<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-KA
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): December 29, 1997
IMN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 2-72849 11-2558192
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification
Number)
520 Broad Hollow Road, Melville, New York 11746
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 844-9805
<PAGE>
Item 2. Acquisition or Disposition of Assets
(a)(i) On December 29, 1997, the Registrant and 1st Potomac Mortgage
Corporation ("Potomac") executed and delivered a stock purchase agreement (the
"Agreement") pursuant to which the registrant agreed to acquire from Potomac
100% of the issued and outstanding shares of capital stock.
(ii) The amount and source of consideration used by the Registrant was, at
closing, delivery of $1,000,000 worth of the Registrant's common stock to
Michael B. Roche (the Principal of Potomac).
(iii) The principle followed in determining the amount of such
consideration was upon negotiation between the parties.
(b) The assets acquired by the Registrant were 100% of the issued and
outstanding capital stock of Potomac. The business of Potomac is mortgage
banking. Potomac owns 20% of the common stock and 100% of the preferred stock of
Seasons Mortgage Group, Inc. (SMG), a mortgage loan sub-servicing company. The
Registrant expects that Potomac will remain a subsidiary of the registrant and
that Potomac's business will continue in a manner in which it was conducted
prior to the acquistion.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial statements of the businesses acquired
(b) Pro forma financial information
(C) Exhibits
(1) Form 8K-A of the Registrant, dated December 2, 1997.
(incorporated by reference to the Registrant's Form 8-KA, dated December
2, 1997)
(2) Stock Purchase agreement between the Registrant and Potomac
dated December 29, 1997 (incorporated by reference to the Registrant's
Form 8-K, dated December 29, 1997).
2
<PAGE>
IMN FINANCIAL CORP.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma condensed combined balance sheet as of September
30, 1997, and the pro forma condensed combined statement of income for the year
ended December 31, 1996 and for the nine months ended September 30, 1997 give
effect to the acquisition of 100% of the outstanding common shares of 1st
Potomac Mortgage Corporation ("Potomac") by IMN Financial Corp. ("IMN"). The pro
forma information is based on the historical financial statements of IMN (as pro
forma'd for significant acquisitions) and Potomac giving effect to the
transaction under the purchase method of accounting and the assumptions and
adjustments in the accompanying notes to the pro forma financial statements. The
IMN statement of financial position at September 30, 1997 and statements of
income for the year ended December 31, 1996 and for the nine months ended
September 30, 1997, is presented as reflected in the pro forma financial
statements in the Registrant's Form 8K-A, dated December 2, 1997.
The pro forma financial statements have been prepared by IMN management
based upon the financial statements of Potomac included elsewhere herein. These
pro forma financial statements may not be indicative of the results that
actually would have occurred if the combination had been in effect on the dates
indicated or which may be obtained in the future. The pro forma financial
statements should be read in conjunction with the audited financial statements
and notes of IMN and Potomac contained elsewhere herein.
3
<PAGE>
IMN FINANCIAL CORP.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
IMN
(Per Pro
Forma 8K-A - Potomac Pro Forma Pro Forma
12/2/97) (Historical) Adjustments Combined
------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Cash $ 915,363 $ 311,929 $ 1,227,292
Mortgage inventory 34,823,389 5,408,405 40,231,794
Points and fees receivable 1,115,015 445,752 1,560,767
Subscription receivable 4,894,488 0 4,894,488
Other current receivables 477,916 460,894 938,810
Marketable securities 5,000,000 25,000 5,025,000
Investments 660,293 0 660,293
Prepaid expenses 2,142,222 0 2,142,222
Property and equipment-net 1,201,186 62,778 1,263,964
Mortgage receivable 2,290,574 0 2,290,574
Intangible assets-net 1,436,984 (2)
7,153,523 0 (167,647) (3) 8,422,860
Other assets 121,538 379,628 501,166
Investment in Potomac 1,000,000 (1)
0 0 (1,000,000) (2) 0
------------- -------------- ------------ --------------
Total assets $ 60,795,507 $ 7,094,386 $ 1,269,337 $ 69,159,230
============= ============== ============ ==============
</TABLE>
See Notes to Pro forma Condensed Combined Financial Statements.
4
<PAGE>
IMN FINANCIAL CORP.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
LIABILTIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
IMN
(Per Pro
Forma 8K-A - Potomac Pro Forma Pro Forma
12/2/97) (Historical) Adjustments Combined
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Liabilities
Accounts payable and
accrued expenses $ 2,866,265 $ 651,642 $ 3,517,907
Warehouse lines of credit 33,990,545 5,300,237 39,290,782
Notes payable 130,000 672,720 802,720
Borrowers escrow funds 573,343 9,102 582,445
Capital lease obligations 330,740 0 330,740
Due to related party 2,504,488 138,182 2,642,670
Deferred income 410,942 0 410,942
Deferred income taxes 2,838,537 37,491 718,492 (2) 3,594,520
Other liabilities 966 3,504 4,470
------------ ------------- ------------- -------------
Total Liabilities 43,645,826 6,812,878 718,492 51,177,196
Stockholders' Equity
Preferred stock-authorized
5,000,000 shares, $.0001
per share 0 0 0
Common stock-authorized
45,000,000 shares,
$.0001 per share, the
pro forma number of
shares outstanding at
September 30, 1997 was 31 (1)
25,188,686 2,488 500 (500) (2) 2,519
999,969 (1)
Additional paid in capital 17,715,766 301,896 (301,896) (2) 18,715,735
37,138 (2)
Retained earnings (568,573) (37,138) (167,647) (3) (736,220)
Subordinated Debt 0 16,250 (16,250) (2) 0
------------ ------------- ------------- -------------
Total Stockholders' Equity 17,149,681 281,508 550,845 17,982,034
------------ ------------- ------------- -------------
Total Liabilities and
Stockholders' Equity $60,795,507 $ 7,094,386 $ 1,269,337 $69,159,230
============ ============= ============= =============
</TABLE>
See Notes to Pro forma Condensed Combined Financial Statements.
5
<PAGE>
IMN FINANCIAL CORP.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE INTERIM PERIOD SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
IMN
(Per Pro
Forma 8K-A - Potomac Pro Forma Pro Forma
12/2/97) (Historical) Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Income
Points, Fees and
Premium Income $ 10,158,151 $ 1,645,102 $ 0 $ 11,803,253
Interest Income 1,159,596 276 0 1,159,872
------------- ------------- ------------- -------------
Total Operating Income 11,317,747 1,645,378 0 12,963,125
------------- ------------- ------------- -------------
Operating Expenses
Field and Direct Expenses 4,948,718 1,022,717 0 5,971,435
Interest Expenses 1,122,157 22,547 0 1,144,704
------------- ------------- ------------- -------------
Total Operating Expenses 6,070,875 1,045,264 0 7,116,139
------------- ------------- ------------- -------------
Gross Profit 5,246,872 600,114 0 5,846,986
General and Administrative
Expenses 5,820,024 603,069 71,849 6,494,942
------------- ------------- ------------- -------------
Income (Loss) from Operations (573,152) (2,955) (71,849) (647,956)
Other Income (Expenses) 0 10,528 0 10,528
------------- ------------- ------------- -------------
Income (Loss) before Provision
for Income Taxes (573,152) 7,573 (71,849) (637,428)
Provision for Income Taxes 0 0 0 0
------------- ------------- ------------- -------------
Net Income (Loss) $ (573,152) $ 7,573 $ (71,849) $ (637,428)
============= ============= ============= =============
Weighted Average Number of
Shares Outstanding 23,582,011
=============
Net Income per Share (Basic) -0.0270
=============
Net Income per Share (Diluted) -0.0270
=============
</TABLE>
See Notes to Pro forma Condensed Combined Financial Statements.
6
<PAGE>
IMN FINANCIAL CORP.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
IMN
(Per Pro
Forma 8K-A - Potomac Pro Forma Pro Forma
12/2/97) (Historical) Adjustments Combined
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating Income
Points, Fees and
Premium Income $ 10,807,637 $ 3,943,412 $ 0 $ 14,751,049
Interest Income 946,798 22,514 0 969,312
-------------- ------------- ------------- --------------
Total Operating Income 11,754,435 3,965,926 0 15,720,361
-------------- ------------- ------------- --------------
Operating Expenses
Field and Direct Expenses 5,733,926 2,523,203 0 8,257,129
Interest Expenses 1,045,357 86,241 0 1,131,598
-------------- ------------- ------------- --------------
Total Operating Expenses 6,779,283 2,609,444 0 9,388,727
-------------- ------------- ------------- --------------
Gross Profit 4,975,152 1,356,482 0 6,331,634
General and Administrative
Expenses 5,996,590 1,405,406 95,798 7,497,794
-------------- ------------- ------------- --------------
Income (Loss) from Operations (1,021,438) (48,924) (95,798) (1,166,160)
Other Income (Expenses)
Interest expense (3,677) 0 0 (3,677)
Other income (expense) 0 29,195 0 29,195
Gain on Sale of Subsidiaries 856,232 0 0 856,232
-------------- ------------- ------------- --------------
Income (Loss) before Provision
for Income Taxes (168,883) (19,729) (95,798) (284,410)
Provision for Income Taxes (14,042) (8,329) 0 (22,371)
-------------- ------------- ------------- --------------
Net Income (Loss) $ (182,925) $ (28,058) $ (95,798) $ (306,781)
============== ============= ============= ==============
Weighted Average Number of
Shares Outstanding 22,516,769
==============
Net Income per Share (Basic) -0.0136
==============
Net Income per Share (Diluted) -0.0136
==============
</TABLE>
See Notes to Pro forma Condensed Combined Financial Statements.
7
<PAGE>
IMN FINANCIAL CORP.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On December 29, 1997, IMN acquired 100% of the outstanding common stock of
Potomac for a total consideration of $1,000,000. The pro forma financial
statements combine the assets and liabilities of the two companies at September
30, 1997 and their results of operations for the year ended December 31, 1996
and the nine months ended September 30, 1997. In combining the entities, the
following pro forma adjustments have been made.
(1) Reflects the acquisition of Potomac as follows:
Issuance of common stock
307,692 shares @ $.0001 per share $ 31
Additional paid in capital 999,969
---------------
Total consideration $ 1,000,000
===============
(2) To eliminate the Investment in Potomac.
Goodwill, net of deferred income taxes $ 1,436,984
Deferred income taxes $ (718,492)
Common stock 500
Additional paid in capital 301,896
Retained earnings (37,138)
Unrealized gains 16,250
---------------
Total Investment in Potomac $ 1,000,000
===============
(3) For purposes of presenting the pro forma condensed combined statement
of income, the following adjustment (which is expected to be
recurring) has been made:
Nine Months Year
Ended Ended
9/30/97 12/31/96
------------- -------------
Increase (decrease) in income:
Amortization of goodwill (15 yrs.) $ (71,849) $ (95,798)
========== ==========
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
IMN FINANCIAL CORP.
(Registrant)
---------------------------------
By: s/Edward Capuano
Edward Capuano,
President and Principal
Executive Officer and
Principal Financial Officer
Dated: January 23, 1998
9
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
FINANCIAL STATEMENTS AND
SUPPLEMENTARY INFORMATION
Year Ended June 30, 1997
<PAGE>
TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITOR'S REPORT ......................................... 1
FINANCIAL STATEMENTS
Balance Sheet ................................................... 2
Statement of Income and Retained Earnings ....................... 3
Statement of Cash Flows ......................................... 4
Notes to Financial Statements ................................... 5
SUPPLEMENTARY INFORMATION
Schedule of General and Administrative Expenses ................. 11
Computation of Adjusted Net Worth ............................... 12
Auditor's Information ........................................... 13
<PAGE>
[LETTERHEAD OF VIVIAN J. PAIGE o CERTIFIED PUBLIC ACCOUNTANT]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
1st Potomac Mortgage Corporation
Fairfax, Virginia
We have audited the accompanying balance sheet of 1st Potomac Mortgage
Corporation as of June 30, 1997, and the related statements of income and
retained earnings and cash flows for the year then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. 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 accounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles, as well as evaluating the
overall financial statement presentation. We believe our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 1st Potomac Mortgage
Corporation as of June 30, 1997, and the results of its operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
the report is presented for purposes of additional analysis and is not a
required part of the basic financial statements of the Corporation. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Vivian J. Paige
November 15, 1997
1
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
BALANCE SHEET
June 30, 1997
CURRENT ASSETS
Cash $ 711,317
Marketable securities 25,000
Accounts receivable 32l,866
Loans on hand 4,416,700
Employee advances 29,258
Stockholder advances 367,375
Income tax refunds due 39,538
Notes receivable 15,869
----------
TOTAL CURRENT ASSETS 5,926,923
==========
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $144,145 59,624
OTHER ASSETS
Deposits 16,599
Nonremarketable securities 360,387
----------
376,986
----------
$6,363,533
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 218,115
Payroll taxes 604,688
Due to affiliate 138,182
Security deposit payable 3,504
Current portion of long-term debt 4,767,043
----------
TOTAL CURRENT LIABILITIES 5,731,532
LONG-TERM DEBT, less current portion 320,917
DEFERRED INCOME TAXES 37,491
STOCKHOLDERS' EQUITY
Common stock, no par value, $5,000
shares authorized, 50 shares
issued and outstanding 500
Paid in capital 301,896
Retained earnings (45,053)
Unrealized gains on securities marketable
securities 16,250
----------
273,593
----------
$6,363,533
==========
See accompanying notes and accountant's report.
2
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
STATEMENT OF INCOME AND RETAINED EARNINGS
For the year ended June 30, 1997
NET REVENUES $4,701,377
EXPENSES
Depreciation 28,622
General and administrative expenses 4,907,910
Interest 85,447
----------
5,021,979
----------
INCOME (LOSS) FROM OPERATIONS (320,602)
OTHER INCOME (EXPENSE)
Interest 25,433
Dividends 222
Income from joint venture 13,465
Sublease rental income 10,512
Rent expenses (10,811)
Gain (loss) on sale of assets (3,331)
Penalties (5,591)
----------
INCOME (LOSS) BEFORE EQUITY
IN INCOME OF INVESTEE (290,703)
EQUITY IN INCOME (LOSS) OF INVESTEE 10,065
----------
INCOME (LOSS) BEFORE INCOME TAXES (280,638)
INCOME TAXES (BENEFIT)
Current (25,423)
Deferred (15,386)
----------
NET INCOME (LOSS) (239,829)
BEGINNING RETAINED EARNINGS 194,776
----------
ENDING RETAINED EARNINGS $ (45,053)
==========
See accompanying notes and accountant's report.
3
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
For the year ended June 30, l997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (239,829)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,622
Deferred income taxes (15,386)
(Gain) loss on disposal of property 3,331
Undistributed (earnings) loss of affiliate (10,065)
(Increase) decrease in accounts receivable (164,205)
(Increase) decrease in loans on hand (3,207,250)
(Increase) decrease in other assets 290,435
Increase (decrease) in accounts payable 201,584
Increase (decrease) in accrued liabilities 606,130
Increase (decrease) in income taxes payable (10,013)
----------
Total adjustments (2,276,817)
----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (2,516,646)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash payments for the purchase of property (21,275)
----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (21,275)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash payments for the purchase of stock (25,000)
Net borrowings on lines of credit 3,285,718
Principal payments on long-term debt (65,733)
----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 3,194,985
----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 657,064
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 54,253
----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 711,317
==========
SUPPLEMENTAL DISCLOSURES
Noncash investing and financing activities:
Stock purchased $ 298,747
Loan obtained (273,747)
----------
Net cash paid 25,000
==========
Cash paid during the period for:
Interest 83,596
Income taxes 3,321
See accompanying notes and accountant's report.
4
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and activity
1st Potomac Mortgage Corporation began doing business in March 1991.
Headquartered in Fairfax, VA, the Corporation operates banches in Virginia and
Maryland. The Corporation's business activity involves origination of mortgage
loans which are sold to other mortgage companies. The Corporation presently has
no intention to hold or service any mortgage loans.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Accounting method
The Corporation uses the accrual basis of a accounting in accordance with
generally accepted accounting principles.
Cash
For purposes of the statement of cash flows, the Corporation considers cash and
certificates of deposit as cash equivalents.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided using
accelerated and straight-line methods over the estimated useful lives of the
assets.
Marketable equity securities
Investments in marketable equity securities which are available for sale are
stated at fair market value. Realized gains and losses on dispositions are based
on the net proceeds and the adjusted book value of the securities sold, using
the specific identification method. Unrealized gains and losses on investment
securities available for sale are based on the difference between book value and
fair value of each security. These gains and losses are credited or charged to
stockholders' equity, whereas realized gains and losses flow through the
Corporation's yearly operations. The Corporation disposed of no available for
sale securities during the year.
5
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
The cost and fair market values of the available for sale securities are as
follows:
Available for sale
equity securities
Cost $ 8,750
Gross unrealized gains 16,250
Gross unrealized losses --
--------
Fair market value $ 25,000
========
There was no change in the net unrealized holding gains on these securities.
Income taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are recognized for differences between the bases of assets and
liabilities for financial and tax reporting. The differences relate primarily to
accounts receivable (deferred for income tax purposes but included for financial
statement purposes) and accounts payable (deductible for financial statement
purposes but not for income tax purposes). The deferred taxes represent future
tax return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
At June 30, 1997, deferred tax liabilities recognized for taxable temporary
differences total $128,764. Deterred tax assets recognized for temporary
differences total $91,273.
Savings and retirement plan
The Corporation has a savings and retirement plan which is available to all
employees who have attained certain age and service requirements. Contributions
made to the plan are entrusted to an investment company which provides
investment consultation and administration. Employee contributions to the plan
are limited to the lesser of 15% of compensation or limits set by the IRS.
Employer contributions are subject to discrimination requirements and are made
at the discretion of the Corporation. No profit sharing contributions were made
during the year.
NOTE B - RELATED PARTY TRANSACTIONS
At June 30, 1997, the Corporation owed $138,122 to an affiliated
6
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
company in which the Corporation owns 20% of the outstanding common stock (Note
C). The amount is non-interest bearing and will be repaid as funds become
available.
In addition, the Corporation's stockholders were advanced funds totaling
$367,375 at June 30, 1997. These amounts will be repaid through payroll
deductions.
The Corporation repurchased and retired 500 shares owned by one of the
stockholders at a cost of $298,747, paying $25,000 cash and issuing a note for
the remainder.
NOTE C - NONMARKETABLE SECURITIES
The Corporation owns 20% of the common stock and 100% of the preferred stock of
Seasons Mortgage Group, Inc. (SMG), a mortgage loan servicing concern. Condensed
balance sheet, prepared in conformity with generally accepted accounting
principles, is summarized below:
Cash $2,857,460
Equipment, net 517,781
Other assets 1,099,395
----------
4,474,636
Liabilities 3,373,168
----------
Equity $1,101,468
==========
The revenues and net income for June 30, 1997 were $1,568,159 and $50,325,
respectively. The investment in SMG is accounted for using the equity method.
The balance in the investment at June 30, 1997 consists of the following:
Balance at 6/30/96 $ 850,229
Return of capital (500,000)
1997 earnings 10,065
----------
$ 360,294
==========
In addition, the Corporation has a small joint venture in which $100 was
invested and losses of $7 were incurred. This is also included in the financial
statements.
NOTE D - LONG TERM DEBT
Long term lease obligations for office equipment which are essentially
equivalent to an installment purchase of the equipment are presented
7
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
as notes payable in the financial statements. The cash price of the equipment is
capitalized at the beginning of the lease period and this value is depreciated
over the estimated useful lives of the related assets. At June 30, 1997, there
were no long term lease obligations.
Notes payable to banks under warehouse lines of credit represent amounts
advanced to the Corporation which the Corporation uses to provide interim
financing, if needed, for the period from loan settlement until the sale of the
mortgage loan to an investor, at which time the amounts advanced under the lines
of credit are repaid. The lines of credit are personally guaranteed by the
stockholders.
Notes payable at June 30, 1997 consisted of the following:
Warehouse line of credit of $4,000,000,
payable as loans are purchased with
interest at the LIBO rate plus 3 l/2%,
secured by deeds of trust tota1ing
$1,434,350. $1,349,434
Warehouse line of credit of $200,000,
payable as loans, are purchased with
interest at the Wall Street Jounal
prime plus 1 1/2%, secured by deeds of
trust totaling $12,500. 12,268
Mortgage purchase facility of
$4,000,000, payable as loans are
purchased with interest at 9.5%,
secured by deeds of trust totaling
$1,741,200. 1,760,866
Warehouse line of credit of $2,500,000,
payable as loans are purchased with
interest at the Wall Street Journal
prime plus 2%, secured by deeds of
trust totaling $1,228,650. 1,210,559
Installment loan payable in monthly
installments of $2,079 including
interest at 9.29%, final payment due
7/00, secured by real estate owned
personally by the stockholders 189,015
Revolving line of credit of
8
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
$200,000, payable on demand with
interest due monthly at the Wall
Street Journal prime plus 2%, secured
by real estate owned personally by the
stockholders. 179,190
Revolving line of credit of $50,000,
payable on demand with interest due
monthly at the Chase Manhattan Bank
prime plus 2%, unsecured. 49,985
Installment loan payable in monthly
installments of $4,581 plus interest
at 9.5%, final payment due 1/00,
unsecured. 101,225
Installment loan payable in monthly
installments of $507 including
interest at 10.99%, final payment due
7/01, secured by automobile. 15,869
Installment loan payable in semi-monthly
installments of $5,000 including
interest at 5.75%, secured by stock. 219,549
----------
$5,087,960
Less current portion (4,767,043)
----------
$ 320,917
==========
Maturities of long term debt are as follows:
Year ending June 30, 1998 $4,767,043
1999 141,887
2000 14,976
2001 164,054
----------
$5,087,960
==========
NOTE E - LEASES
Premises
9
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
The Corporation leases premises in Virginia and Maryland. The lease terms,
expiration dates, and lease obligations to the end of the terms are as follows:
Occupied by Term Expiration Lease Obligation
Portfolio and
Fairfax branches
and HQ 6 years 2/28/03 $1,052,319
Annapolis branch 3 years 7/31/97 3,029
Columbia branch 1 year 2/28/98 22,400
Richmond branch 3 years 7/31/99 69,453
The Virginia Beach branch lease is month-to-month. In addition, the Corporation
leases another space which is currently sub1eased through 5/31/98. This lease
expires 6/30/04 with a total lease obligation to the end of the lease of
$272,638. The sublease will result in rental income of $35,040.
Equipment
In addition the Corporation leases certain telephone and office equipment. Lease
payments totalled $63,283 for the year ended June 30, 1997. The following is a
schedule by years of future minimum lease payments under operating leases that
have an initial or remaining noncancelable term in excess of one year as of June
30, 1997:
Year ending June 30, 1998 $ 57,469
1999 45,126
2000 35,392
---------
$ 137,987
=========
10
<PAGE>
SUPPLEMENTARY INFORMATION
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended June 30, 1997
GENERAL AND ADMINISTRATIVE EXPENSES
Personnel expenses
Wages and salaries $1,102,519
Commissions 1,781,227
Employee benefits 59,607
Payroll taxes 195,338
Temporary labor 51,405
Accounting and legal 59,021
Advertising 420,683
Appraisals and credit reports 182,620
Auto expenses 21,743
Bank charges 52,224
Contributions 50
Couriers 103,829
Dues and subscriptions 4,498
Entertainment and meals 33,495
Equipment rent 95,560
Insurance 20,776
Miscellaneous 48,876
Office expense 179,972
Pagers 3,444
Rent 318,966
Repairs and maintenance 28,231
Taxes and licenses 11,026
Telephone 124,965
Travel 7,835
----------
$4,907,910
==========
See accountant's report.
11
<PAGE>
1st POTOMAC MORTGAGE CORPORATION
COMPUTATION OF ADJUSTED NET WORTH TO DETERMINE
COMPLIANCE WITH FHA NET WORTH REQUIREMENTS
For the year ended June 30, 1997
1) Servicing Portfolio 6/30/97 $ --
2) Add:
Origination 6,933,959
Purchased from Loan Corresp. --
3) Less:
Servicing Retained --
Loan Corresp. Purchase Retained --
4) Total 6,933,959
5) Net Worth Required (1%) 69,340
Stockholders' Equity (Net Worth)
per Balance Sheet $ 273,593
Less: Unacceptable Assets
Stockholder advances (367,375)
Adjusted Net Worth for HUD Requirement Purposes $ (93,782)
Adjusted Net Worth Above Amount Required $ --
Adjusted Net Worth Below Amount Required $ 163,122
See accountant's report.
12
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
AUDITOR'S INFORMATION
For the year ended June 30, 1997
Vivian J. Paige, CPA
Vivian J. Paige, CPA, PC
5750 Chesapeake Boulevard, Suite 203
Norfolk, Virginia 23513
(757)857-7903
FEIN: 54-1692547
13
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
Year Ended June 30, 1996
<PAGE>
TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITOR'S REPORT ......................................... 1
FINANCIAL STATEMENTS
Balance Sheet ...................................................... 2
Statement of Income and Retained Earnings .......................... 3
Statement of Cash Flows ............................................ 4
Notes to Financial Statements ...................................... 5
SUPPLEMENTARY INFORMATION
Schedule of General and Administrative Expenses .................... 11
Computation of Adjusted Net Worth .................................. 12
<PAGE>
[LETTERHEAD OF VIVIAN J. PAIGE o CERTIFIED PUBLIC ACCOUNTANT]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
1st Potomac Mortgage Corporation
Fairfax, Virginia
We have audited the accompanying balance sheet of 1st Potomac Mortgage
Corporation as of June 30, 1996, and the related statements of income and
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. 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 accounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles, as well as evaluating the
overall financial statement presentation. We believe our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 1st Potomac Mortgage
Corporation as of June 30, 1995, and the results of its operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included in
the report is presented for purposes of additional analysis and is not a
required part of the basic financial statements of the Corporation. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Vivian J. Paige
October 22, 1996
1
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
BALANCE SHEET
June 30, 1996
CURRENT ASSETS
Cash $ 54,253
Marketable securities 25,000
Accounts receivable 157,661
Loans on hand 1,209,450
Employee advances 18,254
Stockholder advances 209,756
Notes receivable 15,000
----------
TOTAL CURRENT ASSETS 1,689,384
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $119,383 70,302
OTHER ASSETS
Deposits 16,054
Nonremarketable securities 850,322
----------
866,376
----------
$2,626,062
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Escrow payable $ 32,248
Accounts payable 16,531
Payroll taxes 4,427
Due to affiliate 103,569
Income taxes 10,013
Current portion of long-term debt 1,389,677
----------
TOTAL CURRENT LIABILITIES 1,556,465
LONG-TERM DEBT, less current portion 204,549
DEFERRED INCOME TAXES 52,877
STOCKHOLDERS' EQUITY
Common stock, no par value, $5,000
shares authorized, 100 shares
issued and outstanding 1,000
Paid in capital 600,143
Retained earnings 194,778
Unrealized gains on securities marketable
securities 16,250
----------
812,171
----------
$2,626,062
==========
See accompanying notes and accountant's report.
2
<PAGE>
1st POTOMAC MORTGAGE CORPORATION
STATEMENT OF INCOME AND RETAINED EARNINGS
For the year ended June 30, 1996
NET REVENUES $3,185,447
EXPENSES
Depreciation 27,329
General and administrative expenses 2,893,357
Interest 87,035
----------
3,007,721
----------
INCOME (LOSS) FROM OPERATIONS 177,726
OTHER INCOME (EXPENSE)
Interest 19,595
Dividends 230
Sublease rental income 19,260
Rent expenses (33,209)
----------
INCOME (LOSS) BEFORE EQUITY
IN INCOME OF INVESTEE 183,602
EQUITY IN INCOME (LOSS) OF INVESTEE 57,579
----------
INCOME (LOSS) BEFORE INCOME TAXES 241,181
INCOME TAXES (BENEFIT)
Current 6,334
Deferred 51,134
----------
NET INCOME (LOSS) 183,713
BEGINNING RETAINED EARNINGS 11,065
----------
ENDING RETAINED EARNINGS $ 194,778
==========
See accompanying notes and accountant's report.
3
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
For the year ended June 30, l996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 183,713
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 27,329
Deferred income taxes 51,134
Undistributed (earnings) loss of affiliate (57,579)
(Increase) decrease in accounts receivable (73,943)
(Increase) decrease in loans on hand (1,209,450)
(Increase) decrease in other assets (136,792)
Increase (decrease) in accounts payable 3,449
Increase (decrease) in accrued liabilities 111,583
Increase (decrease) in income taxes payable 10,013
----------
Total adjustments (1,274,255)
----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (1,090,542)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash payments for the purchase of property (40,761)
----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (40,761)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 1,161,484
Principal payments on long-term debt (7,607)
----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 1,153,877
----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,574
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,679
----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 54,253
==========
SUPPLEMENTAL DISCLOSURES
Noncash investing and financing activities:
Property purchased $ 23,349
Loan obtained (23,349)
----------
Net cash paid $ -
==========
Cash paid during the period for:
Interest 87,035
See accompanying notes and accountant's report.
4
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and activity
1st Potomac Mortgage Corporation began doing business in March 1991.
Headquartered in Fairfax, VA, the Corporation operates banches in Virginia and
Maryland. The Corporation's business activity involves origination of mortgage
loans which are sold to other mortgage companies. The Corporation presently has
no intention to hold or service any mortgage loans.
Accounting method
The Corporation uses the accrual basis of accounting in accordance with
generally accepted accounting principles.
Cash
For purposes of the statement of cash flows, the Corporation considers cash and
certificates of deposit as cash equivalents.
Property and equipment
Property and equipment are stated at cost. Depreciation is provided using
accelerated and straight-line methods over the estimated useful lives of the
assets. At June 30, 1996, property and equipment consisted of the following:
Office furniture and equipment $ 166,336
Automobile 23,349
Accumulated depreciation (119,383)
---------
$ 70,302
=========
Marketable equity securities
Investments in marketable equity securities which are available for sale are
stated at fair market value. Realized gains and losses on dispositions are based
on the net proceeds and the adjusted book value of the securities sold, using
the specific identification method. Unrealized gains and losses on investment
securities available for sale are based on the difference between book value and
fair value of each security. These gains and losses are credited or charged to
stockholders' equity, whereas realized gains and losses flow through the
Corporation's yearly operations. The Corporation disposed of no available for
sale securities during the year.
The cost and fair market values of the available for sale securities
5
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
are as follows:
1995
Available for sale
equity securities
Cost $ 8,750 $ 8,750
Gross unrealized gains 16,250 16,250
Gross unrealized losses -- --
-------- --------
Fair market value $ 25,000 $ 20,000
======== ========
The change in net unrealized holding gains on these securities available for
sale in the amount of $5,000 has been charged to stockholders' equity.
Income taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are recognized for differences between the bases of assets and
liabilities for financial and tax reporting. The differences relate primarily to
accounts receivable (deferred for income tax purposes but included for financial
statement purposes) and accounts payable (deductible for financial statement
purposes but not for income tax purposes). The deferred taxes represent future
tax return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
At June 30, 1996, deferred tax liabilities recognized for taxable temporary
differences total $66,631. Deterred tax assets recognized for temporary
differences total $13,754.
Savings and retirement plan
The Corporation has a savings and retirement plan which is available to all
employees who have attained certain age and service requirements. Contributions
made to the plan are entrusted to an investment company which provides
investment consultation and administration. Employee contributions to the plan
are limited to the lesser of 15% of compensation or limits set by the IRS.
Employer contributions are subject to discrimination requirements and are made
at the discretion of the Corporation. No profit sharing contributions were made
during the year.
NOTE B - RELATED PARTY TRANSACTIONS
At June 30, 1996, the Corporation owed $103,569 to an affiliated company in
which the Corporation owns 20% of the outstanding common
6
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
stock (Note C). The amount is non-interest bearing and will be repaid as funds
become available.
In addition, the Corporation's stockholders were advanced funds totalling
$209,756 at June 30, 1996. These amounts will be repaid through payroll
deductions.
NOTE C - NONMARKETABLE SECURITIES
The Corporation owns 20% of the common stock and 100% of the preferred stock of
Seasons Mortgage Group, Inc. (SMG), a mortgage loan servicing concern. Condensed
balance sheet, prepared in conformity with generally accepted accounting
principles, is summarized below:
Cash $3,315,913
Equipment, net 123,813
Other assets 446,314
----------
3,886,040
Liabilities 2,834,897
----------
Equity $1,051,143
==========
The revenues and net income for June 30, 1996 were $501,129 and $288,190,
respectively. The investment in SMG is accounted for using the equity method.
The balance in the investment at June 30, 1996 consists of the following:
Balance at 6/30/95 $ 792,643
1996 earnings 57,586
----------
$ 850,229
==========
In addition, the Corporation has a small joint venture in which $100 was
invested and losses of $7 were incurred. This is also included in the financial
statements.
NOTE D - LONG TERM DEBT
Long term lease obligations for office equipment which are essentially
equivalent to an installment purchase of the equipment are presented as notes
payable in the financial statements. The cash price of the equipment is
capitalized at the beginning of the lease period and this value is depreciated
over the estimated useful lives of the related assets. At June 30, 1996, there
were no long term lease obligations.
Notes payable to banks under warehouse lines of credit represent
7
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
amounts advanced to the Corporation which the Corporation uses to provide
interim financing, if needed, for the period from loan settlement until the sale
of the mortgage loan to an investor, at which time the amounts advanced under
the lines of credit are repaid. The lines of credit are personally guaranteed by
the stockholders.
Notes payable at June 30, 1996 consisted of the following:
Warehouse line of credit of $3,000,000,
payable as loans are purchased with
interest at the LIBO rate plus 3 l/2%,
secured by deeds of trust total1ing
$744,400. $ 682,082
Warehouse line of credit of $200,000,
payable as loans are purchased with
interest at the Wall Street Jounal
prime plus 1 1/2%, secured by deeds of
trust. --
Mortgage purchase facility of
$4,000,000, payable as loans are
purchased with interest at 9.5%,
secured by deeds of trust totaling
$465,050. 446,403
Installment loan payable in monthly
installments of $2,079 including
interest at 9.29%, final payment due
7/00, secured by real estate owned
personally by the stockholders 195,283
Revolving line of credit of
$200,000, payable on demand with
interest due monthly at the Wall
Street Journal prime plus 2%, secured
by real estate owned personally by the
stockholders. 200,000
Revolving line of credit of $50,000,
payable on demand with interest due
monthly at the Chase Manhattan Bank
prime plus 2%, unsecured. 49,985
8
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
Installment loan payable in monthly
installments of $507 including
interest at 10.99%, final payment due
7/01, secured by automobile. 20,473
----------
$1,594,226
Less current portion (1,389,677)
----------
$ 204,549
==========
Maturities of long term debt are as follows:
Year ending June 30, 1997 $1,389,677
1998 12,370
1999 13,655
2000 177,510
2001 1,014
----------
$1,594,226
==========
NOTE E - LEASES
Premises
The Corporation leases premises in Virginia and Maryland. The lease terms,
expiration dates, and lease obligations to the end of the terms are as follows:
Occupied by Term Expiration Lease Obligation
----------- ---- ---------- ----------------
Fairfax branch
and HQ 5 years 2/28/97 $ 52,572
Annapolis branch 3 years 7/31/97 39,283
Columbia branch 1 year 2/28/97 22,400
Portfolio and
Commercial
branches 5 years 6/30/98 83,071
Richmond branch 3 years 7/31/99 98,328
The Virginia Beach branch lease is month-to-month.
9
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
Equipment
In addition, the Corporation leases certain telephone and office equipment.
Lease payments totalled $48,753 for the year ended June 30, 1996. The following
is a schedule by years of future minimum lease payments under operating leases
that have an initial or remaining noncancelable term in excess of one year as of
June 30, 1996:
Year ending June 30, 1997 $ 63,283
1998 57,469
1999 45,126
2000 35,392
---------
$ 201,270
=========
10
<PAGE>
SUPPLEMENTARY INFORMATION
<PAGE>
1ST POTOMAC MORTGAGE CORPORATION
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended June 30, 1996
GENERAL AND ADMINISTRATIVE EXPENSES
Personnel expenses
Wages and salaries $ 663,512
Commissions 1,252,884
Employee benefits 53,897
Payroll taxes 130,510
Temporary labor 13,316
Accounting and legal 24,791
Advertising 83,582
Appraisals and credit reports 63,644
Auto expenses 34,133
Bank charges 1,033
Contributions 285
Couriers 72,595
Dues and subscriptions 9,294
Entertainment and meals 23,568
Equipment rent 57,603
Insurance 11,614
Miscellaneous 17,890
Office expense 108,724
Pagers 3,841
Rent 257,548
Repairs and maintenance 6,793
Taxes and licenses 17,386
Telephone 81,594
Travel 3,320
----------
$2,893,357
==========
See accountant's report.
11
<PAGE>
1st POTOMAC MORTGAGE CORPORATION
COMPUTATION OF ADJUSTED NET WORTH TO DETERMINE
COMPLIANCE WITH FHA NET WORTH REQUIREMENTS
For the year ended June 30, 1996
STOCKHOLDERS' EQUITY (NET WORTH) PER
BALANCE SHEET $ 812,171
LESS: UNACCEPTABLE ASSETS
Stockholder advances (209,756)
----------
ADJUSTED NET WORTH FOR FHA REQUIREMENT PURPOSES $ 602,415
==========
See accompanying notes and accountant's report.
12
