UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
(RULE 14a-101)
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
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-11(c) or 240.14a-12
MERCHANTS BANCORP, INC.
(Name of Registrant as Specified In Its Charter)
N/A
(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: 152,560
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):
$23.00, 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: $3,508,880
5) Total fee paid: $413.00
[ ] 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: ____________________
MERCHANTS BANCORP, INC.
100 NORTH HIGH STREET
HILLSBORO, OHIO 45133
_____ __, 2005
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders,
which will be held at _:__ _.m., on _______ __, 2005 at Merchants National
Bank's Main Office at 100 North High Street, Hillsboro, Ohio 45133. 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 set of proposals
that will allow for the termination of the registration of the Merchants Bancorp
Common Stock under federal securities laws and thereby eliminate the significant
expense required to comply with reporting requirements under those laws. We have
estimated our costs associated with the routine SEC filing and reporting
requirements for the 2005 reporting year would be approximately $423,010. This
figure does not include an additional one time expenditure of approximately
$124,400 necessary to bring the Company into compliance with new requirements
under the Sarbanes-Oxley Act of 2002. We believe the projected costs for the
2005 reporting year are generally indicative of 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 proposals are designed to reduce the
number of common shareholders to fewer than 300 persons, as required for
termination of the registration. The reduction in the number of shareholders
will be accomplished by amending the Company's Amended and Restated Articles of
Incorporation to authorize the issuance of 140,000 shares of a new class of
Preferred Stock which will be used in connection with a merger of a
newly-formed, wholly-owned subsidiary of Merchants Bancorp ("MBI Merger Sub,
Inc."), with and into Merchants Bancorp, Inc. (the "Merger"). The terms of this
Merger have been set forth in an agreement and plan of Merger between the two
companies (the "Merger Agreement"), a copy of which is attached as Appendix A to
the enclosed proxy statement. A copy of the proposed amendment to the Articles
of Incorporation is also attached as Appendix D to the enclosed proxy statement.
At the effective time of the Merger (the "Effective Time"): (i) each share
of Common Stock then held by a shareholder of record who as of the record date
for the special meeting of shareholders (the "Record Date") held 100 or fewer
shares will be converted into the right to receive $23.00 in cash per share from
the Company; and (ii) each share of Common Stock then held by a shareholder of
record who as of the Record Date held 1,500 or more shares will remain as
outstanding Common Shares of the Company. At the Effective Time, each share of
Common Stock then held by a shareholder of record who as of the Record Date held
more than 100 but fewer than 1,500 shares of Common Stock will be converted into
the right to receive: (i) the per share cash consideration of $23.00; (ii) one
share of a newly authorized class of Preferred Stock of the Company; or (iii) a
combination of cash and Preferred Stock. We anticipate that the effect of the
acquisition of our Common Stock from holders of fewer than 1,500 shares will be
a reduction in the total number of shareholders of record from approximately 831
to approximately 226. In order to avoid filings with the SEC, the number of
shareholders must be reduced to less than 300. The number of shares outstanding
is expected to be reduced by approximately 152,560 shares, leaving 2,514,091
shares outstanding from the 2,666,650 Common Shares currently outstanding.
The Merchants Bancorp Board of Directors believes the "going private"
transaction is in the best interest of all Merchants Bancorp 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 Merchants Bancorp 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 ______ __, 2005 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. If you attend the meeting, you may vote in person, even
if you have previously returned your proxy card.
Sincerely,
/s/ Paul W. Pence, Jr.
----------------------------------------
Paul W. Pence, Jr., President & CEO
MERCHANTS BANCORP, INC.
100 NORTH HIGH STREET
HILLSBORO, OHIO 45133
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD __________ ____, 2005
A special meeting of shareholders of Merchants Bancorp, Inc. will be held
at _:__ _.m. on _______ __, 2005 at Merchants National Bank's Main Office at 100
North High Street, Hillsboro, Ohio 45133, for the following purposes:
1. To consider and act upon a proposal to approve the Merger of MBI
Merger Co., Inc., a wholly-owned subsidiary of Merchants Bancorp, with
and into Merchants Bancorp as contemplated by the Merger Agreement
attached as Appendix A to the enclosed proxy statement. Pursuant to
the terms of the Merger Agreement, at the Effective Time of the
Merger: (i) each share of Common Stock then held by a shareholder of
record who as of the Record Date held 100 or fewer shares will be
converted into the right to receive $23.00 in cash per share from the
Company; and (ii) each share of Common Stock then held by a
shareholder of record who as of the Record Date held 1,500 or more
shares will remain as outstanding Common Stock of the Company
unchanged. At the Effective Time, each share of Common Stock then held
by a shareholder of record who as of the Record Date held more than
100 but fewer than 1,500 shares of Common Stock will be converted into
the right to receive: (i) the per share cash consideration of $23.00;
(ii) one share of a newly authorized Class A Preferred Stock of the
Company; or (iii) a combination of cash and Class A Preferred Stock.
2. To amend the Articles of Incorporation to authorize the issuance of
140,000 shares of a new class of Preferred Stock to be used in
connection with the Merger.
3. 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 proposals (1) and (2).
The Board of Directors has set the close of business on ______ __, 2005, 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 proxy card as soon as possible. Promptly returning your
proxy card 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.
IF YOU ARE A SHAREHOLDER OWNING MORE THAN 100 BUT FEWER THAN 1,500 SHARES
OF COMMON STOCK, YOU WILL NEED TO USE YOUR PROXY CARD TO MAKE THE ELECTION TO
RECEIVE CASH, SHARES OF SERIES A PREFERRED STOCK, OR A COMBINATION OF CASH AND
SERIES A PREFERRED STOCK IN EXCHANGE FOR YOUR SHARES OF COMMON STOCK. HOWEVER,
WHILE YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS EXERCISED, YOU MAY NOT
REVOKE YOUR ELECTION BETWEEN CASH OR SERIES A PREFERRED STOCK EXCEPT AS
SPECIFIED IN THE ENCLOSED PROXY STATEMENT.
THE BOARD OF DIRECTORS WILL RE-EVALUATE THE DESIRABILITY OF COMPLETING THE
MERGER IN THE EVENT THE COMPANY WOULD BE REQUIRED TO ACQUIRE MORE THAN 160,000
OF ITS COMMON SHARES FOR CASH, EITHER PURSUANT TO THE TERMS OF THE MERGER OR
PURSUANT TO DISSENTERS' RIGHTS OF APPRAISAL.
Date: _______________, 2005 By Order of the Board of Directors of
Merchants Bancorp, Inc.
James D. Evans, Secretary
MERCHANTS BANCORP, INC.
100 NORTH HIGH STREET
HILLSBORO, OHIO 45133
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _______ __, 2005
The Board of Directors of Merchants Bancorp provides this proxy statement
to you to solicit your vote on the approval of the Agreement and Plan of Merger,
dated as of _____ __, 2005, by and between Merchants Bancorp and MBI Merger Sub,
Inc., a newly-formed subsidiary of Merchants Bancorp organized for the sole
purpose of facilitating this proposed transaction. Pursuant to the Merger
Agreement, MBI Merger Sub, Inc. will merge with and into Merchants Bancorp,
with Merchants Bancorp continuing as the surviving corporation after the Merger.
If Merchants Bancorp's shareholders approve the Merger Agreement, each
shareholder of record:
- holding 100 or fewer shares of Merchants Bancorp, Inc. Common Stock as
of the shareholder Record Date will receive $23.00 cash, without
interest, per share from the Company for each share of Common Stock
held at the Effective Time of the Merger;
- holding 1,500 or more shares as of the shareholder Record Date will
continue to hold the same number of shares of Common Stock held at the
Effective Time of the Merger; and
- holding more than 100 shares of Common Stock but fewer than 1,500
shares of Common Stock as of the shareholder Record Date will have the
opportunity to elect to: (i) receive the per share cash consideration
of $23.00 for each share of Common Stock (the "Cash Consideration")
held at the Effective Time of the Merger; (ii) receive one share of a
newly authorized class of Preferred Stock of the Company (the "Series
A Preferred Stock") for every one share of Common Stock held at the
Effective Time of the Merger; or (iii) receive a combination of Cash
Consideration and Series A Preferred Stock. Any election to receive a
combination of Cash Consideration and Series A Preferred Stock must be
made with respect to whole shares of Common Stock, and no election can
be made which would result in the issuance of a fractional share of
Series A Preferred Stock.
After the Merger, the Company anticipates it will have approximately 226
record holders of its Common Stock. As a result, Merchants Bancorp 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.
The Merger cannot occur unless the holders of a majority of the outstanding
shares of Merchants Bancorp Common Stock entitled to vote at the special meeting
of shareholders approve both the Merger Agreement and an amendment to Article
FOURTH of the Company's Amended and Restated Articles of Incorporation to
authorize the issuance of 140,000 shares of the Series A Preferred Stock. The
Board of Directors has scheduled a special meeting of shareholders to vote on
the Merger as follows:
_______ __, 2005; _:__ _.m.
Merchants National Bank's Main Office
100 North High Street
Hillsboro, Ohio 45133
This document provides you with detailed information about the proposed
Merger. Please see "Where You Can Find More Information" for additional
information about Merchants Bancorp 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 _____ __, 2005. We first mailed this
proxy statement to the shareholders of Merchants Bancorp on or about that date.
IMPORTANT NOTICES
Neither Merchants Bancorp Common Stock nor the Series A Preferred Stock is
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 Merchants
Bancorp 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 material change
in the information included in this document.
You should not construe the contents of this proxy statement or any
communication from Merchants Bancorp, 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.
Merchants Bancorp 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 Merchants Bancorp 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," "us," and "the Company," as used in this proxy
statement, refer to Merchants Bancorp, Inc. and it's wholly owned subsidiaries,
collectively, unless the context indicates otherwise.
The words "Common Stock" or "Common Shares," as used in this proxy
statement, refer to the common stock of Merchants Bancorp, Inc.
TABLE OF CONTENTS
PAGE
----
PROPOSAL I - APPROVAL OF THE MERGER OF MBI MERGER SUB, INC.
WITH AND INTO MERCHANTS BANCORP, INC. ................................ 1
SUMMARY TERM SHEET ................................................... 1
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
AND THE MERGER .................................................... 5
When and Where is the Special Meeting? ............................... 5
How Many Votes Do I Have ............................................. 5
How Many Votes Can be Cast by All Shareholders? ...................... 5
Can I Change My Vote? ................................................ 5
What Happens if the Meeting is Postponed or Adjourned? ............... 5
Why Should I Vote to Approve the Plan of Merger? ..................... 5
How Will the Merger Affect the Day-to-Day Operations ................. 6
How Was the Cash Price for Shares of the Common Stock Determined? .... 6
May I Obtain a Copy of Austin Associates, LLC's Valuation Report? .... 6
When Will the Merger be Completed? ................................... 7
Should I Send in My Common Stock Certificates Now? ................... 7
Who Can Help Answer My Questions? .................................... 7
What Do I Need to Do Now? ............................................ 7
SPECIAL FACTORS ...................................................... 8
Background of the Merger Proposal .................................... 8
Purposes of and Reasons for the Merger Proposal ...................... 13
Structure of the Merger .............................................. 15
Determination of the Terms of the Merger ............................. 17
Financial Fairness ................................................... 18
Recommendation of our Board of Directors ............................. 26
Purposes and Reasons of MBI Merger Sub, Inc. for the
Merger Proposal ................................................... 31
Position of MBI Merger Sub, Inc. as to the Fairness of the Merger .... 31
Interests of Certain Persons in the Merger ........................... 32
Past Contacts, Transactions, Negotiations and Agreements ............. 32
Certain Consequences of the Merger; Benefits and Detriments to
Affiliated and Non-Affiliated Shareholders ........................ 32
Operations of the Bank Following the Merger .......................... 33
Source of Funds and Expenses ......................................... 34
Certain Terms of the Merger .......................................... 35
Regulatory Requirements .............................................. 37
Rights of Dissenting Shareholders .................................... 38
Material U.S. Federal Income Tax Consequences of the Merger .......... 40
Pro Forma Effect of the Merger and Pro Forma Consolidated
Financial Information (Unaudited) ................................. 43
Termination of Securities Exchange Act Registration .................. 43
i
PAGE
----
PROPOSAL II - AMENDMENT TO ARTICLES OF INCORPORATION .................... 45
Series A Preferred Stock ............................................. 44
Common Stock ......................................................... 47
Possible Anti-Takeover Effect of Proposal ............................ 48
Anti-Takeover Measures Currently in Place ............................ 48
Dividend Policy ...................................................... 49
INFORMATION REGARDING THE SPECIAL MEETING OF SHAREHOLDERS ............... 51
Time and Place of Meeting ............................................ 51
Record Date and Mailing Date ......................................... 51
Number of Shares Outstanding ......................................... 51
Purposes of Special Meeting .......................................... 51
Dissenters' Rights ................................................... 52
Voting at the Special Meeting and Requirements for
Shareholder Approval .............................................. 52
Solicitation of Proxies .............................................. 53
Election Procedures for Certain Shareholders ......................... 53
INFORMATION ABOUT MERCHANTS BANCORP AND ITS AFFILIATES .................. 54
Merchants Bancorp, Inc. and Merchants National Bank .................. 54
MBI Merger Sub, Inc. ................................................. 54
Directors and Senior Executive Officers of Merchants
Bancorp, Inc. ..................................................... 56
Legal Proceedings .................................................... 56
Voting Securities Held By Directors, Executive Officers
and 5% Beneficial Owners of Merchants Bancorp, Inc. ............... 56
Recent Affiliate Transactions in Merchants Bancorp Stock ............. 57
Stock Repurchases by Merchants Bancorp, Inc .......................... 58
Market for Common Stock and Dividend Information ..................... 58
Financial and Other Information ...................................... 59
Future Shareholder Proposals and Communications with
the Company's Board of Directors .................................. 60
Other Matters ........................................................ 61
WHERE YOU CAN FIND MORE INFORMATION ..................................... 61
DOCUMENTS INCORPORATED BY REFERENCE ..................................... 61
ii
APPENDICES PAGE
- ---------- ----
Appendix A Agreement and Plan of Merger Between Merchants Bancorp, Inc.
and MBI Merger Sub, Inc. ................................... 63
Appendix B Section 1701.85 of the Ohio Revised Code.................... 69
Appendix C Fairness Opinion of Austin Associates, LLC ................. 73
Appendix D Certificate of Amendment of the Amended and Restated
Articles of Incorporation of Merchants Bancorp, Inc. ....... 75
Appendix E Merchants Bancorp, Inc. Consolidated Pro Forma Financial
Statements ................................................. 80
Appendix F Merchants Bancorp, Inc. Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 2005 ............................ 91
iii
PROPOSAL I - APPROVAL OF THE MERGER OF MBI MERGER SUB, INC. WITH
AND INTO MERCHANTS BANCORP, INC.
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.
- - PURPOSE OF THE TRANSACTION
Shareholders are being asked to consider and vote to approve a transaction
which will reduce the total number of record holders of Common Shares of the
Company to less than 300. This will allow the Company to terminate its status as
a reporting company and avoid the reporting and other SEC filing requirements
attendant thereto. The Board of Directors believes that the burden and expense
associated with being an SEC reporting company far outweigh any advantage of
remaining an SEC reporting company. For more information, see the section
captioned "Purposes of and Reasons for the Merger Proposal" beginning on page 13
of this proxy statement.
- - STRUCTURE OF THE TRANSACTION
The transaction is structured as a merger. In general, a newly-created,
wholly-owned subsidiary of Merchants Bancorp, called MBI Merger Sub, Inc., will
be merged with and into Merchants Bancorp, Inc. (the "Merger"). At the effective
time of the Merger (the "Effective Time"):
- each share of Common Stock then held by a shareholder of record who as
of the Record Date held 100 or fewer shares will be converted into the
right to receive $23.00 in cash per share from the Company (the "Cash
Consideration"). Those shareholders will cease to have any ownership
interest in Merchants Bancorp;
- each share of Common Stock then held by a shareholder of record who as
of the Record Date held 1,500 or more shares will continue to
represent one share of the Company's Common Stock following the
Merger; and
- each share of Common Stock then held by a shareholder of record who as
of the Record Date held more than 100 but fewer than 1,500 shares of
Common Stock will be converted into the right to receive: (i) the per
share Cash Consideration; (ii) one share of
1
a newly authorized Class A Preferred Stock of the Company; or (iii) a
combination of Cash Consideration and Class A Preferred Stock.
For more information, see the section captioned "Structure of the Merger"
beginning on page 15 of this proxy statement.
- - AMENDMENT TO ARTICLES OF INCORPORATION
To facilitate the Merger, shareholders are also being asked to consider and
vote to approve an amendment to Article FOURTH of the Company's Amended and
Restated Articles of Incorporation to authorize the issuance of 140,000 shares
of Series A Preferred stock. This number represents the approximate aggregate
amount of shares held by shareholders owning more than 100 but fewer than 1,500
shares of the Company's Common Stock. The Series A Preferred Stock will be a
non-voting preferred security with a term of 20 years. It will also have a
"Principal Amount" of $23.00 and a preference over the Common Shares in the
event the Company liquidates. The new security will include certain restrictions
on transfer and will also be callable by the Company under certain
circumstances. In addition, the per share dividend received by holders of the
Series A Preferred Stock will be identical in amount to any dividend received by
holders of Common Stock. See Proposal II beginning on page 45 of this proxy
statement for more information on the relative rights and preferences of the
Series A Preferred Stock .
- - ELECTION PROCEDURES FOR CERTAIN SHAREHOLDERS
If you are a shareholder who holds more than 100 shares of Common Stock but
fewer than 1,500 shares of Common Stock, you must make your election regarding
the receipt of the Cash Consideration or Series A Preferred Stock on the proxy
card provided with this proxy statement. You may elect to receive a combination
of Cash Consideration and Series A Preferred Stock in exchange for your shares
of Common Stock. If you fail to specify any election on the enclosed proxy card,
you will be deemed to have elected to receive only Cash Consideration in
exchange for your Common Stock. For more information, see the section captioned
"Election Procedures for Certain Shareholders" beginning on page 53 of this
proxy statement.
- - VOTE REQUIRED TO APPROVE AMENDMENT TO THE ARTICLES AND THE MERGER
TRANSACTION
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
Company's outstanding shares of Common Stock. The amendment to the Company's
Articles of Incorporation to create the new class of Series A Preferred Stock
also requires the affirmative vote of a majority of the Company's outstanding
shares of Common Stock.
The record date for determining who is entitled to vote at the special
meeting has been fixed as the close of business on ______ __, 2005 (the "Record
Date"). On that date, there
2
were 2,666,650 shares of Common Stock outstanding. Directors and senior
executive officers of the Company currently own approximately 24.13% of the
Company's outstanding Common Stock. All of Merchants Bancorp's directors and
executive officers intend to vote in favor of the Merger proposal.
For more information, see the section captioned "Voting at the Special
meeting and Requirements for Shareholder Approval" beginning on page 52 of this
proxy statement.
- - RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of Merchants Bancorp has unanimously approved the
Merger transaction and recommends that you vote to approve the transaction. The
Board of Directors believes that the transaction is fair to all Merchants
Bancorp shareholders, including the non-affiliated Merchants Bancorp
shareholders. For more information, see the section captioned "Recommendation of
our Board of Directors" beginning on page 26 of this proxy statement.
- - AUSTIN ASSOCIATES, LLC'S FAIRNESS OPINION
Austin Associates, LLC, Merchants Bancorp's independent financial advisor,
delivered to the Board of Directors a written opinion dated August 24, 2005,
stating that the consideration to be paid in connection with this Merger is fair
to the shareholders of the Company. The full text of this opinion is attached as
Appendix C to this proxy statement. Please read this opinion. For more
information, also see the section captioned "Financial Fairness" beginning on
page 18 of this proxy statement.
- - POTENTIAL CONFLICTS OF INTEREST OF EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Merchants Bancorp 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. For
example, each member of the Board of Directors and each executive officer holds
of record 1,500 or more shares of the Company's Common Stock. Consequently, the
Company's directors and executive officers will increase their percentage
ownership interest in Merchants Bancorp as a result of the completion of the
Merger. For more information, see the section captioned "Interests of Certain
Persons in the Merger" beginning on page 32 of this proxy statement.
- - DISSENTERS' RIGHTS
This transaction will allow shareholders to exercise dissenters' rights to
appraisal pursuant to Section 1701.85 of the Ohio Revised Code. Such
shareholders have the right to dissent from the Merger and to receive payment in
cash for the appraised fair value of the Company's
3
Common Shares. In order to do this, a shareholder must follow the procedures for
perfecting dissenters' rights under Section 1701.85, which are described more
fully in the section captioned "Rights of Dissenting Shareholders" beginning on
page 38 of this proxy statement. A copy of Ohio Revised Code Section 1701.85 is
also provided as Appendix B to this proxy statement. The Board of Directors has
reserved the express right to re-evaluate the desirability of completing this
transaction in the event the Company would be required to acquire more than
160,000 of its issued and outstanding Common Shares in exchange for cash, either
pursuant to the express terms of the Merger or pursuant to the exercise of
dissenters' rights of appraisal.
The relevant sections of the Ohio law governing this process are reprinted
in their entirety and attached to this document as Appendix B. FAILURE TO COMPLY
PRECISELY WITH ALL PROCEDURES REQUIRED BY OHIO LAW MAY RESULT IN THE LOSS OF
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. The receipt of Series A
Preferred Stock in the Merger will generally be a non-taxable event. Determining
the tax consequences of the Merger can be complicated. You should consult your
financial and tax advisors in order to understand fully how the Merger will
affect you. For more information, see the section captioned "Material U.S.
Federal Income Tax Consequences of the Merger" beginning on page 40 of this
proxy statement.
4
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 _______ __, 2005, at _:__ _.m., local time, at
Merchants National Bank's Main Office, located at 100 North High Street,
Hillsboro, Ohio 45133.
HOW MANY VOTES DO I HAVE?
You will have one vote for every share of Common Stock you owned on the
Record Date.
HOW MANY VOTES CAN BE CAST BY ALL SHAREHOLDERS?
As of the Record Date, 2,666,650 shares of Common Stock were issued and
outstanding and held of record by approximately 831 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 Merchants Bancorp shareholders. The Merger will reduce the number of record
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.
5
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 the operations of either
Merchants Bancorp or Merchants National Bank, its wholly owned subsidiary (the
"Bank"). The Bank will continue to conduct its existing operations in the same
manner as now conducted. Except with respect to the Amendment to the Company's
Articles of Incorporation to provide for the newly authorized Series A Preferred
Stock, the charter documents of the Company will remain in effect and unchanged
by the Merger. No changes to the charter documents of the Bank are proposed in
connection with 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. The only significant change in operations will be that Merchants Bancorp
will no longer file reports and proxy statements with the SEC.
HOW WAS THE CASH PRICE FOR SHARES OF THE COMMON STOCK DETERMINED?
The Board of Directors retained Austin Associates, LLC, 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 Merchants Bancorp in the Merger
transaction. Austin Associates, LLC delivered a valuation report to the Board
valuing the Common Stock at $23.00 per share. The Board of Directors considered
the independent valuation and other factors and, with the recommendation of
Austin Associates, LLC, determined that the cash consideration under the Merger
Agreement should be $23.00 per share. Subsequently, Austin Associates, LLC
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 either cash or Series A Preferred Stock in the Merger. A
copy of the fairness opinion of Austin Associates, LLC is attached as Appendix C
to this proxy statement for your review.
MAY I OBTAIN A COPY OF AUSTIN ASSOCIATES, LLC'S VALUATION REPORT?
In connection with Austin Associates, LLC's fairness opinion, Austin
Associates, LLC has prepared and delivered to Merchants Bancorp 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, or you may request 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.
6
The SEC also maintains an Internet world wide website that contains
reports, proxy statements and other information about issuers, including
Merchants Bancorp, who file electronically with the SEC. The address of that
site is http://www.sec.gov. Merchants Bancorp 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. A copy of the valuation report is attached as an exhibit to the
Company's Schedule 13E-3 and is available for inspection electronically at the
SEC's website.
WHEN WILL THE MERGER BE COMPLETED?
We plan to complete the transaction during the fourth quarter of 2005 so
that registration of the Common Stock can also be terminated in the fourth
quarter of 2005.
SHOULD I SEND IN MY COMMON STOCK CERTIFICATES NOW?
No. After the Merger transaction is completed, all shareholders owning 1,500 or
fewer of the Company's Common Shares will receive written instructions for
exchanging their Common Stock certificates for cash or shares of Series A
Preferred Stock, as the case may be.
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 either Paul W.
Pence, President and Chief Executive Officer, or James D. Evans, Executive Vice
President and Secretary, at (937) 393-1993 or toll free at (800) 875-1993.
Written requests can be made to these individuals at the following address:
Merchants National Bank, 100 North High Street, Hillsboro, Ohio 45133.
WHAT DO I NEED TO DO NOW?
- Mail your signed proxy card 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 Agreement and the proposed amendment to the Company's
Articles of Incorporation creating the new Series A Preferred Stock.
- If you are a shareholder who, as of the Record Date, held more than
100 shares of Common Stock but fewer than 1,500 shares of Common
Stock, you must make your election to receive the Cash Consideration,
shares of Series A Preferred Stock, or some combination thereof, on
the proxy card provided with this proxy statement. If you fail to
specify your election on the enclosed proxy card, you will be deemed
to have elected to receive the Cash Consideration in exchange for your
Common Stock.
- For a more complete description of voting at the shareholders'
meeting, see the section entitled "Information Regarding the Special
Meeting of Shareholders".
7
SPECIAL FACTORS
BACKGROUND OF THE MERGER PROPOSAL
Merchants Bancorp, Inc., the holding company for Merchants National Bank,
was organized in 1996. Because of the aggregate amount of assets and number of
record shareholders, the Company was required in 2002 to register with the
Securities and Exchange Commission in accordance with Section 12(g) of the
Securities Exchange Act of 1934, as amended. As an SEC reporting company,
Merchants Bancorp is currently 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 costs associated with preparing and filing 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. A principal
reason behind pending increases in compliance costs is the enactment of the
Sarbanes-Oxley Act of 2002 and the additional rules and regulations of the SEC
related to the Act. Consequently, we decided to evaluate the costs and benefits
of being a public company at this time in light of the enactment of the
Sarbanes-Oxley Act of 2002, the additional rules and regulations of the SEC
related to the Act, and the additional time and costs associated in complying
with the Act and its related rules and regulations. Set forth in the table below
is a breakdown of our historical and estimated external and internal expenses
related to our SEC reporting obligations.
PAST AND PROJECTED EXTERNAL AND INTERNAL
SEC REPORTING EXPENSES
Estimated Estimated Estimated
2002(1) 2003 2004 2005(2) 2006 2007
-------- -------- -------- --------- --------- ---------
Audit and Audit-Related Fees(3) $102,385 $ 30,700 $ 34,500 $ 37,000 $ 40,700 $ 44,770
Section 404(4) -- -- 35,750 301,900 206,375 216,695
Legal Counsel(5) 17,961 13,767 5,972 8,000 9,000 10,000
Corporate Communications 10,651 7,473 5,495 5,510 6,000 6,300
Internal Compliance Costs(6) 51,435 54,160 57,000 195,000 148,000 155,410
-------- -------- -------- -------- -------- --------
Total $182,432 $106,100 $138,717 $547,410 $410,075 $432,932
======== ======== ======== ======== ======== ========
(1) Includes costs associated with initial registration under the Securities
Exchange Act of 1934.
(2) Not including any fees or expenses paid in connection with the proposed
going-private transaction.
(3) 2005 projections are based on preliminary fee estimates provided by the
Company's current registered public
8
accounting firm, Deloitte & Touche LLP. Projections for 2006 and 2007 were
calculated by the Company through the application of a 10% rate of
inflation to the 2005 projections provided by Deloitte & Touche, LLP.
(4) Projections through 2007 include preliminary fee estimates from the
Company's current internal auditor, BKD, LLP and its current registered
public accounting firm, Deloitte & Touche LLP. While technical compliance
by the Company with Section 404 of Sarbanes-Oxley would not be required
until its 2006 reporting year, the Company had made the determination to
finalize readiness preparations during its 2005 reporting year.
(5) Projections for 2005 through 2007 were provided by the Company's outside
legal counsel, Shumaker, Loop & Kendrick, LLP
(6) Actual expenses through 2004 and projections through 2007 include time
expended by senior management and personnel in report preparation and
oversight, and in the establishment and maintenance of revised internal
controls. Projections for 2005 through 2007 include estimates for the
addition of staff, including a Chief Financial Officer, to handle certain
internal control functions.
As indicated above, projected expenses related to the application of new
requirements under Section 404 of the Sarbanes-Oxley Act, including the addition
of staff to handle internal compliance functions, account for the material
portion of the aggregate expense increases projected for the 2005 through 2007
reporting years. Consequently, as a result of the projected increases in total
expenses and the additional burden on management required for compliance with
SEC rules and regulations under the Sarbanes-Oxley Act, the Company's management
held internal discussions, during the last quarter of 2004 concerning the
possibility of terminating the registration of its 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 projected expense estimates likely to be incurred
by the Company as a result of its SEC reporting obligations. Management
preliminarily determined that the number of record holders of the Company's
Common Shares 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 Merchants Bancorp Common Stock with the SEC. Management's
subsequent review of stock records confirmed that if Merchants Bancorp
repurchased all of the shares of every shareholder of record owning fewer than
1,500 shares of Common Stock, approximately 226 total record shareholders would
remain after the purchases were completed, and 226 total shareholders is
comfortably below the 300 shareholder threshold required to terminate SEC
registration.
Based upon these conclusions, management initially contacted Deloitte &
Touche LLP and its corporate counsel, Shumaker, Loop & Kendrick, LLP ("SLK"),
during the early part of the first quarter of 2005 to begin discussions
regarding issues related to terminating registration of the Common Stock with
the SEC.
Management also contacted Austin Associates, LLC ("Austin Associates"), 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. On February 23, 2005, Rick
Maroney of Austin Associates and Tom Blank of SLK presented the Board of
Directors of Merchants Bancorp with a preliminary Confidential Going-Private
Analysis. At this time, an overview of the primary reasons for going private was
presented to the Board, along with information regarding the general transaction
options for going private. These options included a reverse stock split, a
voluntary tender offer, and an affiliate combination involving the Merger of a
wholly-owned subsidiary with and into Merchants Bancorp. Tom Blank and Rick
Maroney also presented the Board with a general procedural structure for
engaging in further analysis and deliberations regarding the going private
process. The Board was advised
9
to: (1) evaluate the general advantages and disadvantages of being a reporting
company; (2) analyze the Company's shareholder base to determine a desired
ownership threshold above which shareholders would retain their current interest
in the Company; (3) determine the value to be paid for repurchased shares and
the most appropriate means of financing the repurchase; (4) determine the
financial benefit of going private to the Company; and (5) review all relevant
legal considerations involved in going private. Based upon these discussions,
the Board determined that further analysis regarding a proposed going private
transaction was warranted. A chronology of the deliberations undertaken by the
Board of Directors is set forth below.
On March 22, 2005, the Board of Directors met to discuss the advantages and
disadvantages of being a public company, any regulatory issues, and alternatives
to providing all cash consideration to shareholders being eliminated as a result
of the going private transaction. Tom Blank of Shumaker, Loop & Kendrick, LLP
discussed the following advantages of being an SEC registered company.
- More disclosure by the company makes shareholders feel more secure
about their investment.
- Registration allows for potentially increased liquidity by permitting
its listing on an exchange or trading over the counter.
- Investors have the ability to read and analyze company information
online, from the SEC web site.
- Registration makes it easier to raise additional capital through the
sale of Company stock, or to use Company stock to engage in an
acquisition transaction.
Mr. Blank also outlined the following disadvantages, particularly as they
apply to Merchants Bancorp, Inc., of being registered with the SEC.
- Increased expenses related to compliance with SEC reporting
obligations and corporate governance requirements under the
Sarbanes-Oxley Act may place Merchants Bancorp at a competitive
disadvantage.
- Management's time and efforts are inordinately expended on compliance
matters, as opposed to the operation of the Company and its subsidiary
bank.
- SEC regulations do not generally take into account smaller firms,
rather they only have one approach for all firms. This makes it too
expensive, especially for small firms, like Merchants Bancorp, Inc.
In addition, the Board discussed alternatives to providing all-cash
consideration to departing holders of Common Shares in connection with the going
private transaction. Following that discussion, the Board proposed the following
basic structure for the "going private" transaction:
10
- Shareholders owning 100 or fewer Common Shares of the Company would
receive cash in exchange for their Common Shares;
- Shareholders owning more than 100 but fewer than 1,500 Common Shares
of the Company would have the option of choosing between either cash
or shares of a proposed new class of preferred stock of the Company,
the economic terms of which would be similar to the Company's Common
Shares; and
- Shareholders owning 1,500 or more Common Shares of the Company would
retain their Common Shares without change.
The Board decided on this general structure out of consideration to the
Company's shareholders, many of whom have been affiliated with the Company for a
long time. This basic structure allows the Company to meet its objective of
going private, while also allowing a significant number of shareholders (i.e.
those owning more than 100 but fewer than 1,500 Common Shares) to retain an
economic interest in the Company if they choose to do so.
At its April 12, 2005 meeting, the Board of Directors finalized the
material terms for the Series A Preferred Stock to be offered in connection with
the Merger.
At the April 26, 2005 meeting, the Board of Directors discussed the current
costs and continued increase in expenses associated with the Company's
registration as a public company. The Board reviewed future increases in
expenses anticipated as a result of the implementation of the Sarbanes-Oxley Act
of 2002. Management reported that direct and indirect costs for the 2004
reporting year were approximately $138,717, and they were expected to increase
to approximately $547,410 by 2005 and taper off to approximately $432,932 by
2007. The projected 2007 expenses represent an increase of approximately 212%
over the Company's expenses for the 2004 reporting year. The Board also
discussed the minimal trading activity of Merchants Bancorp, Inc. stock. For
example, the following table sets forth for the period indicated the number of
days that any shares of Merchants Bancorp's Common Stock were known by the
Company to have been traded and the total number shares traded during the
period:
Number of Days on Which Any Total Volume of Share
Period Shares Traded During Period Traded During Period
------ --------------------------- ---------------------
1/1/2004 to 3/31/2004 6 days 8,114 shares
4/1/2004 to 6/30/2004 5 days 9,164 shares
7/1/2004 to 9/30/2004 5 days 23,449 shares
10/1/2004 to 12/31/2004 8 days 12,787 shares
1/1/2005 to 3/31/2005 7 days 15,886 shares
4/1/2005 to 6/30/2005 5 days 15,102 shares
Based upon these discussions, the Board determined 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. At this
meeting, the Board of Directors also resolved to direct
11
management to retain both legal counsel and an investment firm to conduct a
valuation study, and the Board adopted a motion authorizing President Pence to
accept the respective proposals from both SLK and Austin Associates. All Board
members approved the motion. As a result, the investment banking firm Austin
Associates was selected to conduct a valuation study and provide a fairness
opinion in connection with the transaction, and SLK was retained to provide the
legal services for the going private transaction. The Board also authorized
management, with the assistance of counsel, to prepare an amendment to the
Company's articles of incorporation to provide for the new class of preferred
shares to be offered in connection with the proposed going private transaction.
On June 24, 2005, the Board met to review the valuation report being
submitted by Austin Associates and to discuss and finalize the structure by
which the Company would complete its going private transaction. Rick Maroney of
Austin Associates presented the results of its valuation study, indicating a
fair value determination of $23.00 per share. A detailed description of this
valuation study is contained in this proxy statement in the section captioned
"Financial Fairness" at page ___ of this proxy statement. Mr. Maroney 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 Mr. Maroney described the assumptions utilized in the
valuation report. Following his presentation, Mr. Maroney was asked if his firm
was prepared to issue an opinion that a price of $23.00 per share is fair from a
financial perspective, and he stated that the valuation study supports a $23.00
per share price. The $23.00 purchase price was thereafter determined upon the
deliberation of the Board of Directors, with the recommendation of Austin
Associates. Mr. Maroney also indicated that he was prepared to issue an opinion
as to the fairness of the new series of preferred shares to be received by some
shareholders. The Board was aware that, as part of its analysis, Austin
Associates relied on management's projections of 2005 earnings and that such
analysis included consideration of the possible appreciation of the per share
price of the company's Common Stock which might occur if those projections were
achieved.
The Board and counsel then discussed the best method for consummating the
going private transaction. The Board considered the alternative structures for a
going private transaction and after considerable discussion, including
discussion with counsel, the Board of Directors unanimously determined that a
merger with a newly chartered subsidiary was the preferred structure because:
- a tender offer process is more expensive and, most importantly, would
provide no assurances that a sufficient number of shareholders would
tender their shares;
- a reverse stock split (which would be accomplished through an
amendment to the Company's Articles of Incorporation) was determined
to be somewhat problematic from a practical standpoint, given the dual
forms of consideration to be offered in the proposed transaction, and
the uncertainty regarding how shareholders who own more than 100 but
fewer than 1,500 Common Shares would choose between such forms of
consideration.
12
The Board determined that the Merger proposal was fair to all shareholders
(including non-affiliated shareholders), generally, and specifically with
respect to shareholders receiving either cash or preferred stock in the Merger.
In analyzing the question of fairness, the Board considered each of the factors
described in "--Recommendation of our Board of Directors" below. The Board also
specifically discussed the fact that, under Ohio law, the Merger transaction
would provide a statutory appraisal right for all shareholders of the Company,
including those owning 1,500 or more Common Shares. 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 Merchants Bancorp 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.
At the 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, the Board of Directors discussed with counsel the steps necessary
to complete the going private Merger transaction. Counsel explained that a proxy
statement and Schedule 13E-3 would be filed with the SEC. 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 Austin
Associates to deliver its opinion with respect to financial fairness, which
opinion was delivered and dated August 24, 2005. A copy of the fairness opinion
provided by Austin Associates is attached as Appendix C hereto.
The Board did not consider any alternatives to a going private transaction.
Specifically, the Board did not consider a possible sale of Merchants Bancorp
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 Merchants Bancorp and those shareholders who retain their shares.
PURPOSES OF AND REASONS FOR THE MERGER PROPOSAL
The purpose of the proposed Merger is to terminate Merchants Bancorp's
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
13
these benefits and will not be in a position to do so in the foreseeable future.
We believe that community banks of our size do not typically receive the
necessary attention from stock analysts and the investment community to create
substantial liquidity. Moreover, our internally-generated equity growth and
limited borrowings have been sufficient to accommodate our need for capital and
growth. Finally, opportunities to utilize our stock to acquire other banks have
been extremely scarce and when in the rare instance they have presented
themselves, our Board has not deemed those opportunities to be in the best
interest of our shareholders.
In the Board's judgment, the registration of Merchants Bancorp stock with
the SEC yields little advantage. Consequently, little 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.
Merchants Bancorp 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
and electronic filings associated with SEC filings).
Our costs associated with the routine SEC filing and reporting requirements
were approximately $138,717 or just under 1.8% of our overhead expenses during
2004.
These expenses consisted of the following:
Audit and Audit-Related Fees ... $34,500
Section 404 Readiness........... $35,750
Securities Counsel ............. $ 5,972
Corporate Communications ....... $ 5,495
Internal Compliance Costs ...... $57,000
We believe that the costs incurred during 2004 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 significant 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. Nor
will the Company be required to bear the audit-related expenses of coming into
compliance
14
with new requirements mandated by Section 404 of the Sarbanes Oxley Act of 2002.
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 do not necessarily reflect future savings, and
the actual savings to be realized may be higher or lower than indicated. We
expect that any savings on the part of the Company will not be realized until
after the fiscal year ended December 31, 2005.
The projected reduction in the number of total record shareholders from 831
to approximately 226 will also result in reduced expenses and less burden on
management because Merchants Bancorp will have approximately 27.2% 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 semi-annual issuance of dividend checks to shareholders and
other shareholder communications.
STRUCTURE OF THE MERGER
Since June 30, 2002, our Company has been a publicly registered company
under the Securities Exchange Act of 1934. This registration was required
because our number of record shareholders as of December 31, 2001 had exceeded
500. 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, Merchants Bancorp will have fewer than 300 record holders of its
shares of Common Stock. Federal Securities law requires the Company to get below
300 record holders before it can deregister its stock. We have recently
organized MBI Merger Sub, Inc. solely to facilitate the Merger transaction. MBI
Merger Sub will be merged with and into Merchants Bancorp pursuant to the terms
of the Merger Agreement attached to the Proxy Statement as Appendix A. Merchants
Bancorp will be the surviving corporation to the Merger. If completed, the
Merger will have the following effects.
SHARES HELD BY SHAREHOLDERS OWNING 100 OR FEWER SHARES. At the Effective
Time of the Merger, each share of Common Stock then held by a shareholder of
record who as of the Record Date held 100 or fewer shares will be converted into
the right to receive the per share Cash Consideration from the Company. After
the Merger and payment of that amount, record holders of these shares will have
no further interest in Merchants Bancorp. Record holders in this category will
not have to pay any service charges or brokerage commissions in connection with
the Merger or the cash payments to them. However, if such record holders hold
the shares in question for the benefit of another (or others), the Company
cannot guarantee the absence of transaction costs with respect to the beneficial
owners of the shares in question.
SHARES HELD BY SHAREHOLDERS OWING 1,500 OR MORE SHARES. At the Effective
Time of the Merger, each share of Common Stock then held by a shareholder of
record who as of the
15
Record Date held 1,500 or more shares will remain as outstanding Common Stock of
the Company unchanged as a result of the Merger.
SHARES HELD BY SHAREHOLDERS OWNING MORE THAN 100 SHARES BUT FEWER THAN
1,500 SHARES. At the Effective Time, each share of Common Stock then held by a
shareholder of record who as of the Record Date held more than 100 but fewer
than 1,500 shares of Common Stock will be converted into the right to receive:
(i) the per share Cash Consideration; (ii) one share of a newly authorized Class
A Preferred Stock of the Company; or (iii) a combination of Cash Consideration
and Class A Preferred Stock. If you elect to receive a combination of Cash
Consideration and Series A Preferred Stock, you will need to indicate on your
proxy card the number of whole Common Shares as to which you elect to receive
the Cash Consideration and the whole number of Common Shares as to which you
elect to receive Series A Preferred Stock. All such elections must be made with
respect to whole shares of Common Stock, and no election can be made which would
result in the issuance of a fractional share of Series A Preferred Stock. If you
fail to specify any election on the enclosed proxy card, you will be deemed to
have elected to receive only Cash Consideration in exchange for your Common
Stock. For more information regarding the rights, preferences and other terms of
the Series A Preferred Stock, see Proposal 2.
Again, each share of Common Stock owned by a shareholder who held of record
fewer than 1,500 shares on the Record Date will be converted into the right to
receive the Cash Consideration, Series A Preferred Stock, or some combination
thereof. The Board selected 1,500 shares as the ownership minimum for several
reasons, including to ensure that, after completion of the Merger:
- the number of record holders of Common Stock would be less than the
300 shareholder limit necessary to terminate registration with the
SEC; and
- Merchants Bancorp would continue to maintain capital in excess of, and
in full compliance with, all regulatory capital maintenance
requirements.
The Board did consider using a cutoff number other than 1,500 shares. However,
in reliance on management's analysis, the Board believes that using a number
greater than 1,500 would not provide any significant benefit, while at the same
time adding unnecessary expense to the transaction. Out of a total of 831 record
shareholders, approximately 226 shareholders own 1,500 or more shares of our
Common Stock. These 226 shareholders own, in the aggregate, approximately 94.3%
of the outstanding shares of Common Stock.
BENEFICIAL OWNERS OF SHARES OF THE COMMON STOCK. Crossing the threshold of
500 record shareholders is not difficult given the general rules the Securities
and Exchange Commission ("SEC") uses to count the number of record shareholders
a company has. For example, if a husband and wife jointly own shares of a
company, they're counted as only one record holder with regard to those shares.
However, if they each individually own shares in addition to those held jointly,
they will be counted as three separate shareholders. In addition, if either the
husband or wife were to also hold shares in a trust for the benefit of a child,
those shares would be deemed to be held by yet another shareholder of record.
Consequently, one
16
individual can count as multiple record holders, which can cause the Company to
have record ownership far in excess of actual beneficial ownership. Importantly,
if you and/or any member of your immediate family hold shares of the Company in
multiple accounts, as demonstrated by the above examples, the determination as
to whether or not you or your family members will continue to hold your Common
Shares following the proposed transaction will be made separately for each such
account. Using the example provided above, if a husband and wife jointly hold
1,000 shares of the Company's Common Stock, and the husband and wife also each
hold 750 shares of the Company's Common Stock in their individual names, all
three accounts would have the option to receive either the per share cash
consideration of $23.00 or new shares of the Series A Preferred upon the
completion of the proposed transaction. This is the case even though the husband
and wife collectively hold in excess of 1,500 Common Shares.
It is also important for shareholders to understand how shares that are
held in "street name" will be treated for purposes of the transaction described
in this proxy statement. Shareholders who have transferred their shares of
Company stock into a brokerage or custodial account are no longer shown on our
shareholder records as the record holder of these shares. The brokerage firms or
custodians can hold the shares directly, but more typically deposit all such
shares with a single nominee, such as Cede & Co. This is what is meant by
"street name." While the nominee for the broker or custodian is generally
considered the record holder of our stock for most purposes, this is not the
case when determining whether a company has fewer than 300 record holders for
purposes of going private. In such instances, the Securities and Exchange
Commission deems the brokerage or custodian to be the holder of record, rather
than the nominee. For purposes of the present transaction, we will be deeming
that to be the case as well. Consequently, if a broker or custodian holds (or is
deemed to hold) 1,500 or more of our Common Shares in the aggregate on the
Record Date, then the stock held by the broker or custodian will be completely
unaffected by the proposed transaction. Because the proposed transaction only
affects record holders, it does not matter whether any of the underlying
beneficial owners for whom that broker or custodian acts own less than 1,500
shares. At the end of this transaction, those beneficial owners will continue to
beneficially own the same number of shares of our Common Stock as they did at
the start of this transaction. If you hold your shares in street name, you
should talk to your broker, custodian or agent to determine how they expect the
transaction to affect you. Because other street name holders may hold through
your broker, custodian or agent, you may have no way of knowing whether you will
be entitled to retain your shares of Common Stock until you have communicated
with your broker, custodian or agent.
DETERMINATION OF THE TERMS OF THE MERGER
The structure and terms of the Merger were determined by management and the
Board of Directors. Because MBI Merger Sub 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 Austin Associates,
an independent financial advisor experienced in the financial analysis and
valuation of financial institutions, to value the Company's Common Stock. The
consideration to be paid for the Common Stock under the Merger was determined by
the Board of Directors. In
17
making this determination, the Board of Directors relied upon a report on the
valuation of the Company's Common Stock and the opinion on the fairness of the
consideration to be received by shareholders owning fewer than 1,500 Common
Shares in connection with the Merger, each of which was delivered by Austin
Associates. See "Financial Fairness."
FINANCIAL FAIRNESS
The Board of Directors believes that the Merger proposal is fair to, and in
the best interests of, the Company and all of its shareholders, including
shareholders who will receive cash or Series A Preferred Stock for their Common
Shares, as well as those shareholders who will continue to hold Common Shares of
the Company. The Board of Directors also believes that the process by which the
Merger is to be approved is fair to all shareholders. In reaching these
conclusions, the Board in part relied on a valuation and fairness opinion
prepared by Austin Associates of Toledo, Ohio.
In addition to Austin Associates' opinion and analyses, the Board of
Directors considered other factors in their evaluation of the transaction.
Austin Associates' opinion and analyses should not be viewed as determinative of
the views of the Board of Directors with respect to the transaction. The Board
of Directors retained Austin Associates based upon its experience in the
valuation of businesses and their securities in connection with going private
transactions and similar transactions. Austin Associates is a nationally
recognized investment banking firm that is continually engaged in providing
financial advisory services to community banks and rendering fairness opinions
in connection with bank mergers and acquisitions and securities valuations. The
fairness opinion is directed only to the fairness, from a financial point of
view, of the consideration to be received in cash or Series A Preferred Stock in
the Merger and is not intended to constitute and does not constitute a
recommendation as to whether shareholders should vote for or against the Merger.
Merchant's shareholders are urged to read the text of Austin Associates'
fairness opinion, which is attached hereto as Appendix C, carefully and in its
entirety.
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 or preferred stock consideration to be paid to certain shareholders.
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.
18
The Board of Directors, including all of the directors who are not
employees of the Company, 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 the Company or the Bank.
In connection with various prior consulting engagements, the Company paid
Austin Associates total fees of $25,000 in 2003; $50,000 in 2004 and $15,000
year-to-date 2005. The Company will pay Austin Associates a fee of $25,000 for
the valuation, fairness opinion, and advisory services provided in connection
with the going private transaction, and the Company will reimburse Austin
Associates for all out-of-pocket expenses incurred in connection with such
services.
The Board of Directors requested that Austin Associates provide its report
on the valuation of the Common Stock and issue a fairness opinion on the price
to be paid for shares of Common Stock in connection with the Merger proposal.
Austin Associates determined that the fair market value of the consideration to
be paid in the going private transaction was $23.00 per share. After considering
all other relevant factors, the Board agreed with Austin Associates' valuation
conclusion of $23.00 per share which is described in more detail later in this
section.
The Board imposed no limitations upon Austin Associates with respect to the
investigations made or procedures followed in rendering the valuation or the
fairness opinion. A copy of Austin Associates' fairness opinion is attached to
this proxy statement as Appendix C. You or your representative (designated in
writing) may inspect a copy of the valuation report at the Bank's main office
during regular business hours. You or your representative (designated in
writing) may also receive a copy of the report upon written request and at your
expense. Please send in your written request to the address set forth on the
cover page of this proxy statement. Additional information or documentation may
be requested from you if necessary to verify your identity or that of your
representative or the authority of your representative. The SEC also maintains
an Internet world wide website that contains reports, proxy statements and other
information about issuers, including Merchants Bancorp, Inc., who file
electronically with the SEC. The address of that site is http://www.sec.gov. The
Company has filed with the SEC a Rule 13e-3 Transaction Statement on Schedule
13E-3 in connection with the transactions described in this proxy statement. As
permitted by the SEC, this proxy statement omits certain information contained
in the Schedule 13E-3. A copy of the valuation report is attached as an exhibit
to the Company's Schedule 13E-3 and is available for inspection electronically
at the SEC's website.
In performing its analysis, Austin Associates assumed, with the Company's
consent, that financial forecasts provided by Company management had been
reasonably prepared, and on a basis reflecting the best currently available
judgment of management, and that the forecasts will be realized in the amounts
and times contemplated thereby. As part of its forecasts, the Company made
19
certain assumptions, including assumptions with regard to general economic and
competitive conditions. The Board was aware that, as part of its valuation
analysis, Austin Associates relied on management's projections of 2005 earnings
and that such valuation included consideration of the possible appreciation of
the per share price of the Company's Common Stock which might occur if those
projections were achieved.
In connection with the valuation and fairness opinion, Austin Associates
made such reviews, analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Among other things, Austin Associates:
1. Held discussion with certain members of the senior management of the
Company regarding the operations, financial condition, future
prospects and projected operations and performance of the Company;
2. Reviewed the Company's filings with the SEC, including annual reports
on Form 10-K for the five fiscal years ended December 31, 2004 and the
quarterly report on Form 10-Q for the fiscal quarter ended June 30,
2005, which the Company's management identified as being the most
current quarterly financial statements available at the time;
3. Reviewed internally prepared financial statements;
4. Reviewed forecasts and projections prepared by the management group
with respect to the Company; and
5. Reviewed certain other publicly available financial data for certain
companies that Austin Associates deemed comparable to the Company.
In connection with the valuation, Austin Associates also considered the
following additional factors: (i) the nature of the business and history of the
enterprise; (ii) the economic outlook in general and the condition and the
outlook of the specific industry in particular; (iii) the financial condition of
the business; (iv) the earning capacity of the Company; (v) the dividend paying
capacity of the Company; (vi) the nature and value of the tangible and
intangible assets of the business; (vii) sale of the stock and the size of the
block to be valued; (viii) the market price of the stocks of corporations
engaged in the same or similar lines of business having their stocks actively
traded in a free and open market; (ix) the marketability of the Company's stock;
and (x) the determination of any control premiums or minority share discounts.
Austin Associates used several methodologies to assess the fairness of the
consideration to be received by shareholders in connection with the Merger. The
following is a summary of the material financial analyses used by Austin
Associates in connection with the Merger. This summary is qualified in its
entirety by reference to the full text of its valuation report. Austin
Associates utilized each of the following analyses based upon its view that each
is appropriate and reflective of generally accepted valuation methodologies
given the accessibility of comparable publicly traded companies, the
availability of forecasts from management of the Company and
20
available information regarding similar transactions in the banking industry.
Each analysis provides an indication of the Company's per share value in order
to assess the fairness of the consideration to be received in connection with
the Merger. Unless specifically noted, no one methodology was considered to be
more appropriate than any other methodology.
Austin Associates' estimate of value for the Company's shares to be cashed
out in the Merger involved several valuation methods including: (1) discounted
cash flow value; (2) net asset value approach; (3) analysis of guideline
transactions; and (4) historical market prices.
DISCOUNTED CASH FLOW VALUE. For this valuation approach, Austin Associates
prepared a discounted cash flow analysis of the Company, which estimated
after-tax cash flows that the Company might produce from the twelve-month period
ending March 31, 2006 through March 31, 2010. The estimates assumed an annual
earnings growth rate of approximately 6.3%. The cash flows were discounted to
present value using a 12.0% discount rate to reflect the relative risk inherent
in the Company's stock. Austin Associates assumed 7.5 percent required equity to
asset ratio in determining excess cash flows per year. A summary of the
projected five-year period is as follows:
(DOLLAR AMOUNTS IN THOUSANDS)
---------------------------------------------------------------
03/31/2006 03/31/2007 03/31/2008 03/31/2009 03/31/2010
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $380,612 $399,643 $419,625 $440,606 $462,637
NET INCOME $ 4,679 $ 4,976 $ 5,292 $ 5,627 $ 5,983
ROAA 1.26% 1.28% 1.29% 1.31% 1.32%
In developing these projections, Austin Associates assumed no material
changes in the operations of the Company including the types of products and
services offered, markets served, branch locations and senior management. Austin
Associates primarily used current trend lines of the Company in making its
projections. In addition to the historical performance of the Company, Austin
Associates considered internal projections as provided by the Company.
Specifically, the Company provided its 2005 forecast of balance sheet and income
statement items.
In addition to calculating annual cash flows, Austin Associates also
determined a residual value. The residual value is calculated by capitalizing
the fifth year earnings projection. The appropriate capitalization rate was
determined to be the 12.0 percent discount rate less a three percent estimated
annual growth rate after year five. The sum of the present value of the cash
flows and residual value based on the 12.0% discount rate equaled $55.4 million
or $20.78 per share.
NET ASSET VALUE. This approach involves taking the book value of a company
and assessing premiums or discounts to the balance sheet accounts based upon the
current market value of its assets and liabilities. Austin Associates determined
the Company's net asset value as of March 31, 2005 to be $37.2 million, or
$13.95 per share. Given the going-concern nature of the valuation and the
results of the earnings-based methods, relatively little weight was given to
this approach.
21
GUIDELINE TRANSACTIONS. This analysis is based on two sets of guideline
transactions, including: (1) price-to-earnings multiples and price-to-tangible
book value ratios for selected publicly traded companies (i.e. minority share
transactions); and (2) price-to-earnings multiples and price-to-tangible book
value ratios for selected bank sale transactions (i.e. sale of control
transactions). For sale of control transactions, Austin Associates also
considered the premium over core deposits multiple. Austin Associates applied a
minority share discount to all sale transaction multiples to determine
appropriate minority share level indications of value under this methodology.
Minority Share Transactions. Under this approach, Austin Associates
analyzed financial and stock performance information for comparable banks in two
geographic regions and subject to the indicated criteria: (1) publicly traded
banks in the Midwest with total assets between $250 and $600 million with last
twelve-month core ROAE between 12% and 18%; (2) publicly traded banks in the
nation having assets between $300 million and $500 million and with last
twelve-month core ROAE between 14% and 16%. The following chart details the
median financial and stock performance results for the selective peer groups and
for the Company:
TOTAL TG EQUITY/ LTM CORE LTM CORE PRICE/ PRICE/LTM
PEER GROUP ASSETS TG ASSETS ROAA ROAE TG BOOK CORE EPS
- ---------- -------- ---------- -------- -------- ------- ---------
Midwest $366,733 8.42% 1.14% 13.72% 195% 14.9
National $368,715 7.99% 1.22% 14.83% 243% 17.5
COMPANY(1) $362,488 8.75% 1.27% 14.96% 200%(2) 15.0(2)
(1) Based on stated net income of $4,556,000.
(2) Selected multiples.
In determining comparable price-to-tangible book and price-to-earnings
multiples, Austin Associates considered various factors, including: (1) the
Company's underlying financial condition and performance in relation to the
selected organizations; and (2) the nature of the geographic market area served
by the Company in relation to the selected organizations. After considering
these and other factors, Austin Associates selected price-to-tangible book and
price-to-earnings multiples of 200 percent and 15.0, respectively, to develop
indications of value for the Company. Pursuant to this analysis, a per share
value based on price to tangible book value equaled $23.79, and a per share
value based on price to earnings equaled $25.63.
Sale of Control Transactions. Under this approach, Austin Associates
analyzed sale of control acquisition transactions for peer groups similar to
those used with respect to minority share transactions. The first peer group
includes Midwestern bank sale transactions with seller's assets between $200
million and $750 with year-to-date ROAE greater than 10 percent. The second peer
group includes bank sale transactions nationally with seller's assets between
$250 million and $600 million with year-to-date ROAE greater than 10 percent and
tangible equity to tangible assets between 6.0 and 10.0 percent. The following
chart details the median financial and deal statistics for the two selective
transaction groups and for the Company:
22
PREMIUM
TOTAL TG EQUITY/ YTD YTD PRICE/ PRICE/LTM OVER
PEER GROUP ASSETS TG ASSETS ROAA ROAE TG BOOK CORE EPS DEPOSITS
- ----------- -------- ---------- ---- ----- ------- --------- --------
Midwest $236,344 7.47% 0.98% 12.43% 247% 19.7 17.4%
National $456,550 7.42% 0.92% 11.96% 293% 26.1 21.5%
COMPANY (1) $362,488 8.75% 1.27% 14.96% 275%(2) 20.0(2) 20.0%(2)
(1) Based on core net income of $4,556,000.
(2) Selected multiples.
Based on our analysis of these transactions, Austin Associates selected a
price-to-tangible book ratio of 275 percent, a price-to-earnings multiple of
20.0, and a premium over core deposits of 20.0 percent to establish indications
of value for the Company under this guideline transactions methodology.
Austin Associates analyzed all control premium information for bank sale
transactions since 2000. The average and median prices paid in these
transactions over the pre-announced stock trading levels of the target companies
approximated between 26 percent and 56 percent. For 2004, the average
three-month control premium measured 32.4 percent, while the average three-month
premium for the 1st quarter of 2005 measured 27.9 percent. Between 2000 and
2004, the median three-month control premium averaged 43.7 percent. Based on
this data, Austin Associates selected a 40.0 percent control premium, resulting
in an implied minority share discount of 28.6 percent. This minority discount
has been applied to the selected control level multiples to establish
indications of value on a minority interest level.
Pursuant to this analysis, a per share value based on price to tangible
book value equaled $23.36, a per share value based on price to earnings equaled
$24.41, and a per share value based on premium over core deposits equaled
$21.77.
MARKET PRICE. The final valuation method considered is the market price of
the Company's stock as reflected in actual trading prices since January 1, 2005.
Several transactions involving the Company's stock were reported from January 1
through April 15, 2005. The prices of these transactions ranged from $19.00 to
$24.00 per share, with the last transactions with a known price occuring at
$19.00 on April 11, 2005. Approximately 23,000 shares exchanged hands in 2005,
representing less than 1.0 percent of the outstanding shares. Because the
Company's stock trades infrequently and is not listed on any exchange or quoted
over-the-counter, Austin Associates applied less weight to the market price in
determining the value of the Company's Common Shares.
FAIR MARKET VALUE. Given the nature of the going private transaction,
Austin Associates determined that the appropriate standard of value was the
"fair market value" of a minority interest in the Company. In certain
transactions and valuations, a marketability discount would be applied to
determine fair market value. However, in a "cash-out" transaction as is being
proposed, Austin Associates has determined that a marketability discount should
not be applied.
23
A summary of the valuation findings discussed previously is provided below:
Discounted Cash Flow Value $20.78
Net Asset Value $13.95
Minority Share Comparable Value
Price to Tangible Book Value $23.79
Price to Earnings Value $25.63
Sale of Control Value w/ Minority Share Discount
Price to Tangible Book Value $23.36
Price to Earnings Value $24.41
Premium to Core Deposits $21.77
Market Price $19.00 - $24.00
FAIR MARKET VALUE DETERMINATION $23.00
Having considered each of the valuation methods discussed above, Austin
Associates concluded the fair market value of one share of the Company's Common
Stock to be $23.00.
PREFERRED STOCK. In connection with the Merger, certain shareholders owning
more than 100 shares, but less than 1,500 shares are being offered shares of
Series A Preferred Stock in lieu of the $23.00 cash offer. The terms of the
Series A Preferred Stock were determined by the Board of Directors of the
Company after consultation with Austin Associates and legal counsel, and include
the following:
- Principal Amount of $23.00 per share;
- Mandatory redemption at the Principal Amount in twenty years;
- Callable after five years at Principal Amount plus 5%, or at any time
at the Principal Amount if the Company has executed any agreement
intended to result in a change in control;
- Annual dividends equal to the cash dividends paid to common
shareholders;
- Liquidation and dividend preferences over the Common Shares; and,
- No voting rights.
In rendering its opinion of the preferred stock terms, Austin Associates
considered that the Company will be able to count the preferred stock as Tier 2
capital for regulatory purposes for a period of at least fifteen years. Austin
Associates has included in its fairness opinion letter that the terms of the
preferred stock are deemed to be fair to the Company and to those shareholders
electing to exchange their Common Shares for preferred stock, in lieu of the
$23.00 cash offer.
UPDATED FINANCIAL STATEMENTS. Austin Associates reviewed the Company's June
30, 2005 regulatory financial statements, as well as, Company's June 30, 2005
10-Q filing. Among other items, Austin Associates noted the following comparison
of financial performance.
($000) MARCH 31, 2005 JUNE 30, 2005 12/31/05 BUDGET
------ -------------- ------------- ---------------
Total Assets $362,373 $360,416 $378,270
Net Income $ 1,107 $ 2,341 $ 4,742
Earnings Per Share $ .42 $ .88 $ 1.78
24
Austin Associates noted that the Company's performance was in-line with first
quarter 2005 performance and consistent with the Company's 2005 budget
forecasts. Austin Associates did not note any material changes in financial
condition since the valuation date of March 31, 2005.
PRO FORMA ANALYSIS. In rendering its opinion, Austin Associates also considered
the pro forma impact of the Merger to the Company. Among other measurements,
Austin Associates considered the pro forma impact to earnings per share ("EPS"),
book value per share, return on average equity ("ROAE"), and regulatory capital
ratios. Assuming all shareholders elect the $23.00 in cash, in lieu of the
preferred stock, Austin Associates concluded that the Merger would have a
positive impact to EPS of approximately 3 percent. Book value per share would be
diluted by approximately 6 percent. ROAE would be enhanced by approximately 161
basis points and consolidated capital ratios would remain well in excess of the
well-capitalized regulatory guidelines for capital adequacy. Assuming all
shareholders owning more than 100 but fewer than 1,500 shares of Common Stock as
of the Record Date elect to receive shares of Series A Preferred Stock in lieu
of cash, Austin Associates concluded that the Merger would have a positive
impact to EPS of approximately 4 percent. Book value per share would be diluted
by approximately 6 percent. ROAE would be enhanced by approximately 179 basis
points and consolidated capital ratios would remain well in excess of the
well-capitalized regulatory guidelines for capital adequacy.
QUALIFYING STATEMENTS REGARDING FAIRNESS OPINION. In rendering its opinion,
Austin Associates relied upon and assumed, without independent verification,
that the financial and other information provided to Austin Associates by the
management of the Company, including the financial projections, was accurate,
complete and reasonably prepared and reflects the best currently available
estimates of the financial results and condition of the Company; that no
material changes have occurred in the information reviewed between the date the
information was provided and the date of the Austin Associates opinion; and that
there were no facts or information regarding the Company that would cause the
information supplied by Austin Associates to be incomplete or misleading in any
material respect. Austin Associates did not independently verify the accuracy or
completeness of the information supplied to it with respect to the Company, and
does not assume responsibility for it. Austin Associates also assumed that the
transaction will be consummated in all material respects as described in the
Merger Agreement. Austin Associates did not make any independent appraisal of
the specific properties or assets of the Company.
AUSTIN WAS NOT ASKED TO OPINE AND DOES NOT EXPRESS ANY OPINION AS TO: (i)
THE TAX OR LEGAL CONSEQUENCES OF THE MERGER; (ii) THE REALIZABLE VALUE OF THE
COMPANY'S COMMON STOCK OR THE PRICES AT WHICH THE COMPANY'S COMMON STOCK MAY
TRADE; AND (iii) THE FAIRNESS OF ANY ASPECT OF THE TRANSACTION NOT EXPRESSLY
ADDRESSED IN THE FAIRNESS OPINION.
THE AUSTIN OPINION DOES NOT ADDRESS THE BOARD'S UNDERLYING BUSINESS
DECISION TO EFFECT THE MERGER OR THE UNDERLYING BUSINESS DECISION TO ENDORSE THE
MERGER, NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER
THE SHAREHOLDER SHOULD VOTE FOR OR AGAINST THE TRANSACTION.
25
The summary set forth above describes the material points of more detailed
analyses performed by Austin Associates in arriving at its fairness opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis, and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Austin Associates made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, Austin
Associates believes that its analyses and summary set forth herein must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses and factors, or portions of this summary, could create
an incomplete and/or inaccurate view of the processes underlying the analyses
set forth in Austin Associates' fairness opinion. In its analyses, Austin
Associates made numerous assumptions with respect to the Company, the
transaction, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the respective entities. The estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by such analyses.
No company or merger utilized in Austin Associates' analyses was identical
to the Company. Accordingly, such analyses are not based solely on arithmetic
calculations; rather, they involve complex considerations and judgments
concerning differences in financial and operating characteristics of the
relevant companies, the timing of the relevant transactions and prospective
buyer interests (in the case of acquisition transactions analysis), as well as
other factors that could affect the public trading markets of companies to which
the Company is being compared.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Based on the factors described above and the considerations set forth
immediately below, the Board of Directors of Merchants Bancorp has determined
that the Merger proposal is in the best interests of, and fair to, the
shareholders of Merchants Bancorp, Inc. (including the non-affiliated
shareholders) and that both the Series A Preferred Stock and the per share Cash
Consideration are fair. 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 Merchants Bancorp 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 Board retained and received advice from an
independent financial advisor, Austin Associates, in determining the
fairness of the per share Cash Consideration and the Series A
Preferred Shares;
- the fact that the Board retained and received advice from independent
legal counsel in evaluating the terms of the Merger Agreement; and
26
- the opinion of Austin Associates, dated August 24, 2005, that the Cash
Consideration, shares of Series A Preferred Stock, or some combination
thereof, as the case may be, to be received by record holders of fewer
than 1,500 shares pursuant to the Merger Agreement is fair to all
shareholders of Merchants Bancorp, Inc. from a financial point of
view.
POSITIVE FACTORS FOR SHAREHOLDERS WHO RECEIVE CASH CONSIDERATION 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 Consideration (including non-affiliated shareholders) included:
- the fact that the Cash Consideration is all cash provides certainty of
value to, and immediate liquidity for, these shareholders;
- the fact that the per share Cash Consideration represents a 65%
premium over the December 31, 2004 net asset value per share of
$13.95; and
- the fact that no brokerage or other transaction costs are to be
incurred by the record holders receiving cash in the Merger. (Please
note, however, that in the event a record holder receiving cash in the
Merger actually holds such shares for the benefit of another (or
others), the Company cannot guarantee the absence of transaction costs
with respect to such beneficial owners.)
POSITIVE FACTORS FOR SHAREHOLDERS WHO RECEIVE SERIES A PREFERRED SHARES 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 Series A Preferred Shares in the Merger (including
non-affiliated shareholders) included:
- the fact that holders of Series A Preferred Shares will have a
preference over holders of Common Shares in the distribution of any
dividend by the Company;
- the fact that holders of Series A Preferred Shares will receive, on a
per share basis, dividends in the same amount as those received by
holders of the Company's Common Stock;
- the fact that holders of Series A Preferred Shares will have a
preference over holders of Common Stock upon any liquidation by the
Company;
- the fact that holders of Series A Preferred Shares are entitled to
receive the Principal Amount for each such share held upon the
expiration of the term of such shares, which term shall end 20 years
following the date of issuance; and
27
- the fact that holders of Series A Preferred Shares will receive a
premium of 5% over the Principal Amount in the event the Company calls
such shares any time prior to the end of the term, unless the call
results from the entry by the Company into any agreement which, if
completed, would result in a change in control of the Company.
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 Merchants Bancorp;
- the fact that such shareholders will continue to possess sole voting
control over the Company, and, because the number of outstanding
shares of Common Stock is being reduced as a result of the Merger
transaction, the fact that such voting control will increase;
- the fact that such shareholders will have dissenters' rights to
appraisal in connection with the proposed Merger transaction to the
same extent as any shareholder owning fewer than 1,500 Common Shares;
and
- the fact that the remaining shareholders would realize the potential
benefits of termination of registration of the Common Stock,
including, reduced expenses of Merchants Bancorp 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 Merchants
Bancorp have interests in the Merger or have relationships that
present actual or potential, or the appearance of actual or potential,
conflicts of interest in connection with the Merger, including the
fact that the directors and executive officers will retain their
shares in the Merger and their ownership interests will increase
modestly; and
- the fact that 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 CONSIDERATION 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 Consideration in the Merger included:
28
- the fact that such shareholders would not have the opportunity to
participate in any future growth and earnings of Merchants Bancorp;
- the fact that such shareholders may 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 SHAREHOLDERS RECEIVING SERIES A PREFERRED SHARES 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 will receive shares of Series A Preferred Stock in the Merger,
including all such non-affiliated shareholders, included:
- the fact that such shareholders would not have the opportunity to
realize an appreciation in the principal amount of their investment in
Series A Preferred Stock;
- the fact that such shareholders would no longer be able to vote on
matters subject to the approval of holders of Common Stock;
- the fact that these shares would contain certain limits on transfer;
and
- the fact that the Board is not seeking the approval of a majority of
these shareholders eligible to receive Series A Preferred Shares 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 Merchants Bancorp;
- the fact that the liquidity of our Common Stock will likely be reduced
following the Merger transaction because of the reduction the number
of our record shareholders of Common Stock and the fact that such
stock is tradable only in privately effected transaction;
- the fact that holders of Series A Preferred Shares will have a
preference to holders of Common Shares in the distribution of any
dividends by, and upon liquidation of, the Company;
- the fact that after the completion of the Merger, Merchants Bancorp
will not be subject to the periodic reporting, proxy rules and Section
16 of the 1934 Act.
While the Board considered the negative factors described above, it
concluded that the benefits of the positive factors outweighed the detriments of
the negative factors and that the proposed transaction was fair and in the best
interest of Merchants Bancorp's shareholders. In connection with its
determination, the Board did not consider, and did not request that Austin
Associates evaluate Merchants Bancorp's liquidation value. The Board did not
consider Merchants Bancorp's liquidation value to be a relevant measure of
valuation given the close approximation of net asset value to the Company's
likely liquidation value. Additionally, the $23.00 price per share offered in
the Merger provides a 65% premium over the net asset value per share of $13.95
at December 31, 2004. While the Board believes that the liquidation value of the
company may exceed the Company's net asset value, the significant disparity
between the $23.00 Cash Consideration price and the company's net asset value
made it unnecessary to evaluate Merchants Bancorp's liquidation value. Because
of the analysis of the Company's net asset value and the significant disparity
between it and the Cash Consideration, the Board believes the Company's
liquidation value would be less than the $23.00 Cash Consideration price. It was
the determination of the Board, based on the Company's historically strong
operating performance and the goodwill that it has established in connection
with the operation
29
of its subsidiary bank, that Merchants Bancorp, Inc. is more valuable as a going
concern than its per share net asset value.
The Board also did not consider any firm offers by third parties because
there were none. Neither management nor the Board made any efforts to identify a
buyer because the Board determined that consideration thereof was inappropriate
in the context of a transaction that would not be intended to result in a change
of control of Merchants Bancorp. The Board believed that it would be
inappropriate to solicit such offers where no change of control was
contemplated. The Board did review information provided to it by Austin
Associates which, among other things, included information concerning prices
paid in acquisition transactions. The Board does not believe that its decision
not to invite third party offers impacted its fairness determination. Likewise,
as discussed previously in "Special Factors - Background of the Merger
Proposal," the Board did not consider any alternatives to a going private
transaction since only the going private transaction would result in Merchants
Bancorp and the Bank continuing to conduct their operations in substantially the
same manner as they currently conduct their operations, only without the costs
associated with being a "public" company. See "Special Factors -- Operations of
the Bank Following the Merger" and " - Background of the Merger Proposal." The
Board believes that its conclusions with respect to the fairness of the
transaction as set forth in "Special Factors - Financial Fairness" and this
section are not altered by the fact that it did not consider any alternatives to
a going private transaction.
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 will likely increase SEC-related compliance expenses dramatically beginning
with the Company's 2006 reporting year.
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 Merchants Bancorp or the
Bank for purposes of negotiating the terms of the Merger transaction or
preparing a report on the fairness of the transaction. Nor did the Board
structure the transaction to require the approval of at least a majority of
unaffiliated security holders. Shareholders who will receive either cash or
Preferred Shares in the Merger represent less than 5.7% of the Common Stock. The
Merger requires approval by shareholders holding a majority of the outstanding
stock. Directors and officers as a group own 24.13% of the outstanding Common
Stock of the Company. Even though the shares held by insiders represent a large
percentage of votes required to approve the transaction, and a large percentage
of shareholders will be receiving cash in the Merger, the Board concluded that
having an unaffiliated representative to act solely on behalf of shareholders
who are not directors or officers of Merchants Bancorp and/or requiring a
majority of unaffiliated shareholders to approve the transaction were
unnecessary for this transaction.
Several transactions involving Company's stock were reported from January 1
through April 15, 2005. The prices of these transactions ranged from $19.00 to
$24.00 per share, with the last transactions with a known price occuring at
$19.00 on April 11, 2005. However, because the Company's stock trades
infrequently and is not listed on any exchange or quoted over-the-counter, the
Board did not apply much weight to recent market prices in making its
recommendation. Rather, the Board relied on the valuation report of its
investment banker, Austin Associates, as to the fair value of the company's
Common Stock as a result of that firm's substantial
30
experience and expertise in the valuation of banking companies similar to
Merchants Bancorp. The Board believes its reliance on the valuation of its
investment banker is preferable to reliance on any particular potentially
short-term movement in a stock's price, as the market for community bank stocks,
like the market generally, may be subject to periods of substantial volatility.
The Board also considered the fact that no brokerage fees would be incurred by
record holders receiving cash in the going private transaction.
Likewise, the Board did not consider establishing a committee of
independent directors to negotiate on behalf of the unaffiliated security
holders. While none of the eight (8) members of Merchants Bancorp's Board of
Directors owns fewer that 1,500 shares, only one such director is an officer of
Merchants Bancorp, Inc. In view of the overall independent composition of the
Board, which unanimously approved the Merger transaction, it was not deemed
necessary to establish a committee of independent directors to negotiate on
behalf of the unaffiliated security holders. The Board of Directors believes
that its predominantly independent composition is sufficient for it to
deliberate on this matter on behalf of all shareholders of Merchants Bancorp.
Nor has the Board structured the transaction to allow access by unaffiliated
shareholders to the corporate files of the Company.
The foregoing discussion of the factors considered by the Board of
Directors is not intended to be exhaustive. In view of the variety of factors
considered in connection with their evaluation of the Merger proposal, the Board
of Directors did not find it practicable to, and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination. The Board considered all the factors as a whole in reaching its
determination. In addition, individual members of the Board of Directors may
have given different weights to different factors.
The Board, based upon the factors outlined above, believes that the Merger
proposal is fair to all shareholders of Merchants Bancorp, including all
non-affiliated shareholders.
PURPOSES AND REASONS OF MBI MERGER SUB, INC. FOR THE MERGER PROPOSAL
MBI Merger Sub was organized solely for the purpose of facilitating the
Merger transaction. As a result MBI Merger Sub's purpose and reasons for
engaging in the Merger transaction are the same as those set forth in
"--Purposes of and reasons for the Merger proposal."
POSITION OF MBI MERGER SUB, INC. AS TO THE FAIRNESS OF THE MERGER
MBI Merger Sub has considered the analyses and findings of the Merchants
Bancorp Board of Directors with respect to the fairness of the Merger proposal
to the Merchants Bancorp shareholders, including all non-affiliated Merchants
Bancorp shareholders. As of the date hereof, MBI Merger Sub adopts the analyses
and findings of the Merchants Bancorp Board of Directors with respect to the
Merger, and believes that the Merger is fair to the Merchants Bancorp
shareholders, including the non-affiliated shareholders of Merchants Bancorp.
See "--Recommendation of our Board of Directors." The Merger Agreement has been
approved by MBI Merger Sub's Board of directors and Merchants Bancorp, as the
sole shareholder of MBI Merger Sub.
31
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The officers and directors of Merchants Bancorp 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 Merchants Bancorp. See "-- Financial
fairness." However, all of the directors and the executive officers own in
excess of 1,500 shares and will, therefore, retain their shares in the Merger,
unlike many other shareholders who will be required to relinquish their interest
in the Common Stock of Merchants Bancorp as a result of the Merger.
Additionally, 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 senior executive officers will increase from approximately 24.13%
to approximately 25.57%. See "Voting Securities and Principal Holders Thereof."
Except as set forth in the immediately preceding paragraph, the executive
officers and directors of Merchants Bancorp, Inc. are not aware of any other
benefits or additional compensation in connection with this transaction that
will not be shared by the company's unaffiliated shareholders generally. The
proposed transaction does not constitute a "change of control" for purposes of
any existing employment agreement with the executive officers of Merchants
Bancorp. Merchants Bancorp has not and does not anticipate entering into any new
employment or other compensation agreements with its executive officers as a
result of the proposed transaction. We understand that all of the directors of
Merchants Bancorp 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.
PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
During the past two years, neither the Company nor MBI Merger Sub has
engaged in significant transactions with each other or with any of their
affiliates, executive officers or directors. Nor has either entity engaged in
negotiations regarding such types of transactions with the other. Except with
respect to the present transaction, there are no agreements between the Company,
MBI Merger Sub or the Company's executive officers and directors and any other
person with respect to any shares of Common Stock.
Neither the Company nor MBI Merger Sub has made an underwritten public
offering of securities for cash during the past three years that was either
registered under the Securities Act of 1933 or was exempt from registration
under Regulation A thereof.
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, MBI Merger
32
Sub will be merged with and into Merchants Bancorp, and Merchants Bancorp will
continue as the surviving company in the Merger. The Merger will cause a
reduction in the number of Merchants Bancorp's record shareholders from
approximately 831 to approximately 226. Further, the Merger will allow the
Company to terminate the registration of its Common Stock under Section 12(g) of
the Securities Exchange Act of 1934, which will permit the Company to cease
submitting current and periodic reports with the Securities and Exchange
Commission and eliminate the necessity for the Company to comply with the proxy
solicitation requirements of Regulation 14A under the Securities Exchange Act of
1934.
The Company will retire shares of its Common Stock acquired for cash or
Series A Preferred pursuant to the Merger. These retired shares will constitute
authorized but unissued Common Stock of the Company. Shareholders receiving cash
pursuant to the Merger will cease to participate in future earnings or growth,
if any, of Merchants Bancorp, but they also no longer bear the risk of any
decreases in the Company's value. Due to its fixed Principal Amount,
shareholders receiving Series A Preferred Stock will also cease to benefit from
any increases in the value of the Company. Their exposure to decreases in
Company value will be minimized but not eliminated.
Distributions by the surviving Merchants Bancorp 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 holders of Merchants
Bancorp common and Series A Preferred Shares but not to the shareholders who
receive cash in the Merger. Because Merchants Bancorp will absorb all
transaction costs related to the transfer of shares on its record books, the
Merger will also provide shareholders of record who receive cash in the Merger a
cost-effective way to cash out their investments. However, if you hold your
shares in street name, you should talk to your broker, custodian or agent to
determine the extent of any transaction costs they may charge in connection with
the proposed transaction.
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 Merchants Bancorp. This applies to both
holders of Common Shares and holders of the newly issued Series A Preferred
Shares. While financial information regarding the Company will cease to be
available as a result of filings made with the SEC, the Company and the Bank
will continue to file period financial reports to the Board of Governors of the
Federal Reserve and the Office of the Comptroller of the Currency. These reports
can be viewed at the following web address:
http://132.200.33.161/nicSearch/servlet/NICServlet?REQ=SVGL&MODE=SEARCH
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".
OPERATIONS OF THE BANK FOLLOWING THE MERGER
Following the Merger, Merchants Bancorp and the Bank will continue to
conduct their existing operations in the same manner as now conducted. The
executive officers and directors
33
immediately prior to the Merger will be the executive officers and directors of
Merchants Bancorp immediately after the Merger. Merchants Bancorp 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 the Company nor the Bank will be affected by the Merger.
Merchants Bancorp and the Bank will continue to be regulated by the same
agencies that regulated each entity before the Merger.
SOURCE OF FUNDS AND EXPENSES
Assuming the repurchase of all shares held by holders of fewer than 1,500
Common Shares, the Company will repurchase approximately 152,560 of its Common
Shares. This would result in an aggregate purchase price of approximately $3.5
million. Importantly, this also assumes no shareholders exercise dissenters'
rights of appraisal in connection with the transaction as otherwise discussed
herein. The Board of Directors has reserved the express right to re-evaluate the
desirability of completing this transaction in the event the Company would be
required to acquire for cash more than 160,000 of its issued and outstanding
Common Shares.
To meet its expected repurchase obligations, the Company intends to secure
a line of credit from First Tennessee Bank in the amount of $4.0 million, which
the Company believes will be sufficient to acquire all of the shares of Common
Stock in the Merger, including any shares which may be tendered by dissenting
shareholders. The terms of the loan commitment have not been finalized, but
customary provisions generally provide for: (1) a rate of interest tied to the
prime rate as provided in the Wall Street Journal; (2) general covenants on the
part of the Company regarding its asset quality, return on assets and equity
capital; (3) repayment terms requiring interest to be paid on a quarterly basis
with the principal amount due on maturity; and (4) a security interest in a
certain percentage of the common stock of the Bank. The Company expects regular
dividends from the Bank to be sufficient on an annual basis to service this debt
arrangement and meet the Company's anticipated dividend payouts to shareholders.
In the event that the purchase price exceeds the $4.0 million line of credit,
which could occur if a significant number of shareholders owning in excess of
1,500 Common Shares exercise dissenters' rights of appraisal pursuant to Ohio
Revised Code Section 1701.85, the Bank stands ready to declare and pay a special
dividend as necessary to cover the shortfall. However, the Board of Directors
has reserved the express right to re-evaluate the desirability of completing
this transaction in the event the Company would be required to acquire more than
160,000 of its Common Shares for cash, either pursuant to the terms of the
Merger or pursuant to dissenters' rights of appraisal.
Following the consummation of the transaction, the Company will monitor its
debt obligations under the line of credit and will consider refinancing line of
credit when terms beneficial to the Company are available. In this vein, the
Company will consider refinancing this obligation through the issuance of Trust
preferred securities ("TRUPS"). TRUPS are hybrid securities which are considered
equity for regulatory purposes and debt for tax purposes. TRUPS also qualify as
regulatory capital for the issuing holding company, but are accounted for on the
holding company's balance sheet as long-term debt obligations.
34
Merchants Bancorp will pay all of the expenses related to the Merger. We
estimate that these expenses will be as follows:
SEC Filing Fees $ 700
Legal Fees $ 75,000
Accounting Fees $ 15,000
Financial Advisory / Valuation Fees $ 25,000
Printing Costs $ 2,500
Transfer Agent Fees $ 2,500
Other $ 4,300
--------
Total $125,000
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 the fourth quarter of 2005 so
that we will terminate our registration with the SEC for the 2005 reporting
period. However, we cannot guarantee that the Merger will be effective by the
end of the fourth quarter of 2005.
The Effective Time of the Merger will occur at the time (i) of the filing
with and acceptance for recording of the Certificate of Merger with the Ohio
Department of State, or (ii) at such time as we specify in the Certificate of
Merger. 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. We cannot assure you that all conditions to the
Merger contained in the Merger Agreement will be satisfied. See "-- Conditions
to Consummation of the Merger" below.
ELECTION TO RECEIVE CASH OR SERIES A PREFERRED SHARES
Shareholders owning more than 100 but fewer than 1,500 Common Shares as of
the Record Date (the "Electing Holders") have the choice of electing to receive:
(1) the Cash Consideration for each share of Common Stock Held; (2) one share of
Series A Preferred Stock for each share of Common Stock held; or (3) a
combination of Cash Consideration and Series A Preferred Stock. The proxy card
provided with this proxy statement includes a place for these shareholders to
make the appropriate election. Electing Holders must indicate their election in
the designated area provided on the proxy card. If you elect to receive a
combination of Cash Consideration and Series A Preferred Stock, you will need to
indicate on your proxy card the
35
number of whole Common Shares as to which you elect to receive the Cash
Consideration and the whole number of Common Shares as to which you elect to
receive Series A Preferred Stock. ANY ELECTING HOLDER THAT FAILS TO MAKE AN
ELECTION ON HIS OR HER PROXY CARD WILL BE DEEMED TO HAVE MADE AN ELECTION TO
RECEIVE THE CASH CONSIDERATION.
CONVERSION AND EXCHANGE OF STOCK CERTIFICATES
At the Effective Time of the Merger, all shares of Common Stock owned by
each shareholder who held 100 or fewer Common Shares as of the Record Date will
automatically be converted into the right to receive the per share Cash
Consideration. The shares of Common Stock owned by each record holder who held
more than 100 but fewer than 1,500 Common Shares as of the Record Date will
automatically be converted into the right to receive the Cash Consideration,
shares of Series A Preferred Stock, or some combination thereof, in accordance
with their election. As soon as practicable after the Merger is completed, each
shareholder who held fewer than 1,500 Common Shares as of the Record Date will
receive a letter of transmittal and instructions for surrendering their stock
certificates in exchange for either the Cash Consideration, shares of Series A
Preferred Stock, or some combination thereof, as the case may be. When these
shareholders deliver their stock certificates to our designated agent along with
the letter of transmittal and any other required documents, their stock
certificates will be retired, and they will be issued a check in the amount of
their respective aggregate Cash Consideration, a new stock certificate
representing the appropriate number of Series A Preferred Shares, or the
appropriate combination thereof.
No service or brokerage charges will be payable by shareholders in
connection with the exchange of their Common Shares. All such expenses will be
borne by Merchants Bancorp. 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 either cash or shares of
Series A Preferred Stock as a result of the Merger, regardless of whether the
shareholder has surrendered his or her Common Stock certificates to us at the
time the distribution is declared. Shareholders eligible to elect to receive
shares of Series A Preferred Stock, and who have made such an election, will be
entitled to all distributions that are declared on Series A Preferred Stock
after the Merger is completed, but no such shareholder will receive any such
distribution until his or her Common Shares have been surrendered as described
in the preceding paragraph. All shareholders 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 Merchants Bancorp and MBI Merger Sub have
approved the Merger Agreement and authorized the consummation of 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 Merchants Bancorp;
36
- the approval of the amendment to the Company's Articles of
Incorporation by the shareholders of Merchants Bancorp authorizing the
Series A Preferred Stock;
- the approval of the Merger and the Merger Agreement by Merchants
Bancorp, Inc. as the sole shareholder of MBI Merger Sub;
- the filing of Certificate of Amendment and Certificate of Merger with
the Ohio Department of State; 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 MBI Merger Sub, generally without
the necessity of further action by you. No specific amendment provision with
respect to the Merger Agreement is 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. Your approval would be 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 Merchants Bancorp's articles of incorporation
not otherwise discussed in this proxy statement; or
- changes any of the terms of the Merger Agreement, if the change would
adversely affect your rights as a shareholder.
The Merger Agreement may be terminated by the mutual consent in writing of
Merchants Bancorp and MBI Merger Sub at any time before the filing of
Certificate of Merger with the Ohio Department of State. At this time, the
parties have no intention of terminating the Merger Agreement. However, the
Board of Directors has reserved the express right to re-evaluate the
desirability of completing this transaction in the event the Company would be
required to acquire for cash more than 160,000 of its issued and outstanding
Common Shares, either pursuant to the express terms of the Merger or pursuant to
dissenters' rights of appraisal as otherwise discussed herein.
REGULATORY REQUIREMENTS
Except for the filing of the Certificate of Merger with the Department of
State of the State of Ohio upon the approval of the Merger by the Merchants
Bancorp shareholders, and compliance with federal and state securities laws, we
are not aware of any material United States federal or state or
37
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 Ohio law, shareholders of the Company have the right to dissent from
the Merger and receive the fair cash value of their shares of the Company Common
Stock. Shareholders who elect to exercise their dissenters' rights must comply
with the provisions of Section 1701.85 of the Ohio General Corporation Law, a
copy of which is attached as Exhibit C.
Below are the steps which you must take if you are shareholder and you wish
to exercise dissenters' rights with respect to the Merger. The description is
not complete and you should read Section 1701.85 of the Ohio General Corporation
Law. Failure to take any one of the required steps may result in termination of
the shareholder's dissenters' rights. If you are a shareholder considering
dissenting, you should consult your own legal advisor. In addition, the Board of
Directors has reserved the right to re-evaluate the form and structure of this
transaction in the event the Company would be required to acquire for cash more
than 160,000 of its issued and outstanding Common Shares, either pursuant to the
terms of the Merger or pursuant to dissenters' rights of appraisal as discussed
herein.
1. Must be a shareholder of record. To be entitled to dissenters' rights as a
shareholder, you must be the record holder of the dissenting shares as of
the Record Date. If you have a beneficial interest in shares of the
Company's Common Stock that are held of record in the name of another
person, you must act promptly to cause the shareholder of record to follow
the steps described below.
2. Do not vote in favor of the Merger. You must not vote shares as to which
you seek fair cash value in favor of the approval and adoption of the
Agreement and Plan of Merger and the Merger contemplated by the Agreement
and Plan of Merger at the special shareholders meeting. This requirement
will be satisfied:
- if a properly executed proxy is submitted with instructions to
vote "against" the Merger or to "abstain" from this vote;
- if no proxy is returned and no vote is cast at the special
meeting in favor of the Merger; or
- if you revoke a proxy and later "abstain" from or vote "against"
the Merger.
A vote "FOR" the Merger is a waiver of dissenters' rights. A proxy that is
returned signed but on which no voting preference is indicated will be
voted in favor of the Merger and will constitute a waiver of dissenters'
rights. Failure to vote does not constitute a waiver of dissenters' rights.
3. Filing a written demand. You must serve a written demand for the fair cash
value of the dissenting shares upon the Company on or before the tenth day
after the shareholder vote approving the Agreement and Plan of Merger and
the Merger. The Company will not inform shareholders of the expiration of
the ten-day period, and therefore, you are advised to retain this document.
The required written demand must specify your name and address, the number
of dissenting shares
38
held of record on the Record Date of the meeting and the amount claimed as
the fair cash value of the dissenting shares. Voting against the Merger is
not a written demand as required by Section 1701.85 of the Ohio General
Corporation Law.
4. Delivery of certificates for placement of a legend. If requested by the
Company, you must submit your certificates for dissenting shares to the
Company within 15 days after the Company sends its request for endorsement
on the certificates by the Company of a legend that a demand for fair cash
value has been made. The certificates will be returned promptly to you by
the Company.
5. Petitions to be filed in court. If you and the Company cannot agree on the
fair cash value of the dissenting shares, you must, within three months
after service of your demand for fair cash value, file a complaint in the
Court of Common Pleas of Highland County, Ohio, for a determination of the
fair cash value of the dissenting shares. The Company is also permitted to
file a complaint. The court, if it determines that you are entitled, will
order that you be paid the fair cash value per share. The costs of the
proceeding, including reasonable compensation to the appraisers, will be
assessed as the court considers equitable. "Fair cash value" is the amount
that a willing seller, under no compulsion to sell, would be willing to
accept, and that a willing buyer, under no compulsion to purchase, would be
willing to pay. In no event will the fair cash value be in excess of the
amount specified in the dissenting shareholder's demand. Fair cash value is
determined as of the day before each respective meeting to approve the
Agreement and Plan of Merger, as amended, and the Merger. The amount of the
fair cash value excludes any appreciation or depreciation in market value
of your shares resulting from the Merger. The fair cash value of your
shares may be higher, the same or lower than the market value of the Common
Shares on the date of the Merger.
Your right to be paid the fair cash value of the dissenting shares will
terminate if:
- for any reason the Merger does not become effective;
- you fail to make a timely written demand on the Company;
- you do not, upon request by the Company, timely surrender
certificates for an endorsement of a legend that a demand for the
fair cash value of the dissenting shares has been made;
- you withdraw your demand, with the consent of the Board of
Directors of the Company; or
- the Company and you have not come to an agreement as to the fair
cash value of the dissenting shares and you have not filed a
complaint within three months after service of our demand for
fair cash value.
From the time you make your demand, your rights as a shareholder shall be
suspended. If the Company pays cash dividends during the suspension, dissenting
shareholders will be paid any such dividend as a credit upon the fair cash value
of the shares. If the right to receive fair cash value is
39
terminated, all rights with respect to the dissenting shares will be restored to
you. Any distribution that would have been made to you had you not made a demand
will be made at the time of the termination.
To be effective, a demand for fair cash value by a shareholder of the
Company Common Stock must be made by or in the name of the record holder, fully
and correctly, as the shareholder's name appears on his or her share
certificate(s) and cannot be made by the beneficial owner if he or she does not
also hold the shares of record. The beneficial owner must, in such cases, have
the record holder submit the required demand in respect of such shares. If you
hold your shares of Company Common Stock in a brokerage account or in other
nominee form and you wish to exercise dissenters' rights, you should consult
with your broker or such other nominee to determine the appropriate procedures
for the making of a demand for fair cash value by such nominee. A record owner,
such as a broker, who holds shares as a nominee for others, may exercise his or
her right of appraisal with respect to the shares held for one or more
beneficial owners, while not exercising this right for other beneficial owners.
In such case, the written demand should state the number of shares as to which
appraisal is sought. Where no number of shares is expressly mentioned, the
demand will be presumed to cover all shares held in the name of such record
owner.
The foregoing constitutes a brief description of the rights of dissenting
shareholders and does not purport to be a complete statement of such rights or
the procedures to be followed by shareholders desiring to receive the fair cash
value of their shares. Each shareholder who may desire to receive the value of
his or her shares should consult Section 1701.85 of the Ohio Revised Code and
strictly adhere to all of the provisions thereof. A copy of this section is
appended hereto as Appendix B and this discussion concerning the rights of
dissenting shareholders is qualified in its entirety by reference to that
section.
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.
Merchants Bancorp 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,
Merchants Bancorp 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 does not address all
40
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 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 or pursuant to the exercise of your right to dissent, you should
be treated for federal income tax purposes as having had your shares redeemed by
Merchants Bancorp 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, $23.00 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
Merchants Bancorp 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 Merchants Bancorp, you should recognize capital gain or
loss as a result of the Merger, and the cash distribution should not be treated
as a dividend.
41
TAX CONSEQUENCES TO SHAREHOLDERS WHO RECEIVE SERIES A PREFERRED STOCK FOR THEIR
SHARES.
If you are a shareholder who receives Series A Preferred Stock for your
shares of Common Stock in the Merger, you should be treated for federal tax
purpose as having received stock as part of a tax-free reorganization under
Section 368(a)(1)(E) of the Internal Revenue Code. The basis in the Series A
Preferred stock you received will equal the basis you had in the Common Shares
you exchanged. While it is our conclusion that the above tax consequences are
appropriate under these particular facts and circumstances, given the
increasingly more aggressive posture of the IRS, we cannot guarantee such a
result. Accordingly, you should consult an independent tax advisor as to the tax
consequences of receiving Series A Preferred Stock in exchange for your Common
Shares.
TAX CONSEQUENCES TO MERCHANTS BANCORP, MBI MERGER SUB AND THE BANK.
Neither Merchants Bancorp, MBI Merger Sub 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 Merchants Bancorp 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 Merchants Bancorp
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.
TAX DISCLOSURE
The tax advice herein was not written to be used, and it cannot be used by
any taxpayer, for the purpose of avoiding penalties that may be imposed on any
taxpayer. The tax advice herein was written to support the promotion of the
proposed Merger. You should seek advice based on your particular circumstances
from an independent tax advisor. 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.
42
PRO FORMA EFFECT OF THE MERGER AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
Unaudited consolidated pro forma financial statements giving effect to the
proposed transaction (the "Consolidated Pro Forma Financial Statements") are
attached hereto as Appendix E. These include unaudited consolidated pro forma
balance sheets as of June 30, 2005 (the "Consolidated Pro Forma Balance
Sheets"), and unaudited consolidated pro forma income statements for the fiscal
year ended December 31, 2004 and the six month period ended June 30, 2005 (the
"Consolidated Pro Forma Income Statements"). Pro forma adjustments to the
Consolidated Pro Forma Balance Sheets are computed as if the Merger occurred at
June 30, 2005, while the pro forma adjustments to the Consolidated Pro Forma
Income Statements are computed as if the Merger occurred on January 1, 2004 and
January 1, 2005, respectively.
Given the uncertainty as to which shareholders owning more than 100 but
fewer than 1,500 Common Shares will elect to receive the Cash Consideration and
which will elect to receive Series A Preferred Stock, management has prepared
its Consolidated Pro Forma Balance Sheets and Consolidated Pro Forma Income
Statements using two alternative assumptions. The first alternative assumes that
all shareholders of record who own more than 100 but fewer than 1,500 shares of
record will elect to receive the Cash Consideration in connection with the
Merger. Under this alternative, the Company has assumed that 152,560 shares of
Common Stock will be acquired at the aggregate cash expense of $3,509,000. The
second alternative assumes that all shareholders of the Company who own more
than 100 but fewer than 1,500 shares of record will elect to receive Series A
Preferred Stock in connection with the Merger. Under this alternative, the
Company has assumed that 14,037 shares of Common Stock will be acquired for cash
at the aggregate cost of $323,000. In each case, we have assumed that no
shareholders owning 1,500 or more shares of record will dissent from the
transaction.
In addition to the foregoing assumptions, the Consolidated Pro Forma
Financial Statements also take into account: (1) certain estimated costs and
expenses related to consummating the Merger; (2) certain estimated cost savings
related to going private; and (3) the relative usage of a line of credit in the
amount of $4.0 million to be secured by the Company through First Tennessee Bank
to finance the proposed transaction. No other arrangements related to financing
the proposed transaction were factored into the pro forma calculations. Please
see the Consolidated Pro Forma Financial Statements provided as Appendix E to
this proxy statement for the complete pro forma financial information relating
to this transaction.
TERMINATION OF SECURITIES EXCHANGE ACT REGISTRATION
Merchants Bancorp's Common Stock is currently registered under the
Securities Exchange Act. We will be permitted to terminate our registration if
there are fewer than 300 record holders of outstanding shares of Merchants
Bancorp Common Stock. Upon the completion of the Merger, Merchants Bancorp will
have approximately 226 record holders of its Common Stock, which is currently
registered under Section 12(g) of the Securities Exchange Act of 1934 Act (the
"Act"). We intend to apply for termination of the registration of Merchants
Bancorp's Common Stock under the Act as promptly as possible after the Effective
Time of the Merger. Trades of Merchants Bancorp Common Stock will continue to be
executed only through privately negotiated
43
transactions after the Merger. Merchants Bancorp Common Stock is not currently
traded on any securities exchange, the Over the Counter Bulletin Board or the
Pink Sheets. Following the termination of the registration of the Company's
Common Stock under the Act, such stock will no longer be eligible for quotation
in an automated quotations system operated by any national securities
association. Once the registration of our Common Stock is terminated, it will
not need to be re-registered under Section 12(g) of the Act until such time as
the Company again exceeds 500 record holders of its Common Shares.
Termination of registration under the Act will substantially reduce the
information required to be furnished by the Company 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 the
Company.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
MERGE MBI MERGER SUB, INC. WITH AND INTO MERCHANTS BANCORP, INC.
44
PROPOSAL II - AMENDMENT TO ARTICLES OF INCORPORATION
The Board is proposing to amend the Company's Amended and Restated Articles
of Incorporation to authorize the issuance of 140,000 shares of Series A
Preferred Stock. The newly authorized Series A Preferred Stock will be issued in
connection with the Merger transaction to all shareholders owning between 100
and 1,500 Common Shares as of the Record Date who elect to receive the new
Series A Preferred Shares. The number of Series A Preferred Shares proposed for
authorization represents the maximum number of such shares that the Company will
likely need to issue in the event every shareholder owning more than 100 but
less than 1,500 Common Shares elected to receive shares of Series A Preferred
Stock, as opposed to the Cash Consideration. The Merger transaction is discussed
more thoroughly in Proposal I above. Below is a description of the terms of the
proposed Series A Preferred Stock, followed by a description of the terms of the
Company's Commons Stock.
SERIES A PREFERRED STOCK
Term
The Series A Preferred Stock shall have a term of twenty (20) years from the
date of issuance (the "Term"), upon the maturity of which, each holder of the
Series A Preferred Stock shall receive $23.00 (the "Principal Amount") for each
share so held. The date of issuance shall be deemed to be the date on which the
amendment to the Company's Articles of Incorporation authorizing the Series A
Preferred is filed with the Ohio Secretary of State.
Voting Rights
Except and insofar as may be provided by law, the holders of the Series A
Preferred Stock shall have no voting rights.
Preemptive Rights
The holders of Series A Preferred Stock have no preemptive right to acquire
additional shares of Series A Preferred Stock, or any other series of Preferred
Stock, which may, from time to time, be authorized and issued by the Company.
Dividend Rights
The holders of shares of Series A Preferred Stock shall be entitled to a
preference in the distribution of dividends, when and as declared by the Board
of Directors, and shall receive such dividends prior to the payment of any
dividends to the holders of the Common Stock and in the same per share amount as
paid to holders of Common Stock. The shares of Series A Preferred Stock shall be
non-cumulative with respect to dividends.
Conversion Right
The shares of Series A Preferred Stock shall have no conversion rights.
45
Transfer Rights
A holder of Series A Preferred Stock may transfer the ownsership of his or her
shares, whether by sale, gift, bequest or otherwise, provided that the transfer
encompasses all shares of Series A Preferred Stock held by the shareholder, and
is to one individual or entity which would count as one record holder on the
Company's record of shareholders.
Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, before any distribution or payment is made to the
holders of Common Shares, or any other junior security, the holders of Series A
Preferred Stock (or any other series on parity with the Series A) will be
entitled to be paid in full the Principal Amount per share. To the extent such
payments are made in full to the holders of the Series A Preferred (and any
other shares on parity), the remaining assets and funds of the Corporation will
be distributed among the holders of all junior securities, including Common
Shares, according to their respective rights and preferences. If upon
liquidation, dissolution or winding up, the amount available for payment to the
holders of Series A Preferred (and any other shares on parity therewith) is
insufficient to pay each holder the Principal Amount per share, then the holders
of Series A Preferred Stock and all other shares on a parity with the Series A
Preferred Stock will share ratably in any distribution of assets in proportion
to the full amounts to which they would otherwise be respectively entitled.
Callability
The Series A Preferred Stock shall be callable in the aggregate at the exclusive
option of the Corporation upon: (1) written notice to the holders thereof any
time after the fifth (5th) anniversary following the date of issuance and
otherwise prior to the expriation of the Term; or (2) the execution of any
agreement or other arrangement which would result in a "Change of Control," as
defined under the proposed amendment to Article FOUR of the Articles of
Incorporation. If the shares of Series A Preferred are called in accordance with
item (2), the holders thereof shall be paid the Principal Amount for each share
held. If such shares are called in accordance with item (1), the holders thereof
shall be paid the Principal Amount for each share held, plus a 5% premium
thereon.
Antidilution Adjustments
If the outstanding shares of Common Stock are increased or decreased or changed
into or exchanged for a different number or kind of shares or other securities
of the Corporation or of any other corporation by reason of any merger,
consolidation, liquidation, reclassification, recapitalization, stock split up,
combination of shares, or stock dividend, appropriate adjustment shall be made
by the Board of Directors of the Corporation in the number, and relative terms,
of the shares of Series A Preferred Stock.
46
COMMON STOCK
Voting Rights
The Company's Articles of Incorporation currently authorize 4,500,000
Common Shares, all of which are without par value. As of the Record Date,
2,666,650 of these Common Shares were issued and outstanding. Each Share of
Common Stock of the Company entitles the holder thereof to one (1) vote on all
matters except the election of directors, where shareholders are entitled to
vote their shares cumulatively. A majority of the votes cast at a meeting of the
shareholders will decide every question or matter submitted to the shareholders,
unless as otherwise expressly required by Ohio law or by the Company's Articles
of Incorporation.
Cumulative Voting
As stated above, shareholders are entitled to vote shares cumulatively in
the election of Directors, and Directors of the Company are elected by a
plurality of votes. A shareholder voting cumulatively may cast the number of
shares he owns times the number of Directors to be elected in favor of one
nominee or allocate such votes among the nominees as he or she determines. As
indicated below, the Company's Code of Regulations provides for a classified, or
staggered, Board of Directors. This means that the Board of Directors is divided
into three classes, as nearly equal in number as possible, with the term of
office of one class of Directors expiring each year. One consequence of a
classified Board of Directors is to minimize the impact of cumulative voting in
the election of Directors.
Preemptive Rights
The holders of Common Shares of the Company have no preemptive right to
acquire additional Shares which may, from time to time, be authorized and issued
by the Company. Preemptive rights permit a shareholder, upon the issuance of
additional shares by a corporation, to subscribe to a sufficient number of such
shares so as to maintain his or her relative pro rata ownership interest in the
corporation.
Transfer and Assessability
The transfer of the Common Shares of the Company may not be restricted by
the Company. No transfers of shares, however, shall be entered upon the records
of the Company until the previous certificates, if any, given for the same shall
have been surrendered and canceled. Once Common Shares of the Company have been
issued, they are fully paid and non-assessable.
Dividend Rights
Dividends may be paid on Common Shares of the Company as are declared by
the Board of Directors out of funds legally available therefor under the Ohio
General Corporation Act. Pursuant to Ohio law, dividends may not exceed the
surplus of a
47
corporation, and may not be declared if the corporation is insolvent or would be
made insolvent by declaration of the proposed dividend. The ability of the Board
of Directors to declare dividends on Company Common Shares is also subject to
the ability of the Bank to pay dividends up to the Company. Various U.S. federal
statutory provisions limit the amount of dividends the Company's banking
subsidiaries can pay to the Company without regulatory approval. Dividend
payments by national banks are limited to the lesser of (1) the level of
undivided profits; (2) the amount in excess of which the bank ceases to be at
least adequately capitalized; and (3) absent regulatory approval, an amount not
in excess of net income for the current year combined with retained net income
for the preceding two years. In addition, U.S. federal bank regulatory
authorities have authority to prohibit the Company's banking subsidiary from
engaging in an unsafe or unsound practice in conducting their business. The
payment of dividends, depending upon the financial condition of the bank in
question, could be deemed to constitute an unsafe or unsound practice. The
ability of the Company's banking subsidiary to pay dividends in the future is
currently, and could be further, influenced by bank regulatory policies and
capital guidelines. For more discussion regarding the restrictions on the
ability of the Bank to pay dividends, refer to Note 13 to the Company's
Consolidated Financial Statements contained in the Company's annual report on
Form 10-K for the fiscal year ended December 31, 2004.
POSSIBLE ANTI-TAKEOVER EFFECT OF PROPOSAL
The proposed amendment to the Articles of Incorporation to authorize and
allow for the issuance of shares of Series A Preferred Stock pursuant to the
going private Merger should not by itself operate to discourage unilateral
tender offers or other attempts to take over the Company. In addition, shares of
Series A Preferred Stock do not possess voting rights under the proposed
amendment to the Company's Articles of Incorporation, and such shares would not
ordinarily be entitled to voting rights in connection with any acquisition or
merger of the Company under the applicable sections of the Ohio General
Corporation Statute. Also, shares of Series A Preferred Stock are, at the option
of the Company, expressly redeemable for the Principal Amount upon the execution
of any agreement or arrangement which would result in a change in control of the
Company.
The foregoing discussion describing the potential "anti-takeover" effects
of this proposal may not contain all of the information that is pertinent to
each investor. Therefore, this disclosure is qualified in its entirety to the
language of the proposed Amendment to the Articles of Incorporation, which is
attached to this Proxy Statement at Appendix D.
ANTI-TAKEOVER MEASURES CURRENTLY IN PLACE
The Company's governing documents currently contain certain provisions to
protect the interest of the Company and its shareholders in the event of a
hostile takeover attempt. THESE WILL NOT CHANGE AS A RESULT OF THE PROPOSED
TRANSACTION. A brief description of the material aspects of these provisions is
provided as follows:
Article Sixth of the Company's Articles of Incorporation requires both a
"supermajority" shareholder vote and the satisfaction of certain "fair price"
provisions in
48
connection with the approval of certain mergers, consolidations, sales of
substantially all of the assets and similar transactions involving control of
the Company ("Combinations"). Fair price provisions are intended to guarantee
that all shareholders receive an identical price in connection with the sale of
their shares.
Specifically, a vote of not less than 80% of the outstanding shares of the
Company is generally required to effect Combinations not approved by a majority
of Directors not affiliated with the potential acquiror (the "Disinterested
Directors"). Additionally, unless the combination is approved by a majority of
Disinterested Directors or the fair price provisions contained in Article Sixth
are satisfied, the vote of two-thirds of the outstanding voting shares of the
Company, not including shares then held by the potential acquiror, is also
required to approve the Combination.
Article III of the Company's Code of Regulations contains a provision which
"classifies" the Board of Directors into three classes. Classification of the
Board provides for the election each year of one-third of the total number of
Directors to rolling three-year terms, which makes it difficult to replace the
Board of Directors.
Article III of the Company's Code of Regulations states that the removal of
a director, otherwise than for cause pursuant to Section 1701.58 of the Ohio
Revised Code, requires the affirmative vote of two-thirds of the outstanding
shares of the Company. However, a Director may not be removed if the number of
shares voted against his removal would be sufficient to elect the Director if
voted cumulatively at a meeting of shareholders called for that purpose.
These provisions and limitations will make it more difficult for companies
or persons to acquire control of the Company without the support of the Board of
Directors of the Company. However, these provisions also could deter offers for
Shares in the Company which might be viewed by certain investors not to be in
their best interest.
DIVIDEND POLICY
It is currently the informal policy of the Company to declare and pay
dividends on a semi-annual basis. Future dividend payments may be made at the
discretion of Merchants Bancorp's Board of Directors upon consideration of
factors such as operating results, financial condition, statutory and regulatory
restrictions, tax consequences, and other relevant factors. Holders of Common
Stock are entitled to share pro rata in the distribution of dividends when and
as declared by the Board of Directors from funds legally available for such
purpose. Upon the amendment to the Company's Articles of Incorporation as
described under this Proposal II, holders of the Series A Preferred Stock, will
be entitled to a dividend preference which will allow them to receive their
dividends prior to any dividend payments to holders of Common Stock. Dividends
paid to holders of Series A Preferred Stock shall be identical in amount, on a
per share basis, as dividends paid to holders of Common Stock.
The ability of the Company to obtain funds for the payment of dividends and
for other cash requirements will be largely dependent on the amount of dividends
which may be declared by its
49
banking subsidiary. Various U.S. federal statutory provisions limit the amount
of dividends the Company's banking subsidiaries can pay to the Company without
regulatory approval. Dividend payments by national banks are limited to the
lesser of (1) the level of undivided profits; (2) the amount in excess of which
the bank ceases to be at least adequately capitalized; and (3) absent regulatory
approval, an amount not in excess of net income for the current year combined
with retained net income for the preceding two years Additionally, under certain
circumstances, approval of the OCC may be required prior to the payment of a
dividend or other distribution.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
CREATE THE NEW CLASS OF PREFERRED STOCK.
50
INFORMATION REGARDING
THE SPECIAL MEETING OF SHAREHOLDERS
TIME AND PLACE OF MEETING
This proxy statement and the accompanying proxy card are furnished in
connection with the solicitation of proxies to be used in voting at the special
meeting of shareholders of Merchants Bancorp, Inc., to be held on _______ __,
2005, at the main office of Merchants National Bank located at 100 North High
Street, Hillsboro, Ohio 45133 at _:__ _.m. (local time) (the "Meeting") and all
adjournments thereof.
Merchants Bancorp, Inc. (the "Company") is a registered bank holding
company of which Merchants National Bank (the "Bank") is a wholly owned
subsidiary.
THE ENCLOSED PROXY IS SOLICITED BY THE BOARD OF DIRECTORS (HEREINAFTER
SOMETIMES REFERRED TO AS "MANAGEMENT") OF THE COMPANY. All costs associated with
the solicitation will by borne by the Company. The Company does not intend to
solicit proxies other than by use of the mails, but certain officers and regular
employees of the Company or its subsidiaries, without additional compensation,
may use their personal efforts, by telephone or otherwise, to obtain proxies.
RECORD DATE AND MAILING DATE
The close of business on ______ __, 2005, is the Record Date for the
determination of shareholders entitled to notice of and to vote at the special
meeting. This proxy statement and the enclosed form of proxy are being first
sent or delivered to the Company's shareholders on approximately _____ __, 2005.
NUMBER OF SHARES OUTSTANDING
As of the close of business on the Record Date, The Company had 4,500,000
shares of Common Stock, no par value, authorized, of which 2,666,650 shares were
issued and outstanding. Each outstanding share is entitled to one vote on all
matters presented at the meeting.
PURPOSES OF SPECIAL MEETING
The purposes of the special meeting are:
1. To consider and act upon a proposal to approve the Merger of MBI Merger
Co., Inc., a wholly-owned subsidiary of Merchants Bancorp, with and into
Merchants Bancorp, Inc. as contemplated by the Merger Agreement attached as
Appendix A to the enclosed proxy statement. Pursuant to the terms of the
Merger Agreement, at the Effective Time of the Merger: (i) each share of
Common Stock then held by a shareholder of record who as of the Record Date
held 100 or fewer shares will be converted into the
51
right to receive the per share Cash Consideration from the Company; and
(ii) each share of Common Stock then held by a shareholder of record who as
of the Record Date held 1,500 or more shares will remain as outstanding
Common Stock of the Company unchanged. At the Effective Time, each share of
Common Stock then held by a shareholder of record who as of the Record Date
held more than 100 but fewer than 1,500 shares of Common Stock will be
converted into the right to receive: (i) the per share Cash Consideration;
(ii) one share of a newly authorized Class A Preferred Stock of the
Company; or (iii) a combination of cash and Class A Preferred Stock.
2. To amend the Articles of Incorporation to authorize the issuance of 140,000
shares of the new class of Series A Preferred Stock.
3. To transact any other business as may properly come before the meeting or
any adjournments of the meeting.
DISSENTERS' RIGHTS
The applicable provisions of the Ohio Revised Code entitle shareholders of
Merchants Bancorp to exercise dissenters' rights to appraisal. For more
information regarding the exercise of dissenters' rights, see "Background of the
Merger Proposal -- Rights of Dissenting Shareholders."
VOTING AT THE SPECIAL MEETING AND REQUIREMENTS FOR SHAREHOLDER APPROVAL
A quorum of shareholders must exist for the special meeting to be held. A
quorum consists of a majority of shares entitled to vote represented at the
special meeting in person or by proxy. Once a share is represented at the
meeting it is deemed present for quorum purposes throughout the meeting or any
adjourned meeting unless a new Record Date is or must be set for the adjourned
meeting. We will count abstentions and broker non-votes, which are described
below, in determining whether a quorum exists.
Approval of both the Merger and the amendment to the Company's Articles of
Incorporation to create the new Series A Preferred Stock requires the
affirmative vote of a majority of the shares of Merchants Bancorp entitled to
vote on Proposals 1 and 2, respectively. Consequently, shares represented at the
special meeting in person or by proxy but withheld or otherwise not cast for the
election of directors, including abstentions and broker non-votes, effectively
constitute votes against the Merger. On the Record Date, Merchants Bancorp's
directors and executive officers owned, directly or indirectly, 643,129 Common
Shares, representing approximately 24.13% of the 2,666,650 outstanding shares of
Common Stock as of that date. Each of the directors and executive officers of
the Company has indicated that he or she intends to vote his or her shares in
favor of the proposed Merger.
Based on the 2,666,650 shares outstanding as of the Record Date, a quorum
will consist of 1,333,326 shares represented either in person or by proxy. Based
on the 2,666,650 shares outstanding as of the Record Date, the minimum number of
votes required to be cast in favor of the approval of
52
the Merger and the amendment to the Company's Articles of Incorporation to
create the new Series A Preferred Stock is also 1,333,326.
Abstentions and broker non-votes (arising from the absence of discretionary
authority on the part of a broker-dealer to vote shares of Common Stock held in
street name for customer accounts) are counted for purposes of determining the
presence or absence of a quorum for the transaction of business. Abstentions do
not count as votes in favor of or against a given matter. 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) being voted upon.
If you properly sign, return and do not revoke your proxy card, the persons
appointed as proxies will vote your shares according to the instructions you
have specified on the proxy card. 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 Proposals 1 and 2, and in the best judgment
of the persons appointed as proxies on all other matters properly brought before
the special meeting which were unknown to us a reasonable time before the
solicitation.
You can revoke your proxy at any time before it is voted by submitting
either a written revocation of your proxy or a duly signed proxy bearing a date
subsequent to your originally submitted proxy to the Secretary of the Company at
100 North High Street, Hillsboro, Ohio 45133. You may also revoke your proxy by
attending the special meeting and voting in person.
SOLICITATION OF PROXIES
Proxies are being solicited by our Board of Directors, and Merchants
Bancorp will pay the cost of the proxy solicitation. Our directors, officers and
employees may, without additional compensation, solicit proxies by personal
interview, telephone, or fax. 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 such brokerage firms, custodians, nominees or other
fiduciaries for any expenses they incur in this regard.
ELECTION PROCEDURES FOR CERTAIN SHAREHOLDERS
If you are a shareholder who held more than 100 shares of Common Stock but
fewer than 1,500 shares of Common Stock as of the Record Date, you must make
your election regarding the receipt of the Cash Consideration or Series A
Preferred Stock on the proxy card provided with this proxy statement. You may
elect to receive a combination of Cash Consideration and Series A Preferred
Stock in exchange for your shares of Common Stock. If you elect to receive part
Cash Consideration and part Series A Preferred Stock, you will need to indicate
on your proxy card the number of whole Common Shares as to which you elect to
receive the Cash Consideration and the whole number of Common Shares as to which
you elect to receive Series A Preferred Stock. All such elections must be made
with respect to
53
whole shares of Common Stock, and no election can be made which would result in
the issuance of a fractional share of Series A Preferred Stock.
If you fail to specify any election on the enclosed proxy card, you will be
deemed to have elected to receive only Cash Consideration in exchange for your
Common Stock. All elections must be received by the Company prior to the second
business day preceding the date of the special meeting of shareholders. You may
change a previously submitted election by completing a new proxy card and
sending it to the Company, but your revised election must be received prior to
the second business day preceding the date of the special meeting of
shareholders.
INFORMATION ABOUT MERCHANTS BANCORP AND ITS AFFILIATES
MERCHANTS BANCORP, INC. AND MERCHANTS NATIONAL BANK
GENERAL
Merchants Bancorp, Inc. (the "Company") was incorporated under the laws of
the State of Ohio on March 29, 1996 at the direction of the Board of Directors
of the Merchants National Bank (the "Bank") for the purpose of becoming a bank
holding company by acquiring all of the outstanding shares of the Bank. In
December, 1996 the Company became the sole shareholder of the Bank. The
principal office of the Company is located at 100 North High Street, Hillsboro,
Ohio 45133. Hillsboro, situated in south central Ohio, is centrally located
between the cities of Columbus, Cincinnati and Dayton, and is the county seat of
Highland County. Highland County has a population of approximately 42,000. The
company, through its banking affiliate, also conducts business in the
neighboring counties of Madison and Fayette, which have populations of
approximately 40,000 and 28,000 respectively.
The Company, through its banking affiliate, offers a broad range of banking
services to the commercial, industrial and consumer market segments which it
serves. The primary business of the Bank consists of accepting deposits through
various consumer and commercial deposit products, and using such deposits to
fund various loan products. The Bank's primary loan products (and the general
terms for each) are as follows: (1) loans secured by residential real estate,
including loans for the purchase of one to four family residences which are
secured by 1st and 2nd mortgages and home equity loans; (2) consumer loans,
including new and used automobile loans, loans for the purchase of mobile homes
and debt consolidation loans; (3) agricultural loans, including loans for the
purchase of real estate used in connection with agricultural purposes, operating
loans and loans for the purchase of equipment; and (4) commercial loans,
including loans for the purchase of real estate used in connection with office
or retail activities, loans for the purchase of equipment and loans for the
purchase of inventory.
All of the Bank's deposit and lending services are available at its four
full service offices. The remaining three offices of the Bank are engaged
primarily in deposit-related services. The Company has no foreign operations,
assets or investments.
54
The Bank is a national banking association organized under the laws of the
United States. The Bank is regulated by the Office of the Comptroller of the
Currency ("OCC"), and its deposits are insured by the Federal Deposit Insurance
Company ("FDIC") to the extent permitted by law and, as a subsidiary of the
Company, is regulated by the Board of Governors of the Federal Reserve. As of
June 30, 2005, the Company and its subsidiary had consolidated total assets of
approximately $360.4 million, consolidated total deposits of approximately
$285.9 million and consolidated total shareholders' equity of approximately
$32.2 million. For more information on the business of the Company and the Bank,
including information on competition in the Bank's primary markets and
information regarding the supervision and regulation of the Company and the
Bank, please see Part I, Item 1 of the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2004.
Merchants Bancorp, Inc. has not been convicted in a criminal proceeding
during the past five years, nor has it been a party to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree or final order enjoining it from future violations of, or
prohibiting activities subject to, federal or state securities law, or finding
any violation of federal or state securities laws.
MBI MERGER SUB, INC.
MBI Merger Sub is a newly-formed Ohio corporation, and is a wholly-owned
subsidiary of Merchants Bancorp, Inc. MBI Merger Sub was organized solely for
the purpose of facilitating the Merger transaction. The Articles of
Incorporation of MBI Merger Sub authorize the issuance of 100 shares of common
stock, all of which are held by Merchants Bancorp, Inc. There is no trading
market for the common stock of MBI Merger Sub., and there have been no trades of
MBI Merger Sub common stock since its date of incorporation. Additionally, MBI
Merger Sub has paid no dividends since its date of incorporation and does not
intend to pay any dividends prior to the Merger. MBI Merger Sub will be merged
with and into Merchants Bancorp and will cease to exist after the Merger. MBI
Merger Sub has not conducted any activities other than those incident to its
formation, its negotiation and execution of the Merger Agreement and its
assistance in preparing various SEC filings related to the proposed transaction.
MBI Merger Sub has no significant assets, liabilities or shareholders' equity.
Members of the board of directors and senior management of MBI Merger Sub are
identical to those of Merchants Bancorp, Inc. The address and telephone number
of MBI Merger Sub's principal offices are also the same as Merchants Bancorp,
Inc.
MBI Merger Sub has not been convicted in a criminal proceeding during the
past five years, nor has it been a party to any judicial or administrative
proceeding during the past five years that resulted in a judgment, decree or
final order enjoining it from future violations of, or prohibiting activities
subject to, federal or state securities law, or finding any violation of federal
or state securities laws.
55
DIRECTORS AND SENIOR EXECUTIVE OFFICERS OF MERCHANTS BANCORP, INC.
The following tables set forth information with respect to each Director and
senior executive of the Company.
NAME AND AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
------------ -------------------- --------------
William Butler, 68 President, Union Stock Yards 1983
Jack Walker, 76 Retired - Insurance Consultant 1974
Donald Fender, Jr., 67 Realtor 1972
Richard S. Carr, 58 Farmer and Vice President of 2002
Five Points Implement.
Paul W. Pence, Jr., 53 President and CEO of the Company and 1981
the Bank
James R. Vanzant, 58 Highland County Health Commissioner 1992
Veterinarian (part-time practice)
Robert Hammond, 61 Attorney, Sole Practitioner 1994
James D. Evans, 55 Executive Vice President and Secretary N/A
of the Company and the Bank
LEGAL PROCEEDINGS
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, excluding traffic violations and similar misdemeanors. The business
address and telephone number of the directors and executive officers at the
Company is 100 North High Street, Hillsboro, Ohio 45133, telephone (937)
393-1993.
56
VOTING SECURITIES HELD BY DIRECTORS, EXECUTIVE OFFICERS AND 5% BENEFICIAL OWNERS
OF MERCHANTS BANCORP, INC.
The following table sets forth information as of the Record Date with
respect to the persons, or groups of persons, known to Merchants Bancorp to be
the beneficial owners of more than five percent of Merchants Bancorp's 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. The information provided below assumes 2,666,650 issued and outstanding
Common Shares prior to the Merger, and 2,514,091 Common Shares issued and
outstanding following the Merger.
PRIOR TO MERGER AFTER MERGER
--------------------------------------- ---------------------------------------
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF SHARES NUMBER OF SHARES PERCENT OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
- ------------------- ------------------ ------------------ ------------------ ------------------
William Butler(1) 41,230 1.55% 41,230 1.64%
Jack Walker(2) 22,000 0.83% 22,000 0.87%
Paul W. Pence, Jr. 148,695 5.58% 148,695 5.91%
James R. Vanzant 1,500 0.06% 1,500 0.06%
Robert Hammond(3) 2,500 0.09% 2,500 0.10%
Donald Fender, Jr.(4) 407,000 15.26% 407,000 16.18%
James D. Evans(5) 11,804 0.44% 11,804 0.47%
Richard S. Carr(6) 8,400 0.32% 8,400 0.33%
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (11): 643,129 24.13% 643,129 25.57%
- ----------
(1) Includes 30 shares held jointly by Mr. Butler with his spouse, 20,600
shares held by the William R. Butler Revocable Trust, for which Mr. Butler
serves as trustee, and 20,600 shares held by the Janet Sue Butler Revocable
Trust, for which Mr. Butler's spouse serves as trustee.
(2) Includes 11,000 shares held by the Jack E. Walker Trust, for which Mr.
Walker serves as trustee, and 11,000 shares held by the Patricia C. Walker
Trust, for which Mr. Walker's spouse serves as trustee.
(3) Includes 1,500 shares held individually by Mr. Hammond and 1,000 shares
held jointly by Mr. Hammond with his spouse
(4) Includes 377,000 shares held by the Donald E. Fender, Jr. Revocable Trust,
for which Mr. Fender serves as trustee, and 30,000 shares held jointly by
Mr. Fender with his spouse.
(5) Includes 11,600 shares held jointly by Mr. Evans with his spouse, and 204
shares held jointly Mr. Evans with other members of his immediate family.
(6) Includes 2,700 shares held individually by Mr. Carr, 2,700 shares held
individually by Mr. Carr's spouse, and 3,000 shares held jointly by Mr.
Carr with his spouse.
RECENT AFFILIATE TRANSACTIONS IN MERCHANTS BANCORP STOCK
Except as provided below, there were no transactions in Merchants Bancorp's
Common Stock by its affiliates which have occurred over the last two years. On
November 25, 2003, Robert L. Hammond, a Director of the Company, beneficially
acquired 1,000 shares of the Company's Common Stock at the cost of $20.00 per
share. On October 1, 2004, Jack E. Walker, a Director of the Company,
beneficially acquired 220 shares of the Company's Common Stock at the cost of
$20.00 per share. On July 19, 2005, Paul W. Pence, Jr., a Director and President
of the Company, beneficially acquired 141,040 shares of the Company's Common
Stock, without cost, from the estate of Margaret D. Pence.
57
STOCK REPURCHASES BY MERCHANTS BANCORP, INC.
On August 28, 2003 Merchants Bancorp entered into a stock redemption
agreement with 3 shareholders of the Company. Collectively the three
shareholders owned 351,350 Common Shares of the Company or 11.71% of outstanding
shares. They sold 333,350 of such shares (referred to herein as the "shares") to
the Company. The Company retained Austin Associates to determine a "fair value"
and issued a "fairness opinion" to the Company dated July 30, 2003. The purchase
was made in two separate settlements. The first settlement was for 55,000 shares
at a total acquisition price of $1,155,000 and occurred on September 5, 2003.
The second settlement occurred on January 9, 2004 for the 278,350 remaining
shares. The cost of the second settlement was $5,845,349.87 and was recorded in
other liabilities on the December 31, 2003 financial statements. The total value
of the transaction was $7,000,349.87.
MARKET FOR COMMON STOCK AND DIVIDEND INFORMATION
Market Information
The number of holders of record of the Company's Common Stock at the Record
Date was 831. There is currently no established public trading market for the
Company's Common Stock and the shares of the Company are not listed on any
exchange. After the Merger, the Company's Common Stock will no longer be
eligible for trading on an exchange or automated quotation system operated by a
national securities association. Merchants Bancorp 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. Sale price information provided
below on a quarterly basis for the year-to-date and the two most recent fiscal
years is based on information reported to the Company by individual buyers and
sellers of the Company's stock, as obtained by the Company at or around the time
of transfer. Not all sales transaction information during these periods was
obtained.
2005
- ---------------------------------
FIRST QUARTER SECOND QUARTER
- --------------- ---------------
HIGH LOW HIGH LOW
- ------ ------ ------ ------
$22.00 $18.00 $24.00 $19.00
2004
- ---------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------- --------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ------ ------ ------ ------ ------ ------ ------ ------
$21.00 $20.00 $20.00 $20.00 $21.00 $19.00 $22.50 $18.77
2003
- ---------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------- --------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ------ ------ ------ ------ ------ ------ ------ ------
$25.00 $18.00 $23.00 $20.00 $25.00 $20.00 $22.50 $20.00
- ----------
At the Record Date, the Company had 2,666,650 shares of Common Stock
outstanding. All of such shares are eligible for sale in the open market without
restriction or registration under the
58
Securities Act of 1933, as amended (the "Securities Act"), except for shares
held by "affiliates" of the Company. Shares held by affiliates are subject to
the resale limitations of Rule 144, as promulgated under the Securities Act. For
purposes of Rule 144, "affiliates" are deemed to be all Directors, Executive
Officers and ten percent beneficial owners of the Company. As of the Record
Date, affiliates of the Company had beneficial ownership of an aggregate of
643,129 shares of the Company's Common Stock. The Company has one shareholder
with beneficial ownership of more than ten percent of its outstanding shares,
and such individual is also a Director of the Company.
Rule 144 subjects affiliates to certain restrictions in connection with the
resale of Company securities that do not apply to individuals currently holding
outstanding shares of Company stock. Affiliates of the Company may sell within
any three-month period a number of shares that does not exceed the greater of
one percent of the number of then outstanding shares of Company Common Stock, or
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding filing by the selling affiliate of the requisite notice of sale
with the SEC on Form 144. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice to the Securities and Exchange
Commission, and the availability of current public information about the
Company.
Dividends
Dividends are generally declared by the Board of Directors of the Company
semiannually (June 30 and December 31, respectively). On June 30, 2005, the
Company paid a dividend of $0.36 per common share to its shareholders. Dividends
per share declared by the Company on its Common Stock during the years of 2004
and 2003 are as follows:
MONTH 2004 2003
- ----- ----- -----
JUNE $0.34 $0.32
DECEMBER $0.36 $0.32
----- -----
TOTALS $0.70 $0.64
===== =====
The Company currently expects that comparable semiannual cash dividends
will continue to be paid in the future.
FINANCIAL AND OTHER INFORMATION
Representatives of the Company's independent registered public accounting
firm for the current year and the most recently completed fiscal year are not
expected to be present at the special meeting of shareholders. If present, such
representative will be provided with the opportunity to make a statement if they
desire to do so, and will be available to respond to any appropriate questions.
59
Merchants Bancorp does not calculate a ratio of earnings to fixed charges
in its regularly prepared financial statements. Merchants Bancorp's ratio of
earnings to fixed charges was 1.78 and 1.94 for the fiscal years ended December
31, 2003 and 2004, respectively, and was 2.01 and 1.90 for the six (6) month
periods ended June 30, 2004 and 2005, respectively.
For a listing of all financial and related information incorporated by
reference into this document from other filings submitted to the SEC, please
refer to the section captioned "Documents Incorporated by Reference."
FUTURE SHAREHOLDER PROPOSALS AND COMMUNICATIONS WITH THE COMPANY'S BOARD OF
DIRECTORS
If the Merger is approved by the requisite vote of the Company's
shareholders, the Company will not be required to include shareholder proposals
in its proxy materials in connection with next year's special meeting, as
permitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934.
However, if any shareholder of the Company wishes to submit a proposal to be
acted upon at the special meeting of the company to be held in 2006, the
proposal must be received by the Secretary of the Company at its principal
executive offices, 100 North High Street, Hillsboro, Ohio 45133, prior to the
close of business on February 4, 2006. Proposals submitted in this regard will
not be included in the Company's proxy materials. With respect to such
proposals, the Company will vote all shares for which it has received proxies in
the interest of the Company as determined in the sole discretion of its Board of
Directors.
The Company's Code of Regulations establishes advance notice procedures
which must be followed by persons (other than the Board of Directors) who wish
to nominate a candidate for election to the Board of Directors. In order to
nominate a director for election at a meeting of the shareholders, it is
necessary that you notify the Company in writing not fewer than 14, nor more
than 50, days prior to the meeting unless the Company provides shareholders less
than 21 days notice of the meeting. In such instances, notice of the nominations
must be delivered or mailed to the Company not later than the seventh day after
the notice of the meeting was mailed, or public disclosure of such meeting was
provided. In addition, the notice must meet all other requirements contained in
our Code of Regulations. Any shareholder who wishes to take such action should
obtain a copy of the Code of Regulations and may do so by written request
addressed to the Secretary of the Board of Directors at the principal executive
offices of the Company provided above.
The Board of Directors has not yet established a formal process for
shareholders to send communications to the Board. The Board of Directors has
determined that, in light of the general accessibility of the directors in the
community, no formal shareholder communication process is required at this time.
Nonetheless, shareholders are encouraged to send written communications
regarding the operation or governance of the Company to the attention of Paul W.
Pence, Jr., President, Chief Executive Officer and Board member, at the main
office of the Company.
60
OTHER MATTERS
The management of the Company is not aware of any other matters to be
presented for consideration at the meeting or any adjournment thereof. If any
other matter should properly come before the meeting, it is intended that the
persons named in the enclosed proxy will vote the shares represented thereby in
accordance with their judgement, pursuant to the discretionary authority granted
therein.
WHERE YOU CAN FIND MORE INFORMATION
Merchants Bancorp 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
Merchants Bancorp, who file electronically with the SEC. The address of that
site is http://www.sec.gov.
Merchants Bancorp 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 Merchants Bancorp 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
Merchants Bancorp has filed previously with the SEC. They contain important
information about Merchants Bancorp and its financial condition.
- Merchants Bancorp's Annual Report on Form 10-K for the year ended
December 31, 2004, filed with the Commission on March 31, 2005, is
hereby incorporated by reference. The audited financial statements are
included as Exhibit 99 to the Form 10-K. The Selected Financial Data
is included in Part II, Item 6 of the Form 10-K on page 12 thereof.
The Supplemental Financial Information is included in Part II, Item 8
of the
61
Form 10-K on page 11 thereof. Management's Discussion and Analysis of
Financial Condition and Results of Operations is included in Part II,
Item 7 of the Form 10-K on pages 13 - 32 thereof. Quantitative and
Qualitative Disclosures About Market Risk are included in Part II,
Item 7A of the Form 10-K on pages 32 - 34 thereof. Discussion
regarding the business of the Company is included in Part I, Item 1 of
the Form 10-K on pages 2 - 8 thereof.
- Merchants Bancorp's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005, filed with the Commission on August 15, 2005, is
hereby incorporated by reference. The unaudited financial statements,
including the notes thereto, are included in Part I, Item 1 of the
Form 10-Q on pages 2 - 8 thereof. Management's Discussion and Analysis
of Financial Condition and Results of Operations is included in Part
I, Item 2 of the Form 10-Q on pages 8 - 12 thereof. Quantitative and
Qualitative Disclosures About Market Risk are included in Part 1, Item
3 of the Form 10-Q on pages 12 - 14 thereof.
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
Merchants Bancorp's special meeting.
A copy of the Company's most recent Annual Report on Form 10-K was
submitted to shareholders in connection with the annual meeting of the Company
held on April 26, 2005. A copy of the Company's Quarterly Report on Form 10-Q is
attached as Appendix F to this proxy statement. 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
Paul W. Pence, President, Merchants Bancorp, Inc., 100 North High Street,
Hillsboro, Ohio 45133. His telephone number is (937) 393-1993.
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.
Date: _______________, 2005 By Order of the Board of Directors of
Merchants Bancorp, Inc.
James D. Evans, Secretary
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
MERCHANTS BANCORP, INC. AND MBI MERGER SUB, INC.
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement"), dated as of
__________ ___, 2005, is hereby entered into by and between MBI Merger Sub,
Inc., an Ohio corporation ("Merger Sub"), and Merchants Bancorp, Inc., an Ohio
corporation ("MBI").
RECITALS
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Ohio. As of the date hereof, the
authorized capital stock of Merger Sub consists of 100 shares of Common Stock,
no par value ("Merger Sub Common Stock"), of which 100 shares are issued and
outstanding. MBI is a corporation duly organized and validly existing under the
laws of the State of Ohio. As of the date hereof, the authorized capital stock
of MBI consists of 4,500,000 shares of common stock, no par value ("MBI Common
Stock"), of which 2,666,650 shares are presently issued and outstanding. The
respective Boards of Directors of MBI and Merger Sub deem the Merger Agreement
advisable and in the best interests of each such corporation and their
respective shareholders. The respective Boards of Directors of MBI and Merger
Sub, 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 MBI and shareholders
of Merger Sub are each entitled to vote to approve the Merger Agreement. The
number of shares of MBI Common Stock and the number of shares of Merger Sub
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 Ohio Revised Code (the "Revised Code"), at the
Effective Time (as defined in Section 1.2), Merger Sub shall merge (the
"Merger") with and into MBI, and MBI shall survive the Merger and shall continue
its corporate existence under the laws of the State of Ohio. Upon consummation
of the Merger, the separate corporate existence of Merger Sub shall terminate
and the name of the Surviving Corporation shall be "Merchants Bancorp, 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
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required regulatory approvals and the expiration of any statutory waiting
periods, a Certificate of Merger meeting the requirements of Section 1701.81 of
the Revised Code shall be filed with the Ohio Office of the Secretary of State
for approval. The Merger shall become effective ("the Effective Time") when the
Certificate of Merger has been accepted for filing by the Ohio Office of the
Secretary of State 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 Revised Code.
1.4 TREATMENT OF MBI COMMON STOCK; CONVERSION OF MERGER SUB COMMON STOCK.
(a) At the Effective Time, by virtue of the Merger and without any further
action on the part of any Record Holder (as hereinafter defined), the following
shall occur:
(1) Each issued and outstanding share of MBI Common Stock owned by a
First Tier Record Holder (as hereinafter defined) shall be converted into the
right to receive cash from the Surviving Corporation in the amount of $23.00 per
share (the "Cash Consideration"), without interest thereon, upon the surrender
to the Surviving Corporation of their certificates formerly representing shares
of MBI Common Stock. Except as otherwise provided in this Section 1.4, First
Tier Record Holders shall cease to have any rights as shareholders of MBI or the
Surviving Corporation, other than such rights, if any, as they may have pursuant
to the Revised Code.
(2) Each issued and outstanding share of MBI Common Stock owned by a
Second Tier Record Holder (as hereinafter defined) who has submitted a Proper
Election (as hereinafter defined) to the Company shall be converted in
accordance with said Proper Election. Second Tier Record Holders that have not
made a Proper Election shall be deemed to have elected to receive the Cash
Consideration in exchange for all shares held at the Effective Time. To the
extent any Second Tier Record Holder has elected, or who otherwise would be
deemed to have elected, the Cash Consideration, such Record Holder shall cease
to have any rights as shareholders of MBI or the Surviving Corporation with
respect to such shares of MBI Common Stock for which the election to receive the
Cash Consideration was made (or deemed to have been made), except such rights,
if any, as such Record Holders may have pursuant to the Revised Code; their sole
and exclusive right with respect to such shares of MBI Common Stock being to
receive the Cash Consideration, without interest thereon, upon surrender to the
Surviving Corporation of their certificates formerly representing shares of MBI
Common Stock. To the extent any Second Tier Record Holder has made a Proper
Election to receive shares of Series A Preferred Stock, such Record Holder shall
cease to have any rights as holders of MBI Common Stock with respect to such
shares of MBI Common Stock for which the election to receive shares of Series A
Preferred Stock was made, except such rights, if any, as they may have pursuant
to the Revised Code; their sole and exclusive right with respect to such shares
of MBI Common Stock being to receive shares of Series A Preferred Stock upon the
surrender to the Surviving Corporation of their certificates formerly
representing shares of MBI Common Stock. Any Second Tier Record Holder making a
Proper Election to receive shares of Series A Preferred Stock shall receive one
share of Series A Preferred Stock for each share of MBI Common Stock held
thereby with respect to which the election to receive shares of Series A
Preferred Stock has been made.
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(3) Each issued and outstanding share of MBI Common Stock owned by a
Third Tier Record Holder (as hereinafter defined) shall remain issued and
outstanding as a share of common stock of the Surviving Corporation without
change. In no event shall any Third Tier Record Holder be entitled to receive
either the Cash Consideration or shares of Series A Preferred Stock with respect
to the shares of MBI Common Stock held thereby.
(b) At the Effective Time, by virtue of the Merger and without any action
on the part of the holder of any Merger Sub Common Stock, each issued share of
Merger Sub 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 Sub or the Surviving Corporation except such rights, if
any, as they may have pursuant to the Revised Code, 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 Sub Common Stock.
1.5 DISSENTERS' RIGHTS. All Record Holders shall be entitled to all rights and
privileges allotted to dissenting shareholders under Section 1701.85 of the
Revised Code. To exercise such rights, a dissenting shareholder shall be
required to adhere to all of the procedures provided under Section 1701.85 of
the Revised Code.
1.6 CERTAIN TERMS.
(a) The term "First Tier Record Holder" shall mean a Record Holder of MBI
Common Stock who holds of record as of the Record Date One Hundred (100) or
fewer shares of MBI Common Stock.
(b) The term "Second Tier Record Holder" shall mean a Record Holder of MBI
Common Stock who holds of record as of the Record Date greater than One Hundred
(100) and fewer than One Thousand Five Hundred (1,500) shares of MBI Common
Stock.
(c) The term "Third Tier Record Holder" shall mean a Record Holder of MBI
Common Stock who holds of record as of the Record Date One Thousand Five Hundred
(1,500) or more shares of MBI Common Stock.
(d) The term "Record Holder" shall mean any record holder or holders of MBI
Common Stock who on the Record Date would be deemed, pursuant to Rule 12g-5-1
under the Securities Exchange Act of 1934 and related interpretive guidance
issued by the Securities and Exchange Commission, to be a single "person" for
purposes of determining the number of record shareholders of MBI.
(e) The term "Proper Election" shall mean a properly completed election by
a Second Tier Record Holder on a form provided to Second Tier Record Holders by
the Company to allow them to elect to receive in exchange for shares of MBI
Common Stock held at the Effective Time: (1) the per share Cash Consideration;
(2) shares of Series A Preferred Stock; or (3) a combination of Cash
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Consideration and Series A Preferred Stock. Any election to receive a
combination of Cash Consideration and Series A Preferred Stock must be made with
respect to whole shares of MBI Common Stock, and no election can be made which
would result in the issuance of a fractional share of Series A Preferred Stock.
For an election to be a Proper Election, it shall be delivered to the Company by
no later than the second business day prior to the special meeting of the
shareholders to be held for the purpose of considering the proposed Merger (the
"Special Meeting"). Second Tier Record Holders shall be entitled to change their
election, provided any such change is provided on the proper form and delivered
to the Company no later than the second business day prior to the Special
Meeting. Any Second Tier Record Holder that is a brokerage, bank or similar
entity holding securities on behalf of multiple beneficial holders may make an
election on behalf of each such beneficial owner.
(f) The term "Record Date" shall mean the certain date fixed by resolution
of the Company's Board of Directors, which date shall be used to determine the
following: (1) the Record Holders entitled to vote on the proposed Merger; and
(2) the Record Holders to be classified as First Tier, Second Tier, and Third
Tier Record Holders.
(g) the term "Merger Consideration" shall mean either the Cash
Consideration or shares of Series A Preferred Stock, as the case may be.
1.7 RESOLUTION OF ISSUES. MBI (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
MBI 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 Record Holder immediately as of the Record Date. All
determinations by MBI under this Article I shall be final and binding on all
parties, and no person or entity shall have any recourse against MBI or any
other person or entity with respect thereto.
For purposes of this Article I, MBI may in its sole discretion, but shall
not have any obligation to do so, (i) presume that any shares of MBI Common
Stock held in a discrete account are held by a person distinct from any other
person, notwithstanding that the registered Record 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 MBI
determines to constitute a single Record Holder for purposes of determining the
number of shares held by such Holder.
1.8 ARTICLES OF INCORPORATION. The Articles of Incorporation of MBI in effect as
of the Effective Time shall be the Articles of Incorporation of the Surviving
Corporation after the Merger until thereafter amended in accordance with
applicable law.
1.9 BYLAWS. The Bylaws of MBI 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.
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1.10 BOARD OF DIRECTORS OF SURVIVING CORPORATION. The directors of MBI
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.
1.11 OFFICERS. The officers of MBI 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
MBI COMMON STOCK CERTIFICATES
2.1 CERTIFICATES HELD BY THIRD TIER RECORD HOLDERS. From and after the Effective
Time, all certificates representing shares of MBI Common Stock held by any Third
Tier Record Holder shall be deemed to evidence the same number of shares of
Common Stock of MBI, as the Surviving Corporation, which they theretofore
represented.
2.2 CERTIFICATES HELD BY FIRST AND SECOND TIER RECORD HOLDERS. From and after
the Effective Time and until presented to the Surviving Corporation, all
certificates which prior to the Effective Time represented shares of MBI Common
Stock that are held by any First or Second Tier Record Holder shall only
evidence the right to receive the Merger Consideration as hereinabove provided.
Upon presentation to the Surviving Corporation by a First or Second Tier Record
Holder of such certificates formerly representing shares of MBI Common Stock,
the Merger Consideration shall be paid in accordance with the provisions
contained in Article I of this Merger Agreement. No interest shall be payable on
any Cash Consideration 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 Sub or the Board of Directors of MBI at any time prior to
the filing of the Certificate of Merger with the Ohio Office of the Secretary of
State may terminate this Merger Agreement. This Merger Agreement shall be
automatically terminated if (i) the Shareholders of MBI fail to approve the
Merger and the Merger Agreement at a special meeting of shareholders of MBI to
be held on such date as shall be determined by the Board of Directors of MBI; or
(ii) any regulatory or other agency (if any) which must approve the Merger, has
not approved the Merger prior to December 31, 2005. 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
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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 Ohio, 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
Sub or MBI; provided, however, that after any approval of the transactions
contemplated by this Merger Agreement by the respective shareholders of Merger
Sub or MBI, 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 Sub Common
Stock or MBI 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 Sub and MBI have caused this Merger Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
MBI MERGER SUB, INC. MERCHANTS BANCORP, INC.
By: /s/ Paul W. Pence, Jr. By: /s/ Paul W. Pence, Jr.
--------------------------------- ------------------------------------
President & CEO President & CEO
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APPENDIX B
PAGE'S OHIO REVISED CODE ANNOTATED
TITLE 17. CORPORATIONS -- PARTNERSHIPS
CORPORATIONS
CHAPTER 1701. GENERAL CORPORATION LAW
MERGER OR CONSOLIDATION
ORC Ann. 1701.85 (2005)
Section 1701.85. Dissenting shareholder's demand for fair cash value of shares
(A) (1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment with
the same information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
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(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting shareholder
within twenty days after the lapse of the fifteen-day period, unless a court for
good cause shown otherwise directs. If shares represented by a certificate on
which such a legend has been endorsed are transferred, each new certificate
issued for them shall bear a similar legend, together with the name of the
original dissenting holder of such shares. Upon receiving a demand for payment
from a dissenting shareholder who is the record holder of uncertificated
securities, the corporation shall make an appropriate notation of the demand for
payment in its shareholder records. If uncertificated shares for which payment
has been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as provided in
this paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
A request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more
70
persons as appraisers to receive evidence and to recommend a decision on the
amount of the fair cash value. The appraisers have such power and authority as
is specified in the order of their appointment. The court thereupon shall make a
finding as to the fair cash value of a share and shall render judgment against
the corporation for the payment of it, with interest at such rate and from such
date as the court considers equitable. The costs of the proceeding, including
reasonable compensation to the appraisers to be fixed by the court, shall be
assessed or apportioned as the court considers equitable. The proceeding is a
special proceeding and final orders in it may be vacated, modified, or reversed
on appeal pursuant to the Rules of Appellate Procedure and, to the extent not in
conflict with those rules, Chapter 2505. of the Revised Code. If, during the
pendency of any proceeding instituted under this section, a suit or proceeding
is or has been instituted to enjoin or otherwise to prevent the carrying out of
the action as to which the shareholder has dissented, the proceeding instituted
under this section shall be stayed until the final determination of the other
suit or proceeding. Unless any provision in division (D) of this section is
applicable, the fair cash value of the shares that is agreed upon by the parties
or fixed under this section shall be paid within thirty days after the date of
final determination of such value under this division, the effective date of the
amendment to the articles, or the consummation of the other action involved,
whichever occurs last. Upon the occurrence of the last such event, payment shall
be made immediately to a holder of uncertificated securities entitled to such
payment. In the case of holders of shares represented by certificates, payment
shall be made only upon and simultaneously with the surrender to the corporation
of the certificates representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting from
the proposal submitted to the directors or to the shareholders shall be
excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief, and the
right and obligation of the corporation to purchase such shares and to pay the
fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section, unless
the corporation by its directors waives such failure;
71
(b) The corporation abandons the action involved or is finally enjoined or
prevented from carrying it out, or the shareholders rescind their adoption of
the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent of
the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder nor
the corporation has filed or joined in a complaint under division (B) of this
section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand until
either the termination of the rights and obligations arising from it or the
purchase of the shares by the corporation, all other rights accruing from such
shares, including voting and dividend or distribution rights, are suspended. If
during the suspension, any dividend or distribution is paid in money upon shares
of such class or any dividend, distribution, or interest is paid in money upon
any securities issued in extinguishment of or in substitution for such shares,
an amount equal to the dividend, distribution, or interest which, except for the
suspension, would have been payable upon such shares or securities, shall be
paid to the holder of record as a credit upon the fair cash value of the shares.
If the right to receive fair cash value is terminated other than by the purchase
of the shares by the corporation, all rights of the holder shall be restored and
all distributions which, except for the suspension, would have been made shall
be made to the holder of record of the shares at the time of termination.
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APPENDIX C
FAIRNESS OPINION OF AUSTIN ASSOCIATES, LLC
August 24, 2005
Board of Directors
Merchants Bancorp, Inc.
100 S. High Street
Hillsboro, OH 45133
Members of the Board:
You have requested the opinion of Austin Associates, LLC ("Austin") as to the
fairness, from a financial point-of-view, of the consideration being offered to
shareholders of Merchants Bancorp, Inc. ("Company') in connection with a going
private transaction ("Transaction"). Under the terms of the Transaction,
shareholders of Company owning 100 or fewer shares will receive $23.00 per share
in cash and shareholders of Company owning between 101 and 1,499 shares may
elect to receive either $23.00 per share in cash or a new Series A Preferred
Stock ("Preferred Stock").
In carrying out our engagement, we have among other things:
(i) Reviewed correspondence and documents related to the Transaction;
(ii) Reviewed the audited and regulatory financial statements of Company
for each of the years-ended 2000-2004;
(iii) Reviewed the interim unaudited financial statements for the three and
six months ended March 31, 2005 and June 30, 2005, respectively;
(iv) Reviewed internal information regarding the business and prospects of
Company including, but not limited to, operating budgets and business
plans;
(v) Prepared a valuation of the common stock of Company in connection with
the Transaction to determine the fair market value of the shares of
Company;
(vi) Reviewed certain publicly available information on Company and other
companies whose business activities were believed by Austin to be
generally comparable to those of Company;
(vii) Reviewed the terms of the Preferred Stock; and,
73
(viii) Reviewed other analyses and information as Austin deemed relevant,
including but not limited to the pro forma impact of the Transaction
to Company's book value, capital and earnings.
In connection with the valuation noted above, Austin considered: (a) the nature
of the business and history of the enterprise; (b) the economic outlook in
general and the condition and the outlook of the specific industry in
particular; (c) the financial condition of the business; (d) the earning
capacity of the Company; (e) the dividend paying capacity of the Company; (f)
the nature and value of the tangible and intangible assets of the business; (g)
sale of the stock and the size of the block to be valued; (h) the market price
of the stocks of corporations engaged in the same or similar lines of business
having their stocks actively traded in a free and open market; (i) the
marketability of the Company's stock; and (j) the determination of any control
premiums or minority share discounts. A summary description of the valuation
approaches utilized and conclusions reached are contained in the Schedule 13E-3
Transaction Statement. A complete valuation report was delivered to the Board of
Directors in June of 2005. While we did not formally update our valuation, in
reaching our opinion, we reviewed and considered the performance of the Company
through June 30, 2005.
In our review and analysis, we relied upon and assumed the accuracy and
completeness of the financial and other information provided to us, or publicly
available, and have not attempted to verify the same. We have assumed that there
has been no material change in the financial condition of Company since the date
of the last financial statements made available to us. Our opinion is
necessarily based upon market, economic and other conditions as of the date
hereof.
We have been retained by the board of directors as independent advisor to the
Company in connection with the Transaction. For our services in rendering this
opinion, Company has paid us a fee and has indemnified us against certain
liabilities.
Based upon our analysis and subject to the qualifications described herein, we
believe that as of the date of this letter, the cash offer of $23.00 per share
and the terms of the Preferred Stock being offered to eligible shareholders are
fair, from a financial point of view, to the Company and its shareholders.
Respectfully,
Austin Associates, LLC
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APPENDIX D
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
MERCHANTS BANCORP, INC.
(PURSUANT TO SECTION 1701.71 OF THE
OHIO REVISED CODE)
Merchants Bancorp, Inc., a corporation organized and existing under the
laws of the State of Ohio (the "Corporation"), in accordance with the provisions
of Section 1701.71 of the Ohio Revised Code, does hereby amend its Amended and
Restated Articles of Incorporation (the "Articles") as follows:
ARTICLE FOURTH
Capital Stock
A. Number and Class of Shares Authorized; Par Value.
The Corporation is authorized to issue the following shares of capital
stock:
(1) Common Stock. The aggregate authorized number of shares of common stock
(referred to in these Amended Restated Articles of Incorporation as "Common
Stock") which the Corporation shall have authority to issue is Four Million Five
Hundred Thousand (4,500,000), all of which shall be without par value.
(2) Series A Non-Cumulative 20-Year Preferred Stock. The aggregate
authorized number of shares of Series A Non-Cumulative 20-Year Preferred Stock
(hereinafter called the "Series A Preferred Stock") which the Corporation shall
have authority to issue is 140,000, all of which shall be without par value.
B. Description of Common Stock:
Each record holder of Common Stock shall be entitled to one vote on all
matters for each share of Common Stock so held. Holders of Common Stock shall
have no cumulative voting rights in any election of directors of the
Corporation. Each record holder of Common Stock shall be entitled to such
dividends as the Board of Directors (herein called the "Board") may in its
discretion periodically declare, subject, however, to any voting and dividend
rights of the holders of the Preferred Shares. In the event of any liquidation,
dissolution or winding up of the Corporation, the remaining assets of the
Corporation after the payment of all debts and necessary expenses shall be
distributed among the holders of the Common Shares pro rata in accordance with
their respective Share holdings, subject, however, to the rights of the holders
of the Series A Preferred Stock then outstanding. Holders of Common Stock shall
not
75
have as a matter of right any preemptive or preferential right to subscribe for,
purchase, receive, or otherwise acquire any part of any new or additional issue
of stock of any class, whether now or hereafter authorized, or of any bonds,
debentures, notes, or other securities of the Corporation, whether or not
convertible into shares of stock of the Corporation. The Common Shares are
subject to all of the terms and provisions of the Series A Preferred Stock as
established in accordance with this Article FOURTH.
C. Description of Series A Preferred Stock.
The terms, preferences, limitations and relative rights of the Series A
Preferred Stock are as follows:
(1) Designation. There shall be shares of Preferred Stock of the
Corporation hereby constituted as a series of Preferred Stock with no par value
designated as "Series A Non-Cumulative 20-Year Preferred Stock".
(2) Principal Amount. Each share of Series A Preferred Stock shall have a
designated principal amount of $23.00 (the "Principal Amount").
(3) Term. The Series A Preferred Stock shall have a term of twenty (20)
years from the date of issuance (the "Term"), upon the maturity of which, each
holder of the Series A Preferred Stock shall receive the Principal Amount for
each share of Series A Preferred Stock so held. The date of issuance shall be
deemed to be the date of filing of this amendment to the Company's Articles of
Incorporation with the Ohio Secretary of State.
(4) Rank. The Series A Preferred Stock, with respect to dividend rights and
rights of liquidation, dissolution or winding up of the Company, ranks senior to
the Common Stock and all of the classes and series of equity securities of the
Company, other than any classes or series of equity securities of the Company
subsequently issued ranking on a parity with, or senior to, the Series A
Preferred Stock. The relative rights and preferences of the Series A Preferred
Stock may be subordinated to the relative rights and preferences of holders of
subsequent issues of other classes or series of preferred stock and equity
securities of the Corporation upon the requisite authorizations of the
Corporation's shareholders and the Board of Directors. The Series A Preferred
Stock is junior to indebtedness issued from time to time by the Corporation,
including notes and debentures.
(5) Number of Shares in Series. The number of shares of Series A Preferred
Stock shall be 140,000 shares.
(6) Voting. Except and insofar as may be provided by law, the holders of
the Series A Preferred Stock shall have no voting rights.
(7) Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of the Corporation, then,
before any distribution or payment shall be made to the holders of any junior
stock, the holders of Series A Preferred Stock shall be entitled to be paid in
full the Principal Amount per share. To the extent such payment shall have been
made in full to the holders of the Series A Preferred
76
Stock, all other series of duly authorized preferred stock and any other stock
ranking int parity with the Series A Preferred Stock, the remaining assets and
funds of the Corporation shall be distributed among the holders of the junior
stock, according to their respective rights and preferences and in each case
according to their respective shares. If upon liquidation, dissolution or
winding up, the amounts so payable are not paid in full to the holders of all
outstanding shares of Series A Preferred Stock, and all other shares on a parity
with the Series A Preferred Stock, then the holders of Series A Preferred Stock
and all other shares on a parity with the Series A Preferred Stock, share
ratably in any distribution of assets in proportion to the full amounts to which
they would otherwise be respectively entitled.
(8) Callbility. The Series A Preferred Stock shall be callable in the
aggregate at the exclusive option of the Corporation upon: (1) written notice to
the holders thereof any time after the fifth (5th) anniversary following the
date of issuance and otherwise prior to the expriation of the Term; or (2) the
execution of any agreement or other arrangement which, if consummated, would
result in a Change of Control. In the event shares of Series A Preferred Stock
shall be called pursuant to item (1) of this Section 8, the holders thereof
shall be paid the Principal Amount plus a premium of 5% of the Principal Amount
for each share so held. In the event shares of Series A Preferred Stock shall be
called pursuant to item (2) of this Section 8, the holders thereof shall be paid
the Principal Amount for each share so held.
(9) Dividend Rights. The holders of shares of Series A Preferred Stock
shall be entitled to a preference in the distribution of dividends, when and as
declared by the Board of Directors, and shall receive out of any assets of the
Corporation legally available therefor such dividends prior to the payment of
any dividends to the holders of the Common Stock and in the same per share
amount as paid to holders of Common Stock. The shares of Series A Preferred
Stock shall be non-cumulative with respect to dividends, and the Corporation
shall have the right to waive the declaration of payment of dividends. Any
dividends waived by the Corporation shall not accumulate to future periods and
shall not represent a contingent liability of the Corporation.
(10) Conversion Rights. The shares of Series A Preferred Stock shall have
no conversion rights.
(11) Preemptive Rights. Holders of Series A Preferred Stock shall not have
as a matter of right any preemptive or preferential right to subscribe for,
purchase, receive, or otherwise acquire any part of any new or additional issue
of stock of any class, whether now or hereafter authorized, or of any bonds,
debentures, notes, or other securities of the Corporation, whether or not
convertible into shares of stock of the Corporation.
(12) Antidilution Adjustments. If the outstanding shares of Common Stock
are increased or decreased or changed into or exchanged for a different number
or kind of shares or other securities of the Corporation or of any other
corporation by reason of any merger, consolidation, liquidation,
reclassification, recapitalization, stock split up, combination of shares, or
stock dividend, appropriate adjustment shall be made by the Board of Directors
of the Corporation in the number, and relative terms, of the shares of Series A
Preferred Stock.
77
(13) Transfer Rights. A holder of Series A Preferred Stock may transfer the
ownsership of his or her Series A Preferred Stock, whether by sale, gift,
bequest or other legal means of transfer, provided that such transfer comprises
all shares of Series A Preferred Stock held thereby, and title to the Series A
Preferred Stock so transferred vests in one individual or entity which would
count as one record holder on the Company's record of shareholders.
(14) Definitions. As used herein with respect to the Series A Preferred
Stock, the following terms have the following meanings:
a. The term "Change of Control" means any of the following:
(i) A purchase or other acquisition by any person, entity or group of
persons (within the meaning of section 13 (d) or 14 (d) of the Securities
Exchange Act of 1934, as amended ("the Exchange Act") or any comparable
successor provisions), directly or indirectly, which results in the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of such person, entity or group of persons equaling 50%
or more of the combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in the election of
directors ("Voting Securities"); excluding, however, any acquisition (i) by
the Corporation or any subsidiary or affiliate of the Corporation, and (ii)
by any employee benefit plan or related trust sponsored or maintained by
the Corporation or any subsidiary or affiliate of the Corporation;
(ii) A merger, reorganization or consolidation to which the
Corporation is a party, or a sale or other disposition of all or
substantially all of the assets of the Corporation (each, a "Corporate
Transaction"); excluding however, any Corporate Transaction pursuant to
which (i) persons who were security holders of The Corporation immediately
prior to such Corporate Transaction do (solely because of their Voting
Securities owned immediately prior to Corporate Transaction) own
immediately thereafter more than 50 percent of the combined voting power
entitled to vote in the election of directors of the then outstanding
securities or the company surviving the Corporate Transaction and (ii)
individuals who constitute the incumbent board of the Corporation will
immediately after the consummation of the Corporate Transaction constitute
at least a majority of the members of the board of the company surviving
such Corporate Transaction; or
(iii) Approval by the security-holders of the Corporation of a plan of
complete liquidation or dissolution of The Corporation.
b. The term "parity stock" means all Series A Preferred Stock, and any
other class of stock of the Corporation hereafter duly authorized, which
ranks on a parity with the Series A Preferred Stock in the payment of
dividends or in the distribution of assets on any liquidation, dissolution
or winding up of the Corporation.
c. The term "junior stock" shall mean the Common Stock and any other class
of stock of the Corporation hereafter duly authorized over which the Series
A Preferred Stock has preference or priority in the payment of dividends or
in the distribution of assets on any liquidation, dissolution or winding
78
(15) Limitations of Rights. Holders of shares of Series A Preferred Stock
shall not have any relative, participating, optional or other special rights and
powers other than as set forth herein.
(16) Each share of Series A Preferred Stock shall be identical in all
respects. When payment of the consideration for which shares of Series A
Preferred Stock are to be issued shall have been received by the Corporation,
such shares shall be deemed to be fully paid and nonassessable.
79
APPENDIX E
MERCHANTS BANCORP, INC.
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
80
TABLE 1.1
MERCHANTS BANCORP, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET AS OF JUNE 30, 2005 (IN $000S)
ASSUMES ALL SHAREHOLDERS WITH LESS THAN 1,500 SHARES RECEIVE CASH @ $23.00 PER
SHARE
ACTUAL PROFORMA
6/30/2005 ADJUSTMENTS 6/30/2005
MERCHANTS ---------------------- MERCHANTS
BANCORP DEBIT CREDIT BANCORP
---------- -------- --------- ----------
ASSETS:
CASH & DUE FROM BANKS $ 10,656 $ 4,000(1) $ 3,619(2) $ 11,037
FED FUNDS SOLD $ 7,525 $ 7,525
INVESTMENT SECURITIES $ 39,033 $ 39,033
LOANS (GROSS) $ 294,728 $ 294,728
LOAN LOSS RESERVE $ 2,624 $ 2,624
---------- ----------
LOANS (NET) $ 292,104 $ 292,104
PREMISES $ 3,452 $ 3,452
OTHER REAL ESTATE $ 624 $ 624
INTANGIBLES $ 0 $ 0
OTHER ASSETS $ 7,022 $ 7,022
---------- ----------
TOTAL ASSETS $ 360,416 $ 360,797
========== ==========
LIABILITIES:
TOTAL DEPOSITS $ 285,882 $ 285,882
FED FUNDS PURCHASED $ 2,644 $ 2,644
OTHER BORROWED MONEY $ 37,862 $ 4,000(1) $ 41,862
PREFERRED STOCK -- SERIES A $ 0 $ 0
OTHER LIABILITIES $ 1,878 $ 1,878
---------- ----------
TOTAL LIABILITIES $ 328,266 $ 332,266
STOCKHOLDERS' EQUITY:
EQUITY CAPITAL $ 31,692 $ 3,619(2) $ 28,073
NET UNREALIZED GAIN ON SEC. $ 458 $ 458
---------- ----------
TOTAL EQUITY $ 32,150 $ 28,531
---------- ----------
TOTAL LIAB. & EQUITY $ 360,416 $ 7,619 $ 7,619 $ 360,797
========== ======== ========= ==========
TIER 1 RISK-BASED CAPITAL RATIO 11.89% 10.52%
TOTAL RISK-BASED CAPITAL RATIO 12.87% 11.51%
TIER 1 LEVERAGE RATIO 8.70% 7.70%
TIER 1 CAPITAL $ 31,680 ($3,619) $ 28,061
TIER 2 CAPITAL $ 2,624 $ 2,624
---------- ----------
TOTAL CAPITAL $ 34,304 ($3,619) $ 30,685
SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
BOOK VALUE PER SHARE (COMMON) $ 12.06 $ 11.35
(1) ASSUMES $4,000 OF FUNDS BORROWED TO FINANCE STOCK REPURCHASE.
(2) CASH PAYMENTS TO SHAREHOLDERS WITH LESS THAN 1,500 SHARES (152,560 SHARES @
$23.00 PER SHARE) PLUS $110 OF ESTIMATED EXPENSES ASSOCIATED WITH THE
TRANSACTION.
81
TABLE 1.2
MERCHANTS BANCORP, INC.
CONSOLIDATED PRO FORMA INCOME STATEMENT FOR 12-MONTHS ENDING 12/31/2004 (IN
$000S)
ASSUMES ALL SHAREHOLDERS WITH LESS THAN 1,500 SHARES RECEIVE CASH @ $23.00 PER
SHARE
ACTUAL PROFORMA
12-MONTHS ENDING 12-MONTHS ENDING
12/31/2004 12/31/2004
MERCHANTS MERCHANTS
BANCORP ADJUSTMENTS BANCORP
---------------- ------------ ----------------
INCOME STATEMENT
INTEREST INCOME $ 20,565 $ 20,565
INTEREST EXPENSE $ 6,938 $ 250(1) $ 7,188
---------- --------- ----------
NET INTEREST INCOME $ 13,627 ($250) $ 13,377
LOAN LOSS PROVISION $ 676 $ 676
---------- ----------
NONINTEREST INCOME $ 1,541 $ 1,541
SALARY AND BENEFITS $ 3,980 $ 3,980
OCCUPANCY & EQUIPMENT $ 1,033 $ 1,033
OTHER NONINTEREST EXPENSE $ 2,930 ($67)(2) $ 2,863
---------- --------- ----------
TOTAL NONINTEREST EXPENSE $ 7,943 $ 7,876
---------- ----------
SECURITIES TRANSACTIONS $ 0 $ 0
---------- ----------
INCOME BEFORE TAXES $ 6,549 ($183) $ 6,366
INCOME TAXES $ 1,942 ($62)(3) $ 1,880
---------- --------- ----------
NET INCOME $ 4,607 ($121) $ 4,486
========== ========= ==========
COMMON DIVIDENDS $ 1,867 ($107) $ 1,760
SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
AVERAGE SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
EARNINGS PER SHARE $ 1.73 $ 1.78
DIVIDENDS PER SHARE (COMMON) $ 0.70 $ 0.70
DIVIDENDS PER SHARE (PREFERRED) N.A. N.A.
(1) ASSUMES $4,000 OF BORROWINGS AT 6.25% INTEREST RATE (PRIME RATE @
06/30/2005).
(2) ASSUMES THE FOLLOWING 12-MONTHS ENDING 12/31/2004 COST SAVINGS/EXPENSES:
TRANSACTION RELATED EXPENSES ($15)
SEC/SOX SAVINGS $ 82
-----
NET COST SAVINGS $ 67
(3) BASED ON 34% TAX RATE.
82
PRO FORMA VS ACTUAL FINANCIAL RATIOS
FOR 12-MONTHS ENDING 12/31/2004
ASSUMES ALL SHAREHOLDERS WITH LESS THAN 1,500 SHARES RECEIVE
CASH @ $23.00 PER SHARE
ACTUAL PROFORMA
12-MONTHS ENDING 12-MONTHS ENDING
12/31/2004 12/31/2004
---------------- ----------------
Return on Average Assets 1.28% 1.25%
Return on Average Common Equity 15.22% 16.83%
Total Equity/Assets (Average) 8.41% 7.40%
Net Interest Income/Average Assets 3.79% 3.71%
Noninterest Expense/Average Assets 2.21% 2.19%
83
TABLE 1.3
MERCHANTS BANCORP, INC.
CONSOLIDATED PRO FORMA INCOME STATEMENT FOR 6-MONTHS ENDING 06/30/2005
(IN $000S)
ASSUMES ALL SHAREHOLDERS WITH LESS THAN 1,500 SHARES RECEIVE
CASH @ $23.00 PER SHARE
ACTUAL PROFORMA
6-MONTHS ENDING 6-MONTHS ENDING
06/30/2005 06/30/2005
MERCHANTS MERCHANTS
INCOME STATEMENT BANCORP ADJUSTMENTS BANCORP
- ------------------------------- --------------- ----------- ---------------
INTEREST INCOME $ 10,676 $ 10,676
INTEREST EXPENSE $ 3,704 $ 125(1) $ 3,829
---------- --------- ----------
NET INTEREST INCOME $ 6,972 ($125) $ 6,847
LOAN LOSS PROVISION $ 360 $ 360
---------- ----------
NONINTEREST INCOME $ 883 $ 883
SALARY AND BENEFITS $ 2,216 $ 2,216
OCCUPANCY & EQUIPMENT $ 478 $ 478
OTHER NONINTEREST EXPENSE $ 1,451 ($22)(2) $ 1,429
---------- --------- ----------
TOTAL NONINTEREST EXPENSE $ 4,145 $ 4,123
---------- ----------
SECURITIES TRANSACTIONS $ 0 $ 0
---------- ----------
INCOME BEFORE TAXES $ 3,350 ($103) $ 3,247
INCOME TAXES $ 1,009 ($35)(3) $ 974
---------- --------- ----------
NET INCOME $ 2,341 ($68) $ 2,273
========== ==========
COMMON DIVIDENDS $ 960 ($55) $ 905
SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
AVERAGE SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
EARNINGS PER SHARE $ 0.88 $ 0.90
DIVIDENDS PER SHARE (COMMON) $ 0.36 $ 0.36
DIVIDENDS PER SHARE (PREFERRED) N.A. N.A.
(1) ASSUMES $4,000 OF BORROWINGS AT 6.25% INTEREST RATE (PRIME RATE @
06/30/2005)).
(2) ASSUMES THE FOLLOWING 6-MONTHS ENDING 06/30/2005 COST SAVINGS/EXPENSES:
TRANSACTION RELATED EXPENSES ($15)
SEC/SOX SAVINGS $ 37
-----
NET COST SAVINGS $ 22
(3) BASED ON 34% TAX RATE.
84
PRO FORMA VS ACTUAL FINANCIAL RATIOS
FOR 6-MONTHS ENDING 06/30/2005
ASSUMES ALL SHAREHOLDERS WITH LESS THAN 1,500 SHARES RECEIVE
CASH @ $23.00 PER SHARE
ACTUAL PROFORMA
6-MONTHS ENDING 6-MONTHS ENDING
06/30/2005 06/30/2005
--------------- ---------------
Return on Average Assets 1.29% 1.25%
Return on Average Common Equity 14.50% 15.85%
Total Equity/Assets (Average) 8.90% 7.90%
Net Interest Income/Average Assets 3.84% 3.77%
Noninterest Expense/Average Assets 2.28% 2.27%
85
TABLE 2.1
MERCHANTS BANCORP, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET AS OF JUNE 30, 2005 (IN $000S)
ASSUMES ALL ELIGIBLE SHAREHOLDERS ELECT TO TAKE PREFERRED STOCK
ACTUAL PROFORMA
6/30/2005 ADJUSTMENTS 6/30/2005
MERCHANTS -------------------- MERCHANTS
BANCORP DEBIT CREDIT BANCORP
---------- ------ --------- ----------
ASSETS:
CASH & DUE FROM BANKS $ 10,656 $ 500(1) $ 433(2) $ 10,723
FED FUNDS SOLD $ 7,525 $ 7,525
INVESTMENT SECURITIES $ 39,033 $ 39,033
LOANS (GROSS) $ 294,728 $ 294,728
LOAN LOSS RESERVE $ 2,624 $ 2,624
---------- ----------
LOANS (NET) $ 292,104 $ 292,104
PREMISES $ 3,452 $ 3,452
OTHER REAL ESTATE $ 624 $ 624
INTANGIBLES $ 0 $ 0
OTHER ASSETS $ 7,022 $ 7,022
---------- ----------
TOTAL ASSETS $ 360,416 $ 360,483
========== ==========
LIABILITIES:
TOTAL DEPOSITS $ 285,882 $ 285,882
FED FUNDS PURCHASED $ 2,644 $ 2,644
OTHER BORROWED MONEY $ 37,862 $ 500(1) $ 38,362
PREFERRED STOCK -- SERIES A $ 0 $ 3,186(3) $ 3,186
OTHER LIABILITIES $ 1,878 $ 1,878
---------- ----------
TOTAL LIABILITIES $ 328,266 $ 331,952
STOCKHOLDERS' EQUITY:
EQUITY CAPITAL $ 31,692 $3,619(4) $ 28,073
NET UNREALIZED GAIN ON SEC $ 458 $ 458
---------- ----------
TOTAL EQUITY $ 32,150 $ 28,531
---------- ----------
TOTAL LIAB. & EQUITY $ 360,416 $4,119 $ 4,119 $ 360,483
========== ====== ========= ==========
TIER 1 RISK-BASED CAPITAL RATIO 11.89% 10.53%
TOTAL RISK-BASED CAPITAL RATIO 12.87% 12.71%
TIER 1 LEVERAGE RATIO 8.70% 7.71%
TIER 1 CAPITAL $ 31,680 ($3,619) $ 28,061
TIER 2 CAPITAL $ 2,624 $ 3,186(5) $ 5,810
---------- --------- ----------
TOTAL CAPITAL $ 34,304 ($433) $ 33,871
SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
BOOK VALUE PER SHARE (COMMON) $ 12.06 $ 11.35
(1) ASSUMES $500 IN BORROWINGS.
(2) INCLUDES $323 FOR CASH PAYMENT TO SHAREHOLDERS WITH LESS THAN 100 SHARES
(14,037 SHARES @ $23.00 PER SHARE) AND $110 OF TRANSACTION COSTS.
(3) ASSUMES 138,523 COMMON SHARES CONVERT TO PREFERRED STOCK SERIES A AT $23.00
PAR VALUE.
(4) REPRESENTS STOCK REPURCHASED FOR CASH AND SHARES CONVERTED TO PREFERRED
STOCK.
(5) FOR PURPOSES OF THE REGULATORY CAPITAL COMPUTATIONS, THE PREFERRED STOCK IS
TREATED AS TIER 2 CAPITAL.
86
TABLE 2.2
MERCHANTS BANCORP, INC.
CONSOLIDATED PRO FORMA INCOME STATEMENT FOR 12-MONTHS ENDING 12/31/2004
(IN $000S)
ASSUMES ALL ELIGIBLE SHAREHOLDERS ELECT TO TAKE PREFERRED STOCK
ACTUAL PROFORMA
12-MONTHS ENDING 12-MONTHS ENDING
12/31/2004 12/31/2004
MERCHANTS MERCHANTS
BANCORP ADJUSTMENTS BANCORP
---------------- ----------- ----------------
INCOME STATEMENT
INTEREST INCOME $ 20,565 $ 20,565
INTEREST EXPENSE $ 6,938 $ 31(1) $ 7,066
---------- ----------
$ 97(4)
---------
NET INTEREST INCOME $ 13,627 ($128) $ 13,499
LOAN LOSS PROVISION $ 676 $ 676
---------- ----------
NONINTEREST INCOME $ 1,541 $ 1,541
SALARY AND BENEFITS $ 3,980 $ 3,980
OCCUPANCY & EQUIPMENT $ 1,033 $ 1,033
OTHER NONINTEREST EXPENSE $ 2,930 ($67)(2) $ 2,863
---------- --------- ----------
TOTAL NONINTEREST EXPENSE $ 7,943 $ 7,876
---------- ----------
SECURITIES TRANSACTIONS $ 0 $ 0
---------- ----------
INCOME BEFORE TAXES $ 6,549 ($61) $ 6,488
INCOME TAXES $ 1,942 $ 12(3) $ 1,954
---------- ----------
NET INCOME $ 4,607 ($73) $ 4,534
========== ==========
COMMON DIVIDENDS $ 1,867 ($107) $ 1,760
SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
AVERAGE SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
EARNINGS PER SHARE $ 1.73 $ 1.80
DIVIDENDS PER SHARE (COMMON) $ 0.70 $ 0.70
DIVIDENDS PER SHARE (PREFERRED) N.A. $ 0.70
(1) ASSUMES $500 OF BORROWINGS AT 6.25% (PRIME RATE @ 06/30/2005).
(2) ASSUMES THE FOLLOWING 12-MONTHS ENDING 12/31/2004 COST SAVINGS/EXPENSES:
TRANSACTION RELATED EXPENSES ($15)
SEC/SOX SAVINGS $ 82
-----
NET COST SAVINGS $ 67
(3) BASED ON 34% TAX RATE.
(4) DIVIDENDS ON 138,523 SHARES OF PREFERRED STOCK TREATED AS INTEREST EXPENSE.
87
PRO FORMA VS ACTUAL FINANCIAL RATIOS
FOR 12-MONTHS ENDING 12/31/2004
ASSUMES ALL ELIGIBLE SHAREHOLDERS ELECT TO TAKE PREFERRED STOCK
ACTUAL PROFORMA
12-MONTHS ENDING 12-MONTHS ENDING
12/31/2004 12/31/2004
---------------- ----------------
Return on Average Assets 1.28% 1.26%
Return on Average Common Equity 15.22% 17.01%
Total Equity/Assets (Average) 8.41% 7.41%
Net Interest Income/Average Assets 3.79% 3.75%
Noninterest Expense/Average Assets 2.21% 2.19%
88
TABLE 2.3
MERCHANTS BANCORP, INC.
CONSOLIDATED PRO FORMA INCOME STATEMENT FOR 6-MONTHS ENDING 06/30/2005 (IN
$000S)
ASSUMES ALL ELIGIBLE SHAREHOLDERS ELECT TO TAKE PREFERRED STOCK
ACTUAL PROFORMA
6-MONTHS ENDING 6-MONTHS ENDING
06/30/2005 06/30/2005
MERCHANTS MERCHANTS
INCOME STATEMENT BANCORP ADJUSTMENTS BANCORP
- ------------------------------- --------------- ----------- ---------------
INTEREST INCOME $ 10,676 $ 10,676
INTEREST EXPENSE $ 3,704 $ 16(1) $ 3,769
---------- ----------
$ 50(4)
---------
NET INTEREST INCOME $ 6,972 ($65) $ 6,907
LOAN LOSS PROVISION $ 360 $ 360
---------- ----------
NONINTEREST INCOME $ 883 $ 883
SALARY AND BENEFITS $ 2,216 $ 2,216
OCCUPANCY & EQUIPMENT $ 478 $ 478
OTHER NONINTEREST EXPENSE $ 1,451 ($22)(2) $ 1,429
---------- --------- ----------
TOTAL NONINTEREST EXPENSE $ 4,145 $ 4,123
---------- ----------
SECURITIES TRANSACTIONS $ 0 $ 0
---------- ----------
INCOME BEFORE TAXES $ 3,350 ($43) $ 3,307
---------
INCOME TAXES $ 1,009 $ 2(3) $ 1,011
---------- ----------
NET INCOME $ 2,341 ($46) $ 2,295
========== ==========
COMMON DIVIDENDS $ 960 ($55) $ 905
SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
AVERAGE SHARES OUTSTANDING 2,666,650 (152,560) 2,514,091
EARNINGS PER SHARE $ 0.88 $ 0.91
DIVIDENDS PER SHARE (COMMON) $ 0.36 $ 0.36
DIVIDENDS PER SHARE (PREFERRED) N.A. $ 0.36
(1) ASSUMES $500 OF BORROWINGS AT 6.25% (PRIME RATE @ 06/30/2005).
(2) ASSUMES THE FOLLOWING 6-MONTHS ENDING 06/30/2005 COST SAVINGS/EXPENSES:
TRANSACTION RELATED EXPENSES ($15)
SEC/SOX SAVINGS $ 37
-----
NET COST SAVINGS $ 22
(3) BASED ON 34% TAX RATE.
(4) DIVIDENDS ON 138,523 SHARES OF PREFERRED STOCK TREATED AS INTEREST EXPENSE.
89
PRO FORMA VS ACTUAL FINANCIAL RATIOS
FOR 6-MONTHS ENDING 06/30/2005
ASSUMES ALL ELIGIBLE SHAREHOLDERS ELECT TO TAKE PREFERRED STOCK
ACTUAL PROFORMA
6-MONTHS ENDING 6-MONTHS ENDING
06/30/2005 06/30/2005
--------------- ---------------
Return on Average Assets 1.29% 1.26%
Return on Average Common Equity 14.50% 16.01%
Total Equity/Assets (Average) 8.90% 7.90%
Net Interest Income/Average Assets 3.84% 3.81%
Noninterest Expense/Average Assets 2.28% 2.27%
90
APPENDIX F
MERCHANTS BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2005
91
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
COMMISSION FILE NUMBER: 0-49771
MERCHANTS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1467303
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 North High Street, Hillsboro, Ohio 45133
(Address of principal executive offices) (Zip Code)
(937) 393-1993
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock - 2,666,650 shares outstanding at August 15, 2005
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
The accompanying information has not been audited by a registered independent
public accounting firm; however, in the opinion of management such information
reflects all adjustments necessary for a fair presentation of the results for
the interim period. All such adjustments are of a normal and recurring nature.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by accounting principles generally accepted in the United
States of America or those made in the Registrant's Form 10-K. Accordingly, the
reader of the Form 10-Q should refer to the Registrant's Form 10-K for the year
ended December 31, 2004 for further information in this regard.
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MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004 (IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 10,656 $ 12,499
Federal funds sold 7,525 16,225
----------- ------------
Total cash and cash equivalents 18,181 28,724
----------- ------------
SECURITIES AVAILABLE FOR SALE
(amortized cost of $38,054 and $30,985 respectively) 39,033 31,979
----------- ------------
LOANS 294,728 294,610
Less allowance for loan losses (2,624) (2,519)
----------- ------------
Net loans 292,104 292,091
----------- ------------
OTHER ASSETS:
Bank premises and equipment, net 3,452 3,623
Accrued interest receivable 2,728 2,679
Deferred Income Tax 283 278
Other 4,635 4,607
----------- ------------
Total other assets 11,098 11,187
----------- ------------
TOTAL $ 360,416 $ 363,981
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 31,925 $ 34,834
Interest bearing 253,957 252,997
----------- ------------
Total deposits 285,882 287,831
----------- ------------
Repurchase agreements 2,644 2,944
FHLB borrowings 37,862 39,920
Other liabilities 1,878 2,508
----------- ------------
Total liabilities 328,266 333,203
----------- ------------
SHAREHOLDERS' EQUITY:
Common stock - no par value; 4,500,000 shares
authorized and 2,666,650 shares outstanding at
June 30, 2005 and December 31, 2004 2,000 2,000
Additional paid-in capital 2,000 2,000
Retained earnings 34,692 33,311
Accumulated other comprehensive income 458 467
Treasury Stock, at cost 333,350 shares
June 30, 2005 and December 31, 2004, respectively (7,000) (7,000)
----------- ------------
Total shareholders' equity 32,150 30,778
----------- ------------
TOTAL $360,416 $363,981
=========== ============
See notes to condensed consolidated financial statements.
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MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Interest and fees on loans $ 4,903 $ 4,699 $ 9,616 $ 9,385
Interest and dividends on securities:
Taxable 236 131 427 270
Exempt from income taxes 226 243 451 487
Interest on federal funds sold and other short-term investments 109 37 182 68
-------- -------- -------- --------
Total interest income 5,474 5,110 10,676 10,210
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 1,477 1,202 2,861 2,378
Interest on repurchase agreements and federal funds purchased 15 26 31 52
Interest on FHLB borrowings 402 433 812 880
-------- -------- -------- --------
Total interest expense 1,894 1,661 3,704 3,310
-------- -------- -------- --------
NET INTEREST INCOME 3,580 3,449 6,972 6,900
PROVISION FOR LOAN LOSSES (180) (181) (360) (334)
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,400 3,268 6,612 6,566
-------- -------- -------- --------
NONINTEREST INCOME - Service charges and fees 412 390 883 780
-------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,080 1,030 2,216 2,048
Occupancy 245 255 478 519
Legal and professional services 136 144 276 256
Franchise tax 86 61 164 127
Data processing 74 79 148 153
Advertising 53 72 104 140
Other 369 362 759 757
-------- -------- -------- --------
Total noninterest expense 2,043 2,003 4,145 4,000
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,769 1,655 3,350 3,346
INCOME TAXES (535) (523) (1,009) (1,057)
-------- -------- -------- --------
NET INCOME $ 1,234 $ 1,132 $ 2,341 $ 2,289
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.46 $ 0.42 $ 0.88 $ 0.86
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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(UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 2,341 $ 2,289
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 284 295
Provision for loan losses 360 334
Gain on sale of mortgage loans (93) (102)
Proceeds from sale of mortgage loans 8,520 8,438
Mortgage loans originated for sale (8,427) (8,336)
Changes in assets and liabilities:
Accrued interest receivable (49) 600
Other assets (28) (1,253)
Accrued interest, taxes and other liabilities (630) (5,669)
--------- ---------
Net cash (used in) provided by operating activities 2,278 (3,404)
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities available for sale 3,272 4,963
Purchases of securities available for sale (10,375) (4,988)
Net increase in loans (373) (6,234)
Capital expenditures (78) (23)
--------- ---------
Net cash provided by investing activities (7,554) (6,282)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits (1,949) 7,387
Net increase in repurchase agreements (300) 847
FHLB payments (2,058) (2,254)
Dividends paid to stockholders (960) (906)
--------- ---------
Net cash (used in) provided by financing activities (5,267) 5,074
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,543) (4,612)
CASH AND CASH EQUIVALENTS:
Beginning of year 28,724 22,395
--------- ---------
End of period $ 18,181 $ 17,783
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for federal income taxes $ 1,600 $ 425
========= =========
Cash paid during the period for interest $ 3,664 $ 3,309
========= =========
See notes to condensed consolidated financial statements.
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MERCHANTS BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The unaudited condensed consolidated financial statements include the
accounts of Merchants Bancorp, Inc. and its wholly-owned subsidiary,
Merchants National Bank (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
In the opinion of management, these condensed consolidated financial
statements include all adjustments (which consist of normal recurring
accruals) necessary to present the condensed consolidated financial
position as of June 30, 2005, the results of operations for the three and
six months ended June 30, 2005 and 2004, and of cash flows for the
six-months ended June 30, 2005 and 2004. These condensed consolidated
financial statements have been prepared in accordance with instructions to
Form 10-Q, and therefore do not include all information and footnote
disclosures necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. Financial
information as of December 31, 2004 has been derived from the audited
consolidated financial statements of Merchants Bancorp, Inc. and
subsidiary. The results of operations for the three and six months ended
June 30, 2005 and 2004 and cash flows for the six months ended June 30,
2005 and 2004 are not necessarily indicative of the results to be expected
for the full year. For further information, refer to the consolidated
financial statements and footnotes as of and for the year ended December
31, 2004, included in the Company's Form 10-K.
Earnings per Share - Basic earnings per share is computed using the
weighted average number of shares of common stock outstanding during the
period. For the three and six months ended June 30, 2005 the Company had
2,666,650 shares outstanding. For the three and six months ended June 30,
2004 the Company had 2,666,650 shares outstanding. There were no common
stock equivalents or potentially diluted securities outstanding during the
respective periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a Replacement of APB Opinion No. 20 and FASB Statement No.
3." This Statement replaces APB Opinion No. 20, "Accounting Changes," and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and
reporting of a change in accounting principle. This Statement requires
retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
This Statement applies to all voluntary changes in accounting principle.
It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific
transition provisions. This Statement is effective for accounting changes
and error corrections made in fiscal years beginning after December 15,
2005. The adoption of this Statement is not expected to have a material
effect on the Registrant's Condensed Consolidated Financial Statements.
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3. LOANS
Major classifications of loans are summarized as follows (in thousands):
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED)
Commercial real estate $ 64,199 $ 64,460
Commercial and industrial 25,101 26,350
Agricultural 42,257 39,970
Residential real estate 137,641 136,165
Installment 23,230 25,080
Other 2,300 2,585
--------- --------
Total 294,728 294,610
Less allowance for loan losses (2,624) (2,519)
--------- --------
$ 292,104 $292,091
========= ========
4. FHLB BORROWINGS
All stock in the Federal Home Loan Bank ("FHLB") and qualifying first
mortgage residential loans are pledged as collateral on FHLB borrowings.
Interest rates of advances from the FHLB at June 30, 2005 are as follows
(in thousands):
INTEREST
RATE AMOUNT
----------- --------
2008 4.78%-5.39% $ 4,000
2010 6.26 % 3,000
2011 5.23 % 84
2012 4.64 % 10,000
2013 2.82%-3.13% 1,639
2018 2.83%-4.04% 7,362
2023 3.02%-4.24% 11,777
--------
Total $ 37,862
========
The maximum amount available to the Company under FHLB borrowings was
approximately $76.7 million and $77.7 million as of June 30, 2005 and
December 31, 2004, respectively.
5. SUBSEQUENT EVENTS
On August 4, 2005, the Company announced the decision of its Board of
Directors to engage in a "going private" transaction for the purpose of
deregistering the Company's common shares under Section 12(g) of the
Securities Exchange Act of 1934. The Board has decided to structure the
going private transaction as follows:
- Shareholders owning 100 or fewer common shares of the Company will
receive $23.00 in cash for each share held;
- Shareholders owning more than 100 but fewer than 1,500 common shares of
the Company will have the option of choosing between $23.00 in cash or
the receipt of a proposed new class of non-voting preferred stock of
the Company called "Series A Preferred Stock"; and
- Shareholders owning 1,500 or more common shares of the Company will
retain their common shares without change.
98
Assuming approval by the Company's shareholders, the transaction will be
facilitated through the merger of a newly organized, wholly-owned
subsidiary with and into the Company. The Company expects to hold a
special shareholder meeting during the fourth quarter of 2005 to allow
shareholders to consider and vote on the proposed transaction. Proxy
materials discussing the proposed transaction in much greater detail will
be distributed to shareholders, which will likely occur toward the early
part of the fourth quarter. As a result of the proposed transaction
structure, all shareholders of the Company will be entitled to dissenters'
rights of appraisal in accordance with Section 1701.85 of the Ohio Revised
Code. The Company expects to repurchase approximately 150,000 to 160,000
of its Common Shares as part of the proposed transaction. However, the
Board has expressly reserved the right to reevaluate the desirability of
completing the transaction in the event the Company is directed by its
shareholders to repurchase more than 160,000 of its Common Shares for
cash.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Merchants Bancorp, Inc. (the "Company") is a bank holding company and sole
shareholder of Merchants National Bank (the "Bank"), headquartered in Hillsboro,
Ohio. At June 30, 2005, the Company had total assets of approximately $360.4
million and total shareholders' equity of approximately $32.1 million.
The Company, through its banking affiliate, offers a broad range of banking
services to the commercial, industrial and consumer market segments which it
serves. The primary business of the Bank consists of accepting deposits through
various consumer and commercial deposit products, and using such deposits to
fund various loan products. The Bank's primary loan products are as follows: (1)
loans secured by residential real estate, including loans for the purchase of
one to four family residences which are secured by 1st and 2nd mortgages and
home equity loans; (2) consumer loans, including new and used automobile loans,
loans for the purchase of mobile homes and debt consolidation loans; (3)
agricultural loans, including loans for the purchase of real estate used in
connection with agricultural purposes, operating loans and loans for the
purchase of equipment; and (4) commercial loans, including loans for the
purchase of real estate used in connection with office or retail activities,
loans for the purchase of equipment and loans for the purchase of inventory.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require us to make
estimates and assumptions about future events and their impact on amounts
reported in our financial statements and related notes. Since future events and
their impact cannot be determined with certainty, the actual results will
inevitably differ from our estimates. Such differences could be material to the
financial statements.
The Company believes the application of accounting policies and the estimates
required therein are reasonable. These accounting policies and estimates are
constantly reevaluated, and adjustments are made when facts and circumstances
dictate a change. Historically, the Company has found its application of
accounting policies to be appropriate, and actual results have not differed
materially from those determined using necessary estimates.
The Company's accounting policies are more fully described in Note 1 to the
condensed consolidated financial statements.
99
Management believes that the determination of the allowance for loan losses
represents a critical accounting policy. The Company maintains an allowance for
loan losses to absorb probable loan losses inherent in the portfolio. The
allowance for loan losses is maintained at a level management considers to be
adequate to absorb probable loan losses inherent in the portfolio, based on
evaluations of the collectibility and historical loss experience of loans.
Credit losses are charged and recoveries are credited to the allowance.
Provisions for loan losses are based on management's review of the historical
loan loss experience and such factors which, in management's judgment, deserve
consideration under existing economic conditions in estimating probable credit
losses. The allowance is based on ongoing assessments of the probable estimated
losses inherent in the loan portfolio. The Company's methodology for assessing
the appropriate allowance level consists of several key elements, as described
below.
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and available legal options. Included in the review of individual loans are
those that are impaired as provided in Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended. Any specific reserves for impaired loans are measured based on the fair
value of the underlying collateral. The Company evaluates the collectibility of
both principal and interest when assessing the need for a specific reserve.
Historical loss rates are applied to other commercial loans not subject to
specific reserve allocations.
Homogenous loans, such as consumer installment and residential mortgage loans,
are not individually reviewed by management. Reserves are established for each
pool of loans based on the expected net charge-offs. Loss rates are based on the
average two-year net charge-off history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the local economy, trends in the nature and
volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the
Company's internal credit review function.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring loss when evaluating reserves for individual loans or pools of
loans.
Specific reserves on individual loans and historical loss rates are reviewed
throughout the year and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off experience.
The Company has not substantively changed any aspect of its overall approach in
the determination of the allowance for loan losses. Excluding the refinement
from a five year to a two year trend in the calculation of the allowance for
loan loss for homogeneous loans, there have been no material changes in
assumptions or estimation techniques as compared to prior years that impacted
the determination of the current year allowance.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE, 2005 AND 2004
The Company reported net income of $1,234,000 and $1,132,000 for the three
months ended June 30, 2005 and 2004, respectively. During the same periods,
basic and diluted earnings per share were $.46 and $.42, respectively. On an
annualized basis, return on average assets was 1.36% and return on average
equity was 15.26% for the three months ended June 30, 2005, compared to 1.27%
and 15.25%, respectively, for the comparable period in 2004.
Net interest income for the three months ended June 30, 2005, was $3,580,000, an
increase of $131,000, or 3.8%, compared to net interest income of $3,449,000 for
the comparable period in 2004. Net interest margin was 4.11% for the three
months ended June 30, 2005, compared to 4.07% for the comparable period in 2004.
The average annualized yield on earning assets increased to 6.29% for the three
months ended June 30, 2005, from 6.03% for the comparable period in 2004. The
average cost of interest-bearing funds was 2.59% for the three months ended June
30, 2005, an increase from 2.25% for the comparable period in 2004. The net
interest margin has remained
100
relatively constant for the same time period as last year. The slight change is
a result of fluctuations in various balance sheet categories.
The provision for loan losses was $180,000 and $181,000 for the three months
ended June 30, 2005 and 2004, respectively. Net charge-offs for the three months
ended June 30, 2005 were $114,000, compared to $189,000 experienced during the
three months ended June 30, 2004. Management does not foresee any large losses
in the portfolio at this time but continues to monitor any exposure which could
arise in the agricultural loan portfolio due to adverse weather conditions.
Total noninterest income was $412,000 for the three months ended June 30, 2005,
an increase of $22,000, or 5.6%, from $390,000 for the comparable period in
2004. The increase can be attributed to growth in transaction volumes.
Total noninterest expense was $2,043,000 for the three months ended June 30,
2005, an increase of $40,000, or 2.0%, from $2,003,000 for the comparable period
in 2004. It is typically expected for non-interest expense to increase 5-10%
each year. The increase is significantly less due to a reduction in depreciation
expense as a result of some assets becoming fully depreciated and the collection
expense being considerably less than in the previous year. Salaries and benefits
have increased $50,000 or 4.9%. The increase is mainly due to the hiring of
additional staff in the loan area. Salaries and benefits expense comprises the
largest component of noninterest expense, with totals of $1,080,000 and
$1,030,000 for the three months ended June 30, 2005 and 2004, respectively.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
The Company reported net income of $2,341,000 and $2,289,000 for the six months
ended June 30, 2005 and 2004, respectively. During each of the same periods,
basic and diluted earnings per share were $.88 and $.86, respectively. On an
annualized basis, return on average assets was 1.29% and return on average
equity was 14.58% for the six months ended June 30, 2005, compared to 1.29% and
15.81%, respectively, for the comparable period in 2004.
Net interest income for the six months ended June 30, 2005, was $6,972,000, an
increase of $72,000, or 1.04%, compared to net interest income of $6,900,000 for
the comparable period in 2004. Net interest margin was 4.04% for the six months
ended June 30, 2005, compared to 4.08% for the comparable period in 2004. The
average annualized yield on earning assets decreased to 6.18% for the six months
ended June 30, 2005, from 6.39% for the comparable period in 2004. The average
cost of interest-bearing funds was 2.50% for the six months ended June 30, 2005,
an increase from 2.26% for the comparable period in 2004. Management attributes
the decrease in net interest margin to the recording of lower yielding 1-4
family loans. Additionally, while prime rates continue to reprice upward,
deposits are repricing upwards faster than loan rates. The longer term treasury
yields are remaining at a historically low yield which is what is used to price
mortgage rates. For these reasons the net interest margin continues to fall but
at a slower rate than in recent past.
The provision for loan losses was $360,000 and $334,000 for the six months ended
June 30, 2005 and 2004, respectively, representing an increase of 7.8%. Net
charge-offs for the six months ended June 30, 2005 were $254,000, compared to
$274,000 experienced during the six months ended June 30, 2004. Management does
not foresee any large losses in the portfolio at this time but continues to
monitor any exposure which could arise in the agricultural loan portfolio due to
adverse weather conditions.
Total noninterest income was $883,000 for the six months ended June 30, 2005, an
increase of $103,000, or 13.1%, from $780,000 for the comparable period in 2004.
The increase is due increased volumes of transactions, resulting in higher
service charges on customers' deposit transactions account and the recording of
miscellaneous fee income during the first quarter.
101
Total noninterest expense was $4,145,000 for the six months ended June 30, 2005,
an increase of $145,000, or 3.6%, from $4,000,000 for the comparable period in
2004. Salaries and benefits expense comprises the largest component of
noninterest expense, with totals of $2,216,000 and $2,048,000, an increase of
8.2%, for the six months ended June 30, 2005 and 2004, respectively. The
salaries and benefits have increased due to the hiring of additional staff in
the loan area. It is typically expected for non-interest expense to increase
5-10% each year. The overall increase is significantly less due to a reduction
in depreciation expense as a result of some assets becoming fully depreciated
and because of collection expense being significantly less in the current year.
FINANCIAL CONDITION
The Company's total assets decreased to $360.4 million as of June 30, 2005 from
$363.9 million as of December 31, 2004, a decrease of .98%. The largest change
in the balance sheet is a change in the mix of the assets. The two main areas
affected by change in balance sheet mix were securities, which increased $7.0
million and fed funds sold, which decreased $8.7 million. Another significant
change was a decrease in deposits of $2.0 million dollars. Loans remained
unchanged and this can be attributed to economic conditions and the timing of
the loan pool.
LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company reported total loans of $294.7 million as of June 30, 2005 and
$294.6 million as of December 31, 2004, an increase of $114,000, or 0.04%. The
portfolio composition has remained consistent during the period.
Federal regulations and generally accepted accounting principles require that
the Company establish prudent allowances for loan losses. The Company maintains
an allowance for loan losses to absorb probable loan losses inherent in the
portfolio, based on evaluations of the collectibility and historical loss
experience of loans. Loan losses are charged and recoveries are credited to the
allowance. Provisions for loan losses are based on management's review of the
historical loan loss experience and such factors which, in management's
judgment, deserve consideration under existing economic conditions in estimating
probable loan losses. The allowance is based on ongoing assessments of the
probable estimated losses inherent in the loan portfolio. The Company has not
substantively changed any aspect of its overall approach in the determination of
the allowance for loan losses from year end. There have been no material changes
in assumptions or estimation techniques as compared to prior years that impacted
the determination of the current year allowance.
The allowance for loan losses was 0.89% of total loans as of June 30, 2005 and
0.86% as of December 31, 2004.
The amount of nonaccrual loans decreased to $685,000 as of June 30, 2005,
compared to $747,000 as of March 31, 2005, and $728,000 at December 31, 2004. As
a percentage of total loans, nonaccrual loans represented 0.23% as of June 30,
2005, 0.25% as of March 31, 2005, and 0.25% as of December 31, 2004.
The category of accruing loans which are past due 90 days or more was $1,260,000
as of June 30, 2005, $847,000 as of March 31, 2005, and $452,000 as of December
31, 2004. As a percentage of total loans, loans past due 90 days and still
accruing interest represented .43% as of June 30, 2005, 0.29% as of March 31,
2005, and 0.15% as of December 31, 2004. The increase of $413,000 from March
2005 is primarily made up of one borrower with loan balances totaling $434,000.
The collateral for these loans include a residential property with a current
loan balance of $137,000 which is in the process of being sold and no loss is
anticipated. The remaining $297,000 loan balance is collateralized by vehicles
and a second residential property. The vehicles are being liquidated and the
backup residential collateral is more than sufficient to cover any loss from the
sale of the vehicles.
As a percentage of the allowance for loan losses, total nonaccrual loans and
loans past due 90 days or more were 74.1% as of June 30, 2005, 62.3% as of March
31, 2005, and 46.8% as of December 31, 2004.
DEPOSITS
Deposits totaled $285.9 million as of June 30, 2005, a decrease of $1.9 million,
or .68%, from $287.8 million as of
102
December 31, 2004. The slight decrease is considered normal in the day to day
operations of a bank.
FHLB BORROWINGS
Federal Home Loan Bank borrowings decreased $2.1 million to $37.9 million as of
June 30, 2005 from $39.9 million as of December 31, 2004. The decrease in
borrowings was primarily a result of principal loan payments made on the
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors and to the earnings and financial condition
of the Company and applicable laws and regulations. The Company paid $ 959,994
and $906,661 in dividends during the six months ended June 30, 2005 and 2004,
respectively.
At June 30, 2005, consolidated Tier 1 risk based capital was 11.89%, and total
risk-based capital was 12.87%. The minimum Tier 1 and total risk-based capital
ratios required by the Board of Governors of the Federal Reserve are 4% and 8%,
respectively.
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as company cash needs, are met. The Company
manages liquidity on both the asset and liability sides of the balance sheet.
Community bank liquidity management currently involves the challenge of
attracting deposits while maintaining positive loan growth at a reasonable
interest rate spread. The loan to deposit ratio at June 30, 2005 was 103.0%
compared to 102.4% as of December 31, 2004. Loans to total assets were 81.8% at
June 30, 2005 compared to 80.9% at the end of 2004. The securities portfolio is
available for sale and consists of securities that are readily marketable.
Approximately 83.3% of the available for sale portfolio is pledged to secure
public deposits, short-term and long-term borrowings and for other purposes as
required by law. The balance of the available for sale securities could be sold
if necessary for liquidity purposes. Also, a stable deposit base, consisting of
87% core deposits, makes the Company less susceptible to large fluctuations in
funding needs. The Company also has both short- and long-term borrowings
capacity available through FHLB with unused available credit of approximately
$27.3 million as of June 30, 2005. The Company has the ability to obtain
deposits in the brokered certificate of deposit market to help provide liquidity
to fund loan growth, if necessary. Generally, the Company uses short-term
borrowings to fund overnight and short-term funding needs in the Company's
balance sheet. Longer-term borrowings have been primarily used to fund
mortgage-loan originations. This has occurred when FHLB longer-term rates are a
more economical source of funding than traditional deposit gathering activities.
Additionally, the Company occasionally uses FHLB borrowings to fund larger
commercial loans.
As of June 30, 2005, management is not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or would be reasonably likely to have, a material adverse impact on the
Company's liquidity, capital resources, or operations.
CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
The Company has certain obligations and commitments to make future payments
under contracts. At June 30, 2005, the aggregate contractual obligations and
commercial commitments are:
103
Payments Due by Period
Contractual Obligations Less than 1-3 3-5 After 5
($ in thousands) Total One Year Years Years Years
- ---------------------------- --------- ----------- -------- -------- ---------
Total Deposits $ 285,882 $ 231,272 $ 39,903 $ 14,707
FHLB Borrowings 37,862 3,386 9,019 6,842 18,615
FHLB interest expense 8,374 1,511 3,700 1,695 1,468
Repurchase Agreements 2,644 2,644 0 0 0
--------- ----------- -------- -------- ---------
Total $ 334,762 $ 238,813 $ 52,622 $ 23,244 $ 20,083
Payments Due by Period
Other Commercial Commitments Less than 1-3 3-5 After 5
($ in thousands) Total One Year Years Years Years
- ---------------------------- --------- ----------- -------- -------- ---------
Commitments to Extend Credit $ 27,768 $ 10,745 $ 5,948 $ 1,001 $ 10,074
Letters of Credit 78 71 7 0 0
--------- ----------- -------- -------- ---------
Total $ 27,846 $ 10,816 $ 5,955 $ 1,001 $ 10,074
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to variations in interest rates, exchange rates,
equity price risk and commodity prices. The Company does not maintain a trading
account for any class of financial instrument, and is not currently subject to
currency exchange rate risk, equity price risk or commodity price risk. The
Company's market risk is composed primarily of interest rate risk.
The major source of the Company's interest rate risk is the difference in the
maturity and repricing characteristics between the Company's core banking assets
and liabilities - loans and deposits. This difference, or mismatch, poses a risk
to net interest income. Most significantly, the Company's core banking assets
and liabilities are mismatched with respect to repricing frequency, maturity
and/or index. Most of the Company's commercial loans, for example, reprice
rapidly in response to changes in short-term interest rates. In contrast, many
of the Company's consumer deposits reprice slowly, if at all, in response to
changes in market interest rates.
The Company's Senior Management is responsible for reviewing the interest rate
sensitivity position of the Company and establishing policies to monitor and
limit exposure to interest rate risk. The guidelines established by
Asset/Liability Committee are approved by the Company's Board of Directors. The
primary goal of the asset/liability management function is to maximize net
interest income within the interest rate risk limits set by approved guidelines.
Techniques used include both interest rate risk analysis that perform simulation
modeling that measures the effect of rate changes on net interest income and
economic market value of equity under different rate scenarios. The current
policy imposes limits on earnings at risk over a twelve month period.
In the Company's simulation models, each asset and liability balance is
projected over a time horizon. Net interest income is then projected based on
expected cash flows and projected interest rates under a stable rate scenario
and analyzed. The results of this analysis are factored into decisions made
concerning pricing strategies for loan and deposits, balance sheet mix,
securities portfolio strategies, liquidity and capital adequacy.
Simulation models are also performed under an instantaneous parallel 200 basis
point increase or decrease in interest rates. The model includes assumptions as
to repricing and expected prepayments, anticipated calls, and expected decay
rates of transaction accounts under the different rate scenarios. The results of
these simulations include changes in both net interest income and market value
of equity.
The Company applies hypothetical interest rate movements for up and down
interest rate movements of 100, 200 & 300 basis points. The interest movements
move in equal amounts, known as ramping, each quarter to give a more likely and
meaningful scenario should rates change. By reacting to changes in economic
conditions, interest rates and market forces, the Company has been able to alter
the mix of short and long-term loans and investments, and
104
increase or decrease the emphasis on fixed and variable rate products in
response to changing market conditions. By managing the interest rate
sensitivity of its asset composition in this manner, the Company has been able
to maintain a fairly stable flow of net interest income.
Simulation models are also performed under an instantaneous parallel 300 basis
point increase or decrease in interest rates. The model includes assumptions as
to repricing and expected prepayments, anticipated calls, and expected decay
rates of transaction accounts under the different rate scenarios. The results of
these simulations include changes in both net interest income and market value
of equity.
Complicating management's efforts to control non-trading exposure to interest
rate risk is the fundamental uncertainty of the maturity, repricing, and/or
runoff characteristics of some of the Company's core banking assets and
liabilities. This uncertainty often reflects options embedded in these financial
instruments. The most important embedded options are contained in consumer
deposits and loans.
For example, many of the Company's interest bearing retail deposit products
(e.g., interest checking, savings and money market deposits) have no contractual
maturity. Customers have the right to withdraw funds from these deposit accounts
freely. Deposit balances may therefore run off unexpectedly due to changes in
competitive or market conditions. To forestall such runoff, rates on interest
bearing deposits may have to be increased more (or reduced less) than expected.
Such repricing may not be highly correlated with the repricing of prime
rate-based or U.S. Treasury-based loans. Finally, balances that leave the
banking franchise may have to be replaced with other more expensive retail or
wholesale deposits. Given the uncertainties surrounding deposit runoff and
repricing, the interest rate sensitivity of core bank liabilities cannot be
determined precisely.
Management believes as of June 30, 2005, there have been no material changes in
the Company's interest rate sensitive instruments which would cause a material
change in the market risk exposures which affect the quantitative and
qualitative risk disclosures as presented in the Company's Form 10-K filed for
the period ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Registrant maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Registrant's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Registrant's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
The Company has carried out an evaluation, under the supervision and with the
participation of the Registrant's management, including the Registrant's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Registrant's disclosure controls and procedures.
Based on the foregoing, the Registrant's Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Registrant's disclosure controls and procedures were effective, in
all material respects, to ensuring that information required to be disclosed in
the reports the Registrant files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2005, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Economic circumstances, the Company's operation and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Forward-looking statements are typically identified
by words or phrases such as "believe," "expect," "anticipate,"
105
"intend," "estimate," "may increase," "may fluctuate," and similar expressions
or future or conditional verbs such as "will," "should," "would" and "could."
These forward-looking statements involve risks and uncertainties including, but
not limited to, economic conditions, portfolio growth, the credit performance of
the portfolios, including bankruptcies, and seasonal factors; changes in general
economic conditions including the performance of financial markets, the prices
of crops, prevailing inflation and interest rates, and losses on lending
activities; results of various investment activities; the effects of
competitors' pricing policies, of changes in laws and regulations on competition
and of demographic changes on target market populations' savings and financial
planning needs; industry changes in information technology systems on which we
are dependent; and the resolution of legal proceedings and related matters. In
addition, the policies and regulations of the various regulatory authorities
could affect the Company's results. These statements are representative only on
the date hereof, and the Company undertakes no obligation to update any
forward-looking statements made.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Voting results from the Company's Annual Meeting of Shareholders held on April
26, 2005 can be found under Part II, Item 6 of the Company's report on Form 10-Q
filed with the Commission in May 2005.
106
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS - The following exhibits are filed as a part of this report:
Exhibit No. Exhibit
- ----------- -------
3.1 Articles of Incorporation of Merchants Bancorp, Inc. filed as
Exhibit (3)(I) to the Form 10 filed with SEC on April 30, 2002
and incorporated herein by reference.
3.2 Code of Regulations filed as Exhibit (3)(II) to the Form 10 filed
with the SEC on April 30, 2002 and incorporated herein by
reference.
4. Instruments Defining the Rights of Security Holders. (See Exhibit
3.1 and 3.2)
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS BANCORP, INC.
Date: August 15, 2005 By: /s/ Paul W. Pence, Jr.
Paul W. Pence, Jr., President and Principal
Financial Officer
107
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
108
EXHIBIT 31
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER
I, Paul W. Pence, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merchants Bancorp,
Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: August 12, 2005
/s/ Paul W. Pence, Jr.
- -------------------------
Paul W. Pence, Jr.
Chief Executive Officer and Principal Financial Officer
109
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Merchants Bancorp, Inc. (the
"Company") on Form 10-Q for the fiscal period ending June 30, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Paul W. Pence, Jr., Chief Executive Officer and Chief Financial Officer of the
Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Paul W. Pence, Jr.
Paul W. Pence, Jr.
Chief Executive Officer and
Chief Financial Officer
August 15, 2005
110
PROXY FOR SPECIAL MEETING OF
MERCHANTS BANCORP, INC.
HILLSBORO, OHIO
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned shareholder of
Merchants Bancorp, Inc., Hillsboro, Ohio, do hereby nominate, constitute, and
appoint Patrick Hays, Joseph P. West, Jr., or Bing Williamson, or any one of
them (with full power of substitution for me and in my name, place and stead) to
vote all the Common Stock of said Company, standing in my name on its books on
_______ ____, 2005 (the "Record Date"), at the Special Meeting of its
shareholders to be held at ______________, Hillsboro, Ohio 45133, on _______
____, 2005 at __:__ _.m. (local time), or any adjournments thereof with all the
powers the undersigned would possess if personally present as follows:
1. To consider and act upon a proposal to approve the Merger of MBI Merger
Co., Inc., a wholly-owned subsidiary of Merchants Bancorp, with and into
Merchants Bancorp, Inc., as contemplated by the Agreement and Plan of
Merger executed by and between said parties and attached as Appendix A to
the enclosed proxy statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL 1.
ELECTION TO RECEIVE CASH CONSIDERATION OR SHARES OF SERIES A PREFERRED STOCK
RECORD SHAREHOLDERS WHO HOLD MORE THAN 100 BUT FEWER THAN 1,500 COMMON SHARES AS OF THE RECORD DATE MUST
CHOOSE ONE OF THE FOLLOWING OPTIONS
[ ] I ELECT TO RECEIVE THE CASH [ ] I ELECT TO RECEIVE SHARES OF [ ] I ELECT TO RECEIVE A COMBINATION OF CASH
CONSIDERATION IN EXCHANGE FOR ALL SERIES A PREFERRED STOCK IN CONSIDERATION AND SERIES A PREFERRED
SHARES OF COMMON STOCK HELD BY EXCHANGE FOR ALL SHARES OF STOCK IN EXCHANGE FOR ALL SHARES OF
ME AT THE EFFECTIVE TIME OF THE COMMON STOCK HELD BY ME AT THE COMMON STOCK HELD BY ME AT THE EFFECTIVE
MERGER EFFECTIVE TIME OF THE MERGER TIME OF THE MERGER AS FOLLOWS:
NUMBER OF WHOLE COMMON SHARES AS TO WHICH I
ELECT TO RECEIVE THE CASH CONSIDERATION:
________________
NUMBER OF WHOLE COMMON SHARES AS TO WHICH I
ELECT TO RECEIVE SHARES OF SERIES A
PREFERRED STOCK: ________________
2. To amend the Articles of Incorporation to authorize the issuance of
140,000 shares of Series A Preferred Stock to be used in connection with
the Merger, as contemplated by the proposed Certificate of Amendment
attached as Appendix D to the enclosed proxy statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL 2.
3. To transact such other business as may properly come before the meeting or
any adjournment thereof.
THIS PROXY CONFERS AUTHORITY TO VOTE "FOR" THE ABOVE PROPOSALS UNLESS OTHERWISE
MARKED. IF ANY OTHER BUSINESS IS PRESENTED AT SAID MEETING, THIS PROXY SHALL BE
VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF MANAGEMENT. ALL SHARES
REPRESENTED BY PROPERLY EXECUTED PROXIES WILL BE VOTED AS DIRECTED.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS and may be revoked
prior to its exercise by either written notice or personally at the meeting or
by a subsequently dated proxy. This proxy revokes all prior proxies given by the
undersigned.
- ------------------------------------ --------------------------
(STOCKHOLDER SIGNATURE) (DATE)
- ------------------------------------ --------------------------
(STOCKHOLDER SIGNATURE) (DATE)
Please Print Name(s)
----------------------------------------------
Please Print Number of Shares
-------------------------------------
(WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE, GUARDIAN, PLEASE
GIVE FULL TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. ALL JOINT OWNERS
MUST SIGN.)
PLEASE SIGN AND RETURN IMMEDIATELY IN THE ENCLOSED POSTPAID ENVELOPE
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.