SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C> <C> <C> <C>
Date of report (Date of earliest event reported) February 26, 1998 (February 11, 1998)
</TABLE>
MASON-DIXON BANCSHARES, INC.
(Exact name of Registrant as specified in Charter)
<TABLE>
<S> <C> <C>
Maryland 0-20516 52-1764929
(State or other Jurisdiction (Commission File Number) (IRS Employer Identification
of incorporation) No.)
</TABLE>
45 W. Main Street, Westminster, MD 21157
(Address of Principal Executive Offices/Zip Code)
Registrant's telephone number, including area code: (410) 857-3401
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 2. Acquisition or Disposition of Assets.
Effective at the close of business on February 11, 1998, Mason-Dixon
Bancshares, Inc. ("Mason-Dixon") acquired substantially all of the assets of,
and assumed certain liabilities of, Rose Shanis & Co., Inc., a Maryland
corporation, Rose Shanis Sons, Inc., a Maryland corporation, Rose Shanis & Co.,
a Maryland general partnership, and Stephen Corp., a Maryland corporation
(collectively, "Rose Shanis Companies"). A copy of the Asset Purchase Agreement,
dated November 26, 1997, as amended on February 11, 1998, and Exhibits thereto,
is filed as Exhibits 2.1 and 2.2.
Prior to the acquisition, Rose Shanis & Co., Inc., Rose Shanis Sons,
Inc., and Rose Shanis & Co. were engaged in the consumer finance business. The
assets of Rose Shanis & Co., Inc., Rose Shanis Sons, Inc., and Rose Shanis & Co.
were acquired by Bay Finance, LLC, a Maryland limited liability company and
subsidiary of Mason-Dixon formed for the purpose of effectuating the
acquisition, which then changed its name to Rose Shanis Loans, LLC. Stephen
Corp. was engaged in the sale of insurance products that are directly related to
extensions of credit by the other Rose Shanis Companies. The assets of Stephen
Corp. were acquired by Bay Insurance, LLC, a Maryland limited liability company
and subsidiary of Mason-Dixon formed for the purpose of that acquisition.
The consideration paid for the assets was $16,250,000 cash plus the
assumption by Bay Finance, LLC of approximately $31,800,000 in scheduled
liabilities. The amount of consideration was based on historical earnings of the
Rose Shanis Companies. The purchase price is subject to adjustment based on the
results of the 1997 year-end audit of the financial statements of the Rose
Shanis Companies filed herewith. The cash amount was paid from internally
generated funds.
One of the assumed liabilities of the Rose Shanis Companies was bank
debt of $29,000,000 assumed by Bay Finance, LLC and guaranteed by Mason-Dixon.
In connection with the assumption of that loan, Mason-Dixon and Bay Finance, LLC
entered into a new loan agreement (the "Credit Facility") with three
unaffiliated banks, the proceeds of which were used to pay the assumed loan in
full. The Credit Facility is a revolving credit facility for up to $38,000,000,
secured by all assets of Bay Finance, LLC, guaranteed by Mason-Dixon and matures
on June 11, 1998. Proceeds of the financing in excess of the amount of the
assumed loan will be used for working capital for Bay Finance, LLC.
Item 5. Other Events.
Mason-Dixon has reached agreement in principle for the private sale to
a private institutional investor of Senior Notes due 2008 (the "Senior Notes")
in the aggregate principal amount of $20,000,000. Mason-Dixon and Mason-Dixon
Capital Trust II (the "Trust") have also filed a registration statement with the
SEC to register preferred securities of the Trust in the aggregate principal
amount of $20,000,000; the proceeds from the sale of the preferred securities
will be used to purchase junior subordinated debentures of Mason-Dixon in the
aggregate principal amount of $20,000,000. The net proceeds from the sale of the
Senior Notes, together with the net proceeds of the sale of junior subordinated
debentures in the amount of approximately $19,235,000, will be used by Mason
Dixon to repay the outstanding balance of the Credit Facility. All the remaining
net proceeds will be used for general corporate purposes,
<PAGE>
which may include the repayment of indebtedness, investments in or extensions of
credit to its subsidiaries and/or the financing of possible acquisitions.
Pending such use, the net proceeds may be temporarily invested. The precise
amounts and timing of the application of proceeds will depend upon the funding
requirements of Mason-Dixon and its subsidiaries and the availability of other
funds.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ROSE SHANIS COMPANIES
Independent Auditors' Report F-1
Combined Balance Sheets as of December 31, 1997 and 1996 F-2
Combined Statements of Income and Retained Earnings
(Partners' Capital) as of December 31, 1997, 1996 and 1995 F-4
Combined Statements of Cash Flows
as of December 31, 1997, 1996 and 1995 F-5
Notes to Combined Financial Statements
as of December 31, 1997, 1996 and 1995 F-7
ROSE SHANIS COMPANIES--SUPPLEMENTARY INFORMATION
Combined Schedules of Other Expenses
as of December 31, 1997, 1996 and 1995 F-16
Combined Schedules of Other Income
as of December 31, 1997, 1996 and 1995 F-17
(b) Pro Forma Financial Information.
Pro Forma Consolidated Balance Sheet
as of December 31, 1997 (unaudited) F-18
Pro Forma Consolidated Statement of Income
as of December 31, 1997 (unaudited) F-19
(c) Exhibits.
*2.1 Asset Purchase Agreement, dated November 26, 1997.
*2.2 Amendment to Asset Purchase Agreement, dated February 11, 1998.
*2.3 Assumption Agreement, dated February 11, 1998.
*2.4 Shareholders' Equity Escrow Agreement, dated February 11, 1998.
*2.5 Indemnity and Escrow Agreement, dated February 11, 1998.
*2.6 Guaranty of Payment Agreement, dated February 11, 1998.
*2.7 Loan Agreement, dated February 11, 1998.
23.1 Consent of Grabush, Newman & Co., P.A.
- ------------------------
<FN>
* Previously filed on Form 8-K dated February 26, 1998 and incorporated by
reference herein.
</FN>
</TABLE>
<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 hereunto duly authorized.
MASON-DIXON BANCSHARES, INC.
Date: April 13, 1998 By: /s/ Thomas K. Ferguson
Thomas K. Ferguson
President and Chief Executive Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and
Board of Directors
Rose Shanis Companies
Baltimore, Maryland
We have audited the accompanying combined balance sheets of Rose
Shanis Companies as of December 31, 1997 and 1996, and the related combined
statements of income, retained earnings (partners' capital) and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Rose Shanis
Companies as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The supplementary information
contained on pages 16 through 17 is presented for the purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Grabush, Newman & Co., P.A.
March 17, 1998
F-1
<PAGE>
ROSE SHANIS COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------------------------------------------------------ --------------
Adjustments
Rose Shanis Stephen and Combined Combined
Companies Corp. eliminations total total
-------------- ------------ -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
FINANCE RECEIVABLES
Direct cash loans $ 27,600,060 $ - $ - $ 27,600,060 $ 29,042,109
Second mortgage real estate loans 413,559 - - 413,559 387,637
Installment sales contracts receivable 18,464,931 - - 18,464,931 23,570,391
Accrued interest income 426,709 - - 426,709 471,956
-------------- ------------ -------------- --------------- --------------
46,905,259 - - 46,905,259 53,472,093
Less:
Allowance for loan losses 2,561,603 - - 2,561,603 2,156,401
Unearned finance charges 109,442 - - 109,442 204,012
Acquisition discount 542,097 - - 542,097 1,117,881
-------------- ------------ -------------- --------------- --------------
Net finance receivables 43,692,117 - - 43,692,117 49,993,799
-------------- ------------ -------------- --------------- --------------
OTHER ASSETS
Cash 157,056 1,903 - 158,959 381,997
Accounts receivable - trade - 238,927 (207,147) 31,780 35,010
Loans receivable - combined companies - 2,845,019 (2,845,019) - -
Buildings, improvements and equipment,
net of accumulated depreciation of
$713,058 and $594,818
281,807 305 - 282,112 403,827
Land - 101,256 - 101,256 101,256
Intangible assets, net of accumulated
amortization of $64,745 and 85,179 - - 85,179 88,518
$502,414
Cash surrender value, life insurance, net
of policy loans of $14,989 and 4,817 - - 4,817 23,456
$14,140
Other assets 16,072 600 - 16,672 115,555
-------------- ------------ -------------- --------------- --------------
Total other assets 544,931 3,188,010 (3,052,166) 680,775 1,149,619
-------------- ------------ -------------- --------------- --------------
Total assets $ 44,237,048 $ 3,188,010 $ (3,052,166) $ 44,372,892 $ 51,143,418
============== ============ ============== =============== ==============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
ROSE SHANIS COMPANIES
COMBINED BALANCE SHEETS
(CONTINUED)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (PARTNERS' CAPITAL)
1997 1996
--------------------------------------------------------- -------------
Adjustments
Rose Shanis Stephen and Combined Combined
Companies Corp. eliminations total total
-------------- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES
Senior debt $ 29,893,000 $ - $ - $ 29,893,000 $ 35,211,000
Subordinated debt 450,000 - - 450,000 652,000
Accounts payable and accrued expenses 1,847,755 278,663 (207,147) 1,919,271 2,380,391
Dealer reserves 482,408 - - 482,408 596,463
Deferred compensation 11,416 - - 11,416 10,261
Unearned insurance commissions - 469,991 - 469,991 563,397
Loans payable - combined companies 2,845,019 - (2,845,019) - -
Commitments and contingencies - - - - -
------------- ------------ -------------- ------------- -------------
Total liabilities 35,529,598 748,654 (3,052,166) 33,226,086 39,413,512
------------- ------------ -------------- ------------- -------------
STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Common stock 6,067 400 - 6,467 6,467
Retained earnings and partners' capital 8,701,383 2,438,956 - 11,140,339 11,723,439
------------- ------------ -------------- ------------- -------------
Total stockholders' equity and partners' capital 8,707,450 2,439,356 - 11,146,806 11,729,906
------------- ------------ -------------- ------------- -------------
Total liabilities and stockholders' equity and
partners' capital $ 44,237,048 $ 3,188,010 $ (3,052,166) $ 44,372,892 $ 51,143,418
============= ============ ============== ============= =============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ROSE SHANIS COMPANIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS (PARTNERS' CAPITAL)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------- -------------- ----------------
Rose Adjustments
Shanis Stephen and Combined Combined Combined
Companies Corp. eliminations total total total
-------------- ----------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Interest income $ 6,965,942 $ - $ - $ 6,965,942 $ 6,823,209 $ 6,428,547
Precomputed finance income 228,062 - - 228,062 305,795 494,099
Interest-bearing finance income 3,675,987 - - 3,675,987 3,928,596 3,493,325
Insurance commissions earned 950,028 541,503 - 1,491,531 1,667,698 1,363,968
Other income 2,002,880 60,450 (42,000) 2,021,330 1,995,190 1,711,512
-------------- ----------- -------------- -------------- -------------- ----------------
Total income 13,822,899 601,953 (42,000) 14,382,852 14,720,488 13,491,451
-------------- ----------- -------------- -------------- -------------- ----------------
EXPENSES
Interest expense 2,638,338 - - 2,638,338 2,641,120 2,674,064
Provision for loan losses 2,644,624 - - 2,644,624 1,110,634 666,714
Salaries 3,543,227 158,225 - 3,701,452 4,355,778 3,897,023
Other operating expenses 3,278,286 89,462 (42,000) 3,325,748 2,712,315 2,462,808
-------------- ----------- -------------- -------------- -------------- ----------------
Total expenses 12,104,475 247,687 (42,000) 12,310,162 10,819,847 9,700,609
-------------- ----------- -------------- -------------- -------------- ----------------
Net income 1,718,424 354,266 - 2,072,690 3,900,641 3,790,842
-------------- ----------- -------------- -------------- -------------- ----------------
RETAINED EARNINGS AND
PARTNERS' CAPITAL
Beginning of year 9,132,099 2,591,340 - 11,723,439 10,814,899 9,973,587
Partner and shareholder
distributions (2,149,140) (506,650) - (2,655,790) (2,992,101) (2,949,530)
-------------- ----------- -------------- -------------- -------------- ----------------
End of year $ 8,701,383 $2,438,956 $ - $ 11,140,339 $ 11,723,439 $ 10,814,899
============== =========== ============== ============== ============== ================
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ROSE SHANIS COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 2,072,690 $ 3,900,641 $ 3,790,842
-------------------- -------------------- -------------------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation and amortization 125,054 138,608 128,392
Provision for loan losses 2,644,624 1,110,634 666,714
Loss on sale of fixed assets - (798) -
Decrease (increase) in
Finance mortgage and installment
receivables (net of allowances,
unearned finance charges and
acquisition discount) 3,611,811 (3,881,425) (5,346,084)
Accounts receivable - trade 3,230 (3,774) (2,999)
Accrued interest income 45,247 (76,943) 824
Cash surrender value - life
insurance 17,790 (934) (2,494)
Other assets 98,883 7,080 (44,269)
Increase (decrease) in
Mortgage escrow - - (56,235)
Life insurance policy loans 849 800 756
Accounts payable and accrued
expenses (461,120) 138,482 175,448
Dealer reserves (114,055) 1,911 (58,159)
Deferred compensation 1,155 1,351 810
Unearned insurance commissions (93,406) (26,062) (31,555)
-------------------- -------------------- -------------------
Total adjustments 5,880,062 (2,591,070) (4,568,851)
-------------------- -------------------- -------------------
Net cash provided by (used in)
operating activities 7,952,752 1,309,571 (778,009)
-------------------- -------------------- -------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures - (326,794) (63,117)
Disposal of fixed assets - 13,500 -
Net cash used in investing activities - (313,294) (63,117)
-------------------- -------------------- -------------------
(continued)
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ROSE SHANIS COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds of loans payable $ 1,675,000 $ 4,905,000 $ 8,485,000
Repayment of loans payable (7,195,000) (2,781,000) (4,850,000)
Partner and shareholder distributions (2,655,790) (2,992,101) (2,949,530)
-------------------- -------------------- -------------------
Net cash provided by (used in)
financing activities (8,175,790) (868,101) 685,470
-------------------- -------------------- -------------------
Net increase (decrease) in cash (223,038) 128,176 (155,656)
CASH
Beginning of year 381,997 253,821 409,477
-------------------- -------------------- -------------------
End of year $ 158,959 $ 381,997 $ 253,821
==================== ==================== ===================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for interest $ 2,665,501 $ 2,636,229 $ 2,654,919
==================== ==================== ===================
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Rose Shanis Companies are finance companies which make direct
loans and installment sales contracts with customers throughout the State of
Maryland.
The accompanying financial statements are prepared in all material
respects in accordance with generally accepted accounting principles as
prescribed in the American Institute of Certified Public Accountants' Audit
and Accounting Guide, "Audits of Finance Companies." Accounting principles
followed by the Companies relative to material matters are:
A. Principles of combination - The combined financial statements
include the accounts of Rose Shanis & Co., Inc., Rose Shanis Sons, Inc.,
Rose Shanis & Co., (a general partnership) and Stephen Corp. All significant
intercompany accounts and transactions have been eliminated.
Rose Shanis Companies have been combined because they are closely
held businesses, owned by one family, and have similar business activities.
The majority of Stephen Corp.'s revenue is derived from insurance sold on
finance and installment sales contracts receivables made by Rose Shanis
Companies. Due to the similar family ownership of Stephen Corp., an
insurance agency, its inclusion is required by the audit guide mentioned
above.
B. Direct cash loans consist substantially of interest-bearing,
unsecured, direct cash loans with a maximum term of 60 months. However, a
significant portion of loans are renewed in less than 12 months. Interest is
recognized using the simple interest method. Substantially all of the loans
made by Rose Shanis Companies are to individuals who reside in the State of
Maryland.
C. Installment sales contracts receivable have a maximum term of
60 months and, in some cases, a dealer reserve is held to cover potentially
doubtful accounts. These contracts either include precomputed finance
charges or are interest-bearing as follows:
1. Sales finance contracts with finance charges precomputed
(add-on method) are issued on contracts sold by third parties. These finance
charges are included in the face amount of the receivables as unearned. Most
contracts are non-recourse to the third party. Income is recognized as
collected using the actuarial (amortization) method.
F-7
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Sales finance contracts may also be issued as
interest-bearing on contracts sold by third parties. Interest income is
recognized using the simple interest method.
D. Second mortgage real estate loans consist of interest-bearing
real estate secured loans having a maximum term of 60 months.
Contractual maturities of finance receivables, installment sales
contracts receivable and second mortgage real estate loans by year are not
presented. The Companies' experience has shown that a substantial portion of
the receivables will be renewed or paid in full prior to maturity.
Accordingly, maturity presentation would not be meaningful.
E. Allowance for loan losses - The allowance for loan losses is
established through a provision for loan losses charged to expense. Losses
are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible losses
on existing loans that may become uncollectible because of present
conditions, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio, portfolio
quality, review of specific problem loans and current economic conditions
that may affect the borrower's ability to pay. The allowance for loan losses
is based on estimates and ultimate losses may vary from the current
estimates
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful.
F-8
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Changes in the allowance for loan losses for the years ending
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Second
Installment mortgage
Finance sales real estate
receivables contracts loans Total
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 $ 984,916 $ 228,884 $ 49,955 $ 1,263,755
Provision for loan losses 671,641 26,609 (31,536) 666,714
Loans charged off (604,423) (139,581) (13,939) (757,943)
Recoveries 258,857 8,292 - 267,149
------------------ ----------------- ------------------ -----------------
Balance - December 31, 1995 1,310,991 124,204 4,480 1,439,675
Provision for credit losses 907,981 201,318 1,335 1,110,634
Loans charged off (608,345) (93,220) - (701,565)
Recoveries 307,657 - - 307,657
------------------ ----------------- ------------------ -----------------
Balance - December 31, 1996 1,918,284 232,302 5,815 2,156,401
Provision for credit losses 1,266,138 1,378,098 388 2,644,624
Loans charged off (1,715,068) (804,779) - (2,519,847)
Recoveries 280,425 - - 280,425
------------------ ----------------- ------------------ -----------------
Balance - December 31, 1997 $ 1,749,779 $ 805,621 $ 6,203 $ 2,561,603
================== ================= ================== =================
</TABLE>
F. Acquisition discount - As part of the Companies' financing of
sales finance contracts, the difference between net funds advanced to the
dealer and the total amounts to be repaid to the Companies net of unearned
finance charges is recorded as acquisition discount and is available to the
Companies to charge related receivables against. If not used to offset
uncollectible receivables, this acquisition discount is earned as the
related receivables are paid off.
Changes in acquisition discount for the years ended December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------------- ------------------
<S> <C> <C> <C>
Balance at January 1, $ 1,117,881 $ 1,545,244 $ 942,630
Additions applicable to new volume 222,130 519,305 846,824
Earned discount (200,253) (340,307) (45,031)
Finance receivables charged off (597,661) (606,361) (199,179)
------------------ ----------------- ------------------
Balance at December 31, $ 542,097 $ 1,117,881 $ 1,545,244
================== ================= ==================
</TABLE>
F-9
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
G. Advertising - Advertising costs, except for costs associated
with direct-response advertising, are charged to operations when incurred.
The costs of direct-response advertising are capitalized and amortized over
the period during which future benefits are expected to be received.
H. Building, improvements and equipment are stated at cost. Major
additions and betterments are charged to the asset accounts while
maintenance and repairs, which do not improve or extend the lives of the
assets, are expensed currently. Buildings, improvements and equipment at
December 31, 1997 and 1996 consisted of the following:
1997 1996
----------------- ---------------
Automobiles $ 72,385 $ 75,860
Buildings 78,038 78,038
Improvements 138,612 138,612
Office equipment 706,135 706,135
----------------- ---------------
995,170 998,645
Less accumulated depreciation 713,058 594,818
----------------- ---------------
Building, improvements
and equipment, net $ 282,112 $ 403,827
================= ===============
I. Depreciation is provided by use of straight-line and
declining-balance methods in accordance with Internal Revenue Service
requirements which approximate the estimated useful lives of the assets.
These methods amortize the cost of the various classes of assets within the
periods of expected use. Depreciation expense for the years ended December
31, 1997, 1996 and 1995 was $121,715, $47,911 and $38,835, respectively.
J. Intangible assets - These consist of software payments, a
covenant not to compete and capitalized legal fees incurred in relation to
the buyout of a shareholder. Amortization is provided by use of the
straight-line method over a life of five years. Amortization expense for the
years ended December 31, 1997, 1996 and 1995 was $3,339, $90,697 and
$89,557, respectively.
K. Dealer reserves - As part of some of the Companies' financing
of sales finance contracts, funds are held back from the dealer and recorded
as dealer reserves. These funds are available to the Companies to charge
related receivables against and are only due back to the dealer if related
uncollectible accounts are not available to offset these reserves.
F-10
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Changes in dealer reserves for the years ended December 31, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- --------------- ---------------
<S> <C> <C> <C>
Balance at January 1, $ 596,463 $ 594,552 $ 652,711
Additions applicable to new volume 239,501 522,005 113,314
Finance receivables charged off (353,556) (520,094) (171,473)
----------------- --------------- ---------------
Balance at December 31, $ 482,408 $ 596,463 $ 594,552
================= =============== ===============
</TABLE>
L. Deferred compensation - The Companies have a deferred
compensation plan with a key employee. The plan stays in force only if the
recipient remains continuously in the employ of the Companies until the
agreed retirement age, disability, or death. Deferred compensation expense
for the years ended December 31, 1997, 1996 and 1995 was $1,155, $1,351 and
$810, respectively. The expense is being accrued over a period starting with
the date of the agreement through the planned retirement age.
M. Income recognition - insurance commissions - Stephen Corp.
receives commissions as an agent for writing life, accident and health,
property and unemployment insurance policies on consumer loans. Commissions
received are recorded as unearned insurance commissions and are recognized
in income as earned over the terms of the respective policies in the same
manner as the insurance company would record such income after deducting
losses paid and reserved. Certain other insurance commissions are recognized
as income when collected.
N. Income taxes - No provision for income taxes has been made for
Rose Shanis & Co., Inc., Rose Shanis Sons, Inc. and Stephen Corp. due to
their elections to operate as tax option "S" corporations. In accordance
with these elections, generally all profits and losses generated by
operations flow through to the shareholders, who are taxed at the individual
level. No provision for income taxes has been made on Rose Shanis & Co.,
since such taxes are the liability of the individual partners and not of the
partnership.
O. Statement of cash flows - For the purposes of the financial
statements, the Companies consider cash-in-bank as cash.
F-11
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
P. Use of estimates in preparing financial statements - Management
uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
Q. Reclassifications - Certain accounts in the prior-years
financial statements have been reclassified for comparative purposes to
conform with the presentation in the current-year financial statements.
NOTE 2 - ACCOUNTS RECEIVABLE - TRADE
Accounts receivable - trade consisted of the following at December
31, 1997 and 1996:
a) Insurance premiums receivable of Stephen Corp. are due from
Rose Shanis Companies. The insurance premiums payable (to Stephen Corp.) are
included in the Rose Shanis Companies' accounts payable.
b) Contingent commissions receivable represent fees due Stephen
Corp. by an insurance company.
1997 1996
------------------ ----------------
Accounts receivable a) $ 207,147 $ 243,922
b) 31,780 35,010
------------------ ----------------
Total $ 238,927 $ 278,932
================== ================
NOTE 3 - FINANCING ARRANGEMENTS
The financing arrangements of the Companies at December 31, 1997
and 1996 are as follows:
A. Revolving bank loan, unsecured, interest at the LIBOR rate plus
a negotiated premium or the bank's floating prime at Rose Shanis Companies'
option, with a maximum line-of-credit of $36,000,000 maturing in February
11, 1998. At the date of maturity, the bank loan was paid off and the bank's
line-of-credit was reestablished with the successor company.
F-12
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 - FINANCING ARRANGEMENTS (continued)
B. Subordinated notes payable, unsecured, with interest rates that
average 12% per annum, with maturities of six months.
C. Notes payable, unsecured, with interest rates that average 12%
per annum, with various maturities.
<TABLE>
<CAPTION>
1997 1996
---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Senior debt
A $ 29,000,000 $ 34,350,000
C - 43,000
C* 893,000 818,000
---------------------- --------------------
Total senior debt 29,893,000 35,211,000
---------------------- --------------------
Subordinated debt
B 450,000 652,000
---------------------- --------------------
Total subordinated debt 450,000 652,000
---------------------- --------------------
Total debt $ 30,343,000 $ 35,863,000
====================== ====================
<FN>
* These notes payable are to related parties consisting of
officers of the Companies, their family members and
employees.
</FN>
</TABLE>
The revolving bank loans mentioned above contain various
restrictions and minimum requirements on the Companies on such items as net
income available for fixed charges, subordinated debt, total debt in
relation to receivables, and tangible net worth. The Companies have complied
with these restrictions as of December 31, 1997, 1996 and 1995 and for the
years then ended, except for two covenants at December 31, 1997 for which
the Companies received a waiver.
All the Companies' debt is due within one year of December 31,
1997.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The deferred compensation plans provide for aggregate payments of
$4,200 per year, but not to exceed $42,000 total payout, upon the key
employee's retirement, death or disability. The Companies have partially
insured against payments which may be required prior to anticipated payout
dates with life insurance of $48,000 less outstanding policy loans.
F-13
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 4 - COMMITMENTS AND CONTINGENCIES (continued)
Rose Shanis Companies have operating leases for all their branch
offices. All leases have options for renewal and are net leases which
require the payment of taxes, insurance and maintenance, etc. by the lessee.
Included in rental expense of the Rose Shanis Companies and in other income
of Stephen Corp., for the years ended December 31, 1997, 1996 and 1995 are
rental payments of $42,000, $43,050, and $46,200, respectively, for rental
properties owned by Stephen Corp.
As noted in Note 7, Rose Shanis Companies sold a substantial
portion of their assets and liabilities in 1998. In conjunction with the
sale, the Companies were released from all of their lease obligations.
Consequently, there are no long-term lease commitments as of December 31,
1997.
Total net rent expense for the years ended December 31, 1997, 1996
and 1995 was $162,406, $141,817 and $137,023, respectively.
During 1996, a lawsuit was filed against Rose Shanis Companies,
Inc. by a competitor alleging interfering with contracts and economic
relationships. The suit seeks compensatory damages of $7.5 million and $8
million in punitive damages. Management is vigorously contesting this suit.
It is not possible to determine the probability of loss, if any, at this
time.
NOTE 5 - COMMON STOCK
Common stock of the various Companies consisted of the following
at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Shares
Par Authorized issued and
Common stock value shares outstanding Amount
- ----------------------------------- -------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Rose Shanis & Co., Inc. $ No par 1,000 54.0 $ 5,400
Rose Shanis Sons, Inc. 10 1,000 66.7 667
Stephen Corp. 100 100 4.0 400
---------------
$ 6,467
===============
</TABLE>
NOTE 6 - RETIREMENT PLANS
Rose Shanis Companies have noncontributory profit-sharing plans
covering substantially all full-time officers and employees who meet
prescribed service requirements. Contributions are at the discretion of the
Board of Directors and amounted to $290,000, $311,500 and $289,884 for the
years ended December 31, 1997, 1996 and 1996, respectively.
F-14
<PAGE>
ROSE SHANIS COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 7 - SUBSEQUENT EVENTS
On February 11, 1998, Rose Shanis Companies sold a substantial
portion of their assets to a bank holding company. In conjunction with the
sale, the purchasing company assumed a substantial portion of the Companies'
liabilities.
F-15
<PAGE>
SUPPLEMENTARY INFORMATION
<PAGE>
ROSE SHANIS COMPANIES
COMBINED SCHEDULES OF OTHER EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------- -------------- ---------------
Rose Adjustments
Shanis Stephen and Combined Combined Combined
Companies Corp. eliminations total total total
--------------- ------------ --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Advertising $ 42,103 $ 1,880 $ - $ 43,983 $ 84,759 $ 94,011
Automobile and travel expense 48,489 2,165 - 50,654 59,887 52,883
Collection expense 583,474 - - 583,474 388,923 279,309
Commitment fee 186,186 8,314 - 194,500 131,251 93,251
Contributions 8,722 390 - 9,112 9,003 8,358
Covenant - - - - 85,052 85,052
Data processing 16,161 722 - 16,883 19,819 24,498
Dealer participation expense 192,909 - - 192,909 240,233 277,929
Deferred compensation 1,106 49 - 1,155 1,351 810
Depreciation and amortization 119,708 5,346 - 125,054 53,556 43,340
Employee benefits 204,326 9,125 - 213,451 184,778 163,204
Heat, light, power and water 36,598 1,634 - 38,232 44,822 34,678
Insurance - general 25,495 1,138 - 26,633 20,158 32,141
Investigation and reports 168,755 - - 168,755 173,505 172,433
Legal and accounting 528,741 23,611 - 552,352 80,481 69,371
Office expense 130,846 5,843 - 136,689 138,280 112,868
Profit-sharing contribution 277,603 12,397 - 290,000 311,500 289,884
Rent 204,406 - (42,000) 162,406 141,817 137,023
Repairs and maintenance 7,970 356 - 8,326 28,734 25,782
Stationery and stamps 125,355 - - 125,355 142,133 137,936
Taxes, licenses and dues 30,219 1,349 - 31,568 30,894 31,240
Taxes - payroll 244,862 10,934 - 255,796 248,395 226,344
Telephone 94,252 4,209 - 98,461 92,984 70,463
--------------- ------------ --------------- --------------- -------------- ---------------
Total other expenses $ 3,278,286 $ 89,462 $ (42,000) $ 3,325,748 $ 2,712,315 $ 2,462,808
=============== ============ =============== =============== ============== ===============
</TABLE>
F-16
<PAGE>
ROSE SHANIS COMPANIES
COMBINED SCHEDULES OF OTHER INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------ -------------- -------------
Adjustments
Rose Stephen and Combined Combined Combined
Shanis Corp. eliminations total total total
Companies
-------------- ------------ --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Commission income $ 49,632 $ - $ - $ 49,632 $ 86,477 $ 52,490
Earned acquisition discount 200,253 - - 200,253 340,307 45,031
Late charge income 1,323,216 - - 1,323,216 1,450,370 1,089,257
Mortgage charge income 7,794 - - 7,794 483 14,123
Rental income - 53,800 (42,000) 11,800 12,950 10,350
Other 421,985 6,650 - 428,635 104,603 500,261
-------------- ------------ --------------- -------------- -------------- -------------
Total other income $ 2,002,880 $ 60,450 $ (42,000) $ 2,021,330 $ 1,995,190 $ 1,711,512
============== ============ =============== ============== ============== =============
</TABLE>
F-17
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following tables set forth certain pro forma combined condensed
financial information of Mason-Dixon and the Rose Shanis Companies giving effect
to the acquisition accounted for as a purchase. The pro forma combined condensed
balance sheet gives effect to the acquisition as of December 31, 1997. The pro
forma combined condensed statement of income gives effect to the acquisition as
of January 1, 1997. The information in the following tables is not necessarily
indicative of the results that would have been achieved had such transaction
been consummated on such dates and should not be construed as representative of
future operations. Such information is subject to the assumptions set forth in
the notes to these Unaudited Pro Forma Financial Statements.
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
Rose Shanis
Mason-Dixon Rose Pro Forma Pro Forma
(Dollars in thousands) Bancshares, Inc. Shanis Adjustments Consolidated
---------------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks.................. $ 20,245 $ 159 $ (312) (a) $ 20,092
Interest bearing deposits in other banks 482 - 482
Federal funds sold....................... 17,236 - 17,236
Investment securities available for sale. 249,855 - (6,684) (b) 243,171
Investment securities held to maturity... 204,045 - 204,045
Loans held for sale...................... 4,439 - 4,439
Loans (net of unearned income)........... 460,391 46,254 (980) (c) 505,665
Less: Allowance for credit losses...... (5,231) (2,561) (7,792)
----------- ---------- ---------- ----------
Loans, net........................... 455,160 43,693 (980) 497,873
Premises and equipment................... 15,530 383 (131) (d) 15,782
Other real estate owned.................. 685 - 685
Deferred income taxes.................... 6,089 - 6,089
Mortgage servicing and sub-servicing rights. 3,412 - 3,412
Intangible assets........................ 2,956 85 5,642 (e) 8,683
Accrued interest receivable and other assets 12,046 53 (4) (f) 12,095
----------- ---------- ---------- ----------
Total Assets......................... $ 992,180 $ 44,373 $ (2,469) $1,034,084
=========== ========== ========== ==========
Liabilities
Non-interest bearing deposits............ $ 89,692 $ - $ 89,692
Interest bearing deposits................ 561,557 - 561,557
----------- ---------- -----------
Total deposits......................... 651,249 - 651,249
Short-term borrowings.................... 97,203 30,343 127,546
Long-term borrowings..................... 160,889 - 9,000 (g) 169,889
Accrued expenses and other liabilities... 7,390 2,884 (323) (h) 9,951
----------- ---------- ---------- ----------
Total Liabilities.................... $ 916,731 $ 33,227 $ 8,677 $ 958,635
----------- ---------- ---------- ----------
Stockholders' Equity
Common Stock............................. 5,077 6 (6) (i) 5,077
Surplus.................................. 35,948 - 35,948
Retained earnings........................ 32,275 11,140 (11,140) (i) 32,275
Unrealized appreciation in certain debt
and equity securities.................. 2,149 - 2,149
----------- ---------- ---------- ----------
Total Stockholders' Equity........... 75,449 11,146 (11,146) 75,449
----------- ---------- ---------- ----------
Total Liabilities And
Stockholders' Equity............... $ 992,180 $ 44,373 $ (2,469) $1,034,084
=========== ========== ========== ==========
<FN>
- -------------------------
(a) Reflects cash paid for dealer reserves not assumed.
(b) Reduction of securities to fund a portion of the cash purchase price.
(c) Reflects certain loans not acquired.
(d) Reflects land and certain fixed assets not acquired.
(e) Reflects excess of purchase price over net assets acquired ($5,725,000), less intangible assets not acquired ($83,000).
(f) Cash value of life insurance policies not acquired.
(g) Reflects an increase of borrowed funds to fund a portion of the cash purchase price.
(h) Constitutes liability for deferred compensation ($11,000) and certain dealer reserves ($312,000) not assumed.
(i) Elimination of common stock and retained earnings.
</FN>
</TABLE>
F-18
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Rose Shanis
Mason-Dixon Rose Pro Forma Pro Forma
(Dollars in thousands except per share data) Bancshares, Inc. Shanis Adjustments Consolidated
---------------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans............................ $ 39,011 $12,393 $ (85) (b) $51,319
Interest on deposits in other banks................... 23 - - 23
Interest on Federal funds sold........................ 1,110 - - 1,110
Interest and dividends on investment securities:...... 0
Taxable interest on mortgage-backed securities..... 17,579 - - 17,579
Other taxable interest and dividends............... 5,063 - (468) (c) 4,595
Tax exempt interest and dividends.................. 4,649 - - 4,649
-------- ------- ------- -------
Total interest income............................ 67,435 12,393 (553) 79,275
-------- ------- ------- -------
Interest Expense
Interest on deposits:
Time certificates of deposit of $100,000 or more 2,168 - - 2,168
Other deposits..................................... 22,030 - - 22,030
-------- ------- ------- -------
Total interest on deposits....................... 24,198 0 0 24,198
Interest on short-term borrowings..................... 4,880 2,638 - 7,518
Interest on long-term borrowings...................... 7,097 - 906 (d) 8,003
-------- ------- ------- -------
Total interest expense........................... 36,175 2,638 906 39,719
-------- ------- ------- -------
Net interest income.............................. 31,260 9,755 (1,459) 39,556
Provision For Credit Losses.............................. 138 2,645 - 2,783
-------- ------- ------- -------
Net interest income after
provision for credit losses.................... 31,122 7,110 (1,459) 36,773
-------- ------- ------- -------
Other Operating Income
Service charges on deposit accounts................... 2,228 - - 2,228
Trust Division income................................. 1,471 - - 1,471
Gain on sale of securities............................ 554 - - 554
Gain on sale of mortgage loans........................ 1,843 - - 1,843
Gain on sale of deposits.............................. - - - 0
Other income.......................................... 1,894 1,990 - 3,884
-------- ------- ------- -------
Total other operating income..................... 7,990 1,990 0 9,980
-------- ------- ------- -------
Other Operating Expenses
Salaries and employee benefits........................ 16,109 4,460 - 20,569
Net occupancy expenses................................ 2,533 224 - 2,757
Equipment expenses.................................... 1,654 125 - 1,779
Legal and professional fees........................... 1,078 552 80 (e) 1,710
FDIC insurance expense................................ 78 - - 78
Outside data processing expense....................... 1,068 17 - 1,085
Amortization of mortgage sub-servicing rights......... 415 - - 415
Amortization of other intangible assets............... 444 - 573 (f) 1,017
Other expenses........................................ 3,412 1,649 - 5,061
-------- ------- ------- -------
Total other operating expenses................... 26,791 7,027 653 34,471
-------- ------- ------- -------
Income Before Taxes...................................... 12,321 2,073 (2,112) 12,282
Applicable Income Taxes.................................. 3,162 808 (a) (824) (g) 3,146
-------- ------- ------- -------
Net Income............................................... $ 9,159 $ 1,265 $(1,288) $ 9,136
======== ======= ======= =======
Per Share Data
Net Income Per Common Share (Basic)................... $ 1.77 $ 1.76
======== =======
Net Income Per Common Share (Diluted)................. $ 1.77 $ 1.76
======== =======
- --------------------------
<FN>
(a) Reflects the income tax expenses attributable to the pretax earnings of
Rose Shanis at the marginal tax rate of Mason-Dixon (39%).
(b) Reflects the reduction of interest income attributable to certain assets
not acquired.
(c) Reflects the loss of interest income attributable to the reduction in
securities necessary to fund a portion of the cash purchase price
($6,684,000 @ 7%).
(d) Reflects the increase in interest expense attributable to the cash
borrowed to fund a portion of the purchase price ($9,000,000 @ 10.07%).
(e) Reflects the estimated amortization of merger related expenses using the
straight-line method over 5 years.
(f) Reflects the amortization of the excess of the purchase price over net
assets acquired (goodwill) using the straight-line method over 10 years.
(g) Reflects the income tax expense attributable to adjustments (b) through
(f) at the marginal tax rate of Mason-Dixon (39%).
</FN>
</TABLE>
F-19
<PAGE>
EXHIBIT 23.1
Board of Directors
Mason-Dixon Bancshares, Inc.
We hereby consent to the inclusion of our report dated March
17, 1998, relating to the combined financial statements with supplementary
information and independent auditors' report of the Rose Shanis Companies in
this Current Report on Form 8-K/A.
Sincerely,
/s/ Grabush, Newman & Co., P.A.
GRABUSH, NEWMAN & CO., P.A.
Baltimore, Maryland
April 13, 1998
<PAGE>
