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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-22567
THE WMF GROUP, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1647759
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1593 SPRING HILL ROAD, SUITE 400, VIENNA, VIRGINIA 22182-2245
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including are code (703) 610-1400
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days, Yes X No
At August 6, 1999, there were 11,135,519 shares if common stock, $.01 par
value, outstanding.
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<PAGE>
The WMF GROUP, LTD.
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
- As of June 30, 1999 (unaudited) and December 31, 1998 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
- Three and Six Months Ended June 30, 1999 and 1998 (unaudited) . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows
- Six Months Ended June 30, 1999 and 1998 (unaudited) . . . . . . . . . . . . . . . . . 3
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The WMF GROUP, LTD.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
As of As of
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,713 $ 8,897
Restricted cash 8,321 13,398
Mortgage-backed securities 6,180 6,195
Mortgage loans held for sale, pledged 66,494 34,217
Principal, interest and other servicing advances 2,206 2,588
Investment 5,861 3,780
Furniture, equipment and leasehold improvements, net 4,621 5,011
Servicing rights, net 28,804 26,243
Goodwill, net 23,371 22,360
Deferred tax asset, net 17,811 17,290
Other assets 3,582 4,548
--------- -------
Total assets $176,964 $144,527
--------- -------
--------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 12,214 $ 15,455
Escrow Payable 3,649 10,853
Subordinated Note - 3,901
Warehouse lines of credit 65,841 34,757
Servicing acquisition line of credit - 4,212
Revolving credit facility 23,150 36,281
Term Loan 24,375 -
Deferred fees 3,433 5,437
Accrued loan servicing losses 6,928 6,253
--------- ---------
Total liabilities 139,590 117,149
Stockholders' equity:
Preferred stock, 12,500,000 shares authorized; 0 and 3,635,972
shares issued and outstanding in 1999 and 1998, respectively - 16,541
Common stock, $.01 par value, 25,000,000 shares authorized;
11,296,919 and 5,349,403 issued and outstanding in 1999
and 1998, respectively 112 53
Treasury Stock (637) -
Additional paid-in capital 68,715 40,509
Retained deficit (30,816) (29,725)
--------- ---------
Total stockholders' equity 37,374 27,378
--------- ---------
Total liabilities and stockholders' equity $176,964 $144,527
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
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THE WMF GROUP, LTD.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1999 1998 1999 1998
-------- -------- ----- ----
<S> <C> <C> <C> <C>
Revenue:
Servicing fees $ 4,098 $ 3,607 $ 7,724 $ 7,301
Gain on sale of mortgage loans, net 8,677 7,101 14,550 12,334
Interest income 1,260 4,328 2,199 5,484
Placement fee income 1,470 2,076 3,493 4,137
Management fee income 432 44 736 44
Other income 741 1,172 1,078 2,316
-------- -------- ------ --------
Total Revenue 16,678 18,328 29,780 31,616
Expenses:
Salaries and employee benefits 7,505 7,614 14,600 13,884
General and administrative 3,971 3,963 6,860 7,036
Occupancy 1,571 964 3,189 1,802
Provision for loan servicing losses 355 273 675 528
Interest 586 3,280 1,477 3,858
Amortization of servicing rights 1,458 1,429 2,744 2,503
Depreciation and amortization 795 680 1,573 1,301
Unrealized loss on treasury short sales - 6,505 - 6,505
-------- -------- ------- --------
Total Expenses 16,241 24,708 31,118 37,417
-------- -------- ------- --------
Income (loss) before income tax expense 437 (6,380) (1,338) (5,801)
Income tax expense (benefit) 269 (2,395) (248) (2,097)
-------- -------- -------- ---------
Net income (loss) $ 168 $ (3,985) $ (1,090) $ (3,704)
-------- -------- -------- ---------
-------- -------- -------- ---------
Net income (loss) per share - Basic $ 0.02 $ (0.76) $ (0.11) $ (0.71)
-------- -------- -------- ---------
-------- -------- -------- ---------
Net income (loss) per share - Diluted $ 0.02 $ (0.76) $ (0.11) $ (0.71)
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial Statements.
2
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THE WMF GROUP, LTD.
Consolidated Statements Of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,090) $ (3,704)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of furniture, equipment
and leasehold improvements 665 497
Amortization of mortgage servicing rights 2,744 2,503
Amortization of goodwill 907 804
Compensation related to stock options 141 160
Provision for loan servicing losses 675 528
Deferred taxes, net (521) -
Mortgage loans originated (488,185) (1,738,381)
Mortgage loans sold 455,908 1,425,696
Decrease (increase) in principal, interest
and other servicing advances 382 (427)
Increase (decrease) in restricted cash 5,077 (121)
Decrease in other assets 966 (2,439)
Increase (decrease) in accounts payable and accrued expenses (3,799) (3,635)
Decrease in escrow payable (7,204) -
Increase (decrease) in deferred fees (2,004) 5,643
--------- ---------
Net cash used in operating activities (35,338) (312,876)
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (275) (1,872)
Purchase of mortgage servicing rights - (929)
Origination of mortgage servicing rights (5,305) (2,554)
Purchases to cover securities sold but not yet purchased - (476,308)
Proceeds from securities sold but not yet purchased - 482,813
Repayment of mortgage backed securities 15 -
Assets acquired and liabilities assumed, net of cash (1,318) (4,513)
Investment in subsidiary (2,081) -
--------- ---------
Net cash used in investing activities (8,964) (3,363)
Cash flows from financing activities:
Repayment of servicing acquisition line of credit (4,212) (500)
Increase in warehouse lines of credit, net 31,084 298,710
Increase (repayment) of revolving credit facility, net (13,131) 17,649
Borrowings under term loan 25,000 -
Repayments of term loan (625) -
Proceeds from issuance of common stock and exercise of options 11,723 4,177
Purchase of treasury stock (820) -
Repayment of subordinated note (3,901) -
--------- ---------
Net cash provided by financing activities 45,118 320,036
Net increase in cash 816 3,797
Cash at beginning of period 8,897 10,786
--------- ---------
Cash at end of period $9,713 $14,583
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $2,025 $ 2,674
Cash paid during the period for income taxes 734 758
Noncash investing and financing activities:
Conversion of preferred stock to common stock $16,541 -
Issuance of Warrants 981 -
Notes payable issued in acquisition of assets 427 -
Stock issued in acquisition of assets 183 -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
THE WMF GROUP,LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The WMF Group, Ltd. and its subsidiaries (the "Company") is one of
the largest independent commercial mortgage bankers in the United States as
measured by servicing portfolio size, based on the 1998 survey published by
the Mortgage Bankers Association of America ("MBA"). The Company is also the
largest originator of Federal National Mortgage Association ("Fannie Mae")
multifamily loans, based on statistics provided by Fannie Mae, and the
largest originator of Federal Housing Administration ("FHA") insured
multifamily and healthcare loans based on statistics provided by the United
States Department of Housing and Urban Development ("HUD"). The Company
originates, underwrites, structures, places, sells and services multifamily
and commercial real estate loans. In the second quarter of 1998, the Company
entered the commercial mortgage investment funds management and special asset
management businesses. Through its relationships with Government Sponsored
Enterprises ("GSEs"), investment banks, life insurance companies, commercial
banks and other investors, the Company provides and arranges financing to
owners of multifamily and commercial real estate on a nationwide basis using
both a retail and wholesale network. The Company generates revenues through
origination fees, servicing fees, net interest income on loans held for sale,
placement fees and funds management fees. The Company does not plan to hold
loans for sale without a pre-arranged take-out commitment from a third-party
mortgage investor.
The Company is a Delaware corporation formed in October 1992. The
Company has three direct wholly owned subsidiaries: WMF Washington Mortgage
Corp. ("WMF Washington Mortgage"), WMF Capital Corp. ("Capital Corp."), and
WMF Carbon Mesa Advisors, Inc. ("Carbon Mesa Advisors"), which are
incorporated under the laws of Delaware. WMF Washington Mortgage's wholly
owned subsidiaries are WMF Huntoon, Paige Associates Limited ("WMF Huntoon
Paige"), WMF Proctor Ltd. ("WMF Proctor"), and WMF Robert C. Wilson Ltd.
("WMF Robert C. Wilson"), which are incorporated under the laws of the states
of Delaware, Michigan and Texas, respectively.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material inter-company
balances and transactions have been eliminated in consolidation.
The consolidated financial statements of the Company as of June 30,
1999, and for the three and six month periods ended June 30, 1999 and 1998
included herein are unaudited, and include all adjustments necessary for the
fair presentation of the financial position, results of operations and cash
flows of the Company as of and for the periods presented. All such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results that may be expected for the full year.
3. ACQUISITION
In April 1999 the Company exercised its option to purchase certain
intangible assets related to Carbon Mesa Advisors. Total value of the
transaction was $1.7 million including $1.1 million in cash, $0.4 million in
notes and 28,479 shares of common stock valued at $0.2 million. The
acquisition was accounted for under the purchase method of accounting and
resulted in recording $1.7 million of goodwill.
4. BALANCE SHEET CLASSIFICATION
The Company prepares its consolidated balance sheet using an
unclassified balance sheet presentation as is customary in the mortgage
banking industry. A classified presentation would have aggregated current
assets, current liabilities, and net working capital as follows:
4
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<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Current assets $87,883 $49,980
Current liabilities 87,152 55,649
--------- ---------
Net working capital (deficit) $ 731 $(5,669)
--------- ---------
--------- ---------
</TABLE>
5. DEBT FACILITIES
On February 10, 1999, the Company refinanced its $150 million
warehouse line of credit, $4.2 million term loan, $35 million secured line of
credit and $10 million secured line of credit. These facilities were replaced
with a $150 million warehouse line of credit, a $25 million secured term
loan, and a $25 million secured line of credit. The Company had an
outstanding balance of $113 million under these credit facilities as of June
30, 1999. The agreement requires the Company to maintain certain financial
ratios relating to liquidity, leverage, working capital and net worth, among
other restrictions. On June 30, 1999, the Company was in compliance with
these covenants.
The Company repaid its remaining $3.9 million subordinated note
balance to Commercial Mortgage Investment Trust, Inc. ("COMIT") on March 19,
1999. COMIT is a commercial mortgage real estate investment trust of which
the Company owns less than 20 percent. The subordinated note balance and
related interest were repaid from proceeds received from a rights offering of
the Company's common stock. See further discussion in Note 6.
6. STOCKHOLDERS' EQUITY
(A) SALE OF PREFERRED STOCK
On December 31, 1998, the Company's three largest shareholders
purchased a total of 3,635,972 shares of a new class of capital stock called
Class A Non-Voting Convertible Preferred Stock ("Class A Stock") for an
aggregate purchase price of $16.7 million.
On January 14, 1999, each outstanding share of Class A Stock was
converted into one share of the Company's common stock, after the Federal
Trade Commission informed the Company that it would not object to the
conversion. As a result of the conversion, the Company's three largest
shareholders received a total of 3,635,972 shares of common stock.
(B) PUBLIC RIGHTS OFFERING
The Company issued to all of its shareholders of record as of
February 1, 1999, 1.072 transferable rights for each share of common stock
held by them on that date. Each right entitled its holder to purchase one
share of common stock for $5.00. The rights expired on March 8, 1999.
Through the rights offering, the Company sold 1,482,271 shares of
common stock for proceeds of approximately $7.4 million. On March 19, 1999,
the Company's three largest shareholders completed the purchase of 664,028
shares of the Company's common stock pursuant to a standby commitment for
proceeds to the Company of approximately $3.3 million.
(C) OTHER
On March 31, 1999, one of the Company's three largest shareholders
purchased an additional 34,520 shares of common stock for proceeds to the
Company of $0.2 million.
On June 23, 1999, the Company issued a total of 250,000 warrants as
part of a settlement agreement between the Company and a Capital Corp
customer. The Company recorded the issuance of the warrants at their
estimated fair market value, which resulted in recording expense of $1.0
million. The warrants permit the
5
<PAGE>
borrower to purchase 250,000 shares of the Company's common stock at $6.25
per share. The exercise price of the warrants may be adjusted upon the
occurrence of certain dilutive events.
7. RECENT ACCOUNTING PRONOUNCEMENT
In June 1999, Statement of Financial Accounting Standards ("SFAS")
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB NO 133, AN AMENDMENT OF
FASB STATEMENT NO. 133, was issued. SFAS No. 137 delayed the effective date
of SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133, as amended, is now effective for the Company
beginning January 1, 2001. Based on the Company's current operations, SFAS
No. 133 is not expected to have a material impact on the Company's financial
position or results of operations but the Company will reassess its impact as
the implementation date draws nearer.
8. LITIGATION
Prior to June 1, two lawsuits were filed against Capital Corp.
alleging a breach by Capital Corp. of its commitment to lend funds to the
respective plaintiffs. One of these suits have been settled and dismissed.
The Company is in settlement negotiations with the plaintiff on the remaining
lawsuit. Management believes that the resolution of the remaining lawsuit
will not have a material adverse impact on the Company's financial position
or results of operations.
The Company is involved in other litigation related to the normal
course of its business. Management is of the opinion that the litigation will
not have a material adverse impact on the Company's financial position or
operating results. No amounts have been accrued because the loss, if any,
cannot be reasonably estimated.
9. COMMITMENTS
The Company enters into commitments to extend credit to borrowers in
the normal course of business. Normally, the Company simultaneously commits
to sell the loan to an appropriate investor. Because the commitment for the
loan normally occurs simultaneously with the investor commitment, the Company
limits its exposure to interest rate changes for these transactions. As of
June 30, 1999, Capital Corp. had commitments outstanding to extend credit to
borrowers of $1.8 million without pre-existing investor sale commitments. As
of June 30, 1999, Carbon Mesa Advisors had floating rate forward commitments
to borrowers of $79.6 million, without pre-existing investor sale commitments.
At June 30, 1999, the Company had floating rate and fixed rate commitments
outstanding to originate multifamily and commercial mortgage loans in the
amount of $169 million and $217 million, respectively, with pre-existing
investor sales commitments.
6
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements contained herein that are not historical facts,
including but not limited to statements regarding anticipated future capital
requirements, the Company's future acquisition and development plans, the
Company's ability to obtain additional debt, equity or other financing, and
the Company's ability to generate cash from operations and further savings
from existing operations, are based on current expectations. These statements
are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially from those projected,
estimated, assumed or anticipated. Among the factors that could cause actual
results to differ are the following: the availability of sufficient capital
to finance the Company's business plan on terms satisfactory to the Company;
competitive factors, such as changes in fees earned from originating and
servicing multifamily and commercial mortgage loans, the introduction of new
competitors, future acquisitions and strategic partnerships; general business
and economic conditions; and the other risk factors described in the
Company's 1998 Annual Report on Form 10-K and from time to time in the
Company's other reports filed with the Securities and Exchange Commission.
Readers should not place undue reliance on any such forward-looking
statements, which are made pursuant to the Private Securities Litigation
Reform Act of 1995.
OVERVIEW
Since 1996, the Company has experienced significant growth in its
revenues, annual loan production volume and servicing volume. The Company
seeks to continue to expand its business through (i) acquisitions, (ii)
internal growth, (iii) design and delivery of new mortgage products, (iv)
expansion into related businesses, and (v) diversification of fee income
sources. Through its acquisitions, the Company's primary focus is to increase
its mortgage origination capabilities and servicing portfolio as well as to
expand into related businesses. If the Company is successful in completing
acquisitions, it will experience increased expenses associated with the
amortization of goodwill and acquired mortgage servicing rights and, if the
acquisitions are financed by additional indebtedness, an increase in interest
expense. Accordingly, such acquisitions may result in a short-term decrease
in income from operations during the period from acquisition through a period
necessary to integrate the acquired companies.
The Company analyzes its operations through three business segments:
mortgage banking, capital markets and advisory services. The mortgage banking
business segment consists of the activities of WMF Washington Mortgage and
its subsidiaries: WMF Proctor, WMF Huntoon Paige and WMF Robert C. Wilson.
The mortgage banking segment also includes corporate administrative expenses.
The capital markets segment consists of Capital Corp., and the advisory
services segment consists of Carbon Mesa Advisors.
RESULTS OF OPERATIONS - SUMMARY
The Company's primary business activities are commercial and
multifamily loan servicing, loan origination and sales of the loans to
investors in the secondary market. With the formation of Carbon Mesa Advisors
in 1998, the Company also manages commercial mortgage investment funds and
provides special asset management services. In 1998, Capital Corp. operated a
commercial mortgage conduit. As stated above, the Company manages its
operations through three business segments, mortgage banking, capital
markets, and advisory services. Revenues from mortgage banking activities are
earned from the origination of commercial and multifamily real estate
mortgage loans and the servicing of such loans. Revenue of the mortgage
banking business segment includes loan servicing fees, gains on sale of
mortgage loans (including related gains on originated servicing rights),
interest income on loans prior to sale, placement fees (revenue earned
relating to utilization of escrow funds), origination fee income and other
income. In the capital markets segment, the principal sources of revenue
include gain on the sale of mortgage loans, gains on the sale of servicing
and interest income on loans prior to sale or securitization (in 1998 only).
During the second quarter of 1999, the operations of Capital Corp. were
scaled back to minimal levels. Structuring fee income, management fees and
origination fees represent the major sources of revenue for the advisory
services segment.
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The Company's revenue is significantly influenced by the timing of
origination, sales and securitization of mortgage loans and is somewhat
sensitive to economic factors such as the general level of interest rates and
demand for commercial and multifamily real estate. As a result, future
revenues may fluctuate due to changes in these factors. The Company expects
that as it expands into new businesses the sources of revenues will change.
Therefore, the Company's historical results may not be indicative of future
periods.
The following table sets forth the summary segment financial
information derived from the Company's consolidated statements of operations:
Summary Financial Information
Results of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1999 1998 1999 1998
-------- -------- ----- ----
<S> <C> <C> <C> <C>
Revenue:
Mortgage Banking*** $ 15,925 $ 15,141 $ 28,727 $ 28,337
Capital Markets 146 3,130 176 3,222
Advisory Services 607 57 877 57
--------- --------- -------- ---------
Total Revenue 16,678 18,328 29,780 31,616
Expenses:
Mortgage Banking*** 14,722 13,527 27,808 25,435
Capital Markets 588 10,236 1,153 10,826
Advisory Services 558 506 1,128 506
Non-operating interest 373 439 1,029 650
--------- --------- -------- ---------
Total Expenses 16,241 24,708 31,118 37,417
--------- --------- -------- ---------
Pretax income (loss) 437 (6,380) (1,338) (5,801)
Provision (benefit) for taxes 269 (2,395) (248) (2,097)
--------- --------- -------- ---------
Net income (loss) $ 168 $ (3,985) $ (1,090) $ (3,704)
--------- --------- -------- ---------
--------- --------- -------- ---------
Mortgage Banking EBITDA*** $ 3,373 $ 3,657 $ 5,077 $ 6,604
Capital Markets EBITDA (435) (7,082) (970) (7,544)
Advisory Services EBITDA 125 (407) (99) (407)
--------- --------- -------- ---------
Consolidated EBITDA $ 3,063 $ (3,832) $ 4,008 $ (1,347)
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
***Mortgage Banking operations include corporate administrative expenses.
The following table sets forth total assets by business segment:
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1999 1998
-------- -----------
<S> <C> <C>
Assets:
Mortgage Banking*** $163,404 $131,264
Capital Markets 7,040 8,558
Advisory Services 6,520 4,705
-------- ---------
Total $176,964 $144,527
-------- ---------
-------- ---------
</TABLE>
***Mortgage Banking operations include corporate administrative expenses.
8
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THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1998
Net income for the second quarter of 1999 was $0.2 million compared
with a loss of $4.0 million for the second quarter of 1998. The Company
reported a net loss for the first six months of 1999 of $1.1 million compared
to a net loss for the first six months of 1998 of $3.7 million. The Company's
core loan origination and servicing businesses generated increases in revenue
for the second quarter and first six months of 1999 versus 1998. These
increases in revenue were more than offset, however, by a reduction in
interest income related to loans held for sale in 1998 by Capital Corp. Total
expenses decreased for the second quarter and first six months of 1999 versus
1998. These decreases in expenses were due primarily to the absence in 1999
of losses on short sales of U.S. Treasury securities and the Company's
continued cost reduction program. These reductions in expenses were partially
offset by the recognition in the second quarter of 1999 of approximately $1.2
million in expenses related to settlement of certain litigation. For a more
detailed explanation of changes in revenues and expenses see the discussion
by business segment below.
The Company's earnings before non-operating interest
expense, income taxes, depreciation and amortization ("EBITDA") for the
second quarter of 1999 was $3.1 million compared with a negative EBITDA of
$3.8 million for the second quarter of 1998, an increase of $6.9 million.
EBITDA for the first six months of 1999 was $4.0 million compared with a
negative EBITDA of $1.3 million for the first six months of 1998, an increase
of $5.3 million. The increase in EBITDA for the second quarter and first six
months of 1999 is attributable primarily to the absence of unrealized hedge
losses recorded in the second quarter of 1998.
EBITDA is widely used in the industry as a measure of a
company's operating performance, but should not be considered as an
alternative to either, (i) income from continuing operations (determined in
accordance with generally accepted accounting principles) as a measure of
profitability, or (ii) cash flows from operating activities (determined in
accordance with generally accepted accounting principles). EBITDA does not
take into account the Company's debt service requirements and other
commitments and, accordingly, is not necessarily indicative of amounts that
may be available for discretionary uses. EBITDA as measured by the Company
may not be comparable to EBITDA as measured by other companies.
MORTGAGE BANKING SEGMENT
REVENUE
Servicing fees were $4.1 million for the second quarter of
1999 compared with $3.6 million for second quarter of 1998, an increase of
$0.5 million or 13.9%. Servicing fees for the first six months of 1999 were
$7.7 million compared with $7.3 million for the first six months of 1998, an
increase of $0.4 million or 5.5%. Revenue related to mortgage servicing is
based upon the unpaid principal balance of loans serviced. Mortgage banking
operations increased its total servicing portfolio by 7.8% from $11.5 billion
as of June 30, 1998 to $12.4 billion at June 30, 1999. The Company earns
lower fees on life insurance servicing and master servicing than on primary
servicing for Fannie Mae and FHA mortgages. Therefore, although the Company's
total servicing portfolio increased year over year, the relative increase in
servicing fees was lower due to changes in the mix of the types of servicing
in its portfolio.
Gain on sale of mortgage loans, net, was $8.6 million for
the second quarter of 1999 compared with $7.0 million for the second quarter
of 1998, an increase of $1.6 million or 22.9%. Gain on sale of mortgage loans
for the first six months of 1999 was $14.5 million compared with $12.3
million for the first six months of 1998, an increase of $2.2 million or
17.9%. For the second quarter of 1999 and 1998, the Company sold $620 million
and $831 million of mortgage loans, respectively. For the first six months
1999 and 1998, the Company sold $979 million and $1.4 billion of mortgage
loans, respectively. The increase in gain on sale of mortgage loans is due
primarily to the recognition of gains related to the origination of DUS
servicing rights discussed below. Total gain related to the recognition of
originated mortgage servicing rights was $2.8 million and $1.4 million for
the second quarters of 1999 and 1998, respectively, and $5.3 million and $2.6
million for the first six months of 1999 and 1998, respectively.
9
<PAGE>
Under the provisions of Statement of Financial Accounting Standards
No. 122, the Company capitalizes retained servicing rights after the
origination and sale of the related loan by allocating the total cost
incurred between the loan and the servicing rights, based on their relative
fair value, if it is practicable to determine the mortgage servicing rights'
fair value. If it is not practicable to determine the servicing rights' fair
value, then no value is allocated to the servicing rights. As a result of the
first observed sale of servicing rights under the Fannie Mae Delegated
Underwriting and Servicing Program ("DUS") in the first quarter of 1999, the
Company reevaluated its mortgage servicing rights capitalization policy and
concluded that market condition changes made it practicable to estimate the
fair value of DUS servicing rights. For the three and six month periods ended
June 30, 1999, the Company recognized gains totaling $0.9 and $3.0 million,
respectively, related to the origination of DUS servicing rights. Prior to
the first quarter 1999, the Company did not recognize gains related to the
origination of DUS servicing because it had determined that it was not
practicable.
Interest income was $1.2 million for both the second
quarter of 1999 and 1998. Interest income for the first six months of 1999
was $2.2 million compared with $2.3 million for the first six months of 1998,
a decrease of $0.1 million or 4.3%. The decrease for the six month period was
due primarily to a lower average balance on loans held prior to funding.
Placement fee income was $1.5 million for the second
quarter of 1999 compared with $2.1 million for the second quarter of 1998, a
decrease of $0.6 million or 28.6%. Placement fee income for the first six
months of 1999 was $3.5 million compared with $4.1 million for the first six
months of 1998, a decrease of $0.6 million or 14.6%. The decrease for the
three and six month periods was primarily the result of the Company's
increased use of investor escrow balances held by the Company as compensating
balances to reduce the interest rate on its credit facilities.
Other income, which includes prepayment penalties,
termination fees, loan management fees, brokerage fees, extension fees and
dividend income from the Company's investment in COMIT, was $0.5 million for
second quarter of 1999 compared with $1.2 million for the second quarter of
1998, a decrease of $0.7 million or 58.3%. Other income for the first six
months of 1999 was $0.8 million compared with $2.3 million for the first six
months of 1998, a decrease of $1.5 million or 65.2%. The decrease for the
three and six month periods was the result of decreased prepayment penalties,
termination fees, loan management fees, brokerage fees and extension fees
offset partially by dividend income from COMIT.
EXPENSES
Mortgage banking segment's total expenses consist of
salaries and benefits (including commissions), other general and
administrative expenses, occupancy expense, provision for loan servicing
losses, interest expense and depreciation and amortization. The mortgage
banking segment's expenses include corporate administrative expenses.
Salaries and benefits, the largest category of costs for
the Company, were $6.8 million for the second quarter of 1999 compared with
$6.9 million for the second quarter of 1998, a decrease of $0.1 million or
1.4%. Salaries and benefits for the first six months of 1999 were $13.0
million compared with $12.8 million for the first six months of 1998, an
increase of $0.2 million or 1.6%. This decrease for the second quarter of
1999 over 1998 reflects staff reductions in 1999 offset partially by normal
increases in salaries. The increase for the six months of 1999 over 1998 is
due primarily to increased staff levels during the first quarter of 1999
versus 1998.
General and administrative expenses consist of professional
fees, travel, management information, telephone and equipment rental, and
other expenses. General and administrative expenses were $3.9 million for the
second quarter of 1999 compared with $3.1 million for the second quarter of
1998, an increase of $0.8 million or 25.8%. General and administrative
expenses for the first six months of 1999 were $6.8 million compared with
$6.0 million for the first six months of 1998, an increase of $0.8 million or
13.3%. The increase in the three and six month periods of 1999 over 1998 is
due primarily to recognition of an additional $1.2 million in the second
quarter of 1999 related to settlement of certain litigation. This charge was
partially offset by lower professional fees, travel and other expenses
resulting from the Company's previously announced cost reduction program.
10
<PAGE>
Occupancy expense was $1.3 million for the second quarter of 1999
compared with $0.9 million for the second quarter of 1998, an increase of
$0.4 million or 44.4%. Occupancy expense was $2.7 million for the first six
months of 1999 compared with $1.7 million for the first six months of 1998,
an increase of $1.0 million or 58.8%. The increase in the three and six month
periods of 1999 over 1998 is due primarily to the costs associated with the
addition of a conduit loan processing group and the expansion of loan
origination operations in New York and Los Angeles.
The provision for loan servicing losses was $0.4 million for the
second quarter of 1999 compared with $0.3 million for the second quarter of
1998, an increase of $0.1 million, or 33.3%. The provision for loan servicing
losses was $0.7 million for the first six months of 1999 compared with $0.5
million for the first six months of 1998, an increase of $0.2 million or
40.0%. The increase in the provision for the three and six month periods is
the result of management's estimate of potential losses. The provision for
loan servicing losses is adjusted as part of the Company's ongoing assessment
of the Company's exposure related to its Fannie Mae DUS portfolio, for which
it is obligated to share certain losses. The principal balance of Fannie Mae
DUS loans in the Company's servicing portfolio was $1.7 billion and $1.2
billion as of June 30, 1999 and 1998, respectively. Although management
considers the allowance appropriate and adequate to cover inherent loan
servicing losses, management's judgment is based on a number of assumptions
about future events, which are believed to be reasonable but which may or may
not be valid. There can be no assurance that losses will not exceed the
allowance, and future increases in the allowance may be required.
Interest expense relates primarily to the warehouse line of credit.
Interest expense was $0.2 million for the second quarter of 1999 compared
with $0.3 million for the second quarter of 1998, a decrease of $0.1 million
or 33.3%. Interest expense was $0.4 million for the first six months of 1999
compared with $0.7 million for the first six months of 1998, a decrease of
$0.3 million or 42.9%. This decrease was due to a lower average balance
outstanding on the warehouse line of credit due to lower levels of loan
originations in 1999.
Depreciation and amortization was $2.2 million for the second
quarter of 1999 compared with $2.0 million for the second quarter of 1998, an
increase of $0.2 million or 10.0%. Depreciation and amortization was $4.2
million for the first six months of 1999 compared with $3.7 million for the
first six months of 1998, an increase of $0.5 million or 13.5%. This increase
for the three and six month periods was due primarily to the depreciation and
amortization related to furniture and equipment and leasehold improvements
acquired in the last half of 1998 as well as increased amortization of
capitalized servicing rights.
CAPITAL MARKETS SEGMENT
The capital markets segment of the Company (Capital Corp.) was
formed in February 1998 to conduct the securitization conduit activities of
the Company. During the second quarter of 1999, the capital markets segment
experienced a loss (before taxes and non-operating interest) of $0.4 million
compared to a loss of $7.1 million for the same period in 1998. For the first
six months of 1999 the capital markets segment had a loss of $1.0 million
compared to a loss of $7.6 million for the first six months of 1998. The loss
in 1999 relates to the cost of a small loan processing unit, a loan
origination office and certain administrative costs incurred to curtail
conduit operations. During the second quarter of 1999, the operations of
Capital Corp. were scaled back to minimal levels. The 1998 loss related
primarily to unrealized losses on short sales of U.S. Treasury securities.
Interest income earned on commercial mortgage loans held for sale
was negligible for the second quarter and first six months of 1999. Interest
income for second quarter and first six months of 1998 was $3.1 million and
$3.2 million respectively. The decrease for the three and six month periods
resulted from the significant decrease in the loan origination activity at
Capital Corp.
Salary and benefits expense was $0.3 million for the second quarter
of 1999 compared with $0.4 million for the second quarter of 1998, a decrease
of $0.1 million, or 25%. Salaries and benefits were $0.7 million for the
first six months of 1999 compared with $0.8 million for the first six months
of 1998, a decrease of $0.1 million or 12.5%. The decreases for the three and
six month periods were due primarily to staff reductions resulting from the
curtailment of conduit operations and the Company's continued cost reduction
program.
11
<PAGE>
Occupancy expense was $0.2 million for the second quarter of 1999
compared with $0.03 million for the second quarter of 1998, an increase of
$0.17 million. Occupancy expense was $0.3 million for the first six months of
1999 compared with $0.1 million for the first six months of 1998, an increase
of $0.2 million. The increase for the three and six month periods of 1999
versus 1998 was due primarily to rent expense of additional Capital Corp.
offices opened in the second and third quarters of 1998. In addition, certain
costs related to closing several Capital Corp. offices, due to the
significant curtailment of conduit operations, were recognized in the second
quarter of 1999. As operations are reduced, the Company is attempting to
sublease its space or otherwise mitigate its cost on leased office space that
will not longer be utilized by Capital Corp. There can be no assurance that
our efforts will be successful.
The capital markets segment incurred no interest expense for the
first six months of 1999 because it held no loans for securitization during
the period. During the first six months of 1998, the segment incurred
interest expense of $2.5 million.
Other general and administrative expenses were $0.01 million for the
second quarter of 1999 compared with $0.8 million for the second quarter of
1998. Other general and administrative expenses were $0.1 million for the
first six months of 1999 compared with $0.9 million for the first six months
of 1998. The decreases in the three and six month periods of 1999 over 1998
are the result of the curtailment of conduit operations and the Company's
continued cost reduction program.
ADVISORY SERVICES SEGMENT
The advisory services segment of the Company, Carbon Mesa Advisors,
began operations during the second quarter of 1998. Revenue within the
advisory services segment of the Company consists of origination fee income
and management fees. Origination fee income includes structuring fees and
loan processing fees (both of which are included in gain on loan sales).
Structuring fees are paid to Carbon Mesa Advisors for structuring loans for
borrowers and loan processing fees are paid to Carbon Mesa Advisors for
processing mortgage loan applications. Carbon Mesa Advisors originates loans
for and manages two commercial mortgage funds. The advisory services segment
earned management fees of $0.4 and $0.7 million for the second quarter and
first six months of 1999, respectively, compared with $0.04 million in the
second quarter of 1998. Total assets under management by Carbon Mesa Advisors
on June 30, 1999 were $241 million, a $102 million increase from the $139
million under management at December 31, 1998.
Expenses consist primarily of salary and benefits, occupancy and
depreciation and amortization. Total expenses were $0.5 and $1.1 million for
the second quarter and first six months of 1999, respectively. Total expenses
for the second quarter of 1998 (the period in which operations began) were
$0.5 million.
NON-OPERATING INTEREST EXPENSES
Non-operating interest expense reflects interest expense on the
Company's term loan, revolving credit facility and the subordinated notes
held by COMIT. Non-operating interest expense was $0.4 million for the second
quarter of 1999 and 1998. Non-operating interest expense was $1.0 million for
the first six months of 1999 compared with $0.6 million for the first six
months of 1998, an increase of $0.4 million or 66.7%. The increase for the
first six months of 1999 versus 1998 is due primarily to interest expense on
the subordinated notes held by COMIT, offset partially by lower borrowings
under the Company's credit facilities. The Company repaid $16.1 million of
the subordinated notes held by COMIT in January 1999 and repaid the remaining
$3.9 million in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan
origination activities, the pursuit of new acquisitions and the purchase of
servicing rights. To meet these needs, the Company currently utilizes a
warehouse line of credit, a revolving line of credit and a term loan.
12
<PAGE>
The Company's credit agreements require the maintenance of certain
financial ratios relating to liquidity, leverage, working capital, and net
worth among other restrictions, all of which were met at June 30, 1999. Among
other things, these covenants restrict Company capital contributions to
Capital Corp., which may result in Capital Corp.'s inability to fulfill
certain contractual obligations.
In connection with its Fannie Mae DUS program, the Company has
established a $7.0 million letter of credit to meet the program's
requirements.
The Company issued to all of its shareholders of record as of
February 1, 1999, 1.072 transferable rights for each share of common stock
held by them on that date. Each right entitled its holder to purchase one
share of common stock for $5.00. The rights expired on March 8, 1999. Through
the rights offering, the Company sold 1,482,271 shares of common stock for
proceeds of approximately $7.4 million. The Company used the proceeds from
the rights offering to repay its remaining $3.9 million subordinated note
balance to COMIT.
On March 19, 1999, the Company's three largest shareholders, Demeter
Holdings Corp. ("Demeter"), Phemus Corporation ("Phemus") and Capricorn
Investors II, L.P. ("Capricorn"), completed the purchase of 664,028 shares of
the Company's common stock for $3.3 million, pursuant to a Standby Purchase
Agreement. In addition, on March 31, 1999, Capricorn purchased an additional
34,520 shares of common stock for total proceeds to the Company of $0.2
million. The proceeds from these transactions were used for working capital.
In May 1999, the Company announced a plan to acquire up to $1.0
million of its common stock. Through June 30, 1999, 133,100 shares have been
repurchased at an aggregate cost of $0.8 million
In the course of the Company's mortgage banking operations, the
Company sells to investors the mortgage loans it originates but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investing activity. Significant
unanticipated prepayments in the Company's servicing portfolio would reduce
servicing income and could require the Company to recognize losses relating
to previously recorded servicing assets and could have a material adverse
effect on the Company's future operating results and liquidity.
CASH FLOWS
OPERATING ACTIVITIES - For the first six months of 1999, the
Company's operating activities used cash of approximately $35.3 million
primarily to increase its mortgage loans held for sale. These are viewed as
short- term assets and are generally financed with short-term borrowings as
discussed under "Financing Activities".
INVESTING ACTIVITIES - Net cash used in investing activities for the
first six months of 1999 was $9.0 million. The primary investing activities
for which cash was used during the first six months of 1999 was an additional
investment in COMIT, payments made related to earnouts and acquisition of
certain assets and the origination of mortgage servicing rights.
FINANCING ACTIVITIES - Net cash provided by financing activities for
the first six months of 1999 was $45.1 million. Principal financing
activities included an increase in the warehouse line of credit to finance
mortgage loans held for sale as discussed under operating activities, the
issuance of common stock pursuant to the rights offering and private
placements to Demeter, Phemus and Capricorn and borrowings under the term
loan. The repayment of the servicing acquisition line of credit, repayments
on the revolving credit facility, net, repayments on the term loan and
repayment of the remaining subordinated note partially offset those sources
of additional financing.
The Company believes its current cash flow from operations and
borrowings available under its debt facilities will be sufficient to meet its
operating needs. Additionally, in the event additional capital resources are
required, the Company believes it will have access to capital through other
sources.
13
<PAGE>
YEAR 2000 COMPLIANCE
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 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 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 the remedies; and
4. preparing contingency plans to deal with the most likely 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 2 0
Accounting System 1 0
Human Resources 1 0
Hardware:
Personal Computers 400 0
File/Data Services 34 0
Networks 20 0
Office Software Suites 400 0
</TABLE>
The Company has evaluated all of its systems and has completed
remedies for the Year 2000 Problem. During the last quarter of 1998, the
Company sent 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 has completed these inquiries and received substantially
all third-party responses.
14
<PAGE>
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
third-party systems may have a negative impact on its operations, it will
attempt to develop relationships with other parties who have been thoroughly
screened for Year 2000 compliance.
REMEDIATION AND TESTING PHASE - During the remediation and testing
phase, the Company addressed potential Year 2000 Problems in systems. Vendors
supply all computer software systems that are critical to the Company's
business, 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 were
substantially tested by December 31, 1998. The Company combined its four loan
servicing systems into two. The two surviving loan-servicing systems are now
Year 2000 compliant and have been tested internally.
All of the Company's servers are Year 2000 compliant. All
non-compliant personal computers have been put out of service. The Company
has replaced all critical non-Year 2000 compliant office software, and other
less significant personal computer software has been upgraded. All telephone
equipment is Year 2000 compliant.
CONTINGENCY PLANS - The Company is in the process of identifying and
analyzing 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 expects to complete its
contingency plans late in the third quarter or early in the fourth quarter of
1999.
COSTS RELATED TO THE YEAR 2000 PROBLEM - To date, the Company has
spent approximately $100,000 for its Year 2000 program, mostly in labor costs
and hardware replacement. The Company expects to incur additional costs,
which it estimates will not exceed $200,000. Compliance costs are relatively
low because all business critical software systems were 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 until the Company completes the contingency planning.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
A description of changes in material litigation pending with the
Company is contained in Note 8 to the Unaudited Consolidated Financial
Statements, included herein under Part I, Item 1, and is incorporated by
reference in response to this item.
ITEM 2 - CHANGE IN SECURITIES AND USE OF PROCEEDS
On June 23, 1999, the Company issued a total of 250,000 warrants as
part of a settlement agreement between the Company and a Capital Corp
customer. The warrants permit the borrower to purchase 250,000 shares of the
Company's common stock at $6.25 per share. The exercise price of the warrants
may be adjusted upon the occurrence of certain dilutive events. The issuance
of the warrants was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, because it did not involve any public
offering.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on Thursday
June 10, 1999 at 10:00 a.m.
(b) All nominated directors were elected at the annual meeting.
The directors elected were as follows:
Mohammed A. Al-Tuwaijri, Charles H. Cremens, Michael R. Eisenson,
J. Roderick Heller III, Shekar Narasimhan, Tim Palmer, John D.
Reilly and Herbert S. Winokur, Jr. The following is the tabulation
with respect to each nominee:
<TABLE>
<CAPTION>
Votes For Votes Withheld
Each Director Each Director
-------------- -------------
<S> <C> <C>
J. Roderick Heller III 10,610,489 35,505
Shekar Narasimhan 10,609,559 36,435
Mohammed A. Al-Tuwaijri 10,610,534 35,460
Michael R. Eisenson 10,609,859 36,135
Tim R. Palmer 10,609,859 36,135
John D. Reilly 10,610,534 35,460
Herbert S. Winokur, Jr. 10,610,009 35,985
Charles H. Cremens 10,609,802 36,192
</TABLE>
(c) In addition to the election of directors, there were two other
matters voted upon at the annual meeting. The first matter was
ratification of the appointment of KPMG LLP as the Company's
independent public accountants for fiscal year 1999. The vote
count was as follows:
<TABLE>
<CAPTION>
Against/
For Withheld Abstentions
---------- --------- -----------
<S> <C> <C>
10,558,524 6,516 80,954
</TABLE>
The second matter was approval of the amendment to the Key
Employee Incentive Plan. The vote count was as follows:
<TABLE>
<CAPTION>
Against/
For Withheld Abstentions
---------- --------- -----------
<S> <C> <C>
10,391,596 182,128 72,720
</TABLE>
16
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.1* Warrant Agreement, dated as of June 23, 1999, between the Company and CKRS Investments,
LLC
10.2* Registration Rights Agreement, dated as of June 23, 1999, between the Company
and CKRS Investments, LLC
10.3 Key Employee Incentive Plan of the WMF Group, Ltd., as amended
and restated 10.4 Letter Agreement dated May 20, 1999 between WMF
Group, Ltd. and Elizabeth Whitbred-Snyder
10.5 Letter Agreement dated June 7, 1999 between WMF Group, Ltd. and Charles H. Cremens
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the registration statement on Form S-3
(File No. 333-83109) filed by the Company on July 16, 1999.
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE WMF GROUP, LTD.
(Registrant)
August 13, 1999 By: /S/ SHEKAR NARASIMHAN
----------------------------------
Shekar Narasimhan
Chairman, Chief Executive Officer
(Principal Executive Officer)
August 13, 1999 By: /S/ ELIZABETH WHITBRED-SNYDER
----------------------------------
Elizabeth Whitbred-Snyder
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1* Warrant Agreement, dated as of June 23, 1999, between the Company and CKRS Investments,
LLC
10.2* Registration Rights Agreement, dated as of June 23, 1999, between the Company
and CKRS Investments, LLC
10.3 Key Employee Incentive Plan of the WMF Group, Ltd., as amended
and restated 10.4 Letter Agreement dated May 20, 1999 between WMF
Group, Ltd. and Elizabeth
Whitbred-Snyder
10.5 Letter Agreement dated June 7, 1999 between WMF Group, Ltd. and Charles H. Cremens
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the registration statement on Form S-3
(file No. 333-83109) filed by the Company on July 16, 1999.
19
<PAGE>
Exhibit 10.3
KEY EMPLOYEE INCENTIVE PLAN
OF
THE WMF GROUP LTD.
1. PURPOSE OF THE PLAN AND DEFINITIONS
1.1 PURPOSE. The purpose of this Key Employee Incentive Plan ("the
Plan") of The WMF Group, Ltd. (the "Company") is to:
(a) furnish incentives to individuals chosen to receive stock-based
awards because they are considered capable of responding by improving
operations and increasing profits and shareholder value;
(b) encourage selected persons to accept or continue employment
with the Company; and increase the interest of key executives in the
company's welfare through their participation in the growth in value of the
Company's Shares.
To accomplish these purposes, this Plan provides a means whereby
executives and key employees, board members, and other enumerated persons may
receive Awards.
1.2 DEFINITIONS. For purposes of this Plan, the following terms have
the following meanings:
"AFFILIATE" means a parent or subsidiary entity, to be interpreted in
accordance with the comparable terms "parent" and "subsidiary" corporation
in the applicable provisions (currently Section 424) of the Code at the time
this definition is being applied.
"ASSUMED OPTION" means any option assumed by the Company with respect to
Common Stock as a result of the Separation Agreement between the Company and
NHP, Inc. dated as of December 8, 1997.
"AWARD" means any award under this Plan, including any grant of Options,
Performance Shares or Director Options.
"AWARD AGREEMENT" means, with respect to each Award, the written
agreement executed by the Company and the Participant or other written
document approved by the Committee setting forth the terms and conditions of
the Award.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute.
<PAGE>
"COMMISSION" means the Securities and Exchange Commission and any
successor agency.
"COMMITTEE" has the meaning given it in Section 4.1.
"COMMON SHARES" or "SHARES" means the shares of the common stock of the
Company, par value $0.01 per share.
"COMPANY" has the meaning given it in Section 1.1.
"DIRECTOR" means a person duly elected or appointed and serving as a
Director of the Company in accordance with the by-laws of the Company.
"DIRECTOR OPTIONS" has the meaning given it in Section 5.3.
"EMPLOYEE" has the meaning ascribed to it for purposes of Section 3401(c)
of the Code and the Treasury Regulations adopted under that Section.
"EMPLOYMENT TERMINATION" means that a Participant has ceased, for any
reason and with or without cause, to be an Employee Director of, or a
consultant to, the Company or any Affiliate of the Company. However, the term
"Employment Termination" shall not include a Non-Employee Director ceasing to
be a Director or a transfer of a Participant from the Company to an Affiliate
or vice versa, or from one Affiliate to another, or a leave of absence duly
authorized by the Company unless the Committee has provided otherwise.
"ERISA" means the Employee Retirement Exchange Act of 1974, as amended
from time to time, and any successor statute.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor statute.
"EXERCISE NOTICE" has the meaning given it in Section 6.1(h).
"GRANT DATE" has the meaning given it in Section 6.1(d).
"INCENTIVE STOCK OPTION" or "ISO" mean any Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422
of the Code or successor provision.
"NON-EMPLOYEE DIRECTOR" means a person who qualifies as a "Non-Employee
Director" as defined in Rule 16b-3 and an "outside director" as defined in
Treasury Regulation 1.162-27(e)(3) and any successor Treasury Regulation.
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"NON-QUALIFIED STOCK OPTION" or "NQO" means any Option that is not an
Incentive Stock Option.
"OPTION" means an option granted under Section 5.
"PARTICIPANT" means an eligible person who is granted an Award.
"PLAN" means this Key Employee Incentive Plan.
"PERFORMANCE SHARE AWARD" means an Award granted under Section 5.4
"RULE 16b-3" means Rule 16b-3 adopted under Section 16(b) of the
Exchange Act or any successor rule, as it may be amended form time to time,
and references to paragraphs or clauses of Rule 16b-3 refer to the
corresponding paragraphs or clauses of Rule 16b-3 as it exists at the
Effective Date or the comparable paragraph or clause of Rule 16b-3 or
successor rule, as that paragraph or clause may thereafter be amended.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time
to time, and any successor statute.
"SPINOFF" means the distribution of Shares pursuant to the Rights
Agreement dated as of April 21, 1997.
"TEN PERCENT SHAREHOLDER" means any person who, at the time this
definition is being applied, owns directly or indirectly (or is treated as
owning by reason of attribution rules currently set forth in Section 424 of
the Code or any successor statute), shares of the Company constituting more
than ten percent (10%) of the total combined voting power of all classes of
outstanding shares of the Company or of any Affiliate of the Company.
2. ELIGIBLE PERSONS
Every person who, at or as of the Grant Date, is (a) an Employee of the
Company or an Affiliate of the Company, or (b) someone whom the Committee
designates as eligible for an Award (other than for Incentive Stock Options)
because the person (i) performs bona fide consulting or advisory services for
the Company or an Affiliate of the Company (other than services in connection
with the offer or sale of securities in a capital-raising transaction) and
(ii) has a direct and significant effect on the financial development of the
Company or an Affiliate of the Company, shall be eligible to receive Awards
hereunder. Directors of the Company who are not Employees are only eligible
to receive Director Options under Section 5.3.
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3. SHARES SUBJECT TO THE PLAN
The total number of Shares that may be issued under Award, all or any
part of which may be issued to any Participant, is eight percent (8.00%) of
the total shares outstanding of the Company plus that number of shares needed
to satisfy the Assumed Options, plus five hundred thousand (500,000) Shares;
provided, however only 368,000 can be ISOs. Such Shares may consist, in whole
or in part, of authorized and unissued Common Shares or Shares reacquired in
private transactions or open market purchases, but all Shares issued under
the Plan, regardless of their source, shall be counted against the foregoing
limitation. Any Shares that are retained by the Company upon exercise or
settlement of an Award in order to satisfy the exercise price in whole or in
part, or to pay withholding taxes due with respect to such exercise or
settlement, shall be treated as issued to the Participant and will thereafter
not be available under the Plan. The number of Shares reserved for issuance
under this Plan is subject to adjustment in accordance with the provisions
for adjustment in this Plan.
4. ADMINISTRATION
4.1 COMMITTEE. This plan shall be administered by a committee (the
"Committee") appointed by the Board. The Committee shall be constituted so
that, as long as Shares are registered under Section 12 of the Exchange Act,
each member of the Committee shall be a Non-Employee Director. The number of
persons that shall constitute the Committee shall be determined from time to
time by a majority of all the members of the Board; provided, however, the
Committee shall not consist of fewer than two persons.
4.2 COMMITTEE'S POWERS. Subject to the express provisions of this Plan
and Rule 16b-3 (so long as it is applicable) and the terms of the Assumed
Options, the Committee shall have the authority, in its sole discretion:
(a) to adopt, amend and rescind administrative and interpretive rules and
regulation relating to the Plan; (b) to determine the eligible persons to
whom, and the time or times at which, Awards shall be granted; (c) to
determine the number of Shares that shall be the subject of each Award;
(d) to determine the terms and provisions of each Award Agreement (which need
not be identical) and any amendments thereto, including provisions defining
or otherwise relating to (i) the period or periods and extent of
exercisability of any Option, (ii) the extent to which the transferability of
Shares issued or transferred pursuant to any Award is restricted, (iii) the
effect of Employment Termination on an Award, and (iv) the effect of approved
leaves of absence (consistent with applicable Treasury Regulations); (e) to
accelerate the time of exercisability of any Option; (f) to construe the
respective Award Agreements and the Plan; (g) to make determinations of the
fair market value of Shares; (h) to waive any provision, condition or
limitation set forth in an Award Agreement; (i) to delegate its duties under
the Plan to such agents as it may appoint from time to time, PROVIDED,
HOWEVER, that the Committee may not delegate its duties with respect to
making or exercising discretion with respect to Awards to eligible persons if
such delegation would cause Awards not to qualify for the exemptions provided
by Rule 16b-3 (unless the Board expressly determines not to have Awards under
the Plan comply with Rule 16b-3); and (j) to make all other determinations,
perform all other acts and exercise all other powers and authority necessary
or advisable for administering the Plan, including the delegation of those
ministerial acts and responsibilities as the Committee
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deems appropriate. Subject to Rule 16b-3 (so long as it is applicable), the
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan, in any Award or in any Award Agreement in the
manner and to the extent it deems necessary or desirable to implement the
Plan, and the Committee shall be the sole and final judge of that necessity
or desirability. The determinations of the Committee on the matters referred
to in this Section 4.4 shall be final and conclusive. Notwithstanding any
provision in the Plan to the contrary, Awards will be made to Non-Employee
Directors under Sections 5.3 and 8 of this Plan. In addition, notwithstanding
any provision of this Plan to the contrary, the Committee may not in any
manner exercise discretion under the Plan with respect to any Awards made to
Non-Employee Directors.
4.3 TERM OF PLAN. No awards shall be granted under this Plan
after 10 years from the Effective Date of this Plan.
5. GRANT OF OPTIONS
5.1 WRITTEN AGREEMENT. Each option shall be evidenced by an Award
Agreement. The Award Agreement shall specify whether each Option it
evidences is a NQO or an ISO.
5.2 ANNUAL $100,000 LIMITATION ON ISOS. To the extent that the
aggregate "fair market value" of Shares with respect to which ISOs first
become exercisable by a Participant in any calendar year exceeds $100,000
taking into account ISOs granted under this Plan, the Options covering such
additional Shares becoming exercisable in that year shall cease to be ISOs
and thereafter be NQOs. For this purpose, the "fair market value" of the
ISOs shall be determined as of the Grant Date of the Options. In reducing
the number of Options treated as ISOs to meet this $100,000 limit, the most
recently granted Options shall be reduced first.
5.3 ANNUAL GRANTS TO NON-EMPLOYEE DIRECTORS. On the last day
of each calendar year beginning with the last day of 1997, each Non-Employee
Director who is then a member of the Board shall automatically be granted
NQOs to purchase 5,000 Shares. Each option referred to in the previous
sentence is referred to as a "Director Option." The exercise price of
Director Options shall be the fair market value of the Shares subject to the
Option on the date the Option is granted. Each Director Option shall be
fully exercisable commencing six months after the date of grant and
continuing, unless sooner terminated as provided in this Plan, for 10 years
after the date it is granted. If, for any reason other than death or
permanent and total disability, a Non-Employee Director ceases to be a member
of the Board, each Director Option held by that Non-Employee Director on the
date that the Non-Employee Director ceases to be a member of the Board may be
exercised in whole or in part at any time within one year after the date of
such termination or until the expiration of the Director Option, whichever is
earlier. If a Non-Employee Director dies or becomes permanently and totally
disabled (within the meaning of Section 422(c)(6) of the Code) while a member
of the Board (or within the period that the Director Options remain
exercisable after the Non-Employee Director ceases to be a member of the
Board), each Director Option then held by that Non-Employee Director may be
exercised, in whole or in part, by the Non-Employee Director, by the
Non-Employee Director's personal representative or by the person to whom the
Non-Employee Director transferred the Director Option by will or the laws of
descent and distribution, at any time within two years after the date
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of death or permanent and total disability of the Non-Employee Director or
until the expiration date of the Director Option, whichever is earlier.
Nothing in this Section 5.3 or in Section 6.1(c) shall have the effect of
accelerating the six-month period during which Director Options are not
exercisable. Each Director Option shall be evidenced by an Award Agreement.
5.4 GRANTS OF PERFORMANCE SHARE AWARDS. The Committee may, in its
discretion, grant Performance Share Awards to eligible Employees. An Award
shall specify the maximum number of shares of Common Shares (if any) subject
to the Performance Share Award and its terms and conditions. The Committee
shall establish the specified period (a "performance cycle") for the
Performance Share Award and the measure(s) of the performance of the Company
(or any part thereof) or the Participant. The Committee may, during the
performance cycle, make such adjustments to the measure(s) of performance as
it may deem appropriate to compensate for, or reflect, any significant
changes that may occur in accounting practices, tax laws, other laws or
regulations that alter or affect the computation of the measure(s). The
Award Agreement shall specify how the degree of attainment of the measure(s)
over the performance cycle is to be determined. The Committee may provide
for full or partial credit, prior to completion of such performance cycle or
the attainment of the performance achievement specified in the Award, in the
event of the Participant's death.
5.5 ASSUMED OPTIONS. As provided in the Separation Agreement between
the Company and NHP, Inc. dated as of December 8, 1997, the Company assumes
obligations with respect to the Assumed Options through this Plan.
6. CERTAIN TERMS AND CONDITIONS OF OPTIONS AND OTHER AWARDS
Each option shall be designated as an ISO or a NQO and shall be subject
to the terms and conditions set forth in Section 6.1. Notwithstanding the
foregoing, the Committee may provide for different terms and conditions in
any Award Agreement or amendment thereto as provided in Section 4.2.
6.1 ALL AWARDS. All Options and other Awards shall be subject to the
following terms and conditions, except as may be otherwise provided in the
Assumed Options:
(a) CHANGES IN CAPITAL STRUCTURE: If the number of outstanding
Shares is increased by means of a share dividend payable in Shares, a share
split or other subdivision or by a reclassification of Shares, then, from
and after the record date for such dividend, subdivision or
reclassification, the number and class of Shares subject to this Plan
(including without limitation its Sections 3, and 5.3) and each outstanding
Award shall be increased in proportion to such increase in outstanding Shares
and the then-applied exercise price of each outstanding Award shall be
correspondingly decreased. If the number of outstanding Shares is decreased
by means of a share split or other subdivision or by a reclassification of
Shares, then, from and after the record date for such split, subdivision or
reclassification, the number and class of Shares subject to this Plan
(including without limitation its Sections 3, and 5.3) and each outstanding
Award shall be decreased in proportion to such decrease in outstanding Shares
and the then-applicable exercise price of each outstanding Award shall be
correspondingly increased.
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(b) GRANT DATE: Each Award Agreement shall specify the date as of
which it shall be effective (the "Grant Date").
(c) FAIR MARKET VALUE: For purposes of this Plan, the fair market
value of Shares shall be determined as follows:
(i) If the Shares are listed on any established stock
exchange or a national market system, including, without limitation, the
National Market System of the National Association of Securities Dealers
Automated Quotation System, its fair market value shall be the closing sales
price for the Shares, or the mean between the high bid and low asked prices if
no sales were reported, as quotes on such systems or exchange (or, if the
Shares are listed on more than one exchange, then on the largest such
exchange) for the date the value is to be determined (or if there are no sales
or bids for such date, then for the last preceding business day on which there
were sales or bids), as reported in THE WALL STREET JOURNAL or similar
publication.
(ii) If the Shares are regularly quoted by a recognized
securities dealer but selling prices are not reported, its fair market value
shall be determined in good faith by the Committee, with reference to the
Company's net worth, prospective earning power, dividend-paying capacity and
other relevant factors, including the goodwill of the Company, the economic
outlook in the Company's industry, the Company's position in the industry and
its management, and the values of stock of other corporations in the same or
similar lines of business.
(d) TIME OF EXERCISE; VESTING: Awards may, in the sole discretion
of the Committee, be exercisable or may vest, and restrictions may lapse, as
the case may be, at such times and in such amounts as may be specified by the
Committee in the grant of the Award.
(e) NONASSIGNABLILITY OF RIGHTS: No Award that is a derivative
security (as defined in Rule 16a-1(c) under the Exchange Act) shall be
transferable other than with the consent of the Committee (which consent will
not be granted in the case of ISOs unless the conditions for transfer of ISOs
specified in the Code have been satisfied) or by will or the laws of the
descent and distribution. Awards requiring exercise shall be exercisable
only by the Participant, assignees that were approved by the Committee,
executors, administrators or beneficiaries of the Participant (who are the
permitted transferees hereunder), guardians or members of a committee for an
incompetent Participant, or similar persons duly authorized by law to
administer the estate or assets of a Participant.
(f) NOTICE AND PAYMENT: To the extent it is exercisable, an Award
shall be exercisable only by written or recorded electronic notice of
exercise, in the manner specified by the Committee from time to time,
delivered to the Company or its designated agent during the term of the Award
(the "Exercise Notice"). The Exercise Notice shall: (a) state the number of
Shares with respect to which the Award is being exercised; (b) be signed by
the holder of the Award or by the person authorized to exercise the Award
pursuant to Section 6.1(c) and (c) include such other information,
instruments and documents as may be required to satisfy any other condition
to exercise set forth in the Award Agreement. Except as provided below,
payment in full, in cash or check, shall be made for all Shares purchased at
the time notice of exercise of an
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Award is given to the Company. The proceeds of any payment shall constitute
general funds of the Company. At the time an Award is granted or before it is
exercised, the Committee, in the exercise of its sole discretion, may
authorize any one or more of the following additional methods of payment:
(i) for all Participants, acceptance of such Participant's
full recourse promissory note for some or all of the exercise price of the
Shares being acquired, payable on such terms and bearing such interest rate
as determined by the Committee, and secured in such manner, if at all, as
the Committee shall approve, including, without limitation, by a security
interest in the Shares which are the subject of the Award or other securities;
(ii) for all Participants, delivery by such Participants of
Shares of the Company already owned by such Participants for all or part of
the exercise price of the Award being exercised, provided that the fair
market value of such Shares are equal on the date of exercise to the exercise
price of the Award being exercised, or such portion thereof as the
Participants are authorized to pay and elect to pay by delivery of such
Shares;
(iii) for all Participants, surrender by such Participants, or
withholding by the Company from the Shares issuable upon exercise of the
Award, of a number of Shares subject to the Award being exercised with a fair
market value equal to some or all of the exercise price of the Shares being
acquired, together with such documentation as the Committee and the broker,
if applicable, shall require; or
(iv) for all Participants, to the extent permitted by
applicable law, payment may be made pursuant to arrangements with a brokerage
firm under which that brokerage firm, on behalf of such Participants, shall
pay to the Company the exercise price of the Award being exercised (either as
a loan to the Participant or from the proceeds of the sale of Shares issued
under that Award), and the Company shall promptly cause the Shares being
purchased under the Award to be delivered to the brokerage firm. Such
transactions shall be effected in accordance with the procedures that the
Committee may establish from time to time.
If the exercise price is satisfied in whole or in part by the
delivery of Shares pursuant to paragraph (ii) above, the Committee may issue
to the Participant an additional Option, with terms identical to those set
forth in the option agreement governing the exercised Option, except for the
exercise price which shall be the fair market value used for such delivery
and the number of Shares subject to such additional Option shall be the
number of Shares so deliverd.
(g) TERMINATION OF EMPLOYMENT: Any Award or portion thereof which
has not vested on or before the date of a Participant's Employment
Termination shall expire on the date of Employment Termination. As to an
Award or portion thereof that has vested by the time of Employment
Termination, the Committee shall establish, in respect of each Award when
granted, the effect of an Employment Termination on the rights and benefits
thereunder and in so doing may, but need not, make distinctions based upon
the cause of termination (such as retirement, death, disability or other
factors) or which party effected the termination (the employer or the
Employee). Notwithstanding any other provision in this Plan or the Award
Agreement, the Committee may decide in its discretion at the time of any
Employment Termination (or within a
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reasonable time thereafter) to extend the exercise period of an Award
(but not beyond the period specified in Section 6.2(b) or 6.3(b), as
applicable) and not decrease the number of Shares covered by the Award with
respect to which the Award is exercisable or vested.
(h) DEATH: Any Award or portion thereof which has not vested on or
before the date of the Participant's death shall expire on the date of such
Participant's death. As to an Award or portion thereof that has vested by the
date of death of the Participant, such Awards or portions thereof must be
exercised within two years of the date of the Participant's death by a person
authorized under this Plan to exercise such Awards.
(i) PAYMENT OF DIVIDENDS UPON EXERCISE OF OPTIONS: Upon exercise of
an Option, other than an Assumed Option the Participant shall be entitled to
receive a cash payment from the Company equal to the amount of cash
dividends that have been paid from the Grant Date of the Option through the
date of exercise of the Option on that number of Common Shares that is equal
to the number of Common Shares being purchased upon exercise of such Option.
(j) OTHER PROVISIONS: Each Award Agreement may contain such other
terms, provisions and conditions not inconsistent with this Plan, as may be
determined by the Committee, and each ISO granted under this Plan shall
include such provisions and conditions as are necessary to qualify such
Option as an "incentive stock option" within the meaning of Section 422 of
the Code, unless the Committee determined above.
(k) WITHHOLDING AND EMPLOYMENT TAXES: At the time of exercise of an
Award, the lapse of restrictions on an Award or a disqualifying disposition
of Shares issued under an ISO (within the meaning of Section 6.3(c)), the
Participant shall remit to the Company in cash all applicable federal and
state withholding and employment taxes. If and to the extent authorized and
approved by the Committee in its sole discretion, a Participant may elect, by
means of a form of election to be prescribed by the Committee, to have Shares
which are acquired upon exercise of an Award withheld by the Company or
tender other Shares owned by the Participant to the Company at the time the
amount of such taxes is determined, in order to pay the amount of such tax
obligations, subject to such limitations as the Committee determines are
necessary or appropriate to comply with Rule 16b-3 in the case of
Participants who are subject to Section 16(b).
(l) NAMED OFFICER PROVISIONS: The Award Agreements (other than the
Assumed Options) for Participants determined by the Committee to be named
officers ("Named Officers") shall contain the following terms and
definitions:
SEVERANCE. If a Named Officer is terminated without "cause" (as
defined below), he or she will be paid his or her then current salary for two
years if he or she is the Chief Executive Officer, for one year if he or she
is an Executive Vice President, for six months if he or she is a Senior Vice
President, or for three months if he or she is a Group Vice President. If
there is a "transfer of control" of the Company (as defined below) and such
an employee is terminated within 180 days of such change, he or she will be
paid his or her then current salary for three years if he or she is the Chief
Executive Officer, for two years if he or she is an Executive Vice
President, for one year if he or she is a Senior Vice President, or for six
months if he or she is a
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Group Vice President; provided, however, no payments shall be made to the
extent they would constitute "excess parachute payments" within the meaning
of Section 280G of the Code.
CAUSE. With respect to the termination of the Participant's
employment by the Company, "cause" means: (i) the engaging by the Participant
in any act of dishonesty in connection with the performance of his employment
duties and responsibilities, (ii) the final judgment of any United States
federal or state court convicting the Participant of a felony, (iii) the
failure of the Participant to perform his duties or responsibilities as
specified by the Company or any Affiliate of the Company, and (iv) the
inability of the Participant to perform his duties or responsibilities for a
period of more than one hundred twenty (120) consecutive days due to physical
or mental illness or incapacity.
TRANSFER OF CONTROL. For the purposes of this Agreement, a
"transfer of control" shall occur, after the Company's Spinoff, upon: (i) a
transfer of a majority of the Company's voting stock outstanding on the day
of the transfer, (ii) sale of substantially all of the Company's assets, to
any entity or person unaffiliated with the Company, (iii) the consolidation
of the Company with or its merger into any other unaffiliated corporation, or
(iv) an act by the Company, or any entity or person affiliated with the
Company, which results in the dissolution of the Company.
6.2 TERMS AND CONDITION TO WHICH ONLY NQOs ARE SUBJECT. Options
granted under this Plan (other than Assumed Options) which are designated as
NQOs shall be subject to the following terms and conditions:
(a) EXERCISE PRICE. The exercise price of a NQO shall be
determined by the Committee.
(b) OPTION TERM. Unless an earlier expiration date is specified
by the Committee at the Grant Date, each NQO shall expire 10 years after the
Grant Date or, if required by applicable state securities laws in the case of
a NQO granted to a Ten Percent Shareholder, five years after the Grant Date.
6.3 TERMS AND CONDITIONS TO WHICH ONLY ISOs ARE SUBJECT. Options
granted under this Plan (other than Assumed Options) which are designated as
ISOs shall be subject to the following terms and conditions:
(a) EXERCISE PRICE. The exercise price of an ISO shall be
determined in accordance with the applicable provisions of the Code and shall
in no event be less than 100% of the fair market value of the Shares covered
by the ISO at the Grant Date; PROVIDED, HOWEVER, that the exercise price of
an ISO granted to a Ten Percent Shareholder shall not be less than 110% of
such fair market value.
(b) OPTION TERM. Unless an earlier expiration date is specified
by the Committee at the Grant Date, each ISO shall expire 10 years after the
Grant Date; PROVIDED, HOWEVER, that an ISO granted to a Ten Percent
Shareholder shall expire no later than five years after the Grant Date.
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(c) DISQUALIFYING DISPOSITIONS. If Shares acquired by exercise of
an ISO are disposed of within two years after the Grant Date or within one
year after the transfer of the Shares to the optionee, the holder of the
Shares immediately before the disposition shall promptly notify the Company
in writing of the date and terms of the disposition and shall provide such
other information regarding the disposition as the Company may reasonably
require and shall pay the Company any withholding and employment taxes which
the Company in its sole discretion deem applicable to the disposition.
(d) TERMINATION OF EMPLOYMENT. All vested ISOs must be exercised
within three months after an optionee ceases to be an Employee unless such
cessation is due to the employee being disabled (within the meaning of
Section 422(c)(6) of the Code), in which case the ISO shall be exercised
within one year of cessation of employment.
6.4 SURRENDER OF OPTIONS. The Committee, acting in its sole discretion,
may include a provision in an option agreement allowing the optionee to
surrender the Option covered by the agreement, in whole or in part in lieu of
exercise in whole or in part, on any date that the fair market value of the
Shares subject to the Option exceeds the exercise price and the Option is
exercisable (to the extent being surrendered). The surrender shall be
effected by the delivery of the option agreement, together with a signed
statement which specifies the number of shares as to which the optionee is
surrendering the Option, together with a request for such type of payment.
Upon such surrender, the optionee shall receive (subject to any limitations
imposed by Rule 16b-3), at the election of the Committee, payment in cash or
shares, or a combination of the two, equal to (or equal in fair market value
to) the excess of the fair market value of the Shares covered by the portion
of the Option being surrendered on the date of surrender over the form of
payment, taking into account such factors as it deems appropriate. To the
extent necessary to satisfy Rule 16b-3, the Committee may terminate an
optionee's rights to receive payments in cash for fractional Shares. Any
option agreement providing for such surrender privilege shall also
incorporate such additional restrictions on the exercise or surrender of
options as may be necessary to satisfy the conditions of Rule 16b-3.
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7. SECURITY LAWS
Nothing in this Plan or in any Award of Award Agreement shall require
the Company to issue any Shares with respect to any Award if, in the opinion of
counsel for the Company, that issuance could constitute a violation of the
Securities Act, any other law or the rules of any applicable securities
exchange or securities association then in effect. As a condition to the
grant or exercise of an Award, the Company may require the Participant (or,
in the event of the Participant's death, the Participant's legal
representatives, heirs, legatees or distributees) to provide written
representations concerning the Participant's (or such other person's)
intentions with regard to the retention or disposition of the Shares covered
by the Award and written covenants as to the manner of disposal of such
Shares as may be necessary or useful to ensure that the grant, exercise or
disposition will not violate the Securities Act, and other law or any rule of
any applicable securities exchange or securities association then in effect.
The Company shall not be required to register any shares under the Securities
Act or register or qualify any Shares under any state or other securities
laws.
8. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN
The Board may at any time amend, suspend or discontinue this Plan
without shareholder approval, except as required by applicable law, PROVIDED,
HOWEVER that no amendment, alteration, suspension or discontinuation shall be
made which would impair the rights of any Participant under any Award
previously granted, without the Participant's consent, except to conform this
Plan and Awards granted to the requirements of federal or other tax laws
including without limitation Section 422 of the Code and/or ERISA, or to the
requirements of Rule 16b-3. The Board may choose to require that the
Company's shareholders approve any amendment to this Plan in order to satisfy
the requirements of Section 422 of the Code, Rule 16b-3 or for any other
reason.
9. SEVERABILITY
If any provision of this Plan is held to be illegal or invalid for any
reason, that illegality or invalidity shall not affect the remaining portions
of the Plan, but such provision shall be fully severable and the Plan shall
be construed and enforced as if the illegal or invalid provision had never
been included in this Plan. Such an illegal or invalid provision shall be
replaced by a revised provision that most nearly comports to the substance of
the illegal or invalid provision.
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10. EFFECTIVE DATE
This Plan was originally adopted by the Board of Directors on October 21,
1997. It was approved in that form by the holders of the Company's voting
shares on December 5, 1997 (the earlier of which is the "Effective Date"). It
was further amended by the Board on December 5, 1997, February 24, 1998, and
March 4, 1999. The Plan as amended by the Board on March 4, 1999, was
approved in that form by the holders of the Company's voting shares on June
10, 1999.
I hereby certify that the foregoing is a full, true and correct copy of
the Key Employee Incentive Plan of The WMF Group Ltd., a Delaware
Corporation, as in effect on the date hereof.
Witness my hand and the seal of the Corporation.
Dated: -------------------------- ------------------------------
Barbara Ekstrom, Secretary
(SEAL)
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Exhibit 10.4
[LOGO]
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TO: LIZ WHITBRED-SNYDER
FROM: SHEKAR NARASIMHAN
RE: PROMOTION
DATE: MAY 20, 1999
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I am pleased to inform you that you are being promoted effective immediately
to Executive Vice President and Chief Financial Officer of the WMF Group,
Ltd. In this capacity you will have overall responsibility for the financial
and operational management of the company. You will be reporting directly to
the CEO.
Your annual compensation is increased to $175,000 and you are now entitled to
an additional 20,000 options under the amended KEIP plan. These options will
be issued to you on June 20, 1999. In addition, you are now eligible for EVP
severance benefits under the company's plan.
Finally, for the period of one-year from this date, you and the company will
have the option to revert you back to responsibilities similar to those you
held as Senior Vice President, Operations. This option must be exercised with
a minimum of 90-day notice and if exercised, you will keep the EVP title and
the compensation outlined above.
Liz, the company and I appreciate your loyalty and past service.
Congratulations and look forward to working with you in your new role.
<PAGE>
Exhibit 10.5
June 7, 1999
Charles H. Cremens
345 Highland Street
Weston, MA 02493
Dear Chuck:
This is to confirm the terms of our offer of employment (subject to formal
Board approval on June 10, 1999):
Title: President and Chief Operating Officer. Subject to election by the
shareholders on an annual basis, you will also serve as a Director of the
Company. Reporting To: Chairman and Chief Executive Officer
Base Salary: $240,000 per annum.
Annual Bonus: Discretionary. As determined by the CEO and approved by the
Compensation Committee. The range for senior management is 0-100% of base
salary.
Fringe Benefits: All those at the EVP level and for regular employees. This
includes vacation, health, life and disability insurance and severance
payments. Details are in the stock-option award agreement, S-3 filings and
Personnel Handbook.
Special Benefits: Reimbursement for travel and boarding expenses to and from
Boston once weekly for up to one year. Special Bonus upon equity realization
event in conformance with the plan approved by the Compensation Committee on
June 10, 1999.
Stock Options: 5,000 options granted effective June 10, 1999 under the terms of
the amended KEIP at $7.00 per share strike price (replaces the 5,000 Director
options which were to be granted to you under our previous consulting
agreement).
Responsibilities: The overall operations and running of the Company and its
subsidiaries including, but not limited to, direct oversight of all
compensation-related matters and the performance of all the business units.
Chuck, I am pleased that we will be working together. Assuming Board approval, I
am planning to make this effective June 10, 1999.
Sincerely,
Shekar Narasimhan
Accepted and Agreed to: _______________
Chuck Cremens
<PAGE>
Exhibit 11, Form 10-Q
Commission File Number 000-22567
The WMF Group, Ltd.
Statement re Computation of Per Share Earnings (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
-------------------------- -----------------------
1999 1998 1999 1998
----------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 168 $ (3,985) $ (1,090) $(3,704)
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Weighted average shares of common
stock used for Basic computation 11,176,734 5,249,501 9,669,051 5,162,668
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Weighted average shares of common
stock 11,176,734 5,249,501 9,669,051 5,162,668
Diluted adjustment:
Assumed exercise of options and
warrants (treasury stock method) - - - -
----------- --------- ----------- ---------
Total weighted average shares and
equivalents used for Diluted
computation 11,176,734 5,249,501 9,669,051 5,162,668
----------- --------- ----------- ---------
----------- --------- ----------- ---------
INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common
share - Basic $ .02 $ (.76) $ (.11) $ (.71)
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Net income (loss) per common
share - Diluted $ .02 $ (.76) $ (.11) $ (.71)
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 UNAUDITED FINANCIAL STATEMENTS OF THE WMF GROUP, LTD. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0001039206
<NAME> WMF GROUP LTD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,034
<SECURITIES> 6,180
<RECEIVABLES> 2,206
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,195
<DEPRECIATION> 2,574
<TOTAL-ASSETS> 176,964
<CURRENT-LIABILITIES> 0
<BONDS> 113,366
0
0
<COMMON> 112
<OTHER-SE> 37,262
<TOTAL-LIABILITY-AND-EQUITY> 176,964
<SALES> 29,780
<TOTAL-REVENUES> 29,780
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 28,966
<LOSS-PROVISION> 675
<INTEREST-EXPENSE> 1,477
<INCOME-PRETAX> (1,338)
<INCOME-TAX> (248)
<INCOME-CONTINUING> (1,090)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,090)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
