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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-22271
CFI MORTGAGE INC.
(Exact Name of Small Business Issuer as specified in its charter)
Delaware
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(State or Other jurisdiction of 52-2023491
incorporation or organization) ----------
(I.R.S. Employer Identification No.)
631 U.S. Highway #1 Suite 309
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North Palm Beach, Florida 33408
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including 561-842-0678
area code ------------
Securities registered pursuant
to Section 12(b) of the Act:: None
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Securities registered pursuant
to Section 12(g) of the Act: Common Stock, par value $.01
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Indicate by check mark whether 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 Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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As of April 14, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price, was approximately
$306,153.
As of March 31, 1999, the registrant has 3,826,912 shares of Common Stock
outstanding.
Registrant's revenues for the fiscal year ended December 31, 1998 was
$14,164,911.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (X)
Transmittal Small Disclosure Format: Yes No X
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PART I
ITEM 1. BUSINESS
CORPORATE HISTORY:
The Company is a holding company whose subsidiaries were rapidly
growing mortgage bankers engaged in originating, purchasing and selling
nonconforming sub-prime and conventional loans on one-to-four unit properties
through its retail, wholesale and consumer finance divisions. (Hereinafter the
first person refers to the Company and its subsidiaries unless the context
indicates otherwise). The Company operated primarily in the State of Florida.
The Company's business strategy was and will be in the future to increase
profitably the volume of its loan originations and purchases. All loan
applications, whether originated or purchased by the Company, were and will be
subject to the Company's underwriting criteria and the guidelines set forth by
the relevant governmental loan program or private investors, as applicable. The
Company previously sold and in the future intends to sell substantially all of
the mortgage loans it originates or purchases, together with the related
mortgage servicing rights, to institutional purchasers, including national and
regional commercial banks and other mortgage lenders.
All of the Company's operations were conducted through its wholly owned
subsidiaries, Bankers Direct Mortgage Corporation, a Florida corporation
(hereinafter referred to as BDMC) and Direct Mortgage Partners, Inc., a Delaware
corporation (hereinafter referred to as DMP). BDMC was incorporated in Florida
as Creative Industries, Inc. in April 1989. In October 1990, Creative
Industries, Inc.'s name was changed to Creative Financing, Inc. In May 1995,
Creative Financing, Inc.'s name was changed to CFI Mortgage Corporation. CFI
Mortgage Corporation changed its name to Bankers Direct Mortgage Corporation in
1997. DMP was incorporated in Delaware in August 1997.
In March 1997, the Company herein, CFI Mortgage Inc. was incorporated
in Delaware, and immediately prior to a public offering, Vincent J. Castoro and
Christopher C. Castoro, who owned all of the issued and outstanding common stock
of BDMC (the "Existing Stockholders"), contributed their shares of common stock
of BDMC to the Company in exchange for 1,200,000 shares of common stock when the
total outstanding shares of common stock of the Company was 2,200,000 shares
(the "Exchange"). From April 1989 until the time of the Exchange, BDMC was
treated under Subchapter S (an "S corporation") of the Internal Revenue Code of
1986, as amended. Simultaneous with the Exchange, BDMC ceased to be treated as
an S corporation.
CFI common shares were traded on the NASDAQ small cap market system
under the symbol CFIM until November 17, 1998 at which time the Company's
securities were moved to the Over the Counter Bulletin Board.
BANKRUPTCY PROCEEDING:
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provides
for an infusion of $800,000 by a lender, which is secured by CFI's assets. The
lender has the option of converting the loan to common stock of CFI at a rate of
2% of the company per $80,000 funded to the Company. Each general creditor shall
receive one share of common stock for each dollar of debt in the reorganized
CFI. The Plan was confirmed on August 2, 1999.CFI will no longer threatened by
any litigation, claims, and assessments on a cash basis, which may have existed
as of December 31, 1998. The only liabilities the company can incur would be an
additional common stock distribution to a creditor whom the company has objected
to their claim and the court might award an additional distribution over the
amount the company had scheduled in its Bankruptcy filings. The company believes
in the validity of the amount due creditors in its Bankruptcy Filings. In the
event that the Company losses some or all of the claims objections the existing
shareholders would be further diluted to the degree that the award to the
creditor exceeds the amount scheduled on the companies Bankruptcy filings. The
overage to the creditors would be paid in the Company's Common Stock. The
dilution tied to the Bankruptcy reorganization is significant. The Company has
3,826,912 Common Shares Outstanding. The result of the Reorganization Plan will
result in the distribution of
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approximately 7,767,820 shares of Common Stock. Additional issuance of stock may
be required pending the outcome of the claim objections pending.
PLAN OF REORGANIZATION:
See attached exhibits of the amended plan of reorganization (Exhibit 1) and
amended disclosure statement (Exhibit 2) as filed with the courts.
EVENTS LEADING TO THE CHAPTER 11 PETITION:
Beginning in September 1998, as a result of a number of factors, cash
prices in the sub-prime mortgage market significantly deteriorated and in some
cases investor yield requirements increased some 200 basis points. This in turn
significantly devalued the Company's loans held for sale and subsequent
revenues.
The Company previously had a warehouse line of $15 million with Bank
One, Texas, NA., which was discontinued as of September 30, 1998. The Company's
other warehouse line, which was with Nikko Financial Services, was terminated
effective November 30, 1998. As of September 30, 1998, the Company was in
violation of the net worth covenant of this agreement. In addition, the Company
previously had a purchase facility agreement with Fidelity Bank and Trust
aggregating $25 million. As of September 30, 1998 the use of that facility was
terminated. Upon termination of the warehouse line with Nikko, further advances
for new loan funding could only be under a repurchase agreement which provided
Nikko with the ability to evaluate whether or not it would enter into any new
transactions with the Company. The Company no longer had a committed warehouse
facility. Given that Nikko could decline the Company's request to fund loans
after November 30, 1998, the Company was not able to make loan-funding
commitments beyond November 30, 1998.
As of March 31,1998 and again as of June 30,1998, the Company did not
meet the required minimum standards for continued inclusion in the NASDAQ
Small-Cap Market in that its net tangible assets had fallen below $2,000,000 and
so the Company received a formal notice of de-listing from NASDAQ. On July 31,
1998 the Company appealed the notice of de-listing at an oral hearing and
awaited a final decision from NASDAQ. On November 17, 1998 NASDAQ informed the
Company by letter that a determination had been made to de-list the Company's
securities from The NASDAQ Stock Market effective with the close of business on
November 17, 1998.
The Company attempted a non-bankruptcy workout with its creditors. The
Company received a commitment from an investor to re-capitalize the Company with
up to $2 million if the Company could restructure its then-existing liabilities.
Accordingly, the Company presented a voluntary, non-bankruptcy plan of
reorganization to all its creditors (and those of its subsidiaries) wherein all
creditors were offered 1 share of the Company's common stock for each dollar
owed.
The success of that reorganization plan was dependent on full
acceptance by all of the Company's creditors and the consent of its underwriters
to issue the related common shares. All creditors did not accept the Company's
common shares in lieu of payment, and the underwriters did not consent to the
issuance of the underlying shares, which resulted in the investor not agreeing
to re-capitalize the Company.
The Company disclosed in a letter to the creditors that in the event
that the voluntary plan was not successful by December 11, 1998, management
intended to seek liquidation of the Company though the filing of a Chapter 7
bankruptcy action on December 14, 1998." Prior to a Chapter 7 bankruptcy
petition being filed, the Company consulted with its bankruptcy counsel, Kevin
C. Gleason, and was advised that a plan similar to the attempted workout could
be accomplished through a petition under Chapter 11 of the bankruptcy code,
without the need for the unanimous consent of the creditors. With its only
alternatives being liquidation under Chapter 7, or an reorganization under
Chapter 11, the Directors elected to seek a course of action under
reorganization.
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The substantial decrease in the Company's net worth from November 24,
1998 through March 10, 1999 was overwhelmingly due to the devaluation of the
mortgage portfolios of the Company's subsidiary, DMP.
CURRENT BUSINESS:
CFI Mortgage Inc. (the "Company") is a diversified financial services
company headquartered in North Palm Beach, Florida. The Company provides
mortgages and mortgage-related services to individuals indirectly through
mortgage brokers and mortgage lenders. The Company originates, processes,
underwrites and funds residential mortgage loans that are sold on an individual
basis to institutional and private investors. The Company originates loans that
do not conform to agency guidelines (non-conforming loans). Non-conforming loans
typically fail to meet agency guidelines due to credit impairment, higher
loan-to-value ratios and debt-to-income ratios, and are priced to compensate for
the additional credit risk. See amended plan of reorganization.
PREVIOUS BUSINESS:
The Company operated two wholly owned subsidiaries, BDMC, the Company's
retail production arm originating both conforming and non-conforming products,
and DMP, the non-conforming production platform for the Company. DMP originated
non-conforming loans on a wholesale basis through mortgage brokers, mortgage
bankers and lenders.
The Company's retail production subsidiary, BDMC, operated through
standalone branches located in Florida and Colorado. Commissioned loan officers
sourced the business through realtors and builders or other contacts.
Applications were taken primarily in face-to-face interviews either by hand or
on laptop computers. The loan officer submitted the application to the branch
office for processing either in hard copy or through electronic transfer via
modem. For conforming loans, application information was transmitted through the
Federal National Mortgage Association's ("FNMA") automated underwriting system.
The applications were then processed in accordance with the required conditions.
For all other loan types, applications were processed in the branch with
verifications collected for key financial information with a complete credit
file submitted to the centralized underwriting area. Certain loan types required
the investor to underwrite the loan. In these situations, the centralized
underwriting area submitted the application package to the Investor for
approval. Once a loan was underwritten, the branch collected the conditions
required by underwriting for approval. When all conditions had been satisfied,
the branch submitted a request to close to the centralized closing area. Closing
documents were generated through the Company's closing department preparation
software and the loans were then closed by approved closing agents who had
executed closing agreements and provided insured closing letters from title
insurers.
The loan programs offered reflected guidelines and terms, which match
those, published by approved investors. The pricing offered the Loan Officers
was generated from a pricing model, which priced to generate a specific dollar
profit on each loan regardless of loan size. That philosophy had allowed the
Company to price larger, more efficient loans aggressively, which had increased
its average loan size. When rates and prices are committed to applicants, the
interest rate risk was transferred to the ultimate investor by locking the rate
and price with the Investor based upon an agreed to closed loan delivery date.
Conforming closed loans were shipped to institutional and private
investors in accordance with commitments made at the time that the rate and
price were guaranteed. Investors then reviewed the loan files and upon clearing
any funding conditions, the investor wired the proceeds to the Company's account
at the warehouse bank for distribution to pay off the loan and the excess
deposited in the Company's operating account to use to fund operations.
On September 11, 1998 CFI Mortgage Inc. (CFIM) completed the sale of
one of its two operating subsidiaries, Bankers Direct Mortgage Corporation
(BDMC), to IMN Financial Corp. (IMNF) by means of a sale of all of the capital
stock of BDMC to IMNF. The Sale was made pursuant to a stock Purchase Agreement
dated
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as of September 4, 1998, the form of which has been previously filed as an
exhibit with the 8K on September 29, 1998. The purchase price consisted of the
assumption of all liabilities of BDMC and IMNF's agreement to pay CFIM
one-eighth of one percent of the value of all closed loans by BDMC for the two
years following closing. But only if BDMC's operations were profitable in the
quarter in which such loans were closed. Further, such payments would only be
made if the net book value of BDMC was at least $0 at closing or if less than
$0, then such payments will be first be applied to make up any negative net
worth in BDMC. The company agreed not to engage in the retail conforming
mortgage business conducted by BDMC for a period of five years following the
closing. IMNF also hired Vincent J. Castoro, the company's former vice president
and a Director as an employee of IMNF as of the closing. Mr. Castoro continues
to serve as a director of CFIM. Prior to the consummation of the sale of BDMC,
there were no material relationships between CFIM or BDMC or any of their
respective officers, directors or affiliates, and IMNF or any of its directors,
officers or Affiliates.
The Company is currently in a claims dispute in the bankruptcy court
with the purchaser of BDMC over the assertion by the purchaser that the
liabilities of BDMC were materially under-disclosed. The Company alleges that
the purchaser reneged on its obligation to pay certain liabilities, which as a
result substantially increased the liabilities of the Company due to parent
guarantees by CFIM on behalf of BDMC.
The Company's wholesale production subsidiary, Direct Mortgage
Partners, operated through its regional operation hubs located in five states to
obtain non-conforming applications and closed loans from mortgage brokers, and
mortgage lenders located in nineteen (19) states. Direct Mortgage Partners also
had a consumer direct office, which obtained application inquiries in response
to direct mail campaigns targeting specific market segments. Each regional
center had the capability to process, underwrite, close, and post-close the
loans produced in the region.
The subsidiary's regional operations hubs followed strict procedural
and policy guidelines. Credit information was submitted to the hub where the
application was credit graded. The grade was then communicated to the
broker/lender who completed the processing and submitted the processed
application for underwriting, credit approval and pricing. Prior to approval,
the operations hubs re-verified credit and depending upon the characteristics of
the application re-verified the property value. Applications with
Characteristics outside of the published matrices required a second signoff from
the centralized credit and compliance area of DMP.
When loans were approved the closing documents are generated by the
operational hub through the closing document preparation software and the loans
were then closed by approved closing agents who had executed closing agreements
and provided the Company with insured closing letters from title insurers.
Non-conforming loans were sold on either a flow or bulk basis with the
Company distributing listings of closed loans and their characteristics to
institutional and private investors who bid on loan(s) on an auction basis. This
process improved the Company's execution. The bids were subject to the review of
the complete closed loan file, which normally took place on site. Once funding
conditions were cleared, the investor's funding occurred as with conforming
loans. The loan programs and guidelines offered to the brokers and lenders
reflected conservative standards offered by a variety of investors who purchase
non-conforming loans routinely from mid-size aggregators such as the Company.
The pricing offered the brokers and lenders reflected differences based upon
credit grade and loan characteristics within the grade. These differences
reflected the adjustments received from the investors for which the Company
aggregates product. The ultimate price offered the broker or lender allowed for
a specific profit percentage to be earned on each loan. The Company also charged
certain fees on each loan at closing to increase revenue and offset operational
costs.
Beginning in September 1998, as a result of a number of factors, cash
prices in the sub-prime mortgage market significantly deteriorated and in some
cases investor yield requirements increased some 200 basis points. This in turn
significantly devalued the Company's loans held for sale and subsequent
revenues.
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GENERAL
CFI Mortgage Inc. (the "Company") is a diversified financial services
company headquartered in North Palm Beach, Florida. The Company provides
mortgages and mortgage-related services to individuals indirectly through
mortgage brokers and mortgage lenders. The Company originates, processes,
underwrites and funds residential mortgage loans that are sold on either an
individual or bulk basis to institutional and private investors. The Company
originates and purchases loans originated that do not conform to agency
guidelines (non-conforming loans). Non-conforming loans typically fail to meet
agency guidelines due to credit impairment, higher loan-to-value ratios and
debt-to-income ratios, and are priced to compensate for the additional credit
risk. See amended plan of reorganization.
GENERAL BACKGROUND
General Business
The Company is a holding company whose subsidiaries were
growing mortgage bankers engaged in originating, purchasing and selling
nonconforming sub-prime and conventional loans on one-to-four unit properties
through its retail, wholesale and consumer finance divisions. (Hereinafter the
first person refers to the Company and its subsidiaries unless the context
indicates otherwise). The Company operated primarily in the State of Florida.
The Company's business strategy was and will be in the future to increase
profitably the volume of its loan originations and purchases. All loan
applications, whether originated or purchased by the Company, were and will be
subject to the Company's underwriting criteria and the guidelines set forth by
the relevant governmental loan program or private investors, as applicable. The
Company previously sold and in the future intends to sell substantially all of
the mortgage loans it originates or purchases, together with the related
mortgage servicing rights, to institutional purchasers, including national and
regional commercial banks and other mortgage lenders.
All of the Company's operations were conducted through its wholly owned
subsidiaries, Bankers Direct Mortgage Corporation, a Florida corporation
(hereinafter referred to as BDMC) and Direct Mortgage Partners, Inc., a Delaware
corporation (hereinafter referred to as DMP). BDMC was incorporated in Florida
as Creative Industries, Inc. in April 1989. In October 1990, Creative
Industries, Inc.'s name was changed to Creative Financing, Inc. In May 1995,
Creative Financing, Inc.'s name was changed to CFI Mortgage Corporation. CFI
Mortgage Corporation changed its name to Bankers Direct Mortgage Corporation in
1997. DMP was incorporated in Delaware in August 1997.
YEAR 2000 ISSUES
The "Year 2000" problem is the result of computer programs being
written using two digits rather than four digits to define the applicable year.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to miscalculate or fail. This "Year 2000" problem creates
risk for the Company from problems in its own computer systems and from third
parties with whom the Company deals on transactions nationwide.
The Company has conducted a preliminary review of its computer systems
to identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to avoid any potential problems. The Company
has few internally developed applications that it utilizes for its operations,
and has been communicating with associated third parties to ensure that they are
addressing the issue. The potential impact of the "Year 2000" issue will depend
not only on the corrective measures the Company undertakes, but also on the way
in which the issue is addressed by businesses and other entities who they
provide or exchange data with.
It is certain that the Company's operations could be negatively
impacted if not adequately resolved, but at this time it is difficult to
quantify the potential financial impact of such situations.
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BUSINESS STRATEGY
The Company's objective is to be a diversified financial service
provider specializing in mortgage related services. The key elements of the
Company's business strategy are as follows:
o Provide its stockholders with superior returns based on profitability.
o Control growth in stable and improving geographic areas with teams of
experienced professionals.
o Build customer loyalty by providing superior service in all of its
production channels, including a diversified product menu, consistent
underwriting utilizing automated underwriting whenever possible, and
timely closings.
o Manage all aspects of loan quality in a manner that allows the loans
produced through its subsidiaries to command superior pricing from
investors.
o Sell additional mortgage related products and services to its mortgage
clients.
o Provide additional services linked to the loan process.
o Develop alternative delivery channels which allow for reduced cost
through direct contact with the ultimate customer.
o Monitor execution alternatives for the sale of mortgage loans and
servicing rights to improve profitability.
REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
From April 17, 1989 (inception) through December 31, 1996, CFI Mortgage
was treated for federal income tax purposes as an S corporation, and was treated
as an S corporation for certain state corporate income tax purposes under
certain comparable state laws. As a result, CFI Mortgage's historical earnings
had been taxed directly to CFI Mortgage's stockholders at their individual
federal and state income tax rates, rather than to CFI Mortgage. Pursuant to the
terms of a contribution agreement (the "Contribution Agreement"), the Existing
Stockholders contributed their stock of CFI Mortgage to the Company, in exchange
for 1,200,000 shares of Common Stock. The Existing Stockholders were Vincent J.
Castoro and Christopher C. Castoro, who received a portion of their Common Stock
as gifts from their father, Vincent C. Castoro (collectively with the Existing
Stockholders, the "Prior Stockholders"), the Company's Chairman of the Board and
former Chief Executive Officer, in 1993.
From April 17, 1989 through December 31, 1996, CFI Mortgage had not
paid any of its earnings to the Prior Stockholders in the form of S Corporation
distributions. On March 26, 1997, CFI Mortgage distributed as a dividend (the
"Distribution") to the Existing Stockholders CFI Mortgage's 40% interest (the
"Interest") in Carroll Street, a New York corporation whose principal asset is a
building located in Brooklyn, New York. The remaining 60% of Carroll Street is
owned by Vincent C. Castoro. The distribution of the Interest, which was
recorded on CFI Mortgage's balance sheet at December 31, 1996 as having a value
of $175,224, was intended to offset taxes payable at the applicable statutory
rate by the Existing Stockholders on the estimated net earnings of CFI Mortgage
for the period from January 1, 1996 to December 31, 1996 and to distribute to
the Existing Stockholders previously earned and undistributed S corporation
earnings.
As an S corporation, the Company's income, whether or not distributed,
was taxed at the stockholder level for federal and state tax purposes. As a
result of the Exchange, the Company and CFI Mortgage, which became a
wholly-owned subsidiary of the Company, became fully subject to federal and
state income taxes. The pro forma provision for income taxes in the accompanying
statements of income shows results as if the Company had always been fully
subject to federal taxes at an assumed tax rate of 34%.
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SEASONALITY
The mortgage banking industry is subject to seasonal trends. These
trends reflect the general pattern of re-sales of homes, which sales typically
peak during the spring and summer seasons and decline from January through
March. In addition, the primary home market in Florida tends to increase during
the fourth quarter, while the second home market increases from October through
April. Refinancing tend to be less seasonal and more closely related to changes
in interest rates. The mortgage servicing business is generally not subject to
seasonal trends, except to the extent that growth of a mortgage servicing
portfolio is generally higher in periods of greater mortgage loan originations.
COMPETITION
The mortgage banking industry is highly competitive. The Company
competes with financial institutions, mainly mortgage companies, commercial
banks and savings and loan associations and, to a certain extent, credit unions
and insurance companies, depending upon the type of mortgage loan product
offered. The Company competes principally by purchasing or originating a variety
of types of mortgage loans, emphasizing the quality of its service and pricing
the loans at competitive rates. Many of the Company's competitors have financial
resources substantially greater than that of the Company. Many of the nation's
largest mortgage companies and commercial banks have a significant number of
branch offices in areas in which the Company's correspondents and wholesale and
retail branches operate. Increased competition for mortgage loans from larger
lenders may result in a decrease in the volume of loans originated and purchased
by the Company, thereby possibly reducing the Company's revenues. The top five
competitors in the market are a) the Associates, b) Household Financial, c)
ContiMortgage Corp., d) Green Tree Financial and e) the Money Store.
REGULATION
The operations of the Company are subject to extensive regulation by
federal and state governmental authorities and are subject to various laws and
judicial and administrative decisions that, among other things, regulate credit
activities, require disclosures to customers, govern secured transactions and
establish collection, repossession and claims handling procedures and other
trade practices. The Company is subject to the rules and regulations of the
Federal Housing Administration ("FHA"), FNMA and the Department of Veteran
Affairs (the "VA") and state regulatory authorities with respect to originating,
processing, underwriting, selling, securitizing and servicing mortgage loans.
In addition, there are other federal and state statutes and
regulations, as well as judicial decisions, affecting the Company's operations.
Those rules and regulations, among other things, impose licensing obligations on
the Company, establish eligibility criteria for mortgage loans, prohibit
discrimination and establish underwriting guidelines which include provisions
for inspections and appraisals, require credit reports on prospective borrowers
and fix maximum loan amounts, and with respect to the VA loans, fix maximum
interest rates. Moreover, lenders such as the Company are required to submit
annually to the FHA, FNMA and VA audited financial statements, and each
regulatory entity has its own financial requirements. The Company's affairs also
are subject to examination by the FHA, FNMA and VA at all times to assure
compliance with all applicable regulations, policies and procedures. Mortgage
origination activities are subject to, among other regulatory requirements, the
Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Home
Mortgage Disclosure Act and RESPA and the regulations promulgated thereunder
which prohibit discrimination and require the disclosure of certain basic
information to mortgagors concerning credit terms and settlement costs. Many of
the aforementioned regulatory requirements are designed to protect the interests
of consumers, while others protect the owners or insurers of mortgage loans.
Failure to comply with these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the servicer, demands
for indemnification or loan repurchases, class action lawsuits and
administrative enforcement actions.
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There are various state and local laws and regulations affecting the
Company's operations. The Company is in possession of all licenses required by
the State of Florida to conduct its business operations and for the states were
it transacts business. Conventional mortgage operations also may be subject to
state usury statutes. FHA and VA mortgage loans are exempt from the effect of
such statutes.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation
or re-mediation activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future. In the ordinary course of its business, the Company from time to time
forecloses on the properties securing loans. Although the Company primarily
lends to owners of residential properties, there is a risk that the Company
could be required to investigate and clean up hazardous or toxic substances or
chemical releases at such properties after acquisition by the Company, and may
be held liable to a governmental entity or to third parties for property damage,
personal injury and investigation and clean up costs incurred by such parties in
connection with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
property.
EMPLOYEES
As of December 31, 1998, the Company had 8 employees whom were
undertaking the plan of reorganization, as all other subsidiary operations had
ceased. None of the Company's employees are represented by a union. The Company
considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located at 631
U.S. Highway # 1, Suite 309, North Palm Beach, Florida 33408, where the Company
leases from a stockholder on a month to month basis and certain office equipment
on various operating leases.
The office leases generally require CFI to pay certain escalation costs
for real estate taxes, operating expenses, usage and common area charge. The
Company considers its facilities to be satisfactory for its current needs.
ITEM 3. LEGAL PROCEEDINGS:
As a result of the confirmation of the bankruptcy plan, the Company is
no longer threatened with any litigation, claims and assessments which may have
exited as of year end December 31, 1998.
The Company is aware of an additional suit pending against Christopher
Castoro and Don L. Lashbrook by Thomson, Kernighan & Co. The Company is not a
party to the suit.
The Company was served on August 17, 1999 with a lawsuit from the
"Unofficial Creditors Committee" seeking $10,000,000 in damages. All of the
former officers and directors of the Company were named as well Gulf Insurance
Company, the Company's Officer & Directors insurance carrier. The Company, its
Directors and former Directors and former Officers believe the suit to be
without merit and intend to vigorously defend the action.
In the event an objection to a claim is made, such objection shall
preclude the consideration of such claim as "allowed" for purposes of timely
distribution in accordance with the Plan. The Disbursing Agent shall escrow
sufficient shares of common stock to cover all potential distributions with
respect to claims that have objections filed against them. The Company has filed
objections to the substantial claims. See attached exhibit (Exhibit 3) for all
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disputed claims that if adjudicated against the Company in bankruptcy court will
result in payment of one share of common stock being issued for every one dollar
($1.00) owed. Claims objections are being done post-confirmation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. PRICE RANGE OF COMMON STOCK
Effective May 27, 1997 the Company's Common Stock was included for
quotation on the NASDAQ Small-Cap Market under the symbol "CFIM." As of March
31, 1998 and again as of June 30, 1998, the Company did not meet the required
minimum standards for continued inclusion in the NASDAQ Small-Cap Market in that
its net tangible assets had fallen below $2,000,000 and so the Company had
received a formal notice of De-listing from NASDAQ. On July 31, 1998 the company
appealed this notice at an oral hearing and had been waiting a final decision
from NASDAQ. On November 17, 1998 NASDAQ informed the Company by letter that a
determination had been made to delist the Company's securities from The NASDAQ
Stock Market effective with the close of business on November 17, 1998. The
following table sets forth the time periods indicated the range of the high and
low close prices for the Company's Common Stock on the NASDAQ Small-Cap Market
and OTC-Bulletin Board Market.
- -----------------------------------------------------------
1997 High Low
- -----------------------------------------------------------
Second Quarter $ 9.81 $7.12
Third Quarter $14.75 $7.37
Fourth Quarter $12.25 $7.87
- -----------------------------------------------------------
1998 High Low
- -----------------------------------------------------------
First Quarter $10.00 $5.00
Second Quarter $14.56 $6.53
Third Quarter $ 8.50 $1.25
Fourth Quarter $ 2.37 $0.12
There were approximately 50 stockholders of record of Common Stock as
of March 31, 1998. This number does not include beneficial owners holding shares
through or "street" names. The Company believes that it has more than 800
beneficial holders of Common Stock.
On December 3, 1997, the Company issued 2,060 shares of 8% Series A
Convertible Preferred Stock, $.01 par value (the "Preferred Stock"), in a
private placement to certain institutional investors. The net proceeds from the
issuance and sale, after deducting selling and other related expenses,
aggregated $1,821,753. The foregoing shares were sold without registration in a
transaction qualifying for exemption from registration afforded by Section 4(2)
of the Securities Act of 1933, as amended.
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On December 3, 1997, CFI issued and sold 2,000 shares of Series A 8%
convertible preferred stock, $0.01 par value, at $1,000 per share in a private
placement. The net proceeds from the sale, after deduction selling and other
related expenses, aggregated $1,821,753. The preferred stock is convertible for
two years into common shares at a price equal to 85% of the five-day average bid
prices immediately prior to the conversion date. The discount on the conversion
price, which was $300,000, is accounted for as a charge against retained
earnings and is amortized over the non-convertible period. Included in the
statement of changes in stockholders equity are charges of $150,000 in the year
ended December 31, 1997 and $150,000 in the quarter ended March 31, 1998
pursuant to the conversion discount. On March 3, 1998, 500 shares of the
preferred stock, plus accrued interest of approximately $10,000 were converted
into 105,467 of common shares.
On June 30,1998, CFI issued and sold 1,000 shares of Series B, 8%
convertible preferred stock, $0.01 par value, at $1,000 per share in a private
placement. The net proceeds from the sale, after deduction of selling and other
related expenses, aggregated $905,000. The preferred stock is convertible for
two years into common shares at a price equal to 85% of the five-day average bid
prices immediately prior to the conversion date, subject to a minimum floor
conversion price of $5.00 per common share. The discount on the conversion
price, which was $150,000, is accounted for as a charge against retained
earnings and is amortized over the non-convertible period.
During the third quarter there were additional conversions of preferred
stock to common shares. On July 31, 1998, 500 shares of the Series B preferred
stock plus accrued interest of $3,397 were converted into 100,679 shares of CFI
common stock and on August 10, 1998, 560 shares of the Series A preferred stock
plus accrued interest of $30,684 were converted into 224,736 shares of CFI
common stock. On September 10, 1998 100 shares of the A preferred stock plus
accrued interest of $ 6,334 were converted to 75,817 shares of CFI common stock.
On September 24, 1998 100 shares of the A preferred stock plus accrued interest
of $ 6,465 were converted to 78,899 shares of CFI common stock. On October 2nd,
1998 150 shares of the A preferred stock plus accrued interest of 9,961 were
converted to 125,993 shares of common stock.
In connection with the preferred stock transaction, the Company granted
warrants to its underwriters, Straussbourger, Pearson, Tulcin & Wolff to
purchase 240,000 shares of common stock at an exercise price of $6.00 per share.
The warrants are exercisable until September 17, 2001. In addition, the Company
issued 60 shares of preferred stock with identical terms as payment for fees for
the private placement. The cost will be included in the net proceeds from the
transaction and will be amortized over the non-conversion term.
Redemption of Convertible Subordinate Debenture in exchange for
Convertible Preferred Stock. On May 18, 1998 the company issued a $2.2 million
Convertible Subordinate Debenture to Thomson, Kernaghan & Co., Ltd. of which
$1.7 million was outstanding at June 30, 1998. On August19, 1998 the company
redeemed the outstanding balance of the Debenture in exchange for the issuance
of 1,700 shares of Convertible Preferred Stock to Thomson, Kernaghan & Co., Ltd.
Following the filing of the bankruptcy petition in March of 1998, during the
bankruptcy proceedings, the Company reached a settlement with the holder for the
exchange of 2,500,000 shares of common stock for 1,700 shares of convertible
preferred stock.
Convertible-Redeemable Preferred Stock Offering. In August 1998, the
company entered into an agreement with Union Trading-Financial Limited for the
placement of the Company's Convertible-Redeemable Preferred Stock. The Preferred
Stock Units will be offered at $20 each and will be convertible into the
Company's Common Stock at the rate of 1 preferred unit to 2.5 shares of Common
Stock.
Furthermore, the terms of CFIM's initial public offering underwriting
agreement require the consent of CFI's underwriter, Strasbourger Pearson Tulcin
and Wolff for any issuance of common stock or securities convertible into common
stock. In a letter dated October 28, 1998 CFIM's underwriter denied its consent
for CFIM to issue it Series D Convertible Preferred Stock offering.
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OTHER EVENTS
a.) Termination of Del Mar Asset Purchase Transaction - The Company had
previously announced that on September 30, 1998 it had entered into an Asset
Purchase Agreement and Plan of Reorganization among Del Mar, CFIM and Michael
Shustek, subject to completion of due diligence and approval by both companies
shareholders and CFIM's IPO underwriter. The transaction as proposed called for
the purchase of 100% of the assets of Del Mar Mortgage and Del Mar Holdings for
5.5 million shares of CFI common stock. By letter dated October 28, 1998, CFIM's
IPO underwriters denied consent for the company to issue common shares under the
Del Mar Asset Purchase transaction. Further, on October 28, 1998 management of
Del Mar notified the Company that "a merger of the two companies would not be in
the best interest of Del Mar or its Shareholders" and so Del Mar terminated the
agreement.
b.) Common Stock Subscription - On October 30, 1998 the company
received a subscription agreement from MediForce Inc., a publicly traded
company, to purchase 1,333,333 shares of CFI Common Stock for $2 million. In
connection with this transaction, Mediforce advanced $150,000 to CFI and
provided a note in the amount of $1,850,000. The terms of the note Call for a
payment of $850,000 on November 14, 1998 and $1,000,000 on November 30, 1998. As
of November 23, 1998 there have been no payments made under this note by
Mediforce.
In a letter dated November 13, 1998 CFI's IPO underwriter indicated
that they were only willing to grant consent for CFIM to sell shares of common
stock to Mediforce, Inc and thereby raise critically needed capital if the
Company made significant cash payments to the underwriter. In as much as the
Company had no means to make payments to the underwriter, consent has not been
granted. By letter dated November 23, 1998, MediForce, Inc. notified the Company
that the Subscription Agreement and Promissory Note are withdrawn and of no
further force and effect and has made demand for return of the original $150,000
advance.
c.) Sale of Series C Convertible Preferred Shares - On October 30, 1998
the Company and General Information Technologies Inc. (GETI) entered into an
agreement with Thomson Kernaghan & Co. Limited (Thomson) whereby Thomson sold
its interest in the Company, consisting of 1,700 Series C Convertible Preferred
shares, to GETI for the sum of $2,125,000. GETI is a wholly owned subsidiary of
MediForce Inc., the party that executed the subscription agreement described in
NOTE 6, section a. above. The closing date of the agreement is November 12,
1998. Payment of the purchase price consists of a $1,700,000 promissory note
issued by GETI to Thomson and 212,500 common shares of CFI to be issued by the
Company to Thomson as consideration for $170,000 of interest and $255,000
premium. In a letter dated November 13, 1998 the Company's IPO underwriter
withheld their consent for the Company to issue the portion of the 212,500
shares under this agreement that related to prepaid interest and the premium.
If, on May 1, 1999, the prior 5 day average closing bid price of the common
shares of the company is below $2.00, then the company will deliver another
70,500 of its common shares to Thomson. In the event that funding is obtained
from the Company's Series D Preferred offering in the amount of $5,000,000 or
more, Thomson will be paid not less than 25% of such funding up to the balance
of the promissory note. As part of the agreement, the exercise price of
Thomson's warrants to purchase 50,000 shares of CFI common stock was reduced
from $2.6563 to $2.00.
d.) Sale of Series A and B Convertible Preferred Shares - Although not
a party to this transaction, the Company is aware that the holder of its Series
A and B Convertible Preferred Shares had entered into an agreement with GETI to
sell its interest in those issues effective October 30, 1998.
The Company has since been notified that the transaction in "c" and "d"
above was never consummated.
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DIVIDEND POLICY
The Company has not paid any cash dividends (except for S corporation
distributions to the Existing Stockholders) on its Common Stock since its
inception and does not currently anticipate paying dividends on its Common Stock
in the foreseeable future. The Company conducts substantially all of its
operations through its subsidiaries. Accordingly, the Company's ability to pay
dividends is also dependent upon the ability of its subsidiaries to make cash
distributions to the Company. The payment of dividends to the Company by its
subsidiaries is and will continue to be restricted by or subject to, among other
limitations, applicable provisions of state and federal laws, contractual
provisions in the Company's financing agreements, the earnings of such
subsidiary and various business considerations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS OF THE COMPANY AND ACCOMPANYING NOTES SET FORTH THEREIN.
GENERAL
The Company operated two wholly owned subsidiaries, BDMC, the Company's
retail production arm originating both conforming and non-Conforming products,
and DMP, the non-conforming production platform for the Company. DMP originated
non-conforming loans on a wholesale basis through mortgage brokers, mortgage
bankers and lenders.
The following comparative analysis and discussion may be misleading due
to the following. Information includes nine months of operations of Bankers
Direct Mortgage Corporation "BDMC" and eleven months for Direct Mortgage
Partners "DMP", and the subsequent filing for a voluntary petition for relief
under Chapter 11 of Title 11 of the United States Code.
On September 11, 1998 CFI Mortgage Inc. (CFIM) completed the sale of
one of its two operating subsidiaries, Bankers Direct Mortgage Corporation
(BDMC), to IMN Financial Corp. (IMNF) by means of a sale of all of the capital
stock of BDMC to IMNF. The Sale was made pursuant to a stock Purchase Agreement
dated as of September 4, 1998, the form of which has been previously filed as an
exhibit with the 8K on September 29, 1998. The purchase price consisted of the
assumption of all liabilities of BDMC and IMNF's agreement to pay CFIM
one-eighth of one percent of the value of all closed loans by BDMC for the two
years following closing. But only if BDMC's operations were profitable in the
quarter in which such loans were closed. Further, such payments would only be
made if the net book value of BDMC was at least $0 at closing or if less than
$0, then such payments will be first be applied to make up any negative net
worth in BDMC.
Beginning in September 1998, as a result of a number of factors, cash
prices in the sub-prime mortgage market significantly deteriorated and in some
cases investor yield requirements increased some 200 basis points. This in turn
significantly devalued the Company's loans held for sale and subsequent
revenues.
The Company previously had a warehouse line of $15 million with Bank
One, Texas, NA., which was discontinued as of September 30, 1998. The Company's
other warehouse line, which was with Nikko Financial Services, was terminated
effective November 30, 1998. As of September 30, 1998, the Company was in
violation of the net worth covenant of this agreement. In addition, the Company
previously had a purchase facility agreement with Fidelity Bank and Trust
aggregating $25 million. As of September 30, 1998 the use of that facility was
terminated. Upon termination of the warehouse line with Nikko, further advances
for new loan funding could only
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be under a repurchase agreement which provided Nikko with the ability to
evaluate whether or not it would enter into any new transactions with the
Company. The Company no longer had a committed warehouse facility. Given that
Nikko could decline the Company's request to fund loans after November 30, 1998,
the Company was not able to make loan-funding commitments beyond November 30,
1998.
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary
petition for relief under Chapter 11 of Title 11 of the United States Code. The
Company's Chapter 11 Plan of Reorganization was confirmed on August 2, 1999.
Comparison for year ended December 31, 1998 and 1997. The primary
source of the Company's revenue is from activities related to providing
homeowner financing solutions through either Bankers Direct Mortgage, the
Company's retail conforming and government insured mortgage banking subsidiary,
Direct Mortgage Partners, the Company's wholesale sub prime lending subsidiary,
or by brokering loans to other lenders who provide a competitive product for the
particular type of loan required.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
For 1998, revenues increased $5,897,647 (71.34%) to $14,164,911 in 1998
from $8,267,264 in 1997. Commissions and fees increased by $2,551,937 (38%) to
$9,267,178 from $6,7715,241 in 1997. The increase in commissions and fees were
primarily attributable to an increase in sub-prime wholesale production volume.
Interest income increased $3,345,710 (215.57%) to $4,897,733 in 1998
from $1,552,023 in 1997. The increase in interest income was primarily due to
the Company increasing its sub-prime origination's, which carry a higher
interest rate than that of conforming loans, combined with holding mortgage
loans for sale longer and thus earning additional interest income over this time
period. Total loan volume in 1998 was $525,000,000 compared to $257,000,000 in
1997, an increase of $268,000,000 representing a 104.28% increase.
Total expenses increased $16,122,939 (113.40%) to $30,340,704 in 1998
from $14,217,765 in 1997. The expenses increased at a much faster rate than
total revenues primarily due to not realizing during 1998 economies of scale and
the efficiencies associated with the Company's implementation and investment in
technology, and due to the addition of experienced staff. Beginning in September
1998, as a result of a number of factors, cash prices in the sub-prime mortgage
market significantly deteriorated and in some cases investor yield requirements
increased some 200 basis points. This in turn significantly devalued the
Company's loans held for sale and subsequent revenues. The substantial increase
in the loan loss provisions from November 24, 1998 through December 31, 1998 was
overwhelmingly due to the devaluation of the mortgage portfolios of the
Company's subsidiary, DMP. The subsequent filing of a petition for relief under
Chapter 11, and workout with warehouse lenders increased loan loss provisions by
$7,135,304 or 44% of the increase.
Selling expenses increased $1,607,210 (30.83%) to $6,820,835 in 1998
from $5,213,625 in 1997. Commissions and benefits accounted for approximately
two-thirds of this increase, which was directly related to the increased volume.
The remainder was the result of the national expansion and the up-front costs
associated with establishing the support functions required for this expansion
to be successful.
General and administrative expenses increased $3,939,106 (53.5%) to
$11,325,638 in 1998 from $7,386,532 in 1997. Salaries and benefits accounted for
over half of this increase. The Company added senior management personnel
experienced in the mortgage industry. Additional expenses were incurred in 1998
as part of the national expansion and the up-front costs associated with
establishing the production support functions required for this expansion
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Interest expense increased $3,394,441 (286.30%) to $4,580,049 in 1998
from $1,185,608 in 1997. This was primarily due to the increase in loan volume
of 104.28% in 1998 as compared to 1997. In addition, the average cost of
borrowings increased due to the rapid growth of non-conforming loans, and loans
were aggregated for a longer period of time by the Company to take advantage of
bulk sale premiums.
The Company experienced a loss from continuing operations, before
taxes, of $16,175,793 in 1998 compared to a net loss, before taxes, of
$5,950,501 in 1997 as a result of the national expansion and the up front costs
associated with establishing the support functions required for this expansion.
The second, third and fourth quarter losses were significantly attributable to
the increases in selling, general and administrative and interest expenses
associated with the above activities. The first quarter loss was primarily the
result of the seasonality of home sales in Florida. Home sales typically decline
in the first quarter of the year due in part to Florida's homestead laws, which
reduce a purchaser's taxes resulting in many home purchasers buying before year
end. The increased demand at year end tends to drive up administrative costs in
the first quarter.
The Company recorded a one-time gain of $536,664 from the sale of the
Bankers Direct Mortgage Corporation, the company subsidiary, to the purchaser,
Island Mortgage Network Financial for the assumption of liabilities.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
For 1997, revenues increased $409,000 (5.2%) to $8,267,000 in 1997 from
$7,858,000 in 1996. Commissions and fees decreased by $852,000 (11.3%) to
$6,715,000 from $7,567,000 in 1996. The decrease in commissions and fees was
attributable to an increase in wholesale production volume and a larger balance
of "Loans Held for Sale" at year-end December 31, 1997 compared to December 31,
1996, resulting in unrealized gains at December 31, 1997.
Interest income increased $1,261,000 (433.3%) to $1,552,000 in 1997
from $291,000 in 1996. The increase in interest income was primarily due to the
Company holding mortgage loans for sale longer and thus earning additional
interest income over this time period. Total loan volume in 1997 was
$257,313,000 compared to $230,814,000 in 1996, an increase of $26,499,000
representing a 11.5% increase.
Total expenses increased $6,672,000 (88.4%) to $14,218,000 in 1997 from
$7,546,000 in 1996. The expenses increased at a much faster rate than total
revenues primarily due to not realizing during 1997 economies of scale and the
efficiencies associated with the Company's implementation and investment in
technology, and due to the addition of experienced staff. Management believes
these efficiencies will be realized in 1998.
Selling expenses increased $1,937,000 (59.1%) to $5,214,000 in 1997
from $3,277,000 in 1996. Commissions and benefits accounted for approximately
two-thirds of this increase, which was directly related to the increased volume.
The remainder was the result of the national expansion and the up-front costs
associated with establishing the support functions required for this expansion
to be successful.
General and administrative expenses increased $4,249,000 (119.0%) to
$7,819,000 in 1997 from $3,570,000 in 1996. Salaries and benefits accounted for
over half of this increase. The Company added senior management personnel
experienced in the mortgage industry. Additional expenses were incurred in 1997
as part of the national expansion and the up-front costs associated with
establishing the production support functions required for this expansion to be
successful. During the year ended December 31, 1997, the Company opened two (2)
retail production offices, seven (7) non-conforming wholesale offices and one
(1) consumer direct office which sources customers through direct mailings. In
addition, the provision for loan losses in 1997 was $432,000, which represented
1.2% of loans held for sale at December 31, 1997.
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Interest expense increased $636,000 (115.6%) to $1,186,000 in 1997 from
$550,000 in 1996. This was primarily due to the increase in loan volume of 11.5%
in 1997 as compared to 1996. In addition, the average cost of borrowings
increased due to the introduction of non-conforming loans, and loans were
aggregated for a longer period of time by the Company to take advantage of bulk
sale premiums.
The Company experienced a loss before taxes of $5,951,000 in 1997
compared to income before taxes of $311,000 in 1996 as a result of the national
expansion and the up front costs associated with establishing the support
functions required for this expansion to be successful.
FINANCIAL CONDITION
DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997:
Cash in banks, net of overdrafts, decreased $1,438,436 to $2,371 at
December 31, 1998 from $1,705,216 at December 31, 1997. The decrease was due to
having no operational subsidiaries at year end December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company operated on a negative cash flow basis. Historically, the
Company's cash requirements include the funding of (i) mortgage originations
pending their sale, (ii) the points and expenses paid in connection with
acquisition of wholesale loans, and (iii) ongoing administrative and other
operating expenses.
On May 30, 1997, the Company completed the initial public offering of
1,000,000 shares of its Common Stock at $5 per share. The net proceeds from the
offering, after deducting underwriting discounts and commissions and offering
expenses, aggregated $3,800,525. In connection with the offering, the Company
granted the underwriter warrants to purchase 100,000 shares of Common Stock at
an exercise price of $6 per share. The warrants are exercisable for a period of
four years commencing May 1998.
On December 3, 1997, the Company issued and sold 2,000 shares of
Preferred Stock at $1,000 per share in a private placement. The net proceeds
from the sale, after deducting selling and other related expenses, aggregated
$1,821,753. The Preferred Stock is convertible for two years into shares of
Common Stock at a price equal to 85% of the five-day average bid prices
immediately prior to the conversion date. The discount on the conversion price
is accounted for as a charge against retained earnings and is amortized over the
nonconvertible period. On March 3, 1998, 500 shares of the Preferred Stock, plus
accrued interest of approximately $10,000, were converted into 105,467 shares of
Common Stock. Furthermore, the Company is obligated to register for resale the
shares of Common Stock issuable upon conversion of the Preferred Stock and, if
the resale registration statement has not been declared effective by April 3,
1998, the Company is subject to cash penalty payments to the holders of the
Preferred Stock. In connection with the Preferred Stock transaction, the Company
granted warrants to purchase 240,000 shares of Common Stock at an exercise price
of $8.50 per share. The warrants are exercisable until September 17, 2001. In
addition, the Company issued 60 shares of Preferred Stock with identical terms
as payment for fees for the private placement. The cost will be included in the
net proceeds from the transaction and will be amortized over the non-conversion
term.
. On May 18, 1998 the company issued a $2.2 million Convertible
Subordinate Debenture to Thomson, Kernaghan & Co., Ltd. of which $1.7 million
was outstanding at June 30, 1998. On August19, 1998 the company redeemed the
outstanding balance of the Debenture in exchange for the issuance of 1,700
shares of Convertible Preferred Stock to Thomson, Kernaghan & Co., Ltd.
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On June 30,1998, CFI issued and sold 1,000 shares of Series B, 8%
convertible preferred stock, $0.01 par value, at $1,000 per share in a private
placement. The net proceeds from the sale, after deduction of selling and other
related expenses, aggregated $905,000. The preferred stock is convertible for
two years into common shares at a price equal to 85% of the five-day average bid
prices immediately prior to the conversion date, subject to a minimum floor
conversion price of $5.00 per common share. The discount on the conversion
price, which was $150,000, is accounted for as a charge against retained
earnings and is amortized over the non-convertible period.
The Company had relied upon a few lenders to provide the primary credit
facilities for its loan originations and purchases. The Company entered into a
$50,000,000 credit agreement with Bank One on June 30, 1997 and a $50,000,000
warehouse line with Nikko in November 1997. The warehouse line with Bank One,
Texas, NA., was discontinued as of September 30, 1998. The Company's warehouse
line, with Nikko Financial Services, was terminated effective November 30, 1998.
As of September 30, 1998, the Company was in violation of the net worth covenant
of this agreement. In addition, the Company previously had a purchase facility
agreement with Fidelity Bank and Trust aggregating $25 million. As of September
30, 1998 the use of that facility was terminated. Upon termination of the
warehouse line with Nikko, further advances for new loan funding could only be
under a repurchase agreement which provided Nikko with the ability to evaluate
whether or not it would enter into any new transactions with the Company. The
Company no longer had a committed warehouse facility. Given that Nikko could
decline the Company's request to fund loans after November 30, 1998, the Company
was not able to make loan-funding commitments beyond November 30, 1998.
For the year ended December 31, 1998, net cash used in operating
activities was $14,307,063 resulting primarily from the net loss from the year.
The losses were financed by the proceeds from the Company's preferred stock
offerings, the use of the credit facilities and long term debt. The cash
proceeds from the offerings and long term debt of $2,961,156 were used (i) to
fund mortgage loans, (ii) to expand the Company's retail and wholesale divisions
and, (iii) for primary marketing and brand recognition and (iv) to purchase new
technology and infrastructure. Cash from operating activities, together with
funds available under its purchase agreements and other credit facilities were
insufficient to fund its operations
HEDGING, INFLATION AND INTEREST RATES
The Company had actively managed the interest rate risk associated with
conforming loans by committing applications to permanent investors at the time
that the rate and price are guaranteed to the applicant, with the investor
agreeing to honor the rate and price committed provided that the resulting loan
is closed and presented for purchase within a specific time frame. The time
frame was set with ample time for delivery based on the rate and price
expiration date given the applicant.
The Company had elected not to hedge against the interest rate risk
associated with nonconforming loans. This decision was subject to review on an
ongoing basis but given the then profit margins and the lack of volatility
associated with pricing for nonconforming loans sold on a whole loan basis, the
Company decided against employing hedging techniques utilizing costly financial
instruments. The period where risk existed was limited since the rate and price
are only guaranteed once the application has been approved with whole loan sales
of closed loans occurring on a bi-monthly basis.
CERTAIN ACCOUNTING PRONOUNCEMENTS
SFAS 128
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings Per Share," which supersedes
Accounting Principles Board No. 15, Earnings per Share ("APB 15"), and is
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effective for the Company for the year ended December 31, 1997. SFAS 128
establishes standards by simplifying the computation and presentation of
earnings (loss) per share, and applies to public entities with publicly held
common stock. It replaces the presentation of primary earnings (loss) per share
with a presentation of basic earnings (loss) per share. SFAS 128 also requires
dual presentation of basic and diluted earnings (loss) per share on the face of
the statements of operations. Basic earnings (loss) per share excludes dilution
and are computed by dividing income available to common stockholders by the
weighted-average common shares outstanding for the period. Diluted earnings
(loss) per share reflect the potential dilution that could occur if preferred
stock contracts, options and warrants were to be exercised or converted or
otherwise resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted earnings (loss) per share is computed similarly
to fully diluted earnings (loss) per share pursuant to APB 15. The Company
adopted SFAS 128 for the year ended December 31, 1997.
SFAS 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which provides accounting and
reporting standards for transfers and servicing of financial assets and
Extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. SFAS No. 125
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Implementation of SFAS No. 125, effective as of January
1, 1997, did not have a significant effect on the financial condition or results
of operations or the Company.
SFAS 123
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 31, 1995, or
for an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a company to choose either
a new fair value-based method or the current APB Opinion 25 intrinsic
value-based method of accounting for its stock-based compensation arrangements.
The statement requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value-based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under APB Opinion 25.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, certain matters
discussed in this Form 10-KSB are "forward- looking statements" as defined in
the Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk
and uncertainties that exist in the Company's operations and business
environment, and are subject to changes based on various important factors. The
Company wishes to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning readers that numerous important factors discussed below, among
others, in some cases have caused, and in the future could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The following include some,
but not all, of the factors or uncertainties that could cause actual results to
differ from projections:
17
<PAGE>
Lending to "sub-prime" borrowers who have higher incidents of default
could adversely affect the Company's projections.
o Loss of funding sources necessary to originate mortgage loans at
profitable margins.
o Diminished ability to sell loans could cause the Company to require
additional funding sources.
o Profitability may be directly affected by the level and fluctuation in
interest rates which affect the Company's ability to earn a spread
between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected
during any period of unexpected or rapid changes in interest rates.
o A general economic slowdown.
o The unanticipated expenses of assimilating newly-acquired business into
the Company's business structure, as well as, the impact of unusual
expenses from ongoing evaluations of business strategies, asset
valuations, acquisitions, divestitures and organizational structures.
o Unpredictable delays or difficulties in the development of new product
programs.
o Rapid or unforeseen escalation of the cost of regulatory compliance
and/or litigation, including but not limited to, environmental
compliance, licenses, adoptions of new, or changes in accounting
policies and practices and the application of such policies and
practices.
o The effects of changes in monetary and fiscal policies, laws and
regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, unforeseen
inflationary pressures and monetary fluctuation, the ability or
inability of the Company to hedge against fluctuations in interest
rates.
o The ability or inability of the Company to continue its current
practices relating to mortgage loans held for sale.
o Increased competition within the Company's markets.
The Company believes that it has the product offerings, facilities,
personnel and competitive and financial resources for continued business
success. However, future revenue, costs, margins and profits are all influenced
by a number of factors, as discussed above.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the financial statements, the reports thereon and
notes thereto, commencing on page F-1 to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 23, 1999, the Company engaged Weinick Sanders Leventhal
& Co., LLP as its independent public accountants to audit its financial
statements in place of Grant Thornton L.L.P. ("Grant Thornton"), the "Former
Accountants".
The report of the Former Accountants on the Company's financial
statements for the year ended December 31, 1997 did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. For the year ended December
31, 1997 there were no disagreements between the Company and the Former
Accountants with respect to any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
18
<PAGE>
The decision of the Company to replace the Former Accountants with
Weinick Sanders Leventhal & Co., LLP as the independent public accountants was
unanimously approved by the Board of Directors.
The Company has not consulted with Weinick Sanders Leventhal & Co., LLP
regarding the application of accounting principles or practices to any specific
transaction, or the type of audit opinion that might be rendered on the
Company's financial statements. Since there was no disagreement between the
Company and the Former Accountants on any matter of accounting principles or
practices or any reportable events, the Company has not consulted with Weinick
Sanders Leventhal & Co., LLP regarding any matter that was the subject of a
disagreement or a reportable event.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors and Executive Officers:
Name Age Title
Vincent C. Castoro (1)................. .64 Chairman and Director
Vincent J. Castoro (1)...................30 Director
Christopher C. Castoro (1)...............32 President, CEO, Director
Thomas J. Healy (2)......................49 Director
Robert J. Thompson (3)..................49 Director
Paul Garrigues (4).......................42 Chief Financial Officer
Don M. Lashbrook (5).....................45 Chief Operations Officer
(1) Vincent C. Castoro is the father of Vincent J. Castoro and Christopher C
Castoro.
(2) Resigned from the Company as Director effective November 11, 1998
(3) Resigned from the Company as Director effective September 3, 1998
(4) Resigned from the Company as Chief Financial Officer in January 1999
(5) Resigned from the Company as Chief Operations Officer in September 1999
upon the sale of the Company's retail subsidiary Bankers Direct Mortgage
Corporation
Vincent C. Castoro founded the Company's operating subsidiary (Bankers
Direct Mortgage Corporation) in April 1989 and has been a director of the
Company since its inception date. Mr. Castoro has served as the Chief Executive
Officer of the Company since March 1991 and devotes his full business time to
the affairs of the Company. Prior to founding the Company, Mr. Castoro was
involved it the heating oil distribution business in the, New York metropolitan
region.
Vincent J Castoro had been the President of the Company's operating
subsidiary (Bankers Direct Mortgage Corporation) from June 1993 until June of
1997. From June of 1997 he has served as a director of the Company and as Vice
President of the Company.
Christopher C. Castoro has been the Chief Executive Officer and
Director of the Company since June 1997. From June of 1993 until June of 1997,
Mr. Castoro served as Executive Vice President of the Company.
19
<PAGE>
From April 1989 to June 1993, Mr. Castoro served as the Secretary and Treasurer
of the Company. Mr. Castoro is a member of the Mortgage Bankers Association of
America, and has served on that organizations Secondary Marketing Committee
since 1994. Mr. Castoro also serves as a member of the Advisory Board of the
Chase Manhattan Mortgage Corporation.
Thomas J. Healy has been the Director of the Mortgage Banking
Strategies Group at CoreStates Capital Markets, a division of CoreStates Bank
N.A. in Fort Lauderdale since November 1990. From March 1987 to November 1990,
Mr. Healy was the, Managing Director of Reserve Financial Management Corp.., an
investment banking firm in Miami, Florida. Mr. Healy is a Master Faculty Fellow
of the Mortgage Banking Association School of Mortgage Banking and an
accomplished lecturer and author in the mortgage banking industry.
Robert J. Thompson is the, founder of R.Thompson & Company, a lobbying
practice formed in 1983 which performs a wide variety of public relations
services for both the government and private sector. Prior to founding R.
Thompson & Company, Mr. Thompson served in the White House as Special Assistant
to President Ronald Reagan and Deputy Director of Legislative Affairs from
February 1982 to November 1982 after serving as Executive Assistant for
Congressional Relations to then Vice President George Bush.
Paul R. Garrigues has been the Chief Financial Officer of the Company
since April 1998. From March 1992 through April 1998, Mr. Garrigues served as
the Chief Financial Officer of Monument Mortgage, Inc., a Walnut Creek, CA.
Mortgage banking company and wholly owned subsidiary of Finet Holdings Inc
(NASDAQ:FNHC).
Dusty Lashbrook served as Chief Operations Officer for the Company
since May of 1997. From March 1996 until May of 1997 he served as senior vice
president of risk management for Citizens Mortgage Corporation. From February
1994 through February 1996 Mr. Lashbrook served as the Director of risk
management for Barnett Mortgage Company. Mr. Lashbrook has over 20 years of
Management experience and has previously sat on the Southeast Regional FNMA
Advisory Board.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation of the Company's Chief
Executive Officer for the three fiscal years ended December 31, 1998. The
remuneration described in the table does not include the cost to the Company of
benefits furnished to the Executive Officer, including premiums for health
insurance and other benefits provided in connection with the conduct of the
Company's business. The value of such benefits did not exceed 10% of the
Executive Officer's cash compensation.
Annual Compensation
Fiscal ------------------- Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
Christopher C. Castoro
Chief Executive Officer ......... 1998 $91,666 ___ ___
1997 $87,500 ___ ___
1996 $71,623 ___ ___
No options or other form of long-term compensation were granted to, or
exercised or held by, the named executive officers during the year ended
December 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 27, 1999 (i) by each person known
by the Company to own beneficially five percent or more of the outstanding
Common Stock, (ii) each of the Company's directors; and (iii) all directors and
executive officers of the
20
<PAGE>
Company as a group. The address of each person listed below is 631 U.S. Highway
One, Suite 309, North Palm Beach, Florida 33408, unless otherwise indicated.
Name of Beneficial Owner Number of Shares Percentage Owned
Vincent C. Castoro....................... 0 0%
Vincent J. Castoro....................... 600,000 15.7%
Christopher C. Castoro................... 355,000 9.3%
Rodger W. Stubbs......................... 200,000 5.2%
All directors and executive officers
As a group (four persons).............. 1,155,000 30.2%
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
In May of 1997 Vincent C. Castoro, the Company's Chairman, loaned $200,000 to
Bankers Direct Mortgage Corporation (prior to the name change from CFI Mortgage
Corporation to Bankers Direct Mortgage Corporation) a wholly owned subsidiary of
the Company. In May of 1997, BDMC repaid $100,000 of the $200,000 owed to
Vincent Castoro. Bankers Direct Mortgage Corporation then repaid Vincent Castoro
the balance of $100,000 debt, plus interest of $14,000, in July of 1998. Vincent
Castoro then loaned an additional $100,000 in July 1998 to the Company, which
remains unpaid. Vincent Castoro has made a claim in the bankruptcy court for the
amount still outstanding.
ITEM 13. SUBSEQUENT EVENTS.
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provided
for an infusion of $800,000 by a lender (Ronco), which is secured by CFI's
assets. The Ronco Funding subscription represents Class 1 of CFI Mortgages
Inc.'s Creditor class in regards to the Companies Bankruptcy Reorganization
plan.. Ronco, or its assigns, shall have the option to convert the amount of the
loan to common stock of the Company pro rata, at the rate of 2 percent of the
outstanding common shares of the Company for each $80,000 of gross
disbursements. Such shares to be determined after the Effective Date, and to
represent two percent (2%) of the Company's outstanding common stock after
distributions to claimants in Classes 2 and 3. A warrant for one share of the
stock of the Company will also be issued to Lender, or its assigns, for each
share of common stock issued to Ronco pursuant to the Agreement with the
Company.
Subsequently, as of September 27, 1999 Ronco Funding, Inc. has subscribed a
gross amount of $284,000. The Company was funded $256,000 which was less the
$28,000 in funding commissions due to the agent of Ronco Funding. The Funding to
date represents (when converted) an approximate seven percent (7%) equity
interest. The Company was granted an extension on September 15, 1999 by the
bankruptcy court extending the time Ronco Funding, Inc and or its assigns, has
to fulfill the $800,000 subscription until October 1, 1999. There can be no
assurances that any additional subscriptions will be made.
On June 28, 1999 the Company's Amended Plan of Reorganization was approved. On
August 2, 1999 the Company's bankruptcy reorganization was confirmed.
Subsequent to the March 10, 1999 petition for relief filing under Chapter 11,
the following material agreements were made through the bankruptcy proceedings.
An agreement was reached to conduct an assignment for the benefit of creditors
for the Company's subsidiary Direct Mortgage Partners for the benefit of its
creditors. In addition, by request of the major creditors of the Company, a
mechanism was included in an amendment to the plan and the order confirming the
plan, which preserves any and all causes of action held by the unofficial
creditors committee, before or after commencement of the case, to be prosecuted
post-confirmation, at the unofficial creditors committee's expense.
21
<PAGE>
EXHIBIT: CFI MORTGAGE INC -- CLAIM OBJECTIONS
<TABLE>
<CAPTION>
CLM CREDITOR DATE OBJ BASIS CLAIM PROP
# # OBJECT AMOUNT DISP
<S> <C> <C> <C> <C> <C> <C>
30 LAING 1 - DMP
62 PALISADES 7/6 1, 8 8 - REJECT
IMPROPER 30-14,248.90
CALC 62-147,918.19 Objections pending
157 K. ALEXANDER 7/6 7 DMP 207,816.00 Claim disallowed
158 NORWEST MTG 7/2 7 DMP 2,318,000.00 Objection pending
146 PEARL PROP 7/2 7 DMP 106,894.57 Objection pending
152 LASHBROOK 7/2 8 BDMC 500,000.00 Objection pending
NO DOC
126 BANK ONE 7/1 8 REJECT - 70,000.00 Objection pending
TEXAS COLLATERAL
LEASE VALUE
127 ICON 7/1 8 REJECT - 127-20,802.74
128 COLLATERAL 128-45,841.91 Objection pending
VALUE
105 D. BIYLER 6/24 5 DMP 17,114.00 Claim disallowed
57 ROBERT 6/24 5 DMP 27,953.86 Claim disallowed
HALF
INTERNAT'L
101 J. SANDERS 6/22 2 DMP 15,974.00 Claim Disallowed
133 IMC MTG 6/22 5, 7 5 - DMP 253,324.81 Objection pending
7 - DMP
117 J. MILLER 6/21 4 DMP 1,432.00 Claim disallowed
99 B. ELDRIDGE 6/21 3 DMP 5,667.00 Claim Disallowed
<CAPTION>
CLM N/C/M HEARING
# DATE
<S> <C> <C>
30
62
157 7/21 done
158
146
152
126
127
128
105 7/21 done
57 7/21 done
101 7/20 done
133
117 7/20 done
99 7/20 done
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
134 APPONLINE 6/21 8 U/C/D 822,919.45 Objection pending
SCH D. GARCIA 6/18 5 DMP 7,396.00 Claim disallowed
118 M. GRAVES 6/18 4 DMP 7,289.31 Claim disallowed
75-1,385.40 -exp 75- Claim disallowed
75, 77 R. CHARLES 6/18 2 DMP 77-4,144.00 - P 77- Claim disallowed
SCH M. GILLEY 6/16 4 DMP 2,032.00 Claim disallowed
44, 47 44-4,430 (P) 44- Claim disallowed, superceded
55, 56 N. FRANCIS 6/16 2, 5, 7 ALL DMP 47-14,918 (U) 47- Claim disallowed, superceded
55-4,430 (P) 55- Claim disallowed
57-14,918 (U) 57- Claim allowed
111 S. HALL 6/14 4 DMP 4,203.00 Claim disallowed
82 BRANNOCK 6/14 8 VARIOUS 82-150,000 82- Claim disallowed, superceded
151 151-150,000 151-Claim allowed in name of Inverrary
Trace
83 C. BAKER 6/10 3 DMP 3,967.00 Claim disallowed
86 M. FLOYD 6/10 1 DMP 5,861.00 Claim disallowed
23 SAF FINAN 6/7 1 DMP 786.55 Claim disallowed
76 J. KELLY 6/7 2 DMP 35,721.00 Claim disallowed
107 J. GUNTHER 6/7 3 DMP 17,500.00 Claim allowed
63 PLANTATION 6/7 5 DMP 102,811(U) Objection pending
PARTNERS 5,488 (P)
102 ATLANTIC 6/7 3 DMP 768.00 Claim disallowed
ELEVATOR
4 APPRAISAL 6/7 4 DMP 46,190.00 Claim disallowed
ENHANCE
(OUSSLEY)
1 MINNESOTA 6/3 4 DMP 51,129.42 Objection pending
BANK
<S> <C> <C>
134
SCH 7/20 done
118 7/20 done
7/20 done
75, 77 7/20 done
SCH 7/20 done
44, 47 done
55, 56 done
done
7/21 done
111 7/20 done
82 7/21 done
151 done
83 7/20 done
86 7/20 done
23 7/20 done
76 7/20 done
107 7/20 done
63
102 7/20 done
4 done
1
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
91 H. COX 6/1 3 DMP 64,513.89 Claim disallowed
27 R. DAWE UNK 6, 8 6 - S/H POC 44,000 shares Claim allowed
8 - LACK OF
DOC
26 K. JORGE UNK 1 DMP 7,678.00 Claim disallowed
Sch G. SAMARO UNK 4 DMP 1,044.00 Claim disallowed
144 L. CAMACHO UNK 4 DMP 5,290.00 Claim disallowed
52 BANK ONE TEXAS 10 Collateral, 2,063,969.37 Objection pending
$318,545.03
51 VINCAM 11 not a liability 708,166.00 Objection pending
of CFI
136 NIKKO 11 improper amount 3,792,391.19 Objection pending
137 FIDELITY 776,796.17 Claim allowed as filed - no objection
filed
145 THOMSON KERNAGHAN 11 1,700,000 agreed, 2,500,000.00 Objection pending
balance in dispute
<S> <C> <C>
91 7/20 done
27 done
26 7/20 done
Sch 7/20 done
144 7/20 done
52
51
136
137
145
</TABLE>
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
I N D E X
<TABLE>
<CAPTION>
Page No.
<S> <C>
Report of Independent Certified Public Accountants ......................................................... F-2
Report of Independent Auditors ............................................................................. F-3
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1998 .................................................... F-4
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997 ...................................................... F-5
Consolidated Statements of Changes in Stockholders' Capital Deficiency
For the Years Ended December 31, 1998 and 1997 ...................................................... F-6 - F-7
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997....................................................... F-8 - F-9
Notes to Consolidated Financial Statements ............................................................ F-10 - F-17
</TABLE>
F-1
<PAGE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
CFI Mortgage Inc.
We have audited the accompanying consolidated balance sheet of CFI Mortgage Inc.
and Subsidiary as of December 31, 1998, and the statements of operations,
stockholders' capital deficiency and cash flows for the year then ended of the
Company and its subsidiaries. These financial statements are the responsible of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CFI
Mortgage Inc. and Subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At December 31, 1998, the Company's
liabilities exceeded its assets by $9,871,233 and had a net loss of $13,985,753
for the year ended December 31, 1998. As described in Notes 1 and 2, on March
10, 1999, the Company filed a voluntary petition for reorganization under
Chapter 11 of the Federal Bankruptcy Code and was authorized to continue
managing and operating the business as a debtor-in-possession subject to the
control and supervision of the Bankruptcy Court. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
New York, N. Y.
July 3, 1999
F-3
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
A S S E T S
<TABLE>
<S> <C> <C>
Current assets:
Cash $ 2,371
State tax refund receivable 76,621
Prepaid expenses 53,658
Due from related parties 86,037
-------------
Total current assets $ 218,687
Property and equipment, at cost, less
accumulated depreciation of $87,902 61,575
-------------
$ 280,262
=============
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
Liabilities not subject to compromise:
Current liabilities:
Accounts payable of subsidiary $ 1,539,341
Liabilities subject to compromise:
Current liabilities:
Unsecured priority liabilities 12,900
Unsecured non-priority liabilities:
Accounts payable $ 948,933
Due to banks 6,686,000
Accrued expenses and other current liabilities 964,321
-------------
Total unsecured non-priority liabilities 8,599,254
-------------
Total liabilities 10,151,495
Stockholders' capital deficiency:
Common stock, $.01 par value
Authorized 20,000,000 shares
Issued and outstanding - 3,301,391 shares 33,014
Preferred stock, $.01 par value
Authorized 10,000,000 shares
Issued and outstanding - 2,450 shares 25
Additional paid-in capital 10,154,246
Accumulated deficit ( 20,058,518)
-------------
Total stockholders' capital deficiency ( 9,871,233)
-------------
$ 280,262
=============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Commissions and fees $ 9,267,178 $ 6,715,241
Interest 4,897,733 1,552,023
----------- -----------
Total revenues 14,164,911 8,267,264
----------- -----------
Expenses:
Selling 6,820,835 5,213,625
General and administrative 11,325,638 7,386,532
Interest 4,580,049 1,185,608
Provision for doubtful accounts and loan losses 7,135,304 432,000
Loss on abandonment of property and equipment 478,878 -
----------- -----------
Total expenses 30,340,704 14,217,765
----------- -----------
Loss from continuing operations ( 16,175,793) ( 5,950,501)
Gain on sale of subsidiary 536,664 -
----------- -----------
Loss before provision (credit) for
income taxes and extraordinary gain ( 15,639,129) ( 5,950,501)
----------- -----------
Provision (credit) for Income taxes:
Current ( 75,988) -
Deferred 331,525 ( 558,000)
----------- -----------
Total provision (credit) for income taxes 255,537 ( 558,000)
----------- -----------
Loss before extraordinary gain ( 15,894,666) ( 5,392,501)
Extraordinary gain - forgiveness of debt 1,908,913 -
----------- -----------
Net loss ($13,985,753) ($ 5,392,501)
============ ============
Basic earnings per common share:
Loss before extraordinary item ($15,894,666) ($ 5,392,501)
Less: Preferred stock dividends ( 222,241) -
Preferred stock discount ( 300,000) ( 150,000)
----------- -----------
Loss available to common stockholders ( 16,416,907) ( 5,542,501)
Extraordinary item 1,908,913 -
----------- -----------
Net loss available to common stockholders ($14,507,994) ($ 5,542,501)
============ ============
Weighted average shares 2,563,007 1,783,250
============ ============
Earnings per share - basic:
Loss per share from continuing operations
before extraordinary item ($ 6.40) ($ 3.11)
Extraordinary item .74 -
----------- -----------
Net loss ($ 5.66) ($ 3.11)
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' CAPITAL DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
----------------------- ------------------- Paid-In
Shares Amount Shares Amount Capital
-------- -------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,500 $ 7,500 - $ - $ 1,234,673
Distribution of investments in 430 Carroll
Street, Inc. to stockholders on March 26, 1997 - - - - -
Exchange of shares of CFI Mortgage Corp.
for shares of CFI Mortgage Inc. 1,192,500 4,500 - - ( 4,500)
Issuance of common stock on May 27, 1997
as a result of a public offering less expenses
of the offering of $1,199,475 1,000,000 10,000 - - 3,790,525
Issuance of preferred stock on December 31, 1997
as a result of a private placement less expenses
of the offering of $178,247 - - 2,060 21 1,821,732
Accretion of preferred stock discount - - - - 150,000
Net loss for the year ended
December 31, 1997 - - - - -
---------- ------- ------ --- ----------
Balance at December 31, 1997 2,200,000 22,000 2,060 21 6,992,430
---------- ------- ------ --- ----------
<CAPTION>
Retained
Earnings
(Accumulated
Deficit) Total
------------ -----
<S> <C> <C>
Balance at January 1, 1997 $ 167,201 $ 1,409,374
Distribution of investments in 430 Carroll
Street, Inc. to stockholders on March 26, 1997 ( 175,224) ( 175,224)
Exchange of shares of CFI Mortgage Corp.
for shares of CFI Mortgage Inc. - -
Issuance of common stock on May 27, 1997
as a result of a public offering less expenses
of the offering of $1,199,475 - 3,800,525
Issuance of preferred stock on December 31, 1997
as a result of a private placement less expenses
of the offering of $178,247 - 1,821,753
Accretion of preferred stock discount ( 150,000) -
Net loss for the year ended
December 31, 1997 ( 5,392,501) ( 5,392,501)
------------ ------------
Balance at December 31, 1997 ( 5,550,524) 1,463,927
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' CAPITAL DEFICIENCY (Continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock
----------------------- -------------------
Shares Amount Shares Amount
--------- -------- ------ ------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 (brought forward) 2,200,000 $22,000 2,060 $21
Conversion of preferred stock on March 3, 1998 103,427 1,034 ( 500) ( 5)
Prefered dividends paid in stock on March 3, 1998 2,040 21 - -
Issuance of preferred stock on June 30, 1998 - - 1,000 10
Accretion of preferred stock discount - - - -
Conversion of preferred stock on July 31, 1998 100,000 1,000 ( 600) ( 6)
Preferred dividends paid in stock on July 31, 1998 679 7 - -
Conversion of preferred stock on August 10, 1998 214,254 2,142 ( 560) ( 6)
Preferred dividends paid in stock on August 10, 1998 10,482 105 - -
Conversion of debt on August 19, 1998 - - 1,700 17
Conversion of preferred stock on September 18, 1998 71,301 713 ( 100) ( 1)
Preferred dividends paid in stock on September 18, 1998 4,516 45 - -
Conversion of preferred stock on September 24, 1998 74,106 741 ( 100) ( 1)
Preferred dividends paid in stock on September 24, 1998 4,793 48 - -
Conversion of preferred stock on October 2, 1998 118,110 1,181 ( 150) ( 1)
Preferred dividends paid in stock on October 2, 1998 7,868 79 - -
Issuance of common stock on October 16, 1998
for underwriting fees 150,000 1,500 - -
Conversion of preferred stock on November 3, 1998 224,098 2,241 ( 300) ( 3)
Preferred dividends paid in stock on November 3, 1998 15,717 157 - -
Preferred stock dividends - - - -
Net loss for the year ended December 31, 1998 - - - -
--------- ------- ----- ---
Balance at December 31, 1998 3,301,391 $33,014 2,450 $25
========= ======= ===== ===
<CAPTION>
Retained
Additional Earnings
Paid-In (Accumulated
Capital Deficit) Total
-------- --------- -----
<S> <C> <C> <C>
Balance at January 1, 1997 (brought forward) $ 6,992,430 ($ 5,550,524) $ 1,463,927
Conversion of preferred stock on March 3, 1998 ( 1,029) - -
Prefered dividends paid in stock on March 3, 1998 9,842 - 9,863
Issuance of preferred stock on June 30, 1998 999,990 - 1,000,000
Accretion of preferred stock discount 300,000 ( 300,000) -
Conversion of preferred stock on July 31, 1998 ( 994) - -
Preferred dividends paid in stock on July 31, 1998 3,390 - 3,397
Conversion of preferred stock on August 10, 1998 ( 2,136) - -
Preferred dividends paid in stock on August 10, 1998 27,292 - 27,397
Conversion of debt on August 19, 1998 1,536,358 - 1,536,375
Conversion of preferred stock on September 18, 1998 ( 712) - -
Preferred dividends paid in stock on September 18, 1998 6,289 - 6,334
Conversion of preferred stock on September 24, 1998 ( 740) - -
Preferred dividends paid in stock on September 24, 1998 6,418 - 6,466
Conversion of preferred stock on October 2, 1998 ( 1,180) - -
Preferred dividends paid in stock on October 2, 1998 9,882 - 9,961
Issuance of common stock on October 16, 1998
for underwriting fees 250,500 - 252,000
Conversion of preferred stock on November 3, 1998 ( 2,238) - -
Preferred dividends paid in stock on November 3, 1998 20,884 - 21,041
Preferred stock dividends - ( 222,241) ( 222,241)
Net loss for the year ended December 31, 1998 - ( 13,985,753) ( 13,985,753)
----------- ------------ ------------
Balance at December 31, 1998 $10,154,246 ($20,058,518) ($ 9,871,233)
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations ($13,985,753) ($ 5,392,501)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Forgiveness of debt ( 433,818) -
Abandonment of property and equipment 478,878 -
Depreciation and amortization 370,350 181,681
Stock issued for underwriting fees 252,000 -
Interest accrued on stockholders' loan 2,750 -
Provision for doubtful accounts and loan losses 7,135,304 432,000
(Provision) credit for deferred tax credit 331,525 ( 558,000)
(Increase) decrease in assets and liabilities:
Interest receivable 212,783 ( 621,751)
Mortgage loans held for sale ( 10,180,189) ( 36,478,571)
Other current assets 72,635 313,921
Miscellaneous receivables ( 76,621) ( 54,375)
Prepaid expenses 220,553 ( 222,918)
Deposits ( 14,341) ( 118,980)
Accounts payable, accrued expenses and
other current liabilities 1,306,881 3,021,061
----------- -----------
Total adjustments ( 321,310) ( 34,105,932)
----------- -----------
Net cash used in operating activities ( 14,307,063) ( 39,498,433)
----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment ( 295,405) ( 594,893)
Payments of related party receivable 18,390 ( 92,615)
----------- -----------
Net cash used in investing activities ( 277,015) ( 687,508)
----------- -----------
Cash flows from financing activities:
Warehouse borrowings 10,387,292 35,463,034
Proceeds from issuance of common stock - 3,920,525
Proceeds from issuance of preferred stock 1,000,000 1,821,753
Cash overdraft - ( 121,449)
Proceeds from long-term debt 1,961,156 377,839
Payments of long-term debt ( 403,590) ( 215,230)
Loan from stockholder 100,000 -
Conversion of debt into preferred stock ( 163,625) -
----------- -----------
Net cash provided by financing activities 12,881,233 41,246,472
----------- -----------
Net increase (decrease) in cash and cash equivalents ( 1,702,845) 1,060,531
Cash and cash equilvalents at beginning of year 1,705,216 644,685
----------- -----------
Cash and cash equilvalents at end of year $ 2,371 $ 1,705,216
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1998 1997
----- ----
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Income taxes $ - $ -
========== ==========
Interest $5,380,239 $1,555,502
========== ==========
Supplemental Schedules of Noncash Investing
and Financing Activities:
Accrued dividends on preferred stock $ 131,781 $ -
========== ==========
Dividends paid by transfer of investment
in 430 Carroll Street, Inc. $ - $ 175,224
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CFI MORTGAGE INC. AND SUBSDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1 - PETITION FOR RELIEF UNDER CHAPTER 11.
On March 10, 1999, CFI Mortgage Inc. ("CFI")
commenced a voluntary petition for relief under Chapter 11 of
Title 11 of the United States Code in the Southern District of
Florida. On June 11, 1999, the bankruptcy court confirmed a plan
of reorganization pursuant to which CFI was discharged from any
debt that arose before the date of confirmation. As a result of
the confirmation of the Plan, CFI is no longer threatened by any
litigation, claims, and assessments which may have existed as of
December 31, 1998.
The Plan provides for an infusion of $800,000 by a
lender which is secured by CFI's assets. The lender has the
option of converting the loan to common stock of CFI at a rate
to be determined after the effective date of the Plan.
Each general creditor shall receive one share of
common stock for each dollar of debt in the reorganized CFI.
The preferred stockholder of Series "A" and "B"
convertible preferred stock shall receive 2 million shares of
common stock in exchange for the preferred stock in the
reorganized CFI.
The Company's subsidiary, Direct Mortgage Partners,
Inc. (DMP) was not a party to the petition for relief under
Chapter 11. Only debts that were guaranteed by CFI and two other
creditors shall be satisfied by issuance of common stock for
each dollar of debt in the reorganized CFI. The aforementioned
debts are included in the total unsecured non-priority
liabilities. As at December 31, 1998 liabilities of DMP that are
not guaranteed by CFI amounted to $1,539,341.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES.
(a) Going Concern:
The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company's ability to return to normal operations is
totally dependent on the success of its voluntary plan of
reorganization and subsequent additional capital infusion. If
this plan is not successful or the additional capital is not
forthcoming or is insufficient, management intends to move the
Company into a Chapter 7 bankruptcy liquidation.
Such conditions raise substantial doubt about the
Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
F-10
<PAGE>
Note 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(b) Organization:
Creative Industries, Inc. was incorporated in the
State of Florida in April 1989, and operates as a licensed
mortgage lender. In October 1990, the Corporation's name was
changed to Creative Financing, Inc. and on May 24, 1995 the
Corporation's name was changed to CFI Mortgage Corporation ("CFI
Mortgage"). CFI Mortgage Inc. was incorporated in Delaware on
March 18, 1997. Immediately prior to the initial public
offering, the existing stockholders of CFI Mortgage contributed
all of their shares of CFI Mortgage common stock to CFI in
exchange for 1,200,000 shares of common stock of CFI. Through
its two wholly-owned subsidiaries, Bankers Direct Mortgage
Corporation ("BDMC"), which was sold on September 11, 1998, and
Direct Mortgage Partners Inc., which ceased operations in the
4th Quarter of 1998, CFI has been engaged in originating,
purchasing and selling loans secured primarily by first
mortgages on one-to-four-residential properties as well as
purchasing and selling servicing rights associated with such
loans. The loans were both conventional conforming loans
(originated and sold through BDMC) and nonconforming loans
(originated and sold through DMP). Significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) Geographic Concentration:
Prior to the sale, BDMC was approved by the U.S.
Department of Housing and Urban Development/Federal Housing
Administration ("FHA") as a nonsupervised mortgagee. Both BDMC
and DMP were licensed and registered in approximately 22 states,
primarily in the southern United States, as mortgage lenders
with approximately 9 branch offices. In 1997, approximately 91%
or $234,747,000 of loans were originated and/or sold in the
State of Florida.
(d) Gain on Sale of Mortgage Loans:
The gain or loss on sales of mortgage loans to
investors is recognized upon purchase of the loan by the
investor. In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which was
effective for transactions occurring after December 31, 1996.
SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments
of liabilities. The statement also provides standards
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No.
125 on January 1, 1997, did not have a material effect on the
Company's financial statements.
(e) Origination Fees:
CFI accounts for origination fee income on mortgages
held for sale in conformity with Statement of Financial
Accounting Standards No. 91. This statement requires that
origination fees be offset by their direct loan costs and the
net deferred income be recognized over the life of the loan.
F-11
<PAGE>
Note 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(f) Property and Equipment:
Property and equipment are stated at cost less
accumulated depreciation and amortization. CFI's policy is to
provide for depreciation and amortization over their estimated
useful lives ranging between three to seven years as a charge to
operations. Expenditures for maintenance, repairs and minor
renewals are charged to operations; expenditures for betterments
are charged to the property accounts. Upon retirement or other
disposition of property and equipment, the carrying value and
related accumulated depreciation and amortization are removed
from the accounts.
(g) Use of Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions in determining the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(h) Income Taxes:
The Company complies with Statement of Financial
Accounting Standards No. ("SFAS 109"), "Accounting for Income
Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets are computed for differences between financial
statement and tax basis of assets and liabilities that will
result in future taxable or deductible amounts, based on the
enacted tax laws and rates to the periods in which differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount to be realized.
(i) Earnings (Loss) Per Common Share:
Earnings (loss) per common share are based on the
weighted average number of common shares outstanding. In March
1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128") "Earning Per Share" which requires dual
presentation of basic and diluted earnings per share on the face
of the statements of operations. Basic earnings (loss) per share
excludes dilution and is computed by dividing net income or loss
less $522,241 for stock dividends and discount accretion in 1998
and $150,000 in 1997 for discount accretion by the
weighted-average common shares outstanding for the period.
Diluted earnings (loss) per share reflect the potential dilution
that could occur if preferred stock conversions, options and
warrants were to be exercised or converted or otherwise resulted
in the issuance of common stock that then shared in the earnings
of the entity. The Company adopted SFAS 128 for the year ended
December 31, 1997.
Since the effect of outstanding options, warrants and
preferred stock conversions are antidilutive in all periods
presented, it has been excluded from the computation of earnings
(loss) per common share.
Note 3 - INTEREST RECEIVABLE.
Interest earned on mortgages held for sale from
origination to date of sale is recognized as earned.
F-12
<PAGE>
Note 4 - INVESTMENT IN 430 CARROLL STREET, INC.
In 1992, CFI Mortgage issued 5,000 shares of its
common stock in exchange for 40% of the capital stock of 430
Carroll Street, Inc., a land holding corporation which was owned
by the CEO of CFI Mortgage. The basis of the 40% interest is
$280,000. In December 1996, management determined to divest
itself of this investment. In February 1997, an appraisal of the
corporation's land revealed that CFI's investment had been
impaired and the investment's fair market value was $175,224.
On February 1, 1997, the Board of Directors approved
a dividend of CFI's undistributed Subchapter S earnings in the
amount of $175,224, which was paid through the transfer of title
of this 40% stock interest to certain stockholders.
Note 5 - RELATED PARTY TRANSACTIONS.
On July 15, 1998, Mr. Vincent C. Castoro, Chairman of
the Board of Directors, loaned CFI Mortgage Inc. $100,000 and in
return holds a promissory note with an interest rate of 6% with
a due date of August 15, 1998. The Company did not repay the
loan principal or interest on the due date and the $102,750
including accrued interest of $2,750 has been included in
accrued expenses and other current liabilities.
The Company has made advances to three officers
aggregating approximately $83,000 as of December 31, 1997 and an
additional $3,000 in 1998. The advances are noninterest-bearing
and are due on demand and included in due from the related
parties.
Note 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities at
December 31, 1998 are comprised of the following:
Professial fees $152,000
Dividends on preferred stock 137,781
Accrued interest 44,713
Accrued payroll 377,077
Deposit payable 150,000
Loans payable - officer 102,750
--------
$964,321
========
Each general creditor shall receive one share of
common stock for each dollar of debt in the reorganized CFI.
F-13
<PAGE>
Note 7 - COMMITMENTS.
(a) Leases:
Effective April 1, 1999, CFI rents its corporate
headquarters, and office facilities from a stockholder on a
month to month basis at $1,890 per month including certain
escalation costs for real estate taxes, operating expenses,
usage and common area charges. Rent expense for real property
leases charged to operations in 1998 and 1997 was $1,004,707 and
$651,374, respectively, and $367,051 and $220,032, respectively,
for equipment leases. All existing leases as of December 31,
1998 have been disavowed under the Chapter 11 Plan.
(b) Employment Contracts
The Company had entered into several employment
contracts with certain officers and employees which expire
between 1998 and 2002 which have been disavowed under the
Chapter 11 Plan.
Note 8 - INCOME TAXES.
The Company and its subsidiaries file a consolidated
federal income tax return. As of December 31, 1998, the Company
and its subsidiaries have a net operating loss carryforward of
approximately, $19,000,000 available to reduce future taxable
income which expires in the year 2014. The deferred tax asset
resulting from the operating loss carryforward of approximately
$7,125,000 in managements estimate requires a valuation
allowance in the same amount based upon management's assessment
that there is not assurance the tax asset will be realized.
Accordingly, the remaining tax asset of $331,525, after the tax
asset of $226,475 sold with the sale of the subsidiary, was
written off to income tax expense.
Note 9 - STOCKHOLDERS' EQUITY.
On May 30, 1997, CFI completed the initial public
offering of 1,000,000 shares of its common stock at $5 per
share. The net proceeds from the offering, after deducting
underwriting discounts and commissions and offering expenses,
aggregated $3,800,525. In connection with the offering, CFI
granted the underwriter warrants to purchase 100,000 shares of
common stock at an exercise priced of $6 per share. The warrants
are exercisable for a period of four years commencing May 1998.
On December 3, 1997, CFI issued and sold 2,060 shares
of Series "A" 8% convertible preferred stock $.01 par value, at
$1,000 per share in a private placement. The net proceeds from
the sale, after deducting selling and other related expenses,
aggregated $1,821,753. The preferred stock is convertible for
two years into common shares at a price equal to 85% of the
five-day average bid prices immediately prior to the conversion
date. The discount on the conversion price is accounted for as a
charge against retained earnings and is amortized over the
nonconvertible period. Included in the statement of changes in
stockholders' equity for the year ended December 31, 1997 is a
charge of $150,000 pursuant to the conversion discount. On March
3, 1998, 500 shares of the preferred stock, plus accrued
interest of approximately $10,000 were converted into 105,467 of
common shares.
Note 9 - STOCKHOLDERS' EQUITY. (Continued)
F-14
<PAGE>
In connection with the preferred stock transaction,
the Company granted warrants to purchase 240,000 shares of
common stock at an exercise price of $8.50 per share. The
warrants are exercisable until September 17, 2001. In addition,
the Company issued 60 shares of preferred stock with identical
terms as payment for fees for the private placement. The cost
will be included in the net proceeds from the transaction and
will be amortized over the nonconversion term.
On May 18, 1998, the Company issued $1,700,000
principal amount of the convertible debentures to a single
investor.
On August 19, 1998, the entire convertible debenture
was retired in exchange for the issuance of 1,700 shares of
Series "C", 10% convertible preferred stock, $0.01 par value in
a private placement on terms substantially identical to the
original debenture. In connection with this issuance of Series
"C" preferred stock, warrants to purchase 50,000 shares of the
Company's common stock at a price of $8.75 a shares held by the
debenture holder were surrendered in favor of new warrants to
purchase 50,000 shares of the Company's common stock at a price
of $2.6563 per share which was the closing market bid price on
the effective date of the exchange. On March 1999, Series "C"
preferred stock was converted into 2,500,000 shares of the
Company's common stock.
On June 30, 1998, CFI issued and sold 1,000 shares of
Series B, 8% convertible preferred stock, $0.01 par value, at
$1,000 per share in a private placement. The proceeds from the
sale amounted to $1,000,000. The preferred stock is convertible
for two years into common shares at a price equal to 85% of the
five-day average bid prices immediately prior to the per common
share. The discount on the conversion price, which was $150,000,
is accounted for as a charge against retained earnings and is
amortized over the non-convertible period.
F-15
<PAGE>
Note 10- STOCK OPTIONS.
The Company adopted a 1997 Stock Option Plan,
effective May 27, 1997 whereby the Company may grant incentive
and nonqualified options to eligible participants that vest in
accordance with a vesting schedule, determined in the sole
discretion of the Compensation Committee of the Company's Board
of Directors. The 1997 Stock Option Plan provides for the
issuance of options with a term of 10 years. All of the options
have an exercise price equal to or greater than the fair market
value of the stock at grant date. The options granted in fiscal
1997 vest 100% of the grant date or ratably over a period of two
years beginning on the first anniversary of the date of grant. A
summary of the Company's 1997 Stock Option Plan as of December
31, 1998 and 1997, and changes during the years ended are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Option Option Option Option
Shares Price Range Shares Price Range
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year:
Granted 80,000 $5.00 - $9.81 80,000 $5.00 - $9.81
Exercised - - - -
Forfeited - - - -
------ ------------- ------ -------------
Outstanding at end of year 80,000 $5.00 - $9.81 80,000 $5.00 - $9.81
====== ============= ====== =============
</TABLE>
The number of options exercisable at December 31,
1997 was 70,000. The weighted-average fair value of options
granted during 1997 was $7.39.
The fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants
in fiscal 1997: a dividend yield of 0%; a risk-free interest
rate range of 6.57% to 6.96%; an expected life of ten years for
all grants; and a volatility range from 66% to 70%.
Options outstanding as of December 31, 1998 and 1997
are summarized below:
Options Outstanding
------------------------------------ Options Exercisable
Weighted ----------------------
Average Weighted Weighted
Remaining Average Average
Ranges of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$5.00 to $ 7.50 40.000 9.41 $5.00 40.000 $5.00
$7.75 to $10.00 40,000 9.42 9.78 40,000 9.81
- --------------- ------ ---- ----- ------ -----
$5.00 to $10.00 80,000 9.80 $7.39 80,000 $7.06
=============== ====== ==== ===== ====== =====
The Company applies APB Options 25 and related
interpretations in accounting for the Plan.
F-16
<PAGE>
Note 10- STOCK OPTIONS. (Continued)
Had the compensation cost for the Company's
stock-based compensation plans been determined consistent with
SFAS 123, the Company's pro forma net income and pro forma net
loss per common share for the years ended December 31, 1998 and
1997 would approximate the amounts below:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss plus discount
accretion of $300,000,
$150,000, respectively
and stock dividends
in 1998 ($14,507,994) ($14,926,628) ($5,542,501) ($5,961,135)
Net loss per common share ($5.66) ($5.82) ($3.11) ($3.34)
</TABLE>
Note 11- OTC - BULLETIN BOARD MARKET.
The common stock of CFI moved to the OTC - Bulletin
Board Market as the Company did not meet the required minimum
standards for continued inclusion in the NASDAQ Small Cap
Market, effective with the close of business on November 17,
1998.
Note 12- FOURTH QUARTER ADJUSTMENT (UNAUDITED).
During the fourth quarter of 1997, the Company
recorded an adjustment of $2,400,000 (unaudited) reversing
revenues recognized in the third quarter of 1997.
NOTE 13 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board periodically
issues new accounting standards in a continuing effort to
improve the quality of financial information and to promote
uniformity in its presentation. Management has reviewed all such
pronouncements made in the last fiscal year and concluded that
none have a material impact on the Company's presentation of its
financial position, results of operations and cash flows.
NOTE 14 - YEAR 2000.
The Company recognizes the need to ensure its
operation will not be adversely affected by Year 2000 software
failures. The Company is communicating with suppliers, customers
and other with which it does business to coordinate Year 2000
conversion. The cost of achieving compliance is estimated to be
a minor increase over the cost of normal software upgrades and
replacements.
F-17
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CFI MORTGAGE INC.
(Registrant)
CFI MORTGAGE INC.
(Registrant)
Date: September 27, 1999 /s/ Stephen E. Williams
------------------------------------------------
Stephen E. Williams
(President,CEO)
Date: September 27, 1999 /s/ Rodger W. Stubbs
------------------------------------------------
Rodger W. Stubbs
(Principal Administrative Officer)
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
In re:
CFI MORTGAGE INC., Case No.99-31134-BKC-PGH
a Delaware corporation Chapter 11
FEIN 52-2023491
Debtor-in-possession.
- ------------------------------/
AMENDED
DISCLOSURE STATEMENT OF CFI MORTGAGE INC.
THIS DISCLOSURE STATEMENT HAS NEITHER BEEN APPROVED NOR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE STATEMENTS CONTAINED HEREWITH.
KEVIN GLEASON, P.A.
Attorneys for CFI MORTGAGE INC.
P. O. Box 224058
Hollywood, FL 33022-4058
(954) 925-0902
MAY 28, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS.........................................................................................................2
I. INTRODUCTION...........................................................................................................4
II. DEFINITIONS..........................................................................................................4
III. HISTORY OF THE DEBTOR................................................................................................6
IV. EVENTS LEADING TO FILING CHAPTER 11..................................................................................11
V. USE OF PROCEEDS.......................................................................................................13
VI. RISK FACTORS........................................................................................................13
DEPENDENCE ON AVAILABILITY OF FUNDING SOURCES...................................................................14
CREDIT RISKS ASSOCIATED WITH NONCONFORMING LOANS................................................................14
INTEREST RATE FLUCTUATIONS......................................................................................15
VOLUME OF MORTGAGE LOANS ORIGINATED AND PURCHASED...............................................................15
SALES OF MORTGAGE LOANS.........................................................................................15
VALUE OF MORTGAGE SERVICING RIGHTS..............................................................................16
POSSIBLE LOSSES ON MORTGAGE LOANS DURING BULKING PERIOD.........................................................16
GEOGRAPHIC CONCENTRATION........................................................................................17
LEGISLATIVE AND REGULATORY RISK.................................................................................17
LIABILITIES UNDER REPRESENTATIONS AND WARRANTIES................................................................18
DELINQUENCY AND DEFAULT RISKS...................................................................................18
RELATIONSHIP WITH BROKERS.......................................................................................18
COMPETITION.....................................................................................................19
DEPENDENCE ON KEY PERSONNEL.....................................................................................19
ADDITIONAL RISK FACTORS.........................................................................................20
A. Market for New Stock.................................................................20
B. General Business Risks...............................................................20
C. Dilution.............................................................................21
D. Continued Leverage; Future Refinancing...............................................21
E. No Dividends.........................................................................22
VII. FACTORS TO BE CONSIDERED IN VOTING DECISIONS........................................................................22
Issuance of Reorganization Securities...........................................................................22
Subsequent Transfers of Reorganization Securities...............................................................22
Valuation of Equity Securities..................................................................................24
Market for Existing Securities..................................................................................24
Delinquency in Filing Periodic Reports..........................................................................25
Estimated Administrative Expenses...............................................................................25
Legal Proceedings...............................................................................................26
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
VIII. TAX CONSEQUENCES OF THE PLAN.......................................................................................27
Introduction....................................................................................................27
Tax Consequences to Creditors...................................................................................28
General................................................................................................28
Consequences to Creditors Receiving Reorganization Securities Whose Claims Constitute Securities.......29
Consequences to Creditors Receiving Stock Whose Claims do not Constitute Securities....................29
Disposition of Reorganization Securities...............................................................29
Tax Consequences to the Debtor..................................................................................30
Debtor's existing tax attributes.......................................................................30
IX. SEC FILING INFORMATION..............................................................................................30
X. THE PLAN OF REORGANIZATION...........................................................................................30
Executory Contracts and Unexpired Leases........................................................................32
Amendments to the Plan..........................................................................................32
XI. MEANS FOR IMPLEMENTATION OF THE PLAN.................................................................................33
XII. FINANCIAL CONDITION................................................................................................33
XIII. LITIGATION AND CLAIMS OBJECTIONS..................................................................................33
Non-Bankruptcy Litigation.......................................................................................33
Assignment of Pre and Post Petition Causes of Action............................................................33
Vincent C. Castoro "Sr."...............................................................................34
Various transactions to miscellaneous persons..........................................................35
Rodger Stubbs..........................................................................................35
Sale of BDMC to IMNF...................................................................................35
Claims Objections...............................................................................................37
XIV. ALTERNATIVES TO THE PLAN OF REORGANIZATION.........................................................................38
XV. DEBTOR'S AFFILIATES AND INSIDERS....................................................................................38
XVI. RECOMMENDATIONS OF THE DEBTOR CONCERNING THE PLAN..................................................................39
XVII. VOTING............................................................................................................39
TABLE OF EXHIBITS........................................................................................................41
</TABLE>
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I. INTRODUCTION
CFI MORTGAGE INC., a Delaware publicly-traded corporation, the Debtor
and Debtor-in-Possession, (hereinafter "Debtor"), hereby provides this Amended
Disclosure Statement (hereinafter "Disclosure Statement") to its creditors,
shareholders, and other parties in interest to explain the treatment to be
afforded creditors and interested parties under the Plan of Reorganization and
any further amendments thereto (referred to as the Plan), and to provide
sufficient information for creditors to decide how to vote on the Plan.
As is required under the Bankruptcy Code, this Disclosure Statement has
been approved by the Court as containing "adequate information" as that term is
defined in Section 1125 of the Bankruptcy Code. The approval by the Court is not
an endorsement of the Plan, simply an approval of this Disclosure Statement as a
means of soliciting your vote on the Plan. This Disclosure Statement is the only
method by which your vote may be solicited. If your vote is solicited by the use
of any information not contained in this Disclosure Statement, such solicitation
should be immediately reported to Robert Anguiera, Esq., Office of the Assistant
United States Trustee, 51 S.W. First Ave., Suite 1204, Miami, FL 33130, phone
number 305-536-7285, fax number 305-536-7360. Such improper solicitations should
also be immediately reported to the counsel for the Debtor, whose address and
phone number are on the first and last pages of this Disclosure Statement.
No representations concerning the Debtor (particularly as to its future
business operations or value of property) are authorized by the Debtor other
than as set forth in this Disclosure Statement. Any representations or
inducements made to secure acceptance which are other than as contained in this
Disclosure Statement should not be relied upon in arriving at a decision.
The Plan forecasts are based upon reasonable and normal accounting
assumptions, as stated therein. Certain of the statements contained herein may
be forward-looking statements that involve risks and uncertainties. In such
instances, actual results could differ materially as a result of a variety of
factors, including developments and risk factors listed from time to time in
future reports made to the Securities and Exchange Commission.
II. DEFINITIONS
For the purpose of this Disclosure Statement and the Plan, the
following terms shall have the respective meanings herein set forth (such
meanings to be equally applicable to the singular and plural forms of the terms
defined):
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Allowed Claim means any Claim against the Debtor listed in the schedule of
liabilities filed pursuant to '521(1) that is not scheduled as disputed,
contingent or unliquidated, and those proofs of Claim which are timely and
properly filed and to which no objection to the allowance of which has been
interposed on or before the applicable period of limitation fixed by the Court,
or as to which any objection has been determined by a Final Order to the extent
that such objection is determined in favor of a claimant. Unless otherwise
specified herein or by Order of the Court, "Allowed Claim" shall not include
interest on such Claim for the period from and after March 10, 1999, the date
upon which a voluntary petition was filed commencing this Chapter 11 case.
Bankruptcy Code or Code means the Bankruptcy Reform Act of 1978, as amended, and
as set forth in '101 et. seq. of Title 11, United States Code (abbreviated as 11
U.S.C.).
Claim means a claim against the Debtor, as defined in '101(4) of the Bankruptcy
Code.
Class means any class into which Allowed Claims and allowed interests are
classified pursuant to Article I of the Plan.
Confirmation Date shall mean the date upon which the Order of Confirmation is
entered by the Court.
Court shall mean the United States Bankruptcy Court for the Southern District of
Florida, in which the Debtor's Chapter 11 Case is pending, and any Court having
competent jurisdiction to hear appeals or certiorari proceedings therefrom.
Debtor or Debtor-in-possession means CFI MORTGAGE INC., a Delaware corporation,
FEIN 52-2023491.
Effective Date means effective date of the Plan, which shall be the later of
June 30, 1999 or the fifteenth business day following the date on which the
Confirmation Order becomes a Final Order.
Final Order means an order or judgment which has not yet been reversed, stayed,
modified or amended and as to which the time to appeal or seek review or
rehearing has expired, and as to which no appeal or petition for review or
rehearing is pending. If any such petition for review or rehearing or appeal
from an order is pending, such order shall nonetheless become a Final Order on
the 11th day after the entry of such order, unless implementation of the Plan
shall have been stayed as of that date.
Lien shall mean a mortgage, pledge, judgment lien, security interest, charging
order, or other charge or encumbrance on the Debtor's property effective under
applicable law and which shall not be subject to being set aside or voided under
applicable bankruptcy law.
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Order of Confirmation shall mean the order to be entered by the Court confirming
the Plan in accordance with the provisions of Chapter 11 of the Bankruptcy Code.
III. HISTORY OF THE DEBTOR
The Debtor was a holding company whose subsidiaries were rapidly
growing mortgage bankers engaged in originating, purchasing and selling
nonconforming sub-prime and conventional loans on one-to-four unit properties
through its retail, wholesale and consumer finance divisions. (Hereinafter the
first person refers to the Debtor and its subsidiaries unless the context
indicates otherwise). The Debtor operated primarily in the State of Florida. The
Debtor's business strategy was and will be in the future to increase profitably
the volume of its loan originations and purchases. All loan applications,
whether originated or purchased by the Debtor, were and will be subject to the
Debtor's underwriting criteria and the guidelines set forth by the relevant
governmental loan program or private investors, as applicable. The Debtor
previously sold and in the future intends to sell substantially all of the
mortgage loans it originates or purchases, together with the related mortgage
servicing rights, to institutional purchasers, including national and regional
commercial banks and other mortgage lenders.
All of the Debtor's operations were conducted through its wholly-owned
subsidiaries, Bankers Direct Mortgage Corporation, a Florida corporation
(hereinafter referred to as BDMC) and Direct Mortgage Partners, Inc., a Florida
corporation (hereinafter referred to as DMP). BDMC was incorporated in Florida
as Creative Industries, Inc. in April 1989. In October 1990, Creative
Industries, Inc.'s name was changed to Creative Financing, Inc. In May 1995,
Creative Financing, Inc.'s name was changed to CFI Mortgage Corporation. CFI
Mortgage Corporation changed its name to Bankers Direct Mortgage Corporation in
1997.
DMP was incorporated in Florida in August 1997. In March 1997, the
Debtor herein, CFI Mortgage Inc. was incorporated in Delaware, and immediately
prior to a public offering, Vincent J. Castoro and Christopher C. Castoro, who
owned all of the issued and outstanding common stock of BDMC (the "Existing
Stockholders"), contributed their shares of common stock of BDMC to the Debtor
in exchange for 1,200,000 shares of common stock when the total outstanding
shares of common stock of the Debtor were 2,200,000 (the "Exchange"). From
April, 1989 until the time of the Exchange, BDMC was treated under Subchapter S
(an "S corporation") of the Internal Revenue Code of 1986, as amended.
Simultaneous with the Exchange, BDMC ceased to be treated as an S corporation.
Comparison for the Nine Months Ended September 30, 1998 and 1997.
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In 1997 management of the Debtor concentrated on the development of the
wholesale production offices of DMP by opening new offices in Plantation,
Florida, Parsippany, New Jersey and Portland, Oregon. Closings for DMP in the
first nine months of 1998 totaled $204 million as compared to the comparable
period in 1997of $18 million, an increase of $186 million. In addition BDMC
opened an additional retail office in Lakewood, Colorado. BDMC had also
concentrated on internal development of the existing offices through the hiring
of quality loan officers. BDMC's production increased from $97 million in the
first nine months of 1997 to $150 million in the comparable period for 1998, an
increase of $53 million.
With the increased production, DMP's support operations were expanded
to effectively handle the workload. However, as a result of the sale of BDMC
total headcount decreased from 236 at December 31, 1997 to 142 at September 30,
1998. The 142 employees consisted of 23 commissioned sales personnel and 119
production support and administrative personnel.
Revenues
The primary source of the Debtor's revenue was from activities related
to providing homeowner financing solutions through either BDMC, the Debtor's
retail conforming and government insured mortgage banking subsidiary, DMP, the
Debtor's wholesale sub prime lending subsidiary, or by brokering loans to other
lenders who provide a competitive product for the particular type of loan
required.
During the nine months ended September 30, 1998 total lending volume
was $354 million with 31.2% from BDMC, 58% from DMP and 10.8% brokered to other
lenders. During the nine months ended September 30, 1997, total lending volume
was $173 million with 68.8% from BDMC, 10.6% from DMP and 20.6% brokered to
other lenders. Sub prime lending activity from DMP could generate profit margins
nearly twice that of BDMC's conforming and government retail production. For
that reason management focused on increasing DMP funding activity. The increase
from 10.6% of the total funding volume during the nine months ended September
30, 1997 to 58% of funding volume during the comparable period in 1998 indicated
a very positive trend related to DMP's contribution to Debtor revenues.
The Debtor's revenues, including interest income, were $12,582,125 for
the nine months ended September 30, 1998, which represented an increase of 96.6%
or $6,182,316 from the nine months ended September 30, 1997 revenues of
$6,399,808. This dramatic increase in revenues was reflective of several
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factors.
The first factor impacting improved revenue levels involved loan sales
activity, both in terms of the balance of loans sold and of the product mix
between conforming/government and sub prime. The majority of revenue from the
Debtor's business activity was recorded upon sale of the loans it had originated
to third party investors. In the nine months ended September 30, 1998, total
loan sales were $351 million vs. only $163 million during the same nine months
of 1997 for an increase of $188 million or 115%. Additionally, there were only
$18 million in sub prime loan sales during the nine months ended September 30,
1997 while in the same nine months of 1998 sales of sub prime loans reached $195
million. Sub prime loans carry profit margins that can be more than twice the
profit margins of conforming/government loans which further amplified the effect
of increased sales activity.
The other major factor responsible for the increase in revenues was
interest income. The Debtor earned interest income on the loans it originated at
the note interest rates from the time it funded the loan until the loan was sold
to third party investors. Sub prime loans typically carry note interest rates
that can be 2% to 4% higher than rates on conforming/government loans.
Management successfully established warehouse borrowing facilities late
in 1997 that allowed the Debtor the opportunity to hold loans longer before sale
to an investor. As a result of the higher loan funding levels, longer holding
period and higher note rates on the sub prime portion of the Debtor's portfolio,
interest income increased from only $516,128.52 during the same nine months of
1997 to $2,969,632 for the nine months ended September 30, 1998.
Expenses
Selling expenses for the nine months ended September 30, 1998 were
$6,326,156, which represented an increase of $3,047,424 from the same nine
months of 1997. The higher level of selling expenses was related to the higher
commission costs driven by the increase in total loans originated. As a
percentage of loans originated, selling expenses decreased by .13% between the
comparable nine months period ended September 30, 1998 and 1997.
General and administrative expenses were $11,189,888 during the nine
months ended September 30, 1998 which was an increase of $7,051,795 over the
same comparable period of 1997. Compensation related expenses, including
temporary services, accounted for $6.7 million or 55% of this increase. The
growth in loan origination activity created an immediate need for administrative
and operational staffing increases. Management believed that the staffing
infrastructure in place as of September of 1998
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was capable of supporting the Debtor's planned growth through the remainder of
1998 without further significant increases.
The growth in branch locations and business volume resulted in
increased occupancy and equipment related expenses. Occupancy costs in the nine
months ended September 30, 1998 increased by $415,697 over the same comparable
period of 1997. Equipment related expenses of depreciation and leasing charges
were up by $302,172 in the first nine months of 1998 over the same comparable
period in 1997. The occupancy and equipment related expense increases
represented approximately 10.2% of the total G&A expense increases.
General office expenses related to office supplies and postage costs
were also higher in the first nine months of 1998 vs. the same comparable period
in 1997. This category of expenses was up by $274,089 and accounted for 3.89% of
the total G&A increase. These expense increases were consistent with the added
branch locations and overall increase in business activity.
Professional service fees, primarily accounting and legal, were
$750,461 higher in the first nine months of 1998 over the same comparable period
in 1997, and reflect the additional effort required to support the Debtor's
increased reporting activities as an SEC registrant in 1998. The Debtor was
still a closely held "S" corporation during the first five months of 1997, and
so the Debtor needed much less support in the area of accounting and legal
services at that time.
The final significant increase in G&A expenses occurred in the area of
loan loss provision, which was up $1,126,964 between the first nine months of
1997 and 1998. The Debtor's higher lending activity coupled with the
introduction of higher risk sub-prime loan originations required the
establishment of a correspondingly higher reserve against potential loan losses.
Interest Expense is primarily the cost of funds borrowed from warehouse
lenders to fund the Debtor's loan originations during the holding period between
funding and sale to an investor. During the nine months ended September 30,
1998, interest expense was $3,013,498, which was $2,677,067 higher than the same
comparable period in 1997. This increase was due to extending the holding period
of loans while increasing the absolute size of loans being held in warehouse.
Net Income (Loss)
The Debtor generated a net loss before taxes of $7,410,754 in the nine
months ended September 30, 1998 vs. a loss before taxes of $1,353,448 during the
same comparable period of 1997, an increase of $6,057,306. The operating losses
experienced by the Debtor during the nine months ended September
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30, 1998 were significantly impacted by several non-recurring events, primarily
during the second quarter. The most significant impact involved an increase in
reserves for potential future loan losses of $690,857 which was recorded at the
end of the second and third quarters. Somewhat related to the loss reserve
analysis was the reversal of nearly $300,000 in interest income which had been
accrued on non performing loans as long ago as the first quarter of 1997.
Another major factor in the operating losses was the impact of a major
branch expansion effort in California, which proved to be too capital intensive
for the Debtor to adequately fund the growth required to reach sustained
profitability. During the Six months ended June 30,1998, the California
operations lost in excess of $500,000 and so, at the end of the second quarter
the Debtor withdrew from its California expansion effort. Costs and contingent
liabilities from the withdrawal were not material, and so the losses from this
effort effectively ceased at the end of the second quarter of 1998.
The Debtor's numerous capital raising efforts, and related regulatory
filing requirements, resulted in dramatically increased consulting, legal,
accounting and brokerage fees. Total costs related to capital raising efforts in
the first half of 1998 approached $400,000 and were not expected to reoccur in
future periods.
Finally, the Debtor evaluated it's two mortgage banking operations to
clearly determine relative contribution to operating results relative to capital
investment required. As a result of this process, it was determined that one of
its susidiaries Bankers Direct Mortgage Corporation would be sold and on August
31, 1998 the sale was transacted.
Developments during Three Months Ended September 30, 1998
During the three months ended September 30, 1998 total lending volume
was $96 million with 32.1% from BDMC, 62.0% from DMP and 5.9% brokered other
lenders. The Debtor's revenues, including interest income, were $2,679,729,
which represented a decrease of 150% compared to same period of 1997. This
decrease was mainly attributable to the sale of BDMC on August 31, 1998 and
lower non-conforming loan sales in the quarter. Although sales volume increased
in the third quarter of 1998 it did not increase at the same rate as expenses.
Selling expenses were $1,851,967, or 1.90% of loans originated. General
and administrative expenses were $3,553,885 which was an increase of $1,523,693
over the same three months last year. Compensation related expenses, including
temporary services, accounted for $2.2 million or 52.98% of this increase. The
growth in loan origination activity created an immediate need for administrative
and
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operational staffing increases in DMP (BDMC having been sold during the
period).
The growth in branch locations and business volume (before the sale of
BDMC) resulted in increased occupancy and equipment related expenses. Occupancy
costs in the three months ended September 30, 1998 increased by $97,234 over the
same three months last year. Equipment related expenses of depreciation and
leasing charges were up by $40,852 in the three months ended September 30, 1998
over the same three months in 1997.
General office expenses related to office supplies and postage costs
were also higher. This category of expenses was up by $52,874 and accounted for
3.47% of the total G&A increase. These expense increases are consistent with the
added branch locations (before the sale of BDMC) and overall increase in
business activity.
Professional service fees, primarily accounting and legal, were
$357,818 higher, reflecting the additional effort required to support the
Debtor's increased reporting activities as an SEC registrant in 1998.
The final significant increase in G&A expenses occurred in the area of
loan loss provision, which was up $254,465 over the same period in 1997. The
Debtor's higher lending activity coupled with the introduction of higher risk
sub-prime loan originations required the establishment of a correspondingly
higher reserve against potential loan losses.
Interest expense was $937,948 which was $682,481 higher than the same
three month period of 1997. This increase was due to extending the holding
period of loans while increasing the absolute size of loans being held in
warehouse.
Net Loss and Changes in Financial Condition
The Debtor generated net loss before taxes of $3,127,408. The operating
losses were mainly caused by reduced loan sales in the current quarter. Cash in
banks, net of overdrafts, decreased $1,572,166 to $133,050 at September 30,
1998. The net decrease resulted from a the losses incurred through the period.
Mortgage loans held for sale totaled $39,051,170 at September 30, 1998 and
related directly to the warehouse finance facilities debt of $39,532,037. Total
liabilities excluding warehouse debt increased by $285,110 or 6% from December
31, 1997 to September 30, 1998.
IV. EVENTS LEADING TO FILING CHAPTER 11
As of March 31, 1998 and again as of June 30, 1998, the Debtor did not
meet the required minimum standards for continued inclusion in the Nasdaq
SmallCap Market in that its net tangible
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assets had fallen below $2,000,000 and so the Debtor received a formal notice of
de-listing from Nasdaq. On July 31, 1998 the Debtor appealed the notice of
de-listing at an oral hearing and awaited a final decision from Nasdaq. On
November 17, 1998 Nasdaq informed the Debtor by letter that a determination had
been made to de-list the Debtor's securities from The Nasdaq Stock Market
effective with the close of business on November 17, 1998.
The Debtor previously had a warehouse line of $15 million with Bank
One, Texas, NA, which was discontinued as of September 30, 1998. The Debtor's
other warehouse line, which was with Nikko Financial Services, was terminated
effective November 30, 1998. As of September 30, 1998, the Debtor was in
violation of the net worth covenant of this agreement. In addition, the Debtor
previously had a purchase facility agreement with Fidelity Bank and Trust
aggregating $25 million. As of September 30, 1998 the use of that facility was
terminated.
Upon termination of the warehouse line with Nikko, further advances for
new loan funding could only be under a repurchase agreement which provided Nikko
with the ability to evaluate whether or not it would enter into any new
transactions with the Debtor. In effect, the Debtor no longer had a committed
warehouse facility. Given that Nikko could decline the Debtor's request to fund
loans after November 30, 1998, it was not deemed prudent to make loan funding
commitments beyond November 30, 1998.
The Debtor attempted a non-bankruptcy workout with its creditors. The
Debtor received a verbal commitment from an investor to recapitalize the Debtor
with up to $2 million if the Debtor could restructure its then-existing
liabilities. Accordingly, the Debtor presenting a voluntary, non-bankruptcy plan
of reorganization to all its creditors (and those of its subsidiaries) wherein
all creditors were offered 1 share of the Debtor's common stock for each dollar
owed.
The success of that reorganization plan was dependent on full
acceptance by all of the Debtor's creditors and the consent of its underwriters
to issue the related common shares. All creditors did not accept the Debtor's
common shares in lieu of payment, and the underwriters did not consent to the
issuance of the underlying shares, and the investor did not agree to
recapitalize the Debtor.
The Debtor disclosed in a filing with the SEC that "In the event that
the plan is not successful by December 11, 1998, management intends to seek
liquidation of the Company though the filing of a Chapter 7 bankruptcy action on
December 14, 1998." Before a chapter 7 bankruptcy was filed, the Debtor
consulted with its current bankruptcy counsel, Kevin C. Gleason, and was advised
that a plan
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similar to the attempted workout could be accomplished through a Chapter 11
bankruptcy, without the need for the unanimous consent of the creditors. With
its only alternatives being a liquidation under Chapter 7, or an attempted
reorganization under Chapter 11, the Directors elected to attempt this
reorganization.
The Debtor has filed relevant financial information with the Securities
and Exchange Commission for the periods ending December 31, 1997 (Form 10K), and
September 30, 1998 (Form 10Q). Those filings are available as detailed in
Exhibit A of this Disclosure Statement. The substantial decrease in the Debtor's
net worth from November 24, 1998 through March 10, 1999 was overwhelmingly due
to the devaluation of the mortgage portfolios of the Debtor's subsidiary, DMP,
and the Debtor's former subsidiary, BDMC, which increased the Debtor's exposure
on its guarantees.
V. USE OF PROCEEDS
Before the Confirmation Date, Ronco Funding, Inc. will infuse $720,000
of working capital into the Debtor, which when combined with the $80,000
advanced by Ronco Funding, Inc. in post-petition financing, will be exchanged
for a twenty percent (20%) equity interest in the Debtor, which shall consist of
freely tradable shares on the public markets. Attached hereto as Exhibit C is a
detail of the use and application of those proceeds. The use of proceeds for the
second $720,000 funding from "Ronco" will follow the pro forma statements
provided for FMS and EDI Management Consultants. The investment will pick up on
the pro forma statements marked month 1. The company intends to invest the
capital according to the time lines provided in the pro forma statements and
estimates closing on the purchases of FMS and EDI Management Consultants as soon
as the Debtor has confirmed its Plan.
FMS is a non-conforming wholesale mortgage lender specializing in
mobile home and manufactured home lending. EDI Management Consultants is a sub
prime wholesale mortgage lender specializing in lending to credit-impaired
borrowers. The synergies of the combined companies are advantageous in cost
abatement and marketing across product lines. The senior management of each
company will contribute depth and experiences anticipated to benefit each
company, and the Debtor, through innovation and anticipation of technological
and other advances and trends in the mortgage banking industry. Vincent C.
Castoro is a principal of EDI Management Consultants, and will draw a salary
from EDI in the amount of $60,000 per year.
VI. RISK FACTORS
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An investment in the common stock offered hereby is speculative and
involves a high degree of risk, including risks associated with the competitive
nature of the mortgage banking business, government regulation and dilution.
The Debtor's business is subject to various business risks. Economic
conditions affect the decision to buy or sell residences. Changes in the level
of consumer confidence, real estate values, prevailing interest rates and
investment returns expected by the financial community could make mortgage loans
of the types originated and purchased by the Debtor less attractive to borrowers
or investors. In addition, a decline in real estate values will have a negative
impact on the loan-to-value ratio for the related mortgage loans, weakening the
collateral coverage and resulting in greater exposure in the event of a default.
DEPENDENCE ON AVAILABILITY OF FUNDING SOURCES
The Debtor's ability to originate and purchase mortgage loans depends
to a large extent upon its net branch agreements with Paradigm and AMS and the
ability to secure financing on acceptable terms. The Debtor currently funds
substantially all of the loans it originates and purchases through net branch
agreements. This is a substantial deviation from the way the Debtor and its
subsidiaries did business pre-petition. To the extent the Debtor is not
successful in maintaining or replacing net branch agreements, it may have to
curtail its mortgage loan purchase and origination activities, which could have
a material adverse effect on the Debtor's financial condition and results of
operations.
The Debtor formerly funded substantially all of the loans it originated
and purchased through borrowing under collateralized loan purchase agreements
with several commercial banks, which generally were terminable at will by either
party. For example, the Debtor formerly had a $50,000,000 warehouse credit
facility with Bank One, Texas, N.A., which matured and was not renewed. The
Debtor's borrowing was partially repaid with the proceeds received by the Debtor
from selling such loans. The Debtor formerly relied upon a few lenders to
provide the primary credit facilities for its loan originations and purchases.
During the year ended December 31, 1996 and the nine months ended
September 30, 1997, 94% and 71%, respectively, of the loans originated or
purchased by the Debtor (or its predecessor) were sold to four and ten
purchasers, respectively. As of the date of filing this Disclosure Statement,
the Debtor is no longer selling mortgages to any such purchasers. During the
year ended December 31, 1996, one of these purchasers accounted for 61% of such
sales and four purchasers accounted for 56% of such sales
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during the nine months ended September 30, 1997.
CREDIT RISKS ASSOCIATED WITH NONCONFORMING LOANS
Through the Debtor's net branch agreements, the Debtor is subject to
various risks associated with originating nonconforming loans, including, but
not limited to, the risk that borrowers will not satisfy their debt service
payments, including payments of interest and principal, and that the realizable
value of the property securing such loans will not be sufficient to repay the
borrower's obligations to the Debtor. Because of the Debtor's increasing focus
on credit-impaired borrowers, the actual rates of delinquencies, foreclosures
and losses on such loans could be higher under adverse economic conditions than
delinquencies, foreclosures and losses currently experienced in the mortgage
lending industry in general. These risks increase during an economic downturn or
recession. Any sustained period of increased delinquencies, foreclosures, losses
or increased costs could adversely affect the Debtor's ability to sell, and
could increase the cost of selling loans on a whole loan basis, which could
adversely affect the Debtor's financial condition and results of operations. In
addition, in an economic slowdown or recession, the value of the Debtor's
mortgage servicing rights may be impaired.
INTEREST RATE FLUCTUATIONS
Changes in interest rates can have differing effects on various aspect
of the Debtor's business, particularly in the areas of volume of mortgage loans
originated and purchased, net interest income, sales of mortgage loans and the
value of the Debtor's purchased mortgage servicing rights. The Debtor currently
sells all of the mortgage loans it originates and purchases through its net
branch agreements. The Debtor does not plan to retain any of its loan portfolio.
For that reason, fluctuations in net interest income should not be a factor in
the success of the Debtor's reorganization.
VOLUME OF MORTGAGE LOANS ORIGINATED AND PURCHASED
In periods of declining interest rates, such as have occurred recently,
demand for mortgage loans typically increases, particularly for mortgage loans
related to refinancing of existing loans. In periods of rising interest rates,
demand for mortgage loans typically declines. The Debtor could be materially
adversely affected by a decline in demand for mortgage loans in the State of
Florida, which is the area in which the Debtor originates and purchases the
majority of its loans.
SALES OF MORTGAGE LOANS
The sale of mortgage loans may generate a gain or loss to the Debtor.
Gains or losses result primarily from three factors. First, the Debtor may
originate or purchase a loan at a price (i.e., interest
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rate and discount) which may be higher or lower than the Debtor would receive if
it immediately sold the loan in the secondary market. These pricing differences
occur principally as a result of competitive pricing conditions in the loan
origination market. Second, gains or losses from the sale of loans acquired and
accumulated for bulk sale depend upon the rate of borrower defaults and
bankruptcies during the accumulation period. Third, gains or losses upon the
sale of loans may result from changes in interest rates which result in changes
in the market value of the loans, or commitments to originate or purchase loans,
from the time the price commitment is given to the customer until the time that
the loan is sold by the Debtor to the investor. In order to reduce the effect of
interest rate changes on the gain and loss on loan sales, the Debtor generally
commits to sell all its warehouse loans (i.e., mortgage loans that have closed)
and its pipeline loans (i.e. mortgage loans which are not yet closed but for
which the interest rate has been established) to institutional investors. In
general, the Debtor will not establish an interest rate for a mortgage loan
until it has obtained a commitment from an institutional investor to purchase
the loan. These commitments are on a "best efforts" basis, and the Debtor has no
obligation to sell a loan to an investor unless and until the loan closes. This
is a material change from the Debtor's former method of operating, which was
implemented to limit risks associated with changes in interest rates, the cause
of the demise of DMP.
VALUE OF MORTGAGE SERVICING RIGHTS
The prices obtained by the Debtor upon the sale of mortgage servicing
rights depend upon a number of factors, including the general supply of and
demand for mortgage servicing rights, as well as prepayment and delinquency
rates on the portfolios of mortgage servicing rights being sold. Interest rate
changes can affect the ability to sell or the profitability of a sale of
mortgage servicing rights to a third party. Purchasers of mortgage servicing
rights analyze a variety of factors, including prepayment sensitivity of
servicing rights, to determine the purchase price they are willing to pay. Thus,
in periods of declining interest rates, sales of mortgage servicing rights
related to higher interest rate loans may be less profitable than sales of
mortgage servicing rights related to lower interest rate loans. Since these
factors are largely beyond the control of the Debtor, there can be no assurance
that the current level of profitability from the sale of mortgage servicing
rights will be maintained. Because the Debtor generally sells mortgage servicing
rights on mortgage loans it originates or purchases within 30 to 90 days of
closing, the length of time the Debtor is exposed to the risk of declines in
value of the rights is relatively short. If the rate of prepayment of the
related mortgage loans exceeds the rate assumed by the Debtor,
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due to a significant reduction in interest rates or otherwise, accelerated
amortization or, in extreme cases, write-off's of servicing rights may become
necessary, thereby decreasing earnings.
POSSIBLE LOSSES ON MORTGAGE LOANS DURING BULKING PERIOD
Although the Debtor sells substantially all of the loans that it
originates and purchases, the Debtor acquires and accumulates some loans for
bulk sale. During the time the loans are held pending sale, the Debtor is not
able to use the proceeds received from selling the loans to fund new
originations. The Debtor could be materially adversely affected by a delay in
selling the mortgage loans once a substantial amount have been acquired for bulk
sale. Furthermore, during the bulking period, the Debtor is subject to various
business risks associated with lending, including the risk of borrower defaults
and bankruptcies, the risk of fraud and losses and the risk that an increase in
interest rates would result in a decline in the value of loans to potential
purchasers. The Debtor will attain the smallest amount of mortgage loans to
qualify for the superior "bulk pricing" and immediately sell the same amount.
GEOGRAPHIC CONCENTRATION
All of the Debtor's loan origination and purchase volume for the year
ended December 31, 1996 and 93% for the nine months ended September 30, 1997
were derived from the State of Florida. Although the Debtor is licensed or
registered in 12 states, the Debtor currently does the large majority of its
business inside the State of Florida. Consequently, the Debtor's results of
operations and financial condition are affected by general trends in the Florida
economy and its residential real estate market.
LEGISLATIVE AND REGULATORY RISK
Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. The reduction or elimination of the mortgage interest
deduction could have a material adverse effect on the demand for the mortgage
loans offered by the Debtor.
The operations of the Debtor are subject to extensive regulation by
federal and state governmental authorities and agencies including the U.S.
Department of Housing and Urban Development ("HUD"). Consequently, the Debtor is
subject to various laws, rules and regulations and judicial and administrative
decisions that, among other things, regulate credit granting activities, govern
secured transactions and establish collection, repossession and claims handling
procedures and other trade practices. Failure to comply with requirements can
lead to loss of approved status, termination of
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servicing contracts without compensation to the servicer, demands for
indemnification or mortgage loan repurchases, class action lawsuits and
administrative enforcement actions. Although the Debtor believes that it is in
compliance in all material respects with applicable federal and state laws,
rules and regulations, there can be no assurance that more restrictive laws,
rules and regulations will not be adopted in the future which could make
compliance more difficult or expensive, restrict the Debtor's ability to
originate, purchase, or sell mortgage loans, further limit or restrict the
amount of interest and other fees that may be earned or charged on mortgage
loans originated, purchased, or serviced by the Debtor or otherwise adversely
affect the business or prospects of the Debtor.
From time to time federal legislation has been proposed to regulate
certain practices with respect to mortgage servicers holding escrow accounts of
borrowers, a business in which the Debtor proposes to engage in the future. Such
legislation, if enacted, would establish in all states a uniform requirement for
the payment of interest on such escrow accounts and otherwise regulate such
escrow accounts in ways which would negatively affect the benefits which the
Debtor would derive from such accounts. It is impossible to predict whether such
legislation or any similar legislation regulating escrow practices will be
enacted, or if enacted, what form it will take.
LIABILITIES UNDER REPRESENTATIONS AND WARRANTIES
In the ordinary course of business, the Debtor makes representations
and warranties to the purchasers and insurers of mortgage loans and the
purchasers of mortgage servicing rights regarding compliance with laws,
regulations and program standards and as to accuracy of information. The Debtor
generally receives similar representations and warranties from the brokers from
whom it purchases loans. Although the Debtor has not incurred losses in any
material respect as a result of mortgage loan repurchases due to breaches in
representations and warranties, there can by no assurance that the Debtor will
not experience such losses in the future.
DELINQUENCY AND DEFAULT RISKS
The Debtor originates and purchases nonconforming sub-prime loans. The
Debtor is generally at risk for any mortgage loan default until the loan is sold
(typically within 10 to 90 days of closing). Once the Debtor sells the loan, the
risk of loss from mortgage loan default and foreclosure generally passes to the
purchaser of the loan.
RELATIONSHIP WITH BROKERS
During the year ended December 31, 1996 and nine months ended September
30, 1997, brokers
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and correspondents accounted for approximately 30% and 34%, respectively, of the
mortgage loans originated and purchased by the Debtor(or its predecessor), while
70% and 66%, respectively, of such mortgage loans were originated by the
Debtor's retail division. None of these brokers or correspondents is
contractually obligated to do business with the Debtor. Further, the Debtor's
competitors also have relationships with the Debtor's brokers and correspondents
and actively compete with the Debtor in its efforts to expand its broker and
correspondent networks. Accordingly, there can be no assurance that the Debtor
will be successful in maintaining its existing relationships or expanding its
broker and correspondent networks.
The Debtor originated and purchased loans in the year ended December
31, 1996 from a total of 17 brokers and ten correspondents, who accounted for
approximately 14% and 16%, respectively, of the total volume of loans originated
and purchased during the year ended December 31, 1996. The Debtor (or its
predecessor) originated and purchased loans in the nine months ended September
30, 1997 from a total of 30 brokers and five correspondents, who accounted for
approximately 24% and 10%, respectively, of the total volume of loans originated
and purchased during such period. Accordingly, if any of the Debtor's principal
brokers and correspondents ceased to do business with the Debtor, the volume of
the Debtor's loan originations and purchases, as well as the Debtor's results of
operations and financial condition, could be materially adversely affected.
COMPETITION
The Debtor faces strong competition in originating, purchasing and
selling mortgage loans and mortgage servicing rights. The Debtor's competition
is principally from savings and loan associations, other mortgage companies,
commercial banks and, to a lesser degree, credit unions and insurance companies,
depending upon the type of mortgage loan product offered. Many of these
institutions have greater financial and other resources than the Debtor and
maintain a significant number of branch offices in the areas in which the Debtor
conducts operations. Increased competition for mortgage loans from larger
lenders may result in a decrease in the volume of loans originated and purchased
by the Debtor, thereby possibly reducing the Debtor's revenues.
DEPENDENCE ON KEY PERSONNEL
The Debtor's future success will depend to a significant extent on the
efforts of key management personnel, including Vincent C. Castoro, Chairman of
the Board, Christopher C. Castoro, Chief Executive Officer, Roger W. Stubbs,
Vice President, and Greg Cutuli, Chief Operating Officer,
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respectively, of the Debtor. In addition, the Plan provides for Steve Williams
to become employed by the Debtor as its Chief Executive Officer. Resumes of some
key personnel are attached as Exhibit E. Following is a table listing the names
of all key personnel anticipated to be employed by the debtor or a
post-confirmation affiliate of the Debtor.
<TABLE>
<CAPTION>
- ---------------------------- ------------------------ ------------------------ -----------------------
Post-confirm.
Current position with the Pre-confirmation
Name Position Debtor salary with the Debtor
- ---------------------------- ------------------------ ------------------------ -----------------------
<S> <C> <C> <C>
Christopher Castoro CEO/Director V.P./Director $100,000 plus bonus
- ---------------------------- ------------------------ ------------------------ -----------------------
Greg Cutuli COO COO/Director $150,000 plus bonus
- ---------------------------- ------------------------ ------------------------ -----------------------
Rodger Stubbs Secretary/Director V.P./Director $225,000
- ---------------------------- ------------------------ ------------------------ -----------------------
Steve Williams None CEO/Director $0
- ---------------------------- ------------------------ ------------------------ -----------------------
</TABLE>
A thorough disclosure of the proposed compensation of each of the above-listed
individuals is contained in the employment contract attached to this Disclosure
Statement as Exhibit J. Each of the above-listed individuals will have an
identical contract with the Debtor. Some interested parties have indicated an
intention to attempt to negotiate some of the terms of the proposed employment
contracts. Vincent C. Castoro will receive a salary of $60,000 per year from EDI
Management Consultants, Inc.
ADDITIONAL RISK FACTORS
The Debtor believes that while the equity securities to be issued under
the Plan have a high degree of risk, that risk compares favorably to liquidation
of the Debtor's assets. The on-going operation of the business will generate the
most return for creditors. The Debtor has not undertaken a valuation of the
equity securities to be issued under the Plan.
1. Market for New Stock
The Debtor will apply to permit trading of its common stock on the OTC
Bulletin Board. However, there can be no assurance that the Debtor will be able
to effect the listing of these securities or, if included, that an active
trading market for its common stock will develop or, if developed, that such
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market will continue. Accordingly, no assurance can be given that a holder of
the Debtor's common stock will be able to sell such securities in the future or
as to the price at which such securities might trade. The liquidity of the
market for such securities and the prices at which such securities trade will
depend upon the number of holders thereof, the interest of securities dealers in
maintaining a market for such securities, and other factors beyond the Debtor's
control.
2. General Business Risks
The principal business risk of the Debtor after the Plan is confirmed
is that the Debtor may not be able to achieve the financial results the Plan
requires. Such a shortfall could have a deleterious effect upon both the Debtor
and the value of its stock.
3. Dilution
The execution of the Plan will result in the dilution of the interests
of current equity shareholders. By example, if 100 people each owned one share
of a company, each would own 1%. If another 100 shares of the same company were
issued to an additional 100 people, each one would only own .5%. In much the
same way, the ownership interest represented by each share of the Debtor will be
substantially diluted by the conversion of claims against the Debtor into common
stock. Exhibit L is a chart of the projected dilution by confirmation of the
Plan.
What the chart does not explain is the increase in the value of each
share by converting debt into equity. Using the same example from the previous
paragraph, if a company owned by 100 people is insolvent, they own 1% of
nothing. If the dilution of their stock interest results in a positive net worth
for the company, then they each own a lesser percentage of the outstanding
shares, but more value per share than before the dilution.
The exchange of stock for debt will wipe out an estimated $10,000,000
of claims against the Debtor. Therefore, the "dilution" of current equity
shareholders is only of academic interest. The actual effect of the "dilution"
is to take a share of nothing, and make it a share in something.
The confirmation of the Plan shall affect a change in the capital stock
of the Debtor pursuant to Del. Code Ann. tit. 8 ss.303 (1996)to increase the
authorized capital stock of the reorganized Debtor to 35,000,000 shares of
Common Stock, par value $.01 per share. The Debtor did not anticipate the
magnitude of the claims filed on behalf of certain large creditors. The Debtor
has been advised that certain creditors have filed claims substantially in
excess of the amounts listed by the Debtor. For example, the Debtor listed Nikko
Financial Services with a claim of $3 million. Nikko has filed a claim
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in excess of $3.8 million. Bank One, Texas, NA was listed by the Debtor for
$1million, but has filed a claim in excess of $2 million.
4. Continued Leverage; Future Refinancing
The Debtor was highly leveraged pre-petition, which was a major cause
of its financial problems. Through the restructuring proposed in the Plan, the
Debtor will be adequately capitalized, and without any significant debt. The
Debtor had in excess of $10 million in unsecured claims at the Petition Date.
After giving effect to the Plan, the Debtor's estimated aggregate indebtedness
will be limited to operating expenses such as payroll, rent, business equipment
leases, and current taxes. The Debtor's management believes that, following the
consummation of the Plan, the Debtor will have sufficient cash flow from
operations to pay all of its outstanding debts as well as the on-going costs of
operation as those payments become due. However, even if the restructuring is
completed, the Debtor's ability to meet its debt service obligations will depend
on a number of factors, including its ability to implement the reorganization
plan.
5. No Dividends
The Debtor does not anticipate that it will be able to pay any
dividends to holders of its common stock in the foreseeable future.
VII. FACTORS TO BE CONSIDERED IN VOTING DECISIONS
In determining whether or not to vote in favor of the Plan, each holder
of a Claim should carefully consider the following factors, together with all of
the other information contained in this Disclosure Statement.
1. Issuance of Reorganization Securities
Section 1145 of the Bankruptcy Code exempts the original issuance of
securities under a plan of reorganization from registration under the Securities
Act of 1933, as amended (the "Securities Act") and state law. Under Section
1145, the issuance of the reorganization Securities is exempt from registration
if three principal requirements are satisfied: (1) the securities must be issued
by a Debtor, its successor, or an affiliate participating in a joint plan with
the Debtor, under a plan of reorganization; (2) the recipients of the securities
must hold a claim against the Debtor or such affiliate, an Interest in the
Debtor or such affiliate, or a claim for an administrative expense against the
Debtor or such affiliate; and (3) the securities must be issued entirely in
exchange for the recipient's claim against or Interest in the Debtor or such
affiliate. or "principally" in such exchange and "partly" for cash or property.
The Debtor
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believes that the issuance of the Reorganization Securities under the Plan will
satisfy all three conditions because: a) the issuance is expressly contemplated
under the Plan; b) the recipients are holders of "Claims" against or "Interests"
in the Debtor; and c) the recipients would obtain the Reorganization Securities
in exchange for such pre-petition (or administrative) Claims and Interests.
2. Subsequent Transfers of Reorganization Securities
The Reorganization Securities to be issued pursuant to the Plan may be
freely transferred by most recipients following initial issuance under the Plan,
and all resales and subsequent transactions in the Reorganized Securities are
exempt from registration under federal and state securities laws, unless the
holder is an "underwriter" with respect to such securities. Section 1145(b) of
the Bankruptcy Code defines four types of "underwriters":
(1) persons who purchase a claim against, an Interest in, or a claim
for an administrative expense against the Debtor with a view to
distributing any security received in exchange for such a claim
or interest;
(2) persons who offer to sell securities offered under a plan for the
holders of such securities;
(3) persons who offer to buy such securities for the holders of such
securities, if the offer to buy is (a) with a view to
distributing such securities; or (b) made under a distribution
agreement; and
(4) a person who is an "issuer" with respect to the securities, as
the term "issuer" is defined in Section 2(11) of the Securities
Act.
Under Section 2(11) of the Securities Act, an "issuer" includes any
person directly or indirectly controlling or controlled by the issuer, or any
person under direct or indirect common control of the issuer.
To the extent that persons who receive Reorganization Securities or
other securities pursuant to the Plan are deemed to be "underwriters", resales
by such persons would not be exempted by Section 1145 of the Bankruptcy Code
from registration under the Securities Act or other applicable law. Persons
deemed to be underwriters would, however, be permitted to sell such
Reorganization Securities or other securities without registration pursuant to
the provisions of Rule 144 under the Securities Act. These rules permit the
public sale of securities received by "underwriters" if current financial
information regarding the issuer is publicly available and if volume limitations
and certain other conditions are met.
Whether or not any particular person would be deemed to be an
"underwriter" with respect to
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<PAGE>
any Reorganization Security or other security to be issued pursuant to the Plan
would depend upon various facts and circumstances applicable to that person.
Accordingly, the Debtor expresses no view as to whether any particular person
receiving Reorganization Securities under the Plan would be an "underwriter"
with respect to any Reorganization Security to be issued pursuant to the Plan.
Given the complex and subjective nature of the question of whether a
particular holder may be an underwriter, the Debtor makes no representation
concerning the right of any person to trade in the Reorganization Securities.
The Debtor recommends that potential recipients of Reorganization Securities
consult their own counsel concerning whether they may freely trade such
Reorganization Securities without compliance with the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
3. Valuation of Equity Securities
The Debtor has not undertaken a valuation of the equity securities to
be issued under the Plan.
4. Market for Existing Securities
In 1998, the Debtor was informed by The Nasdaq Stock Market, Inc.
(hereinafter Nasdaq), that the common stock of the Debtor did not meet the
minimum bid price of $1.00 per share, and that the Debtor's net tangible assets
did not meet the minimum requirement of $4,000,000.00. Nasdaq denied the
Debtor's request for an exception to the minimum bid price requirement. In
addition, the Debtor was informed that it did not meet the minimum quantitative
criteria for inclusion on the Nasdaq SmallCap Market. Accordingly, the Debtor's
securities were delisted from the Nasdaq Stock Market. However, the Debtor's
securities were immediately eligible to trade on the OTC Bulletin Board.
The common stock is currently traded on the OTC Bulletin Board under
the symbol "CFIM". The table attached as Exhibit D sets forth, for the fiscal
periods indicated, the high and low bid prices for the common stock on the OTC
Bulletin Board. The Debtor's fiscal year runs from January 1 through December
31. The Debtor's common stock commenced trading in late May or early June of
1997. Prior thereto there was no public market for the Debtor's common stock.
As of April 14, 1999, the closing bid price of the common stock on the
OTC Bulletin Board was $ .08 per share. The approximate number of record holders
of the common stock at March 10, 1999 was 100 although the Debtor believes that
the number of beneficial owners of such common stock is much greater.
As a result of being delisted from the Nasdaq National Market,
stockholders may find it more
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<PAGE>
difficult to dispose of, or to obtain accurate quotations as to the market value
of the Debtor's common stock.
The Debtor has never declared or paid cash dividends on its capital
stock and Debtor's Board of Directors intends to continue this policy for the
foreseeable future. Earnings, if any, will be used to finance the development
and expansion of the Debtor's business. Future dividend policy will depend upon
the Debtor's earnings, capital requirements, financial condition and other
factors considered relevant by the Debtor's Board of Directors and will be
subject to limitations imposed under Delaware law.
5. Delinquency in Filing Periodic Reports
The Debtor is delinquent in filing the Debtor's periodic quarterly
reports for the fourth quarter of 1998 due to the Debtor's inability to produce
audited financial statements timely. The Debtor has obtained authorization to
engage an accounting firm to complete the audit, which is expected to be
completed no later than the Effective Date of the Plan. The Debtor has
represented to the Court that the audit would be completed before June 7, 1999
to permit interested parties to review it before confirmation. If the Debtor
does not meet that deadline, confirmation may have to be delayed. The Debtor
filed with the SEC Form 12b-25 on April 15, 1999, requesting an extension of
time to file to enable the Debtor to obtain Bankruptcy Court approval of
accountants to audit the Debtor's books and prepare the delinquent quarterly
reports (10-Q's) and year end annual reports (10-K's).
6. Estimated Administrative Expenses
The Administrative Expenses of the Debtor for the entire reorganization
process are estimated to be approximately $100,000.00. Such expenses are subject
to Court approval. The breakdown of such administrative expenses include the
professional fees for the following:
1) Kevin Gleason, P.A. - Debtor's counsel $50,000, plus costs of
approximately $2000, plus 100,000 shares of common stock in the
reorganized Debtor.
2) Weinick, Sanders, Leventhal, CPAs, $40,000
The Debtor's administrative expenses are estimated as above because the
Debtor has administered this case with relatively few professionals. The
Debtor's counsel, Kevin Gleason, P.A. accepted this case with no retainer and
has agreed to take the case through confirmation for a flat fee of $50,000, plus
100,000 shares of common stock. The Debtor engaged outside auditors to do its
tax returns and bring it into compliance with SEC filing requirements. The
Debtor's auditor, Weinick,
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Sanders, Leventhal, LLP has taken a retainer of $25,000, and is not expected to
bill more than $15,000 additional before confirmation of the Plan. The Debtor
allotted an additional $10,000 for unknown costs of administration, including
but not limited to, costs advanced by Kevin Gleason, P.A. not included in the
flat fee, court costs, and fees for the United States Trustee.
The Debtor's loan from Ronco Funding, Inc. is also an administrative
expense to the extent it is funded prior to confirmation of the Plan. The use of
proceeds, Exhibit C, and the business plans, Exhibit B, detail the proposed uses
for the funds borrowed from Ronco as administrative expenses.
G. Legal Proceedings
The Debtor is unaware of any pending legal proceedings which have not
been stayed by the commencement of this case.
The Debtor is subject to three lawsuits, a brief explanation of the
cases will be provided as well as the case numbers and jurisdictions.
1. Optimum Petroleum & Environmental Services of Florida vs. General
Environmental Technologies Inc, Charles C Chillingworth, CFI Mortgage Inc, and
Fred L Tolar, Sr. The case is pending in the US Bankruptcy Court, Middle
District of Florida: Case No.98-16831-8b1.
The Debtor borrowed $150,000 from General Environmental Technologies
(GET) on October 30, 1998. The Debtor never repaid the loan. The Debtor has
listed the debt to GET in its schedules as undisputed. The Debtor was unaware
that GET had borrowed the money from Optimum Petroleum to lend to the Debtor.
The Debtor was unaware of Optimum Petroleum's existence until served with the
lawsuit in late March 1999.
The suit seeks the return of the $150,000 pursuant to, inter alia, 11
U.S.C. ss. 549, as an unauthorized post-petition transfer from the bankruptcy
estate of Optimum Petroleum. A suggestion of bankruptcy was filed. The Debtor
has not seen any claim filed on behalf of Optimum Petroleum.
2. Walter Brannock vs. Vincent Castoro and CFI Mortgage Inc. The case
is pending in the Circuit Court of The Fifteenth Judicial Circuit, in and for
Palm Beach County, Florida, Case No: 98-008164 AD. The Debtor received a
$150,000 deposit from an affiliated company of Walter Brannock on the
anticipated purchase of the Debtor's former subsidiary, BDMC. The purchase
transaction never materialized. Suit was commenced on September 11, 1998. The
Debtor believes it may have affirmative defenses or counterclaims to the suit,
including that Walter Brannock is not the proper party plaintiff. The Debtor has
reserved the right in its Plan to continue this, or any other litigation it
deems
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prudent after a costs/benefits analysis.
3. Vincam Human Resources, Inc vs. Bankers Direct Mortgage Corporation,
CFI Mortgage Inc, Direct Mortgage Partners, Island Mortgage Network and Rodger
Stubbs. The case is pending in The Circuit Court of The 11th Judicial Circuit In
And For Dade County, Florida. Case No: 830027.
Vincam is an employee leasing company, which "leased" employees to BDMC
and DMP. The suit alleges there is an unpaid outstanding balance of $708,176.13.
The complaint, filed on December 29, 1998, alleges many breaches of the
contracts and asserts liability of all parties named in the suit. The lawsuit
further alleges culpability of the Debtor in that the Debtor's subsidiaries had
use and enjoyment of the services to the betterment of the Debtor. The Debtor
asserts that it never signed a contract with Vincam for services and therefore
had no contractual liability to Vincam. Rodger Stubbs signed a "Continuing
Personal Guaranty" for $710,000 on September 21,1998 for the benefit of Vincam.
There has been no request by Rodger Stubbs for indemnification from the Debtor.
Vincam has not moved for stay relief to pursue its litigation.
The Debtor is aware of an additional suit pending against Christopher
Castoro and Vincent J. Castoro by Thomson, Kernighan & Co. The Debtor is not a
party to the suit.
VIII. TAX CONSEQUENCES OF THE PLAN
A. Introduction
The consummation of the Plan will have significant federal income tax
consequences for the Reorganized Debtor, and for other persons, including
Creditors and equity holders. The discussion below summarizes certain of those
consequences. The discussion is for general information only and in based upon
the Internal Revenue Code of 1986, as amended (the "Tax Code"), the Treasury
Regulations thereunder, judicial authority and current administrative rulings
and practice, all of which are subject to change at any time by legislative,
judicial or administrative action. Any such change may be retroactively applied
in a manner that could adversely affect the Reorganized Debtor, and such other
persons. The tax consequences of certain aspects of the Plan are uncertain due
to the lack of applicable legal authority and may be subject to administrative
or judicial interpretations that differ from the discussion below. This
discussion does not address the potential impact of various federal income tax
consequences that may be relevant to certain types of taxpayers subject to
special treatment under the federal income tax laws (such as tax-exempt
organizations, life insurance companies, and taxpayers who are not United States
domestic corporations or citizens or residents of the United States), nor does
it
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discuss any aspect of state, local, foreign or other tax laws that may be
applicable to particular taxpayers. Furthermore, due to the complexity of the
Plan, the lack of applicable legal precedent, the possibility of changes in the
law, and the application of certain legal interpretations to underlying factual
patterns and other matters not discussed below, the federal income tax
consequences described herein are subject to significant uncertainties. No
ruling has been sought or obtained from the Internal Revenue Service ("IRS")
with respect to any of the tax aspects of the Plan, and no opinion of counsel
has been requested or obtained by the Debtor with respect to any such aspects.
CREDITORS, SHAREHOLDERS, PARTNERS, AND ANY OTHER EQUITY HOLDERS ARE
ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS AND COUNSEL AS TO THE TAX
CONSEQUENCES TO EACH OF THEM INDIVIDUALLY OF THE CONSIDERATION OF THE PLAN UNDER
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN LAWS.
2. Tax Consequences to Creditors
1. General
The tax consequences of the implementation of the Plan to a Creditor
will depend in part on whether that Creditor's present claim constitutes a
"security" for federal income tax purposes. Generally, claims arising out of the
extension of trade credit have not been held to be securities, while corporate
debt obligations evidenced by written instruments with maturities, when issued,
of ten years or more, have generally been held to be securities.
As discussed in greater detail below, a creditor which exchanges claims
that are not securities, or that exchanges securities for property other than
Reorganization Securities, may recognize income or loss on the exchange. For
example, the modification of a mortgage may constitute a realization event,
which depending on various facts and circumstances, may require recognition.
In addition, to the extent consideration received by a creditor is
attributable to accrued interest and depending upon the amount a particular
creditor may be required to recognize, some or all of such amount may be treated
as ordinary income or loss regardless of whether its existing claims are capital
assets. The Treasury Department has not issued regulations to determine the
amount of stock, securities, or other property received by the creditor that
will be attributable to accrued interest. In this regard, the Reorganized Debtor
may be required to issue information returns reporting the value of properties
distributed to creditors and the portion thereof deemed attributable to accrued
and unpaid interest.
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Accordingly, creditors are urged to consult their own tax advisors with respect
to the tax treatment of them and any consideration received by them that is
attributable to accrued interest or may be so attributable.
In the case of any gain or loss that a creditor may recognize, other
than in respect of accrued interest, the character of such gain or loss as a
capital gain or loss, or ordinary income or loss, will be determined by a number
of factors, including, but not limited to, the tax status of the creditor, the
nature of the transaction from which the debt was derived, the nature of the
debt in the hands of the creditor, and whether and to what extent the creditor
has previously claimed a bad debt deduction.
2. Consequences to Creditors Receiving Reorganization Securities
Whose Claims Constitute Securities
The issuance of Reorganization Securities solely in exchange for
existing claims against the Debtor, that are "securities" should be treated as
having been issued in a tax-free "reorganization" of the reorganized Debtor and,
accordingly, should not result in income or loss recognition except with respect
to claims for accrued interest. Such creditors will, in general, recognize
ordinary income on the receipt of Reorganization Securities to the extent
allocable to claims for accrued interest not previously included in income, or
will recognize a loss (generally deductible in full against ordinary income) to
the extent that the Reorganization Securities are allocable to accrued interest
previously included in income and does not satisfy in full such claims for
accrued interest.
The aggregate tax basis of a creditor in any Reorganization Securities
received pursuant to the Plan will be equal to its tax basis in existing claims
(other than any claims in respect of accrued interest), decreased by the fair
market value of property (other than Reorganization Securities and any value
allocable to accrued interest) received in satisfaction of its existing claims
and increased by the amount of gain , if any, recognized on the exchange (but
not decreased by the amount of any loss realized on the exchange).
3. Consequences to Creditors Receiving Stock Whose Claims do not
Constitute Securities
If the creditor has previously claimed a bad debt deduction for the
indebtedness, the creditor may realize ordinary income from the recovery of a
previously deducted bad debt to the extent the cash and value of the property
(including Reorganization Securities) received exceeds the basis of the debt
remaining after the bad debt deduction. Further, any such creditors will also
recognize income or loss
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on the exchange of its existing claims (other than claims for accrued interest)
for cash and property equal to the difference between (I) the amount realized in
respect of such claims; and (II) the creditor's tax basis in such claims
(computed by taking into account any bad debt deduction or recovery).
4. Disposition of Reorganization Securities 1.
The aggregate basis in the Reorganization Securities received by a
creditor whose existing claims are not securities will equal the fair market
value of such Reorganization Securities on the Effective Date. Should the
creditor subsequently recognize any gain on the sale or exchange of securities
received pursuant to the Plan, the gain recognized by such creditor on such sale
or exchange will be treated as ordinary income to the extent of the aggregate
amount allowed to such creditor as a bad debt deduction with respect to such
claims. In the case of a cash basis taxpayer, the amount treated as ordinary
income may include any amount which was not included in such creditor's income
on the exchange but which would have been so included if the claim had been
satisfied in full. Any additional gain may be treated as capital gain.
3. Tax Consequences to the Debtor
1. Debtor's existing tax attributes
Based upon tax returns as filed, the consolidated group including the
Debtor has net operating loss ("NOL") carryovers that, subject to the
limitations discussed below, may be available to offset future taxable income or
future tax liabilities of the Reorganized Debtor in its federal income tax
return. The amount of the NOL carryover is not available until the Debtor's
books are closed for 1998. Regardless of the Debtor's estimate of NOL carryover,
this amount is not binding upon the IRS and may be subject to adjustments (which
may be substantial in magnitude) as a result of potential IRS audits of prior
tax returns, which audits may not take place for several years. Moreover, as
discussed below, the NOL carryover will likely be substantially reduced, or
their use limited, as a result of the Debtor's operations during 1999,
including, but not limited to the discharge of indebtedness of the Debtor and
the issuance of the Reorganization Securities under the Plan. Further, the
existence of Debtor's use of the consolidated NOL carryovers is dependent upon
the Debtor being able to make use of losses incurred by subsidiaries that it no
longer controls or will not be filing consolidated returns with in the future.
An adverse determination regarding any of these issues would likely
substantially increase the past and/or future income tax liabilities of the
Debtor.
CFIM is delinquent in filing its federal tax return for 1998, but
expects to file before September
30
<PAGE>
15, 1999. Due to losses incurred, it is not anticipated that any federal tax
liability exists.
IX. SEC FILING INFORMATION
The Debtor's conformed name with the Securities and Exchange Commission
is "CFI MORTGAGE". Its central index key is 0001036071. All documents that have
been filed with the Securities and Exchange Commission can be obtained via the
Internet by visiting the SEC's web site at www.sec.gov, entering the Edgar
database and using the aforementioned central index key.
X. THE PLAN OF REORGANIZATION
The Plan, a complete copy of which accompanies this Disclosure
Statement, provides the details regarding the treatment of Claims against the
Debtor and should be read in conjunction with the Disclosure Statement. Please
refer to the Plan to determine the exact treatment of your Claim. Under the
Plan, the following treatment is proposed for the following classes of Claimants
and interest holders:
Class 1 consists of the allowed post-petition secured Claim of Ronco
Funding, Inc., or its assigns (hereinafter Ronco), in the amount of $800,000,
arising from an order of the Bankruptcy Court permitting the Debtor to borrow
funds secured by assets of the estate. This class is unimpaired.
Ronco, or its assigns, shall have the option to convert the amount of
the loan to common stock of the Debtor pro rata at the rate of 2 percent of the
outstanding common shares of the Debtor for each $80,000 of gross disbursements,
such percentage to be determined after the Effective Date, and to represent 2%
of the Debtor's outstanding common stock after distributions to claimants in
Classes 2 and 3. A warrant for one share of the stock of the Debtor will also be
issued to Lender, or its assigns, for each share of common stock issued to Ronco
pursuant to the Agreement with the Debtor. The Debtor shall execute a PRIVATE
SECURITIES SUBSCRIPTION AGREEMENT on or before the Effective Date (which is
attached to court paper #29 as Exhibit A)
Class 2 consists of the Allowed Claims of general unsecured creditors.
This class is impaired. Each claimant in this class shall receive one share of
common stock in the reorganized Debtor for each dollar of debt. Distributions
shall be made as soon as practicable after confirmation, but not later than 30
days after the Effective Date. Thomson, Kernighan & Co. was a holder of a
convertible interest pre-bankruptcy but elected to convert its Series C
Preferred Stock (see Exhibit K to the Amended Disclosure Statement) into debt
during the pendency of this case. Confirmation of the Plan will recognize and
authorize the election of Thomson, Kernighan & Co.'s, nunc pro tunc, to the date
of its notice of election, April 15, 1999. The Debtor has elected to recognize
the election of Thomson, Kernighan &
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<PAGE>
Co. because the election does not increase the number of shares which Thomson,
Kernighan & Co. will receive under the Plan.
Class 3 consists of the interests of Preferred Shareholders. This class
is impaired. Baldock Ventures Limited (hereinafter BVL) is the only remaining
interest holder in this class. BVL shall receive 2 million shares of common
stock in the reorganized Debtor in exchange for the assignment of the Series A
and B Preferred Stock (see Exhibit K to the Amended Disclosure Statement) to the
Debtor, and a general release from any and all additional liabilities,
including, but not limited to any claims which it asserts would constitute a
Claim in Class 2. The total of 2 million shares may be a combination of the
Debtor's recognition of the pre-confirmation conversion, and issuance of
additional shares at confirmation.
An explanation of the relative rights of the Preferred Stock is
contained in the excerpts from SEC filings, attached as Exhibit K. Baldock
Ventures Limited believes that it has the right to exercise its conversion
rights notwithstanding the operation of the automatic stay of bankruptcy (11
U.S.C. ss. 362).
Class 4 consists of the interests of Common Stock Holders. This class
is impaired. Other than the increase in authorized capital stock and the
dilution by converting debt into equity, the legal, equitable, or contractual
rights of the interest-holders in this class are unaffected by the Plan.
Class 5 consists of the interests of persons holding Warrants for the
purchase of Common Stock of the Debtor. This class is unimpaired. The legal,
equitable, or contractual rights of the interest-holders in this class are
unaffected by the Plan. The Debtor does not take the position that the warrants
in this Class are exempt from registration.
However, for clarification, in the event that the reorganized Debtor
elects to cause a reverse split of its stock, the warrant price will be
increased in equal proportion to the subject reverse split. By way of
illustration, a warrant with an exercise price of $8.75 per share before a
reverse split will bear an exercise price of $17.50 per share after a reverse
split of 2 to 1.
Executory Contracts and Unexpired Leases
The Debtor is unaware of any executory contracts to which it is a
party, except insurance contracts. The Plan calls for the rejection of all
executory contracts, except contracts of insurance under which the Debtor is an
insured. While the Debtor is not a party to any unexpired leases, the Debtor has
guaranteed several leases of equipment and real property. The Debtor's
guarantees of leases are treated as Allowed Claims in Class 2 of the Plan.
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<PAGE>
Amendments to the Plan
The Debtor has the right to amend the Plan before confirmation. Despite
the fact that the Plan is described in this Disclosure Statement, an amendment
of the Plan will not necessitate the amendment of the Disclosure Statement
unless the amendment requires additional information for persons voting on the
Plan to make an informed decision. If amendments to the Plan are made between
the approval of this Disclosure Statement and the mailing of the Plan and
Disclosure Statement to interested parties, a notice will be included indicating
that the summary of the Plan in the Disclosure Statement is incorrect.
The Debtor anticipates that it may have to amend the Plan if Class 2
does not vote to accept a plan which permits equity shareholders to retain their
interests. If a revision is made to eliminate or reduce the participation of
existing equity shareholders, the Plan, as amended, will have to be confirmed by
"cram-down", a process explained in greater detail in Article XVII herein.
XI. MEANS FOR IMPLEMENTATION OF THE PLAN
The Plan will be funded through the infusion of $720,000 in capital
from Ronco Funding, Inc. Thereafter, the Debtor will be able to fund its ongoing
post-confirmation operating expenses from continuing operations of the Debtor.
Post-petition trade debt will be paid in the normal and usual course of
business. The anticipated results of future operations are summarized on the
attached exhibits.
The Debtor will acquire First Mortgage Securities and EDI Management
Consultants, Inc. pursuant to agreements substantially in the form of those in
composite Exhibit F.
The Debtor shall retain the right to issue 750,000 warrants at an
exercise price of 125% of the "bid" price for the common stock of the Debtor on
the Effective Date of the Plan. The Debtor does not have any form of employee
stock option plan. Due to the Debtor's recent history, the Debtor believes that
it may need to issue warrants to recruit and retain key personnel. No current
officers or Directors of the Debtor will be eligible to receive these retained
warrants.
XII. FINANCIAL CONDITION
A consolidated business plan is attached as Exhibit B. The summary page
of the Debtor's Schedules is attached as Exhibit G. The only sources of
information used to create this Disclosure Statement are: the Debtor, its
management, and its outside professionals, including its attorney; and First
Mortgage Securities, Inc., its management, and its outside professionals,
including its attorney.
A liquidation analysis is included as Exhibit M. The Debtor's only
listed assets have no significant value relative to the anticipated amount of
Allowed Claims. The forced sale of the Debtor
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<PAGE>
would not result in any payment to unsecured creditors. Therefore any discussion
of unsecured Claimants receiving any meaningful payment under a liquidation is
strictly academic.
XIII. LITIGATION AND CLAIMS OBJECTIONS
Non-Bankruptcy Litigation
The Debtor does not intend to begin or pursue any non-bankruptcy
litigation. The Debtor reserves the right to commence or continue any litigation
pending on or before the Confirmation Date. For a detailed list of pending
non-bankruptcy litigation, see Article VII, Legal Proceedings, above.
Assignment of Pre and Post Petition Causes of Action
Upon the request of major creditors, some mechanism will be included in
an amendment to the Plan or the order confirming the Plan, which will preserve
any and all causes of action held by the Debtor before or after commencement of
this case, to be prosecuted post-confirmation, at the Debtor's expense, or , if
the Debtor declines to devote its limited resources to litigation, at the
expense of the participating creditors, and if necessary, in the Debtor's name.
The Debtor has disclosed certain transfers in answer to a question on
the Statement of Financial Affairs. Following is a discussion all transfers the
Debtor believes to exist and the Debtor's reasons for declining to pursue
avoidance of the transfers.
Vincent C. Castoro "Sr."
In May of 1997, Vincent C. Castoro (hereinafter VCC) loaned $200,000 to
Bankers Direct Mortgage Corp. (hereinafter BDMC)(immediately before name change
from CFI Mortgage Corp.) In May of 1997, BDMC repaid $100,000 to VCC. VCC was
repaid the balance of $100,000, plus interest of $14,000, in July of 1998 by
BDMC. VCC loaned $100,000 in July, 1998 to the Debtor, which remains unpaid.
Section 547(b) of the Bankruptcy Code permits avoidance of certain
transfers to insiders, made within one year of the commencement of a bankruptcy
case. 11 U.S.C. ss. 547(b) provides, in pertinent part, that
the [Debtor-in-possession] may avoid any transfer of an interest of
the debtor in property (1) to or for the benefit of a creditor; (2) for
or on account of an antecedent debt owed by the debtor before such
transfer was made; (3) made while the debtor was insolvent; (4) made
(A) on or within 90 days before the date of the filing of the petition;
or (B) between ninety days and one year before the date of the filing
of the petition, if such creditor at the time of such transfer was an
insider; and (5) that enables such creditor to receive more than such
creditor would receive if (A) the case were a case under chapter 7 of
this title; (B) the transfer had not been made; and (C) such creditor
received payment of such debt to the extent provided
34
<PAGE>
by the provisions of this title.
The Debtor has concluded that it does not appear that the property
transferred was property of the Debtor. If the Debtor could prove that the
property was property of the Debtor, the Debtor would have to prove that it was
insolvent at the time of the transfer. Since the Debtor raised over $2,000,000
in additional capital after July of 1998, and since the Debtor's subsidiaries
did not experience financial problems until after August of 1998, the Debtor
does not believe it was insolvent until sometime after July of 1998. If the
Debtor proved insolvency and a transfer of its property, the Debtor would
anticipate VCC to raise a defense under 11 U.S.C. ss. 548(c)(4), which provides
that " The [Debtor-in-possession] may not avoid under this section a transfer...
to or for the benefit of a creditor, to the extent that, after such transfer,
such creditor gave new value to or for the benefit of the debtor (A) not secured
by an otherwise unavoidable security interest; and (B) on account of which new
value the debtor did not make an otherwise unavoidable transfer to or for the
benefit of such creditor...."
In short, the Debtor's maximum recovery from VCC appears to be $14,000,
after expenditure of substantial legal and accounting fees, and only if the
Debtor could prove facts which do not appear to be true. The Debtor does not
intend to pursue a preference action against Vincent C. Castoro.
Various transactions to miscellaneous persons
The Debtor has listed in its schedules12 pages of payments made within
the 90 days or one year prior to the commencement of this case. A review of the
list reveals that the first 6 pages appear to be pay checks to employees, plus
one payment to Federal Express. These payments appear to be in the ordinary
course of business, and may not be avoidable. One page shows payments to Bankers
Professional Appraisal Associates, which may be an insider. In 1998, purchases
from BPAA exceeded payments to it. While the Debtor does not believe these
transfers are preferential, the issue is left open to post-confirmation scrutiny
of the creditors. Similarly, payments disclosed to Bankers Professional Survey,
Chris Castoro, Vincent Castoro, Sr., Vincent Castoro, Jr. from BDMC do not
appear to be avoidable by the Debtor. Once again, the issue is left open to
post-confirmation scrutiny of the creditors.
The Amended Plan preserves causes of action, if any, to a trust or
other mechanism to be determined by interested creditors controlled by current
non-insider creditors of the Debtor. The trustees of the trust will determine
whether or not to spend their own money to pursue alleged preferences and
fraudulent transfers.
Rodger Stubbs
Rodger Stubbs was also listed in an amendment to the Statement of
Financial Affairs as having
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<PAGE>
received transfers from the Debtor within one year prior to the commencement of
this case. The amount of the transfers was in the amount of $9,375; and $4,688
in December, 1998. The transfers were for salary. Since Mr. Stubbs is a debtor
in a chapter 13 case, the prospects for recovery against him do not appear to
outweigh the costs of pursuing any action.
Sale of BDMC to IMNF
On September 11, 1998 CFI Mortgage Inc. (CFIM) completed the sale of
one of its two operating subsidiaries, Bankers Direct Mortgage Corporation
(BDMC), to IMN Financial Corp. (IMNF) by means of a sale of all of the capital
stock of BDMC to IMNF. The Sale was made pursuant to a stock Purchase Agreement
dated as of September 4, 1998, the form of which has been previously filed as an
exhibit with the 8K on September 29, 1998. The Debtor has not been able to
locate an executed copy of the agreement, but has undertaken to get a copy from
IMNF. Any interested party may request a copy of the agreement from the Debtor's
counsel. The purchase price consisted of the assumption of all liabilities of
BDMC and IMNF's agreement to pay CFIM one-eighth of one percent of the value of
all closed loans by BDMC for the two years following closing, but only if BDMC's
operations are profitable in the quarter in which such loans are closed.
Further, such payments will only be made if the net book value of BDMC was at
least $0 at closing or if less than $0, then such payments will be first be
applied to make up any negative net worth in BDMC. The company agreed not to
engage in the retail conforming mortgage business conducted by BDMC for a period
of five years following the closing. IMNF also hired Vincent J. Castoro, the
company's former vice president and a Director as an employee of IMNF as of the
closing. Mr. Castoro continues to serve as a director of CFIM, but will be
replaced upon confirmation of the Plan.
Prior to the consummation of the sale of BDMC, there were no material
relationships between CFIM or BDMC or any of their respective officers,
directors or affiliates, and IMNF or any of its directors, officers or
affiliates. The terms of the transaction were established by arm's-length
negotiation. The following unaudited pro forma Consolidated Statement of
Operations indicates the Consolidated figures for CFIM & DMP as if the sale of
BDMC had been effective January 1, 1998 and 1997.
CFI MORTGAGE INC. AND
SUBSIDIARIES Consolidated Statements of Operations
(Unaudited Pro Forma )
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the nine For the nine For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Commissions and fees $ 5,821,844 $ 1,262,824 $ 971,240 $ 1,262,824
Interest 2,354,468 162,362 774,123 147,521
------------ ----------- ----------- -----------
8,176,312 1,425,187 1,745,364 1,410,345
Expenses
Selling 3,703,571 404,060 1,167,118 404,060
General and administrative 8,462,463 1,304,975 2,904,519 1,302,371
Interest 2,319,609 102,196 806,751 102,196
------------ ----------- ----------- -----------
14,485,643 1,811,231 4,878,389 1,808,627
------------ ----------- ----------- -----------
Loss from continuing operations (6,309,331) (386,044) (3,133,025) (398,281)
Gain on disposal of BDMC 536,664 0 536,684 0
------------ ----------- ----------- -----------
Net loss before income tax credit (5,772,668) (386,044) (2,596,361) (398,281)
Income tax credit
Current 0 0 0 0
Deferred 0 0 0 0
------------ ----------- ----------- -----------
NET LOSS $ (5,772,668) $ (386,044) $(2,596,361) $ (398,281)
============ =========== =========== ===========
</TABLE>
Some interested persons have raised questions regarding the examination
of the sale of BDMC to IMNF as an avoidable transfer. A detailed explanation of
that transaction is included herein. While the Debtor believes it may have a
cause of action against IMNF for breach of the agreement of sale, the Debtor
cannot, without additional discovery, determine a reasonable legal or factual
basis to consider the transaction as a preference or fraudulent transfer. IMNF
has filed a claim in this case for in excess of $800,000.
In connection with the sale of BDMC to IMNF, Vincent J. Castoro was
offered an employment contract for a term of five years from September 10, 1998
with a base salary of $175,000 per year and incentives which could yield an
increase in salary to $225,000 per year, plus stock options and other benefits.
Vincent J. Castoro's contract also included a "non-compete" agreement for one
year after termination of the employment contract. An executed copy of the
agreement is available upon request to the Debtor's counsel (subject to
restrictions by order of the court). Some interested persons have suggested that
the employment contract of Vincent J. Castoro may be a part of some avoidable
fraudulent transfer. The Debtor does not share that opinion.
The Debtor is aware of some litigation against IMNF pending in Denver,
Colorado. The Debtor is not a party to the suit, and can only surmise that a
creditor of BDMC is probably pursuing a claim against IMNF.
Claims Objections
Claims objections, other than for voting purposes, will be done
post-confirmation. If an objection to a claim is made prior to the Effective
Date of the Plan, such objection shall preclude the consideration of such claim
as "allowed" for purposes of timely distribution in accordance with the Plan.
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<PAGE>
The Disbursing Agent shall escrow sufficient shares of common stock to cover all
potential distributions with respect to claims that have objections filed
against them. The Debtor has the right to file objections to claims for a period
of 90 days after the Effective Date of the Plan.
Out of an abundance of caution, the Debtor scheduled numerous claims
against its former subsidiary, Bankers Direct Mortgage Corp., and its current
subsidiary, Direct Mortgage Partners, in its schedules. All of such claims were
listed as disputed because the Debtor is not aware of any legal or factual basis
for all creditors of its subsidiaries to assert claims against the Debtor. The
Debtor has filed numerous objections to claims on the grounds that such claims
are not claims against the Debtor, but are claims against a former or current
subsidiary.
The Debtor estimates that the Allowed Claims will not include the vast
majority of the persons initially provided with notice of this case. The Debtor
initially gave notice to all of its known creditors, and the known creditors of
DMP and BDMC. Only creditors of DMP or BDMC who held the guarantee of the
Debtor, or who have some legal or factual basis for establishing a claim against
the Debtor are anticipated to hold Allowed Claims. The last date for filing
claims was May 24, 1999. As of May 24, 1999, the Clerk of the Bankruptcy Court
had processed 129 claims, of which the Debtor has objected to 101 claims and is
investigating the remaining claims for objection before the deadline for
objections set for June 4, 1999 as to voting right, and September 24, 1999 as to
substantive claims.
The Debtor anticipates that its total allowed unsecured claims will
approximate $10 million.
Since the Debtor had relatively few employees, the Debtor is confident
that there are few, if any, priority claims of employees for pre-petition wages.
Since the Debtor experienced significant losses over the past two years, the
Debtor is confident that it will have no priority tax claims.
The Debtor has been advised that certain creditors have filed claims
substantially in excess of the amounts listed by the Debtor. For example, the
Debtor listed Nikko Financial Services with a claim of $3,000,000. Nikko has
filed a claim in excess of $3,800,000. Bank One, Texas, NA was listed by the
Debtor for $1,000,000, but has filed a claim in excess of $2,000,000. The Debtor
has reserved the right to conclude its claims litigation (excepting objections
for the purposes of voting) until after confirmation of its Plan. The Debtor
will evaluate all claims filed and determine whether or not it will object to
any particular claim promptly after confirmation.
XIV. ALTERNATIVES TO THE PLAN OF REORGANIZATION
The most likely alternative to confirmation of the Plan is a dismissal
of the case. Because the
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<PAGE>
Debtor's has virtually no assets other than fixtures that are attached to the
leasehold, there are virtually no unsecured assets for a Chapter 7 trustee to
liquidate for the benefit of general unsecured claimants. It is also possible
that the case could be converted to a Chapter 7 liquidation proceeding. If a
Plan is not confirmed, a virtual certainty exists that the Debtor, either
through dismissal or conversion, would have all of its assets liquidated. In
either event, all unsecured creditors would be adversely affected. In a
dismissal, all of the assets would be liquidated, but as shown by the attached
liquidation analysis (Exhibit M), virtually nothing would be obtained for
distribution to unsecured creditors. Thus, in either a dismissal or a
liquidation, there would be little likelihood of unsecured creditors receiving
any significant payment, let alone more value than is proposed pursuant to the
Plan.
XV. DEBTOR'S AFFILIATES AND INSIDERS
The Debtor's affiliate is Direct Mortgage Partners, Inc. The insiders
at the time of filing this bankruptcy may include Vincent C. Castoro, Vincent J.
Castoro , Christopher Castoro, and Roger W. Stubbs. Following is a table listing
the names of all current and former officers and Directors of the CFIM and the
number of shares they hold, if any.
39
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
# shares held,
Name Position, pre-petition Pre-bankruptcy Post-confirmation position
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
<S> <C> <C> <C>
Chris Castoro Director, CEO 355,000 Director
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Vincent C. Castoro Director, Chairman 0 Director, Chairman
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Vincent J. Castoro Director 600,000 None
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Rodger Stubbs Secretary 200,000* Director, Secretary
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Don L. Lashbrook COO 45,000* None
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Thomas Healy Director 0 None
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Robert Maxwell Director 0 None
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Robert Thompson Director 0 None
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Daniel Heffner Director 0 None
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
Paul Garigues CFO 0 None
- -------------------------------- ----------------------------- ----------------------------- -------------------------------
</TABLE>
* Effective date of transfer was May 27, 1999, from Chris Castoro.
XVI. RECOMMENDATIONS OF THE DEBTOR CONCERNING THE PLAN
In the judgment of the Debtor, it appears that the Plan offers all
classes of Claimants a greater return than would be possible under any available
alternative. In the event of liquidation of the Debtor's property, the Claims of
the all creditors would not be satisfied, according to the Debtor's informal
appraisal of its personal property, and the Claims of unsecured creditors would
be diluted by the additional administrative expenses related to a trustee and
the trustee's professionals. The Plan provides a debt-for-stock exchange as
payment in full to all unsecured creditors.
XVII. VOTING
The Bankruptcy Code provides a detailed description of voting
procedures in Section 1126. Those procedures may be briefly summarized as
follows. A class of claimants has accepted the Plan if more than 50% of those
voting, and at least 2/3 in amount of those voting, vote to accept the Plan. Any
lesser amount of accepting ballots does not bind the Class to the terms of the
Plan.
The Bankruptcy Code provides a mechanism for confirming a plan of
reorganization which has not been accepted by all classes of claims and
interests, known as "cram-down". In this case, if the Allowed Claimants voting
in Class 2 do not accept the Plan, the Plan may have to be amended to extinguish
the interests of current equity shareholders.
In an extinguishment of equity shareholders, the Bankruptcy Code
requires that the classes
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<PAGE>
of extinguished shareholders must be deemed to have rejected the Plan. Where
classes of equity shareholders are deemed to reject a plan, the Bankruptcy Code
provides that the bankruptcy court must find that "the plan does not
discriminate unfairly, and is fair and equitable, with respect to each class of
claims or interests that is impaired under, and has not accepted" the plan. 11
U.S.C. ss. 1129(b)(1).
A plan is "fair and equitable" when considering the interests of equity
shareholders, if " the plan provides that each holder of an interest of such
class receive or retain on account of such interest property of a value, as of
the effective date of the plan, equal to the greatest of the allowed amount of
any fixed liquidation preference to which such holder is entitled, any fixed
redemption price to which such holder is entitled, or the value of such
interest; or the holder of any interest that is junior to the interests of such
class will not receive or retain under the plan on account of such junior
interest any property." 11 U.S.C. ss. 1129(b)(2)(C).
In the event that the Plan is amended to extinguish the existing
interests of equity shareholders, the proposed lending from Ronco Funding will
have to be restructured to permit the issuance of post-confirmation shares of
stock to Ronco in exchange for conversion of its loan into equity. Class 2 will
have to be solicited to accept the further amended plan in order to invoke cram
down. Unless Class 2 accepts some version of a plan, no plan can be confirmed.
Accompanying the Plan is a ballot form. Please take a moment to
complete the form and mail or fax it to Kevin Gleason (see address below), to be
received by him no later than June 9, 1999.
Respectfully submitted,
CFI MORTGAGE INC., KEVIN GLEASON, P.A.
a Delaware corporation Attorneys for the Debtor
FEIN 52-2023491 P.O. Box 224058
Hollywood, FL 33022-4058
(954) 925-0902 phone
(954) 921-2084 fax
By: By:
------------------------------ ----------------------
Christopher Castoro, President Kevin C. Gleason, Esq.
FL Bar No. 369500
41
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
In re:
CFI MORTGAGE INC., Case No.99-31134-BKC-PGH.
a Delaware corporation Chapter 11
FEIN 52-2023491
- --------------------------/
DEBTOR'S AMENDED PLAN OF REORGANIZATION
KEVIN GLEASON, P.A.
P.O. Box 224058
Hollywood, FL 33022-4058
Attorneys for Debtor
(954) 925-0902
(954) 921-2084 fax
May 28, 1999
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS.......................................................2
INTRODUCTION............................................................3
CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS.............3
TREATMENT OF UNCLASSIFIED CLAIMS........................................4
MEANS FOR IMPLEMENTATION OF THE PLAN....................................4
EXECUTORY CONTRACTS AND UNEXPIRED LEASES................................5
EVENTS OF DEFAULT.......................................................6
DISCHARGE...............................................................7
EXEMPTION FROM SECURITIES REGULATIONS...................................7
RETENTION OF JURISDICTION...............................................7
MISCELLANEOUS PROVISIONS................................................8
DEFINITIONS.............................................................9
VOTING ................................................................10
2
<PAGE>
INTRODUCTION
CFI MORTGAGE INC., a Delaware corporation, Debtor and
Debtor-in-Possession (hereinafter Debtor), proposes the following as its Amended
Plan of Reorganization (hereinafter Plan). All initially capitalized terms used
herein are defined in Article X, or in the context of their use.
ARTICLE I
CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS
The Plan provides for the division of creditors into three classes:
Class 1 consists of the allowed post-petition secured Claim of Ronco
Funding, Inc., or its assigns (hereinafter Ronco), in the amount of $800,000,
arising from an order of the Bankruptcy Court permitting the Debtor to borrow
funds secured by assets of the estate. This class is unimpaired.
Ronco, or its assigns, shall have the option to convert the amount of
the loan to common stock of the Debtor pro rata at the rate of 2 percent of the
outstanding common shares of the Debtor for each $80,000 of gross disbursements,
such percentage to be determined after the Effective Date, and to represent 2%
of the Debtor's outstanding common stock after distributions to claimants in
Classes 2 and 3 herein. A warrant for one share of the common stock of the
Debtor will also be issued to Ronco, or its assigns, for each share of common
stock issued to Ronco pursuant to the Agreement between the parties. The Debtor
shall execute a PRIVATE SECURITIES SUBSCRIPTION AGREEMENT on or before the
Effective Date (which is attached to court paper #29 as Exhibit A)
Class 2 consists of the Allowed Claims of general unsecured creditors.
This class is impaired. Each claimant in this class shall receive one share of
common stock in the reorganized Debtor for each dollar of debt. Distributions
shall be made as soon as practicable after confirmation, but not later than 30
days after the Effective Date. Thomson, Kernighan & Co. was a holder of a
convertible interest pre-bankruptcy but elected to convert its Series C
Preferred Stock (see Exhibit K to the Amended Disclosure Statement) into debt
during the pendency of this case. Confirmation of the Plan will recognize and
authorize the election of Thomson, Kernighan & Co., nunc pro tunc, to the date
of its notice of election, April 15, 1999.
Class 3 consists of the interests of Preferred Shareholders. This class
is impaired. Baldock Ventures Limited is the only remaining interest holder in
this class. Baldock Ventures Limited (hereinafter BVL) shall receive 2 million
shares of common stock in the reorganized Debtor in exchange for the assignment
of BVL's Series A and B Preferred Stock (see Exhibit K to the Amended Disclosure
Statement) to the Debtor, and a general release by BVL from any and all
additional liabilities, including,
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but not limited to any claims which BVL asserts would constitute a
Claim in Class 2. The total of 2 million shares may be a combination of the
Debtor's recognition of the pre-confirmation conversion, and issuance of
additional shares at confirmation.
Class 4 consists of the interests of Common Stock Holders. This class
is impaired. Other than the increase in authorized capital stock and the
dilution by converting debt into equity, the legal, equitable, or contractual
rights of the interest-holders in this class are unaffected by the Plan.
Class 5 consists of the interests of persons holding Warrants for the
purchase of Common Stock of the Debtor. This class is unimpaired. The legal,
equitable, or contractual rights of the interest-holders in this class are
unaffected by the Plan. The Debtor does not take the position that the warrants
in this Class are exempt from registration.
However, for clarification, in the event that the reorganized Debtor
elects to cause a reverse split of its stock, the warrant price will be
increased in equal proportion to the subject reverse split. By way of
illustration, a warrant with an exercise price of $8.75 per share before a
reverse split will bear an exercise price of $17.50 per share after a reverse
split of 2 to 1.
ARTICLE II
TREATMENT OF UNCLASSIFIED CLAIMS
Administrative Claims (11 U.S.C. ss. 507(a)(1)) and costs under 28
U.S.C. ss.1930 will be paid in full on or before the Effective Date. United
States Trustee fees arising after confirmation will be paid by the 20th day
following the close of each calendar quarter until this case is closed. Any
payment by the Debtor, for services or costs and expenses in or in connection
with this bankruptcy case are subject to approval of the Bankruptcy Court.
The payments prescribed under this section may be changed by agreement
between the Debtor and the particular Claimant. The Debtor may pay any
Administrative Claim faster or earlier than provided herein.
Priority tax claims (11 U.S.C. '507(a)(8)) owed to the any taxing
authority, including, but not limited to, the States of Florida, Delaware, New
York, or Colorado, County Tax Collectors, and the Internal Revenue Service will
be paid over six years from date of assessment in equal monthly installments
including interest fixed at the Internal Revenue Code rate in effect upon the
date of confirmation.
ARTICLE III
MEANS FOR IMPLEMENTATION OF THE PLAN
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The Debtor will draw down on its post-petition line of credit to the
full extent of any available credit immediately before confirmation of the Plan.
Upon confirmation of the Plan, the administrative expense/secured loan will be
converted into equity in accordance with the treatment provided to Class 1
above, which will capitalize the Debtor. The terms of the conversion of the
secured loan into equity are contained in Exhibit I attached to the Disclosure
Statement.
The Debtor will complete its purchase of FMS and EDI Management
Consultants, Inc. under terms substantially the same as those of the Stock
Acquisition Agreements attached to the Disclosure Statement as Exhibit F.
After the Effective Date, the Debtor will enter into an employment
contract with each of Christopher Castoro, Greg Cutuli, Rodger Stubbs, and Steve
Williams, such contract to be in substantially the form as that attached to the
Disclosure Statement as Exhibit J. The Debtor is authorized to create any class
of voting stock necessary for implementation of the Plan.
After the Effective Date, the Debtor shall continue to operate its
business. It is projected that the consolidated operations of the Debtor and its
post-confirmation subsidiaries, will yield sufficient cash flow, after payment
of expenses, to enable the Debtor to prosper. A complete business plan and
recent financial statement of FMS are attached to the Disclosure Statement as
Exhibit B.
Kevin C. Gleason, Esquire, shall be the disbursing agent for the
initial disbursement provided for under the Plan on the Effective Date for
payments under Article II, Administrative Claims. As to all other payments and
distributions, Christopher Castoro, President, shall be the Disbursing Agent. If
an objection to a claim is made prior to the Effective Date of the Plan, such
objection shall preclude the consideration of such claim as "allowed" for
purposes of timely distribution in accordance with the Plan. The Disbursing
Agent shall escrow sufficient shares of common stock to cover all potential
distributions with respect to claims that have objections filed against them.
The confirmation of the Plan shall affect a change in the capital stock
of the Debtor pursuant to Del. Code Ann. tit. 8 ss.303 (1996)to increase the
authorized capital stock of the reorganized Debtor to 35,000,000 shares of
Common Stock, par value $.01 per share.
All causes of action, pre-petition and post-petition, held, owned or
which could have been asserted by the Debtor, or a party claiming against the
estate shall be assigned to an entity consisting of certain non-insider
creditors, formed and disclosed prior to the Confirmation Date.
ARTICLE IV
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
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Except as provided herein, any executory contract or unexpired lease
not specifically rejected by the Debtor under the Plan or upon application to
the Court by the Debtor prior to the Confirmation Date of the Plan shall be
deemed to have been rejected by the Debtor upon the entry of an order confirming
this Plan or any amendment thereto.
The Debtor is a party to executory contracts in the form of insurance
agreements, including, but not limited to Directors' and Officers Errors and
Omissions insurance. The Debtor assumes all executory contracts in the form of
insurance agreements, under which it is an insured, including, but not limited
to Directors' and Officers Errors and Omissions insurance. The Debtor is unaware
of any insurance agreements, under which it is an insured, which are in default
for non-payment of regular premiums. To the extent that any insurance
agreements, under which it is an insured, require the payment of an additional
premium conditioned upon or due to a provision relating to: (A) the insolvency
or financial condition of the Debtor at any time before the closing of the case;
(B) the commencement of a case under Title 11 of the United States Code; (C) the
appointment of or taking possession by a trustee in a case under Title 11 of the
United States Code before such commencement; or (D) the satisfaction of any
penalty rate or provision relating to a default arising from any failure by the
Debtor to perform non-monetary obligations under any executory contract in the
form of insurance agreements, under which the Debtor is an insured, including,
but not limited to Directors' and Officers Errors and Omissions insurance, such
condition or provision is unenforceable under the terms of 11 U.S.C. ss.
365(b)(2).
While the Debtor is not a party to any known unexpired leases, the
Debtor has guaranteed several leases of equipment and real property. The
Debtor's guarantees of leases are treated as Allowed Claims in Class 2 of the
Plan.
ARTICLE V-EVENTS OF DEFAULT
The occurrence of either one of the following shall constitute an event
of default under the Plan. A. Failure to pay fully any payment required to be
made on the Effective Date, which failure remains uncured for a period of 20
days after the stated due date thereof, provided that any such failure shall not
constitute an event of default if consented to by the holder of the Claim which
is not timely paid. B. Following the Effective Date, any default which may
thereafter occur under any of the documents evidencing, securing or relating to
any class of Claims or Interests, which is reinstated pursuant to the Plan shall
be deemed to be a default under such document, as reinstated, and shall not
constitute a default under the confirmed Plan.
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ARTICLE VI-DISCHARGE
Except as may be otherwise expressly provided by the terms of the Plan,
the treatment afforded in this Plan shall be in exchange for and in complete
satisfaction, discharge and release of all existing Claims of any nature
whatsoever against the Debtor or Debtor-in-Possession, or any of its assets or
property, and all persons or entities shall be precluded from asserting against
the Debtor or its assets or properties any other or further Claims based upon
any act or transaction or any other activity of any kind, nature or description
that occurred prior to the Confirmation Date.
ARTICLE VII
EXEMPTION FROM SECURITIES REGULATIONS
Section 5 of the Securities Act of 1933 and any State or local law
requiring registration for offer or sale of a security or registration or
licensing of an issuer of, underwriter of, or broker or dealer in, a security do
not apply to: the offer or sale under this Plan of a security of the Debtor, or
of the reorganized Debtor or successor to the debtor under the Plan in exchange
for a claim against, an interest in, or a claim for an administrative expense in
this case concerning, the Debtor; or the offer of a security through any
warrant, option, right to subscribe, or conversion privilege in exchange for a
claim against, an interest in, or a claim for an administrative expense in this
case concerning, the Debtor, or the sale of a security upon the exercise of such
a warrant, option, right, or privilege.
ARTICLE VIII-RETENTION OF JURISDICTION
The Bankruptcy Court shall be requested to retain jurisdiction to issue
any orders which may be required pursuant to Title 11 of the United States Code,
Section 1142(b), and to:
A. allow Claims and hear objections thereto;
B. approve the payment of Administrative Expenses;
C. complete any adversary proceeding or contested matters pending or commenced
within any time limitations set by the Court;
D. determine and resolve defaults under the Plan;
E. make such other orders as are necessary and appropriate to carry out the
provisions of the Plan;
F. correct any defect, cure any omission, or reconcile any inconsistency in the
Plan or Order of Confirmation as may be necessary to carry out the purposes and
intent of the Plan;
G. adjudicate all Claims to any Lien on any property of the Debtor or proceeds
thereof;
H. determine the amount of any secured Claim; and
I. recover all assets and properties of the Debtor.
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ARTICLE IX-MISCELLANEOUS PROVISIONS.
1) Any check for any payment due hereunder which shall remain uncashed after
ninety days from the date of mailing same to the record address of the Claimant
shall be deemed forfeited, payment stopped and such funds shall thereupon revert
to the Debtor.
2) Upon confirmation, the Debtor shall be vested with all of its assets and
shall retain all of its property except as specifically provided in the Plan,
free from any Liens, Claims and interests not expressly retained herein.
3) The Debtor has no outstanding Claims, or anticipated future Claims for
retiree benefits within the meaning of 11 U.S.C. Sec. 1114(a).
4) The Debtor's charter shall be amended to prohibit the issuance of nonvoting
equity securities.
5) Claimants who do not voluntarily issue satisfactions of Liens,
releases of judgments, or other documents required to implement this Plan, or
who fail or refuse to tender stock certificates for endorsement or security as
provided herein, will have consequential damages, costs and attorney's fees
setoff against their Claim, and a money judgment in favor of the Debtor may be
issued for any costs and attorneys fees related to such failure.
6) Debtor reserves the right to begin or continue any adversary proceedings or
contested matter permitted under Title 11 of the United States Code, other than
those proceedings which are expressly settled and released by the Plan.
7) If the Plan may not be confirmed otherwise, the Debtor will seek confirmation
by "cram-down" under 11 U.S.C. Sec. 1129(b). "Cram-down" may require amendment
of the Plan to extinguish the interests of Classes 3, 4, and/or 5. Class 2 will
have to be solicited to accept the further amended plan in order to invoke cram
down. Unless Class 2 accepts some version of a plan, no plan can be confirmed.
8) The provisions of the Plan may be enforced by any court of competent
jurisdiction including the Circuit Court of the 15th Judicial Circuit, in and
for Palm Beach County, Florida.
9) The Debtor shall retain the right to issue 750,000 warrants at an exercise
price of 125% of the "bid" price for the common stock of the Debtor on the
Effective Date of the Plan. This provision is in lieu of any employee stock
option plan, and is intended to be offered to recruit and retain key personnel.
No current officers or Directors of the Debtor will be eligible to receive these
retained warrants. The Debtor does not take the position that the retained
warrants are exempt from registration.
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10) If any provision of this Plan is deemed to be an impediment to confirmation
of the Plan, the Debtor reserves the right to amend the Plan by deleting the
relevant portion or portions.
ARTICLE X-DEFINITIONS.
For the purpose of this Disclosure Statement and the Plan, the
following terms shall have the respective meanings herein set forth (such
meanings to be equally applicable to the singular and plural forms of the terms
defined):
Allowed Claim means any Claim against the Debtor listed in the schedule of
liabilities filed pursuant to '521(1) that is not scheduled as disputed,
contingent or unliquidated, and those proofs of Claim which are timely and
properly filed and to which no objection to the allowance of which has been
interposed on or before the applicable period of limitation fixed by the Court,
or as to which any objection has been determined by a Final Order to the extent
that such objection is determined in favor of a claimant. Unless otherwise
specified herein or by Order of the Court, "Allowed Claim" shall not include
interest on such Claim for the period from and after March 10, 1999, the date
upon which a voluntary petition was filed commencing this Chapter 11 case.
Bankruptcy Code or Code means the Bankruptcy Reform Act of 1978, as amended, and
as set forth in '101 et. seq. of Title 11, United States Code (abbreviated as 11
U.S.C.).
Claim means a claim against the Debtor, as defined in '101(4) of the Bankruptcy
Code.
Class means any class into which Allowed Claims and allowed interests are
classified pursuant to Article I of the Plan.
Confirmation Date shall mean the date upon which the Order of Confirmation
is entered by the Court.
Court shall mean the United States Bankruptcy Court for the Southern District of
Florida, in which the Debtor's Chapter 11 Case is pending, and any Court having
competent jurisdiction to hear appeals or certiorari proceedings therefrom.
Debtor or Debtor-in-possession means CFI MORTGAGE INC., a Delaware corporation,
FEIN 52-2023491.
Effective Date means effective date of the Plan, which shall be the later of
June 30, 1999 or the fifteenth business day following the date on which the
Confirmation Order becomes a Final Order.
Final Order means an order or judgment which has not yet been reversed, stayed,
modified or amended and as to which the time to appeal or seek review or
rehearing has expired, and as to which no
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appeal or petition for review or rehearing is pending. If any such petition for
review or rehearing or appeal from an order is pending, such order shall
nonetheless become a Final Order on the 11th day after the entry of such order,
unless implementation of the Plan shall have been stayed as of that date. Lien
shall mean a mortgage, pledge, judgment lien, security interest, charging order,
or other charge or encumbrance on the Debtor's property effective under
applicable law and which shall not be subject to being set aside or voided under
applicable bankruptcy law.
Order of Confirmation shall mean the order to be entered by the Court confirming
the Plan in accordance with the provisions of Chapter 11 of the Bankruptcy Code.
ARTICLE XI-VOTING.
Accompanying the Plan is a ballot form. Please take a moment to
complete the form and mail or fax it to Kevin Gleason (see address below), to be
received by him no later than June 9, 1999.
Respectfully submitted,
CFI MORTGAGE INC., KEVIN GLEASON, P.A.
Attorneys for the Debtor
P.O. Box 224058
Hollywood, FL 33022-4058
(954) 925-0902 phone
(954) 921-2084 fax
By:
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Kevin C. Gleason, Esq.
FL Bar No. 369500
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