<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 000-23821
---------
FLAGSTAR CAPITAL CORPORATION
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3386801
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 TELEGRAPH ROAD, BLOOMFIELD HILLS, MICHIGAN 48302-0953
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 338-7700
--------------
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes X No .
---- ----
As of November 2, 1998, 1,000,000 shares of the registrant's Common
Stock, $1.00 par value, were issued and outstanding and 2,300,000 shares of the
registrant's Series A Preferred Shares, $25.00 par value, were issued and
outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed financial statements of the Registrant are as follows:
Statement of Financial Condition - September 30, 1998 and February 24,
1998
Statement of Earnings - For the three months and period ended September
30, 1998
Statement of Cash Flows - For the period ended September 30, 1998
Condensed Notes to Financial Statements.
2
<PAGE> 3
FLAGSTAR CAPITAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, FEBRUARY 24,
1998 1998
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,803 $ -
Mortgage loans receivable 116,227 113,030
Accrued interest receivable 1,118 409
Other assets 2,861 2,910
================= ================
Total assets $130,009 $116,349
================= ================
LIABILITIES AND SToCKHOLDERS' EQUITY
LIABILITIES
Due to parent $ 644 $ 845
Other liabilities 38 -
----------------- ----------------
Total liabilities $ 682 $ 845
STOCKHOLDERS' EQUITY
Series A Preferred Stock - $25.00 liquidation value,
2,000,000 and 2,300,000 shares authorized and issued at
February 24, 1998 and September 30, 1998, respectively 57,500 50,000
Common stock - $1.00 par value, 500,000 and 1,000,000
Shares authorized and issued at February 24, 1998 and
September 30, 1998, respectively 1,000 500
Additional paid in capital 70,827 65,004
Retained earnings - -
----------------- ----------------
Total stockholders' equity 129,327 115,504
----------------- ----------------
Total liabilities and stockholders' equity $130,009 $116,349
================= ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
FLAGSTAR CAPITAL CORPORATION
STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
--------------------------- ---------------------------
<S> <C> <C>
Interest on loans $ 1,951 $ 4,510
General and administrative expenses 86 212
=========================== ===========================
NET EARNINGS $ 1,865 $ 4,298
=========================== ===========================
PREFERRED STOCK DIVIDENDS $ 1,222 $ 2,927
=========================== ===========================
NET EARNINGS AVAILABLE TO COMMON SHARES $ 643 $ 1,371
=========================== ===========================
EARNINGS PER COMMON SHARE - BASIC $ 0.64 $ 1.77
=========================== ===========================
EARNINGS PER COMMON SHARE - DILUTED $ 0.64 $ 1.77
=========================== ===========================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
FLAGSTAR CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED
SEPTEMBER
30,
1998
------------------
<S> <C>
OPERATING ACTIVITIES
Net earnings $ 4,298
Adjustments to reconcile net earnings to net cash used in operating activities
Increase in accrued interest receivable (1,118)
Increase in other assets (2,861)
Increase in liabilities 682
------------------
Net cash provided by operating activities 1,001
INVESTING ACTIVITIES
Purchase of mortgage loans (132,314)
Principal repayments received on mortgage loans 16,085
------------------
Net cash used in investing activities (116,227)
FINANCING ACTIVITIES
Sale of common stock to Flagstar Bank, FSB 74,954
Sale of preferred stock 57,500
Preferred stock issuance costs paid (3,127)
Dividends paid to common stockholders (1,371)
Dividends paid to preferred stockholders (2,927)
------------------
Net cash provided by financing activities 125,029
------------------
Net increase in cash and cash equivalents 9,803
Beginning cash and cash equivalents -
==================
Ending cash and cash equivalents $ 9,803
==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
FLAGSTAR CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS
Flagstar Capital Corporation (the "Company"), is an operating subsidiary of
Flagstar Bank, FSB (the "Bank"), a federally chartered stock savings bank
founded in 1987. The Company's primary business consists of investing in
residential mortgage loans.
On February 24, 1998, the Company sold to the Bank 499,900 shares of common
stock, $1.00 par value, providing proceeds totaling $65.5 million. The Company
also sold 2.0 million shares of its 8.50% Series A Preferred Stock, $25.00 par
value, to the public in an initial offering, providing gross proceeds totaling
$50.0 million.
On May 21, 1998, in response to the underwriters exercising their over-allotment
option, the Company issued an additional 300,000 shares of its 8.50% Series A
Preferred Stock, $25.00 par value, to the public and 500,000 shares of common
stock, $1.00 par value, providing additional proceeds totaling $17.0 million,
gross. All shares of common stock are held by the Bank.
The Company used the net proceeds from the equity offerings to purchase mortgage
loans.
NOTE 2. - BASIS OF PRESENTATION
The accompanying consolidated unaudited financial statements of the Company,
have been prepared in accordance with generally accepted accounting principles
for interim information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X as promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. All interim amounts are subject to year-end audit, the results of
operations for the interim period herein are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans:
Mortgage loans are carried at the principal amount outstanding, net of purchase
discount and premiums. The amortization of the premiums or discounts are
recorded as an adjustment to interest income using a method which approximates
the interest method.
Non-accrual loans are those loans on which the accrual of interest has ceased.
Loans are placed on non-accrual status immediately if, in the opinion of
management, principal or interest is not likely to be paid in accordance with
the terms of the loan agreement, or when principal or interest is past due 90
days or more and collateral, is insufficient to cover principal and interest.
Interest income on non-accrual loans is recognized only to the extent of cash
receipts. However, where there is doubt regarding the ultimate collectibility of
the loan principal, cash receipts, whether designated as principal or interest,
are thereafter applied to reduce the carrying value of the loan. Loans are
restored to accrual status only when interest and principal payments are brought
current and future payments are reasonably assured.
6
<PAGE> 7
NOTE 3 - SUMMARY OF SIGNIFICANt ACCOUNTING POLICIES (CONT'D)
Statement of Financial Accounting Standards No. 114, entitled "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), requires that the carrying
value of an impaired loan be based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price, or the fair value or the
collateral, if the loan is collateral dependent. Under SFAS 114, a loan is
considered impaired when, based on current information, it is probable that the
borrower will be unable to pay contractual interest or principal payments as
scheduled in the loan agreement. SFAS 114 applies to all loans except
smaller-balance homogeneous consumer loans, loans carried at fair value or the
lower of cost or fair value, debt securities and leases. The Company applies
SFAS 114 to non-accrual mortgage loans. In addition, SFAS 114 modifies the
accounting for in-substance foreclosures ("ISF"). A collateralized loan is
considered an ISF and is reclassified to Assets Acquired as Loan Satisfactions
only when the Company has taken physical possession of the collateral regardless
of whether formal foreclosure proceedings have taken place.
Statement of Financial Accounting Standards No. 118, entitled "Accounting by
Creditors for Impairment of a Loan Income Recognition and Disclosure" ("SFAS
118"), permits a creditor to use existing methods for recognizing interest
revenue on impaired loans. The Company recognizes interest income on impaired
loans pursuant to the discussion above for non-accrual loans.
Allowance for losses:
The allowance for losses provide for risk of losses inherent in the credit
extension process. The allowance is a general allowance and is based on a
periodic review and analysis of the Mortgage Loans. The periodic analysis
includes consideration of such factors as the risk rating of individual credits,
the size and diversity of the portfolio, economic conditions and market
conditions, prior loss experience and results of periodic credit reviews of the
portfolio. The allowance for losses is increased by provisions for losses
charged against income and is reduced by charge-offs, net of recoveries.
Charge-offs are recorded when, in the judgment of management, an extension of
credit is deemed uncollectible, in whole or in part.
Cash and cash equivalents:
The Company considers all short-term, highly liquid investments that are both
readily convertible to cash and have a maturity of generally nine months or less
at the time of purchase to be cash equivalents. At September 30, 1998, the
Company's cash was held in custody of the Bank and there were no cash
equivalents.
Offering costs:
Costs incurred in connection with the raising of capital through the sale of
preferred stock were taken as an adjustment to the additional paid in capital of
the Company.
Dividends:
Preferred Stock.
Dividends on the Series A Preferred Shares are non cumulative. The stock was
issued on February 24, 1998. Quarterly dividends will be payable quarterly on
the last day of March, June, September and December at a rate of 8.50% per annum
of the initial liquidation preference ($25.00 per share).
Common Stock
Stockholders are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds available after the preferred dividends have
been paid.
7
<PAGE> 8
NOTE 3 - SUMMARY OF SIGNIFICANt ACCOUNTING POLICIES (CONT'D)
Net earnings per common share - basic:
Net earnings per share - basic is computed by dividing net income after
preferred dividends by the weighted average number of common shares outstanding.
Income Taxes:
The Company has elected for Federal income tax purposes, to be treated as a Real
Estate Investment Trust ("REIT") and intends to comply with the provisions of
the Internal Revenue Code of 1986 (the "IRC"), as amended. Accordingly, the
Company will not be subject to federal income tax to the extent it distributes
its income to shareholders and as long as certain asset, income and stock
ownership tests are met in accordance with the IRC. As the Company expects to
qualify as a REIT for federal income tax purposes, no provision for income taxes
is included in the accompanying financial statements.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company has entered into an Advisory Agreement (the "Advisory Agreement")
with the Bank (the "Advisor") requiring an annual payment of $250,000. The Bank
provides advice to the Board of Directors and manages the operations of the
Company as defined in the Agreement. The Agreement has an initial term of five
years commencing on February 24, 1998 and automatically renews for additional
five year periods, unless the Company delivers a notice of non-renewal to the
Bank as defined in the Advisory Agreement.
The Company also entered into a servicing agreement with the Bank (the
"Servicer") for the servicing of the residential mortgage loans. Pursuant to the
servicing agreement, the Servicer performs the servicing for the Mortgage Loans,
in accordance with normal industry practice. The servicing agreement can be
terminated without cause upon a thirty day advance notice given to the Servicer.
The servicing fee is 0.375% of the outstanding principal balance of the Mortgage
Loans.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, entitled "Disclosures About
Fair Value of Financial Instruments" ("SFAS 107"), requires the Company to
disclose fair value information about financial instruments for which it is
practicable to estimate the value, whether or not such financial instruments are
recognized on the balance sheet. Fair value is defined as the amount at which a
financial instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation, and is best evidenced by a
quoted market price, if one exists. The calculation of estimated fair value is
based on market conditions at a specific point in time and may not be reflective
of future fair values.
Certain financial instruments and all non-financial instruments are excluded
from the scope of SFAS 107. Accordingly, the fair value disclosures required by
SFAS 107 provide only a partial estimate of the fair value of the Company. Fair
values among REITs are not comparable due to the wide-range of limited valuation
techniques and numerous estimates which must be made. This lack of objective
valuation standard introduces a great degree of subjectivity to these derived or
estimated fair values. Therefore, readers are cautioned in using this
information for purposes of evaluating the financial condition of the Company
compared with other REITs.
8
<PAGE> 9
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)
Loans
The fair value of the Company's residential mortgage loans are estimated by
comparing values for similar residential mortgages sold in the secondary market.
The carrying amounts reflected on the balance sheet at September 30, 1998
approximates fair value based on the valuation technique described in the
preceding paragraph.
Assets and liabilities in which fair value approximates carrying value:
The fair values of certain financial assets and liabilities carried at cost,
including cash, accrued interest receivable, other liabilities, and due to
parent, are considered to approximate their respective carrying value due to
their short-term nature and negligible credit losses.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The principal business of the Company is to acquire, hold, and manage Mortgage
Loans that will generate net income that can be distributed to stockholders. The
Company intends to acquire all its Mortgage Loans from the Bank.
RESULTS OF OPERATION
The Company reported net earnings for the quarter ended September 30, 1998 of
$1,865,000. Interest income from loans was $1,951,000 which was offset by
$24,000 in administrative expenses, and $62,000 in advisory fees.
The Company reported net earnings of $4.3 million for the period ended September
30, 1998. Interest income for the period ended September 30, 1998 was $4.5
million, which was offset by approximately $150,000 in advisory fees, $5,000 in
outside directors fees, and $57,000 in other administrative expenses.
The Company reported net earnings per common share of $ .64 for the quarter
ended September 30, 1998 and $1.77 for the period ended September 30, 1998.
On September 7,1998, the Company declared $1,222,000 in preferred stock
dividends for the quarter ended September 30, 1998. The preferred dividends were
paid on September 30, 1998. For the period ended September 30, 1998 the Company
declared and paid $2,927,000 in preferred stock dividends.
The Company declared and paid a common stock dividend of $643,000 for the three
months ended September 30, 1998, on September 30, 1998. For the period ended
September 30, 1998, the Company declared and paid $1,371,000 in common stock
dividends.
MORTGAGE LOANS
The Company's Mortgage Loans consist of Adjustable Rate Mortgages ("ARMs"), and
Fixed Rate Mortgages ("FRM's"). Reinvestments made in mortgage loans will be
initiated in a manner to maintain the original composition of approximately 70%
ARMs and 30% FRMs. All Mortgage Loans are expected to be purchased from the
Bank.
The following table gives a breakdown of the Mortgage Loans at September 30,
1998.
<TABLE>
<CAPTION>
Principal Average Interest
Product Type Loans Balance Balance Rate WAM WARM % of Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3 year ARM 110 $ 32,720,000 $297,456 6.699% 356 346 28.5
5 year ARM 72 21,498,000 298,582 6.978 360 349 18.7
7 year ARM 92 22,535,000 244,946 6.945 360 352 19.6
15 year Fixed 152 14,509,000 95,451 6.561 180 173 12.6
30 year Fixed 192 23,746,000 123,678 6.900 360 353 20.6
---------------------------------------------------------------------------------------------------
Total 618 $115,008,000 $186,097 6.823% 337 327 100.0%
===================================================================================================
</TABLE>
10
<PAGE> 11
LIQUIDITY
The objective of maintaining liquidity within the Company is to ensure the
availability of sufficient cash flows to meet all of the Company's financial
commitments. In managing liquidity, the Company takes into account various legal
limitations placed on a REIT as discussed below in Other Matters.
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional Mortgage Loans as Mortgage Loans
currently in the portfolio mature, or prepay, and to pay dividends on the Series
A Preferred Shares and common stock. The acquisition of additional Mortgage
Loans is intended to be funded with the proceeds obtained from the repayment of
principal balances by individual borrowers.
For the period ended September 30, 1998, the Company received repayments of
Mortgage Loan principal totaling approximately $16,085,000.
In June 1998, the Company purchased from the Bank $19.1 million in principal
balance of residential mortgage loans ("Mortgage Loans") at a purchase price of
$19.3 million, their estimated fair value. During 1998, the Company has
purchased from the Bank $131.1 million in principal balance of residential
mortgage loans ("Mortgage Loans") at a purchase price of $132.1 million, their
estimated fair value.
The Company does not anticipate any other material capital expenditures other
than Mortgage Loan acquisition.
OTHER MATTERS
As of September 30, 1998, the Company believed that it was in compliance with
the REIT tax rules and that it will continue to qualify as a REIT under the
provision of the Internal Revenue Code (the "Code"). The Company calculates
that:
- - its Qualified REIT Assets, as defined in the Code, are approximately
100% of its total assets, as compared to the federal tax requirements
that at least 75% of its total assets must be Qualified REIT Assets.
- - 100% of its revenues qualify for the 75% source of income test and 100%
of its revenues qualify for the 95% source of income test under the
REIT rules.
- - none of the revenue was subject to the 30% income limitation under the
REIT rules.
The Company also met all REIT requirements regarding the ownership of its common
and preferred stocks and anticipates meeting the 1998 annual distribution and
administrative requirements.
ITEM 3. MARKET RISK
The Company does not utilize any derivatives or hedging instruments to adjust
for market risk. Management believes that the use of these instruments is not
necessary.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11
Exhibit 27 (SEC Use only)
(b) Reports on Form 8-K
None
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAGSTAR CAPITAL CORPORATION
Date: November 4, 1998 /S/ Thomas J. Hammond
---------------------
Thomas J. Hammond
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
/S/ Michael W. Carrie
---------------------
Michael W. Carrie
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
13
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Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
11 Computation of Net Earnings Per Share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
Flagstar Capital Corporation
Computation of Net Earnings per Share
Net earnings for earnings per share are computed by subtracting from the
applicable earnings the dividend requirements on preferred stock to arrive at
earnings available to common stock and dividing this amount by the weighted
average number of common stock outstanding during the period.
<TABLE>
<CAPTION>
For the Quarter For the Period
Ended September 30, 1998 Ended September 30, 1998
-------------------------------- -------------------------------
(In thousands, except share data)
<S> <C> <C>
Net Earnings $ 1,865 $ 4,298
Less: preferred stock dividends 1,222 2,927
-------------------------- ---------------------
Net income available to common stock $ 643 $ 1,371
Average common shares outstanding 1,000,000 774,858
Net earnings per share - basic $ 0.64 $ 1.77
Net earnings per share - diluted $ 0.64 $ 1.77
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 9,803
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 116,227
<ALLOWANCE> 0
<TOTAL-ASSETS> 130,009
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 682
<LONG-TERM> 0
1,000
0
<COMMON> 57,500
<OTHER-SE> 70,827
<TOTAL-LIABILITIES-AND-EQUITY> 130,009
<INTEREST-LOAN> 1,951
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,951
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 1,951
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 86
<INCOME-PRETAX> 1,865
<INCOME-PRE-EXTRAORDINARY> 1,865
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,865
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 6.82
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
