<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 1999
-----------------
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: 0-13649
-----------
BERKSHIRE BANCORP INC.
----------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2563513
- ----------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 BROADWAY, NEW YORK, NEW YORK 10038
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (212) 791-5362
------------------
COOPER LIFE SCIENCES, INC.
-------------------------------------------------
(Former name if changed since last report.)
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
--- ---
As of September 24, 1999, there were 2,127,265 outstanding shares of
the issuers Common Stock, $.10 par value.
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
July 31, 1999 and October 31, 1998 3
Consolidated Statements of Income
For The Three and Nine Months Ended
July 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
For The Nine Months Ended
July 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Index of Exhibits 27
</TABLE>
2
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,949 $ 58
Interest bearing deposits 6,985 65,200
Federal funds sold 17,500 --
--------- ---------
Total cash and cash equivalents 26,434 65,258
Investment Securities:
Available-for-sale 91,080 --
Held-to-maturity 2,140 --
--------- ---------
Total investment securities 93,220 --
Loans, net of unearned income 44,507 --
Loans held for sale 2,212 --
Less: allowance for loan losses (875) --
--------- ---------
Net loans 45,844 --
Accrued interest receivable 1,692 --
Premises and equipment, net 414 --
Deferred taxes 350 925
Prepaid expenses and other 832 647
Goodwill, net of amortization of $425 14,189 --
--------- ---------
Total assets $ 182,975 $ 66,830
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 18,810 $ --
Interest bearing 76,892 --
--------- ---------
Total deposits 95,702 --
Securities sold under agreements to repurchase 1,500 --
Accrued interest payable 273 --
Accrued expenses and accounts payable 1,586 1,185
Income taxes payable 2,286 179
Deferred taxes payable 5,555 --
--------- ---------
Total liabilities 106,902 1,364
--------- ---------
Stockholders' equity
Preferred stock - $.10 Par value: -- --
2,000,000 shares authorized - none issued
Common stock - $.10 par value
Authorized -- 10,000,000 shares
Issued -- 2,566,095 shares
Outstanding --
July 31, 1999, 2,126,265 shares
October 31, 1998, 2,126,265 shares 256 256
Additional paid-in capital 78,546 78,546
Accumulated other comprehensive income, net 7,088 --
Accumulated deficit (7,044) (10,563)
Less: Common stock in treasury - at cost:
July 31, 1999, 439,830 shares
October 31, 1998, 439,830 shares
(2,773) (2,773)
--------- ---------
Total stockholders' equity 76,073 65,466
--------- ---------
$ 182,975 $ 66,830
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $ 2,406 $ 913 $ 6,014 $ 2,457
Interest expense 731 -- 1,787 --
-------- -------- -------- --------
Net interest income 1,675 913 4,227 2,457
Provision for loan losses 10 -- 30 --
-------- -------- -------- --------
Net interest income after
provision for loan losses 1,665 913 4,197 2,457
-------- -------- -------- --------
Other income:
Investment securities gains 2,973 -- 4,614 38,909
Other income 138 -- 471 --
-------- -------- -------- --------
Total other income 3,111 -- 5,085 38,909
-------- -------- -------- --------
Other expense:
General and administrative 1,082 131 1,886 717
Amortization of goodwill 182 -- 425 --
Other (261) -- 154 --
-------- -------- -------- --------
Total non-interest expense 1,003 131 2,465 717
-------- -------- -------- --------
Income before provision for taxes 3,773 782 6,817 40,649
Provision for income taxes 1,707 440 3,085 3,670
-------- -------- -------- --------
Net income $ 2,066 $ 342 $ 3,732 $ 36,979
======== ======== ======== ========
Net income per share:
Basic $ .97 $ .16 $ 1.76 $ 17.39
======== ======== ======== ========
Diluted $ .91 $ .15 $ 1.65 $ 16.37
======== ======== ======== ========
Weighted average number of
shares outstanding
Basic 2,126 2,126 2,126 2,126
======== ======== ======== ========
Diluted 2,265 2,263 2,261 2,259
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For The Nine Months Ended
July 31, 1999
----------------------------------
1999 1998
------ ------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 3,732 $ 36,979
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on investment securities (4,614) (38,909)
(Increase) in deferred taxes (350) (925)
Depreciation and amortization 479 --
Provision for loan losses 30 --
Changes in assets and liabilities:
(Increase) in accrued interest receivable (942) --
Decrease in prepaid expenses and other 108 78
Increase (decrease) in accounts payable, other accrued
expenses, liabilities and income taxes payable 3,968 (1,312)
-------- --------
Net cash provided by (used in) operating activities 2,411 (4,089)
-------- --------
Cash flows from investing activities:
Investment in The Berkshire Bank (25,215) --
Proceeds from sales of The Cooper Companies,
Inc. and Executone Information Systems, Inc.
common stock 4,766 44,617
Net (increase) in federal funds sold 4,939 --
Investment securities available for sale
Purchases (25,657) --
Net increase in loans (4,709) --
Net increase in loans held for sale (2,084) --
Acquisition of premises and equipment (162) --
-------- --------
Net cash provided by (used in) investing activities (48,122) 44,617
-------- --------
Cash flows from financing activities:
Net (decrease) in non interest bearing deposits (2,227) --
Net (decrease) in interest bearing deposits (8,173) --
Dividends paid (213) --
-------- --------
Net cash (used in) financing activities (10,613) --
-------- --------
Net increase (decrease) in cash (56,324) 40,528
Cash - beginning of period 65,258 25,887
-------- --------
Cash - end of period $ 8,934 $ 66,415
======== ========
Supplemental cash flow information:
Cash used to pay interest $ 1,787 $ --
Cash used to pay taxes $ 985 $ 4,159
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
FORWARD-LOOKING STATEMENTS.
Statements in this Quarterly Report on Form 10-Q that are not based on
historical fact may be "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995. They include words like "may", "will",
"expect", "estimate", "anticipate", "continue" or similar terms and reflect the
Company's current analysis of existing trends. Actual results could differ
materially from those expressed or implied due to: major changes in business
conditions and the economy, or the development of an adverse interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments, loss of key senior
management, major disruptions in the operations of the Company's banking
facilities, new competitors or technologies, significant disruptions caused by
the failure of third parties to address the Year 2000 issue, acquisition
integration costs, dilution to earnings per share from stock issuance or
acquisitions, regulatory issues, litigation costs, and other items discussed
throughout this Quarterly Report on Form 10-Q.
Certain information customarily disclosed by financial institutions,
such as estimates of interest rate sensitivity and the adequacy of the loan loss
allowance, are inherently forward-looking statements because, by their nature,
they represent attempts to estimate what will occur in the future.
A wide variety of factors could cause the Company's actual results and
experiences to differ materially from the anticipated results or other
expectations expressed or implied in the Company's forward-looking statements.
Some of the risks and uncertainties that may affect operations, performance,
results of the Company's business, the interest rate sensitivity of its assets
and liabilities, and the adequacy of its loan loss allowance, include but are
not limited to: (i) deterioration in local, regional, national or global
economic conditions which could result, among other things, in an increase in
loan delinquencies, a decrease in property values, or a change in the housing
turnover rate; (ii) changes in market interest rates or changes in the speed at
which market interest rates change; (iii) changes in laws and regulations
affecting the financial services industry; (iv) changes in competition; and (v)
changes in consumer preferences.
For these reasons, the Company cautions readers not to place undue
reliance upon any forward-looking statements. Forward-looking statements speak
only as of the date made and the Company assumes no obligation to update or
revise any such statements upon any change in applicable circumstances.
6
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
NOTE 1. GENERAL
Berkshire Bancorp Inc. (formerly Cooper Life Sciences, Inc.), a
Delaware corporation (the "Company"), was not engaged in any business operations
during the fiscal year ended October 31, 1998. On August 6, 1998, the Company,
through its wholly-owned subsidiary, Greater American Finance Group, Inc.
("GAFG"), made a cash tender offer for any and all of the outstanding shares of
common stock of The Berkshire Bank (the "Berkshire Bank" or the "Bank"), a New
York state-chartered commercial bank. (See Note 2 of Notes to Consolidated
Financial Statements).
The Company's and GAFG's obligation to purchase shares pursuant to the
tender offer was subject to various conditions including, among others, the
receipt of required regulatory approvals from the New York State Banking Board
and the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). The approvals were received in December 1998 and on January 4, 1999,
after the close of the Company's fiscal year ended October 31, 1998, the Company
acquired approximately 99% of the outstanding common stock of the Bank. As a
result of the acquisition, the Company and GAFG became bank holding companies
under the Bank Holding Company Act.
As bank holding companies, the Company and GAFG are subject to
extensive regulation by the Federal Reserve and The Berkshire Bank remains
subject to extensive regulation by the Federal Deposit Insurance Corporation
(the "FDIC") and the Superintendent of Banks of the State of New York.
During interim periods, the Company follows the accounting policies set
forth in its Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Readers are encouraged to refer to the Company's Form 10-K for the
fiscal year ended October 31, 1998 when reviewing this Form 10-Q. Quarterly
results reported herein are not necessarily indicative of results to be expected
for other quarters.
The Company utilizes a fiscal year which ends on October 31 for
reporting purposes, whereas the Bank utilizes a fiscal year which ends on
December 31 for such purposes. The financial information presented herein
combines the Company and the Bank with the Bank's results presented to coincide
with the reporting period of the Company.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the Company's consolidated
financial position as of July 31, 1999 and October 31, 1998 and the consolidated
results of its operations for the three and nine month periods ended July 31,
1999 and 1998, and its consolidated cash flows for the nine month periods ended
July 31, 1999 and 1998.
NOTE 2. - ACQUISITION OF THE BERKSHIRE BANK
On January 4, 1999, the Company, through its wholly owned subsidiary,
Greater American Finance Group, Inc. ("GAFG"), purchased 2,396,600 shares, or
approximately 99%, of the outstanding shares of Common Stock (the "Shares") of
the Bank, a privately-owned New York State chartered commercial bank. The Shares
were acquired for a purchase price of $10.50 per share, net to the seller in
cash, upon the terms and conditions set forth in an Offer to Purchase dated
August 6, 1998, and in the related Letter of Transmittal (collectively, the
"Offer"). The total amount of funds required by GAFG to purchase the Shares was
approximately $25.2 million. On March 31, 1999, GAFG purchased an additional
7
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
5,000 shares for a cash purchase price of $10.50 per share, or approximately
$53,000. All such funds were obtained by GAFG from the Company's cash on hand.
The purchase of the Shares pursuant to the Offer was subject to receipt of the
approval of the New York State Banking Board and the approval of the Federal
Reserve Board. Said approvals have been received by CLS and GAFG. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of the Berkshire Bank have been included in the consolidated
statements of income from the date of acquisition. In connection with the
acquisition, the Company acquired assets with an aggregated fair value of
$119,429,000 and assumed deposits and other liabilities of $108,760,000.
NOTE 3. - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130 "Comprehensive
Income." SFAS No. 130 establishes new standards for reporting comprehensive
income, which includes net income as well as certain other items which result in
a change to equity during the period. Accumulated other comprehensive income was
approximately $7,088,000 net of deferred taxes, at July 31, 1999. Comprehensive
income for the nine months ended July 31, 1998 was $10,820,000 which includes
reclassification adjustments of $3,045,000 net of income tax expense of
$1,569,000. There were no transactions for the nine months ended July 31, 1998
which would generate other comprehensive income.
NOTE 4. - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes loan balances (including loans held for
sale) by category as of July 31, 1999 (in thousands):
<TABLE>
<CAPTION>
July 31, 1999
--------------------------------------
Amount % of Total
------------------ ------------------
<S> <C> <C>
Commercial and professional loans $ 6,072 13.0%
Secured by real estate 37,084 79.4
Personal 2,924 6.3
Other 639 1.3
------------------ ------------------
Total loans $ 46,719 100.0 %
==================
Less:
Allowance for loan losses (875)
------------------
Loans, net $ 45,844
==================
</TABLE>
The Company accounts for its impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable. As
of July 31, 1999, the Company did not have any non accrual or impaired loans.
8
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
NOTE 5. - SECURITIES
The following table summarizes the Company's available-for-sale and
held-to-maturity securities at July 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED GROSS GROSS
AVERAGE UNREALIZED UNREALIZED FAIR
YIELD COST GAINS LOSSES VALUE
--------------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Government
Agency Obligations
Due within one year 5.2% $ 10,000 $ -- $ (50) $ 9,950
Due after one year 5.0 40,009 -- (162) 39,847
through five years
Due after five years 4.9 14,131 -- (117) 14,014
through ten years
Due after ten years 4.8 10,217 -- (67) 10,150
------------ ----------- ------------ ----------
74,357 -- (396) 73,961
------------ ----------- ------------ ----------
Corporate Notes
Due within one year -- -- -- -- --
Due after one year 6.8 955 -- (66) 889
through five years
Due after five years 6.8 1,841 -- (34) 1,807
through ten years
Due after ten years -- -- -- -- --
------------ ----------- ------------ ----------
2,796 -- (100) 2,696
------------ ----------- ------------ ----------
Executone Information -- -- 13,888 -- 13,888
Systems, Inc.
Common Stock
Federal Home Loan 7.0 535 -- -- 535
Bank Stock
------------ ----------- ------------ ----------
535 13,888 -- 14,423
------------ ----------- ------------ ----------
77,688 13,888 (496) 91,080
============ =========== ============ ==========
HELD-TO-MATURITY
U.S. Government
Agency Obligations
Due within one year 4.5 $ 1,000 -- (1) 999
Due after one year 4.9 184 -- (1) 183
through five years
Due after five years 5.0 125 -- -- 125
through ten years
Due after ten years 5.3 335 1 -- 336
------------ ----------- ------------ ----------
1,644 1 (2) 1,643
------------ ----------- ------------ ----------
Corporate Notes
Due within one year -- -- -- -- --
Due after one year 5.9 496 1 -- 497
through five years
Due after five years -- -- -- -- --
through ten years
Due after ten years -- -- -- -- --
------------ ----------- ------------ ----------
496 1 -- 497
------------ ----------- ------------ ----------
2,140 2 (2) 2,140
============ =========== ============ ==========
</TABLE>
9
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
NOTE 6. - COMMON STOCK OF EXECUTONE INFORMATION SYSTEMS, INC.
As more fully discussed in the Company's 1998 10-K, in December 1995,
the Company sold its minority equity interest in Unistar Gaming Corp. ("UGC") to
Executone Information Systems, Inc., a Virginia corporation whose common stock
trades on the NASDAQ National Market System, ("Executone") (the "Executone
Common Stock"). The Company's investment in UGC was approximately $5.2 million.
In exchange for its interest in UGC, the Company received shares of
Executone Common Stock, all of which were sold in open market transactions
during 1998, and shares of Executone Series A and Series B Preferred Stock (the
"Executone Preferred Stock"). In 1997, the Company fully reserved the carrying
value, approximately $2.1 million, of its shares of Executone Preferred Stock
and recorded a deferred tax asset of $925,000.
In March 1999, Executone exercised its right to redeem and convert the
Executone Preferred Stock into Executone Common Stock and on April 6, 1999, in
exchange for its shares of Executone Preferred Stock, the Company received
4,193,204 shares of Executone Common Stock with a market value of approximately
$17.7 million.
At July 31, 1999, the Company owned 3,366,888 shares of Executone
Common Stock which have been classified as available-for-sale securities. The
unrealized gain of approximately $13.9 million, net of deferred taxes of
approximately $5.5 million, has been recorded as a component of other
accumulated comprehensive income.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Berkshire Bancorp Inc. and subsidiaries (the "Company") for the three and
nine months ended July 31, 1999 and 1998. References to the Company herein shall
be deemed to refer to the Company and its consolidated subsidiaries unless the
context otherwise requires. References to Notes herein are references to the
"Notes to Consolidated Financial Statements" of the Company located in Item 1
herein. Historical discussion and analysis is not presented because it is not
meaningful.
The unaudited proforma combined consolidated financial information set
forth in the following tables is presented for informational purposes only and
is not necessarily indicative of the combined financial position or results of
operations that would have occurred had the acquisition of The Berkshire Bank
been consummated on October 31, 1998 or at the beginning of the periods
indicated. The Company utilizes a fiscal year which ends on October 31 for
reporting purposes, whereas the Bank utilizes a fiscal year which ends on
December 31 for such purposes. The consolidated financial information presented
herein combines the financial information of the Company as of its fiscal year
end and the Bank as of the twelve months ending September 30. For the period
July 31, 1999 and 1998, the Bank's financial information was prepared as of and
for the nine months ended June 30, 1999 and 1998 and combined with the Company's
financial information as of and for the nine months ended July 31, 1999 and
1998.
11
<PAGE>
BERKSHIRE BANCORP INC. AND SUBSIDIARIES -
PROFORMA SELECTED CONSOLIDATED FINANCIAL DATA
The following sets forth a comparison of selected financial data which
reflects the balances and results of operations on an unaudited proforma
consolidated basis as if the acquisition of The Berkshire Bank had become
effective on October 31, 1998, 1997 and 1996, in the case of balance sheet
information presented, and at the beginning of the periods indicated, in the
case of operations information presented. Period end amounts have been utilized
to calculate performance ratios (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
July 31, October 31,
------------------------ -------------------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Interest income $ 7,064 $ 6,998 $ 9,392 $ 6,076 $ 4,617
Interest expense 2,237 2,706 3,642 3,836 4,292
-------- -------- -------- --------- ---------
Net interest income 4,827 4,292 5,750 2,240 325
Provision for possible loan losses 40 45 60 60 455
-------- -------- -------- --------- ---------
Net interest income after provision for possible loan losses 4,787 4,247 5,690 2,180 (130)
Other income (loss) 5,137 39,123 39,311 17,336 (1,023)
Other expenses 2,973 3,092 4,474 4,214 4,195
-------- -------- -------- --------- ---------
Income (loss) before income taxes and extraordinary items 6,951 40,278 40,527 15,302 (5,348)
Income taxes 2,382 3,736 3,258 145 14
-------- -------- -------- --------- ---------
Income (loss) before extraordinary items 4,569 36,542 37,269 15,157 (5,362)
Extraordinary items -- -- 150 -- --
-------- -------- -------- --------- ---------
Net income (loss) $ 4,569 $ 36,542 $ 37,119 $ 15,157 $ (5,362)
======== ======== ======== ======== =========
PER SHARE DATA:
Weighted average common shares outstanding-basic 2,126 2,126 2,126 2,147 2,149
Weighted average common shares outstanding-diluted 2,261 2,259 2,258 2,244 2,149
Net income per common share- basic $ 2.15 $ 17.19 $ 17.46 $ 7.06 $ (2.50)
Net income per common share- diluted $ 2.02 $ 16.18 $ 16.44 $ 6.75 $ (2.43)
Dividends paid per common share $ .10 $ -- $ .72 $ -- $ --
BALANCE SHEET SUMMARY:
Investment securities $ 94,604 $ 46,473 $ 50,785 $ 75,696 $ 70,000
Cash and cash equivalents 26,434 43,470 47,472 18,816 8,800
Loans, net 46,361 38,779 38,994 36,992 24,380
Allowance for loan losses (874) (785) (803) (723) (824)
Total assets 182,975 149,940 155,388 152,961 118,953
Deposits 95,702 96,266 86,232 89,469 61,581
Stockholder's equity $ 76,073 $ 74,334 $ 64,958 $ 60,176 $ 30,064
PERFORMANCE RATIOS:
Return on average assets 3.3% 32.5% 23.9% 9.9% (4.5)%
Return on average equity 8.0 65.5 57.4 25.2 (17.8)
Average equity to average assets 41.6 49.6 41.1 39.3 25.3
Net Interest Margin 4.2 3.9 3.9 2.3 0.5
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1999 COMPARED
TO THE THREE AND NINE MONTHS ENDED JULY 31, 1998.
GENERAL
On January 4, 1999, the Company, through its wholly owned subsidiary,
Greater American Finance Group, Inc. ("GAFG"), acquired approximately 99% of the
outstanding shares of the common stock of The Berkshire Bank (the "Berkshire
Bank" or the "Bank") for $25.2 million (see Note 2). At the date of the
acquisition, the Bank had total assets of $119.4 million. The acquisition was
accounted for as a purchase and, accordingly, the actual results of operations
for the three and six months ended July 31, 1999 only include operations of the
Berkshire Bank from the date of acquisition.
Prior to the acquisition of the Bank, the Company was not engaged in
any business operations. Therefore, the results of operations for the three and
nine months ended July 31, 1999 and the results of operations for the three and
nine months ended July 31, 1998 (a period when the Company was not engaged in
any business operations) are not directly comparable.
NET INCOME. Net income for the three months ended July 31, 1999 was $2.06
million, or $.91 per diluted share, as compared to $342,000, or $.15 per diluted
share, for the three months ended July 31, 1998, an increase of approximately
83%. Net income for the nine months ended July 31, 1999 was $3.73 million, or
$1.65 per diluted share, as compared to $36.98 million, or $16.37 per diluted
share, for the six months ended July 31, 1998. Net income in the 1998 period
included a pre-tax gain of $38.91 million, or $17.22 per diluted share, on sales
of marketable securities.
NET INTEREST INCOME AND AVERAGE BALANCES. Net interest income for the three
months ended July 31, 1999 was $1.67 million as compared to $913,000 for the
three months ended July 31, 1998, an increase of 45%. Net interest income for
the nine months ended July 31, 1999 was $4.22 million as compared to $2.45
million for the nine months ended July 31, 1998, an increase of 42%.
The yields on average interest earning assets increased to 6.7% in 1999
from 6.4% in 1998 due to higher yields on interest-bearing deposits and federal
funds sold, partially offset by lower yields on loan and investment securities.
The cost of interest bearing liabilities increased to 5.1% in 1999 from 4.3% in
1998 due to the higher rates paid on interest bearing deposits. However, the
Company's net interest margin on interest earning assets increased to 4.2% in
1999 from 3.9% in 1998 due to the growth in non-interest earning demand
deposits.
Average balances for non-interest bearing demand deposits increased by
22.8% to $17.5 million in 1999 from $13.5 million in 1998. Average balances for
interest bearing deposits and other borrowings decreased by 19.2% to $67.3
million in 1999 from $83.3 million in 1998.
Average interest earning assets totaled $140.1 million for or the nine
months ended July 31, 1999 as compared to $145.7 million in the comparable 1998
period, a decrease of $5.6 million or 3.8%. The decrease in average interest
earning assets was due to the decrease in interest bearing deposits and federal
funds sold to $36.7 million from $63.6, partially offset by the increase in
average loans to $41.7 million from $37.9 and the increase in investment
securities to $61.6 from $44.1 million.
NON-INTEREST INCOME. Non-interest income consists primarily of realized gains on
sales of marketable securities and service fee income. For the three months
ended July 31, 1999, total non-interest income was $3.11 million of which $2.97
million was due to realized gains on sales of marketable securities. Total non-
13
<PAGE>
interest income for the nine months ended July 31, 1999 was $5.08 million, of
which $4.61 million was due to realized gains on sales of marketable securities,
as compared to $38.91 million in the prior year period.
NON-INTEREST EXPENSE. Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the three months ended July 31, 1999
increased by 872,000, or 87%, to $1.0 million from $131,000 for the three months
ended July 31, 1998. Total non-interest expense for the nine months ended July
31, 1999 increased by $1.75 million, or 71%, to $2.46 million from $717,000 for
the nine months ended July 31, 1998. The increase in 1999 includes $1.63 million
of operating expenses of the Bank from January 4, 1999, the date of the
acquisition, and $425,000 for the amortization of goodwill, which were offset by
a decrease of $305,000 in the parent company legal and professional fees.
INTEREST RATE RISK
Fluctuations in market interest rates can have a material effect on the
Bank's net interest income because the yields earned on loans and investments
may not adjust to market rates of interest with the same frequency, or with the
same speed, as the rates paid by the Bank on its deposits.
Most of the Bank's deposits are either interest-bearing demand deposits
or short term certificates of deposit and other interest-bearing deposits with
interest rates that fluctuate as market rates change. Management of the Bank
seeks to reduce the risk of interest rate fluctuations by concentrating on loans
and securities investments with either short terms to maturity or with
adjustable rates or other features that cause yields to adjust based upon
interest rate fluctuations. In addition, to cushion itself against the potential
adverse effects of a substantial and sustained increase in market interest
rates, the Bank has purchased off balance sheet interest rate cap contracts
which generally provide that the Bank will be entitled to receive payments from
the other party to the contract if interest rates exceed specified levels. These
contracts are entered into with major financial institutions.
The Company seeks to maximize its net interest margin within an
acceptable level of interest rate risk. Interest rate risk can be defined as the
amount of the forecasted net interest income that may be gained or lost due to
favorable or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
14
<PAGE>
In the banking industry, a traditional measure of interest rate
sensitivity is known as "gap" analysis, which measures the cumulative
differences between the amounts of assets and liabilities maturing or repricing
at various time intervals. The following table sets forth the Company's proforma
interest rate repricing gaps for selected maturity periods:
<TABLE>
<CAPTION>
PROFORMA INTEREST RATE SENSITIVITY GAP AT JULY 31, 1999
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
-------------------------------------------------------------------------------------
3 MONTHS 3 THROUGH 1 THROUGH OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
---------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 20,000 $ -- $ -- $ -- $ 20,000
---------------- --------------- --------------- --------------- ----------------
Interest bearing deposits in banks 6,957 100 -- -- 7,057
---------------- --------------- --------------- --------------- ----------------
Loans(1)(2)
Adjustable rate loans 14,337 6,848 2,684 2,346 26,215
Fixed rate loans -- 754 1,060 18,332 20,146
Other loans -- -- -- -- --
---------------- --------------- --------------- --------------- ----------------
Total loans 14,337 7,602 3,744 20,678 46,361
Investments(3)(4) 2,216 11,934 17,099 49,255 80,504
---------------- --------------- --------------- --------------- ----------------
Total rate-sensitive assets 43,510 19,636 20,843 69,933 153,922
---------------- --------------- --------------- --------------- ----------------
Deposits accounts(5)
Savings and NOW 11,691 -- -- -- 11,691
Money market 41,096 -- -- -- 41,096
Time deposits 22,734 5,676 2 1,613 30,025
---------------- --------------- --------------- --------------- ----------------
Total deposit accounts 75,521 5,676 2 1,613 82,812
Other borrowings -- -- -- 1,500 1,500
---------------- --------------- --------------- --------------- ----------------
Total rate sensitive liabilities 75,521 5,676 2 3,113 84,312
---------------- --------------- --------------- --------------- ----------------
Gap (repricing differences) (32,011) 13,960 20,841 66,820 69,610
================ =============== =============== =============== ================
Cumulative Gap (32,011) (18,051) 2,790 69,610
================ =============== =============== ===============
Cumulative Gap to Total Rate
Sensitive Assets (20.8)% (11.7)% 1.8% 45.2%
================ =============== =============== ===============
</TABLE>
- -----------------
(1) Adjustable-rate loans are included in the period in which the interest
rates are next scheduled to adjust rather than in the period in which the
loans mature. Fixed-rate loans are scheduled according to their maturity
dates.
(2) Includes nonaccrual loans.
(3) Investments are scheduled according to their respective repricing (variable
rate loans) and maturity (fixed rate securities) dates.
(4) Investments are stated at book value.
(5) NOW accounts and savings accounts are regarded as readily accessible
withdrawal accounts. The balances in such accounts have been allocated
amongst maturity/repricing periods based upon The Berkshire Bank's
historical experience. All other time accounts are scheduled according to
their respective maturity dates.
15
<PAGE>
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in the Bank's
loan portfolio and the general economy. The allowance for loan losses is
maintained at an amount management considers adequate to cover loan losses which
are deemed probable and can be estimated. The allowance is based upon a number
of factors, including the size of the loan portfolio, asset classifications,
economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience and the
Bank's underwriting policies. In general, it is the Bank's policy to maintain a
minimum allowance equal to 1% of outstanding loans plus outstanding commitments
and letters of credit. In addition, the Bank evaluates all loans identified as
problem loans and augments the allowance based upon the perceived risks
associated with such problem loans.
Management believes it uses a reasonable and prudent methodology to
project potential future losses in the loan portfolio, and hence assess the
adequacy of the allowance for loan losses. However, any such assessment is
speculative and future adjustments may be necessary if economic conditions or
the Bank's actual experience differ substantially from the assumptions upon
which the evaluation of the allowance was based. Furthermore, state and federal
regulators, in reviewing the Bank's loan portfolio as part of a future
regulatory examination, may request the Bank to increase its allowance for loan
losses, thereby negatively affecting the Bank's financial condition and earnings
at that time. Moreover, future additions to the allowance may be necessary based
on changes in economic and real estate market conditions, new information
regarding existing loans, identification of additional problem loans and other
factors, both within and outside of management's control.
The following table sets forth information with respect to activity in
the Bank's allowance for loan losses during the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
PROFORMA
NINE MONTHS ENDED JULY 31,
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Average loans outstanding $ 42,595 $ 38,741
============ ============
Allowance at beginning of period 803 723
Charge-offs:
Real Estate Loans 36 --
------------ ------------
Total loans charged-off 36 --
------------ ------------
Recoveries:
Commercial and Other Loans 67 17
------------ ------------
Total loans recovered 67 17
------------ ------------
Net (charge-offs) recoveries 31 17
Provision for loan losses charged to
operating expenses 40 45
------------ ------------
Allowance at end of period 874 785
============ ============
Ratio of net recoveries (charge-offs)
to average loans outstanding .08% .04%
============ ============
Allowance as a percent of total loans 1.85% 1.98%
============ ============
Total loans at end of period $ 47,235 $ 39,564
============ ============
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PROFORMA
TWELVE MONTHS ENDED OCTOBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Average loans outstanding $ 39,085 $ 31,081 $ 24,199
============ ============ ============
Allowance at beginning
of period 723 824 893
Charge-offs:
Commercial and Other Loans -- -- 314
Real Estate Loans -- 196 232
------------ ------------ ------------
Total loans charged-off -- 196 546
------------ ------------ ------------
Recoveries:
Commercial and Other Loans 20 28 22
Real Estate Loans -- 7 --
------------ ------------ ------------
Total loans recovered 20 35 22
------------ ------------ ------------
Net (charge-offs) recoveries (20) 161 524
Provision for loan losses
charged to operating expenses 60 60 455
------------ ------------ ------------
Allowance at end of period 803 723 824
============ ============ ============
Ratio of net recoveries
(charge-offs) to average
loans outstanding (.15)% .19% 2.17%
============ ============ ============
Allowance as a percent of
total loans 2.02% 1.92% 3.27%
============ ============ ============
Total loans at end of period $ 39,797 $ 37,715 $ 25,204
============ ============ ============
</TABLE>
LOAN PORTFOLIO
Loan Portfolio Composition. The Bank's loans consist primarily of
mortgage loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral. Most of the Bank's loans are either made to individuals or
personally guaranteed by the principals of the business to which the loan is
made. At July 31, 1999, the Bank had total loans of $45.8 million, including
$2.2 million of loans held for sale, and an allowance for loan losses of
$875,000. From time to time, the Bank may originate residential mortgage loans
and then sell them on the secondary market, normally recognizing fee income in
connection with the sale.
The following tables set forth information concerning the Bank's loan
portfolio by type of loan at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
PROFORMA
JULY 31,
--------------------------------------
1999 1998
------------ ------------
AMOUNT AMOUNT
------------ ------------
<S> <C> <C>
Commercial and professional loans $ 5,212 $ 4,319
Secured by real estate 38,657 32,096
Personal 3,195 1,876
Other 171 1,273
------------ ------------
Total loans 47,235 39,564
Less:
Allowance for loan losses 874 785
------------ ------------
Loans, net $ 46,361 $ 38,779
============ ============
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PROFORMA
OCTOBER 31,
--------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
AMOUNT AMOUNT AMOUNT
------------ ------------ ------------
<S> <C> <C> <C>
Commercial and professional loans $ 3,548 $ 7,011 $ 5,646
Secured by real estate 33,015 27,164 16,152
Personal 1,970 2,275 2,447
Other 1,264 1,265 959
------------ ------------ ------------
Total loans 39,797 37,715 25,204
Less:
Allowance for loan losses 803 723 824
------------ ------------ ------------
Loans, net $ 38,994 $ 36,992 $ 24,380
============ ============ ============
</TABLE>
It is the Bank's policy to discontinue accruing interest on a loan when
it is 90 days past due or if management believes that continued interest
accruals are unjustified. The Bank may continue interest accruals if a loan is
more than 90 days past due if the Bank determines that the nature of the
delinquency and the collateral are such that collection of the principal and
interest on the loan in full is reasonably assured. When the accrual of interest
is discontinued, all accrued but unpaid interest is charged against current
period income. Once the accrual of interest is discontinued, the Bank records
interest as and when received until the loan is restored to accruing status. If
the Bank determines that collection of the loan in full is in reasonable doubt,
then amounts received are recorded as a reduction of principal until the loan is
returned to accruing status.
18
<PAGE>
IMPAIRED LOAN BALANCE NON ACCRUAL LOANS AND LOANS GREATER THAN 90 DAYS STILL
ACCRUING
The following table sets forth certain information regarding nonaccrual
loans, including the ratio of such loans to total assets as of the dates
indicated, and certain other related information. The Bank had no foreclosed
real estate during these periods (dollars in thousands).
<TABLE>
<CAPTION>
PROFORMA
JULY 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Nonaccrual loans:
Secured by real estate -- 30
-------- --------
Total nonaccrual loans -- 30
-------- --------
Total nonperforming loans -- 30
======== ========
Total nonperforming loans to total assets --% .02%
======== ========
</TABLE>
<TABLE>
<CAPTION>
PROFORMA
OCTOBER 31,
-------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial and Other Loans $ -- $ -- $ 114
Secured by real estate 30 237 555
------------- ------------- -------------
Total nonaccrual loans 30 237 669
------------- ------------- -------------
Total nonperforming loans $ 30 $ 237 $ 669
============= ============= =============
Total nonperforming loans to .08% .63% 2.65%
total assets
============ ============ ============
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Bank, which is approved by the
Board of Directors, is designed primarily to provide satisfactory yields while
maintaining adequate liquidity, a balance of high quality, diversified
investments, and minimal risk. The Bank does not invest in equity securities.
The largest component of the Bank's securities investments, representing more
than 50% of total securities investments, are debt securities issued by the
Federal Home Loan Mortgage Corporation (Freddy Mac), the Federal National
Mortgage Association (Fanny Mae) or the Government National Mortgage Association
(Ginny Mae). The remainder of the Bank's debt securities investments are
primarily short term debt securities issued by the United States or its
agencies. The Bank maintains a small portfolio of less than $2 million of
high-yield corporate debt securities. Recognizing the higher credit risks of
these securities, the Bank underwrites these securities in a manner similar to
its loan underwriting procedures.
As required by the Statement of Financial Accounting Standard No. 115
("SFAS No. 115"), securities are classified into three categories: trading,
held-to-maturity and available-for-sale. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and are reported at fair value with unrealized gains and
19
<PAGE>
losses included in trading account activities in the statement of income.
Securities that the Bank has the positive intent and ability to hold to maturity
are classified as held-to-maturity and reported at amortized cost. All other
securities are classified as available-for-sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses included, on an
after-tax basis, as a separate component of net worth. The Bank does not have a
trading securities portfolio and has no current plans to maintain such a
portfolio in the future. The Bank generally classifies all newly purchased debts
securities as available for sale in order to maintain the flexibility to sell
those securities if the needs arises. The Bank has a limited portfolio of
securities classified as held to maturity, represented principally by securities
purchased a number of years ago. In addition, the Company owns shares of
Executone Information Systems, Inc. (see Note 6) which are included in
available-for-sale securities at July 31, 1999.
The following table sets forth the cost and estimated fair value of
available-for-sale and held-to-maturity securities as of the dates indicated (in
thousands):
<TABLE>
<CAPTION>
COST FAIR VALUE
------------ --------------
Proforma
July 31, 1999
<S> <C> <C>
Available-For-Sale
US Government Agencies $ 75,999 $ 75,762
Corporate Common Equities -- 13,888
Corporate Notes 2,802 2,768
Federal Home Loan Bank Stock 535 535
------------ -------------
Total $ 79,336 $ 92,953
============ =============
Held-To-Maturity
US Government Agencies $ 1,155 $ 1,157
Corporate Notes 496 495
------------ -------------
Total $ 1,651 $ 1,652
============ =============
<CAPTION>
COST FAIR VALUE
------------ --------------
Proforma
October 31, 1998
<S> <C> <C>
Available-For-Sale
US Government Agencies $ 33,586 $ 33,687
Corporate Notes 1,893 1,815
Federal Home Loan Bank Stock 535 535
------------ -------------
Total $ 36,014 $ 36,037
============ =============
Held-To-Maturity
US Government Agencies $ 12,504 $ 12,468
Corporate Notes 2,244 2,242
------------ -------------
Total $ 14,748 $ 14,710
============ =============
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
COST FAIR VALUE
------------ --------------
Proforma
October 31, 1997
<S> <C> <C>
Available-For-Sale
Marketable Securities $ 4,007 $ 38,067
US Government Agencies 15,542 15,445
Corporate Notes 2,276 2,320
Federal Home Loan Bank Stock 535 535
------------ -------------
Total $ 22,360 $ 56,367
============ =============
Held-To-Maturity
US Government Agencies $ 17,088 $ 16,985
Corporate Notes 2,241 2,247
------------ -------------
Total $ 19,329 $ 19,232
============ =============
</TABLE>
REGULATORY RESTRICTIONS AND CAPITAL ADEQUACY
Quantitative measures established by regulation to ensure capital
adequacy require the Company and The Berkshire Bank to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier I capital (as defined) to average
assets (as defined). As of July 31, 1999, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain certain Total risk-based, Tier I risk-based, and Tier I leverage
ratios. There are no conditions or events since the notification that management
believes have changed the Bank's category.
21
<PAGE>
The following table sets forth the actual and required regulatory
capital amounts and ratios of the Berkshire Bank as of July 31, 1999 and 1998
and October 31, 1998, 1997 and 1996 (dollars in thousands):
THE BERKSHIRE BANK
PROFORMA
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
JULY 31, 1999
Total Capital (to Risk-Weighted Assets) $12,569 21.3% $ 4,733 >=8.0% $ 5,916 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 11,828 20.0% 2,366 >=4.0% 3,550 >=6.0%
Tier I Capital (to Average Assets) 11,828 8.3% 5,686 >=4.0% 7,108 >=5.0%
JULY 31, 1998
Total Capital (to Risk-Weighted Assets) 10,188 21.1% 3,851 >=8.0% 4,814 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 9,584 19.9% 1,926 >=4.0% 2,888 >=6.0%
Tier I Capital (to Average Assets) 9,584 8.9% 4,291 >=4.0% 5,364 >=5.0%
OCTOBER 31, 1998
Total Capital (to Risk-Weighted Assets) 10,573 22.2% 3,817 >=8.0% 4,771 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 9,974 20.9% 1,909 >=4.0% 2,863 >=6.0%
Tier I Capital (to Average Assets) 9,974 9.1% 4,397 >=4.0% 5,497 >=5.0%
OCTOBER 31, 1997
Total Capital (to Risk-Weighted Assets) 9,180 19.8% 3,714 >=8.0% 4,642 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 8,598 18.5% 1,857 >=4.0% 2,785 >=6.0%
Tier I Capital (to Average Assets) 8,598 8.8% 3,899 >=4.0% 4,874 >=5.0%
OCTOBER 31, 1996
Total Capital (to Risk-Weighted Assets) 8,427 27.6% 2,445 >=8.0% 3,056 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 8,040 26.3% 1,222 >=4.0% 1,834 >=6.0%
Tier I Capital (to Average Assets) 8,040 11.4% 2,811 >=4.0% 3,514 >=5.0%
</TABLE>
22
<PAGE>
The following table sets forth the actual and required regulatory
capital amounts and ratios of the Company as of July 31, 1999 and 1998 and
October 31, 1998, 1997 and 1996 (dollars in thousands):
BERKSHIRE BANCORP INC. AND SUBSIDIARIES
PROFORMA
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
JULY 31, 1999
Total Capital (to Risk-Weighted Assets) 55,671 67.8% 6,566 >=8.0% 8,208 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 54,796 66.8% 3,283 >=4.0% 4,925 >=6.0%
Tier I Capital (to Average Assets) 54,796 33.8% 6,486 >=4.0% 5,414 >=5.0%
JULY 31, 1998
Total Capital (to Risk-Weighted Assets) 52,910 106.8% 3,964 >=8.0% 4,955 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 52,160 105.6% 1,982 >=4.0% 2,973 >=6.0%
Tier I Capital (to Average Assets) 52,160 48.2% 4,331 >=4.0% 5,414 >=5.0%
OCTOBER 31, 1998
Total Capital (to Risk-Weighted Assets) 51,563 108.5% 3,801 >=8.0% 4,751 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 50,964 107.3% 1,900 >=4.0% 2,851 >=6.0%
Tier I Capital (to Average Assets) 50,964 34.1% 5,975 >=4.0% 7,468 >=5.0%
OCTOBER 31, 1997
Total Capital (to Risk-Weighted Assets) 15,450 18.3% 6,747 >=8.0% 8,435 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 14,868 17.6% 3,371 >=4.0% 5,061 >=6.0%
Tier I Capital (to Average Assets) 14,868 11.6% 5,141 >=4.0% 6,426 >=5.0%
OCTOBER 31, 1996
Total Capital (to Risk-Weighted Assets) 13,334 20.9% 5,096 >=8.0% 6,370 >=10.0%
Tier I Capital (to Risk-Weighted Assets) 12,947 20.3% 2,548 >=4.0% 3,822 >=6.0%
Tier I Capital (to Average Assets) 12,947 12.4% 4,173 >=4.0% 5,216 >=5.0%
</TABLE>
23
<PAGE>
LIQUIDITY
Liquidity management in banking involves the ability to generate funds
to support asset growth and meet the cash flow requirements of customers and
other obligations. The Berkshire Bank's primary source of funds has
traditionally been deposits. In addition, the Bank derives funds from loan and
security repayments and prepayments and revenues from operations. The Bank has
borrowing facilities available to it through the Federal Home Loan Bank of New
York (the "FHLBNY") for use in the event of unanticipated funding needs which
cannot be satisfied from other sources. The Bank has also engaged, to a limited
extent, in borrowings with the FHLBNY on a longer term basis when the Bank is
able to match the term of a borrowing with the term of a loan and lock in a
satisfactory spread, subject to credit and prepayment risks.
For the parent company, Berkshire Bancorp Inc., liquidity means having
cash available to, among other things, fund operating expenses, support asset
growth at the Bank, acquire new business operations, and pay shareholder
dividends. At July 31, 1999, Berkshire Bancorp Inc. had approximately $42.5
million of cash and $14.1 million of marketable securities and is not dependent
upon the receipt of dividends from the Bank to fund its obligations.
IMPACT OF INFLATION AND CHANGING PRICES
The Bank prepares its financial reports according to Generally Accepted
Accounting Principles, which generally require the measurement of financial
condition and operating results in terms of historical dollar amounts without
considering the changes in the relative purchasing power of money over time due
to inflation. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. However, interest rates
generally increase during periods when the rate of inflation is increasing and
decrease during periods of decreasing inflation. Periods of high inflation are
ordinarily accompanied by high interest rates. Changes in the rate of inflation
could also result in changing market interest rates, which could adversely
affect the Bank as discussed above under the caption "Interest Rate Risk."
IMPACT OF THE YEAR 2000
The Company has reviewed its financial and other systems and estimates
that the total cost of the Year 2000 preparedness program will not be material.
The Company will modify and/or replace those systems which may be impacted by
the arrival of the year 2000.
The Bank has an ongoing program to ensure that its operational and
financial systems will not be adversely affected by year 2000 software failures.
The Bank has purchased, installed and converted to new hardware and banking
software, and has successfully completed a series of tests to ensure Year 2000
compliance. The cost of such conversion and other Year 2000 preparations is
estimated to be approximately $200,000. The Bank has developed a contingency
plan which should allow it to continue operations while unforeseen software
problems are corrected. The contingency plan calls for the creation of complete
system backups of critical data on critical dates, the creation of duplicate
account balances and transaction files, and the downloading of account balances
and transaction files to personal computer spreadsheets. In the event that any
software problems are encountered during processing, either at century roll over
or leap year, the Bank expects that it will be able to manage its operations by
using the files noted above, along with manual reports. Given the size of the
Bank, the number of accounts, and the number of daily transactions, management
believes that the Bank could continue operations while such software problems
are corrected.
24
<PAGE>
While the Bank believes it is taking all appropriate steps to assure
year 2000 compliance, it is dependent on vendor compliance to some extent. The
Bank is requiring its systems and software vendors to represent that the
services and products provided are, or will be, year 2000 compliant. The Bank
estimates that the cost to redevelop, replace or repair its technology will not
have a material impact on its financial results.
In addition to possible expenses related to the Bank's systems and
those of its service providers, the Bank could incur losses if Year 2000
problems affect any of the Bank's depositors or borrowers. Such problems could
include, among other things, delayed loan payments. Due to the diversity of the
loan portfolio and the fact that the Bank's market area is not dependent on one
employer or industry, the Bank does not expect any such Year 2000 related
difficulties that may affect its depositors and borrowers to significantly
affect net earnings or cash flow.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
b. There were no reports filed by Company on Form 8-K during the quarter for
which this report on Form 10-Q is filed.
25
<PAGE>
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.
BERKSHIRE BANCORP INC.
----------------------
(REGISTRANT)
Date: September 27, 1999 By: /s/ Steven Rosenberg
------------------- --------------------------
STEVEN ROSENBERG
PRESIDENT AND CHIEF
FINANCIAL OFFICER
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
<S> <C> <C>
27 Financial Data Schedules 28
</TABLE>
STATEMENT OF DIFFERENCES
The greater-than or equal-to sign shall be expressed as .............>=
27
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BERKSHIRE BANCORP INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,949
<INT-BEARING-DEPOSITS> 6,985
<FED-FUNDS-SOLD> 17,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,080
<INVESTMENTS-CARRYING> 93,220
<INVESTMENTS-MARKET> 100,220
<LOANS> 46,719
<ALLOWANCE> 875
<TOTAL-ASSETS> 182,975
<DEPOSITS> 95,702
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,700
<LONG-TERM> 1,500
<COMMON> 256
0
0
<OTHER-SE> 75,817
<TOTAL-LIABILITIES-AND-EQUITY> 182,975
<INTEREST-LOAN> 2,027
<INTEREST-INVEST> 3,086
<INTEREST-OTHER> 901
<INTEREST-TOTAL> 6,014
<INTEREST-DEPOSIT> 1,734
<INTEREST-EXPENSE> 53
<INTEREST-INCOME-NET> 4,227
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 4,614
<EXPENSE-OTHER> 2,465
<INCOME-PRETAX> 6,817
<INCOME-PRE-EXTRAORDINARY> 6,817
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,732
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 4.21
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 803
<CHARGE-OFFS> 36
<RECOVERIES> 67
<ALLOWANCE-CLOSE> 875
<ALLOWANCE-DOMESTIC> 875
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 875
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BERKSHIRE BANCORP INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 61
<INT-BEARING-DEPOSITS> 66,354
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 67,829
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,480
<LONG-TERM> 0
<COMMON> 256
0
0
<OTHER-SE> 66,093
<TOTAL-LIABILITIES-AND-EQUITY> 67,829
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 2,457
<INTEREST-TOTAL> 2,457
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 2,457
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 38,909
<EXPENSE-OTHER> 717
<INCOME-PRETAX> 40,649
<INCOME-PRE-EXTRAORDINARY> 40,649
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,979
<EPS-BASIC> 17.39
<EPS-DILUTED> 16.37
<YIELD-ACTUAL> 0
<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
</TABLE>
