| SCHEDULE 14A |
| INFORMATION REQUIRED IN PROXY STATEMENT |
| SCHEDULE 14A INFORMATION |
Proxy Statement Pursuant to Section 14(a) of the |
| Securities Exchange Act of 1934 |
| Filed by the Registrant | x |
| Filed by a party other than the Registrant | o |
| Check the appropriate box: | |
| x | Preliminary Proxy Statement |
| o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
| o | Definitive Proxy Statement |
| o | Definitive Additional Materials |
| o | Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 |
| MONARCH COMMUNITY BANCORP, INC. |
| (Name of Registrant as Specified in Its Charter) |
(Name of Person(s) Filing Proxy Statement, |
| Payment of Filing Fee (Check the appropriate box): |
| o | No fee required. | ||
| x | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. | ||
| (1) | Title of each class of securities to which transaction applies: | ||
| Common Stock | |||
| (2) | Aggregate number of securities to which transaction applies: | ||
| 78,701 | |||
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): $13.50, which is the per share price to be paid in the transaction subject | ||
| to this Schedule 14A filing | |||
| (4) | Proposed maximum aggregate value of transaction: $1,062,464 | ||
| (5) | Total fee paid: $32.62 | ||
| o | Fee paid previously with preliminary materials. | ||
| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. | ||
| Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | |||
| (1) | Amount Previously Paid: _________________________________________________ | ||
| (2) | Form, Schedule or Registration Statement: ___________________________________ | ||
| (3) | Filing Party: ___________________________________________________________ | ||
| (4) | Date Filed: ____________________________________________________________ | ||
PRELIMINARY COPIES MONARCH COMMUNITY BANCORP, INC. Dear Stockholder: You are cordially invited to attend a special meeting of stockholders, which will be held at ________, on _____________________ , 2007 at Monarch Community Bank’s Main Office at 375 North Willowbrook Road, Coldwater, Michigan 49036. I hope that you will be able to attend the meeting, and I look forward to seeing you. At the special meeting, you will be asked to vote on a proposed transaction that will result in termination of the registration of the Monarch common stock under federal securities laws and thereby eliminate the significant expense required to comply with reporting requirements under those laws. Our costs associated with the routine SEC filing and reporting requirements are estimated at approximately $126,000 or 1.3% of our non-interest expense for our 2006 reporting year and 2007 annual meeting (the “2007 reporting cycle”). We believe that the costs incurred over the 2007 reporting cycle are a conservative estimate for the recurring annual cost savings that should result from the going private transaction and subsequent termination of our SEC registration. Referred to as “going private,” the proposed transaction will reduce the number of stockholders to fewer than 300 persons, as required for termination of the registration. The reduction in the number of stockholders is accomplished by a merger of a newly-formed Maryland corporation (“Monarch Merger Corp.”), with and into Monarch on terms set forth in the merger agreement, a copy of which is attached as Appendix A to the enclosed proxy statement. Under the terms of the merger, (i) each share of common stock owned of record at the close of business on the date of the special meeting of stockholders by a holder of fewer than 1,000 shares (other than an employee of Monarch) will be converted into the right to receive, from Monarch, $13.50 in cash per share, and (ii) each share of common stock owned of record at the close of business on the special meeting date, by a holder of 1,000 or more shares will remain as outstanding Monarch common stock after the merger. We anticipate that the effect of the purchase from holders of less than 1,000 shares will be a reduction in the total number of stockholders from approximately 580 to approximately 110 as required for termination of registration, while the number of shares outstanding is expected to be reduced by approximately 3.1% (to 2,455,080 shares outstanding from the current 2,533,781 shares outstanding.) The Monarch board of directors has approved the “going private” transaction as in the best interest of all Monarch stockholders and recommends that you vote in favor of the proposed transaction. The attached notice of special meeting and proxy statement describe the transaction and provide specific information concerning the special meeting. The “going private” transaction is important for Monarch and its stockholders but will only be approved upon the affirmative vote of a majority of the number of shares entitled to vote at the special meeting. The board of directors has established[Record Date] as the record date for determining stockholders who are entitled to notice of the special meeting and to vote at the special meeting. Whether or not you plan to attend the special meeting, please complete, sign and date the proxy card and return it in the envelope provided in time for it to be received by ____________________, 2007. If you attend the meeting, you may vote in person, even if you have previously returned your proxy card. Sincerely, �� Donald L. Denney |
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PRELIMINARY COPIES MONARCH COMMUNITY BANCORP, INC. NOTICE OF THE SPECIAL MEETING OF STOCKHOLDERS A special meeting of stockholders of Monarch Community Bancorp, Inc. will be held at _____________ [a.m./p.m.] on ______________ , 2007, at Monarch Community Bank’s Main Office at 375 North Willowbrook Road, Coldwater, Michigan 49036, for the following purposes: |
| (1) | To consider and act upon a proposal to approve the merger of Monarch Merger Corp., a wholly-owned subsidiary of Monarch, with and into Monarch as contemplated by the merger agreement attached as Appendix A to the enclosed proxy statement. Pursuant to the terms of the merger agreement, (a) each share of Monarch common stock owned of record at the close of business on the date preceding the effective time of the merger, by a holder of fewer than 1,000 shares of common stock (other than an employee of Monarch), will be converted into, and will represent the right to receive from Monarch $13.50 cash per share; and (b) each share of Monarch common stock owned of record at the close of business on the date preceding the effective time of the merger, by a holder of 1,000 or more shares of common stock will continue to represent one share of Monarch common stock after the merger. | |
| (2) | To transact any other business as may properly come before the meeting or any adjournments of the meeting. |
The board of directors unanimously recommends that you vote FOR the approval of the proposal. Under applicable Maryland Laws, Monarch’s stockholders have do not have dissenters’ rights in connection with the merger. The board of directors has set the close of business on[Record Date], as the record date for determining the stockholders who are entitled to notice of, and to vote at, the meeting or any adjournment of the meeting. We hope that you will be able to attend the meeting. We ask, however, whether or not you plan to attend the meeting, please mark, date, sign, and return the enclosed form of proxy as soon as possible. Promptly returning your form of proxy will help ensure the greatest number of stockholders are present whether in person or by proxy. If you attend the meeting in person, you may revoke your proxy at the meeting and vote your shares in person. You may revoke your proxy at any time before the proxy is exercised. By Order of the Board of Directors, Andrew J. Van Doren , 2007 |
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PRELIMINARY COPIES MONARCH COMMUNITY BANCORP, INC. PROXY STATEMENT The board of directors of Monarch provides this proxy statement to you to solicit your vote on the approval of the Agreement and Plan of Merger, dated as of February 15, 2007, by and between Monarch and Monarch Merger Corp., a newly-formed subsidiary of Monarch organized for the sole purpose of facilitating this proposed transaction. Pursuant to the merger agreement, Monarch Merger Corp., will merge with and into Monarch, with Monarch continuing as the surviving corporation after the merger. If Monarch’s stockholders approve the merger agreement, each stockholder: |
| • | holding fewer than 1,000 shares of Monarch common stock at the time of the merger will receive $13.50 cash, without interest, per share from Monarch; or | |
| • | holding 1,000 or more shares at the time of the merger will continue to hold the same number of shares after the merger and will not receive any cash payment from Monarch. |
After the merger, Monarch anticipates it will have approximately 110 stockholders of record. As a result, Monarch will no longer be subject to the annual and periodic reporting and related requirements under the federal securities laws that are applicable to public companies. In addition, Monarch’s common stock will cease to be traded on the Nasdaq Capital Market and any trading in our common stock after the merger will only occur on the OTC Bulletin Board, in the “pink sheets,” or in privately negotiated transactions. The merger cannot occur unless the holders of a majority of the shares of Monarch common stock entitled to vote at the special meeting of stockholders approve the merger agreement. The board of directors has scheduled a special meeting of stockholders to vote on the merger as follows: [Date and Time] This document provides you with detailed information about the proposed merger. Please see “Where You Can Find More Information” on page __________ for additional information about Monarch on file with the Securities and Exchange Commission. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the proposed transaction or determined if this proxy statement is truthful or complete. The Securities and Exchange Commission has not passed upon the fairness or merits of the proposed transaction nor upon the accuracy or adequacy of the information contained in this proxy statement. It is a criminal offense for any person to tell you otherwise. The date of this proxy statement is ____________ , 2007. We first mailed this proxy statement to the stockholders of Monarch on or about that date. |
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IMPORTANT NOTICES Monarch common stock is not a deposit or bank account and is not insured by the Federal Deposit Insurance Corporation or any other governmental agency. We have not authorized any person to give any information or to make any representations other than the information and statements included in this proxy statement. You should not rely on any other information. The information contained in this proxy statement is correct only as of the date of this proxy statement, regardless of the date it is delivered or when shares of Monarch common stock are converted. We will update this proxy statement to reflect any factors or events arising after its date that individually or together represent a material change in the information included in this document. Monarch makes forward-looking statements in this proxy statement that are subject to risk and uncertainties. Forward-looking statements include information about possible or assumed future results of the operations or the performance of Monarch after the merger is effected. When we use words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions, we are making forward-looking statements that are subject to risk and uncertainties. Various future events or factors may cause our results of operations or performance to differ materially from those expressed in our forward-looking statements. These factors include: |
| (1) | changes in economic conditions, both nationally and in our primary market area; | |
| (2) | changes in governmental monetary and fiscal policies, as well as legislative and regulatory changes; | |
| (3) | the effect of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements; | |
| (4) | the effects of competition from other financial service providers operating in our primary market area and elsewhere; and | |
| (5) | the failure of assumptions underlying the establishment of reserves for possible loan losses and estimations of values of collateral and various financial assets and liabilities. |
The words “we,” “our,” and “us,” as used in this proxy statement, refer to Monarch and its wholly owned subsidiaries, collectively, unless the context indicates otherwise. |
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| TABLE OF CONTENTS |
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This summary, together with the following Questions and Answers section highlights the material information included in this proxy statement. This summary may not contain all of the information that is important to you. To understand the merger proposal fully, and for a more complete description of the legal terms of the merger proposal, you should read carefully this entire document and the other documents referenced in this document. The actual terms of the merger are contained in the merger agreement, a copy of which is attached as Appendix A to this proxy statement. |
| • | The merger would result in a reduction in the number of Monarch stockholders. This reduction is expected to permit Monarch to terminate the registration of its securities under the Securities Exchange Act of 1934.(See page ___.) | |
| • | The merger would be effective when articles of merger are filed with the State Department of Taxation and Assessments of the State of Maryland, or as otherwise specified on the articles of merger. Monarch intends to file the articles of merger promptly following stockholder approval of the merger proposal.(See page ___.) | |
| • | Each holder of record of 1,000 or more shares of Monarch common stock immediately prior to the effective time of the merger will continue to be a holder of the same number of shares he or she owned prior to the effective time.(See page ___.) | |
| • | Continuing Monarch stockholders following the effective time of the merger will not be entitled to any cash payment for their shares of common stock as a result of the merger.(See page ___.) | |
| • | Each holder of record of fewer than 1,000 shares of common stock immediately prior to the effective time of the merger (other than an employee) will be entitled to receive only cash, without interest, in the amount of $13.50 for each share of common stock held immediately prior to the effective time.(See page ___.) | |
| • | Following the effective time of the merger, stockholders who are entitled to be paid cash for their shares will no longer be stockholders of Monarch.(See page ___.) | |
| • | At the special meeting, holders of common stock will be asked to approve the merger transaction. Each share of common stock is entitled to one vote. Under Maryland Law, the merger must be approved by a majority of the shares of Monarch common stock entitled to vote.(See page ___.) | |
| • | On the record date, there were approximately 2,533,781 shares of common stock issued and outstanding. Of those shares, approximately 182,000 shares are owned, directly or indirectly, by directors and executive officers (approximately 7.2% of the outstanding shares). We have been informed that all of Monarch’s directors and executive officers intend to vote in favor of the merger proposal. Therefore, the affirmative vote of 1,084,891 shares (approximately 43% of the outstanding shares) of unaffiliated stockholders is necessary to ensure the approval of the merger. (See page ___.) | |
| • | The applicable Maryland Laws do not entitle stockholders of Monarch to elect dissenters’ rights in connection with the merger.(See page ___.) | |
| • | Shares held in “street name” accounts with brokerage firms, banks and other investment institutions at the effective time of the merger may remain outstanding after the merger. Stockholders who own fewer than 1,000 shares in a “street name” account with a broker, bank or other investment institution will not be cashed out as a result of the merger if the investment institution holds of record 1,000 or more shares immediately prior to the effective time of the merger. If you are a security holder who holds your shares in street name and hold fewer than 1,000 shares you will be unable to predict whether you will be cashed out in the merger unless you promptly take action to become a record holder on Monarch’s stockholder list, rather than a holder in street name. Re-registration of shares can take a week or more to become effective so please do not delay if you wish to ensure that you are the record holder at the time of the merger. (See page ___.) |
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| • | The merger agreement and the transactions contemplated by the merger agreement are subject to a number of conditions, including approval of the merger by our stockholders. (See page ___.) | |
| • | As a result of the merger, Monarch anticipates that it will be able to terminate the registration of its securities under the Securities Exchange Act of 1934. This means Monarch would no longer publicly file financial information nor incur the burdens, risks and expense associated with being subject to this act.(See page ___.) | |
| • | Following the completion of the merger, Monarch’s common stock would no longer be registered with the SEC nor traded on the Nasdaq Capital Market and, as a result, the public would have access to less information about Monarch. For example, while Monarch intends to prepare and distribute to remaining stockholders on an annual basis, an annual report containing audited financial statements along with a less detailed proxy statement, Monarch will not prepare and make available the following reports which it currently files with the SEC: | |
| • | Annual Report on Form 10-K; | |
| • | Quarterly Reports on Form 10-Q; | |
| • | Current Reports on Form 8-K; | |
| • | Forms 3, 4, and 5 required of executive officers and directors under Section 16 of the Securities Exchange Act; and | |
| • | Detailed proxy statement as required by Regulation 14A under the Securities Exchange Act of 1934, as amended. | |
In addition, the merger will result in there being less liquidity in Monarch’s common stock and may negatively affect the goodwill of some customers of Monarch’s subsidiary banks.(See pages ___.) | |
| • | Monarch’s directors and officers have, or may appear to have, a conflict of interest in voting for and recommending the approval of the merger. As a result of the merger, directors and officers’ beneficial ownership of Monarch stock, as a group, are expected to increase from approximately 9% to 10%.(See page ___.) | |
| • | The merger is expected to be taxable to those stockholders who receive cash in exchange for their securities. These holders are expected to recognize gain or loss for federal, and possibly state and local, income tax purposes when they receive cash for their securities. They will generally recognize gain or loss equal to the difference between the amount of cash received and their tax basis in the securities.Stockholders should consult their personal tax advisors for a full understanding of the merger’s tax consequences.(See page ___.) | |
| • | Monarch’s financial advisor, Donnelly Penman & Partners (“Donnelly Penman”), has given the Board of Directors a written opinion dated April 17, 2007 that the cash consideration to be paid to stockholders who receive cash is fair from a financial point of view.(See page ___.) A copy of this opinion is attached to this proxy statement as Appendix B. | |
| • | The board of directors has determined that the proposed merger is substantively and procedurally fair to all unaffiliated stockholders of Monarch, including those being cashed out in the merger, as well as those remaining unaffiliated stockholders. The board has also determined that the price of $13.50 per share to be paid to those holders receiving cash for their shares is a fair price. Applicable SEC rules require that in addition to Monarch itself, Monarch Merger Corp. must express its belief as to the substantive and procedural fairness of the merger to each group of unaffiliated stockholders. Monarch Merger Corp. has determined that the merger is substantively and procedurally fair to the unaffiliated stockholders of Monarch that are cashed-out in the merger, as well as those remaining unaffiliated stockholders of Monarch. (See pages ___ and __.) |
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| • | The board recommends that stockholders vote FOR the Agreement and Plan of Merger proposal. |
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How was the cash price for shares of the common stock determined? The board of directors retained Donnelly Penman, an independent financial advisor experienced in the financial analysis and valuation of financial institutions, to assist the board in determining a fair price for the shares of common stock to be purchased by Monarch in the merger transaction. Donnelly Penman delivered a valuation report to the board valuing a share of the common stock at $13.50 per share. The board of directors considered the independent valuation and other factors and determined that the cash consideration under the merger agreement should be $13.50 per share. Subsequently, Donnelly Penman issued an opinion to the board of directors that the cash consideration to be paid under the merger agreement was fair, from a financial point of view, to Monarch’s stockholders. A copy of the fairness opinion of Donnelly Penman is attached as Appendix B to this proxy statement for your review. May I obtain a copy of Donnelly Penman’s valuation report? In connection with Donnelly Penman’s fairness opinion, Donnelly Penman has prepared and delivered to Monarch a valuation report that details the valuation principles and methodologies used to determine the fairness of the proposed transaction. You or your representative (designated in writing) may inspect and copy the valuation report at Monarch’s main office during regular business hours. You or your representative (designated in writing) may also receive a copy of the report upon written request and at your expense. Please send in your written request to the address set forth on the cover page of this proxy statement. Additional information or documentation may be requested from you if necessary to verify your identity or that of your representative or the authority of your representative. The SEC also maintains a website that contains reports, proxy statements and other information about issuers, including Monarch, who file electronically with the SEC. The address of that site is http://www.sec.gov. Monarch has filed with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 in connection with the transactions described in this proxy statement. As permitted by the SEC, this proxy statement omits certain information contained in the Schedule 13E-3. A copy of the valuation report is attached as an exhibit to Monarch’s Schedule 13E-3 and is available for inspection electronically at the SEC’s website. When will the merger be completed? We plan to complete the transaction during the _______ quarter of 2007 so that registration of the common stock can also be terminated in the _________ quarter of 2007. Should I send in my common stock certificates now? No. After the merger transaction is completed, those stockholders who receive cash in the merger will receive written instructions for exchange of their common stock certificates for cash. Who can help answer my questions? If you have any questions about the special meeting or any of the items to be considered by the stockholders at the meeting, or if you need additional copies of the enclosed materials or proxy, you should contact: Ralph Micalizzi, Chief Financial Officer, 375 North Willowbrook Road, Coldwater, Michigan 49036. His telephone number is (517) 278-4567. What do I need to do now? |
| • | Mail your signed proxy in the enclosed return envelope as soon as possible so that your shares may be represented at the meeting. If you sign and return your proxy but do not include instructions on how to vote, your shares will be voted “FOR” the proposal to approve and adopt the merger and the merger agreement. | |
| • | For a more complete description of voting at the stockholders’ meeting, see the section entitled “Information Regarding the Special Meeting of Stockholders” beginning on page ___ of this proxy statement. |
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| • | Annual Reports on Form 10-K; | |
| • | Quarterly Reports on Form 10-Q; | |
| • | Current Reports on Form 8-K; | |
| • | Forms 3, 4, and 5 required of executive officers and directors under Section 16 of the Securities Exchange Act; and | |
| • | Proxy Statements and related materials as required by Regulation 14A under the Securities Exchange Act of 1934, as amended. |
The costs associated with these reports and other filing obligations comprise a significant corporate overhead expense. These costs include securities counsel fees, auditor fees, costs of printing and mailing the SEC documents and the word processing, specialized software filing costs associated with the SEC reports and other filings, and considerable management’s time and attention devoted to public reporting issues and the SEC’s reporting requirements. These SEC registration-related expenses have increased since the adoption of the Sarbanes-Oxley Act in 2002 and comprise a significant portion of Monarch’s non-interest expense. (See “—Purposes of and Reasons for the Merger Proposal.”) Most of the requirements of the Sarbanes-Oxley Act are now effective and applicable to Monarch, and Monarch has implemented procedures intended to comply with those requirements. However, one very substantial requirement of the Sarbanes-Oxley Act, Section 404, will first be applicable to Monarch in connection with its |
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annual report to be filed in the first quarter of 2008. In general terms, Section 404 of the Sarbanes-Oxley Act will require that management include in each annual report an assessment of the effectiveness of its internal control structure and procedures for financial reporting. Further, for Monarch’s annual report to be filed in 2009, it will require that Monarch’s registered public accounting firm attest to, and report on, this assessment. These requirements are expected to result in significant increased expenses, both in terms the investment of management time to implement the requirements and increased annual charges from Monarch’s registered public accounting firm. The merger proposal is being made at this time, primarily to avoid the costs to be incurred in complying with Section 404 of the Sarbanes-Oxley Act and, secondarily to eliminate those costs that we currently incur as a result of having our securities registered under the Securities Exchange Act. The sooner the proposal can be implemented, the sooner Monarch will cease to incur the expenses and burdens associated with having our securities registered under the Securities Exchange Act and the sooner holders who are to receive cash in the merger will receive and be able to reinvest or otherwise make use of such cash payments. Alternatives Considered. The board considered the following alternatives at its February 15, 2007 Special Meeting, further details of which meeting are described in detail below. In making its determination, the board of directors considered other means of possibly achieving the same result, but rejected these alternatives for the reasons that follow. These alternatives were: |
| • | Tender Offer at a Similar Price. The board of directors was uncertain as to whether this alternative would result in securities being tendered by a sufficient number of record holders so as to accomplish the going private objective and to reduce recurring costs. The board found it unlikely that many holders of small numbers of shares would make the effort to tender their securities. | |
| • | Reverse Stock Split. This alternative would accomplish the objective of reducing the number of record stockholders, assuming approval of the reverse stock split by Monarch’s stockholders. In a reverse stock split, Monarch would acquire the interests of the cashed-out stockholders pursuant to an amendment to Monarch’s articles of incorporation to reduce the number of issued and outstanding shares of common stock such that the cashed-out stockholders would own less than one full share of Monarch common stock. Monarch would then distribute cash for the resulting fractional share interests. The reverse stock split and the merger would both achieve the same objective of reducing the number of record common stockholders, assuming stockholder approval. However, the reverse stock split had the disadvantage that it would result in an unreasonably high share price, or in the alternative, would require an immediate “forward stock split” to return the stock to its pre-reverse share price. The board viewed the merger alternative as preferable because it did not require this subsequent step. |
After consideration of the various alternatives described above, the board determined that the merger proposal was the best choice for Monarch and its stockholders. Monarch estimates that, following the proposed merger, it should have approximately 110 stockholders of record, which will permit Monarch to terminate the registration of its securities under the Securities Exchange Act. Board of Directors. Since the enactment of the Sarbanes-Oxley Act in 2002, management and Monarch’s board of directors had become increasingly aware of the alternative of going private, as that alternative has been presented at industry conferences, in business publications and discussed generally among banking industry participants. Management and the board also became aware of going private transactions being effected by other community bank holding companies which are very similar to Monarch located in Michigan, Ohio, Indiana and Illinois. On August 12, 2005, the Board first discussed the possibility of going private at a strategic planning retreat with members of senior management, including all bank vice presidents. A few weeks earlier, President Denney asked Vice President/General Counsel Van Doren to contact attorney Joseph B. Hemker of Howard & Howard Attorneys, P.C., Monarch’s outside counsel, and request that he attend the planning retreat to discuss a number of issues, including a going private transaction. Mr. Hemker did so, and the board and management discussed the possibility of going private. The consensus, however, was to investigate acquisition opportunities in the bank’s market area before exploring further a going private transaction. After reviewing acquisition opportunities and determining that there were no such opportunities in the bank’s market area, at a senior management strategic planning session in September 2006, management concluded that Monarch must cut its costs substantially in order to increase net income and enhance stockholder value. Management first concentrated on reducing compensation expense. At the same time, President Denney, Ralph Micalizzi, Chief Financial Officer, and William Kurtz, Chief Operating Officer, again began to consider the cost saving possibilities of going private. Attorney Hemker again was contacted, and asked to attend the next board |
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meeting to again discuss a going private transaction. On November 2, 2006, members of senior management, comprised of Mr. Denney, Mr. Kurtz, Mr. Micalizzi, and Mr. Van Doren met with Mr. Hemker to discuss in general terms issues associated with going private, including, but not limited to alternative methods of going private, timing, costs, duties of directors, and related concerns. Following the meeting, management requested that Mr. Hemker attend Monarch’s upcoming November 2006 board meeting to discuss the possibility of going private with Monarch’s board of directors. On November 16, 2006 the board of directors held a meeting at which issues related to going private were discussed. All members of the board of directors were present including Mr. Denney, along with William C. Kurtz, Ralph Micalizzi, Andrew Van Doren, and Joseph B. Hemker. Mr. Denney asked Mr. Micalizzi to provide the board with an overview of the Sarbanes-Oxley Act and Section 404 in particular. Mr. Micalizzi reviewed with the board the current reporting requirements for public companies as well as the additional requirements resulting from the implementation of Section 404. Mr. Micalizzi estimated Monarch would incur additional one-time costs of $75,000 to perform a risk assessment, identify significant business processes, document internal control procedures, assess the design of those controls, and design and perform tests of the effectiveness of internal controls. This would be accomplished with the assistance of outside consultants. Beyond this one-time cost, annual costs for external review of these procedures were estimated at $25,000. In addition to these costs to outside entities, it was estimated that it would be necessary to hire an employee whose job responsibilities would be to perform testing and ongoing monitoring of the control procedures, at an annual cost of $50,000. These estimates reviewed by Mr. Micalizzi with the board did not include any estimate of management time involved in department heads performing periodic testing of their area’s control procedures, nor any of Mr. Micalizzi’s own time in overseeing the 404 responsibilities. Mr. Micalizzi reviewed with the board the historical and anticipated costs if Monarch continues as a reporting company. These costs were estimated at approximately $126,000 as set forth under the caption “—Purposes of and Reasons for the Merger Proposal.” Mr. Micalizzi then reviewed with the board the anticipated cost and the impact on earnings of a going private transaction. Based on estimated costs of approximately $41,000 per year on interest foregone on the funds necessary to acquire the shares of the stockholders to be cashed-out in the merger (see “Financing of the Merger”), Mr. Micalizzi estimated that the going private transaction would improve after-tax earnings by approximately $93,000 per year (or approximately 6%, based on Monarch’s projected 2007 earnings per share). Following Mr. Micalizzi’s presentation, Mr. Hemker reviewed with the board the alternatives described above for going private. Mr. Hemker also discussed with the board the likely timing associated with a going private transaction. The board and counsel then discussed the need for an appointment of a financial advisor to perform a valuation and ultimately render a fairness opinion in connection with the transaction. Following a discussion, the board authorized Mr. Denney to engage Donnelly Penman to serve as financial advisor in connection with a possible going private transaction. The board also instructed management to move forward in exploring a going private transaction for consideration at a future board of directors meeting. At the February 15, 2007 meeting of the board of directors, which was attended by Mr. Denney, all of Monarch’s directors, and William C. Kurtz, Ralph Micalizzi, Andrew Van Doren, Joseph B. Hemker of Howard & Howard Attorneys, P.C. as outside counsel to Monarch, and John Donnelly and Zachary Urban of Donnelly Penman, Mr. Denney began by summarizing the proposed going private transaction. He described the potential costs of continuing as a reporting company and also reported regarding the additional time management that would be required to devote to SEC matters if Monarch continues as an SEC reporting company. (See “Purposes of and Reasons for the Merger Proposal.”) He also discussed the financial impact to Monarch of conducting such a transaction. (See “Sources of Funds and Expenses.”) Mr. Denney then asked Mr. Hemker to make a presentation. Mr. Hemker then discussed the fiduciary duties of the board in considering the proposed transaction. He also summarized the legal structure associated with the proposed transaction, the terms of a proposed Agreement and Plan of Merger by and between Monarch and a Maryland corporation to be formed to facilitate the proposed transaction and the steps necessary to complete a transaction. Mr. Denney then requested John Donnelly and Zack Urban of Donnelly Penman to present the results of the valuation of the per share fair value of the common stock of Monarch prepared by Donnelly Penman. Mr. Donnelly and Mr. Urban then reviewed the considerations, methodology and results of the valuation. (See “Financial Fairness.”) They indicated that Donnelly Penman concluded that a reasonable estimate of the per share |
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Monarch incurs direct and indirect costs associated with the filing and reporting requirements imposed on public companies by the 1934 Act. Examples of anticipated direct cost savings from terminating registration of the common stock include substantially less complicated disclosure, reduced professional and advisory fees, reduced accounting fees, reduced insurance costs, reduced printing and mailing costs for corporate communications, and reduced miscellaneous, clerical and other expenses (e.g., the word processing, specialized software and electronic filings associated with SEC filings). Our costs associated with the routine SEC filing and reporting requirements are estimated at approximately $126,000 or 1.3% of our non-interest expense for our 2006 reporting year and 2007 annual meeting (the “2007 reporting cycle”). These expenses consisted of the following: |
| Accounting Fees | $ | 21,600 | |
| Securities Counsel | $ | 21,200 | |
| Corporate Communications | $ | 6,600 | |
| SEC Filing Fees and Miscellaneous | $ | 26,600 | |
| Internal Compliance Costs | $ | 50,000 |
We believe that the costs incurred over the 2007 reporting cycle are a conservative estimate for the recurring annual cost savings that should result from the going private transaction and subsequent termination of our SEC registration. For example, as a result of the implementation of Section 404 of the Sarbanes-Oxley Act, we have been advised by our independent auditors that the anticipated fees in 2007 associated with Section 404 are expected to be approximately 30% of our audit fees ($85,000 in 2006), which amount does not include our internal compliance costs associated with the implementation of Section 404. Estimates of the annual savings to be realized if the merger is implemented are based upon (i) the actual costs of the services and disbursements in each of the above categories that are reflected in recent historical financial statements and (ii) management’s estimates of the portion of the expenses and disbursements in each category believed to be solely or primarily attributable to the public company status. In some instances, management’s estimates are based on information provided by third parties or upon verifiable assumptions. For example, our auditors have informed us that there will likely be a reduction in annual audit fees if we cease to be public as annual and quarterly reviews of SEC filings will not be needed if we no longer file reports with the SEC. Further legal costs associated with quarterly and annual SEC filings will no longer be incurred. Other estimates are more subjective. For example, we expect lower printing and mailing costs as a result of less complicated disclosure required by our private status, and the reduction in direct miscellaneous clerical and other expenses. The amounts set forth above are only estimates, and the actual savings to be realized may be higher or lower than these estimates. The projected reduction in the number of total record stockholders from 580 to approximately 110 will also result in reduced expenses and less burden on management because Monarch will have approximately 470 fewer stockholders. The decrease in number of stockholders reduces the volume of communications and amount of postage and related expenses associated with the quarterly issuance of dividend checks to stockholders and other stockholder communications. The merger proposal is structured as a “going private” transaction because it is intended to and, if completed, will likely result in the termination of our reporting requirements and other filing obligations under the Securities Exchange Act of 1934, as amended. The merger has been structured so that upon consummation of the merger, Monarch will have fewer than 300 record holders of its shares of common stock. We have recently organized Monarch Merger Corp. solely to facilitate the merger transaction. Monarch Merger Corp. will be merged with and into Monarch pursuant to the terms of the merger agreement. Monarch will be the surviving corporation to the merger. If completed, the merger will have the following effects. Shares held by stockholders owning fewer than 1,000 shares. Each share of common stock owned of record at the close of business on the date of the Special Meeting of Stockholders, by a holder of fewer than 1,000 shares (other than an employee of Monarch) will be converted, pursuant to the terms of the merger, into the right to |
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receive a cash payment of $13.50 per share. After the merger and payment of that amount, holders of these shares will have no further interest in Monarch. These stockholders will not have to pay any service charges or brokerage commissions in connection with the merger or the cash payments to them. Shares held by stockholders owing 1,000 or more shares. Each share of common stock owned of record at the close of business on the date of the Special Meeting of Stockholders, by a holder of 1,000 or more shares of common stock will remain outstanding and continue to represent one share of common stock in Monarch following the merger. Beneficial owners of shares of the common stock. Nominees (such as a bank or broker) may have required procedures, and stockholders holding common stock in “street name” should contact their nominees to determine how they will be affected by the merger transaction. Under the merger agreement, each share of common stock owned by a stockholder who holds of record fewer than 1,000 shares will be converted into the right to receive cash. The board selected 1,000 shares as the ownership minimum for several reasons, including to ensure that, after completion of the merger: |
| • | the number of record stockholders would be less than the 300 stockholder limit necessary to terminate registration with the SEC; and | |
| • | Monarch would have sufficient flexibility to issue stock in the future for corporate purposes, including raising equity capital for Monarch or the bank or attracting and retaining qualified employees, directors or executive officers. |
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The board of directors believes that the merger proposal is fair to, and in the best interests of, Monarch and all stockholders, including those stockholders who are not officers and directors, and to all stockholders who will receive cash for their shares. The board of directors also believes that the process by which the merger is to be approved is fair. The board of directors believes that the merger proposal is fair despite the absence of statutory safeguards identified by the SEC, namely that |
| • | the board did not retain an unaffiliated representative to act solely on behalf of the stockholders who are not officers or directors, including stockholders who will receive only cash in the merger, for the purpose of negotiating the terms of the merger proposal or preparing a report covering the fairness of the merger proposal; and | |
| • | the merger proposal is not structured so that the approval of at least a majority of those stockholders who are not officers and directors is required. |
However, despite the absence of an SEC requirement to do so, the board did obtain an opinion from an unaffiliated third-party, Donnelly Penman, relating to the fairness of the cash consideration to be paid to certain stockholders. As a result of obtaining an independent fairness opinion, the board determined that the cost of obtaining an additional fairness opinion or valuation from an unaffiliated representative for the purpose of negotiating the terms of the merger proposal on behalf of the unaffiliated stockholders would be costly and would not provide any meaningful additional benefit. Stockholders are urged to read the fairness opinion in its entirety. The fairness opinion is directed to Monarch’s board of directors and relates only to the fairness of the consideration offered from a financial point of view. The summary of the valuation report and the fairness opinion in this proxy statement is qualified in its entirety by reference to the actual valuation report and the fairness opinion. A copy of Donnelly Penman’s fairness opinion is attached to this proxy statement as Appendix B. You or your representative (designated in writing) may inspect and copy the valuation report at the bank’s main office during regular business hours. You or your representative (designated in writing) may also receive a copy of the report upon written request and at your expense. Please send in your written request to the address set forth on the cover page of this proxy statement. Additional information or documentation may be requested from you if necessary to verify your identity or that of your representative or the authority of your representative. The SEC also maintains a website that contains reports, proxy statements and other information about issuers, including Monarch, who file electronically with the SEC. The address of that site is http://www.sec.gov. Monarch has filed with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 in connection with the transactions described in this proxy statement. As permitted by the SEC, this proxy statement omits certain information contained in the Schedule 13E-3. A copy of the valuation report is attached as an exhibit to Monarch’s Schedule 13E-3 and is available for inspection electronically at the SEC’s website. The board of directors, including all of the directors who are not employees of Monarch (i.e. 8 of the 9 directors), approved the merger proposal, and the board recommends that the stockholders approve the proposal. All of the members of the board of directors have expressed an intention to vote in favor of the merger proposal, including the board members who are not employees of Monarch or the bank. In connection with rendering its opinion to Monarch, Donnelly Penman performed a variety of financial analyses, which are summarized below. Donnelly Penman believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without consideration of all factors and analyses, could create a misleading view of the analyses and the processes underlying Donnelly Penman’s opinion. Donnelly Penman arrived at its opinion based on the results of all the analyses it undertook, assessed as a whole, and it did not draw conclusions from or with regard to any one method of analysis. The preparation of a valuation is a complex process involving subjective judgments, and is not necessarily susceptible to partial analysis or summary description. In connection with its valuation and in arriving at its opinion, Donnelly Penman: |
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| • | Reviewed the recent history and nature of Monarch; | |
| • | Reviewed current banking industry conditions and trends; | |
| • | Considered the earnings capacity of Monarch; | |
| • | Considered the dividend-paying capacity of Monarch; | |
| • | Reviewed the audited financial statements for the years ended December 31, 2003 through December 31, 2006. | |
| • | Reviewed the Strategic Plan for years 2007 - 2010, as prepared by management of Monarch in November 2006; |
| • | Reviewed the 2007 financial statement projection as prepared by management; | |
| • | Reviewed transactions involving the sale of stock of Monarch over the calendar year 2006 through April 17, 2007; | |
| • | Conducted discussions with the senior management of Monarch concerning the business and future prospects of Monarch; | |
| • | Compared certain financial characteristics of Monarch to certain publicly held companies Donnelly Penman deemed relevant; | |
| • | Prepared a discounted cash flow analysis of Monarch based on the projections provided by management of Monarch; and | |
| • | Reviewed such other financial and industry data, performed such other analyses and taken into account such other matters as Donnelly Penman deemed necessary or appropriate. |
Donnelly Penman did not make or obtain any independent evaluation, valuation or appraisal of the assets or liabilities of Monarch, nor were they furnished with such materials. Donnelly Penman has not reviewed any individual credit files of Monarch and has assumed, without independent verification, that the reported allowances for credit losses are adequate to cover such losses. With respect to the comparable company analysis summarized below, no public company utilized as a comparison is identical to Monarch, and such analyses necessarily involves complex considerations and judgments concerning the differences in financial and operating characteristics of the financial institutions and other factors that could affect the public trading values of the financial institutions concerned. The forecasted financial information furnished by Monarch’s management contained in or underlying Donnelly Penman’s analyses are not necessarily indicative of future results or values, which may be significantly more or less favorable than such forecasts and estimates. The forecasts and estimates were based on numerous variables and assumptions that are inherently uncertain, including without limitation, factors related to general economic and competitive conditions. In that regard, Donnelly Penman with Monarch’s consent, assumed and relied upon the fact that the financial forecasts had been reasonably prepared by management on a basis reflecting the best currently available judgments of management, and that such forecasts will be realized in the amounts and at the times contemplated thereby. Estimates of values of financial institutions or assets do not purport to be appraisals or necessarily reflect the prices at which financial institutions or their securities actually may be sold. Accordingly, actual results could vary significantly from those assumed in the financial forecasts and related analyses. Fair Value Standard.For purposes of the valuation, Donnelly Penman determined the value of Monarch shares at Fair Value. For purposes of the valuation, Donnelly Penman assumed the definition of Fair Value to mean the proportionate interest of Monarch, as a going concern, without any discount for minority status or lack of marketability. Factors considered by Donnelly Penman and the board included the following: |
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Trading Indication Analysis (Current/Historical Market Prices). In preparing its opinion, Donnelly Penman analyzed all trades of Monarch’s common stock that have taken place during calendar year 2006 (weighted average trading price of $11.48), transactions in which Monarch repurchased shares of its common stock during calendar year 2006 (weighted average buyback price of $11.90), all trades of Monarch’s common stock from January 1st, 2007 through February 7th, 2007 (weighted average trading price of $10.63) and the trading price of Monarch’s common stock at February 7th, 2007 ($10.85), collectively referred to as “Trading Indications”. Donnelly Penman then applied the previously described Fair Value Premium of 15% to each of the Trading Indications described above, since these indications have an inherent minority discount, to arrive at Fair Value Indications of $13.20, $13.69, $12.22 and $12.48, respectively. Donnelly Penman then averaged the Fair Value Indications of the Trading Indications to arrive at an average Trading Indication value of $12.90 per share. Net Book Value. The net book value or net equity method implies that a company is worth its accumulated retained earnings, or deficit, plus its original capitalization. Net book value is primarily an amount arrived at over a company’s existence which reflects accounting history expressed in unadjusted dollars and not the company’s potential. Book value is only of importance to the extent it provides an adequate base for the continuance of operations. In most instances where a company earns a significant return on its assets (both tangible and intangible), the net book value approach isnot representative of the company’s intrinsic business value. Donnelly Penman reviewed the book value of Monarch’s assets in limited detail and have found net book value to be $39,986,000, or $15.78 per share as of December 31, 2006. Donnelly Penman also reviewed the tangible book value of Monarch’s assets in limited detail and have found tangible book value to be $29,290,000 or $11.56 per share as of December 31, 2006. Going Concern/Discounted Cash Flow Analysis.This approach argues that a potential investor will pay a price for a security which yields a targeted minimum rate of return on invested capital. Using this targeted rate of return as a discount factor, the present value of the stream of future cash flows for a given number of years can be computed by discounting each year’s estimated free cash flow to the present time. Discounted Cash Flow (“DCF”) valuation does not value the total cash flow of the business. Rather, it values only the free cash flow. In doing so, this analysis separates and ascribes value only to the cash flows that can be taken out of the business. DCF valuation is composed of two values: a forecast of free cash flows for a discrete period and a terminal value that is a surrogate for the present value of the discounted cash flows that are expected to occur in the years after the end of the forecast period. Terminal value at the end of the period of cash flow forecasts may be arrived at in different ways, such as estimating a book value multiple, using a capitalization rate on free cash flow, or applying a price/earnings multiple to forecasted earnings. Donnelly Penman believes using the tangible book value multiple is the appropriate methodology to utilize. Once the free cash flows and terminal values are estimated, the present value of these components must be calculated. The investor is paying today for access to the cash flows generated by the assets in the future, therefore, these cash flows must be discounted to the present. In essence, the discount rate attempts to approximate the rate of return the suppliers of capital will expect to earn. Donnelly Penman has utilized Ibbotson Associates 2006 SBBI Valuation Yearbook capital asset pricing model information to help determine the appropriate discount rate (return on equity) which was determined to be 11.5%. Donnelly Penman prepared a free cash flow analysis of Monarch, which estimated the future after tax cash flows that Monarch might produce over the five year period from January 1, 2007 through December 31, 2011. These estimates were derived from projections provided and deemed reasonable by management and relied upon by DP&P. Through discussions with management the projections were modified to reflect the maximum dividend paying capacity of the bank while maintaining Monarch’s total capital to risk-weighted assets ratio at or above 12.0%. This is a total capital to risk-weighted assets ratio Monarch felt was the minimum they would feel comfortable operating the bank under. In 2007, the maximum dividend available to the bank was utilized taking into consideration the dividend restrictions management described to Donnelly Penman. Donnelly Penman further assumed, to approximate the maximum dividends Monarch could pay, various dividend payouts were utilized through the projection period. These dividends in aggregate dollars were approximately $8.0 million, $1.7 million, $1.3 million, $1.7 million and $1.7 million for the years 2007 through 2011, respectively. These dividend cash flows were then discounted to a present value using a discount rate of 11.5%, chosen as described above to reflect the relative risk that holders of the common equity would be subject to given Monarch’s operations and the current economic environment. Donnelly Penman also estimated the residual value for Monarch’s common stock using the |
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median price to tangible book value multiple of 1.20, which is based on the comparable company analysis previously described. This multiple is applied to Monarch’s estimated tangible book at December 31, 2011 of $23.8 million. Then the 15% Fair Value premium was applied to the residual value indication to eliminate the minority discount inherent in the multiple from the comparable company analysis. The discounted cash flow analysis implied a value of approximately $31.21 million or $12.32 per share based on 2,533,781 shares outstanding as of December 31, 2006 for Monarch’s common stock. This analysis does not purport to be indicative of actual values or actual future results and does not purport to reflect the prices at which any securities may trade at the present or at any time in the future. Donnelly Penman included this analysis because it is a widely used valuation methodology, but noted that the results of such methodology are highly dependent upon the numerous assumptions that must be made, including earnings growth rates, dividend payout rates, terminal values and discount rates. Analysis of Selected Comparable Companies.This approach assumes that a degree of comparability exists between Monarch and other similar firms for which a value has been established over an adequate time horizon in an active and free trading market. Donnelly Penman compared selected operating results of Monarch to a select group of 23 Midwest publicly traded commercial banks and thrifts. Although Monarch recently converted to a state-chartered commercial bank, it still has characteristics of a thrift institution. Therefore, both banks and thrifts were utilized in this analysis. The comparable set were located in Illinois, Indiana, Michigan and Ohio, had total assets greater than $150 million and less than $500 million, and had LTM return on average equity less than 5.0%. The selected group had approximately the following median values: $230.5 million in total assets, $26.4 million in total equity, a total risk-based capital ratio of 16.00%, LTM return on average assets of 0.31%, LTM return on average equity of 3.19% and an LTM efficiency ratio of 82.13%. Donnelly Penman determined that due to Monarch’s large amount of intangible assets that tangible book value was the appropriate metric on which to focus. Additionally, Donnelly Penman analyzed the core deposits (defined as all deposits less brokered deposits, CDs and IRAs over $100,000) of Monarch in comparison with the comparable company universe. This analysis provided valuation benchmarks including the median price multiple of 1.20 times tangible book value (“TBV”) and a 2.24% median trading premium (TBV) to core deposits. The core deposit premium was developed by subtracting each company’s tangible equity from its market capitalization and then dividing that result by the institution’s core deposits. Donnelly Penman then applied this multiple and premium to the corresponding metrics for Monarch. Applying the median price to tangible book value multiple (120.0%) to Monarch’s tangible book value (without eliminating mortgage servicing rights) as of December 31, 2006 of $11.56 per share resulted in an implied per share value of $13.87. Due to the fact that the initial value indications from a set of comparable publicly traded companies represent minority values, Donnelly Penman then added a premium of 15% to eliminate this inherent minority discount, which yielded an indicated Fair Value per share of $15.95 for Monarch. Donnelly Penman also applied the median trading premium (TBV) to core deposits (2.24%) using a similar methodology. Adding the median trading premium to core deposits (2.24%) to Monarch’s core deposits as of December 31, 2006 ($138.5 million) resulted in a dollar premium to TBV of $3.1 million, or $1.22 per share. Applying this premium to Monarch’s tangible book value (without eliminating mortgage servicing rights) as of December 31, 2006 of $11.56 resulted in an implied per share value of $12.78 and then subsequently adding the Fair Value premium of 15% yielded an indicated Fair Value per share of $14.70 for Monarch. No bank or thrift used in the above analyses as a comparison is identical to Monarch. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values of Company and the banks to which it is being compared. Liquidation Value. Due to the nature of Monarch and its business, Donnelly Penman did not believe a liquidation analysis was relevant in this case. Marketability and Minority Discount. Donnelly Penman will typically utilize either a marketability or minority discount, or combination thereof, to value a minority share of a relatively illiquid company on a comparable basis. No such discounts have been applied to Monarch’s common stock in this valuation. If such a discount were applied, it would result in valuation that would be significantly lower than the value assigned below. Conclusion. The following is a summary of the results of Donnelly Penman’s analyses: |
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| Value Conclusion | Valuation Technique: | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Comparable Company | |||||||||||||||||
| DCF | Trading Indication(1) | TBV | Trading Prem/ Core Deposits(2) | ||||||||||||||
| Fair Value Indication | $ | 13.50 | $ | 12.32 | $ | 12.90 | $ | 15.95 | $ | 14.70 | |||||||
| Multiple of Diluted EPS 12/31/2006 ($0.63) | 21.4 | 19.6 | 20.5 | 25.3 | 23.3 | ||||||||||||
| Percentage of Book Value 12/31/2006 ($15.78) | 85.6 | % | 78.1 | % | 81.7 | % | 101.1 | % | 93.1 | % | |||||||
| Percentage of Tangible Book Value excluding mortgage servicing rights 12/31/2006 ($11.56) | 116.8 | % | 106.5 | % | 111.6 | % | 138.0 | % | 127.1 | % | |||||||
| • | the fact that the board retained and received advice from an independent financial advisor, Donnelly Penman, in determining the fairness of the price of $13.50 per share; | |
| • | the fact that the board retained and received advice from independent legal counsel in evaluating the terms of the merger agreement; and |
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| • | the opinion of Donnelly Penman, dated April 17, 2007, that the merger consideration to be received by holders of fewer than 1,000 shares pursuant to the merger agreement is fair to the Monarch stockholders, including those not affiliated with Monarch, from a financial point of view. |
Positive factors for unaffiliated stockholders who receive cash in the merger. In addition to the positive factors applicable to all unaffiliated stockholders set forth above, the factors that the board considered positive for the unaffiliated stockholders who receive cash in the merger included: |
| • | the fact that the cash price per share of $13.50 offered in the merger represents a 26.2% premium over the December 31, 2006 tangible book value per share of $11.56; | |
| • | the fact that the merger consideration is all cash, which provides certainty of value to those stockholders and immediate liquidity for the stockholders who receive cash in the merger; and | |
| • | the fact that no brokerage or other transaction costs are to be incurred by stockholders who receive cash in the merger. |
Positive factors for remaining unaffiliated stockholders.In addition to the positive factors applicable to all unaffiliated stockholders set forth above, the factors that the board considered as positive for the unaffiliated stockholders who will remain stockholders following the merger included: |
| • | the fact that such stockholders would have the opportunity to participate in any future growth and earnings of Monarch; | |
| • | the fact that such stockholders would not be required to pay income taxes as a result of the merger; and | |
| • | the fact that the remaining unaffiliated stockholders would realize the potential benefits of termination of registration of the common stock, including, reduced expenses of Monarch for no longer having to comply with SEC requirements. |
Negative factors for all unaffiliated stockholders.The factors that the board of directors considered negative for all the unaffiliated stockholders included: |
| • | the fact that the directors and executive officers of Monarch have interests in the merger or have relationships that present actual or potential, or the appearance of actual or potential, conflicts of interest in connection with the merger, including the fact that the directors and executive officers will retain their shares in the merger and their ownership interests will increase modestly; and | |
| • | the fact that dissenter’s rights of appraisal would not be available in connection with the transaction. |
Negative factors for unaffiliated stockholders receiving cash in the merger.In addition to the negative factors applicable to all unaffiliated stockholders set forth above, the factors that the board considered negative for the unaffiliated stockholders who would receive cash in the merger included: |
| • | the fact that such stockholders would not have the opportunity to participate in any future growth and earnings of Monarch; | |
| • | the fact that such stockholders would be required to pay income tax on the receipt of cash in the merger; and | |
| • | the fact that these stockholders will not be able to sell their shares at a time and for a price of their choosing. |
Negative factors for remaining unaffiliated stockholders.In addition to the negative factors applicable to all stockholders set forth above, the factors that the board considered negative for the stockholders who will retain their shares in the merger, including all such unaffiliated stockholders, included: |
| • | the fact that after the completion of the merger and registration is terminated, such stockholders will have decreased access to information about Monarch; |
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| • | the fact that after the completion of the merger, there will be approximately 470 fewer stockholders and Monarch’s stock will be traded on the OTC Bulletin Board and the Pink Sheets instead of the Nasdaq Capital Market, which will reduce liquidity in Monarch’s stock; | |
| • | the fact that after the completion of the merger, Monarch will not be subject to the periodic reporting, proxy rules and Section 16 of the 1934 Act; and | |
| • | the merger may negatively affect the goodwill of certain of the bank’s customers. |
While the board considered the negative factors described above, it concluded that the benefits of the positive factors outweighed the detriments of the negative factors and that the proposed transaction was fair and in the best interest of Monarch’s unaffiliated stockholders being cashed-out, as well as those remaining unaffiliated stockholders. The board considered the prices at which Monarch had repurchased its stock over the past two years through its stock repurchase plan and deemed it favorable that the $13.50 share price represented a premium of $1.59 (or 13.4%) to the $11.91 weighted-average price paid to stockholders in such repurchase transactions. The board did not consider any firm offers by third parties because there were none. Neither management nor the board made any efforts to identify a buyer because the board determined that consideration thereof was inappropriate in the context of a transaction that would not be intended to result in a change of control of Monarch. The board believed that it would be inappropriate to solicit such offers where no change of control was contemplated. The board did not consider other methods to significantly reduce its non-interest expenses as an alternative to a going private transaction since only the going private transaction would result in Monarch and the bank continuing to conduct their operations in substantially the same manner as they currently conduct their operations, only without the costs associated with being a “public” company. See “SPECIAL FACTORS — Operations of the Bank Following the Merger.” The board did not consider and vote upon whether or not to, and as a result, did not, retain an unaffiliated representative to act solely on behalf of stockholders who are not directors or officers of Monarch or the bank for purposes of negotiating the terms of the merger transaction or preparing a report on the fairness of the transaction. Nor did Monarch structure the transaction so the approval of at least a majority of unaffiliated security holders is required. Stockholders who are expected to receive cash in the merger represent approximately 3.1% of the common stock. The merger requires approval by stockholders holding a majority of the outstanding stock. Directors and officers as a group have the right to vote approximately 7.2% of the outstanding common stock of Monarch. Because the shares held by directors and officers represent a small percentage of votes required to approve the transaction and because of the small percentage of stockholders receiving cash in the merger, the board concluded that having an unaffiliated representative to act solely on behalf of stockholders who are not directors or officers of Monarch and/or requiring a majority of unaffiliated stockholders to approve the transaction were unnecessary for this transaction. Likewise, the board did not consider establishing a committee of independent directors to negotiate on behalf of the unaffiliated security holders. Monarch’s board of directors consists of nine directors, only one of whom is an officer of Monarch. In view of the makeup of the board it was not deemed necessary to establish a committee of independent directors to negotiate on behalf of the unaffiliated security holders. The foregoing discussion of the factors considered by the board of directors is not intended to be exhaustive. In view of the variety of factors considered in connection with their evaluation of the merger proposal, the board of directors did not find it practicable to, and did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. The board considered all the factors as a whole in reaching its determination. In addition, individual members of the board of directors may have given different weights to different factors. The board, based upon the factors outlined above, believes that the merger proposal is fair to all unaffiliated stockholders of Monarch being cashed-out, as well as those remaining unaffiliated stockholders. |
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Distributions by the surviving Monarch after completion of the merger (other than any distribution for which the record date is a date prior to the date of completion of the merger) will be paid to the owners of Monarch and not to the stockholders who receive cash in the merger. The merger will also provide unaffiliated stockholders who receive cash in the merger a cost-effective way to cash out their investments, because Monarch will pay all transaction costs in connection with the merger proposal. Potential disadvantages to unaffiliated stockholders who remain as stockholders after the merger is completed and registration terminated include: |
| • | the fact that after the completion of the merger, Monarch will not be subject to the periodic reporting, proxy rules, the liability provisions and Section 16 of the Securities Exchange Act, and the provisions of Sarbanes-Oxley which, among other things, requires that Monarch’s officers certify the accuracy of its financial statements; and | |
| • | decreased liquidity, as a result of there being fewer stockholders and Monarch’s stock will not be traded on the Nasdaq Capital Market. |
Potential disadvantages to unaffiliated stockholders receiving cash in the merger include: |
| • | the fact that such stockholders will be required to surrender their shares involuntarily in exchange for a price determined by the board and would not have the opportunity to participate in any future growth and earnings of Monarch or to liquidate their shares at a time and price of their choosing; and | |
| • | the tax consequences described in “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page __ below. |
| SEC filing fees | $ | 32.62 | ||
| Legal fees | $ | 80,000 | ||
| Accounting fees | $ | 10,000 | ||
| Financial Advisory Fees | $ | 30,000 | ||
| Printing costs | $ | 20,000 | ||
| Transfer Agent Fees | $ | 30,000 | ||
| Other | $ | 29,967 | ||
| Total | $ | 200,000 |
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| • | the approval of the merger and the merger agreement by the stockholders of Monarch; | |
| • | the approval of the merger and the merger agreement by the stockholders of Monarch Merger Corp.; |
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| • | the filing of a certificate of merger with the Maryland State Department of Taxation and Assessments; and | |
| • | the receipt of all regulatory approvals, if any. See “— Regulatory Requirements.” |
| • | changes the amount or kind of consideration that you will receive for your shares of common stock; | |
| • | changes any provision of Monarch’s articles of incorporation; or |
| • | changes any of the terms of the merger agreement, if the change would adversely affect your rights as a stockholder. |
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| • | stockholders who are not citizens or residents of the United States; | |
| • | financial institutions; | |
| • | tax-exempt organizations and entities, including IRAs; | |
| • | insurance companies; | |
| • | dealers in securities; and | |
| • | stockholders who acquired their shares of common stock through the exercise of employee stock options or similar derivative securities or otherwise as compensation. |
Tax Consequences to Stockholders Who Retain Their Shares. If you are a stockholder who retains your shares of common stock in the merger and you do not receive any cash or property (including stock) as part of the merger, you will not recognize gain or loss for U.S. federal income tax purposes as a result of the merger. The merger will not affect the adjusted tax basis or holding period of any shares of common stock that you continue to own following the merger. Tax Consequences to Stockholders Who Receive Cash for their Shares. If you are a stockholder who receives cash for your shares of common stock in the merger, you should be treated for federal income tax purposes as having had your shares redeemed by Monarch under Section 302 of the Internal Revenue Code. Unless the cash received is treated as a dividend under Section 301 of the Internal Revenue Code (as discussed below), you will recognize gain or loss for U.S. federal income tax purposes with respect to the cash received for your shares of common stock. The gain or loss will be measured by the difference between the amount of cash received, $13.50 per share, and the adjusted tax basis of your shares of common stock. The gain or loss will be capital gain or loss and will be long-term capital gain or loss if you will have owned your shares of common stock for more than one year at the time the merger is completed. Section 302 of the Internal Revenue Code provides that the cash distribution will not be treated as a dividend if the distribution is (i) “not essentially equivalent to a dividend,” (ii) “substantially disproportionate” with respect to the stockholder or (iii) completely terminates the stockholder’s interest in our company. The constructive ownership rules of Section 318 of the Internal Revenue Code apply in comparing a stockholder’s percentage interest in Monarch immediately before and immediately after the merger. Generally, the constructive ownership rules under Section 318 treat a stockholder as owning (i) shares of common stock owned by certain relatives, related corporations, partnership, estates or trusts, and (ii) shares of common stock the stockholder has an option to acquire. |
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| Selected Pro Forma Financial Data |
| (In thousands except per share data) |
| As of and for the _____ months ended [__________], 2007 | As of and for the year ended December 31, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Net interest income | $ | $ | 8,680 | |||||
| Provision for loan losses | 0 | |||||||
| Non-interest income | 3,122 | |||||||
| Non-interest expense | 9,710 | |||||||
| Income taxes | 544 | |||||||
| Net earnings | $ | $ | 1,548 | |||||
| PER COMMON SHARE | ||||||||
| Basic earnings per share | $ | $ | 0.63 | |||||
| Diluted earnings per share | 0.63 | |||||||
| Book value | $ | $ | 11.56 | |||||
| AT PERIOD END | ||||||||
| Assets | $ | $ | 289,987 | |||||
| Stockholders’ equity | 39,986 | |||||||
| Common shares outstanding | 2,534 | |||||||
| Weighted average shares outstanding | 2,466 | |||||||
30 |
31 |
| The purposes of the special meeting are: | ||
| 1. | To consider and act upon a proposal to approve the merger of Monarch Merger Corp., a wholly-owned subsidiary of Monarch, with and into Monarch as contemplated by the merger agreement attached as Appendix A to the enclosed proxy statement. Pursuant to the terms of the merger agreement, (a) each share of Monarch common stock owned of record at the close of business on the date preceding the effective time of the merger, by a holder of fewer than 1,000 shares of common stock (other than an employee of Monarch), will be converted into, and will represent the right to receive from Monarch $13.50 cash per share; and (b) each share of Monarch common stock owned of record at the close of business on the date preceding the effective time of the merger, by a holder of 1,000 or more shares of common stock will continue to represent one share of Monarch common stock after the merger. | |
| 2. | To transact any other business as may properly come before the meeting or any adjournments of the meeting. (Please note that the meeting will not be adjourned for the purpose of soliciting additional proxies.) | |
32 |
33 |
34 |
holds a B.A. from Alma College, an M.B.A from Western Michigan University’s Haworth School of Business, and has completed the Graduate School of Banking at the University of Wisconsin. He serves on several Michigan Bankers Association committees. Monarch’s executive officers are appointed annually by the board of directors at the meeting of directors following the Annual Meeting of Stockholders. There are no family relationships among these officers and/or directors or any arrangement or understanding between any officer and any other person pursuant to which the officer was elected. Set forth below is biographical information regarding each of our directors other than Mr. Denney whose information is set forth above: |
| Craig W. Dally | 60 | Director since 1992. Vice President, Treasurer and General Manager of Dally Tire Co., a retail and commercial tire reseller with over $1 million in sales located in Coldwater, Michigan. Mr. Dally has served in this capacity for over 20 years. | ||
| Richard L. Dobbins | 62 | Director since April, 2004. Previously served as a Director of MSB Financial, Inc. and Marshall Savings Bank, F.S.B. from 1974 to 2004. Mr. Dobbins is an attorney in private practice since 1973, and is President of North Concord Farms, Inc., North Parma Farms, Inc., and Dobbins Farms, Inc. From 1990 to 2002, he was a director of Caster Concepts, Inc., a manufacturer of industrial wheels and casters in Albion, Michigan. | ||
| Harold A. Adamson | 66 | Director since 1988. Former Chief Executive Officer of Plastic Technology Center, a non-profit organization located in Angola, Indiana from 1995 through 2001. During 2002 and until June 2003, Mr. Adamson was the Assistant Director of Kellogg Community College’s Grahl Center. Mr. Adamson currently is the Chair of the School of Business and of Liberal Arts, Miller College, Battle Creek, Michigan. | ||
| Lauren L. Bracy | 72 | Director since 1991. President and Chief Executive Officer of Bracy & Jahr, Inc., a masonry and building contractor firm located in Quincy, Michigan, and has served in that capacity for over 31 years. | ||
| James R. Vozar | 71 | Director since 1987. Owner of the James R. Vozar Insurance Agency, located in Quincy Michigan, since 1967. | ||
| Martin L. Mitchell | 56 | Director since April 2004. Previously served as Director of MSB Financial, Inc. and Marshall Savings Bank, F.S.B. from 1987 to 2004. In 2004, Dr. Mitchell became President and Chief Executive Officer of Starr Commonwealth, a non-profit organization serving youth and their families with campuses in Albion, Battle Creek and Detroit, Michigan and Columbus and Van Wert, Ohio. Previously he was Executive Vice President and Chief Operations Officer 2002-2004, Vice President and COO 1999-2002, and Vice President of Program from 1981-1999. Dr. Mitchell has served on the Board of Directors of Olivet College, Olivet Michigan since 1995. | ||
| Stephen M. Ross | 63 | Director since 1994. Appointed Chairman in 2004. From 1980 until August, 2003, Mr. Ross was Senior Vice President of the Hillsdale Division of Eagle-Picher, Inc., an automotive supplier. Mr. Ross currently is Vice President of Sales and Marketing for Southern Michigan Tool and Machine, an automotive parts supplier in Hillsdale, Michigan. |
35 |
| Gordon L. Welch | 60 | Director since 1986, currently employed by Michigan Gas Utilities a division of WPSR. WPSR is a publicly traded gas and electric holding company headquartered in Green Bay WI. Previously, Mr. Welch was employed by Aquila as an Economic Development Director and prior to that as a Natural Gas Commodity Broker. |
| Prior to Merger | After Merger | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percent of Shares Beneficially Owned | Number of Shares Beneficially Owned | Percent of Shares Beneficially Owned | |||||||||
| 5% or more beneficial owners: | |||||||||||||
| Jeffrey L. Gendell 55 Railroad Avenue, 3rd Floor Greenwich, CT 06830 | 215,520 | (1) | 8.5 | % | 215,520 | 8.8 | % | ||||||
| Monarch Community Bancorp, Inc. Employee Stock Ownership Plan (“ESOP”) 375 North Willowbrook Road Coldwater, Michigan 49036 | 166,365 | (2) | 6.6 | % | 166,365 | 6.8 | % | ||||||
| (1) | Based upon information disclosed in Schedule 13D filed with the SEC on June 10, 2004. |
| (2) | Shares of Common Stock were acquired by the ESOP in the bank’s conversion from mutual to stock form (the “Conversion”). The ESOP Committee administers the ESOP. First Bankers Trust Company has been appointed as the corporate trustee for the ESOP (“ESOP Trustee”). The ESOP Trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in accordance with the instructions of the participants. As of February 13, 2007, 73,790 shares have been allocated to ESOP participants’ accounts. |
36 |
| Prior to Merger | After Merger | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percent of Shares Beneficially Owned | Number of Shares Beneficially Owned | Percent of Shares Beneficially Owned | |||||||||
| Harold A. Adamson, Director | 11,619 | (2) | * | 11,619 | * | ||||||||
| Lauren L. Bracy, Director | 34,689 | (3) | 1.3 | % | 34,689 | 1.4 | % | ||||||
| Eric Cook, Executive Officer | 6,490 | (4) | * | 6,490 | * | ||||||||
| Craig W. Dally, Director | 9,819 | (5) | * | 9,819 | * | ||||||||
| Donald L. Denney, President, CEO and Director | 31,712 | (6) | 1.2 | % | 31,712 | 1.3 | % | ||||||
| Richard L. Dobbins, Director | 24,773 | (7) | * | 24,773 | 1.0 | % | |||||||
| William C. Kurtz, Executive Officer | 23,646 | (8) | * | 23,646 | * | ||||||||
| Ralph A. Micalizzi, Jr. Executive Officer | 1,340 | (9) | * | 1,340 | * | ||||||||
| Martin L. Mitchell, Director | 16,132 | (7) | * | 16,132 | * | ||||||||
| Stephen M. Ross, Chairman and Director | 22,419 | (2) | * | 22,419 | * | ||||||||
| Andrew J. Van Doren, Executive Officer | 29,834 | (10) | 1.1 | % | 29,834 | 1.2 | % | ||||||
| James R. Vozar, Director | 21,919 | (2) | * | 21,919 | * | ||||||||
| Gordon L. Welch, Director | 11,919 | (2) | * | 11,919 | * | ||||||||
| All directors and executive officers as a group (13 persons) | 246,311 | (12) | 9.5 | % | 246,311 | 10.0 | % | ||||||
| ______________________ | |
| (1) | Except as otherwise noted in these footnotes, the nature of beneficial ownership for shares reported in this table is sole voting and investment power, however, includes shares in the 2003 Recognition and Retention Plan that have not yet vested. |
| (2) | Includes 5,952 shares issuable upon the exercise of options exercisable within 60 days. |
| (3) | Includes 12,500 shares owned by Bracy & Jahr, Inc. where Mr. Bracy is President and Chief Executive Officer and 5,952 shares issuable upon the exercise of options exercisable within 60 days. |
| (4) | Includes shares held jointly with spouse and in 401(k) Plan and Employee Stock Ownership Plan. |
| (5) | Includes 100 shares owned by Dally Tire Company where Mr. Dally is Vice President, Treasurer and General Manager, and 5,952 shares issuable upon the exercise of options exercisable within 60 days. |
| (6) | Includes shares held in 401(k) Plan and Employee Stock Ownership Plan that have not yet vested, and 8,000 shares issuable upon the exercise of options exercisable within 60 days. |
| (7) | Includes 3,968 shares issuable upon the exercise of options exercisable within 60 days. |
| (8) | Includes 6,942 shares issuable upon the exercise of options exercisable within 60 days. |
| (9) | Includes shares held in 401(k) plan and Employee Stock Ownership Plan that have not yet vested, and 500 shares issuable upon the exercise of options exercisable within 60 days. |
| (10) | Includes shares held in 401(k) and ESOP, and 5,550 shares issuable upon the exercise of options exercisable within 60 days. |
| (11) | Includes shares held directly, as well as shares held jointly with family members, shares held in retirement accounts, held in a fiduciary capacity, held by certain of the group members’ families, or held by trusts of which the group member is a trustee or substantial beneficiary, with respect to which shares the group member may be deemed to have sole or shared voting and/or investment powers. |
| (12) | Includes a total of 64,640 shares issuable upon the exercise of options exercisable within 60 days. |
| * | Less than 1% ownership as a percent of class. |
37 |
| Date | # of Shares | Price per Share | Cost | ||||||||
| 01/30/2006 | 30,000 | $ | 12.05 | $ | 361,500 | ||||||
| 02/09/2006 | 10,000 | 11.87 | 118,700 | ||||||||
| 02/14/2006 | 10,000 | 11.86 | 118,600 | ||||||||
| 08/08/2006 | 20,000 | 11.55 | 231,000 | ||||||||
| 08/23/2006 | 5,000 | 11.80 | 59,000 | ||||||||
| 08/31/2006 | 5,000 | 11.60 | 58,000 | ||||||||
| 09/13/2006 | 97,300 | 11.96 | 1,163,708 | ||||||||
| Total | 177,300 | $ | 11.91 | * | $ | 2,110,508 | |||||
| High | Low | Dividend Declared | ||||||||
| 2007 | ||||||||||
| First Quarter | $ | 12.50 | $ | 10.05 | $ | 0.07 | ||||
| Second Quarter (to-date) | $ | $ | $ | 0.07 | ||||||
| 2006 | ||||||||||
| First Quarter | $ | 12.80 | $ | 11.02 | $ | 0.06 | ||||
| Second Quarter | $ | 13.00 | $ | 11.07 | $ | 0.06 | ||||
| Third Quarter | $ | 12.63 | $ | 10.90 | $ | 0.06 | ||||
| Fourth Quarter | $ | 11.25 | $ | 10.03 | $ | 0.06 | ||||
| 2005 | ||||||||||
| First Quarter | $ | 14.33 | $ | 12.00 | $ | 0.05 | ||||
| Second Quarter | $ | 14.33 | $ | 11.75 | $ | 0.05 | ||||
| Third Quarter | $ | 13.75 | $ | 12.00 | $ | 0.05 | ||||
| Fourth Quarter | $ | 12.59 | $ | 10.50 | $ | 0.06 | ||||
As of[Record Date], there were approximately 580 common stockholders of record, not including beneficial owners whose shares may be registered in “street” name. After the merger, the Monarch common stock will no longer be quoted on the Nasdaq Capital Market or be eligible for trading on an exchange. Monarch will not be required to file reports under the Securities Exchange Act, and its common stock will not be registered under the Securities Exchange Act. Monarch anticipates that its stock will continue to be quoted in the over-the-counter market on the OTC Bulletin Board and on the “Pink Sheets.” The “Pink Sheets” is a centralized quotation service that collects and publishes market maker quotes in real time primarily through its website, Pinksheets.com, which provides stock and bond price quotes, financial news and information about securities traded. Stifel Nicolaus & Co. and Keefe, Bruyette & Woods, Inc. have agreed to continue to use their best efforts to make a market in the shares of common stock as long as the volume of trading and certain other market making considerations justify such activity. |
38 |
Monarch is authorized to issue 20,000,000 shares of common stock, par value $0.01 per share and 5,000,000 shares of preferred stock, par value $0.01 per share. The authorized but unissued and unreserved shares of common stock are available for general corporate purposes, including, but not limited to, possible issuance as stock dividends, in connection with mergers or acquisitions, under a cash dividend reinvestment or stock purchase plan, in a public or private offering or under employee benefit plans. Voting Rights. Each share of the common stock has the same relative rights and is identical in all respects with every other share of the common stock. The holders of the common stock possess exclusive voting rights in Monarch. Except as provided below, each holder of common stock is entitled to one vote for each share held of record on all matters submitted to a vote of holders of the common stock. Monarch’s charter provides that in no event will any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns more than 10% of the then outstanding shares of common stock, be entitled or permitted to vote any of the shares held in excess of the 10% limit. If Monarch issues preferred stock, the holders of preferred stock may also possess voting rights. Dividends. Monarch has consistently issued dividends to the holders of the common stock, who are and will continue to be entitled to share equally in any such dividends. For additional information as to dividends, see “Dividend Policy” below. If Monarch issues preferred stock, the holders of preferred stock may have a priority over the holders of the common stock with respect to dividends. Liquidation. In the unlikely event of the complete liquidation or dissolution of Monarch, holders of the common stock would be entitled to receive all assets of Monarch available for distribution in cash or in kind, after payment or provision for payment of (i) all debts and liabilities of Monarch; (ii) any accrued dividend classes; (iii) liquidation preferences upon any preferred stock and other serial preferred stock which may be issued in the future; and (iv) any interest in the liquidation account. Other Characteristics. Holders of the common stock do not have preemptive rights with respect to any additional shares of common stock which may be issued. Therefore, the board of directors may sell shares of common stock of Monarch without first offering such shares to existing stockholders. The common stock is not subject to call for redemption, and the outstanding shares of common stock when issued and upon receipt by Monarch of the full purchase price therefor are fully paid and nonassessable. Preferred Stock. The board may issue preferred stock with such preferences and designations as the board may from time to time determine. The board can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the common stock. Transfer Agent and Registrar. The transfer agent and registrar for the common stock is Registrar and Transfer Company, Cranford, New Jersey. Future dividend payments may be made at the discretion of Monarch’s board of directors, considering factors such as operating results, financial condition, regulatory restrictions, tax consequences, and other relevant factors. |
39 |
SELECTED HISTORICAL FINANCIAL DATA Financial Condition Data: |
| As of | At December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| [______], 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
| (in thousands) | |||||||||||||||||
| Assets | $ | 289,987 | $ | 277,068 | $ | 275,448 | $ | 203,123 | $ | 197,985 | |||||||
| Loans, net | 230,247 | 213,097 | 219,373 | 141,225 | 145,162 | ||||||||||||
| Cash and cash equivalents | 15,297 | 16,286 | 15,649 | 27,331 | 20,207 | ||||||||||||
| Securities available for sale | 13,706 | 14,337 | 8,057 | 19,648 | 17,160 | ||||||||||||
| Securities held to maturity | 228 | 247 | 267 | 286 | 274 | ||||||||||||
| Deposits | 192,572 | 174,715 | 169,573 | 107,240 | 106,744 | ||||||||||||
| Borrowed Funds | 54,476 | 59,562 | 65,955 | 57,384 | 52,500 | ||||||||||||
| Stockholders’ Equity | 39,986 | 40,576 | 39,419 | 37,430 | 36,949 | ||||||||||||
| Book value per share | $ | 15.78 | $ | 14.97 | $ | 14.55 | $ | 15.60 | N/A | ||||||||
Operating Data: |
| For Years Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year to Date | |||||||||||||||||
| [_____], 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
| (in thousands) | |||||||||||||||||
| Interest Income | $ | 17,287 | $ | 15,231 | $ | 13,818 | $ | 12,053 | $ | 12,931 | |||||||
| Interest Expense | 8,607 | 6,567 | 6,173 | 6,060 | 6,466 | ||||||||||||
| Net interest income before provision For loan losses | 8,680 | 8,664 | 7,645 | 5,993 | 6,465 | ||||||||||||
| Provision for loan losses | — | (385 | ) | 4,875 | 1,266 | 397 | |||||||||||
| Net interest income after provision for loan losses | 8,680 | 9,049 | 2,770 | 4,727 | 6,068 | ||||||||||||
| Non-interest income | 3,122 | 3,399 | 3,425 | 2,925 | 2,159 | ||||||||||||
| Non-interest expense | 9,710 | 10,503 | 9,978 | 6,737 | 6,798 | ||||||||||||
| Income before income tax expense | 2,092 | 1,945 | (3,783 | ) | 915 | 1,429 | |||||||||||
| Income tax expense | 544 | 505 | (1,272 | ) | 251 | 415 | |||||||||||
| Net Income | $ | 1,548 | $ | 1,440 | $ | (2,511 | ) | 664 | 1,014 | ||||||||
| Basic earnings per share | $ | 0.63 | $ | 0.57 | $ | (1.05 | ) | $ | 0.31 | N/A | |||||||
| Diluted earnings per share | $ | 0.63 | $ | 0.57 | $ | (1.05 | ) | $ | 0.31 | N/A | |||||||
| At or for the Year Ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At | ||||||||||||||||||
| [______], 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||
| Return on assets (net income as a percentage of average total assets) | 0.54 | % | 0.52 | % | -0.97 | % | 0.32 | % | 0.54 | % | ||||||||
| Return on equity (net income as a percentage of average equity) | 3.85 | % | 3.59 | % | -6.53 | % | 1.80 | % | 4.08 | % | ||||||||
| Equity-to-assets ratio (average equity as a percentage of average total assets) | 14.09 | % | 14.51 | % | 14.81 | % | 17.78 | % | 13.24 | % | ||||||||
| Interest rate spread | 3.26 | % | 3.14 | % | 3.15 | % | 2.69 | % | 3.58 | % | ||||||||
| Net interest margin for period | 3.42 | % | 3.56 | % | 3.33 | % | 3.11 | % | 3.85 | % | ||||||||
| Non-interest expense, as a percentage of average total assets | 4.17 | % | 4.85 | % | 4.40 | % | 4.67 | % | 3.62 | % | ||||||||
| Allowance for possible loan losses as a percentage of total loans | 0.87 | % | 1.35 | % | 2.83 | % | 1.81 | % | 1.18 | % | ||||||||
| Non-performing assets as a percentage of total assets | 0.74 | % | 1.31 | % | 2.23 | % | 2.94 | % | 2.53 | % | ||||||||
| Dividend Payout Ratio | 40.70 | % | 39.44 | % | -20.98 | % | 71.69 | % | 0.00 | % | ||||||||
40 |
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated balance sheet as of[__________], 2007 (the “Pro Forma Balance Sheet”), and the unaudited pro forma consolidated statements of earnings for the year ended December 31, 2006 and[_____] month period ended[__________], 2007 (the “Pro Forma Earnings Statement”), show the pro forma effect of the merger. Pro forma adjustments to the Pro Forma Balance Sheet are computed as if the merger occurred at[__________], 2007, while the pro forma adjustments to the Pro Forma Earnings Statements are computed as if the merger was consummated on January 1, 2006, the earliest period presented. The following financial statements do not reflect any anticipated cost savings which may be realized by Monarch after consummation of the merger. The pro forma information does not purport to represent what Monarch’s results of operations actually would have been if the merger had occurred on January 1, 2006. Pro Forma Consolidated Financial Statements (Unaudited) The following unaudited pro forma consolidated balance sheet as of[__________], 2007 and the unaudited pro forma consolidated income statements for the year ended December 31, 2006, and the _____ months ended[__________],2007, give effect to the following: |
• We have assumed that the merger occurred as of[__________], 2007, for the purposes of the consolidated balance sheet, and as of January 1, 2006, respectively, with respect to the consolidated income statements for the year ended December 31, 2006, and the[_____] months ended[__________], 2007. |
| • We have assumed that a total of 78,701 shares are cashed out in the merger at a price of $13.50 per share for a total of $1,062,464. |
| • We have assumed that all of the cash required to consummate the merger will be provided from working capital of Monarch. |
• We have adjusted for anticipated cost savings, estimated to be approximately $126,000 for the year ended December 31, 2006 and $_______ for the[_____] months ended[__________], 2007. The applicable incremental federal income tax rate is assumed to be 25%. This is an estimate of the actual cost incurred in these periods for legal, accounting and other professional fees associated with the filing requirements under the Securities Exchange Act. This adjustment is not a prediction of future results. No adjustment is made for employee overhead, indirect or incidental expenses. Management estimates that costs associated with being a filing company under the Securities Exchange Act will be higher in later periods. |
41 |
MONARCH COMMUNITY BANCORP, INC. PRO FORMA CONSOLIDATED BALANCE SHEET |
| (In thousands, except share and per share data) |
| As of [__________], 2007 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Historical | Pro Forma Adjustments | Pro Forma Combined | |||||||
| (Unaudited) | |||||||||
| ASSETS | |||||||||
| Cash and non-interest bearing deposits | |||||||||
| Interest bearing deposits in other financial institutions | |||||||||
| Federal funds sold | |||||||||
| Total cash and cash equivalents | |||||||||
| Time deposits with other financial institutions | |||||||||
| Securities available for sale | |||||||||
| Securities held to maturity | |||||||||
| Federal Home Loan Bank (FHLB) stock | |||||||||
| Total securities | |||||||||
| Loans held for sale | |||||||||
| Loans: | |||||||||
| Commercial and agricultural | |||||||||
| Installment | |||||||||
| Real estate mortgage | |||||||||
| Total loans | |||||||||
| Allowance for loan losses | |||||||||
| Net loans | |||||||||
| Premises and equipment, net | |||||||||
| Accrued interest receivable | |||||||||
| Bank owned life insurance | |||||||||
| Other assets | |||||||||
| Total assets | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
| LIABILITIES | |||||||||
| Deposits: | |||||||||
| Non-interest bearing | |||||||||
| Interest bearing | |||||||||
| Total deposits | |||||||||
| Accrued interest payable | |||||||||
| Federal funds purchased | |||||||||
| FHLB borrowings | |||||||||
| Other liabilities | |||||||||
| Total liabilities | |||||||||
| STOCKHOLDERS’ EQUITY | |||||||||
| Common stock: $0.01 par value, ___________ shares authorized; | �� | ||||||||
| 2,533,781 shares outstanding at [__________], 2007 and | |||||||||
| 2,455,080 as adjusted | |||||||||
| Additional paid in capital | |||||||||
| Retained earnings | |||||||||
| Accumulated other comprehensive income, net of tax of $___ of [__________], 2007 | |||||||||
| Total stockholders’ equity | |||||||||
| Total liabilities and stockholders’ equity | |||||||||
42 |
PRO FORMA CONSOLIDATED INCOME STATEMENT |
| (In thousands, except share and per share data) |
| Year Ended December 31, 2006 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Historical | Year-Ended: Pro Forma Adjustments | Pro Forma Combined | |||||||
| Interest and Dividend Income | — | ||||||||
| Loans, including fees | $ | 16,107 | — | $ | 16,107 | ||||
| Securities: Taxable | 538 | — | 538 | ||||||
| Tax exempt | 35 | — | 35 | ||||||
| FHLB stock | 227 | — | 227 | ||||||
| Federal funds sold and other | 380 | — | 380 | ||||||
| Total interest and dividend income | 17,287 | — | 17,287 | ||||||
| Interest expense | |||||||||
| Deposits | 5,418 | — | 5,418 | ||||||
| FHLB borrowing and other debt | 3,189 | — | 3,189 | ||||||
| Total interest expense | 8,607 | — | 8,607 | ||||||
| Net interest income | 8,680 | — | 8,680 | ||||||
| Provision for loan losses | — | — | — | ||||||
| Net interest income after provision for loan losses | 8,680 | — | 8,680 | ||||||
| Non-interest income | — | ||||||||
| Service charges on deposits | 1,699 | — | 1,699 | ||||||
| Net gains on sales of loans | 362 | — | 362 | ||||||
| Investment commission fees | 33 | — | 33 | ||||||
| Other | 1,028 | — | 1,028 | ||||||
| Total non-interest income | 3,122 | — | 3,122 | ||||||
| Non-interest expense | |||||||||
| Salaries and employee benefits | 4,967 | — | 4,967 | ||||||
| Occupancy and equipment | 1,020 | — | 1,020 | ||||||
| Other | 3,723 | (126 | ) | 3,597 | |||||
| Total non-interest expense | 9,710 | (126 | ) | 9,584 | |||||
| Income before income tax expense | 2,092 | 126 | 2,218 | ||||||
| Income tax expense | 544 | 33 | 577 | ||||||
| Net income | $ | 1,548 | 93 | $ | 1,641 | ||||
| Basic earnings per share | $ | 0.63 | $ | 0.04 | $ | 0.67 | |||
| Diluted earnings per share | $ | 0.63 | $ | 0.04 | $ | 0.67 | |||
Assumes $126,000 in cost savings ($21,600 accounting fees; $21,200 securities counsel; $6,600 corporate communications; $26,600 SEC filings; $50,000 internal compliance costs). |
43 |
PRO FORMA CONSOLIDATED INCOME STATEMENT |
| (In thousands, except share and per share data) |
| _____ Months Ended /__________/, 2007: | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Historical | Pro Forma Adjustments | Pro Forma Combined | |||||||
| Interest and Dividend Income | |||||||||
| Loans, including fees | |||||||||
| Securities: Taxable | |||||||||
| Tax exempt | |||||||||
| FHLB stock | |||||||||
| Federal funds sold and other | |||||||||
| Total interest and dividend income | |||||||||
| Interest expense | |||||||||
| Deposits | |||||||||
| FHLB borrowing and other debt | |||||||||
| Total interest expense | |||||||||
| Net interest income | |||||||||
| Provision for loan losses | |||||||||
| Net interest income after provision for loan losses | |||||||||
| Non-interest income | |||||||||
| Service charges on deposits | |||||||||
| Net gains on sales of loans | |||||||||
| Investment commission fees | |||||||||
| Other | |||||||||
| Total non-interest income | |||||||||
| Non-interest expense | |||||||||
| Salaries and employee benefits | |||||||||
| Occupancy and equipment | |||||||||
| Other | |||||||||
| Total non-interest expense | |||||||||
| Income before income tax expense | |||||||||
| Income tax expense | |||||||||
| Net income | |||||||||
| Basic earnings per share | |||||||||
| Diluted earnings per share | |||||||||
Assumes $126,000 in cost savings ($21,600 accounting fees; $21,200 securities counsel; $6,600 corporate communications; $26,600 SEC filings; $50,000 internal compliance costs). |
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PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES (unaudited) |
| (in thousands) |
| Ratio of earnings to fixed charges | Year Ended 12/31/2006 | Year ended 12/31/2005 | Pro Forma Year ended 12/31/2006 | ____ months ended __/__/2007 | Pro Forma ____ months ended __/__/2006 | Pro Forma ____ months ended __/__/2007 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Earnings | ||||||||||||||||||
| Add | ||||||||||||||||||
| Pretax income | $ | 2,092 | $ | 1,945 | $ | 2,218 | ||||||||||||
| Fixed charges | 8,592 | 6,571 | 8,592 | |||||||||||||||
| Amortization of capitalized interest | — | — | — | |||||||||||||||
| Distributed income of equity investees | — | — | — | |||||||||||||||
| Share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges | — | — | — | |||||||||||||||
| Less | ||||||||||||||||||
| Interest capitalized | — | — | — | |||||||||||||||
| Preference security dividend requirements | — | — | — | |||||||||||||||
| Minority interest in pre-tax income of subsidiaries that have not incurred fixed charges | — | — | — | |||||||||||||||
| Total earnings | $ | 10,684 | $ | 8,516 | $ | 10,810 | ||||||||||||
| Fixed Charges | ||||||||||||||||||
| Interest expensed& capitalized | 8,607 | 6,567 | 8,607 | |||||||||||||||
| Amortized premiums, discounts and capitalized expenses | (15 | ) | 4 | (15 | ) | |||||||||||||
| Interest within rental expense | — | — | — | |||||||||||||||
| Preference security dividend requirements of consolidated subs | — | — | — | |||||||||||||||
| Total fixed charges | $ | 8,592 | $ | 6,571 | $ | 8,592 | ||||||||||||
| Ratio of earnings to fixed charges | 124.35 | % | 129.60 | % | 125.81 | % | ||||||||||||
45 |
PRO FORMA BOOK VALUE PER SHARE (UNAUDITED) |
| (in thousands except share and per share data) |
| Actual 12/31/2006 | Pro Forma Adjustments | Pro Forma Combined | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Common stock-$0.01 par value, authorized 20,000,000 shares; 2,533,781 shares issued and outstanding | $ | 25 | $ | 25 | |||||
| Capital surplus | 26,191 | (1,062 | ) | 25,129 | |||||
| Retained earnings | 15,319 | 93 | 15,412 | ||||||
| Accumulated other comprehensive income (loss) | (63 | ) | (63 | ) | |||||
| Unearned compensation | (1,486 | ) | (1,486 | ) | |||||
| Total stockholders’ equity | 39,986 | (969 | ) | 39,017 | |||||
| Outstanding shares 12/31/2006 | 2,533,781 | (78,701 | ) | 2,455,080 | |||||
| Book value per share 12/31/2006 | $ | 15.78 | 0.11 | $ | 15.89 | ||||
46 |
| • | Monarch’s Annual Report on Form 10-K for the year ended December 31, 2006. | |
| • | Monarch’s Quarterly Report on Form 10-Q, as amended, for the quarter ended _____________, 2007. |
We will provide, without charge, to each person to whom this proxy statement is delivered, upon written or oral request of such person and by first class mail or other equally prompt means within one business day of receipt of such request, a copy of any and all information that has been incorporated by reference, without exhibits unless such exhibits are also incorporated by reference in this proxy statement. You may obtain a copy of these documents and any amendments thereto by writing to Andrew J. Van Doren, General Counsel, 375 North Willowbrook Road, Coldwater, Michigan 49036. His telephone number is (517) 278-4567. These documents are also included in our SEC filings, which you can access electronically at the SEC’s website at http://www.sec.gov. We have not authorized anyone to give any information or make any representation about the transaction or us that differs from, or adds to, the information in this proxy statement or in our documents that are publicly filed with the SEC. If anyone does give you different or additional information, you should not rely on it. |
| By Order of the Board of Directors, | |
| Andrew J. Van Doren | |
| Secretary |
47 |
Agreement and Plan of Merger |
48 |
Agreement and Plan of Merger AGREEMENT AND PLAN OF MERGER (this “Merger Agreement”), dated as of February 15, 2007, by and between Monarch Merger Corp., a Maryland corporation (“Merger Co.”), and Monarch Community Bancorp, Inc., a Maryland corporation (“Monarch”). WHEREAS, Monarch is a corporation duly incorporated and validly existing under the laws of the State of Maryland, with authorized capital stock consisting of 20,000,000 shares of common stock, $0.01 par value per share (the “Monarch Common Stock”), of which 2,533,781 are issued and outstanding as of the date hereof; and WHEREAS, Merger Co. is a corporation duly incorporated and validly existing under the laws of the State of Maryland, with authorized capital stock consisting of 100 shares of common stock, $0.01 par value per share (“Merger Co. Common Stock”), of which 100 shares are issued and outstanding as of the date hereof; and WHEREAS, it is proposed that Merger Co. merge with and into Monarch (the “Merger”), so that Monarch is the surviving corporation (hereinafter sometimes called the “Surviving Corporation”) in the Merger; and WHEREAS, the respective Boards of Directors of Monarch and Merger Co. have declared that the proposed Merger is advisable on substantially the terms and conditions set forth herein and that the proposed Merger is in the best interest of the respective corporations and stockholders. NOW, THEREFORE, in order to prescribe (a) the terms and conditions of the Merger, (b) the mode of carrying the same into effect, and (c) the manner and basis of converting the shares of the constituent corporations into cash, shares or obligations of the Surviving Corporation, the parties agree as follows: ARTICLE I 1.1 The Merger. Subject to the terms and conditions of this Merger Agreement, and in accordance with the Title 3 of the Maryland General Corporation Law (the “MGCL”), at the Effective Time (as defined in Section 1.2), Merger Co. shall merge with and into Monarch and Monarch shall survive the Merger and shall continue its corporate existence under the laws of the State of Maryland. Upon consummation of the Merger, the separate corporate existence of Merger Co. shall terminate and the name of the Surviving Corporation shall be “Monarch Community Bancorp, Inc.” 1.2 Effective Time. As soon as is reasonably practicable after the date hereof, after approval of this Merger Agreement by the stockholders of the constituent corporations and after the receipt of all required regulatory approvals and the expiration of any statutory waiting periods, Articles of Merger meeting the requirements of Section 3-109 of the MGCL shall be |
transmitted to the Maryland State Department of Assessments and Taxation (the “Department”). The Merger shall become effective on the date and at the time (the “Effective Time”) specified in the Articles of Merger as filed with the Department. 1.3 Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in the MGCL. 1.4 Treatment of Monarch Common Stock; Conversion of Merger Co. Common Stock. |
(a) At the Effective Time, by virtue of the Merger and without any action on the part of any Holder (as hereinafter defined) of any share of Monarch Common Stock (a “Monarch Share”), the following shall occur: | |
| (i) Each issued and outstanding Monarch Share owned of record by a Qualified Holder (as hereinafter defined) shall remain issued and outstanding as a share of common stock, par value $0.01 per share, of the Surviving Corporation without any change therein. | |
(ii) Each issued and outstanding Monarch Share owned of record by a Cashed-Out Holder (as hereinafter defined) shall be converted into the right to receive cash from the Surviving Corporation in the amount of $13.50 per share (the “Cash Merger Consideration”) and Cashed-Out Holders shall cease to have any rights as stockholders of Monarch or the Surviving Corporation except such rights, if any, as they may have pursuant to the MGCL and, except as aforesaid, their sole right shall be the right to receive the Cash Merger Consideration as aforesaid, without interest thereon, upon surrender to the Surviving Corporation of their certificates which theretofore represented Monarch Shares. | |
(b) At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any share of Merger Co. Common Stock (a “Merger Co. Share”), each issued and outstanding Merger Co. Share shall be converted into the right to receive cash from the Surviving Corporation in the amount of $0.01 per share, and the holders of certificates representing such shares shall cease to have any rights as stockholders of Merger Co. or the Surviving Corporation except such rights, if any, as they may have pursuant to the MGCL, and, except as aforesaid, their sole right shall be the right to receive cash as aforesaid, without interest, upon surrender to the Surviving Corporation of their certificates which theretofore represented Merger Co. Shares. | |
| (c) Except as contemplated by Section 1.6 hereof, in no event shall any Holder holding, of record, as of the close of business on the day immediately preceding the Effective Time, one thousand (1,000) or more Monarch Shares in the aggregate be entitled to receive Cash Merger Consideration with respect to the Monarch Shares so held. It shall be a condition precedent to the right of any Holder to receive Cash Merger Consideration, if any, payable with respect to the Monarch Shares held by such Holder, that such Holder certify to Monarch in the letter of transmittal delivered by Monarch that such Holder held of record as of the close of business on the day immediately preceding the Effective Time fewer than one thousand (1,000) Monarch Shares in the aggregate. |
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1.5 Certain Definitions. |
(a) The term “Qualified Holder” shall mean a Holder of Monarch Shares who holds of record one thousand (1,000) or more Monarch Shares as of the close of business on the day immediately preceding the Effective Time or who is an employee of Monarch or any of its direct or indirect subsidiaries as of the close of business on the day immediately preceding the Effective Time. | |
(b) The term “Cashed-Out Holder” shall mean a Holder of Monarch Shares who is not a Qualified Holder. | |
(c) The term “Holder” shall mean any record holder or holders of Monarch Shares who would be deemed, under Rule 12g5-1 promulgated under the Securities Exchange Act of 1934, as amended, to be a single “person” for purposes of determining the number of record stockholders of Monarch. |
1.6 Maximum Number of Qualified Holders. Notwithstanding the foregoing, if the number of Qualified Holders otherwise meeting the definition set forth in Section 1.5(a) exceeds two hundred seventy (270), only the two hundred seventy (270) Holders holding the greatest number of Monarch Shares as of the close of business on the day immediately preceding the Effective Time shall be considered Qualified Holders hereunder. To the extent Monarch cannot determine the two hundred seventy (270) Holders holding the greatest number of Monarch Shares due to the ownership of the same number of Monarch Shares, such ties will be broken by Monarch based on the length of stock ownership. 1.7 Resolution of Issues. Monarch (along with any other person or entity to which it may delegate or assign any responsibility or task with respect thereto) shall have full discretion and exclusive authority (subject to its right and power to so delegate or assign such authority) to (i) make such inquiries, whether of any Monarch stockholder(s) or otherwise, as it may deem appropriate for purposes of this Article I and (ii) resolve and determine, in its sole discretion, all ambiguities, questions of fact and interpretive and other matters relating to this Article I including, without limitation, any questions as to whether a person is a Qualified Holder or a Cashed-Out Holder and any questions as to the number of Monarch Shares held by a Holder of Monarch Shares. All determinations by Monarch under this Article I shall be final and binding on all parties, and no person or entity shall have any recourse against Monarch or any other person or entity with respect thereto. 1.8 Articles of Incorporation. The Articles of Incorporation of Monarch in effect as of the Effective Time shall be the Articles of Incorporation of the Surviving Corporation after the Merger until thereafter amended in accordance with applicable law. 1.9 Bylaws. The Bylaws of Monarch in effect as of the Effective Time shall be the Bylaws of the Surviving Corporation after the Merger until thereafter amended in accordance with applicable law. 1.10 Board of Directors of Surviving Corporation. The directors of Monarch immediately prior to the Effective Time shall be, from and after the Effective Time, the directors of the Surviving Corporation until their respective successors shall have been elected or |
3 |
appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s Articles of Incorporation and Bylaws. 1.11 Officers. The officers of Monarch immediately prior to the Effective Time shall be, from and after the Effective Time, the officers of the Surviving Corporation until their respective successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s Articles of Incorporation and Bylaws. ARTICLE II 2.1 Certificates Held by Qualified Holders.From and after the Effective Time, certificates representing Monarch Shares held by a Qualified Holder shall be deemed to evidence the same number of shares of common stock of the Surviving Corporation which they theretofore represented. 2.2 Certificates Held by Cashed-Out Holders. Until presented to the Surviving Corporation, certificates which theretofore represented Monarch Shares held by a Cashed-Out Holder shall evidence only the right to receive the Cash Merger Consideration as hereinabove provided. Upon presentation to the Surviving Corporation of certificates which theretofore represented Monarch Shares held by a Cashed-Out Holder, Cash Merger Consideration shall be paid in an amount which such Cashed-Out Holder shall be entitled pursuant to Article I of this Merger Agreement. No interest shall be payable on any Cash Merger Consideration distributable pursuant to this Merger Agreement. 2.3 Merger Co. Certificates. Until presented to the Surviving Corporation, certificates which theretofore represented Merger Co. Shares shall evidence only the right to receive the cash as hereinabove provided. Upon presentation to the Surviving Corporation of certificates which theretofore represented Merger Co. Shares, cash shall be paid in an amount which such holder of Merger Co. Shares shall be entitled pursuant to Article I of this Merger Agreement. No interest shall be payable on any cash distributable pursuant to this Merger Agreement. ARTICLE III 3.1 Termination. Notwithstanding anything herein to the contrary, the Board of Directors of Merger Co. or the Board of Directors of Monarch, at any time prior to the filing of the Articles of Merger with the Department, may terminate this Merger Agreement. This Merger Agreement shall be automatically terminated if (i) the stockholders of Monarch or the stockholders of Merger Co. shall fail to approve the Merger and the Merger Agreement; or (ii) any regulatory or other agency (if any) which must approve the Merger shall not have approved the Merger prior to December 31, 2007. If terminated as provided in this Section 3.1, this Merger Agreement shall forthwith become wholly void and of no further force and effect. 3.2 Amendment. Subject to compliance with applicable law, this Merger Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards |
4 |
of Directors, at any time before or after approval of the matters presented in connection with the Merger by the respective stockholders of Merger Co. or Monarch; provided, however, that after any approval of the transactions contemplated by this Merger Agreement by the respective stockholders of Merger Co. or Monarch, there may not be, without further approval of such stockholders, any amendment of this Merger Agreement which (i) alters or changes the amount or the form of the consideration to be delivered to the holders of Merger Co. Shares or the Holders of Monarch Shares hereunder other than as contemplated by this Merger Agreement, (ii) alters or changes any term of the Articles of Incorporation of the Surviving Corporation, or (iii) adversely affects the holder of any class or series of stock of any of the constituent corporations. This Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 3.3 Counterparts. This Merger Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 3.4 Governing Law. This Merger Agreement and the exhibits attached hereto shall be governed and construed in accordance with the laws of the Maryland without regard to any applicable conflicts of law. IN WITNESS WHEREOF, Merger Co. and Monarch have caused this Merger Agreement to be executed by their respective duly authorized officers as of the date first above written. |
| Monarch Merger Corp. | Monarch Community Bancorp, Inc. | |||
| By: | /s/ Donald L. Denney | By: | /s/ Donald L. Denney | |
| Donald L. Denney | Donald L. Denney | |||
| Title: | President | Title: | President and Chief Executive Officer | |
5 |
Fairness Opinion |
49 |
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April 17, 2007 Board of Directors Members of the Board of Directors: Monarch Community Bancorp, Inc. (“Monarch” or the “Company”) has requested that Donnelly Penman & Partners (“Donnelly Penman”) render its opinion (the “Opinion”) as to whether the cash consideration of $13.50 to be received by certain shareholders in a “going private” transaction (the “Transaction”), is fair, from a financial point of view, to the shareholders of the Company. As a result of the going private transaction, it is anticipated that the number of stockholders of the Company will be reduced to fewer than 300, as required for termination of registration. The reduction in the number of stockholders will be executed through a merger of a newly-formed Maryland corporation (“Monarch MergerCorp.”), with and into Monarch, on terms set forth in the merger agreement (the “Merger Agreement”). Our Opinion is directed to the Board of Directors of the Company and does not constitute a recommendation to the Board of Directors of the Company or the Company’s existing holders of common stock. Donnelly Penman is an investment-banking firm of recognized standing. As part of our investment banking services, we are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, private placements and valuations for stock plans, corporate and other purposes. We are acting as financial advisor to the Company in connection with the Transaction and will receive a fee from the Company for our services pursuant to the terms of our engagement letter with the Company, dated as of December 22, 2006 (the “Engagement Letter”). In connection with our preparation of our Opinion herein, we have, among other things: |
| • | Reviewed the recent history and nature of the Company; |
| • | Reviewed current banking industry conditions and trends; |
| • | Considered the earnings capacity of the Company; |
| • | Considered the dividend-paying capacity of the Company; |
| • | Reviewed the audited financial statements for the years ended December 31, 2003 through December 31, 2006; |
| • | Reviewed the Strategic Plan for years 2007 - 2010, as prepared by management of the Company in |
17160 KERCHEVAL AVENUE • GROSSE POINTE, MI 48230-1661 MEMBER NASD/SIPC |
|
The Board of Directors |
| • | Reviewed the Strategic Plan for years 2007 - 2010, as prepared by management of the Company in November 2006; |
| • | Reviewed the 2007 financial statement projection as prepared by management; |
| • | Reviewed transactions involving the sale of stock of the Company over the calendar years 2006 and through April 17, 2007; |
| • | Conducted discussions with the senior management of the Company concerning the business and future prospects of the Company; |
| • | Compared certain financial characteristics of the Company to certain publicly held companies we deemed relevant; |
| • | Prepared a discounted cash flow analysis of the Company based on the projections provided by management of the Company; and |
| • | Reviewed such other financial and industry data, performed such other analyses and taken into account such other matters as we deemed necessary or appropriate. |
In conducting our review and arriving at our opinion, as contemplated under the terms of our engagement by the Company, we, with the consent of the Company, relied, without independent investigation, upon the accuracy and completeness of all financial and other information provided to us by the Company. Additionally, we relied, without independent investigation, upon the accuracy and completeness of all publicly available information. Donnelly Penman did not undertake any responsibility for the accuracy, completeness or reasonableness of, or any obligation independently to verify, such information. Donnelly Penman has further relied upon the assurance of management of the Company that they are unaware of any facts that would make the information provided by or available to the Company incomplete or misleading in any respect. With respect to the financial forecast information reviewed and discussed with us by the Company, we have assumed that they have been reasonably prepared in good faith and reflect the best currently available estimates and judgments of the senior management of the Company as to the expected future financial performance of the Company. No limitations were imposed by the Company on Donnelly Penman on the scope of Donnelly Penman’s investigation or the procedures to be followed by Donnelly Penman in rendering this opinion. Donnelly Penman did not make any independent evaluation, valuation or appraisal of the assets or liabilities of the Company. Donnelly Penman has not reviewed any individual credit files of the Company and has assumed, without independent verification, that the aggregate allowances for credit losses for the Company are adequate to cover such losses. Our opinion is necessarily based upon economic and market conditions and other circumstances as they exist and have been evaluated by us on the date of our opinion. We do not have any obligation to update our opinion, unless requested by the Company in writing to do so, and we expressly disclaim any responsibility to do so in the absence of any such written request. Our services to the Company in connection with the Transaction have been comprised solely of financial advisory services, as described in the Engagement Letter. |
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The Board of Directors In our analyses, we have made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of the Company. Any estimates contained in our analyses are not necessarily indicative of future results or value, which may be significantly more or less favorable than such estimates. Estimates of values of companies do not purport to be appraisals or to necessarily reflect the prices at which companies or their securities actually may be sold. No comparable company utilized in our analyses was identical to the Company. Accordingly, such analyses are not based solely on arithmetic calculations; rather, they involve complex considerations and judgments concerning differences in financial and operating characteristics of the relevant companies, as well as other factors that could affect the public trading markets of the Company or companies to which it is being compared. None of the analyses performed by us was assigned a greater significance than any other. We hereby consent to the reference to our opinion in proxy materials to be issued pursuant to the Transaction. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the rules and regulations of the Securities and Exchange Commission thereunder. Further, we express no view as to the price or trading range for shares of the common stock of the Company following the Transaction. Based upon and subject to the foregoing, including the various assumptions and limitations set forth herein, it is our opinion that, as of April 17, 2007, the cash consideration of $13.50 per share to be received by the Company shareholders pursuant to the Merger Agreement is fair, from a financial point of view, to the shareholders of the Company. Very truly yours, /s/ Donnelly Penman & Partners Donnelly Penman & Partners |
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PRELIMINARY COPIES Monarch Community Bancorp, Inc. PROXY FOR SPECIAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS THE UNDERSIGNED APPOINTS _______________________ AND __________________________ , JOINTLY AND SEVERALLY, AS PROXIES WITH FULL POWER OF SUBSTITUTION, TO VOTE THEIR SHARES AS DIRECTED BELOW AT THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD AT MONARCH COMMUNITY BANCORP, INC.’S MAIN OFFICE AT 375 NORTH WILLOWBROOK ROAD, COLDWATER, MICHIGAN AT _____ [A.M./P.M.] ON ______, 2007 AND ANY ADJOURNMENT THEREOF, ON EACH OF THE FOLLOWING MATTERS: 1. To approve an Agreement and Plan of Merger, dated as of February 15, 2007 (the “merger agreement”) by and between Monarch Merger Co. and Monarch Community Bancorp, Inc. providing for the merger of Monarch Merger Co. with and into Monarch Community Bancorp, Inc. upon the terms and conditions set forth in the merger agreement as described in the proxy statement of Monarch Community Bancorp, Inc. dated ______ , 2007. FOR AGAINST ABSTAIN 2. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND IN ACCORDANCE WITH THEIR DISCRETION ON SUCH OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING, PROVIDED THAT THOSE MATTERS WERE UNKNOWN TO THE NAMED PROXIES A REASONABLE TIME BEFORE THIS SOLICITATION. THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL 1. Note: Please sign exactly as your name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee, guardian or other representative, please give full title as such. |
| _________________________________ | _____________________________, 2007 | |
| Signature | Date | |
| _________________________________ | _____________________________, 2007 | |
| Signature if Held Jointly | Date |
|