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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
.
Commission File Number 000-27585
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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.)
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1601 Fifth Avenue, Suite 2320, Seattle, Washington 98101
(Address of principal executive offices, including zip code)
(206) 332-0400
(Registrant's telephone number, including area code)
5600 Wyoming Boulevard, N.E., Suite 150, Albuquerque, New Mexico 87109
(Former Address)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of the registrant's common stock held
by nonaffiliates of the registrant (based on the closing sales price of such
stock as reported by the Nasdaq Stock Market) on March 20, 2000 was
$3,435,064. Excludes shares of common stock held by directors, officers and
each person who holds 5% or more of the registrant's common stock. Number of
shares of common stock, $0.001 par value per share, outstanding as of March
20, 2000 was 7,013,098.
DOCUMENTS INCORPORATED BY REFERENCE
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Documents Form 10-K Reference
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Portions of the Proxy Statement for the Items 10, 11, 12 and 13 of Part III
registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference
into Part III of this Form 10-K
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PART I
This report on Form 10-K contains forward-looking statements. Such
statements generally concern future operating results, capital expenditures,
product development and enhancements, numbers of personnel, strategic
relationships with third parties, liquidity and strategy. The forward-looking
statements are generally accompanied by words such as "plan," "estimate,"
"expect," "believe," "should," "would," "could," "anticipate" or other words
that convey uncertainty of future events or outcomes. We have based such
forward-looking statements on our current plans, intentions, expectations,
estimates and assumptions, which are subject to risks and uncertainties that
could cause our actual results to differ materially from those projected in
this document. Factors that could cause or contribute to disparities between
our forward-looking statements and our actual results are discussed throughout
this document, including the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the captions
"Overview," "Year Ended December 31, 1999 Compared to Year Ended December 31,
1998," "Year Ended December 31, 1998 Compared to Year Ended December 31,
1997," "Liquidity and Capital Resources," "Year 2000 Compliance," and "Factors
That May Affect Future Results." Investors are encouraged to consider
carefully these risks in evaluating us and before purchasing our stock.
ITEM 1. BUSINESS
Overview
Loraca International, Inc.
Loraca International, Inc. ("Loraca") is an e-finance 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
Seattle, Washington. 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 Millennium 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,
the Company began to shift its focus to origination of non-prime mortgage
loans under the direction of a new management team. See Item 10, Directors and
Executive Officers. As part of its new strategic focus, the Company closed its
retail lending operations in Albuquerque, New Mexico and Irvine, California
and relocated its principal offices to Lake Oswego, Oregon until March 2000 at
which time the principal offices were moved to Seattle, Washington.
The Mortgage Market
The mortgage market may be broadly divided into four major segments today:
. 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
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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.
Recent Developments
On February 11, 2000, the Company, through its subsidiary, entered into an
agreement to acquire all of the outstanding shares of The Lexus Companies,
Inc. and its subsidiary, Calumet Securities Corporation (collectively
"Lexus"), pursuant to the terms of an Agreement and Plan of Merger. Lexus is a
conforming mortgage banking origination and servicing platform. The Company
(through its subsidiary) shall pay to Lexus an aggregate of (i) 377,778 shares
of common stock of Loraca, and (ii) floating rate convertible subordinated
notes in the principal amount of $2,300,000.
On February 7, 2000, the Company entered into discussions to acquire J.A.
Young & Co., Inc. ("JA Young"), an application service provider that provides
electronic-based solutions to companies' business problems. JA Young
specializes in the telecommunications and financial services industries. The
Company intends to acquire J.A. Young and discussions are underway.
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
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names; 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 Millennium 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.
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 web sites under Internet domain names which it has reserved. 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.
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 (approximately $252,700 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.
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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 December 31, 1999,
the Company employed 4 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 web sites to offer the Company's products online
to mortgage brokers, mortgage bankers, credit unions and community banks.
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 web sites linked to the Company's own web sites, (ii) placing links and
banner advertisements on partners' web sites 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. 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.
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Underwriting
Internet underwriting ("IU") 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 IU
systems with the IU system of the Company will increase a mortgage
originator's capture rate. The Company intends to continue to invest
substantial resources into improving its IU 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
. 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
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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.
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 June 27, 2000. As of December 31, 1999, the Company had
borrowed $1,288,797 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 ("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.
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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.
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, QuickenMortgage.com, Lending Tree,
Keystroke Financial, and Microsoft's Home Advisor.com to name a few.
. Traditional lenders, including Countrywide Home Loans, Wells Fargo, Bank
of America and Chase Mortgage.
. Other mortgage banking companies, commercial banks, savings
associations, credit unions and other financial institutions.
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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; 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", "Go2eMortgage.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 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 31, 1999, the Company employed 20 full-time employees of
which 4 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 are the subject of a collective bargaining agreement.
ITEM 2. 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. Subsequent to year end, Loraca signed a lease for an executive office
space located at 1601 Fifth Avenue, Suite 2320, Seattle, Washington, 98101.
The new office space is 3,204 square feet under a lease which expires in
February 2002.
11
<PAGE>
ITEM 3. 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") in San Diego Superior Court. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Over The Counter Bulletin Board ("OTC-BB")
under the symbol "LCAI." The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock for the
two most recent fiscal years as reported on OTC-BB. The price information
contained in the following table set forth the high and low 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>
Year Ended 1998
1st Quarter................................................ $5.7500 $5.6250
2nd Quarter................................................ 6.2500 5.1250
3rd Quarter................................................ 6.1250 3.0000
4th Quarter................................................ 4.1250 3.4375
Year Ended 1999
1st Quarter................................................ 2.0000 1.1250
2nd Quarter................................................ 8.0000 2.5000
3rd Quarter................................................ 5.7500 5.0625
4th Quarter................................................ 5.4375 4.0000
</TABLE>
On March 20, 2000, the closing sale price for our common stock was $4.00 per
share. On this date, there were approximately 110 holders of record of our
common stock. This figure does not reflect more than 17 beneficial
stockholders whose shares are held in nominee names. We presently intend to
retain future earnings to finance the growth and development of our business,
and as such, we do not anticipate paying cash dividends on our common stock in
the foreseeable future.
The market price of our common stock has experienced large fluctuations and
may continue to be volatile in the future. Factors such as future
announcements concerning us or our competitors, quarterly variations in
operating results, announcements of technological innovations, the
introduction of new products or changes in product pricing policies by us or
our competitors, proprietary rights or other litigation, changes in earnings
estimates by analysts or other factors could cause the market price of our
common stock to fluctuate substantially. Further, the stock market has from
time to time experienced extreme price and volume fluctuations which have
affected the market price for many technology-based companies and which, on
occasion, have been unrelated to the operating performance of those companies.
These fluctuations, as well as the general economic, market and political
conditions both domestically and internationally, including recessions or
military conflicts, may materially and adversely affect the market price of
our common stock.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein and is qualified by reference to the audited
consolidated financial statements and notes thereto appearing elsewhere
herein. The selected consolidated financial data presented below under the
captions "Consolidated Statement of Income Data" and "Consolidated Balance
Sheet Data" for, and as of the end of, each of the years in the 3-year period
ended December 31, 1999, and from inception on March 11, 1996 through December
31, 1996, are derived from the audited consolidated financial statements of
Loraca International, Inc. The audited consolidated financial statements as of
December 31, 1999 and 1998, and for each of the years in the three-year period
ended December 31, 1999, and the independent auditors' report thereon, are
included elsewhere herein.
Selected Financial and Other Data:
<TABLE>
<CAPTION>
For the Years Ended From Inception on
December 31, March 11,1996
----------------------- through
1999 1998 1997 December 31, 1996
------- ------- ----- -----------------
(Dollar amounts in thousands
except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of Income
Data:
Revenues............................ $ 197 $ 637 $ -- $ --
Operating Expenses:
Interest Expense.................. 79 452 -- --
General, administrative and
development...................... 3,795 1,362 80 --
------- ------- ----- -----
Total operating expenses........ 3,874 1,814 80 --
------- ------- ----- -----
Loss from operations................ (3,677) (1,177) (80) --
Other income, net................... 2,788 44 -- --
------- ------- ----- -----
Net loss............................ $ (889) $(1,133) $ (80) $ --
======= ======= ===== =====
Net loss per share:
Basic and diluted................. $ (.13) $ (.19) $(.12) $(.01)
======= ======= ===== =====
Consolidated Balance Sheet Data (at End of Period):
Mortgage loans held-for-sale
(pledged).......................... $ 1,315 $ 1,798 $ -- $ --
Cash and cash equivalents........... 155 36 69 5
Total assets........................ 8,477 5,102 69 5
Warehouse lines payable............. 1,289 1,791 -- --
Total stockholders' equity
(deficit).......................... $ 5,641 $ 2,323 $ (10) $ 5
</TABLE>
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ITEM 7. 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 report. In
addition to historical information, the following discussion and other parts
of this report 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 report. 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, 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.
. 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.
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<PAGE>
Results Of Operations
For the Year Ended Dec. 31, 1999 compared to the Year Ended Dec. 31, 1998
Revenues
Revenues for the year ended December 31, 1999 decreased $440,455 or 69% to
$196,884 as compared to $637,339 for the year ended December 31, 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 $2,059,080 or 113% to $3,873,463 for the year ended
December 31, 1999 as compared to $1,814,383 for the year ended December 31,
1998. The principal components of the increase in expense include $932,442 of
additional personnel and commission expense, $380,528 developmental expenses
relating to the company's e-commerce web-site, $347,380 in incremental
professional and consulting fees and an increase in tax and licenses of
$79,000. The increases in expense are primarily attributable to 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 in early 1999 included payment of severance to the
terminated employees. The expenses for the year ended December 31, 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, the warehouse lines of credit has declined substantially and as a
result interest expenses decreased $373,727 or 83% to $78,786. Accounting and
legal expenses for the company's filing of its Form 10 in 1999 amounted to
approximately $145,000.
Other Income, Net
Other income, net was $2,787,609 for the year ended December 31, 1999 an
increase of $2,743,079 compared to $44,530 for the year ended December 31,
1998. The increase was primarily attributable to the gain on the sale of
investments of $2,781,685 liquidated during the year ended December 31, 1999
for working capital expenses compared to $41,107 during the year ended
December 31, 1998, an increase of $2,740,578.
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 lending 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
16
<PAGE>
$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.
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 year ended December 31, 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 year ended December 31, 1999, the Company had used $2,536,200 by
operating activities, compared to operating cash in-flow of $4,148,761 for the
comparable period in 1998. The decrease in operating cash flow, as adjusted,
resulted from an increase in operating expenses and a net decrease in the net
cash provided from the sale of loans during the year ended December 31, 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 December 31, 1999 the Company had a $5 million warehouse line of credit
with The Provident Bank with a variable rate of interest which could have been
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
June 27, 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. During the year
of 1999, the Company made additional net borrowings from Mr. Baca in the
amount of $157,831, which includes 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 December
31, 1999, the outstanding balance of the note including accrued interest was
$859,568.
17
<PAGE>
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. The company has hired
the services of J. A. Young Co., an application service provider, to develop
the company's e-commerce mortgage website. The terms of the agreement include
the partial payment of services rendered by the issuance of Common Stock. As
of December 31, 1999, 3,047 shares of Common Stock had been issued to J. A.
Young Co. to pay for $15,997 of consulting fees.
Sales of Marketable Securities
During the year ended December 31, 1999 the Company sold 272,500 shares of
ZiaSun Common Stock, generating a gain on sale of $2,781,685. 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 December 31, 1999, the Company held 401,500 shares of ZiaSun common
stock with an approximate market value of $5,847,000. The Company may
liquidate additional investment securities, as needed, to fund its working
capital needs.
New Accounting Standards Not Yet Adopted
The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use," is effective for financial statements with fiscal
years beginning after December 15, 1998. The SOP provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. The SOP requires that we continue to capitalize certain costs of
software developed for internal use once certain criteria are met. The company
has adopted the SOP 98-1 and the cumulated amount of software development
costs capitalized was $0 as of December 31, 1999.
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.
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.
Year 2000 Compliance
The company experienced no problems relating to the Year 2000 issue. All
internal computer and software programs performed without any flaws. The
company also experienced no Year 2000 problems relating to third party
vendors.
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<PAGE>
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.
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 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, Robert L. Hines, Jr. and Thomas G. Bowser, the
Chief Executive Officer of Loraca, President of Loraca, EVP Business
Development 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.
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<PAGE>
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 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 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
20
<PAGE>
discrimination and various state statutes prohibit unfair and deceptive trade
practices and 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 our company. 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.
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.
21
<PAGE>
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.
Our business will be harmed if we are unable to protect our intellectual
property rights from third party challenges or if we are subject to
litigation.
We regard our copyrights, patents, trademarks, trade dress, trade secrets
and similar intellectual property as critical to our success, and we will rely
upon patent, trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. We intend to pursue the
registration of our trademarks in the United States and (based upon
anticipated use) internationally, and may in the future apply for the
registration of certain of our trademarks, and trademark, copyright and trade
secret protection may not be available in every country in which our products
and media properties are distributed or made available through the Internet.
We may be subject to legal proceedings and claims in the ordinary course of
our business, including claims of alleged infringement of the patents,
trademarks and other intellectual property rights of third parties by us and
our licensees. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. We will be
negotiating employment agreements, technological innovation agreements and
proprietary rights agreements with employees and contractors. There is no
assurance that we will be able to enter agreements with all such persons. A
claim by an employee challenging our ownership of our trade secrets or
confidential information would have a material adverse affect on our ability
to realize our business plan.
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;
22
<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
web sites 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 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
23
<PAGE>
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.
If our investment portfolio loses value, our liquidity could be adversely
affected.
The majority of the our liquid assets are invested in marketable securities,
and our investment portfolio is not well diversified. If the market value of
our portfolio drops, our liquidity and our business would be adversely
affected.
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.
24
<PAGE>
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 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.
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.
25
<PAGE>
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 web sites once they have been established. Accordingly,
the satisfactory performance, reliability and availability of our web sites,
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 web sites. Any system interruption that
results in the unavailability of our web sites would reduce the volume and
attractiveness of our product and service offerings.
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 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 web sites. 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.
26
<PAGE>
Unanticipated year 2000 problems relating to our operations could reduce our
future revenues and increase our expenses.
To date we have not experienced problems relating to the year 2000, and we
believe that our computer hardware and software and that of our significant
third-party providers of hardware, software and communications technology are
year 2000 compliant. Although we are well into the year 2000, our systems or
those of our third-party service providers could contain latent defects
related to the year 2000. If we or our third-party technology providers fail
to remedy any year 2000 issues, the result could be lost revenues, increased
operating expenses, and other business interruptions, any of which could harm
our business. The failure to adequately address year 2000 compliance issues in
the delivery of products and services to our customers could result in claims
of misrepresentation or breach of contract, any of which could be costly and
time-consuming to defend.
ITEM 7A. 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditors' report of BDO Seidman LLP and the consolidated
financial statements of Loraca as of December 31, 1999 and 1998, and for each
of the three years in the period ended December 31, 1999, are included in this
Form 10-K as listed in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
Certain information required by Part III is omitted from this Report, in
that the Company intends to file its Proxy Statement pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Report, and certain information included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors and executive officers of the
Company is incorporated by reference to the Company's Proxy Statement filed in
connection with the Company's 2000 Annual Meeting of Stockholders (the "Proxy
Statement") as set forth under the captions "Proposal No. 1 -- Election of
Directors."
Information with respect to delinquent filings pursuant to Item 405 of
Regulation S-K is incorporated by reference to the Proxy Statement as set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the captions "Executive Compensation,"
"Summary Compensation Table," "Stock Option Granted During Fiscal 1999,"
"Option Exercises and Fiscal 1999 Year-End Values," "Employment Agreements and
Termination of Employment And Change of Control Agreements," and "Compensation
of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of the Company by
certain beneficial owners and management is incorporated by reference to the
Proxy Statement as set forth under the caption "Stock Ownership of Certain
Beneficial Owners and Management," and "Employment Agreement and Termination
of Employment and Change of Control Arrangements."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the captions
"Certain Relationships and Related Transactions."
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this Report:
1. Financial Statements
Report of Independent Certified Public Accountant
Consolidated Balance Sheets -- December 31, 1999 and 1998
Consolidated Statements of Income -- Three Years Ended December 31,
1999
Consolidated Statements of Stockholders' Equity -- Three Years Ended
December 31, 1999
Consolidated Statements of Cash Flows -- Three Years Ended December
31, 1999
Notes to Consolidated Financial Statements -- Three Years Ended
December 31, 1999
2. Exhibits
See Exhibit Index.
b. Reports on Form 8-K.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Loraca International, Inc.
/s/ Ronald R. Baca
By: _________________________________
Ronald R. Baca
Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2000
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 30, 2000 by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Ronald R. Baca Chairman of the Board and
______________________________________ Chief Executive Officer
Ronald R. Baca (Principal Executive
Officer)
/s/ Bernard A. Guy President and Chief
______________________________________ Financial Officer
Bernard A. Guy (Principal Financial and
Accounting Officer)
/s/ D. Harrison Gentry Director
______________________________________
D. Harrison Gentry
/s/ John Trombello Director
______________________________________
John Trombello
</TABLE>
30
<PAGE>
LORACA INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants......................... F-2
Consolidated Financial Statements--December 31, 1997, 1998 and 1999
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations and Comprehensive Income (Loss).... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
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. and its subsidiary as of December 31, 1998 and 1999, and
the related consolidated statement of operations and comprehensive income
(loss), stockholders' equity, and cash flows for each of the years ended
December 31, 1997, 1998 and 1999. 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. and its subsidiary as of December 31, 1998 and
1999, and the consolidated results of their operations and cash flows for each
of the years ended December 31, 1997, 1998 and 1999, in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
January 31, 2000
F-2
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents (Note 6)................... $ 35,895 $ 155,072
Marketable securities (Notes 2 and 13)............... 2,682,316 6,367,541
Loan receivables held for sale, net (Notes 6 and 9).. 1,798,514 1,315,301
Prepaid expenses..................................... 24,932 58,785
Furniture, fixtures and equipment, net (Note 3)...... 64,968 51,153
Capitalized leased assets, net (Note 4).............. 10,853 98,023
Receivables, other (Note 6).......................... 49,673 26,782
Goodwill, net of amortization of $25,602 (1998) and
$56,324 (1999) (Note 11)............................ 435,234 404,512
----------- -----------
Total assets..................................... $ 5,102,385 $ 8,477,169
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Warehouse lines of credit (Note 6)................... $ 1,790,960 $ 1,288,797
Other borrowings (Note 7)............................ 61,271 25,762
Accounts payable..................................... 152,569 397,150
Accrued liabilities.................................. 53,318 162,463
Escrow deposits...................................... 12,714 298
Capitalized lease liabilities (Note 4)............... 6,485 102,252
Note payable to stockholder (Note 13)................ 701,737 859,568
----------- -----------
Total liabilities.................................... 2,779,054 2,836,290
----------- -----------
Commitments and contingencies (Notes 4, 5, 8, 9 and
14)
Stockholders' Equity (Notes 5 and 10)
Common stock:
Par value--$.001 per share; 50,000,000 shares
authorized; 7,000,000 (1998) and 7,003,047 (1999)
shares issued and outstanding..................... 7,000 7,003
Additional paid-in-capital......................... 3,276,415 3,292,409
Other accumulated comprehensive income (Note 2).... 252,371 4,442,892
Accumulated deficit................................ (1,212,455) (2,101,425)
----------- -----------
Total stockholders' equity....................... 2,323,331 5,640,879
----------- -----------
Total liabilities and stockholders' equity....... $ 5,102,385 $ 8,477,169
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1998 1999
-------- ----------- -----------
<S> <C> <C> <C>
Revenues
Gains on sales of loans.................. $ -- $ 285,843 $ 113,223
Interest income.......................... -- 351,496 83,661
-------- ----------- -----------
Total revenue.......................... -- 637,339 196,884
-------- ----------- -----------
Expenses
Interest expense (Notes 4, 6 and 7)...... -- 452,513 78,786
Personnel and commission expense......... 64,291 579,336 1,511,778
General, administrative and development
expense (Notes 3 and 4)................. 15,370 782,534 2,282,899
-------- ----------- -----------
Total expenses......................... 79,661 1,814,383 3,873,463
-------- ----------- -----------
Loss from operations....................... (79,661) (1,177,044) (3,676,579)
-------- ----------- -----------
Other income
Dividends................................ -- 3,423 5,924
Gain on sale of investments.............. -- 41,107 2,781,685
-------- ----------- -----------
Total other income..................... -- 44,530 2,787,609
-------- ----------- -----------
Net loss................................... (79,661) (1,132,514) (888,970)
-------- ----------- -----------
Other comprehensive income (Note 2):
Unrealized holding gains arising during
year.................................... -- 317,841 4,190,521
Less reclassification adjustment for
losses included in net loss............. -- (65,470) --
-------- ----------- -----------
Other comprehensive income................. -- 252,371 4,190,521
-------- ----------- -----------
Comprehensive income (loss)................ $(79,661) $ (880,143) $ 3,301,551
======== =========== ===========
Basic and diluted net loss per share....... $ (0.12) $ (0.19) $ (0.13)
======== =========== ===========
Weighted average number of shares
outstanding............................... 681,000 5,967,000 7,001,016
======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Other
---------------- Additional Accumulated
Number Paid-in Comprehensive Accumulated
of Shares Amount Capital Income Deficit Totals
--------- ------ ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 50,000 $ 50 $ 4,950 $ -- $ (280) $ 4,720
Common stock issued to
public for cash at
$.001 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 10).............. 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
Common stock issued
(Note 10).............. 3,047 3 15,994 -- -- 15,997
Net unrealized holding
gains on marketable
securities............. -- -- -- 4,190,521 -- 4,190,521
Net loss................ -- -- -- -- (888,970) (888,970)
--------- ------ ---------- ---------- ----------- ----------
Balance, December 31,
1999................... 7,003,047 $7,003 $3,292,409 $4,442,892 $(2,101,425) $5,640,879
========= ====== ========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LORACA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1998 1999
-------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................. $(79,661) $ (1,132,514) $ (888,970)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Allowance for loan losses.............. -- 100,057 25,775
Depreciation and amortization.......... -- 71,276 187,073
Gain on disposition of investments..... -- (65,470) (2,781,685)
Cash balances acquired from NMMC,
Inc................................... -- 173,848 --
Non-cash stock issuance in exchange for
service............................... -- -- 15,997
Decrease (increase) in assets and
liabilities,net of effects from purchase
of NMMC, Inc.:
Proceeds from sale of loans originated
for sale.............................. -- 21,745,141 10,846,242
Originations of loans held for sale.... -- (16,798,386) (10,388,803)
Receivables............................ -- 329,923 22,890
Related party receivables.............. -- (32,083) --
Prepaid expenses....................... -- 3,444 (33,853)
Increase (decrease) in:
Accounts payable....................... (185) (233,313) 244,581
Accrued liabilities.................... -- 53,318 109,144
Escrow deposits........................ -- 12,714 (12,416)
Amount due to NMMC, Inc................ 79,194 (79,194) 117,825
Total adjustments...................... 79,009 5,281,275 (1,647,230)
-------- ------------ ------------
Net cash provided (used) by operating
activities........................... (652) 4,148,761 (2,536,200)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities...... -- -- (715,125)
Proceeds from sale of marketable
securities............................ -- 762,945 3,910,042
Purchase of furniture, fixtures and
equipment............................. -- (20,097) (137,641)
-------- ------------ ------------
Net cash provided by investing
activities........................... -- 742,848 3,057,276
CASH FLOWS FROM FINANCING ACTIVITIES:
Warehouse lines of credit and other
borrowings, net....................... -- (4,928,997) (502,163)
Net proceeds on stockholder's note
payable............................... -- 222,911 157,831
Principal payments on other
borrowings............................ -- (218,881) (57,567)
Net proceeds on sale of securities..... 65,289 -- --
-------- ------------ ------------
Net cash provided (used) by financing
activities........................... 65,289 (4,924,967) (401,899)
-------- ------------ ------------
Net increase (decrease) in cash.......... 64,637 (33,358) 119,177
Cash and cash equivalents, beginning of
year.................................... 4,616 69,253 35,895
-------- ------------ ------------
Cash and cash equivalents, end of year... $ 69,253 $ 35,895 $ 155,072
======== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
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 valued at $1,088,415 for 100 percent of NMMC,
Inc.'s outstanding shares of common stock. Assets acquired and liabilities
assumed consisted of the following:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Cash........................................................... $ 173,848
Marketable securities.......................................... 483,257
Receivables.................................................... 379,596
Loan receivables held for sale................................. 6,845,326
Prepaid expenses............................................... 28,376
Furniture, fixtures 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
==========
</TABLE>
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:
<TABLE>
<CAPTION>
Name No. of Shares
---- -------------
<S> <C>
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
=========
</TABLE>
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.
In May 1999, the Company transferred 41,000 shares of common stock of ZiaSun
Technologies, Inc. at fair market value of $645,750 to Mr. Baca to satisfy the
same amount of note payable to Mr. Baca.
In August 1999, pursuant to the Company's contract with its technology
developer, 3,047 shares of common stock at $5.25 per share were issued to pay
for $15,997 of consulting fees.
Interest paid in 1998 and 1999 totaled $530,577 and $83,183, respectively.
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
Laraca 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 service 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.
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.
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.
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.
Recurring Losses from Operations
The Company has incurred substantial recurring losses from operations during
the past two years. The long-term viability of the Company is predicated on
the successful restructuring of its operations and a return to profitability.
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
F-8
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1. Summary of Significant Accounting Policies--(Continued)
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.
The mortgage-backed certificate is classified as an available for sale
investment. As such, the investment is reported at its fair market value 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.
Furniture, Fixtures and Equipment
Furniture, fixtures 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 and for Long-Lived Assets to Be Disposed Of". 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 "Intangible Assets". Under APB No. 17, the useful lives of
these identifiable intangible assets and goodwill are continually evaluated to
determine if the amortization periods 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--(Continued)
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 gain on the sale of
mortgage loans and mortgage servicing rights. This 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, 1999, the fair value of cash, loan receivables held for
sale, accounts receivable, warehouse lines of credit, other borrowings,
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.
Advertising
Advertising costs are expensed when incurred.
F-10
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1. Summary of Significant Accounting Policies--(Continued)
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 by exercising the outstanding stock options (Note 5) 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
The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," is effective for financial statements with fiscal
years beginning after December 15, 1998. The SOP provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. The SOP requires that the Company continue to capitalize certain
costs of software developed for internal use once certain criteria are met.
The Company has adopted the SOP 98-1 (Note 3).
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.
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
F-11
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1. Summary of Significant Accounting Policies--(Continued)
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 were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Available for sale:
Equity securities, at cost......................... $1,910,782 $1,532,095
Gross unrealized gains on equity securities........ 252,371 4,408,347
Equity securities, at fair market value............ 2,163,153 5,940,442
Mortgage-backed security, at fair market value
(Note 13)......................................... 519,163 427,099
---------- ----------
$2,682,316 $6,367,541
========== ==========
</TABLE>
Note 3. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Computer equipment..................................... $ 166,106 $ 186,099
Furniture and fixtures................................. 85,775 87,919
Vehicles............................................... 19,745 19,745
Software............................................... 26,459 30,224
Software development................................... 10,930 --
--------- ---------
309,015 323,987
Accumulated depreciation............................... (244,047) (272,834)
--------- ---------
$ 64,968 $ 51,153
========= =========
</TABLE>
Software development costs incurred during 1999 totaled $380,528. The
software development was for internal use. Pursuant to FAS No. 121, the
Company was uncertain as to the software development costs providing
substantial service potential. Consequently, the software development costs of
$380,528 were expensed in 1999.
F-12
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. 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 2002. 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 and
$129,432 for 1998 and 1999.
Capitalized leased assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- --------
<S> <C> <C>
Office equipment......................................... $38,529 $156,353
Less accumulated amortization............................ 27,676 58,330
------- --------
$10,853 $ 98,023
======= ========
</TABLE>
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>
2000................................................ $ 51,979 $137,789
2001................................................ 51,979 134,843
2002................................................ 32,010 32,685
Total minimum lease payments.......................... 135,968 $305,317
========
Less imputed interest (interest of annual rates
ranging from 16.0% to 22.9%)......................... (33,716)
--------
Present value of minimum lease payments............... $102,252
========
</TABLE>
Note 5. Stock Options
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 December 31, 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.
F-13
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Stock Options--(Continued)
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. The
market price at this time was $4.50 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 which was the prevailing market price at the time. The options granted
to Messrs. Baca, Guy and Bowser vest over a four year period. All the options
granted during 1999 were incentive stock options.
A summary of changes in stock options during the year is presented below:
<TABLE>
<CAPTION>
December 31,
1999
----------------
Weighted
Average
Exercise
Shares Price
------- --------
<S> <C> <C>
Options outstanding at beginning of year................ -- $ --
Options granted......................................... 425,000 5.2978
Options cancelled....................................... -- --
Options exercised....................................... -- --
------- -------
Options at end of year.................................. 425,000 $5.2978
======= =======
Options exercisable at end of year...................... -- $5.2978
======= =======
Weighted-average fair value of options granted during
the year............................................... $ 2.580
=======
</TABLE>
In accordance with APB Opinion No. 25, the Company has recorded no
compensation expense as the exercise price exceeds or was equal to the market
price at the date of grant. According to FAS 123, using the Black Scholes
option-pricing model, the total fair market value of stock options granted
during 1999 was $1,096,500 on the date of the grant. These stock options vest
over four years, and accordingly the pro forma compensation expense during
1999 was $130,132.
In accordance with FAS 123 the pro forma effect on net loss attributable to
common stockholders is as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Net loss attributable to common stockholders:
As reported............................................ $ (888,970)
===========
Pro forma.............................................. $(1,019,102)
===========
Loss per share:
As reported............................................ $ (0.13)
===========
Pro forma.............................................. $ (0.15)
===========
</TABLE>
F-14
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Stock Options--(Continued)
The assumptions used in the Black Scholes option pricing model were as
follows:
<TABLE>
<CAPTION>
Number Weighted Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Life Exercise December 31, Exercise
1999 (Years) Price 1999 Price
-------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C>
425,000 9.49 $5.298 -- $5.298
======= ==== ====== === ======
</TABLE>
<TABLE>
<CAPTION>
Year ended
December 31, 1999
-----------------
<S> <C>
Discount rate--bond yield
rate.......................... 5.14--5.97%
Volatility..................... 28%
Expected life.................. 10 years
Expected dividend yield........ --
==========
</TABLE>
Note 6. Warehouse Lines of Credit
On March 29, 1999 the Company entered into a $5,000,000 warehouse line of
credit agreement with Provident Bank bearing interest at Prime plus 1.5% to
Prime plus 3% for amounts exceeding 60 days (Prime at December 31, 1999:
8.50%) 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. At December 31, 1999, the Company had $1,288,797
outstanding on this Warehouse Line of Credit agreement. The unused portion of
the line of credit as of December 31, 1999, was $3,711,203. There are no
financial covenants stipulated on the warehouse line of credit agreement and
management confirmed that the Company was in compliance with all other
covenants at December 31, 1999. This warehouse line of credit may be
terminated at any time by the Provident Bank. The warehouse line of credit
matured on January 4, 2000, and was subsequently renewed for a further year.
On May 28, 1999, the Company terminated its $5,000,000 Warehouse Line of
Credit agreement with U.S. Bank.
On July 7, 1999, the Company entered into a $5,000,000 warehouse line of
credit with Sterling Bank and Trust bearing interest at Prime plus 2%
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. At December 31, 1999, the Company had not used this
facility. The warehouse line of credit matures on June 27, 2000.
F-15
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Other Borrowings
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
Bank revolving line of credit in the amount of $25,000 bearing
interest at Prime rate plus 3% (11.50%, at December 31,
1999), 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 $16,984
Unsecured vendor note bearing interest at 8.25%, payable in
monthly principal and interest installments of $8,778, due
April 1999................................................... 34,517 8,778
Bank note bearing interest at Prime rate plus 3.5%, (1998:
10.75%; 1999: 11.50%), 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 --
------- -------
$61,271 $25,762
======= =======
</TABLE>
Note 8. 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 and 1999. This plan was
terminated during 1999.
Note 9. Commitments and Contingencies
Loan Commitments
At December 31, 1999, the Company had committed to but not yet funded
approximately $1,453,642 of loans.
Allowance for Unsold and Repurchase Losses on Loans
At December 31, 1999, an allowance of $25,775 for losses and costs on unsold
loans was recorded. 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.
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
F-16
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9. Commitments And Contingencies--(Continued)
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.
Employment Agreements
On January 1, 1999, the Company entered into an executive employment
agreement with its President and Chief Executive Officer, Mr. Baca (the "Baca
Agreement"). The Baca Agreement is for an initial term of five years,
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 annum subject to an
annual review and (i) 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 ("EBITDA")
provided that Mr. Baca is employed by the Company on the last day of the
calendar year. The specified EBITA is fixed by the Company prior to the
beginning of each calendar year. For fiscal 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.
If the Company terminates this agreement without cause, the Company will pay
the remainder of the base salary then in effect for the balance of either the
initial term or any subsequent one-year term. In addition, Mr. Baca 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 Mr. Baca 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 June 1, 1999, NMMC entered into executive employment agreements with its
Chief Executive Officer, Mr. Guy and its President, Mr. Bowser (the "Executive
Agreements"). The Executive Agreements are for an initial 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, and (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.
F-17
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9. Commitments And Contingencies--(Continued)
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 project 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 and (iv) accelerated vesting of
his outstanding options.
Technology Contract
Pursuant to the Company's contract with its technology developer, J. A.
Young & Co., the Company has agreed to pay 60% in cash and issue shares of
Common Stock with a market value equal to 40% of J. A. Young & Co.'s monthly
invoice to the Company. At December 31, 1999, the Company had a commitment to
issue 27,538 shares of common stock to J. A. Young in terms of this agreement.
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 Chief Executive Officer) and
Aguilar & Sebastinelli, a Professional Law Corporation ("A&S") in San Diego
Superior Court. 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-18
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9. Commitments And Contingencies--(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 10. 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.
In August 1999, pursuant to the Company's contract with its technology
developer, 3,047 shares of common stock at $5.25 per share were issued in
exchange for $15,997 of consulting fees.
Note 11. 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.
Note 12. Income Taxes
At December 31, 1999, there are $2,048,000 of unused net operating loss
carryforwards that may be applied against future Federal taxable income and
expires beginning in fiscal 2019. Any benefit for the tax carryforwards has
been fully reserved by a valuation allowance because management is unable to
determine if it is more likely than not that these net operating loss and
capital loss will be realized.
Note 13. Related Party Transactions
In June 1998, the Company's President and Chief Executive Officer, 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
F-19
<PAGE>
LORACA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Insurance in 1994 and is currently in liquidation (Note 9). 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.
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 May 1999, the Company transferred 41,000 shares of common
stock of ZiaSun Technologies, Inc. at fair market value of $645,750 to Mr.
Baca to satisfy the same amount of note payable to Mr. Baca. In consideration
of Mr. Baca's capital contributions, the Company issued to Mr. Baca an
unsecured demand promissory note dated as of December 31, 1999 in the amount
of $859,568 (1998: $701,737) and bearing interest at the rate of 8% per annum.
Interest expense related to this note was $39,142 in 1999 (1998: $0).
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 believed that the value of the mortgage backed security
equaled or exceeded the value of the receivables sold at the time of sale. Due
to changes in the interest rates and prepayment of the underlying mortgages,
the mortgage backed security has been revalued to $427,099 at December 31,
1999. This decrease in value of $92,064 is considered to be a permanent
impairment and the amount has been charged to general and administrative
expense on the statement of operations in 1999.
Note 14. Subsequent Events
On February 11, 2000, the Company, through its subsidiary, entered into an
agreement to acquire all of the outstanding shares of The Lexus Companies,
Inc. and its subsidiary, Calumet Securities Corporation (collectively
"Lexus"), pursuant to the terms of an Agreement and Plan of Merger. Lexus is a
conforming mortgage banking origination and servicing platform. The Company
(through its subsidiary) shall pay to Lexus an aggregate of (i) 377,778 shares
of common stock of Loraca, and (ii) floating rate convertible subordinated
notes in the principal amount of $2,300,000.
F-20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
2.1* Agreement and Plan of Reorganization by and between Loraca
International, Inc. and NMMC, Inc. dated as of February 23, 1998.
2.2** Agreement and Plan of Merger dated as of February 11, 2000 by and
among Loraca International, Inc., Loraca Acquisition Corp., The Lexus
Companies, Inc. and the Shareholders of The Lexus Companies, Inc.
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 / 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.
21.1* List of Subsidiaries.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the Company's Registration Statement on Form
10 (File No. 000-27585), effective on December 9, 1999.
** Incorporated by reference to Current Reports on Form 8-K, filed with the
Commission on February 28, 2000 (File No. 000-27585).
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 155,072
<SECURITIES> 6,367,541
<RECEIVABLES> 1,342,083
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,768,409
<PP&E> 941,176
<DEPRECIATION> (387,488)
<TOTAL-ASSETS> 8,477,169
<CURRENT-LIABILITIES> 2,836,290
<BONDS> 0
0
0
<COMMON> 7,003
<OTHER-SE> 5,633,876
<TOTAL-LIABILITY-AND-EQUITY> 8,477,169
<SALES> 196,884
<TOTAL-REVENUES> 196,884
<CGS> 0
<TOTAL-COSTS> 3,873,463
<OTHER-EXPENSES> (2,787,609)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (888,970)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (888,970)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
