<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 12, 2000
INNOVATIVE GAMING CORPORATION OF AMERICA.
(Exact name of registrant as specified in its charter)
MINNESOTA 22482 41-1713864
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4725 AIRCENTER CIRCLE, RENO, NEVADA 89502
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (775) 823-3000
NOT APPLICABLE
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Edward G. Stevenson, former Chairman and Chief Executive Officer of the
Registrant terminated his employment with the Registrant as of May 15, 2000. The
Registrant's press release dated May 12, 2000, which is filed as Exhibit 99.1 to
this Form 8-K/A, is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
See the following Financial Statements, Management Discussion & Analysis and Pro
Forma Financial Information:
Description of Document
- - - - - - -----------------------
(a) Financial Statements and Management Discussion & Analysis of Business
to be Acquired
(i) Audited Financial Statements of First Bankers Mortgage
Services, Inc. for fiscal years ended December 31, 1998 and
December 31, 1997
(ii) Audited Financial Statements of First Bankers Mortgage
Services, Inc. for fiscal year ended December 31, 1999
(iii) Audited Financial Statements of NMortgage, Inc. for fiscal
year ended December 31, 1999 (since inception)
(iv) Management Discussion & Analysis of Business to be Acquired
(b) Pro Forma Financial Information
(c) Exhibits
99.1 Press Release dated May 12, 2000
<PAGE> 3
(a) FINANCIAL STATEMENTS AND MANAGEMENT DISCUSSION & ANALYSIS OF BUSINESS
ACQUIRED.
(i) The consolidated balance sheets of First Bankers Mortgage Services,
Inc. ("FBMS") as of December 31, 1998 and December 31, 1997, and the
consolidated statements of operations, cash flows and shareholders'
equity for the fiscal years ended December 31, 1998 and December 31,
1997, each of which is set forth below, have been derived from the
audited consolidated financial statements of FBMS.
<PAGE> 4
DBC
DAVID B. COHEN & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS AND
MANAGEMENT CONSULTANTS
1771 SPRINGDALE ROAD 5762 OKEECHOBEE BLVD.
CHERRY HILL, NJ 08003 SUITE 405
TEL: (888) 424-1667 WEST PALM BEACH, FLA. 33417
FAX: (609) 424-1713
INDEPENDENT AUDITORS' REPORT
First Bankers Mortgage Services, Inc.
Fort Lauderdale, Florida
Marlton, New Jersey
We have audited the consolidated balance sheets of First Bankers Mortgage
Services, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. 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 audit.
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 consolidated financial position of First Bankers
Mortgage Services, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
David B. Cohen and Company
Certified Public Accountants
West Palm Beach, Florida
March 18, 1999
<PAGE> 5
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
(Audited)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
ASSETS
Cash $ 403,294 $ 279,243
Mortgage loans held for sale 60,407,432 59,711,231
Receivables due on mortgages sold 1,011,868 1,232,150
Advances and other receivables 1,723,460 1,232,519
Prepaid expenses and deferred charges 154,777 136,658
Deferred income taxes (Note 4) 25,628 10,000
Property and equipment, net (Note 1) 922,389 911,589
Related party advances (Note 6) 0 329,000
$ 64,648,848 $ 63,842,390
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Warehouse loans and other notes payable (Note 2) $ 54,616,448 $ 55,331,758
Accounts payable and accrued expenses 5,011,976 4,680,841
Dividends payable 45,535 29,732
Customer deposits 1,084,493 395,902
Federal and state tax liability (Note 4)
Current 283,725 20,000
Deferred 0 232,000
Total Liabilities 61,042,177 60,690,233
COMMITMENTS (NOTES 5 AND 8)
STOCKHOLDERS' EQUITY (NOTE 3)
Preferred stock, 12% cumulative, callable at par value, $10 par; 2,089,500 1,752,000
1,000,000 shares outstanding, 208,950 shares issued and outstanding
Common stock, $.01 par; 10,000,000 shares authorized, 3,000,000 shares 30,000 2,000
issued and outstanding
Additional paid-in capital 1,351,687 1,379,687
Retained earnings 135,484 18,470
Total Stockholders' Equity 3,606,671 3,152,157
$ 64,648,848 $ 63,842,390
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
(Audited)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
<S> <C> <C>
OPERATING REVENUES
Loan originations $ 3,461,348 $ 1,643,357
Sales of mortgage servicing rights 23,449,275 12,761,948
Interest from mortgage operations 5,061,693 2,717,380
Commercial income 223,464 0
Appraisal services 82,985 64,393
TOTAL OPERATING REVENUES 32,278,765 17,187,078
OPERATING EXPENSES
Personnel, including officers' salaries and employee benefits 6,743,825 5,205,653
Sales commissions and fees 15,539,598 7,134,896
General and administrative 4,961,827 1,906,198
Interest 4,434,843 2,578,007
TOTAL OPERATING EXPENSES 31,680,093 16,824,754
Income from operations 598,672 362,324
Provisions for income taxes (Note 4) 173,465 165,000
NET INCOME $ 425,207 $ 197,324
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
(Audited)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS
CAPITAL
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 56,500 $565,000 200,000 $2,000 $1,379,687 $106,476 $2,053,163
Capital Contributions 118,700 1,187,000 - - - - 1,187,000
Dividends declared - - - - - (285,330) (285,330)
Net income for the year - - - - - 197,324 197,324
Balance at December 31, 1997 175,200 $1,752,000 200,000 $2,000 $1,379,687 $18,470 $3,152,157
Capital Contributions 33,750 337,500 2,800,000 $28,000 (28,000) - 337,500
Dividends declared - - - - - (308,193) (308,193)
Net income for the year - - - - - 425,207 425,207
Balance at December 31, 1998 208,950 $2,089,500 3,000,000 $30,000 $1,351,687 $135,484 $3,606,671
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
(Audited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 425,207 $ 197,324
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 324,533 164,518
Deferred income taxes (246,493) 296,000
Mortgage loan reserve 94,217 249,073
Decrease (Increase) in:
Mortgage loans held for sale (854,418) (37,887,521)
Advances and other receivables (490,775) 190,868
Prepaid expenses and deferred charges (18,285) (6,460)
Receivables due on mortgages sold 220,282 (547,017)
Related party advances 329,000 (329,000)
Increase in:
Accounts payable and accrued expenses 334,436 1,769,533
Customers deposits 688,591 111,779
Income tax liability 263,725 11,000
Net cash provided (used) by operating activities 1,070,020 (35,779,903)
INVESTING ACTIVITIES (239,691) (133,841)
Expenditures for property and equipment
Net cash used by investing activities (239,691) (133,841)
FINANCING ACTIVITIES
Borrowings under credit lines, net (751,388) 35,075,689
Capital contributions 337,500 1,187,000
Capital distributions - cash (292,390) (255,598)
Net cash (used) provided by financing activities (706,278) 36,007,091
Net increase in cash 124,051 93,347
Cash beginning of period 279,243 185,896
Cash, end of period $ 403,294 $ 279,243
Interest paid $ 2,034,000 $ 2,025,000
Income taxes paid 21,949 18,536
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred $ 61,186 $ 411,188
For use of equipment
</TABLE>
See notes to consolidated financial statements.
<PAGE> 9
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
(Audited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPERTY AND EQUIPMENT. Property and equipment consists of the
following:
DECEMBER 31, 1998 1997
Furniture and fixtures $162,568 $116,090
Office equipment 235,770 241,838
Leasehold improvements 103,915 87,992
Computer software 58,973 39,402
Computer equipment 310,484 155,018
Telecommunication equipment 85,646 77,322
957,356 717,662
Accumulated depreciation (476,815) (297,759)
$480,541 $419,903
Capitalized Leases
In 1997, the Company entered into a capital lease to purchase computer
equipment for its various branch locations. The term of the agreement
does not exceed a four year period and the asset is capitalized under
the provisions of Financial Accounting standards No. 13.
Property acquired under capital leases consists of the following:
DECEMBER 31, 1998 1997
Equipment $ 662,297 $ 601,111
Accumulated amortization (220,449) (109,425)
$ 441,848 $491,686
The Company also has various equipment acquired under capital lease
agreements which require payments of principal and interest. There were
no capitalized interest costs related to these transactions for either
1998 or 1997. The total lease payments for 1998 and 1997 respectively
were $203,356 and $98,181 net of interest.
<PAGE> 10
The future minimum lease payments under these financing agreements are
as follows:
CAPITAL LEASES
1999 $204,578
2000 122,205
2001 75,855
2002 39,791
Total minimum lease payment 442,429
Less: imputed interest 52,222
Present value of net minimum lease payments $390,207
2. BORROWINGS. Borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
<S> <C> <C>
Warehouse credit line, $25,000,000 limit at December 31, 1998 $21,834,671 $27,383,526
bearing interest at the federal funds rate plus 1.625% (8.750%
December 31, 1998), matures in February 28, 1999 requires certain
equity and leverage ratios, collateralized by first mortgage loans
with a carrying value of $23,219,229 and $29,119,936 for 1998 and
1997 respectively and is guaranteed by the Company's stockholders.
Loan financing credit line, $30,000,000 limit at December 31, -- $27,563,736
1997, bearing interest at the federal funds rate (7.2168 at
December 31, 1997), due on demand, collateralized by first
mortgage loans with a carrying value of $27,846,089. This loan
was converted in 1998 to a repo loan.
Warehouse credit line, $30,000,000 limit at December 31, 1998. 26,310,079 --
Bearing interest at the Cooper River Funding rate plus 1.9625%
(7.15% December 31, 1998) matures in February 1999 requires
certain equity and leverage ratios, collateralized by first
mortgage loans with a carrying value of $27,846,089 for 1998 and
is guaranteed by the Company's stockholders.
Working capital credit facility at December 31, 1998, interest 477,000 180,000
payable monthly at an annual rate equal to the lender's prime rate
plus 1% uncollateralized line of credit matures August 1999.
Warehouse credit line, $7,5000,000 limit at December 31, 1998, 5,398,593 --
bearing interest at the federal funds rate plus .50% requires
certain equity and leverage ratios, collateralized by first
mortgage loans with a carrying value of $5,722,509 and is
guaranteed by the Company's stockholders.
</TABLE>
<PAGE> 11
<TABLE>
<S> <C> <C>
Other notes payable at December 31, 1998, consists of bank debt 596,105 204,496
and notes with private investors, bearing interest rates of 10.25%
to 15.00%, with interest payable as agreed upon.
$54,616,448 $55,331,758
3. STOCKHOLDERS' EQUITY. The Company is required to maintain certain
regulatory net worth requirements. These requirements prohibit the
Company from paying dividends or other distributions which would reduce
its regulatory net worth below standards set by certain regulatory
agencies. The Company's net worth at December 31, 1998 and 1997 was in
excess of the regulatory requirements of $1,469,502 and $1,260,345,
respectively.
Additionally, the company in accordance with requirements under a
warehouse loan agreement is required to maintain a minimum adjusted
tangible net worth of $2,500,000.
4. INCOME TAXES. The Company's provision for income taxes was as follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $419,958 $(131,000)
Deferred (246,493) 296,000
Total Provision for Income Taxes $173,465 $165,000
</TABLE>
The deferred tax consequences of temporary differences in reporting
items for financial statement and income tax purposes are recognized if
appropriate. Realization of the future tax benefit of net operating
loss carryforwards is dependent on the Company's ability to generate
taxable income within the net operating loss carryforward period.
Management has considered this in reaching its conclusion that no
valuation allowance is necessary for financial reporting purposes.
The income tax effect of temporary differences comprising the deferred
tax assets (liabilities) on the accompanying balance sheets is a result
of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets: $25,628 $10,000
Federal tax operating
Loss carryforwards
Other - -
Deferred tax liabilities: -
Federal (152,000)
State - (80,000)
Valuation allowance - -
Net deferred tax asset (liability) $25,628 $(232,000)
</TABLE>
<PAGE> 12
A reconciliation between the statutory federal income tax rate (34%)
and the effective rate of income tax expense for each of the two years
during the period ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Statutory federal income tax rate 34% 34%
Increase/(decrease) in taxes resulting from:
State tax average rates 9 9
Utilization of tax benefit (costs) (14.0) (2.5)
Effective rate 29.0% 45.5%
</TABLE>
5. COMMITMENTS. The Company leases one of its facilities under the terms
of an operating lease from an entity in which the principal
stockholders of the Company are partners. The lease contains an
escalatory clause which is tied to the consumer price index.
Additionally, the Company leases office facilities and equipment under
operating leases with unrelated parties. Rent expense for 1998 and 1997
aggregated $425,000 and $390,490, respectively including $155,150 and
$121,430 on the related party lease.
The total future minimum lease commitments pursuant to these leases are
as follows:
YEAR ENDING DECEMBER 31,
1999 $395,631
2000 212,069
2001 71,998
Minimum lease commitments terminate in year 2001.
6. RELATED PARTY TRANSACTIONS. Amounts due from an officer reflected as
related party advances were repaid during 1998 by the issuance of
additional compensation to the officer.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting
Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" ("SFAS No. 107"), requires that the Company disclose
estimated fair value for its financial instruments. Fair value
estimates, methods and assumptions are set forth below for the
Company's financial instruments:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Assets: $60,407,432 $61,257,892 $59,711,231 $60,539,512
Mortgagee loans held for Sale
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C>
Liabilities: $54,616,448 $54,616,448 $55,331,758 $55,331,758
Warehouse Loans and Other Payables
</TABLE>
The fair value estimates are made at a distinct point in time based on
relevant market information and information about the financial
instruments. Because the Company's financial instruments are not quoted
on a specific market, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment.
<PAGE> 14
(ii) First Bankers Mortgage Services, Inc.
The consolidated balance sheet of First Bankers Mortgage Services, Inc.
and subsidiary as of December 31, 1999, and the related consolidated statements
of operations, stockholders' equity and cash follows for the year then ended ,
each of which is set forth below along with the notes thereto, have been derived
from the audited financial statements of First Bankers Mortgage Services, Inc.
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Bankers Mortgage Services, Inc.
We have audited the accompanying consolidated balance sheet of First Bankers
Mortgage Services, Inc. and subsidiary as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Bankers
Mortgage Services, Inc. and subsidiary as of December 31, 1999, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial statements, certain errors
were discovered by management of the Company during the current year which
resulted in an overstatement of previously reported mortgage loans held for sale
and certain other assets as of December 31, 1998. Accordingly, the 1998
statement of stockholders' equity (deficit) has been restated, and an adjustment
has been made to retained earnings as of January 1, 1999 to correct the errors.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
March 16, 2000
<PAGE> 16
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 275,480
Mortgage loans held for sale, net (Note 3) 14,787,080
Mortgage loans, net (Note 3) 317,400
Furniture, fixtures and equipment, net (Note 4) 851,087
Foreclosed assets, net 299,400
Restricted cash (Note 5) 210,169
Other assets 154,458
------------
$ 16,895,074
------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Warehouse loans (Note 5) $ 18,582,351
Notes payable (Note 6):
Related parties 3,900,948
Other 1,450,160
Accounts payable 1,311,422
Accrued liabilities 2,730,018
Obligations under capital leases 398,391
------------
Total liabilities 28,373,290
------------
Commitments and contingencies (Notes 7 and 9)
Stockholders' deficit (Note 9):
Preferred stock; par value $10;
1,000,000 shares authorized:
Series A, 12%, 250,700 shares issued and outstanding 2,507,000
Series B, 460,656 shares issued and outstanding 4,606,560
Common stock, par value $.01; 10,000,000
shares authorized; 3,000,000 shares issued and outstanding 30,000
Additional paid-in capital 1,812,757
Accumulated deficit (20,434,533)
------------
Total stockholders' deficit (11,478,216)
------------
$ 16,895,074
============
</TABLE>
See notes to consolidates financial statements
<PAGE> 17
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
Revenues:
Loan production and processing revenues $ 1,228,662
Secondary marketing revenues, net 5,500,886
Interest income 3,026,556
-----------
Total revenue 9,756,104
-----------
Expenses:
Loan production and processing 3,712,967
Compensation and employee benefits 6,979,203
General and administrative 3,975,597
Interest expense (Notes 5 and 6):
Related parties 52,600
Other 3,042,722
Provision for estimated loan losses 1,931,780
-----------
Total expenses 19,694,869
-----------
Loss before income tax benefit (9,938,765)
Income tax benefit 224,778
-----------
Net loss $(9,713,987)
===========
</TABLE>
See notes to consolidates financial statements
<PAGE> 18
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Series A and B Additional
preferred stock Common stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998,
(as previously reported) 208,950 $2,089,500 3,000,000 $30,000 $1,351,687 $135,484 $3,606,671
Prior period adjustment (Note 11) (10,464,781) (10,464,781)
----------- -----------
Balances at December 31, 1998,
(as restated) 208,950 2,089,500 3,000,000 30,000 1,351,687 (10,329,297) (6,858,110)
Issuance of 5,000 shares of Series
A preferred stock in satisfaction of
note payable 5,000 50,000 50,000
Issuance of 275,000 shares of Series
B preferred stock in satisfaction of
note payable 275,000 2,750,000 2,750,000
Issuance of 36,750 shares of Series
A preferred stock for cash 36,750 367,500 367,500
Issuance of 185,656 shares of Series
B preferred stock for cash 185,656 1,856,560 1,856,560
Additional paid-in capital resulting from
liabilities assumed by parent 461,070 461,070
Dividends declared on common stock (80,000) (80,000)
Dividends declared on preferred stock (311,249) (311,249)
Net loss (9,713,987) (9,713,987)
----------- ----------
Balances at December 31, 1999 711,356 $ 7,113,560 3,000,000 $30,000 $1,812,757 $(20,434,533 $(11,478,216)
======= =========== ========= ======= ========== ============ ============
</TABLE>
See notes to consolidates financial statements
<PAGE> 19
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(9,713,987)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 288,581
Provision for loan losses 1,931,780
Loss on disposal of furniture and equipment 17,143
Changes in assets and liabilities:
Decrease in mortgage loans held for sale, net 35,499,177
Increase in restricted cash (91,490)
Increase in other assets (2,984)
Decrease in accounts payable (79,295)
Decrease in accrued liabilities (1,891,026)
----------
Net cash provided by operating activities 25,957,899
----------
Cash flows from investing activities:
Capital expenditures (101,522)
Proceeds from disposition of furniture and equipment 7,675
-----
Net cash used in investing activities (93,847)
-------
Cash flows from financing activities:
Decrease in warehouse loans (34,960,793)
Preferred stock issued for cash 2,546,989
Payments on notes payable (131,550)
Common and preferred stock dividends paid (313,339)
Proceeds from notes payable 7,209,353
Payments of capital lease obligations (223,847)
--------
Net cash used in financing activities (25,873,187)
-----------
Decrease in cash and cash equivalents (9,135)
Cash and cash equivalents, beginning 284,615
-------
Cash and cash equivalents, ending $ 275,480
========
Supplemental disclosure of cash flow information:
Cash paid for interest $3,135,900
==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
<TABLE>
<S> <C>
Preferred stock issued in satisfaction
of notes payable and accrued interest $2,800,000
==========
Assumption of Company liabilities by shareholder $ 461,070
==========
Equipment acquired by capital lease $ 140,575
==========
Mortgage loans held for sale reclassified as mortgage loans
receivable $ 374,500
==========
Preferred stock dividends unpaid $ 77,910
==========
</TABLE>
See notes to consolidates financial statements
<PAGE> 20
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
1. Organization and management's plans:
Organization:
First Bankers Mortgage Services, Inc. (the "Company"), is a Florida
mortgage banking company incorporated in 1990. In August 1999, the
Company was acquired by and became a wholly-owned subsidiary of
nMortgage, Inc. (Note 11). The Company is engaged in the origination and
sale of residential mortgages. In addition to conventional mortgage
products, the Company also provides FHA and VA assisted mortgages under
the United States HUD lending program. Mortgages are originated through
retail branches and wholesale lending centers located principally in
Florida.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary United Appraisal Services,
Inc., a Florida corporation, which provided appraisal services through
September 1999. All material intercompany transactions and balances have
been eliminated in consolidation.
Management's plans:
During 1999, the Company reported a $9,713,987 net loss and reported a
stockholders' deficit balance of $11,478,216 at December 31, 1999. In
addition, the Company is not in compliance with certain regulatory
capital requirements administered by various state banking agencies in
certain states in which the Company is licensed to do business, which
subjects the Company to potential mandatory and discretionary actions by
regulators that, if undertaken, could have a direct material effect on
the Company's consolidated results of operations, financial position
and/or cash flows.
The Company has developed plans and strategies to address these factors.
The Company has developed a business plan for 2000 and beyond, which
includes developing and introducing Internet mortgage technologies which
are expected to increase profitability. The Company's plans also include
significantly altering the Company's mortgage closing procedures, which
is expected to reduce the Company's exposure to certain economic risks.
In addition, the Company has incorporated various changes in its
management structure, which the Company believes will improve and
strengthen operations.
In connection with these plans and strategies, the Company intends to
continue working with its parent company in negotiating proposed
business transactions and obtaining additional sources of equity and/or
debt financing.
2. Significant accounting policies:
<PAGE> 21
Use of accounting estimates in financial statement preparation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates, and it is reasonably possible that significant
changes could occur in the near term.
Cash and cash equivalents:
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with an original maturity date
of three months or less to be cash equivalents.
Mortgage loans held for sale, net:
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income. Gain or loss on sales of loans
is recognized at the time of the sale. Origination fees and loan
origination costs on such loans are recognized when the mortgage is
sold, which is normally within 30 days of the origination of the loan.
Interest earned on these mortgages is recognized as income from the time
the mortgage is closed to the time the mortgage is sold.
The Company generally sells the servicing rights on mortgages. The Company
has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights,
and accordingly capitalizes the fair value (quoted market price) of
retained mortgage servicing rights on loans sold. Capitalized mortgage
servicing rights on such loans are amortized in proportion to and over
the period of estimated net servicing income. The carrying amount of
capitalized mortgage servicing rights is evaluated for impairment based
upon quoted market prices of similar loans. At December 31, 1999, the
Company has no retained mortgage servicing rights.
Mortgage loans:
The Company periodically grants mortgage loans to customers. Loans that
management has the intent and ability to hold for the foreseeable future
or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans.
Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred
and recognized as an adjustment to the related loan yield using the
interest method.
<PAGE> 22
The accrual of interest on mortgage loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Loans are placed on non-accrual or charged-off
status at an earlier date if collection of principal or interest is
considered doubtful. All interest accrued but not collected for loans
that are placed on non-accrual or charged-off status is reversed against
interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for loan losses:
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is
collateral dependent.
Furniture, fixtures, equipment and depreciation:
Furniture, fixtures and equipment are stated at cost and depreciation is
provided by the use of the straight-line method over the estimated
useful lives of the assets. The cost of leasehold improvements is
depreciated over the estimated useful lives of the assets or the length
of the respective leases, whichever period is shorter.
The estimated useful lives of furniture, fixtures and equipment are as
follows:
<PAGE> 23
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
Impairment of long-lived assets:
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Based on management's review, the Company does
not believe that any impairments have occurred on long-lived assets
during 1999.
Foreclosed assets:
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenues and
expenses from operations and changes in the valuation allowance are
included in general and administrative expense. Foreclosed assets of
$299,400 at December 31, 1999, are presented net of an allowance for
losses of $198,000.
Restricted cash:
Restricted cash represents cash pledged as collateral on a certain
warehouse loan, held by a third-party financial institution (Note 5).
Comprehensive income:
SFAS No. 130, Reporting Comprehensive Income, establishes requirements for
disclosure of comprehensive income which includes certain items
previously not included in the statements of operations, including
unrealized gains and losses on investments, among others. During the
year ended December 31, 1999, the Company had no items of comprehensive
income.
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
Accounting for Derivative Instruments and Hedging Activities. This
statement is effective for fiscal years beginning after June 15, 2000.
Currently, the Company does not have any derivative financial
instruments and does not participate in hedging activities. Therefore,
management believes that SFAS No. 133 will not have
<PAGE> 24
an impact on its consolidated financial position or results of
operations.
Risks and uncertainties:
During 1999, the Company originated loans with customers concentrated in
the eastern United States, primarily in Florida, Maryland and New
Jersey. Loan originations in these three states collectively represented
approximately 64% of 1999 mortgage loan origination activity.
In the normal course of business, companies in the mortgage banking
industry encounter certain economic and regulatory risks. Economic risks
include interest rate risk, credit risk, and market risk. The Company is
subject to interest rate risk to the extent that in a rising interest
rate environment, the Company will generally experience a decrease in
loan production, which may negatively impact the Company's operations.
Credit risk is the risk of default, primarily in the Company's mortgage
loans that result from the mortgagors' inability or unwillingness to
make contractually required payments. Market risk reflects changes in
the value of mortgage loans available for sale and in commitments to
originate loans.
At December 31, 1999, one warehouse facility accounted for 71% of the
Company's outstanding borrowings. Loss of this credit facility in the
near term could severely impact the Company's ability to fund mortgage
products.
3. Mortgage loans:
The Company's inventory of mortgage loans held for sale consists primarily
of first-trust deed mortgages on residential properties located
throughout the United States. At December 31, 1999, the Company has
mortgage loans held for sale of $14,787,080, which is net of an
allowance for loan losses of $1,386,000, and which are pledged as
collateral on the warehouse loans at December 31, 1999 (Note 5).
Mortgage loans of $317,400 at December 31, 1999, are net of an allowance
for loan losses of $57,100.
4. Furniture, fixtures, and equipment:
Furniture, fixtures and equipment consist of the following at December 31,
1999:
<TABLE>
<S> <C>
Office equipment and furniture $ 1,286,924
Computer hardware and software 430,082
Leasehold improvements 56,172
-----------
1,773,178
Accumulated depreciation (922,091)
-----------
$ 851,087
===========
</TABLE>
<PAGE> 25
5. Warehouse loans:
Under the terms of the Company's warehouse agreements, all mortgage loans
held for sale are pledged as collateral for the warehouse notes payable.
The weighted average interest rate for total warehouse loans was 9.7%.
Warehouse loans consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Warehouse line with a mortgage lending group; total line, $15,000,000;
advances under the line bear interest at the Wall Street Journal
published prime rate of U.S. money center commercial banks plus 1.5%
(9.5% at December 31, 1999); the Company is required to maintain a cash
pledging account; restricted cash at December 31, 1999 under the pledge
agreement was $210,169 $ 13,014,121
Warehouse line with a bank; total line, $15,000,000; advances under the
line bear interest at the one month LIBOR rate plus 4% (10.48% at
December 31, 1999); maturity date May 15, 2000; renewable
annually at the lender's discretion 1,627,393
Warehouse line with a bank; total line, $500,000; advances under the line
bear interest at the note rate of the originated mortgage (7.25% to
8.37% at December
31, 1999); matures March 2000 481,723
Warehouse line with a bank; total line, $400,000; advances under the line
bear interest at the note rate of the originated mortgage (8.5% at
December 31, 1999);
matures May 2000 84,211
Warehouse line with a bank; total line $10,000,000; advances under the
line bear interest at the lender's prime rate plus a margin determined
by the lender's fee and cost schedule in effect on the closing date of
the advance (9.75% at December 31, 1999); line may be termi-
nated by the bank at bank's discretion 488,569
Warehouse line with a bank; total line
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
$2,886,334; advances under the line bear interest at the lender's prime
rate plus the applicable margin determined by the lender's fee schedule
(9.5% at December 31, 1999); due on demand 2,886,334
-----------
$18,582,351
6. Notes payable:
At December 31, 1999, notes payable, consist of the following:
Related parties:
Note payable to officer; unsecured; interest
at 12%; due on demand $ 50,000
Notes payable to parent and affiliate;
unsecured; interest at 8%; maturing
September through December 2000 3,850,948
-------------
3,900,948
-------------
Other:
Note payable to bank; interest at 18%; unsecured; due on demand 477,000
Notes payable to individuals; interest rates ranging from 8% to 18%;
unsecured; notes mature at various dates through August 2000; at
December 31, 1999, $454,473 of the notes payable were in
default 723,160
Note payable to bank; interest at 1.5% over bank's prime rate (10% at
December 31, 1999); loan is collateralized by property owned by the
Company's president and related lease assignments; interest due monthly;
principal balance and any unpaid accrued interest due March 2000 250,000
-------------
1,450,160
-------------
$ 5,351,108
=============
</TABLE>
<PAGE> 27
7. Commitments and contingencies:
Leases:
The Company leases its corporate facilities from a limited partnership in
which the Company's president and vice president have partnership
interests. This non-cancelable operating lease terminates in September
2003. The Company also leases production offices in certain states under
non-cancelable operating leases expiring through December 2002.
Future minimum lease payments under these operating leases are as follows:
<TABLE>
<CAPTION>
Related
party Others Total
<S> <C> <C> <C>
2000 $155,150 $234,350 $ 389,500
2001 155,150 189,750 344,900
2002 155,150 97,550 252,700
2003 103,400 103,400
-------- ----------
$568,850 $521,650 $1,090,500
======== ======== ==========
</TABLE>
Rent expense for the year ended December 31, 1999 was $498,000, of which
$155,150 was to the related party.
In addition, the Company has entered into certain capital lease
agreements. The capitalized cost of all assets acquired under capital
lease obligations is $766,609, less accumulated depreciation of $277,552
at December 31, 1999, and is included in furniture, fixtures and
equipment in the accompanying financial statements. Depreciation expense
incurred on these assets during the year ended December 31, 1999 was
$68,550.
The future minimum lease payments under capital leases and the net present
value of the future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C> <C>
2000 $225,013
2001 205,117
2002 39,073
-------
Total lease payments 469,203
Amount representing interest (70,812)
-------
</TABLE>
Present value of future minimum
<PAGE> 28
<TABLE>
<S> <C>
lease payments $398,391
========
</TABLE>
Employee benefit plan:
The Company has a 401(k) defined contribution plan (the "Plan") which
covers all full-time employees of the Company who have three months of
service and are at least twenty-one years of age. Contributions are
matched at the discretion of the Company, as defined in the Plan. For
the year ended December 31, 1999, the Company's matching contribution
was $21,197.
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
Minimum regulatory capital requirements:
The Company is subject to various regulatory capital requirements
administered by the various state banking agencies in certain states in
which the Company is licensed to do business. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated
results of operations, financial position and/or cash flows. At December
31, 1999, the Company is not in compliance with all regulatory
requirements in certain states.
Indemnifications and mortgage loan repurchases:
Under the terms of the Company's various agreements with third party
investors who purchase mortgage loans from the Company in the secondary
market, the Company may be required to indemnify the investor for
certain losses as a result of the mortgage loan borrower's
non-performance. Additionally, under certain circumstances, the Company
may be required to repurchase loans previously sold. Management believes
it has made adequate provision for these items, which is included in the
mortgage loans held for sale loan loss reserve.
8. Income taxes:
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between
the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
<PAGE> 29
At December 31, 1999, the Company's deferred tax assets consist of the
following:
<TABLE>
<S> <C>
Net operating loss carryforward $ 6,732,000
Allowances for losses 558,000
Deferred loan fees and costs 127,000
-----------
7,417,000
Valuation allowance (7,417,000)
-----------
Net deferred tax asset $ -
===========
</TABLE>
Net operating loss carryforwards of approximately $19.7 million may be
available to offset future taxable income, if any, through 2019. The net
operating loss carryforwards also may be subject to certain limitations
due to ownership changes during 1999. A valuation allowance has been
provided to eliminate the deferred tax assets, as realization of the
assets is not assured.
Based on statutory rates, the Company's expected tax benefit arising from
the net loss would be approximately $3,379,000. The difference between
the expected tax benefit and the actual tax benefit of $224,778 is
primarily due to the tax effect of the valuation allowance.
9. Stockholders' equity:
Series A preferred stock:
At December 31, 1998, the Company had 208,950 shares of Series A, 12%,
cumulative preferred stock outstanding (the "Series A Preferred Stock"),
which is callable at par value ($10 per share). During 1999, the Company
issued 5,000 shares of Series A Preferred Stock in satisfaction of a
$50,000 note payable, and 36,750 shares of Series A Preferred Stock at
$10 per share for total cash proceeds of $367,500.
In 1999, the Company also issued 35,000 shares of Series A Preferred Stock
for $350,000, which are subject to a repurchase option requiring the
Company to repurchase within a one-year period, at the option of the
holder, these preferred shares at par value. Based on the terms of these
specific shareholder agreements, the Company has recorded a liability of
$350,000 in connection with this transaction, which is included in
accrued liabilities at December 31, 1999.
During 1999, the Company declared dividends of $311,249, and paid
$233,339. At December 31, 1999, dividends of $77,910 remain unpaid.
Series B preferred stock:
During 1999, the Company issued 460,656 shares of Series B preferred stock
(the
<PAGE> 30
"Series B Preferred Stock") to an affiliate of the Company, of which
275,000 shares of Series B Preferred Stock were issued in satisfaction
of notes payable and related accrued interest of $2,750,000, and 186,656
shares of Series B Preferred Stock were issued for cash proceeds of
$1,856,560.
Other transactions:
In December 1999, the Company's parent assumed certain accounts payable of
the Company totaling $461,070. In connection with this transaction, the
Company recorded an increase in additional paid-in capital for $461,070,
the amount of the liabilities assumed by the Company's parent.
10. Fair value of financial instruments:
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based upon quoted market
prices. However, in many instances, there are no quoted market prices
for the Company's various financial instruments. In cases where quoted
market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented may not necessarily represent
the underlying fair value of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Mortgage loans held for sale:
The fair value of mortgage loans held for sale is based on commitments
on hand from investors or prevailing market prices. For variable-rate
loans that re-price frequently and with no significant change in credit
risk, fair values are based on carrying values. Fair values for certain
mortgage loans are based on quoted market prices of similar loans sold
(adjusted for differences in loan characteristics). Fair values for
non-performing loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable. The fair value of
mortgage loans held for sale at December 31, 1999 was $14,923,000
(carrying value of $14,787,080).
Warehouse loans and notes payable:
The fair values of warehouse notes payable and notes payable to
non-related parties approximates their carrying values because of the
short maturities of the notes. The
<PAGE> 31
fair values of notes payable to related parties are not practicable to
estimate, based upon the related party nature of the underlying
transactions.
Other financial instruments:
The fair value of other financial instruments (cash and cash
equivalents, accounts payable, and accrued expenses) approximate their
carrying amounts because of the short maturities of those instruments.
11. Prior period adjustment:
Subsequent to the acquisition of the Company by nMortgage, Inc. (Note 1),
management discovered certain errors made in accounting for and
recording losses on the sale of mortgage loans held for sale and
recording mortgage loans at the lower of cost or estimated fair value,
resulting in an understatement of the 1998 loan loss reserves.
Accordingly, the Company's statement of stockholders' equity (deficit)
as of December 31, 1998, has been restated. An adjustment was recorded
to increase the accumulated deficit at December 31, 1998, by
$10,464,781. The correction had no effect on the Company's 1999
consolidated results of operations.
<PAGE> 32
(iii) nMortgage, Inc.
The consolidated balance sheet of nMortgage, Inc. and subsidiaries as
of December 31, 1999, and the related consolidated statements of operations,
stockholders' equity and cash follows for the period from August 23, 1999 (date
of inception) through December 31, 1999, each of which is set forth below along
with the notes thereto, have been derived from the audited financial statements
of nMortgage, Inc.
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
Board of Directors
nMortgage, Inc.
We have audited the accompanying consolidated balance sheet of nMortgage, Inc.
and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows from August 23,
1999 (date of inception) through December 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of nMortgage, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows from August 23, 1999 (date of inception) through December 31,
1999, in conformity with generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
March 16, 2000
<PAGE> 34
nMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 426,248
Mortgage loans held for sale, net (Note 3) 14,787,080
Mortgage loans, net (Note 3) 317,400
Note receivable, related party (Note 3) 61,000
Furniture, fixtures and equipment, net (Note 4) 851,087
Foreclosed assets, net 299,400
Intangible and other assets, net (Note 5) 18,384,805
-----------------
$ 35,127,020
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse loans (Note 6) $ 18,582,351
Notes payable (Note 7):
Related parties 692,000
Other 1,450,160
Accounts payable 1,311,422
Accrued liabilities 2,733,460
Obligations under capital leases (Note 8) 398,391
-----------------
Total liabilities 25,167,784
-----------------
Minority interest 2,507,000
-----------------
Commitments and contingencies (Notes 8, 10, 11 and 13)
STOCKHOLDERS' EQUITY (Note 11):
Preferred stock:
Series A; 5%; par value $.01; 7,500,000 shares authorized; 3,505,000
shares issued and outstanding
(liquidation preference $3,505,000) 35,050
Series B; par value $.01; 500,000 shares authorized;
40,000 shares issued and outstanding 400
Series C; par value $.01;1,500,000 shares authorized,
none issued and outstanding
Series D; par value $10; 500,000 shares authorized,
460,656 shares issued and outstanding 4,606,560
Common stock; par value $.01; 75,000,000 shares
authorized; 12,000,000 shares issued and outstanding 120,000
Additional paid-in capital 6,341,620
Accumulated deficit (3,651,394)
-----------------
Total stockholders' equity 7,452,236
-----------------
$ 35,127,020
=================
</TABLE>
<PAGE> 35
nMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999
<TABLE>
<S> <C>
Revenues:
Loan production and processing revenues $ 352,811
Secondary marketing revenues, net 395,034
Interest income 799,909
-----------------
Total revenue 1,547,754
-----------------
Expenses:
Loan production and processing 728,501
Compensation and employee benefits 1,879,501
General and administrative 1,098,929
Depreciation and amortization 737,629
Interest expense (Note 7):
Related parties 10,357
Other 744,231
Total expenses 5,199,148
-----------------
Net loss $ (3,651,394)
=================
</TABLE>
<PAGE> 36
nMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
Series A through D
preferred stock Common stock Additional
--------------- ------------ paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
---------- -------- ---------- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 12,000,000 shares of
common stock in exchange for
investment in First Bankers
Mortgage Services, Inc. (FBMS)
stock 12,000,000 $120,000 $2,411,000 $2,531,000
Issuance of 3,505,000 shares of
Series A preferred stock for cash 3,505,000 $ 35,050 3,469,950 3,505,000
Issuance of 40,000 shares of
Series B preferred stock to
parent in satisfaction of accounts
payable 40,000 400 460,670 461,070
Issuance of 460,656 shares of
Series D preferred stock in
exchange for FBMS preferred
stock 460,656 4,606,560 4,606,560 4,606,560
Net loss --- --- --- --- --- $(3,651,394) (3,651,394)
----------- ----------
Balances at December 31, 1999 4,005,656 $4,642,010 12,000,000 $120,000 $6,341,620 $(3,651,394) $7,452,236
========= ========== ========== ======== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 37
nMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows used in operating activities:
Net loss $ (3,651,394)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 737,629
Changes in assets and liabilities,
net of business acquisition:
Decrease in mortgage loans held for sale, net 3,545,354
Decrease in other assets 277,797
Increase in accounts payable 61,556
Decrease in accrued liabilities (2,346,027)
------------------
Net cash used in operating activities (1,375,085)
------------------
Cash flows from investing activities:
Cash acquired in business acquisition 780,000
Capital expenditures (84,710)
Issuance of note receivable, related party (61,000)
------------------
Net cash provided by investing activities 634,290
------------------
Cash flows from financing activities:
Decrease in warehouse loans (2,825,439)
Preferred stock issued for cash 3,505,000
Proceeds from notes payable 537,567
Payments of capital lease obligations (50,085)
------------------
Net cash provided by financing activities 1,167,043
------------------
Increase in cash and cash equivalents 426,248
Cash and cash equivalents, beginning
Cash and cash equivalents, ending $ 426,248
==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 925,400
==================
Supplemental disclosure of non-cash investing and
financing activities:
Series B preferred stock issued in satisfaction
of accounts payable $ 461,070
==================
Series D preferred stock issued to parent in
exchange for FBMS preferred stock $ 4,606,560
==================
Equipment acquired by capital lease $ 49,007
==================
Acquisition of FBMS, net of cash acquired:
Fair value of assets acquired $ 12,392,600
Intangible assets 18,525,000
Liabilities assumed (29,166,600)
Fair value of common stock issued (2,531,000)
------------------
Cash acquired $ (780,000)
==================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 38
nMORTGAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999
1. Organization, basis of presentation, and management's plans:
Organization and basis of presentation:
On August 23, 1999, Equitex, Inc., a publicly traded Delaware corporation
("Equitex"), through its subsidiary FBMS Acquisition Corp., entered into
an Agreement and Plan of Reorganization (the "Acquisition Agreement") with
First Bankers Mortgage Services, Inc., a Florida mortgage banking company
("FBMS"), to acquire all of the outstanding common stock of FBMS in
exchange for 250 shares of Equitex preferred stock valued at $2,531,000.
The acquisition was accounted for as a purchase, and the total purchase
price was allocated to the assets and liabilities acquired based on their
estimated fair values, including goodwill of $18,525,000.
FBMS was incorporated in 1990 and is engaged in the origination and sale
of residential mortgages. In addition to conventional mortgage products,
FBMS also provides FHA and VA assisted mortgages under the United States
HUD lending program. Mortgages are originated through retail branches and
wholesale lending centers located principally in Florida.
In accordance with the terms of the Acquisition Agreement, FBMS
Acquisition Corp. was merged with and into FBMS subsequent to the
acquisition. Equitex then formed nMortgage, Inc., a Delaware corporation
("nMortgage"), as a subsidiary holding company of FBMS, and transferred
its common shares of FBMS to nMortgage in exchange for 12,000,000 shares
of nMortgage common stock. Effective December 31, 1999, nMortgage issued
460,656 shares of Series D preferred stock to Equitex to acquire 460,656
shares of FBMS preferred stock (Note 11). The FBMS preferred stock was
originally issued to Equitex prior to the formation of nMortgage for cash
of $1,856,560 and in satisfaction of notes payable and related accrued
interest of $2,750,000.
The accompanying consolidated financial statements include the accounts of
nMortgage, FBMS, and FBMS' wholly-owned subsidiary United Appraisal
Services, Inc., a Florida corporation which provided appraisal services
through September 1999 (collectively referred to as the "Company"). The
results of operations of FBMS and its subsidiary are included in the
Company's consolidated statement of operations from the date of the FBMS
acquisition, August 23, 1999. Minority interest at December 31, 1999,
represents preferred stock of FBMS (Note 10). All material intercompany
transactions and balances have been eliminated in consolidation.
<PAGE> 39
Management's plans:
From August 23, 1999, through December 31, 1999, the Company reported a
net loss of $3,651,394. In addition, FBMS is not in compliance with
certain regulatory capital requirements administered by banking agencies
in certain states in which FBMS is licensed to do business, which subjects
FBMS to potential mandatory and discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Company's
consolidated financial position, results of operations, and/or cash flows.
The Company has developed plans and strategies to address these factors.
The Company has developed a business plan for 2000 and beyond, which
includes developing and introducing Internet mortgage technologies which
are expected to increase profitability. The Company's plans also include
significantly altering mortgage closing procedures, which are expected to
reduce the Company's exposure to certain economic risks. In addition, the
Company has incorporated various changes in its management structure,
which the Company believes will improve and strengthen operations.
In connection with these plans and strategies, the Company also intends to
continue negotiating proposed business transactions (Note 13) and
obtaining additional sources of equity and/or debt financing.
2. Significant accounting policies:
Use of accounting estimates in financial statement preparation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates, and it is reasonably possible that significant changes could
occur in the near term.
Cash and cash equivalents:
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with an original maturity date of
three months or less to be cash equivalents.
<PAGE> 40
Mortgage loans held for sale, net:
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in the aggregate.
Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income. Gain or loss on sales of loans is
recognized at the time of the sale. Origination fees and loan origination
costs on such loans are recognized when the mortgage is sold, which is
normally within 30 days of the origination of the loan. Interest earned on
these mortgages is recognized as income from the time the mortgage is
closed to the time the mortgage is sold.
The Company generally sells the servicing rights on mortgages. The Company
has adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 122, Accounting for Mortgage Servicing Rights, and
accordingly capitalizes the fair value (quoted market price) of retained
mortgage servicing rights on loans sold. Capitalized mortgage servicing
rights on such loans are amortized in proportion to and over the period of
estimated net servicing income. The carrying amount of capitalized
mortgage servicing rights is evaluated for impairment based upon quoted
market prices of similar loans. At December 31, 1999, the Company has no
retained mortgage servicing rights.
Mortgage loans:
The Company periodically grants mortgage loans to customers. Loans that
management has the intent and ability to hold for the foreseeable future
or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination costs, are deferred and recognized as an
adjustment to the related loan yield using the interest method.
Mortgage loans (continued):
The accrual of interest on mortgage loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Loans are placed on non-accrual or charged-off
status at an earlier date if collection of principal or interest is
considered doubtful. All interest accrued but not collected for loans that
are placed on non-accrual or charged-off status is reversed against
interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments
are reasonably assured.
<PAGE> 41
Allowance for loan losses:
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available. Loan losses are charged
against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the
Allowance for loan losses (continued):
principal and interest owed. Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows discounted
at the loan's effective interest rate, the loan's obtainable market price,
or the fair value of the collateral if the loan is collateral dependent.
Furniture, fixtures, equipment and depreciation:
Furniture, fixtures and equipment are stated at cost and depreciation is
provided by the use of the straight-line method over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets or the length of the
respective leases, whichever period is shorter. The estimated useful lives
of furniture, fixtures and equipment are as follows:
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
<PAGE> 42
Impairment of long-lived assets:
The Company reviews long-lived assets and goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Based on management's review, the Company does not
believe that any impairments have occurred on long-lived assets during the
period ended December 31, 1999.
Foreclosed assets:
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenues and
expenses from operations and changes in the valuation allowance are
included in general and administrative expense. Foreclosed assets of
$299,400 at December 31, 1999, are presented net of an allowance for
losses of $198,000.
Restricted cash:
Restricted cash represents cash pledged as collateral on a warehouse loan
held by a third-party financial institution (Notes 5 and 6).
Comprehensive income:
SFAS No. 130, Reporting Comprehensive Income, establishes requirements for
disclosure of comprehensive income which includes certain items previously
not included in the statement of operations, including unrealized gains
and losses on investments, among others. During the period ended December
31, 1999, the Company had no items of comprehensive income.
Stock-based compensation:
SFAS No. 123, Accounting for Stock-Based Compensation, defines a
fair-value based method of accounting for stock-based employee
compensation plans and transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees, and
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and
related interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the
<PAGE> 43
estimated fair value of the Company's stock at the date of the grant over
the amount an employee must pay to acquire the stock.
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement is effective for fiscal years beginning after June 15, 2000.
Currently, the Company does not have any derivative financial instruments
and does not participate in hedging activities. Therefore, management
believes that SFAS No. 133 will not have an impact on its consolidated
financial position or results of operations.
Risks and uncertainties:
During the period ended December 31, 1999, FBMS originated loans with
customers concentrated in the eastern United States, primarily in Florida,
Maryland, North Carolina, New Jersey and the District of Columbia. Loan
originations in these five areas collectively represented approximately
57% of mortgage loan origination activity during the period ended December
31, 1999.
In the normal course of business, companies in the mortgage banking
industry encounter certain economic and regulatory risks. Economic risks
include interest rate risk, credit risk, and market risk. The Company is
subject to interest rate risk to the extent that in a rising interest rate
environment, the Company will generally experience a decrease in loan
production, which may negatively impact the Company's operations. Credit
risk is the risk of default, primarily in the Company's mortgage loans
that result from the mortgagors' inability or unwillingness to make
contractually required payments. Market risk reflects changes in the value
of mortgage loans available for sale and in commitments to originate
loans.
At December 31, 1999, one warehouse facility accounted for 71% of the
Company's outstanding borrowings (Note 6). Loss of this credit facility in
the near term could severely impact the Company's ability to fund mortgage
products.
3. Mortgage loans and related party note receivable:
The Company's inventory of mortgage loans held for sale consists primarily
of first-trust deed mortgages on residential properties located throughout
the United States. At December 31, 1999, the Company has mortgage loans
held for sale of $14,787,080, which is net of an allowance for loan losses
of $1,386,000, and which are pledged as collateral on warehouse loans at
December 31, 1999 (Note 6). In addition, mortgage loans of $317,400 at
December 31, 1999, are net of an allowance for loan losses of $57,100.
At December 31, 1999, the Company also has a $61,000 note receivable from
the president of FBMS. The note is unsecured, due on demand, and bears
interest at 10% per annum.
<PAGE> 44
4. Furniture, fixtures, and equipment:
Furniture, fixtures and equipment consist of the following at December 31,
1999:
<TABLE>
<S> <C>
Office equipment and furniture $ 732,249
Computer hardware and software 225,476
Leasehold improvements 13,491
-----------------
971,216
Less accumulated depreciation (120,129)
-----------------
$ 851,087
=================
</TABLE>
5. Intangible and other assets:
Intangible and other assets consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Goodwill $ 18,525,106
Restricted cash 210,169
Other 267,030
-----------------
Less accumulated amortization (617,500)
-----------------
$ 18,384,805
=================
</TABLE>
Goodwill represents the cost of the Company's investment in subsidiaries
in excess of the net tangible assets acquired. Goodwill is being amortized
using the straight-line method over ten years.
6. Warehouse loans:
Under the terms of the Company's warehouse agreements, all mortgage loans
held for sale are pledged as collateral for the warehouse notes payable.
The weighted average interest rate for total warehouse loans was 9.7%.
Warehouse loans consist of the following at December 31, 1999:
<PAGE> 45
<TABLE>
<S> <C>
Warehouse line with a mortgage lending group; total line, $15,000,000;
advances under the line bear interest at the Wall Street Journal published
prime rate of U.S. money center commercial banks plus 1.5% (9.5% at
December 31, 1999); the Company is required to maintain a cash pledging
account; restricted cash at December 31, 1999 under the pledge agreement
was $210,169 $ 13,014,121
Warehouse line with a bank; total line, $15,000,000; advances under the
line bear interest at the one month LIBOR rate plus 4% (10.48% at December
31, 1999); matures May 2000; renewable annually at the lender's discretion 1,627,393
Warehouse line with a bank; total line, $500,000; advances under the line
bear interest at the note rate of the originated mortgage (7.25% to 8.37%
at December 31, 1999); matures March 2000 481,723
Warehouse line with a bank; total line, $400,000; advances under the line
bear interest at the note rate of the originated mortgage (8.5% at
December 31, 1999); matures May 2000 84,211
Warehouse line with a bank; total line $10,000,000; advances under the
line bear interest at the lender's prime rate plus a margin determined by
the lender's fee and cost schedule in effect on the closing date of the
advance (9.75% at December 31, 1999); line may be terminated by the bank
at bank's discretion 488,569
Warehouse line with a bank; total line $2,886,334; advances under the line
bear interest at the lender's prime rate plus the applicable margin
determined by the lender's fee schedule (9.5% at December 31, 1999); due
on demand 2,886,334
-------------------
$ 18,582,351
===================
</TABLE>
<PAGE> 46
7. Notes payable:
At December 31, 1999, notes payable, consist of the following:
<TABLE>
<S> <C>
Related parties:
Note payable to officer; unsecured; interest
at 12%; due on demand $ 50,000
Notes payable to parent and affiliate;
unsecured; interest at 8%; maturing
September through December 2000 642,000
-------------------
692,000
-------------------
Other:
Note payable to bank; interest at 18%; unsecured; due on demand 477,000
Notes payable to individuals; interest rates ranging from 8% to 18%;
unsecured; notes mature at various dates through August 2000; at December
31, 1999, $454,473 of the notes payable were in default 723,160
</TABLE>
<PAGE> 47
<TABLE>
<S> <C>
Note payable to bank; interest at 1.5% over bank's prime rate (10% at
December 31, 1999); loan is collateralized by property owned by FBMS's
president and related lease assignments; interest due monthly; principal
balance and any unpaid accrued interest due
March 2000 250,000
------------------
1,450,160
------------------
$ 2,142,160
==================
</TABLE>
8. Commitments and contingencies:
Leases:
The Company leases its corporate facilities from a limited partnership in
which the FBMS president and vice president have partnership interests.
This non-cancelable operating lease terminates in September 2003. The
Company also leases production offices in certain states under
non-cancelable operating leases expiring through December 2002.
Future minimum lease payments under these operating leases are as follows:
<TABLE>
<CAPTION>
Related
party Others Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
2000 $ 155,150 $ 234,350 $ 389,500
2001 155,150 189,750 344,900
2002 155,150 97,550 252,700
2003 103,400 103,400
----------------- ----------------- -----------------
$ 568,850 $ 521,650 $ 1,090,500
================= ================= =================
</TABLE>
Rent expense for the period ended December 31, 1999 was $166,000, of which
$51,700 was to the related party.
In addition, the Company has entered into certain capital lease
agreements. The capitalized cost of all assets acquired under capital
lease obligations is $511,907, less accumulated depreciation of $22,850 at
December 31, 1999, and is included in furniture, fixtures and equipment in
the accompanying financial statements. Depreciation expense incurred on
these assets during the period ended December 31, 1999 was $22,850.
<PAGE> 48
The future minimum lease payments under capital leases and the net present
value of the future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
2000 $ 225,013
2001 205,117
2002 39,073
-----------------
Total lease payments 469,203
Amount representing interest (70,812)
-----------------
Present value of future minimum
lease payments $ 398,391
=================
</TABLE>
Employee benefit plan:
FBMS has a 401(k) defined contribution plan (the "Plan") which covers all
full-time employees of FBMS who have three months of service and are at
least twenty-one years of age. Contributions are matched at the discretion
of FBMS, as defined in the Plan. For the period ended December 31, 1999,
FBMS' matching contribution was $4,928.
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
Minimum regulatory capital requirements:
The Company is subject to various regulatory capital requirements
administered by various state banking agencies in certain states in which
the Company is licensed to do business. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial position,
results of operations, and/or cash flows. At December 31, 1999, the
Company is not in compliance with all regulatory requirements in certain
states.
Indemnifications and mortgage loan repurchases:
Under the terms of the Company's various agreements with third party
investors who purchase mortgage loans from the Company in the secondary
market, the Company may be required to indemnify the investor for certain
losses as a result of the mortgage loan borrower's non-performance.
Additionally, under certain circumstances, the Company
<PAGE> 49
may be required to repurchase loans previously sold. Management believes
it has made adequate provision for these items, which is included in the
mortgage loans held for sale loan loss reserve.
9. Income taxes:
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
At December 31, 1999, the Company's deferred tax assets consist of the
following:
<TABLE>
<S> <C>
Net operating loss carryforward $ 6,732,000
Allowances for losses 558,000
Deferred loan fees and costs 127,000
-------------
7,417,000
Valuation allowance (7,417,000)
-------------
Net deferred tax asset $ -
=============
</TABLE>
Net operating loss carryforwards of approximately $19.7 million may be
available to offset future taxable income, if any, through 2019. The net
operating loss carryforwards may be subject to certain limitations due to
ownership changes during 1999. A valuation allowance has been provided to
eliminate the deferred tax assets, as realization of the assets is not
assured.
10. Subsidiary stock transactions:
At December 31, 1999, minority interest of $2,507,000 consists of 250,700
shares of issued and outstanding FBMS Series A preferred stock. This
Series A, 12%, cumulative preferred stock is callable at its par value of
$10 per share.
11. Stockholders' equity:
Series A preferred stock:
In 1999, the Company issued 3,505,000 shares of Series A, 5% convertible
preferred stock (the "Series A Preferred Stock") for $1 per share. The
Series A Preferred Stock has a liquidation preference of $1 per share, and
no voting rights.
The Series A Preferred Stock holders are entitled to 5% annual dividends,
calculated on the liquidation preference. At the option of the Company,
dividends may be paid either
<PAGE> 50
in cash or in additional shares of Series A Preferred Stock. Each share of
Series A Preferred Stock, plus any unpaid dividends, will automatically
convert on November 1, 2000 into one share of the Company's common stock,
or upon the merger of the Company with or into another company, each share
of Series A Preferred Stock will automatically convert into two shares of
common stock.
Series B preferred stock:
In December 1999, the Company issued 40,000 shares of Series B convertible
preferred stock (the "Series B Preferred Stock") in exchange for the
investors assumption of $461,070 of the Company's accounts payable. The
Series B Preferred Stock holder is not entitled to dividends, does not
have a liquidation preference, and has no voting rights. The Series B
Preferred Stock automatically converts into 10 shares of common stock upon
the merger of the Company with or into another company.
Series D preferred stock:
Effective December 31, 1999, the Company issued 460,656 shares of Series D
preferred stock (the "Series D Preferred Stock") to Equitex to acquire
460,656 shares of FBMS preferred stock. The FBMS preferred stock was
originally issued to Equitex prior to the formation of the Company for
cash of $1,856,560 and in satisfaction of notes payable and related
accrued interest of $2,750,000.
Stock option plan:
In October 1999, the Company adopted the 1999 Stock Option Plan (the
"Plan"), which provides for the issuance to employees, officers, directors
and consultants of the Company, options to purchase up to 1,500,000 shares
of the Company's common stock, which has been reserved by the Company for
issuance under the Plan. Options may be granted as incentive stock options
or non-statutory options. For options that are granted, the exercise
period may not exceed ten years.
In December 1999, the Company granted options to two officers/directors of
the Company to purchase up to 800,000 shares of the Company's common stock
at $1.00 per share, which was the estimated fair value of the common stock
on the date of grant, as determined by management. None of these options,
which expire in December 2004, were exercised during 1999.
Had compensation cost for the Company's stock options been determined on
the fair value of such awards at the grant date, consistent with the
methods of SFAS No. 123, the Company's net loss would have been
$3,739,000. The fair value of each option granted was estimated on the
date of grant using the minimum value pricing method utilizing the
following assumptions: dividend yield, 0%; weighted average expected
option term, two years; risk free interest rate, 6%.
<PAGE> 51
12. Fair value of financial instruments:
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation.
Fair value is best determined based upon quoted market prices. However, in
many instances, there are no quoted market prices for the Company's
various financial instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. SFAS No. 107, Disclosures about
Fair Values of Financial Instruments, excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented may
not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Mortgage loans held for sale:
The fair value of mortgage loans held for sale is based on commitments on
hand from investors or prevailing market prices. For variable-rate loans
that re-price frequently and with no significant change in credit risk,
fair values are based on carrying values. Fair values for certain mortgage
loans are based on quoted market prices of similar loans sold (adjusted
for differences in loan characteristics). Fair values for non-performing
loans are estimated using discounted cash flow analyses or underlying
collateral values, where applicable. The fair value of mortgage loans held
for sale at December 31, 1999 was $14,923,000 (carrying value of
$14,787,080).
Warehouse loans and notes payable:
The fair values of warehouse loans and notes payable to non-related
parties approximates their carrying values because of the short maturities
of the notes. The fair values of notes payable to related parties are not
practicable to estimate, based upon the related party nature of the
underlying transactions.
Other financial instruments:
The fair value of other financial instruments (cash and cash equivalents,
the note receivable, accounts payable, and accrued expenses) approximate
their carrying amounts because of the short maturities of those
instruments.
13. Proposed sale of nMortgage, Inc.:
On September 22, 1999, the Company entered into a letter of intent,
whereby all of the outstanding common stock of the Company is to be
acquired by Innovative Gaming
<PAGE> 52
Corporation of America ("IGCA"), an SEC reporting company whose common
stock trades on the Nasdaq SmallCap Market. Under the terms of this
proposed transaction, the Company's shareholders are to receive
approximately 46,000,000 shares of IGCA common stock in exchange for all
outstanding shares of nMortgage, Inc., assuming that there will be
approximately 16,000,000 shares of IGCA common stock outstanding on a
fully-diluted basis, before the transaction.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As a condition of the proposed
transaction, IGCA is to dispose of its gaming assets, resulting in
nMortgage as the sole business operation of IGCA.
There are a number of material conditions that must be satisfied prior to
the completion of this transaction, including any required approval by the
Company's shareholders, the disposal of IGCA's gaming assets, the
negotiation and execution of a definitive agreement between the Company
and IGCA, and approval from all governmental bodies or agencies and
regulatory authorities. There is no assurance that the conditions
summarized above will be satisfied, or that the transaction will occur
consistent with the terms outlined above.
<PAGE> 53
(iv) MANAGEMENT DISCUSSION & ANALYSIS OF BUSINESS TO BE ACQUIRED.
Subsequent to the acquisition of First Bankers Mortgage Services, Inc. ("FBMS")
by nMortgage, Inc. ("nMortgage"), management discovered certain errors made in
accounting for and recording losses on the sale of mortgage loans held for sale
and recording mortgage loans at the lower of costs or estimated fair value,
resulting in an understatement of the 1998 loan loss reserves. These adjustments
were recorded in 1999 as a prior period adjustment. The following Management
Discussion and Analysis has been prepared using 1998 results, adjusted for
errors. The adjusted 1998 results, which also include certain reclassifications
to be consistent with the 1999 classifications, are as follows:
Revenues
Loan Production and Processing Revenues $ 3,717,006
Secondary Marketing Revenues, net 10,231,234
Interest Income 4,487,220
-----------
Total Revenue $18,435,460
Expenses
Loan Production and Processing $ 9,649,778
Compensation and Employee Benefits 10,071,613
General and Administrative 4,358,125
Interest Expense 3,227,970
Provisions for Estimated Loan Losses 1,167,550
-----------
Total Expenses $28,475,036
Net Loss ($10,039,576)
REVENUES: Revenues for the year ended December 31, 1999, were approximately
$9,756,000, compared to revenues of approximately $18,435,460 for the year ended
December 31, 1998. The reason for the decline in revenues was a direct result of
a decline in loan production. Mortgage originations decreased from approximately
$1.672 billion for the year ended December 31, 1998, to approximately $491
million for the year ended December 31, 1999. The reduced originations resulted
in a decrease in closed loans to approximately $324 million for the year ended
December 31, 1999, from approximately $855 million for the year ended December
31, 1998. The reduction in closed loans caused a decrease in loan sales from
approximately $842 million for the year ended December 31, 1998 to approximately
$374 million for the year ended December 31, 1999. The drop in production was
primarily caused by a decrease in the amount of mortgage refinancings that FBMS
and nMortgage closed in 1999 compared to 1998. The drop in closed loans also
resulted in a decrease in revenues from secondary marketing, as the FBMS and
nMortgage were selling fewer loans.
<PAGE> 54
LOAN PRODUCTION AND PROCESSING EXPENSE: Loan production and processing expenses
decreased to $3,713,000 for the year ended December 31, 1999 from $9,650,000 for
the year ended December 31, 1998. The primary reason for the decline in loan
production and processing expenses in 1999 compared to 1998 was a reduction in
the amount of commissions of approximately $5,452,000 paid to brokers as a
result of the reduced dollar amount of loans originated and closed. Other costs,
such as appraisal fees, credit reports and inspection fees also decreased as a
result of the reduction in loan originations and closings.
COMPENSATION AND EMPLOYEE BENEFITS: Compensation and employee benefits decreased
to approximately $6,979,000 for the year ended December 31, 1999, from
approximately $10,072,000 for the year ended December 31, 1998. The main reason
for the reduction was a decrease in commissions of $1,285,000 paid to loan
officers in 1999 compared to 1998 as FBMS and nMortgage originated, closed and
sold substantially fewer loans in 1999 compared to 1998. Additionally, employee
compensation was lower by approximately $1,243,000 and related benefits were
also lower in 1999 compared to 1998, as fewer employees were necessary to
process the reduced loan volume.
GENERAL AND ADMINISTRATIVE: General and administrative expenses decreased to
approximately $3,976,000 for the year ended December 31, 1999, from
approximately $4,358,000 for the year ended December 31, 1998. The reason for
the decline was a reduction in telephone/communication expenses, office supplies
and postage and courier costs, all of which were impacted by lower loan
activity.
INTEREST EXPENSE: Interest expense for the year ended 1999 decreased to
approximately $3,095,000 from approximately $3,228,000 for the year ended
December 31, 1998. The slight decline is interest expense in 1999 compared to
1998 was attributable to lower balances on FBMS' and nMortgage's warehouse lines
of credit, specifically during the last half of 1999. However, the reduced
interest expense from lower loan balances was partially offset by increasing
interest rates during 1999.
PROVISION FOR ESTIMATED LOAN LOSSES: The provision for estimated loan losses
increased to approximately $1,932,000 in 1999 from approximately $1,167,000 in
1998. The increase in 1999 compared to 1998 was attributable to management's
analysis of the fair market value of mortgages held for sale and adjusting the
revenue accordingly. Because of increasing interest rates, new management
believed that it was necessary to be more cautious in providing estimates of
potential losses.
<PAGE> 55
(b) PRO FORMA FINANCIAL INFORMATION.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
On December 31, 1999, nMortgage, Inc. (nMortgage or the Company) entered into a
definitive merger agreement with Innovative Gaming Corporation of America
(IGCA). At closing, nMortgage's stockholders will receive approximately
46,000,000 shares of IGCA common stock in exchange for their nMortgage common
stock. The Company plans to record this transaction as a reverse merger and
recapitalization. The following unaudited pro forma condensed statement of
operations for the year ended December 31, 1999 gives effect to the transaction
as if it had occurred effective January 1, 1999. The following unaudited
condensed balance sheet as of December 31, 1999 gives effect to the transaction
as if it occurred on December 31, 1999.
These financial statements do not purport to present results which would
actually have been obtained if the transaction had been in effect during the
period covered or any future results which may in fact be realized. These
financial statements should be read only in conjunction with the accompanying
notes and the separate historical financial statements and notes thereto of
Innovative Gaming Corporation of America and nMortgage, Inc.
<PAGE> 56
INNOVATIVE GAMING CORPORATION OF AMERICA
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INNOVATIVE INNOVATIVE
GAMING GAMING
CORPORATION PRE-MERGER CORPORATION
OF AMERICA ADJUSTMENTS OF AMERICA
(HISTORICAL) (NOTE 3) (AS ADJUSTED)
------------------ ----------------- -----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $140 $1,000 (A) $1,140
Mortgage loans held for sale 0 0
Receivables due on mortgage 0 0
Accounts receivable, net 759 (759) (A) 0
Current portion of notes receivable 188 (188) (A) 0
Other receivables 0 0
Inventories 4,576 (4,576) (A) 0
Other current assets 655 (655) (A) 0
------------------ ----------------- -----------------
Total current assets 6,318 (5,178) 1,140
PROPERTY AND EQUIPMENT, NET 707 (707) (A) 0
NOTES RECEIVABLE, LESS CURRENT PORTION 268 (268) (A) 3,759
3,000 (A)
759 (A)
OTHER ASSETS 0 0
INTANGIBLE ASSETS, NET 765 (765) 0
------------------ ----------------- -----------------
$8,058 ($3,159) $4,899
================== ================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term warehouse borrowings $0 $0
Accounts payable 585 585
Notes payable, current portion 592 (592) (A) 0
Obligations under capital lease, current portion 0
Accrued liabilities 1,110 1,110
------------------ ----------------- -----------------
Total current liabilities 2,287 (592) 1,695
LONG-TERM LIABILITIES:
Notes payable, less current portion 3,131 3,131
Capital lease obligations, less current portion 0 0
------------------ ----------------- -----------------
Total liabilities 5,418 (592) 4,826
------------------ ----------------- -----------------
Minority interest 0 0 0
------------------ ----------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock
Common stock 90 90
Additional paid-in capital 34,525 34,525
Retained earnings (deficit) (31,975) (2,567) (A) (34,542)
------------------ ----------------- -----------------
Total shareholders' equity 2,640 (2,567) 73
------------------ ----------------- -----------------
$8,058 ($3,159) $4,899
================== ================= =================
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
MERGER
nMORTGAGE ADJUSTMENTS
(HISTORICAL) (NOTE 4) PROFORMA
----------------- ------------------ -----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $426 ($200)(B) $1,366
Mortgage loans held for sale 14,787 14,787
Receivables due on mortgage 318 318
Accounts receivable, net
Current portion of notes receivable 61 61
Other receivables
Inventories
Other current assets
----------------- ------------------ -----------------
Total current assets 15,592 (200) 16,532
PROPERTY AND EQUIPMENT, NET 851 851
NOTES RECEIVABLE, LESS CURRENT PORTION 0 3,759
OTHER ASSETS 299 299
INTANGIBLE ASSETS, NET 18,385 18,385
----------------- ------------------ -----------------
$35,127 ($200) $39,826
================= ================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term warehouse borrowings $18,582 $18,582
Accounts payable 1,312 1,896
Federal and state tax liabilities 0 0
Escrow liabilities 0 0
Notes payable, current portion 2,142 2,142
Obligations under capital lease, current portion 211 211
Accrued liabilities 2,734 3,843
----------------- ------------------ -----------------
Total current liabilities 24,981 0 26,674
LONG-TERM LIABILITIES:
Notes payable, less current portion 0 3,131
Capital lease obligations, less current portion 187 187
----------------- ------------------ -----------------
Total liabilities 25,168 0 29,992
----------------- ------------------ -----------------
Minority interest 2,507 0 2,507
----------------- ------------------ -----------------
STOCKHOLDERS' EQUITY:
Preferred stock 4,641 4,643
Common stock 120 340 (D) 550
Additional paid-in capital 6,342 (33,100)(D) 7,767
(200)(B) (200)
Retained earnings (deficit) (3,651) 32,760 (D) (5,433)
----------------- ------------------ -----------------
Total shareholders' equity 7,452 (200) 7,327
----------------- ------------------ -----------------
$35,127 ($200) $39,826
================= ================== =================
</TABLE>
See notes to condensed pro forma financial statements.
<PAGE> 57
INNOVATIVE GAMING CORPORATION OF AMERICA
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (Note 3)
<TABLE>
<CAPTION>
INNOVATIVE
GAMING
Corporation
of America nMortgage
(HISTORICAL) (HISTORICAL)
----------------- -----------------
<S> <C> <C>
Revenues $2,897 $1,548
COST OF SALES 4,239 0
---------------- ----------------
GROSS PROFIT (LOSS) (1,342) 1,548
OPERATING EXPENSES
Selling, general and administrative 5,134 1,099
Write down of assets to market value 4,655 0
Other operating expenses 0 3,346
---------------- ----------------
Income (loss) from operations (11,131) (4,445)
OTHER INCOME (EXPENSE)
Interest expense, net (73) (754)
---------------- ----------------
INCOME (LOSS) BEFORE TAXES (11,204) (3,651)
---------------- ----------------
PROVISION FOR (BENEFIT OF) INCOME TAXES 0 0
---------------- ----------------
NET LOSS FROM OPERATIONS OF DISCONTINUED
GAMING EQUIPMENT MANUFACTURING (11,204) (3,651)
LOSS ON DISPOSAL OF GAMING EQUIPMENT MANUFACTURING, INCLUDING
PROVISION OF $1,606 FOR OPERATING LOSSES DURING PHASEOUT (2,221) 0
---------------- ----------------
NET LOSS ($13,425) ($3,651)
---------------- ----------------
Preferred stock accretion adjustments 547
Preferred stock dividends 124
----------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS (14,096)
================
LOSS FROM OPERATIONS OF DISCONTINUED GAMING EQUIPMENT
MANUFACTURING ($1.58)
================
LOSS ON DISPOSAL OF GAMING EQUIPMENT MANUFACTURING, INCLUDING
PROVISION FOR OPERATING LOSSES DURING PHASE-OUT PERIOD ($0.29)
================
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($1.87)
================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,525
================
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
MERGER
Adjustments
(NOTE 4) PROFORMA
------------------ -----------------
<S> <C> <C>
Revenues ($2,897)(C) $1,548
COST OF SALES (4,239)(C) 0
----------------- ----------------
GROSS PROFIT (LOSS) 1,342 1,548
OPERATING EXPENSES
Selling, general and administrative (5,134)(C) 1,099
Write down of assets to market value (4,655)(C) 0
Other operating expenses 0 (C) 3,346
----------------- ----------------
Income (loss) from operations 11,131 (2,897)
OTHER INCOME (EXPENSE)
Interest expense, net 73 (C) (754)
----------------- ----------------
INCOME (LOSS) BEFORE TAXES 11,204 (3,651)
----------------- ----------------
PROVISION FOR (BENEFIT OF) INCOME TAXES 0 (C) 0
----------------- ----------------
NET LOSS FROM OPERATIONS OF DISCONTINUED
GAMING EQUIPMENT MANUFACTURING 11,204 (3,651)
LOSS ON DISPOSAL OF GAMING EQUIPMENT MANUFACTURING, INCLUDING
PROVISION OF $1,606 FOR OPERATING LOSSES DURING PHASEOUT 2,221 0
----------------- ----------------
NET LOSS $13,425 ($3,651)
----------------- ----------------
Preferred stock accretion adjustments 547
Preferred stock dividends 124
----------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS (4,322)
================
LOSS FROM OPERATIONS OF DISCONTINUED GAMING EQUIPMENT
MANUFACTURING ($0.08)
================
LOSS ON DISPOSAL OF GAMING EQUIPMENT MANUFACTURING, INCLUDING
PROVISION FOR OPERATING LOSSES DURING PHASE-OUT PERIOD $0.00
================
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($0.08)
================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 53,525
================
</TABLE>
<PAGE> 58
INNOVATIVE GAMING CORPORATION OF AMERICA
NOTES TO UNAUDITED PROFORMA CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) DESCRIPTION OF THE TRANSACTION
On December 31, 1999, nMortgage, Inc. (nMortgage or the Company) entered into a
definitive merger agreement with Innovative Gaming Corporation of America
(IGCA). At closing, nMortgage's stockholders will receive approximately
46,000,000 shares of IGCA common stock in exchange for their nMortgage common
stock. The Company plans to record this transaction as a reverse merger and
recapitalization. The following unaudited pro forma condensed statement of
operations for the year ended December 31, 1999 gives effect to the transaction
as if it had occurred effective January 1, 1999. The following unaudited
condensed balance sheet as of December 31, 1999 gives effect to the transaction
as if it occurred on December 31, 1999.
(2) nMORTGAGE, INC. PERIODS OF PRESENTATION
On August 23, 1999, nMortgage, Inc. through its wholly-owned subsidiary, FBMS
Acquisition Corp., merged with First Bankers Mortgage Services, Inc (FBMS). FBMS
continued as the surviving corporation. The transaction was recorded as a
purchase in accordance with APB No. 16. Accordingly, the Statement of Operations
for nMortage includes the activity for the period from August 23, 1999 (Date of
Inception) through December 31, 1999.
(3) DESCRIPTION OF PRE-MERGER ADJUSTMENTS
IGCA contemplates completing the following transactions in advance of the merger
transaction:
(A) To record the sale of substantially all of its gaming related
assets to Xertain by June 30, 2000 for $4,000,000 plus a
promissory note payable to IGCA in an amount equal to the
accounts receivable of IGCA as of the closing date, adjusted
for certain payments to be made by Xertain and IGCA as
provided for in the note, and Xertain will assume certain
liabilities of IGCA. The accounts receivable promissory note
will be secured by the accounts receivable of IGCA which are
being acquired by Xertain. The $4,000,000 will be payable
$1,000,000 in cash and $3,000,000 in an unsecured promissory
note of a 36-month term, payable upon the due date, plus
interest at 8.5% per annum.
(4) DESCRIPTION OF PROFORMA ADJUSTMENTS
(B) To record legal, accounting and banking fees and other costs
of the transaction.
<PAGE> 59
(C) To reflect the reverse merger as if it had occurred on January
1, 1999. Since IGCA will be a non-operating entity at the date
of the transaction, none of the revenues or expenses of IGCA
would have resulted during the period had the transaction
occurred on January 1, 1999. Accordingly, the adjustment
reflects the removal of these revenues and expenses.
(D) To record the transaction as a reverse merger.
(c) EXHIBITS.
99.1 Press Release dated May 12, 2000
<PAGE> 60
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE GAMING CORPORATION
OF AMERICA
(Registrant)
Date: May 19, 2000 By: /s/ Barrett V. Johnson
------------------------------
Name: Barrett V. Johnson
Title: Chief Executive Officer
