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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO.: 0-22353
FLAGSTAR CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code:
(248) 338-7700
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. X
As of March 17, 2000, 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.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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TABLE OF CONTENTS
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<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 4
Item 3. Legal Proceedings........................................... 4
Item 4. Submission of Matters to a Vote of Security Holders......... 4
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters......................................... 4
Item 6. Selected Financial Data..................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 7a. Market Risk................................................. 10
Item 8. Financial Statements and Supplementary Data................. 11
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 19
PART III
Item 10. Directors and Executive Officer of the Registrant........... 20
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 21
Item 13. Certain Relationships and Related Transactions.............. 22
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 23
Signatures.................................................. 24
</TABLE>
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or stockholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward looking statement" within the meaning of the
Private Securities Litigation Reform Act of 1996.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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PART I
ITEM 1. BUSINESS
GENERAL
Flagstar Capital Corporation (the "Company") was incorporated in Michigan
in June 1995 and remained dormant until reorganized in December 1997. The
Company was formed by Flagstar Bank (the "Bank"), a federally chartered savings
bank, to provide the Bank and its parent holding company and sole stockholder,
Flagstar Bancorp, Inc. ("Flagstar"), with a means of raising capital for bank
regulatory purposes in a cost-effective manner.
The principal business of the Company is to acquire and hold residential
mortgage loans ("Mortgage Loans") that will generate net income for distribution
to stockholders. The Company intends to acquire all its Mortgage Loans from the
Bank, consisting of whole loans secured by first mortgages on single-family
residential real estate properties. The residential mortgage loans consist of
Adjustable Rate Mortgages ("ARMs") and Fixed Rate Mortgages ("FRM's").
On February 24, 1998, the Company offered to the public and sold 2,000,000
shares of the Company's 8.50%, noncumulative, Series A Preferred Shares, $25 par
value per share, providing gross proceeds totaling $50.0 million (the "Series A
Preferred Shares"), and sold to the Bank, 499,900 shares of the Company's common
stock, $1.00 par value providing proceeds totaling $65.5 million (the "Common
Stock").
On May 24, 1998, in response to the underwriters exercising their
over-allotment option, the Company issued an additional 300,000 shares of its
Series A Preferred Shares, to the public and 500,000 shares of Common Stock to
the Bank, providing additional gross proceeds totaling $17.0 million. The Bank
owns all shares of common stock. The Series A Preferred Shares are traded on the
Nasdaq Stock Market, under the symbol "FLGSP".
The Company used the net proceeds raised from the initial public offering
of the Series A Preferred Shares and the sale of the Common Stock to the Bank to
purchase from the Bank the Company's initial portfolio of $113.5 million of
Mortgage Loans ("Initial Portfolio"). The Company's Initial Portfolio consisted
of ARMs and FRM's. Reinvestments made in Mortgage Loans have been and will
continue to be made with a composition of Mortgage Loans that will allow the
Company to maintain the original composition of approximately 70% ARMs and 30%
FRM's. Mortgage Loans are purchased from the Bank on a fair value basis.
In order to preserve its status as a real estate investment trust ("REIT")
under the Internal Revenue Service Code ("Code"), the Company must distribute
annually at least 95% of its "REIT taxable income" (excluding capital gains) to
stockholders and meet certain capital ownership and administrative tests as
defined by the Code. The Company must also annually satisfy three gross income
requirements. First, at least 75% of the Company's gross income for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property or from certain types of temporary
investments. Second, at least 95% of the Company's gross income for each taxable
year must be derived from the above described real property investments and from
dividends, interest, and gain from the sale or other disposition of stock or
securities and certain other types of gross income. Third, short-term gains from
the sale or other disposition of stock or securities, and gains on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) from the date of
acquisition must represent less than 30% of the Company's gross income for each
taxable year.
The Company must also satisfy three tests relating to the nature of its
assets at the close of each quarter of its taxable year. First, real estate
assets must represent at least 75% of the value of the Company's total assets.
Second, not more than 25% of the Company's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by the Company may not exceed 5% of the value of the Company's total assets and
the Company may not own more than 10% of any one issuer's outstanding voting
securities.
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The Company does not anticipate that it will engage in the business of
originating Mortgage Loans and does not expect to compete with mortgage conduit
programs, investment banking firms, savings and loan associations, banks, thrift
and loan associations, finance companies, mortgage bankers or insurance
companies in acquiring its Mortgage Loans. As noted above, the Company has
purchased all of its Mortgage Loans from the Bank and intends on making all of
its future purchases from the Bank.
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 Advisory Agreement. The Advisory
Agreement has an initial term of five years which commenced on February 24, 1998
and will automatically renew for additional five year periods, unless the
Company delivers prior notice to the Advisor as defined in the Advisory
Agreement.
The Company also entered into a Servicing Agreement (the "Servicing
Agreement") with the Bank for the servicing of the Mortgage Loans. Pursuant to
the Servicing Agreement, the Bank services the Mortgage Loans held by the
Company, in accordance with normal industry practice. The Servicing Agreement
can be terminated without cause upon a thirty-day advance notice and payment of
a termination fee equal to 2% of the aggregate outstanding principal amount of
the loans then serviced under the Servicing Agreement. The servicing fee is
0.375% per annum of the outstanding principal balance of the Mortgage Loans.
The Company operations are conducted in a manner that will not subject it
to regulation under the Investment Company Act of 1940. The Company may, under
certain circumstances, purchase the Series A Preferred Shares and other shares
of its capital stock in the open market or otherwise, provided, however, that
the Company will not redeem or repurchase any shares of its Common Stock for so
long as any Series A Preferred Shares are outstanding without the approval of a
majority of the Independent Directors. The Company has no present intention of
repurchasing any shares of its capital stock, and any such action would be taken
only in conformity with applicable federal and state laws and the regulations
and the requirements for qualifying as a REIT.
The Company has no foreign operations.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 2600
Telegraph Road, Bloomfield Hills, Michigan 48302 and its telephone number is
(248) 338- 7700.
ITEM 3. LEGAL PROCEEDINGS
The Company is not the subject to any litigation. The Company is not
currently involved in or, to the Company's knowledge, currently threatened with
any litigation with respect to the Mortgage Loans included in the portfolio.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is authorized to issue up to 1,000,000 shares of Common Stock
and 2,300,000 shares of Preferred Stock, $25 par value per share ("Preferred
Stock"). All of the 1,000,000 shares of Common Stock and all of the 2,300,000
shares of Preferred Stock have been issued. The Bank owns 100% of the Company's
1,000,000 shares of Common Stock outstanding at December 31, 1999 and,
accordingly, there is no trading market for the Company's Common Stock. In
addition, the Bank intends that, as long as any Series A Preferred Shares are
outstanding, it will maintain ownership of the outstanding Common Stock of the
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Company. All voting rights are vested in the Common Stock. The holder of Common
Stock is entitled to one vote per share. Holders of Common Stock are entitled to
receive dividends when, and if declared by the Board of Directors of the Company
out of funds legally available. No dividends or other distributions may be made
with respect to the Common Stock as long as any shares of Preferred Stock are
outstanding and the full dividends on those shares have been paid. The Company
must distribute annually at least 95% of its annual "REIT taxable income" to
stockholders.
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been set aside for the
holders of Preferred Stock the full preferential amounts to which such holders
are entitled, the holders of Common Stock will be entitled to any assets
remaining after the payment of all debts and liabilities.
RESTRICTIONS ON OWNERSHIP AND TRANSFER:
The Company's Certificate of Incorporation contains certain restrictions on
the number of shares of Common Stock and Preferred Stock that individual
stockholders may own. For the Company to qualify as a REIT under the Code, no
more than 50% in number or value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals during the last
half of a taxable year or during a proportionate part of a shorter taxable year
(the "Five or Fewer Test"). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year (the "One Hundred
Person Test"). The ownership by the Bank of 100% of the shares of Common Stock
of the REIT will not adversely affect the Company's REIT qualification because
each stockholder of Flagstar Bancorp, Inc. (the sole stockholder of the Bank)
counts as a separate beneficial owner for purposes of the Five or Fewer Test and
the capital stock of Flagstar Bancorp, Inc. is widely held. Further, the
Certificate of Incorporation of the Company contains restrictions on the
acquisition of Preferred Stock intended to ensure compliance with the One
Hundred Persons Test. Such provisions include a restriction that if any transfer
of shares of capital stock of the Company would cause the Company to be
beneficially owned by fewer than 100 persons, such transfer shall be null and
void and the intended transferee will acquire no rights to the stock.
COMMON STOCK
There is no established public trading market in the Common Stock. As of
March 17, 2000, there were 1,000,000 issued and outstanding shares of Common
Stock held by one stockholder, the Bank. The following table reflects the
distributions paid or payable by the Company on the Common Stock for each
quarter during the year ended December 31, 1999 and the period ended December
31, 1998.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED: 1999 1998
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<S> <C> <C>
March 31................................................. $556,060 $199,538
June 30.................................................. $403,897 $527,914
September 30............................................. $657,978 $644,126
December 31.............................................. $609,887 $722,232
</TABLE>
PREFERRED STOCK
The Series A Preferred Shares are listed on the Nasdaq Stock Market, under
the trading symbol "FLGSP". As of March 17, 2000, there were 2,300,000 issued
and outstanding Series A Preferred Shares held by approximately 135
shareholders. The following table reflects the respective high and low sales
prices for the Series A Preferred Shares for each quarter of 1999 and 1998, from
February 20, 1998, the date upon which
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trading of such shares commenced, through December 31, 1999. The table also
indicates the distributions paid by the Company for each quarter.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH PRICE LOW PRICE CLOSING PRICE DISTRIBUTION
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<S> <C> <C> <C> <C>
December 31, 1999................................ $23.500 $18.250 $18.750 $1,221,875
September 30, 1999............................... $24.875 $23.500 $23.500 $1,221,875
June 30, 1999.................................... $25.000 $24.188 $24.688 $1,221,875
March 31, 1999................................... $24.500 $23.688 $24.125 $1,221,875
December 31, 1998................................ $25.250 $23.625 $24.000 $1,221,875
September 30, 1998............................... $25.125 $24.000 $24.000 $1,221,875
June 30, 1998.................................... $25.313 $24.625 $24.938 $1,221,875
March 31, 1998................................... $25.500 $24.750 $25.125 $ 483,000
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE
PERIOD FROM
INCEPTION OF
OPERATIONS
AT OR FOR THE (FEBRUARY 24,
YEAR ENDED 1998) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
SUMMARY OF STATEMENT OF EARNINGS:
Net interest income....................................... $ 7,258 $ 6,564
Net earnings.............................................. $ 6,865 $ 6,242
Net earnings available to common stock.................... $ 1,978 $ 2,093
Net earnings per common share............................. $ 1.98 $ 2.50
SUMMARY OF STATEMENT OF FINANCIAL CONDITION:
Mortgage loans, net....................................... $118,255 $116,675
Total assets.............................................. $129,722 $130,074
Total stockholder's equity................................ $129,077 $129,327
OTHER DATA:
Dividends paid on preferred stock......................... $ 4,887 $ 4,149
Shares of preferred stock outstanding..................... 2,300 2,300
Shares of common stock outstanding........................ 1,000 1,000
Average yield on mortgage loans........................... 6.784% 6.815%
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Flagstar Capital Corporation was formed by Flagstar Bank, a federally
chartered savings bank, to provide the Bank and its parent holding company and
sole stockholder, Flagstar Bancorp, Inc., with a means of raising capital for
bank regulatory purposes in a cost-effective manner.
The principal business of the Company is to acquire and hold residential
mortgage loans that will generate net income for distribution to stockholders.
The Company intends to acquire all its Mortgage Loans from the Bank, consisting
of whole loans secured by first mortgages on single-family residential real
estate properties. The residential mortgage loans consist of Adjustable Rate
Mortgages ("ARMs"), and Fixed Rate Mortgages ("FRM's").
On February 24, 1998, the Company sold in a public offering 2,000,000
shares of the Company's 8.50%, noncumulative, Series A Preferred Shares, $25 par
value per share, providing gross proceeds totaling $50.0 million (the "Series A
Preferred Shares"), and sold to the Bank, 499,900 shares of the Company's common
stock, $1.00 par value providing proceeds totaling $65.5 million (the "Common
Stock").
On May 24, 1998, in response to the underwriters exercising their
over-allotment option, the Company issued an additional 300,000 shares of its
Series A Preferred Shares, to the public and 500,000 shares of Common Stock to
the Bank, providing additional gross proceeds totaling $17.0 million, gross. The
Bank owns all shares of common stock. The Series A Preferred Shares are traded
on the Nasdaq Stock Market, under the symbol "FLGSP".
RESULTS OF OPERATIONS
The Company reported net earnings for the year ended December 31, 1999 of
$6.9 million. Interest income from loans was $7.5 million, which was offset by
$250,000 in provision for loan losses, $250,000 in advisory fees, $3,000 in
outside directors fees, and $139,000 in other administrative expenses. The
Company reported earnings per common share of $1.98 for the period ended
December 31, 1999. In comparison, net earnings for the period ended December 31,
1998 totaled $6.2 million. Interest income from loans was $6.6 million, which
was offset by approximately $213,000 in advisory fees, $6,000 in outside
directors fees, and $104,000 in other administrative expenses. The Company
reported earnings per common share of $2.50 for the period ended December 31,
1998.
The Company declared and paid $4,887,000 and $4,149,000 in preferred stock
dividends for the year ended December 31, 1999 and for the period ended December
31, 1998, respectively.
The Company declared and paid or accrued common stock distributions of
$2,228,000 for the year ended December 31, 1999 and $2,093,000 for the period
ended December 31, 1998.
MORTGAGE LOANS
As of December 31, 1999, the Company owned Mortgage Loans with a principal
balance of $116,985,000. This amount represents the principal amount of mortgage
loans purchased with the Initial Portfolio remaining plus the principal amount
of mortgage loans purchased during the period beginning at February 24, 1998 to
December 31, 1999. Purchases made during the year ending December 31, 1999 and
for the period ending December 31, 1998 were made to replace principal
amortizations and payoffs in the portfolio. All Mortgage Loans were purchased
from the Bank. In conjunction with the purchase of these Mortgage Loans the
Company paid a premium amount equal to $277,000 and $1.3 million for the year
ended December 31, 1999 and the period ended December 31, 1998, respectively.
This premium amount is recorded by the Company as an adjustment to the basis of
the Mortgage Loans.
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The following table reflects the composition of Mortgage Loans at December
31, 1999:
<TABLE>
<CAPTION>
PRINCIPAL AVERAGE INTEREST
PRODUCT TYPE LOANS BALANCE BALANCE RATE WAM WARM % OF TOTAL
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<S> <C> <C> <C> <C> <C> <C> <C>
3 year ARM........................ 136 $ 36,482,000 $268,254 6.685% 360 339 31.2%
5 year ARM........................ 90 23,861,000 265,121 6.857 360 338 20.4
7 year ARM........................ 86 21,293,000 247,590 6.892 360 340 18.2
15 year Fixed...................... 147 13,292,000 90,422 6.507 180 159 11.3
30 year Fixed...................... 173 22,057,000 127,495 6.932 360 338 18.9
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Total............................ 632 $116,985,000 $185,103 6.784% 340 318 100.0%
==========================================================================
</TABLE>
The following table reflects the composition of Mortgage Loans at December
31, 1998:
<TABLE>
<CAPTION>
PRINCIPAL AVERAGE INTEREST
PRODUCT TYPE LOANS BALANCE BALANCE RATE WAM WARM % OF TOTAL
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<S> <C> <C> <C> <C> <C> <C> <C>
3 year ARM........................ 121 $ 33,634,000 $277,969 6.723% 358 345 29.1%
5 year ARM........................ 84 23,169,000 275,825 6.897 360 348 20.1
7 year ARM........................ 85 20,416,000 240,188 6.937 360 350 17.7
15 year Fixed...................... 153 14,533,000 94,989 6.550 180 170 12.6
30 year Fixed...................... 192 23,628,000 123,060 6.898 360 350 20.5
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Total............................ 635 $115,380,000 $181,702 6.815% 337 325 100.0%
==========================================================================
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The Company has recorded a $250,000 allowance
for loan losses for the year ended December 31, 1999. Management has based the
allowance on assessments of relevant factors including the types and amount of
delinquent loans, historical and anticipated loss experience on such types of
loans experienced by the Bank, and current and projected economic conditions.
Management is of the opinion that the allowance for loan losses is adequate to
meet potential losses in the portfolio. The Company's non-performing loans were
limited to one mortgage loan, for $245,689, or 0.21% of the portfolio, which was
30 days delinquent at December 31, 1999.
The Company did not have an allowance for loan losses at December 31, 1998
The Company's non-performing loans were limited to three mortgage loans,
totaling $342,969, or 0.30% of the portfolio, that were 30 days delinquent. The
Company has certain representations and warranties from the Bank, which are
related to the performance of the Mortgage Loans.
The Bank, in its role as Advisor, has implemented comprehensive internal
asset review systems to provide for early detection of problem assets. Although
this system will not eliminate future losses due to unanticipated declines in
the real estate market or economic downturns, it should provide for timely
identification of any losses created from problem loans.
<TABLE>
<CAPTION>
ACTIVITY WITHIN THE ALLOWANCE FOR LOAN LOSSES
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<S> <C>
Balance, January 1, 1999................... $ 0
Provision for loan losses................ 250,000
Charge-offs, net of recoveries........... --
--------
Balance, December 31, 1999................. $250,000
========
</TABLE>
INTEREST RATE RISK
The Company's income consists primarily of interest payments on Mortgage
Loans. Currently, the Company does not use any derivative products to manage
interest rate risk. If there is a decline in interest rates (as measured by the
indices upon which the interest rates of the Adjustable Rate Mortgage Loans are
based), then the Company will experience a decrease in income available to be
distributed to its shareholders. There can be no assurance that an interest rate
environment in which there is a significant decline in interest rates, over an
extended period of time, would not adversely affect the Company's ability to pay
dividends on the Series A Preferred Shares.
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SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk arises when a number of customers engage in
similar business activities, or activities in the same geographical region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Concentration of credit risk indicates the relative sensitivity of
the Company's performance to both positive and negative developments affecting a
particular industry. The geographic concentrations within the Mortgage Loans
directly affects the overall credit risk of the Company.
The following table shows the Mortgage Loans by geographic area as of
December 31, 1999:
<TABLE>
<CAPTION>
PRINCIPAL PERCENT
LOCATION BALANCE OF TOTAL
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<S> <C> <C>
Michigan................................................ $ 25,955,000 22.2%
California.............................................. 24,632,000 21.1
Colorado................................................ 9,671,000 8.3
Washington.............................................. 8,507,000 7.3
New York................................................ 4,755,000 4.1
Texas................................................... 3,953,000 3.4
Other................................................... 39,512,000 33.6*
------------------------
Total................................................. $116,985,000 100.0%
========================
</TABLE>
- ---------------
* No other state has more than 3% of the total Mortgage Loan portfolio
Approximately 43.3% of the Company's total Mortgage Loans are secured by
residential real estate properties located in California and Michigan.
Consequently, a high concentration of residential mortgage loans in these two
states, may subject the Company to a greater risk of default in the event of
adverse economic, political or business developments and natural hazards in
California and Michigan that may affect the ability of residential property
owners in California and Michigan to make payments of principal and interest on
the underlying mortgages.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management 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 REIT Qualification.
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 Shares issued. The Company does not have
and does not anticipate having any material capital expenditures.
To the extent that the Board of Directors determines that additional
funding is required, the Company may raise such funds through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Code pertaining to a REIT), or a combination of these methods.
The Company, however, may not, without the approval of a majority of the
Independent Directors, incur debt in excess of 20% of the aggregate amount of
the net proceeds received from the sale of the Series A Preferred Shares and
Common Stock of the Company. This limitation includes intercompany advances made
by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without the consent of holders of at least 66 2/3% of
the shares of Preferred Stock outstanding at that time. The Company also may not
issue additional shares of Preferred Stock on a parity with the Series A
Preferred Shares without the approval of a majority of the Company's Independent
Directors.
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MARKET RISK
The Company considers that its primary business objective is to ensure the
availability of sufficient cash flows to meet the obligations mandated by the
Series A Preferred Shares. In managing its investments, the Company accepts a
certain credit risk posture and assumes some interest rate risk.
Interest rate risk generally refers to the potential volatility in net
interest income resulting from changes in interest rates. The Company's risk
occurs when it must replace amortized loans with current production mortgages.
These replacement loans are chosen in a manner to maintain an interest rate risk
posture similar to the Initial Portfolio. The Company must monitor the ratio of
fixed costs (the Series A Preferred Shares' dividends, advisory fees, and
servicing costs) to the interest income potential of the Mortgage Loans. When,
in management's opinion, the coverage ratio is at risk of being depleted, the
Company must look to its parent company, the Bank, for support or utilize the
investment powers of the Company.
The Company will record higher levels of interest income in a rising
interest rate environment and will experience declining interest income during
periods of falling interest rates. This happens because the Company's assets
reprice while the Series A Preferred Shares have a fixed cost of 8.5%.
At December 31, 1999 the Company had a coverage ratio (Projected interest
income divided by REIT dividends plus Advisory fees plus Servicing Fees) of 1.54
compared to 1.53 at December 31, 1998 and 1.67 at inception.
REIT QUALIFICATION
As of December 31, 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
provisions of the Code. The Company calculates:
- its Qualified REIT Assets, as defined in the Code, to be 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.
- that 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 revenues were 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.
10
<PAGE> 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Flagstar Capital Corporation
We have audited the accompanying balance sheets of Flagstar Capital
Corporation as of December 31, 1999 and 1998, and the related statements of
earnings, stockholders' equity and cash flows for the year ended December 31,
1999 and for the period from the inception of operations (February 24, 1998)
through December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flagstar Capital Corporation
as of December 31, 1999 and December 31, 1998, and the results of its operations
and its cash flows for the year ended December 31, 1999 and for the period from
the inception of operations (February 24, 1998) through December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Detroit, Michigan
January 28, 2000
11
<PAGE> 12
FLAGSTAR CAPITAL CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash........................................................ $ 7,456 $ 6,989
Mortgage loans............................................ 118,505 116,675
Less: allowance for loan losses........................... 250 --
-------- --------
Net mortgage loans.......................................... 118,255 116,675
Accrued interest receivable................................. 1,400 1,307
Loan payments in process -- due from parent................. 2,611 5,103
-------- --------
Total assets........................................... $129,722 $130,074
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to parent............................................... $ 610 $ 722
Other liabilities........................................... 35 25
-------- --------
Total liabilities...................................... 645 747
STOCKHOLDERS' EQUITY
Series A preferred stock -- $25.00 liquidation value,
2,300,000 shares authorized and issued at December 31,
1999 and 1998............................................. 57,500 57,500
Common stock -- $1.00 par value, 1,000,000 shares authorized
and issued at December 31, 1999 and 1998.................. 1,000 1,000
Additional paid in capital.................................. 70,577 70,827
Retained earnings........................................... -- --
-------- --------
Total stockholders' equity............................. 129,077 129,327
-------- --------
Total liabilities and stockholders' equity............. $129,722 $130,074
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE> 13
FLAGSTAR CAPITAL CORPORATION
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM THE INCEPTION
OF OPERATIONS
(FEBRUARY 24,
FOR THE YEAR ENDED 1998) THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
<S> <C> <C>
INTEREST INCOME
Interest on loans......................................... $7,508 $6,564
Less: provision for loan losses........................ 250 --
------ ------
Net interest income....................................... 7,258 6,564
EXPENSES
Advisory fee expense -- paid to parent.................... 250 213
Other general and administrative expenses................. 143 109
------ ------
Total expenses............................................ 393 322
------ ------
NET EARNINGS................................................ $6,865 $6,242
PREFERRED STOCK DIVIDENDS................................... 4,887 4,149
------ ------
NET EARNINGS AVAILABLE TO COMMON SHARES..................... $1,978 $2,093
====== ======
EARNINGS PER COMMON SHARE................................... $ 1.98 $ 2.50
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE> 14
FLAGSTAR CAPITAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A ADDITIONAL TOTAL
PREFERRED COMMON PAID IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at inception of operations
(February 24, 1998)....................... $ -- $ -- $ -- $ -- $ --
Initial public offering of Series A
Preferred Stock........................... 57,500 57,500
Issuance of common stock.................... 1,000 70,827 71,827
Net earnings................................ 6,242 6,242
Dividends paid on the 8.50% Non Cumulative
Series A Preferred Shares................. (4,149) (4,149)
Dividend paid or payable to common
stockholder ($2.50 per share)............. (2,093) (2,093)
------- ------ ------- ------- --------
Balance at December 31, 1998................ 57,500 1,000 70,827 -- 129,327
Net earnings................................ 6,865 6,865
Dividends paid on the 8.50% Non Cumulative
Series A Preferred Shares................. (4,887) (4,887)
Distributions paid or payable to common
Stockholder ($2.23 per share)............. (250) (1,978) (2,228)
------- ------ ------- ------- --------
Balance at December 31, 1999................ $57,500 $1,000 $70,577 $ -- $129,077
======= ====== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 15
FLAGSTAR CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
THE INCEPTION OF
OPERATIONS
(FEBRUARY 24, 1998)
FOR THE YEAR ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings................................................ $ 6,865 $ 6,242
Adjustments to reconcile net earnings to net cash provided
by operating activities
Provision for loan losses................................. 250 --
Increase in accrued interest receivable................... (93) (1,307)
Increase in other liabilities............................. 10 25
-------- ---------
Net cash provided by operating activities.............. 7,032 4,960
INVESTING ACTIVITIES
Purchase of mortgage loans................................ (35,530) (147,233)
Principal repayments received on mortgage loans........... 36,192 25,455
-------- ---------
Net cash provided by (used in) investing activities.... 662 (121,778)
FINANCING ACTIVITIES
Sale of common stock...................................... -- 74,954
Sale of preferred stock................................... -- 57,500
Stock issuance costs paid................................. -- (3,127)
Dividends paid to common stockholder...................... (2,340) (1,371)
Dividends paid to preferred stockholders.................. (4,887) (4,149)
-------- ---------
Net cash (used in) provided by financing activities.... (7,227) 123,807
-------- ---------
Net increase in cash................................... 467 6,989
Beginning cash......................................... 6,989 --
-------- ---------
Ending cash............................................ $ 7,456 $ 6,989
======== =========
</TABLE>
The accompanying notes are an integral part of these statements
15
<PAGE> 16
FLAGSTAR CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS
Flagstar Capital Corporation (the "Company"), is a wholly-owned operating
subsidiary of Flagstar Bank, FSB (the "Bank") a federally chartered stock
savings bank, which itself is a wholly-owned subsidiary of Flagstar Bancorp, Inc
("Flagstar") a financial services holding company. The Company is a Michigan
corporation, which commenced operations on February 24, 1998. The Company's
primary business consists of acquiring, holding, and managing residential
mortgage loans.
On February 24, 1998, the Company offered to the public and sold 2,000,000
shares of the Company's 8.50% noncumulative Series A, $25 liquidation value per
share, preferred stock. The sale provided gross proceeds totaling $50.0 million
(the "Series A Preferred Shares"). The Company also sold to the Bank, 499,900
shares of the Company's common stock (the "Common Stock"), $1.00 par value,
providing proceeds totaling $65.5 million
On May 24, 1998, in response to the underwriters exercising their
over-allotment option, the Company issued an additional 300,000 shares of its
Series A Preferred Shares, to the public and 500,000 shares of Common Stock to
the Bank, providing additional gross proceeds of $17.0 million. The Bank holds
all of the Common Stock. The Series A Preferred Shares are traded on the Nasdaq
Stock Market, under the symbol as "FLGSP".
The Company used the net proceeds raised from the initial public offering
of the Series A Preferred Shares and the sale of the Common Stock to the Bank to
purchase, from the Bank, the Company's Initial Portfolio of $113.5 million of
residential mortgage loans ("Mortgage Loans"), at their estimated fair values.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage loans:
Mortgage loans are carried at the principal amount outstanding, net of any
purchase discount and premium. The amortization of premiums or discounts is
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.
The 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 will apply
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
16
<PAGE> 17
FLAGSTAR CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
formal foreclosure proceedings have taken place. The Company did not have any
non-accrual loans classified as impaired.
The 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 loan losses:
An allowance for loan losses is provided when a risk of loss is inherent in
the credit extension process. An allowance is a general allowance and is based
on a periodic review and analysis of the Mortgage Loans. The periodic analysis
will include 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, results of periodic credit reviews of the
portfolio, and any guarantees provided by the seller of the loans. The allowance
for loan 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. As of December 31, 1999, the Company had recorded a
$250,000 allowance for loan losses. No allowance was recorded as of December 31,
1998.
Cash:
The Company considers all short-term, highly liquid investments that are
both readily convertible to cash and have a maturity of generally three months
or less at the time of purchase to be cash equivalents. At December 31, 1999 and
1998, the Company's cash was held in the custody of the Bank.
Offering costs:
Costs incurred in connection with the raising of capital through the sale
of preferred stock were recorded 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 are payable 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, and if declared by the
Board of Directors out of funds available after the preferred dividends have
been paid.
Earnings per common share:
Earnings per share are computed by dividing net income after preferred
dividends by the weighted average number of commonshares outstanding. There are
no dilutive securities, which would require a diluted earnings per share
computation. The Company had 1,000,000 weighted average shares outstanding
during 1999 and 837,902 weighted average share outstanding during 1998.
17
<PAGE> 18
FLAGSTAR CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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 "Code"), 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 Code. 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.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently issued accounting standards
In June 1997, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended which requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The statement is
effective January 1, 2001 for the Company; however, management does not expect
this pronouncement to have an impact on the Company's financial position.
NOTE 3 -- MORTGAGE LOANS
The following reflects the composition of Mortgage Loans at December 31,:
<TABLE>
<CAPTION>
1999 1999 1998 1998
PRODUCT TYPE BALANCE % OF TOTAL BALANCE % OF TOTAL
- ------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
3 year ARM.................... $ 36,482,000 31.2% $ 33,634,000 29.1%
5 year ARM.................... 23,861,000 20.4 23,169,000 20.1
7 year ARM.................... 21,293,000 18.2 20,416,000 17.7
-------------------------- --------------------------
Subtotal ARM................. 81,636,000 69.8 77,219,000 66.9
-------------------------- --------------------------
15 year Fixed.................. 13,292,000 11.3 14,533,000 12.6
30 year Fixed.................. 22,057,000 18.9 23,628,000 20.5
-------------------------- --------------------------
Subtotal Fixed............... 35,349,000 30.2 38,161,000 33.1
-------------------------- --------------------------
Total Mortgage Loans...... $116,985,000 100.0% $115,380,000 100.0%
------------ ===== ------------ ==========
Unamortized premium.......... 1,520,000 1,295,000
Allowance for loan losses.... (250,000) --
------------ ------------
Total..................... $118,255,000 $116,675,000
============ ============
</TABLE>
Properties collateralizing Mortgage Loans are geographically disbursed
throughout the United States. As of December 31, 1999, approximately 22.2% of
these properties are located in Michigan (measured by principal balance), and
another 21.1% are located in the state of California. No other state contains
more than 10% of the properties collateralizing these loans.
18
<PAGE> 19
FLAGSTAR CAPITAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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. Advisory fees
incurred for the year ended December 31, 1999 and the period ended December 31,
1998 totaled approximately $250,000 and $213,000, respectively.
The Company also entered into a servicing agreement with the Bank for the
servicing of the Mortgage Loans. Pursuant to the servicing agreement, the Bank
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 Bank. The servicing fee is 0.375% of
the outstanding principal balance of the Mortgage Loans. The servicing fee is
withheld by the Bank and netted from interest income proceeds received on 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 an 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.
Mortgage loans
The fair value of the Company's residential mortgage loans is estimated by
comparing values for similar residential mortgages sold in the secondary market.
At December 31, 1999 and 1998 the estimated fair value of the Mortgage
Loans was $115,700,000 and $118,000,000, respectively. Both estimated fair
values 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, loan payments in process-due
from parent, due to parent, and other liabilities are considered to approximate
their respective carrying value due to their short-term nature and negligible
credit losses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The persons who are directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE POSITION(S) HELD WITH COMPANY SINCE EXPIRES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas J. Hammond.................... 58 Chairman of the Board and Chief 1997 2002
Executive Officer
Mark T. Hammond...................... 34 Vice Chairman of the Board and President 1997 2001
Michael W. Carrie.................... 45 Director, Executive Vice President and 1997 2000
Chief Financial Officer
Joan H. Anderson..................... 49 Director and Executive Vice President 1997 2002
Mary Kay McGuire..................... 42 Director and Secretary 1997 2000
</TABLE>
The independent directors of the Company are as follows:
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE POSITION(S) HELD WITH COMPANY SINCE EXPIRES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack Christenson..................... 58 Director 1997 2001
Robert W. De Witt.................... 58 Director 1997 2002
</TABLE>
The following sets forth the business experience and other information for
each of the current directors of the Company:
COMPANY DIRECTORS
THOMAS J. HAMMOND has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since its formation in 1997. Mr. Hammond
serves as Chairman of the Board of Directors and Chief Executive Officer of
Flagstar Bancorp, Inc, the parent company of Flagstar Bank. Mr. Hammond also
serves as the Chairman of the Board of Directors and Chief Executive Officer for
the Bank. Mr. Hammond founded the Bank in 1987.
MARK T. HAMMOND has been Vice-Chairman of the Board of Directors and
President of the Company since its formation in 1997. Mr. Hammond serves as
Vice-Chairman of the Board of Directors and President of Flagstar Bancorp, Inc,
the parent company of Flagstar Bank. Mr. Hammond also serves as Vice-Chairman of
the Board of Directors and President of the Bank. Mr. Hammond has been employed
by the Bank since 1987. Mr. Hammond is the son of Thomas J. Hammond.
JOAN H. ANDERSON has been a Director and an Executive Vice President since
the Company's formation in 1997. Ms. Anderson serves as a Director of Flagstar
Bancorp, Inc, the parent company of Flagstar Bank. She is also an Executive
Vice-President of the Bank and Flagstar. Mrs. Anderson has been employed by the
Bank since 1987.
MICHAEL W. CARRIE has served as Director, Executive Vice-President, and
Chief Financial Officer since the Company's formation in 1997. Mr. Carrie serves
as a Director of Flagstar Bancorp, Inc, the parent company of Flagstar Bank. Mr.
Carrie also serves as the Executive Vice-President and Chief Financial Officer
of Flagstar and the Bank. Mr. Carrie has been employed by the Bank since 1993.
MARY KAY MCGUIRE has served as Director and Secretary of the Company since
its formation in 1997. Ms. McGuire also serves as Director, Senior Vice
President, and Secretary of the Bank. She also serves as Senior Vice President
and Secretary of Flagstar Bancorp. Ms. McGuire has been employed by the Flagstar
Bank since 1987.
20
<PAGE> 21
INDEPENDENT DIRECTORS
The Company's Certificate of Designation establishing the Series A
Preferred Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company be approved by a majority of the
Independent Directors of the Company. Messrs. Christenson and DeWitt are the
Company's Independent Directors. For as long as there are only two Independent
Directors, any action that requires the approval of a majority of Independent
Directors must be approved by both Independent Directors. Additionally, the
audit committee is comprised of the independent directors.
If at any time the Company fails to declare and pay a quarterly dividend on
the Series A Preferred Shares, the number of directors constituting the Board of
Directors of the Company will be increased by two at the Company's next annual
meeting. The holders of Series A Preferred Shares, voting together with the
holders of any other outstanding series of Preferred Stock as a single class,
will be entitled to elect the two additional directors to serve on the Company's
Board of Directors. Any member of the Board of Directors elected by holders of
the Company's Preferred Stock will be deemed to be an Independent Director for
purposes of the actions requiring the approval of a majority of the Independent
Directors.
The following sets forth the business experience and other information for
each of the Independent Directors of the Company.
JACK CHRISTENSON has served as a Director since 1997. He is the President
and owner of Jack Christenson, Inc., a residential brokerage company that is
based in Troy, Michigan. Jack Christenson, Inc. was founded in 1982, and is one
of the largest brokerage companies in Michigan. Mr. Christenson has over 21
years experience in the real estate brokerage business and has been a member of
various real estate associations as well as a general partner of a former real
estate investment trust.
ROBERT W. DEWITT has served as a Director since 1997. He is the President
and owner of DeWitt Building Co., Inc., a residential and commercial building
company based in Lathrup Village, Michigan founded in 1979. Mr. DeWitt has over
31 years experience in the construction business and has held various positions
on local and state boards of construction associations. Mr. DeWitt was founder
and served as a director for four years of American Building Traders, Inc.,
which provides curriculum for job training utilizing adult education programs.
He has been the director, for the last five years, of Contract Assistance
Program, an entity co-funded by the State of Michigan, which trains business
contractors and minority contractors.
ITEM 11. EXECUTIVE COMPENSATION
The Company pays the Independent Directors of the Company fees for their
services as directors. The Independent Directors receive a fee of $1,200 for
attendance at each meeting of the Board of Directors and $100 for each telephone
meeting of the Board of Directors. However, multiple fees are not paid for two
or more meetings attended on the same day. The Company does not pay any
compensation to its officers or employees of the Bank, or to directors who are
not Independent Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
21
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below are certain transactions between the Company and its
directors, affiliates, a related parties. Management believes that the
transactions with related parties described herein have been conducted on
substantially the same terms as similar transactions with unrelated parties.
The Bank administers the day-to-day operations of the Company and is
entitled to receive fees in connection with the Advisory Agreement. Advisory
fees paid to parent for the year ended December 31, 1999 and period ended
December 31, 1998, totaled $250,000 and $213,000, respectively.
The Bank services the Mortgage Loans included in the Company's portfolio
and is entitled to receive fees in connection with the Servicing Agreement.
The Company's cash balance of approximately $7.5 million as of December 31,
1999 and $7.0 million as of December 31, 1998 is held in a demand deposit
account with the Bank.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of the Company are included in
Item 8 of this report:
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 1999 and 1998
Statements of Earnings for the year ended December 31, 1999 and the
period from inception of operations (February 24, 1998) through
December 31, 1998
Statements of Stockholders' Equity for the year ended December 31,
1999 and the period from inception of operations (February 24,
1998) through December 31, 1998
Statements of Cash Flows for the year ended December 31, 1999 and
the period from inception of operations (February 24, 1998)
through December 31, 1998
Notes to Financial Statements
(a)(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instruction or are inapplicable
therefore have been omitted.
(a)(3) Exhibits:
*27 Financial Data Schedule
(b) No reports on Form 8-K were issued during the three months ended
December 31, 1999.
- ---------------
* Filed herewith.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant as duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FLAGSTAR CAPITAL CORPORATION
Date: March 21, 2000 /s/ THOMAS J. HAMMOND
--------------------------------------
Thomas J. Hammond
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 21, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
By: /s/ THOMAS J. HAMMOND Chairman of the Board and Chief Executive
------------------------------------------------- Officer
Thomas J. Hammond
By: /s/ MARK T. HAMMOND Vice Chairman of the Board and President
-------------------------------------------------
Marks T. Hammond
By: /s/ MICHAEL W. CARRIE Director, Executive Vice President and Chief
------------------------------------------------- Financial Officer
Michael W. Carrie
By: /s/ JOAN H. ANDERSON Director, Executive Vice President
-------------------------------------------------
Joan H. Anderson
By: /s/ MARY KAY MCGUIRE Director and Secretary
-------------------------------------------------
Mary Kay McGuire
By: /s/ JACK CHRISTENSON Director
-------------------------------------------------
Jack Christenson
By: /s/ ROBERT W. DEWITT Director
-------------------------------------------------
Robert W. DeWitt
</TABLE>
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<C> <S>
*27 Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001051818
<NAME> FLAGSTAR CAPITAL CORP
<MULTIPLIER> 1,000
<CURRENCY> US.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1,000
<CASH> 7,456
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 118,505
<ALLOWANCE> (250)
<TOTAL-ASSETS> 129,722
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 645
<LONG-TERM> 0
0
57,500
<COMMON> 1,000
<OTHER-SE> 70,577
<TOTAL-LIABILITIES-AND-EQUITY> 129,722
<INTEREST-LOAN> 7,508
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,508
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 7,508
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 393
<INCOME-PRETAX> 6,865
<INCOME-PRE-EXTRAORDINARY> 6,865
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,865
<EPS-BASIC> 1.98
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 6.78
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 250
<ALLOWANCE-DOMESTIC> 250
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
