<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-22767
D & N CAPITAL CORPORATION
-----------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 31-1517665
---------------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
400 Quincy Street, Hancock, Michigan 49930
---------------------------------------- ------------------
(Address of Principal Executive Offices (Zip Code)
Registrant's telephone number, including area code (906) 482-2700
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class Which Registered
----------------------------------- ---------------------
9.00% Noncumulative Preferred Stock
Series A (Par Value --$25 Per share) NASDAQ
Securities Registered Pursuant to Section 12(g) of the Act: None
Number of Shares of Common Stock outstanding on December 31, 1998: 31,781
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
----- -----
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
All shares of Common Stock were held by D&N Bank at December 31, 1998;
therefore, no Common Stock is held by non-affiliates.
Documents incorporated by reference Part of Form 10-K
in this Form 10-K which incorporated
----------------------------------- ------------------
None None
<PAGE>
FORM 10-K
Page No.
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PART I
Item 1 Business 1
Item 2 Properties 3
Item 3 Legal Proceedings 3
Item 4 Submission of Matters to a Vote
of Security Holders 4
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters 4
Item 6 Selected Financial Data 7
Item 7 Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
PART III
Item 10 Directors and Executive Officers of the Corporation 26
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners
and Management 28
Item 13 Certain Relationships and Related Transactions 29
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 30
<PAGE>
PART I
Item 1. Business
D&N Capital Corporation (the "Company") is a Delaware corporation
incorporated on March 18, 1997 and created for the purpose of acquiring and
holding real estate assets. The Company is a wholly-owned subsidiary of D&N
Bank (the "Bank"), a federally chartered savings bank, which itself is wholly
owned by D&N Financial Corporation ("D&N"), a financial services holding company
organized under the laws of the state of Delaware.
The principal business of the Company is to acquire and hold residential and
commercial mortgage loans that will generate net income for distribution to
stockholders. The Company intends to acquire all its Mortgage Loans from the
Bank, consisting of whole loans secured by first mortgages or deeds of trust on
single-family residential real estate properties or on commercial real estate
properties. Residential mortgage loans consist of Adjustable Rate Mortgages
("ARMs"), and Fixed Rate Mortgages ("FRMs"). The commercial mortgage loans
consist of fixed and variable rate loans, a majority of which have balloon
payments.
On July 17, 1997, the Company offered to the public and sold 1,210,000
shares of the Company's 9.00% noncumulative preferred stock, Series A, $25 par
value per share, totaling $30,250,000 (the "Series A Preferred Shares"), and
sold to D&N Bank, 31,781 shares of the Company's common stock, $300 par value
($1,000 cost) per share, net of offering costs, totaling $30,250,000 (the
"Common Stock"). All shares of common stock are held by the Bank. The Series A
Preferred Shares are traded on the NASDAQ stock market, under the symbol as
"DNFCP".
The Company used the net proceeds raised from the initial public offering of
the Series A Preferred Shares and the sale of the Common Stock to the Bank to
purchase from the Bank the Company's initial portfolio of $60,524,000, of
residential and commercial mortgage loans ("Mortgage Loans") at their estimated
fair values. Reinvestments in mortgage loans have been and are intended to
continue to be consistent in maintaining an approximate 90% and 10% ratio
between residential and commercial mortgage loans, respectively. All Mortgage
Loans are purchased from the Bank on a fair value basis.
In order to preserve its status as a real estate investment trust ("REIT")
under the Code, the Company must distribute annually at least 95% of its
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"REIT taxable income" (excluding capital gains) to stockholders and meet
certain capital ownership and administrative tests as defined by the Code. The
Company must also annually satisfy two gross income requirements. First, at
least 75% of the Company's gross income for each taxable year must be derived
directly or indirectly from investments relating to real property or mortgages
on real property (as interest on obligations secured by mortgages on real
property, certain "rents from real property" or as gain on the sale or exchange
of such property and certain fees with respect to agreements to make or acquire
mortgage loans), from certain types of temporary investments or certain other
types of gross income. Second, at least 95% of the Company's gross income for
each taxable year must be derived from the above described real property
investments and from dividends, interest, and gain from the sale or other
disposition of stock or securities and certain other types of gross income (or
from any combination of the foregoing). The Company must also satisfy three
tests relating to the nature of its assets at the close of each quarter of its
taxable year. First, at least 75% of the value of the Company's total assets
must be represented by real estate assets (including stock or debt instruments
held for not more than one year that were purchased with the proceeds of a stock
offering or long-term (at least five years) debt offering of the Company, cash,
cash items, and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities.
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans and does not expect to compete with mortgage conduit
programs, investment banking firms, savings and loan associations, banks, thrift
and loan associations, finance companies, mortgage bankers or insurance
companies in acquiring its Mortgage Loans. As noted above, the Company
anticipates that all Mortgage Loans purchased by it, in addition to those in the
initial Portfolio, and purchased to date, will be purchased from the Bank.
The Company does not have any employees, since it has retained the Bank to
perform certain functions pursuant to the Advisory Agreement described below.
All of the officers of the Company are also officers or employees of D&N, the
Bank or their affiliates.
The Company has entered into an Advisory Agreement (the "Advisory
Agreement") with the Bank (the "Advisor") requiring an annual payment of
$125,000. The Bank provides advice to the Board of Directors and manages the
operations of the Company as defined in the Agreement. The Agreement
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has an initial term of five years commencing on July 21, 1997 and automatically
renews for additional five year periods, unless the Company delivers a notice of
nonrenewal to the Advisor as defined in the Advisory Agreement.
The Company also entered into two servicing agreements with the Bank for the
servicing of the commercial and residential mortgage loans. (The Bank in its
role as servicer under the terms of the servicing agreements is herein referred
to as the "Servicer"). Pursuant to each servicing agreement, the Bank performs
the servicing of the Mortgage Loans held by the Company, in accordance with
normal industry practice. The Servicing Agreements can be terminated without
cause upon a thirty day advance notice given to the Servicer. The servicing fee
is 0.375% of the outstanding principal balance for the residential mortgage
loans and commercial mortgage loans.
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company may, under
certain circumstances, purchase the Series A Preferred Shares and other shares
of its capital stock in the open market or otherwise, provided, however, that
the Company will not redeem or repurchase any shares of its Common Stock for so
long as any Series A Preferred Shares are outstanding without the approval of a
majority of the Independent Directors (as defined in the Certificate of
Designation relating to the Series A Preferred Shares). The Company has no
present intention of repurchasing any shares of its capital stock, and any such
action would be taken only in conformity with applicable federal and state laws
and the regulations and the requirements for qualifying as a REIT.
The Company has no foreign operations.
ITEM 2: PROPERTIES
The principal executive offices of the Company are located at 400 Quincy
Street, Hancock, Michigan 49930, telephone number (906) 482-2700.
ITEM 3: LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. Neither the
Company, the Bank, or any of its affiliates is currently involved in nor, to the
Company's knowledge, currently threatened with any material litigation with
respect to the Mortgage Loans included in the portfolio, which litigation would
have a material adverse effect on the business or operations of the Company.
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<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company is authorized to issue up to 250,000 shares of Common Stock and
2,500,000 shares of Preferred Stock, $25 par value per share ("Preferred
Stock"), of which 1,210,000 shares have been issued as the Series A Preferred
Shares. The Bank owns 100% of the Company's 31,781 shares of Common Stock
outstanding at December 31, 1998 and, accordingly, there is no trading market
for the Company's Common Stock. In addition, the Bank intends that, as long as
any Series A Preferred Shares are outstanding, it will maintain ownership of the
outstanding Common Stock of the Company. Subject to the rights, if any, of the
holders of Series A Preferred Stock, all voting rights are vested in the Common
Stock. The holders of Common Stock are entitled to one vote per share.
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors of the Company out of funds legally available
therefore, provided that, so long as any shares of Preferred Stock (including
the Series A Preferred Shares) are outstanding, no dividends or other
distributions (including redemption's and purchases) may be made with respect to
the Common Stock unless full dividends on the shares of the Preferred Stock have
been paid. The Company must distribute annually at least 95% of its annual
"REIT taxable income" (not including capital gains) to stockholders.
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been paid or set aside for
the holders of all series of Preferred Stock the full preferential amounts to
which such holders are entitled, the holders of Common Stock will be entitled to
share equally and ratably in any assets remaining after the payment of all debts
and liabilities.
Restrictions on Ownership and Transfer:
The Company's Certificate of Incorporation contains certain restrictions on
the number of shares of Common Stock and Preferred Stock that individual
stockholders may own. For the Company to qualify as a REIT under the Code, no
more than 50% in number or value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
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<PAGE>
(other than the first year) or during a proportionate part of a shorter taxable
year (the "Five or Fewer Test"). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year (the "One Hundred
Person Test"). The ownership by the Bank of 100% of the shares of Common Stock
of the REIT will not adversely affect the Company's REIT qualification because
each stockholder of D&N Financial Corporation (the sole stockholder of the Bank)
counts as a separate beneficial owner for purposes of the Five or Fewer Test and
the capital stock of D&N Financial Corporation is widely held. Further, the
Certificate of Incorporation of the Company contains restrictions on the
acquisition of Preferred Stock intended to ensure compliance with the One
Hundred Persons Test. Such provisions include a restriction that if any transfer
of shares of capital stock of the Company would cause the Company to be
beneficially owned by fewer than 100 persons, such transfer shall be null and
void and the intended transferee will acquire no rights to the stock.
COMMON STOCK
There is no established public trading market in the Company's Common Stock.
As of March 22, 1999, there were 31,781 issued and outstanding shares of Common
Stock held by one stockholder, the Bank. The following table reflects the
distributions paid by the Company on the Common Stock since the Company's
initial capitalization on April 4, 1997.
Distribution
-----------------------
January 1 to December 31, 1998 $1,150,000 / (1)
April 4 to December 31, 1997 $ 600,000 / (2)
(1) On December 9, 1998, the Company declared a cash dividend in the aggregate
of $1,150,000 payable on December 31, 1998 to D&N Bank as the holder of all
the outstanding common stock of record on December 21, 1998.
(2) On December 11, 1997, the Company declared a cash dividend in the aggregate
of $600,000 payable on December 31, 1997 to D&N Bank as the holder of all
the outstanding common stock of record on December 17, 1997.
PREFERRED STOCK
The Series A Preferred Shares are listed on the Nasdaq Stock Market, under
the trading symbol "DNFCP". As of March 22, 1999, there were 1,210,000 issued
and outstanding Series A Preferred Shares held by approximately 2,360
shareholders. The following table reflects the respective high and
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<PAGE>
low sales prices for the Series A Preferred Shares for the periods of 1998, and
from July 21, 1997, the date upon which trading of such shares commenced,
through December 31, 1997. The table also indicates the distributions paid by
the Company during these periods.
<TABLE>
<CAPTION>
Price
---------------- Distribution
Period High Low Distributions Date
------------------------------------ ------ ------ ------------- ------------------
<S> <C> <C> <C> <C>
July 21, 1997 to September 30, 1997 $26.25 $25.00 $536,938 September 30, 1997
October 1, 1997 to December 31, 1997 26.00 25.25 680,625 December 31, 1997
January 1, 1998 to March 31, 1998 26.38 25.13 680,625 March 31, 1998
April 1, 1998 to June 30, 1998 26.50 25.50 680,625 June 31, 1998
July 1, 1998 to September 30, 1998 25.88 24.63 680,625 September 30, 1998
October 1, 1998 to December 31, 1998 26.88 24.50 680,625 December 31, 1998
</TABLE>
During 1998, the Company declared and paid quarterly dividends of $0.5625
per Series A Preferred Share, the final quarterly dividend being paid on
December 31, 1998, to holders of record on December 21, 1998.
On September 9, 1997 the Company declared a cash dividend of $0.44375 per
Series A Preferred Share to stockholders of record on September 17, 1997.
This dividend was paid on September 30, 1997. On December 11, 1997 the Company
again declared a cash dividend of $0.5625 per Series A Preferred Share to
stockholders of record on December 17, 1997. This dividend was paid on December
31, 1997.
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<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
FINANCIAL DATA
For the Year Ended December 31, 1998 and for the Period
from Inception (March 18, 1997) through December 31, 1997
(In thousands, except per share and yield data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
INCOME STATEMENT:
Interest income $ 4,164 $ 1,952
Net income 3,914 1,852
Net income applicable to common shares 1,191 634
Income per common share 37.47 19.94
BALANCE SHEET:
Mortgage loans 60,259 60,385
Total assets 60,645 60,745
Total stockholder's equity 60,575 60,534
OTHER DATA:
Dividends paid on preferred shares 2,723 1,218
Number of preferred shares outstanding 1,210 1,210
Number of common shares outstanding 32 32
Average yield on mortgage loans 7.32% 7.57%
</TABLE>
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<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On July 17, 1997, the Company offered to the public and sold 1,210,000
shares of the Company's 9.00% Series A Preferred Shares, and sold to D&N Bank
31,781 shares of the Company's Common Stock. All shares of Common Stock are
held by the Bank.
RESULTS OF OPERATIONS
The Company reported net interest income for the year ended December 31,
1998 of approximately $4,164,000. Interest income from residential and
commercial mortgage loans was $3,511,000 and $593,000, respectively. After a
deduction of approximately $125,000 in advisory fees and $125,000 in other
administrative expenses, the Company reported net income of approximately
$3,914,000 for the year ended December 31, 1998.
For the period from inception, March 18, 1997, through December 31, 1997,
the Company reported net interest income of approximately $1,952,000. Interest
income from residential and commercial mortgage loans was $1,644,000 and
$293,000 respectively. After deductions of approximately $100,000 in advisory
and other administrative expenses, the Company reported net income of
approximately $1,852,000.
The Company paid $2,722,500 in Preferred Stock dividends and reported net
income per common share of $37.47 for the year ended December 31, 1998. For the
period from inception, March 18, 1997, through December 31, 1997, the Company
paid $1,217,563 in Preferred Stock dividends and reported net income per common
share of $19.94.
MORTGAGE LOANS
As of December 31, 1998, the Company had $60,259,000 invested in Mortgage
Loans. This amount represents the principal amount of mortgage loans purchased
with the initial portfolio, plus additional purchases since then to replace
runoff. All Mortgage Loans are purchased from the Bank.
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<PAGE>
The following table reflects the composition of interest-earning assets as a
percentage of total interest-earning assets.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Amount Percent Amount Percent
--------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-Earning Asset Mix:
Residential mortgage loans $52,858 87.7% $52,784 87.4%
Commercial mortgage loans 7,401 12.3 7,601 12.6
------- ----- ------- ------
Total interest-earning assets $60,259 100.0% $60,385 100.00%
</TABLE>
At December 31, 1998, there was one delinquent residential loan, totaling
$129,552, or .21% of the portfolio. This loan paid current on February 22,
1999. Also, there were no delinquent commercial mortgage loans, and no
residential or commercial mortgage loans in nonaccrual status as of December 31,
1998.
The following table illustrates the maturity of the Company's loan portfolio
at December 31, 1998. Loans are shown as maturing in the period in which
payment is due. This table does not reflect the effects of possible prepayments
or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Residential mortgage loans Commercial mortgage loans Total
Amounts Due -------------------------- ------------------------- -----------------
in Years Weighted Weighted Weighted
Ending Average Average Average
December 31, Amount Rate Amount Rate Amount Rate
- ------------------------ ------------ ------------- ----------- ------------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1999 $ 1,174 7.34% $ 401 9.19% $ 1,575 7.81%
2000 1,262 7.34 597 9.29 1,859 7.97
2001 1,358 7.34 4,137 8.78 5,495 8.42
2002 1,461 7.34 2,035 9.30 3,496 8.48
2003 1,572 7.35 177 8.60 1,749 7.48
Thereafter 45,237 7.41 -- -- 45,237 7.41
------- ------ -------
Subtotal 52,064 7.40% 7,347 8.98% 59,411 7.60%
Plus: 794 54 848
------- ------ -------
Premiums
Total $52,858 $7,401 $60,259
======= ====== =======
</TABLE>
INTEREST RATE RISK
The Company's income consists primarily of interest payments on Mortgage
Loans. Currently, the Company does not use any derivative products to manage
interest rate risk. If there is a decline in interest rates (as measured by the
indices upon which the interest rates of the Adjustable Rate Mortgage Loans are
based), then the Company will experience a decrease in income available to be
distributed to its shareholders. There can be no assurance that
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<PAGE>
an interest rate environment in which there is a significant decline in interest
rates, over an extended period of time, would not adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.
STATIC GAP ANALYSIS
D&N Capital Corporation's cumulative gap analysis for December 31, 1998 is
found in the table below.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
-------- -------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS:
Net loans receivable $3,384 $ 9,612 $34,523 $ 12,739 $60,259
Cash and due from parent 23 -- -- -- 23
Other assets 5 -- -- -- 5
Accrued interest receivable 358 -- -- -- 358
--------------------------------------------------
Total assets $3,770 $ 9,612 $34,523 $ 12,739 $60,645
==================================================
LIABILITIES:
Other liabilities $ 19 $ 51 $ -- $ -- $ 70
--------------------------------------------------
TOTAL LIABILITIES $ 19 $ 51 $ -- $ -- $ 70
--------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock $ -- $ -- $ -- $ 30,250 30,250
Common stock -- -- -- 9,534 9,534
Additional paid-in capital -- -- -- 20,716 20,716
Retained earnings -- -- -- 75 75
--------------------------------------------------
Total liabilities and
stockholders' equity $ 19 $ 51 $ -- $ 60,575 $60,645
====== ======= ======== ========= =======
Reprice difference $3,751 $ 9,561 $34,523 ($47,835)
Cumulative gap $3,751 $13,312 $47,835 --
% of total assets 6.18% 21.95% 78.88% --
</TABLE>
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk arises when a number of customers engage in
similar business activities, or activities in the same geographical region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Concentration of credit risk indicates the relative sensitivity of
the Company's performance to both positive and negative developments affecting a
particular industry.
The Company's balance sheet exposure to geographic concentrations directly
affects the credit risk of the Mortgage Loans within the portfolio. The
following table shows the Mortgage Loan portfolio by geographic area.
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<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Amount Percent Amount Percent
-------- ----------- ---------- --------
Loans (Dollars in thousands)
- -----
<S> <C> <C> <C> <C>
Residential Mortgage Loans:
Michigan $49,348 81.9% $47,956 79.4%
Ohio 1,911 3.2 2,054 3.4
Wisconsin 365 0.6 1,062 1.8
Indiana 298 0.5 868 1.4
Other (no state has more than 1%) 936 1.5 844 1.4
------- ----- ------- -----
Total Residential Mortgage Loans 52,858 87.7% 52,784 87.4%
Commercial Mortgage Loans:
Michigan (all Commercial Mortgage Loans) 7,401 12.3 7,601 12.6
------- ----- ------- -----
Total Mortgage Loan Portfolio $60,259 100.0% $60,385 100.0%
======= ===== ======= =====
</TABLE>
Approximately 82% of the Company's total Mortgage Loan portfolio are loans
secured by residential real estate properties located in Michigan.
Consequently, these residential mortgage loans may be subject to a greater risk
of default than other comparable residential mortgage loans in the event of
adverse economic, political or business developments and natural hazards in
Michigan that may affect the ability of residential property owners in Michigan
to make payments of principal and interest on the underlying mortgages.
In addition, all of the commercial mortgage properties underlying the
Company's commercial mortgage loans are located in Michigan. Consequently, these
commercial mortgage loans may be subject to greater risk of default than other
comparable commercial mortgage loans in the event of adverse economic, political
or business developments in Michigan that may affect the ability of businesses
in the area to make payments of principal and interest on the underlying
mortgages.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT as discussed below in REIT Qualification.
The Company's principal liquidity needs are to maintain the current
portfolio size through the acquisition of additional Mortgage Loans as Mortgage
Loans currently in the portfolio mature or prepay, and to pay dividends on the
Series A Preferred Shares and Common Shares held. The acquisition of additional
Mortgage Loans is intended to be funded with the proceeds obtained from
repayment of principal balances by the individual mortgagees. The Company does
not have and does not anticipate having any material capital expenditures.
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<PAGE>
To the extent that the Board of Directors determines that additional funding
is required, the Company may raise such funds through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Code requiring the distribution by a REIT of at least 95% of
its "REIT taxable income" and taking into account taxes that would be imposed on
undistributed income), or a combination of these methods. The organizational
documents of the Company do not contain any limitation on the amount or
percentage of debt, funded or otherwise, the Company might incur.
Notwithstanding the foregoing, the Company may not, without the approval of a
majority of the Independent Directors, incur debt for borrowed money other than
debt not in excess of 20% of the aggregate amount of net proceeds received from
the sale of the Series A Preferred Shares and Common Stock of the Company. Any
such debt incurred may include intercompany advances made by the Bank to the
Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without the consent of holders of at least 66 2/3% of
the shares of Preferred Stock outstanding at that time, including the Series A
Preferred Shares, and the Company may not issue additional shares of Preferred
Stock on a parity with the Series A Preferred Shares without the approval of a
majority of the Company's Independent Directors.
REIT QUALIFICATION
As of December 31, 1998, the Company believed that it was in full compliance
with the REIT tax rules and that it will continue to qualify as a REIT under the
provisions of the Code. The Company calculates:
* its Qualified REIT Assets, as defined in the Code, to be 100% of its
total assets, as compared to the federal tax requirements that at
least 75% of its total assets must be Qualified REIT assets.
* that 99% of its revenues qualify for the 75% source of income test
and 100% of its revenues qualify for the 95% source of income test
under the REIT rules.
The Company also met all REIT requirements regarding the ownership of its
common and preferred stocks and the 1998 and 1997, annual distribution and
administrative requirements.
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<PAGE>
YEAR 2000 COMPLIANCE
D&N utilizes various electronic computer systems for the delivery of its
financial services products, for the maintenance of its financial and other
business records, and for general management purposes. Some of these systems
include legacy procedures that may have been designed and historic data that may
have been stored in such a manner that inconsistencies or failures might occur
when dates from the new millennium are considered. Commonly known as the Year
2000 problem, a myriad of related potential computing difficulties face entities
that rely extensively upon computer systems. D&N's major computer systems
include financial control applications provided by M&I Data Services, Inc.;
mortgage lending applications provided by ALLTEL Information Services, Inc. and
FiTech, Inc.; and internally maintained micro-computer and network systems which
support management functions and communications.
D&N's Year 2000 project is progressing on schedule. The project is
addressing computer hardware, software, procedures, large borrowers and
facilities. This project began in October 1996 and is scheduled for completion
by June 1999.
To date all at-risk computer hardware has been tested and confirmed Year
2000 compliant.
The four primary business applications (deposit account processing,
installment loan account processing, general ledger and mortgage loan
processing) have been certified Year 2000 compliant. The remaining application
systems are being tested and contingency plans have been developed to mitigate
business operational risk.
D&N's internally maintained systems, consisting primarily of a Lotus
Notes server array and various workstation-based business suite software, are
Year 2000 compliant as currently installed.
All newly acquired software is being tested for Year 2000 compliance before
acceptance. Software testing has been done to verify date changes from 1999 to
2000, the identification and correct processing of leap years, along with
numerous date projections from 1999 through the next millennium using day, month
and year increments.
Manual procedures have been reviewed and scheduled for change where date
specific actions occur. Necessary changes to supporting forms to properly
record dates in the new millennium have been identified and are being made.
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<PAGE>
Large commercial borrowers have been reviewed for their Year 2000 readiness
and, where necessary, their progress is being monitored for corrective action,
their business continuation and ability to repay their loans. New loan
customers are also being assessed for Year 2000 risk.
The building facilities owned and leased by the Bank have been reviewed for
Year 2000 associated issues such as device controllers used for HVAC, elevators,
alarms and vaults. Where necessary, corrective actions have been taken.
Costs associated with addressing the Year 2000 issue as it affects D&N's
third party applications is implicitly included in the contractual arrangements
for those applications. D&N's total Year 2000 estimated project cost, which is
based upon currently available information, included expenses or the review and
testing of third parties including governmental applications. However, there
can be no guarantee that the hardware, software and systems of such third
parties will be without unfavorable Year 2000 issues and therefore not present a
material adverse impact upon the Bank.
Year 2000 compliance costs incurred during fiscal 1998 totaled $26,000. This
figure does not include the implicit costs associated with the reallocation
of internal staff hours to Year 2000 project related efforts. At this time,
management currently estimates Year 2000 compliance costs will not exceed
$100,000. This estimate does not include normal ongoing costs for computer
hardware, software, terminals and related devices that would be replaced with
the Bank's ongoing programs for updating its delivery infrastructure without the
presence of the Year 2000 issue. The aforementioned Year 2000 project cost
estimate may change as the Bank progresses in its Year 2000 programs and obtains
additional information associated with, and conducts further testing concerning
third parties. At this time no significant projects have been delayed as a
result of D&N's Year 2000 effort.
Management of the Bank believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Bank has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Bank does not complete any additional phases, under the most reasonably
likely worst case scenario, the Bank would be required to process certain
transactions manually, which may effect customer service. In addition,
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect the Bank. The Bank could be subject to litigation
for equipment shutdown or failure to properly date customer records. The amount
of potential liability and lost revenue cannot be reasonably estimated at this
time.
- 14 -
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In October 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". When SFAS 134 is initially applied, an enterprise may reclassify
mortgage-backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place. Those securities and other interests
shall be reclassified based on the entity's ability and intent to hold those
investments. This standard will be adopted effective January 1, 1999 and is not
expected to have any material effect on the Company's financial statements.
OTHER MATTERS
On December 1, 1998, D&N announced that it had entered into a definitive
agreement to merge with Republic Bancorp Inc. (Nasdaq:RBNC), whereby Republic
Bancorp will be the surviving corporation. The combined company will create the
fourth largest bank holding company with headquarters in Michigan with over $4
billion in assets. The merger is subject to shareholder and regulatory
approvals, and is expected to be completed in the second quarter 1999.
The operations of D&N Financial Corporation, and the financial services
industry generally, are influenced by many factors, including the interest rate
environment, competition, legislative and regulatory developments and general
economic conditions.
Except for the historical information contained in this report, certain
statements made herein are forward-looking statements that involve risks and
uncertainties and are subject to various factors that could cause actual results
to differ materially from these statements. Factors that might cause such a
difference include, but are not limited to: regional and national economic
conditions substantial changes in levels of market interest rates, credit and
other risks of lending and investments activities and competitive and regulatory
factors.
- 15 -
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
To The Board of Directors and Stockholders of
D&N Capital Corporation
In our opinion, the accompanying Statements of Condition and the related
Statements of Income, Stockholders' Equity and of Cash Flows present fairly, in
all material respects, the financial position of D&N Capital Corporation at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998 and the period from inception (March 18,
1997) through December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
January 21, 1999
- 16 -
<PAGE>
D&N CAPITAL CORPORATION
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------- -------------------
ASSETS: (Dollars in thousands, except share data)
<S> <C> <C>
Loans receivable:
Residential mortgage loans $52,858 $52,784
Commercial mortgage loans 7,401 7,601
------- -------
Net loans receivable 60,259 60,385
Cash 2 2
Due from Parent 21 --
Other assets 5 --
Accrued interest receivable 358 358
------- -------
Total assets $60,645 $60,745
======= =======
LIABILITIES:
Due to Parent $ -- $ 202
Other liabilities 70 9
------- -------
Total liabilities 70 211
STOCKHOLDERS' EQUITY:
Preferred stock, par value $25.00;
2,500,000 authorized, 1,210,000
issued and outstanding 30,250 30,250
Common stock, par value $300.00
per share; 250,000 shares authorized,
31,781 shares issued and outstanding 9,534 9,534
Additional paid-in capital 20,716 20,716
------- -------
Total paid-in capital 60,500 60,500
Retained earnings 75 34
------- -------
Total stockholders' equity $60,575 $60,534
------- -------
Total liabilities and stockholders' equity $60,645 $60,745
======= =======
</TABLE>
See Notes to Financial Statements.
- 17 -
<PAGE>
D&N CAPITAL CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
December 31
1998 1997*
----------------- -------------------
(In thousands, except per share data)
<S> <C> <C>
INTEREST INCOME:
Loans:
Residential mortgage loans $ 3,511 $ 1,644
Commercial mortgage loans 593 293
------- -------
Total loan interest income 4,104 1,937
Intercompany interest 60 15
------- -------
Total interest income 4,164 1,952
NONINTEREST EXPENSE:
Advisory fees: 125 57
Other expense 125 43
------- -------
Total noninterest expense 250 100
Net income 3,914 1,852
Preferred stock dividends paid 2,723 1,218
------- -------
Net income applicable to common shares 1,191 634
Common stock dividends paid 1,150 600
------- -------
Retained Earnings increase (decrease) $ 41 $ 34
======= =======
Basic and dilutive earnings per common share $37.47 $19.94
======= =======
Weighted average common shares
outstanding 31,781 31,781
======= =======
</TABLE>
* The 1997 period is from inception, (March 18, 1997), through December 31,
1997.
See Notes to Financial Statements.
- 18 -
<PAGE>
D&N CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended
December 31
1998 1997*
----------- --------
(In thousands)
<S> <C> <C>
Preferred stock:
Balance at beginning of period $30,250 --
Issuance of preferred stock -- 30,250
------- -------
Balance at end of period 30,250 30,250
------- -------
Common stock:
Balance at beginning of period 9,534 --
Issuance of common stock -- 9,534
------- -------
Balance at end of period 9,534 9,534
------- -------
Additional paid in capital:
Balance at beginning of period 20,716 --
Issuance of common stock -- 22,247
Less: Preferred Stock offering costs -- (1,531)
------- -------
Balance at end of period 20,716 20,716
------- -------
Retained earnings:
Balance of beginning of period 34 --
Net income 3,914 1,852
Preferred dividends ($2.25 per share in 1998 and
$1.01 per share in 1997.) (2,723) (1,218)
Common dividends($36.19 per share in 1998 and
$18.88 per share in 1997.) (1,150) (600)
------- -------
Balance at end of period 75 34
------- -------
Total stockholders' equity $60,575 $60,534
======= =======
</TABLE>
* The 1997 period is from inception (March 18, 1997), through December 31, 1997.
See Notes to Financial Statements
- 19 -
<PAGE>
D&N CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997*
-------- --------
(In thousands)
<S> <C> <C>
Operating activities:
Net income $ 3,914 $ 1,852
Adjustments to reconcile net income to
net cash provided by operating activities:
Net change in:
Accrued interest receivable -- (358)
Due to or from Parent (223) 202
Other assets (5) --
Accounts payable 61 9
-------- --------
Net cash provided by operating activities 3,747 1,705
-------- --------
Investing activities:
Purchase of mortgage loans (30,098) (67,218)
Principal payments received 30,224 6,833
-------- --------
Net cash provided(used) by investing activities 126 (60,385)
-------- --------
Financing activities:
Proceeds from common stock issued -- 31,781
Proceeds from preferred stock issued -- 30,250
Origination and underwriting costs -- (1,531)
Preferred stock dividends paid (2,723) (1,218)
Common stock dividends paid (1,150) (600)
-------- --------
Net cash provided(used) by financing activities (3,873) 58,682
-------- --------
Net increase in cash -- 2
Cash at beginning of year 2 --
-------- --------
Cash at end of year $ 2 $ 2
======== ========
</TABLE>
* The 1997 period is from inception (March 18, 1997), through December 31, 1997.
See Notes to Financial Statements.
- 20 -
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
D&N Capital Corporation (the "Company"), is a Delaware corporation
incorporated on March 18, 1997 and created for the purpose of acquiring and
holding real estate assets. The Company is a wholly-owned subsidiary of D&N
Bank (the "Bank"), a federally chartered savings bank, which itself is wholly
owned by D&N Financial Corporation ("D&N"), a financial services holding company
organized under the laws of the state of Delaware.
On July 17, 1997, the Company offered to the public and sold 1,210,000
shares of the Company's 9.00% noncumulative preferred stock, Series A, $25 par
value per share, totaling $30,250,000 (the "Series A Preferred Shares"), and
sold to D&N Bank, 31,781 shares of the Company's common stock, $300 par value
($1,000 cost) per share, net of offering costs, totaling $30,250,000 (the
"Common Stock"). All shares of common stock are held by the Bank. The Series A
Preferred Shares are traded on the NASDAQ stock market, under the symbol as
"DNFCP".
The Company used the net proceeds raised from the initial public offering
of the Series A Preferred Shares and the sale of the Common Stock to the Bank to
purchase from the Bank the Company's initial portfolio of $60,524,000 of
residential and commercial mortgage loans ("Mortgage Loans") at their estimated
fair values.
The accounting and financial reporting policies of the Company conform to
generally accepted accounting principles and prevailing industry practices. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans: Mortgage loans are carried at the principal amount
outstanding, plus premium or discount, upon purchase from the Bank. Interest
income is recognized using the interest method, which approximates a level rate
of return over the term of the loan.
Allowance for Loan Losses: The allowance for possible losses on loans is
maintained at a level believed adequate by management to absorb potential
- 21 -
<PAGE>
losses from impaired loans as well as losses from the remainder of the
portfolio. Management's determination of the level of the allowance is based
upon evaluation of the portfolio, past experience, current economic conditions,
size and composition of the portfolio, collateral location and values, cash flow
positions, industry concentrations, delinquencies and other relevant factors. At
December 31, 1998 and 1997, there was no allowance for losses on loans.
Due from Parent: Accounts Receivable from parent represents principal
and interest payments due the Company from the Bank, partially offset by prior
amounts due the Bank by the Company.
Due to Parent: Accounts payable to parent represents the Common Stock
Dividend due the Bank, plus advisory fees and other expenses paid by the Bank
for the Company, offset partially, by principal and interest payments due, which
the Bank owes to the Company.
Offering Costs: Costs incurred in connection with the raising of capital
through the sale of preferred stock were charged against stockholders' equity
upon the issuance of Common Shares to the Bank.
Income Taxes: The Company has elected to be treated as a Real Estate
Investment Trust ("REIT") pursuant to provisions of the Internal Revenue Code of
1986, as amended (the "Code"). As a result, the Company will not be subject to
federal income tax on its taxable income to the extent it distributes at least
95% of its taxable income to its shareholders and it meets certain other
requirements as defined in the Code. The Company intends to maintain its
qualification as a REIT for federal income tax purposes. The Company intends to
make qualifying dividends (for federal income tax purposes) of all of its
taxable income to its Common and Preferred Stock shareholders, a portion of
which may be in the form of "consent" dividends, as defined under the Code. As a
result, the Company has made no provision for federal income taxes in the
accompanying financial statements.
Dividends:
Preferred Stock. Dividends on the Series A Preferred Shares are
noncumulative from issuance (July 17, 1997) and are payable quarterly on the
last day of March, June, September and December at a rate of 9.00% per annum of
the liquidation preference ($25.00 per share).
Common Stock. The Bank, as shareholder, is entitled to receive dividends
when, as and if declared by the Board of Directors from funds legally
available after all preferred dividends have been paid.
- 22 -
<PAGE>
Earnings Per Common Share: Earnings per share is computed by dividing
net income after preferred dividends by the weighted average number of common
shares outstanding. There are no outstanding dilutive securities.
NOTE 3 - MORTGAGE LOANS
Mortgage loans consist of both residential and commercial mortgage loans.
Residential mortgage loans consist of Adjustable Rate Mortgages ("ARMs") and
Fixed Rate Mortgages ("FRMs"). The commercial mortgage loans consist of Fixed
and Variable Rate loans, a majority of which have balloon payments.
The following represents the Mortgage Loan portfolio.
December 31, December 31,
1998 1997
----------- -----------
(In thousands)
Residential mortgage loans $52,858 $52,784
Commercial mortgage loans 7,401 7,601
------- -------
Total $60,259 $60,385
======= =======
Each of the Mortgage Loans are secured by a mortgage, deed of trust or
other security instrument which created a first lien on the residential
dwellings and/or commercial property.
NOTE 4 - DIVIDENDS
For the year ended December 31, 1998, the Company paid dividends on the
Series A Preferred Shares in the amount of $2,722,500 and dividends on the
Common Shares of $1,150,000.
For the period from inception (March 18, 1997) through December 31, 1997,
the Company paid dividends on the Series A Preferred Shares in the amount of
$1,217,563, and dividends on the Common Shares of $600,000.
NOTE 5 - RELATED PARTY TRANSACTION
The Company has entered into an Advisory Agreement (the "Advisory
Agreement") with the Bank (the "Advisor") requiring an annual payment of
$125,000. The Advisor provides advice to the Board of Directors and manages
- 23 -
<PAGE>
the operations of the Company as defined in the Agreement. The Agreement has an
initial term of five years commencing on September 9, 1997 and automatically
renews for additional five year periods, unless the Company delivers a notice of
nonrenewal to the Advisor as defined in the Advisory Agreement. Advisory fees
incurred for the period year ended December 31, 1998 totaled $125,000 and for
the period from inception (March 18, 1997) through December 31, 1997 totaled
approximately $57,000.
The Company also entered into two servicing agreements with the Bank for
the servicing of the commercial and residential mortgage loans. Pursuant to
each servicing agreement, the Bank performs the servicing of the Mortgage Loans
owned by the Company, in accordance with normal industry practice. The
Servicing Agreements can be terminated without cause upon a thirty day advance
notice given to the Servicer. The servicing fee is 0.375% of the outstanding
principal balance for the residential mortgage loans and commercial mortgage
loans. The servicing fees of $217,000 and $94,000 for 1998 and 1997,
respectively, are netted out of loan interest income, prior to remittance by the
Bank to the Company.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, entitled "Disclosures
About Fair Value of Financial Instruments" ("SFAS 107"), requires Companies to
disclose fair value information about financial instruments for which it is
practicable to estimate values, whether or not such financial instruments are
recognized on the balance sheet. Fair value is defined as the amount at which a
financial instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation, and is best evidenced by a
quoted market price, if one exists. The calculation of estimated fair value is
based on market conditions at a specific point in time and may not be reflective
of future fair values.
Certain financial instruments and all nonfinancial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 may provide only a partial estimate of the fair value of the Company.
Fair values among REITs are not comparable due to the wide- range of limited
valuation techniques and numerous estimates which must be made. This lack of an
objective valuation standard, introduces a great degree of subjectivity to these
derived or estimated fair values. Therefore, readers are cautioned against
using this information for purposes of evaluating the financial condition of the
Company compared with other REITs.
- 24 -
<PAGE>
Loans:
Loans were valued using methodologies suitable for each loan type. These
methodologies and the key assumptions made are discussed below.
The fair value of the Company's commercial loans was estimated by assessing
the two main risk components: credit risk and interest rate risk. The estimated
cash flows were discounted, using rates appropriate for each maturity that
incorporates the effects of interest rate changes.
For residential mortgage loans for which market rates for comparable loans
are readily available, the fair value was estimated by discounting expected cash
flows, adjusted for prepayments. The discount rates used for residential
mortgages were secondary market yields for comparable mortgage- backed
securities, adjusted for risk. These discount rates incorporated the effects of
interest rate changes only, since the estimated cash flows were previously
adjusted for credit risk.
The book value and fair value of Mortgage Loans at December 31, 1998 and
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Residential Mortgage Loans $52,858 $52,821 $52,784 $52,796
Commercial Mortgage Loans 7,401 7,416 7,601 7,607
------- ------- ------- -------
Total Portfolio $60,259 $60,237 $60,385 $60,403
======= ======= ======= =======
</TABLE>
Assets and liabilities in which carrying value approximates fair value:
The carrying values of certain financial assets and liabilities, including
cash, accrued interest receivable, due-to-parent and other liabilities, are
considered to approximate their respective fair value due to their short-term
nature and negligible exposure to credit losses.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
- 25 -
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE
CORPORATION
The persons who are directors and executive officers of the Company are as
follows:
Name Position and Office Held
- --------------------- ------------------------------------------
George J. Butvilas Director and Chairman
Kenneth R. Janson Director, President and Chief Executive Officer
Richard E. West Director and Vice President
James Bogan Director
William J. McGarry Director
Gail A. Mroz Director
Daniel D. Greenlee Treasurer and Chief Financial Officer
Peter L. Lemmer Secretary
Eddie J. Johnson Loan Portfolio Management Officer
The following is a summary of the experience of the executive officers and
directors of the Company:
George J. Butvilas, age 53, Director and Chairman; joined D&N as President
in May 1990, and was elected a Director in October, 1990. He was named Chief
Executive Officer of the Bank in 1991 and Chief Executive Officer of D&N in
1992. Prior to joining the Bank, he had over 16 years experience as a
commercial and community banker, most recently as Executive Vice President and
Director of Boulevard Bancorp, Inc. of Chicago, Illinois.
Kenneth R. Janson, age 47, Director, President and Chief Executive Officer;
is also Executive Vice President/Chief Financial Officer and Treasurer of D&N
and the Bank. Prior to joining the Bank in May 1988 as Vice President/Financial
Analysis, he was affiliated with various universities, the last six years as
Associate Professor of Accounting at Michigan Technological University. Mr.
Janson is responsible for directing the accounting, investment and investor
relations functions for the Bank and D&N.
Richard E. West, age 52, Director and Vice President; is also Executive
Vice President/Wholesale Banking of the Bank. Prior to joining the Bank in
January 1990, he was Servicing Manager for 20 years with Rothschild Financial
Corporation and Valley National Bank of Arizona. Mr. West is responsible for
directing the loan servicing, residential lending, consumer lending, bank
operations and information systems functions of the Bank.
- 26 -
<PAGE>
James Bogan, age 47, Director; is also Chief Executive Officer of Portage
Health System, Hancock, Michigan. Prior to joining the Health System in June
1989, he held various positions involving health care management, the last three
years as Chief Operating Officer of Trinity Medical Center, Minot, North Dakota.
Mr. Bogan is responsible for directing the affairs of Portage Health System,
which include a 44 bed acute care unit, a 30 bed nursing home unit, a medical
group including 15 physicians, a home health agency, and two retail pharmacies.
William J. McGarry, age 55, Director; is also the Treasurer and Chief
Financial Officer of Michigan Technological University located in Houghton,
Michigan. He was named to his current position at the University in December
1992, after serving two years as a senior associate with Coopers & Lybrand in
Boston. Prior to his term with Coopers & Lybrand, Mr. McGarry served as
principal consultant with Information Associates of Rochester, New York and was
vice president in charge of the large financial services management consulting
and systems integration practice of SEI Corporation of Cambridge,
Massachusetts. He has also served as senior director of finance and
administration at Rensselaer Polytechnic Institute and as director of
administrative systems at Lehigh University.
Gail A. Mroz, age 46, Director; is also the Director of Finance and
Operations of the Michigan Tech Fund in Houghton, Michigan. Previous to this,
Ms. Mroz was Finance Director and Controller of Copper Country Mental Health,
and has also been an instructor for the School of Business and Engineering
Administration at Michigan Technological University, both of which are in
Houghton, Michigan.
Daniel D. Greenlee, age 46, Treasurer and Chief Financial Officer; is also
Senior Vice President/Controller of the Bank. He has been with the Bank in
various capacities since 1984 and is presently responsible for the accounting,
financial and regulatory reporting, financial analysis, tax and risk management
functions of the Bank.
Peter L. Lemmer, age 41, Secretary; is also Senior Vice President/General
Counsel of D&N and the Bank. Prior to joining the Bank in October 1990, he held
various positions involving legal services, the last five years as Senior Vice
President/Compliance and Vice President, Associate General Counsel/Compliance
Officer with Cal America Savings, later known as Columbus Saving, and American
Federal Bank, respectively. Mr. Lemmer is responsible for the legal and
regulatory functions of the Bank and D&N.
Eddie J. Johnson, age 49, Loan Portfolio Officer; is also Secondary
Marketing Manager and Investment Officer of the Bank. She has been with the
Bank in various capacities since 1983 and is presently responsible for the
management of secondary coverage on the Bank's residential mortgage pipeline,
along with purchases and sales of loan product for the Bank.
- 27 -
<PAGE>
Independent Directors
The Company's Certificate of Designation establishing the Series A
Preferred Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company be approved by a majority of the
Independent Directors of the Company. Messrs. Bogan, McGarry and Ms. Mroz are
the Company's Independent Directors. When there are only two Independent
Directors, any action that requires the approval of a majority of Independent
Directors must be approved by both Independent Directors.
If at any time the Company fails to declare and pay a quarterly dividend on
the Series A Preferred Shares, the number of directors constituting the Board
of Directors of the Company will be increased by two at the Company's next
annual meeting and the holders of Series A Preferred Shares, voting together
with the holders of any other outstanding series of Preferred Stock as a single
class, will be entitled to elect the two additional directors to serve on the
Company's Board of Directors. Any member of the Board of Directors elected by
holders of the Company's Preferred Stock will be deemed to be an Independent
Director for purposes of the actions requiring the approval of a majority of the
Independent Directors.
Audit Committee
The Company's audit committee reviews the engagement and independence its
auditors. The audit committee also reviews the adequacy of the Company's
internal accounting controls. The audit committee is comprised of Messrs.
Bogan, McGarry and Ms. Mroz.
ITEM 11: EXECUTIVE COMPENSATION
The Company does not pay any compensation to its officers or to employees
of the Bank, or to directors who are not Independent Directors. The Company pays
the Independent Directors of the Company fees for their services as directors.
The Independent Directors receive a fee of $250 for attendance (in person or by
telephone) at each meeting of the Board of Directors and $100 for each meeting
of a Committee of the Board. However, multiple fees are not be paid for two or
more meetings attended on the same day.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Bank owns 100% of the common stock of the Company.
- 28 -
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below are certain transactions between the Company and its
directors and affiliates. Management believes that the transactions with
related parties described herein have been conducted on substantially the same
terms as similar transactions with unrelated parties.
The Bank administers the day-to-day operations of the Company and is
entitled to receive fees in connection with the Advisory Agreement. Advisory
fees paid to parent for the period ended December 31, 1998 totaled $125,000.
The Bank services the Residential Mortgage Loans included in the Company's
portfolio and is entitled to receive fees in connection with the Servicing
Agreement.
The Company had cash balances of approximately $1,661 as of December 31,
1998 and 1997, held in a demand deposit account with the Bank.
- 29 -
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) The following financial statements of the Company are included in
Item 8 of this report:
Report of Independent Public Accountants and Statements of Condition
at December 31, 1998 and 1997.
Statements of Income for the year ended December 31, 1998 and the
period from inception (March 18, 1997) through December 31, 1997.
Statements of Changes in Stockholders' Equity for the year ended
December 31, 1998 and the period from inception (March 18, 1997)
through December 31, 1997.
Statements of Cash Flows for the year ended December 31, 1998 and the
period from inception (March 18, 1997) through December 31, 1997.
Notes to Financial Statements
(a)(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instruction or are inapplicable and
therefore have been omitted.
(a)(3) Exhibits:
*12(a) Computation of Ratio of Earnings to Fixed charges.
*12(b) Computation of Ratio of Earnings to fixed charges and
Preferred Stock dividend requirements.
*27 Financial Data Schedule
(b) No reports on Form 8-K were issued during the three months ended
December 31, 1998.
- -----------------
* Filed herewith.
- 30 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant as duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
D&N CAPITAL CORPORATION
(Registrant)
Date: March 22, 1999 By: /s/ KENNETH R. JANSON
---------------------------------- -----------------------------
KENNETH R. JANSON
Director and President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ GEORGE J. BUTVILAS By: /s/ KENNETH R. JANSON
------------------------------ -----------------------------
GEORGE J. BUTVILAS KENNETH R. JANSON
Director, Chairman of the Board Director and President
Date March 22, 1999 Date March 22, 1999
------------------------------ -----------------------------
By: /s/ RICHARD E. WEST By: /s/ JAMES BOGAN
------------------------------ -----------------------------
RICHARD E. WEST JAMES BOGAN
Director and Vice President Director
Date March 22, 1999 Date March 22, 1999
------------------------------ -----------------------------
By: /s/ WILLIAM J. MCGARRY By: /s/ GAIL A. MROZ
------------------------------ -----------------------------
WILLIAM J. MCGARRY GAIL A. MROZ
Director Director
Date March 22, 1999 Date March 22, 1999
------------------------------ -----------------------------
<PAGE>
By: /s/ DANIEL D. GREENLEE
-------------------------------
DANIEL D. GREENLEE
Treasurer, Chief Financial Officer
and principal accounting officer.
Date March 22, 1999
-------------------------------
<PAGE>
Exhibit Index
*12(a) Computation of ratio of Earnings to Fixed charges.
*12(b) Computation of Ratio of Earnings to fixed charges and
Preferred Stock dividend requirements,
*27 Financial Data Schedule
- --------------
* Filed herewith.
<PAGE>
EXHIBIT 12(a)
D&N CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
1998 1997*
---------------
(In thousands, except ratio):
Net income $3,914 $1,852
Fixed charges:
Advisory fees 125 57
Total fixed charges 125 57
Earnings before fixed charges $4,039 $1,909
Fixed charges, as above $ 125 $ 57
Ratio of earnings to fixed charges 32.3 33.5
* For period from inception (March 18, 1997) through December 31,1997.
<PAGE>
EXHIBIT 12(b)
D&N CAPITAL CORPORATION
Computation of ratio of earnings to fixed charges
and preferred stock dividend requirements
1998 1997*
------------- --------------
(In thousands, except ratio)
Net income $3,914 $1,852
Fixed charges:
Advisory fees 125 57
Total fixed charges 125 57
Earnings before fixed charges 4,039 1,909
Fixed charges, as above 125 57
Preferred stock dividend requirements 2,723 1,218
Fixed charges including preferred
stock dividends $2,848 $1,275
Ratio of earnings to fixed charges and
preferred stock dividend requirements 1.42 1.50
* For period from inception (March 18, 1997) through December 31,1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 60,259
<ALLOWANCE> 0
<TOTAL-ASSETS> 60,645
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 70
<LONG-TERM> 0
0
30,250
<COMMON> 30,250
<OTHER-SE> 75
<TOTAL-LIABILITIES-AND-EQUITY> 60,645
<INTEREST-LOAN> 4,104
<INTEREST-INVEST> 0
<INTEREST-OTHER> 60
<INTEREST-TOTAL> 4,164
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 4,164
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 250
<INCOME-PRETAX> 3,914
<INCOME-PRE-EXTRAORDINARY> 3,914
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,914
<EPS-PRIMARY> 37.47
<EPS-DILUTED> 37.47
<YIELD-ACTUAL> 7.32
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
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