<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: September 30, 1998
------------------
Commission File Number 000-22567
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THE WMF GROUP, LTD.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1647759
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) identification no.)
1593 Spring Hill Road, Suite 400, Vienna, Virginia 22182
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including are code (703) 610-1400
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days, Yes X No
--- ---
Common Stock, $.01 par value, outstanding as of December 22, 1998
5,299,383 Shares of Common Stock
1
<PAGE> 2
EXPLANATORY NOTE
In this Form 10-Q/A, The WMF Group, Ltd. (the "Company") is filing
restated financial statements for the three-month period ended September 30,
1998, to recognize certain losses in the appropriate period. The Company's total
pretax and after-tax losses for the nine-month period ended September 30, 1998
have not changed.
On October 14, 1998, the Company announced that as a result of an
accounting revision, the Company had incurred a pretax loss of $7.5 million and
a consolidated after-tax loss of $4.3 million for the six months ended June 30,
1998. After additional analysis, however, the Company has determined that $0.9
million of the pretax loss and $0.6 million of the after-tax loss, originally
attributed to the second quarter, were actually incurred during the third
quarter of 1998. See Note 2 to the Consolidated Financial Statements included in
Item 1 and the discussion under the heading "Restatement" in Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
This report does not reflect events occurring subsequent to September
30, 1998, except that Note 10, "Subsequent Events," reports certain events
occurring before November 16, 1998. The Company has not amended this report to
reflect any other events occurring subsequent to September 30, 1998.
2
<PAGE> 3
The WMF GROUP, LTD.
FORM 10-Q/A
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
------- ----------------------
<S> <C> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets
As of September 30, 1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 (as restated)
and 1997 (unaudited), Nine Months Ended September
30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 (unaudited) 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II. Other Information
- -------- -----------------
Item 1. Legal Proceedings. 17
Item 2. Changes in Securities. 17
Item 3. Defaults upon Senior Securities. 17
Item 4. Submission of matter to a Vote of Security Holders. 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K. 17
Signatures 19
- ----------
</TABLE>
3
<PAGE> 4
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The WMF GROUP, LTD.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash $11,483 $10,786
Restricted cash equivalents 1,672 1,576
Mortgage-backed securities, at amortized cost, pledged 3,820 3,851
Mortgage loans held for sale, pledged 306,153 49,431
Due from broker 296,611 -
Principal, interest and other servicing advances 2,393 2,631
Furniture, equipment and leasehold improvements, net 4,574 2,299
Servicing rights, net 28,147 26,796
Goodwill, net 22,080 18,465
Deferred tax assets, net 15,270 -
Other assets 6,633 3,496
------- -------
Total assets $698,836 $119,331
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $8,020 $5,730
Subordinated Note 19,636 -
Warehouse lines of credit 293,171 48,743
Securities sold but not yet purchased 309,667 -
Servicing acquisition line of credit 4,712 5,462
Revolving credit facility 36,883 5,699
Deferred fees 6,854 3,600
Deferred tax liability, net - 3,274
Accrued loan servicing losses 5,938 5,125
Other liabilities 4,289 2,873
----- -----
Total liabilities 689,170 80,506
------- ------
Stockholders' equity:
Common stock, $.01 par value, 25,000,000
shares authorized; 5,270,796 and 5,042,723 issued and
outstanding, respectively 53 50
Additional paid-in capital 39,943 35,178
Retained earnings (deficit) (30,330) 3,597
-------- -----
Total stockholders' equity 9,666 38,825
----- ------
------- -------
Total liabilities and stockholders' equity $698,836 $119,331
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE> 5
THE WMF GROUP, LTD.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- -----
as restated
(Note 2)
<S> <C> <C> <C> <C>
Revenues:
Servicing fees $3,685 $3,074 $10,986 $8,705
Structuring fees 851 - 851 -
Gain (loss) on sale of mortgage loans, net (3,593) 6,255 8,741 12,172
Gain on sale of servicing 3,523 297 3,523 297
Interest income 10,502 1,542 15,986 3,653
Placement fee income 2,546 1,556 6,683 3,868
Other income 1,672 233 4,032 802
----- --- ----- ---
Total Revenues 19,186 12,957 50,802 29,497
------ ------ ------ ------
Expenses:
Salaries and employee benefits 11,248 5,471 25,133 13,125
General and administrative 3,723 2,398 10,759 5,186
Occupancy expense 1,359 501 3,161 1,539
Provision for loan servicing losses 286 27 813 480
Realized loss on treasury short sales 30,610 - 30,610 -
Unrealized losses on treasury short sales 6,551 - 13,056 -
Interest expense 8,895 686 12,753 1,289
Amortization of servicing rights 1,273 1,145 3,776 3,354
Depreciation and amortization 752 442 2,053 1,180
--- --- ----- -----
Total Expenses 64,697 10,670 102,114 26,153
------ ------ ------- ------
Income (loss) before income tax expense (45,511) 2,287 (51,312) 3,344
Income tax expense (benefit) (15,288) 1,014 (17,385) 1,620
-------- ----- -------- -----
Net income (loss) $(30,223) $1,273 $(33,927) $1,724
========= ====== ========= ======
Net income (loss) per share - Basic $(5.73) $0.30 $(6.53) $0.41
====== ==== ====== ====
Net income (loss) per share - Diluted $(5.73) $0.30 $(6.53) $0.41
======= ===== ======= =====
Weighted average shares outstanding 5,270 4,217 5,199 4,217
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 6
THE WMF GROUP, LTD.
Consolidated Statements Of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(33,927) $1,724
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization of furniture, equipment
and leasehold improvements 822 433
Amortization of mortgage servicing rights 3,776 3,354
Amortization of goodwill 1,230 747
Gain on sale of mortgage servicing rights (3,523) (297)
Provision for loan servicing losses 813 476
Mortgage loans originated (2,827,535) (926,137)
Mortgage loans sold 2,570,813 930,750
Decrease (increase) in principal, interest and other servicing
advances 238 (707)
Increase in due to affiliates - 5,327
Increase in deferred tax asset, net (15,270) -
Decrease in deferred tax liability, net (3,274) (40)
Increase in due from investors - (2,332)
Increase in restricted cash equivalents (96) (285)
Increase in other assets (3,106) (638)
Increase (decrease) in accounts payable and accrued expenses 2,290 4,040
Increase in deferred fees 3,254 1,031
Increase (decrease) in other liabilities 1,416 (1,348)
----- -------
Net cash provided by (used in) operating activities (302,079) 16,098
--------- ------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (3,097) (620)
Purchase of mortgage servicing rights (1,367) (2,379)
Increase in due from broker (296,611) -
Increase in securities sold but not yet purchased 309,667 -
Purchase of ACR production system and pipeline - (4,978)
Proceeds from sale of mortgage servicing rights 3,523 928
Assets acquired and liabilities assumed, net of cash (4,845) -
Origination of servicing rights (3,760) (1,666)
------- -------
Net cash provided by (used in) investing activities 3,510 (8,715)
----- -------
Cash flows from financing activities:
Repayment of servicing acquisition line of credit (750) (500)
Issuance of warrants, net (364) -
Proceeds from issuance of subordinated debt 20,000 -
Increase in revolving credit facility, net 31,184 -
Proceeds from stock issuance 4,768 -
Increase (decrease) in warehouse lines of credit, net 244,428 (5,050)
------- -------
Net cash provided by (used in) financing activities 299,266 (5,550)
------- -------
Net increase in cash 697 1,833
Cash at beginning of period 10,786 6,601
------ -----
Cash at end of period $11,483 $8,434
======= ======
Supplemental disclosures:
Cash paid during the period for interest $10,780 $427
Cash paid during the period for income taxes $1,002 -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 7
THE WMF GROUP, LTD.
Notes to unaudited consolidated financial statements
(in thousands, except share data)
1. ORGANIZATION:
The WMF Group, Ltd. (the "Company") is one of the largest independent
commercial mortgage bankers in the United States as measured by servicing
portfolio size based on the 1997 survey published by the Mortgage Bankers
Association of America ("MBA"), is the largest originator of Federal National
Mortgage Association ("Fannie Mae") multifamily loans based on statistics
provided by Fannie Mae, and is the largest originator of Federal Housing
Authority ("FHA") insured multifamily and healthcare loans based on statistics
provided by the Department of Housing and Urban Development ("HUD"). The Company
originates, underwrites, structures, places, sells and services multifamily and
commercial real estate loans. With the formation of WMF Capital Corp. ("Capital
Corp.") and the acquisition of WMF Carbon Mesa Advisors, Inc. ("Carbon Mesa") in
the first quarter of 1998, the Company operates a commercial mortgage conduit,
manages commercial mortgage investment funds and provides special asset
management services. Through its relationships with Government Sponsored
Enterprises ("GSEs"), investment banks, life insurance companies, commercial
banks and other investors, the Company provides and arranges financing to owners
of multifamily and commercial real estate on a nationwide basis using both a
retail and wholesale network. The Company generates revenues through origination
fees, servicing fees, management fees, structuring fees, net interest income on
loans held for sale and placement fees. While the Company does not plan to hold
loans for sale without a pre-arranged take-out commitment from third-party
mortgage investors, Capital Corp. may provide securitization trading profits in
the future.
The Company is a Delaware corporation formed in October 1992. The
Company has three direct wholly owned subsidiaries: WMF Washington Mortgage
Corp. ("Washington Mortgage") (previously known as Washington Mortgage Financial
Group, Ltd.), WMF Capital Corp., and WMF Carbon Mesa Advisors, Inc. which are
incorporated under the laws of Delaware. WMF Washington Mortgage's wholly owned
subsidiaries are WMF Huntoon, Paige Associates Limited ("WMF Huntoon Paige"),
WMF Proctor Ltd. ("WMF Proctor"), and WMF Robert C. Wilson Ltd. ("WMF Robert C.
Wilson"), which are incorporated under the laws of the states of Delaware,
Michigan and Texas, respectively.
2. RESTATEMENT:
On October 14, 1998, the Company publicly announced that it had
retroactively revised its accounting for U.S. Treasury short sale positions held
by Capital Corp., and as a result, the Company had incurred a pretax loss of
$7.5 million and a consolidated after-tax loss of $4.3 million for the six
months ended June 30, 1998. The Company calculated its third-quarter financial
results using those figures. However, after additional analysis, the Company has
determined that $0.9 million of the pretax loss and $0.6 million of the
after-tax loss, originally attributed to the second quarter, were actually
incurred during the third quarter of 1998.
Provided below is a summary of the impact of recognizing the losses in
the appropriate period and a reconciliation of the financial results previously
reported in the Company's Form 10-Q filed on November 16, 1998, to the restated
financial statement amounts presented in this Form 10-Q/A.
The Company's total pretax and after-tax losses for the nine-month
period ended September 30, 1998 have not changed.
4
<PAGE> 8
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
As previously As Restated
reported (Note 2)
Three months Three months
ended September ended September
30, 1998 30, 1998
(unaudited) Adjustments (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Servicing fees $3,685 $3,685
Structuring Fees 851 851
Gain on sale of mortgage loans, net (3,593) (3,593)
Gain on sale of servicing 3,523 3,523
Interest income 10,502 10,502
Placement fee income 2,546 2,546
Other income 1,672 1,672
------------------------------------------------------
Total Revenues 19,186 - 19,186
------------------------------------------------------
Expenses:
Salaries and employee benefits 11,248 11,248
General and administrative 3,723 3,723
Occupancy expense 1,359 1,359
Provision for loan servicing losses 286 286
Realized losses on treasury short sales 30,660 (50) 30,610
Unrealized loss on treasury short sales 5,648 903 6,551
Interest expense 8,895 8,895
Amortization of servicing rights 1,273 1,273
Depreciation and amortization 752 752
------------------------------------------------------
Total Expenses 63,844 853 64,697
------------------------------------------------------
Income before income tax benefit (44,658) (853) (45,511)
Income tax benefit (15,056) (232) (15,288)
======================================================
Net loss ($29,602) ($621) ($30,223)
======================================================
Net loss per share - Basic and Diluted ($5.62) ($0.11) ($5.73)
======================================================
</TABLE>
3. BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany balances
and transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified to conform with the current period presentation.
The condensed consolidated financial statements of the Company at
September 30, 1998 and for the three and nine months ended September 30, 1998
and 1997 included herein are unaudited and include all adjustments necessary for
the fair presentation of the financial position, results of operations and cash
flows of the Company as of and for the periods presented. All such adjustments
are of a normal recurring nature. Interim results are not necessarily indicative
of results that may be expected for the full year.
5
<PAGE> 9
Beginning with the quarter ended September 30, 1998, the Company
elected to use segment reporting in Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") as described in SFAS No.
131. See footnote number five for a description of SFAS No. 131.
4. BALANCE SHEET CLASSIFICATION:
The Company prepares its consolidated balance sheet using an
unclassified balance sheet presentation as is customary in the mortgage banking
industry. A classified presentation would have aggregated current assets,
current liabilities, and net working capital as follows:
<TABLE>
<CAPTION>
As of September 30, 1998 As of December 31, 1997
------------------------ -----------------------
<S> <C> <C>
Current assets $623,273 $66,344
Current liabilities 679,829 67,645
------- ------
Net working deficit ($56,556) ($1,301)
========= ========
</TABLE>
5. DEBT FACILITIES:
On September 4, 1998, the Company issued $20.0 million of subordinated
debt to Commercial Mortgage Investment Trust, Inc. ("COMIT"), a commercial
mortgage REIT of which the company owns approximately 20%. From this borrowing,
the Company used $10.0 million to repay a portion of the credit line with
another lender, which could be repaid at any time. The balance of $10.0 million
was used for working capital purposes. The subordinated debt is subordinate in
right of payment to certain of the Company's senior indebtedness, is unsecured
and bears interest at a rate of 11% through January 31, 1999 and 15% from
February 1, 1999 through the maturity date of May 31, 1999. Interest is payable
on January 29, 1999, at maturity and upon repayment of principal. In connection
with the COMIT subordinated debt agreement, the Company also issued COMIT
warrants to purchase 1.2 million shares of the Company's common stock at an
exercise price of $11.25 per share. The warrants are exercisable at any time
between October 20, 1998 and September 4, 2003. Before September 4, 1999, the
Company may repurchase up to 75% of the shares issuable upon exercise of the
warrants, at a purchase price of $11.25 per share. The subordinated debt is
reflected on the accompanying balance sheet net of the unamortized value
ascribed to the warrants. Such value amounted to $364,000 as of September 30,
1998.
The Company's debt agreements require the maintenance of certain
financial ratios relating to liquidity, leverage, working capital and net worth,
among other restrictions. On September 30, 1998 the Company was in default of
debt covenants due to transactions with affiliates and debt service coverage.
The Company is currently receiving month-to-month forbearance, the most recent
of which matures on December 14, 1998. The Company has taken certain measures to
cure the default under its credit lines however, if the Company is unable to
cure the covenant defaults, the lender may accelerate repayment of the debt.
Pursuant to the forbearance the Company's lenders, under existing lines of
credit for the Company's Fannie Mae and FHA products, have reaffirmed the
availability of the warehouse credit.
6. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information ("SFAS No. 131"). SFAS No. 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997, but need not be applied to interim financial statements in the initial
year of application. The Company has adopted the provisions of this statement as
of and for the period ended September 30, 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of certain exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposures. This Statement is
effective for all fiscal quarters
6
<PAGE> 10
of fiscal years beginning after June 15, 1999. Earlier adoption is permitted.
The Company has not yet determined the impact, if any, of this statement,
including its provisions for the potential reclassifications of investment
securities, on earnings, financial condition or equity.
7. LITIGATION:
The Company is involved in litigation related to the normal course of
its business. Management is of the opinion that the litigation will not have a
material adverse impact on the Company's financial position or operating
results.
8. INCOME TAXES:
During the nine months ended September 30, 1998, the Company
incurred substantial losses resulting from the extraordinary volatility in
commercial mortgage-backed security spreads and interest rates on U.S. Treasury
securities. The losses were incurred in Capital Corp., a subsidiary formed in
1998. The Company has taken steps to minimize future losses. The Company has
concluded, that it is more likely than not, that it will have sufficient taxable
income, either through continuing operations or asset dispositions, to realize
the tax benefit of the losses over the carryforward period of 20 years and
accordingly no valuation allowance has been recorded. The Company's mortgage
banking operations have continued to be profitable.
9. COMMITMENTS:
The Company enters into commitments to extend credit to borrowers in
the normal course of business. In the event there are significant fluctuations
in interest rates and spreads, the value of the commitments could have a
material adverse effect on the Company's future operating results and
consequently the Company's ability to honor the commitments. Capital Corp. is
currently in discussions regarding an unfunded loan commitment. Capital Corp.
may incur losses, which may be material, involving the resolution of this and
other loan origination obligations.
10. SUBSEQUENT EVENTS:
On October 21, 1998 the Company announced the implementation of a broad
expense reduction program, including a reduction of approximately 15% of the
Company's workforce, and the decrease of general and administrative expenses
throughout the Company. The Company expects that the charges related to the
expense reduction program will be approximately $750,000 and will be incurred
during the fourth quarter of 1998.
On November 5, 1998, Capital Corp. sold multifamily and commercial
mortgage loans with an aggregate outstanding principal balance of approximately
$227 million to Merrill Lynch Mortgage Capital, Inc. The Company closed the
related short sale transactions. The Company does not currently anticipate a
loss on this transaction. As of November 5, 1998, Capital Corp. has multifamily
and commercial loans with an aggregate outstanding principal balance of
approximately $52 million available for sale. Capital Corp. is currently in
discussions to sell the remaining loans available for sale.
7
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein that are not historical facts,
including but not limited to statements regarding anticipated future capital
requirements, the Company's future acquisition and development plans, the
Company's future cost reduction and recapitalization plans, the Company's
ability to obtain additional debt, equity or other financing, and the Company's
ability to generate cash from operations and further savings from existing
operations, are based on current expectations. These statements are forward
looking in nature and involve a number of risks and uncertainties. Actual
results may differ materially from those projected, estimated, assumed or
anticipated. Among the factors that could cause actual results to differ are the
following: the availability of sufficient capital to finance the Company's
business plan on terms satisfactory to the Company; competitive factors, such as
changes in fees earned from originating and servicing multifamily and commercial
mortgage loans, the introduction of new competitors, future acquisitions and
strategic partnerships; general business and economic conditions; and the other
risk factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission. Readers should not place undue reliance on
any such forward-looking statements, which are made pursuant to the Private
Securities Litigation Reform Act of 1995.
GENERAL OVERVIEW
Over the past several years, the Company has experienced significant growth
in its revenues, annual production volume and servicing portfolio. During the
third quarter of 1998, however, the Company experienced significant losses
resulting from the extraordinary volatility in commercial mortgage-backed
security spreads and interest rates on U.S. Treasury securities. In response to
these losses, the Company is taking a number of actions to improve its financial
position, including changes in its securitization strategy, a cost reduction
program and recapitalization plans. On a going-forward basis, to the extent that
the company is successful in these initiatives, the Company will reduce
operating expenses and decrease loans held for sale and accompanying warehouse
balances. Additionally, the Company will no longer need to enter into short sale
transactions.
The Company analyzes its operations through three business segments:
mortgage banking, capital markets and advisory services. The mortgage banking
business segment consists of corporate administrative expenses and the
activities of WMF Washington Mortgage and its subsidiaries: WMF Proctor, WMF
Huntoon Paige and WMF Robert C. Wilson (the "Acquisitions"). The capital markets
business segment consists of Capital Corp., and the advisory services segment
consists of Carbon Mesa.
RESTATEMENT
On October 14, 1998, the Company publicly announced that it had
retroactively revised its accounting for U.S. Treasury short sale positions held
by Capital Corp., and as a result, the Company had incurred a pretax loss of
$7.5 million and a consolidated after-tax loss of $4.3 million for the six
months ended June 30, 1998. The Company calculated its third-quarter financial
results using those figures. However, after additional analysis, the Company has
determined that $0.9 million of the pretax loss and $0.6 million of the
after-tax loss, originally attributed to the second quarter, were actually
incurred during the third quarter of 1998.
The Company's total pretax and after-tax losses for the nine-month
period ended September 30, 1998 have not changed.
RESULTS OF OPERATIONS - SUMMARY
The Company's primary business activities are commercial and
multifamily loan servicing, loan origination and sales of the loans to investors
in the secondary market. With the formation of Capital Corp. and Carbon Mesa,
the Company operates a commercial mortgage conduit, manages commercial mortgage
investment funds, and provides special asset management services. Revenues from
mortgage banking activities are earned from the origination of commercial and
multifamily real estate mortgage loans and the servicing of such loans. The
Company's revenue includes loan servicing fees, gains on sale of mortgage loans
(including origination fees and related gains on originated servicing rights),
interest income on loans prior to sale, placement fees (revenue earned relating
to utilization of escrow funds), fund management fees and other income. While
the Company does not have any immediate plans to securitize the loans it
originates, Capital Corp. may earn securitization trading profits in the future.
Through an ownership interest in COMIT, the Company also invests in structured
real estate debt.
The Company's revenue is significantly influenced by the timing of
originations and sales of mortgage loans and is sensitive to economic factors
such as the general level of interest rates and demand for commercial and
multifamily real estate. As a result,
8
<PAGE> 12
future revenues may fluctuate due to changes in these factors. Therefore, the
Company's historical results may not be indicative of future periods.
During the first nine months of 1998, the Company originated
approximately $3.3 billion in multifamily and commercial real estate loans. This
figure excludes $306 million of loans originated by the Company, which have not
yet been sold to third party investors.
The following table sets forth information derived from the Company's
consolidated statements of operations and reconciles the summary segment
financial information to the consolidated statements of operations for each of
the periods presented:
Segment Financial Information and Reconciliation to Consolidated Statements
Statements of Operations
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/98 9/30/97
(as restated)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Mortgage Banking *** $15,895 $12,957 $44,232 $29,497
Capital Markets 2,223 - 5,445 -
Advisory Services 1,068 - 1,125 -
-----------------------------------------------------------------------
Total 19,186 12,957 50,802 29,497
Consolidated Statement 19,186 12,957 50,802 29,497
Expenses
Mortgage Banking *** 13,970 10,435 39,405 25,590
Capital Markets 48,894 - 59,720 -
Advisory Services 981 - 1,487 -
Non-operating interest 852 235 1,502 563
-----------------------------------------------------------------------
Total 64,697 10,670 102,114 26,153
Consolidated Statement 64,697 10,670 102,114 26,153
Pretax income (loss) (45,511) 2,287 (51,312) 3,344
Provision (benefit) for taxes (15,288) 1,014 (17,385) 1,620
-----------------------------------------------------------------------
Net income (loss) ($30,223) $1,273 ($33,927) $1,724
=======================================================================
Mortgage Banking EBITDA *** 3,849 4,108 10,453 8,440
Capital Markets EBITDA (46,615) - (54,159) -
Advisory Services EBITDA 132 - (275) -
-----------------------------------------------------------------------
Total ($42,634) $4,108 ($43,981) $8,440
Consolidated EBITDA ($42,634) $4,108 ($43,981) $8,440
</TABLE>
*** Mortgage Banking operations includes corporate
administrative expenses.
9
<PAGE> 13
The following table sets forth information derived from the Company's
consolidated balance sheet for each of the periods presented and a
reconciliation to the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------------------------
<S> <C> <C>
Assets
Mortgage Banking *** $113,615 $119,331
Capital Markets 581,079 -
Advisory Services 4,142 -
------------------------------------
Total 698,836 119,331
Consolidated Statement $698,836 $119,331
====================================
</TABLE>
*** Mortgage Banking operations includes corporate
administrative expenses.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997
Net income (loss) was ($30.2) million for the three months ended
September 30, 1998, a decrease of $31.5 million from $1.3 million for the same
period in 1997. Net income (loss) was ($33.9) million for the nine months ended
September 30, 1998, a decrease of $35.6 million from $1.7 million for the same
period in 1997. The decline in net income is due primarily to short sale
transaction losses of $37.2 million and a loss of $10.4 million on loan sales at
Capital Corp. for the third quarter, 1998. The losses were partially offset by
higher gain on loan sales, servicing revenue and placement fee income in the
mortgage banking segment. The pretax losses were further offset by a tax credit
of $15.3 million and $17.4 million for the three and nine months September 30,
1998, respectively.
The Company's earnings (losses) before non-operating interest expense,
income taxes, depreciation and amortization (EBITDA) for the three months ended
September 30, 1998 were ($42.6) million, a decrease of $46.7 million from $4.1
million for the same period in 1997. EBITDA for the nine months ended September
30, 1998 was ($44.0) million, a decrease of $52.4 million from $8.4 million for
the same period in 1997. The decrease in EBITDA for the three and nine months
ended September 30, 1998 as compared to the same period for 1997 is due
primarily to Capital Corp.'s short sale transaction and loan losses discussed
above. Higher servicing fee and placement fee income helped to offset the loss
in EBITDA, as the Company's servicing portfolio balance at September 30, 1998
was $12.7 billion, up from $8.7 billion as of September 30, 1997.
EBITDA is widely used in the industry as a measure of a company's
operating performance, but should not be considered as an alternative either (i)
to income from continuing operations (determined in accordance with generally
accepted accounting principles) as a measure of profitability or (ii) to cash
flows from operating activities (determined in accordance with generally
accepted accounting principles). EBITDA does not take into account the Company's
debt service requirements and other commitments and, accordingly, is not
necessarily indicative of amounts that are available for discretionary uses.
The Company's consolidated tax benefit for the three months ended
September 30, 1998 was $15.3 million, an increase in benefit of $16.3 million
from the tax expense of $1.0 million for the same period in 1997. The Company's
consolidated tax benefit for the nine months ended September 30, 1998 was $17.4
million an increase in benefit of $19.0 million from a tax expense of $1.6
million for the same period in 1997. The tax provision change is the result of
the Company recognizing a deferred tax asset related to the losses incurred
during the three and nine months ended September 30, 1998. Differences between
the effective income tax rate and the Federal and State income tax rates are due
primarily to the amortization of goodwill, a portion of which is not deductible
for income tax purposes. The Company has concluded, that it is more likely than
not, that it will have sufficient taxable income, either through continuing
operations or asset dispositions, to realize the tax benefit of $17.4 million.
10
<PAGE> 14
Mortgage Banking Operations:
Servicing fees earned by the mortgage banking segment were $3.7 million
for the three months ended September 30, 1998, an increase of $0.6 million or
19% from $3.1 million for the same period in 1997. Servicing fees were $11.0
million for the nine months ended September 30, 1998, an increase of $2.3
million or 26% from $8.7 million for the same period in 1997. Revenue related to
mortgage servicing is based upon the unpaid principal balance of loans serviced.
The increase in servicing fees for the three and nine months ended September 30,
1998 is a result of the principal balance of mortgage banking's servicing
portfolio increasing to $12.7 billion as of September 30, 1998, from $8.7
billion as of September 30, 1997, an increase of 46%. The percentage increase in
servicing fee revenue is less than the percentage increase in the servicing
portfolio because the servicing fee on the added servicing, which is primarily
received from insurance companies, is lower than the Company's historical
average servicing rate.
Gain on sale of mortgage loans was $5.6 million for the three months
ended September 30, 1998, a decrease of $0.1 million or 2% from $5.7 million for
the same period in 1997. Gain on sale of mortgage loans was $15.3 million for
nine months ended September 30, 1998, an increase of $4.8 million or 46% from
$10.5 million for the same period in 1997. For the three and nine months ended
September 30, 1998, the mortgage banking segment sold $1.1 billion and $2.6
billion mortgage loans, respectively, as compared to $1.0 billion and $1.7
billion for the three and nine months ended September 30, 1997, respectively.
The decrease in gain on sale of mortgage loans primarily results from a $1.3
million loss related to an interest rate lock on a single loan sold during the
third quarter. Gain on sale of mortgage loans includes the gain on recognizing
originated mortgage servicing rights in the amount of $3.7 million for the nine
months ended September 30, 1998.
Interest income was $1.4 million for the three months ended September
30, 1998, a decrease of $0.1 million or 7% from $1.5 million for the same period
in 1997. Interest income was $3.7 million for the nine months ended September
30, 1998 and 1997. The decrease for the quarter was due to decreases in mortgage
interest rates on the loans held in warehouse.
Placement fee income was $2.5 million for the three months ended
September 30, 1998, an increase of $0.9 million or 56% from $1.6 million for the
same period in 1997. Placement fee income was $6.7 million for the nine months
ended September 30, 1998, an increase of $2.8 million or 72% from $3.9 million
for the same period in 1997. This increase was the result of an increase in the
average investor escrow balances held by the Company, from $272.8 million to
$345.9 million for the nine months ended September 30, 1997 and 1998,
respectively. The escrow balances are on deposit in escrow bank accounts and are
not included in the Company's balance sheet.
Other income (which includes prepayment penalties, termination fees and
loan management fees) was $1.6 million for the three months ended September 30,
1998, an increase of $1.4 million or 700% from $0.2 million for the same period
in 1997. Other income was $3.9 million for the nine months ended September 30,
1998, an increase of $3.1 million or 388% from $0.8 million for the same period
in 1997. The increase was the result of increased prepayment penalties,
termination fees and loan management fees.
The mortgage banking segment's total expenses consist of salaries and
benefits (including commissions), other general and administrative expenses,
provision for loan servicing losses, operating interest expense, amortization of
mortgage servicing rights, and other depreciation and amortization. Mortgage
banking's expenses include corporate administrative expenses.
Salaries and benefits, the largest category of costs for the segment,
increased with loan production primarily due to the payment of commissions on
loan originations. Salaries and benefits expense was $7.9 million for the three
months ended September 30, 1998, an increase of $2.4 million, or 44%, from $5.5
million for the same period in 1997. Salaries and benefits expense was $20.7
million for the nine months ended September 30, 1998, an increase of $7.6
million or 58%, from $13.1 million for the same period in 1997. This increase is
due primarily to increased originations and the Acquisitions. Salaries and
benefits related to corporate administrative costs also increased due to the
acquisition of Carbon Mesa, and the formation of Capital Corp. These factors,
combined with mortgage banking's expansion into non-multifamily commercial
lending, contributed to the increase in the number of mortgage banking and
corporate administrative employees from 239 as of September 30, 1997 to 356 as
of September 30, 1998.
General and administrative expenses consist of professional fees,
travel, management information, telephone and equipment rental, and other
expenses. General and administrative expenses were $2.5 million for the three
months ended September 30, 1998,
11
<PAGE> 15
an increase of $0.1 million or 4% from $2.4 million for the same period in 1997.
General and administrative expenses were $8.6 million for the nine months ended
September 30, 1998, an increase of $3.4 million or 65% from $5.2 million for the
same period in 1997. The increase is a result of integration and start-up costs
associated with the Acquisitions, Carbon Mesa and Capital Corp.
Occupancy expense was $0.9 million for the three months ended September
30, 1998, an increase of $0.4 million or 80% from $0.5 million for the same
period in 1997. Occupancy expense was $2.6 million for the nine months ended
September 30, 1998, an increase of $1.1 million or 73% from $1.5 million for the
same period in 1997. This increase was due to employment increases and the
opening of new offices in the fourth quarter of 1997 and first quarter of 1998.
Mortgage banking's provision for loan servicing losses was $300,000 for
the three months ended September 30, 1998, an increase of $273,000 or 1011% from
$27,000 for the same period in 1997. Mortgage banking's provision for loss was
$800,000 for the nine months ended September 30, 1998, an increase of $300,000
or 60% from $500,000 for the same period in 1997. The provision for losses is
the result of management's ongoing assessment of the Company's exposure related
to its Fannie Mae DUS portfolio. Mortgage banking's principal balance of Fannie
Mae DUS loans in the servicing portfolio was $1.2 billion and $838 million as of
September 30, 1998 and 1997, respectively.
Warehouse interest expense was $0.4 million for the three months ended
September 30, 1998, a decrease of $0.1 million, or 20% from $0.5 million for the
same period in 1997. Warehouse interest expense was $1.1 million for the nine
months ended September 30, 1998, an increase of $0.4 million or 57% from $0.7
million for the same period in 1997. The decrease for the quarter was primarily
due to lower interest rates on the related borrowings.
Non-operating interest expense was $0.8 million for the three months
ended September 30, 1998, an increase of $0.6 million or 300% from $0.2 million
for the same period in 1997. Non-operating interest expense was $1.5 million for
the nine months ended September 30, 1998, an increase of $0.9 million or 150%
from $0.6 million for the same period in 1997. This increase was due to
increased borrowings related to the capitalization of Capital Corp. throughout
1998, the Acquisitions during the fourth quarter of 1997 and the purchase of
Carbon Mesa in first quarter of 1998.
Depreciation and amortization was $1.9 million for the three months
ended September 30, 1998, an increase of $0.3 million or 17% from $1.6 million
for the same period in 1997. Depreciation and amortization was $5.6 million for
the nine months ended September 30, 1998 an increase of $0.9 million or 20% from
$4.5 million for the same period in 1997. This increase was due primarily to the
amortization related to the goodwill recognized as a result of the Acquisitions
in the last quarter of 1997.
Capital Markets Segment:
The capital markets segment of the Company, Capital Corp., was formed
in February of 1998 to conduct the securitization conduit activities of the
Company. During the quarter, capital markets experienced a loss of $10.4 million
on the sale of loans with a principal balance $691 million. This loss was
partially offset by a gain from originated mortgage servicing rights of $105,200
and a gain from a sale of servicing rights of $3.5 million.
Interest income earned on commercial mortgage loans held for sale was
$9.2 million for the three months and $12.3 million for the nine months ended
September 30, 1998. The increase in the third quarter was due to an increase in
the average balance of loans held for sale. The capital markets segment
originated $651 million in multifamily and commercial real estate loans during
the third quarter.
Salary and benefits expense was $2.6 million for the three months and
$3.4 million for the nine months ended September 30, 1998, respectively. The
increase during the third quarter primarily relates to an increase in the number
of employees within the capital markets segment.
Occupancy expense was $351,997 and $441,379 for the three and nine
months ended September 30, 1998, respectively. The third quarter increase was
due to the opening of two loan production offices.
12
<PAGE> 16
Interest expense was $7.6 million and $10.1 million for the three and
nine months ended September 30, 1998, respectively. The third quarter increase
is the result of increased borrowings to finance the acquisition of commercial
mortgage loans.
Realized and unrealized losses on short sales of U.S. Treasury
securities for the three and nine months ended September 30, 1998 were $37.2
million and $43.7 million, respectively. These losses are attributed to the
Company's use of short sales of U.S. Treasury securities to manage interest rate
volatility. The increased losses, during the third quarter, are the result of
interest rate declines in U.S. Treasury securities and changes in the global
economy.
Other general and administrative expense was $1.0 million and $2.0
million for the three and nine months ended September 30, 1998, respectively.
The third quarter increase is primarily due to the increase in the number of
loan production offices in the third quarter.
Advisory Services Segment:
The advisory services segment of the Company, Carbon Mesa, began
operations during the second quarter of 1998. Revenue within the advisory
services segment of the Company consists of origination fee income and
management fees. Origination fee income includes structuring fees and loan
processing fees (included in gain on loan sales). Structuring fees are paid to
Carbon Mesa for structuring loans for borrowers and loan processing fees are
paid to Carbon Mesa for processing mortgage loan applications. For the three and
nine months ended September 30, 1998, origination fees were $989,369 and $1.0
million, respectively. The increase was due to Carbon Mesa's increased loan
structuring and processing volume. Carbon Mesa originates loans for and manages
two commercial mortgage funds. Those funds paid Carbon Mesa management fees of
$78,760 and $122,280 for the three and nine months ended September 30, 1998,
respectively.
Expenses consist primarily of salary and benefits, occupancy and
amortization. Total expenses were $981,675 and $1.5 million for the three and
nine months ended September 30, 1998, respectively. The increase is primarily
due to increased commissions and the addition of new employees related to the
increased volume during the third quarter.
Liquidity and Capital Resources
The Company's principal financing needs are the funding of loan
originations, the pursuit of new company acquisitions, the purchase of servicing
rights and, in the third quarter, the payment of short sale transaction margin
calls. To meet these needs, the Company currently utilizes warehouse lines of
credit, a secured line of credit and a revolving credit facility. As part of the
Company's strategy to limit interest rate and spread risk, Capital Corp. has
limited its existing credit facility with Merrill Lynch Capital Markets Inc. to
$270 million and has added a $50 million revolving credit facility. Under its
terms, commercial mortgage loans can be sold weekly or as often as necessary to
replenish the revolving credit facility.
The Company's debt agreements require the maintenance of certain
financial ratios relating to liquidity, leverage, working capital and net worth,
among other restrictions. On September 30, 1998 the Company was in default of
debt covenants due to transactions with affiliates and debt service coverage.
The Company is currently receiving month-to-month forbearance, the most recent
of which matures on December 14, 1998. The Company has taken certain measures to
cure the default under its credit lines however, if the Company is unable to
cure the covenant defaults, the lender may accelerate repayment of the debt.
Pursuant to the forbearance, the Company's lenders under existing lines of
credit for the Company's Fannie Mae and FHA products have reaffirmed the
availability of the warehouse credit. The Company has fully borrowed all amounts
available under its $10 million working capital line of credit.
The Company has incurred substantial operating losses and at September
30, 1998, has a substantial working capital deficit. The Company has developed a
plan to raise up to $30 million of additional capital, and while the Company
believes that such amounts will be sufficient to meet its needs, there can be no
assurance that the plan will be successful or that the amount will be adequate.
The plan includes the use of $20 million of equity proceeds for the repayment of
the subordinated note.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates but generally retains the
right to service the loans, thereby increasing the Company's investment in loan
servicing rights. The Company views the sale of loans on a servicing-retained
basis in part as an investing activity. Significant unanticipated
13
<PAGE> 17
prepayments in the Company's servicing portfolio could have a material adverse
effect on the Company's future operating results and liquidity.
The Company enters into commitments to extend credit to borrowers in
the normal course of business. In the event there are significant fluctuations
in interest rates and spreads, the value of the commitments could have a
material adverse effect on the Company's future operating results and
consequently the Company's ability to honor the commitments. In the future, the
Company intends to manage this risk by issuing commitments to borrowers and
obtaining loan sale commitments from appropriate investors at the same time.
This essentially simultaneous commitment from both a borrower and a mortgage
investor should enable the Company to eliminate its exposure to interest rate
and credit spread changes for each transaction.
During the nine months ended September 30, 1998, Capital Corp.
originated mortgage loans that were held for securitization. During the holding
period Capital Corp. entered into U.S. Treasury short sale arrangements (which
were marked to market and recorded in earnings), to mitigate the impact of
adverse changes in interest rates. During the nine months ended September 30,
1998, the Company was required to fund margin calls related to changes in the
value of its U.S. Treasury short sale position. For cash flow purposes, Capital
Corp. made arrangements with its warehouse lender and short sale transaction
counterparties to permit Capital Corp. to offset the impact of Treasury short
sale gains and losses with offsetting gains and losses in mortgage loans held
for securitization and to reduce the frequency and amount of margin calls.
Significant fluctuations in interest rates and credit spreads could impact the
effectiveness of the U.S. Treasury short sale arrangements and consequently
could have a material adverse effect on Capital Corp.'s future operating results
and liquidity. Additionally, the U.S. Treasury short sale arrangements do not
mitigate Capital Corp.'s exposure to credit risk during the holding period, and
thus fluctuations in the value of the underlying properties could have a
material adverse effect on the Company's operating results. The Company is not
planning to contribute additional capital to Capital Corp. or to take principal
risk positions at Capital Corp.
On September 4, 1998, the Company and COMIT entered into a Credit
Agreement whereby COMIT loaned $20 million to the Company and the Company
granted COMIT warrants to purchase up to 1.2 million shares of Common Stock of
the Company at $11.25 per share. COMIT immediately assigned the warrants to two
of its shareholders, who provided the capital for the loan. Harvard Private
Capital Holdings, Inc. ("Harvard") received warrants for the purchase of up to
960,000 shares of Common Stock, and Capricorn Investors II, L.P. ("Capricorn")
received warrants for the purchase of up to 240,000 shares of Common Stock.
Cash Flows
Operating Activities: In the nine months ended September 30, 1998, the
Company's operating activities used cash of approximately $302 million primarily
to increase its mortgage loans held for sale. These are viewed as short-term
assets and are generally financed with short-term borrowings as discussed under
"Financing Activities".
Investing Activities: The primary investing activity for which cash was
provided during the nine months ended September 30, 1998 was the acquisition of
Carbon Mesa and the lending and Treasury short sale activities of Capital Corp.
Financing Activities: Net cash provided by financing activities
amounted to $298 million for the nine months ended September 30, 1998. These
amounts were used to capitalize Capital Corp. as well as to finance the increase
in mortgage loans held for securitization as discussed under "Operating
Activities".
During the nine months ended September 30, 1998, the Company's net
working capital deficit increased by $55.3 million from a deficit of $1.3
million to a deficit of $56.6 million. The increase in the deficit is primarily
the result of the losses at Capital Corp., as well as integration and start-up
costs associated with the Acquisitions, Carbon Mesa, and Capital Corp.
Information Systems and the Impact of the Year 2000
The Year 2000 issue results from a programming convention in which
computer programs use two digits rather than four to define the applicable year.
Software and hardware may recognize a date using "00" as the year 1900, rather
than the year 2000. Such an inability of computer programs to recognize a year
that begins with "20" could result in system failures, miscalculations or errors
causing disruptions of operations or other business problems, including, among
others, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
14
<PAGE> 18
The Company's Program. The Company has undertaken a program to address
the Year 2000 issue with respect to the following: (i) the Company's information
technology and operating systems (including its servicing, accounting, human
resources, and financial reporting systems); (ii) the Company's non information
technology systems (such as buildings, equipment, telephone systems and other
infrastructure systems that may contain embedded micro-controller technology;
certain systems of the Company's major vendors and material service providers
(insofar as such systems relate to the Company's business activities with such
parties); and the Company's material customers and investors (insofar as the
Year 2000 issue relates to the Company's ability to provide services to such
customers). As described below, the Company's Year 2000 program involves (i) an
assessment of the Year 2000 problems that may negatively affect the Company,
(ii) the development of remedies to address the problems discovered in the
assessment phase, (iii) the testing of such remedies; and (iv) the preparation
of contingency plans to deal with worst case scenarios.
Assessment Phase. The following table shows the current state of Year
2000 compliance in the Company's computer systems:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMPONENT YEAR 2000 COMPLIANT NUMBER YEAR 2000 NON COMPLIANT NUMBER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Business Critical Software
- --------------------------
- --------------------------------------------------------------------------------------------------------------
Servicing Systems 0 4
- --------------------------------------------------------------------------------------------------------------
Accounting System 1 0
- --------------------------------------------------------------------------------------------------------------
Human Resources 1 0
- --------------------------------------------------------------------------------------------------------------
Hardware
- --------
- --------------------------------------------------------------------------------------------------------------
Personal Computers 400 100
- --------------------------------------------------------------------------------------------------------------
File/Data Servers 29 8
- --------------------------------------------------------------------------------------------------------------
Networks 20 0
- --------------------------------------------------------------------------------------------------------------
Office Software Suites 380 20
- ----------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's internal evaluation of its internal systems is complete
with the exception of PBX and other telephone equipment, and the remediation
phase has begun. In addition, in the last quarter of 1998, the Company currently
expects to complete sending letters to certain of its significant hardware,
software, and other equipment vendors and other material service providers, as
well as to its significant customers, requesting them to provide the Company
with detailed, written information concerning existing or anticipated Year 2000
compliance by their systems insofar as the systems relate to such parties'
business activities with the Company. While the Company cannot thoroughly assess
these other companies' processes and the systems on which they rely, the Company
will attempt to identify areas of vulnerability and reengineer its interactions
appropriately. In the event a third party relationship is deemed to impose an
outright negative material impact on its operations, the Company will engage
alternative service-providers who have been thoroughly screened for compliance.
The Company currently expects to complete these inquiries by March 30, 1999.
Remediation and Testing Phase. The activities conducted during the
remediation and testing phase are intended to address potential Year 2000
problems in Company owned and operated software, hardware, and communications
systems, as well as other non information technology equipment and facilities
with embedded chips, in an effort to demonstrate that the affected systems will
be Year 2000 compliant on a timely basis. All computer software systems in use
for critical business systems are vendor supplied. Of these systems, our
accounting and human resources systems have been certified Year 2000 compliant
and will be substantially tested by December 31, 1998. The Company is in the
process of consolidating four loan processing systems to two. The consolidation
currently is expected to be completed by February 28, 1999. During the same
timeframe, the surviving loan servicing systems will be upgraded to the Year
2000 compliant versions of the software and tested internally. These systems
will then be tested with major customers and investors to ensure that the
delivery of proper data will occur in the Year 2000. The Company currently
expects that all non-compliant servers will be upgraded to Year 2000 compliant
operating systems by December 31, 1998. The Company currently expects that all
non-compliant PCs will be put out of service by December 31, 1998. The Company
has a large surplus of Year 2000 compliant PCs that will be substituted for
non-compliant models. All non-Year 2000 compliant office software are expected
to be replaced by June 30, 1999. The Company currently expects that all PBX, and
other telephone equipment will be remediated by March 30, 1999.
Contingency Plans. The company is developing contingency plans to
handle its most reasonably likely worst case Year 2000 scenarios, which it has
not yet identified fully. The Company intends to complete its determination of
worst case scenarios
15
<PAGE> 19
after it has received and analyzed responses to substantially all of the
inquiries it has made of third parties. Following its analysis, the Company
intends to develop a timetable for completing its contingency plans.
Costs related to the Year 2000 Issue. To date, the Company has incurred
approximately $50,000 in costs for its Year 2000 program, mostly in man-hours.
The Company currently estimates that it will incur additional costs, which are
not expected to exceed $300,000. This number is being kept low since all
business critical software systems are being upgraded using normal vendor
maintenance agreements. The Company currently believes that the costs to resolve
compliance issues with respect to other information systems and its
non-information technology systems will not be material. However, there can be
no assurance that the foregoing cost estimate will not change as the Company
completes its assessment.
Risks related to the Year 2000 issue. Although the Company's Year 2000
efforts are intended to minimize the adverse effects of the Year 2000 issue on
the Company's business and operations, the actual effects of the issue and the
success or failure of the Company's efforts described above cannot be known
until the year 2000. Failure by the Company and its major vendors, other
material service providers and material customers to address adequately the
respective Year 2000 issues in a timely manner (insofar as such issues relate to
the Company's business) could have a material effect on the Company's business,
results of operations and financial condition.
16
<PAGE> 20
PART II.
OTHER INFORMATION
Item 1: Legal Proceedings.
The Company is involved in litigation related to the normal course of
its business. Management is of the opinion that the litigation will not have a
material adverse impact on the Company's financial position or operating
results.
Item 2: Changes in Securities.
On September 4, 1998, the Company and COMIT entered into a Credit
Agreement whereby COMIT agreed to lend $20 million to the Company and the
Company granted warrants for the purchase of up to 1.2 million shares of Common
Stock of the Company to COMIT. COMIT immediately assigned the warrants to two of
its shareholders, who provided the capital for the loan. Harvard received
warrants for the purchase of up to 960,000 shares of Common Stock, and Capricorn
received warrants for the purchase of up to 240,000 shares of Common Stock.
The Company offered the warrants only to Harvard and Capricorn, and no
underwriter was involved in the issuance. The distribution of the warrants to
COMIT and COMIT's assignment of the warrants to Harvard and Capricorn were
exempt from registration under Rule 4(2) of the Securities Act of 1933.
Harvard and Capricorn may exercise the warrants between October 19,
1998 and September 4, 2003, at an exercise price of $11.25 per share. The
Company may repurchase all or a portion of the warrants from Harvard and
Capricorn before September 4, 1999, at a purchase price of $11.25 per share.
Item 3: Defaults upon Senior Securities.
None
Item 4: Submission of Matter to a Vote of Security Holders.
None
Item 5: Other Information.
None
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of The WMF Group, Ltd. (the "Company") (1)
3.2 Amendment to the Company's Restated Certificate of Incorporation (2)
3.3 Amended and restated by-laws of The WMF Group, Ltd. (5)
10.1 Mortgage Selling and Servicing Contract between Fannie Mae and the Company, dated
December 21, 1990. (1)
10.2 Delegated Underwriting and Servicing Addendum to Mortgage Selling and Servicing
Contract between Fannie Mae and the Company, dated as of March 1, 1994. (1)
10.3 Delegated Underwriting and Servicing Master Loss Sharing Agreement between Fannie
Mae and the Company, dated as of March 1, 1994. (1)
10.4 Delegated Underwriting and Servicing Reserve Agreement among Fannie Mae, State
Street Bank and Trust Company and the Company, dated as of June 4, 1996. (1)
10.5 Term Loan Promissory Note between the Company, WMF/Huntoon, Paige Associates Limited
and Residential Funding Corporation, dated June 14, 1996. (1)
</TABLE>
17
<PAGE> 21
<TABLE>
<S> <C>
10.6 Servicing Facility Promissory Note between the Company, WMF/Huntoon, Paige Associates
Limited and Residential Funding Corporation, dated June 14, 1996. (1)
10.7 Letter Agreement dated October 25, 1996 between Washington Mortgage Financing Group and
Michael D. Ketcham. (1)
10.8 Key Employee Incentive Plan. (2)
10.9 Key Employee Incentive Award Agreement. (2)
10.10 Key Employee Deferral Compensation Plan. (2)
10.11 Employee Stock Purchase Plan. (2)
10.12 Stock Purchase Agreement dated as of October 31, 1997 between Washington Mortgage
Financial Group, Ltd. and The Robert C. Wilson Company (3)
10.13 Asset Purchase Agreement dated as of December 16, 1997 between Washington Mortgage
Financial Group, Ltd. and NY Urban West Inc. (4)
10.14 Master Repurchase Agreement dated as of March 5, 1998 between WMF Capital Corp. and
Merrill Lynch Mortgage Capital Inc. (portions have been omitted pursuant to a request
for confidentiality treatment)
11 Statement re re-computation of per share earnings *
21 Subsidiaries of the registrant (4)
27 Financial data schedule *
</TABLE>
(b) Report on Form 8-K.
Form 8-K dated October 23, 1998, filed on October 26, 1998, reporting
third-quarter losses.
(1) Incorporated by reference to the registration statement on Form 10
previously filed by the Company on August 4, 1997.
(2) Incorporated by reference to the registration statement on Form S-1 filed by
the Company on October 30, 1997.
(3) Incorporated by reference to the Form 8-K previously filed by the Company on
November 20, 1997.
(4) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997 filed on March 31, 1998.
(5) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1998 filed on May 15, 1998.
* Filed herewith.
18
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<S> <C>
THE WMF GROUP, LTD.
Date: December 22, 1998 By: /s/ Shekar Narasimhan
---------------------
Shekar Narasimhan
Director, President and Chief
Executive Officer
Date: December 22, 1998 By: /s/ Michael D. Ketcham
----------------------
Michael D. Ketcham
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial Officer)
</TABLE>
19
<PAGE> 1
THE WMF GROUP, LTD.
(in thousands, except per share data)
EXHIBIT 11.
Statement re re-computation of per share earnings
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------------------------------------
NET PER SHARE NET PER SHARE NET PER SHARE NET PER SHARE
LOSS SHARES AMOUNT INCOME SHARES AMOUNT LOSS SHARES AMOUNT INCOME SHARES AMOUNT
---- ------ ------ ------ ------ ------ ---- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS ($30,223) 5,270 ($5.73) $1,273 4,217 $0.30 ($33,927) 5,199 ($6.53) $1,724 4,217 $ 0.41
Effect of
dilutive
securities: - - - - - - - - - - - -
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
DILUTED EPS ($30,223) 5,270 ($5.73) $1,273 4,217 $ 0.30 ($33,927) 5,199 ($6.53) $1,724 4,217 $ 0.41
--------- ----- ------- ------ ----- ------ --------- ----- ------- ------ ------ ------
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,155
<SECURITIES> 3,820
<RECEIVABLES> 303,244
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 623,273
<PP&E> 4,574
<DEPRECIATION> 2,055
<TOTAL-ASSETS> 698,836
<CURRENT-LIABILITIES> 679,465
<BONDS> 309,667
0
0
<COMMON> 53
<OTHER-SE> 9,613
<TOTAL-LIABILITY-AND-EQUITY> 698,836
<SALES> 0
<TOTAL-REVENUES> 50,802
<CGS> 0
<TOTAL-COSTS> 39,053
<OTHER-EXPENSES> 49,495
<LOSS-PROVISION> 813
<INTEREST-EXPENSE> 12,753
<INCOME-PRETAX> (51,312)
<INCOME-TAX> (17,385)
<INCOME-CONTINUING> (33,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,927)
<EPS-PRIMARY> (6.53)
<EPS-DILUTED> (6.53)
</TABLE>
