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As filed with the Securities and Exchange Commission on December 9, 1999
Registration No. 000-27585
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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LORACA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Nevada 87-0555751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5600 Wyoming Boulevard, N.E.
Suite 150
Albuquerque, New Mexico 87109
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (505) 856-0111
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Securities registered under Section 12(b) of the Exchange Act:
Title of Name of each exchange on
Each Class which registered
Common Stock Nasdaq National Market
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of class)
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FORWARD-LOOKING STATEMENTS
This Form 10 contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "intend," "anticipate," "believe,"
"estimate," "project" and "continue" or similar words. You should read
statements that contain these words carefully because they: (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our financial condition; or (3) state other "forward-looking" information.
We believe it is important to communicate our expectations; however, there may
be events in the future that we are not able to predict accurately or over which
we have no control. Our actual results may differ materially from the
expectations we describe in forward-looking statements. Factors that could
cause actual results to differ materially from those we describe include, but
are not limited to, adverse economic conditions in the United States and
particularly in the West, interest rate fluctuations, federal and state
regulatory changes, a decline in the popularity of the Internet, the ability to
manage our growth, implement our strategy and adapt to technological change,
competition, a decline in real estate prices and Year 2000 issues. Forward-
looking statements below should be read in light of these factors.
Unless required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Consequently, you should carefully review the risk factors
set forth in other reports or documents which we file from time to time with the
Securities and Exchange Commission, particularly our Annual Reports on Form 10-
K, our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
Item 1. Business.
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Overview
Loraca International, Inc.
Loraca International, Inc. ("Loraca") is a financial services holding company.
It was formed on March 11, 1996, as a Nevada corporation and currently operates
a mortgage bank through its wholly-owned subsidiary, NMMC, Inc. ("NMMC," and
together with Loraca, the "Company"), headquartered in Lake Oswego, Oregon. NMMC
is a New Mexico corporation which was formed on March 28, 1986, under the name
B.C. Trucking, Inc. In 1991, NMMC commenced loan originations and changed its
name to New Mexico Mortgage Co., Inc. In December 1998, the name New Mexico
Mortgage Co., Inc. was changed to NMMC, Inc. NMMC is currently focused on the
origination and sale of non-prime mortgage products in certain western states
and is doing business as New Mortgage Millenium Corp. All of the outstanding
capital stock of NMMC was acquired by Loraca in a purchase transaction effective
as of February 23, 1998.
From 1991 through early 1999, NMMC originated primarily single family,
conventional and government insured mortgage loans. Commencing in March 1999,
NMMC began to shift its focus to origination of non-prime mortgage loans under
the direction of a new management team. See Item 5, Directors and Executive
Officers. As part of its new strategic focus, NMMC closed its retail lending
operations in Albuquerque, New Mexico and Irvine, California and relocated its
principal offices to Lake Oswego, Oregon.
The Mortgage Market
The mortgage market may be broadly divided into four major segments today:
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. mortgage origination - sourcing, verification and documentation of mortgage
loans, typically done by mortgage brokers and lenders;
. mortgage lending - underwriting, funding and selling closed loans to
mortgage loan investors;
. capital markets - providing liquidity for sales into the secondary market;
and
. servicing - ongoing billing, collection and foreclosure/asset management.
Consumers generally seek mortgage loans to finance a home purchase or to
refinance existing mortgage debt. In some cases, a borrower may refinance for
more than the existing mortgage amount and use the proceeds generated for other
purposes. Mortgage loans are originated through two primary lending channels,
frequently referred to as retail and wholesale. Retail lenders work directly
with consumers, while wholesale lenders work with mortgage brokers or purchase
closed loans from other lenders.
Mortgage Broker Businesses
Mortgage broker businesses are typically small, local enterprises that
increasingly lack the financial resources and technological capability to
compete with financially stronger and more established competitors. In
particular, they generally lack access to the technology necessary to determine
borrower eligibility quickly and to search and analyze available mortgage
products to find the best match for their customers. Because of the complex
nature of the mortgage loan process and the preference of many consumers for
personal contact, the Company believes that local mortgage brokers will continue
to be an integral and important part of the mortgage lending business. However,
as technology advances make it easier for consumers to deal directly with
lenders, the Company believes that mortgage brokers will need to find new ways
to compete more effectively for the consumer's business.
Market Opportunity for the Online Mortgage Origination
Management of the Company believes that mortgage lending is well suited to an
Internet-based distribution model for a number of reasons, including:
. mortgages are information products that need no physical delivery or
warehousing;
. pending mortgage lending transactions can be tracked more efficiently
through the use of graphical and dynamic real-time presentations over the
Internet;
. borrower data can be rapidly transmitted by mortgage originators to mortgage
lenders through the Internet, allowing automated underwriting and
streamlined overall processing; and
. local offices and expenses associated with the traditional distribution
model are reduced.
Consequently, the Company believes a significant market opportunity exists for
an easy to use online service aimed at mortgage originators with a broad
selection of products and services.
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Loraca's Business Strategy
Loraca's business strategy is to build upon its existing mortgage banking
platform and grow its customer base by: (i) expanding its mortgage banking
platform; (ii) offering conventional mortgage products; (iii) developing an
Internet mortgage lending and delivery system to reduce mortgage loan processing
times and enhance existing distribution channels; (iv) creating brand
recognition around its proprietary Internet domain names (including
"NM\\2\\C.com"); and (v) exploring potential acquisition opportunities and
strategic alliances to enlarge its operations in the above areas.
Expansion of Mortgage Banking Platform
Through NMMC, the Company currently originates non-prime mortgages under the
name New Mortgage Millenium Corp. Non-prime mortgages have historically been
the most profitable and least interest rate sensitive mortgage products. The
Company intends to expand its non-prime operations into additional states by
obtaining licenses to transact business in most of the United States, and will
add to its sales force to create additional sales volume.
Additional Mortgage Loan Products
The Company plans to offer additional mortgage loan products through
conventional and electronic-based distribution channels, including conforming
mortgage loans, jumbo mortgage loans and second mortgage loans.
Development of Internet Mortgage Loan Processing and Delivery System
The Company has contracted with J. A. Young & Co., Inc., a Bellevue,
Washington based technology consulting firm ("J. A. Young") to develop an
interactive electronic database which will automate many aspects of the loan
application, underwriting and approval process. Management of the Company
believes that such automation will result in (i) decreased loan processing
times; (ii) increased productivity; (iii) lower processing costs; and (iv)
broader distribution channels for the offer and sale of the Company's products.
Create Brand Recognition
The Company intends to create brand recognition by establishing websites under
Internet domain names which it has reserved, including "NM\\2\\C.com." The
Company plans to launch both traditional and online marketing campaigns to
increase customer awareness and penetrate its target markets.
Explore Potential Acquisitions
The Company intends to pursue acquisition opportunities, as they arise, as the
primary means of expanding its mortgage banking platform for conventional loans.
In addition, the Company has retained the DeHayes Consulting Group out of
Sacramento, California to assist it in identifying and evaluating strategic
partners for the Company in the insurance industry. Management of the Company
believes that certain insurance products (including, among others, title, home
warranty and home hazard insurance), when offered with the Company's mortgage
loan products, may have the potential to expand the Company's customer base and
increase sales of its existing products and services. In evaluating any
acquisition candidate, the Company will analyze several strategic
characteristics, including the candidate's geographic location(s), the types of
products or services it provides, existing distribution channels, the presence
and strength of local competition, the regulations applicable to the candidate
and the structure of the transaction. The Company may purchase candidates which
meet its criteria with cash, equity or debt securities or some combination of
the foregoing.
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Products and Services
The following is a description of the types of mortgage loan products that the
Company offers or intends to offer. All of these loans will be sold to various
institutional investors. Products are designed primarily to satisfy these
investors' criteria.
Conforming Mortgage Loans
Conforming mortgage loans are mortgage loans that conform to the underwriting
standards established by one of the two government-sponsored mortgage entities -
- - the Federal National Mortgage Association ("Fannie Mae") or the Federal Home
Loan Mortgage Association ("Freddie Mac").
Jumbo Mortgage Loans
Jumbo mortgage loans exceed the maximum loan size for a conforming mortgage
loan (currently $240,000 for a single-family home), but otherwise satisfy the
underwriting guidelines established by Fannie Mae or Freddie Mac.
Alternative A Mortgage Loans
Alternative A mortgage loans fail to satisfy one or more elements of the jumbo
or Fannie Mae/ Freddie Mac loan underwriting criteria, such as those relating to
documentation, employment history, income verification, loan-to-value ratios,
credit history, qualifying ratios or borrower net worth.
Second Mortgage Loans
Second mortgage loans are mortgage loans secured by second liens on the
underlying property. These loans are designed primarily for high credit quality
borrowers and are underwritten according to the standards of the investor to
which the loans will be sold. Second mortgage loans are "closed-end," that is
they are fixed in amount at the time of origination and typically amortize over
the term of the loan or have a balloon payment feature at maturity, and
generally bear fixed interest rates.
Non-Prime Mortgage Loans
Non-prime mortgage loans consist of mortgage loans to borrowers who have
impaired or limited credit profiles or higher debt-to-income ratios than would
be acceptable for sale of such loans to Fannie Mae or Freddie Mac. Such mortgage
loans may also fail to satisfy the underwriting criteria of the government-
sponsored entities in other ways, including loan amount and distinctiveness of
property characteristics.
Sales and Marketing
The Company intends to sell its mortgage loan products (i) through its direct
sales force and (ii) online over the Internet. As of September 30, 1999, the
Company employed 13 salespeople marketing to small mortgage brokers and calling
upon accounts in states in which the Company operates. The Company is in the
process of developing websites to offer the Company's products online to
mortgage brokers, mortgage bankers, credit unions and community banks under the
domain name "NM\\2\\C.com."
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The Company plans to use both traditional and online marketing strategies as
well as sales executives to maximize customer awareness and enhance brand
recognition. Traditional advertising efforts will include print campaigns and
promotions at trade shows aimed at building nationwide brand awareness with the
Company's customers. In addition to its advertising campaign through traditional
mediums, the Company intends to enter into affiliations with its customers and
other financial services-related companies to cross-market products. Online
partnering arrangements may include (i) private label marketing arrangements
with mortgage banks, mortgage brokers, community banks, credit unions and real
estate brokers, whereby the Company will provide them with websites linked to
the Company's own websites, (ii) placing links and banner advertisements on
partners' websites and (iii) establishing mortgage loan monitoring services for
those partners' customers.
The Loan Process
Technology
The Company is currently developing technology aimed at the mortgage
origination business under the primary domain name "NM\\2\\C.com." Each mortgage
originator may apply with the Company to receive an account number and password.
The mortgage originator may then access the Company's system and input
information about a potential borrower into the Company's database. Within
minutes, the mortgage originator will receive a decision. If a pre-approval is
granted, the notification will include a list of those items required to
complete the lending process. Alternatively, the Company's proprietary
technology will provide the mortgage originator with alternative mortgage
products for which the borrower may qualify. The mortgage originator may then
track in real time the status of all loan requests submitted under its account.
The Company believes that its technology will reduce the processing time
between receipt of borrower information and loan approval, allow mortgage banks,
mortgage brokers, community banks and credit unions to increase their
transaction volumes and shorten the period of time in which the borrower may be
lost to the competition. In addition, the Company believes that earlier
approvals may result in (i) shorter sale times (and lower inventories) for
builders and developers and (ii) higher closing ratios and quicker realization
of commissions by real estate agents. Further, the Company believes that
increased automation of the mortgage loan approval process will ultimately
reduce the cost of providing a loan, which savings may then be passed on to the
borrower.
Underwriting
Automated underwriting ("AU") is expected to contribute significantly to the
Company's goal of greater efficiency in the lending process by providing the
Company's customers with faster, more cost-efficient credit reviews and
decisions. In addition, the Company believes that integration of existing AU
systems with the AU system of the Company will increase a mortgage originator's
capture rate. The Company intends to continue to invest substantial resources
into improving its AU capabilities. Because it does not hold mortgage loans for
investment purposes, the Company underwrites each mortgage loan to composite
criteria compiled from multiple investors. Such criteria generally involve a
review and analysis of a potential borrower's:
. overall credit history, with an emphasis on mortgage and installment debt;
. employment and income; and
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. subject property value and characteristics.
Quality Assurance and Control
Prior to funding a loan, the Company performs a pre-closing audit to ensure
that the loan meets investor requirements. The pre-closing audit includes:
. generation of a new credit report (depending upon the amount of time which
has elapsed between approval and funding);
. a verbal verification of current employment; and
. a lien search on the subject property.
The Company's quality control provider continuously samples closed loans (i)
to verify compliance with legal documentation requirements, (ii) to ensure
accuracy, and (iii) to help prevent fraud. Quality control reviews enable the
Company to monitor, evaluate and improve the overall quality of loan production
and to identify potential underwriting problems. The Company currently utilizes
the services of an independent outside quality control provider. Each month, the
quality control provider reviews a random 10% sample of loans funded by us. This
examination includes:
. a credit underwriting review;
. a completed loan package re-verification;
. a loan program compliance review; and
. a federal regulatory compliance review.
Every loan selected for review undergoes a complete re-verification of
employment, deposit, mortgage and rental history. A new residential mortgage
credit report is ordered on 10% of the selected loans, while a new review
appraisal may be ordered on another 10% of the selected loans. This review is
intended to detect evidence of fraudulent documentation and/or irregularities in
the processing, funding, servicing or selling of the mortgage loan.
Verification of occupancy and applicable information is made by regular mail.
Over each 12-month period, the Company's quality control provider is required to
examine loans of all product types (from all states of origination) and all
loans with high-risk characteristics. Quality control reports produced by the
outside quality control provider include individual loan overviews, loan group
overviews and key trends or patterns summarized on a monthly and year-to-date
basis. To date, these quality control reviews have not uncovered any material
deficiencies.
Loan Sales
The Company currently sells all mortgage loans that it funds along with the
mortgage loan servicing rights to various institutional investors. The Company
determines the investor following a comparison of prices available for each loan
to be sold, an analysis of market conditions at the time of sale and a review of
the risk profile of the mortgage loan to be sold.
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Recourse and Repurchases
The Company reduces its prepayment and default risk (other than first-payment
defaults) by selling all of the mortgage loans which it closes. However, in
connection with its whole-loan sales, the Company typically makes
representations and warranties to the purchasers of the loans relating to, among
other things: (i) compliance with applicable laws, regulations and program
standards and (ii) the accuracy of the information provided by the Company to
the purchaser, including information provided by the borrower. The Company's
loan sale agreements with institutional investors generally require it to
repurchase mortgage loans if the representations made in the agreement are
materially inaccurate or if the warranties are breached. In addition, the
Company may be required to indemnify the investors for any damages caused by
such breach. In order to reduce its risk related to inaccurate borrower
information, the Company generally requires the mortgage broker or other entity
supplying the borrower information to make representations and warranties
regarding the accuracy of that information and providing for a means of recourse
in the event such representations and warranties are breached.
If a repurchase request is made, the Company typically attempts to remedy the
breach and seek a rescission of the repurchase request. In the event the
Company is unable to remedy the breach or obtain a rescission of the repurchase
request, it may refinance or sell the subject mortgage loan to another investor,
sometimes at a loss. Additionally, in connection with some non-prime mortgage
loan sales, the Company may be required to return a portion of the premium
received upon the sale of the mortgage loan if the loan is prepaid by the
borrower within the first year after sale, net of any prepayment penalty
collected. The Company has attempted to minimize the risk of a loan rejection
and repurchase request through its quality assurance program which monitors the
entire mortgage loan process. If the Company is required to repurchase loans
originated for or sold to investors, its operating results could be materially
adversely affected.
Warehouse Financing
The Company relies upon warehouse financing facilities to support its loan
originations prior to sale. The Company borrows money on a short-term basis
through warehouse lines of credit during the period from loan origination to
sale. The Company has established (i) a $5,000,000 warehouse line of credit
with The Provident Bank which may be terminated at any time by The Provident
Bank and (ii) a $5,000,000 warehouse line of credit with Sterling Bank & Trust
which matures on January 7, 2000. As of September 30, 1999, the Company had
borrowed $1,070,302 from The Provident Bank and had no outstanding borrowings
under its agreement with Sterling Bank & Trust.
The Company's agreements with the Provident Bank and the Sterling Bank & Trust
require it to comply with various operating and financial covenants. These
covenants restrict the Company's ability to, among other things, sell any of its
assets or merge or consolidate with another company. The Company intends to
increase and diversify further its short-term funding capabilities and continue
to identify and pursue alternative and supplementary sources to finance its
mortgage loan originations.
Interest Rate Risk Management
The Company currently sells all loans that it originates together with the
loan servicing rights on a whole loan basis. The Company's loans are sold on
either a pre-approved basis or in bulk transactions within 60 days following
origination on a best-efforts basis. Due to (i) the limited period of time in
which the Company holds the mortgage loans it originates and (ii) the lower
interest-rate sensitivity of the Company's non-prime mortgage loan products, the
Company does not currently engage in hedging transactions.
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Government Regulation
The residential mortgage financing industry is highly regulated. The Company
must comply with extensive and complex rules and regulations of, and licensing
and examination by, various federal, state and local government authorities.
These rules impose obligations and restrictions on the Company's lending
activities. In particular, these rules (i) limit the broker fees, interest
rates, finance charges and other fees the Company may assess, (ii) require
extensive disclosure to the borrower, (iii) prohibit discrimination and (iv)
impose multiple qualification and licensing obligations upon the Company.
Failure to comply with these requirements may result in, among other things,
revocation of required licenses or registrations, loss of approval status,
voiding of loan contracts or security interests, indemnification liability or
the obligation to repurchase mortgage loans sold to mortgage loan purchasers,
rescission of mortgage loans, class action lawsuits, administrative enforcement
actions and civil and criminal liability. The Company believes that it is in
compliance with these rules and regulations.
As a mortgage company which intends to do business over the Internet, the
Company faces an additional level of regulatory risk since the statutes and
regulations governing mortgage transactions have not been revised or updated to
fully accommodate electronic commerce. Most of the federal and state laws,
rules and regulations governing mortgage loans contemplate or assume paper-based
transactions and do not currently address the delivery of required disclosures
and other documents through electronic communications. Until the applicable
laws, rules and regulations are revised to clarify their applicability to
transactions through e-commerce, any company offering mortgage loans through the
Internet or other means of e-commerce will face uncertainty as to legal
compliance. Moreover, there is no assurance that revisions to the laws, rules
and regulations will be adopted and, if adopted, will be timely or adequate to
eliminate this uncertainty.
At the state level, the Company must comply with licensing and regulation in
most of the states where it acts as a mortgage broker or lender. In addition,
any person who acquires 10% or more of the Company's stock may be required to
periodically file certain financial information and other personal and business
information pursuant to state licensing regulations. If any person holding 10%
or more of the Company's stock refuses or fails to comply with these filing
requirements, the Company's existing licensing arrangements could be
jeopardized. The loss of required licenses could have a material adverse effect
on the Company's results of operations and financial condition.
State laws limit the origination fees, interest rates, finance charges and
other fees that the Company may assess, including late charges, insufficient
funds charges for returned checks and prepayment penalties, and may require
payment of interest on escrow balances. State laws may also require extensive
disclosure to the Company's customers concerning fees and charges, brokerage
agreements, lock-in agreements and commitments, alternative mortgage
transactions, escrows for taxes and insurance, choosing settlement attorneys and
insurance agents and private mortgage insurance, among others. These laws
regulate both the content and timing of disclosures. In addition, many state
laws regulate advertising claims in connection with the solicitation of mortgage
loan applications. State and federal laws also prohibit unfair and deceptive
trade practices in the mortgage finance business. The Company believes that it
has obtained all licenses material to its business in the jurisdictions where it
is currently operating, and is in compliance with the laws of these
jurisdictions.
At the federal level, the Company's mortgage brokering and lending activities
are regulated under a variety of laws, including, but not limited to, the Truth
in Lending Act and Regulation Z
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("TILA"), the Equal Credit Opportunity Act and Regulation B ("ECOA"), the Fair
Housing Act, the Fair Credit Reporting Act ("FCRA"), the Real Estate Settlement
Procedures Act and Regulation X ("RESPA"), the Home Mortgage Disclosure Act of
1975 and Regulation C ("HMDA") and the Flood Disaster Protection Act ("FDPA").
These statutes generally require detailed disclosure of information concerning
mortgage loans, and they regulate the manner in which loans are made, including
advertising, disclosure of consumer information, servicing (and transfer of
servicing) of mortgage loans, payments for settlement services and reporting of
consumer data. These laws regulate both the content and timing of disclosures.
The Company believes that it is operating substantially in compliance with the
laws applicable to its business.
Under TILA, lenders are required to provide consumers with uniform,
understandable information concerning certain terms and conditions of their loan
and credit transactions. Disclosures include providing the annual percentage
rate, monthly payment amount and total amount financed, plus certain disclosures
concerning alternative mortgage transactions. In addition, TILA gives
borrowers, among other things, the right to rescind loan transactions if the
lender fails to provide the requisite disclosure.
Under ECOA, creditors are prohibited from discriminating against applicants on
the basis of race, color, sex, age, religion, national origin or marital status.
The regulations under ECOA also restrict creditors from requesting certain types
of information from loan applicants. FCRA requires lenders to supply applicants
with certain information (called an "adverse action notice") when the lender
denies its applicants credit. The Fair Housing Act prohibits discrimination in
mortgage lending on the basis of race, color, religion, sex, handicap, familial
status or national origin. Finally, when acting as a mortgage lender, the
Company must also file annual reports with HUD pursuant to HMDA, which requires
the collection and reporting of statistical data concerning loan transactions.
RESPA requires certain disclosures, including (i) a good faith estimate of
closing costs, fees and impounds, (ii) notice of right to a copy of the property
appraisal and (iii) disclosure of the history of the Company's mortgage
servicing transfer practices. RESPA also prohibits the payment or receipt of
kickbacks or referral fees, fee shares or splits, or unearned fees in connection
with the provision of real estate settlement services.
Under the FDPA, mortgage providers are required to perform the following
actions: (a) determine flood risk by checking government-provided geographical
flood maps to ascertain whether a property is located in a high-risk flood area;
(b) inform the applicant if the property is determined to be in a high-risk area
by notifying him at least 10 days prior to funding or at loan commitment; (c)
require the applicant to buy flood insurance if the property is located in a
high-risk area; and (d) continually monitor loans to insure that if, based on
amendments to the flood plain maps, the property becomes located in a Special
Flood Hazard area during the life of the loan.
The laws, rules and regulations applicable to the Company may undergo periodic
modification and change. Various laws, rules and regulations, are currently
proposed, which if adopted, could impact the Company. There can be no assurance
that these proposed laws, rules and regulations, or other applicable laws, rules
or regulations, will not be adopted in the future, which could (i) make
compliance much more difficult or expensive, (ii) restrict the Company's ability
to originate, purchase or sell loans, (iii) further limit or restrict the amount
of commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company or (iv) otherwise adversely affect the business
or prospects of the Company.
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Competition
The market for mortgage loans is rapidly evolving, both online and through
traditional channels. The competition in wholesale mortgage lending is intense,
and the Company faces additional competitive pressure with the rise of online
lending. The Company currently competes with a variety of other companies
offering mortgage and other financial services products, including the
following.
. Online mortgage brokers, including Loanworks.com (IndyMac), Unifi.com, E-
loan, Iown.com, Mortgage.com, Quicken Mortgage.com, Lending Tree, Keystroke
Financial, Microsoft's Home Advisor.com and Rock Financial to name a few.
. Traditional lenders, including Countrywide Home Loans, Norwest Mortgage,
Bank of America and Chase Mortgage.
. Other mortgage banking companies, commercial banks, savings associations,
credit unions and other financial institutions.
Many of the Company's potential competitors have substantial competitive
advantages over the Company, including:
. longer operating histories;
. greater name recognition;
. larger established customer bases; and
. greater financial, marketing, technical and other resources.
Increased competition, particularly online competition, could result in price
reductions, reduced margins or loss of market share, any of which could
adversely affect the Company's business. Further, there can be no assurance
that the Company's competitors and potential competitors will not develop
services and products that are equal or superior to the Company's or that
achieve greater market acceptance than the Company's products and services. The
Company believes that its ability to compete online will depend upon, among
other things: (i) the efficiency and cost effectiveness of its operations and
technology; (ii) the quality of its service; (iii) brand recognition of the
Company's proprietary domain names, including "NM\\2\\C.com"; and (iv) its
ability to generate customer loyalty.
Intellectual Property
The Company has applied for, but not yet received, trademark protection from
the United States Office of Patents and Trademarks for the trademarks "Go2e.com"
and "Go2efinancial.com." The Company does not currently hold any patents.
While the Company seeks to protect its trademarks and other proprietary rights
through a variety of means, it may not have taken adequate steps to protect
these rights. The Company may also license intellectual property from third
parties in the future, and it is possible that it could be subjected to
infringement actions based upon the intellectual property licensed from these
third parties. Any intellectual property claims brought against the Company,
regardless of their merit, could result in costly litigation and the diversion
of its financial resources and technical and management personnel. Further, if
such claims are proved valid, through litigation or otherwise, the Company
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may be required to change its trademarks or other proprietary marks and pay
financial damages which would adversely affect the Company's business.
The Company currently enters into confidentiality agreements with its new
employees and consultants and has attempted in other ways to limit and control
access to and distribution of its technologies and other proprietary
information. Despite the Company's efforts to protect its proprietary rights
from unauthorized use or disclosure, parties may attempt to disclose, obtain or
use its proprietary rights. The steps the Company has taken may not prevent
misappropriation of its proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect the Company's
proprietary rights as fully as in the United States.
Employees
As of December 9, 1999, the Company employed 25 full-time employees of which
9 were in sales, 15 were in administration and 1 comprised its technology
staff. None of the Company's employees are represented by a labor union or is
the subject of a collective bargaining agreement.
Item 2. Financial Information.
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Effective as of February 23, 1998, Loraca acquired all of the issued and
outstanding capital stock of NMMC in a transaction accounted for as a purchase.
The Company's results of operation and statement of financial position for
fiscal year 1998 include NMMC's results of operations since the date of its
acquisition by Loraca.
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Selected Financial Data of Loraca
(Dollar amounts in thousands, except per share data)
The following selected data as of December 31, 1998, and for each of the
periods in the period ended December 31, 1998, has been derived from the
Company's financial statements audited by BDO Seidman, LLP, independent
certified public accountants, whose report with respect thereto appears
elsewhere herein. Such selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is qualified by reference to the Financial Statements and Notes
thereto appearing elsewhere in this Registration Statement on Form 10. The
following selected data as of September 30, 1999, and for each of the nine month
periods ended September 30, 1999 and 1998 have been derived from the unaudited
financial statements of the Company and include all adjustments, consisting only
of normal recurring accruals, which management considers necessary for a fair
presentation of such financial information for those periods. Results for the
nine months ended September 30, 1999, are not necessarily indicative of the
results to be expected for the year ending December 31, 1999, or for any other
period within that year.
<TABLE>
<CAPTION>
For the Nine Months
For the Years Ended Ended September 30,
December 31, (Unaudited)
---------------------------- --------------------
From
Inception on
March 11,
1998 1997 1996 through 1999 1998
December 31, 1996
---------------------------------------------------------------------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenues $ 637 $ -- $ -- $ 155 $ 655
Operating Expenses:
Interest Expense 452 -- -- 68 379
General and 1,362 80 -- 2,199 921
administrative
---------------------------------------------------------------------------
Total operating expenses 1,814 80 -- 2,267 1,300
---------------------------------------------------------------------------
Loss from operations (1,177) (80) -- (2,112) (645)
Other income, net 44 -- -- (2,393) 16
---------------------------------------------------------------------------
Net income (loss) $(1,133) $ (80) $ -- $ (281) $ (629)
===========================================================================
Net income (loss) per share:
Basic and diluted $ (.19) $(.12) $(.01) $ (.04) $ (.11)
===========================================================================
BALANCE SHEET DATA
(AT END OF PERIOD)
Mortgage loans
held-for-sale $ 1,798 $ -- $ -- $1,085 $3,118
Cash and cash equivalents 36 69 5 (0) 109
Total assets 5,102 69 5 5,825 6,386
Warehouse lines payable 1,791 -- -- 1,070 2,963
Long term obligations 40 -- -- -- --
Total stockholders' equity
(deficit) $ 2,323 $ (10) $ 5 $3,777 $2,312
</TABLE>
________________
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere in this registration
statement. In addition to historical information, the following discussion and
other parts of this registration statement contain forward-looking statements
that involve significant risks and uncertainties. There are several important
factors that could cause the Company's actual results to differ materially from
historical results and those anticipated by the forward-looking statements,
including competitive factors and other factors discussed elsewhere in this
registration statement. The Company has sought to identify the most significant
risks to its business, but cannot predict whether or to what extent any of
such risks may be realized nor can there be any assurance that the Company has
identified all possible risks that might arise. Investors should carefully
consider all of such risks before making an investment decision with respect to
the Company's stock. In particular, investors should refer to the section
entitled, "Factors That May Affect Future Results."
Overview
General
The Company's revenues are derived from both the origination and sale of
mortgage loans. As a wholesale mortgage banker specializing in nonprime
lending, the Company generates income through discount points, fee charges for
processing, documentation preparation, underwriting and other miscellaneous
fees. With respect to the loans that it sells, the Company generates revenues
from net premium income and interest income. Net premium income consists of the
net gain on the sale of mortgage loans and mortgage servicing rights. This net
gain is recognized at the time of receipt of funds based on the difference of
the loans and their related servicing rights value minus the carrying value of
the mortgage loans sold. The carrying value includes loan related expenses,
consisting of fees paid to third parties for appraisal, credit reports and other
third party charges related to the closing and funding of the mortgage
loans. Interest income consists of the interest the Company receives on the
mortgage during the period prior to sale.
The Company's costs and expenses consist largely of the following:
. Interest paid under its warehouse credit facilities.
. Salaries, commissions and benefits paid to employees.
. General and administrative expenses such as occupancy costs, office expenses
and professional services.
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<PAGE>
. Depreciation and amortization expense related principally to the Company's
facilities, computers, software and technology development and goodwill
associated with its acquisitions.
. Reserves for potential loan repurchase demands and premium recapture from
the Company's investors.
Seasonality and Rates
Mortgage loan originations are typically at their lowest level during the
first and fourth calendar quarters primarily due to a reduced level of home
buying activity during the winter months. Mortgage loan originations generally
increase beginning in March and continuing through October. As a result, the
Company's earnings may be lower in the first and fourth quarters than in the
second and third quarters. Further, the Company's expenses may vary quarter to
quarter based on fluctuations in the volume of loans it originates. In
addition, economic and interest rate cycles also impact the mortgage industry,
and mortgage loan volume typically falls in rising interest rate environments.
During such periods, refinancing loan volume decreases because higher interest
rates provide reduced economic incentives for borrowers to refinance their
existing mortgages.
Results Of Operations
Nine Months Ended September 30, 1999, compared to the Nine Months Ended
September 30, 1998
Revenues
Revenues for the nine months ended September 30, 1999, decreased $500,177 or
76% to $154,513 as compared to $654,690 for the same period in 1998. The
decrease resulted from the reduction in gain on sales of loans and interest
income as mortgage loan origination volume declined due to the closure of NMMC's
retail lending operations and the commencement of wholesale operations in Lake
Oswego, Oregon.
Expenses
Total expenses increased $966,796 or 74% to $2,266,671 for the nine months
ended September 30, 1999, as compared to $1,299,875 for the nine months ended
September 30, 1998. The principal components of the increase in expenses include
$560,773 of additional personnel and commission expense, $250,254 in incremental
professional and consulting fees and an increase in tax and licenses of $87,000.
The increases in expenses are attributable to an overlap of NMMC operations in
New Mexico and Oregon and costs incurred to further the Company's new business
initiatives. The expenses related to the closure of the New Mexico operation
included payment of severance to the terminated employees. The expenses for the
nine months ended September 30, 1999, included approximately $90,000 related to
the start-up and subsequent closure of a retail office in California.
Due to the closure of NMMC's retail lending operations, borrowings under the
warehouse line of credit have declined substantially and as a result interest
expenses decreased $311,126 or 82% with The Provident Bank to $67,668.
Other Income, Net
Other income, net was $2,392,813 for the nine months ended September 30, 1999,
an increase of $2,376,294 compared to $16,519 for same period in 1998. The
increase was primarily attributable to the gain on the sale of investments of
$2,387,123 liquidated during the nine months ended September 30, 1999 for
working capital expenses, compared to $20,915 during the nine months ended
September 30, 1998, an increase of $2,366,208.
15
<PAGE>
Fiscal Year Ended December 31, 1998, Versus Fiscal Year Ended December 31, 1997
Revenues
Revenues for the year ended December 31, 1998, were $637,339. The Company did
not earn any revenue during the same period in 1997. Revenues for 1998 included
gains on the sale of loans of $285,843 and interest income of $351,496.
Expenses
Total expenses increased $1,734,722 to $1,814,383 for the year ending December
31, 1998, as compared to $79,661 in 1997, which included a recovery of bad debt
expense equaling $361,006. The increase is attributable to the inclusion of the
operations of NMMC subsequent to February 23, 1998.
Other Income
Other income was $44,530 for the year ending December 31, 1998, primarily
attributable to gain on the sale of securities of $41,107. No other income was
generated during the year ending 1997.
Income Taxes
At December 31, 1998, the Company had approximately $643,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. In addition, the Company has $516,000 of capital loss
carryforwards that may be applied against future capital gain. The Company's
ability to utilize these tax loss carryforwards may be restricted under
applicable tax laws.
Fiscal Year Ended December 31, 1997, Versus Period From Inception, March 11,
1996, Through December 31, 1996
Revenues
The Company did not generate any revenues during the year ended December 31,
1997, or the period from Inception, March 11, 1996, through December 31, 1996.
Expenses
Total expenses increased $79,381 to $79,661 for the year ending December 31,
1997, as compared to $280 for 1996. The increase is attributable to the
initiation of operations within the Company during 1997 as it prepared to
acquire NMMC in 1998.
Quantitative and Qualitative Disclosures about Market Risk
Interest rate movements significantly impact the Company's volume of closed
mortgage loans and represent the primary market risk to the Company. In a
higher interest rate environment, consumer demand for mortgage loans,
particularly refinancing of existing mortgage loans, declines. Interest rate
movements affect the interest income earned on mortgage loans held for sale,
interest expense on the warehouse lines of credit payable, the value of mortgage
loans
16
<PAGE>
held for sale and ultimately the gain on sale of mortgage loans. In addition, in
an increasing interest rate environment, the Company's mortgage loan brokerage
volume is adversely affected.
The Company originates mortgage loans and manages the market risk related to
these mortgage loans by pre-selling them on a best-efforts basis at the time
that the Company establishes the borrower's interest rate. The Company currently
does not maintain a trading portfolio of mortgage loans and/or mortgage
securities. As a result, the Company is not exposed to market risk as it relates
to trading activities. The majority of the Company's portfolio is held for sale
which requires it to perform market valuations of its pipeline, its mortgage
loan portfolio held for sale and related forward sale commitments in order to
properly record the portfolio and the pipeline at the lower of cost or market.
Therefore, the Company monitors the interest rates of its loan portfolio as
compared to prevailing interest rates in the market. Because the Company pre-
sells its mortgage loan commitments forward, it believes that a 1.00% increase
or decrease would not have a significant adverse affect on the Company's
earnings from its interest rate sensitive assets. The Company pays-off the
warehouse lines payable when the mortgage loan is sold and consequently would
not be expected to incur significant losses from an increase in interest rates
on the warehouse line of credit due to the short time frame that the warehouse
line is drawn down. In the future, if the Company does not pre-sell the mortgage
loan commitments, its market risk could change significantly.
Liquidity And Capital Resources
Operating cash flow
The Company has historically operated on a negative cash flow basis due
primarily to development stage expenses and operating expenses that exceeded the
limited revenues from NMMC's retail loan origination operations. During the nine
months ended September 30, 1999, the Company incurred additional expenses
pursuant to the development of the Company's new business initiatives and the
transition of NMMC to the non-prime wholesale operation in Oregon.
For the nine months ended September 30, 1999, the Company had used
($1,477,562) by operating activities, compared to operating cash in-flow of
$3,954,784 for the comparable period in 1998. The decrease in operating cash
flow resulted from an increase in operating expenses and a net decrease in the
net cash provided from the sale of loans during the nine months ended September
30, 1999, compared to the same period in 1998.
Currently, the Company's primary cash requirements include the funding of (1)
mortgage originations pending their sale, (2) interest expense on its warehouse
and other financings and (3) ongoing administrative and other operating
expenses. The Company must be able to sell loans and obtain adequate credit
facilities and other sources of funding in order to achieve positive operating
cash flows and to maintain the ability to originate and purchase loans.
Warehouse Financing
The Company relies upon warehouse financing facilities to support its loan
originations prior to sale. The Company borrows money on a short-term basis
through warehouse lines of credit during the period from loan origination to
sale to third party investors. The Company has relied upon a limited number of
lenders to provide the primary credit facilities for its loan originations. As
of September 30, 1999, the Company had a $5 million warehouse
17
<PAGE>
line of credit with The Provident Bank with a variable rate of interest which
may be terminated at any time by The Provident Bank. The Company also has a $5
million warehouse line of credit with Sterling Bank & Trust which matures on
January 7, 2000.
The Company is required to comply with various operating and financial
covenants as provided in the agreements described above which are customary for
agreements of their type. The continued availability of funds provided to the
Company under these agreements is subject to the Company's continued compliance
with these covenants. The Company was in violation of certain of the financial
covenants under a $5,000,000 warehouse line of credit with U.S. Bank that was in
place as of December 31, 1998, including (i) failure to maintain required
financial ratios, (ii) exceeding allowable quarters of net operating losses and
(iii) failure to maintain positive monthly cash flow. The lender subsequently
waived the loan covenant requirements as of December 31, 1998, and the warehouse
line expired on its extended maturity date of May 31, 1999.
Transactions with Affiliates
From time to time, the Company's Chief Executive Officer, Ronald R. Baca, has
made loans to Loraca and NMMC in order to fund the Company's working capital
needs, including payroll and other office expenses. In consideration of Mr.
Baca's capital contributions, the Company issued to Mr. Baca an unsecured demand
promissory note dated as of December 31, 1998 in the amount of $701,737 and
bearing interest at the rate of 8% per annum. When the Company advances funds to
Mr. Baca, interest is charged at 8% per annum. During the first nine months of
1999, the Company made net advances to Mr. Baca in the amount of $146,642,
including the transfer to Mr. Baca in May 1999 of 41,000 shares of the common
stock of ZiaSun Technologies, Inc., a publicly traded corporation ("ZiaSun"),
with a market value of $645,750. As of September 30, 1999, the outstanding
balance of the note including accrued interest was $555,095.
Transactions Involving Capital Stock
In conjunction with the acquisition of NMMC, Loraca issued a total of
6,200,000 shares of its common stock during the year ended December 31, 1998.
In February 1998, Loraca issued 2,100,000 shares of its common stock ("Common
Stock") to Mr. Baca in exchange for 100 percent of the outstanding shares of
NMMC's common stock. In connection with the acquisition of NMMC, the Company
acquired $173,848 in cash. Loraca also issued 4,100,000 shares of Common Stock
to acquire 1,000,000 shares of the common stock of ZiaSun. The shares of ZiaSun
common stock acquired were valued at $2,125,000.
Sales of Marketable Securities
During the nine months ended September 30, 1999 the Company sold 179,000
shares of ZiaSun Common Stock, generating a gain on sale of $1,906,435. In
addition, in May 1999 the Company transferred 41,000 shares of ZiaSun common
stock, with a market value of $645,750, to Mr. Baca in exchange for forgiveness
of a like amount of the principal and accrued interest on the note payable to
Mr. Baca. As of September 30, 1999, the Company held 495,000 shares of ZiaSun
common stock with an approximate market value of $3,465,000. The Company may
liquidate additional investment securities, as needed, to fund its working
capital needs.
18
<PAGE>
New Accounting Standards Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 was originally
to be effective for fiscal years beginning after June 15, 1999. SFAS No. 137
has deferred the effective date of SFAS 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Management believes the adoption of this
statement will not have a material impact on the Company's results of
operations, financial position or cash flow.
Year 2000 Compliance
The Company will rely upon a significant number of computer software programs
and operating systems in conducting its operations, including software purchased
from third-party vendors and internally developed programs. To the extent that
these software applications contain source code that is unable to correctly
interpret the upcoming calendar year "2000," some level of modification or even
possible replacement of such source code or applications will be necessary. The
Company has received written confirmation from its primary software vendors that
their applications are Year 2000 compliant or will be before December 31, 1999.
Additionally, the Company is creating or revising all internally developed
software to be Year 2000 compliant. Given the information known at this time,
it is currently not anticipated that these "Year 2000" costs will have any
material adverse impact on the Company's business, financial condition, results
of operations or cash flows.
The Company is, however, dependent on Year 2000 compliance by its vendors to
some extent, for example third-party servicers. The Company is requiring its
systems and software venders to represent that the services and products
provided are, or will be Year 2000 compliant. Although no assurance can be
provided regarding compliance by third-party vendors, the Company does not
expect that noncompliance by any such vendors will have a material adverse
effect on its operations. In the event of noncompliance by any such vendor, the
Company believes that alternative vendors will be available to it.
Factors That May Affect Future Results
If we continue to experience losses in the future, our business, financial
condition and growth prospects could be materially adversely affected.
We have had net operating losses in each year since inception, and we may
incur losses in future periods. We may continue to incur losses due to near-
term investments in information systems, sales, marketing, recruiting and
establishing customer support and administrative infrastructure. As a result,
we may not be able to implement our future business plans, and our business,
results of operation, financial condition and growth prospects could be
materially adversely affected. In addition, if revenue grows slower than we
anticipate, or if operating expenses exceed our expectations or cannot be
adjusted accordingly, our business, results of operations and financial
condition will be adversely affected.
If we lose access to credit facilities to finance our mortgage lending
activities, our growth prospects would be severely limited.
19
<PAGE>
We are dependent upon specialized mortgage credit facilities from other
lenders to finance our mortgage lending activities. We currently maintain two
warehouse credit facilities with different terms, conditions and restrictive
covenants. These lines may expire or be cancelled at the discretion of the
lending institutions.
We cannot assure you that financing will continue to be available on favorable
terms or at all. To the extent that we are unable to access adequate capital to
fund loans, we may have to curtail or cease our loan funding activities
entirely. This would have a material adverse effect on our business, results of
operations and financial condition.
If we lose key mortgage investor relationships, our business could be materially
adversely affected.
We rely on select investors to purchase the loans that we originate. These
investors are under no obligation to continue their relationship with us or to
purchase any loan offered for sale by us. Failure of these investors to offer
competitive terms could have a material adverse affect on our business results
of operation and financial condition. In addition, if private investors reduce
their purchases of these mortgage loans, the market and price for such mortgage
loans will be adversely affected, which would have a material adverse affect on
our business, results of operations and financial condition.
We have a limited operating history.
We recently redirected our strategic focus toward wholesale lending, and we
have not yet developed an extensive financial history or experienced a wide
variety of interest rate fluctuations or market conditions. Consequently, our
financial results to date may not be indicative of our future results. We have
recently retained a new senior management team to execute our new business
strategy. Our ability to improve and expand our operations, financial
condition, profitability and growth prospects, is dependent upon execution of
our new strategic focus aimed at wholesale lending. If we are unable to execute
our business plan, our business, results of operations and financial condition
could be materially adversely affected.
We are dependent on our key personnel for successful operations.
We believe that our future success will depend significantly on the continued
services of our senior management and other key personnel, including Ronald R.
Baca, Bernard A. Guy and Thomas G. Bowser, the Chief Executive Officer of
Loraca, President of Loraca and Chief Executive Officer of NMMC, and President
of NMMC, respectively. We have entered into employment agreements with Messrs.
Baca, Guy and Bowser, but there can be no assurance of their continued
employment. We do not maintain life insurance for any of our key personnel. The
loss of the services of any of the above mentioned personnel, or other key
employees, could have a material adverse affect on our business, results of
operations and financial condition.
If the mortgage banking community does not embrace online mortgage financing and
sales, our business may be materially adversely affected.
The growth of our operations is dependent, to some extent, upon the acceptance
of online mortgage financing by mortgage brokers and other mortgage loan
originators. If these groups do not embrace our model for mortgage finance, our
business, results of operations and financial condition may be materially
adversely affected. The market for electronic mortgage financing, particularly
over the Internet, is at an early state of development and is evolving rapidly.
Rapid growth in the use of and interest in the Internet is a recent development.
We cannot be certain
20
<PAGE>
that Internet usage will continue to grow or that a sufficiently broad base of
businesses and consumers will utilize the Internet as a medium by which to
communicate and obtain services traditionally provided in person. Our business
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the new and rapidly evolving market for
Internet products and services.
We believe that acceptance of our online products and services will depend on
the following factors, among others:
. the growth of the Internet as a medium for commerce generally, and as a
market for financial products and services in particular;
. development of the necessary Internet network infrastructure to support new
technologies and handle the demands placed upon the Internet;
. government regulations of the Internet; and
. our ability to successfully and efficiently develop online products and
services that are attractive to a sufficiently large number of mortgage
brokers and other mortgage loan originators.
There is a risk that online mortgage financing will not gain market acceptance
and that businesses and consumers will not significantly increase their use of
the Internet for obtaining loans. If the market for online mortgage financing
fails to develop, or develops more slowly than expected, our business, results
of operations and financial condition would be materially adversely affected.
In addition, if there are insufficient communications services to support the
Internet, it could result in slower response times, which would adversely affect
usage of the Internet. Even if the Internet gains acceptance, we may be unable,
for technical or other reasons, to develop and introduce new online products and
services or enhancements of existing products and services in a timely manner,
and such products and services and enhancements may not gain widespread market
acceptance. Any of these factors could have a material adverse affect on our
business, results of operations and financial condition.
In addition, because the market for online mortgage lending is at an early
state of development, the volume of loans that we originate or sell in any given
period is difficult to predict. If the volume of loans that we originate or
sell falls below our expectations, our business, results of operation and
financial condition could be materially adversely affected.
If we fail to comply with extensive federal and state laws regulating our
industry, we could be subject to penalties, disqualification, lawsuits or
enforcement actions that could have a material adverse affect on our business.
Our operations are subject to extensive regulation by federal and state
authorities. For example, the United States Department of Housing and Urban
Development, or HUD, regulates certain aspects of the mortgage lending business
as do the Federal Reserve Board and the Federal Trade Commission. The Real
Estate Settlement Procedure Act of 1974, the Truth in Lending Act and other
federal statutes require that certain disclosures, such as good faith estimates
of settlement charges, a Truth-in-Lending Statement and a HUD-1 settlement
statement be provided to borrowers. Additional information, such as the HUD
Settlement Cost booklet, must also be provided to borrowers. The Federal Fair
Housing Act and the Equal Credit Opportunity Act prohibit discrimination and
various state statutes prohibit unfair and deceptive trade practices and
21
<PAGE>
impose disclosure and other requirements in connection with the mortgage loan
origination process. If we fail to comply with such regulations, possible
consequences could include loss of approved status, demands for indemnification,
class action lawsuits, and administrative enforcement actions.
In addition, RESPA contains certain prohibitions regarding the giving or
taking of a fee, kickback, or anything of value for the referral of business to
any specific person or organization. However, the payment of reasonable
compensation for the provisions of goods, services and facilities is generally
not prohibited.
If we are unable to differentiate ourselves from competition in our industry,
our business prospects could be harmed.
To compete successfully, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance and expand our services, as well as our
sales and marketing channels. Increased competition, particularly online
competition, could result in price reductions, reduced margins or loss of market
share, any of which could adversely affect our business. We may not be able to
compete successfully in our market environment and our failure to do so could
have an adverse effect on our business, results of operations and financial
condition.
The e-commerce market is new, rapidly evolving and intensely competitive. We
expect competition to intensify in the future. Barriers to entry are minimal,
so our competitors can launch new Internet sites at relatively low cost. In
addition, the residential mortgage loan business is highly competitive. We
currently compete with a variety of other companies offering mortgage services,
including:
. various online mortgage brokers, including E-LOAN, Inc., iOwn.com,
Mortgage.com, Quicken Mortgage.com and Keystroke Financial;
. mortgage companies that offer products through online search engines, such
as Yahoo! and Microsoft Corporation's Home Advisor website;
. mortgage banking companies, commercial banks, savings associations, credit
unions and other financial institutions which still originate the vast
majority of mortgage loans; and
. mortgage brokers.
Many of our mortgage banking and mortgage brokerage competitors have longer
operating histories or significantly greater financial, technical, marketing and
other resources than we do. Some of our online competitors are spending
substantial funds on mass marketing and branding their mortgage services. In
addition, some of our competitors offer a wider range of services and financial
products to customers and have the ability to respond more quickly to new or
changing opportunities. As a result, many have greater name recognition and
more extensive customer bases and can offer more attractive terms to customers
and adopt more aggressive loan pricing policies. We cannot be sure that we will
be able to compete successfully against current and future competitors. If we
are unable to do so it will have a material adverse affect on our business,
results of operations and financial conditions.
If we are unable to manage growth in our business, our results of operation may
not improve.
22
<PAGE>
We anticipate that we will need to rapidly expand our employee base,
facilities and infrastructure in order to be able to compete successfully and
take advantage of market opportunities. We expect this expansion to place
significant strain on our management, operational and financial resources. Our
current personnel, systems, procedures and controls are not adequate to support
anticipated growth of our operations. To manage this expected growth, we will
need to improve our mortgage processing, operational and financial systems,
information processing capacity, procedures and controls. As we may be unable to
hire, train, retain or manage necessary personnel, or to identify and take
advantage of existing and potential strategic relationships and market our
business, our results of operations and financial condition may not improve and
could deteriorate.
If we are unable to respond to rapid technological change and improve our
products and services, our business could be materially adversely affected.
The mortgage market is subject to rapid technological change, changes in user
and customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices that could render existing technology and systems
obsolete. To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our products and services. We
cannot be sure that others will not develop and offer superior products and
services, or if so offered, that they will not gain a greater acceptance among
potential customers. Our success will depend, in part, on our ability to (i)
license and internally develop leading technologies useful in our business, (ii)
enhance our existing services, (iii) develop new services and technology that
address the increasingly sophisticated and varied needs of our customers, and
(iv) respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of proprietary technology entails significant technical and
business risks. There can be no assurance that we will successfully use new
technologies effectively or adapt our technology and transaction-processing
systems to customer requirements or emerging industry standards. If we are
unable, for technical, legal, financial or other reasons, to adapt in a timely
manner to changing market conditions, customer requirements or emerging industry
standards, our business, results of operations and financial condition could be
materially adversely affected.
If our quarterly revenues and operating results fluctuate significantly, the
price of our Common Stock is likely to be volatile.
Our quarterly revenues and operating results are likely to continue to vary
substantially from quarter-to-quarter. Fluctuation in our quarterly results may
cause the price of our Common Stock to be volatile. We believe that the
following factors, among others, could affect our quarterly results:
. fluctuations in mortgage loan interest rates;
. seasonal or other economic factors affecting demand for mortgage credit;
. the volume of our mortgage loan originations;
. the size and timing of our loan sales;
. our ability to offer competitive mortgage rates;
23
<PAGE>
. changes in our pricing policies or our competitors' pricing policies for
mortgage origination and processing fees;
. the proportion of our mortgage originations which are used to purchase homes
or refinance existing debt;
. the introduction of new products and services by us or our competitors;
. the level of consumer interest and confidence in the Internet as a means of
accessing financial products and services;
. the timing of release of enhancements to our products and services;
. our ability to upgrade and develop our information systems and operational
infrastructure to accommodate growth;
. the timing and rate at which we increase our expenses to support projected
growth;
. the cost of compliance with federal and state government laws and
regulations, including any changes in our historic business practices that
could result from legal interpretations;
. any termination or restructuring of any strategic alliance or agreements
with any key financing sources or service providers;
. our announcement of new marketing initiatives or strategic alliance with
other Internet-based companies, or termination of any such initiative or
alliance;
. the volume of business resulting from collaborative marketing efforts with
our strategic partners;
. technical difficulties or service interruptions affecting our Internet
websites or operational data processing systems;
. changes in our operating expenses and investment in our infrastructure;
. general economic conditions; and
. additions or departures of key executives and operational personnel.
In addition, we are aware that from time-to-time, chat groups may develop on
the Internet and that participants in those groups may post statements about us.
These statements may influence the market price of our Common Stock. We do not
monitor statements about us that appear on the Internet, except for authorized
statements made by us. We undertake no obligation of any kind whatsoever to
monitor, correct, comment or respond to statements on the Internet or elsewhere
by others, and it is our policy not to monitor, correct, comment on or respond
to such statements.
If interest rates rise, our results of operations could be materially adversely
affected.
Our residential mortgage business depends upon overall levels of sale and
refinancing of residential real estate as well as on mortgage loan interest
rates. Any fluctuation in interest rates or an adverse change in residential
real estate or general economic conditions, both of which are
24
<PAGE>
outside our control, could have a material adverse affect on our business,
results of operations and financial conditions. Residential real estate values
are highly cyclical. Shifts in the economy and residential real estate values
generally affect the number of home sales and new housing starts. The demand for
mortgage loan financing increases as the number of home sales increases.
Declining interest rates generally increase mortgage loan financing activity
because homeowners refinance existing mortgage loans to obtain more favorable
interest rates. Rising rates, in contrast, discourage refinancing activities and
generally reduce the number of home sales that occur.
The effect of interest rate changes tends to be greater on the market for
refinancing loans than it is on the market for purchase loans, since refinancing
a mortgage loan is voluntary and motivated primarily by a homeowner's desire to
lower financing costs, whereas new home purchasers are motivated by a need or
desire for a new home. Accordingly, the annual volume of mortgage refinance
activity may fluctuate significantly. We cannot predict future interest rate
trends, their impact on our business, or our ability to manage this business
mix.
The value of the loans we make is based, in part, on market interest rates,
and our business, results of operations and financial condition may be
materially adversely affected if interest rates change rapidly or unexpectedly.
If interest rates rise after we fix a price for a loan but before we sell the
loan into the secondary market, the value of that loan may decrease. If we
delay in selling our loans into the secondary market, our interest rate exposure
increases and we could incur a loss on the sale.
If we have to repurchase loans sold to investors, our operating results could be
materially adversely affected.
We may be required to repurchase loans from our investors in the event of
material misrepresentations by us or inaccuracies in the underlying loan
documents. If we have insufficient funds to repurchase such loans upon demand,
it may result in a default under our agreement with that investor.
Additionally, if a loan is repurchased, we may be required to hold it in
inventory until resold. Depending on the circumstances of the transaction, such
resale may result in a loss which may have a material adverse effect on our
business, results of operations and financial condition.
We May Require Additional Capital in the Future
We have expended, and will continue to expend, substantial funds on
development of technology, expansion of our business, potential acquisitions and
product development. We may require additional funds to finance our operations.
We do not know at this time when we may need additional funds, and we cannot be
certain that if we do need additional funds in the future that we will be able
to obtain them on terms satisfactory to us, if at all. If we do raise
additional funds through the issuance of equity or convertible debt securities,
your stock ownership will be diluted. Further, these new securities may have
rights, preferences or privileges senior to yours. Additionally, any debt
financing that may be available to us may include restrictive covenants. If we
are unable to raise additional funds when necessary, we may have to reduce
planned capital expenditures, scale back our operations or enter into financing
arrangements on terms which we would not otherwise accept, any of which may have
a material adverse effect on our business, financial condition and results of
operations.
25
<PAGE>
If our electronic security devices are breached, our business would be
materially adversely affected.
We rely on certain encryption and authentication technology licensed from
third parties to provide secure transmission of confidential information, such
as borrowers' financial information. There can be no assurance that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will not result in a compromise or breach of the
algorithms we use to protect customer transaction data. If any such compromise
were to occur, it could have a material adverse affect on our business, results
of operations and financial condition.
We may be required to spend significant capital and other resources to protect
against such security breaches or to alleviate problems caused by such breaches.
Concerns over the security of transactions conducted on the Internet and privacy
of users may also inhibit the growth of the Internet generally, and e-commerce
in particular. To the extent that our activities involve the storage and
transmission of proprietary information, such as borrowers' financial
information and profile information, security breaches could damage our
reputation and expose us to a risk of loss or litigation and possible
liability. There can be no assurance that our security measures will prevent
security breaches or that a failure to prevent such security breaches will not
have a material adverse effect on our business, financial condition and results
of operations.
Any acquisitions that we undertake could be difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating results.
We may acquire or make investments in complementary businesses, technologies,
service or products. These acquisitions and investments could disrupt our
ongoing business, distract our management and employees and increase our
expenses. We have had discussions with companies regarding our acquiring, or
investing in, their businesses, products, services or technologies. If we
acquire a company, we could have difficulty in assimilating that company's
personnel, operations, technology and software. In addition, the key personnel
of the acquired company may decide not to work for us. We could also have
difficulty in integrating the acquired products, services or technologies into
our operations and we may incur indebtedness or issue equity securities to pay
for any future acquisitions. The issuance of equity securities could be
dilutive to our existing stockholders.
Our business will suffer if we are unable to expand and promote our brand
recognition.
Establishing and maintaining our brand is critical to attracting and expanding
our customer base, solidifying our business relationships and successfully
implementing our business strategy. We cannot assure you that our brand will be
positively accepted by the market or that our reputation will be strong.
Promotion and enhancement of our brand will also depend, in part, on our
success in providing a high-quality customer experience. We cannot assure you
that we will be successful in achieving this goal. Customer complaints may
significantly damage our reputation and offset the efforts we make in promoting
and enhancing our brand and could have an adverse effect on our business,
results of operations and financial condition. If our customers do not perceive
our existing service to be of high-quality or if we alter or modify our brand
image, introduce new services or enter into new business ventures that are not
favorably received, the value of our brand could be diluted, thereby decreasing
the attractiveness of our service to potential customers.
26
<PAGE>
If we are unable to retain and attract qualified personnel, our business could
suffer.
Our ability to grow and our future success depend on our ability to identify,
attract, hire, train, retain and motivate other highly skilled technical,
managerial, sales and marketing customer service and professional personnel.
Competition for such employees is intense, and there is a risk that we will not
be able to successfully attract, assimilate or retain sufficiently qualified
personnel. If we fail to retain and attract the necessary technical,
managerial, sales and marketing, customer service personnel and experienced
professionals, our business, results of operations and financial condition could
be materially adversely affected.
If there are interruptions or delays in obtaining appraisal, credit reporting,
title searching and other underwriting services from third parties, we may
experience customer dissatisfaction and difficulties closing loans.
We rely on other companies to perform certain aspects of the loan underwriting
process, including appraisals, credit reporting and title searches. If the
provision of these ancillary services were interrupted or delayed, it could
cause delays in the processing and closing of loans for our customers. The
value of the service we offer and the ultimate success of our business is
dependant on our ability to secure the timely provision of these ancillary
services by third parties with whom we have business relationships. If we are
unsuccessful in securing the timely delivery of these ancillary services, we
would likely experience increased customer dissatisfaction and our business,
results of operations and financial condition could be materially adversely
affected.
If legislation or regulations surrounding the use of the Internet restrict our
ability to originate mortgages over the Internet, our business could be
materially adversely affected.
Laws and regulations directly applicable to the Internet and e-commerce may
become more prevalent in the future. In the event the Federal Trade Commission
or other governmental authorities adopt or modify laws or regulations relating
to the Internet, our business, results of operations and financial condition
could be materially adversely affected. Such legislation and regulation could
dampen the growth in Internet usage generally and decrease the acceptance of the
Internet as a commercial medium. The laws and regulations governing the
Internet remain largely unsettled, even in areas where there has been some
legislative or regulatory action. It may take years to determine whether and how
existing laws and regulations such as those governing intellectual property,
privacy and taxation apply to the Internet. In addition, the growth and
development of the market for e-commerce may prompt calls for more stringent
consumer protection laws and regulations, both in the United States and abroad,
that may impose additional burdens on companies conducting business over the
Internet.
If our computer systems fail, our business would be materially adversely
affected.
An important element of our strategy is to generate a high volume of traffic
on, and use of, our websites once they have been established. Accordingly, the
satisfactory performance, reliability and availability of our websites,
transaction-processing systems and network infrastructure are critical to our
reputation and ability to attract and retain customers and maintain adequate
customer service levels. Our revenues will depend in part on the number of
potential customers who visit our websites. Any system interruption that results
in the unavailability of our websites would reduce the volume and attractiveness
of our product and service offerings. Our communications hardware and some of
our other computer hardware operations are located at our facilities in Lake
Oswego, Oregon. The hardware for our internal loan and product database, as well
as our loan processing operations, is also maintained in Lake Oswego, Oregon.
Fires, floods, earthquakes, power loss, telecommunications failures, breaches
and similar events could damage these systems. Computer viruses, electronic
breaches or other similar disruptive problems could also adversely affect our
27
<PAGE>
computer systems. Our business, results of operations and financial condition
could be adversely affected if our systems were affected by any of these
occurrences. Our insurance policies may not adequately compensate us for losses
that may occur in the event of a failure of our computer systems or other
interruptions in our business.
Our systems must accommodate a high volume of traffic and deliver frequently
updated information, the accuracy and timeliness of which is critical to our
business. In the past, we have experienced periodic system interruptions, which
we believe will continue to occur from time to time. Any substantial increase in
the volume of traffic on our systems will require us to expand and upgrade
further our technology, transaction-processing systems and network
infrastructure. We cannot be sure that we will be able to accurately project the
rate or timing of increases, if any, in the use of our computer systems or
expand and upgrade our systems and infrastructure to accommodate such increase
in a timely manner. In addition, our future website users may depend on Internet
service providers, online service providers and other website operators for
access to our websites. Many of them have experienced significant outages in the
past, and could experience outage delays and other difficulties due to system
failures unrelated to our systems. Moreover, the Internet infrastructure may not
be able to support continued growth in its use. Any of these problems could
materially adversely affect our business, results of operations and financial
condition.
If previously unregistered shares of our Common Stock are sold into the market,
it could cause the market price of our Common Stock to drop.
This registration statement covers substantially all of the shares of our
Common Stock, some of which could otherwise currently be sold pursuant to Rule
144 of the Securities Act. Accordingly, the number of shares freely tradable in
the open market following the effective date of this prospectus will increase
significantly. If the holders of these shares sell large numbers of shares in
the open market, the market price of our Common Stock could fall sharply. In
addition, the perception that such sales could occur may cause the market price
of our Common Stock to remain relatively low indefinitely. These factors could
also make it more difficult for us to raise funds through future offerings of
Common Stock.
If our internal systems, or the internal systems of our suppliers are not Year
2000 compliant, our business could be seriously disrupted.
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00," which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations.
Computer systems and software that have not been developed or enhanced recently
may need to be upgraded or replaced to comply with Year 2000 requirements.
We believe that each of our software systems on a stand-alone basis will be
year 2000 compliant. However, we rely on software components acquired from
third parties which may not be Year 2000 compliant. The Internet operations of
many of our customers may also be affected by Year 2000 complications. The
failure of our customers or suppliers to ensure that their systems are year 2000
compliant could have an adverse affect on our customers, resulting in decreased
ability to obtain necessary data, telecommunication capacity and Internet use,
which in turn could have an adverse affect on our business, results of
operations and financial condition.
28
<PAGE>
Item 3. Properties.
----------
Loraca's executive offices are located at 5600 Wyoming Blvd., N.E., Suite 150,
Albuquerque, New Mexico, 87109. Loraca currently occupies approximately 5,015
square feet of office space pursuant to a lease expiring in September 2002.
NMMC is headquartered at 6 Centerpointe Drive, Suite 360, Lake Oswego, Oregon,
97035. NMMC currently occupies approximately 4,758 square feet of office space
under a lease which expires in June 2002. The Company anticipates that it will
require additional office space as more personnel join Loraca and NMMC. Loraca
is currently considering relocation to a major West-Coast metropolitan area in
order to attract qualified personnel at the executive level.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The following table sets forth certain information, as of September 28, 1999,
with respect to the beneficial ownership of Loraca Common Stock by (i) all
persons known by Loraca to be the beneficial owners of more than five percent of
the outstanding Loraca Common Stock, (ii) each director of Loraca, (iii) each
executive officer of Loraca named in the Summary Compensation Table and (iv) all
other executive officers of Loraca.
<TABLE>
<CAPTION>
Shares that
May be
Acquired
within 60
days of
Name and Address of Percentage of September
Beneficial Owners Shares Owned Class (2) 28, 1999
- -------------------------------------- ------------ ------------- ------------
<S> <C> <C> <C>
Ronald R. Baca 1,595,402 22.79%
5600 Wyoming Blvd NE, Suite 150
Albuquerque, NM 87109
Bernard A. Guy 0 0%
6 Centrepointe Drive, Suite 360
Lake Oswego, OR 97035
Thomas G. Bowser 0 0%
6 Centrepointe Drive, Suite 360
Lake Oswego, OR 97035
John Trombello 0 0%
5600 Wyoming Blvd NE, Suite 150
Albuquerque, NM 87109
Harrison Gentry 0 0%
5600 Wyoming Blvd NE, Suite 150
Albuquerque, NM 87109
Amber Global Ltd. 583,310 8.33%
Unit No A 12th Fl
1st Pacific Bank Center
No 56 Gloucester Rd
Hong Kong
Aragon Agents Ltd. 584,720 8.35%
Bldg. PT1-07, 1961 Area
Philexcel Compound, Clark Spec Economic
Pampango, Philippines
Chelsea International Ltd. 569,000 8.13%
#1 Queens Row
Central Hong Kong
Katori Consultants Ltd. 585,700 8.36%
P.O. Box 957
Offshore Incorporations Centre
Road Town Tortola, British Virgin Islands
New Age Publications 582,300 8.32%
Bldg. 8584 Boton Wharf
Subic Bay
Freeport Zone
Olongapo City, 2222, Philippines
PT Pasifika Pratama Investindo 569,000 8.13%
The Ascot Jakarta
#2 Jalan Kebon Raya
Jakarta, 10230, Indonesia
Sandford Enterprises Limited 500,000 7.14%
Suite 1-3 16
F Kinwick Centre
32 Hollywood Road
Central Hong Kong
Shang Holdings 584,900 8.35%
P.O. Box 107
Oceanic House
Duke Street
Grand Turk, Turks & Caicos Islands
Executive Officers and Directors as a 1,595,402 22.79%
group (5 persons)......................
</TABLE>
- ---------------------------------
29
<PAGE>
Item 5. Directors and Executive Officers.
--------------------------------
<TABLE>
<CAPTION>
Name Age Position(s)
---- ---- -----------
<S> <C> <C>
Ronald R. Baca 45 Chairman of the Board, Chief Executive
Officer and Director of Loraca; Chairman of
the Board of NMMC
Bernard A. Guy 43 President and Director of Loraca; Chief
Executive Officer and Director of NMMC
D. Harrison Gentry 60 Director of Loraca and NMMC
John S. Trombello 75 Director of Loraca and NMMC
Thomas G Bowser 45 President and Director of NMMC
</TABLE>
Ronald R. Baca has served as the Chief Executive Officer and Chairman of the
Board of Directors of Loraca since February 1998, and as the Chairman of the
Board of NMMC since January 1991. Mr. Baca also served as the President of
Loraca from February 1998 through September 1999, and as President of NMMC from
January 1991 to November 1998. Mr. Baca is also the President and Chairman of
the Board of Directors of Heartland Insurance Company of America, an Illinois-
domiciled insurance company, positions he has held since 1996. In addition, Mr.
Baca serves as the President and a Director of the Raeaca Corporation, New
Mexico Consumer Finance, Home Credit Corporation, and Addaca, Inc., all of which
are private corporations that are currently inactive.
30
<PAGE>
Bernard A. Guy has served as the President and a Director of Loraca since
September 1999, and as Chief Executive Officer and Director of NMMC since March
1999. Prior to joining the Company, Mr. Guy was the President, Chief Operating
Officer and a Director of Southern Pacific Funding Corporation from October 1997
to September 1998, and Executive Vice President and a Director of Southern
Pacific Funding Corporation from April 1995 to October 1997. Southern Pacific
Funding Corporation filed for bankruptcy protection in October 1998. From
January 1994 to April 1995, he was Senior Vice President of Southern Pacific
Thrift and Loan Association's Residential Lending Division and from December
1992 to January 1994 he was Vice President of the same division. From June 1989
to December 1992, Mr. Guy was Senior Vice President of Preferred Financial
Funding Corp., an independent retail mortgage banking company specializing in
non-conforming credit loans. From June 1984 to June 1989, Mr. Guy was Vice
President/Controller for United First Funding.
D. Harrison Gentry has been a Director of Loraca and NMMC since February 1998.
Since January 1995, Mr. Gentry has also served as a member and consultant of
Westpac Consultants, L.L.C., a real estate investment banking firm. In
addition, Mr. Gentry currently serves as a director of Dysart Mortgage, G.B.F.
Properties, and Emerald River Development, Inc.
John S. Trombello has been a Director of Loraca and NMMC since February 1998.
In addition, he is currently the President and a director of Trinity Mortgage
Company of Dallas, positions that he has held since March 1990. Mr. Trombello
has worked in the mortgage business in various capacities for more than forty
years.
Thomas G. Bowser has served as President and a Director of NMMC since March
1999. Prior to joining NMMC, Mr. Bowser served in various capacities with
Southern Pacific Funding Corporation, including as Executive Vice President-
Production from 1997 to September 1998, as Senior Vice President-Wholesale
Production from 1995 to 1997, and as Regional Vice President-Production from
1993 to 1995. Southern Pacific Funding Corporation filed for bankruptcy
protection in October 1998. Mr. Bowser has worked in the mortgage industry,
holding various positions, since 1977.
Item 6. Executive Compensation.
----------------------
The following table summarizes the compensation paid to or earned by the Chief
Executive Officer of Loraca and the next four most highly compensated executive
officers of the Company (the "Named Executive Officers") who were paid more than
$100,000 for services rendered to the Company in all capacities during the
fiscal year ended December 31, 1998 (rounded to nearest thousand):
31
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
1998 Annual Long Term
------------ Compensation
Compensation Awards
------------- ------
Securities
Underlying Other
Name and Principal Salary Bonus Options Compensation
- ------------------ ----------- ----------- ---------- ------------
Position
- --------
<S> <C> <C> <C> <C>
Ronald R. Baca (1)......... $ 100,000 - - -
Chief Executive Officer
Bernard A. Guy (2)......... - - - -
President
Thomas G. Bowser (2)....... - - - -
President of NMMC
</TABLE>
(1) Mr. Baca was elected as Chief Executive Officer and President of Loraca on
February 25, 1998. In September 1999, Mr. Baca resigned as President of
Loraca, and Mr. Guy was elected President of Loraca at that time.
(2) Neither Mr. Guy nor Mr. Bowser was employed by Loraca or NMMC during the
fiscal year ended December 31, 1998.
Option Grants and Exercises in Last Fiscal Year
During the period from its inception until December 31, 1998, the Company had
granted no options to purchase its capital stock. On April 16, 1999, the
Company granted Mr. Baca an option to purchase 200,000 shares of Common Stock
with an exercise price of $5.00 per share. In addition, on September 3, 1999,
the Company granted to each of Mr. Guy and Mr. Bowser, options to purchase
112,500 shares of Common Stock with an exercise price of $5.5625 per share. The
options granted to Messrs. Baca, Guy and Bowser vest over a four year period.
Employment Agreements and Termination of Employment and Change of Control
Arrangements
Loraca has entered into an executive employment agreement with Mr. Baca
effective as of January 1, 1999 (the "Baca Agreement"). The Baca Agreement is
for a five year term commencing on January 1, 1999. On completion of the
initial term, the Baca Agreement will automatically renew for subsequent one-
year terms unless either party to the agreement provides three months advance
written notice. The Baca Agreement provides for a base salary of $240,000 per
year, as well as (i) an annual review and a six percent increase on each
anniversary date, (ii) incentive compensation based on the Company's attainment
of specified levels of earnings before interest, taxes, depreciation and
amortization and (iii) other fringe benefits.
Pursuant to the terms of the Baca Agreement, provided that Mr. Baca is
employed by the Company on the last day of the calendar year, he is entitled to
payment of annual incentive compensation based upon the Company's earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The
compensation plan is fixed by the Company prior to the beginning of each
calendar year. For calendar year 1999, if EBITDA is (i) less than $500,000, Mr.
Baca is entitled to a bonus of ten percent (10%) of EBITDA; (ii) between
$501,000 and $1,000,000, Mr. Baca is entitled to a bonus of twelve percent (12%)
of EBITDA; (iii) between $1,000,000 and $2,000,000, Mr. Baca is entitled to a
bonus of fourteen percent (14%) of EBITDA; or (iv) greater than $2,000,000, Mr.
Baca is entitled to a bonus of fifteen (15%) of EBITDA. The performance bonus is
payable within 30 days following completion of the Company's annual audit.
Under the Baca Agreement, if Mr. Baca is terminated without cause or within 12
months of a change of control, he is entitled to receive a separation payment
equal to two times the base salary if the termination occurs during the initial
term, or a severance payment equal to three times the base salary then in effect
if the termination occurs after the initial term.
32
<PAGE>
NMMC has entered into executive employment agreements with Mr. Guy and Mr.
Bowser effective as of June 1, 1999 (the "Executive Agreements"). The Executive
Agreements are for a term of three years, commencing on June 1, 1999. On
completion of the initial term, the Executive Agreements will automatically
renew for subsequent one-year terms unless either party to the agreement
provides three months advance written notice. The Executive Agreements provide
for a base salary of $150,000 per year for both Mr. Guy and Mr. Bowser, as well
as (i) incentive compensation based on NMMC's attainment of specified levels of
earnings before taxes and a minimum return on average equity; and (ii) other
fringe benefits.
Pursuant to the terms of the Executive Agreements, Messrs. Guy and Bowser are
entitled to distribute a quarterly performance bonus pool at their discretion to
NMMC's employees (including themselves), provided that NMMC's return on equity
(as determined by NMMC's outside auditors) equals or exceeds ten percent (10%)
in a fiscal quarter (a "Qualifying Quarter"). The size of the bonus pool in a
Qualifying Quarter is based upon the difference between NMMC's projected
earnings before taxes ("EBT") and actual EBT in accordance with the following:
If actual EBT is equal to or greater than fifty percent (50%) but less than
seventy five percent (75%) of projected EBT, the bonus pool is equal to five
percent (5%) of actual EBT.
If actual EBT is equal to or greater than seventy five percent (75%) but less
than one hundred percent (100%) of projected EBT, the bonus pool is equal to ten
percent (10%) of actual EBT.
If actual EBT is equal to or greater than one hundred percent (100%) but less
than one hundred twenty five percent (125%) of projected EBT, then the bonus
pool is equal to twelve and one half percent (12.5%) of actual EBT.
If actual EBT is equal to or greater than one hundred twenty five percent
(125%) of projected EBT, then the bonus pool is equal to fifteen percent (15%)
of actual EBT.
The performance bonus must be paid within 45 days following the close of a
Qualifying Quarter.
Under the Executive Employment Agreements, if either Mr. Guy or
Mr. Bowser is terminated without cause, he is entitled to receive a separation
package which includes (i) the base salary for the term remaining under the term
of employment then in effect; (ii) a lump sum payment equal to his average bonus
payment for the four most recently completed quarters multiplied by the number
of quarters remaining under the term of employment then in effect; (iii) payment
of health insurance premiums for coverage elected pursuant to the Consolidated
Budget Reconciliation Act of 1985 ("COBRA") and (iv) accelerated vesting of his
outstanding options.
Benefit Plans
Loraca 1999 Stock Option Plan
The Board of Directors of Loraca has reserved a total of 1,000,000 shares of
Common Stock for issuance under the Loraca 1999 Stock Option Plan (the "Plan").
The purpose of the Plan is to attract, retain and reward persons providing
services to Loraca and to motivate such persons to contribute to the growth and
profitability of Loraca. The Plan permits the grant of options intended to
qualify as incentive stock options ("ISOs") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, as well as non-qualified stock
options. As of September 30, 1999, 425,000 shares of Common Stock were subject
to outstanding options at a weighted average exercise price of $5.2978 per
share, and 575,000 shares remained available for future grant under the Plan.
Options may be granted to employees (including officers and directors who are
also employees), consultants and directors and prospective employees,
consultants and directors, although only employees (including officers and
directors who are also employees) may receive ISOs. The exercise price per
share of a non-qualified stock option must equal at least 85% of the fair market
value of a share of Common Stock on the date of grant, and in the case of ISOs
must be no less than the fair market value on the date of the grant. In
addition, the exercise price for any option granted to an optionee who owns 10%
or more of the total combined voting power of Loraca or any parent or subsidiary
of Loraca must equal at least 110% of the fair market value of a share of Common
Stock on the date of grant. Generally, options granted under the Plan are
immediately exercisable and must be exercised within ten years, and shares
subject to an option generally will vest over four years from the date of grant.
In the event of certain "change in control" transactions involving Loraca,
shares subject to options granted under the Plan will become fully vested and
exercisable. In addition, an acquiring company may assume or substitute for
such outstanding options.
Item 7. Certain Relationships and Related Transactions.
----------------------------------------------
The following transactions involve Loraca, NMMC and certain executive
officers, directors and affiliates of Loraca and/or NMMC. Because of the
relationships between the parties to each transaction, there can be no assurance
that the transactions described below were on terms as favorable to Loraca
and/or NMMC as could have been obtained from unaffiliated third parties.
33
<PAGE>
Prior to the acquisition of the outstanding capital stock of NMMC (formerly
New Mexico Mortgage Company, Inc., and prior to that B.C. Trucking, Inc.) by
Loraca effective as of February 23, 1998 (the "Acquisition Date"), the business
currently conducted by the Company was conducted by NMMC. From 1986 until the
Acquisition Date, NMMC elected to be treated as an S Corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended, and comparable
state tax laws. As a result, until the Acquisition Date, the earnings of NMMC
were attributable, with certain exceptions, for federal and certain state income
tax purposes to its stockholders rather than to NMMC. No distributions were paid
to NMMC's stockholders in 1998.
On the Acquisition Date, Mr. Baca and his wife, Susan Baca, exchanged all of
the outstanding shares of capital stock of NMMC for 2,100,000 shares of the
Common Stock of Loraca. See, Item 10, Recent Sales of Unregistered Securities.
In June 1998, Mr. Baca purchased a bad debt account receivable from NMMC,
involving NMMC's failed attempt to acquire Aim Insurance Company, a California
domiciled insurance carrier which was conserved by the California Department of
Insurance in 1994 and is currently in liquidation. See Item 8, "Legal
Proceedings." As consideration for the purchase of the bad debt account
receivable from NMMC, Mr. Baca forgave a debt payable by NMMC to Mr. Baca in the
amount of $443,000. At the time of this transaction, the bad debt account
receivable had a net carrying value and estimated fair value of $443,000. The
fair value of the bad debt account receivable was determined by management to be
the amount that will eventually be recoverable net of the costs of collection.
Mr. Baca has subsequently recovered about $270,000 from this bad debt account
receivable and is still pursuing the collection.
From time to time, the Company's Chief Executive Officer, Ronald R. Baca, has
made loans to Loraca and NMMC in order to fund the Company's working capital
needs, including payroll and other office expenses. In consideration of Mr.
Baca's capital contributions, the Company issued to Mr. Baca an unsecured demand
promissory note dated as of December 31, 1998 in the amount of $701,737 and
bearing interest at the rate of 8% per annum. When the Company advances funds to
Mr. Baca, interest is charged at 8% per annum. During the first nine months of
1999, the Company made net advances to Mr. Baca in the amount of $146,642,
including the transfer to Mr. Baca in May 1999 of 41,000 shares of the
common stock of ZiaSun Technologies, Inc., a publicly traded corporation
("ZiaSun"), with a market value of $645,750. As of September 30, 1999, the
outstanding balance of the note including accrued interest was $555,095.
In addition, pursuant to an Asset Purchase Agreement entered into as of
December 30, 1998, the Raeaca Corporation, an affiliate of Mr. Baca, purchased
certain receivables from NMMC with a mortgage backed security at a carrying
value of $519,163. The Company participated in no other transactions with the
Raeaca Corporation during its fiscal year 1998 and does not intend to
participate in any further transactions with the Raeaca Corporation during its
fiscal year 1999.
The Company intends to enter into indemnification agreements with its
directors and various executive officers containing provisions which may require
it, among other things, to indemnify its officers and directors against
liabilities that may arise by reason of their status or service as officers or
directors and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. In addition, the Company
intends to execute such agreements with its future directors and executive
officers.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
To date, the Company has had no compensation committee or other committee
performing an equivalent function. No officer or employee of the Company has
participated in deliberations by the Company's Board of Directors concerning
executive officer compensation, except that Mr. Baca participated in the
determination of Mr. Guy's compensation at the time he was hired by the Company.
34
<PAGE>
Item 8. Legal Proceedings.
-----------------
Regional Investors, Inc. v. NMMC, Inc., Dist. of New Mexico No. CIV-99 07120.
A lawsuit was filed on July 15, 1999, in the United States District Court for
the District of New Mexico against NMMC by Regional Investors, Inc.
("Regional"). The complaint alleges that, in connection with a residential
mortgage loan sold by NMMC to Regional, NMMC failed to repurchase a mortgage
upon demand as required by Regional's Correspondent Agreement with NMMC.
Regional is seeking monetary relief in the approximate amount of $43,362. The
Company believes that Regional's claims are without merit and intends to defend
vigorously against the action.
Gray Cary Ware & Freidenrich LLP v. Ronald Baca, et al., San Diego Superior
Court Case No. GIC732677.
On July 16, 1999, Gray Cary Ware & Freidenrich LLP, the Company's corporate
legal counsel ("Gray Cary"), instituted an interpleader action against NMMC,
Ronald R. Baca and Aguilar & Sebastinelli, a Professional Law Corporation
("A&S"). Gray Cary has interpled approximately $81,250, a portion of the
settlement proceeds recovered by NMMC and Mr. Baca in the liquidation
proceedings of Aim Insurance Company, an insolvent California insurer conserved
by the California Department of Insurance (Orange County Superior Court Case No.
72577). The interpled funds were received in trust by Gray Cary on behalf of
NMMC and Mr. Baca. A&S claims that it is entitled to the funds as a result of
an alleged representation by, and contingency fee agreement with, NMMC and Mr.
Baca relating to the liquidation proceedings. NMMC and Mr. Baca claim that they
are entitled to the funds held in trust and deny that A&S has any rights, title
or interest in such funds, and NMMC intends to vigorously defend its rights in
the lawsuit. NMMC and Mr. Baca have filed a cross-complaint against A&S seeking
declaratory relief. Gray Cary claims no interest in the interpled funds.
Aguilar & Sebastinelli, a Professional Law Corporation v. Ronald R. Baca, et
al., San Francisco Superior Court Case No. 306684.
On September 23, 1999, A&S filed an action for breach of contract,
constructive trust, money had and received, breach of promissory note and
declaratory relief against NMMC, Mr. Baca and others in San Francisco Superior
Court. The allegations in the complaint relate to alleged outstanding attorneys'
fees owed by NMMC and Mr. Baca as a result of A&S's alleged prior representation
of NMMC and Mr. Baca in the liquidation proceedings of Aim Insurance Company in
Orange County. A&S alleges monetary damages in the aggregate amount of $171,278.
On December 7, 1999, the San Francisco Superior Court granted NMMC's demurrer to
A&S's complaint and stayed the action pending resolution of the interpleader
action referenced above.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
-------------------------------------------------------------------
Related Stockholder Matters.
- ---------------------------
The Common Stock of Loraca is currently traded on the OTC Bulletin Board under
the ticker symbol "LCAI." The Company is contemplating applying to Nasdaq for
listing on The Nasdaq SmallCap Market. Because the Common Stock is not listed on
any securities exchanges or quoted on the Nasdaq, a limited trading market for
the Common Stock exists. The average weekly trading volume of the Common Stock
during the quarter ended September 30, 1999, is estimated at approximately
17,200 shares, based on historical information from Yahoo!Finance.
35
<PAGE>
The price information contained in the following table sets forth the high and
low closing bid prices per share of the Common Stock as reported by Nasdaq
Historical Research. The high and low bid prices of the Common Stock reflect
inter-dealer prices which do not include retail markups, mark-downs or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
High Low
---- ---
- --------------------------------------------------------------------------------------------
<S> <C> <C>
1997 (1)
First Quarter - -
- --------------------------------------------------------------------------------------------
Second Quarter - -
- --------------------------------------------------------------------------------------------
Third Quarter - -
- --------------------------------------------------------------------------------------------
Fourth Quarter - -
- --------------------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------------------
First Quarter $5.750 5.6250
- --------------------------------------------------------------------------------------------
Second Quarter 6.250 5.1250
- --------------------------------------------------------------------------------------------
Third Quarter 6.125 3.0000
- --------------------------------------------------------------------------------------------
Fourth Quarter 4.125 3.4375
- --------------------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------------------
First Quarter 2.000 1.125
- --------------------------------------------------------------------------------------------
Second Quarter 8.000 2.5000
- --------------------------------------------------------------------------------------------
Third Quarter 5.750 5.0625
- --------------------------------------------------------------------------------------------
</TABLE>
(1) While the Company's Common Stock was eligible to be traded over-the-counter
starting June 30, 1997, Market Makers did not start quoting the security
until January 1998.
On September 30, 1999, the last sale price of the Common Stock, according to
Nasdaq Historical Research was $5.375 per share, and there were approximately
7,000,000 shares of Common Stock outstanding held by 97 stockholders of record.
Of the shares of Common Stock outstanding on September 30, 1999, approximately
(i) 750,000 shares are freely tradable without restriction under the Securities
Act; (ii) 2,100,000 shares (owned by Mr. Baca) will not be tradable pursuant to
Rule 144 under the Securities Act until February 2000; and (iii) 4,150,000 may
be traded in compliance with Rule 144 or pursuant to other exemptions from
registration under the Securities Act. In addition, Loraca has granted options
to purchase 425,000 shares of its Common Stock (vesting over a four-year period)
to officers of the Company pursuant to its 1999 Stock Option Plan with a
weighted average exercise price of $5.2978.
The Company anticipates that all earnings subsequent to the filing of this
Form 10, if any, will be retained to finance the growth and development of the
business and, therefore, the Company does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. Future dividends, if any, will
be determined by the Company's Board of Directors. Prior to its acquisition by
Loraca, NMMC paid dividends to its S Corporation stockholders.
Item 10. Recent Sales of Unregistered Securities.
---------------------------------------
From its inception in March 1996, Loraca has issued 7,003,047 shares of its
Common Stock, $0.001 par value per share. Of the 7,003,047 shares outstanding,
50,000 shares were issued at a price of $0.10 per share on April 7, 1997 to
David Spencer, Loraca's sole incorporator (and President at that time), in order
to capitalize Loraca. The shares issued to Mr. Spencer were exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to Section 4(2) of the Securities Act and
applicable state securities law, which exempt from registration a transaction
not involving a public offering. An additional 750,000 shares of Loraca Common
Stock were issued to approximately 50 purchasers at a price of $0.10 per share
during late April and early May of 1997 in reliance upon Rule 504 of Regulation
D promulgated under the Securities Act and applicable state securities laws.
36
<PAGE>
Effective as of February 23, 1998, Loraca acquired all of the issued and
outstanding shares of common stock of NMMC (formerly New Mexico Mortgage
Company, Inc.) pursuant to an Agreement and Plan of Reorganization. Loraca was
organized on March 11, 1996, and had no revenues or operations prior to the
merger with NMMC. The acquisition was a transaction by an issuer not involving
any public offering. The investment decision by Loraca was made by investors who
were provided with access to information regarding Loraca and NMMC necessary to
make an informed investment decision. In connection with its acquisition of
NMMC, Loraca issued an additional 6,200,000 shares of Common Stock. Of such
shares, 2,100,000 were issued pursuant to Section 4(2) of the Securities Act to
Mr. Baca, an accredited investor, in exchange for all of the outstanding shares
of NMMC held by Mr. Baca and his wife, Susan Baca. The remaining 4,100,000
shares were sold to offshore investors pursuant to Regulation S under the
Securities Act. The shares were issued at the effective price of $0.5183 per
share, or $3,213,415 in the aggregate.
From inception until September 30, 1999, Loraca has granted options to
purchase 425,000 shares of Common Stock. The option grants were all to employees
in transactions exempt from registration pursuant to Rule 701 promulgated under
the Securities Act.
Pursuant to the Company's contract with its technology developer, J. A. Young
& Co., the Company has agreed to issue shares of Common Stock with a market
value equal to 40% of J. A. Young & Co.'s monthly invoice to the Company. The
contract requires J. A. Young & Co. to provide the Company with monthly invoices
on the last day of each month in which services are rendered. J. A. Young & Co.
is entitled to receive forty percent (40%) of the invoiced amount in the Common
Stock of Loraca, using the last sale price on the first day of the month
invoiced, or if no trades occurred on that date, the last sale price on the
first preceding date on which a trade occurred. J. A. Young & Co. is an
accredited investor as defined under Rule 501(a) under the Securities Act, and
the Company contemplates issuing Common Stock to J. A. Young & Co. pursuant to
Section 4(2) of the Securities Act. As of December 9, 1999, 3,047 shares of the
Company's Common Stock have been issued to J.A. Young & Co. pursuant to the
contract.
Item 11. Description of Registrant's Securities to be Registered.
-------------------------------------------------------
The authorized capital stock of Loraca consists of 50,000,000 shares of Common
Stock. The following is a summary of the material provisions of the Common Stock
of Loraca. The summary is subject to, and qualified in its entirety by, the
Articles of Incorporation and Bylaws of Loraca, as amended to date, that are
included as exhibits to this Form 10 (and incorporated herein by reference) and
by the provisions of applicable law.
As of December 9, 1999, there were approximately 7,003,047 shares of Common
Stock outstanding held of record by approximately 107 stockholders.
Of the shares of Loraca's Common Stock outstanding, 750,000 are freely
tradable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. The remaining 6,253,047 shares of Common Stock
outstanding are "restricted securities" as that term is defined in Rule 144.
These shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144. As described below,
Rule 144 permits resales of restricted securities subject to certain
restrictions.
In general, under Rule 144, as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year,
including the holding period of any prior owner except for an affiliate, would
be entitled to sell within any three-month period a number of shares not to
exceed the greater of (i) one percent (1%) of the number of outstanding shares
of Common Stock or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale. Sales under Rule 144 are also subject to certain manner-of-
sale and notice requirements, as well as to the availability of current public
information about the Company. Under Rule 144(k), a person who has not been
considered an affiliate at any time during the 90 days preceding a sale and who
has beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell these shares without complying with the manner-of-sale, public
information, volume limitation or notice provisions of Rule 144.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the holders of Common Stock. In the
event of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities. Holders of Common Stock have no preemptive or subscription
rights, and there are no redemption or conversion rights with respect to such
shares.
The transfer agent and registrar for the Common Stock is Atlas Stock Transfer
Corporation.
Item 12. Indemnification of Directors and Officers.
-----------------------------------------
The General Corporation Law of Nevada ("Nevada Law") permits the
indemnification of officers, directors, and other corporate agents under certain
circumstances and subject to certain limitations. The Company's Bylaws provide
that the Company shall indemnify any person who
37
<PAGE>
is a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Company) by virtue of the fact that he is or was a
director or officer of the Company. The indemnification extends to all expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
which are actually and reasonably incurred by such director or officer in
connection with such action , suit or proceeding, provided that he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Company, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The Company will maintain directors and officers insurance for the benefit
of its officers and directors and intends to enter into indemnity agreements
with each of its officers and directors pursuant to which the Company will
indemnify its officers and directors to the fullest extent allowed by law. At
present, there is no pending litigation or proceeding involving a director or
officer of the Company in which indemnification is being sought, nor is the
Company aware of any threatened litigation that may result in a claim for
indemnification by any director or officer of the Company.
Item 13. Financial Statements and Supplementary Data.
-------------------------------------------
The consolidated financial statements of the Company are set forth beginning
on page F-1.
Item 14. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
- --------------------
On August 23, 1999, the Company retained BDO Seidman, LLP as the Company's
independent accountants. Effective June 2, 1999, the Company dismissed its
former accountants, Meyners + Co., LLC, Certified Public Accountants
("Meyners"). The decision to change independent accountants was ratified by the
Company's Board of Directors. During the two most recent fiscal years audited by
Meyners through June 2, 1999, there were no disagreements with Meyners regarding
any matters with respect to accounting principles or practices, financial
statement disclosure or audit scope or procedure, which disagreements, if not
resolved to the satisfaction of the former accountants, would have caused
Meyners to make reference to the subject matter of the disagreement in
connection with its report. The former accountants' reports for the years and
periods audited by them are not part of the financial statements of the Company
included in this registration statement. Such reports did not contain an adverse
opinion or disclaimer of opinion or qualifications or modifications as to
uncertainty, audit scope or accounting principles. Prior to retaining BDO
Seidman, LLP, the Company had not consulted with BDO Seidman, LLP regarding the
application of accounting principles or the type of audit opinion that might be
rendered on the Company's financial statements. In connection with Meyners +
Co., LLC's membership in the BDO Seidman alliance program, Meyners + Co. and
the Company consulted with BDO Seidman, LLP's valuation group.
38
<PAGE>
Item 15. Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements:
The information required by this item is contained under the section "Index
to Financial Statements" and such section is incorporated herein by reference.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 1 to registration
statement on Form 10 to be signed on its behalf by the undersigned, thereunto
duly authorized.
LORACA INTERNATIONAL, INC.
-----------------------------
(Registrant)
Date December 9, 1999 By /s/ Bernard A. Guy
-------------------------- -----------------------------
Bernard A. Guy
President
40
<PAGE>
LORACA INTERNATIONAL, INC.
INDEX
Page
----
Financial Statements:
Consolidated Financial Statements -December 31, 1996, 1997 and 1998:
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive Loss F-4
Consolidated Statements of Stockholders' (Deficit) Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-18
Consolidated Financial Statements (Unaudited) - June 30, 1998 and 1999:
Consolidated Balance Sheets (Unaudited) F-19
Consolidated Statements of Operations and Comprehensive
Income (Loss) (Unaudited) F-20
Consolidated Statements of Stockholders' Equity (Unaudited) F-21
Consolidated Statements of Cash Flows (Unaudited) F-22 - F-23
Notes to Consolidated Financial Statements (Unaudited) F-24
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Loraca International, Inc.
We have audited the accompanying consolidated balance sheets of Loraca
International, Inc. as of December 31, 1998 and 1997, and the related
consolidated statement of operations and comprehensive loss, shareholders'
(deficit) equity, and cash flows for each of the years in the two-year period
ended December 31, 1998, and for the period from March 11, 1996 (date of
inception) through December 31, 1996. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
positions of Loraca International, Inc. as of December 31, 1998, and 1997, and
the consolidated results of operations and cash flows for each of the years in
the two-year period ended December 31, 1998, and for the period from March 11,
1996 (date of inception) through December 31, 1996 in conformity with generally
accepted accounting principles.
/s/BDO SEIDMAN, LLP
Los Angeles, California
September 30, 1999
F-2
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
-----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 4) $ 69,253 $ 35,895
Marketable securities (Notes 2 and 11) - 2,682,316
Loan receivables held for sale, net (Notes 4 and 7) - 1,798,514
Receivables, other (Note 4) - 49,673
Prepaid expenses - 24,932
Property and equipment, net - 64,968
Capitalized leased assets, net (Note 3) - 10,853
Goodwill, net of amortization of $0 and $25,602 (Note 9) - 435,234
-----------------------------------
Total assets $ 69,253 $ 5,102,385
===================================
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Warehouse lines of credit (Note 4) $ - $ 1,790,960
Other borrowings (Notes 3 and 5) 79,194 67,756
Accounts payable - 152,569
Accrued liabilities - 53,318
Note payable to stockholder (Note 11) - 701,737
Escrow deposits - 12,714
-------------- --------------
Total liabilities 79,194 2,779,054
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 6, 7, 10 and 12)
STOCKHOLDERS' (DEFICIT) EQUITY (Notes 8 and 12)
Common stock:
Par value - $.001 per share; 50,000,000 shares 800 7,000
authorized; 800,000 shares issued and outstanding
as of December 31, 1997 and 7,000,000 shares
issued and outstanding as of December 31, 1998
Additional paid-in-capital 69,200 3,276,415
Other accumulated comprehensive income (Note 2) - 252,371
Accumulated deficit (79,941) (1,212,455)
-----------------------------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (9,941) 2,323,331
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 69,253 $ 5,102,385
===================================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
From Inception on
March 11, 1996
through Years Ended December 31,
December 31, -------------------------------
1996 1997 1998
----------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gains on sales of loans $ - $ - $ 285,843
Interest income - - 351,496
----------------------------------------------------------
Total revenue - - 637,339
----------------------------------------------------------
Expenses
Interest expense - - 452,513
Personnel and commission expense - 64,291 579,336
General and administrative expense 280 15,370 782,534
----------------------------------------------------------
Total expenses 280 79,661 1,814,383
----------------------------------------------------------
LOSS FROM OPERATIONS (280) (79,661) (1,177,044)
----------------------------------------------------------
Other income
Dividends - - 3,423
Gain on sale of investments - - 41,107
----------------------------------------------------------
Total other income - - 44,530
----------------------------------------------------------
Net loss (280) (79,661) (1,132,514)
----------------------------------------------------------
Other comprehensive income (Note 2):
Unrealized holding gains arising during period - - 317,841
Less reclassification adjustment for losses included - - (65,470)
in net loss
----------------------------------------------------------
Other comprehensive income - - 252,371
----------------------------------------------------------
Comprehensive loss $ (280) $ (79,661) $ (880,143)
==========================================================
Basic and diluted net loss per share $ (0.01) $ (0.12) $ (0.19)
==========================================================
Weighted average number of shares outstanding 50,000 681,000 5,967,000
==========================================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
From inception on March 11, 1996 through December 31, 1996 and for each of the
years in the two-year period ended December 31, 1998:
<TABLE>
<CAPTION>
Common Stock
----------------------------
Number Additional Accumulated
of Paid-in Comprehensive Accumulated
Shares Amount Capital Income Deficit Totals
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Inception, March 11, 1996 - $ - $ - $ - $ - $ -
Common stock issued to
incorporators for cash
at $.10 per share 50,000 50 4,950 - - 5,000
Net loss - - - - (280) (280)
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 50,000 50 4,950 - (280) 4,720
Common stock issued to
public for cash at $.10
per share 750,000 750 74,250 - - 75,000
Stock offering costs - - (10,000) - - (10,000)
Net loss - - - - (79,661) (79,661)
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 800,000 800 69,200 - (79,941) (9,941)
Common stock issued
(Note 8) 6,200,000 6,200 3,207,215 - - 3,213,415
Net unrealized holding
gains on marketable
securities - - - 252,371 - 252,371
Net loss - - - - (1,132,514) (1,132,514)
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 7,000,000 $ 7,000 $ 3,276,415 $ 252,371 $ (1,212,455) 2,323,331
---------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From Inception on
March 11, 1996
through Years Ended December 31,
December 31, ----------------------------------
1996 1997 1998
-------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss $ (280) $ (79,661) $ (1,132,514)
Adjustments to reconcile net loss to net cash
provided used by operating activities:
Allowance for loan losses - - 100,057
Depreciation and amortization - - 71,276
Gain on disposition of investments - - (65,470)
Cash balances acquired from NMMC, Inc. - - 173,848
Decrease (increase) in assets and liabilities,
net of effects from purchase of NMMC, Inc.:
Proceeds from sale of loans originated - - 21,745,141
for sale
Originations of loans held for sale - - (16,798,386)
Receivables - - 329,923
Related party receivables - - (32,083)
Prepaid expenses - - 3,444
Increase (decrease) in:
Accounts payable 185 (185) (233,313)
Accrued liabilities - - 53,318
Escrow deposits - - 12,714
Amount due to NMMC, Inc. - 79,194 (79,194)
-------------------------------------------------------------
Total adjustments 185 79,009 5,281,275
-------------------------------------------------------------
Net cash provided (used) by operating activities (95) (652) 4,148,761
-------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities - - 762,945
Purchase of property and equipment - - (20,097)
-------------------------------------------------------------
Net cash provided by investing activities - - 742,848
-------------------------------------------------------------
Cash flows from financing activities:
Warehouse lines of credit, and other - - (4,928,997)
borrowings, net
Net proceeds on stockholder's note payable - - 222,911
Principal payments on other borrowings - - (218,881)
Net proceeds on sale of securities 4,711 65,289 -
-------------------------------------------------------------
Net cash provided (used) by financing activities 4,711 65,289 (4,924,967)
-------------------------------------------------------------
Net increase (decrease) in cash 4,616 64,637 (33,358)
Cash and cash equivalents, beginning of period - 4,616 69,253
-------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,616 $ 69,253 $ 35,895
=============================================================
</TABLE>
F-6
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In February 1998, Loraca International, Inc. ("Loraca") issued 2,100,000
shares of its common stock for 100 percent of NMMC, Inc.'s outstanding shares of
common stock valued at $1,088,415. Assets acquired and liabilities assumed
consisted of the following:
Amount
---------------
Cash $ 173,848
Marketable securities 483,257
Receivables 379,596
Loan receivables held for sale 6,845,326
Prepaid expenses 28,376
Property and equipment 101,398
Other assets 487,080
Goodwill 460,836
Warehouse lines of credit 6,719,956
Other borrowings 104,555
Accounts payable 385,882
Capital lease obligations 15,802
Stockholder note payable 478,826
Debt 166,281
===============
In February 1998, 1,000,000 shares of common stock of ZiaSun Technologies,
Inc., a publicly traded corporation, with an estimated fair market value of
approximately $2,125,000, were received from eight unrelated entities in
exchange for 4,100,000 shares of common stock of Loraca. This exchange does not
constitute significant ownership of ZiaSun Technologies, Inc. since Loraca is
only a minority shareholder and has no control of ZiaSun Technologies, Inc. This
transaction is purely for investment purposes and the common stock of ZiaSun
Technologies, Inc. has been classified as available-for-sale marketable
securities. The eight entities, which received 4,100,000 shares of common stock
of Loraca, are as follows:
Name No. of Shares
---- -------------
1. Bryant Cragun 47,700
2. Katori Consultants, Ltd. 585,700
3. New Age Publications 577,300
4. PT Pasifika Pratama Investindo 569,000
5. Amber Global Ltd. 582,400
6. Aragon Agents Ltd. 584,000
7. Shang Holdings, Inc. 584,900
8. Chelsea International Ltd. 569,000
-------------
4,100,000
In December 1998, the Company's president purchased certain receivables from
NMMC, Inc. in exchange for a mortgage backed security at a carrying value of
$519,163.
Interest paid in 1998 totaled $530,577.
See notes to consolidated financial statements.
F-7
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Loraca International, Inc. was incorporated on March 11, 1996 in Nevada. In
May 1998, Laraca International, Inc. changed its name to Loraca International,
Inc. ("Loraca"). Loraca was formed to engage in the creation and acquisition of
financial services companies. Loraca was considered a development stage company
as defined under the Statement of Financial Accounting Standards (SFAS) No. 7
until February 23, 1998 when it acquired NMMC, Inc., formerly New Mexico
Mortgage Company, Inc., a wholly owned subsidiary. NMMC, Inc. originates and
sells traditional, as well as non-traditional mortgage products on a wholesale
and retail basis primarily throughout the western United States.
CONSOLIDATION POLICY
The accompanying consolidated financial statements include the accounts of
Loraca and its wholly owned subsidiary, NMMC, Inc. (the "Company").
Intercompany transactions and balances have been eliminated in consolidation.
BASIS OF ACCOUNTING
The Company's financial statements have been prepared on the accrual basis of
accounting.
CASH AND CASH EQUIVALENTS
For purpose of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with an initial maturity of three months or less to
be cash equivalents.
INVESTMENTS
Investments in equity securities have been classified as available-for-sale
securities and are reported at fair value. Unrealized holding gains and losses
are excluded from earnings and reported as a separate component of stockholders'
equity. Realized gains and losses are reported in earnings based on the
historical cost on a first-in first-out basis of the specific security sold.
DERIVATIVES
The Company holds derivative financial instruments comprised of a subordinated
mortgage backed certificate. The fair value of the certificate is determined by
computing the present value of the excess of the weighted average coupon on the
loans sold over the coupon on the senior interests, the servicing fees paid to
the loan servicer, and fees payable to the trustee. Prepayment assumptions used
in the present value computation are based on a sample of historical prepayment
speed of 22 percent. The cash flows expected to be received by the Company, not
considering the expected losses, are discounted at an interest rate that the
Company believes an unaffiliated third-party purchaser would require as a rate
of return on such a financial instrument. Expected losses are discounted using
a rate based on the underlying underwriting guidelines, actual life losses to
date, and current delinquency, foreclosure and real estate owned (REO)
information. To the extent that actual future excess cash flows are different
from estimated excess cash flows, the fair value of the Company's certificate
will be adjusted, with corresponding adjustments made to operations in that
period.
F-8
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The mortgage backed certificate is classified as an available for sale
investment. As such, the investment is reported at its amortized cost in the
accompanying consolidated financial statements.
LOAN RECEIVABLES HELD FOR SALE
Mortgage loans held for sale are reported at the lower of amortized cost or
market value as determined by outstanding commitments from investors or current
investor-yield requirements on an individual loan basis reduced or increased by
the net deferred fees or costs associated with originating the loan.
ALLOWANCE FOR LOSSES
The allowance for losses is based on management's periodic evaluation of the
potential loss exposure associated with the portfolio of mortgage loans held for
sale and the costs to be incurred due to the repurchase of mortgage loans or
indemnification of losses based on alleged violations of representations and
warranties customary to the mortgage banking industry, and reflects an amount
that, in management's opinion, is adequate to absorb such estimated losses. In
evaluating the potential exposure, management takes into consideration numerous
factors, including current economic conditions, prior loss experience,
underlying collateral value, the provisions of loan sale agreements and the
composition of the portfolio of mortgage loans held for sale or previously sold.
RECEIVABLES
Management believes other receivables to be fully collectible. Accordingly,
no allowance for doubtful accounts is required.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization on
assets are computed using accelerated depreciation methods over the estimated
useful lives of the assets, which range from three to seven years.
LONG-TERM ASSETS
The Company applies SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets". Under SFAS No. 121, long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used are
reported at the lower of the carrying amount or their estimated fair market
value. Long-lived assets and certain identifiable intangibles to be disposed of
are reported at the lower of the carrying amount or their estimated fair market
value less costs to sell.
Identifiable intangible assets not covered by FAS No. 121 and goodwill not
identified with assets that are subject to an impairment loss under FAS No. 121
are accounted for in accordance with Accounting Principal Board ("APB") Opinion
No. 17. Under APB No. 17, the amortization periods of identifiable assets and
goodwill are continually evaluated to determine if the useful lives should be
revised. If the useful lives are changed, the unamortized cost would be
allocated to the remaining periods in the revised useful lives. In addition,
the Company periodically reviews the carrying values of its identifiable
intangible assets and goodwill by comparing them to their estimated fair market
value and expected future benefits of the assets to determine if an impairment
exists under APB No. 17.
F-9
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's revenues are derived from both the origination and sale of
mortgage loans. As a wholesale mortgage banker, the Company generates income
through discount points, fee charges for processing, documentation preparation,
underwriting and other miscellaneous fees. With respect to the loans that it
sells, the Company generates revenues from net premium income and interest
income. Net premium income consists of the net gain on the sale of mortgage
loans and mortgage servicing rights. This net gain is recognized at the time of
receipt of funds based on the difference of the loans and their related
servicing rights value minus the carrying value of the mortgage loans sold.
Interest income consists of the interest the Company receives on the mortgage
during the period to sale.
LOAN ORIGINATION FEES AND COSTS
Loan fees, discount points and certain direct origination costs are recorded
as an adjustment of the cost of the loan and are recorded in earnings when the
loan is sold. The Company sells whole loans including servicing rights.
In 1997, the Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. Under SFAS No.
125, a transfer of financial assets in which control is surrendered is accounted
for as a sale to the extent that consideration other than beneficial interests
in the transferred assets is received in the exchange. Liabilities and
derivatives incurred or obtained by the transfer of financial assets are
required to be measured at fair value, if practicable. Also, servicing assets
and other retained interests in the transferred assets must be measured by
allocating the previous carrying value between the assets sold and the interest
retained, if any, based on their relative fair values at the date of the
transfer.
There was no material impact on the Company's consolidated financial
statements as a result of the adoption of SFAS No. 125.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1998, the fair value of cash, loan receivables held for
sale, accounts receivable, warehouse lines of credit, other borrowings, and
accounts payable, including amounts due to and from related parties,
approximates carrying values because of the short-term maturity of these
instruments.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of the
net assets acquired of NMMC, Inc., is amortized on a straight-line basis over
the expected period to be benefited of 15 years. The Company will assess the
recoverability of this goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future cash flows of the acquired operation.
F-10
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are expensed when incurred.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements, as
well as the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this liability method, deferred taxes are determined based on the
temporary difference between the consolidated financial statements and tax basis
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. The principal differences relate
to items expensed for financial reporting purposes that are not currently
deductible for tax purposes, such as depreciation and net operating loss carry-
forwards.
NET INCOME (LOSS) PER SHARE
Loraca has adopted SFAS No. 128, which provides for the calculation of "Basic"
and "Diluted" earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income (loss) available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share.
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income includes all changes in equity
except those resulting from investments by owners and distribution to owners.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 was originally
to be effective for fiscal years beginning after June 15, 1999. SFAS No. 137
has deferred the effective date of SFAS 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Management believes the adoption of this
statement will not have a material impact on the Company's financial statements.
F-11
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise", which effectively changes the way
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. The adoption
of SFAS 134 had no impact on the Company's financial position.
NOTE 2 -- MARKETABLE SECURITIES
Investments at December 31, 1998, were as follows:
Amount
---------------
Available for sale:
Equity securities, at cost $ 1,910,782
Unrealized gains on equity securities 252,371
---------------
2,163,153
Mortgage-backed security, at amortized cost which
approximates fair market value 519,163
---------------
$ 2,682,316
===============
NOTE 3 -- LEASES
The Company leases a building under an operating lease that expires in 2002
with a five-year renewal option. The Company also leases equipment under
capital leases that expire in various years through 1999. Generally, the
Company is required to pay executory costs, such as property taxes and
insurance, on the capital leases. Total rental expense was $85,688 for 1998
(1997: $60,059).
Capitalized leased assets at December 31, 1998, consisted of the following:
Amount
---------------
Office equipment $ 38,529
Less accumulated amortization 27,676
---------------
$ 10,853
===============
F-12
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- LEASES (CONTINUED)
The following is a schedule of future minimum lease payments required under
the operating and capital lease obligations, together with the present value of
future minimum lease payments:
<TABLE>
<CAPTION>
Capital Operating
Years ending December 31, Leases Leases
- ---------------------------------------- --------------- ---------------
<S> <C> <C>
1999 $ 6,520 $ 65,640
2000 - 67,556
2001 - 69,474
2002 - 53,183
--------------- ---------------
Total minimum lease payments 6,520 $ 255,853
===============
Less imputed interest (35)
---------------
Present value of minimum lease payments $ 6,485
===============
</TABLE>
NOTE 4 -- WAREHOUSE LINES OF CREDIT
At December 31, 1998, the Company had $1,790,960 outstanding under a $5,000,000
bank line of credit agreement bearing interest at LIBOR index plus 2.50% (7.62%
at December 31, 1998), collateralized by all pledged loans, all cash deposited
in the collateral account, all purchase commitments and the proceeds resulting
from sales, all notes, deeds of trust, mortgages, assignments, security
agreements, financing statements, guarantees and other documents and instruments
relating to pledged loans, any existing servicing contracts, and all proceeds,
products and profits of any loan. The unused portion of the line of credit as of
December 31, 1998, is $3,209,040 (see Note 13)
The loan agreements relating to the bank line of credit contain various
covenants. The covenants of this agreement include the following provisions,
among others:
A. NMMC, Inc. is required to maintain certain financial ratios.
B. NMMC, Inc. cannot have more than two consecutive calendar quarters
of net operating losses.
C. NMMC, Inc. shall maintain a positive cash flow during each month.
D. NMMC, Inc. cannot make any capital expenditures or incur any
capitalized lease obligation in excess of $50,000 per annum.
E. NMMC, Inc. cannot undertake any additional secured borrowing,
incur any other secured indebtedness, guaranty any indebtedness or
become contingently liable, in an aggregate amount in excess of
$50,000.
F. NMMC, Inc. cannot have an uninsured final nonappealable judgement,
the execution of which has not been stayed by any court, pursuant to
which damages, fines or other penalties are assessed against the
Company or any guarantor in excess of $100,000.
F-13
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, the Company was in violation of the interest
coverage ratio requirements with respect to item A. and was also in violation of
items B. and C. above. The bank waived these loan covenant requirements at
December 31, 1998.
NOTE 5 -- OTHER BORROWINGS
<TABLE>
<S> <C>
Bank revolving line of credit in the amount of $25,000 bearing
interest at Prime rate plus 3% (10.75% at December 31, 1998),
secured by a stockholder's real estate, payable in monthly
installments of .5% of the principal balance plus any finance
charge accrued or $50, whichever is greater, no specified due date $ 20,908
Unsecured vendor note bearing interest at 8.25%, payable in monthly
principal and interest installments of $8,778, due April 1999 34,517
Bank note bearing interest at Prime rate plus 3.5% (11.25% at
December 31, 1998), collateralized by a vehicle, payable in
monthly principal and interest installments of $931, due April 1999 3,684
Unsecured bank note bearing interest at 13.25%, payable in monthly
principal and interest installments of $535 due June 1999 2,162
Capitalized lease obligation 6,485
---------------
$ 67,756
===============
</TABLE>
NOTE 6 -- PROFIT SHARING PLAN
Effective January 1, 1993, NMMC, Inc. adopted a 401(k) defined contribution
profit sharing plan. Substantially all employees who have attained age 18 and
completed one year of service are eligible. Employee contributions can be made
through a salary reduction arrangement, and the Company may, at its discretion,
make contributions up to maximum allowable amounts. No employer contributions
were made to the plan during 1998.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS
At December 31, 1998, the Company had committed to but not yet funded
approximately $263,450 of loans.
ALLOWANCE FOR UNSOLD AND REPURCHASE LOSSES ON LOANS
At December 31, 1998, an allowance of $92,417 for costs on unsold loans. The
Company has not experienced significant repurchase losses or indemnification of
losses based on alleged violations of representations and warranties customary
to the mortgage banking industry.
Please refer to Note 1 for the accounting policy on allowance for losses.
F-14
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
OFF BALANCE SHEET RISK
Interest rate movements significantly impact the Company's volume of closed
mortgage loans and represent the primary market risk to the Company. In a
higher interest rate environment, consumer demand for mortgage loans,
particularly refinancing of existing mortgage loans, declines. Interest rate
movements affect the interest income earned on mortgage loans held for sale,
interest expense on the warehouse lines of credit payable, the value of mortgage
loans held for sale and ultimately the gain on sale of mortgage loans. In
addition, in an increasing interest rate environment, the Company's mortgage
loan brokerage volume is adversely affected.
The Company originates mortgage loans and manages the market risk related to
these mortgage loans by pre-selling them on a best-effort basis at the time that
the Company establishes the borrower's interest rate. The Company currently
does not maintain a trading portfolio of mortgage loans and/or mortgage
securities. As a result, the Company is not exposed to market risk as it
relates to trading activities. The majority of the Company's portfolio is held
for sale which requires it to perform market valuations of its pipeline, its
mortgage loan portfolio held for sale and related forward sale commitments in
order to properly record the portfolio and the pipeline at lower of cost or
market. Therefore, the Company monitors the interest rates of its loan
portfolio as compared to prevailing interest rates in the market. Because the
Company pre-sells its mortgage loan commitments forward, it believes that a
1.00% increase or decrease would not have a significant adverse affect on the
Company's earnings from its interest rate sensitive assets. The Company pays-
off the warehouse lines payable when the mortgage loan is sold and consequently
would not be expected to incur significant losses from an increase in interest
rates on the warehouse line of credit due to the short time frame that the
warehouse line is drawn down. In the future, if the Company does not pre-sell
the mortgage loan commitments, its market risk could change significantly.
LITIGATION
Gray Cary Ware & Freidenrich LLP v. Ronald Baca, et al., San Diego Superior
---------------------------------------------------------------------------
Court Case No. GIC732677.
- ------------------------
On July 16, 1999, Gray Cary Ware & Freidenrich LLP, the Company's corporate
legal counsel ("Gray Cary"), instituted an interpleader action against NMMC,
Inc., Ronald R. Baca (the Company's President) and Aguilar & Sebastinelli, a
Professional Law Corporation ("A&S"). Gray Cary has interpled approximately
$81,250, a portion of the settlement proceeds recovered by NMMC, Inc. and Mr.
Baca in the liquidation proceedings of Aim Insurance Company, an insolvent
California insurer conserved by the California Department of Insurance (Orange
County Superior Court Case No. 72577). The interpled funds were received in
trust by Gray Cary on behalf of NMMC, Inc. and Mr. Baca. A&S claims that it is
entitled to the funds as a result of an alleged representation by, and
contingency fee agreement with, NMMC, Inc. and Mr. Baca relating to the
liquidation proceedings. NMMC, Inc. and Mr. Baca claim that they are entitled
to the funds held in trust and deny that A&S has any rights, title or interest
in such funds, and NMMC, Inc. intends to vigorously defend its rights in the
lawsuit. Gray Cary claims no interest in the interpled funds.
F-15
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION (CONTINUED)
Aguilar & Sebastinelli, a Professional Law Corporation v. Ronald R. Baca, et
----------------------------------------------------------------------------
al., San Francisco Superior Court Case No. 306684.
- -------------------------------------------------
NMMC, Inc. and Mr. Baca are informed that on September 23, 1999, A&S filed an
action for breach of contract, constructive trust, money had and received,
breach of promissory note and declaratory relief against NMMC, Inc. Mr. Baca and
others in San Francisco Superior Court. NMMC, Inc. and Mr. Baca believe that
the allegations in the complaint relate to alleged outstanding attorneys' fees
owed by NMMC, Inc. and Mr. Baca as a result of A&S' alleged prior representation
of NMMC, Inc. and Mr. Baca in the liquidation proceedings of Aim Insurance
Company in Orange County. A&S alleges monetary damages in the aggregate amount
of $171,278. A&S has not yet served the complaint on either NMMC, Inc. or Mr.
Baca. NMMC, Inc. and Mr. Baca believe that A&S' claims are without merit and
once the complaint is served, if ever, NMMC, Inc. intends to vigorously defend
such action.
The Company is also a party to legal claims arising in the normal course of
business. In the opinion of management, based in part on discussions with legal
counsel, resolution of such matters will not have a material adverse effect on
the financial position and operating results of the Company.
NOTE 8 -- COMMON STOCK
On February 23, 1998, Loraca issued 2,100,000 shares of common stock for 100
percent of NMMC, Inc.'s outstanding shares of common stock valued at $1,088,415.
In addition, on February 23, 1998, 1,000,000 shares of common stock in a
publicly traded corporation with an estimated fair market value of approximately
$2,125,000 were received in exchange for 4,100,000 shares of Loraca's common
stock.
NOTE 9 -- ACQUISITION
On February 23, 1998, Loraca issued 2,100,000 shares of common stock for 100
percent of NMMC, Inc.'s outstanding shares of common stock valued at $1,088,415
in a business combination accounted for as a purchase. NMMC, Inc. primarily
engages in mortgage broker services relating to single family residences in New
Mexico. The results of operations of NMMC, Inc. are included in the
accompanying consolidated financial statements since the date of acquisition.
The total cost of the acquisition was $1,088,415, which exceed the fair value of
the net assets of NMMC, Inc. by $460,836. The excess was recorded as goodwill
and is being amortized over 15 years on the straight-line basis.
Pro forma unaudited information assuming the acquisition of NMMC, Inc.
occurred at the beginning of the periods presented:
Years Ended
December 31,
1997 1998
------------------------------------
Revenues $ 1,028,968 $ 654,017
Net income (loss) $ 150,721 $ (1,050,827)
Earnings (loss) per share $ 0.05 $ (0.18)
F-16
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- ACQUISITION (CONTINUED)
The unaudited pro forma information is not indicative of the results which may
have been obtained had the transactions occurred on January 1, 1997 or of future
results.
NOTE 10 -- INCOME TAXES
At December 31, 1998, there are $643,000 of unused net operating loss
carryforwards that may be applied against future Federal taxable income and
expires in 2019. The Company also has $516,000 of capital loss carryforwards
that may be applied against future capital gains and expires in 2004. Any
benefit for the tax carryforwards has been fully reserved because management is
unable to determine if it is more likely than not that these net operating
losses will be realized.
NOTE 11 -- RELATED PARTY TRANSACTIONS
In June 1998, the Company's President, Ronald R. Baca purchased a bad debt
account receivable from NMMC, Inc. involving NMMC, Inc.'s failed attempt to
acquire Aim Insurance Company, a California domiciled insurance carrier, which
was conserved by the California Department of Insurance in 1994 and is currently
in liquidation (Note 7). As consideration for the purchase of the bad debt
account receivable from NMMC, Inc., Mr. Baca forgave a debt payable by NMMC,
Inc. to Mr. Baca in the amount of $443,000. At the time of this transaction, the
bad debt account receivable had a net carrying value and estimated fair value of
$443,000 and so no gains or losses were recorded. The fair value of the bad debt
account receivable was determined by management to be the amount that will
eventually be recoverable net of the costs of collection. Mr. Baca has
subsequently recovered about $270,000 from this bad debt account receivable and
is still pursuing the collection.
From time to time, Mr. Baca has made loans to Loraca and NMMC, Inc. in order
to fund the Company's working capital needs, including payroll and other office
expenses. In consideration of Mr. Baca' capital contributions, the Company
issued to Mr. Baca an unsecured demand promissory note dated as of December 31,
1998 in the amount of $701,737 and bearing interest at the rate of 8% per annum.
Interest expense related to this note was $0 in 1998.
Effective December 31, 1998, Mr. Baca purchased certain receivables from NMMC,
Inc. in exchange for a mortgage backed security at a carrying value of $519,163.
Management believes that the value of the mortgage backed security equals or
exceeds the value of the receivables sold.
NOTE 12 -- SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company closed its California and New
Mexico sales and processing branches. The Company is now originating and
selling specialty mortgage products in selected states from its offices in
Oregon.
On January 1, 1999, the Company entered into an employment agreement with its
President and Chief Executive Officer. The initial term of the employment
relationship pursuant to this agreement is for a period of five years following
such date, unless sooner terminated. On completion of the initial term, the
agreement will automatically renew for subsequent one-year terms unless either
party provides three months advance written notes. The agreement provides for a
base salary subject to an annual review and a six percent increase on each
anniversary date, incentives based on the Company's attainment of specified
levels of earnings before interest, taxes, depreciation and amortization, and
other fringe benefits. If the Company terminates this agreement without cause,
the Company will pay the remainder of the base salary
F-17
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -- SUBSEQUENT EVENTS (CONTINUED)
then in effect for the balance of either the initial term or any subsequent one-
year term. In addition, the Chief Executive Officer also receives a "separation
package," which includes a severance payment equal to two times the base salary
if the termination occurs during the initial term, or a severance payment equal
to three times the base salary then in effect if the termination occurs after
the initial term. The separation package will be paid provided that the Chief
Executive Officer agrees to act as a consultant for the Company without further
compensation for six months following the termination of the employment
relationship, if requested to do so by the Company, and refrains from
competition with the Company.
On March 29, 1999, the Company entered into a $5,000,000 Warehouse Loan
Agreement with Provident Bank. Pursuant to this agreement, Provident Bank may
agree to fund certain loans evidenced by promissory notes and secured by
mortgages, deeds of trust, or deeds to secure debt conveying interests in real
estate.
On April 14, 1999, the Company adopted a Stock Option Plan under which options
may be granted to prospective and existing employees, consultants, and directors
of the Company and its subsidiary to purchase common shares at a price equal to
the fair market value at the date of grant. The maximum aggregate number of
shares, that may be issued under the Plan shall be one million (1,000,000) and
shall consist of authorized but unissued or reacquired shares of stock or any
combination thereof.
On April 16, 1999, the President and Chief Executive Officer of the Company
was granted an option to purchase 200,000 shares of common stock of the Company
at an exercise price of $5.00 per share.
The Company did not renew its $5,000,000 line of credit after May 31, 1999.
NMMC, Inc. has entered into executive employment agreements with Mr. Barney
Guy and Mr. Thomas Bowser effective as of June 1, 1999 (the "Executive
Agreements"). The Executive Agreements are for a term of three years,
commencing on June 1, 1999.
On September 3, 1999, the Company granted to each, Mr. Barney Guy and Mr.
Thomas Bowser, an option to purchase 112,500 shares of Common Stock at a per
share option price of $5.5625.
Pursuant to the Company's contract with its technology developer, J. A. Young
& Co., the Company has agreed to issue shares of Common Stock with a market
value equal to 40% of J. A. Young & Co.'s monthly invoice to the Company. J. A.
Young & Co. is an accredited investor as defined under Rule 501(a) under the
Securities Act, and the Company contemplates issuing Common Stock to J. A. Young
& Co. pursuant to Section 4(2) of the Securities Act.
F-18
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
1999
--------------
<S> <C>
ASSETS
Cash and cash equivalents $ 0
Marketable securities 3,469,853
Loan receivables held for sale, net 1,084,684
Receivable from stockholder 0
Receivables, other 53,636
Mortgage backed security 519,163
Prepaid expenses 60,030
Property and equipment, net 112,274
Capitalized leased assets, net 113,088
Goodwill, net of amortization of $48,644 412,192
--------------
Total assets $ 5,824,920
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse lines of credit $ 1,070,302
Other borrowings 26,818
Accounts payable 270,150
Accrued liabilities 9,004
Escrow deposits 5,369
Current portion long term debt 32,935
Long term debt, net of current portion 78,497
Note payable to stockholder 555,095
--------------
Total liabilities 2,048,170
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock:
Par value - $.001 per share; 50,000,000 shares authorized; 7,000
7,000,000 shares issued and outstanding as of September 30, 1999
Additional paid-in-capital 3,276,415
Other accumulated comprehensive income 1,425,135
Accumulated deficit (931,800)
--------------
TOTAL STOCKHOLDERS' EQUITY 3,776,750
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,824,920
==============
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
REVENUES
Gains on Sales of Loans $ 347,383 $ 103,887
Interest income 307,307 50,626
----------- -----------
Total revenue 654,690 154,513
EXPENSES
Interest Expense 378,794 67,668
Personnel & Commission 476,335 1,037,108
General & Administrative 444,746 1,161,895
----------- -----------
Total Expenses 1,299,875 2,266,671
INCOME (LOSS) FROM OPERATIONS (645,185) (2,112,158)
OTHER INCOME (EXPENSE)
Interest and Dividend Income 3,331 5,690
Gain (Loss) on Sale of Assets 20,915 2,387,123
Bad Debt Expense (7,727)
----------- -----------
Total Other Income (Expense) 16,519 2,392,813
----------- -----------
NET INCOME (LOSS) (628,666) 280,655
Other comprehensive income:
Unrealized holding gains (loss) during period (262,356) 1,172,764
----------- -----------
Comprehensive income (loss) (891,022) 1,453,419
=========== ===========
Basic and diluted net income (loss) per share $ (0.11) $ 0.04
=========== ===========
Weighted average number of shares outstanding 5,622,000 7,000,000
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
From January 1,1998 and for each Periods ended September 30, 1999:
<TABLE>
<CAPTION>
Other
Number Additional Accumulated
of Paid-in Comprehensive Accumulated
Shares Amount Capital Income (loss) Deficit Totals
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 800,000 $ 800 $ 69,200 $ - $ (79,941) $ (9,941)
Common stock issued 6,200,000 6,200 3,207,215 - - 3,213,415
Net unrealized holding
loss on marketable
securities - - - (262,356) - (262,356)
Net loss - - - - (628,666) (628,666)
--------------------------------------------------------------------------------------------------
Balance, September 30, 1998 7,000,000 7,000 3,276,415 (262,356) (708,607) 2,312,452
Net unrealized holding
gains on marketable
securities - - - 514,727 - 514,727
Net loss - - - - (503,848) (503,848)
--------------------------------------------------------------------------------------------------
Balance, January 1, 1999 7,000,000 7,000 3,276,415 252,371 (1,212,455) 2,323,331
Net unrealized holding
gains on marketable
securities (unaudited) - - - 1,172,764 - 1,172,764
Net income (unaudited) - - - - 280,655 280,655
--------------------------------------------------------------------------------------------------
Balance, September 30, 1999
(unaudited) 7,000,000 $ 7,000 $ 3,276,415 $ 1,425,135 $ (931,800) 3,776,750
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
1998 1999
-----------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income (loss) $ (628,666) $ 280,655
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Allowance for loan losses 100,057 -
Depreciation and amortization 61,340 69,827
Gain on disposition of investment (65,470) (2,387,123)
Cash balances acquired from NMMC, Inc. 173,848 -
Decrease (increase) in assets and liabilities,
net of effects from purchase of NMMC, Inc.:
Proceeds from sale of loans originated
for sale 16,949,897 8,957,189
Originations of loans held for sale (13,322,807) (8,243,360)
Receivables 277,433 (3,963)
Related party receivables (32,083) -
Prepaid expenses (17,981) (35,098)
Increase (decrease) in:
Accounts payable (246,567) 98,801
Accrued liabilities 137,052 (44,315)
Escrow deposits 19,259 (7,345)
Capital lease liabilities 117,825
Amount due to NMMC, Inc. (79,194) -
-----------------------------------------
Total adjustments 3,954,784 (1,477,562)
-----------------------------------------
Net cash provided (used) by operating activities 3,326,118 (1,196,907)
-----------------------------------------
Cash flows from investing activities:
Purchase of marketable securities - (715,125)
Proceeds from sale of marketable securities 434,186 2,322,562
Purchase of property and equipment (14,034) (196,324)
-----------------------------------------
Net cash provided (used) by investing activities 420,152 1,411,113
-----------------------------------------
Cash flows from financing activities:
Warehouse lines of credit and other
borrowings, net (3,809,184) (717,733)
Payments on stockholder's note payable, net 77,771 499,108
Overdraft coverage 18,781
Principal payments other borrowings, net 24,397 (50,257)
-----------------------------------------
Net cash used by financing activities (3,707,016) (250,101)
-----------------------------------------
Net increase (decrease) in cash 39,254 (35,895)
Cash and cash equivalents, beginning of period 69,253 35,895
-----------------------------------------
Cash and cash equivalents, end of period $ 108,507 $ 0
=========================================
</TABLE>
F-22
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In February 1998, Loraca International, Inc. ("Loraca") issued 2,100,000
shares of its common stock for 100 percent of NMMC, Inc.'s outstanding shares of
common stock valued at $1,088,415. Assets acquired and liabilities assumed
consisted of the following:
Amount
---------------
Cash $ 173,848
Marketable securities 483,257
Receivables 379,596
Loan receivables held for sale 6,845,326
Prepaid expenses 28,376
Property and equipment 101,398
Other assets 487,080
Goodwill 460,836
Warehouse lines of credit 6,719,956
Other borrowings 104,555
Accounts payable 385,882
Capital lease obligations 15,802
Stockholder note payable 478,826
Debt 166,281
===============
In February 1998, 1,000,000 shares of common stock in a publicly traded
corporation with an estimated fair market value of approximately $2,125,000 were
received in exchange for 4,100,000 shares of common stock of Loraca.
Interest paid in 1999 and 1998 totaled $25,953 and $338,731.
See notes to consolidated financial statements.
F-23
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of September 30, 1999, the consolidated
statements of operations and comprehensive income for the nine months ended
September 30, 1999 and 1998, and the consolidated statements of cash flows for
the nine months ended September 30, 1999 and 1998 are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. It is recommended that these financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's financial statements for the fiscal year
ended December 31, 1998.
The accompanying consolidated financial statements reflect all adjustments
that are, in the opinion of management, necessary to present fairly the
financial position as of September 30, 1999, the results of operations for the
nine months ended September 30, 1999 and 1998, and cash flows for the nine
months ended September 30, 1999 and 1998. All such adjustments are of a normal
and recurring nature. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year. Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
F-24
<PAGE>
<TABLE>
<CAPTION> Index to Exhibits
<S> <C>
Number Description
- ------ ---------------------------------------------------------------------------------------------
2.1* Agreement and Plan of Reorganization by and between Loraca International, Inc. and NMMC, Inc.
dated as of February 23, 1998.
3.1 Articles of Incorporation of Loraca International, Inc., as amended.
3.2* Amended and Restated Bylaws of Loraca International, Inc.
4.1* Specimen Common Stock Certificate.
10.1* 1999 Stock Option Plan, and form of Stock Option Agreement thereunder.
10.2* Executive Employment Agreement dated as of January 1, 1999, between Loraca
International, Inc. and Ronald R. Baca.
10.3* Form of Employment Agreement (between Loraca International, Inc. and Bernard A. Guy /
Thomas G. Bowser).
10.4 Master Agreement for Professional Services dated as of August 13, 1999, between Loraca
International, Inc./NMMC, Inc. and J.A. Young & Co.
10.5* Amended and Restated Warehouse Loan and Security Agreement dated as of August 2, 1999,
between NMMC, Inc. and The Provident Bank.
10.6* Participation Agreement dated as of July 7, 1999, between NMMC, Inc. and Sterling Bank
and Trust.
10.7* Lease dated as of July 18, 1997, between Loraca International, Inc. and G&P Resorts,
Inc., as amended.
10.8* Sublease dated as of June 14, 1999, between Loraca International Inc. and The Ryland
Group, Inc.
10.9* Asset Purchase Agreement dated as of December 30, 1998, between NMMC, Inc. and Raeaca Corp.
10.10* Demand Promissory Note dated December 31, 1998 in favor of Ronald R. Baca.
10.11 Engagement Letter dated August 24, 1999 between Loraca International, Inc. and the DeHayes
Consulting Group.
16.1 Letter from Meyners & Co., LLC, Certified Public Accountants.
21.1* List of Subsidiaries.
27.1 Financial Data Schedule.
</TABLE>
* Previously filed.
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
LORACA INTERNATIONAL, INC.
THE UNDERSIGNED person, acting as sole incorporator under applicable
provisions of the Nevada Business Corporation Act, does hereby adopt the
following Articles of Incorporation for said corporation.
ARTICLE I
NAME
The name of the corporation is LORACA INTERNATIONAL, INC.
ARTICLE II
DURATION
The duration of the corporation is perpetual.
ARTICLE III
PURPOSES
The specific purpose for which the corporation is organized is to
acquire, operate, form, promote and develop mortgage companies operating in the
southwestern United States, to investigate existing companies meeting that
description with a view to identifying targets which present attractive business
opportunities, and to negotiate the acquisition thereof. The corporation shall
also have power
(a) To engage in any and all activities as may be reasonably related
to the
<PAGE>
foregoing and following purposes.
(b) To purchase, own and develop real and personal property, to enter
into leases, contracts and agreements, to open bank accounts and to conduct
financial transactions.
(c) To engage in any all other lawful purposes, activities and
pursuits, which are substantially similar to the foregoing, or which would
contribute to accomplishment of the expressed purposes of the corporation.
(d) To change its primary business purpose from time to time as may to
the Board of Directors seem appropriate.
(e) To engage in any other lawful business authorized by the laws of
Nevada or any other state or other jurisdiction in which the corporation may
be authorized to do business.
ARTICLE IV
CAPITAL
The corporation shall have authority to issue Fifty Million
(50,000,000) common shares of a par value of one mil ($.001) per share. There
shall be only one class of authorized shares, to wit: common voting stock. The
common stock shall have unlimited voting rights provided in the Nevada Business
Corporation Act.
None of the shares of the corporation shall carry with them the pre-
emptive
2
<PAGE>
right to acquire additional or other shares of the corporation. There shall be
no cumulative voting of shares.
ARTICLE V
INDEMNIFICATION OF DIRECTORS
No shareholders or directors of the corporation shall be individually
liable for the debts of the corporation or for monetary damages arising from the
conduct of the corporation.
ARTICLE VI
BY-LAWS
Provisions for the regulation of the internal affairs of the
corporation not provided for in these Articles of Incorporation shall be set
forth in the By-Laws.
ARTICLE VII
REGISTERED OFFICE AND AGENT
The address of the corporation's initial registered office shall be
3238 East Flamingo Road, Suite 156, Las Vegas, NV 89121. The corporation's
initial registered agent at such address shall be Gateway Enterprises, Inc.
Gateway Enterprises, Inc. hereby acknowledges and accepts
appointment as corporation registered agent:
3
<PAGE>
GATEWAY ENTERPRISES, INC.
By:__________________________
ARTICLE VIII
INCORPORATORS
The identity and address of the incorporator is:
David Spencer
4897 South Kings Row Circle
Salt Lake City, UT 84117
The aforesaid incorporator shall be the sole initial Director of the
corporation and shall act as such until the corporation shall have conducted its
organizational meeting or until one or more successors shall have been elected
and accepted their election as directors of the corporation.
Dated this 4th day of March, 1996.
---
/s/ David Spencer
_______________________________
David Spencer, Incorporator
4
<PAGE>
IN WITNESS WHEREOF I, David Spencer, have executed these Articles of
Incorporation in duplicate this 4th day of March, 1996, and say:
---
That I am the incorporator herein; that I have read the above and
foregoing Articles of Incorporation; that I know the contents thereof and that
statements contained therein are true to the best of my knowledge and belief,
excepting as to matters therein alleged on information and belief, and as to
those matters I believe them to be true.
/s/ David Spencer
________________________________
David Spencer
5
<PAGE>
AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
LORACA INTERNATIONAL, INC.
The undersigned, being the duly constituted officer of Loraca
International, Inc. acting pursuant to applicable provisions of the Nevada
Revised Business Corporation Act, do hereby adopt the following Articles of
Amendment to the Articles of Incorporation of Loraca International, Inc.
1. Article III of the original Articles of Incorporation is hereby
repealed in its entirety, and the following Article III is hereby substituted
therefore as if it had been set forth in the original Articles of Incorporation.
ARTICLE III
PURPOSES
The specific purpose for which the corporation is organized is to
evaluate a privately held company known a New Mexico Mortgage, Inc., whose
primary business is to provide innovative loan programs, designed to fit the
needs of any borrower with a possible view towards acquiring New Mexico
Mortgage, Inc.
(a) To engage in any and all activities as may be reasonably related
to the foregoing and following purposes.
(b) To enter into leases, contracts and agreements, to open bank accounts
and to conduct financial transactions.
(c) To engage in any all other lawful purposes, activities and pursuits,
which are substantially similar to the foregoing, or which would contribute to
accomplishment of the expressed purposes of the corporation.
<PAGE>
(d) To change its primary business purpose from time to time as may be
deemed advisable, by the Board of Directors.
(e) To engage in any other lawful business authorized by the laws of Nevada
or any other state or other jurisdiction in which the corporation may be
authorized to do business.
2. The foregoing amendment was duly adopted on February 28, 1997 by the
vote of the majority of the outstanding shares of the corporation.
3. On the date the amendment was adopted, there were (50,000) common shares
of the corporation outstanding each of which was entitled to vote one vote on
the amendment. Of these, (50,000), which represents 100% of the issued and
outstanding voted in favor of the Amendment. No shares were voted against.
4. The foregoing vote was sufficient under the Charter and Bylaws of the
corporation to adopt the aforesaid Amendment to the Articles of Incorporation of
the corporation.
IN WITNESS WHEREOF, I, David Spencer, have executed the Amended Articles of
Incorporation in duplicate this 1st day of March, 1997 and say:
That I am the President and sole director of the corporation; that I have
read the above and foregoing Amendment to the Articles of Incorporation thereof;
know the contents thereof
/s/ David Spencer
_________________________________
David Spencer (President)
Subscribed and sworn before me this 1st day of March, 1997 by David Spencer.
---
[SEAL OF NOTARY PUBLIC]
2
<PAGE>
SECOND AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
LARACA INTERNATIONAL, INC.
(to be known hereafter as LORACA INTERNATIONAL, INC.)
The undersigned, being the duly constituted officer of Laraca
International, Inc. acting pursuant to applicable provisions of the Nevada
Revised Business Corporation Act, do hereby adopt the following Second Amendment
to the Articles of Incorporation of Laraca International, Inc.
1. Article I of the original Articles of Incorporation is hereby repealed
in its entirety, and the following Article I is hereby substituted therefore as
if it had been set forth in the original Articles of Incorporation:
ARTICLE I
NAME
The name of the Corporation is Loraca International, Inc.
2. The foregoing amendment was duly adopted on May 29, 1998 by the written
consent of stockholders holding a majority of the outstanding shares of the
corporation, as permitted by N.R.S. (S)78.320.
3. On the date the amendment was adopted, there were Seven Million
(7,000,000) common shares of the corporation outstanding each of which was
entitled to one vote on the amendment. Of these, stockholders holding Three
Million Eight Hundred Forty Three Thousand and Three Hundred and Two (3,843,302)
shares, which
<PAGE>
represents 54.9% of the issued and outstanding common shares, consented in
writing to the Amendment.
4. The foregoing vote by written consent was sufficient under the Charter
and Bylaws of the corporation to adopt the aforesaid Second Amendment to the
Articles of Incorporation of the corporation.
IN WITNESS WHEREOF, I, Ronald R. Baca, have executed the Second Amendment
to the Articles of Incorporation in duplicate this 29th day of May, 1998, and
say:
That I am the President of the corporation; that I have read the above and
foregoing Second Amendment to the Articles of Incorporation thereof; that I know
the contents thereof and that statements contained therein are true to the best
of my knowledge and belief, excepting as to matters therein alleged on
information and belief, and as to those matters I believe them to be true.
/s/ Ronald Baca
__________________________
Ronald R. Baca
Subscribed and sworn to before me this 29th day of May, 1998 by Ronald R. Baca.
/s/ Nicola P. Ontiveros
___________________________
Notary Public
Residing in Albuquerque, NM
My Commission Expires:
1/4/99
______________________
[NOTARY SEAL OF
NICOLA P. ONTIVEROS]
<PAGE>
Exhibit 10.4
J.A. YOUNG & CO.
MASTER AGREEMENT FOR PROFESSIONAL SERVICES
This Agreement is made effective this 13/th/ day of August, 1999, by and between
------ ------
NMMC, Inc. d/b/a/ New Mortgage Millenium Corp./Loraca International, Inc.
- -------------------------------------------------------------------------
(CLIENT) and J.A. Young & Co. (JAYCO).
ARTICLE 1 - WORK TO BE PERFORMED
During the term of this Agreement, and subject to the conditions herein set
forth, CLIENT may call upon JAYCO to perform specific professional services.
In each instance a separate Statement of Work (SOW) will be prepared, each being
separately subject to the terms and conditions of this Agreement. Said SOW will
define (1) Scope of Work to be performed ("Work"), (2) Proposed Schedule of Work
and (3) Estimated Cost of Work. Such document will be mutually agreed upon by
CLIENT and JAYCO, subject to the terms and conditions of this Agreement, and
will be executed by an authorized representative of each party.
CLIENT agrees to provide work space, computer machine time, security
arrangements, modem and telephone connections, and existing office productivity
software and materials necessary in conjunction with the fulfillment of the
projects defined in each separate SOW, as defined above.
Any terms or conditions of any purchase or work order submitted hereunder which
is contrary to the terms of this Agreement shall be void and of no force and
effect.
ARTICLE 2 - COMPENSATION
2.1 Time and Expense: As full compensation for performance of the Work, CLIENT
shall pay JAYCO a fee on a time and expense basis in accordance with the
hourly labor rates, charges and payment provisions set forth in each
separate SOW. Said hourly labor rates for JAYCO staff are based on the
skill level and background required to perform the proposed Work. Any
overtime authorized by CLIENT will be invoiced at the same hourly rate as
regular time. Reasonable expenses, if agreed to, will be included. Invoices
will include a summary of actual hours worked by JAYCO's employees engaged
directly on the project and the pertinent billing rate. Direct non-salary
expenses such as subcontractors, materials, travel expenses and other
project costs and expenses will be itemized separately on each invoice for
each separate portion of the work.
2.2 Fixed Fee/Lump Sum: As full compensation for performance of the Work,
CLIENT shall pay JAYCO a fixed fee as set forth in each separate document
defining the professional Work to be performed. The fixed fee defined in
the SOW will cover only the specific tasks, expenses, and deliverables
specified in the Scope of Work. Tasks, expenses, and deliverables specified
by the CLIENT that are not included in the Statement of Work will be
provided on a time and expense basis. Invoices will be based on JAYCO's
percentage of completion in accordance with milestones set forth in the SOW
for the fixed-fee project defined in the SOW including an estimation of the
percentage of actual hours worked by JAYCO's employees engaged directly on
the project and the pertinent billing rate. Direct non-salary expenses such
as subcontractors, materials, travel expenses and other project costs and
expenses will be itemized separately on each invoice for each separate SOW.
2.3 Taxes: Any taxes or fees, enacted by local, state or federal government
subsequent to the date of this contract, and based on gross receipts or
revenues will be added to amounts due under this contract, in accordance
with any such fees or taxes.
Page 1 of 6
<PAGE>
MASTER AGREEMENT FOR PROFESSIONAL SERVICES (cont.)
2.4 Payment: Invoices will be submitted monthly and shall be due and payable
within ten (10) days of receipt. Remittance will be mailed to JAYCO at the
address noted on such invoices or as JAYCO may otherwise advise.
2.5 Disputed Amounts: CLIENT may withhold payment of any JAYCO invoice (or part
thereof) that it in good faith disputes are due or owing by providing JAYCO
a written explanation of the basis of the disputed amounts. CLIENT shall,
by the applicable due date, pay any amounts then due that are not disputed.
The parties shall diligently pursue an expedited resolution of the dispute.
If the dispute is not settled within 60 days, then within ten (10) days
after JAYCO's request or such later date upon which any such amount may
become due, CLIENT shall deposit any disputed amount into an interest-
bearing escrow account in a nationally recognized financial institution
reasonably acceptable to JAYCO and shall furnish evidence of such deposit
to JAYCO. Upon the resolution of any disputes as to which CLIENT has
deposited funds into escrow, the funds paid into the escrow account in
respect of such dispute, together with any interest earned thereon and any
expenses of opening and maintaining the escrow account shall be allocated
between the Parties in accordance with the resolution of the dispute.
ARTICLE 3 - INDEPENDENT CONTRACTOR STATUS/LEGAL RELATIONSHIP
The parties intend that JAYCO, in performing Work specified in this Agreement,
shall act as an independent contractor and shall have control of its work and
the manner in which it is performed. JAYCO is not authorized to make any
contract, agreement, warranty or representation on behalf of CLIENT.
JAYCO shall be solely responsible for wages, salaries and other amounts due its
employees or subcontractors under this Agreement and shall be responsible for
all reports and obligations respecting its employees concerning social security,
income tax, unemployment insurance, worker's compensation, and similar matters.
Unless specifically agreed to otherwise, in writing, JAYCO agrees not to use any
work product prepared on behalf of CLIENT for any other individual or entity.
ARTICLE 4 - PROFESSIONAL RESPONSIBILITY
JAYCO shall perform Work consistent with the skill and care ordinarily exercised
by other professional consultants under similar circumstances at the time Work
is performed, subject to any limitations established by CLIENT as to degree of
care, time or expense to be incurred or other limitations of this Agreement. No
other representation, warranty or guaranty, express or implied, is included in
or intended by JAYCO's Work, proposals, agreements or reports.
ARTICLE 5 - LIMITATION OF LIABILITY
Each party, its officers, directors, shareholders, employees, agents, and
representatives, agrees to limit the liability of the other, for all claims or
legal proceedings of any type arising out of or relating to the performance of
Work under this Agreement (including but not limited to JAYCO's breach of the
Agreement, its professional negligence, errors and omissions and other acts) to
the amounts paid under the particular Scope of Work in the course of which the
injury arose. Neither party shall be liable for any indirect, special or
consequential loss or damages arising from this Agreement.
Page 2 of 6
<PAGE>
MASTER AGREEMENT FOR PROFESSIONAL SERVICES (cont.)
ARTICLE 6 - INDEMNIFICATION
Subject to the limitation of liability above, each party agrees to indemnify,
defend and hold harmless the other from any claim, suit, liability, damage,
injury, cost or expense, including attorneys fees, (hereafter collectively
called "Loss") arising out of such party's a) breach of this Agreement or b)
willful misconduct or negligence in connection with the performance of this
Agreement.
ARTICLE 7 - CONFIDENTIALITY
At the request of CLIENT, JAYCO has agreed to execute a separate Confidentiality
Agreement.
ARTICLE 8 - TERM OF AGREEMENT; TERMINATION
This Agreement will be for an initial term commencing on the date hereof, and
ending at the end of the calendar year in which the Agreement was fully
executed, and will thereafter automatically renew for successive periods of one
(1) year each, unless terminated by either party by not less than thirty (30)
days prior written notice to the other party. In the event of termination by the
CLIENT prior to completion of the SOW, CLIENT agrees to pay for all costs for
services performed up to the date of termination.
The obligations of the parties to indemnify and the limitations on liability set
forth in this Agreement shall survive the expiration or termination of this
Agreement.
ARTICLE 9 - TIME OF PERFORMANCE/FORCE MAJEURE
JAYCO shall not be in default of performance under this Agreement where such
performance is prevented, suspended or delayed by any cause beyond JAYCO's
control.
Neither party will hold the other responsible for damages for delays in
performance caused by acts of God or other events beyond the control of the
other party and which could not have been reasonably foreseen or prevented. If
such events occur, it is agreed that both parties will use their best efforts to
overcome all difficulties arising and to resume as soon as reasonably possible
performance of Work under this Agreement. Delays within the scope of this
provision will extend the contract completion date for specified Work
commensurately.
ARTICLE 10 - NO THIRD PARTY BENEFICIARIES
There are no third party beneficiaries of this Agreement, and no third party
shall be entitled to rely upon any work performed or reports prepared by JAYCO
hereunder for any purpose whatsoever.
ARTICLE 11 - DESIGNS AND DISCOVERIES
In the course of providing Work to CLIENT, JAYCO may utilize or develop designs,
ideas, discoveries, inventions, or improvements of these (collectively "Ideas"),
made by the JAYCO Parties. CLIENT agrees that JAYCO's utilization or development
of such Ideas does not grant CLIENT any right in the form of ownership or
license to such Ideas. All Ideas utilized or developed by JAYCO while providing
CLIENT Work shall be deemed to be property of JAYCO. Notwithstanding the
foregoing all work product prepared by JAYCO on behalf of CLIENT shall belong
exclusively to CLIENT.
ARTICLE 12 - LAWS AND REGULATIONS
Both parties will be entitled to regard all applicable laws, rules, regulations
and orders issued by any federal, state, regional or local regulatory body as
valid and may act in accordance therewith until such time as the same may be
modified or superseded by such regulatory body or invalidated by final judgment
in a court of
Page 3 of 6
<PAGE>
MASTER AGREEMENT FOR PROFESSIONAL SERVICES (cont.)
competent jurisdiction, unless prior to such final judicial determination, the
effectiveness of such law, rule or regulation has been stayed by an appropriate
judicial or administrative body having jurisdiction.
ARTICLE 13 - ATTORNEYS' FEES AND COSTS
The prevailing party in any action to enforce or interpret provisions of this
Agreement shall be entitled to recover all reasonable fees, costs and expenses,
of enforcement or interpretation.
If JAYCO is requested to respond to any mandatory orders for the production of
documents or witnesses on CLIENT's behalf regarding work performed by JAYCO,
CLIENT agrees to pay all costs and expenses incurred by JAYCO not reimbursed by
others in responding to such order, including attorneys fees, staff time at
current billing rates and reproduction expenses.
ARTICLE 14 - GOVERNING LAW
This Agreement shall be subject to, interpreted and enforced according to the
laws of the State of Oregon.
ARTICLE 15 - BREACH OF AGREEMENT
In the event either party perceives a breach of this Agreement by the other,
said party shall immediately notify the other party of the breach and allow
fifteen (15) days in which to remedy or to propose a plan to remedy the
perceived default.
ARTICLE 16 - ARBITRATION
Any controversies or claims arising out of or relating to this Agreement, other
than equitable claims, shall be fully and finally settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect (the "AAA Rules"), conducted by one arbitrator either
mutually agreed upon by J.A. Young & Co. and CLIENT or chosen in accordance with
the AAA Rules, except that the parties thereto shall have any right to discovery
as would be permitted by the Federal Rules of Civil Procedure for the period of
90 days following the commencement of such arbitration and the arbitrator
thereof shall resolve any dispute which arises in connection with such
discovery. The prevailing party shall be entitled to costs, expenses and
reasonable attorney's fees, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
ARTICLE 17 - SEVERABILITY
Any provision of this Agreement held in violation of any law will be deemed
stricken, and all remaining provisions shall continue valid and binding upon the
parties. The parties will attempt in good faith to replace any invalid or
unenforceable provision(s) of this Agreement with provisions which are valid and
enforceable and which come as close as possible to expressing the intention of
the original provisions.
ARTICLE 18 - NON-WAIVER
A failure to exercise or waiver of any right(s) granted to a party under any
clause of this Agreement shall not act to waive any other right(s) granted to
such party under this Agreement, whether under the same or different clauses.
ARTICLE 19 - ASSIGNMENT
This Agreement may not be assigned without the express written consent of each
party, which consent will not be unreasonably withheld.
Page 4 of 6
<PAGE>
MASTER AGREEMENT FOR PROFESSIONAL SERVICES (cont.)
ARTICLE 20 - NOTICES
All notices and other communications pursuant to this Agreement shall be in
writing and shall be deemed to have been duly given if personally delivered or,
if mailed, when mailed by United States certified or registered mail, or by
Federal Express (or comparable overnight mail service), postage prepaid, or sent
via facsimile to the other party at the address or facsimile number set forth
below (or at such other address as shall be given in writing by either party to
the other) with a copy to Client's attorney.
<TABLE>
<CAPTION>
<S> <C>
If to JAYCO: If to CLIENT:
J.A. Young & Co., Inc. NMMC, Inc. d/b/a/ New Mortgage Millenium Corp
2800 Northup Way, Suite 120 6 Centerpointe Dr., S.W., Suite 360
Bellevue, WA 98004 Lake Oswego, OR 97035
ATTN: Dr. James A. Young ATTN: Mr. Bernard A. Guy
President/CEO Chief Executive Officer
fax: 425/576-1050 fax: 503/670-9033
with a copy to CLIENT's attorney:
Mr. Mark Lee
c/o Gray, Cary, Ware & Freidenrich, LLP
4365 Executive Drive, suite 1600
San Diego, CA 92121
fax: 858/677-1477
</TABLE>
ARTICLE 21 - ENTIRE AGREEMENT
The obligations of the parties to indemnify and the limitations on liability set
forth in this Agreement shall survive the expiration or termination of this
Agreement. This Agreement, consisting of all documents attached hereto, together
with each SOW executed between the parties, constitutes the entire agreement
between the parties, and supersedes any and all prior written or oral agreements
with respect to the subject matter hereof. No amendment hereto will be binding
unless reduced to writing and signed by authorized representatives of each
party.
The parties hereto have read this Agreement and accept all of its terms and
conditions subject to those modifications, if any, which are typed or
handwritten on the Agreement or attached and incorporated herein and which have
been initialed by all contracting parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
NMMC, Inc. d/b/a/ New Mortgage Millenium Corp./ J.A. YOUNG & CO., INC. (JAYCO)
Loraca International, Inc. (CLIENT)
By_____________________________ By____________________________
James A. Young, Ph.D. Bernard A. Guy
Title President Title Chief Executive Officer
-------------------------- -------------------------
Page 5 of 6
<PAGE>
MASTER AGREEMENT FOR PROFESSIONAL SERVICES (cont.)
Date August 13, 1999 Date
------------------------- -------------------------
Page 6 of 6
<PAGE>
Exhibit 10.11
Management Consultants to the
Financial Services, Insurance, and
Health Care Industries
A. James DeHayes CONFIDENTIAL
CLU, ChFC
Principal August 24, 1999
Chairman & CEO
Reginald F. Woods ENGAGEMENT LETTER
Principal
President & COO Ron Baca
President and Chief Executive Officer
Dennis W. Cross LORACA INTERNATIONAL, INC.
CLU, FLMI #4210 Louisiana Boulevard
Principal NE Albuquerque, New Mexico 87109
Managing Director
Mark T. Lee
Peter A. Bogren Gray Cary Ware & Freidenrich
Executive Vice President 4365 Executive Drive, Suite 1600
Strategic Development San Diego, California 92121
George E. Councill
Managing Director Dear Ron and Mark:
Kenneth B. Doyle It was a pleasure to meet with you and especially to
Managing Director hear your insights during our session in San
Australia/Asia Francisco on the 20th. The purpose of this letter is
to briefly outline the scope of the project to
Robert L. Nellson source a joint venture insurance partner for Loraca
Managing Director International, Inc. ("Loraca") to provide insurance
services for Loraca's new distribution strategies.
Patrick J. O'Neill DeHayes Consulting Group ("DCG") can offer Loraca
Executive Vice President the strategic assistance necessary to break out
Chief Marketing Officer potential partners and sort through the best fit.
Thomas Quinn DCG will assist Loraca to:
Managing Director
. Contact pre-approved, potential joint venture
Mark A. Schoder partners to review the opportunity and engage
Managing Director their interest.
John M. Watts . Bring the opportunities to Loraca and their
CLU counsel and help to sort through the options.
Managing Director
. Effect the appropriate alliance to meet Loraca's
Alan Richards needs.
FSA, MAAA, AIA
Chairman, Advisory Board Our professional fees for consulting services would
be $10,000 per month for six months. To cover all
Philip H. Dutter costs relating to travel, communications, clerical,
Member, Advisory Board and other support services, DCG's expenses would be
30% of all professional fees billed per month. At
Dr. Martin Leshner the end of the six-month period, DCG's consulting
Member, Advisory Board services will continue at Loraca's request.
S. Roy Woodall
Member, Advisory Board
<PAGE>
Ron Baca
Mark T. Lee
August 24, 1999
Page 2
As mentioned at our session, we charge a back-end fee if
the joint venture partner becomes a source of capital.
Our standard charge for capital investment or other
capital-related contribution made by any joint venture
partner is five percent (5%) of the first $5 million, and
two and one half percent (2.5%) of anything above $5
million.
We are enthusiastic about the prospect of working with
you and Loraca's management team in support of Loraca's
new distribution strategies. If the terms set forth above
meet with your approval, please sign below.
Cordially and sincerely,
A. James DeHayes
Chairman and Chief Executive Officer
Agreed and Accepted:
BY:_________________________
Signature of Authorized
Representative
____________________________
Printed Name of Authorized
Representative
<PAGE>
Exhibit 16.1
[LETTERHEAD OF MEYNERS + COMPANY, LLC]
December 9, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read Item 14 of Loraca International, Inc.'s Form 10 dated October 7,
1999, and Amendment No. 1 to Form 10 dated December 9, 1999, and are in
agreement with the statements contained therein. We have no basis to agree or
disagree with other statements of the registrant contained therein.
MEYNERS + COMPANY, LLC
/s/ Meyners + Company, LLC
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 3,989,016
<RECEIVABLES> 1,138,320
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,187,366
<PP&E> 707,381
<DEPRECIATION> (69,827)
<TOTAL-ASSETS> 5,824,920
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 7,000
<OTHER-SE> 5,817,920
<TOTAL-LIABILITY-AND-EQUITY> 5,824,920
<SALES> 154,513
<TOTAL-REVENUES> 154,513
<CGS> 2,266,671
<TOTAL-COSTS> 2,266,671
<OTHER-EXPENSES> (2,392,813)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 280,655
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
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