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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
STARNET FINANCIAL, INC.
(Name of Small Business Issuer in its charter)
DELAWARE 75-2168244
(State of incorporation) (IRS Employer Identification No.)
17311 NORTH DALLAS PARKWAY, SUITE 350 75248
(Address of principal executive offices) (Zip Code)
(972) 818-1212
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act: NONE.
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
---------------------------------
Copies of Communications Sent To:
I. BOBBY MAJUMDER, ESQ.
GARDERE & WYNNE, L.L.P.
3000 THANKSGIVING TOWER
1601 ELM STREET
DALLAS, TEXAS 75201-4761
TELEPHONE: (214) 999-3000
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TABLE OF CONTENTS
<TABLE>
<S> <C>
NOTE ABOUT FORWARD-LOOKING STATEMENTS.........................................2
Risk Factors..................................................................3
PART I
Item 1 - Description of Business.............................................11
Item 2 - Management's Discussion and Analysis or Plan of Operation...........26
Item 3 - Description of Property.............................................31
Item 4 - Security Ownership of Certain Beneficial Owners and Management......31
Item 5 - Directors, Executive Officers, Promoters and Control Persons........33
Item 6 - Executive Compensation..............................................35
Item 7 - Certain Relationships and Related Transactions......................39
Item 8 - Description of Securities...........................................39
PART II
Item 1 - Market for Common Equity and Related Stockholder Matters............42
Item 2 - Legal Proceedings...................................................43
Item 3 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.................................43
Item 4 - Recent Sales of Unregistered Securities.............................43
Item 5 - Indemnification of Officers and Directors...........................44
PART F/S
Financial Statements.........................................................46
PART III
Item 1 - Index to Exhibits...................................................46
Item 2 - Description of Exhibits.............................................46
</TABLE>
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
StarNet Financial, Inc. ("StarNet") is including the following
cautionary statement to make applicable, to the extent possible, the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). The following cautionary statement also is made for the purpose of taking
advantage of any defenses that may exist under other laws, including common law.
Forward- looking statements include statements concerning plans, objectives,
goals, strategies, expectations, future events or performance and underlying
assumptions and other statements which are other than statements of historical
facts. This document contains forward-looking statements which can be identified
by the use of words such as "intend," "anticipate," "believe," "estimate,"
"project," or "expect" or other similar statements. These forward-looking
statements involve risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in the forward-looking
statements. StarNet's expectations, beliefs and projections are expressed in
good faith and are believed by StarNet to have a reasonable basis, including
without limitation, management's examination of historical operating trends,
data contained in StarNet's records and data available from third parties but
there can be no assurance that management's expectations, beliefs or projections
will occur or be achieved or accomplished. In addition to other factors and
matters discussed elsewhere, that following are important factors that, in the
view of StarNet, could cause actual results to differ materially from those
discussed in the forward-looking statements:
o StarNet has only recently begun operations and is presently
incurring losses;
o The results of StarNet's operations will be affected by
various factors and subject to certain risks inherent in
mortgage lending, many of which are beyond the control of
StarNet, including general economic conditions and interest
rate levels;
o Mortgage lending is a highly competitive business, and
StarNet's results will be dependent upon the success of its
marketing efforts and its ability to attract and retain key
personnel;
o The substantial growth projected by StarNet, if achieved, must
be efficiently and effectively managed;
o Because StarNet's ability to fund mortgage loans depends on
the availability of financing sources, its revenues and
business would be negatively affected if its current financing
sources were canceled or not renewed; and
o StarNet must remain current with rapidly changing
technologies.
StarNet does not undertake to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future. We believe that our forward-looking statements are
within the safe harbor provided by the Reform Act. When considering these
statements, you should keep in mind the risk factors described below and other
cautionary statements in this document.
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RISK FACTORS
We have only recently begun operations and are presently incurring
losses.
Although, a number of our subsidiaries and divisions have been in
operation for a number of years, we have only operated as a consolidated group
for a short period of time. Consequently, our business profile is that of a
development-stage company. Typical of a development-stage company, our ability
to generate revenue is subject to substantial uncertainty and risk. In addition,
we anticipate that our operating expenses will increase substantially in the
foreseeable future as we open additional regional and net branch offices and
increase our sales and marketing activities. Accordingly, we expect to incur
losses at least through the second quarter of fiscal year 2001 and may continue
to incur losses for some time thereafter. There can be no assurance that we will
begin expanded operations successfully or on a timely basis or that we will be
successful in obtaining market acceptance. There can be no assurance that we
will be able to achieve or sustain operating profitability. Our success may
ultimately depend on management's ability to react expeditiously to exigencies
that have not been taken into account in our business plan.
We have a need for additional financing.
We require substantial capital to pursue our operating strategy. We
fund, and expect to continue to fund, mortgage loans not only with our own cash,
but also primarily with cash obtained through borrowings from nonaffiliated
lenders. Our subsidiary, StarNet Mortgage, currently uses two warehouse lines
of credit with an aggregate borrowing limit of $11,000,000 provided by First
State Bank of Moulton and Lott State Bank.(1)
Additionally, StarNet Mortgage maintains two true warehouse lines of
credit with DLJ Mortgage Capital, Inc. of New York, New York and IMPAC
Warehouse Lending Group of Irvine, California with borrowing limits of
$30,000,000 and $25,000,000, respectively. Through the practice of managing the
flow of loans through shipping and investor purchase, the credit facilities can
be turned up to two times their size. We fund substantially all of the loans
which we originate and purchase through borrowings under our warehouse lines of
credit. These borrowings are in turn repaid with the proceeds received by
selling such loans either through whole loan sales or bulk sales.
We conducted a private placement of our Common Stock during the last
quarter of fiscal year 2000 and the first quarter of fiscal year 2001. We
anticipate that the net proceeds of this private offering will permit us not
only to maintain, but to increase the line-of-credit facilities available for
funding mortgage loans. To the extent that we are unable to obtain additional
line-of-credit financing, or even to maintain or replace (at comparable levels)
our existing warehouse lines of credit, we would have to curtail our loan
production activities or sell loans earlier than is optimal, thereby having a
material adverse effect on our results of operations and financial conditions.
Further, we may need additional capital to satisfy future capital requirements.
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(1) Rather than true "warehouse" lines of credit, StarNet Mortgage has
agreements known as "loan purchase agreements" with all of the aforementioned
banks. These agreements require that StarNet Mortgage provide a firm commitment
showing the loan rate locked, price to be purchased at, and the expiration date
of the lock for each loan before funds are released. These commitments assure
that each loan will be purchased out of the line at a guaranteed price within a
given time frame.
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We cannot assure you that we will be able to raise needed capital from
other sources on terms favorable to us, if at all. If we are unable to obtain
sufficient capital in the future, our ability to pursue our business strategy
and results of operations for future periods may be impaired.
Our additional financing requirements could result in dilution to
existing stockholders.
If additional financing is required, it could be obtained through one
or more transactions which effectively dilute the ownership interests of holders
of our Common Stock. Further, there can be no assurance that we will be able to
secure such additional financing. We have the authority to issue additional
shares of Common Stock, as well as additional classes or series of ownership
interests or debt obligations of the Company which may be convertible into any
class or series of ownership interests in the Company. We are authorized to
issue 60,000,000 shares of Common Stock and 3,000,000 shares of Preferred Stock.
Such securities may be issued without the approval or other consent of the
holders of our Common Stock.
We have substantial indebtedness.
We rely on lines-of-credit to fund our operations. From time-to-time,
the amount of indebtedness under these lines-of-credit is substantial. Our
substantial indebtedness could increase our vulnerability to general economic
and industry conditions, limit our ability to fund future working capital,
capital expenditures and other general corporate requirements, and require us to
dedicate a substantial portion of our cash flow from operations to payments on
our indebtedness, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures and other general corporate purposes. Our
profit margins may also decrease if interest rates on our lines-of-credit
increase.
We have a limited number of offices.
Currently, we have six regional offices established. We intend to
establish three additional regional offices during fiscal year 2001. Because of
our small number of traditional offices, we may be at a competitive disadvantage
compared to other mortgage banking firms that can spread their operating costs
across more offices and originate more loan production and revenue within their
much more extensive branch office networks.
Our future success will be dependent on our ability to attract and
retain key personnel.
Our success depends in large part on the efforts and abilities of our
senior management, including Kenneth F. Urbanus, our Chief Operating Officer and
President, Edward P. Dayton, our Executive Vice President-Operations and
Secretary, Thomas Deutsch, our Executive Vice President- National Production,
and Ms. Jennifer Salsbury, our Executive Vice President-Risk Management/
Secondary Marketing. The loss of one or more of these individuals could
adversely affect our business. We currently have employment agreements with Ms.
Salsbury and Messrs. Urbanus, Dayton and Deutsch. We do not carry key-man
insurance on any of our executive officers.
We further believe that our future success also depends significantly
upon our ability to attract, train, retain and motivate highly skilled mortgage
bankers, as well as technical, sales and management employees and consultants.
We cannot assure you that we will be able to retain our current key
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personnel or attract and retain qualified personnel, which would materially and
adversely affect our business and operating results.
The substantial growth projected by us, if achieved, must be
efficiently and effectively managed.
Our growth has placed, and will likely continue to place, a significant
strain on our managerial, operational and financial resources. We need to:
o improve our financial and management controls, reporting
systems and procedures;
o expand, train and manage our workforce for marketing, sales
and support and website development and design; and
o manage multiple relationships with various customers and other
third parties.
We face risks in connection with any potential acquisition that could
have a material adverse impact on our growth or our operations.
From time to time, we may consider selective strategic acquisitions of
mortgage lenders and other mortgage banking-related companies. There is
substantial competition for acquisition opportunities in the mortgage industry.
This competition could result in an increase in the price of, and a decrease in
the number of, attractive acquisition candidates. As a result, we may not be
able to successfully acquire attractive candidates on terms we deem acceptable.
In addition, we cannot assure you that we will be able to obtain the requisite
financing on terms we deem acceptable. Pursuing acquisitions also involves a
number of special risks, including adverse short-term effects on our results of
operations, dilution resulting from issuances of our Common Stock, diversion of
management's time, strain on our financial and administrative infrastructure,
difficulties in integrating acquired businesses and personnel, loss of personnel
and unanticipated legal liabilities. We cannot guarantee you that we will be
able to overcome these acquisition risks or that they will not adversely affect
our growth and results of operations.
The loss of key purchasers of our loans or a reduction in prices paid
could adversely affect our financial condition.
We sell substantially all of the mortgages that we originate to
institutional buyers. Generally, we sell the servicing rights to our loans at
the time we sell those loans. During fiscal year 2000, we sold our loans to
twenty different investors, some of which compete with us directly for retail
originations. If these financial institutions or other significant purchasers of
our loans cease to buy our loans or servicing rights and equivalent purchasers
cannot be found on a timely basis, then our business and results of operations
could be materially adversely affected. Our results of operations could also be
affected if these financial institutions or other purchasers lower the price
they pay to us or adversely change the material terms of their loan purchases
from us.
The prices at which we sell our loans vary over time. A number of
factors determines the price we receive for our loans. These factors include:
o the number of institutions that are willing to buy our loans;
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o the amount of comparable loans available for sale;
o the levels of prepayments of, or defaults on, loans;
o the types and volume of loans we sell;
o the level and volatility of interest rates; and
o the quality of our loans.
The prices at which we can sell our mortgage servicing rights vary over
time and may be materially adversely affected by a number of factors, including
the general supply of and demand for mortgage servicing rights and changes in
interest rates. Servicing rights for a particular loan category that was
originated at higher interest rates tend to have a lower value than those
originated with comparatively lower interest rates due to the greater likelihood
that loans with higher interest rates will be prepaid more quickly.
Our hedging strategy may not protect us from interest rate risk and may
lead to losses.
Although we generally sell our loans within 30 days after funding,
there may be unexpected delays that could increase our interest rate exposure.
While we use hedging and other strategies to minimize our exposure to interest
rate risks, no hedging or other strategy can completely protect us. In addition,
the nature and timing of hedging transactions may influence the effectiveness of
these strategies. Poorly designed strategies or improperly executed transactions
could actually increase our risk and losses. In addition, hedging strategies
involve transaction and other costs. We cannot assure you that our hedging
strategy and the hedges that we make will adequately offset the risks of
interest rate volatility or that our hedges will not result in losses.
We rely on others for consulting services.
We may enter into agreements with contractors, which may include firms
providing website design, software design, information systems and marketing
services. We have verbally entered certain of these agreements, but only one of
the agreements was committed to writing. The verbal agreements are terminable at
will, and the written agreement terminated on April 30, 2000. When and if
terminated, there is no assurance that the verbal agreements could be replaced
on the same or similar financial terms.
To expand our Internet business, we intend to expend significant funds
currently without assurance of increased future earnings or
profitability.
We anticipate expending significant funds to implement our growth
strategy. There may be a significant delay between the timing of these
expenditures and any increase in earnings, which may depress our earnings. Our
future plans are subject to both known and unknown risks and uncertainties that
may cause our actual results in future periods to be materially adversely
different than our prior performance. As a result, we cannot guarantee that our
future revenues will increase or that we will continue to be profitable.
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Our Internet success will depend, in part, on the development and
maintenance of the Internet's infrastructure and consumer acceptance of the
Internet as a distribution channel for mortgages. Internet-based mortgage
lending is relatively new, and we cannot assure you that consumers will increase
their use of the Internet for obtaining mortgage loans. In order to increase our
loan volume on the Internet, we depend on building and maintaining relationships
with operators of Internet mortgage websites, attracting consumers with our loan
terms and service, and controlling our costs. However, our ability to
significantly increase the number of loans we originate over the Internet and to
continue to originate loans profitably over the Internet remains uncertain.
To expand our Internet business, we must safeguard our customers'
financial data and our computer systems against Internet intruders and
hackers.
Our online loan origination and processing activities will be adversely
affected if we are unable to satisfactorily safeguard the security and privacy
of our customers' financial data. A significant barrier to the future growth of
e-commerce and online communication is the concern over the security of
confidential information transmitted over the Internet. We use Netscape
Communicator v4.5 rather than earlier Netscape versions or other browsers to
avoid certain security problems, such as root certification authority
recognition. We believe that we have taken adequate measures to ensure the
privacy and confidentiality of our customers' financial information.
Nevertheless, continuing consumer confidence in and usage of the Internet for
mortgage loan origination and processing could be adversely affected by evidence
of the inability of a mortgage loan originator to assure the privacy and
confidentiality of customers' financial information.
Our computer systems may be subject to break-in by hackers accessing
our computer systems through the our Internet website. We currently use the
Intruder Alert software package for Internet website security. Intruder Alert
will notify us of any attempted break-in to our computer network, stop the
intruder, and then build a visual map showing the intruder's Internet Service
Provider thus allowing us to locate and report the intruder to the authorities.
The results of our operations will be affected by various factors and
will be subject to certain risks inherent in the mortgage lending
industry, many of which are beyond our control, including general
economic conditions and interest rate levels.
Our business may be adversely affected by periods of economic slowdown
or recession which may be accompanied by decreased demand for consumer credit
and declining real estate values. Any material decline in real estate values
reduces the ability of borrowers to use home equity to support borrowings and
increases the loan-to-value ratios of loans previously made by us, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of default. Further, delinquencies, foreclosures, and losses generally
increase during economic slowdowns or recessions.
Any sustained period of such increased delinquencies, foreclosures or
losses could adversely affect the pricing of our loan sales. While we believe
the underwriting criteria and collection methods we utilize enable us to
mitigate the higher risks, we cannot assure you that such criteria or methods
will afford adequate protection against such risk.
Fluctuations in interest rates and increases and decreases of the prime
rate may directly impact the mortgage market and our ability to attract "A" or
"B/C" or other classes of mortgage loans. If interest
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rates should rise, the number of applications for new mortgages may decrease.
The "A" mortgage market is primarily composed of borrowers who are
interest-rate-driven or for purchasing homes; that is, "A" mortgage borrowers
refinance current mortgages for ones with lower interest rates and otherwise
more favorable terms. As interest rates increase, such refinancing diminishes
purchase activities and the number of loan applications in the "A" market
decreases. The "B/C" market is primarily comprised of borrowers who are
payment-driven with a use of the mortgage loan as a source of equity. Often a
goal of the "B/C" borrower is to leverage available equity for immediate use,
and despite increases in interest rates, the "B/C" borrower focuses primarily on
the amount of the monthly payment. Thus, the decrease in loan applications in
the "B/C" market which may occur when interest rates increase, is typically not
as significant as in the "A" mortgage market. However, since we intend to
continue to concentrate our loan origination efforts in the "A" mortgage market,
there can be no assurance that in the event that interest rates rise, that such
a rise will not have a negative impact on our financial position by causing
fewer "A" mortgages to be processed.
We retain some risk on loans that we sell.
Although we sell substantially all loans which we originate and
purchases on a nonrecourse basis, we retain some risk on substantially all loans
sold. During the period of time that loans are held pending sale, we are subject
to the various business risks associated with the lending business, including
the risk of borrower default, the risk of foreclosure and the risk that a rapid
increase in interest rates would result in a decline in the value of loans to
potential purchasers.
In the ordinary course of our business, we may be subject to claims
made against us by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
our employees, officers and agents (including our appraisers), incomplete
documentation and failures to comply with various laws and regulations
applicable to our business. We believe that there are no such claims currently
asserted. However, any such claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on our
results of operations and financial condition.
We are at any one time potentially subject to past portfolio
liabilities, particularly from our conforming loan business. We may receive
demands for repurchase from various investors. Though we will attempt to have
such individual requests rescinded or cured, there can be no assurance that
individual defects will be cured. Regardless, we do not believe that this risk
would seriously impair our ability to operate successfully.
We face intense and increasing competition in the mortgage lending
industry that could adversely impact our market share and our revenues.
As a marketer of mortgage loans, we face intense competition, primarily
from traditional mortgage lenders, such as commercial banks, savings and loan
associations, credit unions, thrift institutions, and finance companies, as well
as from Internet-based lending companies and other lenders on the Internet.
Furthermore, entry barriers in the mortgage industry are relatively low and
increased competition is likely. As we seek to expand our business, we will face
a greater number of competitors, many of whom will be well-established in the
markets we seek to penetrate.
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Competition can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, and interest rates.
Furthermore, we depend largely on real estate brokers, visitors to our Internet
website, independent mortgage brokers, financial institutions and other mortgage
bankers for our originations and purchases of new loans. Many of our competitors
are substantially larger, have better name recognition and have more capital and
other resources than us. Our competitors also use the Internet to obtain
originations and purchases of new loans and also seek to establish relationships
with our independent mortgage brokers, financial institutions, and other
mortgage bankers, none of whom is obligated by contract or otherwise to continue
to do business with us.
Competition may also be affected by fluctuations in interest rates and
general economic conditions. During periods of rising interest rates,
competitors which have "locked-in" low borrowing costs may have a competitive
advantage. During periods of declining interest rates, competitors may solicit
our customers to refinance their loans. During economic slowdowns or recessions,
our borrowers may have new financial difficulties and may be receptive to offers
by our competitors.
Competition may also lower the rates we are able to charge borrowers,
thereby potentially lowering the amount of premium income on future loan sales
and sales of servicing rights. Increased competition also may reduce the volume
of our loan originations and loan sales. We cannot assure you that we will be
able to compete successfully in this evolving market.
Mortgage banking is a highly regulated industry at both the federal and
state levels of government. We must become compliant and maintain our
compliance with a myriad of federal and state laws and regulations.
Our business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of our operations. We are subject to the rules and
regulations of, and examinations by, the United States Department of Housing and
Urban Development ("HUD") and state regulatory authorities with respect to
originating, processing, underwriting and selling loans. These rules and
regulations, among other things, impose licensing obligations on us, establish
eligibility criteria for mortgage loans, prohibit discrimination, provide for
inspections and appraisals of properties, require credit reports on loan
applications, regulate assessment, collection, foreclosure and claims handling,
investment and interest payments on escrow balances and payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to demands for indemnifications or mortgage loan
repurchases, certain rights of rescission for mortgage loans, class action
lawsuits and administrative enforcement actions.
Our operations on the Internet are not currently subject to direct
regulation by any government agency in the United States beyond mortgage-related
regulations and regulations applicable to businesses generally. A number of
legislative and regulatory proposals currently under consideration by federal,
state and local governmental organizations may lead to laws or regulations
concerning various aspects of business on the Internet, including:
o user privacy;
o taxation;
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o content;
o access charges;
o liability for third-party activities; and
o jurisdiction.
The adoption of new laws or the application of existing laws may decrease the
use of the Internet, increase our costs or otherwise adversely affect our
business.
The United States Congress and other governmental officials have also
occasionally suggested the elimination of the home mortgage interest deduction
for federal income tax purposes, either in part or entirely, based on borrower
income levels, type of loan or principal amount of loan. The competitive
advantages of tax-deductible interest, when compared with other sources of
financing, could be eliminated or seriously impaired by such government action.
Regulatory and legal requirements are subject to change. If such
requirements change and become more restrictive, it would be more difficult and
expensive for us to comply and could affect the way we conduct our business,
which could adversely impact our results of operations. Although we believe we
are currently in material compliance with the laws, rules and regulations to
which we are subject, we cannot assure you that we are, or will be, in full
compliance with applicable laws, rules and regulations. If we cannot comply with
those laws or regulations, or if new laws limit or eliminate some of the
benefits of purchasing a mortgage, our business and results of operations may be
materially adversely affected.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
THE COMPANY
StarNet Financial, Inc. ("StarNet" or the "Company") is engaged in the
business of originating, purchasing and selling mortgage loans secured primarily
by single-family and condominium residences through traditional distribution
channels and over the Internet. The Company:
o originates mortgage loans through our "net branches" located
across the United States;
o conducts wholesale loan originations and processing operations
using a nationwide network of independent mortgage loan
brokers; and
o conducts direct consumer mortgage loan origination over the
Internet.
Our loan origination activities include (i) offering a variety of
residential mortgage loans, (ii) attracting suitable loan applicants, (iii)
reviewing borrower credit and mortgaged property title, appraised value and
insurance ("underwriting"), (iv) issuing conditional loan commitments, and (v)
funding qualified loans at closing. Upon origination, we pool and sell both our
conforming loans (generally loans to borrowers with perfect or good credit) and
our non-conforming loans (generally loans to borrowers with below average or
delinquent credit) to institutional investors. We also sell individual loans to
such investors.
We are licensed, or are exempt from licensing requirements, to
originate, purchase closed loans, underwrite, and fund or sell residential
mortgage loans in 33 states in the United States. We sell loans primarily to DLJ
Mortgage Capital, Impac Mortgage Holdings, Homeside Lending, Inc., Cendant
Mortgage, Chase Manhattan Mortgage, IndyMac, Interfirst Mortgage, Household
Finance, Ohio Savings Bank and numerous other mortgage companies and investors.
In addition, we participate in the following Texas bond programs: Denton County
Finance Corporation Single Family Mortgage Revenue Bonds, Garland Housing
Finance Corporation Single Family Mortgage Revenue Bonds, Collin County Housing
Finance Corporation Single Family Mortgage Revenue Bonds, Grand Prairie Housing
Finance Corporation Single Family Mortgage Revenue Bonds, and Tarrant County
Housing Finance Corporation Single Family Mortgage Revenue Refunding Bonds.
As a mortgage lender, we generate revenues by origination and
subsequently selling loans. These revenues consist of loan processing fees, net
gain on sale, and net interest income. Loan processing fees include application,
documentation, commitment, and processing fees paid by borrowers. Net gain on
sale consists of the difference in price paid by the borrower and the price paid
by the purchaser (or permanent investor), which includes the value of the rights
to service loans. Net interest income consists of the difference between
interest received by us for the time we hold a loan and interest paid by us
under our credit facilities. Our profit on sales of loans depends on the price
we are able to sell our loans into the secondary market. Currently, when we
receive a rate lock on a loan, we sell that loan immediately under a best
efforts contract and then deliver it into a bulk or flow contract. We receive
additional fees when we close a loan. These fees range from a processing fee to
a warehousing fee and can equal up to one-half of one percent of the loan
amount. In addition, when we sell loans into the
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secondary market, we are able to make additional marketing gains because of
interest rate movements in the market from the time we lock the rate with our
investors under a best efforts contract.
Our expenses largely consist of:
o salaries, commissions and benefits paid to employees;
o occupancy and equipment costs;
o Internet and other technology-related expenses, including
licensing and participation fees and advertising costs; and
o data processing and communication costs.
Many of these expenses are variable rather than fixed. Commissions paid to loan
originators vary depending on their originations, and other salaries and
benefits fluctuate from quarter to quarter based on our assessment of the
appropriate level of personnel (other than loan originators), which generally
correlates to current and anticipated loan origination volume.
OUR STRATEGY
Growth Strategy
The total value of our loan originations for fiscal year 2000 was
$216,572,896. Our goal is to continue to expand our wholesale and retail
mortgage banking business primarily through our traditional originating channels
and through our Internet-based origination channel. To achieve this goal, we are
concentrating on the following growth strategies:
o Expand our traditional business into new regions. We intend to
extend our business model and expand our traditional lending
activities into new geographic regions. During fiscal
year 2000, we opened new regional loan offices in Houston and
Denver, and during the first quarter of fiscal year 2001, we
opened a new regional loan office in Springfield, Missouri. We
intend to open three additional offices over the next 12
months in the eastern and central United States and possibly
other areas. In connection with our geographic expansion, we
plan to advertise in related local and regional print media to
create name recognition and create awareness of our products
and services.
o Hire additional sales-oriented loan originators. We intend to
hire additional loan originators and production personnel in
our existing markets. In the future, the majority of our
business will be generated through these personnel. We also
intend to expand into geographic areas with experienced loan
originators and production personnel who have already
established a client base.
o Expand through selective strategic acquisitions. At various
times, we expect to consider acquiring mortgage lenders that
share our business philosophy regarding progressive marketing,
innovative use of technology and sound underwriting. In order
to increase core sales, we may also consider acquiring other
mortgage banking-related
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companies to enhance our product and service offerings. In
evaluating acquisition candidates, we will consider factors
such as the impact of the acquisition on our earnings, our
ability to support and retain production personnel and our
ability to enhance and expand the acquired business. We
believe our broad and competitive product line and the
technical and other back-up support we offer make us an
attractive partner for potential acquisition candidates.
o Enhance and expand our Internet business. We believe the
Internet will be an increasingly important medium to provide
mortgage products and services. We intend to increase our
Internet mortgage origination volume by opening additional
Internet call centers, by expanding our business into the
remaining states in which we are not yet licensed or otherwise
qualified and by establishing relationships with additional
websites so as to increase the number of sources that refer
customers to us. We also intend to develop further
enhancements to our website to allow prospective borrowers to
apply for a mortgage loan, lock in an interest rate and
receive a commitment in one online session. Further, we
anticipate that our customers will be able to log onto our
secure website at any time, and through the use of a unique,
personal password, monitor the progress of their loan
application. We intend to start an intensive marketing
campaign in selected markets to promote our own
StarNetMortgage.com website and create name recognition. We
also intend to enter into contracts to provide private label
Internet origination services to thrifts and smaller banks.
o Form joint ventures with homebuilders and realtors. We
currently market mortgage loans through joint ventures with
realtors and corporate affinity lending. We intend to also
market loans through joint ventures with homebuilders, which
we believe, in turn, will enhance the Company's revenues.
o Enter the correspondent mortgage banking business. We intend
to enter into the correspondent mortgage banking business,
where we will buy loans from well-managed mortgage bankers who
have sufficient capital resources and then pool and sell these
loans into the secondary market. By becoming a conduit for
mortgage bankers to sell their loans, we anticipate that we
will strengthen our relationships with these brokers and
expand our other business.
o Total mortgage lending solution. We intend to offer title
insurance, abstract services, home equity lines of credit and
credit-life insurance products to our mortgage customers. We
believe we can enhance the revenues we earn through the
cross-selling of these and other products and services and
leverage our origination network without significant
additional capital investments.
Operating Strategy
We believe that, by taking advantage of the following competitive
advantages in both our traditional and Internet-based origination channels, we
will be able to continue to expand our mortgage banking business:
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o Lending to home buyers. We concentrate on making loans to home
buyers rather than to home owners who are refinancing their
mortgages. We believe this makes our business less susceptible
to interest rate increases, because in a rising interest rate
environment home purchase mortgage volume tends to be more
stable than mortgage refinancing volume, which tends to
decrease significantly.
o Range of products available. We believe we have one of the
broadest and best-priced product offerings in the industry.
Offering a variety of well-priced loan products enables us to
best serve the largest number of mortgage customers, each of
whom may find different loan characteristics desirable. Our
products are listed in the "Business-- Services and Products"
section of this registration statement.
o Use of advanced technology. In a continuous effort to increase
efficiency, we have dedicated ourselves to maintaining
state-of-the-art information systems. We are in the process of
installing an "enterprise" computer system. This system
controls most aspects of our operations, from the processing
of a loan application through the closing of the loan and our
sale of the loan to institutional investors. The system also
performs checks and balances on many aspects of our
operations, and it supports our marketing efforts. We believe
this integrated approach reduces our marginal origination cost
per loan. We intend to continually look for new ways to
improve efficiencies through automation.
o Use of comprehensive and user-friendly website. In September
1999, we introduced a new, technologically advanced version of
our StarNetMortgage.com website that was designed to provide
customers with 24-hour access to our interest rates and
product terms and the ability to lock in an interest rate, to
file a pre-approval request or application, to check the
status of their pending application and to obtain their credit
report. Our website also provides mortgage customers with an
array of "tools" that assist them in determining how much
financing they can afford, what kind of mortgage best suits
their needs and otherwise provides answers to frequently asked
questions. We intend to introduce a number of enhancements to
our website that will enable our customers, in one continuous
online session, to apply for a loan, receive a loan commitment
if approved and lock in an interest rate.
o Loan products specifically underwritten for sale to investors.
Our underwriting process is designed to ensure that each loan
we originate can be sold to a third-party investor by
conforming the loan to the underwriting and credit standards
of that investor. Whenever possible, we use "artificial
intelligence" underwriting systems, including Fannie Mae's
Desktop Underwriter(R), to ensure consistency with our
investors' predetermined standards. These systems interface
with our "enterprise" computer system. In addition, we have a
series of internal and external quality control procedures in
place to ensure compliance with our underwriting standards.
o Involved sales strategy. Our loan originators are primarily
compensated through sales commissions, which encourages them
to be responsive to our customers. In addition, we foster a
consultative sales strategy that emphasizes pro-active and
frequent customer assistance. Our loan originators actively
guide customers through the loan
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application process, not merely providing information
requested by the customer, but keeping customers informed
about rate changes and market conditions.
OUR HISTORY
In March 1987, we were incorporated in Delaware under the name of
"Sarkis Capital, Inc." On May 13, 1999, we entered into an exchange agreement
with LoanNet, Inc., a Texas corporation ("LoanNet") and the shareholders of
LoanNet, whereby we agreed to acquire LoanNet and its subsidiary, The GM Group,
Inc., a Texas corporation (d/b/a StarNet Retail, sometimes referred to herein as
"GM"), from the LoanNet shareholders in exchange for shares of our Common Stock
(the "Exchange Agreement"). Pursuant to the Exchange Agreement, we issued
9,000,000 shares of our Common Stock in exchange for all of the outstanding
shares of LoanNet. The closing of the Exchange Agreement took place on May 28,
1999. As part of the reorganization, we changed our name to "StarNet Financial,
Inc." in June 1999. The transaction was accounted for as a recapitalization.
Effective as of October 1, 1999, we purchased substantially all of the
assets of Occidental Mortgage Company, which was engaged in the business of
originating mortgage loans. In connection with the asset purchase, we delivered
to Occidental (i) a five-year promissory note in the original principal amount
of $365,000 and (ii) a five-year option to purchase up to 300,000 shares of
Common Stock at a price of $1.00 per share. Additionally, for a period of four
months beginning October 15, 1999, we agreed to pay Occidental an amount equal
to one percent (1%) of the aggregate mortgage loans closed by us which are
attributable to mortgage loans that Occidental had in process immediately prior
to closing.
Also effective as of October 1, 1999, we acquired all of the
outstanding capital stock of Residential Lenders, Inc., which is engaged in the
business of originating mortgage loans. In connection with the acquisition, we
issued 250,000 shares of Common Stock; made an initial cash payment of $175,000,
less certain disbursements; and paid an additional $200,000 to the shareholders
of RLI.
Effective as of December 31, 1999, we sold all of the capital stock of
GM. We did, however, retain certain operations, personnel and relationships of
GM. These operations, personnel and relationships are now part of our StarNet
Retail division.
On April 28, 2000, we purchased substantially all of the assets of Wall
Street Mortgage, which is engaged in the business of residential mortgage
brokering. In connection with the acquisition, we issued 57,557 shares of Common
Stock and a warrant to purchase up to 12,500 shares of Common Stock with an
exercise price of $4.625 per share. As part of this acquisition, we have
acquired several exclusive advertising agreements with cyberXpo.com, Inc., a
Dallas, Texas-based company, that operates various mobile Internet access
venues, or "cyberCenters," in seven states. Such advertising agreements provide
us with the exclusive right to display mortgage lending and real estate
advertising at any cyberCenter that is operating in a mall, airport or in a
previously agreed upon retail location.
We conduct our business through two wholly owned subsidiaries and two
distinct operating divisions. StarNet Mortgage, Inc. and Residential Lenders,
Inc. are our wholly owned subsidiaries. Occidental Mortgage Company and StarNet
Retail are operated as divisions.
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For the purposes of the "Business" section, references to "StarNet",
the "Company", "we", "our" and "us" include StarNet Mortgage, StarNet Retail,
RLI and Occidental, unless otherwise indicated. Our principal executive office
is located at 17311 North Dallas Parkway, Suite 350, Dallas, Texas 75248, and
our telephone number is (972) 818-1212.
OUR OPERATING STRUCTURE
A description of our five business units follows:
StarNet Mortgage, Inc. ("StarNet Mortgage")
StarNet Mortgage is our residential loan origination subsidiary
comprised of "net branch" offices presently being established across the United
States. The net branch concept has been described by industry analysts as one of
the most mutually-attractive relationships between a mortgage banking company
and its originators in the marketplace today. Unlike traditional retail office
operations where expansion into a new market by the mortgage company requires
finding, leasing and furnishing an office, recruiting and hiring originators and
support personnel, and implementing start-up marketing programs, the net branch
approach places the burden of overhead on the branch rather than the company.
This enables a mortgage company to grow at an accelerated rate without a
proportionate increase in its operating expenses.
Our net branch program offers one of the most comprehensive packages of
benefits, products, and services to experienced mortgage professionals in the
marketplace, including affiliation with a national corporate identity, full
lender status as a mortgage banker, exemption from certain regulatory licensing,
fee disclosure and net worth requirements, access to a comprehensive and
competitive product line, FHA and VA direct endorsement underwriting, sub-prime
underwriting, improved processing efficiency through Internet-based automation
systems, established investor relationships, marketing programs, staff training,
production and recruitment incentives, accounting, bookkeeping and payroll
services, and group benefits like health insurance.
Our net branches cover their own overhead expenses, maintain their own
profit-and-loss statements, and retain branch profits after expenses. StarNet
Mortgage receives certain processing and document preparation fees on a "per
loan" basis from the branch to cover its own net branch servicing expenses,
while branch loan origination contributes to our production volume growth and
profitability.
Since the completion of the StarNet Mortgage program for its net branch
operations, we have successfully recruited 26 new originators in seven states.
We project that number to grow to 100 by May 2001. Geographical market coverage
by our net branch offices is expected to coincide with our defined expansion and
state licensing timetable. Qualification criteria and hiring standards for
prospective net branch representatives have been established by us, and
adherence is closely monitored by an executive oversight committee.
While StarNet Mortgage recognizes its ultimate market to be mortgage
consumers across the country, it also realizes that its primary avenue to these
consumers is through its net branch originators. Accordingly, its initial
marketing efforts are targeted at prospective originators already established
and successful in their respective markets. Individuals or groups fitting this
prospect profile include
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experienced mortgage bankers and loan officers or originators with other
mortgage companies or financial institutions.
As of May 1, 2000, we have entered into a management agreement with
StarBranch Mortgage, Inc. to manage and operate all of our net branch
operations. This management agreement gives StarBranch the responsibility and
authority as net branch operations manager to (1) contract with branch offices
in any state in which we are licensed, (2) to monitor, supervise and oversee the
operations, processes and origination of loans by the net branch offices, (3) to
hire necessary staff to properly conduct the net branch operations, (4) fix
compensation and benefits for such employees, and (5) to generally administer
and manage the net branch operations. However, the net branch operations will
continue to be subject to the authority of the Board of Directors of our
subsidiary, StarNet Mortgage.
StarNet Mortgage also has a working relationship with a network of over
2,400 mortgage brokers in 33 states. Over 1,900 of these brokers presently
operate within the states constituting our initial geographic marketplace. Those
brokers are in the following states:
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------- ----------------------- ----------------------
Arizona 56 California 1377 Colorado 116
-------------------------- ----------------------- ----------------------
Connecticut 1 Florida 23 Georgia 5
-------------------------- ----------------------- ----------------------
Hawaii 7 Idaho 10 Indiana 4
-------------------------- ----------------------- ----------------------
Kansas 4 Kentucky 2 Louisiana 1
-------------------------- ----------------------- ----------------------
Maryland 1 Michigan 1 Minnesota 3
-------------------------- ----------------------- ----------------------
Missouri 6 Montana 3 Nevada 26
-------------------------- ----------------------- ----------------------
New Jersey 1 New Mexico 16 New York 1
-------------------------- ----------------------- ----------------------
North Carolina 13 Ohio 2 Oklahoma 1
-------------------------- ----------------------- ----------------------
Oregon 37 South Carolina 2 Tennessee 1
-------------------------- ----------------------- ----------------------
Texas 586 Utah 20 Washington 72
-------------------------- ----------------------- ----------------------
Wisconsin 1 Wyoming 1
-------------------------- ----------------------- ----------------------
</TABLE>
We anticipate wholesale production during the fiscal year 2001 to
exceed $650 million in loans and to continue to grow at an accelerated rate as
we commence activity in other states.
StarNet Retail
StarNet Retail is our residential loan origination division under which
the retail operations and homebuilder group programs are conducted or will be
conducted. StarNet Retail is a fully-approved FHA loan underwriter offering a
comprehensive menu of conventional as well as government-insured mortgage
products to its clients.
StarNet Retail is developing an active retail division that will
generate monthly production from residential real estate agencies and
homebuilders. Due to the nature of the business conducted by
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StarNet Retail, the period of time between loan approval or commitment and
closing is extended by the time required for home construction.
StarNet Retail also intends to develop joint venture agreements with
homebuilders. It is intended that the majority of the loans that will result
from these joint ventures will be FHA government-insured which then will be sold
to investors immediately following closing. StarNet Retail's management
anticipates pursuing such homebuilder programs in those markets that coincide
with our corporate geographical expansion.
Residential Lenders, Inc.
RLI is our retail originator in our Eastern Region and our Internet
originating division. RLI receives approximately 1,500 hits per week on their
website. From these hits, RLI will contact the customer and turn that lead into
a new loan. RLI also advertises extensively on the Internet. RLI has recently
entered into the wholesale arena. This wholly owned subsidiary has hired staff
to originate mortgage loans throughout the Eastern region of the United States.
The Internet has become a substantial medium for both communication and
electronic commerce. International Data Corporation ("IDC") estimates the number
of Internet users worldwide will increase from 115 million in 1998 to
approximately 400 million in 2002. In addition, IDC expects that the number of
U.S. households using the Internet for online banking will grow from less than
6.6 million in 1998 to more than 32 million in 2003, showing the growth in
reliance on the Internet for financial services. Consumers have become
proficient in using the Internet for finding, evaluating and purchasing a wide
variety of products and services.
Because of its flexibility, the Internet provides companies with
additional ways to reach consumers with the most current information about their
products and services. This information can be updated instantaneously to
provide new features and presentations, or to adjust prices and terms according
to market changes. In addition, the Internet provides a cost-efficient means of
conducting a document-intensive business such as mortgage banking. Consumers can
apply online, have access to their file, update information instantly, and check
the status of their loans 24 hours a day, seven days a week.
To market and sell loans on the Internet, we intend to work with many
of the leading websites in our industry. We believe a large number of Internet
mortgage shoppers will be introduced to lenders on these types and other future
types of websites. We believe our inclusion in these types of websites will give
us a strategic advantage because they are developing their business processes
and software in conjunction with their existing participating lenders and, in
some cases, limiting access by additional lenders.
Occidental Mortgage Company
Occidental is our division which originates mortgage loans from 33
states and through three areas of origination: wholesale, retail and Internet
originations.
Prior to our acquisition of the assets of Occidental, Occidental had
been in existence for 32 years, originating primarily FHA loans from its retail
loan representatives. This division originates the
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majority of its loans from the wholesale arena, focusing on non-conforming
loans. Occidental has been the largest seller of loans to Impac Mortgage
Holdings, a real estate investment trust, for the past four years.
Occidental operates two offices in Irvine, California, and Denver,
Colorado, serving 23 states. It has centralized underwriting and funding out of
the Irvine location, thus making the Denver location a production office only.
In addition, all of our secondary marketing is handled out of the Irvine
location.
General Overview
Each of our subsidiaries and our Occidental division will also offer
integrated, interactive, easy- to-use websites providing complete mortgage
transaction fulfillment. Currently, most mortgage lending websites act primarily
as referral sites to prospective borrowers. These types of sites do not offer
transaction fulfillment for the consumer and therefore do not control the entire
mortgage process.
Utilizing our StarNetMortgage.com website, borrowers can choose the
subsidiary or division in their geographic area and will be able to efficiently
search, analyze and compare various mortgage products from a number of lenders
and apply for, qualify for, and obtain the loan most compatible with their
individual financial characteristics and borrowing requirements. They will also
be able to track online the status of their mortgage applications from
submission through closing and to monitor their loans on an ongoing basis after
closing, enabling them to optimize any potential refinance decisions in the
future.
We intend to continue to streamline and refine our online origination
and processing procedures, enabling borrowers to directly benefit from the cost,
speed, and convenience efficiencies made possible by improved techniques and
technologies.
Our management recognizes that successful online origination requires a
comprehensive web marketing plan designed to attract attention, generate traffic
and ultimately reach prospective borrowers. As part of that plan, we are
negotiating a strategic alliance with a major Internet service provider in order
to enhance our visibility and exposure.
U.S. RESIDENTIAL MORTGAGE INDUSTRY OVERVIEW
Traditional United States Mortgage Market
The Mortgage Bankers Association estimates that the United States'
mortgage market totaled over $4.3 trillion of loans outstanding and that
mortgage originations were $1.2 trillion in 1999. The mortgage industry is
divided broadly into four major segments today:
o mortgage origination -- sourcing, verifying and documenting of
mortgage loans, typically done by mortgage brokers and
single-source lenders;
o mortgage funding -- underwriting, funding and selling closed
loans to mortgage loan purchasers;
o securitization -- aggregating loans for sale into the
secondary market; and
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o servicing -- ongoing billing, collection and
foreclosure/collateral management.
Over the past two decades, the mortgage industry has evolved. Until the
late 1970's, the mortgage market was primarily a captive banking market where
retail banks and savings and loan institutions originated loans through their
branches, underwrote and closed loans internally, funded loans from their own
customer deposits and then serviced the loans themselves. This internal chain of
production was broken by the emergence of the pure mortgage bank that could buy
mortgages from mortgage brokers and sell to government sponsored mortgage
investors, such as Fannie Mae and Freddie Mac, and the development of a large,
liquid secondary funding and trading market for mortgage debt. This efficient
new market for mortgage funding made it viable for the first time to uncouple
from the large retail banks both the front-end functions of mortgage origination
and mortgage funding and the back-end function of servicing mortgages.
This transformation has created both a large, concentrated and
efficient secondary mortgage market and a large, fragmented and inefficient
mortgage origination and banking market. There are over 20,000 mortgage
brokerage operations in the United States, according to the National Association
of Mortgage Brokers. However, there is no multi-lender originator that operates
nationally and enjoys a widely recognized consumer brand. In 1999, no mortgage
originator had over 10% market share in terms of the total number of originated
mortgages in the United States. While increased competition at all levels of the
industry has resulted in tremendous innovation in the mortgage choices available
to consumers, the level of complexity associated with these loans has also
increased. In addition, the underwriting and lending processes remain paper and
time intensive with little visibility into the process for consumers. As a
result of the cumbersome underwriting and lending process, we believe that the
traditional mortgage lending process causes many consumers to feel:
o uncertain that their single-source lenders and brokers are
providing unbiased advice and recommending the most suitable
mortgage products;
o skeptical that interest rates and closing costs initially
quoted will ultimately be available;
o intimidated by the number and variety of mortgage products
available;
o pressured to commit to a particular product before they have
researched and compared products to their satisfaction;
o frustrated with the amount and types of fees that they are
required to pay in connection with the obtainment of a
mortgage; and
o overwhelmed by the substantial time and effort that it takes
to get a mortgage loan.
Furthermore, many borrowers receive little ongoing assistance in
managing their debt after the loan is closed. Many direct lenders who also
engage in mortgage servicing are not committed to proactive monitoring of their
customers' loans because they risk losing servicing fees if customers refinance
with other lenders. Multi-lender brokers have the incentive to pursue
refinancing opportunities
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but typically lack the technological capability to proactively monitor the
market changes of thousands of loan products on a continuous basis.
Market Opportunity for Online Mortgage Origination
Now with the emergence of the Internet as a viable means of conducting
electronic commerce, the mortgage banking industry has made great efforts to
utilize this non-traditional distribution channel to increase the amount of
originated mortgages. Mortgage origination is well suited to an Internet-based
distribution model for a number of reasons, including:
o mortgages are information products that need no physical
delivery or warehousing;
o complex mortgage products can be made more understandable
through the use of graphical and dynamic real-time
presentations, including explanations of terminology and easy
access to detailed supporting information;
o borrower data can be efficiently captured through an Internet
website, allowing real-time automated underwriting and
streamlined overall mortgage application processing; and
o costly local offices or brokers and the expensive fee
structure associated with the traditional mortgage
distribution model are no longer required.
Many companies have attempted to capitalize on this large market
opportunity. Existing mortgage banks have created Internet websites to sell
their loans directly online as an alternative method to the traditional mortgage
origination process. These existing mortgage banks, however, do not offer the
consumer a multi-lender selection or comparisons of mortgage products and may
also be reluctant to reduce their fees for Internet customers due to their fear
of merely diverting customers from their traditional distribution channels.
A number of Internet websites currently exist that serve as
multi-lender distribution channels for mortgage banks. These Internet websites
act as referral sites and offer links to various mortgage banks. While many of
these referral websites offer a variety of mortgage lenders, they do not offer
complete transaction fulfillment for the consumer and therefore do not control
the entire mortgage process. Furthermore, because these referral sites do not
eliminate the necessity for the services of commissioned loan agents, they do
not provide substantial cost savings to the consumer.
We believe that in addition to traditional distribution channels (such
as regional offices and brokers), there exists a significant market opportunity
for a centralized, nationally-accessible and simple- to-use online service with
a broad selection of products, a compelling value proposition based upon saving
borrowers money, time and effort, and an open, integrated service that provides
complete transaction fulfillment. Our online service differs from those of our
competitors in that we offer a variety of products and allow the customer to
complete the mortgage application process online instead of merely being a
referral service where customers can only compare interest rates and costs of
various lenders or are limited to the products of a single lender.
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SERVICES AND PRODUCTS
We provide a broad range of mortgage lending services, which include
conventional, governmental, jumbo (large loan amounts) and non-conforming home
mortgage loans. The majority of our loans are made to owners of single-family
and condominium residences who use the loan proceeds to purchase new homes or
(to a lesser extent) refinance existing home mortgages. We provide funds and
close loans to approved mortgage brokers and correspondent lenders who originate
the mortgage for the consumer. We solicit these brokers for business, competing
with other lenders.
We provide a variety of products to our approved mortgage broker
customers related to home loans. In general, we offer mortgage brokers products
for their clients who have credit from "A" (perfect and good credit) to "D"
(below average and delinquent) and who desire conventional loans, government
loans, conforming loans, and non-conforming loans. All mortgage products are
secured by the real property used as collateral for the mortgage.
Mortgage brokers submit loan packages to our representatives for review
and approval. After the mortgage loan is closed, we package the loans into
groups and sell the loans to mortgage lending conduits. We determine to whom we
will sell the loans based on the conduits' price and service at the time the
interest rate is locked and a commitment is delivered to the customer. We do not
retain the rights to service either the mortgage loans we close or the loans we
purchase from approved correspondent lenders. We anticipate that we will enter
into a sub-servicing agreement with a FNMA- approved servicer at the time we
obtain FNMA approval. We do not anticipate permanently servicing our loan
originations for the remainder of fiscal year 2001.
SALES AND MARKETING
Pricing and Yield Management. We use the latest technology included in
the "Telerate Plus" financial markets package produced by Bridge Information
Systems, Inc. Telerate Plus uses Bridge's market service to provide real-time
mortgage prices and yields, as well as instrumentalized data for analysis and
charting. It also provides us with up-to-the-minute news and economic statistics
regarding the mortgage markets. Athena (part of the Telerate Plus software
package) provides charting capabilities, enabling us to have flexibility in
trading our mortgage loans. Athena assists in mapping out the strategy in the
fixed-income and derivative markets. With the flexibility and customization
power of Athena, our risk manager can chart the open-high-low-close data from
any source, with up-to-the-minute data updates.
Mortgage providers hedge their risk by selling loans. In accordance
with this practice, we cover our interest rate risk initially by selling the
mortgages into the immediate cash market. When a loan is quoted firm to the
customer, the loan will be sold "optional" delivery, which gives us the
opportunity to search the market for a buyer willing to pay a better price for
the loan before it is sold. When the loan is closed, the interest rate risk will
be covered in either the cash-forward markets or with derivatives on the futures
market. If a loan is not delivered, a non-delivery pair-off fee is assessed.
However, when selling to FNMA, delivery is mandatory once the sale of a loan is
approved; our opportunity to shop for a better price is not available.
Distribution. We currently originate approximately 90% of our mortgage
loans through traditional distribution channels such as independent mortgage
brokers. We believe that such percentage
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is comparable to major mortgage banking firms' percentage of originations
through traditional distribution channels. Independent mortgage brokers
generally receive commissions based on originating fee and premium price.
We have established relationships with a network of over 2,400 mortgage
brokers across the country and intend to maintain strong working relationships
with them and anticipate we will also pay competitive commissions. We also plan
to offer these mortgage brokers significant opportunities to participate in the
development of specific corporate strategies and procedures through their
attendance at meetings with our senior executives.
The remaining 10% of our current mortgage loans originate through the
Internet. On April 15, 2000 we acquired several exclusive advertising agreements
with cyberXpo.com, Inc., a Texas-based company that operates various mobile
Internet access venues, or "cyberCenters," in seven states. Such advertising
agreements provide us with the exclusive right to display mortgage lending and
real estate advertising at any cyberCenter that is operating in a mall, airport
or in a previously agreed upon retail location. Since we began cyberCenter
advertising on April 28, 2000, we have already noticed an increase in our
Internet mortgage loan origination rate and we anticipate that this rate will
continue to increase in the future. Additionally, we anticipate that by
continuing to utilize the Internet to originate mortgages we will, in time, be
able to decrease the amount of commissions paid to independent mortgage brokers.
We also anticipate that our future Internet originations will be
facilitated through Internet call centers. We currently have one Internet call
center in Orlando, Florida and anticipate opening more call centers in the next
12 months. When a customer is introduced to us over the Internet, we will
communicate with that customer online or through our Internet call center. Our
call center employs representatives who are trained to work with customers in a
consultative manner. Our consultative sales approach stresses proactive and
frequent contact with customers. For example, our representatives provide
customers with written analysis, comparing the costs of different loan products,
showing closing costs and amortization schedules. The representatives are
trained to call customers frequently, to provide them with updated information
about interest rates and to answer frequently-asked questions. The objective of
our call center representatives is to build a relationship with potential
customers, and gain the confidence and business of those customers.
Homebuilder Relationships and Net Branches. We anticipate expanding
mortgage loan originations by developing relationships with homebuilders and
using our net branches across the country. We intend to have sales agents visit
homebuilders on a regular basis to develop business, to solicit their input and
to answer their questions. We expect that the sales managers will be supported
by a help desk, staffed full time by employees trained to meet homebuilders' and
their customers' needs. Our senior executives plan to call upon these customers
to ensure that we understand and respond to their mortgage loan requirements.
Marketing. We currently market our services through trade shows,
advertising and promotions in newspapers, magazines, billboards, radio,
television and the Internet and through direct contact with mortgage brokers. We
also plan to market our services through direct contact with homebuilders, as
well as to maintain a nationwide toll-free telephone number for loan
applications and to assign sales representatives to each city where we operate.
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COMPETITION
We compete against savings and loan associations, thrifts, commercial
banks, consumer finance companies and other mortgage bankers in the origination
of single-family and condominium residential mortgage loans. Many of our
competitors are large and operate nationally. We compete on the basis of quality
of services along with the use of technology and the relationships established
by our sales and operations staff.
OPERATIONS
Our operations are headquartered in Dallas, Texas. Occidental operates
out of offices located in Irvine, California, and Denver, Colorado. RLI operates
from offices located in Orlando, Florida. We also operate mortgage origination
offices in Houston, Texas and Springfield, Missouri. The centralization of
operations in Dallas, Texas allows us to participate in the "bulk sale" loan
process and results in expanded revenue opportunities over typical single loan
sales and creates greater economies of scale in the operations delivery of
closed loans.
EMPLOYEES AND CONSULTANTS
As of the date of this registration statement, we had 91 full-time
employees in the following departments:
<TABLE>
<S> <C>
Sales 36
Administration 16
Operations 34
Secondary Marketing 5
</TABLE>
Consultants. We have used, and intend to continue using, outside
consulting firms to assist us in planning our operations and implementing our
business plan. Among the consultants we have engaged are Crossroad
Communications and John Duff & Associates.
Labor Relations. None of our employees are represented by a labor
union. We believe we have and will continue to have a good relationship with our
employees. Management meets with employees on a routine basis to discuss our
objectives, as well as more specific labor issues such as scheduling,
compensation and work rules.
LITIGATION
On January 3, 2000, an action was brought against us for breach of
contract and fraud by Joni Baquerizo, James Cunningham, Sam W. Pitts, Jr., and
Jay Robinson, each of whom is a former employee (the "Plaintiffs"). The
Plaintiffs allege that we owe them unpaid wages, unpaid bonuses and stock
options. We believe that the Plaintiffs' claims are without merit and intend to
vigorously defend ourselves in this litigation.
From time to time, we are a defendant, or are threatened to be made a
defendant, in lawsuits encountered in the ordinary course of our business, the
resolution of which should not have a material
24
<PAGE> 26
adverse effect on our financial position. Except as disclosed above, we are not
currently aware of any litigation currently pending or threatened to which we
are subject to or to which we may be a party.
GOVERNMENT REGULATIONS
Our business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of our operations. We are subject to the rules and
regulations of, and examinations by, HUD and state regulatory authorities with
respect to originating, processing, underwriting and selling loans. These rules
and regulations, among other things, impose licensing obligations on us,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applications, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to demands for indemnifications or
mortgage loan repurchases, certain rights of rescission for mortgage loans,
class action lawsuits and administrative enforcement actions.
Further, federal and state regulations continue to affect the mortgage
loan industry relative to fee disclosure obligations, broker licensure
requirements and approval/renewal criteria for government- insured loan
underwriting.
Mortgage broker fee disclosure requirements, originally mandated under
the Real Estate Settlement Procedures Act and expanded under the Housing
Community Development Act of 1992, were clarified in HUD Statements of Policy in
1996. As a result of these clarifications, mortgage loan brokers are obligated
to disclose virtually all income received in mortgage transactions from any
sources whatsoever, direct or indirect, to prospective borrowers. Originators or
mortgage bankers funding their own loans are not subject to this same degree of
disclosure.
Legislation requiring the licensure of mortgage loan brokers has been
adopted in 45 states in the United States, with the remainder of the states
expected to follow suit in the near future. In addition to requiring background
investigations and continuing educational requirements, many states have
established specific criteria designed to demonstrate financial soundness on the
part of the individual mortgage loan broker.
Mortgage loan companies seeking approval and/or renewal of the ability
to underwrite readily- marketable FHA/VA government insured loans continue to
face expanded and stricter requirements by HUD relative to minimum net worth
standards and prior mortgage loan origination volume. We plan on maintaining
excess capital to the minimum net worth required by HUD at all times.
We believe that we are in compliance in all material respects with
applicable federal, state and local laws and regulations.
25
<PAGE> 27
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We are engaged in the business of originating, purchasing and selling
mortgage loans secured primarily by single-family residences through traditional
channels of distribution and over the Internet. It is the intent of our
management to create a mortgage lending operation which is highly diversified in
the following ways:
o Product lines. We offer or intend to offer conforming conventional,
Federal Housing Administration ("FHA") and Veterans Administration
("VA") mortgages, "sub-prime" mortgages (generally loans to borrowers
with below average or delinquent credit) and "non-conforming" mortgages
(which allow for more limited documentation of borrowers' credit).
o Geography. We have employees in California, Florida, Texas, Colorado,
Nevada and Missouri. We are presently qualified to do business in 33
states. We expect to be qualified and licensed as required in the
remainder of the United States within the next three to six months. We
also expect to open three new regional offices by the end of fiscal
year 2001.
o Channels of distribution. We are originating and/or purchasing mortgage
loans by traditional retail loan officers, broker-correspondents, "net
branch" employees, and the Internet.
Our history to date reflects the implementation of this strategy. The
initial operations consisted of the establishment of a lending office in Dallas,
Texas, which included "wholesale" and "net branch" capability. Such operations
have the ability to operate nationwide.
Effective as of October 1, 1999, we acquired Residential Lenders, Inc.,
a Florida-based retail loan operation specializing in conforming lending. RLI
has operated an Internet website for approximately three years from which it
derives a substantial volume of its business. This acquisition, therefore helps
us to continue our diversification both as to geography and distribution
channel.
Effective as of October 1, 1999, we also acquired the assets and
operations of Occidental Mortgage Company, a California-based retail and
wholesale loan operation specializing in sub-prime and non-conforming lending.
Occidental also has limited capability to service loans (i.e. collect customer
payments, hold tax and insurance escrows and pay the same when due). Management
believes that this acquisition serves geographic and product line
diversification.
In September 1999, we established a wholesale loan office in Houston,
Texas, staffed with personnel knowledgeable and experienced in sub-prime and
non-conforming loans as well as conforming conventional, FHA and VA loans.
In December 1999, we established a wholesale loan office in Denver,
Colorado, staffed with personnel knowledgeable and experienced in non-conforming
loans. We believe that we will be able to service the Rocky Mountain area with
centralized underwriting and closing from our Western Regional office in Irvine,
California.
Effective as of December 31, 1999, we sold all of the capital stock of
GM. We did, however, retain certain operations, personnel and relationships of
GM.
On April 28, 2000, we purchased substantially all of the assets of Wall
Street Mortgage of Dallas, Inc., a Dallas-based company which is engaged in the
business of residential mortgage brokering. As part of this acquisition, we have
acquired several exclusive advertising agreements with cyberXpo.com, Inc., a
Dallas, Texas-based company, that operates various mobile Internet access
venues, or "cyberCenters," in seven states. Such
26
<PAGE> 28
advertising agreements provide us with the exclusive right to display mortgage
lending and real estate advertising at any cyberCenter that is operating in a
mall, airport or in a previously agreed upon retail location. In connection with
this acquisition, we acquired a new regional office in Springfield, Missouri.
We continually evaluate prospective acquisitions. However, having
experienced rapid growth, we intend to focus during the near term on the further
development of the infrastructure (in terms of management, systems, equipment,
policies and procedures) necessary to cohesively integrate our operations and
optimize their effectiveness in fulfilling our strategic objectives.
PRODUCTION
STARNET MORTGAGE
FISCAL YEAR ENDED 3/31/00 - CLOSINGS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 3/31/00
<S> <C>
StarNet - Dallas $ 98,657,785
StarNet - Houston 37,519,026
RLI - Eastern Region 36,124,454
OMC - Western Region 532,688,233
-------------
TOTAL: $ 704,989,498
</TABLE>
STARNET MORTGAGE
FISCAL YEAR ENDED 3/31/00 - NEW APPLICATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 3/31/00
<S> <C>
StarNet - Dallas $ 43,783,191
StarNet - Houston 19,348,729
RLI - Eastern Region 16,315,070
OMC - Western Region 137,125,906
-------------
TOTAL: $ 216,572,896
</TABLE>
We anticipate receiving and processing $1,800,000,000 of mortgage loan
applications during fiscal year 2001, and we anticipate that we will close up to
$650,000,000 of those loans during fiscal year 2001. We anticipate wholesale
production to grow at an accelerated rate as we commence activity in other
states. However, these expectations are subject to interest rate fluctuations
and other market conditions, which we have no control over.
PIPELINE
The loan pipeline (the "Pipeline") is the volume of loans in our
combined system that have met all of our preliminary criteria subject to
completion of underwriting documentation. As of March 31, 2000, the Pipeline had
a total of $157,644,146 in mortgage loans available. The Pipeline consists of
approximately $100,000,000 of non- conforming loans ("A"), $25,000,000 in
sub-prime loans ("B/C") and the balance is in government-insured loans and
various conforming product. As of March 31, 2000, the total approximate Pipeline
by region was as follows:
27
<PAGE> 29
<TABLE>
<S> <C>
Western Region $ 85,967,076
Central Region (Dallas and Houston) $ 47,297,070
Eastern Region $ 24,380,000
============
$157,644,146
</TABLE>
The loans generated by us can be sold on an individual basis ("flow")
or sold in package form ("bulk"). We can form one package or several packages
during a month, depending on the best execution (i.e., highest price). Loans
sold on a flow can be sold rapidly. Loans sold in bulk generally require more
time to assemble, often 15 to 30 days from the date of our funding.
As of March 31, 2000, we had a cash position of $294,172. Throughout
the 2000 fiscal year, we have experienced negative cash flows from operations
amounting to $5,250,005. Rising interest rates leading to a decline in loan
production place additional pressures on liquidity.
During the fourth quarter of fiscal year 2000 and the first quarter of
fiscal year 2001, we conducted a private placement of our Common Stock. As part
of this private placement, we issued 1,486,702 shares of Common Stock, and we
raised approximately $1.4 million in cash. Additional capital will need to be
raised for us to continue our business as contemplated in our business plan
beyond the next 12-month period.
RESULTS OF OPERATIONS
As a mortgage lender, we generate revenues through the origination and
subsequent sale of funded loans. These revenues are made up of loan processing
fees, net gain on sale, and net interest income. Loan processing fees include
application, documentation, commitment, and processing fees paid by borrowers.
New gain on sale consists of the difference in price paid by the borrower and
the price paid by the permanent investor, which includes the value of the rights
to service loans. Net interest income consists of the difference between
interest received by us for the time we hold a loan and interest paid by us
under our credit facilities.
Our expenses largely consist of:
o salaries and benefits paid to employees;
o occupancy and equipment costs;
o Internet and other technology-related expenses, including
licensing and participation fees and advertising costs; and
o data processing and communication costs.
A substantial portion of these expenses are variable in nature. Commissions paid
to loan originators are 100% variable, while other salaries and benefits
fluctuate from quarter to quarter based on our assessment of the appropriate
levels of non-loan originator staffing, which correlates to the current level of
loan origination volume and our estimates of future loan origination volume.
Seasonality affects the mortgage industry as loan originators are
typically at their lowest levels during the first and fourth quarters of the
calendar year due to a reduced level of home buying activity during the winter
months. Loan originations generally increase during the warmer months beginning
in March and continuing through October. As a result, we expect higher earnings
in our first and second quarters and lower earnings in the third and fourth
quarters of our fiscal year.
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<PAGE> 30
Interest rate and economic cycles also affect the mortgage industry, as
loan originations typically fall in rising interest rate environments. During
these periods, refinancing originations decrease, as higher interest rates
provide reduced economic incentives for borrowers to refinance their existing
mortgages. Due to stable and decreasing interest rate environments over recent
years, our current performance may not be indicative of results in rising
interest rate environments.
Prior to May 1999, we were known as Sarkis Capital, Inc. ("Sarkis"), an
inactive publicly held corporation pursuing a business combination with a
privately held company believed to have growth and profit potential,
irrespective of the industry in which the privately held company was operating.
With the acquisition of LoanNet, Occidental, RLI and Wall Street, we have
embarked on a plan to become a significant competitor in the mortgage banking
industry. Subsequent to the acquisitions, we raised approximately $3.6 million
in capital through a private placement of our Common Stock which closed on
September 30, 1999 and approximately $1.4 million through a private placement of
our Common Stock which closed on June 30, 2000. As such, our prior results are
not indicative of our future prospects.
Due to the evolution of our business strategy, we believe that our
historical results of operations for the periods presented may not be directly
comparable. Further, we believe the historical results of operations do not
fully reflect the operating efficiencies and improvements that are expected to
be achieved by the continued integration of our acquired businesses.
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto and other
detailed information appearing elsewhere herein.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED WITH FISCAL YEAR ENDED
MARCH 31, 1999
No comparison to the fiscal year ended March 31, 1999 is relevant since
we did not begin mortgage loan operations until the fiscal year ended March 31,
2000.
REVENUES
During fiscal year 2000, we had gross revenues of $4,929,177.
LOAN PROCESSING EXPENSES
Loan processing expenses amounted to 464,027 in fiscal year 2000.
MARKETING AND SALES EXPENSE
Marketing and sales expense consists primarily of advertising and
promotional expenditures. Marketing and sales expense amounted to $368,500 in
fiscal year 2000.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses for fiscal year 2000 consisted of
$5,396,410 in compensation and benefits, $565,822 in travel and entertainment,
$1,216,159 in office occupancy expenses, $593,459 in consulting and contract
services, $216,901 in legal and professional services, $39,656 in insurance and
$329,003 in depreciation and amortization.
29
<PAGE> 31
INTEREST EXPENSE
Interest expense is comprised of interest on indebtedness. Interest
expense amounted to $36,696 in fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had a cash position of $294,172. Throughout
fiscal year 2000, we have experienced negative cash flows from operations
amounting to $5,250,005. Rising interest rates leading to a decline in loan
production place additional pressures on liquidity.
During the fourth quarter of fiscal year 2000 and the first quarter of
fiscal year 2001, we conducted a private placement of our common stock. As part
of this private placement, we issued 1,486,702 shares of Common Stock, and we
raised approximately $1.4 million dollars. Additional capital will need to be
raised for us to continue our business as contemplated in our business plan
beyond the next 12-month period.
The discussion above addresses working capital requirements. In
addition to working capital, we fund our "Mortgage Loans Held for Sale" through
advances under warehouse lines of credit. Our subsidiary, StarNet Mortgage,
currently uses two lines of credit (implemented by means of "loan purchase
agreements") with an aggregate limit of $11,000,000 provided by First State Bank
of Moulton and Lott State Bank. Additionally, StarNet Mortgage maintains two
warehouse lines of credit with DLJ Mortgage Capital, Inc., a New York
corporation, and IMPAC Warehouse Lending Group, a California corporation.
We have a critical need for additional working capital to execute our
business strategy. We anticipate using the net proceeds of the private placement
discussed above to open additional regional offices, hire additional personnel
and maintain net worth requirements for federal agency approvals and credit
facilitation. In the event that we are unable to obtain additional capital, we
will forego further expansion of our net branch and regional office network,
reduce the number of employees and overhead expenses, curtail our loan
production activities and/or sell loans earlier than is optimal and concentrate
our efforts on our existing operations.
We believe that the lines of credit, funds generated from operations
and the net proceeds of the private placement will be sufficient to finance our
current and anticipated operations for at least the next 12 months. Our
long-term capital requirements beyond this 12-month period will depend on
numerous factors, including the following:
o the rate of market acceptance of our products and services;
o the ability to expand our customer base; and
o the level of expenditures for sales and marketing and other
factors.
To the extent that the lines of credit, the net proceeds of the private
placement and our revenues are insufficient to fund the activities in the short
or long term, we would need to raise additional funds by incurring debt or
through public or private offerings of our stock. We are, however, actively
negotiating with other providers of mortgage warehouse lending facilities for
increased limits and more favorable terms.
INFLATION
Fluctuations in interest rates and increases and decreases of the prime
rate may directly impact the mortgage market and our ability to attract "A" or
"B/C" or other classes of mortgage loans. If interest rates should rise, the
number of applications for new mortgages may decrease. The "A" mortgage market
is primarily composed
30
<PAGE> 32
of borrowers who are interest-rate-driven or for purchasing homes; that is, "A"
mortgage borrowers refinance current mortgages for ones with lower interest
rates and otherwise more favorable terms. As interest rates increase, such
refinancing diminishes purchase activities and the number of loan applications
in the "A" market decrease. The "B/C" market is primarily comprised of borrowers
who are payment-driven with a use of the mortgage loan as a source of equity.
Often a goal of the "B/C" borrower is to leverage available equity for immediate
use, and despite increases in interest rates, the "B/C" borrower focuses
primarily on the amount of the monthly payment. Thus, the decrease in loan
applications in the "B/C" market which may occur when interest rates increase,
is typically not as significant as in the "A" mortgage market. However, since we
intend to continue to concentrate our loan origination efforts in the "A"
mortgage market, there can be no assurance that in the event that interest rates
rise, that such a rise will not have a negative impact on our financial position
by causing fewer "A" mortgages to be processed.
However, management does not believe that inflation will have a
material impact on the Company's pricing of goods or services since the Company,
generally, has the ability to adjust prices for its technical services to meet
the current market conditions.
ITEM 3 - DESCRIPTION OF PROPERTY
FACILITIES
Our current headquarters in Dallas, Texas consists of approximately
7,899 square feet of leased office space, with the lease expiring on January 31,
2001. The monthly rental amount for all Dallas facilities is $10,268. The
Company also maintains the following facilities:
<TABLE>
<CAPTION>
SQUARE LEASE MONTHLY RENTAL
LOCATION FOOTAGE EXPIRATION AMOUNTS
<S> <C> <C> <C>
Irvine, CA 9,448 square feet 04/30/01 $17,478.80
Orlando, FL 2,400 square feet 01/15/04 $ 4,031.49
Houston, TX 2,749 square feet 08/14/01 $ 2,978.25
Denver, CO 1,400 square feet 08/31/01 $ 1,543.75
Springfield, MO 3,309 square feet 12/01/04 $ 2,757.50
</TABLE>
We believe that these facilities will be adequate for our current and
proposed operations. In the opinion of the Company's management, the Company's
properties are adequately covered by insurance.
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of July 14, 2000 the number and
percentage of outstanding shares of Common Stock beneficially owned by each
person who beneficially owns:
o More than 5% of the outstanding shares of our Common Stock;
o Each of our executive officers;
o Each of our directors; and
o All of our officers and directors as a group.
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<PAGE> 33
Except as otherwise noted, the persons named in this table, based upon
information provided by these persons, have sole voting and investment power
with respect to all shares of Common Stock owned by them.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially % Beneficially
Name of Beneficial Owner Owned 1,2 Owned
------------------------------------------------- ------------ --------------
<S> <C> <C>
Daniel L. Jackson (3)
8150 North Central Expressway, Suite 1700
Dallas, Texas 75206 2,998,975 15.5%
Oslin Nation Trust (4)
8150 North Central Expressway, Suite 1700
Dallas, Texas 75206 2,948,975 15.2%
Rea Capital Corporation (5)
4751 West Park Boulevard, Suite 106-422
Plano, Texas 75903 2,359,800 12.2%
Sarkis J. Kechejian (6)
421 East Airport Freeway
Irving, Texas 75062 1,685,146 8.7%
Bradley M. Pence 100,110 *
Edward P. Rea (7) -- --
Kenneth F. Urbanus (8) 956,903 4.9%
Edward P. Dayton 12,500 *
Tom Deutsch -- --
Jennifer Salsbury -- --
All directors and executive officers as a group
(7 persons) (9) 4,068,488 20.7%
</TABLE>
-------------------------
* Less than 1%.
(1) The rules of the SEC provide that, for the purposes hereof, a person is
considered the "beneficial owner" of shares with respect to which the
person, directly or indirectly, has or shares the voting or investment
power, irrespective of his economic interest in the shares. Unless
otherwise noted, each person identified possesses sole voting and
investment power over the shares listed, subject to community property
laws.
(2) Based on 19,199,578 shares outstanding on July 14, 2000. Shares of
Common Stock subject to warrants that are exercisable within 60 days of
July 14, 2000, are deemed beneficially owned by the person holding such
warrant for the purposes of calculating the percentage of ownership of
such person but are not treated as outstanding for the purpose of
computing the percentage of any other person. All common shares held by
the officers and directors listed above are "restricted securities" and
as such are subject to limitations on resale. The shares held by the
officers and directors may be sold pursuant to Rule 144 under certain
circumstances, subject to certain lock-up agreements.
(3) Includes 2,948,975 shares of Common Stock (which includes 150,000
shares of Common Stock issuable upon the exercise of a warrant) owned
by the Oslin Nation Trust, for which Mr. Jackson serves as trustee.
(4) Includes 150,000 shares of Common Stock issuable upon the exercise of a
warrant.
(5) Includes 150,000 shares of Common Stock issuable upon the exercise of a
warrant.
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<PAGE> 34
(6) Includes 160,000 shares of Common Stock held by the Kechejian
Foundation, which Mr. Kechejian controls. Includes 150,000 shares of
Common Stock issuable upon the exercise of a warrant. Includes the
cancellation of 125,000 shares of Common Stock, which will be canceled
under an agreement with the Oslin Nation Trust and Rea Capital
Corporation. Includes 87,000 shares of Common Stock held by the Sarkis
J. Kechejian Trust, for which Mr. Kechehian serves as trustee. Does not
include 250,000 shares of Common Stock held by Mr. Kechejian's wife.
(7) Does not include 2,359,800 shares of Common Stock (which includes
150,000 shares of Common Stock issuable upon the exercise of a warrant)
owned by Rea Capital Corporation. Mr. Edward P. Rea's wife owns all of
the issued and outstanding shares of capital stock of Rea Brothers,
Ltd. which owns all of the issued and outstanding shares of capital
stock of Rea Capital Corporation. Mr. Rea disclaims beneficial
ownership of the shares owned by his wife, Rea Brothers, Ltd. and Rea
Capital Corporation.
(8) Includes 611,903 shares of Common Stock and a warrant to purchase
300,000 shares of Common Stock held by Occidental Mortgage Corporation,
which Mr. Urbanus controls.
(9) Includes 150,000 shares of Common Stock issuable upon the exercise of a
warrant held by Oslin Nation Trust, for which Mr. Jackson serves as
trustee. Also includes 300,000 shares of Common Stock issuable upon the
exercise of a warrant held by Occidental Mortgage Corporation, which
Mr. Urbanus.
ITEM 5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The executive officers and directors of the Company and their ages as
of the date of this Registration Statement are as follows:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
Daniel L. Jackson (1) 50 Chairman of the Board
Kenneth F. Urbanus (2) 47 President, Chief Operating Officer and
Director
Edward P. Dayton 57 Executive Vice President-Operations and
Secretary
Thomas Deutsch 50 Executive Vice President-National
Production
Jennifer Salsbury 49 Executive Vice President-Risk
Management/Secondary Marketing
Bradley M. Pence (1)(2) 33 Director
Edward P. Rea (1)(2) 59 Director
</TABLE>
-----------------------
(1) Audit committee member.
(2) Compensation committee member.
33
<PAGE> 35
BIOGRAPHICAL INFORMATION
Mr. Daniel L. Jackson has been Chairman of the Board of Directors of
the Company since May 1999. Mr. Jackson has 25 years experience providing
accounting, taxation, and advisory services to various industries and
government. Since 1987, he has been engaged as a Certified Public Accountant,
Certified Management Consultant and Certified Fraud Examiner with Jackson &
Rhodes P.C.
Mr. Kenneth F. Urbanus has been President, Chief Operating Officer and
a director of the Company since October 1999. From 1996 until assuming his
duties at StarNet, he was President, Chief Executive Officer and Senior Vice
President-Production of Occidental Mortgage Company in Irvine, California. From
1992 to 1994, he was a Vice President of CenFed Bank, FSB, where he managed the
government lending department as well as the retail and wholesale lending
activities in Orange and San Diego Counties, California.
Mr. Edward Dayton has been Executive Vice President-Operations of the
Company since August 1999. From 1990 until assuming his duties at StarNet, he
was Regional Division Manager-Wholesale Lending of Stratford Mortgage in Dallas,
Texas.
Mr. Thomas Deutsch has been Executive Vice President-National
Production of the Company since October 1999. From 1996 until assuming his
duties at StarNet, he was Senior Vice President and Director of Wholesale
Lending of Occidental Mortgage Company. From 1987 to 1996, he was Senior Vice
President of Imperial Credit Industries, where he managed the wholesale
division.
Ms. Jennifer Salsbury has been Executive Vice President-Risk
Management/Secondary Marketing of the Company since October 1999. From 1996
until assuming her duties at StarNet, she was Senior Vice President of
Occidental Mortgage Company, where she handled risk management. From 1991 to
1996, she was Senior Vice President-Secondary Marketing of Rancho Mortgage
Corporation, where she was responsible for risk management, quality control, and
corporate training.
Mr. Bradley M. Pence has been a director of the Company since May 1999.
Mr. Pence is not employed by the Company. Since 1995, he has held various
positions with Churchill Capital Company, L.L.C. of Dallas, Texas, where he is
an expert in originating, underwriting and placing large commercial property
transactions.
Mr. Edward P. Rea has been a director of the Company since May 1999.
Mr. Rea is not employed by the Company. Since 1998, he has been an independent
business consultant. From 1994 until 1998, he was President and co-founder of
The Crafters' Marketplace, Ltd. in Ontario, Canada, where he created and
directed a retail chain of 26 craft outlet stores throughout Canada with annual
sales in excess of $35,000,000.
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<PAGE> 36
ITEM 6 - EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table contains information concerning the annual
compensation and long-term compensation payable to named executive officers
during the period for the fiscal year ended March 31, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------------- -------------
FISCAL
YEAR OTHER SECURITIES
NAME AND PRINCIPAL ENDED ANNUAL UNDERLYING ALL OTHER
POSITION MARCH 31, SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
---------------------------- --------- --------- -------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Daniel L. Jackson (1)
Chief Executive Officer 2000 -- -- -- 200,000 --
Kenneth F. Urbanus
President and Chief
Operating Officer 2000 240,000 -- -- 200,000 --
Michael J. Gulinson (2)
Executive Vice President
and Chief Financial Officer 2000 130,000 -- -- 50,000 --
Edward P. Dayton
Executive Vice President- 2000 75,000 (3) -- 50,000 --
Operations
Thomas Deutsch
Executive Vice President-
National Production 2000 108,000 (4) -- 50,000 --
Jennifer Salsbury
Executive Vice President-
Risk Management /
Secondary Marketing 2000 144,000 (5) -- 50,000 --
</TABLE>
-----------------------
(1) Mr. Jackson resigned as our Chief Executive Officer as of February 1,
2000.
(2) Mr. Gulinson resigned as our Executive Vice President-Finance and Chief
Financial Officer as of June 7, 2000.
(3) Mr. Dayton's bonus consists of two basis points on all closed loans.
(4) Mr. Deutsch's incentive bonus consists of two basis points of funded
loans for the first $10,000,000 during a month and four basis points of
funded loans over $10,000,000 during a month.
(5) Ms. Salsbury's monthly incentive bonus consists of one and a half basis
points on the net gain on loans that are sold each month.
35
<PAGE> 37
The following table provides information with respect to the executive
officers included in the Summary Compensation Table who received option grants
during the period for the fiscal year ended March 31, 2000.
INCENTIVE STOCK OPTIONS
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
[INDIVIDUAL GRANTS]
------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE
---- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Daniel L. Jackson(1) 200,000 25.6% $ 1.00 10/14/2009
Kenneth F. Urbanus(2) 200,000 25.6% $ 1.00 10/14/2009
Michael J. Gulinson(3) 50,000 6.4% $ 3.375 10/31/2009
Edward P. Dayton(4) 50,000 6.4% $ 1.00 10/14/2009
Thomas Deutsch(5) 50,000 6.4% $ 1.00 10/14/2009
Jennifer Salsbury(5) 50,000 6.4% $ 1.00 10/14/2009
</TABLE>
----------------------
(1) Mr. Jackson's options are incentive options, were granted on October
15, 1999, and vest in 50% increments over two years.
(2) Mr. Urbanus's options are incentive options, were granted on October
15, 1999, and vest in 20% increments over five years.
(3) Mr. Gulinson's options expired on June 7, 2000, the date of his
resignation, because none were exercisable on that date.
(4) Mr. Dayton's options are incentive options, were granted on October 15,
1999, and become completely vested as of October 31, 2000.
(5) Mr. Deutsch and Ms. Salisbury's options are incentive options, were
granted on October 15, 1999, and vest in 20% increments over five
years.
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<PAGE> 38
The following table provides information on the stock options that the
executive officers included in the Summary Compensation Table held at March 31,
2000:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
----------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)*
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------------ -------------------------
<S> <C> <C>
Daniel L. Jackson 200,000 $400,000
Kenneth F. Urbanus 200,000 $400,000
Michael J. Gulinson 50,000 --
Edward P. Dayton 50,000 $100,000
Thomas Deutsch 50,000 $100,000
Jennifer Salsbury 50,000 $100,000
</TABLE>
---------------------
* Based on the closing price of the Common Stock on The NASD
Over-the-Counter Bulletin Board on March 31, 2000 of $3.00 per share.
EMPLOYMENT CONTRACTS
As of October 15, 1999, we entered into an employment agreement with
Kenneth F. Urbanus, our President and Chief Operating Officer (the "Urbanus
Agreement"). The Urbanus Agreement provides for an annual base salary of
$240,000, a transportation allowance of $1,000 per month, participation in any
savings and retirement plan and welfare benefit plans adopted by the Company,
and other standard provisions.
As of November 1, 1999, we entered into an employment agreement with
Michael J. Gulinson, our Executive Vice President-Finance and Chief Financial
Officer (the "Gulinson Agreement"). The Gulinson Agreement provided for an
annual base salary of $130,000, a transportation allowance of $500 per month,
participation in any savings and retirement plan and welfare benefit plans
adopted by the Company, and other standard provisions. Mr. Gulinson resigned as
of June 7, 2000.
As of October 1, 1999, we entered into an employment agreement with
Edward P. Dayton, our Executive Vice President-Operations (the "Dayton
Agreement"). The Dayton Agreement provides for an annual base salary of $75,000,
an incentive bonus equal to two basis points on all funded loans, a
transportation allowance of $500 per month, participation in any savings and
retirement plan and welfare benefit plans adopted by the Company, and other
standard provisions.
As of October 1, 1999, we entered into an employment agreement with
Thomas Deutsch, our Executive Vice President-National Production (the "Deutsch
Agreement"). The Deutsch Agreement provides for an annual base salary of
$108,000, an incentive bonus equal to two basis points of funded loans for the
first $10,000,000 during a month and four basis points of funded loans over
$10,000,000 during a month, a transportation allowance
37
<PAGE> 39
of $750 per month, participation in any savings and retirement plan and welfare
benefit plans adopted by the Company, and other standard provisions.
As of October 1, 1999, we entered into an employment agreement with
Jennifer Salsbury, our Executive Vice President-Risk Management/Secondary
Marketing (the "Salsbury Agreement"). The Salsbury Agreement provides for an
annual base salary of $144,000, an monthly incentive bonus equal to one and a
half basis points on the net gain on loans that are sold each month, a
transportation allowance of $500 per month, participation in any savings and
retirement plan and welfare benefit plans adopted by the Company, and other
standard provisions.
1999 STOCK OPTION PLAN
In October 1999, our board of directors adopted, and in December 1999
our shareholders approved, our 1999 Stock Option Plan (the "Option Plan"), under
which both incentive stock options and nonqualified stock options may be granted
to our key employees, non-employee directors, and independent contractors and
consultants. The Option Plan will terminate on October 3, 2009, and no options
may be granted under the Option Plan thereafter. The term of an option granted
under the Option Plan may not exceed ten years from the date of grant of that
option. The options granted under the Option Plan are generally for the maximum
ten-year period. Approximately 91 of our employees may participate in the Option
Plan; though options have been granted to only 11 key employees to date.
The compensation committee administers and interprets the Option Plan.
In that capacity, the compensation committee has complete discretion, within the
limits set forth in the Option Plan, to determine the terms of the options
granted, including the term of, the number of shares subject to, the exercise
price of, and the form of consideration payable upon exercise of each such
option. However, the Option Plan requires the exercise price of each incentive
stock option be at least the fair market value of our Common Stock at the time
of the option grant. Additionally, no incentive stock option may be granted
under the Option Plan to anyone who owns more than 10% of our outstanding Common
Stock unless the exercise price is at least 110% of the fair market value of our
Common Stock at the date of grant and the option is not exercisable for more
than five years after it is granted. The board of directors or the compensation
committee may amend, alter or discontinue the Option Plan without the
stockholders' approval, except that the board of directors or the compensation
committee do not have the power or authority to materially increase the number
of securities that may be issued under the Option Plan or to materially modify
the requirements of eligibility for participation in the Option Plan.
Options to purchase 780,000 shares of Common Stock have been granted.
Of that number, an option to purchase 50,000 shares of Common Stock has been
exercised pursuant to the Option Plan, and an option to purchase 50,000 shares
of Common Stock has expired. The market value as of August 1, 2000 of all shares
of Common Stock subject to outstanding options was $595,000 (based upon the
closing bid price of the Common Stock of $0.875 as reported on the Bulletin
Board on such date).
COMMITTEES
We maintain a Compensation Committee, consisting of three board
members, and an Audit Committee consisting of three board members. The
Compensation Committee is responsible for review and making recommendations to
our board of directors on all matters relating to compensation and benefits
provided to executive management. The members of the Compensation Committee are
Messrs. Pence, Rea and Urbanus. The Compensation Committee has the exclusive
authority to administer our 1999 Stock Option Plan. The Audit Committee assists
our board of directors in exercising its fiduciary responsibilities for
oversight of audit and related matters, including corporate accounting,
reporting and control practices. It is responsible for recommending to our board
of directors the independent auditors for the following fiscal year. The Audit
Committee meets periodically with our management, financial personnel and the
independent auditors to review internal accounting controls and auditing and
financial reporting matters. The members of the Audit Committee are Messrs.
Jackson, Pence and Rea.
38
<PAGE> 40
COMPENSATION OF DIRECTORS
We do not currently pay any remuneration to our non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Other than Mr. Urbanus, none of the members of the compensation
committee is currently or has been, at any time since our incorporation, an
officer or employee of ours. No member of the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 1, 1999, we entered into a consulting agreement with LoanNet
Consulting, which expired on April 30, 2000. Daniel L. Jackson is the sole
director and President of LoanNet Consulting and the Chairman of the Board of
Directors and a stockholder of the Company. The consulting agreement was for one
year and was not renewed upon completion of its term. The agreement provided for
a monthly payment of $14,000. LoanNet Consulting advised our management on
issues concerning strategic planning, acquisitions, and raising of capital.
ITEM 8 - DESCRIPTION OF SECURITIES
Under our Certificate of Incorporation, our authorized capital stock
consists of 63,000,000 shares, which includes 60,000,000 shares of Common Stock,
and 3,000,000 shares of preferred stock, $0.01 par value per share. As of the
date of this Registration Statement, we had outstanding 19,199,578 shares of
Common Stock. Currently, there are approximately 500 holders of record of our
Common Stock. We have reserved for issuance 750,000 shares of Common Stock for
issuance upon exercise of outstanding warrants and 5,000,000 shares of Common
Stock for issuance pursuant to the exercise of stock options which may be
granted to key employees and non- employee directors of the Company and
independent contractors and consultants to the Company.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share of
Common Stock standing in such holder's name on our records with respect to all
matters required by law to be submitted to a vote of our shareholders. The
holders of Common Stock have the sole right to vote, except as otherwise
provided by law or by our Certificate, including provisions governing any
preferred stock. The Common Stock does not have any cumulative voting,
preemptive, subscription or conversion rights. Election of directors and other
general shareholder action requires the affirmative vote of a majority of the
shares of Common Stock represented at a meeting in which a quorum is
represented. The outstanding shares of Common Stock are validly issued, fully
paid and non-assessable.
Subject to the rights of any then outstanding shares of preferred
stock, if any, holders of Common Stock are entitled to receive when, as and if
declared by the board of directors, out of funds legally available therefor,
dividends payable in cash, stock or otherwise. Upon any liquidation, dissolution
or winding up, whether voluntary or involuntary, and after the holders of the
preferred stock shall have been paid in full the amounts to which they are
entitled (if any), or a sum sufficient for such payment in full shall have been
set aside, our remaining net assets will be distributed pro rata to the holders
of the Common Stock, to the exclusion of the holders of preferred stock.
39
<PAGE> 41
WARRANTS AND OPTIONS
We have outstanding warrants to purchase up to 762,500 shares of Common
Stock. All but 12,500 of the warrants are immediately exercisable at $1.00 per
share. The remaining 12,500 warrants are immediately exercisable at $4.625 per
share. Warrants to purchase up to 300,000 shares of our Common Stock expire
October 14, 2004. Warrants to purchase up to 12,500 shares of our Common Stock
expire February 28, 2002. The remaining warrants to purchase up to 450,000
shares of our Common Stock expire December 31, 2002. We have outstanding options
to purchase 680,000 shares of Common Stock, all of which expire October 14,
2009. As of June 30, 2000, options to purchase 50,000 shares of our Common Stock
granted under the Option Plan had been exercised, and options to purchase 50,000
shares of our Common Stock granted under the Option Plan had expired.
PREFERRED STOCK
The board of directors is authorized, without action by the holders of
the Common Stock, to provide for the issuance of our preferred stock and to fix
the designations, powers, preferences and rights of the shares of the preferred
stock and the qualifications, limitations, or restrictions thereof. This
includes, among other things, voting rights, conversion privileges, dividend
rates, redemption rights, sinking fund provisions and liquidation rights. The
issuance of our preferred stock could adversely affect the voting power of the
holders of the Common Stock and could have the effect of discouraging or making
more difficult any attempt by a person or group to attain control of the
Company. We have no present plans to issue any preferred stock.
DELAWARE BUSINESS COMBINATION STATUTE
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "DGCL"). In general, this law prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. An "interested stockholder"
is, generally defined as a person who, together with affiliates and associates,
owns (or within three years prior, did own) 15% or more of the corporation's
voting stock. This provision of Delaware law may have the effect of delaying,
deferring or preventing a change of control of the Company without further
action by the stockholder.
CERTAIN CHARTER PROVISIONS
General
Certain provisions of our Certificate and By-laws could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise as well as the removal of incumbent officers and directors.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to first negotiate with us.
Number of Directors; Removal; Vacancies
The Certificate and the By-laws provide that the number of directors
shall be determined from time to time exclusively by a vote of a majority of our
board of directors then in office; provided, however, that the number of
directors shall not be less than one. The Certificate also provides that our
board of directors shall have the exclusive right to fill vacancies, including
vacancies created by an expansion of the board. The Certificate further provides
that directors may be removed only for cause upon the affirmative vote of at
least 80% of all of the shares of our capital stock then entitled to vote in the
election of directors.
40
<PAGE> 42
Amendments to By-laws
The Certificate provides that a majority of the board of directors or
the holders of all shares of our capital stock then entitled to vote have the
power to amend or repeal our By-laws.
Amendment of the Certificate of Incorporation
Any proposal to amend, alter, change or repeal any provision of the
Certificate requires approval by the affirmative vote of a majority vote of the
voting power of all of the shares of our capital stock entitled to vote.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. of Dallas, Texas serves as the
transfer agent and registrar for shares of our Common Stock.
41
<PAGE> 43
PART II
ITEM 1 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
GENERAL
On October 19, 1999 our Common Stock commenced trading on the NASD
Over-the-Counter Bulletin Board (the "Bulletin Board") under the symbol "SNFN".
There was no material market for our Common Stock prior to October 19, 1999. The
table below sets forth the high and low bid prices of our Common Stock for the
periods indicated, as reported by the Bulletin Board.
These quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Price Range of
Common Stock
--------------
High Low
----- -----
<S> <C> <C>
FISCAL YEAR ENDING MARCH 31, 2000:
Third Quarter .................................. $10.25 $ 2.50
Fourth Quarter ................................. 6.50 2.00
FISCAL YEAR ENDING MARCH 31, 2001:
First Quarter................................... $ 3.00 $0.875
</TABLE>
On August 1, 2000, the closing bid price for a share of our Common
Stock, as reported on the Bulletin Board, was $0.875. As of August 1, 2000,
there were approximately 500 stockholders of record of our Common Stock.
MARKET PRICE
When the trading price of our Common Stock is below $5.00 per share,
our Common Stock is considered to be a "penny stock" which is subject to rules
promulgated by the SEC (Rules 15g-1 through 15g-9) under the Securities Exchange
Act of 1934 (the "Exchange Act"). These rules impose significant requirements on
brokers under these circumstances, including: (a) delivering to customers the
SEC's standardized risk disclosure document; (b) providing to customers current
bids and offers; (c) disclosing to customers the broker-dealers and sales
representative compensation; and (d) providing to customers monthly account
statements.
DIVIDENDS
The Company has never declared or paid any cash dividends on its Common
Stock, and the Company currently intends to retain any future earnings to fund
the development of its business and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. Future declaration
and payment of dividends on its Common Stock, if any, will be determined in
light of the then-current conditions, including the Company's earnings,
operations, capital requirements, financial conditions, restrictions in
financing agreements, and other factors deemed relevant by the Board of
Directors.
42
<PAGE> 44
ITEM 2 - LEGAL PROCEEDINGS
On January 3, 2000, an action was brought against us for breach of
contract and fraud by Joni Baquerizo, James Cunningham, Sam W. Pitts, Jr., and
Jay Robinson, each of whom is a former employee (the "Plaintiffs"). The
Plaintiffs allege that we owe them unpaid wages, unpaid bonuses and stock
options. We believe that the Plaintiffs' claims are without merit and intend to
vigorously defend ourselves in this litigation.
From time to time, we are a defendant, or are threatened to be made a
defendant, in lawsuits encountered in the ordinary course of our business, the
resolution of which should not have a material adverse effect on our financial
position. Except as disclosed above, we are not currently aware of any
litigation currently pending or threatened to which we are subject to or to
which we may be a party.
ITEM 3 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As of June 1, 1999, Jackson & Rhodes, P.C. was dismissed as the
Company's certifying accountants. The Board of Directors approved the engagement
of Farmer, Fuqua, Hunt & Munselle, P.C. as the Company's new principal
certifying accountants as of June 1, 1999. As of May 31, 2000, Farmer, Fuqua,
Hunt & Munselle, P.C. resigned as the Company's certifying accountants. During
its tenure, Farmer, Fuqua, Hunt & Munselle, P.C. had not audited the Company or
any of its subsidiaries. The Board of Directors approved the engagement of
Simonton, Kutac & Barnidge, LLP, as the Company's new principal certifying
accountants as of June 1, 2000.
During each of its tenure as certifying accountant for the Company,
Jackson & Rhodes, P.C. and Farmer, Fuqua, Hunt & Munselle, P.C.'s reports on the
financial statements of the Company did not contain an adverse opinion or
disclaimer of opinion or were qualified or modified as to uncertainty, audit
scope or accounting principles. The dismissal and resignation of Jackson &
Rhodes and Farmer, Fuqua, Hunt & Munselle, respectively, were not the result of
any disagreements on any matter involving accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
ITEM 4 - RECENT SALES OF UNREGISTERED SECURITIES
StarNet (formerly known as Sarkis Capital, Inc.("Sarkis")) was
incorporated in March 1987, in Delaware. On May 13, 1999, Sarkis entered into an
exchange agreement with LoanNet, Inc., a Texas corporation ("LoanNet") and the
shareholders of LoanNet (the "LoanNet Shareholders"), whereby Sarkis agreed to
acquire LoanNet, and its subsidiary, The GM Group, Inc., a Texas corporation
(sometimes referred to herein as "GM") from the LoanNet shareholders in exchange
for shares of Sarkis common stock (the "Exchange Agreement"). Pursuant to the
Exchange Agreement, Sarkis issued 9,000,000 shares of its common stock in
exchange for all of the outstanding shares of LoanNet. The closing of the
Exchange Agreement took place on May 28, 1999. As part of the reorganization,
Sarkis changed its name to "StarNet Financial, Inc." in June 1999. As a result
of this transaction, the LoanNet Shareholders owned approximately 83% of the
then issued and outstanding shares of Sarkis common stock and LoanNet became the
wholly-owned subsidiary of the Company. A Sarkis shareholder was also issued a
warrants to purchase 200,000 shares of our Common Stock at an exercise price of
$1.00 per share. This warrant to purchase 200,000 shares of Common Stock was
exercised in September 1999. The transaction was exempt from registration and
prospectus delivery requirements pursuant to Section 4(2) of the Securities Act.
On September 30, 1999, we closed a private placement of 3,626,473
shares of our Common Stock at a price of $1.00 per share. There were 73
purchasers, of which all but 30 were accredited investors. In connection with
this private placement, we prepared and delivered a private placement memorandum
covering the offering (the
43
<PAGE> 45
"Memorandum"). This Memorandum was prepared in compliance with Rule 506 of
Regulation D promulgated under the Securities Act. The transaction was exempt
from registration and prospectus delivery requirements pursuant to Section 4(2)
of the Securities Act.
Effective as of October 1, 1999, we issued a five-year option to
Occidental Mortgage Corporation to purchase up to 300,000 shares of our Common
Stock at a strike price of $1.00 per share. The transaction was exempt from
registration and prospectus delivery requirements pursuant to Section 4(2) of
the Securities Act.
Effective as of October 1, 1999, we issued 250,000 shares of our
restricted Common Stock to three shareholders of Residential Lenders, Inc.
("RLI") in connection with our acquisition of RLI. We delivered the Memorandum
to the shareholders of RLI. This transaction was exempt from the registration
and prospectus delivery requirements of the Securities Act under Section 4(2)
thereof.
Effective as of January 1, 2000, we issued warrants to purchase 450,000
shares of Common Stock to three stockholders at an exercise price of $1.00 per
share. These warrants expire on December 31, 2002. The transaction was exempt
from registration and prospectus delivery requirements pursuant to Section 4(2)
of the Securities Act.
Effective as of April 28, 2000, we issued (i) 57,557 shares of our
Common Stock and (ii) a two year warrant to purchase up to 12,500 shares of our
Common Stock to Wall Street Mortgage Corporation, a Texas corporation (f/k/a
Wall Street Mortgage of Dallas, Inc.) ("Wall Street"), in connection with our
acquisition of certain assets of Wall Street. This transaction was exempt from
the registration and prospectus delivery requirements of the Securities Act
under Section 4(2) thereof.
On June 30, 2000, we closed a private placement of 1,486,105 shares of
our Common Stock at a price of $1.00 per share. There were 25 purchasers, of
which all but five were accredited investors. In connection with this private
placement, we prepared and delivered a private placement memorandum covering the
offering (the "Memorandum"). This Memorandum was prepared in compliance with
Rule 506 of Regulation D promulgated under the Securities Act. The transaction
was exempt from registration and prospectus delivery requirements pursuant to
Section 4(2) of the Securities Act.
ITEM 5 - INDEMNIFICATION OF OFFICERS AND DIRECTORS
LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Mandatory Indemnification of Directors and Officers
Our Restated Certificate of Incorporation provides that to the fullest
extent permitted by Delaware statutory or decisional law, a director of the
Company shall not be liable to us or our stockholders for any act or omission in
such director's capacity as a director. Any repeal or amendment of the
Certificate of Incorporation, or adoption of any other provision of the
Certificate of Incorporation inconsistent with such exculpatory provisions, by
our stockholders shall be prospective only and shall not adversely affect any
limitation on the liability to the Company or our stockholders of a director of
the Company existing at the time of such repeal, amendment or adoption of an
inconsistent provision.
Additionally, the By-laws provide that, we shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action, suit, or proceeding by
or in the right of the Company) (collectively referred to as an "Action"), by
reason of the fact that he is or was a director or officer of the Company,
against expenses (including, without limitation, attorneys' fees), judgments,
fines, and amounts paid in settlement (collectively, "Expenses") actually and
reasonably incurred by him in connection with such Action, if he
44
<PAGE> 46
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
Action, had no reasonable cause to believe his conduct was unlawful.
We shall also indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding by or in the right of the Company to procure a judgment in
its favor by reason of the fact that he is or was a director or officer of the
Company against Expenses actually and reasonably incurred by him in connection
with the defense or settlement of such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company.
Discretionary Indemnification of Directors and Officers
In addition to the above mandatory indemnification, our By-laws provide
that we may indemnify any person who was or is a party or is threatened to be
made a party to any Action by reason of the fact that he is or was an employee
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise (each such person being hereinafter referred
to as a "Corporate Functionary"), against Expenses actually and reasonably
incurred by him in connection with such Action, if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Company and, with respect to any criminal Action, had no reasonable cause to
believe his conduct was unlawful. The termination of any Action by judgment,
order, settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Company or, with respect to any criminal
Action, that he had reasonable cause to believe that his conduct was unlawful.
An "other enterprise" includes, without limitation, an employee benefit plan,
and a "fine" includes, without limitation, any excise tax imposed with respect
to an employee benefit plan.
We may also indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action, suit, or
proceeding by or in the right of the Company to procure a judgment in its favor
by reason of the fact that he is or was a Corporate Functionary against Expenses
actually and reasonably incurred by him in connection with the defense or
settlement of such action, suit, or proceeding, if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Company.
Notwithstanding the foregoing, no indemnification shall be made in
respect of any claim, issue, or matter as to which a Corporate Functionary shall
have been adjudged to be liable to the Company, unless and only to the extent
that the Court of Chancery or the court in which such action, suit, or
proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
Corporate Functionary is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
45
<PAGE> 47
PART F/S
FINANCIAL STATEMENTS
The financial statements included in the Company's Form 10-KSB for the
fiscal year ended March 31, 2000 have been prepared pursuant to an audit
performed by Simonton, Kutac & Barnidge, LLP and pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company's management, the financial statements include all adjustments necessary
to present fairly the financial position of the Company as of March 31, 2000,
and the Company's results of operations and cash flows for such fiscal year. The
financial statements for this Form 10-SB were filed with the SEC on Form 10-KSB,
for the fiscal year ending March 31, 2000, on July 14, 1999.
PART III
ITEM 1 - INDEX TO EXHIBITS
ITEM 2 - DESCRIPTION OF EXHIBITS
The following Exhibits are included in this Item:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- ------------
<S> <C>
3.1 Articles of Incorporation of StarNet Financial, Inc.
incorporated herein by reference from StarNet's Registration
Statement on Form S-1, File No. 33-13627, filed with the
Securities and Exchange Commission on April 28, 1987
3.2 Amended and Restated Certificate of Incorporation of StarNet
Financial, Inc. under Section 245 of the Delaware General
Corporation Law*
3.3 By-laws of StarNet Financial, Inc. incorporated herein by
reference from StarNet's Registration Statement on Form S-1,
File No. 33- 13627, filed with the Securities and Exchange
Commission on April 28, 1987
3.4 Amended and Restated By-laws of StarNet Financial, Inc.*
10.1 Employment Agreement by and between StarNet and Kenneth F.
Urbanus, dated October 15, 1999*
10.2 Employment Agreement by and between StarNet and Edward P.
Dayton, dated October 1, 1999*
10.3 Employment Agreement by and between StarNet and Thomas
Deutsch, dated October 1, 1999*
10.4 Employment Agreement by and between StarNet and Jennifer
Salsbury, dated October 1, 1999*
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C>
10.5 1999 Stock Option Plan*
10.6 Master Repurchase Agreement between StarNet Mortgage, Inc. and
DLJ Mortgage Capital, Inc., dated May 31, 2000*
10.7 Master Repurchase Agreement between Impac Warehouse Lending
Group and StarNet Financial, Inc. and StarNet Mortgage, Inc.,
dated as of November 5, 1999*
10.8 Mortgage Purchase Agreement by and between First State Bank
Moulton, Texas and StarNet Mortgage, Inc., dated December 23,
1999*
10.9 Mortgage Purchase Agreement by and between Lott State
Bank-Marlin Branch and The GM Group, Inc., dated May 22, 1997*
16.1 Letter on change in certifying accountant incorporated herein
by reference from StarNet's Current Report on Form 8-K, File
No. 33- 13627, filed with the Securities and Exchange
Commission on June 8, 1999, and as amended in StarNet's
Current Report on Form 8-K/A, File No. 33-13627, filed with
the Securities and Exchange Commission on February 1, 2000
16.2 Letter on change in certifying accountant incorporated herein
by reference from Registrant's Current Report on Form 8-K,
File No. 000-30693, filed with the Securities and Exchange
Commission on June 16, 1999
21.1 Subsidiaries of the Registrant*
23.1 Consent of Simonton, Kutac & Barnidge, LLP*
27.1 Financial Data Schedule*
</TABLE>
*Filed herewith.
47
<PAGE> 49
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: August 11, 2000 STARNET FINANCIAL, INC.
By: /s/ Kenneth F. Urbanus
-------------------------------------
Kenneth F. Urbanus
President and Chief Operating Officer
48
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C>
3.1 Articles of Incorporation of StarNet Financial, Inc.
incorporated herein by reference from StarNet's Registration
Statement on Form S-1, File No. 33-13627, filed with the
Securities and Exchange Commission on April 28, 1987
3.2 Amended and Restated Certificate of Incorporation of StarNet
Financial, Inc. under Section 245 of the Delaware General
Corporation Law*
3.3 By-laws of StarNet Financial, Inc. incorporated herein by
reference from StarNet's Registration Statement on Form S-1,
File No. 33- 13627, filed with the Securities and Exchange
Commission on April 28, 1987
3.4 Amended and Restated By-laws of StarNet Financial, Inc.*
10.1 Employment Agreement by and between StarNet and Kenneth F.
Urbanus, dated October 15, 1999*
10.2 Employment Agreement by and between StarNet and Edward P.
Dayton, dated October 1, 1999*
10.3 Employment Agreement by and between StarNet and Thomas
Deutsch, dated October 1, 1999*
10.4 Employment Agreement by and between StarNet and Jennifer
Salsbury, dated October 1, 1999*
10.5 1999 Stock Option Plan*
10.6 Master Repurchase Agreement between StarNet Mortgage, Inc. and
DLJ Mortgage Capital, Inc., dated May 31, 2000*
10.7 Master Repurchase Agreement between Impac Warehouse Lending
Group and StarNet Financial, Inc. and StarNet Mortgage, Inc.,
dated as of November 5, 1999*
10.8 Mortgage Purchase Agreement by and between First State Bank
Moulton, Texas and StarNet Mortgage, Inc., dated December 23,
1999*
10.9 Mortgage Purchase Agreement by and between Lott State
Bank-Marlin Branch and The GM Group, Inc., dated May 22, 1997*
16.1 Letter on change in certifying accountant incorporated herein
by reference from StarNet's Current Report on Form 8-K, File
No. 33- 13627, filed with the Securities and Exchange
Commission on June 8, 1999, and as amended in StarNet's
Current Report on Form 8-K/A, File No. 33-13627, filed with
the Securities and Exchange Commission on February 1, 2000
16.2 Letter on change in certifying accountant incorporated herein
by reference from Registrant's Current Report on Form 8-K,
File No. 000-30693, filed with the Securities and Exchange
Commission on June 16, 1999
21.1 Subsidiaries of the Registrant*
23.1 Consent of Simonton, Kutac & Barnidge, LLP*
27.1 Financial Data Schedule*
</TABLE>
*Filed herewith.
