<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended March 31, 1999, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period
from to
Commission File Number 0-19847
FIRST MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-2960716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3230 Fallow Field Drive 91765
Diamond Bar, California (Zip Code)
(Address of principal executive
offices)
(909) 595-1996
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
None registered:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on June 15, 1999, based on the average bid and asked prices on that
date reported by the OTC Bulletin Board, was $2,081,000. Solely for purposes
of this calculation, all executive officers and directors of the registrant
were considered affiliates as were all beneficial owners of more than 10% of
the registrant's Common Stock. As of June 15, 1999, 5,315,697 shares of the
registrant's Common Stock were issued and outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual meeting
of shareholders of the registrant to be held on September 22, 1999 are
incorporated by reference into Part III hereof. The definitive proxy
statement will be filed with the Securities and Exchange Commission within 120
days after March 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MORTGAGE CORPORATION
Dated June 25, 1999 By S/Clement Ziroli
Clement Ziroli, Chairman of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on June 25, 1999.
By S/Clement Ziroli
Clement Ziroli, Chairman of the Board of
Directors and Chief Executive Officer
(Principal Executive Officer)
By S/Pac W. Dong
Pac W. Dong, Director, Chief Financial
Officer, Controller and Executive Vice
President (Principal Financial and
Accounting Officer)
By S/Bruce G. Norman
Bruce G. Norman, Director, President and
Chief Operating Officer.
By S/Harold Harrigian
Harold Harrigian, Director
By S/Robert E. Weiss
Robert E. Weiss, Director
<PAGE>
First Mortgage Corporation
Index to Financial Statements
Report of Independent Auditors F-2
Financial Statements
Balance Sheet as of March 31, 1999 and 1998 F-3
Statement of Income for the years ended March 31, 1999, 1998 and 1997 F-4
Statement of Stockholders' Equity for the years ended March 31, 1999, 1998
and 1997 F-5
Statement of Cash Flows for the years ended March 31, 1999, 1998 and 1997 F-6
Notes to Financial Statements F-7
All other schedules are omitted because they are not required, are not
applicable or because the information is included in the Company's financial
statements or the notes thereto.
<PAGE>
Report of Independent Auditors
Board of Directors
First Mortgage Corporation
We have audited the accompanying balance sheet of First Mortgage Corporation
as of March 31, 1999 and 1998, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Mortgage Corporation at
March 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1999 in conformity
with generally accepted accounting principles.
Orange County, California
June 4, 1999
<PAGE>
<TABLE>
First Mortgage Corporation
Balance Sheet
<CAPTION>
March 31
1999 1998
<S> <C> <C>
Assets
Cash $14,839,000 $ 8,182,000
Mortgage loans held for sale 45,463,000 53,052,000
Other receivables and servicing advances, net 7,378,000 10,566,000
Capitalized servicing rights, net 12,475,000 7,490,000
Property and equipment, net 761,000 664,000
Prepaid expenses and other assets 765,000 361,000
Note receivable, Fin-West - 130,000
Total assets $81,681,000 $80,445,000
Liabilities and stockholders' equity
Liabilities:
Notes payable, banks $35,469,000 $40,427,000
Sight drafts payable 9,450,000 9,372,000
Accounts payable and accrued liabilities 2,967,000 1,392,000
Deferred income taxes 4,065,000 2,259,000
Total liabilities 51,951,000 53,450,000
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares - None - -
Common stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 5,347,197 in
1999 and 5,808,697 in 1998 2,924,000 4,963,000
Retained earnings 26,806,000 22,032,000
Total stockholders' equity 29,730,000 26,995,000
Total liabilities and stockholders' equity $81,681,000 $80,445,000
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
First Mortgage Corporation
Statement of Income
<CAPTION>
Year ended March 31
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Loan origination income $ 3,857,000 $ 3.303,000 $ 3,426,000
Loan servicing income 7,761,000 7,628,000 7,137,000
Gain on sale of mortgage loans 18,191,000 7,611,000 5,374,000
Interest income 3,862,000 2,527,000 2,165,000
Other income 3,000 5,000 2,000
Total revenues 33,674,000 21,074,000 18,104,000
Expenses:
Compensation and benefits 11,407,000 8,282,000 8,217,000
General and administrative expenses 8,782,000 6,285,000 5,708,000
Amortization of capitalized servicing rights 4,061,000 3,174,000 1,563,000
Interest expense 1,275,000 701,000 690,000
Total expenses 25,525,000 18,442,000 16,178,000
Income before income taxes 8,149,000 2,632,000 1,926,000
Income tax expense 3,375,000 1,101,000 811,000
Net income $ 4,774,000 $ 1,531,000 $ 1,115,000
Basic and diluted earnings per share $ .87 $ .26 $ .19
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
First Mortgage Corporation
Statement of Stockholders' Equity
<CAPTION>
Common stock Retained
Shares Amount earnings Total
<S> <C> <C> <C> <C>
Balance at March 31, 1996 5,883,117 $5,261,000 $19,386,000 $24,647,000
Net income - - 1,115,000 1,115,000
Repurchase of shares (24,000) (114,000) - (114,000)
Balance at March 31, 1997 5,859,117 5,147,000 20,501,000 25,648,000
Net income - - 1,531,000 1,531,000
Repurchase of shares (50,420) (184,000) - (184,000)
Balance at March 31, 1998 5,808,697 4,963,000 22,032,000 26,995,000
Net income - - 4,774,000 4,774,000
Repurchase of shares (461,500) (2,039,000 - (2,039,000)
Balance at March 31, 1999 5,347,197 $2,924,000 $26,806,000 $29,730,000
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
First Mortgage Corporation
Statement of Cash Flows
<CAPTION>
Year ended March 31
1999 1998 1997
<S> <C> <C> <C>
Operating activities
Net income $ 4,774,000 $ 1,531,000 $ 1,115,000
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities:
Provision for deferred income tax4s 1,806,000 426,000 966,000
Provision for losses on foreclosoure (344,000) (459,000) 153,000
Amortization of originated mortgage servicing rights
excess service fee and purchased servicing rights 4,157,000 3,310,000 1,683,000
Depreciation of property and equipment 269,000 220,000 195,000
Originations and purchases of
mortgage loans held for sale (866,641,000)(476,986,000)(353,411,000)
Sales and principal repayments of mortgage loans held
for sale 874,230,000 451,220,000 346,004,000
Change in other receivables and servicing advances 3,532,000 (484,000) (231,000)
Change in prepaid expenses and other assets (404,000) 185,000 345,000
Change in accounts payable and accured liabilities 1,575,000 576,000 51,000
Loss (gain) on sale of assets (1,000) - 7,000
Net cash provided by (used in) operating activities 22,953,000 (20,461,000) (3,123,000)
Investing activities
Sale of commercial paper - - 9,955,000
Originated mortgage servicing rights (9,119,000) (3,436,000) (3,838,000)
Purchase of mortgage servicing rights (23,000) (655,000) (577,000)
Note receivable, Fin-West 130,000 - -
Purchase of property and equipment (369,000) (306,000) (212,000)
Proceeds from sale of assets 4,000 14,000 30,000
Change in due from affiliates - 134,000 60,000
Net cash provided by (used in) investing activities (9,377,000) (4,249,000) 5,418,000
Financing activities
Change in notes payable, banks (4,958,000) 20,255,000) (481,000)
Change in sight drafts payable 78,000 8,418,000 (1,745,000)
Change in note payable, officer - (1,500,000) -
Repurchase of common stock (2,039,000) (184,000) (114,000)
Net cash provided by (used in) financing activities (6,919,000) 26,989,000 (2,340,000)
Increase (decrease) in cash 6,657,000 2,279,000 (45,000)
Cash at beginning of year 8,182,000 5,903,000 5,948,000
Cash at end of year $14,839,000 $ 8,182,000 $ 5,903,000
</TABLE>
<PAGE>
1. Summary of Significant Accounting Policies
Business and Basis of Presentation
First Mortgage Corporation (the Company) is a mortgage banking company that
originates, purchases, warehouses, sells and services primarily first deed of
trust loans (mortgage loans) for the purchase or refinance of owner-occupied
one-to-four family residences through a network of branch offices located in
the states of California, Arizona and Nevada.
Fin-West Group (Fin-West), an affiliated company, owns 89.8% of the Company's
outstanding common stock.
Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of cost or aggregate
market value. Market value is determined by purchase commitments from
investors and prevailing market prices.
Originated Mortgage Servicing Rights and Purchased Servicing Rights
Originated Mortgage Servicing Rights (OMSR)
In accordance with Accounting for Transfers and Servicing of Financial
Assets and Estinguishments of Liabilities (FAS 125), the Company
recognizes OMSRs as an asset separate from the underlying originated
mortgage loan by allocating the total cost of originating a mortgage loan
between the loan and the servicing right based on their respective fair
values. Mortgage servicing rights are carried at the lower of cost, less
accumulated amortization, or fair value.
FAS 125 requires that a portion of the cost of originating a mortgage loan
be allocated to the mortgage servicing right based on its fair value
relative to the loan as a whole. To determine the fair value of the
mortgage rights created during the year, the Company used quoted market
prices of comparable servicing transactions.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Originated Mortgage Servicing Rights and Purchased Servicing Rights
(continued)
Purchased Servicing Rights
The purchase price paid for contractual rights to service mortgage loans
(not exceeding the present value of estimated future net servicing income)
is capitalized and amortized in proportion to, and over, the period in
which estimated servicing revenue is in excess of estimated servicing
costs.
The Company evaluates the net realizable value of purchased servicing
rights based on a disaggregation basis based on loan type, loan
origination year and loan interest rate.
Amortization of originated mortgage servicing rights and purchased servicing
rights is based upon estimates of future prepayment rates for the underlying
mortgage loans which, in turn, are affected by changes in general economic
conditions and prevailing interest rates for home mortgages. Prepayment rates
tend to increase (causing faster amortization) as mortgage interest rates
decline, and are inversely affected as mortgage interest rates increase. The
Company adjusts its amortization rates (which consider differences in mortgage
loans including interest rate, loan type and the loan's age or seasoning) as
estimated prepayment rates vary from those originally anticipated.
Servicing Advances
Servicing advances consist of advances and costs incurred by the Company in
connection with the administration of the foreclosure process for loans being
serviced. The majority of these amounts will be received from either the
insuring agency or proceeds of the foreclosure sale. The Company provides a
reserve for the estimated portion of the advances and costs that are not
reimbursable by the insuring agencies.
Loan Origination Fees
Loan origination fees and certain direct loan origination costs for mortgage
loans held for sale are deferred until the related loans are sold.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Loan Origination Fees (continued)
Loan servicing income, which is generally a fee based on a percentage of the
outstanding principal balances of the mortgage loans serviced by the Company
(or by a subservicer where the Company is the master servicer), is recorded as
income as the installment collections on the mortgages are received by the
Company or the subservicer.
Gain on Sale of Mortgage Loans Held for Sale
Gains or losses on the sale of mortgage loans held for sale are recognized at
the date of sale. Included in gain on sale is the estimated present value of
any servicing fees to be received by the Company and included in capitalized
servicing rights.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation is provided using the straight-line method, except
for automobiles, which are being depreciated using the double declining basis,
over the estimated useful lives of the assets which range from three to eight
years. Leasehold improvements are being amortized over the lesser of the
estimated useful lives of the improvements or the lease terms, using the
straight-line method.
Income Taxes
The Company files a separate federal income tax return and is included in the
State of California combined return of Fin-West.
Statement of Cash Flows
The Company paid interest in 1999, 1998 and 1997 of $1,282,000, $540,000 and
$641,000, respectively.
The Company paid income taxes in 1999, 1998 and 1997 of $1,855,000, $615,000
and $30,000, respectively.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Net Income per Share
As of March 31, 1998, the Company adopted Statement No. 128, Earnings Per
Share, and restated all prior period earnings per share (EPS) data, as
required. Statement No. 128 replaced the presentation of primary and fully
diluted EPS pursuant to APB Opinion No. 15, Earnings Per Share, with the
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted net income per share is computed by
dividing net income by the weighted average number of common shares
outstanding for the period and the dilutive effect, if any, of stock options
and warrants outstanding for the period.
Use of Estimates in the Preparation of Financial Statements
The preparation of the financial statements of the Company requires management
to make estimates and assumptions that affect reported amounts. These
estimates are based on information available as of the date of the financial
statements. Therefore, actual results could differ from those estimates.
Current Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. This statement provides guidance for the way public
enterprises report information about derivatives and hedging in annual
financial statements and in interim financial reports. The derivatives and
hedging disclosure is required for financial statements for fiscal years
beginning after June 15, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The Company is in the
process of evaluating the effect of Statement 133, if any, on the earnings and
financial position of the Company.
<PAGE>
2. Mortgage Loans Held for Sale
<TABLE>
Mortgage loans held for sale consist of the following at March 31, 1999 and
1998:
<CAPTION>
1999 1998
<S> <C> <C>
Principal balance outstanding $46,575,000 $54,381,000
Loan origination discounts (1,072,000) (1,238,000)
Deferred loan fees (40,000) (91,000)
$45,463,000 $53,052,000
</TABLE>
All mortgage loans held for sale are collateralized by first trust deeds on
underlying real properties located primarily in California and may be used as
collateral for the Company's borrowings.
At March 31, 1999, the Company had short-term commitments amounting to
approximately $9,945,000 to fund mortgage loans subject to credit approval.
The Company generally does not engage in forward delivery contracts to hedge
its portfolio.
3. Mortgage Servicing Assets
<TABLE>
Capitalized mortgage servicing assets consist of originated mortgage servicing
rights and purchased servicing rights. Activities are summarized as follows:
<CAPTION>
1999 1998
<S> <C> <C>
Beginning balance $7,490,000 $6,709,000
Additions 9,142,000 4,091,000
Amortization and write-offs (4,071,000) (3,247,000)
Impairment (86,000) (63,000)
Ending balance $12,475,000 $7,490,000
</TABLE>
To determine servicing value impairment at the end of the year, the post-
implementation originated servicing portfolio was disaggregated into its
predominant risk characteristics, namely loan type, interest rate and investor
type. These segments of the portfolio were then valued, using quoted market
prices of comparable servicing rights. The calculated value was then compared
with the book value of each segment to determine if a reserve for impairment
was required.
<PAGE>
4. Other Receivables and Servicing Advances
<TABLE>
Other receivables and servicing advances consists of the following at March
31, 1999 and 1998:
<CAPTION>
1999 1998
<S> <C> <C>
Foreclosures and advances on real estate owned $ 5,283,000 $ 8,798,000
Servicing advances 2,485,000 2,518,000
Other 280,000 264,000
Allowance for possible losses (670,000) (1,014,000)
$7,378,000 $10,566,000
</TABLE>
5. Property and Equipment
<TABLE>
Property and equipment consists of the following at March 31, 1999 and 1998:
<CAPTION>
1999 1998
<S> <C> <C>
Furniture and equipment $2,511,000 $2,190,000
Automobiles 137,000 131,000
Leasehold improvements 403,000 395,000
3,051,000 2,716,000
Less accumulated depreciation and amortization (2,290,000) (2,052,000)
$ 761,000 $ 664,000
</TABLE>
<PAGE>
6. Income Taxes
<TABLE>
Income tax expense for the years ended March 31, 1999, 1998 and 1997 consists
of the following:
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $1,270,000 $ 583,000 $ (112,000)
State 299,000 92,000 (43,000)
1,569,000 675,000 (155,000)
Deferred:
Federal 1,206,000 224,000 701,000
State 600,000 202,000 265,000
1,806,000 426,000 966,000
$3,375,000 $1,101,000 $ 811,000
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of March 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
State income taxes $ 547,000 $ 190,000
Accrued liabilities 216,000 65,000
Deferred loan fees 18,000 41,000
Provision for foreclosure 168,000 253,000
Purchased servicing rights 379,000 313,000
Mark-to-market adjustments 356,000 128,000
Total deferred tax assets 1,684,000 990,000
Deferred tax liabilities:
Originated mortgage servicing rights (5,517,000) (3,030,000)
Capitalized servicing fees (4,000) (7,000)
Accelerated depreciation (98,000) (88,000)
Other (130,000) (124,000)
Total deferred tax liabilities (5,749,000) (3,249,000)
Net deferred tax liabilities $(4,065,000) $(2,259,000)
</TABLE>
<PAGE>
6. Income Taxes (continued)
<TABLE>
Income tax expense computed at the statutory federal income tax rate (34%) and
income tax expense provided in the financial statements differ as follows for
the years ended March 31, 1999, 1998 and 1997:
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax computed at the statutory rate $2,771,000 $ 899,000 $ 655,000
State income tax, net of federal income tax benefit 594,000 194,000 146,000
Other 10,000 8,000 10,000
Income tax expense $3,375,000 $1,101,000 $ 811,000
</TABLE>
7. Notes Payable, Banks
At March 31, 1999, the Company had two line of credit agreements with banks
which provide for borrowings up to $70,000,000 and $35,000,000 with interest
payable monthly at 1.25% per annum or the prime rate of 7.75% at March 31,
1999, depending on the level of borrowings and the compensating balances
maintained. Fiduciary funds are used by the Company to satisfy compensating
balance requirements. At March 31, 1999, borrowings under these lines of
$35,469,000 are collateralized by mortgage loans held for sale. The weighted
average interest rate for the fiscal year ended March 31, 1999 was 2.02%.
The lines of credit are subject to renewal on September 1, 1999 and August 31,
2000, respectively. Management believes the line of credit agreements will be
renewed prior to their expiration. Under the credit agreements, the Company
must comply with certain financial and other covenants, including the
maintenance of a minimum net worth, other financial ratios, and a minimum
servicing portfolio size. Further, absent the consent of the lenders, such
covenants prohibit the Company from declaring or paying any dividends on any
shares of the Company's common stock. At March 31, 1999, the Company was in
compliance with the aforementioned loan covenants.
One of the warehousing lines of credit allows the bank to act as an agent on
behalf of the Company and invest in short term, highly liquid investment grade
securities to the extent that the warehouse line is not utilized to fund
mortgage loans. All investment securities are considered to be available for
sale and carried at fair value. As of March 31, 1999 there were no investment
securities purchased under this line.
<PAGE>
8. Related Party Transactions
The Company leases certain premises from Fin-West, at a monthly rental of
$22,000. Total rent expense for these premises amounted to $264,000 for the
year ended March 31, 1999 and $240,000 for each of the years ended March 31,
1998 and 1997.
The Company paid title insurance fees to an affiliated entity of $582,000,
$308,000 and $151,000 for the years ended March 31, 1999, 1998 and 1997,
respectively.
9. Loan Servicing
<TABLE>
The Company's loan servicing portfolio at March 31, 1999 and 1998 consisted of
the following:
<CAPTION>
1999 1998
<S> <C> <C>
GNMA mortgage-backed securities $ 873,235,000 $ 810,304,000
FHLMC 249,624,000 257,448,000
FNMA 165,403,000 185,459,000
Other 319,470,000 413,640,000
$1,607,732,000 $1,666,851,000
</TABLE>
At March 31, 1999 and 1998, the Company subserviced approximately $80,581,000
and $96,708,000, respectively, of mortgage loans for a nonaffiliated company,
which is included above.
Related fiduciary funds held by the Company in noninterest-bearing accounts
totaled approximately $27,467,000 and $31,474,000 at March 31, 1999 and 1998,
respectively. These funds are not included in the accompanying balance sheets.
The Company is required to pay interest equal to 2% per annum of the average
daily balance of certain fiduciary funds to mortgagors.
The Company had insurance coverage for errors and omissions and employee
fidelity in the amount of $2,300,000 at March 31, 1999 and 1998.
<PAGE>
10. Financial Instruments
The Company is a party to financial instruments with off balance sheet risk in
the normal course of business through the origination and sale of mortgage
loans. These financial instruments include mandatory and optional forward
commitments which involve, to varying degrees, elements of credit and interest
rate risk. At any time the risk to the Company , in the event of default by
the purchaser, is the difference between the contract price and current market
value, which amount is a percentage of the outstanding commitments.
Historically the Company has not incurred losses due to the failure or lack of
performance of the counter parties to these commitments.
Realized gains and losses on mandatory and optional delivery forward
commitments are recognized in the period settlement occurs. Unrealized gains
and losses on mandatory forward commitments are included in the lower of cost
or market valuation adjustment to mortgage loans held for sale. Additionally,
unrealized gains and losses on optional delivery forward commitments to which
mortgages have been allocated are included in the lower of cost or market
valuation adjustment to mortgage loans held for sale.
Statement of Financial Accounting Standards No, 107, Disclosure About Fair
Value of Financial Instruments (FAS 107), requires disclosure of fair value
information about all financial instruments held or owned by a company except
for certain excluded instruments and instruments for which it is not
practicable to estimate fair value. At March 31, 1999, the estimated fair
value of mortgage loans held for sale, mortgage servicing rights and notes
payable approximated the net carrying value of such accounts.
11. Profit Sharing Plan
The Company is a participant in a profit-sharing plan maintained by Fin-West,
covering all full-time employees who have completed at least one year of
service. Annual contributions by the Company to the plan are discretionary and
were $150,000, $50,000 and $0 for the years ended March 31, 1999, 1998, and
1997, respectively.
<PAGE>
12. Commitments and Contingencies
Leases
Minimum annual rental payments under operating leases for office space are as
follows:
2000 $413,000
2001 108,000
2002 75,000
2003 43,000
2004 29,000
$668,000
Net rental payments to nonaffiliated entities of approximately $268,000,
$242,000 and $212,000 have been charged to occupancy expense in the
accompanying statements of operations for the years ended March 31, 1999, 1998
and 1997, respectively.
Litigation
The Company is currently a defendant in certain litigation arising in the
ordinary course of business. It is management's opinion that the outcome of
these actions will not have a material effect on the Company's financial
position, results of operations or cash flows.
13. Stockholders' Equity
Under the Company's 1992 Stock Incentive Plan, the compensation committee of
the Board of Directors is authorized to grant awards to any officer or
employee of the Company. Awards granted can take the form of incentive stock
options, nonqualified stock options or restricted stock or any combination
thereof. A maximum of 625,000 shares of common stock may be issued under the
Plan. Incentive stock options are granted at a price not less than 100% of the
fair market value at date of grant, except for employees who own shares
possessing greater than 10% of total combined voting power whose grant price
shall not be less than 110% of the fair market value at date of grant. The
compensation committee also determines the exercise price of nonqualified
stock options and the purchase price of restricted stock, provided that the
purchase price of restricted stock may not be less than 25% of its fair market
value at the date of grant. Incentive stock options and nonqualified stock
options become exercisable not less than six months after the date of grant,
as determined by the compensation committee. Options
<PAGE>
13. Stockholders' Equity (continued)
remain exercisable until their specified expiration date, but the expiration
date cannot be more than ten years after the date of grant for incentive stock
options.
The Company also has a 1993 Stock Option Plan for Non-Employee Directors (the
Plan) which provides for an aggregate of 100,000 shares of the Company's
common stock to be available for eligible directors. All options granted under
the Plan are to be nonqualified options with an exercise price equal to 100%
of fair market value of the common stock on the date the option is granted.
Each option granted under the Plan may be exercised in full on the 185th day
after the date of grant and terminates five years from the date of grant.
Under the Plan, an option to purchase 5,750 shares of the Company's common
stock has been granted to each nonemployee director in office on the last
business day of each July beginning in 1993.
<TABLE>
The following summarizes stock option activity under both of the Company's
stock plans for the year ended March 31, 1999:
<CAPTION>
Weighed-
Average
Exercise
Options Price Options
March 31, March 31, March 31,
1999 1999 1998
<S> <C> <C> <C>
Options outstanding at
beginning of fiscal year 436,625 $5.09 372,555
Option granted 97,550 $4.43 94,000
Options exercised - -
Options expired (112,025) $6.55 (29,930)
Options outstanding at
end of fiscal year 422,150 $4.54 436,625
Exercise price:
Per share for options
exercised during the
fiscal year n/a n/a
</TABLE>
<PAGE>
13. Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Options Options
March 31, March 31,
1999 1998
<S> <C> <C>
Per share for options outstanding
at end of fiscal year $3.50 - $5.00 $3.50 - $6.80
Weighted average fair value of options granted $1.51 $1.13
Weighted average contractual life
of option outstanding (in years) 2.2 2.3
</TABLE>
All outstanding options as of March 31, 1999 were exercisable. Options
available for future grants under the plans were 302,850 and 288,375 as of
March 31, 1999 and 1998, respectively.
The Company currently follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations
in accounting for its stock options. Under APB 25, because the exercise price
of the Company's employee stock options are equal to the underlying stock on
the date of grant, no compensation expense is recognized. The Company intends
to follow the provisions of APB 25 for future years.
Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123),
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Expected life (years) 4.50 4
Interest rate 6.00% 5.50%
Volatility 0.31 0.31
Dividend yield 0.00% 0.00%
</TABLE
<PAGE>
13. Stockholders' Equity (continued)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The estimated stock-based compensation cost calculated using the assumptions
indicated totaled $83,000 and $59,000 in 1999 and 1998, respectively. The pro
forma net income resulting from the increased compensation cost was $4,691,000
($0.85 per share) and $1,472,000 ($0.25 per share) in 1999 and 1998,
respectively. The effect of stock-based compensation on net income for 1999
and 1998 may not be representative of the effect on pro forma net income in
future years because compensation expense related to grants made prior to 1998
is not considered.
14. Earnings Per Share
</TABLE>
<TABLE>
The following table sets forth the computation of basic and diluted earnings
per share:
<CAPTION
Year ended March 31
1999 1998 1997
<S> <C> <C> <C>
Numerator:
Net income $4,774,000 $1,531,000 $1,115,000
Denominator:
Shares used in computing basic earnings per share 5,506,690 5,847,906 5,872,596
Effect of stock options treated as equivalents
equivalents under the treasury stock method 11,498 1,683 2,065
Denominator for diluted earnings per share 5,518,188 5,849,589 5,874,661
Basic and diluted earnings per share $.87 $.26 $.19
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-70760) pertaining to the First Mortgage Corporation 1992
Stock Incentive Plan and 1993 Stock Option Plan for Non-Employee Directors and
in the related Prospectus of our report dated June 4, 1999, with respect to
the financial statements of First Mortgage Corporation included in its Annual
Report (Form 10-K) for the year ended March 31, 1999.
Orange County, California
June 28, 1999
