OMB APPROVAL
--------------------------
OMB Number: 3235-0059
Expires: August 31, 2004
Estimated average burden
hours per response...14.73
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement.
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2)).
[ ] Definitive Proxy Statement.
[ ] Definitive Additional Materials.
[ ] Soliciting Material Pursuant to Section 240.14a-12
CAPITAL DIRECTIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[ ] 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:
11,029
- --------------------------------------------------------------------------------
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):
$50.00, 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:
$551,450
- --------------------------------------------------------------------------------
5) Total fee paid:
$44.61
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] 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 No.:
- --------------------------------------------------------------------------------
3) Filing Party:
- --------------------------------------------------------------------------------
4) Date Filed:
- --------------------------------------------------------------------------------
PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
CAPITAL DIRECTIONS, INC.
322 South Jefferson Street
Mason, Michigan 48854
________________________, 2003
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders,
which will be held at ____, on ____________________, 2003 at Mason State Bank's
Main Office at 322 S. Jefferson St., Mason, Michigan 48854. 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 Capital
Directions 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 $84,483 or 3.04% of our overhead
expense for our 2002 reporting year and 2003 annual meeting (the "2002 reporting
cycle"). We believe that the costs incurred over the 2002 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 shareholders to fewer than 300 persons, as required for
termination of the registration. The reduction in the number of shareholders is
accomplished by a merger of a newly-formed, wholly-owned subsidiary of Capital
Directions ("CDI Merger Co., Inc."), with and into Capital Directions 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
shareholders, by a holder of fewer than 225 shares will be converted into the
right to receive, from Capital Directions, $50.00 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 225 or more shares will remain as
outstanding Capital Directions common stock after the merger. We anticipate that
the effect of the purchase from holders of less than 225 shares will be a
reduction in the total number of shareholders from approximately 449 to
approximately 282 as required for termination of registration, while the number
of shares outstanding is expected to be reduced by less than 1.86% (to 580,381
shares outstanding from the current 591,410 shares outstanding.)
The Capital Directions board of directors has approved the "going
private" transaction as in the best interest of all Capital Directions
shareholders 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 Capital Directions and its
shareholders 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 __________, 2003 as the record
date for determining shareholders 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 __________, 2003. If
you attend the meeting, you may vote in person, even if you have previously
returned your proxy card.
Sincerely,
Timothy P. Gaylord
President & CEO
1
CAPITAL DIRECTIONS, INC.
322 South Jefferson Street
Mason, Michigan 48854
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ________________, 2003
A special meeting of shareholders of Capital Directions, Inc. will be
held on _______________________, 2003, at Mason State Bank's Main Office at
322 S. Jefferson St., Mason, Michigan 48854, for the following purposes:
(1) To consider and act upon a proposal to approve the merger of
CDI Merger Co., Inc., a wholly-owned subsidiary of Capital
Directions, with and into Capital Directions 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 Capital Directions common stock
owned of record at the close of business on the shareholder
meeting date, by a holder of fewer than 225 shares of common
stock, will be converted into, and will represent the right to
receive from Capital Directions $50.00 cash per share; and (b)
each share of Capital Directions common stock owned of record
at the close of business on the shareholder meeting date, by a
holder of 225 or more shares of common stock will continue to
represent one share of Capital Directions 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.
The board of directors has set the close of business on ______________
2003, as the record date for determining the shareholders 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, that you 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 shareholders 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,
Douglas W. Dancer
Secretary
_________________, 2003
2
CAPITAL DIRECTIONS, INC.
322 South Jefferson Street
Mason, Michigan 48854
PROXY STATEMENT
For Special Meeting of Shareholders
To Be Held on ________, 2003
The board of directors of Capital Directions provides this proxy
statement to you to solicit your vote on the approval of the Agreement and Plan
of Merger, dated as of June 30, 2003, by and between Capital Directions and CDI
Merger Co., Inc., a newly-formed subsidiary of Capital Directions organized for
the sole purpose of facilitating this proposed transaction. Pursuant to the
merger agreement, CDI Merger Co., Inc., will merge with and into Capital
Directions, with Capital Directions continuing as the surviving corporation
after the merger. If Capital Directions's shareholders approve the merger
agreement, each shareholder:
- holding fewer than 225 shares of Capital Directions common stock at the
time of the merger will receive $50.00 cash, without interest, per
share from Capital Directions; or
- holding 225 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 Capital Directions.
After the merger, Capital Directions anticipates it will have
approximately 282 shareholders of record. As a result, Capital Directions 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, Capital Directions' common stock will cease to be traded
on the OTC Bulletin Board and any trading in our common stock after the merger
will only occur in the "pink sheets" or in privately negotiated transactions.
The merger cannot occur unless the holders of a majority of the shares
of Capital Directions common stock entitled to vote at the special meeting of
shareholders approve the merger agreement. The board of directors has scheduled
a special meeting of shareholders to vote on the merger as follows:
[Date and Time]
Mason State Bank's Main Office
322 S. Jefferson St.
Mason, Michigan 48854
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 Capital Directions 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 ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.
The date of this proxy statement is __________________, 2003. We first
mailed this proxy statement to the shareholders of Capital Directions on or
about that date.
3
IMPORTANT NOTICES
Capital Directions 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 Capital
Directions common stock are converted. By accepting receipt of this proxy
statement, you agree not to permit any reproduction or distribution of its
contents in whole or in part.
We will update this proxy statement to reflect any factors or events
arising after its date that individually or together represent a fundamental
change in the information included in this document.
You should not construe the contents of this proxy statement or any
communication from Capital Directions, whether written or oral, as legal, tax,
accounting or other expert advice. You should consult with your own counsel,
accountant or other professional advisor, as appropriate.
Capital Directions 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 Capital Directions 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 Capital Directions and its wholly owned subsidiaries, collectively, unless
the context indicates otherwise.
4
TABLE OF CONTENTS
SUMMARY TERM SHEET................................................................................................6
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER....................................................9
SPECIAL FACTORS..................................................................................................11
Background of the Merger Proposal.............................................................................11
Purposes of and Reasons for the Merger Proposal...............................................................13
Structure of the Merger.......................................................................................14
Determination of the Terms of the Merger......................................................................15
Financial Fairness............................................................................................15
Recommendation of our Board of Directors......................................................................17
Interests of Certain Persons in the Merger....................................................................19
Certain Consequences of the Merger; Benefits and Detriments to Affiliated and Non-Affiliated Shareholders.....19
Operations of the Bank Following the Merger...................................................................20
Financing of the Merger.......................................................................................20
Source of Funds and Expenses..................................................................................20
Certain Terms of the Merger...................................................................................20
Effective Time of the Merger..................................................................................20
Conversion and Exchange of Stock Certificates.................................................................21
Conditions to Consummation of the Merger......................................................................21
Amendment or Termination of the Merger Agreement..............................................................21
Regulatory Requirements.......................................................................................22
Rights of Dissenting Shareholders.............................................................................22
Material U.S. Federal Income Tax Consequences of the Merger...................................................22
Pro Forma Effect of the Merger................................................................................23
Termination of Securities Exchange Act Registration...........................................................24
INFORMATION REGARDING THE SPECIAL MEETING OF SHAREHOLDERS........................................................25
Time and Place of Meeting.....................................................................................25
Record Date and Mailing Date..................................................................................25
Number of Shares Outstanding..................................................................................25
Purpose of Special Meeting....................................................................................25
Voting at the Special Meeting.................................................................................25
Dissenters' Rights............................................................................................25
Procedures for Voting by Proxy................................................................................25
Requirements for Stockholder Approval.........................................................................26
Solicitation of Proxies.......................................................................................26
INFORMATION ABOUT CAPITAL DIRECTIONS AND ITS AFFILIATES..........................................................26
General.......................................................................................................26
Directors and Executive Officers of Capital Directions........................................................27
Voting Securities and Principal Holders Thereof...............................................................28
Recent Affiliate Transactions in Capital Directions Stock.....................................................30
Stock Repurchases by Capital Directions.......................................................................30
Market for Common Stock and Dividend Information..............................................................30
Description of Common Stock...................................................................................31
Dividend Policy...............................................................................................31
SELECTED HISTORICAL FINANCIAL DATA...............................................................................32
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.....................................................................33
WHERE YOU CAN FIND MORE INFORMATION..............................................................................37
DOCUMENTS INCORPORATED BY REFERENCE..............................................................................37
5
SUMMARY TERM SHEET
This summary term sheet, together with the following Question 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.
OVERVIEW OF THE MERGER
We are furnishing this proxy statement to allow Capital Directions
shareholders to consider and vote on a proposal to approve the merger of a
newly-created, wholly-owned subsidiary, CDI Merger Co., Inc. with and into
Capital Directions. Pursuant to the terms of the merger agreement,
- each share of common stock owned of record at the close of
business on the date of the Special Meeting of Shareholders, by a
holder of fewer than 225 shares of Capital Directions common
stock will be converted into, and will represent the right to
receive $50.00 per share in cash; and
- each share of common stock owned of record at the close of
business on the date of the Special Meeting of Shareholders, by a
holder of 225 or more shares of common stock will continue to
represent one share of Capital Directions common stock after the
merger.
According to our stock records, as of the record date for the special
meeting (__________, 2003) there are approximately 167 shareholders who own
fewer than 225 shares (who, together, own approximately 11,029 shares of common
stock, or about 1.86% of total outstanding shares) and approximately 282
shareholders who own 225 or more shares (who together own approximately 580,381
shares of common stock or about 98.14% of total outstanding shares).
The sole purpose of the merger is to reduce the number of record
shareholders below 300 persons so that we may terminate the registration of the
common stock with the SEC and thereby avoid the significant costs and personnel
time commitment necessary for compliance with the SEC reporting requirements.
VOTING ON THE MERGER
At the special meeting, you will be asked to vote on a proposal to
approve the merger transaction as described in the merger agreement. Each share
of common stock is entitled to one vote. The Company's Articles of Incorporation
and the merger agreement provide that the merger must be approved by the
affirmative vote of a majority of the shares of common stock (approximately
295,706 shares) entitled to vote on the merger proposal. A majority vote of
non-affiliated shareholders (i.e., shareholders who are not officers and
directors of Capital Directions or of the Bank) is not required to approve the
merger proposal. Abstentions and broker non-votes will have the same effect as a
vote against the merger proposal.
The record date for determining who is entitled to vote at the special
meeting has been fixed as the close of business on _______________, 2003. On the
record date, there were 591,410 shares of common stock outstanding, held of
record by approximately 449 holders. Of those shares, 45,153 shares are
beneficially owned by directors and executive officers (approximately 7.63% of
the outstanding shares). We have been informed that all of Capital Directions'
directors and all of Capital Directions' executive officers intend to vote in
favor of the merger proposal.
PURPOSE, STRUCTURE AND EFFECTS OF THE MERGER
The purpose of the merger is to reduce the total number of holders of
shares of the common stock to less than 300 persons so that we may terminate our
status as a reporting company and avoid the reporting and other SEC filing
requirements attendant to that status. The board of directors believes that the
management burden and monetary expense associated with the SEC reporting and
other filing requirements far outweigh any advantage of remaining as an SEC
reporting company.
6
The merger has been structured as follows: A newly-created,
wholly-owned subsidiary of Capital Directions, CDI Merger Co., Inc., will be
merged with and into Capital Directions with Capital Directions remaining as the
surviving corporation to the merger. CDI Merger Co., Inc. will then cease to
exist. In the merger:
- each share of common stock owned of record at the close of
business on the date of the Special Meeting of Shareholders, by a
holder of fewer than 225 shares of common stock will be converted
into, and will represent the right to receive $50.00 in cash from
Capital Directions for each share, and those shares will be
cancelled; and
- each share of common stock owned of record at the close of
business on the date of the Special Meeting of Shareholders, by a
holder of 225 or more shares of common stock will continue to
represent one share of Capital Directions common stock following
the merger.
Upon completion of the merger, shareholders whose shares are converted
into cash (generally those owning fewer than 225 shares) will cease to have any
ownership interest in Capital Directions and will cease to participate in future
earnings and growth, if any, of Capital Directions or to benefit from any
increases, if any, in the value of the Capital Directions stock. Moreover, upon
completion of the merger, the certificates representing those shares of common
stock will be cancelled. Generally, shareholders of record who own 225 or more
shares on the record date will retain their shares of common stock in the
merger.
Shareholder records indicate that approximately 282 of the total 449
record shareholders own 225 or more shares of our common stock. Since 282 is
comfortably below the 300 shareholder threshold, the board determined to use 225
shares as the minimum required share ownership level. The 282 shareholders who
own 225 or more shares own approximately 98.14% of the outstanding shares. The
167 shareholders who will receive cash for their shares in the merger own
approximately 1.86% of the outstanding shares.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors of Capital Directions has unanimously approved
the merger transaction and recommends that you vote to approve the transaction.
The board of directors believes that the transaction is in the best interests of
Capital Directions and its shareholders, and that the transaction is fair to all
Capital Directions shareholders, including the non-affiliated Capital Directions
shareholders. In reaching their decision to recommend and approve the merger
proposal, the board of directors considered a number of factors, including the
valuation of the common stock and fairness opinion by Donnelly, Penman, French,
Haggarty & Co. See "Proposal 1: Approval of the Merger -- Special Factors --
Recommendation of our board of directors"; and "-- Financial fairness. "
THE MERGER CONSIDERATION
If the merger is completed, Capital Directions will pay $50.00 in cash
per share for each share of common stock converted into cash in the merger
transaction. In the aggregate, Capital Directions will pay approximately
$551,450 to acquire all of the shares from shareholders who will receive cash as
a result of the merger. The funds necessary to acquire these shares are
anticipated to come from working capital at the holding company and from a
special dividend paid by the Bank to Capital Directions. Further, we estimate
that Capital Directions will incur approximately $52,342 in costs and expenses
associated with the merger transaction.
DONNELLY, PENMAN, FRENCH, HAGGARTY & CO.'S FAIRNESS OPINION (PAGES __-__)
Donnelly, Penman, French, Haggarty & Co., Capital Directions'
independent financial advisor, delivered to the board of directors a written
opinion dated June 30, 2003, stating that the consideration of $50.00 per share
is fair to the shareholders who receive cash in the transaction. Donnelly,
Penman, French, Haggarty & Co. will receive a fee of approximately $10,000 for
the services it has provided to Capital Directions in respect of the proposed
merger. The full text of Donnelly, Penman, French, Haggarty & Co.'s opinion
dated June 30, 2003, is attached as Appendix B to this proxy statement. Please
read this opinion. See "Proposal 1: Approval of the Merger -- Special Factors --
Financial fairness" for a description of Donnelly, Penman, French, Haggarty &
Co.'s opinion and the analyses performed by it.
7
POTENTIAL CONFLICTS OF INTEREST OF EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Capital Directions and the Bank
may have interests in the transaction that are different from your interests as
a shareholder, or relationships that may present conflicts of interest,
including the following:
- Each member of the board of directors, and each of the executive
officers hold of record 225 or more shares of the common stock
and will retain their shares in the merger; and
- As a result of the merger, the shareholders who own of record at
the close of business on the date of the Special Meeting of
Shareholders, 225 or more shares, such as our directors and
executive officers, will increase their percentage ownership
interest in Capital Directions as a result of the purchase by
Capital Directions of the shares owned by the holders of less
than 225 shares. For example, assuming the merger is approved,
the aggregate ownership percentage of the directors and officers
will increase from 7.63% to approximately 7.78% as a result of
the reduction of the number of shares of the common stock
outstanding by approximately 11,029 shares.
See "Proposal 1: Approval of the Merger -- Special Factors -- Interests
of certain persons in the merger" and "Certain Relationships and Related
Transactions" for a description of these potential conflicts.
CONDITIONS TO THE MERGER
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 shareholders; and
- satisfaction of certain conditions including receipt of all
regulatory approvals.
See "Certain Terms of The Merger -- Conditions to consummation of the
merger" and "-- Regulatory requirements" for a description of the conditions to
the consummation of the merger under the merger agreement.
TERMINATION OF THE MERGER TRANSACTION
The merger transaction may be terminated in specified circumstances,
such as if the required shareholder vote is not obtained. See "Certain Terms of
the Merger -- Amendment or termination of the merger agreement" for a
description of the termination events under the merger agreement.
DISSENTERS' RIGHTS
The applicable Michigan laws and provisions of Capital Directions'
articles of incorporation and bylaws do not entitle shareholders of Capital
Directions to dissent from the merger. See "Description of the
Merger-Dissenters' Rights."
FEDERAL INCOME TAX CONSEQUENCES
A shareholder who receives cash in the merger will generally be taxed
on receipt of the merger consideration if and to the extent that the amount
received exceeds tax basis in the common stock. Determining the tax consequences
of the merger can be complicated. See "Material U.S. Federal Income Tax
Consequences of the Merger" for more details on the federal income tax
consequences of the merger. You should consult your financial and tax advisors
in order to understand fully how the merger will affect you.
8
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
The following questions and answers are intended to briefly address
commonly asked questions regarding the special meeting and the merger. These
questions and answers may not address all questions that may be important to you
as a shareholder. Please refer to the more detailed information contained
elsewhere in this proxy statement, the appendices to this proxy statement, and
the documents referred to or incorporated by reference in this proxy statement.
WHEN AND WHERE IS THE SPECIAL MEETING?
The meeting will be held on __________, 2003, at _____ p.m., local
time, at Mason State Bank's Main Office, located at 322 S. Jefferson St., Mason,
Michigan 48854.
HOW MANY VOTES DO I HAVE?
You will have one vote for every share of common stock you owned on
______________, 2003, the record date.
HOW MANY VOTES CAN BE CAST BY ALL SHAREHOLDERS?
As of ______, 2003 (the record date), 591,410 shares of common stock
were issued and outstanding and held of record by approximately 449
shareholders.
CAN I CHANGE MY VOTE?
Yes, just send in a new proxy with a later date, or send a written
notice of revocation to the corporate secretary at the address on the cover of
this proxy statement. If you attend the special meeting and want to vote in
person, you can deliver a written revocation of your proxy to the secretary at
the meeting.
WHAT HAPPENS IF THE MEETING IS POSTPONED OR ADJOURNED?
Your proxy will be good and may be voted at the postponed or adjourned
meeting. You will still be able to change or revoke your proxy until it is
voted.
WHY SHOULD I VOTE TO APPROVE THE PLAN OF MERGER?
The board of directors believes that the merger is in the best
interests of all Capital Directions shareholders. The merger will reduce the
number of holders of shares of common stock to below 300 persons, which will
then allow termination of the registration of the common stock under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The board believes
that the monetary expense and the burden to management incident to continued
compliance with the 1934 Act significantly outweigh any material benefits
derived from continued registration of the shares.
The merger will also serve as a source of liquidity for those
shareholders who receive cash for their shares. The board recognizes that there
is no active trading market for the common stock and no market is expected to
develop upon consummation of the merger. The board believes that the merger
provides a means for those shareholders with a limited number of shares to
receive cash for their shares at a fair price and without out-of-pocket costs.
HOW WILL THE MERGER AFFECT THE DAY-TO-DAY OPERATIONS?
The merger will have very little effect on Capital Directions or on the
Bank's operations. The Bank will continue to conduct its existing operations in
the same manner as now conducted. The articles of incorporation and by-laws of
Capital Directions and the Bank will remain in effect and unchanged by the
merger. The deposits of the Bank will continue to be insured by the FDIC. After
the merger is completed, the current officers and directors of the Bank will
continue to hold the positions each now holds with the Bank, and the Bank will
continue to be regulated by the same agencies as before the merger.
9
HOW WAS THE CASH PRICE FOR SHARES OF THE COMMON STOCK DETERMINED?
The board of directors retained Donnelly, Penman, French, Haggarty &
Co., 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 Capital Directions in
the merger transaction. Donnelly, Penman, French, Haggarty & Co. delivered a
valuation report to the board valuing a share of the common stock at $47.50 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 $50.00 per share. Subsequently, Donnelly, Penman, French, Haggarty &
Co. 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
the shareholders receiving cash in the merger. A copy of the fairness opinion of
Donnelly, Penman, French, Haggarty & Co. is attached as Appendix B to this proxy
statement for your review.
MAY I OBTAIN A COPY OF DONNELLY, PENMAN, FRENCH, HAGGARTY & CO.'S VALUATION
REPORT?
In connection with Donnelly, Penman, French, Haggarty & Co.'s fairness
opinion, Donnelly, Penman, French, Haggarty & Co. has prepared and delivered to
Capital Directions 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 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. You may also be required to execute an agreement to protect the
confidentiality of the information contained in the report.
WHEN WILL THE MERGER BE COMPLETED?
We plan to complete the transaction during the fourth quarter of 2003
so that registration of the common stock can also be terminated in the fourth
quarter of 2003.
SHOULD I SEND IN MY COMMON STOCK CERTIFICATES NOW?
No. After the merger transaction is completed, those shareholders 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 shareholders at the meeting, or if you need additional
copies of the enclosed materials or proxy, you should contact: Timothy P.
Gaylord, President and Chief Executive Officer, 322 South Jefferson Street,
Mason, Michigan 48854. His telephone number is (517) 676-0500, extension 203.
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 shareholders'
meeting, see the section entitled "Additional Information About
the Special Meeting -- How to vote my proxy" beginning on page
___ of this proxy statement.
10
SPECIAL FACTORS
BACKGROUND OF THE MERGER PROPOSAL
Prior to the formation of Capital Directions as the holding company for
Mason State Bank in 1988, Mason State Bank had been a reporting company to the
FDIC under Section 12(g) of the Securities Exchange Act of 1934, as amended.
Upon formation of Capital Directions in 1988, it became a reporting company to
the SEC under Section 12(g) of the Securities Exchange Act of 1934, as the
successor to the Bank. As an SEC reporting company, Capital Directions is
required to prepare and file with the SEC, among other items, the following:
- Annual Reports on Form 10-K;
- Quarterly Reports on Form 10-Q; 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 and filing costs
associated with the SEC reports and other filings. These SEC
registration-related expenses have been increasing over the years, and we
believe that they will continue to increase, particularly in light of the
Sarbanes-Oxley Act of 2002, and the additional rules and regulations of the SEC
related to such Act.
As a result of these expenses, the burden on management required for
compliance with SEC rules and regulations, and the additional requirements of
the Sarbanes-Oxley Act, Capital Directions management held internal discussions,
during the 1st quarter of 2003, concerning the possibility of terminating the
registration of the common stock with the SEC. Based upon these internal
discussions, management concluded that any benefits from being a registered
("public") company are substantially outweighed by the burden on management and
the expense related to the SEC reporting obligations. Management preliminarily
determined that the number of record shareholders must be reduced below 300
persons in a transaction that would be deemed by the SEC to be a "going private"
transaction in order to terminate the registration of the Capital Directions
common stock with the SEC. Management's subsequent review of stock records
confirmed that, if Capital Directions repurchased all of the shares of every
shareholder that owned fewer than 225 shares of common stock, only approximately
282 total record shareholders would remain after the purchases were completed,
and 282 total shareholders is comfortably below the 300 shareholder threshold
required to terminate SEC registration.
Based upon these conclusions, management contacted its independent
accountants in April 2003 and corporate counsel in May 2003 to discuss issues
related to terminating registration of the common stock with the SEC.
During its discussions in May 2003, management discussed with Capital
Directions' corporate counsel and independent accountants possible structures
for a transaction by which all shares owned by holders of fewer than 225 shares
would be acquired by Capital Directions. Based upon these discussions,
management determined that three viable alternatives existed: a tender offer
structure, a reverse stock split, and a merger of a wholly-owned subsidiary with
and into Capital Directions. Based upon these discussions, management later
presented these alternative structures to the board for consideration.
Management also contacted Donnelly, Penman, French, Haggarty & Co., an
independent financial advisor experienced in the financial analysis and
valuation of financial institutions, to provide advice concerning the potential
financial terms of a "going private" transaction. A chronology of the activities
of the board of directors is set forth below.
At its February 2003 meeting, the board of directors first discussed
the current costs and continued increase in expenses associated with Capital
Directions, Inc. trading as a public company and the minimal trading activity of
its common stock.
The board of directors held a special meeting on March 13, 2003 to
discuss the advantages and disadvantages of being a public company. At this
meeting, the board discussed strategies to become private, valuation and
fairness issues, the regulatory process, accounting issues, shareholder approval
process, shareholder
11
impact and the impact on Capital Directions. The board directed Mr. Gaylord, the
Company's President to talk with a consultant about "going private".
At its April 17, 2003 meeting, the board informed Crowe Chizek of its
plan to go forward with a "going private" strategy.
On May 1, 2003, a special meeting was held to update the board on the
proposal to complete a valuation and to discuss retaining an attorney for the
purpose of the "going private" transaction.
On May 15, 2003, at the regularly-scheduled board meeting, the
investment banking proposals were reviewed and Donnelly, Penman, French,
Haggarty & Co. was selected to conduct a valuation study.
On May 29, 2003, a special meeting was held to review proposals
regarding legal representation in a "going private" transaction and Howard and
Howard was selected to represent the Company.
On June 23, 2003, at the regularly-scheduled board meeting, a proposal
was summarized whereby the Company would engage in a transaction to reduce the
number of shareholders to permit it to terminate its SEC reporting obligations.
The potential costs and additional time management that would be devoted to SEC
matters, along with the limited trading activity of the common stock were
discussed. John Donnelly of Donnelly, Penman, French, Haggarty & Co. presented
the results of their valuation study, indicating a fair market value of $47.50.
Donnelly, Penman, French, Haggarty & Co. explained the detailed procedures
performed and the financial analyses supporting the range of values. The board
members discussed the different factors involved in these procedures and
Donnelly, Penman, French, Haggarty & Co. further clarified the assumptions
utilized in its valuation report. Discussion took place regarding recent trades
and the Company's shareholder base. Mr. Donnelly was asked if his firm was
prepared to issue an opinion that a price of $50.00 per share is fair, from a
financial perspective and he stated that the valuation study supports a $50.00
per share price.
President Gaylord then asked Joseph Hemker of Howard and Howard to
discuss the fiduciary duties of the board in considering the proposed
transaction. The board and counsel then discussed the steps necessary to
complete a transaction. Counsel explained that, if the board approved the merger
proposal, a proxy statement and Schedule 13E-3 would be filed with the SEC. The
board considered the alternative structures for a going private transaction and
after considerable discussion, the board of directors unanimously voted in favor
of proceeding with the proposed "going private" merger transaction. The board
reviewed the shareholder records and determined that shares held of record by
shareholders owning fewer than 225 shares should be converted to the right to
receive cash in the merger. The board of directors agreed that $50.00 was a fair
value for the shares of common stock to be purchased by Capital Directions in
the merger and that the merger transaction was fair to all shareholders
(including non-affiliated shareholders). The board then authorized management to
begin the process of preparing the required transaction documents as well as the
necessary SEC filings. The board also requested an opinion by Donnelly, Penman,
French, Haggarty & Co. that the $50.00 per share price was fair, from a
financial point of view, to the shareholders owning fewer than 225 shares who
would receive cash in the merger. Donnelly, Penman, French, Haggarty & Co. later
delivered a fairness opinion, dated June 30, 2003, to the board, which opinion
states that $50.00 per share is fair, from a financial point of view, to all
shareholders of Capital Directions, including the shareholders receiving cash in
the merger.
Following the June 23rd meeting, the board reviewed with management a
draft merger agreement prepared by counsel and the board then adopted
resolutions approving a form of merger agreement, authorizing management to
proceed with the merger transaction and to seek shareholder approval of the
merger proposal. Finally, on July 23, 2003, the board members reviewed with
management a draft proxy statement and transaction statement on Schedule 13E-3
prepared by counsel and discussed the necessary SEC disclosures. Thereafter, the
board approved the form of proxy statement and Schedule 13E-3 and authorized
management to make all necessary filings with the SEC or otherwise to consummate
the proposed "going private" transaction.
The board agrees with management that the burden on management and the
expense of the SEC reporting and other filing obligations outweighs any benefit
from the SEC registration of our common stock. The board also determined that a
merger was the preferred structure because
- a tender offer process is more expensive, could take many months
to complete, and would provide no assurances that a sufficient
number of shareholders would tender their shares;
12
- a reverse stock split (which would be accomplished through an
amendment to the Company's Articles of Incorporation) would
require a subsequent forward stock split in order to restore the
Company's stock price to its approximate pre-reverse stock split
range, which was viewed as complicating and burdensome.
The board determined that the merger proposal was fair to all
shareholders (including non-affiliated shareholders), generally, and
specifically with respect to shareholders receiving cash in the merger. In
making this determination, the board did not utilize the following procedural
safeguards:
- the merger transaction was not structured to require separate
approval by a majority of those shareholders who are not officers
or directors of Capital Directions or the Bank; and
- the directors did not retain any unaffiliated representative to
act solely on behalf of shareholders who are not officers or
directors for purposes of negotiating the terms of the merger
transaction or to prepare a report regarding the fairness of the
transaction.
The board has determined that, based upon the factors described in
"--Recommendation of our board of directors" below, the merger is fair to all
shareholders of Capital Directions, including shareholders who are not officers
or directors.
The board did not consider any alternatives to a going private
transaction. The board did not consider a possible sale of Capital Directions
since no firm offers had been presented to the board and no determination had
been made that such a sale would be in the best interest of the shareholders.
Further, the board did not view a sale as an alternative that could achieve the
benefits of the going private transaction, including liquidity for those
shareholders being paid cash in the merger while allowing a reduction of costs
for Capital Directions and those shareholders who retain their shares.
PURPOSES OF AND REASONS FOR THE MERGER PROPOSAL
The purpose of the proposed merger is to terminate Capital Directions'
status as a reporting company with the SEC, which the board believes will reduce
expenses and create shareholder value. We are aware that the advantages to being
a public company, including potential investment liquidity and the possibility
for use of company securities to raise capital or make acquisitions, may be
important to some companies. We have not, however, taken advantage of any of
these benefits and will not be in a position to do so in the foreseeable future.
In the board's judgment, the registration of Capital Directions stock with the
SEC yields no advantages and, therefore, no justification exists for the
continuing direct and indirect costs of registration with the SEC. In addition,
the board believes that management has reduced corporate overhead as much as
possible, and that the majority of the corporate costs remaining are those
associated with being a public company. We believe these costs will only
continue to increase.
Capital Directions 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 $84,483 or 3.04% of our overhead
expense for our 2002 reporting year and 2003 annual meeting (the "2002 reporting
cycle").
These expenses consisted of the following:
Accounting Fees........................................ $20,000
Securities Counsel..................................... $3,600
Corporate Communications............................... $2,500
SEC Filing Fees and Miscellaneous...................... $5,000
13
Internal Compliance Costs.............................. $53,383
We believe that the costs incurred over the 2002 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. 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. We expect that these
estimated savings will not be realized until after the fiscal year ended
December 31, 2003.
The projected reduction in the number of total record shareholders from
449 to approximately 282 will also result in reduced expenses and less burden on
management because Capital Directions will have less than 37.19% of its current
number of shareholders. The decrease in number of shareholders reduces the
volume of communications and amount of postage and related expenses associated
with the quarterly issuance of dividend checks to shareholders and other
shareholder communications.
STRUCTURE OF THE MERGER
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,
Capital Directions will have fewer than 300 record holders of its shares of
common stock. We have recently organized CDI Merger Co., Inc. solely to
facilitate the merger transaction. CDI Merger Co. will be merged with and into
Capital Directions pursuant to the terms of the merger agreement. Capital
Directions will be the surviving corporation to the merger. If completed, the
merger will have the following effects.
Shares held at the close of business on the date of the Special Meeting
of Shareholders, by shareholders owning fewer than 225 shares. Each share of
common stock owned of record at the close of business on the date of the Special
Meeting of Shareholders, by a holder of fewer than 225 shares will be converted,
pursuant to the terms of the merger, into the right to receive a cash payment of
$50.00 per share. After the merger and payment of that amount, holders of these
shares will have no further interest in Capital Directions. These shareholders
will not have to pay any service charges or brokerage commissions in connection
with the merger or the cash payments to them.
Shares held at the close of business on the date of the Special Meeting
of Shareholders, by shareholders owing 225 or more shares. Each share of common
stock owned of record at the close of business on the date of the Special
Meeting of Shareholders, by a holder of 225 or more shares of common stock will
remain outstanding and continue to represent one share of common stock in
Capital Directions following the merger.
Beneficial owners of shares of the common stock. Nominees (such as a
bank or broker) may have required procedures, and shareholders 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
shareholder who holds of record fewer than 225 shares will be converted into the
right to receive cash. The board selected 225 shares as the ownership minimum
for several reasons, including to ensure that, after completion of the merger:
14
- the number of record shareholders would be less than the 300
shareholder limit necessary to terminate registration with the
SEC; and
- Capital Directions would have sufficient flexibility to issue
stock in the future for corporate purposes, including raising
equity capital for Capital Directions or the Bank or attracting
and retaining qualified employees, directors or executive
officers.
Out of a total of 449 record shareholders, approximately 282
shareholders own 225 or more shares of our common stock. These 282 shareholders
own, in the aggregate, approximately 98.13% of the outstanding shares of common
stock.
DETERMINATION OF THE TERMS OF THE MERGER
The structure and terms of the merger were determined by current
management and the board of directors. Because CDI Merger Co. is an affiliated
company, the terms of the merger cannot be considered the result of arm's-length
negotiations between unrelated parties. Consequently, the board retained
Donnelly, Penman, French, Haggarty & Co., an independent financial advisor
experienced in the financial analysis and valuation of financial institutions,
to value the common stock. The cash consideration to be paid for the common
stock under the merger was determined by the board of directors, in part, in
reliance on Donnelly, Penman, French, Haggarty & Co.'s valuation report and
fairness opinion. See "-- Financial fairness."
FINANCIAL FAIRNESS
The board of directors believes that the merger proposal is fair to,
and in the best interests of, Capital Directions and all shareholders, including
those shareholders who are officers and directors as well as those who are not
officers and directors, and to all shareholders 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 shareholders who are not officers or
directors, including shareholders 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 shareholders 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 relating to the fairness
of the cash consideration to be paid to certain shareholders. 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 non-affiliated shareholders would be costly and would not
provide any meaningful additional benefit.
The board of directors approved the merger proposal, and the board
recommends that the shareholders 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 Capital
Directions or the Bank.
The board of directors required that Donnelly, Penman, French, Haggarty
& Co. (i) provide its valuation of the common stock, and (ii) issue a fairness
opinion on the price determined by the board of directors to be paid for shares
of common stock in connection with the merger proposal. The board imposed no
limitations upon Donnelly, Penman, French, Haggarty & Co. with respect to the
investigations made or procedures followed in rendering the valuation or the
fairness opinion. A copy of Donnelly, Penman, French, Haggarty & Co.'s fairness
opinion is attached to this proxy statement as Appendix B.
15
Donnelly, Penman, French, Haggarty & Co., a Michigan corporation, is an
independent financial advisor with extensive experience in the valuation of
banks and bank holding companies in the states of Michigan, Ohio, Indiana and
Illinois. The board chose Donnelly, Penman, French, Haggarty & Co. to perform
the valuation based upon its reputation and management's recommendations.
No material relationship exists or has existed within the past two
years between Capital Directions, Donnelly, Penman, French, Haggarty & Co. or
any of their respective affiliates. Capital Directions will pay Donnelly,
Penman, French, Haggarty & Co. a fee of approximately $10,000 for its services
rendered in connection with the merger and will reimburse it for out-of-pocket
expenses incurred in connection with such services.
Donnelly, Penman, French, Haggarty & Co.'s estimate of value for the
Company's shares to be cashed out in the merger involved several different
valuation methods including, analysis of comparable acquisition transactions,
analysis of selected comparable companies, discounted cash flow analysis, net
book value, and historical trading multiples.
Analysis of Comparable Acquisition Transactions. Under this approach,
Donnelly, Penman, French, Haggarty & Co. analyzed bank/thrift acquisition
transactions since January 1, 2001, where each selling entity had assets less
than $250 million, a latest twelve months (LTM) return on average equity between
12.0% and 15.0%, and less than a 60% capital efficiency ratio. The data from
these transactions showed an approximate median multiple of 1.81 times price to
book value, 1.87 times price to tangible book value, and 16.7 times LTM earnings
per share.
Donnelly, Penman, French, Haggarty & Co. then multiplied the above
amounts by the applicable figures for the Company as of March 31, 2003. The
Company's book value per share of $24.48, multiplied by 1.81 resulted in an
implied value of $44.31. The value implied by taking its tangible book value per
share of $24.48 times 1.87 was $45.78. The Company's fully diluted earnings per
share for the twelve months ended March 31, 2003 was $3.30, which when
multiplied by 16.7 resulted in an implied value of $55.11.
Analysis of Selected Comparable Companies. Donnelly, Penman, French,
Haggarty & Co. compared operating results of the Company to certain Michigan
publicly traded commercial banks and thrifts, each of which had total assets
less than $1 billion and a return on average equity of between 10% and 20%. The
comparable companies also had median total assets of $230 million, median total
equity of $29.1 million, median total risk-based capital ratio of 14.6%, median
LTM return on average assets of 1.31%, median LTM return on average equity of
12.29%, and median LTM efficiency ratio of 56.93%. From these figures, Donnelly,
Penman, French, Haggarty & Co. arrived at median price multiples of 1.59 times
book value, 1.59 times tangible book value and 12.7 times LTM earnings per share
for the comparable companies. Applying these figures to the Company resulted in
the following per share implied values: $38.92 for book value, $38.92 for
tangible book value and $41.91 for LTM fully diluted earnings.
Discounted Cash Flow Analysis. For this valuation approach, Donnelly,
Penman, French, Haggarty & Co. prepared a discounted dividend stream analysis of
the Company, which estimated after tax cash flows that the Company might produce
from January 1, 2003 through December 31, 2007. The estimates assumed an annual
earnings growth rate of approximately 12.1%, which is higher than the Company's
historical growth rate, and is based upon the assumption that the Company's
business will continue to grow. Donnelly, Penman, French, Haggarty & Co. also
assumed that the Company would pay 50% of its earnings as dividends. The
dividend cash flows were discounted to present value using a 12.0% discount rate
to reflect the relative risk the Company's stockholders would be subject to.
Donnelly, Penman, French, Haggarty & Co. estimated the residual value for the
Company's stock using a price to tangible book value multiple of 1.87 times.
Applying that multiple to the Company's estimated tangible book value at the end
of the projection period implied a value of $48.07 per share.
Net Book Value. This approach implies that a company is worth its
accumulated retained earnings, or deficit, plus its original capitalization.
Donnelly, Penman, French, Haggarty & Co. found the Company net book value as of
March 31, 2003 to be $14,599,000, or $24.48 per share.
Historical Trading Multiples. Donnelly, Penman, French, Haggarty & Co.
analyzed the Company's quoted trades on the OTC Bulletin Board for various
historical periods. For the 90 days before June 11, 2003, the historical average
price was $49.88. For the 365 days before June 11, 2003, the historical average
price was $45.13.
16
Conclusion. Donnelly, Penman, French, Haggarty & Co. did not apply any
marketability or minority discount typically applied to minority shares of
relatively illiquid companies. Based on the above methods of valuation,
Donnelly, Penman, French, Haggarty & Co. opined that the fair market value of
the Company's common stock as of March 31, 2003 was $47.50.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
The board of directors of Capital Directions has determined that the
merger proposal is in the best interests of, and fair to, the shareholders of
Capital Directions (including the non-affiliated shareholders) and that the
merger consideration ($50.00 per share) payable to the shareholders who receive
the cash in the merger is fair to those shareholders. See "-- Financial
fairness." Accordingly, the board of directors unanimously approved the merger
proposal, and recommends that the shareholders vote in favor of the merger and
the merger agreement.
In reaching its decision to approve the merger proposal and in making
its recommendation, the Capital Directions board of directors considered a
number of material factors, with each of them considered as positive or negative
from a fairness standpoint.
Positive factors for all shareholders. The factors that the board
considered positive for all the shareholders, including all non-affiliated
shareholders, included:
- the fact that the cash price per share of $50.00 offered in the
merger represents a 204% premium over the March 31, 2003 book
value per share of $24.48;
- the fact that the board retained and received advice from an
independent financial advisor, Donnelly, Penman, French, Haggarty
& Co., in determining the fairness of the price of $50.00 per
share;
- the fact that the board retained and received advice from
independent legal counsel in evaluating the terms of the merger
agreement; and
- the opinion of Donnelly, Penman, French, Haggarty & Co., dated
June 30, 2003, that the merger consideration to be received by
holders of fewer than 225 shares pursuant to the merger agreement
is fair to the Capital Directions shareholders from a financial
point of view.
Positive factors for shareholders who receive cash in the merger. In
addition to the positive factors applicable to all shareholders set forth above,
the factors that the board considered positive for the shareholders who receive
cash in the merger (including non-affiliated shareholders) included:
- the fact that the merger consideration is all cash, which
provides certainty of value to those shareholders and immediate
liquidity for the shareholders who receive cash in the merger;
and
- the fact that no brokerage or other transaction costs are to be
incurred by shareholders who receive cash in the merger
17
Positive factors for remaining shareholders. In addition to the
positive factors applicable to all shareholders set forth above, the factors
that the board considered as positive for the shareholders who will remain
shareholders following the merger, including all such non-affiliated
shareholders, included:
- the fact that such shareholders would have the opportunity to
participate in any future growth and earnings of Capital
Directions;
- the fact that such shareholders would not be required to pay
income taxes as a result of the merger; and
- the fact that the remaining shareholders would realize the
potential benefits of termination of registration of the common
stock, including, reduced expenses of Capital Directions for no
longer having to comply with SEC requirements.
Negative factors for all shareholders. The factors that the board of
directors considered negative for all the shareholders, including all
non-affiliated shareholders, included:
- the fact that the directors and executive officers of Capital
Directions 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;
and
- the fact that there was no independent committee of the board
charged with negotiating the terms of the merger on behalf of the
shareholders and no unaffiliated representative was retained by
the board to act solely on behalf of the non-affiliated
shareholders.
Negative factors for shareholders receiving cash in the merger. In
addition to the negative factors applicable to all shareholders set forth above,
the factors that the board considered negative for the shareholders who would
receive cash in the merger included:
- the fact that such shareholders would not have the opportunity to
participate in any future growth and earnings of Capital
Directions;
- the fact that such shareholders would be required to pay income
tax on the receipt of cash in the merger; and
- the fact that the board is not seeking the approval of a majority
of these shareholders receiving cash in the merger.
Negative factors for remaining shareholders. In addition to the
negative factors applicable to all shareholders set forth above, the factors
that the board considered negative for the shareholders who will retain their
shares in the merger, including all such non-affiliated shareholders, included:
- the fact that after the completion of the merger and registration
is terminated, the shareholders will have decreased access to
information about Capital Directions;
- the fact that after the completion of the merger, there will be
approximately 167 fewer shareholders and the Company's stock will
be traded on the Pink Sheets instead of the OTC Bulletin Board,
which may reduce liquidity in the Company's stock; and
- the fact that after the completion of the merger, Capital
Directions will not be subject to the periodic reporting, proxy
rules and Section 16 of the 1934 Act.
In connection with its determination, the board did not consider, and
did not request that Donnelly, Penman, French, Haggarty & Co. evaluate Capital
Directions' liquidation value. The board did not consider Capital Directions'
liquidation value to be a relevant measure of valuation, given that the $50.00
price per share offered in the merger represents a 204% premium over the book
value per share of $24.48 at March 31, 2003. It was the determination of the
board that Capital Directions is more valuable as a going concern than its book
value per share.
18
The board considered the timing of the transaction in its analysis only
to the extent that the increased burdens resulting from the Sarbanes-Oxley Act
of 2002 would likely impact the Company more significantly in connection with
the Company's preparation of its 2003 annual report and for its 2004 annual
meeting than the Act did in connection with its 2003 annual meeting.
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 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 shareholders who are not directors or officers of Capital Directions or the
Bank for purposes of negotiating the terms of the merger transaction or
preparing a report on the fairness of the transaction. The board, based upon the
factors outlined above, believes that the merger proposal is fair to all
shareholders of Capital Directions, including all non-affiliated shareholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The officers and directors of Capital Directions and the Bank who are
also shareholders will participate in the merger in the same manner and to the
same extent as all of the other shareholders of Capital Directions. See "--
Financial fairness." However, all of the directors and the executive officers
own in excess of 225 shares and will, therefore, retain their shares in the
merger, unlike many other shareholders who will be required to relinquish their
interest in Capital Directions as a result of the merger. And, if the merger is
completed, the respective ownership percentages of each of the directors and
some of the executive officers will increase, as will the ownership interests of
any other shareholder who retains his or her shares. As a result of the merger,
the collective ownership interest of the directors and officers will increase
from 7.63% to approximately 7.78%. See "Security Ownership of Certain Beneficial
Owners and Management."
We understand that all of the directors of Capital Directions and the
Bank and all of the executive officers intend at this time to vote their shares
in favor of the proposal to approve and adopt the merger and the merger
agreement.
CERTAIN CONSEQUENCES OF THE MERGER; BENEFITS AND DETRIMENTS TO AFFILIATED AND
NON-AFFILIATED SHAREHOLDERS
Pursuant to the terms of the merger agreement, following shareholder
approval of the merger proposal and subject to the fulfillment or waiver of
certain conditions, CDI Merger Co. will be merged with and into Capital
Directions, and Capital Directions will continue as the surviving company in the
merger. The merger will cause a reduction in the number of Capital Directions'
shareholders from approximately 449 to approximately 282. Further, the merger
will result in termination of the registration of the common stock with the SEC,
which will eliminate the reporting and proxy solicitation obligations of Capital
Directions pursuant to the Securities Exchange Act of 1934.
The shares that are acquired in the merger will be cancelled. Because
all shares of common stock held by the shareholders, who, at the close of
business on the date of the Special Meeting of Shareholders, own fewer than 225
shares will be cancelled in the merger, shareholders who own these shares will
cease to participate in future earnings or growth, if any, of Capital Directions
or benefit from any increases, if any, in the value of Capital Directions or its
stock, and they no longer will bear the risk of any decreases in value.
Distributions by the surviving Capital Directions 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
Capital Directions and not to the shareholders who receive cash in the merger.
The merger will also provide shareholders who receive cash in the
merger a cost-effective way to cash out their investments, because Capital
Directions will pay all transaction costs in connection with the merger
proposal.
A potential disadvantage to shareholders who remain as shareholders
after the merger is completed and registration terminated is decreased liquidity
and decreased access to information about Capital Directions.
19
A potential disadvantage to shareholders receiving cash in the merger
include the tax consequences described in "Material U.S. Federal Income Tax
Consequences of the Merger" beginning on page __ below.
OPERATIONS OF THE BANK FOLLOWING THE MERGER
Following the merger, Capital Directions and the Bank will continue to
conduct their existing operations in the same manner as now conducted. The
executive officers and directors immediately prior to the merger will be the
executive officers and directors of Capital Directions immediately after the
merger. Capital Directions and the Bank's charter and by-laws will remain in
effect and unchanged by the merger. The deposits of the Bank will continue to be
insured by the FDIC. The corporate existence of neither Capital Directions nor
the Bank will be affected by the merger. Capital Directions and the Bank will
continue to be regulated by the same agencies that regulated each entity before
the merger.
FINANCING OF THE MERGER
The funds necessary to acquire shares of common stock in the merger,
approximately $551,450, are anticipated to come from working capital at the
holding company and from a special dividend paid to Capital Directions by the
Bank. Although this dividend will reduce the capital of the Bank, the Bank will
be well-capitalized both before and after the dividend.
SOURCE OF FUNDS AND EXPENSES
We estimate that approximately $551,450 will be required to pay for the
fractional shares of Capital Directions common stock exchanged for cash in the
merger. We intend to finance the merger using existing capital. Additionally,
Capital Directions will pay all of the expenses related to the merger. We
estimate that these expenses will be as follows:
SEC filing fees $182
Legal fees $25,000
Accounting fees $2,500
Financial Advisory Fees $12,000
Printing costs $1,800
Transfer Agent Fees $9,860
Other $1,000
Total $52,342
CERTAIN TERMS OF THE MERGER
The following is a summary of certain provisions of the merger
agreement and certain matters relating to the merger. The following summary does
not purport to be complete and is qualified in its entirety by reference to the
merger agreement which is attached as Appendix A to this proxy statement and is
incorporated herein by reference. You are urged to read the merger agreement in
its entirety and to consider it carefully.
EFFECTIVE TIME OF THE MERGER
We are working to complete the merger during December, 2003 so that we
will terminate our registration with the SEC by December, 2003. However, we
cannot guarantee that the merger will be effective by the end of December 2003.
20
The merger will become effective at the time (i) of the filing with and
acceptance for record of the certificate of merger by the Department of Consumer
and Industry Services of the State of Michigan, or (ii) at such time as we
specify in the certificate of merger (not to exceed 90 days after the
certificate of merger is accepted for filing by the Michigan Department of
Consumer and Industry Services). The certificate of merger will be filed as soon
as practicable after the requisite approval of the merger proposal by the
shareholders at the special meeting is obtained and the other conditions
precedent to the consummation of the merger have been satisfied or waived. We
cannot assure you that all conditions to the merger contained in the merger
agreement will be satisfied or waived. See "-- Conditions to consummation of the
merger."
CONVERSION AND EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the merger is completed, we will mail to
each shareholder receiving cash in the merger a letter of transmittal and
instructions for surrendering their stock certificates. When these shareholders
deliver their stock certificates to us along with the letter of transmittal and
any other required documents, their stock certificates will be cancelled and
they will be issued a check in the amount of $50.00 per share of common stock
that is being cancelled in the merger.
When the merger is completed, the shares of common stock owned by each
shareholder receiving cash in the merger will automatically be converted into
cash without any further action on the shareholder's part. In order to receive
the cash, however, such shareholders must deliver to Capital Directions their
stock certificates along with a letter of transmittal and any other required
documents. No service charge will be payable by shareholders in connection with
the cash payments or otherwise; and all expenses will be borne by Capital
Directions. A shareholder will not be entitled to any distributions that are
declared after the merger is completed on any shares of common stock that are
automatically converted into cash as a result of the merger, regardless of
whether the shareholder has surrendered his or her stock certificates to us.
Each shareholder will be entitled to distributions on his or her common stock
declared prior to the date on which the merger is completed, even if it is not
paid until after the merger is completed provided he or she held the common
stock on the date of record for such distribution. PLEASE DO NOT SURRENDER YOUR
STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF TRANSMITTAL
CONDITIONS TO CONSUMMATION OF THE MERGER
The boards of directors of Capital Directions and CDI Merger Co. have
approved the merger agreement and authorized the consummation of the merger. As
the sole shareholder of CDI Merger Co., Capital Directions has approved the
merger. The completion of the merger depends upon a number of events, including:
- the approval of the merger and the merger agreement by the
shareholders of Capital Directions;
- the satisfaction of certain conditions as more fully set forth in
the merger agreement; and
- the receipt of all regulatory approvals, if any. See "--
Regulatory requirements."
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be amended by mutual written agreement of our
board of directors and board of directors of CDI Merger Co., generally without
the necessity of further action by you. However, your approval is required for
any modification or amendment that:
- changes the amount or kind of consideration that you will receive
for your shares of common stock;
- changes any provision of Capital Directions' articles of
incorporation; or
- changes any of the terms of the merger agreement, if the change
would adversely affect your rights as a shareholder.
No amendments or modifications to the merger agreement are presently
contemplated. However, if there is any material amendment to the merger
agreement before the special meeting, we will notify you and provide you with
information relating to the amendments prior to the meeting.
21
The merger agreement may be terminated by the mutual consent in writing
of Capital Directions and CDI Merger Co. at any time before the filing of a
certificate of merger with the Michigan Department of Consumer and Industry
Services. At this time, the parties have no intention of terminating the merger
agreement.
REGULATORY REQUIREMENTS
Except for the filing of the certificate of merger with the Department
of Consumer and Industry Services of the State of Michigan upon the approval of
the merger by the Capital Directions shareholders, and compliance with federal
and state securities laws, we are not aware of any material United States
federal or state or foreign governmental regulatory requirement necessary to be
complied with or approval that must be obtained in connection with the merger.
RIGHTS OF DISSENTING SHAREHOLDERS
Under applicable Michigan laws and Capital Directions' articles of
incorporation and bylaws, Capital Directions' shareholders do not have the right
to dissent from the merger and to receive the fair value of their shares in
cash.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material U.S. federal income
tax consequences of the merger. The discussion is based upon the Internal
Revenue Code of 1986, as amended, its legislative history, applicable Treasury
regulations, existing administrative interpretations and court decisions
currently in effect. Any of these authorities could be repealed, overruled or
modified at any time after the date of this proxy statement, and any such change
could be applied retroactively. This discussion does not address any tax
consequences under state, local or foreign laws.
The discussion that follows neither binds the IRS nor precludes the IRS
from adopting a position contrary to that expressed in this proxy statement, and
we cannot assure you that such a contrary position could not be asserted
successfully by the IRS or adopted by a court if the positions were litigated.
Capital Directions does not intend to obtain a ruling from the IRS with respect
to the U.S. federal income tax consequences of the merger. In addition, Capital
Directions does not intend to obtain an opinion from tax counsel with respect to
the federal income tax consequences of the merger.
This discussion assumes that you hold your shares of common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code.
This discussion is for general information only and does not address all aspects
of federal income taxation that may be important to you in light of your
particular circumstances or if you are subject to certain rules, such as those
rules relating to:
- shareholders 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
- shareholders 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 Shareholders Who Retain Their Shares.
If you are a shareholder 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
22
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 Shareholders Who Receive Cash For Their Shares.
If you are a shareholder 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 Capital Directions 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, $50.00 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 shareholder or (iii) completely terminates the shareholder's
interest in our company. The constructive ownership rules of Section 318 of the
Internal Revenue Code apply in comparing a shareholder's percentage interest in
Capital Directions immediately before and immediately after the merger.
Generally, the constructive ownership rules under Section 318 treat a
shareholder as owning (i) shares of common stock owned by certain relatives,
related corporations, partnership, estates or trusts, and (ii) shares of common
stock the shareholder has an option to acquire. If you receive cash for your
common stock in the merger and completely terminate your direct and constructive
ownership interest in Capital Directions, you should recognize capital gain or
loss as a result of the merger, and the cash distribution should not be treated
as a dividend.
Tax Consequences to Capital Directions, CDI Merger Co. And The Bank.
Neither Capital Directions, CDI Merger Co. nor the Bank will recognize
gain or loss for U.S. income tax purposes as a result of the merger.
Backup Withholding.
Certain shareholders of Capital Directions may be subject to backup
withholding on the cash payments received for their shares of common stock.
Backup withholding will not apply, however, if you furnish to Capital Directions
a correct taxpayer identification number and certify that you are not subject to
backup withholding on the substitute Form W-9 or successor form included in the
letter of transmittal to be delivered to you following the date of completion of
the merger (foreigners should contact their tax advisers).
Backup withholding is not an additional tax but is credited against the
federal income tax liability of the taxpayer subject to the withholding. If
backup withholding results in an overpayment of a taxpayer's federal income
taxes, that taxpayer may obtain a refund from the IRS.
This discussion is only intended to provide you with a general summary
and is not intended to be a complete analysis or description of all potential
U.S. federal income tax consequences of the merger. In addition, this discussion
does not address tax consequences that may vary with, or are contingent on, your
individual circumstances. Moreover, this discussion does not address any
non-income tax or any foreign, state or local tax consequences of the merger.
Accordingly, you are strongly encouraged to consult with your own tax advisor to
determine the particular U.S. federal, state, local or foreign income or other
tax consequences of the merger that are applicable to you.
PRO FORMA EFFECT OF THE MERGER
The following selected pro forma financial data illustrates the pro
forma effect of the transactions contemplated by the merger on Capital
Directions' financial statements as of and for the six months ended June 30,
2003 and as of and for the year ended December 31, 2002. Management has prepared
this information based on its estimate that Capital Directions will pay $50.00
to shareholders in lieu of fractional shares in the merger. Please see "Pro
Forma Financial Information" for the complete pro forma financial information
relating to this transaction.
23
SELECTED PRO FORMA FINANCIAL DATA
(In thousands except per share data)
As of and for the As of and for
Six months ended the year ended
June 30, 2003 December 31, 2002
--------------- -----------------
Net interest income $2,196 $4,511
Provision for loan losses 0 0
Non-interest income $512 $1,005
Non-interest expense $1,433 $2,752
Income taxes $378 $864
Net earnings $897 $1,900
PER COMMON SHARE
Basic earnings per share $1.55 $3.27
Diluted earnings per share $1.53 $3.25
Book value $24.43 $23.67
AT PERIOD END
Assets $123,615 $126,214
Shareholders' equity $14,147 $13,746
Common shares outstanding 580,381 580,381
Weighted average shares outstanding 578,909 580,801
TERMINATION OF SECURITIES EXCHANGE ACT REGISTRATION
Capital Directions' common stock is currently registered under the
Securities Exchange Act and quoted on the OTC Bulletin Board. We will be
permitted to terminate our registration if there are fewer than 300 record
holders of outstanding shares of Capital Directions common stock. Upon the
completion of the merger, Capital Directions will have approximately 282
shareholders of record. We intend to apply for termination of the registration
of Capital Directions' common stock under the Securities Exchange Act as
promptly as possible after the effective date of the merger. In addition,
Capital Directions' common stock will cease to be traded on the OTC Bulletin
Board and any trading in our common stock after the merger will only occur in
the "pink sheets" or in privately negotiated transactions.
Termination of registration under the Securities Exchange Act will
substantially reduce the information required to be furnished by Capital
Directions to its shareholders and to the Securities and Exchange Commission and
would make some of the provisions of the Securities Exchange Act, such as the
short-swing profit provisions of Section 16, the requirement of furnishing a
proxy or information statement in connection with shareholder meetings under
Section 14(a) and the requirements of Rule 13e-3 regarding "going private"
transactions, no longer applicable to Capital Directions.
We estimate that termination of the registration of Capital Directions
common stock under the Securities Exchange Act will save Capital Directions
approximately $84,483 per year in legal, accounting, printing, management time
and other expenses per year.
24
INFORMATION REGARDING THE
SPECIAL MEETING OF SHAREHOLDERS
TIME AND PLACE OF MEETING
We are soliciting proxies through this proxy statement for use at a
special meeting of Capital Directions shareholders. The special meeting will be
held at ________________ on _______________________, 2003, at Mason State Bank's
Main Office at 322 S. Jefferson St., Mason, Michigan 48854.
RECORD DATE AND MAILING DATE
The close of business on __________, 2003, is the record date for the
determination of shareholders entitled to notice of and to vote at the special
meeting. We first mailed the proxy statement and the accompanying form of proxy
to shareholders on or about _____________, 2003.
NUMBER OF SHARES OUTSTANDING
As of the close of business on the record date, Capital Directions had
1,300,000 shares of common stock, $5.00 par value, authorized, of which 591,410
shares were issued and outstanding. Each outstanding share is entitled to one
vote on all matters presented at the meeting.
PURPOSE OF SPECIAL MEETING
The purposes of the special meeting are:
1. To consider and act upon a proposal to approve the merger of CDI
Merger Co., Inc., a wholly-owned subsidiary of Capital
Directions, with and into Capital Directions 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 Capital Directions common stock owned of record at
the close of business on the shareholder meeting date, by a
holder of fewer than 225 shares of common stock, will be
converted into, and will represent the right to receive from
Capital Directions $50.00 cash per share; and (b) each share of
Capital Directions common stock owned of record at the close of
business on the shareholder meeting date, by a holder of 225 or
more shares of common stock will continue to represent one share
of Capital Directions common stock after the merger.
2. To transact any other business as may properly come before the
meeting or any adjournments of the meeting.
VOTING AT THE SPECIAL MEETING
The merger must be approved by the affirmative vote of the holders of a
majority of the shares entitled to vote at the special meeting. On
__________________, 2003, Capital Directions' directors and executive officers
owned, directly or indirectly, 45,153, representing approximately 7.63%, of the
approximately 591,410 outstanding shares of common stock as of that date. Each
of the directors has indicated that he or she intends to vote his or her shares
in favor of the proposed merger.
DISSENTERS' RIGHTS
The applicable Michigan laws and provisions of Capital Directions'
articles of incorporation and bylaws do not entitle shareholders of Capital
Directions to dissent from the merger. See "Description of the
Merger-Dissenters' Rights."
PROCEDURES FOR VOTING BY PROXY
If you properly sign, return and do not revoke your proxy, the persons
appointed as proxies will vote your shares according to the instructions you
have specified on the proxy. If you sign and return your proxy but do not
specify how the persons appointed as proxies are to vote your shares, your proxy
will be voted FOR the approval of Proposal 1 and in the best judgment of the
persons appointed as proxies on all other matters properly brought before the
special meeting.
25
You can revoke your proxy at any time before it is voted by delivering
to Kimberly A. Dockter, Treasury & Administrative Officer, 322 South Jefferson
Street, Mason, Michigan 48854, either a written revocation of the proxy or a
duly signed proxy bearing a later date or by attending the special meeting and
voting in person.
REQUIREMENTS FOR SHAREHOLDER APPROVAL
A quorum will be present at the meeting if a majority of the
outstanding shares of Capital Directions common stock are represented in person
or by valid proxy. We will count abstentions and broker non-votes, which are
described below, in determining whether a quorum exists. Approval of the merger
requires the affirmative vote of a majority of the shares of Capital Directions
entitled to vote on Proposal 1. Any other matter that may properly come before
the special meeting requires that more shares be voted in favor of the matter
than are voted against the matter. We will count abstentions and broker
non-votes in determining the minimum number of votes required for approval.
Based on the 591,410 shares outstanding as of the record date, a quorum
will consist of 295,706 shares represented either in person or by proxy. Based
on the 591,410 shares outstanding as of the record date, the minimum number of
votes required to be cast in favor of the proposal in order to approve the
merger is 295,706.
Abstentions. A shareholder who is present in person or by proxy at the
special meeting and who abstains from voting on any proposal will be included in
the number of shareholders present at the special meeting for the purpose of
determining the presence of a quorum. Abstentions do not count as votes in favor
of or against a given matter. Since the proposal must be approved by the
affirmative vote of a majority of the shares entitled to vote, an abstention has
the effect of a vote against the proposal.
Broker Non-Votes. Brokers who hold shares for the accounts of their
clients may vote these shares either as directed by their clients or in their
own discretion if permitted by the exchange or other organization of which they
are members. Proxies that contain no voting instructions by the broker on a
particular matter are referred to as "broker non-votes" with respect to the
proposal(s) not voted upon. Broker non-votes are included in determining the
presence of a quorum. A broker non-vote, however, does not count as a vote in
favor of or against a particular proposal for which the broker has no
discretionary voting authority. Since the proposal must be approved by the
affirmative vote of a majority of the shares entitled to vote, a broker non-vote
has the effect of a vote against the proposal.
SOLICITATION OF PROXIES
Proxies are being solicited by our board of directors, and Capital
Directions will pay the cost of the proxy solicitation. Our directors, officers
and employees may, without additional compensation, solicit proxies by personal
interview, telephone, fax, or otherwise. We will direct brokerage firms or other
custodians, nominees or fiduciaries to forward our proxy solicitation material
to the beneficial owners of common stock held of record by these institutions
and will reimburse them for the reasonable out-of-pocket expenses they incur in
connection with this process.
INFORMATION ABOUT CAPITAL DIRECTIONS AND ITS AFFILIATES
GENERAL
Capital Directions is a one-bank holding company registered under the
Bank Holding Company Act of 1956, as amended. Capital Directions was
incorporated under the laws of the State of Michigan on August 11, 1987 to serve
as the holding company for its sole bank subsidiary, Mason State Bank ("the
Bank"). Capital Directions has no substantial assets except its investment in
the Bank. The Federal Reserve Board regulates Capital Directions. Capital
Direction's address is 322 South Jefferson Street, Mason, Michigan 48854 and its
telephone number is (517) 676-0500.
The Bank was organized in 1886 under the laws of Michigan and is
subject to the Michigan Banking Code of 1969. It is insured by the Bank
Insurance Fund through the Federal Deposit Insurance Corporation. The Bank is
regulated by the Michigan Office of Financial and Insurance Services and the
Federal Deposit Insurance Corporation. The Bank provides services to
individuals, businesses, local, state and federal governmental units and
institutional customers located in Mason, Leslie and the surrounding areas.
Services include demand deposits,
26
savings and time deposits, collections, cash management, night depositories and
personal, installment, commercial and real estate loans. The Bank offers a
credit card program affiliated with the Visa and MasterCharge Inter-Bank charge
card system. The Bank maintains a correspondent relationship with several of the
major banks in the Detroit area and elsewhere, in order to provide for the
clearance of checks, the transfer of funds, the periodic purchase and sale of
Federal funds, and participation in large loans which would be beyond the Bank's
legal lending limit if made by the Bank alone.
The Bank's principal office is located at 322 South Jefferson Street,
Mason, Michigan. It operates branches at 661 North Cedar Street, Mason, Michigan
and at 810 W. Bellevue, Leslie, Michigan. The Bank owns its main office and
Cedar Street office. The facility in Leslie is operated under a lease agreement.
The Bank has full and part-time employees (38 full-time equivalents).
In addition to its traditional banking business, the Bank operates an
insurance agency subsidiary and a mortgage company subsidiary. The Bank
purchased Lakeside Insurance Services, Inc. in 1994 to take advantage of the
expanded insurance powers granted to banks in 1994. Lakeside is licensed in
Michigan to sell life, accident and health, multiple line property and casualty
insurance and variable annuity contracts.
Mason State Mortgage Company, LLC was formed on July 16, 2002 to allow
for expansion of mortgage product offerings as well as certain tax savings. This
was facilitated by a 99% ownership by the Bank and a 1% ownership by Capital
Directions.
DIRECTORS AND EXECUTIVE OFFICERS OF CAPITAL DIRECTIONS, INC.
The following sets forth certain information with respect to Capital
Direction's Executive Officers as of June 30, 2003.
Position With First Elected as an
Name (Age) Capital Directions Officer of Capital Directions
---------- ------------------ ------------------------------
Gerald W. Ambrose (53) Chairman 1994
Marvin B. Oesterle (51) Vice Chairman 1981
Timothy P. Gaylord (48) President and C.E.O. 1995
Douglas W. Dancer (62) Secretary 1990
Lois A. Toth (52) Treasurer 1998
Mr. Ambrose is a director and Chairman of the board of directors of
Mason State Bank.
Mr. Oesterle is a director and Vice Chairman of the board of directors
of Mason State Bank.
Mr. Gaylord is a director and President and Chief Executive Officer of
Mason State Bank.
Mr. Dancer is a director and Secretary of the board of directors of
Mason State Bank.
Ms. Toth is Vice President, Controller and Cashier of Mason State Bank.
Capital Directions' executive officers are appointed annually by
the board of directors at the meeting of directors following the Annual
Meeting of Shareholders. 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:
27
PRINCIPAL OCCUPATION FOR THE DIRECTOR
NAME AGE LAST FIVE YEARS OR MORE SINCE (1)
---- --- ----------------------- ---------
Gerald W. Ambrose 53 County Controller for the County of Ingham; Chairman 1990
of the board, Mason State Bank and the Company. His
principal business address is 341 S. Jefferson St.,
Mason, MI 48854
Douglas W. Dancer 62 Partner, Nu-Horizons, Inc., Realtor, Vision Real 1986
Estate, and Former President, Dancer's Inc. Department
Stores; Secretary of the board, Mason State Bank and
the Company. His principal business address is 566 N.
Cedar St., Mason, MI 48854
Timothy P. Gaylord 48 President & Chief Executive Officer of Mason State 1995
Bank and the Company. His principal business address
is 322 South Jefferson Street, Mason, Michigan 48854.
Peter D. Houk 58 Partner, Fraser, Trebilcock, Davis & Dunlap PC and 2003
Retired Circuit Court Judge. His principal business
address is 124 W. Allegan St., #1000, Lansing, MI
48933.
Paula J. Johnson 56 Realtor, Vision Real Estate and Developer, PAL, LLC 1996
i.e.: Vision Village Condominiums. Her principal
business address is 217 S. Cedar St., Mason, MI 48854.
James W. Leasure 52 Owner, Showtime, Inc. and Wash Express. His principal 2000
business address is 969 Eden Rd., Mason, MI 48854.
Marvin B. Oesterle 51 Partner, Oesterle Brothers Seed Corn; Vice Chairman of 1981
the board, Mason State Bank and the Company. His
principal business address is 1975 Okemos Rd., Mason,
MI 48854.
(1) Includes service as a director of the Company's wholly-owned
subsidiary, Mason State Bank.
All of the above-listed persons are U.S. citizens. During the past five years,
none of them have been a party in any judicial or administrative proceeding that
resulted in a judgment, decree, or final order enjoining them from future
violations of, or prohibiting activities subject to, federal or state securities
laws, or finding any violation with respect to such laws. Nor have any of them
been convicted in any criminal proceeding during the past five years. The
business address and telephone number of the directors and executive officers at
the Company is 322 South Jefferson Street, Mason, Michigan 48854, telephone
(517) 676-0500.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth information as of ___________, 2003 with
respect to the persons and groups known to Capital Directions to be the
beneficial owners of more than five percent of Capital Directions' common stock,
each of the directors, executive officers, and all directors and executive
officers as a group before and their anticipated ownership after the merger.
28
Prior to Merger After Merger
--------------- ------------
Name and Address Number of Shares Percent of Shares Number of Shares Percent of Shares
of Beneficial Owner Beneficially Owned Beneficially Owned Beneficially Owned Beneficially Owned
- -------------------- ------------------ ------------------ ------------------ ------------------
5% or more beneficial
owners:
June M. Oesterle Trust 54,586(1) 9.24% 54,586(1) 9.41%
Lyle M. Oesterle Trust
1975 Okemos Road
Mason, MI 48854
Colin J. Fingerle Trust 37,343 6.31% 37,343 6.43%
845 Argentine Rd.
Howell, MI 48843
Executive officers and
directors:
Gerald W. Ambrose 1,111 * 1,111 *
Douglas W. Dancer 20,933 3.54% 20,933 3.61%
Timothy P. Gaylord 9,808 1.66% 9,808 1.69%
Peter D. Houk 225 * 225 *
Paula J. Johnson 450 * 450 *
James W. Leasure 8,492 1.44% 8,492 1.46%
Marvin B. Oesterle 3,934 * 3,934 *
Lois A. Toth 200 * 200 *
All directors and executive 45,153 7.63% 45,153 7.78%
officers as a group
(8 persons)
- --------
* Less than one percent
(1) Total of shares owned by both the June M. Oesterle Trust of which
June M. Oesterle is the sole trustee and the Lyle M. Oesterle Trust of which
Lyle M. Oesterle, spouse of June M. Oesterle, is sole Trustee.
29
RECENT AFFILIATE TRANSACTIONS IN CAPITAL DIRECTIONS STOCK
With the exception of routine periodic purchases through the Company's
401(k) plan, there were no transactions in Capital Directions' common stock by
its affiliates which have occurred over the last sixty days except as follows.
On September 8, 2003, the Company's President, Timothy P. Gaylord exercized
stock options to purchase 900 shares of Capital Directions' common stock at
$21.875 per share.
STOCK REPURCHASES BY CAPITAL DIRECTIONS, INC.
During the past two years, Capital Directions has repurchased the
following shares of its common stock:
Date # of Shares Price per Share Cost
---- ----------- --------------- ----
27-Dec-01 3,000 $39.42 $118,260.00
01-May-02 5,252 39.30 206,403.60
09-May-02 1,396 40.00 55,840.00
05-Dec-02 1,265 43.00 54,395.00
--------- ------------- --------------- -----------
Total 10,913 $434,898.60
MARKET FOR COMMON STOCK AND DIVIDEND INFORMATION
Capital Direction's common stock is quoted on the OTC Bulletin Board
under the symbol "CTDN." The table below sets forth the high and low sales
prices for the common stock from January 1, 2001, through June 30, 2003 as
reported by the OTC Bulletin Board, for the calendar quarters indicated, and the
dividends declared on the stock in each quarter. These price quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
necessarily represent actual transactions.
Dividend
High Low Declared
---- --- --------
2003
First Quarter $49.75 $43.00 $.39
Second Quarter 52.00 48.25 $.39
2002
First Quarter $39.50 $38.00 $.39
Second Quarter 41.95 38.25 $.39
Third Quarter 43.00 39.60 $.39
Fourth Quarter 43.50 40.61 $.39
2001
First Quarter $40.00 36.25 $.34
Second Quarter 39.75 36.37 .35
Third Quarter 40.25 37.00 .36
Fourth Quarter 41.00 37.50 .37
As of July 16, 2003, there were approximately 449 common shareholders
of record, which includes those persons for whom Cede & Co. serves as nominee.
After the merger, the Capital Directions common stock will no longer be
quoted on the OTC Bulletin Board or be eligible for trading on an exchange or
automated quotation system operated by a national securities association.
Capital Directions 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. Capital Directions anticipates that its stock will continue to be
quoted in the over-the-counter market, 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., Inc., Howe Barnes Investments, Inc.,
and Oppenheimer & Co., Inc. have agreed to continue
30
to use its 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.
DESCRIPTION OF COMMON STOCK
The Bank is authorized to issue 1,300,000 shares of common stock, par
value $5.00 per share. The authorized but unissued and unreserved shares of
capital 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. Generally no
shareholder approval is required for the issuance of these shares, except for
shares to be offered to directors, officers and controlling persons (as defined
under applicable federal regulations) in other than a public offering.
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
Capital Directions. 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.
Dividends. Capital Directions 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.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of Capital Directions, holders of the common stock would be entitled
to receive all assets of the Company available for distribution in cash or in
kind, after payment or provision for payment of (i) all debts and liabilities of
the Company; (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 capital
stock of Capital Directions without first offering such shares to existing
shareholders. The common stock is not subject to call for redemption, and the
outstanding shares of common stock when issued and upon receipt by Capital
Directions of the full purchase price therefore are fully paid and
nonassessable.
Transfer Agent and Registrar. The transfer agent and registrar for the
common stock is American Stock Transfer and Trust Company, New York, New York.
DIVIDEND POLICY
Future dividend payments may be made at the discretion of Capital
Directions' board of directors, considering factors such as operating results,
financial condition, regulatory restrictions, tax consequences, and other
relevant factors.
31
SELECTED HISTORICAL FINANCIAL DATA
FINANCIAL CONDITION DATA:
At December 31,
---------------
2002 2001 2000 1999 1998
------------- -------------- -------------- ------------- -----------
(in thousands)
Assets $126,214 $117,277 $115,023 $105,713 $100,229
Loans, net 96,055 91,784 84,596 88,057 80,904
Cash and cash equivalents 8,434 6,973 8,566 3,151 3,321
Securities available for sale 12,644 12,200 15,670 9,751 5,320
Securities held to maturity 400 0 0 0 6,276
Deposits 74,707 70,933 72,423 72,030 72,389
Borrowed Funds 35,401 31,125 29,492 20,561 15,593
Shareholders' Equity 14,350 13,763 12,834 11,828 10,997
Book value per share $ 24.36 $ 23.09 $ 21.46 $ 19.82 $ 18.48
OPERATING DATA:
For Years Ended December 31,
----------------------------
2002 2001 2000 1999 1998
------------- -------------- -------------- ------------- -----------
(in thousands)
Interest Income 7,897 8,049 7,958 7,525 6,880
Interest Expense 3,372 3,715 3,798 3,440 3,125
------------- -------------- -------------- ------------- -------------
Net interest income before provision 4,525 4,334 4,160 4,085 3,755
For loan losses
Provision for loan losses 0 0 6 48 (23)
------------- -------------- -------------- ------------- -------------
Net interest income after provision for loan 4,525 4,334 4,154 4,037 3,778
losses
Noninterest income 1,005 819 794 592 565
Noninterest expense 2,752 2,640 2,569 2,471 2,461
------------- -------------- -------------- ------------- -------------
Income before income tax expense 2,778 2,513 2,379 2,158 1,882
Income tax expense 868 775 729 659 548
------------- -------------- -------------- ------------- -------------
Net Income 1,910 1,738 1,650 1,499 1,334
============= ============== ============== ============= =============
Basic earnings per share $ 3.23 $ 2.91 $ 2.76 $ 2.51 $ 2.24
Diluted earnings per share $ 3.20 $ 2.88 $ 2.74 $ 2.49 $ 2.22
At or for the Year Ended December 31,
-------------------------------------
2002 2001 2000 1999 1998
------------- ------------ -------------- ------------- -------------
Return on assets (net income 1.56 1.53 1.54 1.44 1.47
as a percentage of average total assets)
Return on equity (net income 13.66 12.94 13.28 13.06 12.53
as a percentage of average equity)
Equity-to-assets ratio (average equity 11.44 11.83 11.59 11.00 11.75
as a percentage of average total assets)
Interest rate spread 3.35 3.35 3.37 3.52 3.67
Net interest margin for period 3.98 4.11 4.18 4.26 4.50
Noninterest expense, as a 2.25 2.32 2.40 2.37 2.72
percentage of average total assets
Allowance for possible loan 1.08 1.13 1.23 1.18 1.23
losses as a percentage of total loans
Non-performing assets as .07 .26 .12 .32 .37
a percentage of total assets
Dividend Payout Ratio 48.32 48.80 46.01 45.42 42.63
32
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands except per share data)
The following unaudited pro forma condensed consolidated balance sheet
as of June 30, 2003 (the "Pro Forma Balance Sheet"), and the unaudited pro forma
consolidated statements of earnings for the year ended December 31, 2002 and six
month period ended June 30, 2003 (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 June 30, 2003, while the pro
forma adjustments to the Pro Forma Earnings Statements are computed as if the
merger was consummated on January 1, 2002, the earliest period presented. The
following financial statements do not reflect any anticipated cost savings which
may be realized by Capital Directions after consummation of the merger.
The pro forma information does not purport to represent what Capital
Directions' results of operations actually would have been if the merger had
occurred on January 1, 2002.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma consolidated balance sheet as of June
30, 2003 and the unaudited pro forma consolidated income statements for the year
ended December 31, 2002, and the six months ended June 30, 2003, give effect to
the following:
- We have assumed that the merger occurred as of June 30, 2003, for the
purposes of the consolidated balance sheet, and as of January 1, 2002,
respectively, with respect to the consolidated income statements for the year
ended December 31, 2002, and the six months ended June 30, 2003.
- We have assumed that a total of 11,029 shares are cashed out in the
merger at a price of $50.00 per share for a total of $551,450. Additionally, we
have assumed that we have incurred or will incur $52,342 in costs and expenses
relating to the merger.
- We have assumed that all of the cash required to consummate the
merger will be provided from working capital of the corporation. This will be
offset by a 2-year fixed rate borrowing in the amount of $603,792 from the
Federal Home Loan Bank at a current interest rate of 2.30%.
- We have not reflected the anticipated cost savings, estimated to be
approximately $84,483 per year that we expect as a result of the merger.
33
CAPITAL DIRECTIONS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 2003 (Unaudited)
(In thousands, except share and per share data)
As of June 30, 2003
--------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- --------
(Unaudited)
ASSETS
Cash and non interest bearing deposits $ 3,231 $ $ 3,231
Interest bearing deposits in other financial institutions 1,583 1,583
Federal funds sold - -
--------- ---------
Total cash and cash equivalents 4,814 4,814
Time deposits with other financial institutions 1,883 1,883
Securities available for sale 10,283 10,283
Securities held to maturity 900 900
Federal Home Loan Bank (FHLB) stock 2,412 2,412
--------- ---------
Total securities 13,595 13,595
Loans held for sale 67 67
Loans:
Commercial and agricultural 4,755 4,755
Installment 1,478 1,478
Real estate mortgage 93,129 93,129
--------- ---------
Total loans 99,362 99,362
Allowance for loans losses (1,015) (1,015)
--------- ---------
Net loans 98,347 98,347
Premises and equipment, net 1,080 1,080
Accrued interest receivable 458 458
Bank owned life insurance 1,827 1,827
Other assets 1,544 1,544
--------- -------- ---------
Total assets $ 123,615 $ - $ 123,615
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non interest bearing $ 14,751 $ 14,751
Interest bearing 60,713 60,713
--------- ---------
Total deposits 75,464 75,464
Accrued interest payable 155 155
Federal funds purchased 370 370
FHLB borrowings 31,171 604 31,775
Other liabilities 1,704 1,704
--------- ---------
Total liabilities 108,864 109,468
SHAREHOLDERS' EQUITY
Common stock: $5 par value, 1,300,000 shares authorized;
590,043 shares outstanding at June 30, 2003 and
580,381 as adjusted 2,950 (55) 2,895
Additional paid in capital 2,243 2,243
Retained earnings 9,445 (549) 8,896
Accumulated other comprehensive income, net of tax of
$58 as of June 30, 2003 113 113
--------- -------- ---------
Total shareholders' equity 14,751 (604) 14,147
--------- -------- ---------
Total liabilities and shareholders' equity $ 123,615 $ - $ 123,615
========= ======== =========
34
PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 2002 (Unaudited)
(In thousands, except share and per share data)
Year Ended December 31, 2002
---------------------------------------------
Year-Ended:
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- ----------
Interest and Dividend Income
Loans, including fees $ 7,052 $ $ 7,052
Securities: Taxable 505 505
Tax exempt 168 168
FHLB stock 125 125
Federal funds sold and other 47 47
--------- ---------
Total interest and dividend income 7,897 7,897
Interest expense
Deposits 1,453 1,453
FHLB borrowing and other debt 1,919 14 1,933
--------- -------- ---------
Total interest expense 3,372 14 3,386
--------- -------- ---------
Net interest income 4,525 (14) 4,511
Provision for loan losses - - -
--------- -------- ---------
Net interest income after provision for loan losses 4,525 (14) 4,511
Non-interest income
Service charges on deposits 320 320
Net gains on sales of loans 350 350
Investment commission fees 49 49
Other 286 286
--------- ---------
Total non interest income 1,005 1,005
Non-interest expense
Salaries and employee benefits 1,576 1,576
Occupancy and equipment 345 345
Other 831 831
--------- ---------
Total non interest expense 2,752 2,752
--------- -------- ---------
Income before income tax expense 2,778 (14) 2,764
Income tax expense 868 (4) 864
--------- -------- ---------
Net income $ 1,910 $ (10) $ 1,900
========= ======== =========
Basic earnings per share $ 3.23 $ 3.27
========= =========
Diluted earnings per share $ 3.20 $ 3.25
========= =========
35
PRO FORMA CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 2003 (Unaudited)
(In thousands, except share and per share data)
Six Months Ended June 30, 2003
---------------------------------------------
Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- ----------
Interest and Dividend Income
Loans, including fees $ 3,312 $ $ 3,312
Securities: Taxable 166 166
Tax exempt 95 95
FHLB stock 64 64
Federal funds sold and other 57 57
--------- ---------
Total interest and dividend income 3,694 3,694
Interest expense
Deposits 593 593
FHLB borrowing and other debt 899 6 905
--------- -------- ---------
Total interest expense 1,492 6 1,498
--------- -------- ---------
Net interest income 2,202 (6) 2,196
Provision for loan losses - - -
--------- -------- ---------
Net interest income after provision for loan losses 2,202 (6) 2,196
Non-interest income
Service charges on deposits 174 174
Net gains on sales of loans 207 207
Investment commission fees 21 21
Other 110 110
--------- ---------
Total non interest income 512 512
Non-interest expense
Salaries and employee benefits 874 874
Occupancy and equipment 167 167
Other 392 392
--------- ---------
Total non interest expense 1,433 1,433
--------- -------- ---------
Income before income tax expense 1,281 (6) 1,275
Income tax expense 379 (1) 378
--------- -------- ---------
Net income $ 902 $ (5) $ 897
========= ======== =========
Basic earnings per share $ 1.53 $ 1.55
========= =========
Diluted earnings per share $ 1.51 $ 1.53
========= =========
36
WHERE YOU CAN FIND MORE INFORMATION
Capital Directions files reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934, as amended.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. You may read and copy, at the prescribed rates, this
information at the SEC's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The SEC also maintains an Internet world wide website that contains
reports, proxy statements and other information about issuers including Capital
Directions, who file electronically with the SEC. The address of that site is
http://www.sec.gov.
Capital Directions and the merger subsidiary have 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. The
Schedule 13E-3, including any amendments and exhibits filed or incorporated by
reference as a part thereof, is available for inspection or copying as set forth
above or is available electronically at the SEC's website.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows Capital Directions to "incorporate by reference"
information into this document. This means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be a part of
this document, except for any information that is superseded by information that
is included directly in this document or in any other subsequently filed
document that also is incorporated by reference herein.
This document incorporates by reference the documents listed below that
Capital Directions has filed previously with the SEC. They contain important
information about Capital Directions and its financial condition.
- Capital Directions' Annual Report on Form 10-K for the year ended
December 31, 2002.
- Capital Directions' Quarterly Report on Form 10-Q, as amended,
for the quarter ended June 30, 2003.
We also incorporate by reference any additional documents that we may
file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, between the date of this document and the date
of Capital Directions' special meeting.
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 Kimberly A. Dockter, Treasury &
Administrative Officer, 322 South Jefferson Street, Mason, Michigan 48854. Her
telephone number is (517) 676-0500, extension 204.
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,
Douglas W. Dancer
Secretary
37
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
CAPITAL DIRECTIONS, INC. AND
CDI MERGER CO., INC.
AGREEMENT AND PLAN OF MERGER (this "Merger Agreement"), dated as of
June 30th, 2003, by and between CDI Merger Co., Inc., a Michigan corporation
("Merger Co."), and Capital Directions, Inc., a Michigan corporation ("CDI").
RECITALS
Merger Co. is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan. As of the date hereof,
the authorized capital stock of Merger Co. consists of 60,000 shares of Common
Stock, no par value ("Merger Co. Common Stock"), of which 100 shares are issued
and outstanding.
CDI is a corporation duly organized and validly existing under the laws
of the State of Michigan. As of the date hereof, the authorized capital stock of
CDI consists of its common stock, $5.00 par value ("CDI Common Stock"), of which
1,300,000 shares are presently authorized and of which 590,043 shares are issued
and outstanding.
The respective Boards of Directors of CDI and Merger Co. deem the
Merger Agreement advisable and in the best interests of each such corporation
and their respective shareholders. The respective Boards of Directors of CDI and
Merger Co., by resolutions duly adopted, have approved the Merger Agreement and
have each recommended that the Merger Agreement be approved by their respective
shareholders and have each directed that this Merger Agreement be submitted for
approval by their respective shareholders. Shareholders of CDI and shareholders
of Merger Co. are each entitled to vote to approve the Merger Agreement. Except
in connection with the exercise of stock options, the number of shares of CDI
Common Stock and the number of shares of Merger Co. Common Stock are not subject
to change before the Effective Time (as hereinafter defined).
Therefore, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto hereby covenant and agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Merger
Agreement, and in accordance with the Michigan Business Corporation Act (the
"Michigan Act"), at the Effective Time (as defined in Section 1.2), Merger Co.
shall merge (the "Merger") with and into CDI and CDI shall survive the Merger
and shall continue its corporate existence under the laws of the State of
Michigan. Upon consummation of the Merger, the separate corporate existence of
Merger Co. shall terminate and the name of the Surviving Corporation shall be
"Capital Directions, Inc."
1.2 Effective Time. As soon as is reasonably practicable after the date
hereof, after approval of this Merger Agreement by the shareholders of the
constituent corporations and after the receipt of all required regulatory
approvals and the expiration of any statutory waiting periods, a Certificate of
Merger meeting the requirements of Section 707 of the Michigan Act shall be
filed with the Michigan Department of Consumer and Industry Services for
approval. The Merger shall become effective ("the Effective Time") when the
Certificate of Merger has been filed with the Michigan Department of Consumer
and Industry Services or as otherwise specified in the Certificate of Merger.
1.3 Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects set forth in the Michigan Act.
1.4 Treatment of CDI 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 of any share of CDI Common Stock,
the following shall occur:
(i) Each issued and outstanding share of CDI Common
Stock owned of record by a Qualified Holder (as hereinafter
defined) shall remain issued and outstanding as a share of
common stock of the Surviving Corporation.
(ii) Each issued and outstanding share of CDI Common
Stock owned of record by a Disqualified Holder (as hereinafter
defined) shall be converted into the right to receive cash
from the Surviving Corporation, in the amount of $50.00 per
share (the "CDI Merger Consideration") and, thereafter,
Disqualified Holders shall cease to have any rights as
shareholders of CDI or the Surviving Corporation except such
rights, if any, as they may have pursuant to the Michigan Act,
and, except as aforesaid, their sole right shall be the right
to receive the CDI Merger Consideration as aforesaid, without
interest thereon, upon surrender to the Surviving Corporation
of their certificates which theretofore represented shares of
CDI Common Stock.
(b) At the Effective Time, by virtue of the Merger and without
any action on the part of the holder of any Merger Co. Common Stock,
each issued share of Merger Co. Common Stock shall be converted into
the right to receive cash from the Surviving Corporation in the amount
of $1.00 per share, and the holders of certificates representing such
shares shall cease to have any rights as shareholders of Merger Co. or
the Surviving Corporation except such rights, if any, as they may have
pursuant to the Michigan Act, 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 shares of Merger Co. Common
Stock.
2
(c) In no event shall any Holder holding of record as of the
close of business on the Shareholder Meeting Date (as hereinafter
defined) 225 or more shares in the aggregate be entitled to receive any
CDI Merger Consideration with respect to the shares so held. It shall
be a condition precedent to the right of any Holder to receive CDI
Merger Consideration, if any, payable with respect to the shares held
by such Holder that such Holder certify to CDI in the letter of
transmittal delivered by CDI that such Holder held of record as of the
close of business on the Shareholder Meeting Date fewer than 225 shares
in the aggregate.
1.5 Certain Definitions.
(a) The term "Qualified Holder" shall mean a Holder of CDI
Common Stock who holds of record as of the close of business on the
Shareholder Meeting Date two hundred twenty five (225) or more shares
of CDI Common Stock.
(b) The term "Disqualified Holder" shall mean a Holder of CDI
Common Stock who is not a Qualified Holder.
(c) The term "Holder" shall mean any record holder or holders
of CDI Common Stock 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 shareholders
of CDI.
1.6 Resolution of Issues. CDI (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 CDI shareholder(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 the number of shares held by any Holder immediately prior to the Effective
Time. All determinations by CDI under this Article I shall be final and binding
on all parties, and no person or entity shall have any recourse against CDI or
any other person or entity with respect thereto.
For purposes of this Article I, CDI may in its sole discretion, but
shall not have any obligation to do so, (i) presume that any shares of CDI
Common Stock held in a discrete account are held by a person distinct from any
other person, notwithstanding that the registered Holder of a separate discrete
account has the same or a similar name as the Holder of a separate discrete
account; and (ii) aggregate the shares held by any person or persons that CDI
determines to constitute a single Holder for purposes of determining the number
of shares held by such Holder.
1.7 Articles of Incorporation. The Articles of Incorporation of CDI 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.
3
1.8 Bylaws. The Bylaws of CDI 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.
1.9 Board of Directors of Surviving Corporation. The directors of CDI
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 appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws.
1.10 Officers. The officers of CDI 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
STOCK CERTIFICATES
2.1 Certificates Held by Qualified Holders. From and after the
Effective Time, certificates representing shares of CDI Common Stock held by a
Qualified Holder shall be deemed to evidence the same number of shares of Common
Stock of CDI, as the Surviving Corporation, which they theretofore represented.
2.2 Certificates Held by Disqualified Holders or by Holders of Merger
Co. Common Stock. Until presented to the Surviving Corporation, certificates
which theretofore represented shares of CDI Common Stock held by a Disqualified
Holder and certificates which theretofore represented Merger Co. Common Stock
shall only evidence the right to receive cash as hereinabove provided. Upon
presentation to the Surviving Corporation of certificates which theretofore
represented shares of CDI Common Stock held by a Disqualified Holder or which
theretofore represented shares of Merger Co. Common Stock, cash shall be paid in
an amount to which such holder 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
GENERAL PROVISIONS
3.1 Termination. Notwithstanding anything herein to the contrary, the
Board of Directors of Merger Co. or the Board of Directors of CDI at any time
prior to the filing of the Certificate of Merger with the Michigan Department of
Consumer and Industry Services may terminate this Merger Agreement. This Merger
Agreement shall be automatically terminated if (i) the Shareholders of CDI fail
to approve the Merger and the Merger Agreement at a special meeting of
shareholders of CDI to be held on such date as shall be determined by the Board
of Directors of CDI (the "Shareholder Meeting Date"); or (ii) any regulatory or
other agency (if
4
any) which must approve the Merger, has not approved the Merger prior to
December 31, 2003. 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 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.
3.3 Governing Law. This Merger Agreement shall be governed and
construed in accordance with the laws of the State of Michigan, without regard
to any applicable conflicts of law.
3.4 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 of Directors, at any time before or after approval of
the matters presented in connection with the Merger by the shareholders of
Merger Co. or CDI; provided, however, that after any approval of the
transactions contemplated by this Merger Agreement by the respective
shareholders of Merger Co. or CDI, there may not be, without further approval of
such shareholders, 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. Common Stock or CDI Common Stock 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.
IN WITNESS WHEREOF, Merger Co. and CDI have caused this Merger
Agreement to be executed by their respective duly authorized officers as of the
date first above written.
CDI MERGER CO., INC. CAPITAL DIRECTIONS, INC.
By: /s/Timothy P. Gaylord By: /s/Timothy P. Gaylord
----------------------- -----------------------
Timothy P. Gaylord Timothy P. Gaylord
Title: President Title: President and CEO
5
APPENDIX B
June 30, 2003
Board of Directors
Capital Directions, Inc.
322 S. Jefferson Street
Mason, MI 48854
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, of the cash consideration of $50.00 per share to be received by the common
shareholders of Capital Directions Inc. ("CDI" or the "Company") owned of record
by a "Disqualified Holder" as defined in the Agreement and Plan of Merger
("Merger Agreement") between CDI and CDI Merger Co. (Merger Co.) dated June 30,
2003 and the transaction contemplated thereby (the "Transaction"). Each issued
and outstanding share of CDI Common Stock owned of record by a Qualified Holder
(as defined in the Merger Agreement) shall remain issued and outstanding. Each
issued and outstanding share of CDI Common Stock owned of record by a
Disqualified Holder shall be converted into the right to receive cash in the
amount of $50.00 per share (the "CDI Merger Consideration"). Thereafter,
Disqualified Holders shall cease to have any rights as shareholders of CDI
except such rights, if any, as they may have pursuant to the Michigan Business
Corporation Act, and, except as aforesaid, their sole right shall be the right
to receive the CDI Merger Consideration as aforesaid, without interest thereon,
upon surrender to the CDI of their certificates which theretofore represented
shares of CDI Common Stock.
Donnelly, Penman, French, Haggarty & Co. ("DPFH") 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
CDI in connection with the Transaction and will receive a fee from CDI for our
services pursuant to the terms of our engagement letter with CDI, dated as of
May 27, 2003 (the "Engagement Letter").
In arriving at our Opinion, we have:
I. Reviewed the 10-K Annual Reports of the Company for the years ended
December 31, 1999 through 2002, the most recent 10-Q Quarterly Report
filed May 13, 2003 as well as internal interim financials through June
30, 2003;
II. Reviewed reports from the Board of Directors meetings, Loan Review
Committee and Strategic Plan Update meetings held during the month of
June, 2003;
III. Compared certain financial characteristics of the Company to certain
publicly held companies we deemed relevant;
The Board of Directors
Capital Directions, Inc.
June 30, 2003
Page 2
IV. Reviewed current banking industry conditions and trends concerning the
valuation of recent mergers and acquisitions;
V. Conducted discussions with the senior management of the Company
concerning the business and future prospects of the Company;
VI. Prepared a discounted cash flow analysis of the Company based on
projections derived from discussions with and deemed reasonable by
management of the Company; and
VII. 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 CDI, we, with the consent of CDI, relied, without
independent investigation, upon the accuracy and completeness of all financial
and other information provided to us by CDI. DPFH has further relied upon the
assurance of management of CDI that they are unaware of any facts that would
make the information provided by or available to CDI incomplete or misleading in
any respect. With respect to the financial forecast information discussed with
us by CDI, 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 CDI as to the expected future financial performance of CDI. CDI'S
management team has undertaken and agreed to advise us promptly if any
information previously provided has become inaccurate or is required to be
updated during the period of our review.
No limitations were imposed by CDI on DPFH on the scope of DPFH's investigation
or the procedures to be followed by DPFH in rendering this opinion. On June 23,
2003, the Board of Directors was provided with a DPFH valuation of the fully
marketable, undiscounted value of a share of CDI common stock as of March 31,
2003. Although DPFH believes the value presented to the board was a reasonable
valuation, the actual share valuation for purposes of this Transaction is at the
sole discretion of the Board of Directors. In addition, DPFH was not requested
to and did not make any recommendation to CDI'S Board of Directors as to the
form of the consideration to be paid to CDI'S shareholders. DPFH was not
requested to opine as to, and this opinion does not address, CDI'S underlying
business decision to proceed with or effect the Transaction or the relative
merits of the Transaction compared to any alternative transaction that might be
available to CDI.
DPFH did not make or obtain any independent evaluation, valuation or appraisal
of the assets or liabilities of CDI, nor were we furnished with such materials.
DPFH has not reviewed any individual credit files of CDI and has assumed,
without independent verification, that the aggregate allowances for credit
losses for CDI 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 CDI in writing to do so,
and we expressly disclaim any responsibility to do so in the absence of any such
request. Our services to CDI in connection with the Transaction have been
comprised solely of financial advisory services, as described in the Engagement
Letter.
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 CDI. Any estimates contained in our analyses are not
necessarily indicative of future results or value, which may be
The Board of Directors
Capital Directions, Inc.
June 30, 2003
Page 3
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 company or
merger utilized in our analyses was identical to CDI. 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, the timing of the relevant mergers
and prospective buyer interests, as well as other factors that could affect the
public trading markets of companies to which CDI is being compared. None of the
analyses performed by us was assigned a greater significance than any other. The
complete valuation provide to CDI on June 23, 2003, including a comprehensive
explanation of methodologies utilized has been included as Attachment A
following this Opinion.
Our opinion is furnished to the Board of Directors of CDI in connection with its
consideration of the proposed Transaction and does not constitute a
recommendation to or any advice to the Board of Directors of CDI or to any
shareholder to take any other action in connection with the Transaction.
Furthermore, this letter should not be construed as creating any fiduciary duty
on the part of DPFH to any such party. We hereby consent to the reference to our
opinion in the proxy statement relating to the shares of common stock of CDI to
repurchased in the Transaction and to the inclusion of the foregoing opinion in
the materials relating 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.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that, as of June 30, 2003, the
CDI Merger Consideration of $50.00, is fair, from a financial point of view, to
the common shareholders of CDI.
Very truly yours,
/s/ John C. Donnelly
John C. Donnelly
Managing Director
Donnelly Penman & Partners
Attachment
ATTACHMENT A
June 23, 2003
Board of Directors
Capital Directions, Inc.
322 S. Jefferson Street
Mason, MI 48854
Attn: Mr. Timothy P. Gaylord
Dear Board of Directors: PRIVATE & CONFIDENTIAL
Capital Directions, Inc. ("Capital Directions" or the "Company") has engaged
Donnelly, Penman, French, Haggarty & Co. ("DPFH") to render its opinion (the
"Opinion") with respect to the fair market per share value of the Company's
common stock as of March 31, 2003 in the event of a recapitalization through a
reverse stock split or "squeeze out" merger transaction.
DPFH is a regional investment banking firm of recognized standing. As part of
our investment banking services, we are regularly engaged in the valuation of
corporate entities on a stand-alone basis or in connection with capital raising
and merger and acquisition transactions. No limitations were imposed by the
Company upon DPFH with respect to the investigations made or procedures followed
by DPFH in rendering its Opinion.
In arriving at our Opinion, we have:
I. Reviewed the Annual Reports of the Company for the years ended December
31, 1999 through 2002 as well as interim financials through March 31,
2003;
II. Reviewed reports from the Board of Directors meetings, Loan Review
Committee and Strategic Plan Update meetings held during the months of
April and May, 2003;
III. Compared certain financial characteristics of the Company to certain
publicly held companies we deemed relevant;
IV. Reviewed current banking industry conditions and trends concerning the
valuation of recent mergers and acquisitions;
V. Conducted discussions with the senior management of the Company
concerning the business and future prospects of the Company;
Mr. Timothy P. Gaylord
June 23, 2003
Page 2
VI. Prepared a discounted cash flow analysis of the Company based on
projections derived from discussions with and deemed reasonable by
management of the Company; and
VII. 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 connection with rendering its Opinion to Capital Directions, DPFH performed a
variety of financial analyses, which are summarized below. DPFH 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 DPFH's Opinion. DPFH 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.
DPFH did not make or obtain any independent evaluation, valuation or appraisal
of the assets or liabilities of Capital Directions, nor were we furnished with
such materials. DPFH has not reviewed and individual credit files of the Company
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 and comparable merger
transaction analysis summarized below, no public company utilized as a
comparison is identical to Capital Directions, 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 acquisition or public trading values of the
financial institutions concerned. The forecasted financial information furnished
by the Company's management contained in or underlying DPFH'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, DPFH assumed, with the Company's
consent, 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. None of the analyses performed by DPFH were assigned a greater
significance by DPFH than any other.
Mr. Timothy P. Gaylord
June 23, 2003
Page 3
COMPANY BACKGROUND
Capital Directions, Inc. ("Capital Directions" or the "Company") is a holding
company whose wholly owned subsidiary includes Mason State Bank (the "Bank").
Lakeside Insurance Agency is a wholly owned subsidiary of the Bank. Mason State
Mortgage Co., LLC (the "Mortgage Company") was formed in July of 2002 and is 99%
owned by Mason State Bank, with the remaining 1% owned by Capital Directions.
The Company and its subsidiaries provide a broad range of banking and financial
services. Substantially all revenues and services are derived from banking
products and services. The Bank operates predominantly in Central Michigan as a
commercial bank. The Bank's primary services include accepting retail deposits
and making residential, consumer and commercial loans. While the Company's chief
decision makers monitor the revenue streams of the various products and
services, operations are managed and financial performance is evaluated on a
Company wide basis. Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable operating segment.
Mason State Bank was established in 1886 and has operated continuously in Ingham
County since inception. The Bank's stock was acquired by Capital Directions,
Inc. in 1988 when the holding company was formed. Capital Directions has
experienced 13 years of consecutive growth and earnings. Net Income for the year
ended December 31, 2002 was $1,910,000, representing basic earnings per share of
$3.23.
Capital Directions is traded through the OTC Bulletin Board Exchange under the
symbol CTDN. Its shares are traded on a limited basis through the local brokers
of Stifel, Nicolaus & Co, Inc., Monroe Securities, Howe Barnes Investments,
Inc., Morgan Stanley Dean Witter and Raymond James and Associates, Inc. As of
December 31, 2002, there were 422 holders of the Company's common stock. The
most recent trade of the stock was 100 shares at $52.00 on June 11, 2003.
The Bank has a main office and a branch office located in Mason, Michigan. In
addition, they have leased branch office space in a supermarket in nearby
Leslie, Michigan. Both cities are located directly south of the Lansing / East
Lansing metro area. According to SNL Securities LP, the median household income
in Mason and Leslie is $49,260 and $43,214 respectively and total deposits were
$213.0 million and $79.4 million as of June, 2002. Both Leslie and Mason are
located in Ingham County, which ranks 7th in population of Michigan's 83
counties. The largest employers in the County include the State of Michigan,
Michigan State University, General Motors, Sparrow Health Systems and Dart
Container.
Mr. Timothy P. Gaylord
June 23, 2003
Page 4
INDUSTRY OVERVIEW
Commercial, retail and mortgage banking are highly competitive businesses in
which the Company receives competition from both bank and non-bank institutions.
As a result of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 and the Gramm-Leach-Bliley Act of 1999, the number and types of
depository institution competitors have substantially increased.
Capital Directions faces increased competition from finance companies, credit
unions and bank and non-bank mortgage lenders. These companies may offer higher
lending limits and other non-traditional services that Capital Directions does
not currently offer. Some of the Company's competitors also can leverage greater
resources in order to gain a larger business presence within Capital Directions'
target service areas.
While being relatively small can be a disadvantage, there are certain potential
benefits as well. Community banks that make customer service a priority may be
able to gain an advantage with customers in their local market that feel
neglected by the larger banks. Because the larger banks often seek large
homogenous markets and products, niche opportunities are created for smaller
institutions that seek to fill the needs of the underserved. Also, the relative
difference in size can often correspond to a more agile management team that can
respond more quickly to the ever changing competitive environment.
ECONOMIC OVERVIEW
Reports from the Federal Reserve Districts, as outlined in the June 11, 2003
Federal Reserve "Beige Book,"1 indicate that economic growth generally remained
slow to and uneven despite the recent modest improvement observed by a few
Districts.
Lending activity continued to increase, mostly for refinancing residential
mortgages. The Chicago District reports that many households appear to be taking
advantage of refinancing to pay down other debt, which is limiting growth in
credit card balances. Business lending increased in the Dallas, Cleveland, and
Philadelphia Districts, but was weak in the Atlanta and Chicago Districts and in
most of the San Francisco District. The Richmond District reports no signs of a
pickup in commercial lending any time soon.
Most Districts reported little change in loan delinquencies. The Cleveland
District noted a few reports that credit quality had slipped, and bankers in the
Philadelphia District expect commercial loan quality to slip in the second half
of the year because revenue growth for many business borrowers has been
weaker-than-expected. However, the Chicago District indicated that the credit
quality on commercial loans was improving modestly, while the San Francisco
District reported that the credit quality of bank loans was generally stable to
slightly improved. A mild increase in residential mortgage foreclosures was
reported in the Atlanta District, while the
- --------
(1) Summary of Commentary on Current Economic Conditions by Federal Reserve
District, June 11, 2003.
Mr. Timothy P. Gaylord
June 23, 2003
Page 5
Dallas District reported a May spike in home foreclosures in the Dallas-Fort
Worth area. Banks in the St. Louis District reported that they had tightened
lending standards for small firms.
The Livingston Study2, based on survey responses of 28 participants from
banking, industry, academia and trade associations, forecasts economic recovery
in 2003 in its December 2002 report. The results of this most recent release
project real Gross Domestic Product ("GDP") growth of 2.8% in the first half of
2003 followed by a strengthening in the second half of 2003 to 3.6%. The
unemployment rate is expected to remain at 5.9% from December 2002 to June 2003,
and then decline to 5.5% by the end of 2003. Interest rates on three-month
Treasuries are expected to increase to 1.5% by June 2003, to 2.1% by December
2003 and to end 2004 at 3.2%. Long-term interest rates are also expected to
increase in 2003 but at a less drastic pace than the short-term rates. For
example, the interest rate on 10-year Treasury notes is approximately 4.1% as of
December 2002. The survey participants expect the 10-year Treasury notes to
increase throughout 2003 and 2004, reaching 5.3% at the end of 2004. The
participants' view of the long-term inflation and output growth has been fairly
steady during 2002. It is their collective belief that real GDP will grow 3.2%
over the next 10 years, while inflation will average 2.5% over the same time
period. The result of the current economic malaise has been a reduction in
after-tax corporate profits, which declined approximately 4.3% in 2002 when
compared to the 2001 levels. However, after-tax profits are expected to rebound
strongly in 2003 at an anticipated growth rate of 12.3%. The anticipated
corresponding stock price increase is projected to lag the rebound in earnings
quite significantly. The respondents to this survey anticipate a slow rise in
stock price levels (as measured by the S&P 500 Index) through the end of 2004
with a 29% growth from December 31, 2002 to December 31, 2004.
VALUATION METHODOLOGY
The following is a brief summary of the analyses performed by DPFH in connection
with its Opinion:
(a) Analysis of Comparable Acquisition Transactions. DPFH analyzed bank/thrift
acquisition transactions announced and/or completed since January 1, 2001. Each
selling bank/thrift had total assets less than $250 million, a latest twelve
months ("LTM") return on average equity of greater than 12.0% and less than
15.0% and less than a 60% capital efficiency ratio. This analysis provided an
approximate median multiple of 1.81 times price to book value, 1.87 times price
to tangible book value and 16.7 times LTM earnings per share. Applying the
median multiple for price to book value of 1.81 times to Capital Directions'
March 31, 2003 book value per share of $24.48 results in an implied value per
share of $44.31 on a control, marketable basis. Using the same methodology, the
values implied by applying the relevant multiples to Capital Directions'
tangible book value per share at March 31, 2003 of $24.48 and fully diluted
earnings per share for the twelve months ended March 31, 2003 of $3.30 were
found to be $45.78 per share and $55.11 per share, respectively.
- ----------------------------
(2) www.phil.frb.org/econ/liv/index.html
Mr. Timothy P. Gaylord
June 23, 2003
Page 6
DPFH notes that no selling bank/thrift reviewed was identical to the Company and
that, accordingly, any analysis of comparable transactions necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the parties to the transactions being compared.
(b) Analysis of Selected Comparable Companies. DPFH compared selected operating
results of Capital Directions to a select group of Michigan publicly traded
commercial banks and thrifts. The comparable set had Total Assets less than $1
billion and Return of Average Equity (ROAE) of between 10% and 20%. Additional
outliers have been eliminated at DPFH's discretion. The selected group had
approximately the following median values: $230 million in total assets, $29.1
million in total equity, a total risk-based capital ratio of 14.6%, LTM return
on average assets of 1.31%, LTM return on average equity of 12.29% and a LTM
efficiency ratio of 56.93%. This analysis provided valuation benchmarks
including the median price multiples of 1.59 times book value, 1.59 times
tangible book value and 12.7 times LTM earnings per share. Applying the median
price to book value multiple resulted in an implied per share value of $38.92
for Capital Directions on a marketable basis. Using the same methodology, the
implied values provided by application of the relevant multiples to Capital
Directions' March 31, 2003 tangible book value and LTM fully diluted earnings
per share were found to be $38.92 per share and $41.91 per share, respectively.
No bank used in the above analyses as a comparison is identical to Capital
Directions. 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.
(c) Discounted Cash Flow Analysis. DPFH prepared a discounted dividend stream
analysis of Capital Directions, which estimated the future after tax cash flows
that the Company might produce over the five-year period from January 1, 2003
through December 31, 2007. These estimates were derived from discussions with
and deemed reasonable by Capital Directions' management team. The estimates
assumed that Capital Directions' pre-tax earnings would grow at a compound
annual growth rate of approximately 12.1% throughout the projection period. This
rate is significantly greater than Capital Direction's historical growth rate.
This assumes that Capital Directions continues to grow their business in their
home markets and further expands to new areas. DPFH further assumed, with
management's guidance, that the Company would make dividend payouts equal to 50%
of earnings through the projection period. These dividend cash flows were then
discounted to a present value using a discount rate of 12.0%, chosen to reflect
the relative risk that holders of the common equity would be subject to given
the Company's operations and the current economic environment. DPFH also
estimated the residual value for Capital Directions' common stock using a price
to tangible book value multiple of 1.87 times, which is an approximation derived
from the earlier presented analysis of tangible book value multiples in
comparable transactions. This multiple is applied to the Company's estimated
tangible book value at December 31, 2007 of $20.6 million. The discounted
dividend analysis implied a value of $48.07 per share for Capital Directions'
common
Mr. Timothy P. Gaylord
June 23, 2003
Page 7
stock on a marketable basis. 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. DPFH 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.
(d) 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.
In most going concerns with a viable future it can be demonstrated that these
companies would change hands for more than net book value. 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 is not
representative of the company's intrinsic business value. We have reviewed the
book value of the Company's assets in limited detail and have found net book
value to be $14,599,000, or $24.48 per share as of March 31, 2003.
(e) Historical Trading Multiples. DPFH analyzed the quoted trades listed on the
OTC Bulletin Board for Capital Directions, Inc. (CTDN) for varying historical
periods. DPFH used a simple average of the stock price quoted for a period of 90
and 365 days. For the past 90 days, as of June 11, 2003, the historical average
price was $49.88 with a period volume of 6,200 compiled over 10 separate trading
days. For the past 365 days, as of June 11, 2003, the historical average price
was $45.13 with a period volume of 23,800 compiled over 44 separate trading
days. It should be noted that volume may reflect "double counting" due to both
the buy and sell side of a transaction being counted. In addition, the prices
and volumes displayed are per the trading information provided on the
www.otcbb.com website and may not reflect all transactions that occurred over
the aforementioned time period.
Mr. Timothy P. Gaylord
June 23, 2003
Page 8
CONCLUSION
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. This Opinion has been prepared for
the confidential use of the Board of Directors and senior management of the
Company and may not be reproduced, summarized, described or referred to or given
to any other person without DPFH's prior written consent. Our Opinion is limited
solely to the value of the Company's common stock as of March 31, 2003 given the
relevant market and company specific information available at the present time.
DPFH 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 Capital
Direction'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.
On the basis of, and subject to, the foregoing, we are of the opinion that, as
of March 31, 2003, the fair market value of the Company's common stock is $47.50
per share.
Sincerely,
DONNELLY, PENMAN, FRENCH, HAGGARTY & CO
CAPITAL DIRECTIONS, INCORPORATED
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Paula J. Johnson and James W. Leasure, jointly
and severally, proxies, with full power of substitution, to vote all the shares
of capital stock of Capital Directions, Inc. which the undersigned may be
entitled to vote, at the Special Meeting of Shareholders to be held at Mason
State Bank, 322 South Jefferson Street, at ___________________ on
__________________, 2003, or any adjournment thereof.
THE PROXIES NAMED ON THE REVERSE HEREOF AS DIRECTED TO VOTE AS SPECIFIED ON THE
REVERSE HEREOF OR, IF NO SPECIFICATION IS MADE, "FOR" PROPOSAL NUMBER 1 AND TO
VOTE IN ACCORDANCE WITH THEIR DISCRETION ON SUCH OTHER MATTERS THAT MAY PROPERLY
COME BEFORE THE MEETING. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL
NUMBER 1.
(TO BE SIGNED ON REVERSE SIDE.)
- --------------------------------------------------------------------------------
<Table>
1. TO APPROVE AN AGREEMENT AND
PLAN OF MERGER, DATED AS OF
JUNE 30, 2003 (THE "MERGER
AGREEMENT"), BETWEEN CAPITAL
DIRECTIONS, INC. AND CDI MERGER
CO., INC., PROVIDING FOR THE
MERGER OF CDI MERGER CO., INC.,
WITH AND INTO CAPITAL DIRECTIONS
UPON THE TERMS AND CONDITIONS SET
FORTH IN THE MERGER AGREEMENT AS
DESCRIBED IN THE PROXY STATEMENT
DATED ___________, 2003.
FOR AGAINST ABSTAIN
/ / / / / /
2. TRANSACT SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING OR
ANY ADJOURNMENTS OF THE MEETING.
NOTE: Please sign exactly as name appears hereon.
Joint owners should each sign. When signing as
attorney, executor, administrator, trustee, or
guardian, please give full title as such.
------------------------------ ---/---/---
SIGNATURE DATE
------------------------------ ---/---/---
SIGNATURE DATE
- -----------------------------------------------------------------------------------------------
</Table>