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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Premier Mortgage Resources, Inc.
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(Name of Small Business Issuer in its charter)
Nevada 88-0343833
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
280 Windsor Highway New Windsor, NY 12553
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (914) 561-7770
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Securities to be registered under Section 12(g) of the Act:
Common Stock
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(Title of class)
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(Title of class)
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TABLE OF CONTENTS
PART I
PAGE
Item 1 Description of Business 4
Item 2 Management's Discussion and Analysis or Plan of Operation 11
Item 3 Description of Property 14
Item 4 Security Ownership of Certain Beneficial
Owners and Management 15
Item 5 Directors, Executive Officers, Promoters and Control Persons 16
Item 6 Executive Compensation 18
Item 7 Certain Relationships and Related Transactions 19
Item 8 Description of Securities 20
PART II
Item 1 Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters 21
Item 2 Legal Proceedings 22
Item 3 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 23
Item 4 Recent Sales of Unregistered Securities 23
Item 5 Indemnification of Directors and Officers 25
FINANCIAL STATEMENTS
See attached Financial Statements
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EXHIBIT INDEX
No. Description of Exhibit
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3.1 Articles of Incorporation of Mortgage Resources, Inc., dated August 17,
1995*
3.2 Articles of Amendment, dated October 16, 1995*
3.3 Annual List, changing corporate name to Premier Mortgage Resources, Inc.,
dated August 20, 1997*
3.4 Certificate of Reinstatement, dated August 20, 1997*
3.5 Bylaws of Mortgage Resources, Inc.*
3.6 Articles of Incorporation of United National, Inc., dated November 21,
1997*
3.7 Articles of Organization of United National Mortgage, LLC, dated October
2, 1996*
3.8 Certificate Of Amendment to Articles of Organization of United National
Mortgage, LLC, dated February 3, 1998*
3.9 Operating Agreement of United National Mortgage, LLC, dated July 1,
1996*
3.10 LLC Interest Acquisition Agreement*
10.1 Reorganization Agreement, dated July 2, 1998*
10.2 Agreement to Sell Stock, dated April 22, 1998*
10.3 Indemnification Agreement with Donald Wilen*
10.4 Indemnification Agreement with Joseph Cilento*
10.5 Indemnification Agreement with William "Rudy" Scott*
10.6 Sample Net Branch Agreement*
21.1 Subsidiaries of Registrant*
23.1 Consent of Auditors*
27 Financial Data Schedule*
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* Previously Filed.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Office
Premier Mortgage Resources Inc. ("we", "us" or "the Company") currently
maintains its principal office at 280 Windsor Highway, New Windsor, New York
12553 where its telephone number is (914) 561-7770 and its facsimile number is
(914) 561-7748.
Organization/Historical Background
The Company was originally incorporated in Nevada on August 17, 1995 as
"Mortgage Resources, Inc." The Company was inactive following its organization
and its charter was revoked on April 26, 1997 by the State of Nevada for failure
to file its 1996-1997 Annual List of Officers and Directors. Its charter was
reinstated on August 20, 1997; however, during the period that its charter was
revoked another corporation had taken the name "Mortgage Resources, Inc." and,
therefore, the Company changed its name to "Premier Mortgage Resources, Inc." in
order to secure reinstatement.
On April 22, 1998 (formalized on June 9, 1998) the Company entered into an
Agreement and Plan of Reorganization with Donald S. Wilen, the sole stockholder
of United National, Inc., the manager and holder of a 2% interest in United
National Mortgage, LLC, a mortgage banker. On July 2, 1998, under that Plan,
which was structured as a tax-free, stock-for-stock exchange pursuant to Section
358(a)(1)(B) of the Internal Revenue Code, the Company acquired all of the
issued and outstanding shares of United National, Inc. in exchange for the
issuance of 377,778 shares (after giving effect to the 1 for 6 reverse stock
split effective on April 12, 1999) of the Company's Common Stock.
United National, Inc. was incorporated in the State of Nevada on November 21,
1997, and is a wholly owned subsidiary of the Company. It performs all of the
loan processing and telemarketing services for United National Mortgage, LLC
("UNM"). It owns a 2% ownership in interest in UNM. United National,
Inc. has entered into an agreement with UNM to acquire all of the ownership
interest of UNM for nominal consideration immediately upon approval of the New
York Banking Department of the change in control.
United National Mortgage, LLC is a New York limited liability company engaged in
the mortgage banking business. As such, it is licensed by the New York State
Department of Banking which requires that the owner of 9% or more of a mortgage
banker be pre-approved by it. Pending approval by the New York State Department
of Banking of the change in control, Donald Wilen, continues to own the 98%
interest, and United National Inc. owns 2%. Donald Wilen will transfer his
interest to United National, Inc. upon regulatory approval of the ownership
change, without the payment of any further consideration.
Business - Corporate Structure
We are a holding company providing services and financing to our subsidiary,
United National, Inc. United National, Inc. provides marketing and processing
services to United National Mortgage, LLC that offers mortgage banking.
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Business Operations
Premier Mortgage Resources, Inc. - Parent
Premier Mortgage Resources, Inc is organized to act as a holding company
responsible inter alia for raising funds for United National, Inc. and UNM. As a
holding company, Premier Mortgage Resources, Inc. provides certain staff
functions to its subsidiaries, but has no business operations. All
business operations are conducted by UNM, which performs all line functions. The
staff functions which the Company supplies to its subsidiaries includes overall
management, strategic direction, financing, legal services, accounting and
related services including cash management and budgeting, marketing, and public
relations/advertising.
United National, Inc. - First Tier Subsidiary
United National, Inc., is engaged in providing various telemarketing and
mortgage processing services on behalf of UNM. As such, it is wholly dependent
on UNM and the level of its core business activity for its own revenues. United
National, Inc. derives its revenues from performing telemarketing services in
which phone calls are placed to prospective borrowers to solicit mortgage
business. This solicitation effort on the part of United National, Inc.
generates a pool of prospective borrowers that are likely to do business with
UNM.
United National, Inc. absorbs all the cost of the telemarketing operation,
including, but not limited to, payroll, payroll benefit costs, rent and general
and administrative costs. It then bills UNM for calls made at a contractually
agreed upon rate. It also derives revenues by billing UNM at a contractually
agreed upon rate for mortgage loan processing. Our expenses include the payroll
cost, leased space, and general and administrative costs of mortgage personnel
engaged in these activities.
United National Mortgage, LLC, Second Tier Subsidiary To-Be-Acquired
Although the legal transfer of ownership is pending approval by the New York
State Department of Banking, United National Mortgage, LLC is managed as a
wholly owned subsidiary of United National, Inc., and operates as the mortgage
banking division of Premier Mortgage Resources, Inc. UNM is actively building a
network of offices around the country by seeking existing mortgage brokers or
bankers interested in becoming representative offices of UNM, called "Net
Branches." Presently, UNM has six (6) Branches.
Upon becoming a Net Branch, the broker or banker is provided with: (i) the
right to use the name United National Mortgage, LLC, which provides national
exposure for the broker or banker (through UNM's advertising and marketing
efforts); (ii) the use of the UNM's central computer system and other
technology; (iii) staffing and hiring of the staff of each Net Branch by UNM;
and (iv) employee benefits. The establishment of a Net Branch in no way
represents a real estate acquisition by UNM, United National Mortgage, Inc. or
Premier Mortgage Resources, Inc. All branch managers, including Net Branch
managers, are employees of the Company. For Net Branches, in states where
permissible, Net Branch managers are contractually obligated to pay the
expenses of the branch. In states where not permissible, the Company pays these
expenses directly. All revenue earned and related expenses by the branches of
the Company are reflected in the statement of income of the Company.
General Business Plan of UNM
United National Mortgage, LLC is in the residential and wholesale mortgage
banking business. Its primary focus has been the retail and wholesale
origination and the sale of mortgage loans for one-to-four family properties.
UNM is an approved loan correspondent with approximately twenty lenders such as
Countrywide Credit, Flagstar Bank, Provident Bank, Interfirst, IndyMac, Alliance
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Mortgage, and other national prime and subprime mortgage lenders. UNM originates
loans and closes them in UNM's name using funds from a warehouse line of credit.
UNM does not close loans unless one of our mortgage purchasers has given UNM an
approval for the loan and has agreed to purchase the loan. After the closing of
the loan, a package of documents is sent to the mortgage purchaser, the investor
reviews the documents and purchases the loan by wiring the funds to our
warehouse bank. The difference between the amounts we close the loan for and the
amount the investor pays the warehouse line constitutes part of the profit on
that particular transaction.
UNM's strategy is to expand its retail and wholesale loan origination business.
Increased loan origination will expand its revenue base. UNM intends to continue
to sell loans after closing to permanent investors and does not foresee our
maintenance of the mortgage's servicing rights. Servicing is a process whereby a
mortgage company collects the mortgage payment and any escrows for taxes and
insurance from borrowers. Companies that service loans make a small fee on each
transaction. UNM does not plan to enter the servicing business. UNM sells its
right to collect the payments to the permanent investor to whom the loans have
been sold. As a result, the company realizes immediate cash from the sale of
these mortgage servicing rights. By selling the servicing rights, UNM does not
run the risk of the underlying mortgage being refinanced by the borrower thus
ending the income stream from servicing.
Management of UNM believes that its business plan of combining expanded loan
origination along with the Company's continuing objective of improving operating
efficiencies will place it in a strong competitive position in the mortgage
industry.
The Retail Origination Division
Retail loan origination involves the direct solicitation of realtors, builders
and other end borrowers for the origination of mortgage loans. UNM derives
revenues from the premium that it receives when the loan is sold. Additionally,
UNM derives revenues from fees charged directly to customers. Generally, that
premium is shared on a negotiated basis with loan officers who procure the loan
and assist in the loan origination process. One method we use of conducting
retail originations is through the "Net Branch" concept, as discussed earlier,
which entails partnering with established mortgage brokers who join the company
as UNM employees and conduct their retail origination activities under the UNM
name. In turn, UNM provides them with access to processing, underwriting and
closing support functions as well as access to expanded product offerings in all
states where UNM is licensed to transact mortgage business. Net Branch managers
agree contractually to absorb the costs of their local branch operating costs
such as payroll, use and occupancy and general and administrative costs
associated with the operations of their local branch. Revenues from closed loan
transactions are then contractually split with the Net Branch operator and the
Company using predetermined formulas. UNM believes that its strategy of
expanding its retail presence through the "Net Branch" concept will allow it to
expand more quickly in designated markets without the commitment to absorb local
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branch operating costs. This allows UNM greater flexibility to expand or contact
retail operations as business volumes rise and fall due to business conditions
or the rise or fall in interest rate levels UNM sells substantially all of the
mortgage loans that it produces. It sells these loans to investors (which may
include broker/dealers, banks, thrifts, insurance companies, and state and local
housing finance agencies), either as individual loans or pursuant to certain
bulk purchase commitments.
UNM also nominally engages in the origination and brokerage of loans on
commercial real estate assets, including shopping centers office properties and
other commercial loans. It typically brokers (e.g. arranges for the loan from
third-party lenders) these transactions. Transactions to date have not been
material to UNM's results of operations. UNM's loan origination activities are
conducted trough its corporate headquarter offices in New Windsor, New York.
Current branch operations are located in New York, Massachusetts and Illinois.
The Wholesale Origination Division
Wholesale loan origination involves the purchase of loans from mortgage brokers.
UNM realizes revenue from the sale of such loans to investors for a price
greater than the amount paid to the mortgage broker. UNM generally sells the
loans to investors at pre-approved purchase prices which serves to reduce the
risk of a loss on such sale(s). Wholesale loan origination tends to generate
less revenues on a per transaction basis than retail origination, but expansion
into the wholesale sector is less costly than retail origination because
wholesale origination does not require the establishment of costly office space
and the related overhead expense. The operation structure enables UNM to quickly
enter new markets.
Loan Servicing
UNM's current plans do not include the servicing of loans that it originates
since it plans to sell the servicing rights on loans it originates in order to
generate additional cash flow on a current basis. Loan servicing consists of
collecting principal and interest payments from borrowers, remitting aggregate
principal and interest payments to investors, making cash advances when
required, accounting for principal and interest, collecting funds for payment of
mortgage-related expenses, such as taxes and delinquent mortgagors, conducting
foreclosures and property dispositions in the event of unremedied defaults and
generally administering the mortgage loans.
Quality Control
In order to ensure that UNM originates high quality mortgage loans, it has
retained the services of a quality control company with an industry wide
reputation to conduct evaluations of UNM's loan origination activities on a
monthly basis.
Competition
The mortgage banking industry is highly competitive. UNM competes with other
financial providers who have greater technical expertise, financial resources
and marketing capabilities than United National, Inc. and UNM. We are uncertain
that UNM will be able to overcome competitive disadvantages it will face as a
small start up company with limited capital. Our competitors include
institutions, such as mortgage banks, state and national banks, savings and loan
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associations, savings banks, credit unions and insurance companies and mortgage
bankers. Some of UNM's competitors have financial resources that are
substantially greater than those of UNM, including some competitors which have a
significant number of offices in areas where UNM conducts its business. UNM
competes principally by offering loans with competitive features, by emphasizing
the quality of its services and by pricing its range of products at competitive
rates.
Although the mortgage business is competitive, it is also fragmented in that no
single lender has a significant market share of total origination volume.
Overall mortgage origination volume is shared in varying percentages among
commercial banks, savings and loan and mortgage banking companies. Historically,
mortgage banks have had an estimated twenty to thirty percent share of total
orientation volume. Commercial banks, savings banks, savings and loan
associations and mortgage banking companies service the bulk of residential
mortgages. Management of UNM does not anticipate any significant changes in the
market share described above in the near term.
Number of Employees
Premier Mortgage Resources, Inc. is a holding company and has no employees.
United National, Inc. also has no employees, but it utilizes telemarketing and
support personnel from UNM. Presently, UNM has 35 employees working in the
departments listed below. Three members of the telemarketing staff are part
time, and the remaining employees in all departments are full time employees.
These numbers include Net Branch personnel.
Department/Job Function Number of Employees
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Executives 3
Loan Officers 12
Support Staff 5
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Total 20
Cautionary Factors That May Affect Future Results
This registration statement contains some forward-looking statements.
"Forward-looking statements" describe our current expectations or forecasts of
future events. These statements do not relate strictly to historical or current
facts. In particular, these include statements relating to future actions,
prospective products, future performance or results of current and anticipated
products, sales, efforts, the outcome of contingencies and financial results.
Any or all of the forward-looking statements we make may turn out to be wrong.
They can be affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties. Many factors, such as product acceptance,
competition and marketing capabilities, will be important in determining future
results. Consequently, no forward-looking statements can be guaranteed. Actual
future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
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advised, however, to consult any future disclosures we make on related subjects
in our 10-QSB, 8-KSB, and 10-KSB reports to the SEC.
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.
Limited Operating History. Although we were organized in August 1995, we had no
business operations until the acquisition of United National, Inc. on July 2,
1998. United National, Inc.'s operating "subsidiary," United National Mortgage,
LLC has been in business since October 1996. That limited liability company is
the entity which produces the revenues for the Company group and it has not yet
been profitable. Accordingly, investors should consider us to be essentially a
new, developing company. As a new, developing company, our operations are
subject to all of the risks inherent in the establishment of a new business
enterprise, including the lack of significant operating history. There can be no
assurance that our future operations will be profitable. Revenues and profits,
if any, will depend upon various factors, including our ability to finance
mortgage loans, secure mortgage loan applications, process mortgages, and
generally do business in a sufficient volume to provide sufficient cash margins
to cover our operating costs. Our securing of sufficient capital is crucial.
Without sufficient capital we cannot meet our projected goals or accomplish our
business plans; and such failure could have a material adverse affect on us and
the value and price of our publicly traded securities.
Liquidity and Working Capital Risks; Need for Additional Capital to Finance
Growth and Capital Requirements. We will seek additional funds and seek to raise
additional capital from public or private equity or debt sources to: (i) provide
working capital to meet our general and administrative costs until net revenues
make the business self-sustaining; (ii) make acquisitions of existing mortgage
brokers, mortgage processors, and mortgage bankers; and (iii) exploit and expand
such acquisitions. We cannot give assurance that we will be able to raise any
such capital on terms acceptable to us or at all. Such financing may be upon
terms that are dilutive or potentially dilutive to our stockholders. If
alternative sources of financing are required, but are insufficient or
unavailable, we will be required to modify our growth and operating plans in
accordance with the extent of available funding.
Effect of our future Issuance of Preferred Stock. Our authorized capital
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock. Our Board of Directors, without any action by our shareholders, is
authorized to designate and issue shares of Preferred Stock in such series as it
deems appropriate and to establish the rights, preferences and privileges of
such shares, including dividends, liquidation and voting rights. The rights of
holders of shares of Preferred Stock that may be issued in the future may be
superior to the rights granted to the holders of the then existing shares of
Common Stock. Also, the ability of the Board of Directors to designate and issue
such undesignated shares could impede or deter an unsolicited tender offer or
takeover proposal regarding us and the issuance of additional shares having
preferential rights could adversely affect the voting power and other rights of
holders of our Common Stock.
Limitation of Liability and Indemnification of Officers and Directors. Our
officers and directors are required to exercise good faith and high integrity in
the management of Company affairs. Our Articles of Incorporation provide,
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however, that the officers and directors shall have no liability to the
shareholders for losses sustained or liabilities incurred which arise from any
transaction in their respective managerial capacities unless they violated it in
good faith, engaged in intentional misconduct or knowingly violated the law,
approved an improper dividend or stock repurchase, or derived an improper
benefit from the transaction. As a result, a purchaser of the shares may have a
more limited right to action than he would have had if such provision were not
present. Our Articles and By-Laws also provide for the indemnification by the
Company of the officers and directors against any losses or liabilities they may
incur as a result of the manner in which they operate the Company's business or
conduct the internal affairs, provided that in connection with these activities
they act in good faith and in a manner which they reasonably believe to be in,
or not opposed to, the best interests of the Company, and their conduct does not
constitute gross negligence, misconduct or breach of fiduciary obligations. To
further implement the permitted indemnification, we have entered into Indemnity
Agreements with our current officers and directors and we will provide similar
agreements for future officers and directors.
Dependence on Key Personnel. Our future success will depend largely on the
efforts and abilities of our management, including especially Messrs. Wilen,
Scott and Cilento. The loss of any of them or the inability to attract
additional, experienced management personnel could have a substantial adverse
affect on the Company; we have not obtained "key man" insurance policies on any
of our management and do not expect to obtain it on any of our future management
personnel, as employed. Our ability to implement our strategies depends upon our
ability to attract highly talented managerial personnel. There can be no
assurance that we will attract and retain such employees in the future. The
inability to hire and/or loss of key management or technical personnel could
materially and adversely affect our business, results of operations and
financial condition.
Government Regulation. Our mortgage banking business is subject to substantial
government regulation. We are required to secure and maintain various licenses
from each state in which we conduct business. In addition, our business
operations will be subject to all government regulations normally incident to
conducting business (e.g., occupational safety and health acts, workmen's
compensation statutes, unemployment insurance legislation, income tax and social
security laws and regulations, environmental laws and regulations, consumer
safety laws and regulations, etc.) as well as to governmental laws and
regulations applicable to small public companies and their capital formation
efforts. Although we will make every effort to comply with applicable laws and
regulations, we can provide no assurance of our ability to do so, nor can we
predict the effect of those regulations on our proposed business activities.
Anticipated Operating Losses. Assuming that we can obtain the financing to make
acquisitions and exploit them, we most likely will continue to suffer operating
losses until we can achieve a sufficient volume of mortgage loans to cover our
operating costs.
Competition. The mortgage banking market is extremely competitive. UNM competes
with other financial providers who have greater technical expertise, financial
resources and marketing capabilities than United National, Inc. and UNM. UNM
will be able to overcome competitive disadvantages it will face as a small start
up company with limited capital.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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The following discussion and analysis should be read in conjunction with the
financial statements of the Company and summary of selected financial data for
United National Mortgage, LLC ("UNM") as shown below. This discussion should not
be construed to imply that the results discussed herein will necessarily
continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such discussion
represents only the best present assessment of the management of the Company.
Overview - Sources of Revenue
We are a holding company that has no business activities and generates no
revenues. We do, however, provide support and staff functions to our
subsidiaries, which do generate revenues.
Analysis of Premier Mortgage Resources, Inc.
The revenues of Premier Mortgage Resources, Inc. were $121,210 for calendar
1998, and there were no significant revenues in 1997. For the year ending
September 30, 1999, our revenues were $197,040. The increase in 1999 interim
over 1998 interim is due in part to higher revenue billings to UNM by us for
telemarketing and also processing services, and also due to increased payroll
costs for processing services that can be billed to UNM for reimbursement.
Total expenses for Premier were $216,742 for calendar 1998. There were no
significant expenses in calendar 1997. For the nine months ending September 30,
1999, total expenses were $284,230. Selling, general and administrative expenses
for interim 1999 increased over interim 1998 due to a higher number of employees
on payroll who perform telemarketing and mortgage banking services on behalf of
UNM.
On December 31, 1999 through issuance of a convertible preferred stock issuance,
the Company raised $380,000 in capital. With these additional funds, we project
that our current cash balance will adequately support our current level of
operations through the first quarter of 2000.
We believe that our marketing plan will have a positive impact on capital
resources and liquidity. As such, our reliance on capital contributions to fund
operating losses should dissipate in favor of positive cash flow, self-funding
operations. While there can be no guarantee that these marketing plans, revenue
enhancement goals and acquisition strategies will be successful, we believe that
we have identified specific short term objectives that should impact cash flow
on a positive basis and restore profitability.
Analysis of United National, Inc.
Our first tier subsidiary, United National, Inc. derives revenues by billing UNM
at a contractually agreed upon rate for mortgage loan processing. Its expenses
include the payroll cost, leased space, and general and administrative costs of
mortgage personnel engaged in these activities.
The transactions between United National, Inc and UNM are of an inter-company
nature and therefore do not form the basis for a more complete understanding of
the nature of the core mortgage banking activities of UNM. The results of UNM
are currently not combined into our results. Upon approval of the change in
control by the New York State Banking Department, as discussed elsewhere in this
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document, the remaining 98% of UNM will be transferred to United National, Inc.
At that time, our results of operations will include the results of operations
of UNM and thereby give the reader a more complete understanding of UNM's core
business.
Analysis of United National Mortgage, LLC ("UNM")
As discussed elsewhere in this document, our operations and potential for
success is largely based upon the outcome of operations for the core mortgage
banking business of UNM.
UNM is engaged in the business of mortgage banking and is focused on expanding
its origination of residential mortgage loans.
UNM intends to expand its mortgage origination business through its retail
branch network, direct telemarketing and wholesale mortgage banking. It is in
the process of developing an Internet based direct origination capability.
UNM sells the loans it originates as well as the related servicing rights to
institutional buyers. There are no plans, at present, to hold onto loans for
investment purposes. It is dependent on the sale of its loans into the secondary
market in order to generate cash to support operating costs.
One focus of UNM is to attract successful mortgage brokerage operations
into the Company in key markets through the "Net Branch" concept. The Corporate
Mission of the Company is to build a national network of mortgage brokers all
working under the United National Mortgage corporate name. That network will
provide marketing, technology and business systems to Uniteds' broker partners;
and further, to rapidly grow into a mortgage institution national in scope by
attracting the best available mortgage personnel.
In addition, UNM expects to expand its consumer-direct telemarketing call
center. The cost of this expansion which will take place in February 2000 is
expected to be under $10,000 before the call center is producing sufficient
origination loans to pay for the cost of the expansion. Our expected dollar
amount for expansion during the first quarter of 2000 is $120,000, broken down
as follows: (i) an acquisition of a net branch in Westport Connecticut for
approximately $60,000, (ii) the hiring of 3 loan officers at an approximate cost
of $48,000, and (iii) a direct mail campaign to existing and prospective
customers at an approximate cost of $12,000. The Company also intends to solicit
mortgage loans through a wholesale mortgage strategy whereby the loans are
originated through wholesale mortgage brokers and submitted to UNM for prior
approval and funding. To this end we have hired a wholesale manager whose salary
is included I our original projections. In addition, we have hired a wholesale
representative for the New York City area. We expect to spend approximately five
thousand to eight thousand dollars before that operation breaks even and begins
to show profit. We also have hired a Regional Manager for the New
Jersey/Pennsylvania area who will be recruiting retail loan officers as well as
pursing the wholesale loan strategy. We expect that endeavor to cost
approximately ten thousand dollars before it begins to show profitability in the
first quarter of 2000. Other branch expansion strategies currently under
consideration are in Connecticut, Massachusetts and the Mid-Atlantic region of
the U.S. These endeavors will be both retail and wholesale.
Other traditional origination channels that we plan to use include:
- - Open new retail branch offices in selected markets
- - Hire additional loan officers to solicit loans
- - Increase consumer awareness of United through direct advertising and
marketing.
- - Selectively consider and pursue strategic alliances with national-based
referral sources such as affinity groups, trade associations, etc.
- - Strategic acquisitions of mortgage companies in the industry
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Selected Summary Financial Data of United National Mortgage, LLC.
<TABLE>
<CAPTION>
YEAR ENDED: 9 MOS. ENDED:
------------------------ --------------------------
DEC. 31, DEC 31, SEPT. 30 SEPT. 30
1998 1997 1999 1998
------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Income Statement Data:
Mortgage Fee Income $ 628,930 $ 69,566 $ 540,439 $ 510,789
Selling, General and
Admin. Expenses 1,269,653 335,473 1,133,749 1,002,557
(Loss) Before Income
Taxes (640,723) (266,887) (593,310) (491,768)
Net Loss $ (640,723) $ (266,887) $ (593,310) $ (491,768)
Unrealized (Loss)
on Securities (124,338) -- -- --
Comprehensive Loss (765,061) (266,887) (593,310) (491,768)
Balance Sheet Data:
Cash & Cash
Equivalents $ 161,438 $ 516,442 $ 124,371 $ 57,176
Mortgage Loans
Held for Sale, Net 1,681,132 169,658 647,693 1,917,785
Total Assets 2,571,604 731,010 1,456,814 2,909,971
Warehouse Line of
Credit Payable 1,703,926 174,200 509,781 1,776,106
Other Liabilities 568,557 169,321 621,247 778,356
Total Stockholder Equity 299,121 123,659 325,786 355,510
Operating Data:
Total Mortgage Originations
(in thousands) $ 24,000 $ 4,000 $ 33,000 $ 17,500
</TABLE>
Revenue from the sale of mortgages and brokerage and ancillary income generated
from its branches to pay the expenses of the branch for the calendar year ended
December 31, 1998 was $579,944. These revenues are derived from origination
fees, discount points, service released premium and ancillary fee income from
residential mortgage transactions. Interest income was $48,986 for the same
period representing interest income from holding residential mortgage loans
from the date of closing to purchase by permanent investors. All Branch
managers are employees of the Company. In states where permissible, net branch
managers are contractually obligated to pay the expenses of the branch. In
states where not permissible, the Company pays these expenses directly. All
revenue earned and related expenses by the branches of the Company are
reflected in the statement of Income of the Company.
Operating expense including warehouse line of credit interest expense was
$1,269,653 for the year ending December 31, 1998. Operating expenses primarily
include commission expense to sales people, payroll and related payroll taxes as
well as general and administrative expenses.
During 1998, we fully commenced operations, and therefore, all comparisons to
prior years reflect the nominal operations of the Company in 1997.
We have not generated any profits since inception and we are not expected to
generate profits for the current fiscal year ending December 31, 1999. Revenues
from mortgage closings do not cover operating expenses due to an insufficient
13
<PAGE> 14
number of mortgage closings to cover operating costs and start up costs. There
can be no guarantee that expected revenues for fiscal year 2000 will increase
enough to cover operating costs or that the Company will add enough new "Net
Branch" volume to reach profitability.
Capital Resources and Liquidity
We have been highly dependent on capital raised through stock investors to fund
operations. On October 6, 1999, we had $106,626 cash on hand which is not
expected to be sufficient to cover net operating expenses through the end of
1999. Further, the Company is entirely reliant on warehouse lines of credit to
fund mortgage loans. Currently, there are open warehouse lines of credit in the
amount of $11,000,000 available. There can be no guarantee that warehouse
lenders will continue the lines of credit if losses were to continue or net
worth was to fall below required levels.
ITEM 3. DESCRIPTION OF PROPERTY
Offices
We maintain our principal office at 280 Windsor Highway, New Windsor, New York
12553, where our telephone number is (914) 561-7770 and our facsimile number is
(914) 561-7747.
Our home office is a freestanding building situated on approximately .5 acres,
owned by UNM. This building was purchased for $370,000 from a non-related party
in February of 1998. There is a $300,000 mortgage on this property held by
Michael T. Tighe, also a non-related party. We have made substantial
improvements to this building in 1998, spending approximately $35,000 for such
improvements.
The building, formerly a restaurant, contains 5,000 square feet on the first
floor with 3,000 square feet of storage in the basement. The first floor area is
divided into one large work area with two smaller offices. The occupancy rate is
25. There are 40 parking spaces. We believe that these premises are adequate for
our home office operations for the foreseeable future.
Additionally, UNM owns a building located at 48 Mill Street, Newburgh, New York
12550. This property was purchased for $105,000 from Donald Wilen in 1998. For
this property, there is a $90,000 mortgage held by Kingston-Newburgh Enterprise
Corporation. This building has three floors, and approximately 1500 square feet.
The work area is concentrated on the first floor, containing approximately 600
square feet. There are eight workstations set up for telemarketing. The
occupancy rate is 22. There is no parking provided.
Licenses
United National Mortgage, LLC, as a mortgage banker, holds various licenses in
twenty-one states, which are as follows:
STATE LICENSE TYPE LICENSE # EXPIRATION
- ---------------------------------------------------------------------
Colorado Mortgage Banker 098332 None
Connecticut First Mortgage 0003767 08/30/00
Connecticut Second Mortgage 0006294 06/30/00
Georgia Mortgage Lender 12659 12/31/00
14
<PAGE> 15
Illinois Mortgage Lender 5157 08/6/01
Iowa Mortgage Banker 552 06/30/00
Maryland Mortgage Lender 4454 12/31/01
Mass. Mortgage Broker Mb1341 11/30/00 5/31/00
Mortgage Lender Ml0890 11/30/99 5/31/00
Michigan Broker/lender Fl-1043 None
New Mexico Broker/lender None None
New York Mortgage Banker 05390 None
No. Carolina Mortgage Banker A 1521 None
Oregon Mortgage Lender None 07/19/01
Pennsylvania Mortgage Banker 1406 06/30/00
Rhode Island Mortgage Banker Pending
So. Carolina Mortgage Lender S-4, 213 None
Utah Mortgage Banker None None
Washington Mortgage Banker None None
Real Estate Investments
At the present time, we have no intention or any interest in making investments
in real estate (except for our own offices). Therefore, we have no policy with
respect to any investments in real estate or interests in real estate,
investments in real estate mortgages, and securities of or interests in persons
primarily engaged in real estate activities.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 28, 1999, information regarding
the beneficial ownership of shares of our Common Stock by each person known by
us to own five percent or more of the outstanding shares of Common Stock, by
each of our Officers, by each of our Directors, and by our Officers and
Directors as a group. On September 28, 1999 there were 3,806,128 shares issued
and outstanding of record, including the shares which are the subject of the
litigation attempting to cancel them.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE
NAME & ADDRESS OF COMMON AS OF 9/28/99(1)
BENEFICIAL OWNERS STOCK
- ----------------- -------- ------------
<S> <C> <C>
Donald S. Wilen 377,778 9.9%
208 Windsor Highway
New Windsor, NY 12553
Nicko Fillas 225,000 5.9%
c/o Glenn Michael Financial, Inc.
534 Broadhollow Road
Melville, New York 11747
Gulf Atlantic Publishing, Inc. 396,834(2) 10.4%
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
1947 Lee Road
Winter Park, FL 32789
Select Media, Inc. 166,667(2) 4.4%
4772 E. Michigan St., #7
Orlando, FL 32812
Seas Capital Management
Group, Inc.(3) 143,000 3.8%
c/o Ephraim Sobol
164 Madison Ave., 3rd Fl.
New York, NY 10016
Ephraim Sobol 293,000 7.7%
164 Madison Ave., 3rd Fl.
New York, NY 10016
All Executive Officers and Directors
as a group (1 person) 377,778 9.9%
</TABLE>
- ----------
(1) Based upon 3,806,128 shares issued and outstanding on September 28,
1999,which total includes the shares subject to the litigation in which
the Company seeks to cancel such shares. This does not include 152,670
Common Stock Purchase Warrants exercisable to purchase 152,670 shares of
our Common Stock at exercise price of 6.00 per share exercisable according
to the following schedule:
<TABLE>
<CAPTION>
Name Warrants Expiration Date
---- -------- ---------------
<S> <C> <C>
Douglas Nagel 33,334 3/18/00
Selectmedia Ltd. Corp. 33,334 3/20/00
Super Nova Inc. 33,334 2/9/00
Visual Company 8,334 6/5/00
Azucar Ltd. 11,000 6/3/00
Robert Hall 8,334 3/23/00
James Hall 8,334 4/15/00
Total Warrants 136,004
</TABLE>
(2) These shares are the subject of the litigation seeking to cancel
them.
(3) Seas Capital Management Group, Inc. is owned by Ephraim Sobol and the
143,000 shares are also included in the 293,000 shares owned beneficially
by him.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
Premier Mortgage Resources, Inc. consists of three separate entities, as
outlined below, and three levels of management.
1. Premier Mortgage Resources, Inc.; Donald Wilen, the sole shareholder of
United National, Inc., acquired operational control of Premier Mortgage
Resources, Inc. in July 1998, by exchanging his shares of United National
Inc for controlling shares of Premier Mortgage Resources, Inc.
2. United National, Inc. is now a wholly owned subsidiary of Premier Mortgage
Resources, Inc. It functions as a telemarketing resource, soliciting new
business for United National Mortgage, LLC. United National, Inc. also
16
<PAGE> 17
processes customer files and contracts for United National Mortgage, LLC.
3. United National Mortgage, LLC is managed as subsidiary of United National,
Inc., and operates as the mortgage banking division of Premier Mortgage
Resources, Inc. It is with this entity that we are focusing our business
expansion, although the legal transfer of ownership is pending approval by
the New York State Department of Banking.
Directors and Executive Officers of Premier Mortgage Resources, Inc.
Name Age Position
- ---- --- --------
William R. Scott, Jr. 43 Vice President of Marketing
Donald S. Wilen 63 President, Director
Joseph A. Cilento 46 Chief Financial Officer
Directors and Executive Officers of United National, Inc.
Name Age Position
- ---- --- --------
William R. Scott, Jr. 43 Vice President of Marketing
Donald S. Wilen 63 President, Director
Joseph A. Cilento 46 Chief Executive Officer
Directors and Executive Officers of United National Mortgage, LLC.
Name Age Position
- ---- --- --------
William R. Scott, Jr. 43 President
Donald S. Wilen 63 Chief Executive Officer, Director
Joseph A. Cilento 46 Chief Operating Officer
WILLIAM R. SCOTT, JR. ("RUDY") is Vice President of Marketing of Premier
Mortgage Resources, Inc.; Vice President of Marketing of United National, Inc.;
and President of United National Mortgage, LLC. Mr. Scott has served in these
capacities since July of 1999. From October of 1996 though July of 1999, Mr.
Scott was Vice President of Marketing for United National Resources, Inc.,
responsible for building strategic business alliances with brokerage firms,
banks and mortgage companies. As President of United National Mortgage, LLC. Mr.
Scott continues to identify key alliances and to develop and locate Net
Branches. Mr. Scott is responsible for recruiting and hiring sales professionals
and loan officers. He also oversees and directs our expanding network of branch
offices. Prior to July of 1999, Mr. Scott did not hold officer's positions in
Premier Mortgage Resources or United National, Inc.
17
<PAGE> 18
From 1994 through 1996, Mr. Scott was Vice President of FHB Funding. Overall,
his experience spans over 15 years, and covers all aspects of the mortgage
business, including underwriting and sales. He is a columnist for MORTGAGE
REPORT, a national mortgage magazine.
DONALD S. WILEN is President of Premier Mortgage Resources, Inc. and sole
Director; President of United National, Inc. and sole Director; and Chief
Executive Officer, Managing Member and sole Director of United National
Mortgage, LLC. He is an attorney and Certified Public Accountant, receiving his
B.S. in Accounting from Brooklyn College in 1958 and his C.P.A. certification in
1964. He is licensed as a C.P.A. in New York. In 1968, Mr. Wilen received an MBA
from Baruch College, and in 1978, he received a J.D. from Brooklyn Law School.
Since 1979, Mr. Wilen has been a member of the Bar of the State of New York.
As Chief Executive Officer of UNM, Mr. Wilen directs the operations, overseeing
all legal and accounting matters. He coordinates and structures strategic
business alliances with brokerage firms, banks and mortgage companies in
conjunction with Mr. Scott.
From 1983 to 1997, Mr. Wilen was a senior partner in the CPA firm Wilen, Klapper
& Glassman, and President of Tara Mortgage Inc. He has been a columnist for
NATIONAL MORTGAGE PRESS since 1997.
JOSEPH A. CILENTO is Chief Financial Officer of Premier Mortgage Resources,
Inc., Chief Executive Officer of United National, Inc., and Chief Operating
Officer of United National Mortgage, Inc. He has served in these capacities
since July of 1999. Mr. Cilento is a Certified Public Accountant, receiving a
B.B.A. degree from Baruch College in 1975, and his C.P.A. certification in 1978.
He is licensed as a C.P.A. in the state of New York.
Mr. Cilento was awarded the Certified Mortgage Banker designation by The
Mortgage Bankers Association in 1996. Mr. Cilento was an officer of Emigrant
Mortgage Corporation from 1997 to July of 1999. From 1987 to 1997, he was
President of his mortgage banking company, Home Funding, which he sold. Mr.
Cilento was Vice President of Finance for Merrill Lynch Realty from 1984 to
1987.
Mr. Cilento is responsible for overseeing all operations, secondary markets and
finance areas of the company.
ITEM 6. EXECUTIVE COMPENSATION
Currently, our Directors are not compensated for their services, although their
expenses in attending meetings are reimbursed.
Compensation of Directors
We do not currently compensate our Directors for their services.
Compensation of Management
18
<PAGE> 19
<TABLE>
<CAPTION>
Title 1999 1998 1997
----- ------ ---- ----
<S> <C> <C> <C> <C>
Donald Wilen CEO, Director $ -0- -0- -0-
William R. Scott President $ -0- -0- -0-
Joseph Cilento CFO $ -0- -0- -0-
</TABLE>
Mr. Cilento receives an annual salary of $107,000 from UNM.
William R. Scott presently receives $36,000 annually from UNM; he earned $25,000
from UNM in 1998, and no salary in 1997.
None of the named persons has received stock options or other such non-cash
compensation. Mr. Scott will also receive a bonus based upon total mortgage
production; however, details of this program have not been finalized.
Employment Agreements
Each Net Branch established signs a "Branch Agreement" which provides a
structure, salary and benefits much like an employment agreement. As of this
date, we have six Net Branches. We do not, however, have any employment
agreements with our officers or directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 22, 1998, Donald S. Wilen, now the Company's President and Director,
agreed to exchange his ownership of United National, Inc. for 377,778
(post-split) shares of the Company's Common Stock, giving him operational
control. A written Plan of Reorganization was entered into on June 9, 1998,
providing for the exchange by Mr. Wilen of his 100 shares of capital stock of
United National, Inc. for the 377,338 (post-split) shares of the Company's
Common Stock in a tax-free stock-for-stock exchange under Section 358(a)(1)(B)
of the Internal Revenue Code. United National, Inc. is the owner of a 2%
interest in United National Mortgage, LLC, a mortgage banker. The other 98%
interest is owned by Donald S. Wilen who has agreed that, upon approval by the
New York State Department of Banking of the required licenses, he will transfer
such 98% interest without further payment.
On August 5, 1998, the Company commenced an offering of its Common Stock under
Rule 504 of Regulation D. The offering was of 1,000,000 shares. A total of
877,640 shares were issued (post 6:1 reverse stock split) in the offering for
total proceeds of $953,418.
On February 22, 1999, the Company declared a 6 to 1 reverse stock split
effective on April 12, 1999.
In August 1999 the Company commenced a private placement offering of its Common
Stock under Rule 505 of Regulation D. The offering was of 1,100,000 shares at a
price of $ .50 per share. The offering was fully subscribed.
19
<PAGE> 20
ITEM 8. DESCRIPTION OF SECURITIES
Our capital structure consists of shares of Preferred Stock and Common Stock,
both having a par value of $.001 per share. The authorized classes, and the
amount or number of each which are authorized and outstanding as of the date of
this Memorandum, are as follows:
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
Preferred Stock 10,000,000 0
Common Stock 50,000,000 3,806,128
Common Stock Purchase Warrants 152,670 152,670
</TABLE>
Preferred Stock
The 10,000,000 shares of Preferred Stock authorized are undesignated as to
preferences, privileges and restrictions. As the shares are issued, the Board of
Directors must establish a "series" of the shares to be issued and designate the
preferences, privileges and restrictions applicable to that series. To date, the
Board of Directors has not designated any series of Preferred Stock.
Common Stock
The authorized common equity of the Company consists of 50,000,000 shares of
Common Stock, with a $.001 par value, of which 3,806,128 shares of Common Stock
are issued and outstanding. Shareholders (i) have general ratable rights to
dividends from funds legally available therefor, when, as and if declared by the
Board of Directors; (ii) are entitled to share ratably in all assets of the
Company available for distribution to shareholders upon liquidation, dissolution
or winding up of the affairs of the Company; (iii) do not have preemptive,
subscription or conversion rights, nor are there any redemption or sinking fund
provisions applicable thereto; and (iv) are entitled to one vote per share on
all matters on which shareholders may vote at all shareholder meetings. All
shares of Common Stock now outstanding are fully paid and nonassessable and all
shares of Common Stock to be sold in this offering will be fully paid and
nonassessable when issued.
The Common Stock does not have cumulative voting rights, which means that the
holders of more than fifty percent of the Common Stock voting for election of
directors can elect one hundred percent of the directors of the Company if they
choose to do so. The Company, which has had no earnings, has not paid any
dividends on its Common Stock and it is not anticipated that any dividends will
be paid in the foreseeable future. Dividends upon Preferred shares must have
been paid in full for all past dividend periods before distribution can be made
to the holders of Common Stock. In the event of a voluntary or involuntary
liquidation, all assets and funds of the Company remaining after payments to the
holders of Preferred Stock will be divided and distributed among the holders of
Common Stock according to their respective shares.
Common Stock Purchase Warrants
Prior to our acquisition of United National, Inc. that company had issued
20
<PAGE> 21
152,670 Common Stock Purchase Warrants, each exercisable to purchase one share
of the common stock of United National, Inc. at an exercise price of $6.00 per
share. The warrants expire as follows:
<TABLE>
<CAPTION>
Name Warrants Expiration Date
---- -------- ---------------
<S> <C> <C>
Douglas Nagel 33,334 3/18/00
Selectmedia Ltd. Corp. 33,334 3/20/00
Super Nova Inc. 33,334 2/9/00
Visual Company 8,334 6/5/00
Azucar Ltd. 11,000 6/3/00
Robert Hall 8,334 3/23/00
James Hall 8,334 4/15/00
Total Warrants 136,004
</TABLE>
As part of the acquisition, we assumed the Warrants, meaning that we recognized
the right of the warrant holders to purchase one share of our common stock for
each share of the common stock of United National, Inc. purchasable under the
warrant.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ Bulletin Board under the
symbol "PMTE," now "PMTED" pending our becoming a reporting company. To maintain
that listing, we must become a fully-reporting company to the SEC under the
Securities Exchange Act of 1934 on or before March 8, 2000. We anticipate
accomplishing such filing by November 1, 1999. Based on that time line, the
filing will be effective on or about December 31, 1999. We believe that we can
clear all comments by the March 8, 2000 required date.
J. Alexander Securities, Inc., our initial market maker, was authorized to
commence the trading of our stock on the OTC Bulletin Board on February 20, 1998
but actual trading began on approximately July 7, 1998. The range of our prices
since then is:
<TABLE>
<CAPTION>
Quarter High Ask Low Bid
- ------- -------- -------
1998
<S> <C> <C>
3rd Qtr, '98 $ 2.125 $ 1.44
4th Qtr '98 1.56 .21
</TABLE>
<TABLE>
<CAPTION>
Quarter High Ask Low Bid
- ------- -------- -------
1999
<S> <C> <C>
1st Qtr '99 .4375 .10
2nd Qtr '99 .1875 .1875
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
3rd Qtr '99 .4375 .4375
4th Qtr '99 (to Oct.4, 1999) .75 .4375
</TABLE>
The forgoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions.
Dividend Policy
We have not had any earnings or profits and have not paid any dividends. Our
proposed operations are capital intensive and we need working capital. Therefore
we will be required to reinvest any future earnings in the Company's operations.
Our Board of Directors has no present intention of declaring any cash dividends,
as we expect to re-invest all profits in the business for additional working
capital for continuity and growth. The declaration and payment of dividends in
the future will be determined by our Board of Directors considering the
conditions then existing, including the Company's earnings, financial condition,
capital requirements, and other factors.
ITEM 2. LEGAL PROCEEDINGS
Except as described below we are not engaged in any pending legal proceedings.
We are not aware of any legal proceedings pending, threatened or contemplated,
against any of our officers and directors, respectively, in their capacities as
such.
On August 19, 1999, the Company filed a suit captioned "Premier Mortgage
Resources, Inc. v. Corporate Relations Group, Inc., Gulf Atlantic Publishing,
Inc., James M. Hall, Robert D. Hall, Select Media, Inc., Roberto Veitia, L. Van
Stillman and Olde Monmouth Stock Transfer Co., Inc." docketed to No. C199-7019,
Division 35 in the Circuit Court of the Ninth Judicial Circuit in and for Orange
County, Florida.
As against Olde Monmouth Stock Transfer Co., Inc., the Company's stock transfer
agent, the suit is solely to enjoin the transfer of the shares, and Olde
Monmouth is a nominal defendant only. The Court has enjoined the transfer of the
shares and the Company has timely filed an injunction bond.
The case involves two separate causes of action: one cause of action for the
cancellation of shares issued without authorization and a second for return of
shares issued when contract services were not performed.
In the first cause of action, the Company's former attorney, L. Van Stillman, on
or about March 31, 1999, authorized and directed the Company's then transfer
agent to issue 583,334 (post-reverse split) free-trading shares of the Company's
Common Stock to the other defendants. The Company claims that it did not
authorize or direct the issuance of the shares, and Mr. Stillman has now
acknowledged that. The Company seeks to cancel the 583,334 shares.
In the second cause of action, the Company seeks the return of 94,000 shares
issued to Corporate Relations Group, Inc. (62,667 shares) and Gulf Atlantic
Publishing, Inc. (31,333 shares) issued to those companies for services which
the Company alleges were not performed. It appears that the defendants already
disposed of 10,333 shares, leaving a balance of 83,667 shares in dispute.
22
<PAGE> 23
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We selected Massella, Tomaro & Co., LLP, 375 Broadway, Suite 103, Jericho, New
York 11753 as our independent auditors and accountants. We have included our
audited financial statements for the calendar years ended December 31, 1998 and
December 31, 1997 in this filing in reliance upon the authority of that firm as
expert in auditing and accounting.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
We were incorporated on August 17, 1995. In connection with our organization, we
issued to founders 433,334 shares of our Common Stock (giving effect to the 1
for 6 reverse stock split of February 1999) to three founders for total proceeds
of $2,600. This issuance was considered exempt under Section 4(2) of the
Securities Act. Immediately following, we issued 400,000 shares of our Common
Stock (giving effect to the 1 for 6 reverse stock split of February 1999) to 33
investors for total proceeds of $2,400. This offering was made under Rule 504 of
Regulation D and this issuance was considered exempt under Section 3(b) of the
Securities Act and Rule 504 of Regulation D promulgated thereunder.
There were no further issuances of our securities until July 2, 1998. On July 2,
1998, we acquired United National, Inc. in a tax-free, stock-for-stock exchange
under Section 351(a)(1)(B) of the Internal Revenue Code. Mr. Donald Wilen, the
sole stockholder of United National, Inc. exchanged his 100 shares of the Common
Stock of that corporation for 377,778 shares (post-split) of our Common Stock.
This issuance was considered exempt under Section 4(2) of the Securities Act. In
connection with this transaction, 433,334 shares of our Common Stock owned by
then affiliates were returned to the Company and canceled.
Also in connection with the transaction, we previously assumed 152,670 warrants
issued and outstanding by United National, Inc. United National, Inc. had issued
these warrants to seven (7) lenders as an inducement to loan funds to the
corporation. Each warrant entitles the holder to purchase one share of Common
Stock for $6.00. The Warrants expire as follows:
<TABLE>
<CAPTION>
Name Warrants Expiration Date
---- -------- ---------------
<S> <C> <C>
Douglas Nagel 33,334 3/18/00
Selectmedia Ltd. Corp. 33,334 3/20/00
Super Nova Inc. 33,334 2/9/00
Visual Company 8,334 6/5/00
Azucar Ltd. 11,000 6/3/00
Robert Hall 8,334 3/23/00
James Hall 8,334 4/15/00
Total Warrants 136,004
</TABLE>
We considered the assumption of the Warrants previously issued to the seven (7)
lenders to be exempt under Section 4(2) of the Securities Act of 1933.
On August 5, 1998, we began offering of 1,000,000 shares Common Stock pursuant
to Rule 504 of Regulation D at an offering price of $1.00 per share. As a result
of that offering, from August to October, 1998 we issued 156,000 shares for
total proceeds of $156,000 and we secured the conversion of $358,000 of
outstanding promissory notes, for total combined proceeds of $514,000. This
23
<PAGE> 24
issuance was considered exempt under Section 3(b) of the Securities Act and Rule
504 of Regulation D promulgated thereunder.
On October 27, 1998 we issued 8,334 shares to an individual in payment for
financial and business consulting services valued at $33,500. This value was
determined with reference to the price at which free-trading shares were then
being offered under the Rule 504 offering, discounted to reflect that these
8,334 shares were restricted from transfer. This issuance was considered exempt
under Section 4(2) of the Securities Act.
In December, 1998 we amended the Rule 504 offering to change the offering price
to $.0845 per share. As a result of that offering, during December, 1998 and the
first quarter of 1999, we issued 787,807 shares (post-split) for total proceeds
of $399,418. This issuance was considered exempt under Section 3(b) of the
Securities Act and Rule 504 of Regulation D promulgated thereunder.
On or about March 31, 1999 the Company's then counsel authorized and directed
the issuance of 3,500,000 shares of the Company's Common Stock at an offering
price of $.001 per share, allegedly under Rule 504 of Regulation D. The
counsel's actions were not authorized or directed by the Company and the Company
has filed suit to cancel such issuances. On February 22, 1999 we authorized a 1
for 6 reverse stock split for stockholders of record on April 12, 1999 and all
of the foregoing issuances have been stated on a pre-split basis.
On February 22, 1999 we authorized a 1 for 6 reverse stock split for
stockholders of record on April 12, 1999 and all of the foregoing issuances have
been stated on a pre-split basis.
In August 1999 we made an offering of 1,100,000 shares of our Common Stock to
approximately 15 accredited investors under Rule 505 of Regulation D at an
offering price of $0.50 per which was fully subscribed. This issuance was
considered exempt under Section 4(2) of the Securities Act, Section 3(b) of the
Securities Act and Rule 505 of Regulation D promulgated thereunder.
As of September 30, 1999, we issued a total of 536,000 shares of our Common
Stock to various persons in payment for services in private placements. Of the
total, 50,000 shares were issued to an attorney in payment for legal services
valued at $25,000, and 486,000 shares of Common Stock were issued to 9
individuals or entities for services as finders in the forgoing private
placement. These issuances were considered exempt under Section 4(2) of the
Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Nevada Corporation Law
Section 78.7502 of the Nevada General Corporation Law contains provisions
authorizing indemnification by the Company of directors, officers, employees or
agents against certain liabilities and expenses which they may incur as
directors, officers, employees or agents of the Company or of certain other
entities. Section 78.7502(3) provides for mandatory indemnification, including
24
<PAGE> 25
attorney's fees, if the director, officer, employee or agent has been successful
on the merits or otherwise in defense of any action, suit or proceeding or in
defense of any claim, issue or matter therein. Section 78.751 provides that such
indemnification may include payment by the Company of expenses incurred in
defending a civil or criminal action or proceeding in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by the
person indemnified to repay such payment if he shall be ultimately found not to
be entitled to indemnification under the Section. Indemnification may be
provided even though the person to be indemnified is no longer a director,
officer, employee or agent of the Company or such other entities. Section 78.752
authorizes the Company to obtain insurance on behalf of any such director,
officer employee or agent against liabilities, whether or not the Company would
have the power to indemnify such person against such liabilities under the
provisions of the Section 78.7502.
Under Section 78.751(e) the indemnification and advancement of expenses provided
pursuant to Sections 78.7502 and 78.751 are not exclusive, and subject to
certain conditions, the Company may make other or further indemnification or
advancement of expenses of any of its directors, officers, employees or agents.
Because neither the Articles of Incorporation, as amended, nor the By-Laws of
our Company otherwise provide, notwithstanding the failure of the Company to
provide indemnification and despite a contrary determination by the Board of
Directors or its shareholders in a specific case, a director, officer, employee
or agent of the Company who is or was a party to a proceeding may apply to a
court of competent jurisdiction for indemnification or advancement of expenses
or both, and the court may order indemnification and advancement of expenses,
including expenses incurred in seeking court-ordered indemnification or
advancement of expenses if it determines that the petitioner is entitled to
mandatory indemnification pursuant to Section 78.7502(3) because he has been
successful on the merits, or because the Company has the power to indemnify on a
discretionary basis pursuant to Section 78.7502 or because the court determines
that the petitioner is fairly and reasonably entitled indemnification or
advancement of expenses or both in view of all the relevant circumstances.
Articles of Incorporation and By-Laws
Our Articles of Incorporation and By-Laws empower us to indemnify current or
former directors, officers, employees or agents of the Company or persons
serving by request of the Company in such capacities in any other enterprise or
persons who have served by the request of the Company is such capacities in any
other enterprise to the full extent permitted by the laws of the State of
Nevada.
Officers and Directors Liability Insurance
At present, we do not maintain Officers and Directors Liability Insurance and,
because of the anticipated cost of such insurance, we have no present plans to
obtain such insurance.
Indemnity Agreements
In order to induce and encourage highly experienced capable persons to serve as
directors and officers, we have entered into an Indemnity Agreement with each
director and officer presently serving us and will provide the same agreement to
future directors and officers as well as certain agents and employees. The
Agreement provides that we shall indemnify the director and /or officer, or
other person, when he or she is a party to, or threatened to be made a party to,
25
<PAGE> 26
a proceeding by, or in the name of, we. Expenses incurred by the indemnified
person in any proceeding are to be paid to the fullest extent permitted by
applicable law. The Agreement may at some time require us to pay out funds which
might otherwise be utilized to further our business objectives, thereby reducing
our ability to carry out our projected business plans.
Sec Position on Indemnification for Security Act Liability
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that is the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suite
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Premier Mortgage Resources, Inc.
--------------------------------
(Registrant)
Date February 3, 2000 /s/ DONALD WILEN
---------------- ------------------------------------------
Donald Wilen, President
/s/ JOSEPH CILENTO
------------------------------------------
Joseph Cilento, CFO
26
<PAGE> 27
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 28
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
number
------
<S> <C>
Independent auditors' report F-1
Consolidated balance sheet at December 31, 1998 F-2
Consolidated statements of operations for the years ended
December 31, 1998 and 1997 F-3
Consolidated statement of stockholders' equity for the years ended
December 31, 1998 and 1997 F-4
Consolidated statements of cash flows for the years ended
December 31, 1998 and 1997 F-5
Notes to consolidated financial statements F-6 - F-15
</TABLE>
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Premier Mortgage Resources, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Premier Mortgage
Resources, Inc. and Subsidiary (the "Company") as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1998 and the consolidated results of its operations
and cash flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
Massella, Tomaro & Co., LLP
Jericho, New York
August 13, 1999, except for
Note 8(d) as to which the date is September 27, 1999
F-1
<PAGE> 30
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 2,053
---------
Total current assets 2,053
=========
Investment in affiliate, at cost 691,000
Organizational costs, net 970
---------
Total assets $ 694,023
=========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Accrued expenses $ 49,233
Due to related parties 1,503
Notes payable - convertible 100,000
Note payable 50,000
---------
Total current liabilities 200,736
=========
Commitments and contingencies (Note - 8) --
---------
Stockholders' equity:
Common stock - $.001 par value, 50,000,000 shares authorized,
1,063,188 shares issued and outstanding 1,063
Preferred stock - $.001 par value, 10,000,000 shares
authorized, -0- shares issued and outstanding --
Additional paid-in capital 586,914
Accumulated deficit (94,690)
---------
Total stockholders' equity 493,287
---------
Total liabilities and stockholders' equity $ 694,023
=========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 31
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Income - Related Party $ 121,210 $ -
--------------- ----------------
Expenses:
Selling, general, and administrative expenses 182,509 1,072
--------------- ----------------
Total expenses 182,509 1,072
--------------- ----------------
Loss before interest expense and provision for income taxes (61,299) (1,072)
Interest expense (34,233) -
---------------- ----------------
Loss before provision for income taxes (95,532) (1,072)
Provision for income taxes - -
--------------- ----------------
Net (loss) (95,532) (1,072)
Other items of comprehensive income - -
--------------- ----------------
Comprehensive net (loss) $ (95,532) $ (1,072)
================ ================
Basic:
Net (loss) $ (.12) $ Nil
================ ================
Weighted average number of
common shares outstanding 822,878 833,347
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 32
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity(Deficit)
------ ------ ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 833,347 $ 833 $ 4,167 $ (4,864) $ 136
Net loss for the year ended
December 31, 1997 -- -- -- (1,072) (1,072)
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 833,347 833 4,167 (5,936) (936)
Cancellation of common stock in
connection with reorganization (433,333) (433) (2,167) -- (2,600)
Issuance of common stock in
connection with recapitalization 377,778 378 (9,243) 6,778 (2087)
Issuance of common stock in
connection with conversion
of notes payable 59,667 60 357,940 -- 358,000
Issuance of common stock in connection
with limited offering memorandum,
net of costs 18,334 18 101,999 -- 102,017
Issuance of common stock in
connection with amended
limited offering memorandum,
net of costs 199,062 199 100,726 -- 100,925
Issuance of common stock in lieu of
consideration for services rendered
to the Company 8,333 8 33,492 -- 33,500
Net loss for the year ended
December 31, 1998 -- -- -- (95,532) (95,532)
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 1,063,188 $ 1,063 $ 586,914 $ (94,690) $ 493,287
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 33
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (95,532) $ (1,072)
Adjustments to reconcile net (loss) to net
cash used for operating activities:
Amortization 287 1,072
Issuance of common stock for services 33,500 -
Increase (decrease) in:
Accrued expenses 49,233 -
-------------- --------------
Net cash used for operating activities (12,512) -
--------------- --------------
Cash flows from investing activities:
Investment in affiliate (691,000) -
-------------- --------------
Net cash used for investing activities (691,000) -
--------------- --------------
Cash flows from financing activities:
Sale of common stock in connection with
private placement, net of costs 193,462 -
-
Proceeds from issuance of convertible notes payable 458,000 -
Proceeds from issuance of note payable 50,000 -
Advances from related parties 4,103 -
-------------- --------------
Net cash provided by financing activities 705,565 -
-------------- --------------
Net increase in cash 2,053 -
Cash, beginning of period - -
-------------- --------------
Cash, end of period $ 2,053 $ -
============== ==============
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ - $ -
============== ===============
Income taxes $ - $ -
============== ===============
Schedule of non-cash operating activities:
In connection with services rendered to the Company,
8,333 shares of common stock were issued as consideration $ 33,500 $ -
============== ==============
Schedule of non-cash investing activities:
Issuance of 59,667 shares of common stock in connection
with conversion of note payable $ 358,000 $ -
============== ==============
Contribution of real property directly by the Company's
President in lieu of stock received in connection
with acquisition of subsidiary $ 85,000 -
============== ==============
Issuance of 377,778 shares of Common Stock in
connection with recapitalization $ (2,087) $ -
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 34
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1 - ORGANIZATION
The Company
Premier Mortgage Resources, Inc. (the "Company") was incorporated in
the State of Nevada on August 17, 1995 under the name "Mortgage
Resources, Inc." The name of the Company was changed on August 20, 1997
to its current name. Until the acquisition of United National, Inc.
("United") in June 1998, the Company had no operations. The Company
acquired United during June 1998 in order to commence operations in the
mortgage banking industry.
Reorganization
During June 1998, pursuant to an Agreement and Plan of Reorganization
(the "Reorganization Agreement"), the current President and shareholder
received 377,778 representing 48.6% of the common stock outstanding
after the cancellation of 433,333 shares of the previous officers as
discussed in the next paragraph, in consideration for 100% of the
shares of common stock of United. Such transaction is considered a
capital transaction whereby United contributed its stock for the net
assets of the Company which was consummated simultaneously with a
recapitalization of the Company.
Simultaneously with the execution of the Reorganization Agreement, the
former officers of the Company canceled 433,333 shares of common stock
and resigned as officers of the Company. In connection with the
resignation of the previous officers of the Company, the previous sole
shareholder of United was elected as President of the Company.
Accordingly, after such capital transaction, United became a wholly
owned subsidiary of the Company.
United
United was incorporated in the State of Nevada on November 21, 1997.
Since the date of incorporation and through August 1998, United had
limited operations. Since August 1998, United has performed loan
processing and telemarketing services for United National Mortgage,
LLC. ("LLC"). As of December 31, 1998 United owns approximately 2%
interest in the LLC which is accounted for under the cost method.
LLC
The LLC is a limited liability company whereby the Company's President
owns approximately 98% as of December 31, 1998. The Company currently
has an option to purchase the remaining 98% interest from its President
subject to the approval by New York State Banking Department. The LLC
is a licensed mortgage banker in approximately sixteen states which
primarily originates conforming conventional loans, and sells those
loans to investors, with servicing released. The intent of the Company
is to execute its option and have the LLC become a wholly owned
subsidiary in order to enter the mortgage banking industry.
F-6
<PAGE> 35
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Stock split
On February 22, 1999, the Company declared a 1 for 6 reverse stock
split (effective on April 12, 1999) for its common stock. The financial
statements give retroactive effect to such reverse stock split
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, United (the
"Companies") after elimination of all significant intercompany
transactions and accounts.
b) Cash and cash equivalents
The Company considers highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
c) Upon the Company acquiring the remaining 98% interest in the LLC as
discussed in Note 1, it will adopt all the accounting policies of
the LLC. Accordingly, its revenue recognition policies are expected
to be as follows;
(i) Revenue Recognition: Revenue from both the "Retail Origination
Division" and the "Wholesale Division" will be recognized
upon loan sale to the investor.
(ii) Branch Office Operations: All branch managers, including Net
Branch managers, will be employees of the Company. For Net
Branches, in states where permissible, Net Branch managers
are contractually obligated to pay the expenses of the branch.
In states where not permissible, the Company pays these
expenses directly. All revenue earned and related expenses by
the branches of the Company will be reflected in the statement
of operations of the Company.
d) Income taxes
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes" which requires the use of the "liability method" of
accounting for income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences
are expected to reverse. Current income taxes are based on the
respective periods' taxable income for federal and state income tax
reporting purposes.
e) Earnings per share
During 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 replaced the previously
required reporting of primary and fully diluted earnings per share
with basic and diluted earnings per share, respectively. Unlike the
previously reported primary earnings per share, basic earnings per
share exclude the dilutive effects of stock options. Diluted
earnings per share is similar to the previously reported fully
diluted earnings per share. Earnings per share amounts for all
periods presented have been calculated in accordance with the
requirements of SFAS No. 128.
F-7
<PAGE> 36
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
f) Use of estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions which affect the reported amounts of
assets and liabilities, revenues and expenses during the reporting
period and the disclosure of contingent assets and liabilities at
the date of the financial statements. The most significant estimate
with regards to the consolidated financial statements relate to the
valuation of the costs in excess of United's net assets and the
estimated useful life used in amortizing such excess costs. Actual
results could differ from those estimates.
g) Fair value disclosure at December 31, 1998
The carrying value of cash, accrued expenses, and notes payable are
a reasonable estimate of their fair value.
h) Organizational costs
Organizational costs consist of legal costs incurred in the
establishment of the Company. Organizational costs are being
amortized on a straight-line basis over a five year estimated useful
life.
i) Costs in excess of net assets of business acquired.
Costs in excess of net assets of business acquired relate to the
acquisition of United and are being amortized on a straight-line
basis over the estimated useful life of twenty years as estimated by
management.
j) Effect of New Accounting Standards
The Company does not believe that any recently issued accounting
standards, not yet adopted by the Company, will have a material
impact on its financial position and results of operations when
adopted.
k) Cost Method of Accounting
United accounts for the investment in the LLC under the cost method
of accounting as a result of its 2% ownership interest. Upon
approval from the New York Banking Department, the Company's
President will transfer the remaining 98% interest in the LLC to
United for a nominal consideration ($10) in accordance with the
agreement discussed in Note 3. Upon such transfer the LLC will
become a wholly owned subsidiary and will be consolidated by the
Company.
F-8
<PAGE> 37
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 3 - INVESTMENT IN AFFILIATE, AT COST
On July 29, 1998, United entered into a LLC Interest Acquisition
Agreement (the "LLC Acquisition Agreement") with the Company's
President whereby for an initial $508,000 it acquired a 1% interest in
the LLC and the option to acquire the remaining 99% interest in the LLC
as follows; 1% based on required capital by the LLC in order to remain
in compliance with its net capital requirements with various state
banking laws until it reaches its expected level of revenues sufficient
to maintain its capital requirements and the remaining 98% (which is
contingent upon obtaining approval from the New York Banking
Department) for nominal consideration ($10). As of December 31, 1998,
United has invested an aggregate of $691,000 into the LLC based on the
above agreement.
The LLC Acquisition Agreement called for the closing and transfer of
the remaining 98% interest by March 31, 1999. The approval from the New
York Banking Department has not been received and accordingly such
transaction has not been consummated. The closing date has been
extended to February 15, 2000.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Professional fees $ 15,000
Interest 34,233
----------
$ 49,233
==========
</TABLE>
NOTE 5 - LOAN PAYABLE
During March 1998, an outside third party loaned United $50,000 bearing
interest at 12% per annum. The loan is due on demand due to no formal
terms having been established. As of December 31, 1998, such advance
remains unpaid.
NOTE 6 - CONVERTIBLE NOTES PAYABLE
Prior to the Reorganization Agreement, United issued convertible
promissory notes amounting to $458,000 that bear interest 12% per
annum. The maturity date of the notes (if not converted prior to their
due date) were as follows; $100,000 due May 31, 1998 and the remaining
$358,000 due in six monthly installments commencing September 15, 1998.
Pursuant to the Reorganization Agreement, the Company assumed $358,000
of such
F-9
<PAGE> 38
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
convertible promissory notes which were subsequently converted into
approximately 59,667 shares of the Company's common stock as of
December 31, 1998. The remaining $100,000 notes were repaid during
April 1999 by United. As of December 31, 1998, the Company is in
default for two notes totaling $100,000, which have been repaid by
April 1999 and the accrued interest related to all the notes which has
been accrued, however not paid. Pursuant to the notes, the Company may
be liable for legal cost (which are deemed immaterial) if there is any
litigation in connection with the default of the two notes and the
unpaid interest.
NOTE 7 - PROVISION FOR INCOME TAX
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related to differences between the financial statement
and tax bases of assets and liabilities for financial statement and
income tax reporting purposes. Deferred tax assets and liabilities
represent the future tax return consequences of these temporary
differences, which will either be taxable or deductible in the year
when the assets or liabilities are recovered or settled. Accordingly,
measurement of the deferred tax assets and liabilities attributable to
the book-tax basis differentials are computed at a rate of 34% federal
and 9% state pursuant to SFAS No. 109.
The only material tax effect of significant items comprising the
Company's current deferred tax assets as of December 31, 1998 is the
Company's net operating losses "NOL"s" which amounted to approximately
$95,000 as of December 31, 1998. The deferred tax asset associated with
the Company's NOL's amounted to approximately $36,000 as of December
31, 1998.
In accordance with SFAS 109, the Company has recorded a 100% valuation
allowance for such deferred tax asset since management could not
determine that it was "more likely than not" that the deferred tax
asset would be realized in the future. The Company's NOL's amounting to
approximately $95,000 will expire by 2013 if not utilized prior.
The Company and its subsidiary file separate tax returns for federal
and state tax purposes. As such, income tax is based on the separate
taxable income or loss of each entity.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
a) Year 2000
The Companies have addressed and will continue to address the year
2000 issue to ensure the reliability of its operational system. The
Companies have and will continue to make certain investment in its
software systems and applications to ensure that it is Year 2000
compliant. These expenditures, which are expensed as incurred are
not expected to be
F-10
<PAGE> 39
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
material. The Companies are also working with its financial
institutions for which it conducts its business with to ensure their
compliance with Year 2000 issues in order to avoid any interruptions
in its business.
b) Advertising and Corporate Relations Agreements
On March 13, 1998, United entered into agreements for public
relations and advertising services with Gulf Atlantic Publishing,
Inc ("Gulf Atlantic") and Corporate Relations Group, Inc.("Corporate
Relations"). The agreements are for a period of twelve months and
include certain marketing products such as mailings, press releases
and posting to websites, along with distributing due diligence
packages to all inquiring brokers and setting up shows for
advertising purposes. As consideration for such services, the
Company agreed to sell 109,560 free trading shares of common stock
for a total of $30,000. (See Note 8(d) below for pending
litigation).
c) Introduction Agreement
On March 17, 1998, United entered into an Introduction Agreement
with Select Media Ltd. Corp. ("Select Media") in connection with its
efforts to obtain loans to fund United's operations. The agreement
stipulated that Select Media would provide United with names and
introductions for the purpose of allowing United to solicit such
individuals for loans. As consideration for such introductions,
United agreed to pay Select Media 15% of the amounts borrowed by
United and one warrant to purchase stock of the Company for each $1
of funds loaned to United. (See Note 8(d) below for pending
litigation). As of December 31, 1998, United is not liable for any
compensation payable to Select Media.
d) Pending litigation
Although as of December 31, 1998, the Company's previous transfer
agent issued an aggregate of 83,668 shares of common stock to the
entities mentioned in notes 8(b) and 8(c), the Company, in August
1999 filed a formal complaint in the state of Florida whereby the
courts granted a temporary restraining order against the individuals
and/or entities which received such stock to prohibit the transfer
of stock. The Company contends that such shares held by these
individuals/entities were wrongfully issued. As of December 31, 1998
such shares are not included as outstanding in the Company's
financial statements since management contends that the related
services discussed in notes 8(b) were not fulfilled and no funds
were received related to note 8(c), therefore the Company has no
obligation related to these agreements. Management is involved in
discussions with some of the defendants to reach an out-of-court
settlement of the litigation. The Company has not recorded any
potential contingency loss since management intends on pursuing this
matter vigorously.
F-11
<PAGE> 40
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
e) Investment in affiliate, at Cost
The Company has committed in funding the LLC in order for the LLC to
remain in compliance with various state banking requirements as to
its net capital requirements until such time it reaches its expected
revenue level thereby becoming self funding. As of December 31,
1998, the Company and United have invested $691,000 in the LLC.
NOTE 9 - STOCKHOLDER'S EQUITY
a) Reorganization
The Company, pursuant to the Reorganization Agreement i) cancelled
433,333 shares of common stock representing a portion of shares held
by its former officers, ii) accepted resignations from its former
officers, iii) issued 377,778 shares to United's sole stockholder
which represented 48.6% of the common stock outstanding after the
cancellation of the 433,333 shares, and, iv) elected United previous
sole stockholder as its President. Accordingly, United became a
wholly owned subsidiary in connection with such capital transaction
whereby United contributed its common stock for the net assets of
the Company followed by immediately a recapitalization of the
Company.
In June 1998, prior to the Reorganization Agreement, United issued
convertible promissory notes amounting to $458,000 that bear
interest 12% per annum. The maturity date of the notes (if not
converted prior to their due date) were as follows; $100,000 due May
31, 1998 and the remaining $358,000 due in six monthly installments
commencing September 15, 1998. Pursuant to the Reorganization
Agreement, the Company assumed $358,000 of such convertible
promissory notes which were subsequently converted into
approximately 59,667 shares of the Company's common stock as of
December 31, 1998. The remaining $100,000 notes were repaid during
April 1999 by United. As of December 31, 1998, the Company is
primarily in default for two notes totaling $100,000, which have
been repaid by April 1999 and the accrued interest related to all
the notes which amounted to $34,233. Pursuant to the notes, the
Company may be liable for legal cost (which are deemed immaterial)
if there is any litigation in connection with the default of the two
notes and the unpaid interest.
Lastly, in connection with such convertible promissory notes, the
Company issued a total of 102,667 warrants which allow the holders
to purchase 102,667 shares of the Company's common stock at $1 per
share through June, 2000.
b) Limited Offering Memorandum
During August 1998, the Company commenced a Limited Offering
Memorandum (the "Offering") pursuant to Rule 504 of Regulation D
promulgated under the Securities Act of 1933. The Company offered up
to 166,667 shares of its common stock at $6 per share. The minimum
purchase amount per investor was $10,000. As of December 31, 1998
the Company sold 18,334 shares of common stock yielding net proceeds
after certain offering
F-12
<PAGE> 41
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
costs of $102,017. In addition, as discussed in Note 9(a), the
Company issued 59,667 shares of its common stock pursuant the
Offering upon the assumption and conversion of United's convertible
note payables amounting to $358,000.
Pursuant to an addendum to the offering, during December 1998, the
Company offered an additional 566,667 shares of its common stock to
certain investors for an aggregate consideration of $287,300. As of
December 31, 1998, the investors accepted and the Company issued
199,062 shares of common stock yielding net proceeds of $100,925
related to the addendum.
c) Issuance of common stock for services
During October 1998, the Company issued 8,333 shares to a consultant
of the Company in lieu of consideration for consulting services.
Accordingly, in connection with the issuance of such shares, the
Company recorded consulting expense amounting to $33,500.
d) Warrants
As of December 31, 1998, the Company has outstanding a total of
102,667 warrants which allow the holders to purchase 102,667 shares
of the Company's common stock at $1 per share through June, 2000
NOTE 10 - RELATED PARTY TRANSACTIONS
a) Exclusive Telemarketing Agreement
On August 12, 1998, United entered into an Exclusive Telemarketing
Agreement ("Telemarketing Agreement") with the LLC whereby United is
the exclusive telemarketing agent for the LLC until it acquires the
remaining interest in the LLC. As for consideration for performing
telemarketing services for the LLC, the LLC will pay United an
hourly rate for its telemarketing services. For the year ended
December 31, 1998, United generated telemarketing income amounting
to $61,210.
b) Exclusive Loan Processing Agreement
On August 12, 1998, United entered into an Exclusive Loan Processing
Agreement ("Processing Agreement") with the LLC whereby United is
the exclusive processing service for the LLC until it acquires the
remaining interest in the LLC. As consideration for performing
processing services for the LLC, the LLC will pay United a
processing fee for each loan processed.. For the year ended December
31,1998, United generated loan processing fee income amounting to
$60,000.
F-13
<PAGE> 42
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
c) Rent Expense
For the year ended December 31, 1998, pursuant to the Telemarketing
and Processing Agreement, United paid $65,000 to the LLC for rent in
connection with the space utilized in performing telemarketing and
processing services.
d) Due to related parties
The amount due to related parties as of December 31, 1998 amounting
to $1,503 is an over advances from the LLC in connection with the
reimbursement to United for telemarketing and processing services.
NOTE 11 - PRO FORMA FINANCIAL STATEMENTS
The following pro forma information presents in a condensed format
the Company's balance sheet as of December 31, 1998 and statement of
operations for the year then ended as if the acquisition of the LLC
by United was consummated and considered in effect as of January 1,
1998:
<TABLE>
<CAPTION>
Pro forma
balance sheet at
December 31, 1998
-----------------
<S> <C>
Total assets $ 2,574,627
===========
Total liabilities $ 2,473,219
===========
Total stockholders' equity $ 101,408
===========
</TABLE>
<TABLE>
<CAPTION>
Pro forma
Statement of operations
for the year ended
December 31, 1998
-----------------
<S> <C>
Total income $ 515,903
===========
Total expenses $ 1,250,057
===========
Net loss $ (734,154)
===========
</TABLE>
F-14
<PAGE> 43
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
This pro forma information regarding the Company's balance sheet and
statement operations has been presented for disclosure purposes and
does not purport to be indicative of the Company's financial
position and results of operations which would have actually
resulted had the acquisition of the LLC occurred as of January 1,
1998.
NOTE 12 - SUBSEQUENT EVENTS
a) Limited Offering Memorandum
Pursuant to the amended Offering, the Company through September 1999
received net proceeds of approximately $247,958 after offering costs
and issued approximately 540,351 shares of common stock.
b) Private transaction
During August 1999, the Company entered into a private transaction
whereby it sold 1,100,000 restricted shares of its common stock for
$550,000 before an 8% commission, netting $506,000 to the Company.
In addition, the Company also committed to issue and additional
550,000 shares that will be treated as additional commission in
connection with such private transaction.
F-15
<PAGE> 44
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<PAGE> 45
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Page
number
------
<S> <C>
Consolidated balance sheet (unaudited) at September 30, 1999 F-1
Consolidated statements of operations (unaudited) for the nine months ended
September 30, 1999 and 1998 F-2
Consolidated statement of stockholders' equity (unaudited) for the nine months ended
September 30, 1999 F-3
Consolidated statements of cash flows (unaudited) for the nine months ended
September 30, 1999 and 1998 F-4
Notes to consolidated financial statements F-5 - F-9
</TABLE>
<PAGE> 46
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 729
-----------
Total current assets 729
-----------
Investment in affiliate, at cost 1,365,357
Organizational costs, net 781
-----------
Total assets $ 1,366,867
===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Accrued expenses $ 77,000
Due to related parties 42,320
Note payable 50,000
-----------
Total current liabilities 169,320
-----------
Commitments and contingencies (Note - 5) --
-----------
Stockholders' equity:
Common stock - $.001 par value, 50,000,000 shares authorized,
3,253,539 shares issued and outstanding 3,253
Preferred stock - $.001 par value, 10,000,000 shares
authorized, -0- shares issued and outstanding --
Additional paid-in capital 1,376,084
Accumulated deficit (181,790)
-----------
Total stockholders' equity 1,197,547
-----------
Total liabilities and stockholders' equity $ 1,366,867
===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
F-1
<PAGE> 47
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Income - Related Party $ 197,040 $ 45,985
----------- -----------
Expenses:
Selling, general, and administrative expenses 276,340 109,253
----------- -----------
Total expenses 276,340 109,253
----------- -----------
Loss before interest expense and provision for income taxes (79,300) (63,268)
Interest expense 7,800 25,000
----------- -----------
Loss before provision for income taxes (87,100) (88,268)
Provision for income taxes -- --
----------- -----------
Net (loss) (87,100) (88,268)
Other items of comprehensive income -- --
----------- -----------
Comprehensive net (loss) $ (87,100) $ (88,268)
=========== ===========
Basic:
Net (loss) $ (.04) $ (.14)
=========== ===========
Weighted average number of
common shares outstanding 2,158,364 637,562
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
F-2
<PAGE> 48
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 1,063,188 $ 1,063 $ 586,914 $ (94,690) $ 493,287
Issuance of common stock
in connection with limited
offering memorandum and
private transaction, net of costs 2,190,351 2,190 789,170 - 791,360
Net loss for the nine months ended
September 30, 1999 - - - (87,100) (87,100)
------------- ------------- ------------- -------------- --------------
Balances at September 30, 1999 3,253,539 $ 3,253 $ 1,376,084 $ (181,790) $ 1,197,547
============= ============= ============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
F-3
<PAGE> 49
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (87,100) $ (88,268)
Adjustments to reconcile net (loss) to net
cash used for operating activities:
Amortization 189 217
Issuance of common stock for services - 33,500
Increase (decrease) in:
Accrued expenses 27,767 25,000
-------------- --------------
Net cash used for operating activities (59,144) (29,551)
-------------- ---------------
Cash flows from investing activities:
Investment in affiliate (674,357) (599,000)
-------------- ---------------
Net cash used for investing activities (674,357) (599,000)
-------------- ---------------
Cash flows from financing activities:
Sale of common stock in connection with
private placement, net of costs 791,360 126,740
Proceeds from issuance of convertible notes payable - 458,000
Proceeds from issuance of note payable - 50,000
Repayment of notes payable (100,000) -
Advances from related parties 40,817 4,661
-------------- --------------
Net cash provided by financing activities 732,177 639,401
-------------- --------------
Net (decrease) increase in cash (1,324) 10,850
Cash, beginning of period 2,053 -
-------------- --------------
Cash, end of period $ 729 $ 10,850
============== ==============
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest $ - $ -
============== ===============
Income taxes $ - $ -
============== ===============
Schedule of non-cash operating activities: In connection with services rendered
to the Company, 8,333 shares of common stock were issued as
consideration $ - $ 33,500
============== ==============
Schedule of non-cash investing activities:
Issuance of 59,667 shares of common stock in connection
with conversion of note payable $ - $ 358,000
============== ==============
Contribution of real property directly by the Company's
President in lieu of stock received in connection
with acquisition of subsidiary $ - 85,000
============== ==============
Issuance of 377,778 shares of common stock
in connection with recapitalization $ - $ (2,087)
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
F-4
<PAGE> 50
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
NOTE 1 - ORGANIZATION
Premier Mortgage Resources, Inc. (the "Company") was incorporated in
the State of Nevada on August 17, 1995 under the name "Mortgage
Resources, Inc." The name of the Company was changed on August 20, 1997
to its current name. Until the acquisition of United National Inc.
("United") in June 1998, the Company had no operations. The Company
acquired United during June 1998 in order to commence operations in the
mortgage banking industry.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the interim
financial statements include all adjustments necessary in order to make
the financial statements not misleading. The results of operations for
the nine months ended are not necessarily indicative of the results to
be expected for the full year. For further information, refer to the
Company's audited financial statements and footnotes thereto at
December 31, 1998.
NOTE 2 - INVESTMENT IN AFFILIATE, AT COST
On July 29, 1998, United entered into a LLC Interest Acquisition
Agreement (the "LLC Acquisition Agreement") with the Company's
President whereby for an initial $508,000 it acquired a 1% interest in
United National Mortgage, LLC ("LLC") and the option to acquire the
remaining 99% interest in the LLC as follows; 1% based on the required
capital by the LLC in order to remain in compliance with its net
capital requirements with various state banking laws until it reaches
its expected level of revenues sufficiently to maintain its capital
requirements, and the remaining 98% (which is contingent upon obtaining
approval from the New York Banking Department) for nominal
consideration ($10). As of September 30, 1999, United has invested an
aggregate of $1,365,357 into the LLC based on the above agreement.
The LLC Acquisition Agreement called for the closing and transfer of
the remaining 98% interest by March 31, 1999. The approval from the New
York Banking Department has not been received and accordingly such
transaction has not been consummated. The closing date is expected to
occur before February 15, 2000.
NOTE 3 - LOAN PAYABLE
During March 1998, an outside third party loaned United $50,000 bearing
interest at 12% per annum. The loan is due on demand due to no formal
terms having been established. As of September 30, 1999, such advance
remains unpaid.
F-5
<PAGE> 51
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
NOTE 4 - CONVERTIBLE NOTES PAYABLE
In June 1998, prior to the Reorganization Agreement, United issued
convertible promissory notes amounting to $458,000 that bear interest
12% per annum. The maturity date of the notes (if not converted prior
to their due date) were as follows; $100,000 due May 31, 1998 and the
remaining $358,000 due in six monthly installments commencing September
15, 1998. Pursuant to the Reorganization Agreement, the Company assumed
$358,000 of such convertible promissory notes which were subsequently
converted into approximately 59,667 shares of the Company's common
stock as of December 31, 1998. The remaining $100,000 notes were repaid
during April 1999 by United. As of September 30, 1999, the Company is
primarily in default for the accrued interest related to all the notes
which has been accrued, however not paid. Pursuant to the notes, the
Company may be liable for legal cost (which are deemed immaterial) if
there is any litigation in connection with the unpaid interest.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
a) Year 2000
The Companies have addressed and will continue to address the year
2000 issue to ensure the reliability of its operational system. The
Companies have and will continue to make certain investment in its
software systems and applications to ensure that it is Year 2000
compliant. These expenditures, which are expensed as incurred are
not expected to be material. The Companies are also working with its
financial institutions for which it conducts its business with to
ensure their compliance with Year 2000 issues in order to avoid any
interruptions in its business.
b) Advertising and Corporate Relations Agreements
On March 13, 1998, United entered into agreements for public
relations and advertising services with Gulf Atlantic Publishing,
Inc ("Gulf Atlantic") and Corporate Relations Group, Inc.("Corporate
Relations"). The agreements are for a period of twelve months and
include certain marketing products such as mailings, press releases
and posting to websites, along with distributing due diligence
packages to all inquiring brokers and setting up shows for
advertising purposes. As consideration for such services, the
Company agreed to sell 109,560 free trading shares of common stock
for a total of $30,000. (See Note 5(d) below for pending
litigation).
F-6
<PAGE> 52
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
c) Introduction Agreement
On March 17, 1998, United entered into an Introduction Agreement
with Select Media Ltd. Corp. ("Select Media") in connection with its
efforts to obtain loans to fund United's operations. The agreement
stipulated that Select Media would provide United with names and
introductions for the purpose of allowing United to solicit such
individuals for loans. As consideration for such introductions,
United agreed to pay Select Media 15% of the amounts borrowed by
United and one warrant to purchase stock of the Company for each $1
of funds loaned to United. (See Note 5(d) below for pending
litigation). As of September 30, 1999, United is not liable for any
compensation to Select Media pursuant to such agreement.
d) Pending litigation
Although as of September 30, 1999, the Company's previous transfer
agent issued an aggregate of 83,668 shares of common stock to the
entities mentioned in notes 5(b) and 5(c), the Company, in August
1999 filed a formal complaint in the state of Florida whereby the
courts granted a temporary restraining order against the individuals
and/or entities which received such stock to prohibit the transfer
of stock. The Company contends that such shares held by these
individuals/entities were wrongfully issued. As of September 30,
1999 such shares are not included as outstanding in the Company's
financial statements since management contends that the related
services discussed in notes 5(b) were not fulfilled and no funds
were received related to note 5(c), therefore the Company has no
obligation related to these agreements. Management is involved in
discussions with some of the defendants to reach an out-of-court
settlement of the litigation. The Company has not recorded any
potential contingency loss since management intends on pursuing this
matter vigorously.
e) Investment in affiliate, at Cost
The Company has committed in funding the LLC in order for the LLC to
remain in compliance with various state banking requirements as to
its net capital requirements until such time it reaches its expected
revenue level thereby becoming self funding. As of September 30,
1999, United has invested $1,365,357 in the LLC.
NOTE 6 - STOCKHOLDER'S EQUITY
a) Limited Offering Memorandum
During August 1998, the Company commenced a Limited Offering
Memorandum (the "Offering") pursuant to Rule 504 of Regulation D
promulgated under the Securities Act of 1933 which was subsequently
amended during December 1998. During the nine months ended September
30, 1999 the Company sold approximately 540,351 shares of common
stock yielding net proceeds (after certain offering costs) of
approximately $285,360.
F-7
<PAGE> 53
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
b) Private transaction
During June 1999, the Company entered into a private transaction
whereby it sold 1,100,000 restricted shares of its common stock for
$550,000 before an 8% commission, netting $506,000 to the Company.
In addition, the Company also issued an additional 550,000 shares
which have been treated as additional commission in connection with
such private transaction.
c) Warrants
As of September 30, 1999, the Company has outstanding a total of
102,667 warrants which allow the holders to purchase 102,667 shares
of the Company's common stock at $1 per share through June, 2000.
NOTE 7 - RELATED PARTY TRANSACTIONS
a) Exclusive Telemarketing Agreement
On August 12, 1998, United entered into an Exclusive Telemarketing
Agreement ("Telemarketing Agreement") with the LLC whereby United is
the exclusive telemarketing agent for the LLC until it acquires the
remaining interest in the LLC. As for consideration for performing
telemarketing services for the LLC, the LLC pays United an hourly
rate for its telemarketing services. For the nine months ended
September 30, 1999, United generated telemarketing income amounting
to $132,240.
b) Exclusive Loan Processing Agreement
On August 12, 1998, United entered into an Exclusive Loan Processing
Agreement ("Processing Agreement") with the LLC whereby United is
the exclusive processing service for the LLC until it acquires the
remaining interest in the LLC. As consideration for performing
processing services for the LLC, the LLC pays United a processing
fee for each loan processed.. For the nine months ended September
30, 1999, United generated loan processing fee income amounting to
$64,800.
c) Rent Expense
For the nine months ended September 30, 1999, pursuant to the
Telemarketing and Processing Agreement, United paid $117,000 to the
LLC for rent in connection with the space utilized in performing
telemarketing and processing services and approximately $118,000 for
reimbursement for leased employees.
F-8
<PAGE> 54
PREMIER MORTGAGE RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
d) Due to related parties
The amount due to related parties as of September 30, 1999 amounting
to $42,320 is an over advanced from the LLC in connection with
telemarketing and processing services.
NOTE 8 - PRO FORMA FINANCIAL STATEMENTS
The following pro forma information presents in a condensed format
the Company's balance sheet as of September 30, 1999 and statement
of operations for the nine months then ended as if the acquisition
of the LLC by United was consummated as of January 1, 1999:
<TABLE>
<CAPTION>
Pro forma
balance sheet at
September 30, 1999
------------------
<S> <C>
Total assets $ 1,416,004
==============
Total liabilities $ 1,258,028
==============
Total stockholders' equity $ 157,976
==============
</TABLE>
<TABLE>
<CAPTION>
Pro forma
Statement of operations
for the nine months ended
September 30, 1999
------------------
<S> <C>
Total income $ 536,205
==============
Total expenses $ 1,323,732
==============
Net loss $ (787,527)
==============
</TABLE>
This pro forma information regarding the Company's balance sheet and
statement operations has been presented for disclosure purposes and
does not purport to be indicative of the Company's financial
position and results of operations which would have actually
resulted had the acquisition of the LLC occurred as of January 1,
1999.
F-9
<PAGE> 55
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
<PAGE> 56
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998
ASSETS
<TABLE>
<CAPTION>
Current assets
<S> <C>
Cash and cash equivalents $ 57,176
Investment in marketable securities 217,923
Mortgages receivable - net of unearned discount of $28,755 1,917,785
Other receivables 73,606
Prepaid expenses 26,993
----------
Total current assets 2,293,483
Property, plant and equipment - at cost 612,657
Security deposits 3,830
----------
$2,909,970
==========
</TABLE>
See notes to financial statements (unaudited).
1
<PAGE> 57
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
Warehouse note payable - secured by mortgage receivable $1,776,106
Current maturities on long-term debt 49,973
Loans payable 10,948
Accrued expenses 116,030
Mortgage proceeds to be disbursed 127,570
----------
Total current liabilities 2,080,627
Long-term debt - net of current maturities
Capitalized leases payable - secured by telephone
system and office equipment $ 57,072
Mortgage payable - secured by land and building 327,531
Notes payable 89,230 473,833
------------
MEMBERS' EQUITY
Members' equity - unadjusted 352,275
Unrealized gain on marketable securities 3,235 355,510
----------- ----------
$2,909,970
==========
</TABLE>
See notes to financial statements (unaudited).
2
<PAGE> 58
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
Gain on sales of mortgages and brokerage income $ 470,587
Interest income 25,754
---------
496,341
Operating expenses
Warehouse interest $ 33,716
Operating expenses 968,841 1,002,557
--------- ---------
LOSS FROM OPERATIONS (506,216)
Other income (expense)
Realized gain on marketable securities 3,248
Interest and dividend income 8,100
Miscellaneous 1,800
Income on rental operations 1,300 14,448
--------- ---------
NET LOSS (491,768)
Other comprehensive income (loss)
Unrealized loss on securities arising during the year (120,424)
---------
COMPREHENSIVE LOSS $(612,192)
=========
</TABLE>
See notes to financial statements (unaudited).
3
<PAGE> 59
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF MEMBERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
MEMBERS' COMPREHENSIVE
EQUITY INCOME(LOSS) TOTAL
<S> <C> <C> <C>
Balance - January 1, 1998 $ 263,830 $ 123,659 $ 387,489
Contribution by member 590,928 -- 590,928
Net loss (491,768) -- (491,768)
Other comprehensive income (loss)
Unrealized loss on securities arising
during the year -- (120,424) (120,424)
Distribution to member (10,715) -- (10,715)
--------- --------- ---------
Balance - September 30, 1998 $ 352,275 $ 3,235 $ 355,510
========= ========= =========
</TABLE>
See notes to financial statements (unaudited).
4
<PAGE> 60
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (491,768)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation and amortization on property, plant
and equipment $ 17,351
Depreciation on rental property 588
Realized gain on marketable securities (3,248)
Changes in operating assets and liabilities
Increase in mortgage receivable (1,748,127)
Increase in other receivables (61,492)
Decrease in accrued interest receivable 268
Increase in prepaid expenses (11,044)
Decrease in customers' deposits (910)
Increase in accrued expenses 54,561
Increase in mortgage proceeds to be disbursed 127,570 (1,624,483)
----------- -----------
Net cash used for operating activities (2,116,251)
INVESTING ACTIVITIES
Purchase of marketable securities (119,911)
Proceeds from the sale and redemption of
marketable securities 180,529
Purchase of property, plant and equipment (517,122)
Increase in security deposits (3,830)
-----------
Net cash used for investing activities (460,334)
</TABLE>
See notes to financial statements (unaudited).
5
<PAGE> 61
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS (UNAUDITED) (CONT'D)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
FINANCING ACTIVITIES
<S> <C> <C>
Increase in note payable secured by mortgage receivable $ 1,601,906
Borrowing of long-term debt secured by building 345,000
Repayment of long-term debt (118,089)
Borrowing secured by mortgage on rental property 100,000
Borrowing on loans payable - other 4,006
Contribution by member 590,928
Distribution to member (10,715)
-----------
Net cash provided by financing activities 2,513,036
-----------
Net decrease in cash (63,549)
Cash and cash equivalents at beginning of year 120,725
-----------
Cash and cash equivalents at end of year $ 57,176
===========
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 80,044
===========
Income taxes
$ 0
===========
Schedule of non-cash investing activities:
Acquisition of telephone equipment and computers
in connection with capital lease obligations $ 96,307
===========
</TABLE>
See notes to financial statements (unaudited).
6
<PAGE> 62
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
BACKGROUND INFORMATION
United National Mortgage LLC (the "Company") is a licensed mortgage banker in
sixteen states with the predominant portion of business conducted in the
southern New York area. In addition, the Company is a HUD-Approved Title II
Nonsupervised Loan Correspondent. The Company primarily originates conforming
conventional loans, and sells those loans to investors, servicing released.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principals for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management the interim financial statements include all
adjustments necessary in order to make the financial statements not misleading.
The results of operations for the nine months ended is not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the Company's audited financial statements and footnotes
thereto at December 31, 1998.
INVESTMENT IN RENTAL REAL ESTATE
The Company acquired a parcel of rental real estate in Newburgh, New York from
its principal member. This property had a fair value of $105,000 at the time of
acquisition. This property is currently subject to a $96,160 mortgage that is
secured by the property and all of the Company's furniture, fixtures and
equipment. The mortgage has 113 remaining monthly installments of $1,240
inclusive of interest at 10% per annum. This real estate was rented to a party
deemed to be related (see note "RELATED PARTY"). During the nine months ended
September 30, 1998, $588 of depreciation was taken on the rental real estate.
WAREHOUSE LINES-OF-CREDIT
The Company maintains warehouse lines-of-credit with four financial
institutions. Up to $16,000,000 of funds, secured by owned mortgages held for
sale, are available to be advanced to the Company. These borrowing lines are
subject to interest rates at a slight premium over the prime rate.
7
<PAGE> 63
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
LONG-TERM DEBT
The Company has a mortgage with 173 remaining monthly installments of $3,707,
inclusive of interest at 10% per annum that is secured by the land and building.
The leases payable represent amounts due on capitalized leases of a telephone
system and office equipment.
<TABLE>
<CAPTION>
<S> <C>
Total due for year ending December, 1998 $16,677
Total due for year ending December, 1999 36,890
Total due for year ending December, 2000 36,890
Total due for year ending December, 2001 5,618
-------
Total minimum lease payments 96,075
Less amounts representing interest 7,454
------
Present value of net minimum lease payments 88,621
Current portion 31,549
------
Long-term portion $57,072
=======
</TABLE>
BUILDING CARRYING COSTS AND LEASES
The Company utilizes the building disclosed in "Property, Plant and Equipment"
as its main office. In lieu of rent, the Company incurred carrying costs that
included real estate taxes and interest from the mortgage on the property.
The Company leases various space on a month to month basis that is utilized for
branch offices. The current charge in regard to these offices is $2,000 per
month.
Building carrying costs and rent expense for the nine month period ended
September 30, 1998 was approximately $41,600.
The Company is liable under the terms of various operating leases with payments
totaling approximately $1,100 per month for remaining periods varying from 22 to
39 months.
8
<PAGE> 64
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
RELATED PARTY
The Company recognized net rental income of $1,300 for rental of the entire real
estate property and a portion of the main office building by a related entity
during the nine months ended September 30, 1998. The Company incurred allocable
costs of $24,700, which has been offset against the gross rental income of
$26,000 during the nine months ended September 30, 1998.
The Company was charged approximately $45,900 for telemarketing and
approximately $45,100 for processing fees performed by this related entity for
the nine months ended September 30, 1998.
CONTINGENCIES
Loans sold under investor programs are subject to repurchase if they fail to
meet the origination criteria of those programs. In addition, loans sold to
investors are also subject to indemnification or repurchase if the loan is two
or three months delinquent during a set period, which usually varies from the
first six months to a year after the loan is sold. As of balance sheet date
there were no requests for indemnification or repurchase.
During the nine months ended September 30, 1998, United National has issued
approximately $2,500,000 of commitments to applicants to close loans at
prevailing rates. The Company, in order to assure itself of a market place to
sell its loans, has agreements with investors who will accept all loans meeting
certain investor criteria, to deliver the loans at the rate prevailing at the
time of delivery.
9
<PAGE> 65
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
<PAGE> 66
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
C O N T E N T S
<TABLE>
<CAPTION>
REFERENCE
---------
<S> <C>
Balance Sheet (unaudited) at September 30, 1999 1 - 2
Statement of Income and Comprehensive Income
(unaudited) for the nine months ended September 30, 1999 3
Statement of Members' Equity (unaudited) for the
nine months ended September 30, 1999 4
Statement of Cash Flows (unaudited) for the nine
months ended September 30, 1999 5 - 6
Notes to financial statements (unaudited) for the
nine months ended September 30, 1999 7 - 9
</TABLE>
<PAGE> 67
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 123,150
Investment in marketable securities 1,221
Mortgages receivable - net of unearned discount of $9,715 647,693
Other receivables 29,732
Due from affiliate 42,320
Prepaid expenses 23,607
----------
Total current assets 867,723
Property, plant and equipment - at cost 584,561
Security deposits 4,530
----------
$1,456,814
==========
</TABLE>
See notes to financial statements (unaudited).
1
<PAGE> 68
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1999
LIABILITIES AND MEMBERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Warehouse note payable - secured by mortgage receivable $509,781
Current maturities on long-term debt 51,148
Accrued expenses 123,777
Accrued Expenses - Branch 7,366
Other payables 41,078
----------
Total current liabilities 733,150
Long-term debt - net of current maturities
Capitalized leases payable - secured by telephone
system and office equipment $ 19,847
Mortgage payable - secured by land and building 290,873
Notes payable 87,159 397,879
----------
MEMBERS' EQUITY
Members' equity - unadjusted 325,785
----------
$1,456,814
==========
</TABLE>
See notes to financial statements (unaudited).
2
<PAGE> 69
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C>
Gain on sales of mortgages and brokerage income $ 247,358
Mortgages and Brokerage Income - Branch 202,385
Interest income 82,681
-----------
532,424
Operating expenses
Warehouse interest $ 100,068
Operating expenses 1,033,681 1,133,749
----------- -----------
LOSS FROM OPERATIONS (601,325)
Other income (expense)
Interest and dividend income 2,140
Income on rental operations 5,875 8,015
----------- -----------
NET LOSS (593,310)
Other comprehensive income (loss)
Unrealized gain on securities arising during the year 679
-----------
COMPREHENSIVE LOSS $ (592,631)
===========
</TABLE>
See notes to financial statements (unaudited).
3
<PAGE> 70
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF MEMBERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
MEMBERS' COMPREHENSIVE
EQUITY INCOME(LOSS) TOTAL
--------- ------------- ---------
<S> <C> <C> <C>
Balance - January 1, 1999 $ 299,800 $ (679) $ 299,121
Contribution by member 644,880 -- 644,880
Net loss (593,310) -- (593,310)
Other comprehensive income (loss)
Unrealized loss on securities arising
during the year -- 679 679
Distribution to member (25,585) -- (25,585)
--------- --------- ---------
Balance - December 31, 1998 $ 325,785 $ - 0 - $ 325,785
========= ========= =========
</TABLE>
See notes to financial statements (unaudited).
4
<PAGE> 71
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (593,310)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation and amortization on property, plant
and equipment $ 26,862
Changes in operating assets and liabilities
Decrease in mortgage receivable 1,033,439
Increase in other receivables (12,756)
Decrease in accrued interest receivable 2,995
Decrease in prepaid expenses 7,780
Decrease in customers' deposits (1,971)
Increase in accrued expenses 115,186 1,171,535
------------- -------------
Net cash provided by operating activities 578,225
INVESTING ACTIVITIES
Proceeds from the sale and redemption of
marketable securities 154,889
Purchase of property, plant and equipment (94,511)
Increase in security deposits (700)
Increase in amount due from affiliate (40,817)
-------------
Net cash provided by investing activities 18,861
</TABLE>
See notes to financial statements (unaudited).
5
<PAGE> 72
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS (UNAUDITED) (CONT'D)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C>
FINANCING ACTIVITIES
Decrease in note payable secured by mortgage receivable $ (1,194,145)
Repayment of long-term debt (52,033)
Repayment of mortgage on rental property (1,753)
Repayment of loans payable - other (6,738)
Contribution by member 644,880
Distribution to member (25,585)
------------
Net cash used for financing activities (635,374)
------------
Net decrease in cash (38,288)
Cash and cash equivalents at beginning of year 161,438
------------
Cash and cash equivalents at end of year $ 123,150
============
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest $ 134,399
============
Income taxes $ - 0 -
============
</TABLE>
See notes to financial statements (unaudited).
6
<PAGE> 73
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
BACKGROUND INFORMATION
United National Mortgage LLC is a licensed mortgage banker in sixteen states
with the predominant portion of business conducted in the southern New York
area. In addition, the Company is a HUD-Approved Title II Nonsupervised Loan
Correspondent. The Company primarily originates conforming conventional loans,
and sells those loans to investors, servicing released.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management the interim financial statements include all
adjustments necessary in order to make the financial statements not misleading.
The results of operations for the nine months ended is not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the Company's audited financial statements and footnotes
thereto at December 31, 1998.
INVESTMENT IN RENTAL REAL ESTATE
The Company acquired a parcel of rental real estate in Newburgh, New York from
its principal member. This property had a fair value of $105,000 at the time of
acquisition. This property is currently subject to a $92,759 mortgage that is
secured by the property and all of the Company's furniture, fixtures and
equipment. The mortgage has 101 remaining monthly installments of $1,240
inclusive of interest at 10% per annum. This real estate was rented to a party
deemed to be related (see note "RELATED PARTY").
WAREHOUSE LINES-OF-CREDIT
The Company maintains warehouse lines-of-credit with four financial
institutions. Up to $16,000,000 of funds, secured by owned mortgages held for
sale, are available to be advanced to the Company. These borrowing lines are
subject to interest rates at a slight premium over the prime rate.
7
<PAGE> 74
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
LONG-TERM DEBT
The Company has a mortgage with 161 remaining monthly installments of $3,707,
inclusive of interest at 10% per annum that is secured by the land and building.
The leases payable represent amounts due on capitalized leases of a telephone
system and office equipment.
<TABLE>
<S> <C>
Total due for year ending December, 1999 $14,213
Total due for year ending December, 2000 36,890
Total due for year ending December, 2001 5,618
-------
Total minimum lease payments 56,721
Less amounts representing interest 5,325
-------
Present value of net minimum lease payments 51,396
Current portion 31,549
-------
Long-term portion $19,847
=======
</TABLE>
BUILDING CARRYING COSTS AND LEASES
The Company utilizes the building disclosed in "Property, Plant and Equipment"
as its main office. In lieu of rent, the Company incurred carrying costs that
included real estate taxes and interest from the mortgage on the property.
The Company leases various space on a month to month basis that is utilized for
branch offices. The current charge in regard to these offices is $2,000 per
month.
Building carrying costs and rent expense for the nine month period ended
September 30, 1999 was approximately $47,500.
The Company is liable under the terms of various operating leases with payments
totaling approximately $1,100 per month for remaining periods varying from 10 to
27 months.
8
<PAGE> 75
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
RELATED PARTY
The Company recognized net rental income of $5,875 for rental of the entire real
estate property and a portion of the main office building by a related entity
during the nine months ended September 30, 1999. The Company incurred allocable
costs of $111,600 which has been offset against the gross rental income of
$117,475 during the nine months ended September 30, 1999.
The Company was charged approximately $132,200 for telemarketing and
approximately $65,700 for processing fees performed by this related entity for
the nine months ended September 30, 1999.
CONTINGENCIES
Loans sold under investor programs are subject to repurchase if they fail to
meet the origination criteria of those programs. In addition, loans sold to
investors are also subject to indemnification or repurchase if the loan is two
or three months delinquent during a set period, which usually varies from the
first six months to a year after the loan is sold. As of balance sheet date
there were no requests for indemnification or repurchase.
United National has issued approximately $1,500,000 of commitments to applicants
to close loans at prevailing rates. The Company, in order to assure itself of a
market place to sell its loans, has agreements with investors who will accept
all loans meeting certain investor criteria, to deliver the loans at the rate
prevailing at the time of delivery.
9
<PAGE> 76
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE> 77
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1998
C O N T E N T S
<TABLE>
<CAPTION>
REFERENCE
<S> <C>
Independent Auditors' Report
Balance Sheet EXHIBIT "A"
Statement of Income and Comprehensive Income EXHIBIT "B"
Statement of Members' Equity EXHIBIT "C"
Statement of Cash Flows EXHIBIT "D"
Notes to Financial Statements
</TABLE>
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
The Members
United National Mortgage LLC
We have audited the accompanying balance sheet of United National
Mortgage LLC as of December 31, 1998, and the related statements of income,
members' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 financial statement presentation. We
believe that our audit provides 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 United National
Mortgage LLC as of December 31, 1998, and results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
HIRSHFIELD AND KANTOR
Melville, New York
April 23, 1999
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
The Members
United National Mortgage LLC
HUD TITLE II - LOAN CORRESPONDENT - ID#12378-0000-1
We have audited the accompanying balance sheet of United National
Mortgage LLC as of December 31, 1998, and the related statements of income,
members' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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 audit provides 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 United National
Mortgage LLC as of December 31, 1998, and the results of its operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the
financial statements taken as a whole. The computation of adjusted net worth
included in this report is presented for the purpose of additional analysis and
is not a required part of the financial statements of United National Mortgage
LLC. Such information has been subjected to the auditing procedures applied in
the audit of the financial statements and, in our opinion, is fairly stated in
all material respects in relation to the financial statements taken as a whole.
HIRSHFIELD AND KANTOR
Melville, New York
April 23, 1999
<PAGE> 80
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 161,438
Investment in marketable securities 155,431
Mortgages receivable - net of unearned discount of $23,048 1,681,132
Accrued interest receivable 2,995
Other receivables 16,976
Due from affiliate 1,503
Prepaid expenses 31,387
----------
Total current assets 2,050,862
Property, plant and equipment - at cost 507,208
Investment in rental real estate - net 9,704
Security deposits 3,830
----------
$2,571,604
==========
</TABLE>
EXHIBIT "A"
Page 1 of 2
The accompanying notes are an integral part of these financial statements.
<PAGE> 81
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
LIABILITIES AND MEMBERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Warehouse note payable - secured by mortgage receivable $1,703,926
Current maturities on long-term debt 43,043
Loans payable 6,738
Customers' deposits in excess of advances 1,971
Accrued expenses - interest 18,705
- other - Branch 132,842
----------
Total current liabilities 1,907,225
Long-term debt - net of current maturities
Capitalized leases payable - secured by telephone
system and office equipment 40,396
Mortgage payable - secured by land and building 324,862
MEMBERS' EQUITY
Members' equity - unadjusted $299,800
Unrealized loss on marketable securities (679) 299,121
-------- ----------
$2,571,604
==========
</TABLE>
EXHIBIT "A"
Page 2 of 2
The accompanying notes are an integral part of these financial statements.
<PAGE> 82
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Gain on sales of mortgages and brokerage income - Branch $ 568,773
Interest income 48,986
----------
617,759
Operating expenses
Warehouse interest $ 61,523
Operating expenses 1,208,130 1,269,653
---------- ----------
LOSS FROM OPERATIONS (651,894)
Other income (expense)
Realized gain on marketable securities 5,697
Interest and dividend income 13,665
Interest expense - other (11,311)
Income on rental operations 3,120 11,171
---------- ----------
NET LOSS (640,723)
Other comprehensive income (loss)
Unrealized loss on securities arising during the year (124,338)
----------
COMPREHENSIVE LOSS $ (765,061)
==========
</TABLE>
EXHIBIT "B"
The accompanying notes are an integral part of these financial statements.
<PAGE> 83
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
MEMBERS' COMPREHENSIVE
EQUITY INCOME(LOSS) TOTAL
<S> <C> <C> <C>
Balance - January 1, 1998 $ 263,830 $ 123,659 $ 387,489
Contribution by member 690,980 690,980
Net loss (640,723) (640,723)
Other comprehensive income (loss)
Unrealized loss on securities arising
during the year (124,338) (124,338)
Distribution to member (14,287) (14,287)
--------- --------- ---------
Balance - December 31, 1998 $ 299,800 $ (679) $ 299,121
========= ========= =========
</TABLE>
EXHIBIT "C"
The accompanying notes are an integral part of these financial statements.
<PAGE> 84
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (640,723)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation and amortization on property, plant
and equipment $ 23,135
Depreciation on rental property 784
Realized gain on marketable securities (5,697)
Changes in operating assets and liabilities
Increase in mortgage receivable (1,511,474)
Increase in other receivables (4,862)
Increase in accrued interest receivable (2,727)
Increase in prepaid expenses (15,438)
Increase in customers' deposits 1,061
Increase in accrued expenses 90,087 (1,425,131)
----------- -----------
Net cash used for operating activities
(Forwarded) (2,065,854)
</TABLE>
EXHIBIT "D"
Page 1 of 3
The accompanying notes are an integral part of these financial statements.
<PAGE> 85
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Net cash used for operating activities
(Brought forward) $(2,065,854)
INVESTING ACTIVITIES
Purchase of marketable securities $ (164,034)
Proceeds from the sale and redemption of
marketable securities 285,679
Purchase of property, plant and equipment (417,466)
Increase in security deposits (3,830)
Increase in amount due from affiliate (1,503)
----------
Net cash used for investing activities (301,154)
FINANCING ACTIVITIES
Increase in note payable secured by mortgage receivable 1,529,726
Borrowing of long-term debt secured by building 345,000
Repayment of long-term debt (133,006)
Borrowing secured by mortgage on rental property 100,000
Repayment of mortgage on rental property (5,488)
Repayment of loans payable - other (204)
Contribution by member 585,980
Distribution to member (14,287)
----------
Net cash provided by financing activities 2,407,721
-----------
Net increase in cash 40,713
Cash and cash equivalents at beginning of year 120,725
-----------
Cash and cash equivalents at end of year $ 161,438
===========
</TABLE>
EXHIBIT "D"
Page 2 of 3
The accompanying notes are an integral part of these financial statements.
<PAGE> 86
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
SUPPLEMENTARY INFORMATION
CUSTOMERS' DEPOSITS - Customers' deposits are assumed to be debts that are
settled within 90 days.
WAREHOUSE NOTES PAYABLE - These borrowings are considered to be individual loans
that are secured by individual mortgages, and are expected to be repaid within
three months.
FILING FEES AND INTEREST PAID - During the year, the Company paid a total of
$325 for filing fees. Interest paid during the year was $106,725, which
consisted of warehouse interest expense and interest on borrowings.
NON-CASH TRANSACTIONS
The primary member contributed a rental real estate property to the Company
during the year. The property had a fair value at the time of contribution of
$105,000 and the $85,000 net balance in the member's loan account was converted
into members' equity.
Telephone equipment and computers were acquired during the period under two
capitalized leases at a total cost of $96,307. The lease obligations were for
the full amount of the assets.
EXHIBIT "D"
Page 3 of 3
The accompanying notes are an integral part of these financial statements.
<PAGE> 87
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
BACKGROUND INFORMATION
United National Mortgage LLC is a licensed mortgage banker in sixteen states
with the predominant portion of business conducted in the southern New York
area. In addition, the Company is a HUD-Approved Title II Nonsupervised Loan
Correspondent. The Company primarily originates conforming conventional loans,
and sells those loans to investors, servicing released.
SUMMARY OF ACCOUNTING POLICIES
MORTGAGES RECEIVABLE - Mortgages receivable (net of the unearned discounts) are
carried at the lower of cost or market on the aggregate basis.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at
cost. Depreciation and amortization is computed using the straight-line method
over the useful life of the assets. The useful life of the furniture,
capitalized leased equipment, office equipment and computers is five to seven
years. The rental property, building and building improvements are depreciated
over thirty-nine years.
INCOME TAXES - The members have elected to be taxed as a partnership whereby the
Company's federal tax burden or benefits are passed on to the members. This
election has also been made for New York State purposes.
COMMITMENT FEES - Commitment fees paid to various lending institutions are
applied against discounts in the ratio of the commitments used to the total
commitment. When the commitment expires or is deemed to be unusable, any
remaining unexpensed portion of the fee is written off.
USE OF ACCOUNTING ESTIMATES - Management uses estimates and assumptions in
preparing these financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could vary
from the estimates that were used.
<PAGE> 88
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
SUMMARY OF ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION - Revenue from both "The Retail Origination Division" and
"The Wholesale Division" is recognized upon loan sale to the investor. All
revenue earned by branch offices are accumulated together to reflect the total
revenues of the Company.
BRANCH OFFICE OPERATIONS - All branch managers, including net branch managers,
are employees of the Company. In states where permissible, net branch managers
are contractually obligated to pay the expenses of the branch. For net
branches, in states where not permissible, the Company pays these expenses
directly. All revenue earned and related expenses by the branches of the
Company are reflected in the statement of income of the Company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits, certificates of deposit, money
market funds and all highly liquid debt instruments with original maturities of
three months or less.
CASH AND CASH EQUIVALENTS (CONTINUED)
The Company maintains cash balances in several banks. Accounts at each of these
institutions are insured by the Federal Deposit Insurance Corporation up to
$100,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's mortgage receivable held for sale is
$1,740,600. The carrying amount for all other financial instruments approximates
fair value.
OTHER RECEIVABLES
Other receivables include $9,225 of loan closing proceeds and $2,039 due from an
investor.
<PAGE> 89
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
INVESTMENT IN MARKETABLE SECURITIES
The Company has investments in various publicly traded stocks that are readily
salable and are available for sale. As required under FASB #115, the year end
marketable securities are marked to market. In the prior period, the marketable
securities reflect an unrealized gain of $123,659. The $124,338 unrealized loss
in the current period was primarily the result of the reduction in appreciation
from this prior year write-up. The Company realized $5,697 of income from the
sale of marketable securities and $13,665 from interest and dividend income
during the year.
PROPERTY, PLANT AND EQUIPMENT
The property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
OWNED LEASED TOTAL
<S> <C> <C> <C>
Office furniture and equipment $ 34,707 $ 96,307 $131,014
Land 55,500 55,500
Building and improvements 347,551 347,551
-------- -------- --------
437,758 96,307 534,065
Less accumulated depreciation and amortization 17,226 9,631 26,857
-------- -------- --------
$420,532 $ 86,676 $507,208
======== ======== ========
</TABLE>
During the current year the total charges to income for depreciation and
amortization of this property, plant and equipment were $23,135.
INVESTMENT IN RENTAL REAL ESTATE
The company acquired a parcel of rental real estate in Newburgh, New York from
its principal member. This property had a fair value of $105,000 at the time of
acquisition. This property is currently subject to a $94,512 mortgage that is
secured by the property and all of the Company's furniture, fixtures and
equipment. The mortgage has 110 remaining monthly installments of $1,240
inclusive of interest at 10% per annum. This real estate was rented to a party
deemed to be related (see note "RELATED PARTY"). During the current year, $784
of depreciation was taken on the rental real estate.
<PAGE> 90
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
WAREHOUSE LINES-OF-CREDIT
United National maintains warehouse lines-of-credit with four financial
institutions. Up to $16,000,000 of funds, secured by owned mortgages held for
sale, are available to be advanced to the Company. These borrowing lines are
subject to interest rates at a slight premium over the prime rate.
LONG-TERM DEBT
The Company has a mortgage with 170 remaining monthly installments of $3,707,
inclusive of interest at 10% per annum that is secured by the land and building.
The leases payable represent amounts due on capitalized leases of a telephone
system and office equipment.
<TABLE>
<S> <C>
Total due for year ending December, 1999 $36,890
Total due for year ending December, 2000 36,890
Total due for year ending December, 2001 5,618
-------
Total minimum lease payments 79,398
Less amounts representing interest 7,454
-------
Present value of net minimum lease payments 71,944
Current portion 31,548
-------
Long-term portion $40,396
=======
</TABLE>
STAFF LEASING COSTS
In 1998 the Company maintained a co-employment relationship with a Professional
Employee Organization ("PEO") that provides human resource services for a fee.
The "PEO" is responsible for personnel administration, human resource functions
and payroll processing. As such, United National does not have direct salary,
payroll tax or benefit costs for the employees leased from the "PEO". Instead,
the Company has expensed all of these costs as staff leasing costs. The Company
was reimbursed $57,762 of staff leasing costs paid on behalf of a related
entity.
ESCROW
Approximately $7,300 is being held in trust in regard to escrows on unsold
loans. This cash and its related liability are not reflected on the balance
sheet.
<PAGE> 91
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
BUILDING CARRYING COSTS AND LEASES
The Company utilizes the building disclosed in "Property, Plant and Equipment"
as its main office. In lieu of rent, the Company incurred carrying costs that
included real estate taxes and interest from the mortgage on the property.
The Company leases various space on a month to month basis that is utilized for
branch offices. The current charge in regard to these offices is $2,000 per
month.
Building carrying costs and rent expense for the period was $55,517.
The Company is liable under the terms of various operating leases with payments
totaling approximately $1,100 per month for remaining periods varying from 19 to
36 months.
RELATED PARTY
The Company recognized net rental income of $3,120 for rental of the entire real
estate property and a portion of the main office building by a related entity.
The Company incurred allocable costs of $61,880 which has been offset against
the gross rental income of $65,000.
The Company was charged $61,210 for telemarketing and $60,100 for processing
fees performed by this related entity.
CONTINGENCIES
Loans sold under investor programs are subject to repurchase if they fail to
meet the origination criteria of those programs. In addition, loans sold to
investors are also subject to indemnification or repurchase if the loan is two
or three months delinquent during a set period, which usually varies from the
first six months to a year after the loan is sold. As of balance sheet date
there were no requests for indemnification or repurchase.
United National has issued approximately $2,686,415 of commitments to applicants
to close loans at prevailing rates. The Company, in order to assure itself of a
market place to sell its loans, has agreements with investors who will accept
all loans meeting certain investor criteria, to deliver the loans at the rate
prevailing at the time of delivery.
<PAGE> 92
SUPPLEMENTARY INFORMATION
<PAGE> 93
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY
INFORMATION ACCOMPANYING THE BASIC FINANCIAL STATEMENTS
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Computation of Adjusted Net Worth is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
HIRSHFIELD AND KANTOR
Melville, New York
April 23, 1999
<PAGE> 94
UNITED NATIONAL MORTGAGE LLC
COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL AND
RECERTIFICATION OF NONSUPERVISED LOAN CORRESPONDENTS
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Home Office (no branch offices with approval) $ 50,000
NET WORTH REQUIRED $ 50,000
========
Members' Equity per Balance Sheet $299,121
Less: unacceptable asset
Due from affiliate 1,503
--------
ADJUSTED NET WORTH FOR HUD REQUIREMENT PURPOSES $297,618
========
Adjusted Net Worth ABOVE Amount Required $247,618
========
</TABLE>
<PAGE> 95
UNITED NATIONAL MORTGAGE LLC
COMPUTATION OF ADJUSTED NET WORTH TO DETERMINE COMPLIANCE
WITH NEW YORK STATE BANKING DEPARTMENT REGULATIONS
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
NET WORTH REQUIRED $250,000
Members' Equity per Balance Sheet $299,121
Less: unacceptable asset
Due from affiliate 1,503
--------
ADJUSTED NET WORTH FOR NEW YORK STATE BANKING
DEPARTMENT REQUIREMENT PURPOSES $297,618
Adjusted Net Worth ABOVE Amount Required $ 47,618
========
</TABLE>
<PAGE> 96
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
SCHEDULE OF OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Staff leasing expense $ 484,008
Commission expense 41,599
Processing fees 60,100
Automobile expense 13,435
Advertising 104,010
Property carrying costs and rent 55,517
Utilities 7,447
Office expense 72,136
Telephone 45,950
Computer costs 23,250
Postage and messenger fees 13,963
Insurance 18,594
Legal and professional fees 58,843
Depreciation and amortization 23,135
Filing fees and licenses 38,779
Equipment rental 15,676
Repairs and maintenance 16,708
Consulting fees 46,974
Marketing expense 61,210
New York State filing fees 325
Warehouse fees 6,471
----------
$1,208,130
==========
</TABLE>
<PAGE> 97
UNITED NATIONAL MORTGAGE LLC
(A Limited Liability Company)
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE> 98
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1997
C O N T E N T S
REFERENCE
Independent Auditors' Report
Balance Sheet EXHIBIT "A"
Income Statement EXHIBIT "B"
Statement of Member's Equity EXHIBIT "C"
Statement of Cash Flows EXHIBIT "D"
Notes to Financial Statements
<PAGE> 99
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $110,725
Cash - time deposits 10,000
Investment in marketable securities 395,717
Mortgage receivable - net of unearned discount of $4,542 169,658
Other receivables 12,114
Accrued interest receivable 268
Prepaid expenses 15,949
--------
Total current assets 714,431
Property and equipment - at cost 16,579
--------
$731,010
========
</TABLE>
EXHIBIT "A"
Page 1 of 2
The accompanying notes are an integral part of these financial statements.
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
The Member
United National Mortgage LLC
We have audited the accompanying balance sheet of United National
Mortgage LLC as of December 31, 1997, and the related statements of income,
member's equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 financial statement presentation. We
believe that our audit provides 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 United National
Mortgage LLC as of December 31, 1997, and results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
HIRSHFIELD AND KANTOR
Melville, New York
April 9, 1998
<PAGE> 101
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND MEMBER'S EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Warehouse note payable - secured by mortgage receivable $174,200
Note payable - secured 100,000
Loan payable - insurance financing 1,691
Customers' deposits in excess of advances 910
Loan payable - other 5,251
Filing fee payable 325
Accrued expenses - interest 2,275
- other - Branch 58,869
--------
Total current liabilities 343,521
MEMBER'S EQUITY
Member's equity - unadjusted $263,830
Unrealized gain on marketable securities 387,489 123,659
-------- --------
$731,010
========
</TABLE>
EXHIBIT "A"
Page 2 of 2
The accompanying notes are an integral part of these financial statements.
<PAGE> 102
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Gain on sales of mortgages and brokerage income $ 17,812
Interest income 1,331
---------
19,143
Operating expenses
Warehouse interest $ 1,239
Operating expenses 334,234 335,473
--------- ---------
LOSS FROM OPERATIONS (316,330)
Other income (expense)
Realized gain on marketable securities 40,890
Interest and dividend income 11,362
Interest expense - other (2,809) 49,443
--------- ---------
NET LOSS $(266,887)
=========
</TABLE>
EXHIBIT "B"
The accompanying notes are an integral part of these financial statements.
<PAGE> 103
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF MEMBER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN(LOSS) ON
MEMBER'S MARKETABLE
EQUITY SECURITIES TOTAL
<S> <C> <C> <C>
Balance - January 1, 1997 $ 308,958 $ (32,803) $ 276,155
Contribution by member 221,759 221,759
Write-up to market of current
year's marketable securities 156,462 156,462
Net loss (266,887) (266,887)
--------- --------- ---------
Balance - December 31, 1997 $ 263,830 $ 123,659 $ 387,489
========= ========= =========
</TABLE>
EXHIBIT "C"
The accompanying notes are an integral part of these financial statements.
<PAGE> 104
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(266,887)
Adjustments to reconcile net loss to net
cash used for operating activities
Depreciation $ 3,713
Realized gain on marketable securities (40,890)
Changes in operating assets and liabilities
Increase in mortgage receivable (169,658)
Increase in other receivables (12,114)
Increase in accrued interest receivable (268)
Increase in prepaid expenses (11,063)
Increase in customers' deposits 910
Increase in filing fees payable 325
Increase in accrued expenses 61,144 (167,901)
--------- ---------
Net cash used for operating activities
(Forwarded) (434,788)
</TABLE>
EXHIBIT "D"
Page 1 of 3
The accompanying notes are an integral part of these financial statements.
<PAGE> 105
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Net cash used for operating activities
(Brought forward) $(434,788)
INVESTING ACTIVITIES
Purchase of marketable securities $ (87,463)
Proceeds from the sale and redemption of
marketable securities 99,242
Purchase of property and equipment (20,292)
---------
Net cash used for investing activities (8,513)
FINANCING ACTIVITIES
Increase in note payable secured by mortgage receivable 174,200
Assumption of note payable - secured 100,000
Increase in loans payable - other 5,251
Repayment of loans payable (3,195)
Contribution by member 201,277
---------
Net cash provided by financing activities 477,533
---------
Net increase in cash 34,232
Cash and cash equivalents at beginning of year 86,493
Certificate of deposit (10,000)
---------
Cash and cash equivalents at end of year $ 110,725
=========
</TABLE>
EXHIBIT "D"
Page 2 of 3
The accompanying notes are an integral part of these financial statements.
<PAGE> 106
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
SUPPLEMENTARY INFORMATION
CUSTOMERS' DEPOSITS - Customers' deposits are assumed to be debts that are
settled within 90 days.
WAREHOUSE NOTES PAYABLE - These borrowings are considered to be individual loans
that are secured by individual mortgages, and are expected to be repaid within
three months.
FILING FEES AND INTEREST PAID - During the year, the Company paid a total of
$325 for filing fees. Interest paid during the year was $1,773, consisting
primarily of warehouse interest expense and interest on unsecured borrowings.
NON-CASH TRANSACTIONS
Net transfers of marketable securities totaling $20,482 are included in the
current year's contribution by member. All amounts were determined utilizing
fair market value on the dates of the transfers.
$4,886 of prepaid insurance has been financed with a short-term loan payable.
EXHIBIT "D"
Page 3 of 3
The accompanying notes are an integral part of these financial statements.
<PAGE> 107
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
BACKGROUND INFORMATION
During the current fiscal year, United National Mortgage LLC obtained mortgage
banking licenses in the states of New York, Connecticut, Georgia, Iowa, Kansas,
Massachusetts, Maryland, Michigan, Pennsylvania and Utah.
The Company originates non-conforming "B", "C" and "D" type loans, and sells
those loans to investors, servicing released. United National services the areas
in which the Company is licensed with the predominant portion of business
conducted in the New York area.
In this its first period of operations, United National suffered a material
operating loss. The substantial lead time between the initial application and
the closing and sale of mortgage loans resulted in the Company expending
substantial sums setting up its operation without being able to recognize
matching revenues.
SUMMARY OF ACCOUNTING POLICIES
MORTGAGES RECEIVABLE - Mortgages receivable (net of the unearned discounts) are
carried at the lower of cost or market on the aggregate basis.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation is computed using the double-declining method over the useful life
of the assets. The useful life of the furniture is seven years and the office
equipment and computers are five years.
COMMITMENT FEES - Commitment fees paid to various lending institutions are
applied against discounts in the ratio of the commitments used to the total
commitment. When the commitment expires or is deemed to be unusable, any
remaining unexpensed portion of the fee is written off.
USE OF ACCOUNTING ESTIMATES - Management uses estimates and assumptions in
preparing these financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could vary
from the estimates that were used.
<PAGE> 108
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
SUMMARY OF ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION - Revenue from both "The Retail Origination Division" and
"The Wholesale Division" is recognized upon loan sale to the investor. All
revenue earned by branch offices are accumulated together to reflect the total
revenues of the Company.
BRANCH OFFICE OPERATIONS - All branch managers are employees of the Company. In
states where permissible, branch managers are contractually obligated to pay the
expenses of the branch. In states where not permissible, the Company pays these
expenses directly. All amounts paid by the Company are classified to the
applicable category of the expenditure.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits, certificates of deposit, money
market funds and all highly liquid debt instruments with original maturities of
three months or less.
The Company maintains cash balances in several banks. Accounts at each of these
institutions are insured by the Federal Deposit Insurance Corporation up to
$100,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value of the Company's mortgage receivable held for sale is
$175,942. The carrying amount for all other financial instruments approximates
fair value.
OTHER RECEIVABLES
Other receivables include $10,080 of loan closing proceeds and $2,034 due from
an investor.
INVESTMENT IN MARKETABLE SECURITIES
The Company has investments in various publicly traded stocks that are readily
salable and are available for sale. During the current year, the Company
realized interest and dividend income of $11,084. Gains on the sale of
securities totaled $40,890 and included a $38,437 gain on securities transferred
at fair market value to the member. As required under FASB #115, United National
<PAGE> 109
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
wrote-up the value of these securities to their market value. The unrealized
gain was credited directly to member's equity.
PROPERTY AND EQUIPMENT
The property and equipment consist of the following:
<TABLE>
<S> <C>
Furniture $14,242
Office equipment and computers 6,050
-------
20,292
Less accumulated depreciation (3,713)
-------
$16,579
=======
</TABLE>
Depreciation expense was $3,713 for this period.
WAREHOUSE LINES-OF-CREDIT
United National maintains warehouse lines-of-credit with three financial
institutions. Up to $4,000,000 of funds, secured by owned mortgages held for
sale, are available to be advanced to the Company. One warehouse line requires
that a minimum balance of $10,000 be maintained in a certificate of deposit.
STAFF LEASING COSTS
In 1997 the Company entered into a co-employment relationship with a
Professional Employee Organization ("PEO") that provides human resource services
for a fee. The "PEO" is responsible for personnel administration, human resource
functions and payroll processing. As such, United National does not have direct
salary, payroll tax or benefit costs for the employees leased from the "PEO".
Instead, the Company has expensed all of these costs as staff leasing costs.
INCOME TAXES AND FILING FEES
The member has elected to be taxed as a sole proprietorship whereby the
Company's federal tax responsibilities are passed on to the member who will bear
the tax burden personally. This election has also been made for New York State
purposes.
New York State filing fees totaled $650 for the period and included a prior
year's underaccrual of $325.
<PAGE> 110
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE PAYABLE - SECURED
This note, secured by substantially all of the Company's assets, calls for
monthly installments of interest only calculated at 18% per annum. The note was
satisfied in the subsequent period.
Interest expense for the period totaled $2,536.
LEASE
On June 3, 1997 the Company entered into a lease agreement for office space
which commenced on July 1, 1997. The lease is on a month-to-month basis and
calls for monthly rent of $2,000.
Rent expense for the period totaled $12,000.
CONTINGENCIES
Loans sold under investor programs are subject to repurchase if they fail to
meet the origination criteria of those programs. In addition, loans sold to
investors are also subject to indemnification or repurchase if the loan is two
or three months delinquent during a set period, which usually varies from the
first six months to a year after the loan is sold. As of balance sheet date
there were no requests for indemnifications, nor has United National been asked
to repurchase any loans.
<PAGE> 111
SUPPLEMENTARY INFORMATION
<PAGE> 112
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY
INFORMATION ACCOMPANYING THE BASIC FINANCIAL STATEMENTS
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Computation of Adjusted Net Worth is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
HIRSHFIELD AND KANTOR
Melville, New York
April 8, 1998
<PAGE> 113
UNITED NATIONAL MORTGAGE LLC
COMPUTATION OF ADJUSTED NET WORTH TO
DETERMINE COMPLIANCE WITH FHA NET WORTH REGULATIONS
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
1. Servicing Portfolio December 31, 1997 $ -0-
2. Add:
Origination -0-
3. Less:
Servicing Retained -0-
--------
4. TOTAL $ -0-
========
5. Net Worth Required $250,000
Member's Equity per Balance Sheet $387,489
Less - unacceptable assets
Unrealized gain on marketable securities 123,659
--------
ADJUSTED NET WORTH FOR HUD REQUIREMENT PURPOSES 263,830
--------
Adjusted Net Worth ABOVE Amount Required $ 13,830
========
</TABLE>
<PAGE> 114
UNITED NATIONAL MORTGAGE LLC
(A LIMITED LIABILITY COMPANY)
SCHEDULE OF OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Staff leasing expense $ 70,014
Commission expense 7,280
Selling and promotion 5,901
Travel 14,071
Automobile expense 5,714
Advertising 3,694
Rent 12,000
Office expense 8,226
Telephone 18,938
Computer costs 3,888
Postage and messenger fees 3,917
Insurance 6,425
Dues, subscriptions and conferences 1,116
Legal and professional fees 36,584
Depreciation 3,713
Filing fees and licenses 28,654
Equipment rental 2,417
Repairs and maintenance 215
Consulting fees 77,152
Marketing expense 22,143
New York State filing fees 650
Bank charges and warehouse fees 657
Miscellaneous 865
--------
$334,234
========
</TABLE>
