<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, 1999
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 12, 1999, 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, 1999 and December 31,
1998
Statement of Earnings - For the three and nine months ended September
30, 1999 and the three months and the period ended September 30, 1998
Statement of Cash Flows - For the nine months ended September 30, 1999
and 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, DECEMBER 31,
ASSETS 1999 1998
------------------ -----------------
<S> <C> <C>
Cash and cash equivalents $ 12,596 $ 6,989
Mortgage loans receivable 113,603 116,675
Accrued interest receivable 1,333 1,307
Other assets 2,485 5,103
------------------ -----------------
Total assets $ 130,017 $ 130,074
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to parent $ 658 $ 722
Other liabilities 32 25
------------------ -----------------
Total liabilities 690 747
STOCKHOLDERS' EQUITY
Series A Preferred Stock - $25.00 liquidation value,
2,300,000 shares authorized and issued at September 30,
1999 and December 31, 1998 57,500 57,500
Common stock - $1.00 par value, 1,000,000 shares
authorized and issued at September 30, 1999 and
December 31, 1998 1,000 1,000
Additional paid in capital 70,827 70,827
Retained earnings - -
------------------ -----------------
Total stockholders' equity 129,327 129,327
------------------ -----------------
Total liabilities and stockholders' equity $ 130,017 $ 130,074
================== =================
</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 FOR THE FOR THE FOR THE
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest on loans $ 1,974 $ 1,951 $ 5,585 $ 4,510
General and administrative expenses 94 86 301 212
----------------- ------------------ ------------------ ------------------
NET EARNINGS $ 1,880 $ 1,865 $ 5,284 $ 4,298
================= ================== ================== ==================
PREFERRED STOCK DIVIDENDS $ 1,222 $ 1,222 $ 3,666 $ 2,927
================= ================== ================== ==================
NET EARNINGS AVAILABLE TO
COMMON SHARES $ 658 $ 643 $ 1,618 $ 1,371
================= ================== ================== ==================
EARNINGS PER COMMON SHARE $ 0.66 $ 0.64 $ 1.62 $ 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
FOR THE NINE MONTHS PERIOD ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
1999 1998
--------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 5,284 $ 4,298
Adjustments to reconcile net earnings to net cash used in operating activities
Increase in accrued interest receivable (26) (1,118)
Decrease (increase) in payments in process 2,618 (2,861)
(Decrease) increase in liabilities due parent (64) 644
Increase in liabilities 7 38
--------------------- --------------------
Net cash provided by operating activities 7,819 1,001
INVESTING ACTIVITIES
Purchase of mortgage loans (25,009) (132,314)
Principal repayments received on mortgage loans 28,081 16,085
--------------------- --------------------
Net cash used in investing activities 3,072 (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 (1,618) (1,371)
Dividends paid to preferred stockholders (3,666) (2,927)
--------------------- --------------------
Net cash (used in) provided by financing activities (5,284) 125,029
--------------------- --------------------
Net increase in cash and cash equivalents 5,607 9,803
Beginning cash and cash equivalents 6,989 -
--------------------- --------------------
Ending cash and cash equivalents $ 12,596 $ 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 primary business of the Company is to acquire, hold, and
manage residential mortgage loans that will generate income that can be
distributed to stockholders.
NOTE 2 - FORMATION OF THE COMPANY
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 from the Bank.
NOTE 3. - 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, 1999.
6
<PAGE> 7
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 income that can be distributed to stockholders. The
Company intends to acquire all its mortgage loans from the Bank.
RESULTS OF OPERATIONS
The Company reported net earnings for the quarter ended September 30, 1999 of
$1,880,000. Interest income from loans was $1,974,000, which was offset by
$3,000 in outside director's fees, $28,000 in administrative expenses, and
$63,000 in advisory fees. During the quarter ended September 30, 1998 the
Company reported net earnings of approximately $1,865,000. Interest income from
loans for the quarter was $1,951,000, which was offset by $57,000 in
administrative expenses, and $62,000 in advisory fees.
The Company reported net earnings of $5.3 million for the nine months ended
September 30, 1999. Interest income from loans was $5.6 million for the nine
months ended September 30, 1999, which was offset by $111,000 in administrative
expenses and $187,000 in advisory fees. For the period ended September 30, 1998,
the Company reported $4.3 in net earnings. Interest income from loans was $4.5
million, which was offset by $57,000 in administrative expenses, $5,000 in
outside directors fees, and $150,000 in advisory fees.
The Company reported net earnings per common share of $0.66 and $0.64 for the
quarters ended September 30, 1999 and 1998, respectively. For the nine months
ended September 30, 1999 and the period ended September 30, 1998, the Company
reported net earnings per common share of $1.62 and $1.77, respectively.
During the quarters ended September 30, 1999 and 1998, the Company declared and
paid $1,222,000 in preferred stock dividends. For the nine months ended
September 30, 1999 and the period ended September 30, 1998, the Company declared
and paid $3,666,000 and $2,927,000, respectively, in preferred stock dividends.
The Company declared a common stock dividend of $658,000 and $643,000 for the
quarters ended September 30, 1999 and 1998, respectively. For the nine months
ended September 30, 1999 and the period ended September 30, 1998, the Company
declared common stock dividends of $1,618,000 and $1,371,000, respectively.
MORTGAGE LOANS
The Company's residential mortgage loans ("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 the portfolio which was 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,
1999.
<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 126 $ 32,150,000 $ 255,162 6.726% 360 339 28.7
5 year ARM 97 25,662,000 264,556 6.861 360 341 22.9
7 year ARM 76 17,655,000 232,302 6.937 360 342 15.7
15 year Fixed 150 13,828,000 92,185 6.504 180 162 12.3
30 year Fixed 179 22,900,000 127,934 6.930 360 341 20.4
---------------------------------------------------------------------------------------------------------
Total 628 $ 112,195,000 $ 178,655 6.804% 338 319 100.0%
==========================================================================================================
</TABLE>
7
<PAGE> 8
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 operational concerns involve the maintainenance of the current
Mortgage Loan portfolio size through the acquisition of additional Mortgage
Loans as Mortgage Loans currently in the portfolio mature, or prepay. Mortgage
Loans are acquired from the Bank at the estimated fair value. The Company must
also pay cash dividends to the holders of the Series A Preferred Shares, while
distributing the remainder of net earnings to the common stockholders.
During June 1999, the Company purchased from the Bank $25.1 million in principal
balance of residential mortgage loans at a purchase price of $25.3 million,
their estimated fair value.
For the quarter and nine months ended September 30, 1999, the Company received
principal repayments from mortgage loans totaling approximately $7.4 million and
$28.1 million, respectively.
The Company does not anticipate any material capital expenditures. The Company
will acquire additional residential mortgage loans as required from the Bank.
At September 30, 1999 the Company had a liquidity coverage ratio (Projected
interest income divided by REIT dividends plus Advisory fees plus Servicing Fees
) of 1.58 versus the liquidity coverage ratio at December 31, 1998 of 1.53 and
at inception of 1.67.
OTHER MATTERS
As of September 30, 1999, 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 1999 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.
8
<PAGE> 9
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
9
<PAGE> 10
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 12, 1999 /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)
10
<PAGE> 11
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Computation of Net Earnings per Share
27 Financial Data Schedule
</TABLE>
<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 For the For the For the
Quarter Quarter Nine Months Period
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Earnings $ 1,880 $ 1,865 $ 5,284 $ 4,298
Less: preferred stock dividends 1,222 1,222 3,666 2,927
----------------- --------------- ---------------- --------------
Net income available to common stock $ 658 $ 643 $ 1,618 $ 1,371
================= =============== ================ ==============
Average common shares outstanding 1,000,000 1,000,000 1,000,000 774,858
Net earnings per share - basic $ 0.66 $ 0.64 $ 1.62 $ 1.77
Net earnings per share - diluted $ 0.66 $ 0.64 $ 1.62 $ 1.77
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001051818
<NAME> FLAGSTAR CAPITAL CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,596
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 113,603
<ALLOWANCE> 0
<TOTAL-ASSETS> 130,017
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 690
<LONG-TERM> 0
0
57,500
<COMMON> 1,000
<OTHER-SE> 70,827
<TOTAL-LIABILITIES-AND-EQUITY> 130,017
<INTEREST-LOAN> 1,974
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,974
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 94
<INCOME-PRETAX> 1,880
<INCOME-PRE-EXTRAORDINARY> 1,880
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,880
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 6.804
<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>
