<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1998
REGISTRATION NO. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________
THE WMF GROUP, LTD.
(Exact name of registrant as specified in its charter)
__________________
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<S> <C> <C>
DELAWARE 6162 54-1647759
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
1593 SPRING HILL ROAD SHEKAR NARASIMHAN
SUITE 400 1593 SPRING HILL ROAD
VIENNA, VIRGINIA 22182 SUITE 400
(703) 610-1400 VIENNA, VIRGINIA 22182
(ADDRESS, INCLUDING ZIP CODE, (703) 610-1400
AND TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER, INCLUDING
PRINCIPAL EXECUTIVE OFFICES) AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
_______________
Copy to:
RANDALL S. PARKS
HUNTON & WILLIAMS
RIVERFRONT PLAZA
951 EAST BYRD STREET
RICHMOND, VIRGINIA 23218
(804) 788-7375
_______________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after effectiveness of the Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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================================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT(2) PRICE(2) FEE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Rights to Purchase Shares of Common Stock, $.01 par value per share 2,666,567
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share 2,666,567 $5.00 $13,332,835 $3,707
================================================================================================================================
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(1) Maximum number of shares of The WMF Group, Ltd.'s common stock to be sold to
current holders of common stock of The WMF Group, Ltd., in this rights
offering.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) of the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
================================================================================
<PAGE>
================================================================================
The information in this prospectus is not complete and may be changed. The
Company may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell, and it is not soliciting an offer to buy, these securities
in any state where the offer or sale is not permitted.
================================================================================
2,666,567 SHARES
[WMF LOGO] COMMON STOCK
$5.00 PER SHARE
The Company is distributing transferable rights to individuals who own shares of
the Company's common stock. During this rights offering, the Company will issue
up to 2,666,567 shares of common stock.
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<CAPTION>
- ---------------------------------------------------------------
Net Proceeds
Rights Price to the Company (1)
- ---------------------------------------------------------------
<S> <C> <C>
Per Share $ 5.00
- ---------------------------------------------------------------
Total $13,332,835
- ---------------------------------------------------------------
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(1) Before deducting expenses payable by the Company,
estimated to be $_________.
===============================================================
THE EXERCISE OF THE RIGHTS INVOLVES SUBSTANTIAL RISK.
YOU SHOULD REFER TO THE DISCUSSION OF MATERIAL RISK FACTORS,
BEGINNING ON PAGE __ OF THIS PROSPECTUS.
===============================================================
You will receive 1.072 rights for each share of common stock that you own on
______________, 1999. You will not receive any fractional rights. Each right
entitles you to purchase one share of common stock for $5.00 per share. If you
exercise all of your rights, you will also have the opportunity to purchase
additional shares at the same purchase price.
Because they purchased approximately 3.6 million shares of the Company's capital
stock on December 31, 1998, Demeter Holdings Corporation ("Demeter"), Phemus
Corporation ("Phemus"), and Capricorn Investors, II, L.P. ("Capricorn"), have
agreed that they will not exercise, transfer or acquire any rights during this
rights offering.
However, Demeter, Phemus and Capricorn will purchase up to a total of 664,028
additional shares of capital stock not otherwise purchased during this rights
offering.
Shares of the Company's common stock are currently traded on the National Market
of The Nasdaq Stock Market, Inc. under the symbol "WMFG." The rights are
expected to trade on the _________________. BT Alex Brown, Inc. has informed
the Company that it intends to make a market in the rights.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is _________, 1999
<PAGE>
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY............................................................................................................. 1
Questions and Answers About The Company.................................................................................... 1
Questions and Answers About The Rights Offering............................................................................ 3
A WARNING ABOUT FORWARD-LOOKING STATEMENTS..................................................................................... 8
RISK FACTORS................................................................................................................... 9
Losses By The Company, Including Losses Related To Short-Sale Transactions, May Recur...................................... 9
Unsatisfied Loan Commitments May Cause Additional Losses................................................................... 9
Losses Related To Loans Held For Sale For Which The Company Does Not Have Investor Commitments Could
Affect The Company's Results Of Operations........................................................................... 10
The Company May Incur Losses Related To Loan Commitments For Which It Does Not Have A Purchaser And Has Not Entered Into
Hedge Arrangements................................................................................................... 10
Company's Loss Of Deferred Tax Assets Could Adversely Affect Shareholder Equity............................................ 10
If You Do Not Exercise Your Rights, Your Ownership Interest May Be Diluted................................................. 10
Principal Stockholders May Not Act In The Best Interest Of Other Stockholders.............................................. 11
Stand-By Commitment By Principal Stockholders Is Conditional............................................................... 12
If The Class A Stock Is Converted To Common Stock, The Principal Stockholders May Be Able To Control Most
Or All Shareholder Votes............................................................................................. 12
Maturity Of Warehouse Financing May Result In The Company's Inability To Make Additional Loans After April 1, 1999......... 13
The Company May Need Additional Capital Even After Rights Offering......................................................... 14
The Company May Be Unable To Complete Acquisitions Or Enter Into New Business Lines........................................ 15
The Company May Incur Losses On Mortgage Loans Under The DUS Program....................................................... 15
The Company Is Liable For Certain Representations And Warranties Concerning Mortgage Loans................................. 16
The Company May Incur Losses As A Result Of Changes In General Economic Conditions......................................... 16
The Company's Operations May Decline As A Result Of Impairment Of Mortgage Servicing Rights................................ 17
The Company May Not Be Able To Recover Advanced Funds...................................................................... 17
The Company May Incur Losses Upon Termination Of Certain Servicing Contracts............................................... 17
The Company May Be Unable To Continue To Comply With Government Regulation And Programs.................................... 18
The Company's Operations May Be Significantly Affected By The Year 2000 Problem............................................ 18
The Company Relies On Certain Key Personnel................................................................................ 20
The Company's Business Depends On Its Sales Staff.......................................................................... 20
The Company Is Subject To National And Regional Competition................................................................ 21
Certain Anti-Takeover Provisions May Affect Your Rights As A Shareholder................................................... 21
The Company Does Not Anticipate Paying Dividends On Common Stock........................................................... 21
No Prior Market For The Rights Exists...................................................................................... 21
The Sale Of A Substantial Amount Of Common Stock May Affect The Market Price............................................... 21
The Company's Stock Price Has Been And May Continue To Be Volatile......................................................... 22
THE COMPANY.................................................................................................................... 24
Recent Developments........................................................................................................ 24
Business................................................................................................................... 26
Business Strategy.......................................................................................................... 30
THE RIGHTS OFFERING............................................................................................................ 33
The Rights................................................................................................................. 33
Basic Subscription Right................................................................................................... 33
Oversubscription Privilege................................................................................................. 33
Stand-By Purchase Commitment By Principal Stockholders..................................................................... 34
Expiration Date............................................................................................................ 34
Withdrawal Right........................................................................................................... 34
Determination Of Share Price............................................................................................... 34
Transferability Of Rights.................................................................................................. 34
Exercise Of Rights......................................................................................................... 35
</TABLE>
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Method Of Payment.......................................................................................................... 35
Guaranteed Delivery Procedures............................................................................................. 36
Signature Guarantees....................................................................................................... 36
Shares Held For Others..................................................................................................... 37
Foreign Shareholders....................................................................................................... 37
Ambiguities In Exercise Of The Rights...................................................................................... 37
Company's Decision Binding................................................................................................. 38
No Revocation.............................................................................................................. 38
Fees and Expenses.......................................................................................................... 38
Subscription Agent......................................................................................................... 38
Financial Advisor.......................................................................................................... 39
IF YOU HAVE QUESTIONS.......................................................................................................... 40
USE OF PROCEEDS................................................................................................................ 41
CAPITALIZATION................................................................................................................. 41
PLAN OF DISTRIBUTION........................................................................................................... 42
FEDERAL INCOME TAX CONSIDERATIONS.............................................................................................. 43
Taxation Of Stockholders................................................................................................... 43
Taxation Of The Company.................................................................................................... 43
PRICE RANGE OF COMMON STOCK.................................................................................................... 44
SELECTED FINANCIAL DATA........................................................................................................ 45
LEGAL MATTERS.................................................................................................................. 47
EXPERTS........................................................................................................................ 47
IF YOU WOULD LIKE ADDITIONAL INFORMATION....................................................................................... 48
SIGNATURES..................................................................................................................... iv
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This section answers in summary form some questions you may have about the
Company and this rights offering. The information in this section is not
complete and may not contain all of the information that you should consider
before exercising your rights. You should read the entire prospectus
carefully, including the "Risk Factors" section and the documents listed
under "If You Would Like More Information."
QUESTIONS AND ANSWERS ABOUT THE COMPANY
WHAT IS THE WMF GROUP, LTD.?
. The WMF Group, Ltd. (the "Company") is one of the largest commercial
mortgage financial services companies in the United States, according
to a 1997 survey by the Mortgage Bankers Association of America.
. The Company is the nation's largest originator of multifamily and
healthcare loans insured by the Federal Housing Administration
("FHA"), based on statistics provided by the U.S. Department of
Housing and Urban Development.
. The Company is the nation's largest originator of multifamily loans
sold through Fannie Mae, based on statistics provided by Fannie Mae.
. The Company has originated more than $7 billion in multifamily and
commercial loans since 1993.
. As of September 30, 1998, the Company serviced loans having a total
outstanding principal balance of $12.7 billion.
. The Company has six subsidiary companies. Please see page __ for a
chart illustrating the Company's corporate structure.
. As of November 30, 1998, the Company had 343 employees in 19 cities
around the country.
. For more information, See "The Company."
WHAT DOES THE COMPANY DO?
The Company divides its business into three main segments:
. MORTGAGE BANKING: The Company's mortgage banking operations include
the origination, sale and servicing of multifamily and commercial
loans.
= Origination: The Company makes loans to fund the purchase and
construction of commercial buildings, such as apartment
complexes, hospitals and retail stores.
= Sale: After the Company originates a loan, it often sells the
loan to a mortgage investor. Some investors pool these loans
together and then securitize the loan pool, which means that the
investor sells interests in the loan pool to other investors.
= Servicing: Servicing a loan involves keeping records of the
borrower's payments and outstanding principal balance, sending
out monthly statements, collecting payments and fees on behalf of
the investors, remitting payments to the investors and performing
other services. The Company usually services the loans that it
originates and sells to investors. The Company also buys the
right to service loans that it does not originate.
1
Prospectus Summary
<PAGE>
. CAPITAL MARKETS: WMF Capital Corp. ("Capital Corp."), one of the
Company's subsidiaries, was created in early 1998 to run the
Company's capital markets operations. The capital markets segment
operates a commercial mortgage conduit. This means that the capital
markets segment originates loans and pools those loans with loans
originated by other firms. The capital markets segment then
securitizes the combined loan pool. The operations of Capital Corp.
have been substantially curtailed since it suffered substantial
losses in the fall of 1998.
. ADVISORY SERVICES: In March of 1998, the Company started its advisory
services operations through the creation of WMF Carbon Mesa Advisors,
Inc. ("WMF Carbon Mesa"). The advisory services segment manages
commercial mortgage investment funds and provides special asset
management services.
. For more information, see "The Company - Business."
WHAT IS THE COMPANY'S HISTORY?
. The Company entered the mortgage banking industry in 1992 as "WMF
Holdings, Inc.," a holding company for two companies that are now its
subsidiaries. One of those subsidiaries, WMF Huntoon, Paige
Associates, Limited, has operated a mortgage banking business under
various owners and under various names since 1979. The other
subsidiary, WMF Washington Mortgage Corp., has operated a mortgage
banking business under various owners and under various names since
1984.
. In April of 1996, NHP Incorporated purchased the Company and changed
its name to "NHP Financial Services, Ltd."
. In 1997, NHP Incorporated was purchased by Apartment Investment and
Management Co. As a condition of that merger, NHP Incorporated
renamed the Company "The WMF Group, Ltd.", and the Company became an
independent, publicly traded corporation on December 8, 1997.
WHERE IS THE COMPANY LOCATED?
. The Company's principal executive offices are located at:
The WMF Group, Ltd.
1593 Spring Hill Road, Suite 400
Vienna, Virginia 22182
(703) 610-1400
. The Company also has principal offices in:
* Edison, New Jersey * Dallas * Atlanta
* Phoenix * Houston * Charlotte
* Detroit * Los Angeles * Grand Rapids, Michigan
2
Prospectus Summary
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
WHAT IS A RIGHT?
The Company will distribute to you, at no charge, 1.072 rights for every
share of common stock that you own on ________, 1999. The Company will not
distribute any fractional rights, but will round the number of rights you are
to receive up or down to the nearest whole number. Each right entitles its
holder to purchase one share of common stock for $5.00. When you "exercise"
a right, that means that you choose to purchase the common stock that the
right entitles you to purchase. You may exercise any number of your rights,
or you may choose not to exercise any rights. See "The Rights Offering - The
Rights."
WHAT IS A RIGHTS OFFERING?
A rights offering is an opportunity for you to purchase additional shares of
common stock at a fixed price and in an amount proportional to your existing
interest in the Company. This enables you to maintain or increase your
current percentage ownership in the Company.
WILL EVERY SHAREHOLDER RECEIVE RIGHTS IN PROPORTION TO THEIR CURRENT
HOLDINGS?
Yes. However, on December 31, 1998, Demeter, Phemus and Capricorn purchased
a total of 3,635,972 shares of the Company's capital stock for approximately
$16.7 million. Demeter, Phemus and Capricorn have also surrendered warrants
to purchase 1.2 million shares of the Company's common stock and have entered
into a standby purchase commitment (described below).
Demeter, Phemus and Capricorn completed the purchase of capital stock before
the rights offering to provide the Company with additional equity more
quickly than would have been possible through the rights offering. Because
Demeter, Phemus and Capricorn purchased these shares in advance of the rights
offering, they have agreed that they will not exercise, transfer or
acquire any rights during the rights offering. Rights held by Demeter, Phemus
and Capricorn will expire without being exercised.
To guarantee the Company minimum proceeds of $3.3 million from the rights
offering, Demeter, Phemus and Capricorn have agreed to a standby commitment
to purchase up to a total of 664,028 additional shares of capital stock at
$5.00 per share if the Company does not sell all 2,666,567 shares offered in
the rights offering. See "The Rights Offering - StandBy Commitment by
Principal Stockholders."
WHY IS THE COMPANY ENGAGING IN A RIGHTS OFFERING?
The rights offering is part of a recapitalization plan that the Company
expects will raise up to approximately $30 million in equity for the Company
(the "Recapitalization Plan"). The Company needs the additional equity as a
result of losses incurred during the second and third quarters of 1998.
Instead of selling additional equity securities to outside parties, the
Company's Board of Directors has chosen to give you the opportunity to buy
more shares and provide the Company with additional capital.
In the second and third quarters of 1998, the Company incurred net losses of
$33.9 million, or $6.53 per share. Almost all of these losses were incurred
by Capital Corp. and resulted from volatility in commercial mortgage-backed
security markets and interest rates on U.S. Treasury securities. See "The
Company - Recent Developments."
As a result of these losses, the Company is in default of certain financial
covenants under its lines of credit and has substantially curtailed its
operations at Capital Corp. While the Company's line of credit lenders have
agreed to forbear
3
Prospectus Summary
<PAGE>
declaring the Company in default until April 1, 1999, the Company's other
lines of business are operating profitably, the Company requires additional
equity to repay certain of its debts and for working capital.
The Recapitalization Plan has two parts:
. Sale of Approximately $16.7 Million of Class A Stock to Demeter, Phemus
and Capricorn
On December 31, 1998, the Company's three largest shareholders, Demeter,
Phemus and Capricorn, purchased a total of 3,635,972 shares of the
Company's newly created Class A Non-Voting Convertible Preferred Stock
("Class A Stock") for an aggregate purchase price of approximately $16.7
million. See "The Company - Recent Developments."
Each share of Class A Stock will be converted into one share of the
Company's common stock, if the Federal Trade Commission does not object
to such a conversion pursuant to provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. If the Federal Trade Commission
objects to the conversion, Demeter, Phemus and Capricorn will retain
their shares of Class A Stock and will receive quarterly dividends on
those shares.
Also as part of the transaction, Harvard Private Capital Holdings, Inc.
("Harvard"), which is an affiliate of Demeter and Phemus, and Capricorn
canceled warrants to purchase 1,200,000 shares of common stock at a
price of $11.25 per share that were issued to them in connection with
their financing of the purchase of $20 million of the Company's
subordinated notes by Commercial Mortgage Investment Trust, Inc.
("COMIT") on September 4, 1998, immediately following the Company's
realization of its initial losses. In addition, Demeter, Phemus and
Capricorn have agreed to a standby purchase agreement, described below.
The Company has applied the proceeds of the sale of Class A Stock to
partially repay the subordinated notes held by COMIT. COMIT used the
repayment to redeem shares of its preferred stock that were sold to
Harvard and Capricorn to fund the purchase of the notes, effectively
resulting in the partial conversion of the subordinated notes into
common stock.
COMIT is a real estate investment trust controlled by Harvard and
Capricorn. WMF Carbon Mesa manages COMIT, and the Company owns a
minority ownership interest in COMIT.
Because of their participation in this transaction, Demeter, Phemus and
Capricorn have agreed not to exercise, transfer or acquire any rights
during the rights offering.
Demeter, Phemus and Capricorn have further agreed to a standby
commitment to purchase up to 664,028 shares of the Company's capital
stock for up to $3,320,140 in the rights offering, as described below.
. $13.3 Million Rights Offering
The Company is issuing all of its shareholders of record as of _______,
1999, 1.072 transferable rights for each share of common stock held by
them on that date. Each right will entitle you to purchase one share of
common stock for $5.00. Because Demeter, Phemus and Capricorn have
agreed not to exercise, transfer or acquire any rights, a total of
2,666,567 rights could be exercised during the rights offering for a
total purchase price of $13,332,835.
If the Company sells less than 2,666,567 shares during the rights
offering, Demeter, Phemus and Capricorn have also agreed to a standby
commitment under which they will purchase up to 664,028 shares of
capital stock at $5.00 per share for a maximum total purchase price of
$3,320,140. Consequently, the Company expects that it will sell at least
664,028 shares in the rights offering for total proceeds of $3,320,140.
The Company has agreed to apply the proceeds from the rights offering,
including proceeds from any shares sold to Demeter, Phemus and
Capricorn, first to repay the remaining subordinated notes held by
COMIT. If the
4
Prospectus Summary
<PAGE>
Company is unable to repay all of the subordinated notes held by COMIT,
Harvard and Capricorn will have the option of converting the remaining
notes for capital stock of the Company at an exchange rate of $5.00 per
share.
The Recapitalization Plan will result in the effective conversion of the
Company's $20 million of subordinated notes into capital stock and may
raise additional common equity, which will be used to repay a portion of
the Company's revolving debt and for working capital.
HOW MANY SHARES MAY I PURCHASE?
You will receive 1.072 rights for each share of common stock that you own on
________ __, 1999. The Company will not distribute fractional rights, but
will round the number of rights you are to receive up or down to the nearest
whole number. Each right entitles you to purchase one share of common stock
for $5.00. See "The Rights Offering - Basic Subscription Right."
If you exercise all of the rights that you receive, you will have the
opportunity to purchase additional shares of common stock. On the attached
Subscription Certificate, you may request to purchase as many additional
shares as you wish for $5.00 per share. If shareholders request a total of
more than 2,666,567 shares, then the number of additional shares that you may
purchase will be determined on a pro rata basis, in proportion to the number
of rights you exercised. In some cases, this may mean that you will be able
to purchase fewer shares than the total that you requested on your
Subscription Certificate. See "The Rights Offering - Oversubscription
Privilege."
HOW DID THE COMPANY ARRIVE AT THE $5.00 PER SHARE PRICE?
In determining the price per share during the rights offering, the Company
considered current and historical market prices for the common stock. The
common stock traded above $5.00 per share until September of 1998, a short
time before the public announcement of this rights offering. See "The Rights
Offering - Determination of Share Price."
HOW DO I EXERCISE MY RIGHTS?
You must properly complete the attached Subscription Certificate and forward
it to Boston Equiserve, L.P. on or before ______________, 1999. The address
for Boston Equiserve, L.P. is on page __. See "The Rights Offering -
Exercise of Rights." Your Subscription Certificate must be accompanied by
proper payment for each share that you wish to purchase. See "The Rights
Offering - Method of Payment."
HOW LONG WILL THE RIGHTS OFFERING LAST?
You will be able to exercise your rights only during a limited period. If
you do not exercise your rights before 5:00 p.m. Eastern Standard Time, on
________ __, 1999, the rights will expire. The Company, in its discretion,
may decide to extend the rights offering for up to 10 days. See "The Rights
Offering - Expiration Date."
AFTER I EXERCISE MY RIGHTS, CAN I CHANGE MY MIND?
No. Once you send in your Subscription Certificate and payment, you cannot
revoke the exercise of your rights. See "Rights Offering - No Revocation."
5
Prospectus Summary
<PAGE>
IS EXERCISING MY RIGHTS RISKY?
The exercise of your rights involves a degree of risk. You should carefully
consider the "Risk Factors" described in this prospectus, beginning on page
___.
WHAT HAPPENS IF I CHOOSE NOT TO EXERCISE MY RIGHTS?
You will retain your current number of shares of common stock even if you do
not exercise your rights. If you do not exercise your rights, you will
diminish your proportionate interest in the Company, and your voting rights
will be diluted. See "Risk Factors - Dilution."
CAN I SELL MY RIGHTS?
Yes. You may sell or transfer your rights to another individual or entity.
The Company expects that the rights will trade on the ____________. See "The
Rights Offering - Transferability of the Rights." The Company cannot assure
you that you will be able to sell your rights at all or at a price that is
satisfactory to you. See "Risk Factors - No Prior Market for Rights."
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY RIGHTS?
The receipt and exercise of your rights are intended to be nontaxable.
Shareholders who sell their rights may be taxed on all or a portion of the
proceeds from that sale. You should seek specific tax advice from your
personal tax advisor. See "Federal Income Tax Considerations - Taxation of
Shareholders."
WHEN WILL I RECEIVE MY NEW SHARES?
If you purchase shares of common stock through the rights offering, the
Company will send you certificates representing those shares as soon as
practicable after ________ __, 1999.
CAN THE COMPANY CANCEL THE RIGHTS OFFERING?
Yes. The Company can cancel the rights offering at any time on or before
________ __, 1999, for any reason but has agreed with Demeter, Phemus and
Capricorn to use its reasonable best efforts to complete the rights offering
as soon as practicable. If the Company cancels the rights offering, any
money received from stockholders will be refunded promptly. See "The Rights
Offering - Withdrawal Right."
HOW MUCH MONEY WILL THE COMPANY RECEIVE FROM THE RIGHTS OFFERING?
The Company's gross proceeds from the rights offering depend on the number of
shares that are purchased. If the Company sells all 2,666,567 shares offered
by this prospectus, then the Company will receive proceeds of $13,332,835.
To guarantee the Company a minimum of $3,320,140 in proceeds from the rights
offering, Demeter, Phemus and Capricorn have agreed to a standby commitment.
If the Company sells fewer than 2,666,567 shares of common stock during this
rights offering, then Demeter, Phemus and Capricorn will purchase, for $5.00
per share, the lesser of (A) 664,028 shares of capital stock, or (B)
2,666,567 shares minus the number of shares sold during the rights offering.
As a result, the Company expects to receive minimum proceeds of approximately
$3,320,140 from the rights offering, even if no stockholders exercise their
rights. See "The Rights Offering - Stand-By Commitment by Principal
Shareholders."
6
Prospectus Summary
<PAGE>
HOW WILL THE COMPANY USE THE PROCEEDS FROM THE RIGHTS OFFERING?
The Company will use the proceeds from the rights offering first to repay
amounts outstanding under the Company's 11% subordinated notes held by COMIT
and then to repay a portion of its revolving credit facility and for
additional working capital. See "Use of Proceeds." If the Company is unable
to repay all of the subordinated notes held by COMIT, Harvard and Capricorn
will have the option of converting the remaining notes into capital stock at
an exchange rate of $5.00 per share.
HOW MANY SHARES WILL BE OUTSTANDING AFTER THE RIGHTS OFFERING?
The number of shares of common stock outstanding after the rights offering
depends on the number of shares that are purchased and whether the Class A
Stock is converted to common stock before the rights offering ends.
If the Company sells all of the shares offered by this prospectus, then the
Company will issue 2,666,567 new shares of common stock during the rights
offering. If the Class A Stock has not been converted to common stock before
the rights offering ends, the Company will have approximately 7,965,950
shares of common stock and 3,635,972 shares of Class A Stock issued and
outstanding after the rights offering.
If none of the stockholders exercise their rights, then Demeter, Phemus and
Capricorn will purchase a total of 664,028 shares of common stock from the
Company immediately following the rights offering. This will result in the
Company's having approximately 5,963,411 shares of common stock and 3,635,972
shares of Class A Stock issued and outstanding after the rights offering.
WHO CAN I TALK TO IF I HAVE MORE QUESTIONS?
If you have more questions about the rights offering, please contact:
________________________
________________________
________________________
(---) --------------
See "If You Have Questions."
7
Prospectus Summary
<PAGE>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus may contain "forward-looking statements." Any statement in this
prospectus, other than a statement of historical fact, may be a forward-looking
statement.
You can generally identify forward-looking statements by looking for words such
as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or
"continue." Variations on those or similar words, or the negatives of such
words, also may indicate forward-looking statements.
Although the Company believes that the expectations reflected in this prospectus
are reasonable, the Company cannot assure you that its expectations will be
correct. The Company has included a discussion entitled "Risk Factors" in this
prospectus, disclosing important factors that could cause its actual results to
differ materially from its expectations. If in the future you hear or read any
forward-looking statements concerning the Company, you should refer back to
these Risk Factors.
The forward-looking statements in this prospectus are accurate only as of its
date. If the Company's expectations change, or if new events, conditions or
circumstances arise, the Company is not required to, and may not, update or
revise any forward-looking statement in this prospectus.
8
A Warning About Foward-Looking Statements
<PAGE>
RISK FACTORS
As you decide whether to exercise your rights, and when you evaluate the
Company's performance and the forward-looking statements in this prospectus, you
should carefully consider the following risk factors, as well as the other
information contained in this prospectus.
LOSSES BY THE COMPANY, INCLUDING LOSSES RELATED TO SHORT-SALE TRANSACTIONS, MAY
RECUR
The Company incurred significant losses during the first nine months of 1998,
and the Company cannot assure you that similar losses will not occur again in
the future. For the nine months ended September 30, 1998, the Company reported a
net loss of $33.9 million, or $6.53 per share. To manage its exposure to
interest-rate changes, Capital Corp. entered into "short-sale" contracts to sell
U.S. Treasury securities and incurred significant losses on these transactions.
The losses resulted primarily from a drop in the interest rate on U.S. Treasury
securities. During the second and third quarters of 1998, the interest rates and
yields on U.S. Treasury securities dropped to historic lows, and prices for
those securities increased dramatically.
A short-sale contract for U.S. Treasury securities involves Capital Corp. and an
investment bank or brokerage firm (called the "counterparty"). In a short-sale
contract, Capital Corp. borrows U.S. Treasury securities from the counterparty,
and the counterparty sells those securities to an investor on behalf of Capital
Corp. The counterparty sets aside the proceeds from that sale in a brokerage
account. To repay the counterparty for its loan of U.S. Treasury securities,
Capital Corp. must purchase U.S. Treasury securities on the market at a later
date. When the loan is repaid, the counterparty gives the Company the proceeds
in the brokerage account. If the price of U.S. Treasury securities has dropped
since the counterparty made the loan, then Capital Corp.'s cost to repay the
loan will be lower than the amount in the brokerage account, and Capital Corp.
will make a profit on the short-sale arrangement.
During the first nine months of 1998, the price of U.S. Treasury securities
increased, so Capital Corp.'s cost to repay its counterparty was greater than
the amount of proceeds in the brokerage account. Therefore, Capital Corp.
incurred losses on the short-sale contracts. At the same time, the value of
Capital Corp.'s mortgages held for securitization did not offset these losses.
To satisfy margin calls on the short-sale contracts, Capital Corp. sold most of
the mortgages held for securitization at a significant loss.
The short-sale contracts for U.S. Treasury securities were part of the Company's
arrangements to reduce the effects of interest rate movements. See "Risk of Loss
from Changes in General Economic Conditions." In addition to the short-sale
contracts, the Company and its subsidiaries have also entered into swap
contracts and futures contracts. These transactions may also be used to manage
the effect of interest rate changes on lines of credit with variable interest
rates and on the value of uncommitted loans held for sale. In an effort to avoid
future losses related to such transactions, the Company and its subsidiaries
have entered into arrangements with its creditors to reduce the cash
requirements of those transactions. The Company cannot assure you, however, that
losses related to interest rate volatility and short-sale arrangements will not
recur in the future.
UNSATISFIED LOAN COMMITMENTS MAY CAUSE ADDITIONAL LOSSES
As a result of the losses described above and to prevent additional losses, the
Company decided that it would no longer contribute capital to Capital Corp. This
determination resulted in Capital Corp.'s being unable to fulfill its
obligations under at least one loan commitment. The Company has settled all
claims related to that loan commitment, but the Company cannot assure you that
it will not incur significant losses in the future related to the Company's
inability to meet other loan commitments. See "The Company -Recent
Developments -Losses Related to Unsatisfied Loan Obligations."
9
Risk Factors
<PAGE>
LOSSES RELATED TO LOANS HELD FOR SALE FOR WHICH THE COMPANY DOES NOT HAVE
INVESTOR COMMITMENTS COULD AFFECT THE COMPANY'S RESULTS OF OPERATIONS
Generally the Company sells loans to third-party mortgage investors at
predetermined prices before the Company funds or purchases the loan. However,
sometimes the Company originates or purchases a mortgage loan before an investor
has agreed to purchase it from the Company. During the period between the
Company's origination or purchase of a loan and the sale of the loan to an
investor (called the "holding period"), the Company must bear the interest rate
risk and credit risk associated with that loan. If the holding period is long,
the Company's risks are higher. Adverse changes in interest rates, the market
for these mortgage-backed securities, or the value of assets securing the
mortgages could impair the Company's ability to sell loans and securities,
increasing the Company's holding period and potential losses. If the Company is
unable to sell its loans for a long period of time, the Company's business and
results of operations could be materially adversely affected.
THE COMPANY MAY INCUR LOSSES RELATED TO LOAN COMMITMENTS FOR WHICH IT DOES NOT
HAVE A PURCHASER AND HAS NOT ENTERED INTO HEDGE ARRANGEMENTS.
Capital Corp. has entered into commitments to lend money on certain terms and
conditions which subject the Company to interest rate and market risks until the
Company sells the loans. No investor has committed to purchase these loans, and
Capital Corp. has not entered into arrangements to manage the interest rate and
market risk associated with those loans. If interest rates increase and the
demand for such loans declines before Capital Corp. is able to sell these loans,
Capital Corp. may incur significant losses. The Company is currently seeking
investors for the loans, but the Company cannot assure you that Capital Corp.
will not incur significant losses before such an investor is found or that it
will locate an investor at all.
COMPANY'S LOSS OF DEFERRED TAX ASSETS COULD ADVERSELY AFFECT SHAREHOLDER EQUITY
As of September 30, 1998, the Company had $21.2 million in deferred tax assets
related to the Company's losses during the second and third quarters of 1998.
The Company has recognized the tax benefit of those operating losses as deferred
tax assets and believes that it is more likely than not that the Company will
have sufficient taxable income to realize the tax benefits of those losses
during the next 20 years. However, in the event of a change of control of the
Company or Capital Corp. or certain other material changes in the Company's
business, the Company would have to establish a valuation allowance against the
deferred tax asset. The valuation allowance against the deferred tax asset could
adversely affect shareholder equity and the trading price of the common stock.
IF YOU DO NOT EXERCISE YOUR RIGHTS, YOUR OWNERSHIP INTEREST MAY BE DILUTED
If you do not exercise all of your rights, you may suffer significant dilution
of your percentage ownership in the Company relative to stockholders who
exercise their rights. Immediately after the rights offering, the net tangible
book value per share of common stock will significantly decrease. The chart
below illustrates the potential dilution that could result if a stockholder who
owns 100,000 shares of common stock fails to exercise its rights, and other
stockholders purchase all 2,666,567 shares of common stock offered through this
rights offering. This table assumes that the shares of Class A stock held by
Demeter, Phemus and Capricorn have not been converted to common stock prior to
the rights offering.
<TABLE>
<CAPTION>
Before the Rights Offering After the Rights Offering After the Rights Offering
Assuming Stockholder Exercises Assuming Stockholder Exercises
All Rights No Rights
<S> <C> <C> <C>
Shares Owned by 100,000 207,200 100,000
Stockholder
Total Number of 5,299,383 7,965,950 7,965,950
</TABLE>
10
Risk Factors
<PAGE>
<TABLE>
<S> <C> <C> <C>
Common Shares
Outstanding
Stockholder's Percentage 1.89% 2.60% 1.26%
Ownership
Book Value per Share [_______] [_______] [_______]
</TABLE>
PRINCIPAL STOCKHOLDERS MAY NOT ACT IN THE BEST INTEREST OF OTHER STOCKHOLDERS
The following discussion assumes that the Class A Stock acquired by Demeter,
Phemus and Capricorn is not converted into common stock. If the Class A Stock is
converted into common stock, as the Company expects, the Principal Stockholders
will have a substantially higher percentage of the Company's voting stock. See
"--If the Class A is Converted ..." below.
As of December 31, 1998, Demeter, Phemus, Capricorn and Winokur Holdings, Inc.
(an affiliate of Capricorn) (the "Principal Stockholders") owned approximately
54.55 percent of the Company's voting stock. Together, the Principal
Stockholders have enough votes to elect all of the Company's directors and to
approve or disapprove any matters that are determined by a majority vote of the
stockholders of the Company. Furthermore, because of their holdings, the
Principal Stockholders can prevent a sale of the Company or other transaction
resulting in a change of control. The rights offering could result in the
Principal Stockholders owning as little as 37.35 percent of the Company's common
stock, meaning that the Principal Stockholders will no longer be able to control
most of the Company's shareholder votes. As long as the Principal Stockholders
control the Company's shareholder votes, the Company cannot assure you that the
Principal Stockholders will cause the Company to act in the best interest of all
of the other stockholders.
The Company had approximately 5,299,383 shares of common stock issued and
outstanding as of December 31, 1998. The Principal Stockholders owned shares of
the Company's common stock as follows:
<TABLE>
<CAPTION>
Stockholder Name Number of Shares Owned Percentage Ownership
---------------- ---------------------- --------------------
<S> <C> <C>
Capricorn Investors II, L.P. 836,012 15.77%
Demeter Holdings Corporation 1,873,231 35.35%
Phemus Corporation 102,671 1.94%
Winokur Holdings, Inc. 78,925 1.49%
TOTAL FOR ALL
PRINCIPAL STOCKHOLDERS 2,890,839 54.55%
</TABLE>
Michael Eisenson and Tim Palmer, directors of the Company, are officers of
Demeter and Phemus. Herbert Winokur, also a director of the Company, is the
manager of the general partner of Capricorn. In addition, Phemus owns limited
partnership interests in Capricorn. Mr. Winokur is the sole shareholder and
director of Winokur Holdings, Inc.
Because Demeter, Phemus and Capricorn purchased 3,635,972 shares of the
Company's Class A Stock on December 31, 1998, they have agreed that they will
not exercise, transfer or acquire any rights during this rights offering.
Assuming that Demeter, Phemus and Capricorn do not exercise their rights and
that all of the other rights issued during this rights offering (including those
held by Winokur Holdings, Inc.) are exercised, the Company will have
approximately 7,965,950 shares of common stock issued and outstanding after the
rights offering. The Principal Stockholders will own common stock as follows:
<TABLE>
<CAPTION>
Stockholder Name Number of Shares Owned Percentage Ownership
---------------- ---------------------- --------------------
<S> <C> <C>
Capricorn Investors II, L.P. 836,012 10.49%
Demeter Holdings Corporation 1,873,231 23.52%
Phemus Corporation 102,671 1.29%
Winokur Holdings, Inc. 163,533 2.05%
</TABLE>
11
Risk Factors
<PAGE>
<TABLE>
<S> <C> <C>
TOTAL FOR ALL
PRINCIPAL STOCKHOLDERS 2,975,447 37.35%
</TABLE>
As shown in the table above, if all of the rights are exercised (and Demeter,
Phemus and Capricorn do not exercise, transfer or acquire rights during the
rights offering), the rights offering will result in the Principal Stockholders'
owning a smaller percentage of the Company than they currently own.
To guarantee the Company proceeds from the rights offering of at least $3.3
million, Demeter, Phemus and Capricorn have entered into a Standby Purchase
Agreement. Under that agreement, if the Company sells fewer than 2,666,567
shares during the rights offering, then Demeter, Phemus and Capricorn will
purchase the lesser of (A) 664,028 shares, or (B) 2,666,567 shares, minus the
number of shares sold during the rights offering. See "Rights Offering -Stand-By
Commitment by Principal Stockholders."
Therefore, if no stockholders exercise their rights, Demeter will purchase
503,619 shares of common stock, Phemus will purchase 27,603 shares, and
Capricorn will purchase 132,806 shares. In this instance, after the rights
offering the Company will have a total of 5,963,411 shares of common stock
outstanding, and the Principal Stockholders will own common stock as follows:
<TABLE>
<CAPTION>
Stockholder Name Number of Shares Owned Percentage Ownership
---------------- ---------------------- --------------------
<S> <C> <C>
Capricorn Investors II, L.P. 968,818 16.25%
Demeter Holdings Corporation 2,376,850 39.86%
Phemus Corporation 130,274 2.18%
Winokur Holdings, Inc. 78,925 1.32%
TOTAL FOR ALL
PRINCIPAL STOCKHOLDERS 3,554,867 59.61%
</TABLE>
As shown above, if no stockholders, or very few stockholders, exercise their
rights, the Principal Stockholders will increase their percentage ownership of
the Company, and together the Principal Stockholders will be able to control
most shareholder votes.
STAND-BY COMMITMENT BY PRINCIPAL STOCKHOLDERS IS CONDITIONAL
To guarantee that the Company will receive proceeds of approximately $3.3
million from the rights offering, Demeter, Phemus and Capricorn have agreed to
purchase, at $5.00 per share, the lesser of (A) 664,028 shares of capital stock,
or (B) 2,666,567 shares, minus the number of shares purchased during the rights
offering. However, this commitment is subject to certain conditions to closing,
including that there must not have been a material adverse change in the
Company's business, financial condition, assets or prospects. The Company cannot
assure you that all of these conditions will be satisfied and that Demeter,
Phemus and Capricorn will complete the agreed-upon purchases. To the extent that
Demeter, Phemus or Capricorn fails to perform its obligations, the Company may
not receive sufficient proceeds from the rights offering to fund its capital
needs.
IF THE CLASS A STOCK IS CONVERTED TO COMMON STOCK, THE PRINCIPAL STOCKHOLDERS
MAY BE ABLE TO CONTROL MOST OR ALL SHAREHOLDER VOTES
On December 31, 1998, Demeter, Phemus and Capricorn purchased a total of
3,635,972 shares of the Company's Class A Stock. Demeter purchased 2,757,633
shares of Class A Stock, Phemus purchased 151,145 shares of Class A Stock, and
Capricorn purchased 727,194 shares of Class A Stock. Under certain
circumstances, these non-voting shares may be converted into shares of the
Company's common stock, and such a conversion could result in the Principal
Stockholders holding as much as 75% of the Company's voting stock.
12
Risk Factors
<PAGE>
The Company has agreed that each share of Class A Stock will be converted to one
share of common stock, if the Federal Trade Commission does not object to such a
conversion pursuant to provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
If the conversion of Class A Stock to common stock occurs prior to the rights
offering, Demeter will own a total of 4,630,864 shares of common stock, Phemus
will own a total of 253,816 shares of common stock, and Capricorn will own a
total of 1,563,206 shares of common stock. Depending on when the conversion
takes place and how many shares of common stock are purchased during the rights
offering, the Principal Stockholders will own shares of common stock as follows:
<TABLE>
<CAPTION>
If Conversion Occurs After Rights Offering
------------------------------------------
Stockholder Name If Conversion Prior Assuming 2,666,567 Shares Are Assuming 664,028 Shares Are
To Rights Offering Purchased In Rights Offering Purchased In Rights Offering
TOTAL SHARES OF COMMON 8,935,355 11,601,922 9,599,383
STOCK OUTSTANDING
Shares Percentage Shares Percentage Shares Percentage
<S> <C> <C> <C> <C> <C> <C>
Capricorn Investors II, L.P. 1,563,206 17.49% 1,563,206 13.47% 1,696,012 17.67%
Demeter Holdings Corp. 4,630,864 51.83% 4,630,864 39.91% 5,134,483 53.49%
Phemus Corp. 253,816 2.84% 253,816 2.19% 281,419 2.93%
Winokur Holdings, Inc. 78,925 0.88% 163,533 1.41% 78,925 0.82%
TOTAL FOR ALL PRINCIPAL 6,526,811 73.04% 6,611,419 56.98% 7,190,839 74.91%
STOCKHOLDERS
</TABLE>
As shown above, if the Federal Trade Commission does not object to the
conversion of the Class A Stock to common stock, the Principal Stockholders will
own at least 56.98 percent of the Company's voting stock, and could own
approximately 75 percent of the voting stock. At a minimum, the Principal
Stockholders will be able to control most shareholder votes, including the
election of all directors. If the Principal Stockholders own almost 75 percent
of the Company after the rights offering, they will be able to control all
shareholder votes.
If the Principal Stockholders increase their percentage ownership of the
Company's voting stock through a conversion of Class A Stock, the Company cannot
assure you that the Principal Stockholders will cause the Company to act in the
best interest of all of the other stockholders.
MATURITY OF WAREHOUSE FINANCING MAY RESULT IN THE COMPANY'S INABILITY TO MAKE
ADDITIONAL LOANS AFTER APRIL 1, 1999
The Company's warehouse financing agreement matures on April 1, 1999. If the
Company does not renew the warehouse revolving credit facility or enter into a
new facility before April 2, 1999, the line of credit will be withdrawn. The
Company cannot assure you that it will be able to renew the line of credit or
enter into a new credit facility by April 1, 1999.
13
Risk Factors
<PAGE>
The warehouse line of credit is important to the Company's business because it
permits the Company to make loans and sell those loans to investors. The Company
must obtain funds so that it can temporarily hold loans between the time it
makes a loan and the time it sells the loan to a mortgage investor. To obtain
this financing, the Company depends on warehouse facilities with financial
institutions or institutional lenders. In addition, to implement its growth
strategy, the Company needs its warehouse facilities to continue to be
available, and the Company may require increases in the capacity of its
warehouse facilities.
The Company cannot assure you that its warehouse financing will continue to be
available on satisfactory terms. The inability of the Company to arrange
additional warehouse facilities or to maintain existing facilities would make it
more difficult for the Company to generate revenue through the origination and
servicing of mortgages.
As of September 30, 1998, the Company's warehouse facilities had an aggregate
capacity of $452 million (of which $159 million was unused).
THE COMPANY MAY NEED ADDITIONAL CAPITAL EVEN AFTER RIGHTS OFFERING
The Company's ability to conduct its business depends to a significant degree on
its ability to incur indebtedness and obtain equity capital. The Company needs
financing primarily to fund its loan originations, pursue new acquisitions and
purchase servicing rights. To meet these needs, the Company currently uses
warehouse lines of credit, a secured line of credit and a revolving credit
facility.
The Recapitalization Plan also is intended to raise additional capital for the
Company. Even after the completion of the Recapitalization Plan, however, the
Company may need additional capital to meet its working capital requirements.
The Company cannot assure you that such capital will be available on
satisfactory terms, if at all. If all of the rights are not exercised, or if the
Company fails to reach sufficient cash flows, the Company will require
additional debt or equity.
Through this rights offering and its existing lines of credit, the Company
believes that it will have access to sufficient funds to carry on its existing
level of business. If the Company decides to complete further acquisitions,
however, the Company will need additional capital. The Company cannot assure you
that its existing lines of credit will remain available, and the Company cannot
assure you that it will be successful in consummating any future financing
transactions on satisfactory terms, if at all.
Factors which could affect the Company's access to the capital markets, or the
costs of such capital, include:
. changes in interest rates,
. general economic conditions, and
. investors' perceptions of the Company's business,
results of operations, leverage, financial condition
and business prospects.
Economic, financial, competitive and other matters strongly influence each of
these factors, and the Company may not be able to control those influences.
In addition, covenants under the Company's existing or future debt securities
and credit facilities may significantly restrict the Company's ability to incur
additional indebtedness or to issue additional preferred stock. The covenants
require the Company to maintain certain debt-to-equity and coverage ratios, and
the Company would not be able to borrow additional capital if the new debt would
violate those ratios.
The Company's ability to repay its outstanding debts on time may depend on its
ability to refinance those debts. The Company may not be able to refinance debt
if the Company is unable to sell additional debt or equity securities on
satisfactory terms.
14
Risk Factors
<PAGE>
THE COMPANY MAY BE UNABLE TO COMPLETE ACQUISITIONS OR ENTER INTO NEW BUSINESS
LINES
The Company plans to expand its business both internally and through
acquisitions of other commercial mortgage financial service companies. The
Company cannot assure you that it will be able to support its continued growth.
The Company also cannot assure you that it will be able to identify, finance and
purchase additional acquisition candidates, or that future acquisitions, if
completed, will be successful. If the Company cannot successfully complete
additional acquisitions, the market price of the common stock may decline.
When the Company acquires new businesses with different markets, customers,
financial products, systems and managements, the Company may have difficulty
integrating those business into its existing operations. This integration
process may cause unforeseen difficulties and may require a large portion of
management's attention and the Company's resources. These difficulties may be
particularly acute as the Company expands into business lines outside of its
traditional multifamily business.
The Company originally focused on originating and servicing mortgages on
multifamily properties, such as apartment buildings and condominiums. Since
1996, the Company has expanded its origination and servicing of mortgages on
other commercial properties, such as office buildings, hotels, and retail
stores. The Company plans to continue to expand its business in both the
multifamily and commercial mortgage areas. See "The Company - Business
Strategy."
To support, manage and control continued growth, the Company must be able to
hire, train, retain, supervise and manage its workforce. The Company must also
develop the skills necessary to compete successfully in its new business lines.
In particular, the success of certain acquisitions may depend on the Company's
ability to retain key employees of the acquired business.
The Company is not currently planning or negotiating any specific acquisitions
or expansions into new business. However, if the rights offering is successful,
such discussions could occur in the near future.
THE COMPANY MAY INCUR LOSSES ON MORTGAGE LOANS UNDER THE DUS PROGRAM
WMF Washington Mortgage Corp. ("Washington Mortgage") is an approved lender
under the Federal National Mortgage Association's ("Fannie Mae") Delegated
Underwriting and Servicing ("DUS") Program. Under this program, Washington
Mortgage originates, places and services multifamily loans for Fannie Mae
without having to obtain Fannie Mae's prior approval for each loan.
The DUS Program requires Washington Mortgage to pay a portion of any losses on
mortgages that it originates under the program. These losses may cost Washington
Mortgage up to 20 percent of the original principal balance of the loan.
Additionally, if borrowers default under loans in the DUS Program, the value of
Washington Mortgage's servicing rights for those loans could materially
decrease. See "Loss of Value from Impairment of Mortgage Servicing Rights."
To qualify for the DUS Program, Washington Mortgage must maintain a letter of
credit or cash sufficient to cover its estimated portion of any losses. As of
September 30, 1998, the unpaid principal balance of Washington Mortgage loans in
the DUS Program totaled $1.3 billion and Washington Mortgage had a $5.9 million
reserve for probable loan losses under the DUS Program. Washington Mortgage also
had a $4.8 million letter of credit to pay for losses under the program. While
the Company believes that these reserves are sufficient, actual losses under the
DUS Program could exceed these reserves and hurt the Company's performance. If
the Company incurs and is required to fund additional losses, the market price
of the common stock may be adversely affected.
15
Risk Factors
<PAGE>
THE COMPANY IS LIABLE FOR CERTAIN REPRESENTATIONS AND WARRANTIES CONCERNING
MORTGAGE LOANS
When the Company originates mortgage loans and then sells them to investors, the
Company must make certain representations and warranties concerning those
mortgages. These representations and warranties cover such matters as title to
mortgaged property, lien priority, environmental reviews and certain other
matters. When making these representations and warranties, the Company relies in
part on similar representations and warranties made by the borrower or others.
If the representations made by a borrower or others are false, the Company will
have a claim against the borrower or other party. The Company's ability to
recover its damages, however, depends on the financial condition of the party
that made the false representation. In addition, the Company makes some
representations and warranties even though it does not receive similar
representations and warranties from borrowers or others. If those
representations are later found to be false, the Company would have to pay for
any losses and would not have a claim against another party. The Company cannot
assure you that it will not experience a material loss as a result of its
representations and warranties.
THE COMPANY MAY INCUR LOSSES AS A RESULT OF CHANGES IN GENERAL ECONOMIC
CONDITIONS
The following general economic conditions could have an adverse affect on the
Company's business:
. periods of general, regional or industry-related economic slowdown
or recession,
. rising interest rates, or
. declining demand for real estate.
An economic slowdown will generally reduce the Company's origination and sales
of mortgages, which generated approximately 48.7 percent of the Company's
revenue during the nine months ending September 30, 1998. In addition, periods
of economic slowdown or recession may increase the risk that borrowers will
default on multifamily and commercial mortgage loans, and those defaults may
have an adverse effect on the Company's financial condition. When the owner of a
mortgage forecloses on a property, the Company's servicing fees may be reduced
or eliminated and the Company may experiences additional losses.
Periods of economic slowdown or recession may be accompanied by decreased demand
for multifamily or commercial properties. Decreased demand may result in
declining values for the properties securing outstanding loans, and decreased
property values weaken the Company's collateral coverage and increase the
possibility of losses in the event of default. If more properties are for sale
during recessionary periods, the Company may receive lower prices when it sells
foreclosed properties, or it may have to delay such sales. The Company cannot
assure you that it will be able to sell foreclosed properties in the multifamily
or commercial markets. Any material deterioration of such markets could reduce
the Company's proceeds from foreclosure sales.
Changes in the relationship between short-term and long-term interest rates
could also affect the Company's results of operations, which in turn could
affect the value of the common stock. Between the time the Company funds a loan
and the time it sells the loan, the Company earns net interest income. Net
interest income is based on the long-term rate earned on a loan minus the short-
term borrowing costs to finance the loan.
During the nine months ended September 30, 1998, interest income amounted to
31.5 percent of the Company's total revenue. If long-term interest rates
decrease and short-term interest rates do not decrease by the same amount, then
the Company's net interest income may decline. If long-term interest rates drop
below the short-term rates, the Company could incur a net interest expense
instead of earning net interest income.
The Company also earns income from placement fees, which are earned from the
placement and utilization of escrow funds. If the short-term interest rates
decrease, the Company's income from placement fees may decline.
16
Risk Factors
<PAGE>
THE COMPANY'S OPERATIONS MAY DECLINE AS A RESULT OF IMPAIRMENT OF MORTGAGE
SERVICING RIGHTS
Under generally accepted accounting principles, the Company must treat its
servicing rights as an asset. Servicing rights are recorded as an asset on the
Company's balance sheet at either the purchase price paid for the servicing
rights or the relative fair value of the servicing rights at the time the
Company sells a loan and retains the servicing associated with that loan. The
Company also must amortize the value of the servicing rights over their
estimated lives.
If the value of the servicing rights, as shown on the Company's balance sheet,
exceeds their fair value, then the rights are impaired. The fair value of the
servicing rights may be affected by, and impairment may result from, factors
such as:
. changes in mortgage prepayments, which tend to increase as long-term
interest rates decline, and tend to decrease as such interest rates
rise;
. prepayment penalty terms, including lockout and yield maintenance
requirements;
. higher than expected rate of loan defaults;
. lower than expected short-term interest rates;
. factors which impact the net cash flow generated from the servicing
rights, such as the cost of servicing such loans; and
. the underlying loans' average custodial balances (the amount
deposited by borrowers for taxes, deposits and replacement reserves).
To the extent that the Company's servicing rights are impaired, the Company's
operating results and stock price may be adversely affected. Although the
Company has never recorded any impairment, it may record impairment at any time
in the future. The Company cannot assure you that it has accurately estimated
the factors that could cause impairment of the servicing, or that the Company's
mortgage servicing rights can be sold at their value, if at all.
THE COMPANY MAY NOT BE ABLE TO RECOVER ADVANCED FUNDS
When borrowers are late in making payments on the multifamily and commercial
mortgage loans serviced by the Company, the Company may be required to advance
principal, interest, tax and insurance payments for those loans, to the extent
that the Company believes that those advances are ultimately recoverable. At
September 30, 1998, the Company had made servicing advances of $2.4 million. The
Company must make these advances from its working capital, but when the late
payments are collected, the Company's advances will be repaid first. If the
collected payments are not sufficient to repay all of the Company's advances,
the Company could incur losses, which could have a material impact on the
Company.
THE COMPANY MAY INCUR LOSSES UPON TERMINATION OF CERTAIN SERVICING CONTRACTS
As of September 30, 1998, the Company had contracts to service mortgages with a
total principal balance of $12.7 billion. Approximately 23 percent of those
contracts are terminable upon 30 days' notice by the owner of the serviced
mortgage. Most of the contracts with these termination provisions are for the
servicing of mortgages held by insurance companies. As the Company increases its
servicing of mortgages held by insurance companies, the percentage of servicing
contracts with such termination provisions will also increase.
The rest of the Company's servicing contracts are for a term equal to the life
of the mortgage. The holder of the mortgage may terminate the contract only for
cause, after paying the Company a termination fee, or after prepayment or other
early termination of the mortgage.
17
Risk Factors
<PAGE>
If a significant number of the Company's mortgage servicing contracts were
terminated and the Company were unable to replace them with new servicing
contracts, the Company's operations would be adversely affected.
THE COMPANY MAY BE UNABLE TO CONTINUE TO COMPLY WITH GOVERNMENT REGULATION AND
PROGRAMS
The Company's operations are regulated by:
. federal, state and local government authorities, including the
Federal Housing Administration ("FHA") and the Government National
Mortgage Association ("Ginnie Mae");
. various federal, state and local laws and judicial and administrative
decisions; and
. regulations of government sponsored entities (such as Fannie Mae)
that purchase mortgages originated and/or serviced by the Company.
Among other things, these laws, regulations and decisions:
. require the Company to maintain a minimum net worth and minimum lines
of credit;
. require periodic financial reports;
. require a quality control plan for the underwriting, origination and
servicing of loans;
. restrict loan originations, credit activities, maximum interest rates,
and finance and other charges;
. regulate disclosures to customers, the terms of secured transactions
and personnel qualifications; and
. require certain collection, repossession and claims-handling
procedures and other trade practices.
Although the Company believes that it complies in all material respects with
applicable laws and regulations and with the requirements of mortgage
purchasers, the Company cannot assure you that it will be able to continue to
comply if more restrictive laws, rules, regulations or requirements are adopted
in the future. If the Company fails to comply with all applicable requirements,
the Company could lose the opportunity to originate, sell or service mortgages
in certain jurisdictions, or to originate mortgages on behalf of, sell mortgages
to or service mortgages held by certain institutions. If that occurs, the
Company's financial results could be adversely affected.
The FHA insured approximately 11.8 percent of loans originated by the Company
during the nine months ended September 30, 1998 and approximately 47.4 percent
of loans serviced by the Company as of September 30, 1998. If the laws or
regulations governing FHA programs change, the availability of FHA-insured loans
could decrease, and the Company's ability to originate or service those
mortgages could be affected. Any such change could have a material adverse
effect on the Company and its results of operations.
The Company must obtain the consent of the State of Arizona and Fannie Mae prior
to a change in control of the Company. While the rights offering may be
considered a change in control, the Company has no reason to believe that these
consents will not be granted. If the Company fails to receive any such consents,
it will lose the net income (if any) generated by loans originated in Arizona or
held by Fannie Mae.
THE COMPANY'S OPERATIONS MAY BE SIGNIFICANTLY AFFECTED BY THE YEAR 2000 PROBLEM
The Year 2000 Problem refers to errors that may occur when computers 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. If a
18
Risk Factors
<PAGE>
computer does not recognize a date on or after January 1, 2000, the error could,
among other things, prevent the Company from processing transactions, sending
invoices, or engaging in other normal business activities.
The Company's Program. The Company has developed a program to address the Year
2000 Problem as it may affect:
. the Company's computer and operating systems, including its servicing,
accounting, human resources and financial reporting systems;
. the Company's other systems, such as buildings, equipment, telephone
systems and other non-computer systems that may contain technology
that is sensitive to the Year 2000 Problem;
. certain systems of the Company's major vendors and material service
providers, if those systems relate to the Company's business
activities;
. certain systems of the Company's material customers and investors, if
those systems relate to the Company's ability to provide services to
the customers and investors.
As described below, the Company's Year 2000 program involves
1. assessing the Year 2000 Problem and determining how it may
negatively affect the Company;
2. developing remedies to address the problems discovered in the
assessment phase;
3. testing of the remedies; and
4. preparing 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>
- --------------------------------------------------------------------------------
Year 2000 Year 2000
Compliant Non Compliant
Component Number Number
<S> <C> <C>
Business Critical Software
--------------------------
Servicing Systems 0 4
Accounting System 1 0
Human Resources 1 0
Hardware
- --------
Personal Computers 470 30
File/Data Services 37 0
Networks 20 0
Office Software Suites 400 0
- ----------------------
- -------------------------------------------------------------------------------
</TABLE>
The Company has evaluated all of its systems except its telephone equipment, and
the Company has begun to develop remedies for the Year 2000 Problem. During the
last quarter of 1998, the Company expects to finish 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
that they provide detailed, written information concerning existing or
anticipated Year 2000 compliance by their systems. The Company expects that it
will complete these inquiries and receive substantially all third-party
responses by March 30, 1999.
While the Company cannot thoroughly assess other parties' Year 2000 readiness,
it will attempt to identify areas of vulnerability and change relationships with
those parties as appropriate. If the Company believes that a third-party's
systems may have a negative material impact on its operations, it will develop
relationships with other parties who have been thoroughly screened for Year 2000
compliance.
19
Risk Factors
<PAGE>
Remediation and Testing Phase. During the remediation and testing phase, the
Company will address potential Year 2000 Problems in systems and will attempt to
demonstrate that the affected systems will be Year 2000 compliant on a timely
basis. All computer software systems that are critical to the Company's business
are supplied by vendors, and the vendors are contractually responsible for the
systems' becoming Year 2000 compliant. However, the Company cannot assure you
that it will be able to recover damages from any vendor who fails to bring a
system into Year 2000 compliance.
Of the Company's critical systems, its 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 combining its four loan
processing systems into two. The Company expects that this consolidation will be
completed no later than February 28, 1999. At the same time, the two surviving
loan servicing systems will be made Year 2000 compliant and tested internally.
These systems will then be tested with major customers and investors to ensure
that the delivery of proper data will occur on and after January 1, 2000.
The Company expects that all non-compliant servers will be Year 2000 compliant
by December 31, 1998. All non-compliant personal computers will be put out of
service by December 31, 1998. The Company will replace all non-Year 2000
compliant office software by June 30, 1999. The Company expects that all
telephone equipment will be Year 2000 compliant by March 30, 1999.
Contingency Plans. The Company has not yet fully identified its most likely
worst-case scenarios that could occur because of the Year 2000 Problem. The
Company is developing contingency plans for the scenarios that have been
identified. The Company intends to complete its determination of worst case
scenarios after it has received and analyzed responses to most of the inquiries
it will make of third parties. After its analysis, the Company plans to develop
a timetable for completing its contingency plans.
Costs Related to the Year 2000 Problem. To date, the Company has spent
approximately $50,000 for its Year 2000 program, mostly in labor costs. The
Company expects to incur additional costs, which it estimates will not exceed
$300,000. Compliance costs are relatively low because all business critical
software systems are being upgraded under normal vendor maintenance agreements.
The Company currently believes that the costs to resolve the Year 2000 Problem
for its other systems will not be material. However, the Company cannot assure
you that its cost estimates will not change as the Company completes its
assessment.
Risks Related to the Year 2000 Problem. Although the Company's Year 2000 program
is intended to minimize the adverse effects of the Year 2000 Problem on the
Company's business and operations, the actual effects of the Year 2000 Problem
and the success or failure of the Company's efforts described above cannot be
known until after January 1, 2000. If the Company, its major vendors, service
providers or major customers fail to address adequately the Year 2000 Problem in
a timely manner, the Company's business, results of operations and financial
condition could be adversely affected.
THE COMPANY RELIES ON CERTAIN KEY PERSONNEL
The Company depends on the efforts and abilities of a number of its current key
management, including J. Roderick Heller, III, the Company's Chairman of the
Board of Directors, and Shekar Narasimhan, the Company's President and Chief
Executive Officer. The success of the Company depends to a large extent on its
ability to retain and continue to attract key employees through its compensation
plans, including employee stock options. If the Company loses certain key
employees or cannot retain or attract key employees in the future, the Company's
operations could be adversely affected.
THE COMPANY'S BUSINESS DEPENDS ON ITS SALES STAFF
The Company's business depends on the efforts and abilities of its 59-person
sales staff. The success of the Company depends to a large extent on its ability
to retain and attract sales personnel through its compensation policies,
including commission arrangements and its deferred compensation plan. If sales
staff responsible for a significant portion of the Company's annual loan
origination volume terminate their employment, the Company's loan origination
volume and its operating results could be adversely affected.
20
Risk Factors
<PAGE>
THE COMPANY IS SUBJECT TO NATIONAL AND REGIONAL COMPETITION
The Company operates throughout the United States and faces different levels of
competition in various individual markets. Generally, the Company has very few
national competitors and many local and regional competitors. The profile and
business practices of competitors may change, however, because the multifamily
and commercial mortgage industry is currently consolidating. Certain of the
Company's competitors are larger than the Company and have greater financial
resources, including greater access to and lower cost of capital. In addition,
the Company's business is characterized by low barriers to entry, and recently
new competitors have successfully raised the capital necessary to enter the
business. If competition increases in the Company's markets, the Company's level
of loan origination, servicing and fees could decrease.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY AFFECT YOUR RIGHTS AS A SHAREHOLDER
The Company's Board of Directors has the authority to issue up to 12,500,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote of, or action by, the
Company's stockholders. Your rights will be subject to, and may be adversely
affected by, the rights of holders of preferred stock, including the Class A
Stock. Holders of the Class A Stock do not have voting rights. If the Company
chooses to issue preferred stock with voting rights, the issuance could provide
desirable flexibility in connection with possible acquisitions and other
corporate purposes. The issuance of voting preferred stock could also make it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Certain provisions of Delaware law applicable to the
Company may also discourage third-party attempts to acquire control.
THE COMPANY DOES NOT ANTICIPATE PAYING DIVIDENDS ON COMMON STOCK
The Company does not plan to pay cash dividends on the Company's common stock in
the foreseeable future. The Board of Directors will decide, in the exercise of
its business judgment, whether to apply legally available funds to the payment
of dividends. The Board of Directors will consider the Company's results of
operations and financial condition, any existing or proposed commitments for the
use of available funds, and the Company's obligations to its creditors or
holders of preferred stock, if any preferred stock is issued. Financial
covenants in the Company's credit agreements or in arrangements with government-
sponsored entities may restrict the Company's ability to pay dividends.
NO PRIOR MARKET FOR THE RIGHTS EXISTS
You are permitted to sell or transfer your rights, but the Company cannot assure
you that such a sale will be practicable or profitable. The rights will be
listed for trading on ____________________. Prior to this rights offering, there
has been no public market for the rights, and the Company cannot assure you that
an active public market for the rights will develop or be sustained. If a market
for the rights develops, it may be volatile and unreliable. The Company cannot
assure you that you will receive a satisfactory price upon the sale of the
rights.
THE SALE OF A SUBSTANTIAL AMOUNT OF COMMON STOCK MAY AFFECT THE MARKET PRICE
If substantial amounts of common stock are sold in the public market following
the rights offering, the market price of the stock could be adversely affected.
If the rights offering is fully subscribed and the Class A Stock is converted
into common stock, the Company will have approximately 11,601,922 shares of
common stock outstanding. Of those shares, approximately 6,611,419 shares (56.99
percent) will be held by the Principal Stockholders. The Principal Stockholders
are "affiliates" of the Company under Rule 144 of the Securities Act of 1933 and
these shares generally will be subject to sale only subject to the volume
limitations of Rule 144. However, the Company has agreed to register for resale
without restriction (A) the shares of common stock which may be issued on
conversion of the Class A Stock and (B) any shares of common stock purchased
pursuant to the stand-by purchase commitment.
21
Risk Factors
<PAGE>
In addition, as part of a transaction entered into in December 1998, the Company
(i) has issued warrants to purchase 100,000 shares of common stock for $5.98125
per share exercisable through December 30, 2002, (ii) has issued warrants to
purchase 150,000 shares of common stock for $10.00 per share exercisable through
December 30, 2003, and (iii) has secured certain obligations with the pledge of
an additional 50,000 shares of authorized but unissued common stock. The Company
has agreed to register for resale all of these shares if they are issued.
If after the rights offering the Company is unable to repay all of the
subordinated notes held by COMIT, Harvard and Capricorn will have the option to
exchange those notes for shares of capital stock at an exchange rate of $5.00
per share.
The sale of a substantial number of these shares at any time or over time could
adversely affect the market price of the Company common stock. The Company
cannot predict the effect that the availability and future sales of common stock
could have on the market price.
THE COMPANY'S STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
Trading volume and prices for the common stock has been subject to wide
fluctuations during the past year and may continue to fluctuate in response to
quarterly variations in operations, results, announced earnings and other
factors. The Company cannot always foresee or predict such events. Other factors
that may affect stock prices include the sale or attempted sale of a large
amount of securities in the public market, the registration for resale of any
shares of common stock, and the effect on the Company's earnings of equity-based
compensation awards to management. The market price of the Company's common
stock could also be influenced by developments or matters not related to the
Company.
22
Risk Factors
<PAGE>
THE WMF GROUP, LTD.
CURRENT CORPORATE STRUCTURE
------------------------------
The WMF Group Ltd.
------------------------------
---------------------------------------------------------------
- -------------------------- ------------------------- ---------------------
WMF Carbon Mesa WMF Washington WMF Capital Corp.
Advisors, Inc. Mortgage Corp.
- -------------------------- ------------------------- ---------------------
---------------------------------------------------------------
- -------------------------- ------------------------- ---------------------
WMF Huntoon Paige WMF Proctor WMF Robert C. Wilson
- -------------------------- ------------------------- ---------------------
23
Current Corporate Structure
<PAGE>
THE COMPANY
The WMF Group, Ltd. is a Delaware corporation formed in October 1992 under the
name "WMF Holdings, Inc." Originally, the Company was created to hold the
operations of WMF Huntoon, Paige Associates Limited ("WMF Huntoon Paige") and
WMF Washington Mortgage Corp. ("Washington Mortgage"). WMF Huntoon Paige and
Washington Mortgage are now wholly-owned subsidiaries of the Company. Please see
the chart on page __ for an illustration of the Company's organizational
structure.
WMF Huntoon Paige has originated and serviced multifamily and healthcare
mortgages insured by the FHA under various owners and under various names since
1979. Washington Mortgage acquired WMF Huntoon Page in 1991. Washington Mortgage
has originated and serviced multifamily and commercial mortgages under various
owners and under various names since 1984.
On April 1, 1996, NHP Incorporated ("NHP") purchased the Company and named it
"NHP Financial Services, Inc." In early 1997, NHP was acquired by Apartment
Investment and Management Co. ("AIMCO"). As a condition of that purchase, AIMCO
required NHP to spin-off the Company. On December 8, 1997, the Company became an
independent, publicly traded company.
RECENT DEVELOPMENTS
1998 LOSSES. During the nine months ended September 30, 1998, the Company
incurred a net loss of $33.9 million, or $6.53 per share. Almost all of these
losses were incurred at Capital Corp. and resulted from volatility in commercial
mortgage-backed security markets and interest rates on U.S. Treasury securities.
Despite the losses, the Company's mortgage banking segment remained profitable
during the third quarter, and the Company as a whole experienced increased
revenue during the first nine months of 1998.
LOSSES AND RESTRUCTURING AT CAPITAL CORP. Most of the Company's losses during
the first three quarters of 1998 resulted from short-sale transaction losses
related to Capital Corp.'s inventory of mortgage loans. During that period,
Capital Corp. originated $969 million in mortgage loans. To protect itself
against interest rate fluctuations prior to the sale or securitization of its
loans, Capital Corp. entered into arrangements for the short sale of U.S.
Treasury securities. Because of interest rate volatility during that period, the
Company was required to fund losses related to changes in the value of its
short-sale positions. To reduce its exposure to margin calls, Capital Corp. sold
$691 million in loans, and closed the related U.S. Treasury short positions, at
a loss. Capital Corp. also recognized a loss on the short-sale positions related
to its remaining $278 million loan inventory.
To reduce the cash requirements of its short-sale activities, the Company made
arrangements with its warehouse lender and short-sale counterparties to permit
the Company to offset the impact of losses on the short sale of U.S. Treasuries
with gains and losses in mortgage loans held for securitization. During November
and December of 1998, Capital Corp. entered into agreements to sell the
remainder of its loan inventory and closed the related short-sale positions
without incurring additional losses. As part of these agreements, the Company
and COMIT have agreed to purchase $2.4 million and $7.6 million of subordinated
interests in a pool of $63.5 million of these loans.
As a result of the losses incurred, Capital Corp. has become unable to satisfy
certain loan commitments. Capital Corp. has settled one claim related to these
obligations but the Company may not be able to settle similar claims in the
future. See "Risk Factors -- Unsatisfied Loan Obligations May Cause Additional
Losses." The Company does not intend to contribute additional capital to Capital
Corp. or to take principal risk positions at Capital Corp.
COST-SAVING MEASURES. In response to its 1998 losses, the Company implemented a
cost-reduction program, reducing its workforce by 15 percent and decreasing
general and administrative expenses. The Company expects that the cost-reduction
program will result in annual savings of at least $7.5 million beginning in
1999.
ISSUANCE OF SUBORDINATED NOTES. On September 4, 1998, the Company entered into a
Credit Agreement with Commercial Mortgage Investment Trust, Inc. COMIT is a real
estate investment trust that is owned by Harvard, Capricorn and the Company and
managed by WMF Carbon Mesa. Under the Credit Agreement, Harvard and Capricorn
contributed a total of
24
The Company
<PAGE>
$20 million to COMIT, and the Company then sold $20 million of its 11 %
subordinated notes to COMIT. The Company also issued warrants to COMIT entitling
it to purchase 1,200,000 shares of common stock at $11.25 per share. COMIT later
assigned 960,000 of the warrants to Harvard and 240,000 of the warrants to
Capricorn.
DESIGNATION OF CLASS A STOCK. On December 31, 1998, the Board of Directors of
the Company amended the Company's Certificate of Incorporation to provide for a
new class of preferred stock, designated "Class A Non-Voting Convertible
Preferred Stock" (the "Class A Stock"), par value $0.01.
Each share of Class A Stock may be converted into one share of the Company's
common stock, if the Federal Trade Commission does not object to such a
conversion pursuant to certain provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. If the Federal Trade Commission objects to the
conversion, the Class A Stock will remain outstanding, and holders of Class A
Stock will receive quarterly dividends on those shares at a rate of 11% before
February 1, 1999, at an agreed-upon rate of up to 15% between February 1, 1999
and March 31, 1999, and at an agreed-upon rate of up to 18% after March 31,
1999.
The Class A Stock does not have voting rights, except to the extent such rights
are required by Delaware corporate law. The Company has the option of redeeming
each share of Class A Stock for $4.587 in cash. The Class A Stock will not be
traded on any national exchange and will not be registered for resale under the
Securities Act of 1933, but the Company has agreed to register any shares of
common stock issued upon conversion of the Class A Stock.
The Company issued 3,635,972 shares of Class A Stock as part of the
Recapitalization Plan, described below.
RECAPITALIZATION PLAN. To provide for its working and other capital needs after
the losses at Capital Corp., the Company has entered into the Recapitalization
Plan. The Recapitalization Plan has two parts and is expected to raise a minimum
of $20 million and a maximum of $30 million of new equity:
. SALE OF $16.7 MILLION OF CAPITAL STOCK TO DEMETER, PHEMUS AND CAPRICORN
On December 31, 1998, the Company's three largest shareholders, Demeter,
Phemus and Capricorn, acquired 3,635,972 shares of the Company's Class A
Stock for total cash proceeds of approximately $16.7 million. In this
transaction, Demeter acquired 2,757,633 shares of the Company's Class A
Stock, Phemus acquired 151,145 shares of Class A Stock, and Capricorn
acquired 727,194 shares of Class A Stock.
As part of the transaction, Harvard (an affiliate of Demeter and Phemus)
and Capricorn canceled the warrants to purchase 1,200,000 shares of
common stock issued to COMIT in connection with the subordinated notes.
In addition, Demeter, Phemus and Capricorn have agreed to enter a
standby purchase agreement in connection with the rights offering
(described below). The Company has applied the proceeds of the sale of
Class A Stock to repay partially the subordinated notes held by COMIT.
COMIT used the repayment to redeem shares of its preferred stock that
were sold to Harvard and Capricorn to fund the purchase of the notes,
effectively resulting in the partial conversion of the subordinated
notes into common stock.
25
The Company
<PAGE>
Because of their participation in this transaction, Demeter, Phemus and
Capricorn have agreed not to exercise, transfer or acquire any rights
during the rights offering.
. $13.3 MILLION RIGHTS OFFERING
The Company is issuing all of its shareholders of record as of _______,
1999, 1.072 transferable rights for each share of common stock held by
them on that date. Each right will entitle its holder to purchase one
share of common stock for $5.00. Because Demeter, Phemus and Capricorn
have agreed not to exercise, transfer or acquire any rights, a total
of 2,666,567 rights could be exercised during the rights offering for a
total purchase price of $13,332,835.
Demeter, Phemus and Capricorn have entered into a Standby Purchase
Agreement to purchase up to 664,028 shares of common stock not otherwise
purchased in the rights offering for a total purchase price of
$3,320,140. Consequently, the Company expects that it will sell at
least 664,028 shares of common stock in the rights offering for total
proceeds of at least $3,320,140.
The Company has agreed to apply the proceeds from the rights offering
and from any shares sold to Demeter, Phemus and Capricorn first to repay
the remaining subordinated notes held by COMIT. If after the rights
offering the Company is unable to repay all of the subordinated notes
held by COMIT, Harvard and Capricorn will have the option to exchange
the notes for shares of Company capital stock at an exchange rate of
$5.00 per share.
The Recapitalization Plan will result in the effective conversion of the
Company's up to $20 million of subordinated notes into capital stock and also
may raise additional common equity, which will be used to repay borrowing under
the Company's revolving line of credit and for working capital.
BUSINESS
The Company has three principal lines of business: (i) mortgage banking, (ii)
capital markets and (iii) advisory services. Mortgage banking involves
origination and servicing of mortgage loans.
MORTGAGE ORIGINATION. Mortgage origination involves the making of loans to
borrowers who use real estate property as collateral. The Company's staff of 59
loan originators targets a wide variety of borrowers including developers, local
entrepreneurial owners, large portfolio owners and public companies such as real
estate investment trusts.
Currently, the Company originates mortgages through two channels -- retail and
wholesale. For the retail operation, the Company has loan originators in 19
offices located throughout the country. Those individuals directly solicit
owners of real estate, as well as local multifamily and commercial mortgage
brokers. The Company believes that having a local presence within a market
significantly adds to its understanding of the local economic, demographic and
real estate trends, thus allowing it to serve borrowers and investors better. A
local presence also helps develop borrower relationships and identify new
customers.
In those markets where the Company does not have a retail presence, it acts
through "correspondent relationships" with local mortgage brokers. In this
relationship, a local commercial mortgage broker identifies potential borrowers
and refers them to the Company for their loans. Currently, the Company
originates loans through correspondents throughout the United States. In 1997,
the Company obtained 21.5 percent of its $2.3 billion of loan originations
through correspondents.
The Company's relationship with correspondents differs between multifamily and
commercial lending and FHA lending. For multifamily and commercial lending, the
Company enters into an agreement with each correspondent which generally
provides that (1) the borrower will pay the correspondent, usually based on a
percentage of the loan, (2) in some instances, the Company will have a right of
first refusal to finance properties meeting the criteria of its loan programs
and investors and (3) the correspondent will be eligible for incentive fees
based on servicing fees received by the Company from the originated loans.
Generally either party to a multifamily and commercial correspondent agreement
may terminate the relationship without cause upon prior written notice. The
multifamily and commercial correspondent agreements usually do not place
geographic restrictions on either the Company or the correspondent.
26
The Company
<PAGE>
With respect to FHA lending, correspondents generally enter into agreements with
the Company for each individual transaction and the terms of the agreements vary
from transaction to transaction. These agreements define the compensation,
roles, representations and warranties for the correspondent and the Company.
After it identifies a potential borrower, the Company determines which of its
mortgage products best meets the borrower's needs. Then the Company works with
the borrower and a mortgage investor to prepare a loan application. When the
borrower completes the application, the Company's underwriters conduct due
diligence. In the case of FHA loans, the FHA conducts due diligence. See "--
Mortgage Underwriting." The loan is evaluated, and if appropriate, submitted to
a loan committee consisting of senior officers of the Company.
If the Company or the FHA approves the loan, the Company issues a commitment to
the borrower. Normally, the Company simultaneously commits to sell the loan to
an appropriate investor. Because the commitment for the loan sometimes occurs
prior to the investor commitment, the Company may attempt to eliminate its
exposure to interest rate changes for each transaction. Typical investors
include insurance companies, banks, credit corporations, government sponsored
entities (such as Fannie Mae) and other institutional investors. Typically the
Company funds a loan 15 to 30 days after the loan commitment. At that time, the
Company funds the loan using its warehouse lines of credit and the borrower pays
the Company an origination fee, typically one percent of the principal amount of
the loan.
Within 10 to 45 days after funding the loan, the Company completes the sale of
the loan to an investor. In connection with such sales, the Company sometimes
retains certain liabilities. See "Risk Factors -- Retained Risks of Mortgage
Loans Sold" and "Risk Factors -- Mortgage Loans Sold Under DUS Program." After
selling a mortgage loan, the Company typically retains the right to service the
loan. See "-- Mortgage Servicing."
As of December 31, 1997, the Company held 32 mortgage loans for sale with an
aggregate principal balance of $49.4 million and investors had committed to
purchase all of the loans held for sale, and after that date, the Company sold
each of the loans. As of September 30, 1998, the Company held 46 mortgage loans
for sale with an aggregate principal balance of $306.2 million. After September
30, 1998, the Company entered agreements to sell each of these mortgage loans.
As of September 30, 1998, the Company had commitments to lend that were not
matched with investor commitments. Those commitments are subject to market risk
until such time as a permanent investor is identified.
The Company provides a diverse range of products to borrowers through three
product groups: Conventional Multifamily, FHA Multifamily and Healthcare, and
Commercial/Life Insurance Company. The following table sets forth information
regarding loan origination volume by business unit for each of the last three
years.
LOAN ORIGINATION VOLUME BY BUSINESS UNIT
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
9 MONTHS
ENDED
SEPT. 30,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONVENTIONAL MULTIFAMILY 768.8 742.0 505.4 448.0
FHA MULTIFAMILY AND HEALTHCARE 386.5 489.7 505.6 325.5
COMMERCIAL/LIFE INSURANCE/ (1)/ 2,128.5 1,075.2 117.5 29.0
------- ------- ------- -----
TOTAL 3,283.8 2,306.9 1,128.5 802.5
======= ======= ======= =====
</TABLE>
/(1)/ INCLUDES CONDUIT ORIGINATIONS.
Conventional Multifamily (Fannie Mae). This business unit finances multifamily
properties that are not supported by governmental insurance or guarantees. The
Company sells such loans to a variety of mortgage investors, including Fannie
27
The Company
<PAGE>
Mae. One of the Company's most active conventional products is Fannie Mae's DUS
Program. Currently, there are only 28 companies approved to participate in this
program. In 1997, total DUS Program production was $4.5 billion, of which the
Company produced approximately $200 million.
Under the DUS Program, Fannie Mae allows the Company to approve, close and
service loans on multifamily mortgages that meet predetermined criteria. Fannie
Mae commits to purchase these loans after they close. As part of the program,
Fannie Mae requires that participating companies share in the risk of loss on
the loan. See "Risk Factors -- Mortgage Loans Sold Under DUS Program." In return
for sharing the risk of loss, the Company receives a servicing fee that is
significantly higher than its typical fee. The Company underwrites each loan to
manage its loss exposure and enhance its return on servicing. See "-- Mortgage
Underwriting," below.
In addition to its participation in the DUS Program, the Company is a Fannie Mae
Prior Approval Lender and is one of the designated post-closing review lenders
for the Fannie Mae Aggregation Facility. These programs allow the Company to
sell certain loans to Fannie Mae that would not otherwise qualify for the DUS
Program. Unlike DUS, however, neither of these programs requires that the
Company share in the risk of loss.
FHA Multifamily and Healthcare. The Company, through WMF Huntoon Paige, is the
largest provider of FHA-insured multifamily and healthcare financing in the
country. The Company originates and services both construction and permanent
loans. For the twelve months ended September 30, 1998, the Company's
subsidiaries originated 12.5 percent of all FHA multifamily and healthcare
insured debt financing.
The Company operates FHA lending through a separate subsidiary because typical
property characteristics, borrower requirements, licensing, and approval
processes differ significantly between FHA and conventional multifamily
financing. To participate in FHA programs, the Company must comply with the
applicable requirements of the National Housing Act and the regulations and
policies of the FHA. See "Risk Factors -- Uncertainties Resulting from
Government Regulation and Changes in Government Programs."
Commercial/Life Insurance Company Loans. With its acquisitions in 1996 and 1997,
the Company has substantially increased its presence in the market for
commercial, non-multifamily financing. The Company originates loans secured by a
variety of properties, including office buildings, retail centers, hotels,
warehouses and nursing homes. Through relationships with regional mortgage
banks, insurance companies have been particularly active investors in this
segment. The Company has a variety of established relationships with insurance
companies, including: John Hancock, UNUM, Canada Life, CIGNA, American General,
Nationwide, Berkshire Life, Government Personnel Mutual and Century Life.
In addition to originating conduit-eligible loans that are processed by its
capital markets group, through Capital Corp., the Company has established
origination relationships with commercial mortgage conduits operated by major
financial institutions, including Merrill Lynch, NationsBank, N.A. and
ContiFinancial. In 1998, the Company originated loans totaling approximately
$1.1 billion through these investor sources.
MORTGAGE UNDERWRITING. The Company's originators work with underwriters who
perform due diligence on all loans prior to commitment and approval. The
Company's underwriters assess each proposed loan including a review of (1)
borrower financial position and credit history, (2) past operating performance
of the underlying collateral, (3) potential changes in project economics and (4)
appraisal, environmental and engineering studies completed by a pre-approved
list of third-party consultants. Additionally, underwriters inspect the
property, review tenant and lease files, survey comparable markets, and analyze
area economic and demographic trends. A loan committee consisting of the
Company's senior officers reviews and approves each proposed loan.
The Company applies its own underwriting guidelines, as well as those provided
by investors. Among other things, the Company considers debt service coverage,
loan-to-value ratios, property financial and operating performance, quality of
property management, borrower credit history and tenant profile. The standards
vary from investor to investor and may include a subjective element based on an
assessment of the total credit risk. The standards generally do not involve
mechanical application of a set formula. The Company revises its underwriting
criteria based on its experience and as market conditions and investor
requirements change.
Due in part to its underwriting procedures, in 1997 the Company achieved a loan
delinquency rate (i.e., loans delinquent over 60 days) equal to only 0.21
percent of its entire conventional multifamily and commercial portfolios. In
connection with the Fannie Mae DUS Program, the Company has originated over 296
DUS loans since 1990 with original principal
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The Company
<PAGE>
balances in excess of $1.4 billion. The Company has experienced one loss of $0.3
million on a DUS loan. That loan was originated by another lender, and the
Company acquired the risk-sharing obligation as part of its DUS approval in
1990.
The Company uses the underwriting criteria established by the FHA to recommend
loans for FHA insurance. The Company must provide the FHA with certain
information. The FHA then examines the loans and decides whether to provide
insurance.
MORTGAGE SERVICING. As a mortgage servicer, the Company performs both primary
and master servicing functions. Primary servicing involves:
. collecting mortgage payments,
. maintaining escrow accounts for the payment of taxes and
insurance premiums,
. sending payments of principal and interest,
. reporting to investors on financial and property issues and
. general loan administration.
The primary servicer must inspect properties, determine the adequacy of
insurance coverage, monitor delinquent accounts and, in cases of extreme
delinquency, institute forbearance arrangements or foreclosure proceedings on
behalf of investors.
Master servicers administer and report on securitized pools of mortgage-backed
securities. Normally, the mortgages in the pool are serviced by individual
primary servicers. Master servicing agreements typically require the primary
servicer to retain responsibility for administering the mortgage loans, and the
master servicer supervises the primary servicers by monitoring their compliance
with the servicing contract. The master servicer consolidates all accounting and
reporting to the issuer of the securities.
The Company has contracts to service loans with mortgage owners and originators
of mortgage-backed securities. The contracts are generally for a term equal to
the term of the serviced mortgage or the mortgage-backed security and are
terminable for cause. Contracts with insurance companies who own mortgages are
usually terminable on 30 days' notice by the owner, in many instances without
cause. In some circumstances, the insurance company must pay a termination fee
if it terminates a servicing contract without cause. Under these agreements, the
Company receives an annual fee for primary servicing. The fee typically ranges
from 5 basis points to 40 basis points of the unpaid principal balance of the
loans underlying the securities. Fees for master servicing typically range from
one to ten basis points.
As of September 30, 1998, the Company acted as the primary servicer for
approximately $11.1 billion of loans and the master servicer for an additional
$1.6 billion of loans. These loans were obtained through the Company's
origination network and through the purchase of servicing rights. A breakdown of
the servicing portfolio is shown below.
SERVICING PORTFOLIO BY PRODUCT TYPE
$ IN MILLIONS
<TABLE>
<CAPTION>
9 MONTHS YEAR ENDED
ENDED DECEMBER 31,
-------------------------------------
SEPT. 30,
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONVENTIONAL MULTIFAMILY 3,735 1,544 1,644 1,409
FHA AND GINNIE MAE 4,397 4,201 3,076 2,657
COMMERCIAL 2,924 4,173 1,267 201
MASTER SERVICING 1,622 952 214 145
------ ------ ----- -----
TOTAL 12,678 10,870 6,201 4,412
====== ====== ===== =====
</TABLE>
29
The Company
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The Company principally services loans in its offices in Vienna, Virginia;
Edison, New Jersey; and Houston, Texas. It employs approximately 92 persons in
these servicing facilities. As of September 30, 1998, the Company serviced 3,383
loans. As part of its servicing functions on these loans, the Company managed
escrow accounts totaling $378 million and processed approximately $83.0 million
in principal and interest payments each month. The Company continuously reviews
its servicing operations and seeks to implement improvements in its systems and
business processes.
CAPITAL MARKETS (CAPITAL CORP.). Capital Corp., the mortgage conduit subsidiary
of the Company, was formed in February of 1998. Capital Corp. was established to
securitize mortgages originated by the Company's other subsidiaries, its own
loan origination network and third-parties. Capital Corp. is headquartered in
Charlotte, North Carolina, with loan production offices in Atlanta and New York.
Capital Corp. earns its revenues from four sources:
. "carry": the profit resulting from the difference between
the Company's cost of capital and the yield on mortgages
held prior to securitization and sale;
. origination fees: fees earned on mortgages originated by
Capital Corp.;
. servicing rights revenue: revenue gained from the sale of
servicing rights to a third party; and
. trading profit: the difference between the price paid for
the individual loans and the price received for the
securitized loan pool.
In response to losses incurred at Capital Corp. in the second and third quarter
of 1998, the Company has decided that it will not make further investments in
Capital Corp. and has substantially curtailed its operations. However if the
Company cannot assure you that it will not be required to make additional
investments in Capital Corp.
The Company has entered into an agreement pursuant to which it will originate
loans for Greenwich and share in any profits from securitization of such loans.
ADVISORY SERVICES (WMF CARBON MESA). The Company's advisory services segment was
formed in March 1998, when the Company acquired all of the assets of Carbon Mesa
Advisors, Inc. and Strategic Real Estate Partners and created WMF Carbon Mesa
Advisors, Inc. ("WMF Carbon Mesa"). Based in Los Angeles, WMF Carbon Mesa
managed a private commercial mortgage fund, provided a variety of advisory
services to institutional investors and originated over $400 million in loans
and investments in 1997. WMF Carbon Mesa employs 16 people.
WMF Carbon Mesa develops new loan products, manages commercial mortgage
investment funds, provides special asset management servicing and originates
commercial mortgages. In June 1998, WMF Carbon Mesa entered into an agreement to
manage COMIT. COMIT invests in multifamily and commercial mortgages, primarily
those originated by the Company that are not sold in securitizations or to other
institutional investors. These types of multifamily and commercial loans include
bridge, mezzanine and structured transactions.
BUSINESS STRATEGY
Because of its geographic scope and quality services, the Company believes that
it is well-positioned to compete effectively in the commercial real estate
financing industry. The commercial and multifamily mortgage banking industry is
increasingly characterized by expensive technological demands, large and
sophisticated infrastructure for real estate underwriting and risk evaluation,
and the rapid emergence of the securitized market. The Company believes that
these developments will lead to the creation of sophisticated and well-
capitalized mortgage finance enterprises. The Company seeks to use its existing
infrastructure and its market position to increase market share of its
established businesses and increase its non-multifamily commercial business.
The Company seeks to increase reported earnings and cash flow through
. acquisitions and internal growth,
30
The Company
<PAGE>
. design and delivery of new mortgage products, including
structured loan products and participating loan products,
and
. expansion into related businesses, such as due diligence
services.
ACQUISITIONS. The Company has pursued a strategy of acquiring (1) multifamily
and commercial mortgage businesses that either serve key real estate markets in
the United States or provide specialized services that enhance its product line,
and (2) additional servicing portfolios. In the past, the Company has sought to
acquire companies with active and productive loan origination staffs,
significant market share and servicing portfolios of $250 million or more and
expects to continue to do so following completion of the Recapitalization Plan
to the extent its resources permit.
During 1996, the Company increased its portfolio of serviced mortgages by 40.9
percent from $4.4 billion to $6.2 billion, primarily as a result of two
acquisitions. On May 13, 1996, WMF Huntoon Paige purchased a portion of the loan
production pipeline and servicing, as well as certain other assets, of ACR
Investment Corp. for approximately $4.2 million, plus potential future payments
based on realization of loans closed from the pipeline through August 1997. The
acquired pipeline and loan production offices originated approximately $138
million in multifamily and healthcare loans for WMF Huntoon Paige in 1996.
On December 31, 1996, Washington Mortgage acquired all of the common stock of
Detroit-based Proctor & Associates of Michigan ("Proctor"), the 37th largest
commercial mortgage banking firm in the United States based on the MBA Survey.
Washington Mortgage paid approximately $3.7 million in cash to acquire Proctor.
The acquisition brought to the Company a $1.1 billion loan servicing portfolio
of multifamily, retail and office building mortgages, as well as 17 active
correspondent relationships with life insurance companies.
On April 16, 1997, Washington Mortgage purchased substantially all of the
mortgage banking assets and liabilities of Askew Investment Company ("Askew") in
Dallas, Texas for $4.6 million, excluding transaction costs. Askew is a
multifamily and commercial mortgage bank with correspondent relationships with
14 insurance companies, which originated $375 million of mortgages in 1996. The
acquisition increased the Company's mortgage servicing portfolio by $425 million
and gave the Company access to the traditional insurance company whole-loan
buyers in the markets served by Askew. The purchase also provided the Company
with a new source of loans for securitization through the Company's capital
market relationships.
On November 5, 1997, Washington Mortgage purchased 100 percent of the
outstanding stock of The Robert C. Wilson Company and its Arizona subsidiary
(collectively, "Robert C. Wilson") for a purchase price of approximately $4.0
million in cash (80 percent of which was paid at closing and the remaining 20
percent of which will be paid in the form of earnouts upon the attainment of
certain performance objectives over a 42-month period). In addition to its
mortgage and equity origination and servicing activities, Robert C. Wilson
provides commercial office leasing and real estate sales. Robert C. Wilson has
correspondent relationships with 24 insurance companies and originated
approximately $475 million of mortgages in 1997. The acquisition increased the
Company's servicing portfolio by $554 million.
On December 23, 1997, Washington Mortgage purchased substantially all of the
mortgage banking assets of New York Urban West, Inc. ("New York Urban") for a
purchase price of approximately $4.9 million in cash (84 percent of which was
paid at closing and the remaining 16 percent of which will be paid in the form
of earnouts upon the attainment of certain performance objectives over a 42-
month period). An approved HUD mortgagee, New York Urban originated $225 million
of mortgages in 1997 and had correspondent relationships with several life
insurance companies. The acquisition increased the Company's servicing portfolio
by $1.3 billion.
On March 27, 1998, the Company created WMF Carbon Mesa, which purchased all of
the assets of WMF Carbon Mesa Advisors, Inc., and Strategic Real Estate Partners
for a combination of cash and common stock. WMF Carbon Mesa develops new loan
products, manages commercial mortgage investment funds, provides special asset
management services and originates commercial mortgages.
The Company also grows its servicing portfolio through the acquisition of
servicing rights. Since 1992, the Company has acquired servicing rights on
approximately $1.3 billion of mortgages in over 44 transactions.
31
The Company
<PAGE>
As a result of acquisitions and internal growth, the Company has increased loan
originations from approximately $240 million in 1992 to approximately $3.3
billion for the nine months ended September 30, 1998. The Company's servicing
portfolio has increased from approximately $3.0 billion in 1992 to $12.7 billion
as of September 30, 1998.
In furtherance of its acquisition strategy, the Company routinely reviews, and
conducts investigations of, potential acquisitions of multifamily and commercial
mortgage businesses. As of the date of this prospectus, the Company does not
have any agreements for pending acquisitions and has not entered into any
letters of intent with respect to pending acquisitions. However, if the
Recapitalization Plan is successful and the Company obtains sufficient working
capital, the Company may enter into discussions with one or more potential
acquisition targets in the commercial mortgage financial services business. The
Company cannot assure you that such discussions will result in future
acquisitions, or that if those acquisitions are completed, they will be
successful. The Company also cannot assure you that it will successfully develop
any particular product or enter into any particular product line.
DESIGN AND DELIVERY OF NEW MORTGAGE PRODUCTS. Since 1992, the Company has been
involved in developing more than eight new products, including one of the first
whole-loan conduits (Common Sense/SM/), a revolving credit facility for real
estate investment trusts and a forward commitment program for tax-credit new
construction. Using these products, the Company has originated loans totaling
over $1.2 billion from 1992 to 1997.
The Company has also enhanced its bridge loan product, has added a number of
loan products to sell to life insurance companies, and has developed a
securitized loan product with a major Wall Street conduit for commercial
lending. Through WMF Carbon Mesa, the Company intends to develop new financing
products in response to changing market conditions, including continued
development of bridge loan products, as well as the addition of high-yield,
mezzanine and participating loan products. The Company cannot assure you that it
will be successful in developing any particular new product or, if a product is
developed, that it will be profitable for the Company.
EXPANSION INTO RELATED BUSINESSES. The Company seeks to build upon its
experience in evaluating real estate to expand its services and develop related
products. The Company has used its expertise to provide due diligence services
for institutional clients, to enter the advisory services/funds management
business and to expand its presence in the commercial mortgage-backed securities
market. Other possible businesses may include asset management, commercial
leasing and management and the purchase and retention of commercial mortgage-
backed securities. Expansion may occur through a combination of acquisitions,
strategic alliances and internal business development. There can be no assurance
that the Company will seek to undertake any specific line of business, or that,
if it undertakes a particular line of business, that the business will be
successful.
32
The Company
<PAGE>
THE RIGHTS OFFERING
THE RIGHTS
The Company is distributing transferable rights to individuals who own shares of
its common stock on ________, 1999, at no cost to the stockholders. The Company
will give you 1.072 rights for each share of common stock that you own on
____________, 1999. You will not receive fractional rights during the rights
offering, but instead the Company will round your number of rights up or down to
the nearest whole number. Each right will entitle you to purchase one share of
common stock for $5.00.
If you wish to exercise your rights, you must do so on or before _______ __,
1999 at 5 p.m., Eastern Standard Time. After that date, the rights will expire
and will no longer be exercisable.
BASIC SUBSCRIPTION RIGHT
Each right will entitle you to receive, upon payment of $5.00 to the Company,
one share of common stock (the "Basic Subscription Right"). The Company will
send you certificates representing the shares that you purchase pursuant to your
Basic Subscription Right as soon as practicable after ________ __, 1999, whether
you exercise your rights immediately prior to that date or earlier.
OVERSUBSCRIPTION PRIVILEGE
Subject to the allocation described below, each right also grants you an
"Oversubscription Privilege" to purchase additional shares of common stock that
are not purchased by other stockholders. You are entitled to exercise your
Oversubscription Privilege only if you exercise your Basic Subscription Right in
full.
If you wish to exercise your Oversubscription Privilege, you should indicate the
number of shares that you would like to purchase in the space provided on your
Subscription Certificate. When you send in your Subscription Certificate, you
must also send the full purchase price for the number of additional shares that
you have requested to purchase (in addition to the payment due for shares
purchased through your Basic Subscription Right).
If the number of shares remaining after the exercise of all Basic Subscription
Rights is not sufficient to satisfy all Oversubscription Privileges, you will be
allocated shares pro rata (subject to elimination of fractional shares), in
proportion to the number of shares you purchased through your Basic Subscription
Right. However, if your pro rata allocation exceeds the number of shares you
requested on your Subscription Certificate, then you will receive only the
number of shares that you requested, and the remaining shares from your pro rata
allocation will be divided among other shareholders exercising their
Oversubscription Privileges.
As soon as practicable after _________ __, 1999, the Company will determine the
number of shares of common stock that you may purchase pursuant to the
Oversubscription Privilege. The Company will send you certificates representing
these shares as soon as practicable after __________ __, 1999. If you request
and pay for more shares than are allocated to you, the Company will refund that
overpayment, without interest.
In connection with the exercise of the Oversubscription Privilege, banks,
brokers and other nominee holders of rights who act on behalf of beneficial
owners will be required to certify to the Subscription Agent and the Company as
to the aggregate number of rights that have been exercised, and the number of
shares of common stock that are being requested through the Oversubscription
Privilege, by each beneficial owner on whose behalf such nominee holder is
acting.
33
The Rights Offering
<PAGE>
STAND-BY PURCHASE COMMITMENT BY PRINCIPAL STOCKHOLDERS
Because Demeter, Phemus and Capricorn purchased 3,635,972 shares of the
Company's Class A Stock on December 31, 1998, they have agreed that they will
not exercise, transfer or acquire any rights during the rights offering.
However, if the Company sells fewer than 2,666,567 shares of common stock during
this rights offering, then Demeter, Phemus and Capricorn have entered into a
Standby Purchase Agreement to purchase for $5.00 per share, the lesser of (A)
664,028 shares of the Company's capital stock or (B) 2,666,567 shares, minus the
number of shares sold during the rights offering. This agreement guarantees that
the Company will receive at least $3,320,140 in gross proceeds from the rights
offering.
If no stockholders exercise their Basic Subscription Rights and only Demeter,
Phemus and Capricorn purchase shares pursuant to this rights offering, the
proceeds to the Company will be $3,320,140. In contrast, if all rights are
exercised, the gross proceeds to the Company of the rights offering will be
$13,332,835.
EXPIRATION DATE
The rights will expire at 5:00 p.m., Eastern Standard Time, on _______ __, 1999,
unless the Company, in its discretion, extends the rights offering for up to 10
days. If you do not exercise your Basic Subscription Rights and Oversubscription
Privilege prior to ___________ __, 1999, the rights will be null and void. The
Company will not be required to issue shares of common stock to you if the
Subscription Agent receives your Subscription Certificate or your payment after
that date, regardless of when you sent the Subscription Certificate and payment,
unless you send the documents in compliance with the Guaranteed Delivery
Procedures described below.
WITHDRAWAL RIGHT
The Company may withdraw the rights offering at any time prior to or on ________
__, 1999, for any reason (including, without limitation, a change in the market
price of the common stock). If the Company withdraws the rights offering, any
funds received from stockholders will be promptly refunded, without interest or
penalty.
DETERMINATION OF SHARE PRICE
The Company and its Board of Directors decided to charge $5.00 per share during
the rights offering after considering such factors as the historic and current
market price of the Company's common stock and the Company's need for capital.
The $5.00 per share price should not be considered an indication of the actual
value of the Company or its common stock. The Company cannot assure you that the
market price of the common stock will not decline during the rights offering.
The Company also cannot assure you that you will be able to sell shares of
common stock purchased during the rights offering at a price equal to or greater
than $5.00 per share.
TRANSFERABILITY OF RIGHTS
Starting on the date on which the rights are distributed, you may purchase or
sell rights through usual investment channels, including banks and brokers. See
"Risk Factors - No Prior Market for Rights."
You may transfer the rights evidenced by a single Subscription Certificate in
whole by endorsing the Subscription Certificate for transfer in accordance with
the accompanying Instructions. You may transfer a portion of the rights
evidenced by a single Subscription Certificate (but not fractional rights) by
delivering to the Subscription Agent a Subscription Certificate properly
endorsed for transfer, with instructions to register such portion of the rights
evidenced thereby in the name of the transferee and to issue a new Subscription
Certificate to the transferee evidencing such
34
The Rights Offering
<PAGE>
transferred rights. In such event, a new Subscription Certificate evidencing the
balance of the rights will be issued to you, or, if you so instruct, to an
additional transferee.
If you wish to transfer all or a portion of your rights (but not fractional
rights), you should allow a sufficient amount of time prior to _________ __,
1999, for
. the transfer instructions to be received and processed by the
Subscription Agent,
. a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to the transferred rights, and
to you with respect to retained rights, and
. the rights evidenced by such new Subscription Certificates to be
exercised or sold by the recipients thereof.
Neither the Company nor the Subscription Agent will be liable to a transferee or
transferor of rights if Subscription Certificates are not received in time for
exercise or sale prior to ________ __, 1999.
Except for the fees charged by the Subscription Agent (which the Company will
pay, as described below), you will be responsible for paying any commissions,
fees and other expenses (including brokerage commissions and transfer taxes)
incurred in connection with the purchase, sale or exercise of the rights.
Neither the Company nor the Subscription Agent will pay any such commissions,
fees or expenses.
The Company anticipates that the rights will be listed on __________ and that
you will be able to transfer and exercise the rights through the facilities of
the Depository Trust Company. BT Alex Brown, Inc. has informed the Company that
it intends to make a market in the rights.
EXERCISE OF RIGHTS
You may exercise your rights by delivering to the Subscription Agent on or
prior to _________ __, 1999:
. A properly completed and duly executed Subscription Certificate;
. Any required signature guarantees; and
. Payment in full of $5.00 per share of common stock to be purchased
through the Basic Subscription Right and the Oversubscription
Privilege.
You should deliver your Subscription Certificate and payment to the address set
forth below under "-- Subscription Agent."
METHOD OF PAYMENT
Payment for the shares must be made by:
(1) or bank draft drawn upon a United States bank or a postal, telegraphic
or express money order payable to "Boston Equiserve, L.P., as
Subscription Agent"; or
(2) wire transfer of funds to the account maintained by the Subscription
Agent for such purpose at _________________________________________.
If you are purchasing an aggregate number of shares of common stock totaling
$500,000 or more, the Company may agree to an alternative payment method. If you
use an alternative payment method, the Subscription Agent must receive the full
amount your payment in currently available funds within one over-the-counter
("OTC") trading day prior to _______ __, 1999.
35
The Rights Offering
<PAGE>
Payment will be deemed to have been received by the Subscription Agent only
upon:
(A) clearance of any uncertified check;
(B) receipt by the Subscription Agent of any certified check or bank draft
drawn upon U.S. bank or of any postal, telegraphic or express money
order; or
(C) receipt of funds by the Subscription Agent through an alternative
payment method.
================================================================================
PLEASE NOTE THAT FUNDS PAID BY UNCERTIFIED PERSONAL CHECK MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR. ACCORDINGLY, IF YOU WISH TO PAY BY MEANS OF AN
UNCERTIFIED PERSONAL CHECK, THE COMPANY URGES YOU TO MAKE PAYMENT SUFFICIENTLY
IN ADVANCE OF _________ ___, 1999, TO ENSURE THAT THE PAYMENT IS RECEIVED AND
CLEARS BEFORE THAT DATE. THE COMPANY ALSO URGES YOU TO CONSIDER PAYMENT BY MEANS
OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
================================================================================
GUARANTEED DELIVERY PROCEDURES
If you want to exercise your rights, but time will not permit your Subscription
Certificate to reach the Subscription Agent on or prior to __________ ___, 1999,
you may exercise your rights if you satisfy the following Guaranteed Delivery
Procedures:
(1) You send, and the Subscription Agent receives, payment in full for
each share of common stock being purchased through the Basic
Subscription Right and the Oversubscription Privilege, on or prior to
__________ ___, 1999;
(2) You send, and the Subscription Agent receives, on or prior to ________
___, 1999, a Notice of Guaranteed Delivery, substantially in the form
provided with the attached Instructions, from a member firm of a
registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States. The
Notice of Guaranteed Delivery must state your name, the number of
rights that you hold, the number of shares of common stock that you
wish to purchase pursuant to the Basic Subscription Right and the
number of shares, if any, you wish to purchase pursuant to the
Oversubscription Privilege. The Notice of Guaranteed Delivery must
guarantee the delivery of your Subscription Certificate to the
Subscription Agent within three OTC trading days following the date of
the Notice of Guaranteed Delivery; and
(3) You send, and the Subscription Agent receives, your properly completed
and duly executed Subscription Certificate, including any required
signature guarantees, within three OTC trading days following the date
of your Notice of Guaranteed Delivery. The Notice of Guaranteed
Delivery may be delivered to the Subscription Agent in the same manner
as your Subscription Certificate at the addresses set forth below, or
may be transmitted to the Subscription Agent by facsimile
transmission, to facsimile number (781) 575-2420. You can obtain
additional copies of the form of Notice of Guaranteed Delivery by
requesting it from the Subscription Agent at the address set forth
below under "-- Subscription Agent."
SIGNATURE GUARANTEES
Signatures on the Subscription Certificate must be guaranteed by an Eligible
Guarantor Institution, as defined in Rule 17Ad-15 of the Exchange Act, subject
to the standards and procedures adopted by the Subscription Agent. Eligible
Guarantor Institutions include banks, brokers, dealers, credit unions, national
securities exchanges and savings associations.
Signatures on the Subscription Certificate do not need to be guaranteed if:
36
The Rights Offering
<PAGE>
(1) the Subscription Certificate provides that the shares of common stock to be
purchased are to be delivered directly to the you, the record owner of such
rights, or
(2) the Subscription Certificate is submitted for the account of a member firm
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust company
having an office or correspondent in the United States.
SHARES HELD FOR OTHERS
If you hold shares of common stock for the account of others, such as a broker,
a trustee or a depository for securities, you should notify the respective
beneficial owners of such shares as soon as possible to obtain instructions with
respect to the rights beneficially owned by them.
If you are a beneficial owner of common stock held by a holder of record, such
as a broker, trustee or a depository for securities, you should contact the
holder and ask him to effect transactions in accordance with your instructions.
FOREIGN SHAREHOLDERS
If your address is outside of the United States or is an APO or FPO address, the
Company will not mail your rights to you, but the Subscription Agent will hold
the rights for your account. To exercise your Basic Subscription Right and
Oversubscription Privilege, your must notify the Subscription Agent by
completing an International Subscription Form, which will be mailed to you
instead of a Subscription Certificate. You should mail or telecopy the
International Subscription Form to the Subscription Agent's address and telecopy
number, set forth on page __.
AMBIGUITIES IN EXERCISE OF THE RIGHTS
If you do not specify the number of rights being exercised on your Subscription
Certificate, or if your payment is not sufficient to pay the total purchase
price for all of the shares that you indicated you wished to purchase, you will
be deemed to have exercised the maximum number of rights that could be exercised
for the amount of the payment that the Subscription Agent receives from you.
If your payment exceeds the total purchase price for all of the rights shown on
your Subscription Certificate, your payment will be applied, until depleted, to
subscribe for shares of common stock in the following order:
(1) to subscribe for the number of shares, if any, that you indicated on the
Subscription Certificate(s) that you wished to purchase through your Basic
Subscription Right;
(2) to subscribe for shares of common stock until your Basic Subscription Right
has been fully exercised;
(3) to subscribe for additional shares of common stock pursuant to the
Oversubscription Privilege (subject to any applicable proration).
Any excess payment remaining after the foregoing allocation will be returned to
you as soon as practicable by mail, without interest or deduction.
37
The Rights Offering
<PAGE>
================================================================================
IMPORTANT
PLEASE CAREFULLY READ THE INSTRUCTIONS ACCOMPANYING THE SUBSCRIPTION CERTIFICATE
AND FOLLOW THOSE INSTRUCTIONS IN DETAIL.
DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE COMPANY.
---
YOU ARE RESPONSIBLE FOR CHOOSING THE PAYMENT AND DELIVERY METHOD FOR YOUR
SUBSCRIPTION CERTIFICATES, AND YOU BEAR THE RISKS ASSOCIATED WITH SUCH DELIVERY.
IF YOU CHOOSE TO DELIVER YOUR SUBSCRIPTION CERTIFICATE AND PAYMENT BY MAIL, THE
COMPANY RECOMMENDS THAT YOU USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED. THE COMPANY ALSO RECOMMENDS THAT YOU ALLOW A SUFFICIENT
NUMBER OF DAYS TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF
PAYMENT PRIOR TO ____________ __, 1999. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY
TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, THE COMPANY STRONGLY URGES YOU TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY
ORDER OR WIRE TRANSFER OF FUNDS.
================================================================================
COMPANY'S DECISION BINDING
All questions concerning the timeliness, validity, form and eligibility of any
exercise of rights will be determined by the Company, whose determinations will
be final and binding. The Company, in its sole discretion, may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any right by
reason of any defect or irregularity in such exercise. Subscriptions will not be
deemed to have been received or accepted until all irregularities have been
waived or cured within such time as the Company determines in its sole
discretion. Neither the Company nor the Subscription Agent will be under any
duty to give notification of any defect or irregularity in connection with the
submission of Subscription Certificates or incur any liability for failure to
give such notification.
NO REVOCATION
AFTER YOU HAVE EXERCISED YOUR BASIC SUBSCRIPTION RIGHT OR OVERSUBSCRIPTION
PRIVILEGE, YOU MAY NOT REVOKE THAT EXERCISE.
FEES AND EXPENSES
The Company will pay all fees charged by the Subscription Agent. You are
responsible for paying any other commissions, fees, taxes or other expenses
incurred in connection with the exercise or transfer of the rights. Neither the
Company nor the Subscription Agent will pay such expenses.
SUBSCRIPTION AGENT
The Company has appointed Boston Equiserve, L.P. as Subscription Agent for the
rights offering. The Subscription Agent's address for packages sent my mail,
courier or overnight delivery is:
Kevin M. Breen
Boston Equiserve, L.P.
150 Royall Street
Canton, Massachusetts 02021
38
The Rights Offering
<PAGE>
The Subscription Agent's telephone number is (781) 575-3204, and its facsimile
number is (781) 575-2420.
You should deliver your Subscription Certificate, payment of the Subscription
Price and Notice of Guaranteed Delivery (if any) to the Subscription Agent.
The Company will pay the fees and expenses of the Subscription Agent, which the
Company estimates will total $______. The Company has also agreed to indemnify
the Subscription Agent from any liability which it may incur in connection with
the rights offering.
FINANCIAL ADVISOR
The Company has engaged BT Alex. Brown, Inc. as its financial advisor in
connection with the Recapitalization Plan.
39
The Rights Offering
<PAGE>
IF YOU HAVE QUESTIONS
If you have questions or need assistance concerning the procedure for exercising
rights, or if you would like additional copies of this prospectus, the
Instructions, or the Notice of Guaranteed Delivery, you should contact the
Information Agent:
____________________
____________________
____________________
(---) ---------------
40
If You Have Questions
<PAGE>
USE OF PROCEEDS
The Company will apply its net proceeds from the rights offering first to repay
a loan to COMIT and then to repay a portion of its revolving credit facility and
to finance its working capital and other capital requirements. On September 4,
1998, the Company entered into a Credit Agreement with COMIT, pursuant to which
the Company sold $20 million of its 11% subordinated notes to COMIT. The Company
also issued warrants to COMIT entitling it to purchase 1,200,000 shares of
common stock at $11.25 per share. COMIT transferred the warrants to Harvard and
Capricorn.
On December 31, 1998, Demeter, Phemus and Capricorn purchased a total of
3,635,972 shares of the Company's Class A Stock. Demeter purchased 2,757,633
shares of Class A Stock, Phemus purchased 151,145 shares of Class A Stock, and
Capricorn purchased 727,194 shares of Class A Stock, for aggregate consideration
of approximately $16.7 million. The proceeds from this sale were used to used to
repay a portion of the $20 million debt that the Company owes to COMIT. In
addition, Harvard (an affiliate of Demeter and Phemus) and Capricorn canceled
the 1,200,000 warrants that they received in connection with the Credit
Agreement. Demeter, Phemus and Capricorn have also entered into a Standby
Purchase Agreement whereby they will purchase up to 664,028 shares of capital
stock.
Assuming that shareholders exercise all of the rights, the Company will receive
proceeds from this rights offering of approximately $13.3 million. The Company
will use the first $3.3 million in proceeds to repay the remainder of its debt
to COMIT. In the event the Company is unable to renegotiate its revolving credit
facility, the Company will be required to use 25 percent of any proceeds in
excess of $3.3 million to repay a portion of its revolving credit facility. All
remaining proceeds will be used for the Company's working capital requirements.
The Company expects to receive minimum proceeds of approximately $3.3 million
from this rights offering, because Demeter, Phemus and Capricorn have agreed
that if the Company sells fewer than 2,666,567 shares during the rights
offering, they will purchase, for $5.00 per share, the lesser of (A) 664,028
shares of the Company's capital stock or (B) 2,666,567 shares minus the number
of shares sold during the rights offering. These minimum proceeds will be
sufficient to repay the Company's outstanding debt to COMIT, but will not be
sufficient to repay the revolving credit facility or to finance the Company's
working and other capital requirements.
If the Company receives only the minimum proceeds, or if the Company fails to
reach sufficient revenue levels, the Company may require additional capital. The
Company cannot assure you that such capital will be available on satisfactory
terms.
CAPITALIZATION
The following table sets forth the capitalization of the Company, on an
historical basis as of September 30, 1998, and on a pro forma basis as of
September 30, 1998, based on completion of the Recapitalization Plan (i)
assuming the minimum purchase by Demeter, Phemus and Capricorn of 664,028 shares
pursuant to their stand-by purchase commitment and (ii) assuming the maximum
exercise of all 2,666,567 rights. The net proceeds from the Recapitalization
Plan will be applied as set forth above in Use of Proceeds.
September 30, 1998
-------------------------
Pro Forma
--------------
Historical Minimum Maximum
---------- ------- -------
Debt:
[To come]
Stockholders' Equity:
Common Stock
Class A Stock
41
Use of Proceeds/Capitalization
<PAGE>
PLAN OF DISTRIBUTION
Promptly following the effective date of the Registration Statement that
contains this prospectus, the Company will distribute the rights and copies of
this prospectus to individuals who own shares of common stock on _________,
1999. If you wish to exercise your rights and purchase shares of common stock,
you should complete the Subscription Certificate and return it, with payment for
the shares, to the Subscription Agent, Boston Equiserve, L.P., at the address on
page __. See "The Rights Offering - Exercise of Rights."
If you have any questions, you should contact the Company's Information Agent,
BT Alex. Brown, Inc. at the telephone number and address on page ___. At the
conclusion of the rights offering, the Company will pay BT Alex. Brown, Inc. a
____________ fee for its services as Information Agent.
To guarantee the Company minimum proceeds of approximately $3,320,140 from this
rights offering, Demeter, Phemus and Capricorn have entered into a Standby
Purchase Agreement. Under that agreement, if the Company sells fewer than
2,666,567 shares of common stock during the rights offering, then Demeter,
Phemus and Capricorn will buy, for $5.00 per share, a total of the lesser of (A)
664,028 shares of the Company's capital stock or (B) 2,666,567 shares, minus the
number of shares sold during the rights offering. Demeter will purchase 75.84
percent of any shares purchased pursuant to the Standby Purchase Agreement,
while Phemus will purchase 4.16 percent of such shares, and Capricorn will
purchase 20 percent of such shares.
42
Plan of Distribution
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes the material federal income tax considerations of
the rights offering to you and the Company. This summary is based on current
law, which is subject to change at any time, possibly with retroactive effect.
This summary is not a complete discussion of all federal income tax consequences
of the rights offering, and, in particular, may not address federal income tax
consequences applicable to Company shareholders subject to special treatment
under federal income tax law. In addition, this summary does not address the
tax consequences of the rights offering under applicable state, local or foreign
tax laws. This discussion assumes that your shares of common stock and the
rights and shares issued to you during the rights offering constitute capital
assets.
Receipt and exercise of the rights distributed pursuant to the rights
offering is intended to be nontaxable to Company shareholders, and the following
summary assumes they will qualify for such nontaxable treatment. If, however,
the rights offering does not qualify as a nontaxable distribution, you would be
treated as receiving a dividend equal to the fair market value of the rights on
their distribution date and expiration of the rights would result in a capital
loss.
THIS DISCUSSION IS INCLUDED FOR YOUR GENERAL INFORMATION ONLY. YOU SHOULD
CONSULT YOUR TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO YOU OF THE RIGHTS
OFFERING IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES, INCLUDING ANY STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES.
TAXATION OF SHAREHOLDERS
RECEIPT OF A RIGHT. You will not recognize any gain or other income upon
receipt of a right.
TAX BASIS AND HOLDING PERIOD OF RIGHTS. Your tax basis in each right will
depend on whether you exercise the right, transfer the right, or allow the right
to expire.
If you exercise or transfer a right, your tax basis in the right will be
determined by allocating the tax basis of your common stock on which the right
is distributed between the common stock and the right, in proportion to their
relative fair market values on the date of distribution of the right. However,
if the fair market value of your rights is less than 15 percent of the fair
market value of your existing shares of common stock, then the tax basis of each
right will be deemed to be zero, unless you elect, by attaching an election
statement to your federal income tax return for 1999, to allocate tax basis to
your rights.
If you allow a right to expire, it will be treated as having no tax basis.
Your holding period for a right will include your holding period for the
share of common stock upon which the right is issued.
EXPIRATION OF RIGHTS. You will not recognize any loss upon the expiration
of a right.
TRANSFER OF RIGHTS. If you sell any of your rights, you will recognize a
gain or loss equal to the difference between the sale proceeds and your basis
(if any) in the rights sold. If your holding period for the rights (determined
as described above) is more than one year, such gain or loss generally will be
long-term capital gain or loss.
EXERCISE OF RIGHTS. You generally will not recognize a gain or loss on the
exercise of a right. The tax basis of any share of common stock that you
purchase through the rights offering will be equal to the sum of your tax basis
(if any) in the right exercised and the price paid for the share. The holding
period of the shares of common stock purchased through the rights offering will
begin on the date that you exercise your rights.
TAXATION OF THE COMPANY
The Company will not recognize any gain, other income or loss upon the
issuance of the rights, the lapse of the rights, or the receipt of payment for
shares of common stock upon exercise of the rights.
43
Federal Income Tax Considerations
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's common stock is listed for quotation under the symbol "WMFG" on
the National Market of The Nasdaq Stock Market, Inc. The following table sets
forth the high and low per-share closing prices for the Company's common stock
for each quarterly period since the completion of the Company's initial public
offering on December 8, 1997.
<TABLE>
<CAPTION>
Calendar Year High Low
------------- ---- ---
<S> <C> <C>
1997
----
Fourth Quarter (from December 9, 1997) $ 14 $12 1/8
1998
----
First Quarter 32 1/2 11 1/8
Second Quarter 28 1/4 19 5/8
Third Quarter 29 5
Fourth Quarter (through December __, 1998) ------ ------
</TABLE>
As of December __, 1998, there were ___ holders of record of the Company's
common stock. The Company believes, based on the number of proxy materials
distributed in connection with its 1998 Annual Meeting of Stockholders, that the
number of beneficial owners as of that date exceeds _________.
44
Price Range of Common Stock
<PAGE>
SELECTED FINANCIAL DATA
Set forth on the following page is selected financial data of the Company for
the nine months ended September 30, 1998 and 1997, and for the years ended
December 31, 1997, 1996 and 1995. The selected financial data has been derived
from, and should be read in conjunction with, the unaudited consolidated
financial statements and accompanying notes included in the Company's Quarterly
Report on Form 10-Q/A for the nine months ended September 30, 1998 and 1997 and
the audited consolidated financial statements and accompanying notes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considered necessary for a fair
presentation of the Company's financial position and the results of operations
for those periods. Operating results for the nine months ended September 30,
1998, are not necessarily indicative of results that may be expected for the
year ending December 31, 1998. The selected financial data below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
contained in the reports listed in the previous paragraph, which are
incorporated by reference herein.
45
Selected Financial Data
<PAGE>
SELECT CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
The Company
------------------------------------------
For the
Nine Months Nine Months Period
Ended Ended Pro Forma April 1 to
September 30, September 30, December 31, December 31,
1998 1997 1997 1996 /(1)/ 1996
-------------- -------------- --------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 50,802 $29,497 $ 44,645 $ 30,301 $23,473
Expenses 84,729 27,773 42,203 29,416 22,318
Net income (loss) (33,927) 1,724 2,442 885 1,155
Net income (loss) per share-Basic /(2)/ (6.53) 0.41 0.57 0.21 0.27
Weighted average shares 5,199 4,217 4,273 4,217 4,217
outstanding-Basic /(2)/
Net income (loss) per share-Diluted /(2)/ (6.53) 0.41 0.55 0.21 0.27
Weighted average shares 5,199 4,217 4,453 4,217 4,217
outstanding-Diluted/(2)/
BALANCE SHEET DATA
Mortgage loans held for sale $ 306,153 $35,650 $ 49,431 $40,263
Servicing rights 28,147 22,520 26,796 22,460
Total assets 698,836 93,783 119,331 88,097
Total debt /(3)/ 354,402 40,586 54,442 46,137
Shareholder's equity 9,666 24,252 38,825 22,528
OTHER DATA
Cash Flow from
Operating activities /(4)/ $(302,079) $16,098 $ (881) $ 3,395 $(6,588)
Investing activities /(4)/ 3,510 (8,715) (21,463) (9,624) (9,276)
Financing activities/ (4)/ 299,266 (5,550) 26,529 7,833 17,029
EBITDA /(5)/ (43,981) 8,440 11,439 8,256 6,502
<CAPTION>
WMF Holdings Ltd. and Subsidiaries
------------------------------------
For the
Period
January 1, to Year Ended
March 31, December 31,
1996 1995
------------------ ----------------
<S> <C> <C>
INCOME STATEMENT DATA
Revenues $ 6,828 $ 21,999
Expenses 6,523 21,222
Net income (loss) 305 777
Net income (loss) per share-Basic /(2)/ 0.07 0.16
Weighted average shares 4,217 4,717
outstanding-Basic /(2)/
Net income (loss) per share-Diluted /(2)/ 0.07 0.16
Weighted average shares 4,217 4,717
outstanding-Diluted/(2)/
BALANCE SHEET DATA
Mortgage loans held for sale $23,116 $ 32,462
Servicing rights 8,477 8,466
Total assets 48,976 57,176
Total debt /(3)/ 34,108 43,304
Shareholder's equity 4,324 4,018
OTHER DATA
Cash Flow from
Operating activities /(4)/ $ 9,983 $(21,897)
Investing activities /(4)/ (548) (2,343)
Financing activities/ (4)/ (9,196) 26,833
EBITDA /(5)/ 1,754 4,743
</TABLE>
________________________________________
/1/ On April 1, 1996, NHP, Incorporated acquired all of the outstanding
capital stock of the Company (the "Acquisition"). This data has been adjusted to
reflect results of operations for the twelve months ended December 31, 1996, as
if the Acquisition had occurred January 1, 1996. Adjustments include all income
amounts for the three months ended March 31, 1996 and additional amortization of
$575,647.
/2/ Gives retroactive effect to a 789.94 per share stock split effective
October 3, 1997.
/3/ Includes $5,000,000 of notes to the Company's former shareholder as of
March 31, 1996 and December 31, 1995, which were repaid in conjunction with the
Acquisition.
/4/ Operating, investing and financing cash flow represents the amount of
cash generated from operating, investing and financing activities, respectively,
as determined using GAAP.
/5/ EBITDA is a non-GAAP presentation of the Company's performance and
consists of income from operations before non-warehouse interest expense, income
taxes, depreciation and amortization. EBITDA is included because it is used in
the industry as a measure of a company's operating performance and provides
information in addition to that supplied by GAAP-based data regarding the
ability of the Company's business to generate cash, but should not be construed
as an alternative either (i) to income from operations (determined in accordance
with GAAP) as a measure of profitability of (ii) to cash flows from operating
activity (determined in accordance with GAAP). EBITDA does not take into account
the Company's debt service requirements and other commitments and, accordingly,
is not necessarily indicative of amounts that may be available for discretionary
uses. EBITDA as measured by the Company may not be comparable to EBITDA as
measured by other companies.
46
Selected Financial Data
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby will
be passed upon for the Company by Hunton & Williams, Richmond, Virginia.
EXPERTS
The consolidated balance sheet of the Company and its subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended December 31,
1997 and December 31, 1995, and all related schedules, have been incorporated
herein in reliance on the reports of KPMG Peat Marwick LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The consolidated balance sheets of the Company and its subsidiaries as of
December 31, 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year ended December 31,
1996, and all related schedules have been incorporated herein in reliance on the
reports of Arthur Andersen LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
47
Legal Matters/Experts
<PAGE>
IF YOU WOULD LIKE ADDITIONAL INFORMATION
The Company files annual, quarterly and special reports, proxy statements and
other information with the U.S. Securities and Exchange Commission ("SEC"). You
may read and copy this information at the SEC's public reference rooms, which
are located at:
450 Fifth Street, NW 7 World Trade Center, Suite 1300
Washington, DC 20549 New York, NY 10048
500 West Madison Street, Suite 1400
Chicago, IL 60661-2511
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. This information is also available on-line through the SEC's
Electronic Data Gathering, Analysis, and Retrieval System (EDGAR), located on
the SEC's web site (http://www.sec.gov.).
Also, the Company will provide you (free of charge) with any of its documents
filed with the SEC. To get your free copies, please call or write:
Michael D. Ketcham
Chief Financial Officer
1453 Spring Hill Road, Suite 400,
Vienna, VA 22182
(703) 610-1400
The Company has filed a Registration Statement with the SEC on Form S-3 with
respect to the rights offering. This prospectus is a part of the Registration
Statement, but the prospectus does not repeat important information that you can
find in the Registration Statement, reports and other documents that the Company
filed with the SEC. The SEC allows the Company to "incorporate by reference"
those documents, which means that the Company can disclose important information
to you by referring you to other documents. The documents that are incorporated
by reference are legally considered to be a part of this prospectus. The
documents incorporated by reference are:
(1) Annual Report on Form 10-K for the year ended December 31, 1997;
(2) Quarterly Report on Form 10-Q for the period ended March 31, 1998;
Quarterly Report on Form 10-Q for the period ended June 30, 1998, as
amended by Form 10-Q/A filed December 21, 1998; Quarterly Report on
Form 10-Q for the period ended September 30, 1998, as amended by Form
10-Q/A filed December 22, 1998;
(3) Current Report on Form 8-K filed January 8, 1998; Current Report on
Form 8-K filed September 26, 1998;
(4) The description of the common stock contained in the Company's
Registration Statement on Form 10, as filed with the Commission on
August 4, 1997, as amended on September 22, 1997, October 8, 1997 and
November 19, 1997;
(5) Any filings with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act of 1934 between the date of this prospectus and
the expiration of the rights offering.
As you read the above documents, you may find some inconsistencies in
information from one document to another. If you find inconsistencies between
the documents, or between a document and this prospectus, you should rely on the
statements made in the most recent document.
You should rely only on the information in this prospectus or incorporated by
reference. The Company has not authorized anyone to provide you with any
different information.
48
If You Would Like Additional Information
<PAGE>
PROSPECTIVE INVESTORS MAY RELY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. THE COMPANY HAS NOT AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE
INVESTORS WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. THIS
PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO BE ISSUED PURSUANT TO THE RIGHTS
OFFERING. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE
DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF THESE SECURITIES.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE IN THE JURISDICTION.
[WMF LOGO] (R)
COMMON STOCK
PROSPECTUS
_________ __, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with this Registration
Statement. The Company will pay all expenses of the rights offering. All such
expenses are estimates, other than the filing fees payable to the Securities and
Exchange Commission and the Nasdaq National Market.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee $
Nasdaq National Market Listing Fee.............
Printing Fees and Expenses.....................
Legal Fees and Expenses........................
Information Agent Fee..........................
Financial Advisory Fee.........................
Accounting Fees and Expenses...................
Blue Sky Fees and Expenses.....................
Subscription Agent Fee.........................
Miscellaneous.................................. --------
Total........................................
(To be provided by amendment.) ========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of Delaware (the
"DGCL") empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or complete action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no cause
to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 of the DGCL further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
Part II - i
<PAGE>
Article Seven of the Company's Restated Certificate of Incorporation, as
amended, and Article VI, Section 1 of the Company's By-laws, each of which is an
exhibit to this prospectus and each of which is incorporated herein by
reference, provide in effect for the indemnification by the Company of each
director and officer of the Company to the fullest extent permitted by
applicable law.
ITEM 16. EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1 Standby Purchase Agreement dated as of October 16, 1998
between the Company, Demeter Holding Corporation and Phemus
Corporation (to be filed by amendment)
4.1 Restated Certificate of Incorporation of The WMF Group, Ltd.
(the "Company") (1)
4.2 Amendment to the Company's Restated Certificate of
Incorporation (2)
4.3 Amendment to the Company's Restated Certificate of
Incorporation, Designating Class A Non-Voting Convertible
Preferred Stock (to be filed by amendment)
4.4 Amended and Restated Bylaws of The WMF Group, Ltd. (3)
4.5 Form of Certificate representing the Common Stock (1)
4.6 Rights Agreement dated as of ________________ by and between
the Company and _______________________ as Subscription
Agent (including form of Right Certificate) (to be filed by
amendment)
5 Opinion of Hunton & Williams (to be filed by amendment)
10.1 Registration Rights Agreement dated June 12, 1998, between
the Company, Harvard Private Capital Holdings, Inc. and
Capricorn Investors II, L.P., as amended by the First
Amendment to the Registration Rights Agreement, dated
December __, 1998, between the Company, Harvard Private
Capital Holdings, Inc., Capricorn Investors, II, L.P.,
Demeter Holdings Corporation and Phemus Corporation (to be
filed by amendment)
10.2 Series 1 Warrant Agreement dated September 4, 1998, between
the Company and Commercial Mortgage Investment Trust, Inc.
(to be filed by amendment)
10.3 Series 2 Warrant Agreement dated December __, 1998, between
the Company and _______________ (to be filed by amendment)
10.4 Series 3 Warrant Agreement dated December __, 1998, between
the Company and _______________ (to be filed by amendment)
10.5 Registration Rights Agreement dated December __, 1998,
between the Company and HN Acquisitions, Inc. (to be filed
by amendment)
10.6 Stock Purchase Agreement dated as of October 16, 1998, by
and among the Company, Harvard Private Capital Holdings,
Inc., Demeter Holdings Corporation, Phemus Corporation and
Capricorn Investors II, L.P. (to be filed by amendment)
23.1 Consent of Hunton & Williams (included in Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page)
99.1 Form of Subscription Certificate (to be filed by amendment)
99.2 Instructions to Stockholders as to use of Subscription
Certificate (to be filed by amendment)
99.3 Notice of Guaranteed Delivery for Subscription Certificates
(to be filed by amendment)
(1) Incorporated by reference to the registration statement on Form 10
previously filed by the Company on August 4, 1997, as amended.
(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 Company's Form 10-Q for the
quarter ended March 31, 1998 filed on May 15, 1998.
Part II - ii
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to Item 15, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be the initial bona fide offering thereof.
Part II - iii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Fairfax County, Commonwealth of Virginia, on December 30, 1998.
THE WMF GROUP, LTD.
BY: /s/ Shekar Narasimhan
----------------------
Shekar Narasimhan
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on December 30, 1998. Each of the undersigned officers and directors of the
registrant hereby constitutes Shekar Narasimhan, Glenn A. Sonnenberg and Michael
D. Ketcham, any of whom may act, his true and lawful attorneys-in-fact with full
power to sign for him and in his name in the capacities indicated below and to
file any and all amendments to the registration statement filed herewith
(including post-effective amendments), making such changes in the registration
statement as the registrant deems appropriate, and to sign and file any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, and generally to do
all such things in his name and behalf in his capacity as an officer and
director to enable the registrant to comply with the provisions of the
Securities Act of 1933 and all requirements of the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Roderick Heller Chairman of the Board
- -----------------------------
Roderick Heller
/s/ Shekar Narasimhan President, Chief Executive Officer and Director
- -----------------------------
Shekar Narasimhan (Principal Executive Officer)
- ----------------------------- Director
Mohammed A. Al-Tuwaijri
- ----------------------------- Director
Michael Eisensen
/s/ Tim R. Palmer Director
- -----------------------------
Tim R. Palmer
/s/ John D. Reilly Director
- -----------------------------
John D. Reilly
Director
- -----------------------------
Herbert S. Winokur, Jr.
/s/ Michael D. Ketcham Executive Vice President/Chief Financial
- -----------------------------
Michael D. Ketcham Officer/Treasurer
(Principal Financial Officer)
/s/ Mathew J. Whelan, III Controller
- -----------------------------
Mathew J. Whelan, III (Principal Accounting Officer)
</TABLE>
Part II - iv
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1 Standby Purchase Agreement dated as of October 16, 1998
between the Company, Demeter Holding Corporation and Phemus
Corporation (to be filed by amendment)
4.1 Restated Certificate of Incorporation of The WMF Group, Ltd.
(the "Company") (1)
4.2 Amendment to the Company's Restated Certificate of
Incorporation (2)
4.3 Amendment to the Company's Restated Certificate of
Incorporation, Designating Class A Non-Voting Convertible
Preferred Stock (to be filed by amendment)
4.4 Amended and Restated Bylaws of The WMF Group, Ltd. (3)
4.5 Form of Certificate representing the Common Stock (1)
4.6 Rights Agreement dated as of ________________ by and between
the Company and _______________________ as Subscription
Agent (including form of Right Certificate) (to be filed by
amendment)
5 Opinion of Hunton & Williams (to be filed by amendment)
10.1 Registration Rights Agreement dated June 12, 1998, between
the Company, Harvard Private Capital Holdings, Inc. and
Capricorn Investors II, L.P., as amended by the First
Amendment to the Registration Rights Agreement, dated
December __, 1998, between the Company, Harvard Private
Capital Holdings, Inc., Capricorn Investors, II, L.P.,
Demeter Holdings Corporation and Phemus Corporation (to be
filed by amendment)
10.2 Series 1 Warrant Agreement dated September 4, 1998, between
the Company and Commercial Mortgage Investment Trust, Inc.
(to be filed by amendment)
10.3 Series 2 Warrant Agreement dated December __, 1998, between
the Company and _________________ (to be filed by amendment)
10.4 Series 3 Warrant Agreement dated December __, 1998, between
the Company and _________________ (to be filed by amendment)
10.5 Registration Rights Agreement dated December __, 1998,
between the Company and HN Acquisitions, Inc. (to be filed
by amendment)
10.6 Stock Purchase Agreement dated as of October 16, 1998, by
and among the Company, Harvard Private Capital Holdings,
Inc., Demeter Holdings Corporation, Phemus Corporation and
Capricorn Investors II, L.P. (to be filed by amendment)
23.1 Consent of Hunton & Williams (included in Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Arthur Andersen LLP
24 Power of Attorney (included on signature page)
99.1 Form of Subscription Certificate (to be filed by amendment)
99.2 Instructions to Stockholders as to use of Subscription
Certificate (to be filed by amendment)
99.3 Notice of Guaranteed Delivery for Subscription Certificates
(to be filed by amendment)
(1) Incorporated by reference to the registration statement on Form 10
previously filed by the Company on August 4, 1997, as amended.
(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 Company's Form 10-Q for the quarter
ended March 31, 1998 filed on May 15, 1998.
Part II - v
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
The WMF Group, Ltd.
We consent to incorporation by reference in the registration statement on Form
S-3 of The WMF Group, Ltd. of our report dated March 13, 1998, relating to the
consolidated balance sheet of The WMF Group, Ltd. and subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended December 31,
1997 and December 31, 1995, which report appears in the December 31, 1997 annual
report on Form 10-K of WMF Group Ltd., and to the reference to our firm under
the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Washington, DC
December 24, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form S-3 of our report dated February 28, 1997 included in the
Form 10-K as of December 31, 1997. It should be noted that we have not audited
any financial statements of the company subsequent to December 31, 1996 or
performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Washington, D.C.
December 31, 1998
