately prior to
the Effective Date shall continue to be the officers of Franklin and
F&M Trust as the surviving entities.
(e) >r eet on Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of Fraaklizi, Commuunity or the holders of any of the following
securities, the following shall occur:
(i) Outstanding Franklin Common Stock ~ share
of Frmilclin Common Stock issued and outstanding ~ Y
prior to the Effective Date shall, on and after the Effective Date,
continue to be issued and outstanding as an identical share of
Frarilclin Common Stock, except that shares of Franklin Common
Stock owned by Community (other than shares held in trust,
managed, custodial or nominee accouirts and the like that in any
such case are beneficially owned by third parties and shares
acquired in respect of debts previously corrtracted), if any, shall
become treasury stock of Franklin.
(ii} Cancellation of Certain Common Stock. Each share
of Community Common Stock that is owned by Franklin, by
Community as treasury shares, or by any of their respective
Subsidiaries (other than shares that are held in trust, managed,
custodial or nominee accounts and the lfice and that are beneficially
owned by third parties), if any, shall be canceled and cease to be
issued and outstanding, and no consideration shall be delivered
therefor.
(iii) Conversion of Community Common Stock Each
share of Commmunity Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares
canceled pursuant to Section 1.02(exii) and Dissenting
Community Shares) shall be converted into the right to receive
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cash in an amount to be determined by application of the following
formula (the "Merger Consideration"):
Cash per share of Community Common Stock =
($1,130,000 - X } _ Y
X =amount of cash paid try Franklin to the holders
of Series A Capital Notes pursuant to Section 1.03.
Y = # of shares of Community Common Stock
issued and outstanding immediately Prior to the
Effective Time (other than sham canceled Pursuant
to Section 1.02(exii).
1) rv) Dissenting Community Shsres. The outstanding
shares of Community Conemon Stock, the holders of which have
timely filed written notices of an raetentian to demand appraisal
far their shares ("Dissenting Community Shares") pursuant to
Subchapter D of Chapter I S of the BCL and have not e,~edively
withdrawn or Lost their dis.rs' rights ender the BCL, shall
not be converted into or represent a right to recatve the Merger
Consideration un~r thi.4 Agreement, and the holders thereof
shall be entitled only to such rights as are grarsted by Subchapter
D of Chapter 15 of the BCL. If any such holder of Community
Common Stuck shall haul failed to perfect or eA`ectivaly shall
have withdrawn or lost such right, the Dissenting Community
Shares held by such holder shall thereupon be canvrrad i,~ or
repre~nt a right to receives die Merger C~siideration in
accordance with Section 1.02(e)(iii) ojdusAgreeruen~
(f} Surrender an Ex a of Community Stock Certific~.
(i) Exchange Agent. Prior to the Effective Time,
Franklin shall appoint its transfer agent, or a bank or trust company
which may be F&M Trust, as the exchange and paying agent (the
"Exchange Agent") for the payment and exchange of the Merger
Consideration.
(ii) Exchange Fund. Three (3) days prior to the
Effective Time, Franklin shall deposit with the Exchange Agent, in
trust for the benefit of holders of shares of Community Common
Stock, sufficient cash to make all payments and deliveries to
shareholders of Community pursuant to Section 1.02(e}(iii}. Any
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cash deposited with the Exchange Agent shall hereinafter be
referred to as the "Exchange Fund."
(iii) Exchange Procedures. As soon as reasonably
practicable after the Effective Time {and in any case no lae than
five {5) days thereafter), Franklin shall cause the Facchang g
to mail to each record holder of a Community Certificate a letter of
transmittal which shall specify that delivery of the Community
Certificates shall be effected, and risk of loans ~ ~ of the
Community Certificates shall pass, only upo
Community Certificates to the Exchange Agent, and which letter
shall be in customary form and have such other provisions as
Franklin may reasonably specify and instructions for effecting the
suixender of such Community CertificaRes in exchange for the
Merger Consideration. Upon surre~er of a Community
Certificate to the Exchange Agent letedin accordance with the
transmittal, duly executed and comp
inshvctions thereto, and such other documents as may reasonably
be required by ~ Exchange Agent, the holder of such Community
Certificate shall be entitled to receive in exchange therefor a check
in the amount equal to the aggregate amount of cash that such
holder has the right to receive pursuant to Section 1.42(exiii). No
interest will be paid or will accrue on any cash payment pursuant
to Section 1.02{exiii). In the event of a transfer' of ownership of
Community Common Stock which is not registered in the transfer
records of Communrity, a check in the proper amount pursuant to
Section 1.Q2(exiii) may be issued with respect to such Canmumty
Common Stock, to such a transferec if the Conmmunity Certificate
formerly representing such shares of Comm ~ C al~ncumtents
is presented to the Exchange Agent, accompam Y
required to evidence and effect such transfer and to evidence that
any applicable stock transfer taxes have been paid. "
(iv) No Further Ownership RigJets. All cash paid upon
conversion of shares of Community Common Stock in accordance
with the terms of this Agreement shall be deemed to have been
paid in full satisfaction of all rights pertaining to the shares of
Commurrity Common Stock.
(v) Termination of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to the holders of
Community Certificates for twelve (l2) months after the Effective
Date shall be delivered to Franklin or otherwise on the instructions
of Franklin and any holders of the Community Certificates who
have not previously complied with this Section 1.02(f) shall
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thereafter look only to Franklin for the Merger Consideration with
respect to the shares of Community Common Stock formerly
represented thereby to which such holders are entitled pursuant to
Section 1.02(exiii).
(vi) No Liability. None of Franklin, Community, any of
their respective Affiliates or the Exchange Agent shall be liable to
any Person in respect of any Merger Consideration from the
Exchange Fund deliveaed to a public official pursuant to any
applicable abandoned property, escheat or similar' law.
(vii) Investment of the Exchange Fund. The Exchange
Agent shall invest any cash included in the Exchange~Funsuch
reasonably directed by Franklin; provided: (y)
investments shall be in: (i) obligations of or guaranteed by the
United States of America and backed by the full faith and cxedit of
the United States of America; (ii) commercial paper obligations
rated P-1 and A-1 or better by Moody's Investors Service, Inc'
("Moody's„) and Standard & Poor's Corporation ("S&P'~,
respectively, (iii) deposit accounts of any bank chartered under the
laws of the United States of America, or any state thereof, whose
secxarities are rated at the time of deposit P-1 and A 1 or better by
Moody's and S&P, respectively; or (iv) if FBtM Trust is the
Exchange Agent, certificates of deposit or time deposit accounts of
F&M Trust; and further provided: {z} that no holder of shares of
Community Common Stock shall suffer or incur any loss in
connection with any such investment of the Exchange Fund. Any
interest and other income resulting from such investments shall be
payable to Franklin.
{viii) Lost Certificates. if any Communrity Certficate
shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Community
Certificate to be lost, stolen or destroyed and, if required by
Franklin the posting by such Person of a bond in such reasonable
amount as Franklin may direct as indemnity against any claim that
may be made against it with respect to such Community
Certificate, the Exchange Agent will deliver in exchange for such
lost, stolen, or destroyed Community Certificate the applicable
Merger Consideration with respect to the shares of Community
Common Stock formerly represented thereby'
(ix) Withholding Rights Franklin shall be entitled to
deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Community
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Common Stock such tarn~untm a~snit of ~ P ~~dedunde7 the
withhold wrath respect g
IRC and the Hiles and regulations promulgated thereunder or any
provisions of tax La withhe de amauntsm shall bes treated for al
by Franklni, such ~d to the holder of
purposes of this Agreement as having been P of which such
the shares of Community Common Stock in respect
deduction and withholding was made by Franklin.
(x) Stock Transfer Books. At the close of business on
the Effective Date, the stock transfer books of Community with
respect to Community Common Stock issued and shall be
to the Effective Time shall be closed and, thereafter,
no further registration of transfers on the records of CormnunitY of
shares of Cormmunity Common Stock issued and outstanding prim'
to the Effective Tune. From and after the Effective Time, the
holders of Community Certificates shall cease to have any rights
with respect to such shares of Community Common Stock,
formerly represented thereby, except as otherwise provided herein
or by Law. On or after the Effective Time, any Community
Certificates presented to the Exchange Agent or Franklin for any
reason shall be ere ~~ ~ Co~uniry Common Stformerly
with respect to th
represented thereby.
Section 1.03 - Satisf ' n of Series C N On the Effective Date, Franklin
holder of each Series A Capital Note who has Hat
shall cause to be paid to any remaining Common Stock, an amount
exercised his/her right to convent such notes into Community
sufficierrt to satisfy Community Trust's obligations thereunder, including aU principal and
accrued interest through the Effedive Date, in full.
Section 1.04 -The Subsidi~~ Franklin and Community shall use their best
efforts to cause Community Tit to a with and into FBrM Trust, with F&M Trust surviving
such merger, coricurready ~>~ or as soon as practicable after the Merger on the Effective Date.
Concurrently with, or as soon as reasonably practicable after, the execution and delivery of this
,Agt~eement, Franklin shall cause F&M Trust, and Community shall cause Community Trust, to
execute and deliver the Subsidiary Plan of Merger.
ARTICLE II
REPRESENTATIONS AND WARRAN'T'IES OF COMMi1NITY
Community hereby represents and warrants to Franklin that, except as specifically set
forth in the Community Disclosure Schedule delivered to Franklin by Community on the date
hereof
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Section 2.01 -Organization.
(a) Community is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania. Community has the corporate
power and authority to cazry on its business and operations as now being conducted and to own
and operate the properties and assets now owned and being operated by it. Community is
qualified or licensed to do business as a foreign corporation in each jurisdiction in which it is
required to be so qualified or licensed as the result of the ownership or leasing of property or the
conduct of its business.
(b} Community Tnast is a Pennsylvania trust company duly organized, validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania.
community Trust has the corporate power and authority to carry on its business and operations
as now being conducted and to own and apenate the properties and assets now owned and being
operating by it. Community Trust is qualified or licensed to do business in each jurisdiction in
which it is required to be so qualified or licensed as a result of the ov-mersbip or leasing of
property or the conduct of its a business.
(c) There are no Community Subsidiaries other than Community Trust and
those identified on the Community Disclosure Schedule. Each of the other Community
Subsidiaries identified on the Community Disclosure Schedule has been duly organized, is
validly existing and in good standing under the laws of the jurisdiction of its organization. Each
such othex Community Subsidiary has the a~rporate power and authority to carry on its business
and operations as now being conducted acct to own and operate the properties and assets now
named and being operated by it. Each such other Community Subsidiary is qualified or licensed
to do business in each jurisdiction in which it is required to be so qualified or licensed as a result
of the ownership or leasing of property or the conduct of its business.
(d) Except as disclosed on the Community Disclosure Schedule, the
respective minute books of Community, Community Trust and each of the other Community
Subsidiaries identified on the Community Disclosure Schedule accurately record, in all material
respells, all material corporate actions of its shareholders and board of directors (snchrding
committees).
(e) Prior to the date of this pgieerrrent, Community has delivered to Franklin
true and correct copies of the articles of incorporation and bylaws of Communty, the articles of
incorporation and bylaws of Community Trust, cad the articles of incorporation and bylaws of
each Community Subsidiary, each as in effect on the date hereof.
Section 2.02 -Capitalization.
(a} The authorized capital stock of Community consists exclusively of (a)
3,000,000 shares of common stock, $.10 par value per share (,Community Common Stock"), of
which 208,571 shares are outstanding, validly issued, fully paid and nonassessable; and (b)
500,000 shares of preferred stock, $1.00 par value per share, of which no shares are issued or
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outstanding. No shares of Community Common Stock were issued in violation of any
preemptive rights. Except for the outstanding Series A Capital Notes, which are convertible into
Community Common Stock upon a change in control, and outstanding warrants for 10,000
shares of Community Common Stock, both being identified on the Community Disclosure
Schedule, neither Community nor Community Trust nor any other Community Subsidiary has or
is bound by any subscription, option, warrant, call, commitment, agreement or other Right of any
character relating to the purchase, sale or issuance or voting of, or right to receive dividends or
other distributions on any shares of the capital stock of Community or any other secwity of
Community or any securities representing the right to vote, purchase or otherwise receive any
shares of the capital stock or any other security of Community.
(b) The authorized capital stock of Community Trust consists of (a) 2,004,000
shares of common stock, $1.00 par value per share, of which 10,000 shares are outstanding,
validly issued, fully paid, not in violation of preemptive rights and, to the knowledge of
Community, no assessm®nt is cun~ently imposed, all of which are owned by Community free and
clear of any lien, security interests, pledges, charges and restrictions of any kind or nature; and
(b) 500,004 shares of preferred stock, $1.00 par value per share, of which no shares have been
issued. The authorized and outstanding shares of each other Community Subsidiary is set forth
on Community Disclosure Schedule 2.02(b). Neither Community nor any Community
Subsidiary has or is bound by any subscription, option, warrant, call, commitment, agreement or
other right of any character relating to the purchax, sale or issuance or voting of, or right to
receive dividends or other distributions on any shares of the capital stock of any Community
Subsidiary or any other security of any Community Subsidiary or any securities representing the
right to vote, purchase or otherwise receive any shares of the capital stock or any other security
of any Community Subsidiary. Except as set forth on the Community Disclosure Schedule,
either Community or Commwuty Trust own all of the outstanding shares of capital stock of each
Community Subsidiary free and clear of all liens, security interests, pledges, drarges,
encumbrances, agreements and restrictions of any kind ox nature.
(c) Except as set forth in the Community Disclosure Schedule, neither
Community Trust nor any Community Subsidiary owns any equity interest, directly or indirectly,
in any other association or controls any other company, except for equity interests held in the
investment portfolio of Commwtity Trust and equity interests held by Community Trust in a
fiduciary capacity There are no subscriptions, options, warrants, calls, commitments,
agreements or other Rights outstanding and held by Community or Community Trust with.
respect to any other company's capital stock or the equity of any other person.
(d) To the best of Commurrity's knowledge, except as disclosed in
Community Disclosure Schedule 2A2, no person or "group" (as that term is used in
Section 13(d}(3) of the Exchange Act), is the beneficial owner (as defined in Section 13(d} of the
Exchange Act) of 5% or more of the outstanding shares of Community Common Stock.
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Section 2.03 - Authority; No Violation.
{a) Subject to (i} approval by the shareholders of Community of this
Agreement and (ii) receipt of the required approvals from Regulatory Authorities described in
Section 3.03 hereof and compliance with such approvals, Community has full corporate power
and authority to execute and deliver this Agreement and to complete the transactions
contemplated hereby. Community Trust has full corporate power and authority to execute and
deliver the Subsidiary Plan of Merger and to complete the Subsidiary Merger. The execution
and delivery of this Agreement by Community and the completion by Community of the
transactions contemplated hereby and thereby have been unanimously and duly and validly
approved by the board of directors of Community, at a meeting duly called and held, and, except
for approval by the shareholders of Community, no other corporate proceedings on the part of
Community are necessary to complete the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Community and, subject to (i) approval of
the shareholders of Community of this Agreement and {ii) receipt of the required approvals from
Regulatory Authorities described in Section 3.03 hereof and compliance with such required
approvals, constitutes the valid and binding obligation of Community, enforceable against
Community in accordance with its teens, subject fiuther to applicable bankruptcy, insolvency
and similar Laws affecting creditors' rights generally and subject, as to enforceability, to general
principles of equity. The Subsidiary Plan of Merger, upan its execution and delivery by
Community Trust, will constitute the valid and binding obligation of Community Trust,
enforceable against Community Trost in accordance with its terms, subject to applicable
insolvency and similar laws affecting creditors' rights generally and subject, as to enforcealn'lity,
to general principles of equity.
(b) None of (A) the execution and delivery of this Agreement by Community,
{B} the execution and delivery of the Subsidiary Plan of Merger by Community Trust,
(C) subject to receipt of approvals from the Regulatory Authorities referred to in Section 3.03
hereof and Conomumty's and Franklin's ccxnpliaace with airy conditions contained therein, the
conaplction of the transactions contemplated hereby, and (D) compliance by Community or
Community Trust with any of the terms or provisions hereof or of the Subsidiary Plan of Merger,
will (i) conflict with or result in a breach of any provision of the articles of incorporation or
bylaws of Community or any Community Subsidiary; (ii) violate any Law applicable to
Community ar any Community Subsidiary or any of its respective properties or assets; or
(iii) violate, conflict with, result in a breach ofany provisions of, constitute a default (or an event
which, with notice or lapse of time; or both, would constitute a default) under, result in the
termination of, accelerate the performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest, charge or other encumbrance upon any
of the properties or assets of Communnty or any Community Subsidiary under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement, commitment or other instrument or obligation to which Community ar any
Community Subsidiary is a party, or by which they or any of their respective properties or assets
may be bound or affected.
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Section 2.04 -Consents. Except for the consents, approvals, filings and registrations
$om or with the Regulatory Authorities referred to in Section 3.03 hereof and compliance with
any conditions contained therein, and the approval of this Agreement by the shareholders of
Commusrity under the BCL, Community's articles of incorporation and bylaws, and the approval
of the Subsidiary Plan of Merger by Community as the sole shareholder of Community Trust and
by the board of directors of Community Trust, no consents or approvals of, or filings or
registrations with, any public body or authority are necessary, and no consents or approvals of
any third parties are necessary, or will be, in connection with the execution and delivery of this
Agreement and the completion by Community and Community Trust of the transactions
contemplated hereby or by the Subsidiary Plan of Merger. As of the date hereof, Community
and Community Trust have no reason to believe that (i) any required consents or~approvals will
not be recedved or will be received with conditions, limitations or restrictions unacceptable to it
or which would adversely impact Community's ability to complete the transactions contemplated
by this Agreement or that (ii) any public body or authority, the consent or approval of which is
not required or any fil~g ~~ ~~ is not required, will object to the completion of the
transactions contemplated by this Agreement.
Section 2.05 -Financial Statements.
(a) Except as disclosed in Community Disclosure Schedule 2.05, Community
has previously delivered to Franklin the Community Regulatory Reports filed thmugh March 31,
2008 and will deliver to Franklin the Community Regulatory Reports for any dates or periods
thereafter through the Closing Date as soon as they are available. The Community Regulatory
Reports, as amended (provided such amendments have been filed with the appropriate
Regulatory Authority) have been, or with respect to those not yet prepared, will be, pr lepared
all material respects in accordance with applicable regulatory accounting I~aP
practices, including, but not limited to, all applicable rules, regulations and pronouncsrments of
applicabic Regulatory Authorities, throughout the periods covered by such statements, and fairly
present, or with respect to those not yet prepared, will fairly Present in all material respects, the
consolidated financial position, results of operations and changes in shareholders' equity of
Community or Community Trust, as the case may be, as of and for the periods ended on the
dates thereof, in accordance with applicable regulatory accounting Principles, including, but not
limited to, all applicable rules, regulations and pronouncements of applicable Regulatory
Authorities, applied on a consistent basis.
(b) Conununity has previously delivered to Franklin the Community
Financials through March 31, 2008 and will deliver to Frankin the Community Financials for
any dates or periods thereafter through the Closing Date as soon as they are available. The
Community Financials have been, or with respect to those not yet prepared, will be, prepared in
accordance with GAAP applied on a consistent basis throughout the periods covered by such
statements, except as noted therein, and fairly present, or with respect to those not yet prepared,
will fairly present, the financial position, results of operations and cash flows of Community as
of and for the periods ended on the dates thereof, in accordance with GAAP applied on a
consistent basis, except as noted therein.
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(c) At the date of each balance sheet included in the Community Financials or
the Community Regulatory Reports, neither Community nor any Community Subsidiary had any
liabilities, obligations or loss contingencies of any nature (whether absolute, accrued, contingent
or otherwise) of a type required to be reflected in such Community Financials or Community
Regulatory Reports or in the footnotes thereto which are not fiilly reflected or reserved against
therein or fully disclosed in a footnote thereto, subject, in the case of any unaudited statements,
to normal, recurring audit adjustments and the absence of footnotes.
Section 2.06 -Taxes. Community and the Community Subsidiaries are members of the
same affiliated group within the meaning of IRC Section 1504(a) of which Community is a
connnon parent. Community has daily filed, and will file, all federal, state and local tax returns
and all tax filings required to be filed by or with respect to Community and the Comomunity
Subsidiaries on or prior to the Closing Date (all suet returns being accutate and correct in all
material respects) and has duly paid or will pay, or made or will make, provisions and related
balance sheet accruals {if required) for the payment of all federal, state aad local taxes which
have been incttrnd by or are dne or claimed to be due from Community or any Community
Subsidiary by any taxing authority or pursuant to any tax sharing agreement or arrangement
(written or oral) on or prior to the Closing Date other than taxes which (x} (i) are not delinquent
ar (ii) are being contested in good faith ~ {y) (i) are adequately reserved for, (ii) have not
resulted in the imposition of any lien and (iii) if adversely deterrrtined would not be reasonably
expects to result in a Material Adverse Effect as to Community or any Community Subsidiary.
Section 2.07 - No Material Adv a Effect. Except as disclosed in Community
Disclosure Schedule 2.07, neither Community nor any Community Subsidiary has suffered any
Material Adverse Effect since March 31, 2008.
Section 2.08 - Contracts.
(a) Except for this Agreement and as disclosed an Community Disclosure
Schedule 2.08, neither Community nor any Community Subsidiary is a party to or subject to:
(i) any agreement, contract, arrangement, commitment or undng (whether written or oral}
that is a "material contract" within the meaning of Item 601(bx10) of the SEC's Regulation 5-K;
(ii) any real estate lease; (iii) any employment, consulting ar severance contract or arrangement
with any past or present officer, director or employee, except for oral "at will" arrangements;
(iv) any plan, arrangement ar contract providing for bonuses, pensions, options, restricted stock,
deferrod compensation, retirement paym®ts, profit sharing or similar arrangements for or with
any past or present officers, directors or employees of Community or any Community
Subsidiary; {v) any collective bargaining agreement with any labor union relating to employees
of Community or any Community Subsidiary; (vi) any agreement which by its terms limits the
payment of dividends by Community or any Community Subsidiary; (vii) any insMtment
evidencing or related to indebtedness for borrowed money whether directly or indirectly, by way
of purchase money obligation, conditional sale, lease purchase, guaranty or otherwise, in respect
of which Conununity or any Community Subsidiary is an obligor to any person, which
instrument evidences or relates to indebtedness, or which contains financial covenants or other
restrictions (other than those relating to the payment of principal and interest when due) which
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would become applicable on or after the Closing Date to Franklin or any Franklin Subsidiary;
(viii} any contract limiting the freedom of Community or any Community Subsidiary to engage
of orbank-related or other business permissible under law; (ix) any contract
in any type banking
relating to the acquisition of any business that has not been fully performed, including where
contingent compensation remains to be paid; (x) any contract or agreement pursuant to which
Community or any Community Subsidiary is obligated to make payments in excess of $10,000
on an annual basis that cane°t be terminated by Community or a Community Subsitliary without
penalty upon 90 days or less notice; or (xi) any contractual or other agreements which give any
director, officer or employee of Community or any Community Subsidiary the right to terminate
such agreement in connection with the Merger.
(b) Except as disclosed in eo,mrnunity Disclosure Schedule 2.08, neither
Community nor any Community S~ibsidiary leases any real property. The Community
Disclosure Schedule describes in reasonable detail each such lease, including the term and rent
due thereunder and Community has delivered to Franklin true, correct and complete copies of all
such leases. None of such leases are currenntly in default and Community has not received notice
of, or has knowledge of, a proposed non-renewal of any of said leases. Each real estate lease that
may require the c;onser-t of the lessor or its agent to the Merger by reason of a prohibition or
restriction relating to assi®ament, by operation of law or otherwise, or change in control, is listed
in the Community Disclosure Schedule identifying the section of the lease that contains such
prohibition or restriction.
(c) Neither Community nor any Community Subsidiary is in default in any
material respect under any material contract, agreement, commitment, arrangement, lease,
insurance policy or other instrument to which it is a party, by which its assets, business or
operations may be bound or affected, or under which it or its assets, business or operations
receive benefits, and there has not occurred any event that, `u'rth the lapse of time or the giving of
notice or both, would constitute such a default.
(d) True and correct copies of "material contracts,,, leases, agreements, plans,
arrangeanents and instruments referred to in Section 2A8(a), 2.08(b) or 2.08(e) have been
provided to Framklin on or before the date hereof, are listed on the Community Disclosure
Schedule and are in full force and effect on the date hereof and ~th~ Cg~~ or nin~shvment
knowledge of Community, any other patty to any such contract, p
has breached any provision of, or is in default in any respect under any term of, any such
contract, tease, plan, arrangement or instrument, (i) no party to any "material contract,,' lease,
plan, arrangement or instrument will have the right to terminate any or all of the provisions of
any such contract, plan, arrangement or instrument as a result of the transactions contemplated
by this Ag~reeanent, {ii} none of the employees (including officers} of Community or any
Community Subsidiaries, possess the right to terminate their employment as a result of the
exertion of this Agreement, (iii) no plan, employment agreement, temunation agreement, or
similar agreement or arrangement to which Community or any Community Subsidiary is a party
or under which Community or any Community Subsidiary may be liable contains provisions
which permit an employee or independent contractor to terminate it without cause and continue
to accrue future benefits thereunder, and (iv) no such agr~ent, plan or arrangement
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(x) provides for acceleration in the vesting of benefits or payments due thereunder upon the
occurrence of a change in ownership or control of Community or any Communty Subsidiary
absent the occurrence of a subsequent event; {y) provides for benefits which may cause the
disallowance of a federal income tax deduction under IRC Section 2806; or (z) requires
Community or any Community Subsidiary to provide a benefit in the form of Community
Common Stock or determined by reference to the value of Community Common Stock.
Section 2.09 - Ownershiy of Property' Lcurar~ce Coverase.
(a) Community and each Community Subsidi marketable title to all assets
property acquired after the date hereafi good and, as to real property,
and properties ovmed by Community or such Community Subsidiary in the conduct of its
business, whether such assets and properties are real or personal, tangible or intangible, including
assets and property reflected in the balance sheets centained in the Communty Regulatory
Reports and in the Community Financials or acquired subsequent thereto (except to the extent
that such assets and propertiies have been disposed of far fair value, in the ordinary course of
business, since the date of such balance sheets), subject #o no encwmbrances, liens, mortgages,
security interests or pledges, except (i) statutory liens for amounts not yet delinquent or which
are being contested in good faith and (ii) items permitted undo Article 1V. Community or any
Community Subsidiary, as lessee, has the right under valid and subsisting leases of real and
personal properties used by it in the conduct of its business to occupy or use all such properties
as presently occupied and used by each of them. Such existing leases and commitments to lease
constitute or will constitute operating leases for both tax and finanaal accounting purposes and
the lease expense and minimum rental commitments with respect to such leases and lease
commitments are 8s disclosed in the notes to the Community Finanaals.
(b) Community and the Community Subsidiaries currently maintain insurance
considered by Community to be reasonable for its operations and similar in scope and coverage
to that maintained by other businesses similarly engaged. Neither Commmity nor any
Community Subsidiary has received notice from any insurance carrier that (i) such insurance will
be cancelled ar that coverage thereunder will be reduced or eliminated, or {ri) premium costs
with respect to such policies of insurance will be materially increased. Except as disclosed on
Community Disclosure Schedule 2.09, there are presently no material claims pending under such
policies of insurance and no notices have been given by Community or, any Community
Subsidiary under such policies during the past two years. All such insurance is valid and
enforceable and in full force and effect, and within the last three years Community and the
Community Subsidiaries have received each type of insurance coverage for which any of them
has applied and during such periods have not been denied indemnification far any material
claims submitted under any of their insurance policies.
Section 2.10 -Legal 1' o ~ s• Except as disclosed on Community Disclosure
Schedule 2.10, neither Community nor any Community Subsidiary is a party to any, and there
are no pending or, to the best of Community's knowledge, threatened, legal, administrative,
arbitration or other proceedings, claims (whether asserted or unasserted), actions or
governmental investigations or inquiries of any nature {i) against Community or any Community
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Community Subsidiary's assets are or may be
Subsidiary, {ii} to which Community s or any
subject, (iii) challenging the validity or propriety of any of the transactions contemplated by this
Agreement, or (iv) which could adversely affect the ability of Community or any Community
Subsidiary to perform under this Agreement.
Section 2.11 - Comuliance With A cable Law.
(a) Community and each Community Subsidiary holds all licenses, franchises,
permits and authorizations necessary for the lawful conduct of its businesses under, and has
complied in all material respells with, all applicable Laws.
(b) (i) Except as disclosed on Community Disclosure Schedule 2.11,
community and each Community Subsidiary is in substantial compliance with all of the statutes,
lato Authority applicable to it enforces; (ii} no
regulations or ordinances which each Rego rY it or gavermnental
Regulatory Authority has threatened to revoke any license, franchise, perm
or any Community Subsidiary, or required or
authorization which is material to Community Subsidiary to enter into a cease and desist
threatened to require Community or any Community and (iii} no
order, consent order, memorandum of understanding, or written agreement with it;
Regulatory Authority has restricted or limited the operations of Community or any Community
without limitation any restriction on the payment of dividends (any such
Subsidiary, including
memorandum, agreement or order described in this sentence is hereina$er refeaed to as a
" ent Neither Community nor any Community Subsidiary has consented to
Regulatory Agreem )•
or entered into any Regulatory Agreement.
Section 2.12 - ~RISA• Community bas Previously delivered to Franklin true and
an benefit plans within the meaning of ERISA
complete copies of all employee penal 1 stock purchase
Section 3(2}, includmg profit sharing p1am, employee stock ownership p ans,
plans, deferred compensation and supplemental income plans, supplemental executive retirement
plans, employment agreements, amiual executive and administrative incentive plans ox long term
1 licies and agreements, group insurance plans, and all other
incentive plans, severance P s~ pa vacation
employee welfare benefit plans withn the meaning of ERISA Section 3(1) (including
pay, sick leave, short-term disability, long-term disability, and medical plans) and all other
employee benefit plans, policies, agreements and arrangements, all of which are set Earth in the
Community Disclosure Schedule, sponsored or contnbuted to for the benefit of the employees or
former employees (including retired employees) and any benefiaaries thereof or directors or
entity (a "Community ERISA Affiliate") that, together
former directors of Community or any m or o ,
with Community, is treated as a single employer under IRC Sections 414(b), (c), ( ) ( )
together with (i) the most recent actuarial (if any) and financial reports relating to those plans
which constitute "qualified plans" under IRC Section 4Q1(a), (ii) the most recent annual reports
relating to such plans filed with any government agency, and (iii) all rulings and determination
letters which pertain to any such plans. Neither Community or any Community ERISA Affiliate,
nor any pension plan maintained or previously maintained by Community or any Community
ERISA Affiliate, has incurred, directly or indirectly, within the past six (6) years any liability
under Title IV of ERISA (including to the Pension Benefit Guaranty Corporation) or to the IRS
with respect to any pension plan qualified under IRC Section 401(a) except liabilities to the
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Pension Benefit Guaranty Corporation pursuant to ERISA Section 4007, all of which have been
fully paid, nor has any reportable event under ERISA Section 4043 occurred with respect to any
such pension plan. With respect to each of such plans that is subject to Title IV of ERISA, the
present value of the accrued benefits under such plan, based upon the actuarial assumptions used
for funding purposes in the plan's most recent actuarial report did not, as of its latest valuation
date, exceed the then current value of the assets of such plan allocable to such acc7ued benefits.
Neither Community nor any Community ERISA Affiliate has incinred is subject to any liability
under ERISA Section 420 i for a complete or partial withdrawal fi °m a multiemployer plan. A11
"employee benefit plans," as defined in ERISA Section 3(3), of Community or any Community
ERISA Affiliate comply and within the past six {6) years h$ve complied in all material respects
with (i) relevant provisions of ERISA and (ii) in the case of plans intended to qualify for
favorable income tax treatment, provisions of the IRC relevant to such treatment. No prohibited
transaction (which shall mean any transaction prohibited by ER1SA Section 406 and not exempt
under ERISA Section 448 or any transaction prohibited under IRC Section 4975} has occurred
t six {6) years with respect to any employce benefit plan maintained by
within the pas
Community or any Community ERISA Affiliate which would result inwthe~ ~ ~ rIRC
indirectly, of an excise tax under IRC Section 4975 or other penalty
vides continuation coverage under group health plans for separating employees
Coaununiry pro
and "qualified benefiaaries" in accordance with the provisions of IRC Section 4980B(f1. Such
group health plans are in material compliance with Section 1862(b)(1) of the Social Security Act.
Section 2.13 -Brokers, Find and Financial Advisors; Fairness Opi~~. Except for
Community's engagement of Boenning & SGSttergood, ~c• ('Boenning"} in connection with
transactions contemplates by this Agreement, neither Community nor any Community
Subsidiary nor any of ffieir respective officers, directors, employees or agents, has employed any
bmker, finder or financial advisor in connection with the transactions contemplated b~this
Agreement or in connection with any transaction other than the Merger, or, except
commitments disclosed in the Community Disclosure Schedule, ink any liability or
commitment for any fees or commissions to any such person in connection with the transactions
contemplated by this Agreement or in cormection with any transaction other than the Merger,
which has not been reflccted in the Community Financials. The Community Disclosure
Schedule contains as an exhibit the engagement letter between Community and Boeaning.
Boenning ~ provided Community with its opinion to the effect that, as of the date of approval
of this Agreement by the board of directors of Community, the Merger Consideration is fair to
shareholders of Community from a financial point of view.
Section 2.14 -Environmental Matters.
(a) Neither Community nor any Community Subsidiary, nor any properties
now or formerly owned or operated by Community or any Community Subsidiary in its own or
in a fiduciary or other representative capacity or on which Community or any Community
Subsidiary holds or held a mortgage or other security interest or has foreclosed or taken a deed in
lieu of foreclosure in its own or in a fiduciary or other representative capacity, has been or is in
violation of or liable under any Environmental Law. There are no actions, suits or proceedings,
or demands, claims, notices or investigations (including without limitation notices, demand
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letters or requests for information from any environmental agency) instituted or pending, or to
the knowledge of Community or any Commumty Subsidiary, threatened, relating to the liability
of any property owned or operated by Community or any Community Subsidiary in its own or in
a fiduciary or other representative capacity under any Environmental Law.
(b) To the knowledge of Community, no ProP~Y~ now or formerly owned or
operated by Community or any Community Subsidiary or on which Community or any
Community Subsidiary holds or held a mortgage or other security interest or has foreclosed or
taken a deed in lieu of foreclosure in its own or in a fiduciary or other representative capacity,
has been listed or proposed for listing on the National Priority List under the Cmnpreheaslve
Enviromnental Response Compensation and Liability Act of 1980, as amended (`•CERCLA'~, on
the Comprehensive Environmental Response Compensation and Liabilities Information System,
or any similar state list, or which is the subject of federal, state or local enforcement actions or
other investigations which may lead to claims against Community or a Community Subsidiary
for res~nse costs, reanedial work, investigation, damage to natural resources or for personal
injury or property damage claims, including, but not limited to, claims under CERCLA.
(c) To the knowledge of Community, there has been no release nor is there
the threat of release of any substance described in clause (ii) of the definition of Environmental
now or formarly owned or
Law set forth in Section 1.01 hereof on, at or from any pmpertY~
operated by Community or any Community Subsidiary or on which Community or any
Community Subsidiary holds or held a mortgage or other security interest or has foreclosed or
taken a deed in lieu of foreclosure in its own or in a fiduciary or other representative capacity, or
any pr.~perty adjacent to or in the immediate vicinity of any such properties.
Section 2.15 - K~ated Pam-' Trnnsactions. Except as disclosed on Community
Disclosure Schedule 2.15, neither CoY,;rt:~,urity nor any Commumty Subsidiary is a party to any
transaction (including any loan or other cxedit accommodation), with any Affiliate of
Community or any Community Subsidiary. No loan or credit accommodation currently being
extended to any Affiliate of Community or any Community Subsidiary is presently in default or,
during the three year period prior to the date of this Agreement, has been in default or has been
restructured, modified or extended. Neither Community to r ~ Y suC cl~loan o o~ credit
been nwtified that principal and interest with respect
accommodation will not be paid when due.
Section 2.16 -Schedule of T tion Benefits. The Community Disclosure Schedule
2.16 includes a schedule of the maximum amount of termmatron benefits and related payments
which currently are or would be payable to the individuals identified thereon, under any and all
employment agreements, special termination agreements, supplemental executive retirement
plans, deferred bonus plans, deferred compensation Plans, salary continuation plans, or any other
pension benefit or welfare benefit plan maintained by Community or any Conununity Subsidiary
for the benefit of executive officxxs or directors of Community or such Community Subsidiary
(the Benefits Schedule"), assuming that the Closing Date would have occurred on December 31,
2007 and that the emplovl~als are entitled t benefi under any such planerminaCeeP ~ edi ftoe~
thereafter. No other rndi
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in Community Disclosure Schedule 2.16, as of the date of this Ageement, no director or
executive officer of Community or any Community Subsidiary had deferred any compensation
accrued by Community or such Community Subsidiary.
Section 2.17 -Takeover Laws. Community has taken all action required to be taken by it
in order to exempt this Agreement, the Subsidiary Plan of Merger and the transactions
contemplated hereby and thereby from, and this Agreement, the Subsidiary Plan of Merger and
the transactions contemplated hereby and thereby are exempt from, the requirements of any
,~ „ « „ " "aflYliate transaction," "business combination," or
"moratorium, control fie, fair price,
other antitakeover provisions in the articles of incorporation and bylaws of Co ~>~~on
Community Trust, or any applicable anti-ta)ceovez laws and regulations of any j
including, without limitation, of the Commonwealth of Pennsylvania.
Section 2.18 - ? Thor and EzrroloX~-t Matt~• To the knowledge of Community, neither
Community nor any Community Subsidiary, nor any facilities owned or operated by Community
or any Community Subsidiary has bcen or is in violation of or is liable ender any Labor and
administrative, arbitration or other proceedings, demands,
Employment Law. 'There are no legal, without limitation notices, demand letters or
claims, notices, audits or investigations (including
requests for informadon from arty federal, state or local commission, agency or board) instituted
or pending, or to the knowledge of Community threatened, relating to ffie liability of Community
or any Community Subsidiary under any Labor and Employment Law.
Section 2.19 - '-Mo do S Except ~
disclosed on Community Disclosure Schedule 2.19, Community ~is not aware o~ has not been
advised of, and has no ream to believe, that any facts or cilrcumstances exist which would cause
Community Trust (a) to be deemed to be op8 ~ violation in any respell of the USA
PATRIOT Act, the Bank Secrecy Act and any regulations or rules promulgated under either of
the foregoing statutes, any order issued with respect to anti-money laundering by rho U.S.
Department of the Treasury's Office of Foreign Assets Control, or any other applicable aati-
money laundering statute, Wile or regulation, or (b) to be deemed not to be in satisfactory
compliance in any material respect with the applicable privacy of customer information
requ~remeirts contained in any federal and state privacy laws and regulations, including, without
limitation, in Tstle V of the Grimm- oath-Bl ~Ao oCommuru~ty Truster has adopter d
thereunder. Furthermore, the bo
implemented an anti-money laundering program that contains adequate and appropriate customer
identification ratification procedures float has not been deemed ineffective in any material
respect by any Regulatory Authority and that meets the requirements in ail material respects of
Section 353 of the USA PATRIOT Act and the regulations thereunder
Section 2.20 - Resulator~ Canit~l. Except as disclosed in Community Disclosure
Schedule 2.20, Community and Community Trust meet all applicable regulatory capital
requirements.
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Section 2.21 - Conununity Trust Accounts.
(a) Community Trust has all corporate powers and all material governmental
licenses, authorizations, permits, consents and approvals required to (i) administer the
Community Trust Accounts, (ii) Perform the Client Agreements, and (iii) hold as trustee or agent
the Custodial Assets.
(b} In all material respects, each Client Agreement was duly executed and
delivered by Community Trust and, to Community's knowledge, each other party thereto and
constitutes the valid and binding obligation of Community Trust and, to Commumty's
knowledge, each such other parry, enforceable against Community Trust and, to Community's
knowledge, each such other party, in accordance with their respective terms.
(c) With respect to each Client Agreement, neither Community Trust nor, to
Community's knowledge, any other party thereto is in default or breach in any material respect
under the terms of any contract in connection with such Client Agreanent.
(d} As of the date hereof, Community Trust has not received any notice from
any Client stating that it proposes to tenrminate any Client Agreement or Community Trust
Account.
Section 2.22 - of R ' ns. 'Ihe representations made by Community in
this Agreement are true, correct and complete in all material respects, and do not omit statements
necessary to make them not misleading under all facts and circumstances.
ARTICLE IIi
RF,pRESENTATIONS AND W~1tRANTIES O FRANKLIN
Franklin hereby represents and warrants to Community that, except as set forth in the
Franklin Disclosure Schedule delivered by Franklin to Community on or~priox to the date hereof:
Section 3.01 -Organization.
(a) Franklin is a corporation duly organized, validly existing and in mod
standing under the laws of the Commonwealth of Pem~sylvania. Franklin is duly registered as a
financial holding company under the BHC Act. Franklin has the corporate power mid authon~
to ~y on its business and operations as now being conducted and to own and opera
properties and assets now owned and being operated by it. Each Franklin Subsidiary is duly
organized, validly existing, and in gaod standing under the laws of the jurisdiction of its
incorporation and each possesses full corporate power and authority to carry on its respective
business and to own, lease and operate its properties as Presently conducted. Neither Franklin
nor any Franklin Subsidiary is required by the conduct of its business or the ownership or leasing
of its assets to qualify to do business as a foreign corporation in any jurisdiction other than the
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Commonwealth of Pennsylvania, except where the failure to be so qualified would not have a
Material Adverse Effect.
(b) of Franklin, is a Pennsylvania
F&M Trust, awholly-owned subsidiary ~~, the laws of the
chartered bank and trust company, duly organized and vali~ a e~ nand authority to carry on
Commonwealth of Pennsylvania. F&M Trost has the corpo Im
its business and operations as now being conducted and to own and operate the properties and
assets now owned and being operated by it.
Section 3.02 - Authori • N Violation.
(a) Franklin has full corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby, sub}ect to receipt of all
at Authorities. F&M Trust has fiill corporate power and
necessary approvals of Regal cry
authority to execute and deliver the Subsidiary Plan of Merger and to consummAuthonh~~ The
of all necessary approvals of Regulatory
Plan of Merger subject to receipt
execution and delivery of this Agreement by Franklin and the completion by Franklin of the
transactions contemplated hereby have been duly and validly approved by the board of directors
on the part of Franklin are necessary to complete
of Franklin, and no other corporate pigs ant has base duly and validly executed and
the transactions contemplated hereby. Tlris Agreem Authorities
sub act to receipt of the require] approvals of Regulatory _
deiiverei by Franklin and, j
described in Section 3.03 hereof constitutes the i terms asubjoct toobapp~cable b Fankrvptcmy,
enforceable agauist Fratilclin in accordance wrth e~nerally and subj
creditors' rights g act, as to enforceability,
insolvency and similar laws atTe~g its execution and delivery
to g~'~ principles of equity- 'The Subsidiary Plan of Merger, upon _
by F&M Trust, will constitute the valid and binding o~gation livable conservatorhip, anld
against F&M Trust iD accordance with its terms, ~ simil laws affecting cn~t~' nghts
receivership provisions of the FDIA, or insolvency
generally and subjecx, as to enforceability, to general principles of equity.
None of (A) the execution and delivery of this Agreement by Franklin, (B)
N) of the Subsidiary Plan of Merger by FBtM Trust, (C) subject to receipt
the execution and delivery Authorities referred to in Section 3.03 hereof and Community's
of approvals from the Regulatary
and Franklin's compliance with any conditions contained therein, the consummation of the
transactions contemplated hereby, and (D) compliance by Franklin or F&M Trust with any of the
terms or provisions of this Agreement or of the Subsidiary Plan of Merger will not {i) conflict
vision of the articles of incorporation or bylaws of Franklin
with or result in a breach of any pro regulation, judgment,
or any Franklin Subsidiary, (ii) violate any statute, code, ordinance, rule,
order, writ, decree or injunction applicable to Franklin or any Franklin Subsidiary or any of their
respective properties or assets; or (iii) violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, fi accelerat the performanceequired by, or~resultrin
a default), under, result in the termination , interest, charge or other
a right of termination or acceleration or the creation of any lien, security of the terms, conditions
encumbrance upon any of the properties or indenture o trust, license, lease, agreement or
or provisions of any note, bond, mortgage,
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other investment or obligation to which Franklin is a party, or by which they or any of their
respective properties or assets may be bound or affected, except for such violations, conflicts,
breaches or defaults under clause (ii) or (iii) hereof which, either individually or in the aggregate,
will not have a Material Adverse Effect on Franklin or Franklin's or F&M Trust's ability to
consummate the transactions contemplated herein.
Section 3.03 -Consents. Except for consents, approvals, filings and registrations from or
with the Federal Reserve Board, the PDB, the FDIC, and compliance with any conditions
contained therein, and the approval of the Subsidiary Plan of Merger by Franklin as sole
shareholder of F&M Trust, and by F&M Trust board of directors, no consents or approvals of, or
filings or registrations with, any public body or authority are necessary, and no consents or
approvals of any third parties are necessary, or will be, in connection with (a) the execution and
delivery of this Aunt by Franklin or the Subsidiary Plan of Merger by FBcM Trust, and (b)
the completion by Franklin of the transactions conterplated hereby or by FBcM Trust of the
Subsidiary Merger. Except as set forth in Franklin Disclosure Schedule 3.03 and as to issues
relating to the MOU, Franklin has no reason to believe that (i) any required consents or
approvals will not be received or will be received with conditions, limitations or restrictions
unacceptable to it or which would adversely impact Franklin's or F&M Trust's ability to
complete the transactions contemplated by this Agreement or that (ii) any public body or
authority, the consent or approval of which is not required or any filing with which is not
requnred, will object to the completion of the transactions contemplated by this Agreement.
Section 3.04 - No Material Adverse Effect. Franklin has not suffered any Material
Adverse Effect since March 31, 2008.
Section 3.05 -Legal Proceedings. Neither Franklin nor any Franklin Subsidiary is a party
to any, and there are no pending or, to the best of Franklin's knowledge, threatened legal,
administrative, arbitration or other proceedings, claims, actions or governmental investigations
or inquiries of any nature (i) against Franklin or any Franklin Subsidiary, (ii) to which Franklin's
or any Franklin Subsidiary's assets are or may be subject, {iri) challenging the validity or
propriety of any of the transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of Franklin to perform under this Agreement, except for any
proceedings, claims, actions, investigations or inquiries referred to in clauses (i) or (ii) which,
individually or in the aggregate, would not be reasonably expected to have a Material Adverse
Effect on Franklin.
Section 3.06 - Com»liance With Anulicable Law.
{a) Franklin and the Franklin Subsidiaries hold all licenses, franchises,
permits and authorizations necessary for the lawful conduct of their businesses under, and have
complied in all material respects with, applicable laws, statutes, orders, rules or regulations of
any federal, state or local governmental authority relating to them, other than where such failure
to hold or such noncompliance will neither result in a linritation in any material respect on the
conduct of their businesses nor otherwise have a Material Adverse Effect on Franklin.
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(b) (i) To Franklin's knowledge, Franklin and each Franklin Subsidiary is in
substantial compliance with all of the statutes, regulations or ordinances which each Regulatory
Authority applicable to them enforces; (ii) no Regulatory Authority has threatened to revoke any
license, franchise, permit or governmental authorization which is material to Franklin or any
Franklin Subsidiary or required or threatened to require Franklin or any Franklin Subsidiary to
enter into a cease and desist order, memorandum of understanding or wririen agreement with it
and (iii) no Regulatory Authority has restricted or limited the operations of Franklin or any
Franklin Subsidiary, including without limitation any restriction on the payment of dividends
(any such memorandum, order or agreement described in this sentence is hereinafter referred to
as a "Regulatory Agreement").
Section 3.07 - lnform~ian to be St}pplied. The information to be supplied by Franklin
for inclusion in the Proxy Statement and/or any information Franklin filed with the SEC under
the Exchange Act as of the date the Proxy Statement is mailed to shareholders of Community
and up to and including the date of the meeting of shareholders of Community to which sack
Proxy Statement relates, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein not misleading. The information
supplied, or to be supplied, by Franklin for inclusion in the Applications will, at the time such
documents are filed with any Regulatory Authority and up to and including the dates} of the
obtaimnent of any required regulatory approvals or consents, be accurate in all material respects.
Section 3.08 -Securities Documents. The Securities Documents filed or to be filed by
Franklin under the Exchange Act at any time since March 31, 2008 complied or will comply, at
the time filed with the SEC, in all material respects, with the Exchange Act and all applicable
Hiles and regulations of the SEC.
Section 3.09 -Quality o~$~~sentations• The represa~tattons made by Franklin in this
Agreement are true, correct and complete in all material respects and do not omit statements
necessary to make the representations not misleading under the circumstances.
ARTICLE lv
COVENANTS OF THE PARTIES
Section 4.01- Conduct of Community's Easiness.
(a) From the date of this Agreement to the Closing Date, Community will,
and will cause each Community Subsidiary to, conduct its business and engage in transactions,
only in the ordinary course and consistent with past practice and policies, except as otherwise
required or permitted by this Agreement or with the written consent of Franklin. Community
will use its reasonable good faith efforts, and will cause Community Trust to use its reasonable
good faith efforts, to {i) preserve its business organizations intact, {ii} maintain good
relationships with employees, and (iii) preserve far itself the good will of customers of
Community and Community Subsidiaries and others with whom business relationships exist.
Notwithstanding the foregoing or any provision of this Article 1V to the contrary, neither
Community nor any Community Subsidiary shall be required to perform any covenant binding
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upon it pursuant to any provision of Article N if, prior to the time for performance, Community
shall have provided to Franklin written notice that Community's board of directors shall have
reasonably determined in its good faith judgment and after consultation with outside counsel that
the performance of the covenant would constitute or result in a breach of the MOU. From the
date hereof to the Closing Date, except as otherwise consented to or approved by Franklin in
writing or as permitted or required by this Agreement, Community will not and Community will
not permit any Community Subsidiary to:
(i) amend or change arty provision of its articles of
incorporation or bylaws, except with respect to Community Trust,
which Community shall cause to file an application with PDB to
amend its articles of incorporation in order to become a
Pennsylvania chartered bank and trust company, as is necessary to
effectuate the Subsidiary Merger;
(ii} change the number of authorized or issued shares of
its capital stock or issue or grant any option, warrant, call,
commitment, subscription, Right or agreement of any character
relating to its authorized or issued capital stock or any securities
convertible into shares of such stock, or split, combine or reclassify
any shares of capital stock, or declare, set aside or pay any
dividend or other distribution in respect of capital stock;
(iii) grant any severance or termination pay (other than
pursuant to written policies or written agreements of Community
or Community Subsidiaries in effect on the date hereof and
provided to Franklin prior to the date hereof, or as provided for by
this Agreement) to, or enter into any new or amend any existing
employment agreement with, increase the compensation of, grant
job promotions to or pay any bonus to, any employee, officer,
director, indepea~dent contractor, agent or other person associated
with Community or any Community Subsidiary, except for
discretionary bonuses mutually agnred upon by Community and
Franklin;
(iv) except as provided in Section 4.01(c), merge or
consolidate Community or any Community Subsidiary with any
other Person, or sell or lease all or any substantial portion of the
assets or business of Community or any Community Subsidiary;
make any acquisition of all or any substantial portion of the
business or assets of any tither Person, firm, association,
corporation or business organization; permit the revocation or
surrender by Community Trust of its certificate of authority to
maintain, or file an application for the relocation of, any existing
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office; or, file an application for a certificate of authority to
establish a new branch office;
(v) sell or otherwise dispose of the capital stock of
Community Trust, or sell or otherwise dispose of any asset of
Commurrity or any Community Subsidiary other than in the
ordinary course of business consistent with past practice; subject
any asset of Community or any Communty Subsidiary to a lien,
pledge, security interest or other encumbrance (other than in
connection with the satisfaction of legal requirements in the
exercise of trust powers) other than in the ordinary course of
business consistent with past practice; or, incur any indebtedness
for borrowed money (ar guarantee any indebtedness for borrowed
money), except in the ordinary course of business consistent with
past practice;
(vi) take any action which would result in any of the
representations and warranties of Community set forth in this
Agreement becoming untrue as of any date after the date hereof or
in any of the conditions set forth in Article V hereof not being
satisfied, except in each case as maybe required by applicable law;
(vii) change any method, practice or principle of
accounting, except as may be required from time to time by
changes in GAAP becoming effective after the date of this
Agreement {without regard to any optional early adoption date} or
by any Regulatory Authority responsible for regulating
Community or Community Trust;
(viii) waive, release, grant or transfer any rights of value
or modify or change in any material respect any existing material
agreement to which Community or any Community Subsidiary is a
party, other than in the ordinary course of business, consistent with
Past practice;
(ix) implement any pension, retirement, profit sharing,
bonus, welfare benefit or similar plan or surao~gement which was
not in effect on the date of this Agreement or, excerpt as may be
necessary to comply with applicable law or GAAP taking effect
after the date of this Agreement but prior to the Closing Date, and
with not less than thirty (30) days prior written notice thereof to
Franklin, amend any existing plan or arrangement;
(x) purchase any security for its investment portfolio
not rated "A" or higher by either Standard 8c Poor's Corporation or
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Moody's investor Services, Inc. or otherwise alter, in any material
respect, the mix, maturity, credit or interest rate risk profile of its
portfolio of investment securities or its portfolio of mortgage-
backed securities;
(xi) make a loan or any other extension of credit
commitment (including without limitation, lines of credit and
letters of credit} to any borrower or group of affiliated borrowers,
or increase, compromise, extend, renew or modify any existing
loan or commitment outstanding;
(xii) except as set forth on the Community Disclosure
Schedule, enter into, renew, extend or modify any transaction `fi'rth
any Affiliate other than transactions in the ordinary course of
business and which are in compliance with applicable laws and
regulations;
(xiii) except for the execution of this Agreement, take any
action that would give rise to a right of any party to accelerate any
payment obligation or to receive any termination fee or penalty
under any contract to which Community or any Community
Subsidiary is a party; or
(xiv) agree to do any of the foregoing.
(b) For purposes of this Section 4.01, it shall not be considered in the ordinary
course of business for Community or any Commwuty Subsidiary to do any of the following:
(i) make any capital expenditure not disclosed on the Community Disclosure Schedule, without
the prior written consent of Franklin; or (ii) make any sale, assignment, transfer, pledge,
hypothecation or other disposition of any assets having a book or market value, whichever is
greater, in the aggregate in excess of $10,000, other than the pledges of assets to exercise trust
powers; (iii) undertake or enter any lease, contract or other commitment for its account involving
a payment by Community or any Commwuty Subsidiary of mon~thanm$1 ~ ~ ~ ydate
containing a material financial commitment and extending beyon
hereof.
(c) Any other provision contained herein to the contrary notwithstanding, and
in any event only upon the prior written request of Franklin, Community shall use its best efforts
to: (i) cause Community Insurance, Inc. to merge with and into Community, with Community
surviving such merger, to be effective no later than the Effective Date; and/or (ii) cause: {y)
Community Realty, Inc. to merge with and into Community Trust, with Community Trust
surviving such merger, to be effective no Later than the Effective Date; or (z) Community Realty,
Inc. to merge with and into F&M Trust, with F&M Trust surviving such merger, to be effective
on the Effective Date.
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Section 4.02 - Access• Confidentialiri.
(a) From the date of this Agreement through the Closing Date, Community
shall afford to and shall cause each Community Subsidiary to afford to Franklin and its
authorized agents and representatives, such access to its properties, assets, books and records and
persarmel, at reasonable hours and after reasonable notice and subject to~tPippl~bl~so~ ~~g
to the exchange of information, as Franklin may reasonably requ
Community will furnish any person making such investigation on behalf of Franklin with such
fmanaal and operating data and other information with respect to the businesses, properties,
assets, books and records and personnel as the person making such investigation shall from time
to time reasonably request.
(b) Community and Franklin each agree to conduct such investigation and
discussions hereunder in a manner so as not to interfere unreasonably with normal operations and
customer and employee relationships of the other party
(c) In addition to the access permitted by subparagraph (a} above, from the
date of this Agreement through the Closing Date, community shall duly and fully inform on a
prompt and timely basis and discuss with Franklin regarding matters relating to investments,
derivatives, and remedial matters undertaken in compliance with the MOU, provided that
nothing contained in this subparagraph shall be construed to grant Franklin any decision-making
authority with respect to such matter.
(d) If the transactions contemplated by this Agreement shall not be
consummated, Community and Franklin will continue to comply with the terms of the
confidentiality agreement dated 3anuary 23, 2008.
Section 4.03 - Regulat Matters aad Consents.
(a} Community shall prepare a Proxy Statement to be mailed to shareholders
of Community in connection with the meeting of shareholders of Community to consider and
approve the transactions contemplated hereby, which Proxy Statement shall conform to all
applicable legal requirements. Communrty agrees to provide the Proxy Statement to Franklin far
review Prod approval prior to its distribution to Community shareholders, which approval
Franklin agrees shall not be um~easonably withheld, delayed or conditioned. Franklin shall
prepare and furnish such information relating to it and its directors, officers, and shareholders, as
maybe reasonably requested by Community in connection with the Proxy Statement.
{b) Franklin will prepare all Applications to Regulatory Authorities and make
all filings for, and use its reasonable best efforts to obtain as promptly as practicable after the
date hereof, all necessary pernrits, consents, approvals, waivers and authorizations of all
Regulatory Authorities necessay or advisable to complete the transactions contemplated by this
Agreement.
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(c) Community will furnish Franklin with all information conceiving
Community as may be reasonably necessary or advisable in connection with the any Application
or Sling made by or on behalf of Franklin to any Regulatory Authority in connection with the
transactions contemplated by this Agreement and the Subsidiary Plan of Merger
shall have the ri t to review in advance, and to
(d) Franklin and Community 8h
the extent practicable each will consult with the other on, all information which appears in any
filing made with or written materials submitted to any Regulatory Authority or any third party in
cx~riciedion with the transactions contemplated by this Agreement and the Subsidiary Plan of
Merger. In exercising the foregoing right, each of the parties hereto shall act reasonably and as
promptly as practicable. The parties hen~to agree that they wi11 consult with each other with
respect to the obtaining of all permits, consents, approvals and authorizations of the Regulatory
Authorities and third parties necessary or advisable to consummate the transactions contemplated
by this Agreement and the Subsidiary Plan of Merger and each party will keep the other apprised
of the status of matters relating to completion of the transactions contemplated hereby and
thereby.
(e) Each party will promptly furnish the other party with copies of all written
communications to, or received by it or any Subsidiary from, any Regulatory Authority in
respect of the transactions contemplated hereby.
Section 4.04 - Takes' i..g of Necessary Action. Fr~lin and C°minwnti)` shall each use its
best efforts in good faith, and each of them shall cause its Subsidiaries to use their reasonable
best efforts in good faith, to take or cause to be taken alt action necessary or desirable on its part
using its best efforts so as to permit completion of the Merger and the Subsidiary Merger, as
saon as practicable after the date hcreof, including, without limitation, (A} obtaining the consent
or approval of each individual, partnership, corporation, association or other business or
professional entity whose consent or approval is rewired or desirable for consummation of the
transactions contemplated hereby (including assignrment of leases without any change in terms};
provided that Community shall not agree to make any payments or modifications to agreements
in connection therewith without the prior written consent of Franklin, and (B) requesting the
delivery of appropriate opinions, consents and letters from its counsel and independent auditors.
No party hereto shall take, or cause, or to the best of its ability permit to be taken, any action that
would substantially impair the pros~cts of completing the Merger and the Subsidiary Merger
pwsuant to this Agreement and the Subsidiary Plan of Merger; provided that nothing herein
contained shall preclude Franklin or Community or from exercising its rights under this
Agreement.
Section 4.05 -Certain Agreexnents•
(a) In the event of any threatened or actual claim, action, suit, proceeding or
investigation, whethcr civil, criminal or administrative, in which any person who is now, or has
been at any time prior to the date of this Agreement, or who becomes prior to the Effective Date,
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a director or officer or employee of Community or any of its Subsidiaries (the "Indemnified
parties") is, or is threatened to be, made a party to a suit based in whole or in part on, or arising
in whole or in part out of, or pertaining to (i) the fact that he is or was a director, officer or
employee of Community or any of its Subsidiaries or (ii) this Agreement or any of the
transactions contemplated hereby, whether in any case asserted or arising before or after the
Effective Date, the parties hereto agroe to cooperate and defend against and respond thereto to
the extent permittea or required by applicable law and the articles of incorprn'ation and by-laws
of Commutity. On or after the Effective Date, Franklin shall indemnify., defena and held
harmless all prior and then-existing directors and officers of Community and any Community
Subsidiary, against (i) all losses, claims, damages, costs, expenses, habilities or judgments or
amounts that are paid in settlement (with the approval of Franklin which approval shall not be
unreasonably withheld} of or in connection with any claim, action, suit, procsreding or
investigation based in whole or in part on or arising in whole or in part out of the fact that such
person is or wss a director, officer or employee of Community or any Commumty Subsidiary,
whether pertaining to any mattes' existing or o8 at or prior to the Effective Date and
whether asserted or claimed prior to, or at or after, the Effective Date ("Indemnified Liabilities")
and (ii) all Indemnified Liabilities based in whole or in part on, or arising in whole or in part out
of, or pertaining to this Agreement or the transactions contemplated hereby, to the same extent as
such officer, director or employee may be indemnified by Community or any Community
Subsidiary as of the date hereof including the right to advancement of expenses, provided,
however, that any such officer, director or employee of Community or any Community
Subsidiary shall not be indemnified by Franklin and/or F&M Trust if such inaemttification is (i}
prohibited by applicable law; (ii) relates to acts or omissions of such person constituting fraud,
deception, intentional misrepresentation, self-dealing, gross negligence or willful misconduct; or
{iii) relates to a breach of such person's duties under the MOU.
(b) Franklin shall maintain Community's or any Community Subsidiary's
existing directors' end officxrs' liability insurance policy (or a policy providing comparable
1 no less favorable, including Franklin's existing policy if it
coverage amounts on teens general Y
meets the foregoing standard) covering persons who are currently covered by such insuusnce for
a period of six years after the Effective Date; provided, however, that in no event shall Franklin
be obligated to expend, in order to maintain or provide insurance coverage pRnsuant to this
Section 4.05(b), any amount per annum m excess of 150'/0 of the amount of the annual premiums
paid as of the date hereof by Community for such insurance (the "Maximum Amount")• If the
amount of the annual premiums necessary to maintain or procure such insurance coverage
exceeds the Malcimum Amount, Franklin shall use all reasonable efforts to maintain the most
advantageous policies of directors' and officers' insurance obtainable for an annual premium
equal to the Maximum Amount.
(c) In the event that Franklin or any of its respective successors or assigns (i)
consolidates with or merges into any other person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case the successors and assigns of
such entity shall assume the obligations set forth in this Section 4.05.
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Section 4.06 - No Other Bids and Related Matters. Community shall not, nor shall it
authorize or permit any of its officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other representative retained by it to:
(a) Initiate, solicit, encourage (including by way of furnishing informarion), or
take any other action to facilitate, any inquiries or the making of any proposal which constitutes
an Acquisition Proposal (as hereinafter defined);
(b) Except as specifically provided in the second paragraph following subpart
(c), enter into or maintain or continue discussions or negotiate with any person in furtherance of
an Acquisition Proposal;
(c) Agree to or endorse any Acquisition Proposal.
Community shall notify Franklin as promptly as practicable, in reasonable detail, as to
any inquiries and proposals which it or any of its representatives or agents may receive.
Notwithstanding the foregoing, it shall not be a breach of this Section 4.06 for the
Community board of directors to review and consider any unsolicited Acquisition Proposal,
and/or to discuss the teams and negotiate with the Person making the unsolicited Acquisition
Proposal, provided that the Commnrrityadvice of od. u~tsid ~e1 vtha-t a familure to do sow cold
judgment and after receipt of wntten
constitute a breach of its fiduciary duties under applicable Law, provided that in doing so
Cammunity, its officers, directors, employees, investment banker, financial advisor, attorney,
accountant or other representative do not otherwise breach this Section 4.06.
As used herein, the term "Acquisition Proposal" means a bona fide proposal (including a
written or verbal communication) involving a Person other than Franklin or an Affiliate of
Franklin for: (A) a merger, consolidation or acquisition of all or substantially all the assets or
liabilities of Community, any Community Subsidiary, or any other business combination
involving Community or any Community Subsidiary; or (B) a transaction involving the transfer
of beneficial ownership (with the meaning of Rule 13d-3 under the Exchange Act) of any class
or series of equity securities of Community or any Community Subsidiary and as a result of such
moony such person would beneficially own 10°/9 or more of the then outstanding shares or
units of such class or series.
Section 4.07 - MOU. Except with respect to the maintenance of $1,000,000 in aggregate
value of cash, cash equivalents and marketable securities, Community shall comply, and shall
cause Community Trust to comply, in all material respects with the MOU. From the date of this
Agreement through the Effective Date, Community shall promptly provide to Franklin copies of
alI correspondence and reports received by Community or Community Trust from any
Regulatory Authorities or submitted by Community or Community Trust to any Regulatory
Authorities relating in any way to the MOU.
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Section 4.08 -Duty to Advise• Doty to Update Disclosure Ste- Eat p~Y shall
promptly advise the other party of any change or event having a Material Adverse Effect on it or
which it believes would cause or constitute a breach of any of its representations, warranties or
covenants set forth herein. Each party shall update its respective Disclosure Schedule as
promptly as practicable after the occurrence of an event or fact which, if such event or fact had
occurred prior to the date of this Agreement, would have been disclosed in suds Disclosure
Schedule. The delivery of such updated Disclosure Schedule shall not relieve a party from any
breach or violation of this Agreement and shall not have any effect for the purposes of
determining the satisfaction of the condition set forth in Sections 5.01(c) and 5.02(c) hereof, as
applicable.
Section 4.09 - Current Information.
(a) During the period from the date of this Agreement to the Eff~ive Date,
Community shall, upon the request of Franklin, cause one or more of its designated
representatives to confer on a monthly or more frequent basis with representatives of Franklin
regarding its financial condition, operations and business and matters relating to the completion
of the transactions contemplated hereby.
(i) Within twenty {20) days after the end of each month,
Community will deliver to Franklin a balance sheet and a statement
of operations, without related notes, for such month for each of
Community, Community Trust and each other Community
Subsidiary.
(ii) Within twenty (20) days after the end of each month,
Community will deliver to Franklin an internally prepared report of
consolidated net income and a year to date general ledger report of
fees and the market value of assets under management.
(iii} Within forty-five {45) days after the end of each
respective quarter, Community will deliver to Franklin a
consolidated and consolidating balance sheet and statement of
operations for the period ended 3une 30, 2008, which was reviewed
by Smith Elliott Kearns & Company, LLC ("Smith Elliott"} and a
consolidated and consolidating balance sheet and statement of
operations for the period ended Septernbea' 30, 2008, which was
audited by Smith Elliott. Franklin shall bear the costs of such
review and audit by Smith Elliott.
(b} Community shall provide to Franklin a copy of the minutes of any meeting
of the board of directors of Community or any Community Subsidiary, or any committee thereof,
or any senior management committee, Promptly after such minutes are approved at a subsequent
meeting of the board or committee, but in any event within thirty (30) days of the meeting of
such board or committee to which such minutes relate, except that with respect to any meeting
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held within thirty (30) days of the Closing Date, such minutes shall be provided prior to the
Closing Date.
Section 4.10 - Undertakinus by Franklin and Community.
(a} From and after the date of this Agreement, Community shall:
(i) Voting b rs. Use its best efforts to cause all
meanbers of Community's board of directors to enter into the Letter
Agreement attached hereto as Exhibit 2 (the "Letter Agreement's
and to recommend approval of the Merger to shareholders of
Community and to otherwise support the Merger;
(ii) PhaQe I Environmental Audit. Permit Franklin, if
Franklin elects to do so, at its own expense, to cause a "phase 1
environmental audit" to be performed within sixty (b0) days after
the date of this Agreement at any physical location owned or
occupied by Community on the date hereof;
(iii) Aaoroval of Subsidiary Plan of Merger. Take all
action necessary and appropriate to approve the Subsidiary Plan of
Merger as sole shareholder of Community Trust and cause the
execution and delivery of, the Subsidiary Plan of Merger by
Community Trust;
(iv) Outside Service Bateau Contracts. if requested to
do so by Franklin, Use its reasonable best efforts to obtain an
extension or early termination of any contract with an outside
service bureau or other vesldor of services to Community, on terms
and conditions mutually acceptable to Community and Franklin,
but nothing in this Section 4.11(a)(iv) shall be construed as
obligating Community to terminate any.contract or arrangement;
{v) Reseaves and Merger-Related Costs. Before the
Effective Date, establish such additional accruals and reserves as
may be necessary to conform the accounting reserve practices and
methods of Community to those of Franklin (as such practices and
methods are to be applied to Community from and after the
Closing Date) and Franklin's plans 'w'ith respect to the conduct of
the business of Community following the Merger and otherwise to
reflect merger-related expenses and costs incurred by Community;
provided, however, that Community shall not be required to take
such action {A) unless such action is not inconsistent with GAAP
and would not result in a breach of the MOU or a violation of
applicable laws and regulations; (B) more than five (S} days prior
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to the Effective Date; and (C) unless Franklin agrees in writing that
all conditions to closing set forth in Section 5.02 have been
satisfied or waived (except for the expiration of any applicable
waiting periods). Prior to the delivery by Franklin of the writing
refen~ed to in the preceding clause, Community shall provide
Franklin a written statement, certified witho ~ dated the date of
the chief executive oi~tcer of Community
such writing, that no accival or rescrve made by Community
pursuant to this subsection, or any litigation or regulatory
proceeding arising out of any such accusal or reserve, shall
constitute or be deemed to be a breach ~ ~ol~O ~Slon o
representation, warranty, covenant, condition or other pro
this Agreement or to constitute a termination event within the
meaning of Section 6.Oi(g) hereof;
(vi) Shareholders' 11~ i~ B. Take all action necessary to
properly call and convene a meeting of its shareholders as soon as
reasonably Practicable to consider and vothe board of directors of
and the transactions contemplated hereby;
Community shall reco7nnaend that the shareholders of Community
approve this Agreement and the transactions contemplated hereby;
(vii) Personnel ~ Excxpt as otherwise
restricted by law, deliver to Franklin, if not done so heretofore,
schedule(s) of all employees including pertinent information
concernsng each sack employee as reasonably requested by
Franklin and sorted as rea~nably requested by Franklin; such
schedule(s) shall be updated as necessary to reflect in a timely
mariner any deletions or additions; and make available for
inspection and copying by Frnnlclsn all personnel records;
(viii) Personnel A~diti and T lions. Advise and
consult with Franklin regarding the ~g or termination of any
employee;
{sx) Fmrlnyrnent Policies. Deliver to Franklin all
personnel policy manuals, memoranda and postings, and all
employee handbooks or other corrssnunications with employees
regarding personnel policies and practices; famish additional
information as reasonably requested by Franklin with respect to
such policies and practices and any others not covered by any such
written materials;
(x) WARN Notices. Assist Franklin as reasonably
requested by it in connection with Franklin providing notices to
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affected employees under the Workers Adjustment and Retraining
Notification Act or complying with any other Labor and
Employment Law; and
(xi} Exn~lovment Law Claims. Inform Franklin
promptly upon .receiving notice of any legal, administrative,
arbitration or other proceedings, demands, notices, audits or
investigations (by any federal, state or local commission, agency or
board) relating to the alleged liability of Community or any
Community Subsidiary under any Labor and Entploymezrt Law.
(b) From and after the date of this Agreement, Franklin and Community shall
each:
(i) public Announcements. Cooperate and cause its
respective ot~icers, directors, employees and agents to cooperate in
good faith, consistent with their respcetive legal obligations, in the
preparation and distribution of, and agree upon the form and
substance of, any press release related ~ this Agreement and the
transactions contemplated hereby, and any other public disclosures
related thereto, including without limitation communications to
Community shareholders, Community's internal announcements
and customer disclosures, but nothing contained herein shall
prohibit either party from making any disclosure which its counsel
deems necessary under applicable law;
(ii) 1VI ' tst enance of Ins~a ce. Maintain, and cause
their respective Subsidiaries to maintain, insurance in such
amounts as are reasonable to cover such risks as are customary in
relation to the character and location of its properties and the
nature of its business;
(iii) Mint ce of Books and~t o s. Maintain, and
cause their respective Subsidiaries to maintain, books of account
and records in accordance with GAAP applied on a basis
consistent with those principles used in preparing the financial
statements heretofore delivered; and
(iv) Taxes. File all federal, state, and local tax returns
required to be filed by them or their respective Subsidiaries on or
before the date such returns are due {inchuding any extensions) and
pay all taxes shown to be due on such returns on or before the date
such payment is due and provide or properly accrue for taxes not
yet due and payable.
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Section 4.11 -Employee Benefits and Termination Benefits.
(a) Employee Bceefits. Except as provided in Section 4.11(b), as of the
Effective Time, each employee of community or any Community subsidiary who becomes an
employee of Franklin or of any Franklin Subsidiary shall be entitled to fiill credit for each year of
service with Community or any Community Subsidiary for purposes of determining eligibility
for participation and vesting, but not benefit accrual, in Franklin's, or as appropriate, in the
Franklin Subsidiary's, employee benefit plans, programs and policies. Franklin shall use the
original date of hire by Community or the Commwuty Subsidiary in making these
determinations. Subject to the other provisions of this Section 4.11 {a), after the Effective Time,
Franklin may maintain, discontinue, amend, convert to, or merge with, any Franklin or Franklin
Subsidiary plan any Community benefit plan, subject to the plan's provisions and applicable law.
{b) Severance Poticy. Franklin agrees to cause F&M Trust to provide
severance pay, as set forth below, to any full-time, active employee of Community or any
Community Subsidiary whose employment is terminated hereafter in connection with the Merger
up to twelve (1 Z) months beyond the Effective Date, because (i} such employee's position is
eliminated, or (ii} such employee is not offered or retained in comparable employment (i.e., a
position of gearerally similar job description or responsibilities with Commmsity or any
Community Subsidiary) with F&M Trust or any Franklin Subsidiary, excluding any employee (i)
who has an existing employment agreement with Community or any Community Subsidiary, {ii)
who has accepted an offer from Franklin of noncomparable employment or (iii) whoa
employment is terminated for Cause (as defined below), provided such employee executes such
documentation as Franklin may reasonably require, including Franklin's customary form of
release and provided such employee does not vohrntarily leave employment with Franklin or
F&M Trust prior to the date the systems conversion occrn~s. The severance pay to be provided
by F8cM Trust under this subsection sha11 equal twa (2) weeks' pay for each full year of
continuous service (determined based on the date of the employee's c~mgnencxrnerrt of
employment with Community) with a minimum severance benefit of four (4) weeks' pay and a
maximum severance benefit of twe~rty-six (2~ weeks' pay. For proposes of this Section 4.11(b),
"Cause" shall mean termination because of the employee's personal dishonesty, failure to meet
established performance goals and standards, misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties or willful violation of any law, rule or
regulation (other than traffic violations or similar offenses). The benefits provided to terminated
Community employees under this subsection are the only severance benefits payable by Franklin
or F&M Trust to such employees (excluding severance benefits provided under existing
employment or consulting agreements or as otherwise required by law). The benefits payable to
employees under this subsection or otherwise shall in any event be in lieu of any termination
benefits to which such employees would otherwise be entitled under Franklin's or F&M Trust's
severance policies or programs then in effect.
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(c) Intention reearding Future Employment. Franklin shall use its reasonable
best efforts to inform the employees of Community at least thirty (30) days prior to the Effective
Date of the likelihood of such employees having continued employment with F&M Trust
following the Effective Date.
Section 4.12. - Adj~tment Account.
(a) Establisbment of Trust. Prior to the Closing, Community shall. establish
pursuant to a written instrument a trust under Pennsylvania law, which will be administered by
F&M Tract as trustee (the. `°I'rust" ), and the purpose of which is to hold certain oontingeM assets
of Community Trust and to facilitate certain post-closing actions of the parties hereto, as more
fully described in this Section 4.12.
(b) Assignment of Ri¢ht to Can ' ¢ent Assets. Promptly after the
establishment of the Trust, and prior to the Closing, Community shall cause Community Trust to
assign all of Community Trust's right, title and interest in the Contingent Assets (as defined
below) to the Trust. Following such assignment, and prior to Closing, the Trust shall grant to the
shareholders of Community beneficial interests in the Trust on a pro rata basis based upon each
such shareholder's overall equity ownership interest in Community as of the time of such grant
(the `Beneficial Intesests'~.
(c) Definition of "Contingent Assets". For purposes of this Section 4.12,
"Contingent Assets" shall mean the $120,000 off balance sheet receivable described in note 11
of the consolidated financial statements of Community as of and for the year ending Deceanber
31, 2007.
(d) Pay~,~n+ Related to Continu~t sets. Promptly upon receipt by a path'
hereto, or any Subsidiary of a party hereto, of any payment related to the Contingent Assets, such
party shall, or shall cause its Subsidiary to, as applicable, forward such payment to the Trust.
The Trust shall promptly acknowledge its receipt of any payment related to the Contingent
Assets in a writing delivered to Franklin ~in accordance with the notice provisions set forth in
Section 7.06(a).
(e) Terms of Trust Instrument. The trust instrument identified in Section
4.12{a} shall expressly provide that (i) the Beneficial Interests will be granted pro-rata to
shareholders of Community as a part of the consideration for the Merger; (ii) the Beneficial
Interests will not be transferable except by operation of law or by will, and no form or certificate
will be used to represent the Beneficial Interests; (iii) the Beneficial Interests will not have
voting or dividend rights and will not bear a stated rate of interest; (iv} the Trust will have the
limited purpose described in subsections (a) and (b} hereof and will not engage in any ongoing
trade or business; and (v) the Trust will terminate upon the earlier of the completion of its stated
purpose or its tenth anniversary.
(fl Effect of Termination of Trust upon Tenth Anniversary. The trust
instrument shall further provide that in the event that payment on the Contingent Assets has not
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been received by either the Trust or F&M Trust by the tenth anniversary of the establishment of
the Trust, then the Trust shall promptly assign all of its right, title and interest in the Contingent
Assets to F&M Trust, and the Trost shall proceed to promptly terminate its existence.
Immediately upon such assignment, all of F&M Trust's obligations arising hereunder with
respect to the Contingent Assets shall became null and void, and F&M Trust shall have no
further obligation or responsibility to the Trust or any beneficiaries thereof.
(g} Limited Obligation of Frankliin. It is expressly aclanowledged and agreed
that Franklin's obligation hereunder is limited to paying over to the Trust any funds actually
received by Franklin or F&M Trust within tenth years of the establishment of the Trust and
specifically related to the Contingent Assets. Further, it is agreed and understood that the
Beneficial Interests will not represent an equity or ownership interest in Franklin or any Affiliate
of Franklin, and any amount ultimately paid pursuant to the Beneficial Inerests will not depend
upon the operating results of Franklin or F8cM Trust as the surviving entities.
Section 4.I3 -Certain Releases. Franklin agrees to take commercially reasonable to the
immediately after the Effective Date, to cause the holder of the mortgage with respect
premises located at 3907 Market Street, Camp Hill, PA, to release Lowell R. and Linda Lee
Gates, as individuals, from their obligations on their respective commercial guarantees with
respect to such mortgage.
ARTICLE V
CONDITIONS
Section S.Ol -Conditions to 's Obliggtiar-s under this Aa~nent. The
obligations of Community hereunder shall be subject to satisfactton at or poor to the Closing
Date of each of the following conditions, unless waived by Community pursuant to Section 7.03
hereof
(a} Corporate Proceedin .All action required to be taken by, or on the part
of, Franklin and F8tM Trust to authorize the execution, delivery and performance of this
Agreement and the Subsidiary Plan of Merger, respectively, and the consummation of the
transactions contemplated by this Ageement and the Subsidiary~Plan of Merger, shall have been
duly and validly taken by Franklin and F&M Trost; and Community shall have received certified
copies of the resolutions evidencing such authorizations;
(b) Covenants. The obligations and covenants of Franklin required by this
Agreement to be peafonned by Franklin at or prior to the Closing Date shall have been duly
performed and complied with in all respells, except where the faihue to perform or comply with
any obligation or covenant would not, either individually or in the aggregate, result in a Material
Adverse Effect with respect to Franklin;
(c} Representations and Warranties. The representations .and warranties of
Franklin set forth in this Agreement shall be true and correct, as of the date of this Agreement,
and as of the Closing Date as though made on and as of the Closing Date, except as to any
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representation or warranty {i) which specifically relates to an earlier' date or {ii) where the breach
of the representation or warranty would not, either individually or in the aggregate, constitute a
Material Adverse Effect with respect to Franklin;
(d) Shareholder Approval. The shareholders of Community and Comrunity
vet shall have approved the Merger, the Subsidiary Merger, this Agreement and
Trust, respecti y, ve articles of incorporation,
the Subsidiary Plan of Merger in accordance with their respe~ _
bylaws and applicable law; provided,~hve ~~d have~t pay to Franklin the fee speafied in
Community from any obhgahon it
Section 7.01(c) under the terms thereof.
{e) A~roval~ torn Au 'ties. Franklin shall have received all
required approvals of Regulatory Authorities of the Merger and the Subsidiary Merger and
delivered copies thereof to Community; and all notice and waiting periods required thereunder
shall have expired or been terminated;
(f) No Ind. 'There shall not be in effect any order, decree or injunction
of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(g) Officer's 'cafe. Franklin shall have delivered to Community a
certificate and such other documents, dated the Closing Date and signed, without personal
liability, by its chairman or president, to the effect that the conditions set forth a of theme officer
through (f) of this Section 5.01 have been satisfied, to the best knowledg
executing the same;
(h) ' 'ono Coups for F in. Community shall have received an
opinion dated the Closing Date from Rhoads 8t Sinop LLP, counsel to Franklm, in substantially
the form of Exhibit 3 hereto.
Section 5.02 -Conditions to Franklin's Obligations ~ ent• T~
obligations of Franklin hereunder shall be subject to satisfactton at or prior to the Closmg Date of
each of the following conditions, unless waived by Franklm pursuant to Section 7.03 hereof:
(a) Corporate Prose All action required to be taken by, or on the part
of, Community and Community Trust to authorize the execution, delivery and performance of
this Agreement and the Subsidiary Plan of Merger, respectively, and the consummation of the
transactions contemplated by this Agreement and the Subsidiary Plan of Merger, shall have been
duly and validly taken by Commwnity and Community Trust and Franklin shall have received
certified copies of the resolutions evidencing such authorizations;
{b) Covenants. The obligations and covenants of Community, required by
this Agreement to be performed by it at or prior to the Closing Date shall have been duly
performed and complied with, in all respects, except where the failure to perform or comply with
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any obligation or covenant would not, either individually or in the aggregate, result in a Material
Adverse Effect with respect to Community;
(c) Ren~'esentations and Warranties. The representations and warranties of
Community set forth in this Agreement shall be true and correct as of the date of this Agreement,
and as of the Closing Date as though made on and as of the Closing Date, except as to any
representation or warranty (i} which specifically relates to an earlier date or (ii) where the breach
of the representation or warranty would not, either individually or in the aggregate, result in a
Material Adverse Effect with respect to Community;
(d} ~~urov s of Regulatory Authon_ 'ti~_s. Franklin and C°mr°unit3' shall have
received all required approvals or consents of Regulatory Authorities for the Merger and the
Subsidiary Merger; all notice and waiting periods required thereunder shall have expired or been
terminated; and, no such approval or consent shall have imposed any condition or requirement
(including, without limitation, the MOU, or any teen thereofl v~-hich the Franklin board of
directors reasonably determines would, following the Effective Time, be expected to cause a
Material Adverse Effect as to Franklin or would otherwise reduce the contemplated benefits to
Franklin of the Merger and the other transactions contemplated hereby;
(e) No Iniun~. 'I'h~ shall not be in effect any order, decree or injunction
of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(f} No Material Adverse Effect. Since March 31, 2008, there shall not have
occurred any Material Adverse Effect with respect to Community;
(g) Trust. Franklin shall have received, towith re e ~l the Trust shall
evidence that the actions contemplated by Section 4.12(a) and (b} resg
have occuured.
(h) Officer's Certificate. Community shall have delivered to Franklin a
certificate and such other documents, dated the Closing Date and signed, without personal
liability, by its chairman of the board or president, to the effect that the conditions set forth in
subsections (a) through (g) of this Section 5.02 have been satisfied, to the best knowledge of the
officer executing the same;
(i) Qpinion of Counsel for Comm,~n'tv_. Franklin shall have received an
opinion dated the Closing Date from Sardis, Flower 8c Lindsay, counsel to Community, in
substantially the form of Exhibit 4 hereto.
(j) Phase I Environmen Audit Results. The results of any "phase I
environmental audit" conducted pursuant to Section 4.10(a)(ii) with respect to owned or
occupied premises shall be reasonably satisfactory to Franklin; provided, however, that (i} any
such environmental audit must be initiated within 30 days of the date of this Agreement, (ii)
Franklin must elect to terminate this Agreement or waive its right to terminate the Agreement
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under this Section 5.02(j) within l 5 days of receiving the results of all such environmental audits
and {iii) Franklin may not terminate this Agr ~ anto~ a aggregate value of all uch premises S
of such audits result in a Matenal Adverse Eff p
ARTICLE VI
TERMIN TION WAIVER AND NDMENT
Section 6.01 -Termination. This Agreement maybe terminated on or at any time prior to
the Closing Date:
(a} By the mutual written consent of the Parties hereto;
(b) By Franklin or Community:
(i) if the Closing Date shall not have occurred on or
before December 31, 2008, unless the failure of such occurrence
shall be due to the failure of the Party seeking to terminate this
Agreeement to perform or observe, in any material respect, its
ageements set forth in this Agreement required to be performed or
observed by such Party on or before the Closing Date; or
(ii) if either Party has received a final imappealable
administrative order from a Regulatory Authority whose approval
or consent has been requested that such approval or consent will
not be granted;
unless in the case of both Section 6.01(b}(i) and 6.0I (bxii) hereof
the failure of such occutt'ence shall be due to the failure of the
party seeking to terminate this Agreement to P~~ or observe in
any material respect its agreements set forth herein required to be
performed or observed by such party on or before the Closing
Date.
(c) By Community or Franklin if Community's shareholders fail to approve
of Community shareholders called for that purpose; provided a
this Agreement at the meeting
pexiod of at least thirty days elated b~"'~ the date of mailing the Proxy Statement and the
date of such meeting and that a quorum is present at such meeting.
(d} By Franklin if Commumty or any Community Subsidiary enters into any
letter of intent, agreement or similar type agreement with a view to being acquired by, or
effecting a business combination with, any other Person; or any agreement of merger, to
consolidate, to combine or to sell a material Portion of its assets or to be acquired in any other
manner by any other person or to acquire a material amount of assets or a material equity
position in any other Person, whether financial or otherwise.
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{e) By Community if Community enters into any transaction described in (d)
above after receipt of written advice of counsel that failure to do so would constitute a breach of
fiduciary duty by Community's directors under applicable Law.
(f) By Franklin at any time prior to the Closing Date if (i} Community shall
have breached the ~ovisions of Section X4.06 of this Agreement, (ii) the board of directors of
Community shall have failed to recommend and endorse this Agreement and the transactions
contemplated hereby, or withdrawn or modified its approval or recommendation of this
Agreement and the Mager, or reconunended or endorsed an Acquisition Proposal, (iii) the board
of directors of Community shall have failed to tail, give notice of, convene or hold a meeting of
shareholders to approve the Merger, (iv) Community shall have failed to approve the Subsidiary
Plan of Merger as the sole shareholder of Community Trust by the Closing Date, or (v) the board
of directors of Community Trust shall have failed to appmve the Subsidiary Plan of Merger by
the Closing Dste.
(~ At any time on or prior to the Effective Date, by Community in 'writing if
Franklin has, or by Franklin in writing if Community has, in any material respect, breached (i)
any material covenant or undertaking contained herein or (ii) any representation ar warranty
contained herein, which in the case of a breach referred to in subclause (i) or (ii) above by
Franklin would have a Material Adverse Effect an Franklin and in case of a breach referred to in
subclause (i) or (ii) above by Community would have a Material Adverse Effect on Community,
in any case if such breach has not been substantially cured by the earlier of thirty (30) days after
the date on which written no f on such at~e~suchis breach no long ca~isesl a~Material Adversoe
the Effective Date, but not
Effect.
Section 6.02 -Effect of Termii~atiQn. If this Agreemment is terminated pursuant to
Section 6.01 hereof, this Agreement shall forthwith become void (other than Section 4.02(d),
Secfiion 4.10(bxi} and Section 7.01 hereof, which shall remain in full force and effect), and there
shall be no further liability hereunder on the part of Franklin or Community to the other, except
for any liabfiity acisirtg out of any uncured willful breach of any covenant or other agreement
contained in this Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.01- F,~a~ ~ ~~ Fees•
(a} Except as set forth in Section 7.01(b) and (c), each party hereto shall bear
and pay all costs and expenses incurred by it in connection with the transactions contemplated
hereby, including fees and expenses of its own financial consultants, accountants and counsel.
(b) If this Agreement is terminated as a result of any breach of a
representation, warranty, covenant or other agreement which is caused by the willful or
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intentional breach of a party hereto, such party shall be liable to the other for out-of-pocket costs
and expenses, including, without limitation, the reasonable fees and expenses of lawyers,
accountants and investment bankers, incurred by such other party in connection with the entering
into of this Agreement and the carrying out of any and all acts contemplated hereunder
("Expenses"); provided, however, that the maximum amount Community shall be liable to
Franklin for Expenses pursuant to this Section 7.01(b) shall be $56,500, and the maximum
amount Franklm shall be liable to Community for Expenses pursuant to this Secti~ 7.01(b) shall
be $56,500. The payment of Expenses shall not constitute an exclusive remedy, but is in
addition to any other rights or remedies available to the parties hereto at law.
(c) if Community fails to complete the Merger after the occurrence of one of
the following events and Franklin shall not be in material breach of this Agreement, Community
shall immediately pay Franklin a fee of One Hundred Thirteen Thousand and No/100 Dollars
($113,000.00):
(i) A Person other than Franklin or an Affiliate of
Franklin:
(A) Acquires beneficial ownership {within the
meaning of Rule 13d-3 under the Exchange Act) of 15%
or more of the then outstanding shares of Community
Common Stock; or
(B) Enters into an agreement, letter of intent or
memorandum of understanding with Community pursuant
to which such Perin or any Affiliate of such Person
would:
(ii)
proposes, or
recommend
memorandum
above; or
(1) Merge or consolidate, or enter into
any similar transaction, with community;
(2} Acquire all or substantially all of the
assets or liabilities of Community; or
{3) Acquire beneficial ownership of
securities representing, or the right to acquire
beneficial ownership of or to vote securities
representing, 15% or more of the then outstanding
shares of Community Common Stock; or
Community authorizes, recommends o
publicly announces an intention to
.r propose, an agreement, letter of
of understanding described in subsectio
r publicly
authorize,
intent, or
n (c)(i)(B)
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(iii) The Community shareholders vote but fail to
approve the Merger at the Community shareholders meeting, or the
Community shareholders meeting is cancelled, if prior to the
shareholder vote or cancellation:
(A) The Community board of directors shall
have withdrawn or modified its recommcndation that
Community shareholders approve the Merger and adopt
this Agreement;
(B) There has been an announcement by a
Person other than Franklin or an Affiliate of Franklin, of an
offer or proposal to acquire 15% or mare of the Community
Common Stock then outstanding, or to acquire, merge, or
consolidate with Community, or to purchase all or
substantially all of Community's assets and, within eighteen
(18) months of such announcement Community enters into
an agreement with such Person, or any Affiliate of such
person, for such Person or Affiliate to acquire, merge, or
consolidate with Community or to purchase all or
substantially all of Community's assets;
(C} Any director or executive officer of
Community or other person who has signed a Letter
Agreement acting jointly or severally, and who,
individually or in the aggregate, beneficially own one
percent (1%) or more of the Community Common Stock,
shall have failed to maintain continued ownership of the
shares of Community Common Stack over which he, she or
they exercise sole or shared voting power, except as
permitted by the Letter Agreement; or
(D} Any director or executive officer of
Crnnmunity or other person who has signed a Letter
Agreertnent shall have failed to vote at the Community
shareholders meeting the shares of Community Common
Stock over which he or she exercises sole or shared voting
power except as permitted by the Letter Agreement.
(iv) This Agreement is terminated pursuant to Section
6.01(d), (e), (f}(ii) or (fj(iii).
Section 7.02 -Non Survival of Renre~ent tions and Warranties. All representations,
warranties and, except to the extent specifically provided otherwise herein, agreements and
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covenants, other than those covenants that by their terms are to be performed after the Effective
Date, including without limitation the covenants set forth in Sections l .02(e), 4.05, 4.11 and 4.12
which will survive the Merger, shall termsnate on the Closing Date.
Section 7.03 -Amendment. Extension and Waiver. Subject to applicable law, at any time
prior to the consummation of the transactions contemplated by this Agreement, the parties may
(a} amend this Agreement, (b) extend the time for the performance of any of the obligations or
other acts of either party hereto, (c) waive any inaccuracies in the representations ~ warranties
contained herein or in any document delivered pursuant hereto, or (d) waive compliance with
any of the agreemerrts or conditions contained in Articles N and V hereof or otherwise provided
that any mnendment, extension or waiver granted or executed after shareholders of Community
ved this Agreement shall not modify either the amount or the form of the
have ~o vided hereby to holders of Community Common Stock upon
consideration to be pro
consummation of the Merger or otherwise materially adversely affect the shareholders of
Community without the approval of the shareholders who would be so affected. This ABreeaneat
may not be amended except by an wstrument in wasting authorized by the respective Boards of
Directors and signed, by duly authorized officers, on behalf of the parries hereto. Any
agreement on the part of a party hereto to any extension or waiver shall be valid only if but such
in an instrument in writing signed by a duly authorized officer on behalf of such party,
waiver or failure to insist on strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
t This Agreement, including the documents and other
Section 7.04 - Entire~•
writings referred to herein or delivered pursuant hereto, contains the entire agreement and
understanding of the parties with respect to its subject matter. This Agreement sees all
prior arrangements and understandings betwecn the parties, both written or oral, with respecties
its subject matter. 'This Agreement shall inure to the benefit of and be binding upon p
hereto snd their respective successors; vid how v that nothing in this Agreement,
sod or implied, is intended to confer upon any party, other than the parties hereto and their
ri ts, remedies, obligations or liabilities other than pursuant to
respective successors, any gh
Sections 1.02{e}, 4.05, 4.11 and 4.12.
Section 7.05 - Nom t• Neither party hereto may assign any of its rights or
obligations hereunder to any other person, without the prior written consent of the other parry
hereto.
Section 7.06 -Notices. All notices or other communications hereunder shall be in writing
and shall be deemed given if delivered personally, mailed by prepaid registered or certified mail
(return receipt requested), or sent by telecopy, addressed as follows:
(a) If to Franklin, to:
Franklin Financial Services Corporation
20 South Main Street
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Chambersburg, Pennsylvania 17201
Attention: William E. Snell, 3r., President & CEO
TelecopyNo.: (717) 261-3545
with a copy to:
Rhoads & Sinon LLP
One South Market Square,12th Floor
Harrisburg, Pennsylvania 17108-1146
Attention: Dean H. Dusrnberre, Esgtrire
Telecopy No.: (717) 231-6676
(b) If to Community, to:
Community Financial, lnc.
3907 Market Street
Camp Hill, Pennsylvania 17011
Attention: Susan A. Russell, President & CEO
Telecopy No.: (717} 737-7834
with copies to:
Saidis, Flower 8c Landsay
26 West High Street
Carlisle, Pennsylvania 17013
Attention: John B. Lampi, Esquire
Telecopy No: (717) 243-6486
Section ?.07 - The captions ~~~ ~ this Agreement are for reference
purposes only and are not part of this Agreement.
Section 7.08 -Count This Agreement may be executed in any numbs' of
counterparts, and each such countxrpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
Section 7.09 - ~• if ~Y provision of this Agreement or the application thereof
to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of
this Agreement and the application of such provisions to other persons or circumstances shall not
be affected thereby and shall be enforced to the greatest extent permitted by law.
Section 7.10 - Gov~w• This Agreement shall be governed by and construed in
accordance with the domestic internal law of the Commonwealth of Pennsylvania, excluding its
conflicts of law principles.
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IlV WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized officers as of the day and year first above written.
FRANI~I.IN FINANCIAL SERVICES
CORPORATION
By: /s/William E. Snell. Jr:
William E. Snell, Jr., President and CEO
COIv~y:UNITY FINANCIAL, INC.
By: /s/Susan A. Russell
Susan A. Russell, President and CEO
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EXHIBIT 1
FORM OF SUBSIDIARY PLAN OF MERGER
SUBSIDIARY PLAN OF MERGER
THIS SUBSIDIARY PLAN OF ME1tGER {"Plan of Merger") dated as of June 26, 2008, is
by and between FARMERS AND ME,RC`HANTS TRUST COMI'ANY OF CHAMBERSBURG,
a Pennsylvania bank and trust company ("F&M Trust"), and COb~-9U13ITY TRUST COMPANY,
a Pennsylvania trust company ("Community Trust").
BACKGROUND
1. F&M Tivst is a Pennsylvania bank and trust company and awholly--owned
subsidiary of Franklin Financial Services Corpchration, a Pennsylvania corporation ("Franklin'.
The authorized capital stock of F&M Trust csnsists of 138,036 shares of common stock, par vahhe
$10.00 per share ("F&M Trust Common Stock"), of which at the date hereof 137,568 shares are
issued and outstanding.
2. Community Trust is a Pennsylvania trust company and a wlmlly-owned Subssdiary
of Community Financial, Inc. ("Community"). The authorized capital stock of Community Trust
c•,onsists of 2,000,000 shares of common stock, par value $1.00 per share ("Community Trost
Comhnon Stock', of which at the date hereof 208,571 shares are issued aad outstanding, 500,000
shares of preferred stock, $ l .00 par value per share, of which no shares are issued or outstanding.
3. The respective Boards of Directors of F8cM Trust mid Community Truk deem the
merger of Community Trust with and into F&M Trust, pursuant to the terms sad csynditions set
forth or referred to herein, to be desirable and in the best interests of the respective corporations
and their respective stockholders.
4. The respective Boards of Directors of F&M Trust and Community Trust have
adopted resolutions approving this Plan of Merger. The respective Boards of Dn~ectors of Franklin
and Community have adopted resolutions approving an Agreement and Plan of Merger dated as of
2008 (the "Agreement', between Franklin. and Community, pursaant to which
this Subsidiary Plan of Merger is being exeartod by F&M Trust and Community Trust.
AGREEMENT
In consideration of the premises and of the mutual covenants and agreements herein
contained, F&M Trost and Community Trust, intending to be legally bound hereby, agree:
ARTICLE I
MERGER; BUSINESS
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1.1 Subject to the temps and conditions of this Plan of Merger and in accordance with
the applicable laws and regulations of the Commonwealth of Pennsylvania, on the Effective Date
Community Trust shall merge with and into F&M
(as that term is defined in Article V hereof):
Trust; the separate existence of Cosmnuruty Trust shall cease; and F&M Trust shall be the
surviving bank under the name ate title "Fanners and Merchants Trust Company of
Chambersburg" (surf transaction referred to herein as the "Subsidiary Merger" and F&M Trust, as
the surviving bank in the Merger, referred to herein as the "Surviving Entity„).
1.2 Busirxess. The business of the Surviving F~ntity shall be conducted at thc main
office of F&M Trust, and shall be loud at 20 South Main Streit, Chambersburg, Pennsylvania
17201, and its legally established branches, which shall include the main office of Community
Trust.
ARTICLE II
ARTICLES OF INCORPORATION AND BY-LAWS
On and after the Effective Date of the Merger, the articles of inoorporaban and by-laws of
F&M Trust shall continue to be the articles of incorporation and bylaws of the Surviving Entity.
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS
3.1 Board of Directors- On and after the Effective Date of the Merger, the Hoard of
Directors of F&M Trust as the Surviving Entity in the Mergex shall consist of those pearsons who
were the directors of FBcM Trust immediately Prior to the Effective Date. Each such director shall
hold office until his or her successor' is elected and qualified or otherwise in accordance with the
articles of incorporation and by laws of the Surviving Entity
3.2 O~rcers. On and after the Effective Date of the Merger, the officers of F&M Trust
duly elected and holding office immediately prior to such Effective Date shall be the officers of
F&M Trust, as the Surviving Entity in the Merger.
ARTICLE IV
CONVERSION OF SSARES
4.1 Stock of F&M TYrrst. Each share of F&M Trust Common Stock issued and
outstanding hnrnediate~y Prior' to the Effective Date shall, on and after the Effective Date, continue
to be issued and outstanding as a share of common stock of the Surviving Bank.
4.2 Stock of Comnew~ity Trust- Each share of Community Trust Common Stock
issued and outstanding immediately prior' to the Effective Date shall, on the Effective Date, be
canceled and no cash, stock or other property shall be delivered in exchange therefore.
ARTICLE V
EFFECTIVE DATE OF THE MERGER
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The Merger shall be effective on the date on which articles of merger executed by
Community Trust and F&M Trust are filed with and endorsed by the Pennsylvania Department of
Banking, unless a later date is ~ecified in such articles of merger {the "Effective Date"}.
ARTICLE VI
EFFECT OF THE MERGER
On the Effective Date: the separate existence of Commurrity Trust shall cease; the
principal office of Community. Trust shall become a breach office of the Surviving Entity; and all
of the property (real, personal and mixed), rights, powers, duties and obligations of F&M Trust and
Community Trust shall be taken and deemed to be transferred to and vested in the Surviving
Entity, without further ad or deed, as provided by applicable laws and regulations.
ARTICLE VII
CONDITIONS PRECEDENT
The obligations of F&M Trust and Community Trust to effect the Merger shall be subject
to (i}the approval of this Plan of Meager by Community and Franklin in their capacities as the sole
shareholder of Community Trust and FBtM Trust, respectively, (ii) receipt of the required approval
of the Federal Deposit Insurance Corporation, the Pennsylvania Department of Banking, and any
other applicable regulatory authority (iii) receipt of any necessary approval to operate the main
office of Community Trust as an office of the Surviving Fartity, and (iv) the cwmpletion of the
transactions contemplated by the Agreement on or before the Effective Date.
ARTICLE VIII
TERMINATION
This Subsidiary Plan of Merger shall terminate upon any termination of the Agreement in
accordance with its terms; provided, however, that any such termiination of this Subsidiary Plan of
Merger shall not relieve any party hereto from liability on account of a breach by suer party of any
of the terms hereof or thereof.
ARTICLE IX
AMENDMENT
Subject to applicable law, this Subsidiary Plan of Merger may be amended, by action of the
respective Boards of Directors of the parties hereto, at any time prior to consummation of the
Merger, but only by an instrument in writing signed by duly authorized officers on behalf of the
parties hereto.
ARTICLE X
MISCELLANEOUS
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10.1 Extensions; Waivers. Each party, by a written instrument signed by a duly
authorized officer, may extend the time for the performance of any of the obligations or other acts
of the other party hereto and may waive compliance with any of the obligations of the other party
contained in this Subsidiary Plan of Merger.
10.2 Notices. Any notice ar other communication requited or pernditted cu- ureic s
Subsidiary Plan of Merger shalt be given, and shall be ei~ective, in accordance with the pro .
of the Agreement.
10.3 Captions. The headings of the several Articles herein are inserted for convenience
of reference only and are not intended to be part o~ or to affect the meaning ar inteapretation of,
this Subsidiary Plan of Merger.
10.4 Cou~erparts. For the convenience of the parties hereto, this Subsidiary Plan of
M er may be executed in several counterparts, each of which shall be deemed the original, but
all of which together shall constitute one and the same instrument.
10.5 Governing Law. This Subsidiary Plan of Merger shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to the
conflict of laws principles thereof.
IN WTI'NESS WHEREOF, each party has caused this Plan to be executed on its behalf and
its corporate seal to be affixed hereto by its duly authorized oi~cxas, all as of the day and yeas' first
written above.
ATTEST:
Secretary
(SEAL)
ATTEST:
Nid~olas E. Dunphy, Jr., Secretary
{SEAL)
FARMERS AND MERCHANTS TRUST
COMPANY OF CHAMBERSBURG
By:
William E. Snell, Jr., President
coMMt.JNrrY TRUST coMPANY
By:
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Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 112 of 160
COMMONWEALTH OF PENNSYLVANIA
COUNTY OF
. SS:
On this day of , 2008, before me, a Notary Public for the State and County
aforesaid, personally ome William E. Snell, Jr. as President, and ~ ~
Secretary, of Farmers and Merchants Trust Company of Chambetsburg, and each in his said
opacity adct-owledged the foregoing instrument to be the act and deed of said institution and the
seal effaced thereto to be its seal; and came also a majority of the Board of Directors of said
institution, and each of them acknowledged said instrument to be the ad and deed of said
institution ~d of himself or herself as off cer thereof.
WITNESS my official seal and signature this day and year aforesaid.
Notary Public
My Commission Expires:
~sEAL)
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COMMONWEALTH OF PENNSYLVANIA :
. SS:
COUNTY OF
On this day of , 2008, before me, a Notary Public for the State and
County aforesaid, personally came Susan A. Russell, President, and Nicholas E. Dunphy, Jr., as
Secretary, of Comity Trust Company, and each in his said capacity acknowled8~ the
foregoing instrument to be the act and deed of said association and the seal affixed thereto to be its
seal and eacl- of them acknowledged said instrument to be the act ami deed of said assoaation and
of himself or herself as office thereof.
WITNESS my offiaal seal and signature tiffs day and year aforesaid.
Notary Public
My Commission Expires:
(SEAL)
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EXHIBIT 2
FORM OF VOTING AGREEMENT
_, 2008
Franklin Financial Services Corporation
24 South Main Street
Chambersburg, PA 17201
Gentlemen:
Franklin Financial Services Corporation ("Franklin") and Community Financial, Inc.
("Community") desire to enter into ~ Agreement and Plan of Merger dated as of
~ 2008 ("Agreement"), pursuant to which, subject to the terms and conditions set forth
therein, (a) Commwnty will merge with and into Franklin with Franklin surviving the merger
and (b) shareholders of Community will receive cash in exchange for common stock of
~„~;ty o~g on the closing date (the foregoing, collectively, referred to herein as the
"Merger").
Franklin has required, as a condition to its execution and delivery to Community of the
Agreement, that the undersigned, being a director of Community, execute and deliver to Franklin
this Letter Agreement.
The undersigned, in order to induce Franklin to execute the Agreement, hereby
irrevocably:
(a} Agrees to be present (in person or by proxy) at all meetings of
shareholders of Community called to vote for approval of the Agt~oement and the Merger and to
vote all Shares of common stock of Community as to which the undersigned has sole voting
power and, to the extent of the undersigned's proportionate interest, vote shares of common
stock of Community as to which the unde~gned shares voting power, and to use his or her
reasonable best efforts to cause to be voted any other shares of Commiurity common stock over
which. he or she shares voting power, in each case (i) in favor of approval and adoption of the
Agreement and the transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the Board of Directors of Community) and {ii)
against approval or adoption of any other merger, business combination, recapitalization, asset
sale, partial liquidation ~ similar transaction involving Community and any other person other
than Franklin or an Affiliate of Franklin;
(b) Except as required by law, agrees that the undersigned will not, and will
not permit any company, trust or other entity controlled (as defined for purposes of Rule 144
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under the Securities Act) by the undersigned to, contract to sell, sell or otherwise transfer or
dispose of any of the Shares or any interest therein or any voting rights with respect thereto,
other than subsequent to the shareholder meeting of Community held in connection with the vote
on the Agreement or a gift where the donee has agreed in writing to abide by the terms of this
Letter Agreement in a form reasonably satisfactory to Franklin;
(c) Agrees not to exercise any options to purchase Commumty common stock
after the date hereof;
(d) Agrees that neither Community nor Franklin shall be bound by any
attempted sale of any shares of Community common stock over which the undersigned has
voting power, and Community's transfer agent shall be given an appropriate stop tr~sfer order
and shall not be required to register any such attem~ed sale, unless the sale has been effected in
compfiaace with this Letter Agreement;
(e) Represents that the undersigned has the capacity to enter into this Letter
Agreement and that it is a valid and binding obligation enforceable against the undersigned in
accordance with its terms, subject to bankruQtcy, insolvency and other laws affecting creditors'
rights and general equitable principles.
(f) It is understood and agreed that the Provisions of subparagraph (a) of this
Letter Agreement relaxe solely to the capacity of the undersigned as a shareholder or other
beneficial owner of shares of Community common stock and is not in any way intended to affect
the exercise by the undersigned of the undersigned's responsibilities and fiduciary duties as a
director of Community. It is further widerstood and agreed that such subparagraph of this Lettea
Agreement is not in any way intended to affect the exercise by the undersigned of any fiduciary
responsibility which the undersigned may have in respect of any shares of Community common
stock held or corrlxolled by the undersigned as of the date hereof.
The obligations set forth herein shall terminate concurrently with any termination of the
Agreement.
This Letter Agreement may be executed in two or more counterparts, each of which shall
be deemed to constitute an original, but all of which together shall constitute one and the same
better Agreement.
lfiis Letter Agreement shall inure to the benefit of Franklin, and shall be binding on the
undersigned and his or her executors, personal representatives, administrators, heirs, legatees,
guardians and other personal representatives. Tltis Agreement shall survive the death or
incapacity of the undersigned.
The undersigned agrees that, in the event of his or her breach of this Letter Ageeznent,
Franklin shall be entitled to such remedies and relief against the undersigned as are available at
law or in equity. The undersigned acknowledges that there is not an adequate remedy at law to
compensate Franklin for a violation of this Agreement, and irrevocably waives, to the extent
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permitted by law, any defense that he or she aught have based on the adequacy of a remedy at
law which might be asserted as a bar to specific performance, injunctive relief, or other equitable
relief. The undersigned agrees to the granting of injunctive relief without the posting of any
bond and further agrees that, if any bond shall be required, such bond shall be in a nominal
amount.
Please confirm, intending to be legally bound, that the foregoing correctly states the
understanding between the undersigned and Franklin by signing and returning to Franklin a
counterpart hereof.
Very truly yours,
Name:
Accepted as of this day of
2008:
FRANKLIN FINANCIAL SERVICES CORPORATION
By:
William E. Snell, Jr., President & CEO
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EXHIBIT 4
FORM OF OPINION OF COMMUNITY COUNSEL
Franklin shall have received from counsel to Community an opinion, dated as of
the Closing Date, substantially to the effect that, subject to customary exceptions and
qualifications and the specific exceptions and qualifications delineated below:
(a) Community has been duly incorporated and is validly existing as a
cx~rporation in good standing under the laws of the Commonwealth of Pennsylvania.
(b) Community Trust Company has been duly organized as a trust
company, has been duly converted to and is validly existing as a bank and trust company
in good standing tinder the laws of the Commonwealth of Pennsylvania.
(c) Each of the other Community Subsidiaries identified on
Community Disclosure Schedule 2.01(c) has been duly organized, is validly existing and
in good standing under the laws of the jurisdiction of its organization.
(d) Each of Community and Community Trust has full corporate
power to carry out the transactions contemplated in the Agreement and the Subsidiary
Plan of Merger, respectively. The execution and delivery of the Agreement and the
Subsidiary Plan of Merger and the consummation of the transactions contemplated
thereunder have been duly and validly authorized by all necessary corporate action on the
part of Community and Community Trust, as the case maybe, and the Agreement and the
Subsidiary Plan of Merger constitute valid and legally binding obligations, in accordance
with their respective terms, of Community and Community Trust, respectively, except as
may be limited by banlauptcy, insolvency, reorganization, moratorium, receivership,
conversatorship, and other laws affecting creditors' rights generally, and as may be
limited by the exercise of judicial discretion in applying principles of equity.
(e) Subject to satisfaction of the conditions set forth in the Agreement,
neither the transactions contemplates in the Agreement and the Subsidiary Plan of
Merger, nor compliance by Community or Community Trust with any of the respective
provisions thereof, will (i) conflict with or result in a breach or default under (A) the
articles of incorporation or bylaws of Community or Community Trust, or (B) based
solely on certificates of officers and without independent verification, to the knowledge
of such counsel, any note, bond, mortgage, indenture, license, agreement or other
instrument or obligation to which Community or Community Trust is a party; or (ii}
based solely on certificates of officers, to the knowledge of such counsel, result in the
creation or imposition of any material Lien, instrument or encumbrance upon the property
of Community or Community Trust, except such material lien, inshument or obligation
that has been disclosed to Franklin pursuant to the Agreement, or (iii) violate in any
material respect any order, writ, injunction, or decree known to such counsel, or any
federal or state statute, rule or regulation applicable to Community or Community Trust
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Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 119 of 160
which, in the experience of such counsel, is typically applicable to transactions of the
type contemplated by the Agreement.
(fl There is, to the knowledge of such counsel, no legal,
administrative, arbitration or governmental proceeding or investigation pending or
threatened to which Community or Community Trust is a party which would, if
determined adversely to Community or Community Trust, as the case may be, have a
material adverse effect on the business, properties, results of operations, or condition,
financial ax otherwise, of Community taken as a whole or which presents a claim to
restrain or prohibit the transactions contemplated by the Agreement.
(g) To the knowledge of such counsel, no consent, approval,
authorization, or order of any federal or state court or federal or state governmental
agency or body, or of any third party, is required for the consummation by Community
and by Community Trust of the transactions contemplated by the Agreement and the
Plan, except for such consents, approvals, authorizations or orders as have been obtained.
Paragraphs {a), (b}, (c), (d), (e), (f) and (g) of this opinion are qualified in
their entirety and the opinions therein are qualified in effect by the MOU, and any legal
effect thereof.
1-67
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 120 of 160
EXHIBIT 2
BOENN {NG t~SCATTERGOOD, we
ESTAEt15ME0 t91i
INVESTMENT BANKING
June 26, 2008
Board of Directors
Community Financial, Inc.
3907 Market Street
Camp Hill, Pennsylvania 1701 ]
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of view,
to the holders of the outstanding shares of the common stock of Community Financial
Inc., the holding company of Community Trust Company (collectively "CTC', of the
proposed merger by and between CTC and Franklin Financial Services Corporation
("Franklin Financial"). The terms of the proposed merger (the "Proposed Merger") by
and between Franklin Financial and CTC are set forth in the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of dune 26, 2008, by and among CTC and
Franklin Financial and provides that each outstanding share of CTC Common Stock as
defined in Section 1.02(e) (the "Shares' will be converted into the right to receive (i)
$1.13 million, plus up to $120,000 as defined in Section 4.12(c), divided by the total
number of Shares issued and outstanding immediately prior to the Effective Time (the
"Merger Consideration'.
Boenning & Scattergood, Inc., as part of its investment banking business,
regularly is engaged in the valuation of assets, securities and companies in connection
with various types of asset and security transactions, including mergers, acquisitions,
private placements, public offerings and valuations for various other purposes, and in the
determination of adequate consideration in such transactions. In the ordinary course of
our business as abroker-dealer, we may, from time to time, purchase securities from, and
sell securities to, CTC and Frar~ldin Financial or its affiliates. In the ordinary courx of
business, we may also actively trade the securities of CTC and Fracildin Financial for our
own account and for the accounts of customers and accordingly may at any time hold a
long or short position in such securities.
We have acted exclusively for the Board of Directors of CTC in rendering this
fairness opinion and will receive a fee from GTC for our services. CTC has agreed to
indemnify us against certain liabilities arising out of our engagement.
In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performance, current financial position and general prospects of CTC
and reviewed certain internal financia] analyses and forecasts prepared by the
manageanent of CTC, (ii) reviewed the Merges Agreement, (iii} reviewed and analyzed
historical market prices and trading volumes of Shares, (iv) studied and analyzed the
4 TOWER BRIDGE 200 BARB HARBOR DRIVE • SUITE 300 • WEST CONSHOHOCKEnI• PA 19A2B-2979
1010 834.1212 + X800) 887.1212 • FAX (640- 8?25701
2-1
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 121 of 160
f5()El~lNINGF~5CAT7ERGlX)D. ~u
Board of Directors
Community Financial, Inc.
June 26, 2008
Page 2 of 3
consolidated financial and operating data of CTC and Franklin Financial, {v} considered
the financial terms and conditions of the Proposed Merger between CTC and Franklin
Financial as compared with the financial terms and conditions of comparable mergers and
acquisitions, (vi) met and/or communicated with certain members of CTC senior
management to discuss its operations, historical financial statements and future prospects,
and (vii) conducted such other financial analyses, studies and investigations as we
deemed appropriate.
Our opinion is given in reliance on information and representations made ar given
by CTC and their respective of]:icers, directors, auditors, counsel and other ag~ts, and on
filings, releases and other information issued by CTC including financial statements,
financial projections, and stock price data as well as certain information from recognized
independent sources. We have not independently verified the information concxrning
CTC nor other data which we have considered in our review and, for purposes of the
opinion set forth below, we have assumed and relied upon the accuracy and completeness
of all such information and data. We express no opinion as to any financial projections
or the assumptions on which they are based. We have not conducted any valuation or
appraisal of any assets or liabilities of CTC, nor have any valuations or appraisals been
provided to us. Additionally, we assume that the Proposed Merger is, in all respects,
lawful under applicable law.
With regard to financial and other infornation re]ating to the general prospects of
CTC, we have assumed that such information has been reasonably prepared and reflects
the best cwrently available estimates and judgment of the management of CTC as to their
moat likely future performance. We have further relied on the assurances of management
of CTC and Franklin Financial that they are not aware of any facts or circumstances that
would make any of such information inaccurate or misleading. We have not been asked
to and have not undertaken an independent verification of any of such information and
we do not assume any responsibility or liability for the accuracy or completeness theroof.
We have not reviewed individual client files of CTC. We have assumed that aiI of the
representations and warranties contained in the Merger Agreement and all related
agreements are true and correct, that each party under the agreements will perform all of
the covenants required to be performed by such party under the agreements, and that the
conditions precedent in the agreements are not waived. Also, in rendering our opinion,
we have assumed that in the course of obtaining the necessary regulatory approvals for
the consummation of the Proposed Merger no conditions will be imposed that will have a
material adverse effect on the contemplated benefits of the Proposed Merger to CTC.
Our opinion is based upon information provided to us by the management of
CTC, as well as market, economic, financial and other conditions as they exist and can be
evaluated only as of the date hereof and accordingly, it speaks to no other period. Our
opinion is for the information of CTC's Board of Directors in connection with its
evaluation of the Proposed Merger and does not constitute a recommendation to the
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!~(?ENNINGc~St.4TTEIiGCIOD. ~~.
Board of Directors
Community Financial, Inc.
June 26, 2008
Page 3 of 3
Board of CTC in connection with the Proposed Merger. In addition, we express no
opinion or recommendation as to how the stockholders of CTC should vote on the
Proposed Merger. Our opinion is not to be quoted or refen~ed to, in whole or in part, in a
registration statement, prospectus, proxy statement or in any other document, nor shall
this opinion be used for any other purpose, without our prior written consent, except that
this opinion maybe included in its entirety in any Rling made by CTC in respect to the
Proposed Merger with the Securities and Exchange Commission.
Based on the foregoing, it is our opinion that, as of the date hereof, the Merger
Consideration offered pursuant to the Merger Agr~oement, is fair, from a financial point of
view, to the holders of the Shares.
Sincerely,
Soenning & Scattergood, Inc.
2-3
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 123 of 160
EXIIIBIT 3
STATYTfORY FROMSIOAiS RELATING TO DL43&ATERS• RIGHTS
PHNNS)ZYANIA BANKING CODE OF l 965, AS AMENDED
EXCERPT FROM CHMTfiR 1
SBCT[ON ]222. RfigbtrofDimenEfngSlwrd~oTira
ff a ahareholder of an ioetirtttion.ehallpbjact to a ptolwaed pNo of aetion of the imtitution
autltorimd:nads aasc6on ofthic set and nKh:sxion pmvidea.that the ~arrholder shall he enticed to
rig>t0r:atd reaamdin oEa diaaatmtg ehtrr]w1d~ thrrigbAs and.remediesdeach aherebolda ahaA be
goearned hraheprawdotte olF1Le Btrineea trgtporttion Law {IS F..GS.A. g§ 1001, etseq.)
applisa4ie•toi~ea~ ahapti'ioldwa'aad tdtil~'6etabjeetto•the limiaticoa on axt~aort
remedist.ttotle[tholayloviri~c. Bllieresaoquo'e9 hlr.m iaathatiaa ea s teaWl ofthe axeroiae of aucb
tig~lshy a dl+eeaacg; ahare1tetilet mayfie held aoddispaaedofaa tretunry sbaras. ar, in the ease ofa
mercer or oataotidtrioa, as othertvite providadin Ae pLn of tnaget of comadidation.
E7GG6RPTFROMCHAPTSR IG
S1iC'iTON 1607. ~Righta~Dln+ermbrgSlwarholl~aa
{a) .A.ahualwtder od'®-inat$wim.wkiah is a patty to aphm~io which the ptopoaed merger or
wgaoGdatiegiillreiplt iaaa ieaMalion anbjaot.oplltireotwho ohjeola totheplen shell be antilbdlo
therigtas eat tetoatgeb of a itieeauiag ahen~holffiei provided imdar, erid.subjeM to ootepliattce with,
theprovisioas of aedior~ 1222 of thisact.
THE P.ENNSYLYANIA BIISIN8S3 i'ARPORATION LAW OF 1988, AS Aiw¢NDED
SXCl:RPTFAOMSUBCHAPTER 19C
SECTION 1930. DlaseetnsRiglkx
(a)-Ffatrrnlitnk. If:ar7 tLue>,otdenof adomesric busiueas ootporatiaet that is to be a pent'
a amarga.or eauoolidetion puna~w a plan of raager ~ oatrolidNien objecw to the plan of
metsra ornaaeoTidnion and ontapliea with the proritiona of9nbchaprerD otChapter lS (rela0ng to
d~aototsrl~al<theelterdtohler ehallbeaRittedtotheaigldaand.reaaodiesofditsmtiog
shaeelo'ldma~etemprwided, if my. See aLo aalion I906(o) {relstiagto dieaerKers rightK upon
special troamtent)
SL)#3CHAPTBR lSDDISSENFEIZSR]GHTS
SIiCTION IS71_ Applkweonmedl~ratyfSLbd~apmrr.
(a) t3saerpit2tda as othetaiae petivided iasnbaectioa (bb ~Y a6aeholdQ (~
da6~d b aeclmn tS72 (relethid to.aefeaitionY) o[alanintle corporati6n shell harts dte right to ditaent
from, sad t9o ebtain.paymedEoftBea Air value o[hit elrrae:ie2he avnot•d.atq' earporste action. onto
othaewise a6taia fiv valaafarhia a~ieea, ardy aattratl~ P~ ~alY P the ashatahdder
shall hsveths~tig6b.arydaantedieeprevided~in:tltiaaubdnp6er. See:
Section 190ti(i) (relating io diexoteta rights apon speeial ttQetrnerx).
I07
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Sec4on 1930 (relatorg b diasemtera rightsj.
Section 1931(d) (relating b disseeters rights in share a~cha~cs).
Section 193~c) (relating to dissenter rigMa N weed Verafen}
Section I952(d) (relating to diasentess rights in division j.
Sxtion 1962(c) (tolatiog to di~teas riphOs ur comrorsion).
Satioa 2)04(b) (relating to Procedure).
Section 737A (relaliog b corporation option where a teatriaierr oe transfer of a security is
held mvaGd}
Section 2325(b) (relating to atinit~ vole requrtemeat}
Seetioe 2204(gj (mlding to diaseoters rights trpoa election}.
Section 2705(4) (rebtirrg b disaeatas righrs.upoaamewai ofedecti®).
Section 2904(h) (rdating to proceaeiej.
Sootioa 2907(a) (relating m preeee0'uogs to ierrrtnatte broach of rptelifyirrg conditionc).
Section 7104(b) (3) (relating to procedure}
~(Ji) Bnoepaaer.-
(1)Exoept as othera~ae provided ut paragraph•~}~ the holders of'ffic shares of a~
cLrcor aerie erl'a>ae<aa ahaU aiot haw the rjgLt bo tliaseeit and obtain payment ol'the iYir wlue
of tho etiarca ostler this su6ehapter if, oa ffte meorddge$tred b datmraiaa tbe:ahsreitoldts
eatiUed.to Dotioe of aril to vote at thee~ st sryieh a plan epeodred in way af'section
! 93Q 1977(4); 193g(c)ar 195,(4) u+b be.vabd on, a om~9te ehrteed:the 5nt paMic
amwnrteastat8aasudt s,pLnhu bem sppsoved byihe shatehdders by aomaaM without a
meetieg, the t9troa are either:
(i) 6atad on a rratiorret aecnride•atdrarge or desigt-uedaa anatiotu!
marketsystem aeenriEy en an iraardea7c.eptotstioo systdrr by the National
Mocieion of Securitiaa Tbalas. hre.;•or
(it) held beaefieitly or of record by mass tht±n 2,000 persons.
(2) 1?aragreph (! 1:a7uU reapply baod,diamrnsa riSMs shall beavarlabhz withmd
regard blhsetneeptiea provided is that paragraph ion case d:
(i) Repealed.
4ii} Sbares.e~'anv pvaferred or epeeial oless or aerie noMss the artiolaa, tla
plan erlhe taams.of:9re Vaawgieer aditle aq ebarElraldees ef]he cLas er
aeries tavotaUtereoa and teguieefortLaadoplian~ftlw.phm m the
ef3aCtitatioa oTtlre Uaisactioa the affimsative vale of a nwim+h edthavotas
cast by all.ahardmldas udihe eliua or aeries.
108
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(iii) shares entitled to dinmtder rights andar aeetion 19tlti(c) {relating to
diaaeutas righter tgfoa spwial ~eatmaat).
(3) The erhareholdtsa aJ asorpontiott tbt aogttira by purehue, h:ne, exciunge or
other digtosition all or substantially sll of the shares, pmpa~y of ase~s of anodur aotpotatioa
by the issnanee of store, dtligatiau sr agtenviere, aid a wri$out aatmaing the liat»litica of
the other corporation and whh or Nithout IiK intavmtipo ef:.ano0mr corporation of outer
pasaL shall mt ba entitkd~to dte rioLla asdaemadies~dissmtiag abntaholdms provided in
Chia aubebapta regstdlas oftlre fast. if it bethteas4~tlts~goisitiiir was aecagpl>shed
try the easuanoe dvotiag shsre of tbo aapgcgtian to bsaalatantsrtg ittomodirtoly at3er dro
aogtueritia-sufficient to ehsot a ma}oiity amore of'dw.d'vaetas of thccarporation.
{c) C3mnt yfoptiowd dbasawa ripbt 4bs by'bws orsratilutioriad' lha board of dsedcrs
maydireot thnalE a a part df the shasdioldas shall have diersatet~a:ights ip oenaeotiop ttrith.ltgr
corporate action ar~odter O'aeeaetian thrt•woaail olhawLe not mode atidr sLereiholderto dissenters
(d) •itlaetoe.rd'dlpsslas rfg7Ytc Unleer otherwise.prmtidad'by . if, propaedcaaporere
aeti~ tlrt srrndd gtva tisrts-dineabms ridllts edaQtiasnbpets wbmiued eo a unto rt a.nteding ad
ahaeaht-lden, them shall Ee i~luded is m mdoaed ~ the'noliea of meatiog:
(1) aertuamenoffbepropaaedattimandastaDrmsst~atlhatltua~holdars;Lsvea
right'to mereraat ad obtain payment of the Ler wlue of ffiea:shnas by oomphiag wig the
lama of this tabrJ~apter, sad
(2) a copy ofthia subehapta.
(e) t7AraaAanres. the proosdwe oflhis aubaupty dull ahw'bs applicalila W sny
uraoaactiondosa~ed in any atalateother than tFaspmt~lhat.m~tereferancetothis aaro6spterfor the
ptapose ad gcaoritlg dineMes righter.
(~ Grtain pra-tripnr of arrcles irs~ac,<iur. '(bier snb~apter msy mt be relaxed by an
provis~t of the srtialss
(>i) r"oarpaaooiae rya! F Fc~ptarpoaes o£snbsedion {b) (1) (ii), slarec thu
errs held hene0cially a joiffi temms, tatartm by die tatiratiaer, teoama.in ~xoimon or n trurt hY taros
mare pererons, as fiduciarie or athaNmq alall be deaoad to bafidd beneficiagy by aoa perm.
(h) cmra r~jaanae See sectioe l I OS (mhmng to seatriotioa an egoiAahle.rolio~, 1904
(relstiag to deTioto~trrtaetion doccrioa aboliited~ 1'!b8(,~) (mirGag to deeermimtioa of ahard~oldtra
ofiecard) and 2512 (rchtmg to disuntas rightsprooadura).
SECTION 1572. Defi~rliona.
Thefalotoiog atads snd pbraae whao teed •in this sttbnhaptar~thall lisve themeanittg: give
to tham~;n this.eoticn anlea the ormepd alaar~y;adiasea ethar+vae;
'~Carparaffars° rbaiaenaro~fdtaahapeahaw•ar~rn.aby:tLeaiea.M.ht~arathacorpaasle
actiar ac the sueeesaor by tttagar, canatilidation„divi~ canaeeraicn err atltsvrise ofthat:iantaL A
plan ad'dntisica may darigtstawhioh axoramreor•36sretildo(oorpotatlaosis thwtaaosaeaor
eorporation for the ptupoaea of dis sttbehapta. the de~igrrated tsrccaeaor oorparntion: ar eorporaticaa
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in a division dnU haver sole reapontibili ty for payments to disaeataa and other liabditia under this
subchapter except ac otherwise provided in the pLrtofdnrisioa
"Diaasrrrsr. " A strmeholda ~ benaficist oartect who is enliUed to and does assert dissenters
rights undtr this subclupter and who hes performed every act roquired ~ to the time ianrohrcd far the
seseriicn of droet rights.
'Fpir Yalsne." 11re fiir wise of chaser immodwtdy bdarethe tdYamation of the eorpente
action to which the dissestedyeou tsltv~g irrW acooaet aUtdevant [wtora. but atelrsdbrg mry
appieeistion or dfipraistion in entiegtation of tlKatspotstt fiction.
'Intawt " httvest from die etlremive deteof the otsperite.at3ioa tsstil thedase~af paytseot
at sach.nte as a 6sr andbgsilsbTamder d1 of We circumstmces, iatcinj ioto:accetut sll,relavmt
faetow itrclndaigthn averagerate omrenlly paid by'Ihe corporatiorram its pr~noipd.baok.lorms.
'~6aneboidn. "A tthsehdda as da1metl it- aediort 1103 (r+elstioglo rldinBieas~ or a
uhimste bstitdltasl oemer ufaharer, inshrdisg sailboat JimiWieo a hddar of depaeitsry nawptg what
the betteficisl ittteratovmedirrdnded an itrtereatia~e Heels dlhv eorparalimr.upon.dissoluUon.
SPGITON 1573. Racerdmdbta~llrldlroldrrtaedawnsrx
(a) Ru+avdlroldrxr y',ri4mas A raad7roida of shpes of a btr®raa may assort
dirserttassi{L1satlo!>wrantha- a1 af'.Oreshsrorx~rstged inlriss~Ulre~osiy ifheRisaents widr
sapectto all tlreahates oT6ressms doss a sties beadmislly otsaedby soy rite ptfiaonapd disdoaes
Ore~neaosaddrwsot'ffiepersonorpasanonbedlE'he.~saus y~>bst•aver,hisrigMs
ahsU Ik detamiad m il'9ie shtraa a b which he haft dissenterd artd.his adrer sharer was reyisttxed ie
the rarsea dfdiffaranl alisrehoidete.
(b) Bmd7addoxwns qf. A bend'rcist oarard'shsra ofa.btuit-as eotparMian who
is mt~hesesard kidder may asamtdisserAars rightli veldt ri~la widr mepocbto s6sres htild•on his
bdwltas tthsl be Crested ss s ~tfimtaigshsrsmnla the Clams of~is wtb~spter the snhmite
to thecapowtisn rwt later ffisn the atstartprr dtlineouas riglps a wrrittm,a['tbetrosord
holds. A beaefieisl wrmrmay sot dissart with rmpaot a some` 6ntlexs thstr all sharer of the same
class m sexies owned by~the owns. whether err notthe shares.so,osnted by him eme regisorred in his
aatne
SEC7TON 1574. JVoAoraJ'8tratlBern w dtsanx
ffthepraposed anporaee actin is subrsiMed to • vote st s~meef>ng, of ahardroldps of'a
bueitrar oapaaioq, say Peaoa who wisher to aissam and eihtm psytaent:etGths fairvahes dhia
spas aatvtSe wiL the csgrentiea.prror to dr vwe,.; arreteu~~ise>e9f'atmtion.to dbtrrodthat he
be paid thailltirvsYro ot'1~ shwa ~8re ptopaed actin is affesgtsted, rmert~llastao edrmge ie the
bsrre6oit.o or)r:ztarestiom wt asordsarar ~mg.aon6otatuly>hsstgl, fire e~eelive dqe
o!'the.praposed aoUpa andisut t!draiu•fr®vaESg Lis sLsns in;pproiral aian~ aettioo. A dmaNa
who$its3n~y rsapceot sht~trobssgau~e soy ~'mP~ oftheiuvshre ci']w ihsees mast diic
.subehspNr. 'Nti9ls a prmry~ a vale e~ina tLe'prQpased norparete acdoaihell c~tidrte the
arrittat netiee regrrirod hs• this aectiere.
5BCIION 2575. Nolloetodrssastlpayarant
(s) arla if the proposed corpm>ite:actiao is spprovad bythe reeptired vote n a
meetinb of slurdtoldets~of a basierese earpora6os„ dte osspedtiana>ail mss? a fnrdra notice W all
disaeatesrs who gave8ue aotice d'intesetioa m demand psymeat aCd~efiir vslueuftLeirshareseand
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who rdraored hotn votitg in fawn ad'the proposed rc4on. Ff the proposed corporate action is to be
taken wiUrom a vote ad'sbrreboldea, We corporation sbaFl sand to a0 :hsrelroldas who m emitlad to
dissmsnd darrsad paym®t of tbe~av vabte afthea shares a notice of the adoption of the plan or
olha corporate anon In eitl~ case. thertarice shell:
p) State whereand whm a dsmsnd for payaimt must be sent and certscates for
ceriifiated shoe must be deposited is seder to obtain pa}vnent.
(?J htfam hoblaa d mearti5crted dues tovdrat axteru transfer ad' ahsurea will be
restricted Stan the lima thet.denund for paytrrettsr received.
(3) ~pPb a fiptm.ter demsediq.paymeutthat inchrda s request for oartifi~on d
the date on wbiehtlhe sbatdrolder, ar the person on sdhosabendtcial shareholder distends,
acquired bmndtcirl owtteship of the rbnts.
(A) Be aoeosopanied by a copy cf this.arbehepta.
•(b) .1~'+~Ql'+1~' 2hetiaaesstforreeeiptofthedemandand
deposit of aertifiated slims shatl'beaot leas tbae3U days freantbe mailing dtbe police.
SliC130N IS76. Fdbint to oompiysvitb mtia es dsttrtrdpps)anre+K etc
(a) ~Y ofj~bmr oftkanrLahfa',tbaet A shrreholdeT aiho fiuh to timely demrnd
paymee4 ar falftm the case doorifioMed sbargjto timely dbposit atati6csaa, as wgrired by notice
ptant~t to section 1575 r}ehtigg to ttn4iee demaad prypnernl) ~.Il rrot,lrrve amp right wndar his
subebapterto reonlve pyygteet~od3iiefaitvebtecths sheer,
~(b) Rastsicatar on raraes~JlaotrdrAans. Trthe shara.ane na repraaded hy.cerrificates, the
btripsa oorpaaetior-mep rnrtriet.Khar ttapaft fiam thatima d'receipaof demand tiorprymept marl
eH'aattraion of Ste prepmed oarporate aatiap or i6e rdeae of mrtrictias order the tenors ofsechoe
1577 (a) (reletieg'to fsihtre to effeetmte corporate spina).
(c) Rdgltfs raarinsdbv sJbrr'ibaldsr. The disxeter shill retain all.olbar rights ol'a shareholder
uptrl Qtose ~ arc nrod'dted by aaecnrstiar of the prepoaed corporau actiaa
SfiCTlONl377. Relsats~'rrat~ictlatsaoaymentJ~aahares.
(a) faRrar b ~deata ewparrts: actloa Widrin 60 drys atter•Ote data set for d®u+dinp
psymasr sad deporitiog oettif'iottas, il'ibe bwoesr eorporat~m bas not ~'ecanted the proposed
oosporete atxioe, i4r1a11 velum mycmtiBcrta tbst havebeep deposited and role+se uncerthicsted
shares from attytraroknarDrictiond imposed by lesson oCtha dNnand for parnteot
(b) Retrewtal,gfustdce to dtetarsdyaytttst. When mtcmtiGed slime have beep ralased from
oarafer rratrietioerapd dlrpwited catititrtealrava beam reNUned, finecasporsaian mry ar +ny lass
time clad aoesrmouoebo~tharesgmad'session 1375 (rahtingto notice to deotatd
pavment~ with 1iltesdfacL
(c) PrdsMrrt ~tr.+tltra sArrrara Pramtptly.atYa effi4catation of the propated oeaporate
aetia4 or ttpert timely raeegtt ad'derttmd•far ptrymad oftlm:eatytndLe ttsticn hr~ ttrsady btxn
efl'e~oed.Rreearparation shdl.ad@tatamN so dwenters srdro•hrve piailedeamrd.md (rfiheir alrres
arerett~wrted) have depedted their oerfiBcatas dtasptamt tbatbe cosposaian etrtimata to ba3br
fair vtdue al'Ateribrret, or glvsastitlep imdeo tlw no remittance radar this auction avill be made. 7be
rmRUnee or notieeshtll haaaalry:
lit
3-5
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 128 of 160
(1 } The elwing bdanee shat and staemmt of income oftha isauet of the shares held or
owned by the disamw for a focal you ending trot rttore than 16 monmte baton @te date of ramittatke
or notice together with the latent svailnMe interim Fmeettial sretnnteMs.
(3} A statrattent of the carporati~ s a~titaste of the fair value of the sbres.
(3) A aatioc otthe right of the diaseota to demmd payment or wpple-rtenisl payment, ae the
.case may bs, atxoettpattied by a"mpy oftlia su6shapw.
~~ Faihtra>b ~ttataepaAsawt Htbe catporation dttas not rmtitthe atnws~ of its tutuoafe of
the fait vnlna of the afiaays provided by stdgaeliwt.(c~,.irshali rtlmnamy oadtioNea that hnro'boa-
depooted and relene:yrteat~ed sharesfrom eay3rattsfr taMriotiom bnpoeed by asasm of Ara
dtattendtlru payment. 'Ats~aatparatian they makes natseion m nary sachcartiGaate of m ~ raoords
ofthe aorporaose teletitag,a stay such rpum't>liatled shaven lhu sua6dmaod htr been made, lt'
shres with raQecl to w6i~•natation has hemp sosiie sheU'be lratrdmaS, ench.sieer amt~wu
iatad tltaeiosaor.the.wlatatg.to aoirlisolfgasd ~ Baas dolt bar a aamiir
notatiar4 6agetlrr~ tin tttate of the origiad ditaesAieg Corder r oxor of atra~•sharas. A
hatnfase of sncb shave shaft no4aogrie bl"~ trassfa•atyt~tts mibn aasparatim other flan
thoseflut•the~ortOind diaattar had altarvtaltiitg detmnd for paymatt af~luir fairvahra.
S]i1CTIt7t~11378. ~stlroealeyddaaenferoffdrvolgtttJ's1~gr~s.
(a) Craesat"nde 7ftlrobusinasoaapatatioat~ixanoGcrotitrealimuasoftiw.fiirvflue~af
fire shares. wiQtotA readtti~ such ammau, .ar natNS:payrtt¢tttofi~ eatimiaa addre Twvslue o!' a
ditwattv's shares s parroiltsd by section 1597(e)(neLtigglo payrvmt bffav vedtte of aharas) and 1be
disamtr beYeues theethe,atootmtstated Q remitted irlesi than theiiirvatne s4'hisaheses, he nmy
ssttdto•1he ootporatiao:hie awns a ofthe taavshs;.afthcshares ~whisb shaA be.deam«1 a
deannd &>Q payaaea of 1ba ametttK ad'dafioiartcy.
(b} ii~Ga sf, jfithrrsto,~l& nataae Where the dissmta does twR.tile hie own enrcitoate vr-des
sobeextiaa (a) tsithia 30 day: after llu tnatliag by Ihe"eorporatioo eetitatt~iamaecs noting the
dissamr ahail beanthieai>b no trtae then thesmamtatatad ie thcaotix or rtaWtad to~him"by the
cwtporalioa
SfiC1701d 1579" Ydeation pmcrseiYr-~ gread(a
(a} C,arura! mle: Within 60 days after the L-taat af:
{l) e~ctw6ote of the proposed corporate notion;
~=) tintdy secaipt of any danaods.fa Payment tmdc Section 1 s7S (mlatmg eo.natiee
to demmd paytaeot);. or
(3) tmeiyxeoeipt"af aey aetimata purauartt to 3eotioa IS76 (mistiagto astimete~by
flisamta oftsur~value afshares).
Itatry demands far paytnaeermrin uasatllsd, the 6nsittesi corparationntay,f~k in ewetrt an
application for rolidngttaetmg that the fav value aflhe shoes bedeKamiowl by dta.oatrt.
(ti)1Kmedoeorpjolredergrdlawrfane Auabum>as,wharaver~reaidstg.w6wcaaatunas"have
not hem eeltled el-a!1 rte made paRtiex to the praceediag as roan ec6en ytinst fhe¢ shwas. A copy of
the. applisaion shall be eeirved on eachsnch diseeeter. Jf a d'usaNes is a ttonresidmtt, the ~' maybe
Ill
3-6
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 129 of 160
served
on him in the manner provided or prescribed by or pursuant to 42 Pa C.S. Ch. 53 (relating to basal of
jurisdiction and~interstate and intersectional procedure}.
(c) Jurisdiction of the court. The jurisdiction of the court shall be plenary and exclusive. The .court
may appoint an appraiser to receive evidence and zecommend a decision on the issue of fair value.
The appraiser shall have such power and authority as may be spe<tified in the order of appointment or
in any amendment theroof
(d) Measure of recovery. Bach dissenter who is made a party shall be entitled to recover the
amount by which the fair value of his shares is found to exceed the amoun#, if an}-, previously remitted,
plus interest. ~ .
(e) B,~'eet of eotporattoes's failure to fele applieut[on. If the corporation fails to file an application as
provided in subsection (a), any dissenter who made a demead and who bas not already settled his claim
against the corporation may do so in the name of the aorposatioa at.any time within 30 clays after the
expiration of the 60-day period. If a dissexttes does not file an application within the 30-day period, each
dissenter entitled to fik an application shall be paid the cor~ratioa's estimate of the fair value of the
shares and no more, and rosy bring aa~actien to recover say amount not previously remitted.
SECTION 1580. Costs and expenses of wiluatYon p~vaeeedings:
(a) General rule. Tlee costs and expenses of any proceeding under sec~iom 1579 (relating to
valuation ProceedSags geaeral~y} including the reasamable compen8atiam and axpoeeses of the appraiser
appointed by the court, shall be determined by the court and a ag:einst the business corporation
eacopt that airy Part of the cysts and expenses may be apportioned and esseased ee the court deemas
appropriate against aU ~• some of the diseeateeB who an partios acid whose aetson in demaeiding
supplemem#e2 payment under scctiem IS78 (relating to osdmato by disscsntcr of fair vahu of shares) the
court Ends #o be dfiatory, obdurate, arbitrary, vexatious ~ in bad faith.
{b) .9ssesamenr of connrsl fees and expert fires when lack of good faith appears. Peas and expenses
of counsel sad of experts for the raepeative partios may ba easessed as the eweurt deems apgmpriaroe against
the emporatian and is favor of any or all disseners if flee corporation failod to comply substantially with
the regnireno~ents of this anbchapter sad may be assessed against either the corporation ar a dissenter, in
favor of any other party, if the cwurt fends that the party against whom the foes cad are assessed
acted is bed faith or in a dilatory, obdurate, arbitrary or veocatious manner is respect to the rights provided
by this subchapter. ..
{c} Award of fees for benefits to other disserater~ If the court fords that tine services of counsel for
any dissenter ware of substantial boncfit to other dissenters similarly situated and should not be assessed
against the corporatism, it may award to those counsel reaeoaebla fees to be paid out of the amounts
awarded to• the dissenters whc were beae$ted
113
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Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 130 of 160
Case 1:10-cv-01285-WWC Document 20-5
EXAIBIT 4
Filed 09/15/2010 Page 131 of 160
CO1~2MUl~ITY FINANCIAL, INC.
ANNUAL FINANCIAL REPORT
December 31, 2007
4-1
T'~~fST
r.vcP~r.r
_._,___
{ Case 1:10-cv-01285-VW11C Document 20-5 Filed 09/15%2010 F~age 132 of 160 ~~
TilBLB OF CONTENTS
Pale
Iaaepeadest AaBibor's Report 1
Conaelidsted Fhssndat Statements
Consolidated Bahmce Sheets 2
I Consobdated Stetmuents of Operations 3
f Consolidated 3tatomrats of Changes in Stoctholders' Sgnity 4
Consolidated Statoozonts of Cash Flows S
Notes to Consolidated Fisatw alti l1 Stsiaeoorats 6 -11
Indepesd~t Aad{tor's Report oa Snpplsnaentary Iaforma#ion 12
sapglea~entsry Information
Camsolidatiag Schedule ofBahace Sheet Information I3
Co~asolidatiag Schedule of Operations information i4
4-2
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 133 of 160
6aim 191bt1 Eearor ~ TLC
~a a~abte Aooodu4 st
INDEPBNDENTAUDITOR'SBEPORT
To t6c Board of Directors and Stoclcholdere
Camomrmity Financial, Imo.
Camp Hill, PemsyTvama
We have sudi~ed the accompanying consolidated balaacx ~ of ComamaiLy Flomcial,
Imo. and subaidiariea a of Deeemabar 31, 2007 sad 2006, end the related cosaokdatod etabeamats of
operaflons, is- a~dcboldeas' ocNity and cash flows for ~ 3nurs theca ended. These fmancis~l
atatemeats sae ~e regroaaibility ofthe Caporatiion.'s meoagemeat. Our respaoosibilsty is to express as
opiaiaa om tliea flaeacia! atatemeafs based on our audits.
We cead~ our audits is accordsace wid- auditing standards ga~erally accepted is the
Uaitod States of Ameria. Tlrae standards require that'ove plan and perfozm ibe audit ~ obtain reamable
aesoranee about whether the financis4l are free of mate¢isl. misstab~mt. Aa audit includes
aasmiaing, oa a test basis, evideacx aogrpoatiag the amouals and discloaeaes is the f nanrial atataoaeats. An
audit aLo includes assessing the aceamntiag pnaciples need azud signi5caat estimates made by measgemeat,
as well as evaluating the oveaall fiaeacial statement preseatatiaa. We believe that Darr sa~dits provide a
ras~ble basis for our opinion.
]h onr opmiriea, the c~solidated Sneaaal statemnemta re~aed to above presort fairll-, m all
mafaaial re~a~s, the finanaal posits of Coamnuaity Fiamcial, Inc. sad snbudiaria~s aIs of Deomnber 31,
2007 sad 2006, and the results of their opmatsoms and their ash tlasvs for tl~ years then waded, in conformity
wi0z acoo~iag pria:aplea gaaerally act is the United 3tetea of Aaoaice.
~~~~~' ~~ ~~ t
r '
fig, Permaylvaaie
bieroh 13, 2~8
4-3
Case ~ :10-cv-01285-WWC Document 20-5 Filed 09/15/2010
y
Page 134 of 160
CONSQ.iflp~~~DBA.~ANCBSSEETS
n.~er~e. sl, .~ee~ e>,d 2aa6'
Ass~TS Zoos
Current Aaaeta
Ceah and cash aquivalenta S 168,213
A~ fees and o0ra receivables 70,097
~ 5ecurilies avaiLbk far sale 349,655
prepaid expamaa 25,674
Toad assent aeaets 613,639
propertyand Bga~mcnt
Lend
i3t~ding
Aaaimorlatod deprsoiatiam
Total propcaty end equ~t, net
Other Aaeah
Toorl genet
~~
CnrrentLiwbNttlee
Awonoos payabh
Argued
Glmentpoa6an of aobepayabye
II ~p ~>
Tatrl caveat Uaba'litiea
8erha A Cap3fal Notes
Note Payable, Lees Catsea-t Potftaa<
Mosi~e Pgabiw, Len GStrrea-t Portion
Toed I~b7iUa
BT~OLD$6S'>BQUt!'Y
Capital etodr, prafemred, par wine $ I; 500,000 eharea
sothoriaad aniao aher~a h+ned and orobtaodto8
Capital X14 oonaraar par whre S .10; $000,000 ahana
et~ariaadead208,S71 ahem ieatted end ~d$og
paid-m capiml
Acoammdaled de5ait
AooamWated athr aomr~rebenivt income(lose)
Tahl etodt3olden' equity
Totisl lie6albiea and atoaYholdaa' egaty
90,125
436,489
218.178
744.792
26 773
4 9
6338
S 194,918
18,020
s,ala
12,629
233.961
200,000
20,915
?93,117
748 0`13
20.857
1,917,980
~ 1,583,346)
S
349
i 1
4lre notes to ooneoAtfefed dnanclelataternents ers en HxbB-at punt of theca sfa[amsnta',
. -2-
2006
188,965
231,a94
311,179
~3
754,861
90,125
436,489
216
743
229
513.
i
$ 26,507
2,247
7,918
11956
48,628
~~
29,329
305,494
S63A51
20,857
1,917,980
( 1,242,427}
~1
]7
S 1
4-4
Case 1:10-cv-01285-WWC Document 20-5 Filed 09!15/2010 Page 135 of 160
COMMUNI?~~iNANClAL, IIVG
CDNSOLIDATBD S~AT$M..L°NTS OF OPERATIONS
pe,~ g~it,Decsatibar 3I, 20(17 and 5006
200q 2006
Income $ 672,957 $ ?93,590
FQ~ 26,526 24,195
Intexeet m°0n°6
Gain on sale of aeeiuidos
66 91Z
103
Other isicome 4
-" 699 73 8] B,B00
18:peman 432.681 446,730
Salaries end wages 39,444 34,018
Fayroll texas 805
59 64,199
}smployx beme~tc ,
9,423
6,593
~~ SO 25
(3mritable cont:ibutia~ns 2
630 4.673
Conforences and ednasti~ ,
402
23 14,094
Depertaneat ~ feet ,
682
9 8,532
Ines ~ ~ ,
41.830 30,128
lneunw~ 31.913 32,617
lntae~
~~~~~~ _ 186,160
140 7,666
954
~~~ 20,653 ~,~
Office 5,622 6,105
Poeta~e
~~~ ~ 60,448 70,801
endure 9.978
15
310 13,346
29,?73
SoBware maioteasnce ,
13,771 11,991
Taxm 4,937 4,766
Telephone 235
8 9,178
~~ ~ t ,
6,854 6,388
Utilities _ 3? 320 35,1Q2
Total expemes 1040 2 ._.. 866,018
Jn~e ~~} befom iacome tsxea { 340,919) ( 47,238)
Appllcabk lacoau Taxea 0 0
Net income {ices) (~ 3„~? ($,.~,o;;
The oofeslo deed >tnarn~e! ste(errranta are an Integral hart of tlteee mss.
-3-
4-5
O~
- - - _.___ . _a._~
t^.OM71lr11V17'Yl+'INAlVCI~tL,1NG
C~OIVSOI.mATBD STAY6AdSNTS OF ClI.INGb'2i /lVS7bC3sFlOLDERS' BgUlTY
Years 6irJaiDeearrbw' 3Y, 20DT urid 21706
13alaocaDeoegeber 3i, 2005
Coopreliwwi~vs tweor>rs:
Netiauonte
tie Ee nonnllmei toes our
eeairities a fac arle
Total cOpap[a6e~e ~oocoa (lose)
13~oet~olse of erodt watra~e
Halaua Decxmbes 31, 2006
Co~n+er<iiutre trrama'
Net htoome (tae)
CmoBe is nmratliaed las oa
eeeurltlea available for ale
Total comprehensive income (lass}
8itetoise of stook vrarente
Balaaoe December 31, T.007
Accam~late6
veder rot.!
Commoa Yaid-io Aecumolsted Compre6eeslve 3toci~oldars'
Stock Ca~pffal Dtlteit lwceme (loss) >~tti
$ 20,607 S 1,868,230 (S 1,195,189) (S 1,493) S 692,155
( 47,23 ( 4'7.238)
{ 3,100) ( 3,100)
S 50,338}
2S0 49,750 0 0 50,000
20,857 1,917,980 ( 1,242,427) ( 4,593) 691,817
( 340,919) ( 34019)
( 9!5) ( 9152
~ 341,834)
S 20.857 51.,917,98 d (8 l (S 5,508) S 349,983
1 Ae no!@810 oor~aofldatBd flnende! stetelne~+f8 ere an fitoprol part of tl+eae atsfonferNB.
-4-
n
v
c~
0
0
N
Ut
C7
O
n
C
3
rn
~_
N
O
CT1
TI
CD
!Z
O
Cn
N
0
0
.D
N
cQ
(D
W
O
O
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 137 of 160
t^omuvxfz~' ~av,,llvt~, nvc
CONSOLIDATJB'D S7.fTBIIIBNTS OF C~ISEFLOwS
Yews l4uded Daexneber 31, 2007 end 2006
2007 ?A06
Cash Sows from operatin6 sctlvtties: ($ 340,919) (S 47,238)
Net income (loss)
At~nstraenta to nxoacile ~ income to net ceeh
by oP~B activities: 320
37 35,102
Depreciation and amoeti:ation
(Gain) lose on $e sale of securities available for sale ,
( B6)
( 9i2)
~~) deoseeee m amp' 397
161 ( 38,906)
'~'~~ recavabia ,
( 2,431) ( 1,256)
Prepaid aspamees
~~ () ~ ~~~' 168.411 18,562
A~ ImPe~ 15,773 2.247
Actaned
Net cash provided (need) by oP~B activities 39 455
,_._..~~ 32,381)
S
Cash iloee from iavestla: activWas:
p ~ metnt~ac froaa ~ sale of ava~7abk for sale sectaities
160,000
384,000
Poechaea od' avatiablo for sale aewuitiee ( 194,305}
( 1,29d) ( 234,239)
4I)
( 53.0
Poa~bases ofbadcpnamisea and t . ,~
Net cash provided (used) by-inveat>Q8 actlv~hes ~~ 96+.~
Cam iilowc from 8oascia8 acttvities: p ( 250,000)
Nei iaoresae (dacsaee} in line of credit 0 42,874
PrOCOeda from long term debt
522}
( 19
( 16,615)
Prymrote ~~~
Proceeds from iastwoce of ccenmam stock ,
0 SO 000
Net cash (need) by iiaeacin6 activities
i 19,522}
~ ]73i74I)
Net maeese (decrease) in cash emd cash equivalc~ ( 20,752} ( 109,402)
Csah sad cash eolmvsieats, bo&umiaB balsnce 186.955 298,367
Cash and cash egnivateats, ending balamoe S 168 213 S 1 65
$apl/kmental diseiosara Of cash $o~s iaforma$os-:
Csah paid duma6 ~e year for. .
$ 31,913
S 32,617
~
~ 0 0
ilaTplame~hl sahedde of noscs~ invectit6 and
Snend~g aefMtia;
Unralised ~ (loss) on securities awrlabk for sale ($ 915) (S 3,100)
The notes to wnso0d~ed finarx:ia! statements are an fMaOr~af part ~fhese slatamer~
-6-
4-7
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 138 of 160
NOTES TO CONSOLIDATED RWANCIAL STATEMENTS
Note 1. SigoiScant Axonntfng Policies
Nature of Operations
The Ctnpotation's bosiaeas is c:ondnctad 1~1~Y >b~ ~ ~O1tY-owned subsidiary,
commvmity Tnut Compmy, a sta0e-charf3aed, aon-deposit°dY troo< ~3'• Comnmroity Trust
t„oaoperty provides a vaciaty of ttsrst, fidnoisry and enstodit earviaa to ~tbsmera tbrorogh its
office located io Camp F3iII, Penaeylvauia. Trust Caerpatry is su3tject m regulatory
oversight b9 hie Commonwealth of Pemeylva»;e Deper'oaeat o~fIlanldng.
Basic of Cansolidatlotr
The cansolidetod financial tdetesoants include the eccenuts of Co~r>aity Financial, Inc. ($re
"Corpooration'~ and t1s wLoDy-owned wbodiaties, COY Tiwt CoapnY+ C~nnnnity
Realty, Inc, and Coramuuity Lo~aua, lee. Cooeaossat~y lleatty.Inc. owns ~ larsd•and the
bniidmg in which corpaaaie of5oaa and that aperaticns aes bated. All matoral i~euroompemy
balanoec sad traasecdams Lore been egminated in oamolidation.
Aceoantr ltecelvable/AHowasce for Do~rtfal Aetoaretc
Aoerued Sac an recorded whey invoices aro issued sad an ll~y paid by the middle of the
month via elaohamc finds ttander $can>Im trend aocooafs bird.
htisusgaroeat oomsidas all recdvables to be fiiliy oollsotl6la based oa an evahtatien of speclflc
reosivabiee, the corporation's historial losses, and the aatistutS economic eooditiome.
Aoeordmgty, ~ altaevaaaee for doubtful t-oornmts $ ngtmmrsd. If amotrrts become tnocoltecb'ble,
they wr71 be charged to operation wLen that deteaminetloa is made.
Bstimata
The preperatian of i~tamaial atakanea>s is cantionmity with sa~vadug p &~Y
accepted in the United States of America seguirea maal/emeat to make ea6mdas and
assumpdomr 9ott siyect tare mported amommc of eetrote and tisbittlies and disabume eot'caoafbzgeat
asset: end Zieba'1>tiee at We date of tba Saencial and the reported amouatc of roventa>B
and mcpeaes dnriag the reporting period. Actual reauttr could differ from those aatimsles.
Ct-sh and Cast Bgdralanta
Cash and ash equivalents con:itt of obeclatug, aavh~gc and moaiay msrimt aooonms as welt as
nmreetmmt seanitiea ~, d the time ofpmnLs~, Lave remraiaing mattuitiet of tbee months ar
less. .
• Seenritlec Avatlabk for Saie
l~rmage~memt determiors the sppropriaee oteasifiosticn of debt seauitiea at the time of purchase
and rawals~s such designation a of each balance sheaf date.
Seormtiea cad se avat7~sla for trale are thus t-eanitiec that the Gbrpasstba intends to hold
for as ioddarbe period of liras ben oar neoeraa~y m matar3ly. Setanitios araWbla fa sub ais
anted at firdr vulva Uaraal3aed piue and loess ere npostod p ins of desreases in other
carapreLaoeive income. Reatiaed pins or losses, detmsodned an the basis of the cost of the
speoifie seearitiea s~ are itroludad in earaiap. Premaitmos and disoa~nsda era rarropisad is
interest iaomse using a method which 9ta iotanest me~od over me ttumr of the
-B-
4-8
Case (1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 139 of 160
Note 1. Si~oificaat Accountitg Poficles {Continaad)
earorities. Declines in the fair value of available for. sole aecutitiea below their cost that arc
deemed m be other than tearporary, if eery, era mSeated in earnings at realised lasses. In
eat~ating otl~than-temporary impairment loos, mana~emant caodd~s {I) the length of time
sod the ezleat to which be far value has heea lea tLan tort, (2) tLe financial aoudition rmd aeer-
term prapads of the leave, and (3) the imeat sod sbiUty of the Carporatica tiD ratamo ita
iuveetment is the issuer for a period of time eu~iciemt to a11oa for any anticipated recovery in fair
valve.
Property and Equipment
Property and equipareat is ostried at cost lest accrrmnlaoed depreastioa. Depreaatioa is
am the attm~-line memod over eadmaoed uaefirl lives tm~ ~ 10 to 40 years for
bror7dtog sad iroen 3 to 7 years far equipmneat. 4Jlrea assets era retired err oberwiae dirposed• oi;
the oost and mlated sooumdated depseaatian an temooved From the sooomots, sod mY readtiag
grin a hxs is recognised i ieecane fat tLe period. The ooh of msiateQanoe and repairs ie
oLatged fA operetioae as iacrtned; aigoi5wtt renewals and beuermests ue caphaliaed.
Debt Lsemee Coats
Debt isrmsaoe coop, wLiah are included in char sstsls, era being rmoortised ova tin life of the
related debt nsiag a tnebod which approz;mates the eifeCtive interest method.
Income Tasxe
The Oorprostion wad aubaiaiariaa 5k : co~solidsted ftidenl iacomo trx rotura 7aoaomc taxes am
provided for fire tat ei'Jbets of trsaaatioas reported is the fmaaoiri autemaatla wd oomiss of
taxes oturaotly due plan defected taxes. 1>Md'arrad taxes arc provided for the trmpaanry diffaaroes
is rho tax heals of the t:orporatioa's esaets sod ]iabdlitias wad 8reir reported amauab and a~
operating loss oerryforavnds. Deferred tax sssa~ wad l'oebilitias are abiermined based m tLe
essrobed rates that are to be in etyaot w]rea the di$amcea are espeoted to mvsrse.
Defiared fret sssep are reduced by a vahuitioa diawaace whoa, is the open of mssagemeat, it
p nose h'kaly than as tLat wme portioa of be deiiaed tart wears grill notba realised. Deferred
tax expoose err beaafit is tLe resort of fire in the deferred tax swots wad liaba'tities.
CampreLeeshe' I>seo~ (Loa:)
U~ tt~Y g pia, ~ inoomre is de8oed ere fire clunge
is equity tram traneaotiaaa wad other evemp fro®aasia-caves aoisoes. It it~ciadec all obsatRoa is
egnity eruxpt bone raaaltimQ from imestmeots by sbsrcholdess s>rd b fiodrholders.
Camopcebraive Income iuaoIndea eat iaoeeae and certain elemaa0r od"other oompsebsodve
ia~me" seah ere faeiga omiemy tawsaotioans; scoonstio~g Eoa• fuaaes camtraa~ eieoployars
aoooootmg fircpea:;oas; and aooormting for otrpin imaerdmeate in debt and equity aeenritiee.
The Caporatios< Lea eLwted to repast ip oa~orpadtearire income in the atsamemt o#'absages in
stocltLaldas' egaily. The o~nty element of "char ooarprehaasive iucome° bat be
Las is tLe tmrealiaed gain err loos on available for sale reomities.
The ocmrpcaeamfa at'other oompradraasive iaoome (lass) for t1n years ceded Deceonber 3l, 2007
and 2006 are u follows:
2007 2006
t3roas uaralized Lolling gains (Ioases) arising duringtbe year { S 829) ($ 2,18$)
Reclassificatioo adjnstoeentfor {galas) losses realized
Net mrra)isod hold'mg galas (loascs)
.~.
g6 { 912)
(5915 S 3,1
4-9
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010
Note 2. Sacnritles Avaihsbk for Sale
Page 140 of 160
Seaudtiea available for sale at Dccembar 31, 2007 aetd 2006 aanaiat of the following:
Boas (how
Amorttaad Uatoo}laed Uareallaod
(bet (~asc ].sag FolrValoe
Decmher31,2007
U. S. 4}eemry Sequitiec S ]49,310 S 660 S 0 S 149,970
Cdponm Beads 205.659 0 6168 199685
Deepaber13,2006
lI. S.14raosap 8e~ities 109,916 S 84 S 0 S 110,000
~asposaoaBonde _ 205.856 0 4.677 281.179
~1 ~ ~~ .~'~irr r~s
The fair vitae and g~ mt+eiliaed losses far aeooritia avaiiaWa for eels, totaled by the !e®gth of
time that iadividoat eeoaeitiea have bees io a ooatianone g~ nmroaliaa8 toes poaitiam, at
Deoembea3l, 2007 and December 31,2006 avers se follows:
Amem6er7t,2a07
u 8.7faesuy8eoaaiec
GbpomneBaode
Loa 01m >Z eaa~9s
ta+sa
Dnoaeud
F~.yda lessee
s 14D,970 s o
6
l3moaAr~mme
Cisoa
tlm.dtma
1htrVolae Iona
S 0 S 0
o D
7~
Ctraa
Uaraiime
Patr Wtlu Loma
s ~u.97o _~_r__.~__~~t~o
~~ ~i8~i-
nee~ea st, zoos l+.a m.o u maa9s ,~ moa3s vrgose roeeL
c,+me tva~ t~
narnl~a U~tiumu UaveaBra
t+.tr vane lawn ~ 7hir Yaloe loses xoir Votra !saes
U. S. I'mosmy 9aam7tot S 110 OOD S 0 ~5--~p~;1~y0 S, 0 S 110,000 S D
CapmeloBeadc .:I.I:i~ S 4 +C..~ :~4
At Dewemlxc S 1, 2007, the gross umtialvsed ]oseae touted S 6,168. At December 31, 2006, the
yroa nma~Gmd tosses aocaled S 4,677. ~ the Co1pD~ao lac dce ability to Bold the
eactaii5ee uadil caaherily, iio nmrealiaed loaaec me deemied to be other then temo~orary.
T'he amortised asst and fair vainea of investma>t aeocs~ties aval7able far sate at December 31,
2007 by caatractcnl aeaeaity acs shoova below. C~smai matucitiee w8E ttl~er item eogseeted
matutrtiea beoanae bcemaera may >>sve the right to Dail orprepry obltga>iaoe with ~ vaathout Dell
m poem~tNoe.
Amorftrad Fair
Coat Valax
Due in oneyear or kes $ 355,15'3 $ 349,655
Due alkr sae Year thraagb $ve years ...~~ _....._.....g
~.3Si.1~ ~
Proceeds from matncitiee of available far sate s during 2007 talaled S 160,000 reeti~g
gross gaiw of3 86fortheyear.
-B-
410
Case {1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 141 of 160
Note 3. Line of Credit
At Decpabet 21, 2006 t~ Carpatatiea had a S 1,000,000 line of credit wiW a local $natneieI
instlteetion The interest me it ~ New Yoe9t Prime Race phu 1 %. The Carpmntion vvaa required
~ to have a~icient colhgetal is tbar bcoloerage account so oc to pmvide ffie iattitution wig a 70%
margin agdenrt U~ted States Ttaaerry m other Agcy teceaitiae held as collateral. There mere
' ne amomea oatetandbteg order the line of ctedet at December 31, 20D6. 'the line of credit was
closed is 20D7.
Note 4. I,oag term Debt
I
Mottgagx Payable
The G'arpotttioa has a moatgage lean tinonih Ccanmace Beak oalltteraliaed by the oarpoas4e
' o~oebwldiag and leadpayable is W taoatl~+payateaAs ofptiaeipal and latent ac S $464. The
I psymemta change to 8 253 for flue tema3aat 180 moatbt. Tlm iateaat rate is Sctad at 5.6596 for
the indtial 60 taaatbs, sad 6-m is based an rim prime tree plea 191. Rx the g tram. The
loan >o geeaeanleed by Detain atocirholdera wed meteues is 2023. Glouzeat and lomg farm matn¢itiet
are es follows:
20D7 21106
~ Me¢tgsge payable S 305,746 S 317,450
Carreat Maturities ( 12.629) ( 11,95b)
bang terra pmtiam of mortgage Payable ~~s Sr~..~0:~
Alois Payable
The t:cnpaeatiem ptvebased a vehicle which it 5eut>ad fior 6fl moegha at 5.99% through Lexeet
Finencitl. Principal and ieebuettpaymeaa are 5 83l per month Gwent and ~ term aoatnritics
ere es fnIlotts:
13ote Payable
Curt+eat Mateuities
I.cag term parrtioa of note payable
?A07 2086
S 29,329 S 37,247
{ 8.414) 7 918
~20~~ S~~
Mateetities of all. leg-tame debt in ewh of the next five yests an ae follows:
zoos s 2I,o43
2oD~ zzszs
2010 23,6b1
201I 17447
2012 15,848
6eries A Crpitst Notes
Deaiog 20115, CcmZnvuoi4Y T~ ~~. as part of itt oegou'alpltm, iataed nca aegofiaWo
Settee A ~ Notes to arty d3reetm~a of the Cetpoatticau. Proceeds frame the ieaeooe foaled
S 200,000. The notes bar interest at 69'. par aomaem oommeacimg Deaemba~r 31, 2006. lateteit is
payable rani-amttally oa the beet beset day of June sad December of Bade yar. The principal
bthmce of 5200.000 wet date a>d payable tm December 31,2007.
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4-11
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 142 of 160
Note 4. Lung-term Debt (Confirmed)
Series A GapiW Notes (Contfmred)
The Notes an aoaeeiared. Aa an in~tive to participate is the issuance, etch cote holder was
ienied 250 eLares of Community Fmtaaitl. Jac. stock for every S 10,000 lent to the Cosporaiion.
The Nom also have oLagge in ceaitrol pioviaiooa that illow the eta Loaders to oaanrert their
netts into (laaamimity Finaacdal atock. The number of abarea to be iasaed world be based on the
book value pa share of the Comp~p+ on flue closin8 date of a change in caatroi.
Note 5. Stock Parchtae Warrants
Dining 2004, the Corporatim isaiied stock pusohaee worrartc 8i~8 ~ ~~ ~ ~ 1D
purobsse a total of 10,000 ahaues of oomaoom atodi at the psiix of S 12.70 per share. These
waaeoti wet4 originally to vest amiodly at a rate of 20% per Year, bepmuasg on December 31,
2006. The wanairta eapdra on the esz]ier of ten yens Erwin tlue date the waertats beooaie fully
veefed or one yen fol)awina fhe dale the waaaaft Loser's ao~rloy ~t~ nnveated
ceases. Dining ZOOS, the Boaad av6uarita~d the
waszsnts. Aa of December 31, 2009,10,000 warreote were ~eroaetble and row of the waaauts
have bem eaeroiaed
At ' 1,2006, the Cotpaadoa Lad oabbmdiga ~P R'~a m directaas for a
total of 7,8~W shares ai a S ZO pea' when eaaecise price. Dati~ 2006, 2,500 of ~e ws~ were
acaaised. The mug ontatimd'mg wssrao2a of 5,340 expired Dsea®ber 1S, ?A07.
Note 6. Employee Benefit Plain
The Carpooetioa Las a 401(k) Plan for its eaoployeea. Undn the Plea, the t'~orpnaticrauatohes
25% of the flnt a!6 of the emrployee to ~ PLm. Peiuia:i expense ialdad S 1,631
and S 1,611 for 2007 and 2006, setpecbvoly. All empioyeea aSe 21 and oroer a-s elig~k: for flu
Plan.
Note 7. OpereSai Leases
17ue Corp~iam Las vaiions opetathag leaaa for of1'ica equipment. The louse axbae at vaoaas
ds~ 2008. Laaaed egiripasmt eKpeose aouo~ to S 1,836 tad S 2,481 far the yoais
ebdad December 31, 2007 tad 2006, reapeauvely. Fimue nsiaimnm lease paynaats ere u
folk>w::
2008 $ 1,06E
2008 1,068
2010 1,068
Note 8 lnc~se Taus
TLe iiiaomra tax provision refiecled is the statements of eperatioms oo~eta of the boliowing
oonipoamts for Oie year ended Daoembar 31, 2007 and 2006:
2007 2006
Dafeaed. federal ~ ~~~:
TLe effeoi: of temporary diffesraces gist give rise to aignifioaat portiooa of the deferred taium ss
of December 31, 2007 and 2006 were for act operating loss caayfiuiwarde and de8u+ec~tion.
-10-
4-12
Cas~ 1:10-cv-01285-WWC Document~20-5
i
i
Note 8 Income Tour {Cotatinned)
Filed 09/15/2010 Page 143 of 160
The Ccupaaeoa Las federal ntx optraing loos caayforwarda of ~R''00R°°~y S 1.5 million as of
December3l, ?A07, wLiah bagm to expire be~Oirtg ~° 2020. Doe to reatrriag lotstas from
opecatioaa and u ~ ttlr~g ~ ~ n8 L~ carryfaraards, ~gemeat boa
recorded a valuation allowance for the total defacrod to:easel.
Deferred axes include tLe following centponeata st December 31:
7A07 ?A06
Defected Tax Aaeets:
Net operating loss cartyforwarda S 449,641 $ 314,445
DetetredTaxLiabt7i>z'es: ( Z_64~ f 5.0111
men ~e 497,D34 349,434
Na def~ened tax o=val ( ,~.~ { 349.4341
Valwtios dlowance
Note 4. ReLted Party TYaeustcd~
The Corporation rued aervioes paoviricd by a law firm which is owsted by m afffioea of tLe
~ Profeaienal ~ ~ savicm tnrrdet'ad by this fnm wem S 14,301 and S 5,722 in
2007 and ~OOb, respectively
Note 10. Caatcentra8otu of Rids
Apprely 269 of the Coaporeaom'e fee itxwme was derdved ifom two c~utamosrs for fhe
year ended Deaembrt 31.2007. Appruxitnately 25°16 a£the Gorpoa~tio®'s fee income was
derived fmm two aratnmers far the year ended becembar 31,2006.
Note 11. Coedingmtcia end He;tdatatry hlattets
The Corpontioa is aubjeet io elaums and,h-rrsol~ in tLc ardiaary wane of business. T`wo atuat
matters was concluded daring 2007.
The mattes of 111agaro et al versus Camnrtmity TYtut Camopeay cues utded in 3uae 2007 with tLe
executiotz of a coasdeotiai settlen>eru agreensarat a0 Parties. There wu no fi>tanaLtl
impact in ffie Corparatiom and the Cotparation was mimbtased for aJ1 its defense ovals.
Act additiosd maaet was resolved co~araimg tLe cor,5omsatiaa of a fosmrl aoooaeot fifod om
behalf of a tnut, by Conumamaity T1wt Coirrpany aurviog st trnatee. The i>rbecated paNes masted
to We taut agreed upon a tet9emeat oonoerniug aLtims made tLroug~'~e ettnastiao of a
conOdeatial Stipulation whaanxads ware sealed byfba Coact. Commmily Tiaat CCoarpagy
paid S 175,000 to the ttttst at pad of fim teams of &ie Stipulation sold madmim an off bsimCe
sheet xceivabaa of S 120.000 which repreeeds a remreindet ioteceat payaLle to 6se Carporatioau
upon Ste death of the benefioiary•
As pad of its ortgoing ovecaigLi ai' Comity liaet ~Pa4Y ~'1, ~ ~Y~
Depetimeat of Battldng (Daparttttsad) issued a reused ltlataortmdom of ikadangmding (M0~7}
dated Sammy Z2, 2004 std ~2?,2006 andNovemba 6, 2007 dose to Commamtty's
operating P~e°°~ aotod in ib prior a:u~ationa of Ch>mmunity. The bdOU cegttites flat
C~~y ceRnLmory cspifal, ere defined by flu Department, of at least S 1 m3llien at
the tiers it files its gtnrtariy cafl repacta.
Maasgem~ ocntintts to work with the Depsc~at to addrou the te;maittiog iasne of the IdOU
c~~8 a capital pLm that wt71 any the Department.
.ff.
4-13
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 144 of 160
d~ fowl $eras v t]oapsy.lLt:
~eve~reamaa~.rao~a+
INDFPEADENT AUDITOR'S REPORT ONS'UPPLE11fENTARYINFORMATIOA'
To the $oard of 1)ireatoaa and Statkhoidas
Co®ermity Fiaanaial, lac.
t',tmp Hill, Peaneylvania
dar mport oa our atrdet of the bast oensolidatad fmaaedrl a0atema~ of Como~oaaairy
Finaaaial, Inc. and ~Sidiuia for the year ended December 91, 2007 appears onPage 1. librt audit was
made far ffia pu~oae of £ormiag as oplaiom en ~ baaie oo~oaolsdtled fmaacid sbmements taloea at a whole.
The caowbdat5o~ iafonoahon far the peer eMal Dooembet 31, 2007 on ~ 13 and 34 is prosrsled for
puepoaes of additions[ aralyais oftha oomaolidafed ijnaoaiat a~ameabs anther tbaa to preaead tba tad
poaitIoa and iesnbs of opersdians of ie iadividoal oo~nias. Such id'es~sdion Ira bean anl3jeokd ao the
ao~ prooedsres appliedm t'ho avd'da of the baadc oonaolida~ed ihnncid Wtemaats and. m our opioioa, is
firirlj staged in ell material mspads in misiioa m $e boric oomsolidaled tiaaacia3 s0etemears talma so a whole.
t~Onbeeaburg, Pecrosylvaaia
I~Iscrh 13, 2008
-12-
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Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 147 of 160
EXHIBIT 5
COMMUNITY FINANCIAL, INC.
Reviewed Financial Statements
Six Months Ended
June 30, 2008
5-1
TRUST
COgPAR1'
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 148 of 160
TABLE OF CONTENTS
Page
Report of Certified Pabiic Atconatsats 1
Coasolidated Fiaancial Statemeats
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements
6-10
Sapplemeatary Informattoa
Consolidating Schedule of Balance Sheet Information 11
Consolidating Schedule of Operations Information
12
5-2
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 149 of 160
To the Board of Directors and Stockholders
Community Financial, inc.
Camp Hill, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Community Financial,
inc. as of June 30, 2008, and the rekted consolidated statements of operations and changes in stockholders'
equity and cash flows for the six months then ended, in accordance with Stateaunts on Standards for
Accounting and Review Servicxs issued by the American baatitttte of Certified Public Accountants. All
information included in these financial statements is the representation of the management of Community
Financial, Inc.
A review consists principally of inquiries of Corporation personnel and analytit~l procedures
applied to financial data. It is anbstsatially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to
the accompanying financial statements in order for them to be in conformity with generally acxepted
accawting principles.
Our review was made for the purpose of expressing limited assurance that there are no
material modifications that should be made to the financial statements in order for them to be in confomnity
with generally accepted accounting principles. The information included in the accompanying Consolidating
Schedak of Balance Sheet information and Consolidating Schedule of Operaions Information is presented
only fm supplementary analysis purposes. Such information has been subjected to the inquiry and analytical
procedures :pplied in the review of the basic financial statements, and we are not aware of any material
modifications that should be made thereto.
Chambersburg, Pennsylvania
July 18, 2008
5-3
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 150 of 160
COMMUNITY FINANCIAL, INC.
-
CONSOLIDATED BALANCE SHEETS
Jrene 30, 2008
ASSETS 20DS
Current Assets
Cash and cash equivalents $ 211,429
Accrued fees and other receivables 42,309
Prepaid expanses 33,944
Total cumni assets 287,682
Property and Equip~aent
land 90,125
gWid~g 436,489
Egwpment 218,178
744,792
Accumulated depreciation ( 285,179}
Total property and equipment, net 459,613
Other Assets 6,143
Total assets S 753,438
I.IABII.i7TES
Current L[ahlNtks
Accwmts payable $ 16,535
Current portion of note payable 8,414
Cmient pa~rtion of mortgage payable 12,630
Total current liabilities 3T?579
Series A Capital Notes 200,000
Note P.:yable, Less CuneHt Portio~a 1b,771
Mor~age Payabb; I,et6 Garre=t Portion 287,035
Total liaM7ities 541=385
STOCKHOLDERS'EQUITY
Capital Brock, preferred, par value S 1;500,000 shares
authorized a~ m Bhares issued and outstanding
Capital stock, cwa~oa, par vshne t .10; 2,000,000 shares
authorized and 208,571 shares issued and outstanding 20,857
Paid-in capital 1,917,980
Accumulated deficit ( 1,726,784)
To1ai stockholders' equity 212,1153
Total tiabfiities and stockholders' equity S 753,438
See Accountant's Review Report
The notes !o consaiidated financial statements are an Integral part of Neese statements.
-2-
5-4
Case 1:10-cv-01285-VW1IC Document 20-5 Filed 09/15/2010 Page 151 of 160
COMMUNITY FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Sfx Montks Endtd June 30, 2008
2008
Income
Fees $ 282,827
Interest income 5,215
288,042
Expeeses
Salaries and wages 195,411
Payroll ~~ 20,799
Employee benefits 27,570
' Advertising 3,463
Loss on sale of sccuriiies 5,164
t;onferences and educatia~a 268
Department of badring fees 5,480
Dues and subscriptions 4,925
~~~ 23,441
Interest t 5,543
Miscellaneous 267
pg~ 6,124
Postage 2,881
' Professional fees 66,852
Repairs aad maintenance 3,659
Software maintenance 9,951
Taxes 12,178
Telephone 2,526
Travel and entertainment 2389
Utilities 3,989
Depreciation 1s,60o
Total expenses 431,480
Incaane (loss) before income taxes ( 143,438)
Applicable Iawme Tares 0
Net income (loss) ($ 143,438)
.~.o~
See AccoantanYs Review Report
The notes fo rxansolldated financial statements e-e an Integral part of these statements,
-3-
5-5
n
Balance December 31, 2007
CanpreAensigs lncor~:
Net iacAtae (loss)
Chaaga in unrealized loss on
seoarities available for sale
Total comprehensive income (loss)
Balance June 30, 2008
v
cn
0
0
N
cn
COMMUNITY FINANCUL, INC
CONSOLIDATED STATEMENTS OF CHANGES INSTOCJCKOLDERS' EQUITY
Six MorNfis Ended ,/une 30, x008
Commoa Paid-in
Stock Capital
,20,857 1,917,980 {
Accun.alsted
Other
Accumulated Comprehensive
Defkit Income (Cosa)
1,583,346) ( 5,508)
Total
Stockholders'
Equity
349,983
143,438)
( 143,438}
5,508 5,508
137,930).
~~ 2~ 857 $ 1,917,980 ($ 1,726,784) $ 0 $ 212 053
See AocotrntanYs Review Report
The noses to consotldated finandai statements are an integral pan of these statements.
-4-
n
O
O
n
m
~_
N
0
1l
m
0
~_
N
O
O
CQ
CD
CJ~
N
O
-+,
O
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 153 of 160
COMMUNITY FINANCIAL, ING
CONSOLIDATED STATEMENTS OF CASH PLOWS
Six ]Iloptks Ended June 30, 2008
2008
Cssh Rows from opezating scttvities: ~ $ 143,438)
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities: 600
18
Depreciation and amortization
(Gain) loss on the sale of securities available for sale ,
5,164
(Iueresse) decrease is assets:
788
27
Accounts receivable ,
( 8,270)
Prapaid expenses
Increase (decrease) in liabilities: 178
383)
Accounts payable ,
S 18,020)
Accrued expenses
Net cash provided {used) by operating activities { 296,559)
Cash Rovrs from iwestiag activities:
Proceeds and maturities from the sale of available for ale securities
350,000
Nei cash provided {used) by investing activities 350,000
Cash flows from financing tictivltiea: 10,225)
~
payments on borrowings .
Net cash (used) by financnag activities 10225
Net increase (decrease) in cash and cash equivalents 43,216
Cash and cash equivalents, beginning balance 168,213_
Cash and cash equivalents, ending balance $ 211,429
Supplemental diadostire of cast fto~rs iaformatbn:
Cash paid daring the year for:
~~
$ 15,543
Income taxes 0
See Accountants Review Report
The notes to ovnsoAdated frrtarK:iai statements are an integral pert of Btese statements.
-5-
5-7
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 154 of 160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Sigs{ficaat Accounting Policies
Nature of Operations
The Corporation's business is conducted principally through its wholly-owned subsidiary,
Community Trust Company, estate-chartered, non-depository trust company. Conmrnnity Trust
Company provides a variety of trust, fiduciary and custodial services to customers through its
office located in Camp Hili, pennsylvania. Community Trust Company is subject to regulatory
oversight by the Commonwealth of Pennsylvania Deparpncnt of Basking.
Basis of Conso{illation
The consolidated financial statements include the accowits of Community FinancW, Ise. (the
"Cmporation'~ and its wholly-owned subsidiaries, Comaranity Trust Compaq, Canmunity
Realty, Inc. and Community Insurance, inc. Cammrinity Rea1<y, ~. owns the land sad !hc
building is which corporate offices and twat operatiats are Iocaoed. All material iateroompany
balances and transactions have bees eliminated m consolidati~.
Accounts Receh-ab{e/Albwance for DoabtlW Aceoaats
Accrued fees are recorded when imroices are isarred sell are generally paid by tlm middle of the
following month via electronic finds transfer froze the tnrst scco~ billed.
Management considers all receivables to be fully collectrble based os am evaluation of specific
receivables, the cozporation's historicrtl leases, and flu esisting tic condtions•
Accordingly, no allowance for doubtful accounts is required. If am~onsts become uncollectsble,
they will be charged to operations when that dettxznination is made.
Estimates
The preparation of financial statements in r:onformity with accounting Wiles generally
accepted in raze United States of America requires management m mate eatimt~s sad
assnmptians that affect the repassed amounts of assets and fiabilitiea and of contingent
assets and liabilities at the date of the fmaztcial statements and the reported aszou~ of revenues
and expenses during the reporting period. Actual results could diffier fiasa those estimates.
Cash and Cash 13gafvaknts
Cash and cash egtrivalezrts consist of checking, savings and tnastey marloet accounts es web as
investment secwities that, at the time of purchase, have remaining maturities of three months or
less.
Seeurities Available for Sale
Management determines the appropriate c{asaificatia of debt securities at the time ofpurchase
and re-evaluates such designation as of each ba{aace sheet date.
Securitica chtssified ss available: for sale are those secsrities that the Corporation intends to hold
for an indefinite period of time b~ not neoeasarily to inattnity. Securities available for sale are
carried at fair value. Unrealized gain sad kisses an zeparted ss increases or decreases is o~cr
comprehensive income. Realized gains or kisses, detetmised ~ the basis of the test of the
speafic securities sold, are included m earnings. Prmtiume and diacouats are recognized in
interest income using a method which approximates the interest method over the terms of the
See ,4ccowltent's Rev~r Report
-6-
5-$
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 155 of 160
Note 1. Significant Accounting Polities (Continued}
securities. Declines is the fair value of available for sale securities below their cost that are
Beamed to be other than temporary, if any, are reflected in earnings as realized losses, In
estimating other-than-temporary impairarcnt losses. maeagement considers (1) the length of tune
and the extent to which the fair value has been less than cost, (2) the financial condition and aear-
term prospects of the issuer, and (3) the urtent and ability of the Corporation to retain its
investment in the issuer for a period of tune sufficient to allow for any anticipated recovery in fav
value.
Property and Equipment
Property and equipment is carried at cost less acetnmulated depreciation. Depreciation is
ccnmputed en the straight line method over estimated useful lives ranging from 10 to 40 years for
building a~ firorn 3 to 7 years for equipment. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts, sad any resUdtiag
gain or loss is ncogniacd in income fa the period. The cost of maintenaacx and repairs is
charged W operations as incurred; significant renewals and betterments are capitalized.
Debt Issuance Costs
Debt issuance costs, which are included in other assets, are being amortized over the life of the
related debt Ming a method which approximates the effective interest method.
Income Ta=es
The Corporation and snbsidiaries 51e a consolidated federal income tax return. Income taxes are
provided for the tax effects of transactions reported in the financial statements sad eatsist of
taxes carnally due phts deferred teases. Deferred farces are provided for the temporary differences
in the tax basis of the Corporation's assets and liabf litiea and their reported amounts and net
operating loss carryfarasrds. Dcferrod tax assets and liabilities are determined based on the
enseted rates that are expected to be in effecx when flu differences are expected to reverse.
Deferred tax assets are reduced by a vahiatian allowance when, is the opinion of man:gemeat, it
is more likely dean not that some portion of the deferred tax assets will not be realised. Deferred
tax expense or benefit is the result of the changes in the deferred tax assets and liabilities.
Compreheaslve Iaceme (Loss)
Under generally acsupted socounting principles, coaprehensive income is defined as the chmge
inequity from traasactians and other etnmts fromnon-owner sauces. It iaclit~s all diangea in
equity except those resuhiag from iaveatmeats by ahtaeholdecs and distributions tD stockholders.
Cos~rehensive income includes net iacorae and caertain elements of "other eomprehmsive
income" such as foreign currency tzaneactions; aaucmting for futures ceatracts; employers'
accounting for pensions; and accounting for certain iaveatments in debt and egmty secnridies.
The Corporation has elected m report its comprehensive iacxunc in the statenacot of changes in
stockhokkrs' equity. The only element of "other eamtprehensive incamue" that the Corporation
has is the umrealized gain or lass an available for sale securities.
The cromponents of other comprehensive income (loss) for the period ended 3une 30, 21108 are as
follows:
2608
Gross unrealized holding gains (losses) arising during the year $ S,1 b4
Reclassification adjustment for (gains) losses realized 5 164
Net unrealized holding galas (losses) ~Q
See AccourttanYs Review Report
- 7-
5-9
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 156 of 160
Note 2. Long-term Debt
Mortgage Payable
The Corporation has a mortgage loan through Commerce Bank collateralized by the corporate
office building and land payable in 60 monthly payments of principal and interest at S 2,464. The
payments change to S 2,353 for the remaining 180 months. The ingest rate is fixed at 5.65% for
the initia160 mmrths, and then is beard oo the prune Tale plus 1 % for the remaimog term The
lose is guaranteed by certain stockholders and matures in 2023. Current sod long tam maturities
are as fotlows:
2008
Mortgage payable $ 294,665
Current Matwrities ( 12,630)
Long term portion of mortgage payable $~ 287 ,mss
Note Payabk
The Corporation purchased a vehicle which it fmauced for b0 moaths at 5.9996 tlrrongh Lexus
Financial. Priaapal and interest payments arc S 831 per month. Current and long tam maturities
are u follows:
2008
Note payable $ 25,185
Current Maturities ( 81414)
Long tam portion of note payable $~ 16®~
Maturities of all long-term debt is eae~ of the next five years are as follows:
2008 S 21,043
2009 22,325
2010 23,661
2011 17,417
2012 15,848
Series A Capital Notea
During 2005, Commnaity Trust Company, as pad of its capital phm, leaned nan-~gotiabk
Series A Capital Notes to certain diredars of fire Ceaporatieu. Pmcee~ from the iaaarmce totaled
$ 200,000. The notes bear interest at 696 pa a~nnnm eommencnag December 31, 2007. Interest is
payabk semi-anmraDy eu the last bnaineas day of June and December of etrch year. The principal
balance of S 200,000 wan dne and payabk on December 31, 2007. Interest expense of x,000 was
paid on Jane 30, 2008.
See Accountants Re+riew Report
-8-
5-10
Case 1:10-cv-01285-VWVC Document 20-5 Filed 09/15/2010 Page 157 of 160
Note 2. Long-term Debt (Continued)
Series A Capital Notes (Continued)
The Notes are unsecured. As an incentive to participate in the issuance, each note holder was
issued 250 shares of Community Financial, Inc. stock for every S 10,000 cent ro the Corporation.
The Notes also have change in control provisions that aik-w the note holders to convert their
notes into Community Financial stock. The anmbcr of shares to be issued would be based on the
book value per share of the Company on the closing date of a change in control.
Note 3. Stock Purchase Warrasts
During 2004, the Corporation issued stock purchase warrants giving an e~loyee the right to
purchase a total of 10,000 shares of commnon stock at the price of S 12.70 per shoe. These
warrants were originally to vest annuagy at a rate of 2096 per year, begianiag ea December 31,
2007. The warrants expire on the earlier of ten years fsam flu date We warrants become fully
vested or one year following the date the warrant holder's ~~ployment with the Caaporatioa
cxases. Dnring 2005, the Board authorized the iia~iate vesting of all remaining navestod
warrants. As of Jwte 30, 2008,10,000 warrants were exercisable sad none of the warrants bare
been exercised.
At January 1, 2407, the Corporation had outstannding stock purchase warrants to directors for a
total of 7,844 shares at a S 20 per share exerci~ price. Daring 2006, 2,500 of the warrants were
exercised. The remaining outstanding watiants of 5,340 expired December 15, 2007.
Note 4. Employe Benefit Plan
The Corporation has a 40l (k) Plan for its employers. 1Jnder the Porn, the Corporation matches
25% of the first 4% of the employee contribtriions to fire Plan. Pension expense totaled S 1,381
for the period ended June 30, 2008. All employees age 21 and over are eligible for the Plan.
Note 5. Operating Leases
The Corporation has various operating leases for office equipment. The leases mature at various
dates thmoBir 2009. Lead equipment expense amoomted to S 534 for the period ended June 30,
2008. Fuhae minimum lease payments are as follows:
2008 S 534
2009 SO1
Note 6. Income Tries
The income tax provision zeflec~d in the statements of operations consists of the following
comp~e~ats for the period ended lone 30, 2008:
2008
Deferred, federal
$ 0
...~...~
The effects of temporary differences that gave rim to significant portions of the deferred taxes as
of Jnne 34, 2008 were for net operating loss carryfarwarda and depreciation.
See Accountants Review Report
-9-
5-11
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 158 of 160
Note 6. Income Taxes {Continued)
The Corporation has federal net operating loss cactyi'orwards of aproximately S l .5 million as of
June 30, 2008, which begin to expire begiffiing is 2020. Due to re:cucting losses from operations
and uncertainty in utilizing the net operating loss eactyforwards, management has recorded a
valuation allowance for the total deferred tax asset.
Deferred ffixes include the following components at Junc 30:
2008
Defaced Tax Asseffi:
Net operating loss cactyforvvards S 499,641
Defected Tax Liabilities:
Depreciation expense (~
~ defaced ~ ~~ 497,034
Valuation allowance 4 0 4
~~
Note 7. Related Party Transaction
The Corporation used service provided by a law firm which is owned by as officer of the
Corporation. Professional fees for services rcadered by this firm were S 5,682 as of June 30,
2008..
Nate 8. Concentratiams of Risk
Approximately 26% of the Corporation's fee income was derived from two cn~omers for the
period ended Inns 30, 2008.
Note 9. Contlugettcies and Regulatory Mattes
The Corporation is subject to claims and lawsuits in the ordinary course of business.
As part of its ongoing overaighi of Community Trust Company (Commtmity), the Pe~aylvania
Depnrtment of Bsnloxlg {Department) issued a revised Memorandmn of Undersfanding'(MOU)
dated Jamnrcy 22, 2004 and ap~ted >ylareh 27, 2006 and November 6, 2007 due to Commtmity's
operating perftxman~.x noted is its prior exsmmations of Couimanity. The MOU requires that
Coromnaity maintain regalstary tatipital, ea defined by the Department, of at least S 1 mr7lion at
the time it files its quarterly call reports.
Manageatcnt moues to work with the Department m address the remaining issue of the MOU
txtncerniug a capital plea that will satisfy the Departnunt.
The Corporatism is currently is the procxsa of merging wilt another iastitntion. Community
Financisla' shareho3ders will vote on the merger in September 2008. Settlement is expected to
occur in the fourth quarts of 2008.
See Accountant s Review Repot
-10-
5-12
Case 1:10-cv-01285-WWC Document 20-5 Filed 09/15/2010 Page 159 of 160
coMMUNITY FrnANCIAL, INC.
CONSOLIDATING SCHEDULE OFBALM-CE SHEET INFORMATION
Jane 30, 2008
Cotnmoaity
Cotnmanity Trwt Comeaustty
ptnaaelal, Ina Company Realty, inc. Commustty
lasunoee, loc. Elimieatton: ConsoOdeted
ASSETS
Cash and cnh equivalents S O b 211,429 b O b O S O S 211,429
309
0 0 42
Axreed fees and other nxeivables 0 42,309 0
0 ,
0 0 33,944
paid ~~ 0 33,944
Proppiy and egaipment
0 0 90.125
0 0 90,i2S
Land
BuBd~b 0 0 298,739 0 137,750 434,489
1.aaehoW improvematts 0 137,750 0 0 ( 137,750) 0
178
0 0 218
deprealation 0 218,178 0
0 ( 224,799) ( 60.380) ,
0 0 ( 285.119)
y teeeivabk 0 415,158 146,641 100 ( 561,899) 0
0
1 in suMidiaries 561,041 0 0
o loo 6,a3 0( 561;041)
o a 6.143
~,,,,~
'
7otalAsaets S 561.041 S 834,069 S 481,168 S !00 (i 1,122,940) ~ 759.438
LlAB1L17T8:8 AND STOCIQIOLDSRB'
EQUTN (DE8t1C1'I')
uab8ltks
Aecannpayabk S O S 16,535 S O S O S O S 16,535
Catrad po7tiati of tare payable 0 8,414 0
0 12
630 0 0 8,414
0 0 12,630
Cumad portion of tttortp~e payable ,
0
0 171
0 0 16
p~ p~ q~ ~an 0 16,771
7
035 ,
035
0 0 287
pryable, ~ caQrent Pow ,
0 0 26
0 ,
0 0 200
000
Series A Capital Notrs 0 200.000 .
0
Intereontpany payabk 354,4% 0 195,964 11.439 ( 561,899)
TotalLiabHitlea 354,4% 241,720 495,629 11,439 ( 561,899) 541385
Stoekboldtn' Igtdty (De1kN)
Cs<ock 20.BS7 10.000 10,OOD IOD { 20,100) 20,857
p„d-yt Wphl 1917,980 2,062,7% 0 0 ( 2,062.156} 1,917,980
Acetttrtitlcd other mmptdtendve loss ( 5,508} 0 0 0 5,508 0
Acoatrslehd deficit ( 1,726.784) ( 1,480.407) ( 24,46D ( 11,439) 1,516.307 ( 1,72b,784)
Tool Stoekhoidera' Equity (Delkk) 206 S ~ 592.349 ( 14.461) ( 11,339) ( 561,041) 212,053
Total UabSptln and Stockboklera'
gq,dty ~)
S 561,041 S 834,069 5 481,166
S 100 (S 1,122,940) S 753,438
See Accountant's Reltiela Report
-11-
5-13
Case 1:10-cv-01285-VW11C Document 20-5 Filed 09/15/2010 Page 160 of 160
COMMUNITYFINANCL4L,1NC.
CONSOLIDATING SCHEDULE OF OPER4TIONS INFORMATION
Six Months Ended June 30, 2008
Comaoaolry
Comotmlry Troy Comnoolry Commaaity
Fioaaciai, lac. Company Redty, lea lasoraaeq lac. Eliatioatbas CoowlWated
1NCOAlE
Fee iaame:
Fiducisy activities S O S 273,027 S O S O S O S 273,D27
Adminisaauve fees 0 9.800 0 0 0 9.800
Total Fa /same 0 282,827 0 0 0 282,827
Auer income:
LNaat 0 5,215 0 0 0 5,215
Iteeml 0 0 14,763 0 ( 14,783) 0
/name pose) from vvholly~owned
su6tidiviea { i43,43~ 0 0 0 143.438 0
Totd Uther iaamt ( 143,438) 3,215 10.763 0 128,655 5,215
FJ
Sys
0 !93,411
0
0
0
195,411
payroll trues 0 20,799 0 0 0 20,799
F,~,ya y~~ 0 27,570 0 0 0 27,570
Ativenidn8 0 3,463 0 0 0 3,463
Lou onokofsoemitias 0 3,164 0 0 0 5,164
Canfetaaea and adaadon 0 268 0 0 0 268
peprpmtk of ~ fees 0 5,480 0 0 0 5,480
Does aal) Wbic[1p11pR4 0 4,925 0 0 0 4,925
Iotmtetee 0 23,441 0 0 0 23,441
~~ 0 6,841 8,702 0 0 15,543
T1sa8nmous 0 267 0 0 0 26?
ORiee 0 6,I24 0 0 0 6,124
p~ 0 2,881 0 0 0 2,861
Preftuiaul fas 0 66,852 0 0 0 66,852
R~ 0 14,783 0 0 ( l4,?83) 0
Atpaitsaedmaiatemau 0 3,659 0 0 0 3,659
~{~ maiatemtoe 0 9,951 0 0 0 9,951
Toes 0 12,176 0 0 0 12,178
Talap6ota 0 2,524 0 0 0 2,526
Ttavd and eantninmeat 0 2,389 0 0 0 2,389
[h0iaes 0 3,489 0 0 0 3989
n 0 14,671 3,929 0 0 18,608
ToulBspense 0 433,632 12.631 0 ( 14.783) 431.496
laame(Lou)BeforelaeameTases ( 143,438)( 143,590) 2,152 0 143,438 ( 143,438)
INCOIS~ TAXES 0 0 0 0 0 0
Net Iaatne (Lou) (S 143,436) (S 145,590} S 2,152 S 0 S _ 143,438 (S 143,436)
See Accountants Review Report
-12-
5-14
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 1 of 30
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
MATTHEW P. AMOS, et al.
Plaintiffs
CIVIL NO. 1:CV-10-1285
vs.
,.,
f.,YJ"1 ,
. l,~
...:..
~Il .-t
FRANKLIN FINANCIAL SERVICES ~~~~-~~ -~
CORPORATION, et. al, ~~~~ ~~~-_=
Defendants ~ ~'- ~µ {
~ ~.~ cv .,
.. ,
..
.~~ ' ,
MEMORANDUM '-~ ~~ ' '~
~. -
I. Introduction and Procedural History ~ u~~
Matthew P. Amos and the other twenty-four plaintiffs are former
shareholders in Community Financial, Inc. (CFI). Defendant, Franklin Financial Services
Corp. (Franklin Financial), acquired CFI in a merger whereby CFI ceased to exist and its
shareholders were paid cash for their shares. Plaintiffs filed this suit against Franklin
Financial and seven individual defendants, mostly shareholders and officers of CFI.
Plaintiffs alleged that in the years leading up to the merger, the individual defendants
operated CFI in a way that diluted the value of Plaintiffs' shares upon the merger relative
to the value of Defendants' shares. To accomplish this goal, Defendants "devised a
scheme or artifice to defraud" and engaged in fraudulent conduct directed at Plaintiffs
and other non-defendant shareholders.'
Plaintiffs made claims under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, and under state law for conversion,
unjust enrichment, breach of fiduciary duty, fraud and waste of corporate assets,
conspiracy, and a violation of the Pennsylvania Uniform Commercial Code.
1 The total number of shareholders, excluding the ind
(Am. Compl. ¶ 104).
a~
Case 1:10-cv-01285-VW1/C Document 60 Filed 11/22/11 Page 2 of 30
Two motions to dismiss were filed under Fed. R. Civ. P. 12(b)(6), one by
Franklin Financial and the other by the individual defendants. In part, both motions
argued that the RICO claims lacked merit because Plaintiffs were basing them on fraud in
the sale of securities (by way of the merger) and RICO excludes from the reach of the
statute claims that would be actionable as securities fraud.Z We agreed with this
argument. See Amos v. Franklin Fin. Services Corp., 2011 WL 2111991, at *4 (M.D. Pa.
May 26, 2011). Since the RICO claims were the only federal ones, and diversity
jurisdiction did not exist, we declined to exercise supplemental jurisdiction over the state-
law claims and dismissed the entire action on May 26, 2011. Id., at *6.
Plaintiffs have filed a motion for reconsideration. Franklin Financial has
filed a brief in opposition and so have the individual defendants. Plaintiffs argue we erred
in concluding that their RICO claims were actionable as a Rule 10b-5 securities-fraud
claim. Plaintiffs contend that because the defendant shareholders controlled the majority
of the shares in CFI, and a majority of the shares were all that was needed to accomplish
the merger, the merger was a "freeze-out merger." As a freeze-out merger, it was
immaterial whether other shareholders were fraudulently induced into voting for it
because the defendants had no need for the votes of other shareholders. It follows that
Plaintiffs have no actionable 10b-5 claim because as a matter of law they could not show
the requisite element of causation.
For the reasons set forth below, we agree with Plaintiffs' argument
concerning causation and that their motion should be granted. Thus, we will vacate our
previous order. Nonetheless, for other reasons advanced by Defendants in support of
2 As noted in our previous memorandum, no one can bring a RICO claim that is
actionable as securities fraud. More specifically, "no person may rely upon any conduct that
would have been actionable as fraud in the purchase or sale of securities to establish a [RICO)
violation ...." 18 U.S.C. § 1964(c). Section 1964(c) prohibits a RICO claim "when the
conduct pled as predicate offenses is 'actionable' as securities fraud ...." Bald Eagle Area
Sch. Dlsf. v. Keystone Fin., Inc., 189 F.3d 321, 330 (3d Cir. 1999).
-2-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 3 of 30
dismissal of the RICO claims we will enter another order which, once again, dismisses
the RICO claims and declines to exercise jurisdiction over the state-law claims.3
I I. Plaintiffs Are Entitled to Reconsideration of the May 26, 2011, Order
As !t Was Based on a Clear Error of Law
The May 26, 2011, order dismissing the action was final because it left
nothing more to be done by this court. See Dotzel v. Ashbridge, 438 F.3d 320, 323 (3d
Cir. 2006). Plaintiffs' motion for reconsideration challenges the legal correctness of that
order. The motion is therefore treated as one under Fed. R. Civ. P. 59(e) to alter or
amend the judgment. Holland v. Holt, 409 F. App'x 494, 496 (3d Cir. 2010)(per
curiam)(nonprecedential). A motion for reconsideration under Rule 59(e) is used "`to
correct manifest errors of law or fact or to present newly discovered evidence."' Lazaridis
v. Wehmer, 591 F.3d 666, 669 (3d Cir. 2010)(quoting Max's Seafood Cafe ex rel. Lou-
Ann, Inc. v. Quinteros, 176 F.3d 669, 677 (3d Cir. 1999)). "A proper Rule 59(e) motion
therefore must rely on one of three grounds: (1) an intervening change in controlling law;
(2) the availability of new evidence; or (3) the need to correct a clear error of law or fact
or to prevent manifest injustice." Id.
"A motion for reconsideration may not be used as a means to argue new
facts or issues that were not presented to the court in the context of the matter previously
decided." Worbetz v. Ward North America, Inc., 54 F. App'x 526, 533 (3d Cir. 2002)
(nonprecedential). It cannot be used to raise new legal issues. United States v.
Metropolitan St. Louis Sewer Dist., 440 F.3d 930, 933 (8th Cir. 2006)(quoted case and
internal quotation marks omitted). Nor can it be used to reargue issues that the court has
already considered and disposed of. Blanchard v. Gallick, No. 09-1875, 2011 WL
3 Our discussion below will assume familiarity with our previous memorandum.
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1878226, at *1 (M.D. Pa. May 17, 2011)(Caldwell, J.)(citing Ogden v. Keystone
Residence, 226 F. Supp. 2d 588, 606 (M.D. Pa. 2002)).
In opposing the motion, Defendants first argue that it is untimely because
Local Rule 7.10 requires that motions for reconsideration be "filed within fourteen (14)
days after the entry of the order concerned" and Plaintiffs filed the motion on June 13,
2011, eighteen days after May 26, 2011, the date of the order. We reject this argument.
Local Rule 7.10 specifically excludes from its scope a motion to alter or amend under
Fed. R. Civ. P. 59, and as noted above, Plaintiffs' reconsideration motion is governed by
Fed. R. Civ. P. 59(e).4 Rule 59(e) allows a party twenty-eight days from the entry of the
order to file a motion to alter or amend. Plaintiffs' motion for reconsideration was
therefore timely as the Rule 59(e) deadline expired on June 23, 2011, and Plaintiffs'
motion was filed on June 13, 2011, ten days before.
Defendants next argue that the motion must be denied because the
argument raised in the motion was not presented in opposing the motions to dismiss. As
noted above, a reconsideration motion cannot be used to argue legal issues not
presented in connection with the proceedings leading to the challenged order.
Defendants correctly point out that Plaintiffs' argument is new. In opposing
dismissal, Plaintiffs never said that the merger was afreeze-out merger,5 nor did they cite
9 Local Rule 7.10, as amended on December 1, 2010, reads as follows:
Any motion for reconsideration or reargument must be
accompanied by a supporting brief and filed within fourteen (14)
days after the entry of the order concerned. This rule is not
applicable to a motion to alter or amend a judgment under Fed.
R. Civ. P. 59.
5 The merger may not be a freeze-out merger as that term is commonly understood
since under the terms of the merger both majority and minority shareholders were cashed out,
with CFI becoming awholly-owned subsidiary of Franklin Financial. This does not affect
Plaintiffs' argument because, no matter how the merger is characterized, the relevant point is
that the majority shareholders did not need the votes of the minority shareholders.
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in support of the argument Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 111
S.Ct. 2749, 115 L.Ed.2d 929 (1991), and Scattergood v. Perelman, 945 F.2d 618 (3d Cir.
1991), the two cases they cite now in support of their no-causation arguments It is also
true that, generally, new arguments cannot be considered on a motion for reconsideration
under Rule 59(e). This general principle, however, does not apply to clear errors of law
or fact. For example, in Max's Seafood Cafe ex rel. Lou-Ann, Inc., supra, while the Third
Circuit recognized that courts take a"'dim view of issues raised for the first time in post-
judgment motions,"' 176 F.2d at 678 (quoted case omitted), the court nonetheless
decided that the district court had abused its discretion in refusing to consider a factual
argument first raised by the corporate defendant on a motion to alter or amend. The
district court had held the corporate defendant in contempt of a consent decree. The new
argument was that the corporation had not come into existence until after the statements
in violation of the consent decree at issue had been made. The court of appeals ruled
that this factual issue was "so fundamental," id., that it should have been considered on
reconsideration, noting that "reconsideration is the appropriate means of bringing to the
court's attention manifest errors of fact or law." Id. (citing Harsco Corp. v. Zlotnicki, 779
F.2d 905, 909 (3d Cir. 1985)). See also In re: Linerboard Antitrust Litig., 361 F. App'x
392, 397 n.2 (3d Cir. 2010)(nonprecedential)(district court properly granted
reconsideration to correct the court's error of law in vacating an injunction on the
mistaken belief that the court would lose jurisdiction after the end of the underlying class
action).
In light of Virginia Bankshares and Scattergood, we believe we made a
clear error of law, even though that error resulted from Plaintiffs' failure to present us with
the argument at the time Defendants moved to dismiss. In Virginia Bankshares, the
6 Scattergood was cited, but for an issue of state law.
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Supreme Court held that shareholders whose votes were not needed either by law or by
corporate bylaw to authorize a merger could not bring a section 14(a) securities-fraud
claim for misrepresentations in a proxy statement issued in connection with the merger.
The Court ruled that the shareholders could not show the necessary causation. 501 U.S.
at 1087, 111 S.Ct. at 2755. In Scattergood, the Third Circuit followed Virginia
Bankshares in ruling that, without more, shareholders whose votes were not needed for
the freeze-out merger could not show causation for both a section 14(a) claim and a Rule
10b-5 claim. 945 F.2d at 625-26.
Application of Virginia Bankshares and Scattergood is clear and
straightforward. Plaintiffs draw our attention to the allegations of their amended
complaint. They allege that defendant Gates exercised warrants in December 2006
which had the effect of giving the defendant shareholders ownership or control of 50.36%
shares, giving them "voting control of the company," (Am. Comp/. ¶ 56), and, as of
September 2007, "enabling them to control the direction of the company, including
effectuating the merger with Franklin Financial and ensuring the demise of CFI." (Id. ¶
57). As Plaintiffs argue, since these allegations mean that Defendants had no need for
minority shareholders to vote for the merger, our conclusion that Plaintiffs had an
actionable Rule 10b-5 securities-fraud claim was mistaken. Since our conclusion was
also contrary to direct and controlling Supreme Court precedent, we must grant the
motion for reconsideration to correct this clear error of law.
In opposing the reconsideration motion, the individual defendants and
Franklin Financial argue that the amended complaint does not show that afreeze-out
merger occurred. They contend the above allegations only establish that the defendants
owned a controlling number of shares in December 2006 and September 2007, and that
the amended complaint is silent on the number they owned on August 8, 2008, the record
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date for being able to vote on the merger.' We reject this argument. Viewing the
allegations in the light most favorable to Plaintiffs, a reasonable inference is that the
defendants not only acquired the majority of the shares but maintained their majority
control at all relevant times; paragraph 57 identifies a point in time but also alleges the
majority control in existence at that time enabled the defendants to "effectuat[e] the
merger with Franklin Financial and ensur[e] the demise of CFI."
Additionally, the individual defendants argue that the allegations fail to show
that the merger was afreeze-out merger because the proxy statement stated that CFI's
directors and officers owned 91,036 shares and that this was about 43.65% of the
shares, (Am. Comp/., Ex. D, CM/ECF p. 24), making the votes of the minority
shareholders critical to the merger. We reject this argument. It ignores defendant
Habacivich's 14,000 shares. The defendants are not all alleged to be directors at the
time of the merger. Plaintiffs allege they were directors at various times. (Am. Comp/. ¶
13). Habacivich's shares gives the individual defendants the 50.36% control alleged in
paragraphs 56 and 57. These defendants cite no authority for their proposition that a
freeze-out merger occurs only when the officers and directors of a corporation own
enough stock to control a merger vote. The crucial allegation is that while neither
Habacivich nor Linda Lee Gates were officers or directors at the time of the merger, they
had agreed with the remaining defendants to vote for the merger, thereby rendering the
votes of the nondefendant shareholders irrelevant.
Having decided to grant reconsideration, we turn to Defendants' argument
that there is still an actionable securities-fraud claim even though Defendants did not
need minority shareholder votes to effect the merger. They contend that for the RICO
' Am. Comp/., Ex. D, Proxy Statement, CM/ECF p. 24. (The page number refers to
the page number assigned by the Case Management/Electronic Case Files (CM/ECF)
system.)
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bar to apply they need not show that Plaintiffs themselves have an actionable securities-
fraud claim, only that the conduct upon which they base their claim is actionable as
securities fraud. They cite in support MLSMK Inv. Co. v. JP Morgan Chase & Co., 651
F.3d 268, 277-78 (2d Cir. 2011); and Gatz v. Ponsoldt, 297 F. Supp. 2d 719, 730 (D. Del.
2003)(RICO exclusion applies "regardless of whether a particular plaintiff has standing to
bring a civil action under § 10b or Rule 10b-5"). Defendants assert that even if Plaintiffs
have no securities-fraud claim, the non-defendant shareholders who voted for the merger
based on the alleged misrepresentations do, and that the existence of the latter claim
bars the RICO claims.
In making the argument, Defendants point to the allegations in the
amended complaint that "[m]any non-defendant shareholders voted to approve the sale
of CFI" based on the proxy statement's estimate that shareholders would have received
$2.79 per share if the merger had occurred on July 1, 2008, Am. Compl. ¶ 61), and that
this was a "`classic bait and switch' fraudulent sales technique." (Id.).$ Defendants argue
that these allegations support an actionable securities-fraud claim because the
shareholders who voted for the merger lost their right to a state appraisal remedy by
voting for the merger. The loss of this right supplies the causation element missing in the
freeze-out mergers presented in Virginia Bankshares and Scattergood. Defendants cite
in support Wilson v. Great Am. Indus., Inc., 979 F.2d 924, 931 (2d Cir. 1992)(minority
shareholders in a freeze-out merger can establish loss causation for asecurities-fraud
8 Franklin Financial was to pay $1.13 million for CFI, payable to the shareholders
based on the number of shares owned and the book value at the end of the month preceding
the merger date. (Am. Compl. ¶ 21 and doc. 20-5, Ex. D, proxy statement, dated Aug. 8,
2008, CM/ECF pp. 1 and 35). The proxy statement said that if the merger Mad taken place on
July 1, 2008, the book value of CFI at the end of July 2008 would give a cash value of $2.79
per share. (Am. Compl. ¶ 61 and doc. 20-5, Ex. D, proxy statement, dated Aug. 8, 2008,
CM/ECF pp. 1 and 35). The merger was consummated on November 29, 2008. (Am. Compl.
¶ 67; Ex. C, doc. 20-4, CM/ECF p. 2). CFI's book value on October 31, 2008, was $.15 per
share. However, the merger agreement's ultimate valuation was $.71 per share. (Am. Compl.
¶ 69).
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Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 9 of 30
claim if they voted for the merger and lost state appraisal rights as a result); and Howing
Co. v. Nationwide Corp., 972 F.2d 700, 707-09 (6th Cir. 1992)(same).
We agree with Defendants, and the cases cited, that Defendants need not
show that the plaintiffs in this action have an actionable securities-fraud claim as long as
Defendants show that the conduct upon which Plaintiffs base their RICO claims is
actionable as a securities fraud claim. Hence Defendants could rely on a securities
fraud-claim that could have been brought by others, shareholders who are neither plaintiff
nor defendant. We also accept that these other shareholders could show causation by
loss of a state appraisal remedy. However, we are not convinced that the allegations of
the amended complaint show that these shareholders have an actionable claim, and we
will therefore not dismiss the RICO claims on the basis of the RICO exclusion for
securities fraud claims.
As Plaintiffs point out, Wilson is distinguishable because under New York
law appraisal was the exclusive remedy and by voting for the merger shareholders lost
the only remedy under state law that would have given them fair value for their stock. In
In re Digital Island Sec. Litig., 223 F. Supp. 2d 546, 559 (D. Del. 2002), the court
distinguished Wilson on this basis in concluding there was no securities-fraud claim in
that case because Delaware allowed shareholders to file an equitable action as well.
Hence there was no injury.
Similarly, Pennsylvania has an appraisal remedy for minority shareholders,
but it may not be the exclusive remedy. It may be that shareholders may also bring a
claim, as Plaintiffs have here, for damages for breach of the majority shareholders'
fiduciary duty in connection with afreeze-out merger. See Mitchell Partners, L. P. v. Irex
Corp., 656 F.3d 201, 216 (3d Cir. 2011), panel rehearing granted, _ F.3d _, 2011 WL
4448604 (3d Cir. 2011)(question of exclusiveness of appraisal remedy certified to the
Pennsylvania Supreme Court).
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But we do not base our decision solely on the fact that the appraisal remedy
is, or may not be, exclusive. Franklin Financial argues that it is irrelevant whether the
remedy was exclusive or not; the shareholders still lost a remedy. We disagree. We
think to show that the RICO exclusion applies, Defendants had to show that the appraisal
remedy had some distinct advantage that was lost when the minority shareholders voted
for the merger. We base this requirement on Wilson's rationale for accepting the loss of
a state remedy to show the necessary causal link; the loss of a state remedy satisfies the
element of loss causation for asecurities-fraud claim, that is, the requirement of showing
economic harm. Wilson, 979 F.2d at 931. Defendants have not shown that Plaintiffs
would suffer economic harm by pursuing other state remedies. In this regard, we note
that in Howing Co. the Sixth Circuit observed that the appraisal remedy "would have been
more attractive," 972 F.2d at 710, if the proxy statement had provided the required
information, basically concluding that the appraisal remedy had some advantage.
In the absence of injury, there does not appear to be a securities-fraud
claim.9 Since we have decided that Defendants have failed to show that the RICO
exclusion applies, we will address the other arguments they made against the RICO
claims, presented in their motions to dismiss.
III. Standard of Review
In considering a motion to dismiss, "[w]e 'accept all factual allegations as
true, construe the complaint in the light most favorable to the plaintiff, and determine
whether, under any reasonable reading of the complaint, the plaintiff may be entitled to
9 Based on this conclusion, we need not address Plaintiffs' other argument for
reconsideration, that we erred in concluding that the fraud involved the purchase or sale of
CFI's stock, rather than just the 2005 notes. In any event, this argument cannot be considered
on reconsideration because it is simply a repeat of an argument we rejected earlier.
Moreover, our earlier ruling remains correct.
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Case 1:10-cv-01285-1N1NC Document 60 Filed 11/22/11 Page 11 of 30
relief."' Byers v. Intuit, Inc., 600 F.3d 286, 291 (3d Cir. 2010)(quoted case omitted). The
court is not limited to evaluating the complaint alone. It may consider documents that
form the basis of a claim. Lum v. Bank of America, 361 F.3d 217, 221 n.3 (3d Cir. 2004).
It may also consider "documents whose contents are alleged in the complaint and whose
authenticity no party questions," even though they "are not physically attached to the
pleading ...." Pryor v. Nat'l Collegiate Athletic Assn, 288 F.3d 548, 560 (3d Cir. 2002).
A complaint has to plead "enough facts to state a claim to relief that is
plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955,
1974, 167 L.Ed.2d. 929 (2007). Detailed factual allegations are not required, id. at 555,
127 S.Ct. at 1964; Pryor, supra, 288 F.3d at 564, only a "short and plain statement"
showing the right to relief. Pryor, supra, 288 F.3d at 564 (citing Swierkiewicz v. Sorema
N.A., 534 U.S. 506, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) and quoting Fed. R. Civ. P.
8(a}(2)). "The plausibility standard is not akin to a `probability requirement,' but it asks for
more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Igbal,
556 U.S. 662, _, 129 S.Ct. 1937, 1949 (2009)(quoting Twombly, 550 U.S. at 556, 127
S.Ct. at 1965). "[M]ore than labels and conclusions" are required. Twombly, 550 U.S. at
555, 127 S.Ct. at 1964-65. In addition, allegations of fraud must be pled with
particularity. Lum, supra, 361 F.3d at 223.10
IV. The RICO Claims Lack Merit
A. Plaintiffs Fail to Show Proximate Cause Because the Injury
Alleged Is Derivative of Injury to CFI, Not a Direct Injury to Plaintiffs
A RICO claim requires a plaintiff to show proximate cause; "but for"
causation is not enough. Anza v. Ideal Steel Supply Co., 547 U.S. 451, 456-57, 126
10 Plaintiffs have filed a RICO case statement, but that statement adds nothing to the
allegations of the amended complaint. We therefore look solely to the amended complaint to
evaluate the motions to dismiss.
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S.Ct. 1991, 1996, 164 L.Ed.2d 720 (2006). There must be "'some direct relationship
between the injury asserted and the injurious conduct alleged."' ld., 126 S.Ct. at 1996
(quoting Holmes v. Securities Investor Prot. Corp., 503 U.S. 258, 268, 112 S.Ct. 1311,
1318, 117 L.Ed.2d 532 (1992)). "When a court evaluates a RICO claim for proximate
causation, the central question it must ask is whether the alleged violation led directly to
the plaintiffs injuries." !d. at 461, 126 S.Ct. at 1998.
Based on the requirement that a direct relationship be shown, shareholder
RICO claims based on injuries to the corporation fail for lack of causation. The claim
belongs to the corporation, and any injury to the shareholder, flowing only indirectly from
the injury to the corporation, has no proximate causal relationship to the defendant's
conduct. See Bixler v. Foster, 596 F.3d 751, 757, 758-59 (10th Cir. 2010)(collecting
case); Penn Mont Securities v. Frucher, 502 F. Supp. 2d 443, 466-67 (E.D. Pa.
2007)("Indirect or derivative harms to a shareholder plaintiff do not confer RICO
standing."); McCoy-McMahon v. Godlove, No. 08-5989, 2011 WL 4820185, at *13 (E.D.
Pa. Sept. 30, 2011)("When the victim of a RICO violation is a corporation and the
shareholder indirectly suffers harm from the corporate injury, proximate cause is not
met.")(citing Penn Mont Securities, 502 F. Supp. 2d at 466). Cf. In re Sunrise Sec. Litig.,
916 F.2d 874, 879 (3d Cir. 1990)(under a RICO proximate cause analysis, depositors of
a saving and loan association could not bring RICO claims in their own right because
their injuries flowed from the injuries to the savings and loan).
Defendants contend Plaintiffs have failed to show causation because the
injury they allege, diminution in the value of their shares, is derivative of the injuries
Plaintiffs allege were inflicted on CFI by Defendants. We agree.
We review the pertinent allegations of the amended complaint. Defendant
Lowell Gates "plotted a cynical method of enriching himself and the other defendants .. .
." (Am. Comp/. ¶ 35). The scheme involved engineering "a sure and steady decline in
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the fortunes of CFI, while falsely representing to non-defendant shareholders, including
the plaintiffs, that every effort was being made to make CFI profitable." (!d.). As part of
the scheme, "Series A Capital Notes" were issued in 2005. By way of these notes, the
individual defendants lent $200,000 to CTC in exchange for repayment with interest, or
upon a change in control of CFI, the ability to convert the debt to CFI shares based on
the "`book value per share ... on the closing date of the change in control."' (Id. ¶
19)(quoting the CFI 2005 annual report, n.4)."
Sometime before mid-2008, the individual defendants conspired with
Franklin Financial to enter into the merger agreement. (Id. ¶ 21). Franklin Financial was
to pay $1.13 million for CFI, payable to the shareholders based on the number of shares
owned and the book value at the end of the month preceding the merger date. (Am.
Comp/. ¶ 21 and doc. 20-5, Ex. D, proxy statement, dated Aug. 8, 2008, CM/ECF pp. 1
and 35).
The merger was consummated on November 29, 2008. (Am. Comp/. ¶ 67;
Ex. C, doc. 20-4, CM/ECF p. 2). CFI's book value on October 31, 2008, was $.15 per
share.12 The individual defendants exercised their right to convert their notes into stock,
resulting in the issuance of 1,366,380 new shares. (Am. Comp/. ¶ 65). This meant that
the total shares owned by the individual defendants came to over 1,470,000 while non-
defendant shareholders held only 103,535. (Id.). This "dilution" of the shares held by the
latter led to the sixty-two non-defendant shareholders (including the plaintiffs) dividing
about $75,000 between them while the seven individual defendants collectively received
11 Paragraph 19 says the loan went to CFI, but Plaintiffs say this is a mistake, and the
loan really went to Community Trust Company (CTC), the wholly-owned subsidiary of CFI.
12 However, the merger agreement's ultimate valuation was $.71 per share. (Am.
Comp/. ¶ 69).
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$1,050,000, (id. ¶¶ 71, 72), even though before the merger the non-defendant
shareholders owned a little less than 50% of the company. (!d. ¶ 14).
Plaintiffs allege that to accomplish this result the individual defendants
engaged, in part, in fraudulent conduct, that would cause CFI's financial condition to
deteriorate, thereby providing an excuse for the merger. The defendants "devised a
scheme or artifice to defraud," (Id. ¶ 114), "to diminish the value of CFI so more stock
could be obtained by the defendants at a lower value and thus dilute the value of the
plaintiffs' and other shareholders' shares and increase the portion of CFI's sale price
provided to the individual defendants." (!d. ¶ 116).
Defendants are accused of engaging in certain transactions that diminished
CFI's value to accomplish this scheme. "After June 30, 2008, CFI incurred additional
operating losses orchestrated by the defendants ...." (Id. ¶ 63). Franklin Financial
assisted in this by using "CFI assets to pay the costs associated with completing the
merger, thus driving down the value of CFI." (Id. ¶ 64). The Defendants "devalu[ed] CFI,
[and] wasted [its] assets." (Id. ¶ 78; see also ¶ 66).
Franklin Financial joined this scheme and benefitted by "obtaining a
company with more than $70 million in assets under management, reaping estimated
annual returns of $700,000, and a $500,000 corporate headquarters for a mere
$1,130,000." (Id. ¶ 14). Defendants described this as a "sweetheart deal," (id. ¶ 14), a
deal fora "bargain price", (id. ¶ 99), or one fora "bargain basement price." (Id. ¶ 105).
It is apparent from these allegations that Plaintiffs are basing their injuries
on injuries to CFI. The injury they claim, dilution of the value of their shares, is alleged to
have occurred because Defendants wasted the assets of CFI. This injury is indirect and
does not satisfy RICO causation. See Penn Mont Securities, 502 F. Supp. 2d at 463,
467 (observing that "[c]orporate waste is a `classic' derivative harm," in ruling that dilution
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Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 15 of 30
of the plaintiffs' shares was not actionable under RICO because it resulted from injury to
the corporation).
In opposing Defendants' proximate-cause argument, Plaintiffs argue that
their injury is really one to their right to maintain their proportionate ownership of CFI
stock. This is a direct injury to them, not derivative of any injury to the corporation, and
satisfies RICO proximate cause.
In making this argument, Plaintiffs principally rely on Lochhead v. Alacano,
697 F. Supp. 406 (D. Utah 1988). However, Lochhead is distinguishable. In that case,
the plaintiff shareholder in Arctic Circle, Incorporated, sued five defendants -officers,
directors and majority shareholders of Arctic Circle - over a stock option plan never
validly adopted, according to the plaintiff. The plan allowed defendants to purchase
24,150 additional shares of Arctic Circle stock. The defendants exercised this option in a
later merger of Arctic Circle into Quaker State Minit-Cube, Incorporated. In making his
claim, the plaintiff relied on an injury to his right to maintain his proportionate ownership
interest in Arctic Circle. Under the terms of the merger, a fixed number of Quaker State
shares were exchanged for Arctic Circle shares, regardless of the number of Arctic Circle
shares outstanding. Thus when the defendants exercised their option to purchase
additional Arctic Circle shares, the defendants allegedly received proportionally more
shares of Quaker State than they should have. 697 F. Supp. at 409. Plaintiff asserted he
would have received 30,194 more shares of Quaker State, id., and sought as
compensatory damages $728,405, his calculation of the value of the additional shares of
Quaker State stock he would have received if the defendants had not exercised their
stock options.
The defendants moved to dismiss this claim, arguing that it was really one
for a diminution in the value of his shares, which was a derivative action, and hence not
one that could be brought directly by a shareholder. The court disagreed, noting that "'[A]
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shareholder has a direct right to attack a corporate transaction which dilutes his
proportionate ownership."' !d. at 412 (quoting Gordon v. Fundamental Investors, Inc.,
362 F. Supp. 41, 45 (S.D.N.Y. 1973)). The court also noted that neither Arctic Circle nor
Quaker State had suffered any injury and that "the overall value of Arctic Circle at the
time of merger was unaffected by defendants' actions since its purchase price was fixed
irrespective of the number of shares outstanding." Id. at 411. The court concluded that
the plaintiff shareholder "had the right to maintain his relative status as a stockholder and
to protect his proportionate ownership interest against fraudulent dilution," id. at 413, and
allowed the claim to proceed.
Plaintiffs argue that Lochhead supports a conclusion that their RICO claims
have a direct causal relationship to Defendants' conduct. Plaintiffs argue that, just as in
Lochhead, their injury was the dilution of the relative value of their shares, (doc. 45, Pls.'
Opp'n Br. at p. 16), and that no injury was suffered by CFI as its purchase price, $1.13
million, remained the same both before and after Defendants' efforts to destroy it.
Plaintiffs' reliance on Lochhead is misplaced, for reasons given by the
individual defendants in their reply brief. First, and as recited above, Plaintiffs allege an
injury based on the dilution of the value of their shares (Am. Compl. ¶ 116), not on a
dilution of their proportionate ownership interest in CFI. Second, this injury is allegedly
the result of injury to CFI either by the wasting of its assets or by some other expenditure
of its assets. (Id. ¶¶ 63, 64, 78, 114). Plaintiffs themselves cannot avoid this
characterization. (Doc. 45, Pls.' Opp'n Br. at p. 13)("The dilution of corporate assets is
the proper basis for direct-action litigation ...."). Third, unlike in Lochhead, where the
plaintiff sought damages commensurate with the injury to his right to proportionate
ownership, Plaintiffs here seek the return of any investment they might have made in CFI
Plaintiffs have cited other cases, Alleghany Corp. v. Breswick & Co., 353
U.S. 151, 77 S.Ct. 763, 1 L.Ed.2d 726 (1957); Borak v. J.l. Case Co., 317 F.2d 838 (7th
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Cir. 1963); Zinman v. FDIC, 567 F. Supp. 243 (E.D. Pa. 1983); and Gordon v.
Fundamental Investors, Inc., 362 F. Supp. 41 (S.D.N.Y. 1973). The court has reviewed
these cases and finds they are distinguishable for the same reason Lochhead is -they all
dealt with shareholder claims that their proportionate ownership in the corporation had
been injured.
The court has to look at "the nature of the wrongs alleged in the body of the
complaint," Lochhead, 697 F. Supp. at 411 (quoted case omitted). Plaintiffs are alleging
injury to the value of their shares by way of an injury to the corporation. This is an
indirect injury that is insufficient for a RICO claim. We therefore conclude that Plaintiffs
have failed to allege RICO causation on their claims.
B. Plaintiffs' RICO Claims Fail Because Plaintiffs Have Not
Pled a Pattern of Racketeering Activity
Plaintiffs' two substantive RICO claims are based on 18 U.S.C. §§ 1962(b)
and 1962(c). Both sections require a plaintiff to show that the defendant engaged in a
pattern of racketeering activity. In pertinent part, for a claim under section 1962(b), a
plaintiff must allege that the defendant: (1) "through a pattern of racketeering activity" (2)
acquire[d] or maintain[ed] ...any interest in or control of (3) any enterprise ...." Id. §
1962(b)(numbering added). In pertinent part, for a claim under section 1962(c), the
plaintiff must allege that the defendant: (1) "conduct[ed] or participate[d] ... (2) in the
conduct of [an] enterprise's affairs ... (3) through a pattern of racketeering activity ...."
Id. § 1962(c)(numbering added).
"A pattern of racketeering activity" requires a plaintiff to establish "at least
two acts of racketeering activity within aten-year period." In re Ins. Brokerage Antitrust
Litig., 618 F.3d 300, 364 (3d Cir. 2010)(citing 18 U.S.C. § 1961(5)). An act of
racketeering activity (otherwise known as a predicate act) is specifically defined in 18
U.S.C. § 1961(1) as certain state crimes, id. § 1961(1)(A), and numerous federal crimes,
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including federal mail or wire fraud. Id. § 1961(1)(6).13 "`[T]o prove a pattern ... a
plaintiff or prosecutor must show that the racketeering predicates are related, and that
they amount to or pose a threat of continued criminal activity."' United States v. Bergrin,
650 F.3d 257, 267 (3d Cir. 2011)(quoting H.J., Inc. v. Nw. Bell Tel. Co., 492 U.S. 229,
244, 109 S.Ct. 2893, 2900, 106 L.Ed.2d 195 (1989))(emphasis in H.J., Inc.).
"'Relatedness"' can be shown if the predicate acts "`have the same or similar purposes,
results, participants, victims, or methods of commission, or otherwise are interrelated by
distinguishing characteristics and are not isolated events."' Id. at 267 (quoting H.J. Inc.,
492 U.S. at 240, 109 S.Ct. at 2901). "'Continuity"' is "'both aclosed- and open-ended
concept, referring either to a closed period of repeated conduct, or to past conduct that
by its nature projects into the future with a threat of repetition."' Id. at 267 (quoting H.J.,
Inc., 492 U.S. at 241, 109 S.Ct. 2902).
Since Plaintiffs assert Defendants engaged in a pattern involving closed-
ended continuity, (doc. 45, Pls.' Opp'n Br. at p. 26), we analyze the pattern element of
their RICO claims on that basis. "`Closed-ended continuity"' can be established "`by
proving a series of related predicates extending over a substantial period of time."'
Bergrin, 650 F.3d at 267 (quoting H.J., Inc., 492 U.S. at 242, 109 S.Ct. 2902).
In their motion to dismiss, the individual defendants maintain for various
reasons that the amended complaint fails to allege the necessary pattern. In its own
motion, Franklin Financial also argues that Plaintiffs have not alleged a pattern. We deal
with the arguments separately.
13 The state crimes that can be racketeering activity are "any act or threat involving
murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or
dealing in a controlled substance or listed chemical (as defined in section 102 of the
Controlled Substances Act), which is chargeable under State law and punishable by
imprisonment for more than one year." 18 U.S.C. § 1961(1)(A).
-18-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 19 of 30
1. Plaintiffs Have Failed to Allege the Individual
Defendants Engaged in a Pattern Of
Racketeering Activity
The individual defendants argue Plaintiffs' amended complaint fails to allege
a pattern of racketeering activity for the following reasons, in part. First, the predicate
acts (assuming they are predicate acts as defined by RICO) are not alleged in specific
detail so that it is impossible to determine if they are related.
Second, the predicate acts, committed from 2001 through the October 2008
merger, are not plausibly related, given the stated purpose of the alleged scheme.
Plaintiffs allege the scheme was to allow the individual defendants to either profit from the
sale of CFI or at least minimize their losses, after wasting the corporation's assets over
those years, by diluting the value of the non-defendant shareholders' stock when there
was a change in control.14 The defendants argue it is not plausible that they would have
engaged in conduct ruining the company hoping that years down the line they would find
a buyer which would purchase it after they had put it in financial difficulty. Moreover,
even if there were plausibility, Plaintiffs have not alleged how the predicate acts are
related to the fraudulent scheme, the first prong of the pattern requirement.
Third, Plaintiffs have failed to allege closed-ended continuity because the
allegations support only a short term scheme with a single goal that has now been
accomplished, citing Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12, 19 (1st
Cir. 2000)(single-goal scheme with a finite number of predicate acts occurring over a
short period of time does not establish closed-ended continuity).
Fourth, the individual defendants argue that Plaintiffs have not adequately
pled the racketeering activity. They maintain that Plaintiffs rely solely on mail and wire
14 Plaintiffs allege the scheme allowed the individual defendants, who owned 50.36%
of the shares just before the merger, to claim 93% of the $1.13 million Franklin Financial paid
for CFI.
-19-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 20 of 30
fraud for the predicate acts but that the allegations do not establish either type of fraud for
two reasons. To begin with, the allegations are not specific enough in three ways. First,
they violate F. R. Civ. P. 9(b), which requires allegations of fraud to be pled with
particularity, meaning allegations about the date, time or place of the fraud, or some other
means of injecting precision. Lum v. BankofAmerica, 361 F.3d 217, 223-24 (3d Cir.
2004). Rule 9(b) also requires allegations about the substance of the fraudulent
statement and the identities of the maker and the recipient. Id. at 224. Second, they fail
to allege how the use of the mails or wires relates to the fraudulent scheme. See
Richardson v. Richardson, No. 07-4510, 2008 U.S. Dist. Lexis 55436, at *12-13 (E.D. Pa.
July 22, 2008). See also Bonavitacola Elec. Contractor, Inc. v. Boro Developers, Inc., 87
F. App'x 227, 231 (3d Cir. 2003)(nonprecedential)("When mail or wire fraud is the
predicate act to a RICO violation, the plaintiff must allege that mailings are related to the
underlying fraudulent scheme, even though mailings need not be an essential element of
the scheme and need not themselves contain any misrepresentations.")(citing Tabas v.
Tabas, 47 F.3d 1280, 1294 and n.18 (3d Cir. 1995); Kehr Packages, Inc. v. Fidelcor, Inc.,
926 F.2d 1406, 1413 (3d Cir. 1991)).15 Third, Plaintiffs allege that Defendants have
collectively engaged in predicate acts and have failed to allege the specific defendants
responsible for each fraudulent statement. See DeLage Landen Fin. Services, Inc. v.
Cardservice Int'1, Inc., 2001 U.S. Dist. Lexis 9692, at *9-10 ((E.D. Pa. July 12, 2001).
After reviewing Plaintiff's opposition, we agree with the defendants that
Plaintiffs have not sufficiently pled a pattern of racketeering activity. In briefing the issue,
Plaintiffs assert that the following are predicate acts:
15 Mail or wire fraud consists of: "(1) a scheme to defraud, (2) the use of the mails or
wires for the purpose of executing the scheme, and (3) fraudulent intent." Richardson, 2008
U.S. Dist. Lexis 55436, at "12 (citing United States v. Pharis, 298 F.3d 228, 234 (3d Cir.
2002)).
-20-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 21 of 30
1. Gabriella Eisen trust fund litigation--CTC held money in
trust to pay the special needs of Gabriella Eisen. In or around
2000-2001, Lowell Gates "authorized distribution from the
trust for Gabriella's mother, contrary to the intent of the trust,
using the mails, telephones, and/or emails, which would
constitute mail and/or wire and/or bank fraud, as well as
possibly embezzlement of pension and/or welfare funds, or
unlawful welfare fund payments. See 18 U.S.C. §§ 664,
1341, 1343, 1954." Gates and CTC were sued over the illegal
payments, leading to a settlement of $175,000, as reported in
CFI' 2008 Annual report proxy. This settlement reduced CFI's
book value and capitalization.
(Am. Compl. ¶¶ 93 and 108(f)).'s
2. The Solenberger case--In or around August 2001,
defendant, Lowell Gates, transferred the proceeds of Mary K.
Solenberger's Individual Retirement Accounts (IRA) to an
irrevocable trust administered by CTC. This had unfavorable
tax consequences for Solenberger. Her estate sued Gates in
state court, alleging that the transfer was intended to benefit
Gates financially by allowing CTC to control Solenberger's
funds, and thereby earn fees. According to the estate,
Gates's conduct reflected a pattern of self-dealing whereby
Gates encouraged clients to transfer money to CTC without
advising them of the unfavorable tax consequences
associated with the transfer.
The case settled with a substantial payout to the
Solenberger estate. Plaintiffs allege Gates engaged in
fraudulent acts in connection with this transfer. "Gates in
conjunction with some or all of the individual defendants
utilized the mails and/or telephone to effect this fraud upon
Mary Solenberger and/or her estate in violation of 18 U.S.C.
§§ 1341, 1343." The settlement also diminished CFI's value.
(Am. Compl. ¶¶ 89 and 108(d)); doc. 45, Pl.'s Opp'n Br. at p. 20).
3. The Magaro case-Lowell Gates advised one of his
clients, Marie Magaro, to borrow against her IRA, a prohibited
transaction under federal tax law. In January 2003, Magaro
sued Gates, his law firm and CTC. This lawsuit revealed that
Gates created a conflict of interest between CTC and its
clients. It also revealed he had written a letter "propos[ing] a
cover-up of the prohibited transaction from the tax authorities,
a clear example of mail fraud, wire fraud, obstruction of
justice, money laundering, bank fraud, and monetary
16 Paragraph 93 avers the settlement reduced CTC's book value and capitalization,
but it is clear that Plaintiffs meant to say CFI.
-21-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 22 of 30
transaction fraud in violation of 18 U.S.C. §§ 1341, 1343,
1503, 1951, 1956." "Costs and expenses from this legal
matter led to the reduction in capitalization of CTC."
(Am. Compl. ¶¶ 90-92, and 108(e)).
4. The Helm case--CFI management, including defendant
Russell, refused to give plaintiff, Patricia A. Helm, the
addresses of other shareholders when she requested that
information in 2007 pursuant to 15 Pa. Con. Stat. Ann. § 1508
(West Supp. 2011) so that she could investigate the
management of CFI. To obtain the information she had to file
suit in state court. The state court found that CFI
management, including defendant Russell, had acted in "bad
faith" and in a "vexatious" manner and awarded attorney's
fees for forcing Helm to litigate her right to obtain this
information.
According to Plaintiffs, the refusal to provide Helm with the
shareholder information was a predicate act. The costs and
expenses to CFI, including attorney's fees, from this legal
matter reduced the book value and capitalization of CFI.
Additionally, because the mails, fax machines, a-mails and
telephones were used, this conduct constituted mail and wire
fraud in violation of 18 U.S.C. §§ 1341 and 1343.
(Am. Compl. ¶¶ 96 and 108(b)).
Plaintiffs argue that these four lawsuits over a period of at least eight years
establish a pattern of racketeering. We disagree, in part for the reasons advanced by the
individual defendants. We first look at whether the conduct is sufficiently alleged to be a
predicate act. We take each alleged predicate act separately.
The Gabriella Eisen trust fund litigation is not a predicate act. Plaintiffs
assert it is because the mail and wires were used to authorize the illegal distribution from
the trust fund. However, that is not enough. Plaintiffs must also allege how the use of
the mails or wires related to a fraudulent scheme, the purpose of the mailings or wires
-22-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 23 of 30
within that scheme, the fraudulent statement and perhaps (in the absence of some other
precision) when and where it was made."
The Solenberger case is not a predicate act. Plaintiffs allege the transfer
from Solenberger's IRAs to an irrevocable trust administered by CTC was fraudulent and
that Gates along with unnamed other individual defendants, used the mails and/or the
telephone to effect this fraud on Mary Solenberger. However, as noted above, this is not
enough. Plaintiffs must also allege how the use of the mails or wires related to a
fraudulent scheme, the purpose of the mailings or wires within that scheme, the
fraudulent statement and perhaps (in the absence of some other precision) when and
where it was made.
The Magaro case is not a predicate act. Plaintiffs allege that a proposed
cover-up of the illegal transaction by Lowell Gates in a January 2003 letter was a clear
example of mail fraud, wire fraud, obstruction of justice, money laundering, bank fraud,
and monetary transaction fraud in violation of 18 U.S.C. §§ 1341, 1343, 1503, 1951,
1956. As noted above, the allegations of mail and wire fraud are not specific enough. As
for the remaining crimes, Plaintiffs do not allege the cover-up was accomplished, only
that it was proposed.
Finally, the Helm case is not a predicate act because a violation of 15 Pa.
Con. Stat. Ann. § 1508 is not listed in section 1961(1)(A) as a state-law crime that
qualifies as a predicate act.18 See St. Clair v. Citizens Fin. Group, 340 F. App'x 62, 66
(3d Cir. 2009)(per curiam)(nonprecedential)("antitrust violations are not on the list of
predicate acts in 18 U.S.C. § 1961(1) and, thus, cannot be the basis of a RICO claim").
17 Plaintiffs' allegations about embezzlement of pension and/or welfare funds, or
unlawful welfare fund payments are also conclusory. Plaintiffs also concede these are only
"possibl[e]" violations of federal law.
le In fact, section 1508 does not deal with a criminal offense at all; it gives a
shareholder the right to inspect the shareholder list and to enforce that right civilly.
-23-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 24 of 30
Nor does it help Plaintiffs that they allege the conduct also constitutes mail and wire fraud
because the mail and wires were used. An individual defendant may have used the mails
or wires in connection with this conduct but, as noted above, that is not sufficient.
Plaintiffs must also allege how the use of the mails or wires related to a fraudulent
scheme, the purpose of the mailings or wires within that scheme, the fraudulent
statement and perhaps (in the absence of some other precision) when and where it was
made.
Plaintiffs point to other alleged conduct as predicate acts. Plaintiffs allege
that the individual defendants' removal of certain Plaintiffs from the boards of CTC and
CFI and to withhold corporate information are part of the pattern of racketeering activity.
(Doc. 45, Pls.' Opp'n Br. at p. 22). They quote in support Gintowt v. TL Ventures, 239 F.
Supp. 2d 580 (E.D. Pa. 2002), where the court described the RICO claim as "Defendants
depriving Plaintiff of appropriate financial information and concealing ...the actual
business activities of the alleged enterprise ...with purpose and intent of defrauding
Plaintiff." Id. at 584. This language does not assist Plaintiffs. The court was merely
summarizing the RICO claim in that case and not addressing the predicate-acts
requirement.
Aside from the inadequate pleading of the predicate acts, the defendants
also correctly assert that Plaintiffs have not alleged a plausible pattern arising from these
four lawsuits. Plaintiffs allege a scheme whereby the individual defendants would gain
financially by cashing out of the merger with the majority of the $1.13 million Franklin
Financial would pay for CFI. The individual defendants would accomplish this by diluting
the value of Plaintiffs' shares. Dilution of Plaintiffs' shares would be accomplished by
wasting the corporate assets, thereby driving down its book value and benefitting the
individual defendants under the terms of the 2005 capital notes. Plaintiffs allege that the
individual defendants litigated the four lawsuits because the judgments entered against
-24-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 25 of 30
CFI, and the attorney's fees and costs involved in litigating the suits, would be one way of
wasting the corporate assets.
An assertion that the individual defendants engaged in unlawful acts,
leading to lawsuits, with these lawsuits being contested so that the corporate assets
would be wasted is one way of showing that the predicate acts are related because they
would then all serve the purpose of diluting Plaintiffs' shares. See Bergrin, supra, 650
F.3d at 270 ("relatedness" element satisfied if the predicate acts are averred to have
been committed for the "same or similar purposes"). However, we agree with the
defendants that it is not plausible that the individual defendants would have engaged in
the alleged predicate acts, deliberately driving down the value of CFI, and then hoping
they could find a company like Franklin Financial to buy it. Two of the lawsuits, the
Solenberger case in 2001 and the Magaro case in 2003, arose four and two years,
respectively, before the capital notes were issued in 2005, and it was three years after
that, in 2008, that Franklin Financial agreed to purchase CFI.19 We agree with the
defendants that this is too long-range to be part of a plausible RICO claim.20
19 The individual defendants also argue it is implausible because the sale was forced
by a 2007 mandate by the Pennsylvania Department of Banking essentially requiring that CFI
have at least one million dollars in cash or cash equivalents in reserve, a requirement CFI
could not meet. The defendants argue this mandate could not have been anticipated years
earlier. We do not rely on this argument as it relies on matters outside the amended
complaint.
20 We note that Plaintiffs have alleged other predicate acts. CTC "repeated[ly]
refused "to comply with banking laws and regulations" and this led to fees assessed by the
state banking department that were much higher than they should have been. (Am. Compl. ¶
94). Plaintiffs do not argue in their opposition brief that these are predicate acts (whatever the
violations might have been), and we do not see how they could be under the definition of a
predicate act in section 1961(1)(A).
Plaintiffs also argue in their opposition brief that the defendants committed wire fraud
by temporarily wiring funds, called "intercompany receivables" from CFI to CTC "to artificially
inflate stated shareholder equity to misrepresent CTC as complying with ...capitalization
requirements." (Am. Compl. ¶ 40). We fail to see how these actions could form part of the
pattern.
-25-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 26 of 30
2. Plaintiffs Have Failed to Allege Franklin Financial
Engaged in a Pattern of Racketeering Activity
In moving to dismiss, Franklin Financial argues that no allegations are
made that it engaged in any of the predicate acts set forth in paragraphs 89 through 98 of
the amended complaint, only that the individual defendants did. Defendant Franklin
Financial argues that other allegations against it, (Am. Compl. ¶¶ 100, 101, 107(a) and
(b)), are too vague to establish predicate acts ordeal with conduct that occurred after the
merger and the dilution of Plaintiffs' shares. In opposition, Plaintiffs essentially argue that
they have made sufficient allegations because they allege that Franklin Financial began a
business relationship with CFI in 2004 when Franklin Financial became the administrator
of the $53.5 million estate of Lowell Gates's aunt and uncle. (Am. Compl. ¶ 76). They
have also alleged that Franklin Financial conspired with the individual defendants and,
because it had engaged in due diligence concerning the merger, knew about the
individual defendants' predicate acts and ratified them by agreeing to the merger. (Id. ¶
131).
We have already decided that Plaintiffs have failed to allege predicate acts
by the individual defendants, so Plaintiffs cannot rely on any predicate acts by those
defendants. We have also decided that Plaintiffs have failed to allege a pattern of
racketeering activity against the individual defendants. Since Plaintiffs' position on
Franklin Financial's pattern of racketeering activity is dependent on the validity of its
allegations against the individual defendants, we conclude that Plaintiffs have failed to
allege a pattern of racketeering activity against Franklin Financial.
-26-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 27 of 30
C. Plaintiffs' Section 1962(c) RICO Claim Fails Because
Plaintiffs Have Not Pled the Existence
of an Association-in-Fact Enterprise
A section 1962(c) claim has as an element the existence of an
"enterprise." 21 Plaintiffs rely on the existence of an association-in-fact enterprise. An
association-in-fact enterprise "must have a structure." In re Ins. Brokerage Antitrust
Litig., supra, 618 F.3d at 366 (quoting Boyle v. United States, 556 U.S. 938, _, 129 S.Ct.
2237, 2244, 173 L.Ed.2d 1265 (2009)). "Specifically, it `must have at least three
structural features: a purpose, relationships among those associated with the enterprise,
and longevity sufficient to permit these associates to pursue the enterprise's purpose."'
Id. (quoting Boyle, 556 U.S. at _, 129 S.Ct. at 2244)).
The individual defendants argue that Plaintiffs have failed to allege these
structural elements of an enterprise. In opposition, Plaintiffs maintain that they have,
relying principally on paragraphs 13 and 14 of the amended complaint. Paragraph 13
alleges that the enterprise consists of Franklin Financial and the individual defendants.
Paragraph 14 provides a general description of the scheme that led to the RICO claims:
14. Generally, the scheme involved Defendants Lowell
Gates, Dunphy, Habacivich, Henry, Kohr, and Russell leading
non-defendant shareholders, including plaintiffs, to believe
that their business was sound. Then, through an insider loan
agreement with board members and management, those
individual defendants received stock at its book value at
change of control of CFI to Defendant Franklin Financial as
well as interest on the loan. Those defendants oversaw the
diminution of assets, profited to the detriment of the plaintiffs
and other non-defendant shareholders by receipt at or near
the very last day of CFI's existence of more than 1.3 million
shares of CFI that effectively diluted the value of the shares of
the plaintiffs and other non-defendant shareholders, who had
collectively owned approximately 100,000 shares or roughly a
little less than one-half of the company before the stock
dilution. Defendant Franklin Financial benefited from the
zl As we noted above, for a claim under section 1962(c), the plaintiff must allege that
the defendant: (1) "conduct[ed] or participate[d] ... (2) in the conduct of [an] enterprise's
affairs ... (3) through a pattern of racketeering activity ...." Id. § 1962(c)(numbering added).
-27-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 28 of 30
sweetheart deal of obtaining a company with more than $70
million in assets under management, reaping estimated
annual returns of $700,000, and a $500,000 corporate
headquarters for a mere $1,130,000. In addition, Defendant
Franklin Financial stated in the August 8, 2008 Proxy
Statement, set forth at Exhibit D, and incorporated fully herein,
that it had conducted a full due diligence review of CFI and
CTC prior to the merger, and, upon information and belief,
through this review was made fully aware of, and was fully
complicit in the scheme. Franklin Financial further assumed
successor liability for all actions by CFI and CTC and the
individual defendants, for all actions occurring prior to the
Effective Date of the merger.
(Am. Compl. ¶ 14). Plaintiffs also assert that the remaining paragraphs of the amended
complaint set the scheme out in more detail. They also point out that under Boyle they
need not allege any kind of hierarchical structure or chain of command. Boyle, supra,
556 U.S. at _, 129 S.Ct. at 2245.
We agree with the individual defendants that Plaintiffs have failed to allege
an enterprise. Of the three minimum structural elements, Plaintiffs have sufficiently
alleged apurpose -- to allow the individual defendants to either profit from the sale of CFI
or at least minimize their losses by diluting the value of the non-defendant shareholders'
stock when there was a change in control, accomplished by wasting CFI's assets. They
have also alleged longevity as this allegedly took place over a number of years.
However, Plaintiffs fail to allege a relationship among those associated with the
enterprise because they fail to allege facts showing a relationship between Franklin
Financial and the individual defendants. Plaintiffs attempt to show this relationship by
relying on Franklin Financial's becoming the administrator of the $53.5 million estate of
Lowell Gates's aunt and uncle in 2004, (Am. Compl. ¶ 76), and its decision to acquire CFI
by merger and the "relationship" that developed as Franklin Financial reviewed CFI's
financial condition before agreeing to the merger, at a "bargain" price. These allegations
do not establish a relationship. They imply only unilateral action by Franklin Financial in
its dealings with CFI. Plaintiffs therefore fail to state a section 1962(c) claim.
-as-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22/11 Page 29 of 30
D. Plaintiffs' R1C0 Conspiracy Claim Under
Section 1962(d) Fails Because Plaintiffs
Have Failed to Allege Violations of Section
1962(b) or Section 1962(c)
18 U.S.C. § 1962(d) makes it illegal "to conspire to violate any of the
provisions [ofJ subsections (a), (b), or (c)" of section 1962. Franklin Financial and the
individual defendants move to dismiss Plaintiffs' claim under section 1962(d) on the
ground that they have failed to allege valid claims under subsections (b) and (c). We
agree with this argument. See Lum v. Bank ofAmerica, 361 F.3d 217, 227 n.5 (3d Cir.
2004)(failure to adequately plead a substantive RICO claim under section 1962(c) means
that the section 1962(d) conspiracy claim was properly dismissed).
V. Conclusion
Our analysis above leaves no federal claims in the case. As we did when
we dismissed the RICO claims before, we decline under 28 U.S.C. § 1367(c)(3) to
exercise our supplemental jurisdiction over the state-law claims. See Jacobowitz v. M&T
Mortgage Corp., 372 F. App'x 225, 228-29 (3d Cir. 2010)(per curiam)(nonprecedential).
We will therefore dismiss the action without prejudice to Plaintiffs' pursuing their state-law
claims in state court.22
We will issue an appropriate order.
/s~lliam W. Caldwell
William W. Caldwell
United States District Judge
Date: November 22, 2011
22 Plaintiffs assert that they are entitled to discovery to find support for their RICO
claims because the individual defendants were concealing their illegal activities from them.
Based on the allegations already presented, we do not think discovery would validate the
RICO claims.
-29-
Case 1:10-cv-01285-WWC Document 60 Filed 11/22!11 Page 30 of 30
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
MATTHEW P. AMOS,
Plaintiff
CIVIL NO. 1:CV-10-1285
ORDER
AND NOW, this 22nd day of November, 2011, it is ordered that:
1. Plaintiffs' motion (doc. 54) for reconsideration under Fed.
R. Civ. P. 59(e) is granted, and the order of May 26, 2011, is
vacated.
2. Defendants' motions (doc. 38 and 39) to dismiss are
granted in the following respect: the RICO claims in counts I,
II, and III are hereby dismissed.
3. The court declines to exercise supplemental jurisdiction
over the state-law claims in counts IV, V, VI, VII, VIII and IX,
and those claims are dismissed without prejudice to filing
them in state court.
4. The Clerk of Court shall close this file.
vs.
FRANKLIN FINANCIAL SERVICES
CORPORATION, et. al,
Defendants
/s/William W. Caldwell
William W. Caldwell
United States District Judge
Case: 11-4528 Document: 003111155822 Page: 1 Date Filed: 02/04/2013
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 11-4528
MATTHEW P. AMOS; CHRISTINE A. AMOS; ROBERT A. ABEL; PAMELA MOBIUS
ARMSTRONG; DAVID L. ENGLEHART; JANET C. NACLERIO; DONALD A. ERNEY;
TIMOTHY P. FARRELL; KEVIN M. FINN; DAWSON FLINCHBAUGH; CAROLE A.
FOWLER; PATRICIA A. HELM; BRUCE G. HOLRAN; RONALD N. HUGHMANICK;
JANET C. NACLERIO; EDWARD R. NORFORD; RONALD L. PROUGH; WILLIAM J.
REGAN; LOUIS M. ROBINSON; BRUCE A. SMITH; CHARLOTTE SPITZ; ROBERT M.
TROXELL; JANET M. WESTCOTT; CURT H. ZIMMERMANN; RICHARD ZLOGAR;
JEFFREY S. NICKUM,
Appellants
v.
FRANKLIN FINANCIAL SERVICES CORPORATION; LOWELL R. GATES; LINDA LEE
GATES; NICHOLAS J. DUNPHY; WILLIAM T. HABACIVICH; CHARLES J. HENRY;
ANDREW W. KOHR; SUSAN A. RUSSELL
On Appeal from the United States District Court '..~
for the Middle District of Pennsylvania `~~ ~ = -.-
.
,
(Civ. No. 1-10-cv-01285) r ~ .~
~ ~ ; :_'
District Judge: The Hon. William W. Caldwell ~ = ~' ~ _"~ ~-.-.
Argued: October 5, 2012 ! = ~=~; - - -
y= r" ~,n;
_,...
efore: McKEE, Chief Judge, JORDAN and
~_:
.~ ~_,
~ s <-.. _.
~....
_,_
--
VANASKIE, Circuit Judges `` ~--
JUDGMENT
This cause came on to be heard on the record from the United States District Court for
the Middle District of Pennsylvania and was argued on October 5, 2012.
On consideration whereof it is now here ORDERED AND ADJUDGED by this Court
that the order of the said District Court entered November 22, 2011, be, and the same is hereby
affirmed. Costs taxed against appellants. All of the above in accordance with the opinion of this
Court.
Case: 11-4528 Document: 003111155822 Page: 2 Date Filed: 02/04/2013
ATTEST:
/s/Marcia M. Waldron
Clerk
Dated: January 11, 2013
Costs taxed in favor of Appellee as follows:
Brief $160.04
TOTAL $160.04
`,µ1O{~qp,
c, ~'O - yyf~~C1~.
~; ~c
r :
~~
• ___
CertiAed y ~id issued in lieu
ofafor~ ate 02/04/2013
Clerk, U.S. Court of Appeals for the Third Circuit
2
IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA
MATTHEW P. AMOS, CHRISTINE A.
AMOS, ROBERT A. ABEL, PAMELA CIVIL DIVISION
MOBIUS ARMSTRONG, DAVID L.
ENGLEHART, DONALD A. ERNEY, No. 13-952
TIMOTHY P. FARRELL,KEVIN M.
FINN, DAWSON E. FLINCHBAUGH,
CAROLE A. FOWLER, PATRICIA A. PRAECIPE TO DISCONTINUE LAWSUIT
HELM, BRUCE G. HOLRAN, RONALD
N. HUGHMANICK, JANET C. Filed on behalf of all plaintiffs
NACLERIO, EDWARD R. NORFORD,
RONALD L. PROUGH, WILLIAM J. Counsel of Record for the plaintiffs
REGAN, LOUIS M. ROBINSON, BRUCE :
A. SMITH, CHARLOTTE SPITZ, ROBERT: Michael A. Farnan
M. TROXELL, JANET M. WESTCOTT, PA ID 69158
CURT H. ZIMMERMANN, RICHARD The Farnan Law Office
ZLOGAR, JEFFREY S. NICKUM, P.O. Box 42397
Pittsburgh, PA 15203
Plaintiffs, 412-592-7737 (Phone)
412-202-1313 (Fax)
V. :
FRANKLIN FINANCIAL SERVICES
CORPORATION; LOWELL R. GATES;
LINDA LEE GATES; NICHOLAS J.
DUNPHY; WILLIAM T. HABACIVICH;
CHARLES J. HENRY, ANDREW W.
KOHR; and SUSAN A. RUSSELL,
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IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA
MATTHEW P. AMOS, et al.
Plaintiffs,
CIVIL DIVISION
V.
No. 13-952
FRANKLIN FINANCIAL SERVICES, et al.:
Defendants.
PRAECIPE TO DISCONTINUE LAWSUIT
TO THE PROTHONOTARY:
On behalf of all plaintiffs, I respectfully request that this matter be
discontinued against all defendants.
Respectfully submitted,
THE FARNAN W FFICE
By:
chael A. Fa a
PA ID No. 69158
mfarnangfarnanlawoffice.com
P.O. Box 42397
Pittsburgh, PA 15203
Tel: (412) 592-7737
Fax: (412) 202-1313
Counsel for Plaintiffs
June 3, 2013
IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA
MATTHEW P. AMOS, et al.
Plaintiffs,
CIVIL DIVISION
V.
No. 13-952
FRANKLIN FINANCIAL SERVICES, et al.:
Defendants.
CERTIFICATE OF SERVICE
I hereby certify that a copy of the foregoing PRAECIPE TO DISCONTINUE,was this day
served by U.S. Mail, postage prepaid, addressed as follows:
Stephen Moniak, Esq.
Rhoads & Sinon, LLP
One South Market Square, 12th Floor
P.O. Box 1146
Harrisburg, PA 17108-1146
Ian M. Comisky, Esq.
Evan H. Lechtman, Esq.
Blank Rome LLP
One Logan Square
130 North 18th Street
Philadelphia, PA 19103-6998
THE F RNA LAW OFFICE
By:
Mi hael A. F a
PAID No. 69158
mfarnangfarnanlawoffice.com
P.O. Box 42397
Pittsburgh, PA 15203
Tel: (412) 592-7737
Fax: (412) 202-1313
Counsel for Plaintiffs
June 3, 2013