As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 4/24/15  Kentucky Bancshares Inc/KY        S-4                  115:28M                                    Toppan Merrill/FA

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Table of Contents

 

As filed with the Securities and Exchange Commission on April 24, 2015

Registration No. 333-  __________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Kentucky Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

P.O. Box 157

Paris, Kentucky 40362-0157

(859) 987-1795

(Address, including zip code, and telephone number, including area code, of

Registrant’s principal executive offices)

 

Louis Prichard

President and CEO

339 Main Street

P.O. Box 157

Paris, Kentucky  40362-0157

(859) 987-1795

 (Name, address, including zip code, and telephone number, including

area code, of agent for service)

 

Copies to:

 

Approximate Date of Commencement of Proposed Sale of the Securities to the Public: As soon as practicable after this Registration Statement becomes effective and upon completion of the share exchange described in the enclosed document.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box. o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered		Amount to be registered(1)		Proposed maximum price per Share(2)			Proposed maximum aggregate offering price(2)			Amount of registration fee
Common stock, no par value		263,456 shares		$	33.03		$	7,295,997		$	848

 

(1)

This amount is based upon the maximum number of shares of the registrant’s common stock anticipated to be issued upon the consummation of the share exchange described in this Registration Statement.

(2)

This amount is estimated solely for purposes of calculating the registration fee. It is calculated pursuant to paragraph (f)(2) of Rule 457 under the Securities Act of 1933, as amended, and is equal to (A) the book value per share of Madison Financial Corporation common stock on March 31, 2015 (the latest practicable date prior to the date of the filing of this Registration Statement), multiplied by (B) 220,890, the number of shares of Madison Financial Corporation common stock to be exchanged in the share exchange.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant will file a further amendment that specifically states that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement will become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

Table of Contents

 

The information in this proxy statement-prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement-prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PRELIMINARY — SUBJECT TO COMPLETION - DATED April 24, 2015

 

Prospectus of

Proxy Statement of

 

 

 

 

PROPOSED SHARE EXCHANGE — YOUR VOTE IS VERY IMPORTANT

 

The boards of directors of Kentucky Bancshares, Inc. (“Kentucky Bancshares”) and Madison Financial Corporation (“Madison”) have each agreed to the acquisition of Madison by Kentucky Bancshares. Kentucky Bancshares will acquire all of the outstanding common stock of Madison through a statutory share exchange.

 

In the share exchange, each share of Madison common stock will be exchanged into 1.1927 shares of Kentucky Bancshares common stock with the possibility of being reduced by 0.0001 shares of Kentucky Bancshares common stock for each $718 by which Madison’s Consolidated Net Book Value is less than $10,981,000 as of the tenth business day before the closing of the share exchange.  See page 49 for the definition of Consolidated Net Book Value.

 

As of March 31, 2015, Madison reported that it had a Consolidated Net Book Value of $11,562,825. Assuming that Consolidated Net Book Value remains unchanged through the date ten days before the closing, the exchange ratio would be 1.1927 shares of Kentucky Bancshares common stock for each share of Madison common stock, and the aggregate value of the Kentucky Bancshares shares issued to Madison shareholders in the share exchange would be $7,337,222, based on the $27.85 closing price of Kentucky Bancshares common stock on April 21, 2015.  For a range of hypothetical exchange ratios based on performance by Madison prior to closing, see “THE SHARE EXCHANGE AGREEMENT — What Madison Shareholders Will Receive in the Share Exchange” beginning at page 49.

 

Kentucky Bancshares’ common stock is not traded on any national securities exchange.  There is no established public market for Kentucky Bancshares common stock other than it is currently traded over the counter on the OTC Bulletin Board under the symbol “KTYB.” Based on the closing price of Kentucky Bancshares common stock on April 21, 2015, of $27.85 per share, a 1.1927 exchange ratio would have represented approximately $33.22 in value for each share of Madison. We urge you to obtain current market quotations for Kentucky Bancshares common stock.

 

Shareholders of Madison common stock are being asked to approve the share exchange.  The holders of Madison’s preferred stock are not entitled to and are not being requested to vote at the special meeting.  The holders of Kentucky Bancshares common stock are not entitled to and are not being requested to approve the share exchange.

 

We cannot complete the share exchange unless the shareholders of Madison approve the share exchange.

 

You should read this entire proxy statement-prospectus carefully because it contains important information about the share exchange. In particular, you should read carefully the information under the section entitled “Risk Factors,” beginning on page 15.

 

Neither the Securities and Exchange Commission nor any state securities regulators or bank regulatory agency has approved or disapproved of the securities to be issued in the share exchange or determined if this document is truthful or complete. Any representation to the contrary is a criminal offense. The shares of Kentucky Bancshares common stock to be issued in the share exchange are not deposits or savings accounts or other obligations of any bank or savings association, and are not insured by the FDIC or any other governmental agency.

 

This proxy statement-prospectus is dated [·], 2015 and is first being mailed to Madison shareholders on or about [·], 2015.

 

Table of Contents

 

Madison Financial Corporation

1001 Gibson Bay Drive, Suite 101

Richmond, Kentucky  40475

(859)  626-8008

 

Notice of Special Shareholders’ Meeting to be held on [·], 2015

 

[·], 2015

Date:		[·], 2015
Time:		[·] .m., Richmond, Kentucky time
Place:		1001 Gibson Bay Drive, Second Floor Richmond, Kentucky
Purpose:		·                  a proposal to adopt and approve the Agreement and Plan of Share Exchange, dated as of January 21, 2015, by and among Kentucky Bancshares, Inc. and Madison Financial Corporation (“Madison”) as such agreement and plan may be amended from time to time (the “share exchange proposal”); and ·                  a proposal to approve the adjournment of the Madison special meeting, if necessary or appropriate, to solicit additional proxies, if there are not sufficient votes at the time of the special meeting to approve the share exchange proposal (the “adjournment proposal”).
Record Date:		Close of business on [·], 2015

 

The approval of the share exchange proposal by Madison shareholders is required to complete the share exchange, as described in this proxy statement-prospectus.

 

Madison common shareholders will have the right to exercise dissenters’ rights under applicable provisions of Kentucky law and receive the fair value of their shares of Madison common stock as determined by the Circuit Court of Bourbon County, Kentucky, as more fully described in this proxy statement-prospectus.  In order to perfect dissenters’ rights, a shareholder must give written demand to Madison before the share exchange proposal is voted on at the special meeting and must not vote in favor of the share exchange proposal.  A copy of the sections of the Kentucky Business Corporation Act pertaining to dissenters’ rights is included as Appendix “B” to this proxy statement-prospectus.

 

The Madison board of directors recommends that you vote (1) “FOR” approval and adoption of the share exchange proposal and (2) “FOR” the adjournment proposal.

 

Madison will transact no other business at the meeting.  Please refer to the other sections of this proxy statement-prospectus for further information about the business to be transacted at the Madison special meeting.

 

If you plan to attend the meeting, please note that registration will begin at [·].m.  Each shareholder may be asked to present valid picture identification, such as a driver’s license or passport. Cameras, recording devices and other electronic devices will not be permitted at the meeting.

 

By order of the Board of Directors,

 

Michael R. Eaves

Chairman of the Board

 

Your Vote is Important

 

 

Table of Contents

 

PLEASE NOTE

 

We have not authorized anyone to provide you with any information other than the information included in this  proxy statement-prospectus and the documents we refer you to herein.  If someone provides you with other information, please do not rely on it.

 

This proxy statement-prospectus has been prepared as of the date on the cover page. There may be changes in the affairs of Kentucky Bancshares or Madison since that date that are not reflected in this document.

 

As used in this proxy statement-prospectus, the term “Kentucky Bancshares”  refers to Kentucky Bancshares, Inc. and, where the context requires, may refer to Kentucky Bancshares, Inc. and its subsidiaries, including Kentucky Bank.  When used in this proxy statement-prospectus, “we,” “us,” and “our” refer to Kentucky Bancshares.

 

As used in this proxy statement-prospectus “Madison” refers to Madison Financial Corporation and, where the context requires, “Madison” may refer to Madison Financial Corporation and its subsidiaries, including Madison Bank.

 

QUESTIONS AND ANSWERS

 

The following are answers to certain questions that you may have regarding the special meeting.  We urge you to read the remainder of this document carefully because the information in this section may not provide all the information that might be important to you in determining how to vote.  Additional important information is also contained in the appendices to this document.

 

Q:           Why am I receiving this document?

 

A:           The Madison board of directors is using this document to solicit proxies of Madison shareholders in connection with the proposals relating to the Agreement and Plan of Share Exchange (“share exchange agreement”) that Kentucky Bancshares and Madison have entered into.   In addition, we are using this document as a prospectus for Madison shareholders because Kentucky Bancshares is offering to issue shares of its common stock in exchange for shares of Madison common stock in the share exchange.

 

Q:           What am I being asked to vote on?

 

A:   Holders of Madison common stock are being asked to vote on two proposals:

 

·                  a proposal to adopt and approve the share exchange agreement, including the related plan of share exchange (the “share exchange proposal”), and

 

·                  a proposal to approve the adjournment of the Madison special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the share exchange proposal (the “adjournment proposal”).

 

Q:           What will I receive in the share exchange?

 

A:           If the share exchange is completed, Madison shareholders will receive 1.1927 shares of Kentucky Bancshares common stock for each share of Madison common stock that they hold immediately before the share exchange, subject to reduction (“share exchange consideration”).  We use the term “exchange ratio” to include the ratio resulting after any applicable reduction of the 1.1927 ratio.  The 1.1927 ratio may be reduced by 0.0001 shares of Kentucky Bancshares common stock for each $718 by which Madison’s Consolidated Net Book Value is less than $10,981,000 as of the tenth business day before the closing of the share exchange (the “Determination Date”).

 

As of March 31, 2015, Madison reported that it had a Consolidated Net Book Value of $11,562,825. Assuming that Consolidated Net Book Value remains unchanged through the date ten days before the closing, the exchange ratio would be 1.1927 shares of Kentucky Bancshares common stock for each share of Madison common stock, and the aggregate value of the Kentucky Bancshares shares issued to Madison shareholders in the share exchange would be $7,337,222, based on the $27.85 closing trading price of Kentucky Bancshares common stock on April 21, 2015.

 

i

Table of Contents

 

For purposes of the potential reduction, the term “Consolidated Net Book Value” means the unaudited consolidated net shareholders’ equity of Madison  determined in accordance with generally accepted accounting principles as of the Determination Date, without giving effect to

 

·                  the after-tax impact of any negative provision for loan and lease losses for the period between September 30, 2014 and the Determination Date, which provision would otherwise have the effect of decreasing the allowance for loan and lease losses,

 

·                  the after-tax impact of any realized gains or losses on securities sold by Madison or Madison Bank after September 30, 2014,

 

·                  accumulated other comprehensive income (loss), and

 

·                  expenses paid or incurred by Madison as of the Determination Date in connection with the share exchange.

 

 

The following table shows the range of hypothetical adjustments to the exchange ratio (the number of shares of Kentucky Bancshares common stock into which each share of Madison common stock would be converted in the share exchange), and the aggregate value of the Kentucky Bancshares shares to be issued in the share exchange, based on various levels of Consolidated Net Book Value as of the Determination Date.

 

Consolidated Net Book Value	Exchange Ratio	Value Per Share of Madison*	Aggregate Value*
$10,981,000 or more	1.1927	$33.22	$7,337,236
10,000,000	1.0561	29.41	6,496,594
9,000,000	0.9168	25.53	5,639,671
8,000,000	0.7775	21.65	4,782,748
7,000,000	0.6382	17.77	3,925,825
6,000,000	0.4989	13.89	3,068,902
5,000,000	0.3596	10.01	2,211,979

*Assigns a per share value to Kentucky Bancshares common stock of $27.85 based on the closing price on April 21, 2015 and assumes 220,890 shares of Madison common stock outstanding as of the closing.  Ignores cash issued in lieu of fractional shares of Kentucky Bancshares common stock.

 

No fractional shares of Kentucky Bancshares common stock will be issued in the share exchange.  A Madison shareholder who otherwise would have received a fraction of a share of Kentucky Bancshares common stock will instead receive cash equal to the fraction multiplied by $32.50.

 

Q:           Will the value of the share exchange consideration change before the time the share exchange is completed?

 

A:           In the share exchange, Madison shareholders will receive shares of Kentucky Bancshares common stock for shares of Madison common stock they hold based on the exchange ratio.  Any fluctuation in the trading market price of Kentucky Bancshares stock before the share exchange is completed will change the value of the shares (but not the number of shares) of Kentucky Bancshares common stock that Madison shareholders will receive.

 

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Q:           When do you expect to complete the share exchange?

 

A:           We currently expect to complete the share exchange at the end of the second quarter of 2015 or the beginning of the third quarter of 2015.  However, we cannot assure you when or if the share exchange will occur.  Among other things, we must first obtain the required approvals of the Madison shareholders at the special meeting and the required regulatory approvals described below in “The Share Exchange - Regulatory Approvals Required for the Share Exchange.”

 

If the share exchange does not close on or before July 31, 2015, either Madison or Kentucky Bancshares may terminate the share exchange agreement.  This deadline will be extended, except in limited circumstances, until September 30, 2015, if Madison and Kentucky Bancshares are still awaiting regulatory approval on July 31, 2015.

 

 

Q:           Is the share exchange subject to conditions?

 

A:           The share exchange is subject to several conditions to closing, including the receipt of required regulatory approvals and approval of the Madison shareholders. These conditions are listed below in “The Share Exchange — Conditions to the Share Exchange.”  If any condition to the share exchange is not satisfied or waived, to the extent permitted by law, the share exchange will not be completed.

 

Q:           What happens if the share exchange is not completed?

 

A:           If the share exchange is not completed, shares of Kentucky Bancshares common stock will not be issued to Madison shareholders in exchange for their shares of Madison common stock, and Madison will remain an independent company.  In specified circumstances in connection with the termination of the share exchange agreement, including a change in the recommendation by Madison’s board of directors, Madison may be required to pay Kentucky Bancshares a termination fee of $350,000.

 

Q:           When and where is the special meeting?

 

A:           The special meeting will be held at Madison Bank, 1001 Gibson Bay Drive, Second Floor, Richmond, Kentucky on [·], 2015 at [·].m., Richmond, Kentucky time.

 

Q:           How do I vote?

 

A:           If you are a shareholder of record of Madison as of the record date for the special meeting, you may vote by signing the enclosed proxy card and returning it in the postage-paid envelope provided or casting your vote in person at the special meeting.  You may also vote by Internet.

 

If you hold your shares in “street name” through a bank, broker or other nominee, please follow the voting instructions provided by your bank, broker or other nominee to ensure that your shares are represented at the special meeting.  Shareholders that hold shares through a bank, broker, or other nominee who wish to vote at the special meeting will need to obtain a “legal proxy” from the record holder.

 

Q:           Why is my vote important?

 

A:           If you do not vote, it will be more difficult to obtain the necessary quorum to hold the special meeting.  In addition, we cannot complete the share exchange without obtaining the necessary vote of  Madison’s shareholders in favor of the share exchange proposal.   In particular, approval of the share exchange proposal requires that at least  two-thirds of the outstanding shares of Madison common stock vote in favor of that proposal.   Therefore, not voting will have the effect of voting against the share exchange proposal.

 

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Q:           How does the Madison board of directors recommend that I vote?

 

A:           The Madison board of directors recommends that you vote “FOR” the share exchange proposal and “FOR” the adjournment proposal.

 

Q:           What constitutes a quorum at the special meeting?

 

A:           The presence at the special meeting, in person or by proxy, of holders of at least a majority of the outstanding shares of Madison common stock entitled to vote at the special meeting will constitute a quorum for the transaction of business.  Abstentions and broker non-votes will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum.  A broker non-vote occurs under stock exchange rules when a broker is not permitted to vote on a matter without instructions from the beneficial owner of the shares and no instructions are given.  Brokers have authority to vote only on the adjournment proposal without instructions from the beneficial owner of the shares.

 

Q:           What is the vote required to approve each proposal?

 

Each share of Madison common stock is entitled to one vote at the special meeting on each proposal.

 

The share exchange proposal will be approved if at least two-thirds of shares of Madison common stock outstanding on the record date vote in favor of that proposal.   Abstentions and broker non-votes will have the effect of a vote against the share exchange proposal.

 

The adjournment proposal will be approved if the number of votes cast in favor of each proposal exceeds the number of votes cast against it.  Abstentions and broker non-votes will not be counted and will have no effect on the voting results of the adjournment proposal.

 

Q:           If my shares are held in street name by my broker, will my broker automatically vote my shares for me?

 

A:           No. Your broker cannot vote your shares without instructions from you except with respect to the adjournment proposal. You should instruct your broker as to how to vote your shares, following the directions your broker provides to you.  Please check the voting form used by your broker.  Without instructions, your shares will not be voted on the share exchange, which will have the effect described below.

 

Q:           What if I do not vote or fail to instruct my broker?

 

If you are a holder of Madison common stock and you choose not to vote or fail to instruct your broker to vote your shares, it will have the same effect as a vote against the share exchange proposal.  An abstention or broker non-vote will have no effect on the adjournment proposal.  However, if you fail to vote your shares, your failure to do so may make it more difficult for Madison to meet the quorum requirements of its special meeting.

 

Q:           Can I attend the special meeting and vote my shares in person?

 

A:           Yes.  All Madison shareholders, including shareholders of record and shareholders who hold their shares through banks, brokers, nominees or any other holder of record, are invited to attend the special meeting.   Holders of record of Madison common stock can vote in person at the special meeting.  If you are not a shareholder of record, you must obtain a proxy, executed in your favor, from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the special meeting.  If you plan to attend the special meeting, you must hold your shares in your own name or have a statement from your bank, broker or other record holder confirming your ownership of shares as of the record date for the special meeting.  In addition, you must bring a form of personal photo identification with you in order to be admitted.  Madison reserves the right to refuse admittance to anyone without proper proof of share ownership or without proper photo identification.  The use of cameras, sound recording equipment, communications devices or any similar equipment during the Madison special meeting is prohibited without Madison’s express written consent.  Regardless of whether you plan to attend the special meeting, we recommend that you vote your shares early by Internet or mail to ensure that a quorum exists at the Madison special meeting and to ensure that your vote will be counted if you later choose not to attend

 

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the Madison special meeting. You may revoke any previously submitted proxy and vote your shares in person at the Madison special meeting.

 

Q:           What do I do if I want to change or revoke my vote?

 

A:           You may revoke your proxy and change your vote at any time before the special meeting, or earlier deadline specified in the proxy card, by signing and returning a new proxy card or voting instruction form with a later date, or by attending the special meeting and voting in person. However, your attendance at the special meeting will not automatically revoke your proxy.  At the special meeting you must specifically notify the inspector of election that you will be voting in person at the special meeting and that you previously submitted a proxy.  We provide additional information on changing your vote under the headings “Special Meeting - Voting Information - Revoking a Proxy” included elsewhere in this proxy statement-prospectus.

 

Q:           Am I entitled to exercise dissenters’ rights?

 

A:           Yes.  Madison shareholders have dissenters’ rights regarding the share exchange.  If you, as a Madison shareholder, wish to exercise your dissenters’ rights, then you MUST do the following:

 

1)  Written Notice.  Send written notice to Madison BEFORE the shareholder meeting.

·                  In the written notice you must state your intent to demand payment for your shares of Madison common stock if the share exchange is approved.

 

·                  The written notice must be sent to Madison Financial Corporation, 1001 Gibson Bay Drive, Suite 101,  Richmond, Kentucky 40475; Attention: Debra G. Neal, Executive Vice President.

 

2)  Voting at Shareholder Meeting.   Additionally, you CANNOT vote “FOR” the share exchange at the Madison shareholder meeting.  If you return a signed proxy without voting instructions or with instructions to vote “FOR” the share exchange proposal, your shares will be automatically voted in favor of the share exchange proposal, which will terminate your right to dissent.

 

If you do not comply with the two steps above, you will forfeit your right to dissent and receive the fair value of your shares in cash.

 

If you assert and perfect your dissenters’ rights as described above, you will not receive the share exchange consideration but will be entitled to receive the “fair value” of your shares of Madison common stock in cash as determined in accordance with the Kentucky Business Corporation Act.

 

If the share exchange is approved and you followed the two steps above, then Madison or Kentucky Bancshares will send you a written notice explaining the additional procedures you must take in order to receive payment.  This notice will be sent to you within ten days following the Madison shareholder meeting.

 

Appendix “B” includes the relevant provisions of the Kentucky Business Corporation Act regarding these rights.  See “The Share Exchange - Dissenters’ Rights” beginning on page 42 of this proxy statement-prospectus.

 

Q:           Should I send in my Madison stock certificates now?

 

A:           No.  Madison shareholders with shares represented by stock certificates should not send Madison common stock certificates with their proxy cards. After the share exchange is completed, Madison shareholders who hold stock certificates will be mailed a transmittal form with instructions on how to exchange their Madison common stock certificates for the share exchange consideration.

 

Q:           What if I cannot find my stock certificates?

 

A:           There will be a procedure for you to receive the share exchange consideration in the share exchange, even if you have lost one or more of your Madison common stock certificates. However, this procedure will take time to complete.  In order to ensure that you will be able to receive the share exchange consideration promptly after the share exchange is completed, if you cannot locate your Madison common stock certificates after looking for them

 

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carefully, we urge you to contact Madison’s transfer agent, American Stock Transfer & Trust Company, LLC, as soon as possible and follow the procedure they explain to you for replacing your Madison common stock certificates.  You can speak with someone in the Shareholder Services department at American Stock Transfer & Trust Company, LLC by calling (800) 937-5449.  Alternatively, you can follow the instructions on American Stock Transfer’s website at http://www.amstock.com.  You can also write to American Stock Transfer at the following address: Shareholder Services Department, 6201 15th Avenue, Brooklyn, New York  11219.

 

Q:           Whom should I call with questions?

 

A:           Madison shareholders may contact Madison by telephone at (859) 626-8008  and ask for Debra G. Neal, Executive Vice President.

 

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companies merger”) which will be the surviving entity and Madison will cease to exist, and Madison Bank will be merged into Kentucky Bank which will be the surviving entity and Madison Bank will cease to exist.

 

The share exchange agreement, which includes the plan of share exchange, is attached to this document as Appendix “A” and is incorporated into this proxy statement-prospectus by reference.  We encourage you to read carefully the entire share exchange agreement, including the plan of share exchange to be voted upon by the Madison shareholders at the special meeting, as it is the legal document that governs the share exchange.

 

What You Will Receive in the Share Exchange (See pages 49 and 50)

 

If the share exchange is completed, Madison shareholders will receive 1.1927 shares of Kentucky Bancshares common stock for each share of Madison common stock that they hold immediately before the share exchange, subject to reduction (“share exchange consideration”).  We use the term “exchange ratio” to include the ratio resulting after any applicable reduction of the 1.1927 ratio.  The 1.1927 ratio may be reduced by 0.0001 shares of Kentucky Bancshares common stock for each $718 by which Madison’s Consolidated Net Book Value is less than $10,981,000 as of the tenth business day before the closing of the share exchange (the “Determination Date”).

 

As of March 31, 2015, Madison reported that it had a Consolidated Net Book Value of $11,562,825. Assuming that Consolidated Net Book Value remains unchanged through the date ten days before the closing, the exchange ratio would be 1.1927 shares of Kentucky Bancshares common stock for each share of Madison common stock, and the aggregate value of the Kentucky Bancshares shares issued to Madison shareholders in the share exchange would be $7,337,222, based on the $27.85 closing trading price of Kentucky Bancshares common stock on April 21, 2015.

 

For purposes of the potential reduction, the term “Consolidated Net Book Value” means the unaudited consolidated net shareholders’ equity of Madison  determined in accordance with generally accepted accounting principles as of the Determination Date, without giving effect to

 

·                  the after-tax impact of any negative provision for loan and lease losses for the period between September 30, 2014 and the Determination Date, which provision would otherwise have the effect of decreasing the allowance for loan and lease losses,

·                  the after-tax impact of any realized gains or losses on securities sold by Madison or Madison Bank after September 30, 2014,

·                  accumulated other comprehensive income (loss), and

·                  expenses paid or incurred by Madison as of the Determination Date in connection with the share exchange.

 

 

The following table shows the range of hypothetical adjustments to the exchange ratio (the number of shares of Kentucky Bancshares common stock into which each share of Madison common stock would be converted in the share exchange), and the aggregate value of the Kentucky Bancshares shares to be issued in the share exchange, based on various levels of Consolidated Net Book Value as of the Determination Date.

 

Consolidated Net Book Value	Exchange Ratio	Value Per Share of Madison*	Aggregate Value*
$10,981,000 or more	1.1927	$ 33.22	$ 7,337,236
10,000,000	1.0561	29.41	6,496,594
9,000,000	0.9168	25.53	5,639,671
8,000,000	0.7775	21.65	4,782,748
7,000,000	0.6382	17.77	3,925,825
6,000,000	0.4989	13.89	3,068,902
5,000,000	0.3596	10.01	2,211,979

*Assigns a per share value to Kentucky Bancshares common stock of $27.85 based on the closing price on April 21, 2015 and assumes 220,890 shares of Madison common stock outstanding as of the closing.  Ignores cash issued in lieu of fractional shares of Kentucky Bancshares common stock.

 

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No fractional shares of Kentucky Bancshares common stock will be issued in the share exchange.  A Madison shareholder who otherwise would have received a fraction of a share of Kentucky Bancshares common stock will instead receive cash equal to the fraction multiplied by $32.50.

 

Each share of Kentucky Bancshares common stock outstanding immediately prior to the share exchange will remain outstanding immediately following the share exchange.

 

Reasons for the Share Exchange (See page 35 for Madison and page 37 for Kentucky Bancshares)

 

Madison:  Madison’s board of directors considered a number of factors in approving the terms of the share exchange, including:

 

·                  Its knowledge of Madison’s business, operations, financial and regulatory condition, earnings and prospects and of Kentucky Bancshares’ business, operations, financial and regulatory condition, earnings and prospects, taking into account the results of Madison’s due diligence review of Kentucky Bancshares.

 

·                  Its belief that the transaction represented the best available means of resolving Madison’s  preferred stock obligations under the U.S. Treasury’s Capital Purchase Program Troubled Asset Relief Program (“TARP”) which, if not promptly addressed, will continue to erode shareholder value.

 

·                  Its knowledge of the current environment in the financial services industry, including national and regional economic conditions, increased regulatory burdens, evolving trends in technology, increasing competition, the current financial market and regulatory conditions and the likely effects of these factors on the potential growth of Madison and Kentucky Bancshares, development, productivity, profitability and strategic options, and the illiquidity of Madison’s common stock.

 

·                  The financial presentation of Professional Bank Services (“PBS”), dated January 20, 2015, to Madison’s board of directors and PBS’s opinion, dated January 20, 2015, to the board, to the effect that, as of January 20, 2015, and based upon and subject to the assumptions, procedures, considerations, qualifications and limitations set forth in the opinion, the per share exchange consideration in the share exchange was fair, from a financial point of view, to the holders of Madison common stock.

 

·                  The financial terms of the share exchange, including the fact that, based on the twenty day average closing price of Kentucky Bancshares common stock as of January 16, 2015, the implied value of the per share share exchange consideration represented an approximate 7% premium to the common tangible book value per share of Madison common stock as of September 30, 2014.

 

·                  The expected treatment of the share exchange as a “reorganization” for United States federal income tax purposes, which would generally not be taxable to the extent Madison shareholders exchange their shares of Madison common stock for shares of Kentucky Bancshares common stock. The expected tax treatment of the share exchange is described in more detail under “Material Federal Income Tax Consequences of the Share Exchange and Holding Companies’ Merger.”

 

Kentucky Bancshares:  Kentucky Bancshares’ board of directors considered a number of factors in approving the terms of the share exchange, including:

 

·                  The financial and other terms of the share exchange agreement, including the exchange ratio, tax treatment and deal protection and termination fee provisions.

 

·                  Management’s view that the acquisition of Madison provides an attractive opportunity to expand Kentucky Bank’s market share and customer base in Madison County.

 

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·                  That Madison’s community bank background and local customer base is compatible with Kentucky Bank.

 

·                  Management’s determination that anticipated cost savings resulting from integrating Madison Bank’s operations with Kentucky Bank will permit Kentucky Bancshares  to realize operating efficiencies that Madison cannot achieve as a stand-alone institution.

 

·                  The likelihood of regulators approving the share exchange without undue conditions.

 

Effect of the Share Exchange on Preferred Stock (See page 31)

 

Madison has outstanding 8,508 shares of Series A preferred stock, 3,370 shares of Series B preferred stock and 169 shares of Series C preferred stock.  Upon completion of the share exchange, Kentucky Bancshares will arrange for Madison to redeem or repurchase all of its outstanding preferred stock in accordance with its terms, which is the liquidation price plus all accrued but unpaid dividends.  The aggregate amount to redeem all the outstanding Madison preferred stock as of July 1, 2015, an approximate time for closing, would be approximately $6.1 million.  Kentucky Bancshares has agreed to fund the preferred stock redemption and repurchase and anticipates it would do so by means of contributing additional capital to Madison upon completion of the share exchange.

 

Your Expected Tax Treatment as a Result of the Share Exchange (See page 61)

 

Kentucky Bancshares and Madison have structured the share exchange and holding companies’ merger to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”) with the result that Madison common shareholders will not recognize a gain or loss in connection with the exchange of their shares (except with respect to any cash received) for Kentucky Bancshares common stock.  Based upon customary representations and warranties by Kentucky Bancshares and Madison, Wyatt, Tarrant & Combs, LLP, counsel to Madison, has provided a tax opinion to this effect.   See “Material Federal Income Tax Consequences of the Share Exchange and Holding Companies’ Merger” beginning on page 61for a more detailed discussion of the tax consequences of the share exchange.

 

 

Tax laws are complex, and the tax consequences of the share exchange and holding companies’ merger may vary depending upon your individual circumstances or tax status. For these reasons, we recommend that you consult your tax advisor concerning the federal, state, local or other tax consequences to you of the share exchange and holding companies’ merger.

 

Madison Common Shareholders Will Have Dissenters’ Rights as a Result of the Share Exchange (See page 42)

 

Madison shareholders have dissenters’ rights regarding the share exchange.  If you, as a Madison shareholder, wish to exercise your dissenters’ rights, then you MUST do the following:

 

1)  Written Notice.  Send written notice to Madison BEFORE the shareholder meeting.

 

·                  In the written notice you must state your intent to demand payment for your shares of Madison common stock if the share exchange is approved.

 

·                  The written notice must be sent to Madison Financial Corporation, 1001 Gibson Bay Drive, Suite 101, Richmond, Kentucky 40475; Attention:  Debra G. Neal, Executive Vice President.

 

·                 

 

2)  Voting at Shareholder Meeting.   Additionally, you CANNOT vote “FOR” the share exchange at the Madison shareholder meeting.  If you return a signed proxy without voting instructions or with instructions to vote “FOR” the share exchange proposal, your shares will be automatically voted in favor of the share exchange proposal, which will terminate your right to dissent.

 

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If you do not comply with the two steps above, you will forfeit your right to dissent and receive the fair value of your shares in cash.

 

If you assert and perfect your dissenters’ rights as described above, you will not receive the share exchange consideration but will be entitled to receive the “fair value” of your shares of Madison common stock in cash as determined in accordance with the Kentucky Business Corporation Act.

 

If the share exchange is approved and you followed the two steps above, then Madison or Kentucky Bancshares will send you a written notice explaining the additional procedures you must take in order to receive payment.  This notice will be sent to you within ten days following the Madison shareholder meeting.

 

Appendix “B” includes the relevant provisions of the Kentucky Business Corporation Act regarding these rights.  See “The Share Exchange - Dissenters’ Rights” beginning on page 42 of this proxy statement-prospectus.

 

 

Additional Funding Sources (See page 60)

 

To fund the redemption of the Madison preferred stock, Kentucky Bancshares anticipates obtaining a term loan of approximately $5,000,000.  Kentucky Bancshares has received a commitment letter from Stock Yards Bank, Louisville, Kentucky, for a $5,000,000 term loan, expected to close in July 2015, if not earlier, with a 10-year term and an interest rate equal to the Federal Home Loan Bank Fixed Rate Advance Rate at the time of closing plus 250 basis points, which as of April 14, 2015, would have resulted in an interest rate of 4.99%.  Under the terms of the commitment, principal and interest would be due quarterly and amortized over the 10-year period of the loan.  The term loan would be secured by all the outstanding capital stock of Kentucky Bank.

 

Kentucky Bancshares anticipates funding the balance of the amount necessary to redeem the Madison preferred stock, approximately $1.1 million, from Kentucky Bancshares’ current cash reserves.

 

 

 

Information About the Special Meeting (See page 25)

 

The special meeting of the shareholders of Madison will be held on [·], at [·]m., Richmond, Kentucky time.  The meeting will be held at Madison Bank, 1001 Gibson Bay Drive, Second Floor, Richmond, Kentucky.  At the meeting, the shareholders of Madison will vote on (1) the share exchange proposal described in this proxy statement-prospectus and in the notice for the meeting and (2) a proposal to adjourn the special meeting to one or more later dates, if necessary, to permit Madison to solicit additional proxies if there are insufficient votes at the special meeting to constitute a quorum or to approve the share exchange proposal.

 

If Madison’s shareholders approve the share exchange proposal, and the other conditions to completing the share exchange are satisfied, we expect to close the share exchange at the end of the second quarter or beginning of the third quarter of 2015, or as soon thereafter as is practicable.

 

If the share exchange does not close on or before July 31, 2015, either Madison or Kentucky Bancshares may terminate the share exchange agreement.  This deadline will be extended, except in limited circumstances, until September 30, 2015, if Madison and Kentucky Bancshares are still awaiting regulatory approval on July 31, 2015.

 

 

Quorum and Vote Required at the Special Meeting (See page 27)

 

Shareholders who own Madison common stock at the close of business on [·], 2015 will be entitled to vote at the Madison special meeting.  Each share of Madison common stock is entitled to one vote.  A majority of the issued and outstanding shares of Madison common stock as of the record date for the special meeting must be present in person or by proxy at the special meeting in order for a quorum to be present. If a quorum is not present at the special meeting, the special meeting will be adjourned, and no vote will be taken until and unless a quorum is present.

 

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Approval of the share exchange proposal requires the affirmative vote of at least two-thirds of the shares of Madison common stock outstanding on the record date.   Abstentions and broker non-votes are treated as votes against the share exchange proposal.

 

Approval of the adjournment proposal requires that the number of votes cast at the special meeting “for” the adjournment proposal exceeds the number of votes cast “against” the proposal.  Abstentions and broker non-votes will not affect the voting results of the adjournment proposal.  Approval of the adjournment proposal is not a condition to completion of the share exchange.

 

The Madison board of directors has recommended that Madison shareholders vote (a) “FOR” approval and adoption of the share exchange proposal and (b) “FOR” the proposal to adjourn or postpone the special meeting of shareholders, if necessary or appropriate, to solicit additional proxies in favor of approval and adoption of the share exchange proposal.

 

 

Affiliate Agreements (See page 28)

 

In consideration of Kentucky Bancshares agreeing to enter into the share exchange agreement, each of the directors of Madison and Madison Bank, solely in their role as an owner of shares of Madison common stock, entered into an affiliate agreement with Kentucky Bancshares.  The affiliate agreements provide that the director agrees, among other things, to vote all of the shares owned beneficially by him or her in favor of the share exchange proposal. However, with respect to any shares of Madison common stock over which the director has or shares voting power in a fiduciary capacity on behalf of a person other than Madison, the affiliate agreements do not require he or she vote in favor of the share exchange if he or she determines in good faith and after receipt of an opinion of counsel that voting such shares in favor of the share exchange proposal would be a breach of fiduciary duty owed to such person.  Under the affiliate agreements, each director agrees not to transfer any Madison common stock without Kentucky Bancshares’ consent except for transfers by operation of law, by will or under the laws of descent and distribution.  The  affiliate agreements also contain certain confidentiality, non-competition and non-solicitation covenants.  The affiliate agreement form is attached to this proxy statement-prospectus as Appendix “C.”

 

Share Ownership of Management (See page  85 for Kentucky Bancshares and page 48 for Madison)

 

Kentucky Bancshares common stock:  As of March 7, 2015, directors and executive officers of Kentucky Bancshares beneficially owned 464,524 shares, or approximately, 17.0% of the issued and outstanding shares of Kentucky Bancshares common stock.

 

None of Madison or any Madison subsidiary owns any shares of Kentucky Bancshares common stock.  To Kentucky Bancshares’ knowledge, directors and executive officers of Madison have or share no voting or dispositive power over any shares of Kentucky Bancshares common stock.

 

Madison common stock:  As of the record date for the Madison special meeting, directors and executive officers of Madison beneficially owned 68,038 shares, or approximately 30.8% of the issued and outstanding shares of Madison common stock.

 

Neither Kentucky Bancshares nor any Kentucky Bancshares subsidiary owns any shares of Madison common stock.  Directors and executive officers of Kentucky Bancshares have or share no voting or dispositive power over any shares of Madison common stock.

 

Management and Operations after the Share Exchange (See page 42)

 

After the share exchange, Madison will be merged into Kentucky Bancshares and Kentucky Bancshares will be the surviving corporation and will continue its corporate existence under Kentucky law.  Madison will cease to exist.  Additionally, after the share exchange and the holding companies’ merger, Madison Bank will be merged into

 

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Kentucky Bank with Kentucky Bank as the surviving corporation.  Kentucky Bank will continue its corporate existence under Kentucky law and Madison Bank  will cease to exist.  All offices of Madison Bank will be operated as branch offices of Kentucky Bank following this merger.

 

The share exchange agreement contemplates that Debra G. Neal, Executive Vice President of Madison and Madison Bank, will enter an employment agreement as a project consultant with Kentucky Bank for a term of 18 months at an annual base salary of $113,000.   See “Interests of Madison Directors and Executive Officers in the Share Exchange.”

 

 

We Must Obtain Regulatory Approval to Complete the Share Exchange (See page 45)

 

The share exchange, preferred stock redemption  and related mergers require the approval of the Board of Governors of the Federal Reserve Board (“Federal Reserve Board”), the Federal Deposit Insurance Corporation (“FDIC”), and the Kentucky Department of Financial Institutions.  The share exchange may not be consummated until at least 15 days after approval of the share exchange by the Federal Reserve Board.   Kentucky Bancshares and Kentucky Bank have made application for each of the above regulatory approvals, which applications are currently pending.

 

We Must Meet Several Conditions to Complete the Share Exchange (See page 54)

 

The share exchange will only be completed if certain conditions, including the following, are met:

 

·                  obtaining all consents and approvals of, and filing all registrations and notifications with, all regulatory agencies required for closing the share exchange and completing the mergers, including approval of the Federal Reserve Board, the FDIC and the Kentucky Department of Financial Institutions (see “The Share Exchange - Regulatory Approvals Required for the Share Exchange”);

 

·                  the shareholders of Madison have approved the share exchange agreement and share exchange proposal;

 

·                  the registration statement of which this proxy statement-prospectus is a part becomes effective and no stop orders are issued with respect to it;

 

·                  the Loan Department Lease, dated February 1, 1999, respecting approximately 2,260 square feet at Madison Bank’s Gibson Bay location, has been amended to provide for a termination date of November 15, 2015;

 

·                  there are no events, changes or occurrences after January 21, 2015, which have had, individually or in the aggregate, a material adverse effect on Madison, Madison Bank or Kentucky Bancshares;

 

·                  Kentucky Bank shall have executed the employment agreement with Debra G. Neal, in the form attached to Madison’s disclosure memorandum delivered with the share exchange agreement (see “Interests of Madison Directors and Executive Officers in the Share Exchange”);

 

·                  the Madison board has received a written opinion from Professional Bank Services to the effect that, subject to the terms, conditions, assumptions and qualifications set forth in such opinion, as of the date of the opinion, the exchange ratio of 1.1927 shares of Kentucky Bancshares common stock for each share of Madison common stock in the share exchange is fair, from a financial viewpoint, to the Madison shareholders; and

 

·                  Wyatt, Tarrant & Combs, LLP has delivered an opinion to the effect that the share exchange (followed by the preferred stock redemption and holding companies merger) qualifies as a “reorganization” within the meaning of Section 368(a) of the Code so that no gain or loss will be recognized for Federal income tax purposes by a shareholder of Madison who exchanges Madison common stock solely for shares of Kentucky Bancshares common stock in the share exchange.

 

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Termination and Termination Fee (See page 59)

 

The share exchange agreement may be terminated, either before or after shareholder approval, in certain circumstances described in detail later in this proxy statement-prospectus.  If Kentucky Bancshares or Madison terminates the share exchange agreement because of a proposed alternative acquisition transaction that meets the requirements of the share exchange agreement, Madison must pay Kentucky Bancshares a termination fee of $350,000.  See “The Share Exchange Agreement — Termination” on page 59.

 

Madison’s Directors and Executive Officers Have Interests in the Share Exchange that Differ from Madison Shareholders’ Interests (See page 46)

 

You should be aware that some of Madison’s directors and executive officers have interests in the share exchange and have arrangements that are different from, or in addition to, those of Madison shareholders generally. These interests and arrangements may create potential conflicts of interest.  Madison’s board of directors was aware of these interests and considered these interests, among other matters, when making its decision to approve the share exchange agreement, and in recommending that Madison shareholders vote in favor of approving the share exchange proposal.

 

These interests include the following:

 

·                  Directors and executive officers of Madison as a group own approximately 12.9% of the Madison Series A preferred stock.  In connection with the closing, each share of Madison preferred stock will be redeemable at its liquidation value plus all accrued and unpaid dividends.

 

·                  Debra G. Neal, Executive Vice President of Madison and Executive Vice President and Chief Financial Officer of Madison Bank, has agreed to enter into an employment agreement with Kentucky Bank for an eighteen-month period after the share exchange.

 

·                  Each present and former director, officer and employee of Madison (when acting in such capacity) will be indemnified against any costs or expenses incurred in legal proceedings arising out of matters existing or occurring at or before the effective time of the share exchange to the fullest extent permitted by law and to which such person would be entitled to indemnification under Madison’s articles of incorporation and bylaws.

 

·                  Madison’s main office location is owned by 1st Madison Properties, LLC, which is owned by several members of Madison’s board of directors, and leased to Madison Bank.

 

 

The interests of both directors and certain executive officers are more fully described in this proxy statement-prospectus under the heading “Interests of Madison Directors and Executive Officers in the Share Exchange.”

 

Differences in Rights of Madison Shareholders after the Share Exchange (See page 64)

 

Madison shareholders will become Kentucky Bancshares shareholders as a result of the share exchange. Their rights as shareholders after the share exchange will be governed by Kentucky Bancshares’ articles of incorporation and bylaws.  The rights of Kentucky Bancshares shareholders are different in certain respects from the rights of Madison shareholders. Some of the principal differences are described later in this proxy statement-prospectus, in the section entitled “Comparison of Shareholders’ Rights”  beginning on page 64.

 

Accounting Treatment (See page 118)

 

Kentucky Bancshares will account for the share exchange as a purchase transaction for accounting and financial reporting purposes in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

 

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SELECTED HISTORICAL FINANCIAL INFORMATION

FOR KENTUCKY BANCSHARES AND MADISON

 

Selected Historical Consolidated Financial Information of Kentucky Bancshares

 

The following table sets forth selected historical consolidated financial information of Kentucky Bancshares as of and for the years ended December 31, 2010 through December 31, 2014.  This information is based on, and should be read in conjunction with, Kentucky Bancshares’ consolidated financial statements and related notes for the year ended December 31, 2014 included as Appendix “D” to this proxy statement-prospectus.  The information for the year ended December 31, 2014 should also be read in conjunction with Kentucky Bancshares’  “Management’s Discussion and Analysis of Financial Condition and Results of Operations” at page 97.  Results of past periods are not necessarily indicative of results that may be expected for any future period.

 

		At or For the Year Ended December 31
		2014			2013			2012			2011			2010
($ in 000s, except per share data)
CONDENSED STATEMENT OF INCOME:
Interest Income		$	29,731		$	28,168		$	28,233		$	29,889		$	30,276
Interest Expense		3,756			3,456			3,716			5,565			10,067
Net Interest Income		25,975			24,712			24,517			24,324			20,209
Provision for Losses		950			1,050			2,050			2,450			3,250
Net Interest Income After Provision for Losses		25,025			23,662			22,467			21,874			16,959
Other Income		10,158			10,222			11,870			9,347			10,566
Other Expense		27,215			27,203			25,686			24,615			22,021
Income Before Income Tax Expense		7,968			6,681			8,651			6,606			5,504
Income Tax Expense		897			859			1,643			919			565
Net Income		7,071			5,822			7,008			5,687			4,939
SHARE AND PER SHARE DATA:
Basic Earnings per Share (EPS)		$	2.60		$	2.15		$	2.59		$	2.09		$	1.81
Diluted EPS		2.60			2.15			2.59			2.09			1.81
Cash Dividends Declared		1.00			0.96			0.92			0.88			0.84
Book Value		28.65			24.90			27.21			25.38			22.29
Average Common Shares-Basic		2,721			2,705			2,705			2,719			2,732
Average Common Shares-Diluted		2,721			2,709			2,708			2,720			2,732
SELECTED BALANCE SHEET DATA:
Net loans		$	532,293		$	463,214		$	423,928		$	406,025		$	406,905
Securities Available for Sale		246,861			230,396			192,780			180,419			176,867
Trading Assets		5,370			—			—			—			—
Total Assets		855,209			770,579			701,010			659,453			658,943
Deposits		654,869			617,400			590,425			542,924			537,401
Repurchase agreements		12,457			12,867			4,315			4,524			7,179
Federal Home Loan Bank advances		93,785			57,847			17,449			30,326			43,206
Stockholders’ Equity		77,942			67,672			74,009			68,953			61,043
PERFORMANCE RATIOS: (Average Balances)
Return on Assets		0.89		%	0.80		%	1.03		%	0.87		%	0.71%
Return on Stockholders’ Equity		9.50		%	8.12		%	9.70		%	8.74		%	7.84%
Net Interest Margin (1)		3.69		%	3.85		%	4.19		%	4.35		%	3.43%
Equity to Assets (annual average)		9.34		%	9.84		%	10.60		%	9.97		%	9.07%

 

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