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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 333-27037
UNITED FINANCIAL MORTGAGE CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
ILLINOIS 36-3440533
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 ENTERPRISE DRIVE, SUITE 206
OAK BROOK, ILLINOIS 60523
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
ISSUER'S TELEPHONE NUMBER: (630) 571-7222
SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common Stock REGISTERED
The Chicago Stock Exchange
SECURITIES TO BE REGISTERED UNDER SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [_] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year......................
The aggregate market value of the voting and non-voting common equity held
by non-affiliates is $5.2 million.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [_] No [X]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date. 3,900,029.
DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"). The listed documents
should be clearly described for identification purposes (e.g., annual report
to security holders for fiscal year ended December 24, 1990).
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [_] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company was formed as an Illinois corporation in April of 1986 to engage
in the business of mortgage banking. The Company is licensed as a mortgage
banker in the states of Arkansas, California, Colorado, Delaware, Florida,
Illinois, Indiana, Kentucky, Maryland, Missouri, New Mexico, Oregon, South
Carolina, Utah, Washington, Wisconsin and Texas. The Company also does
business in other states that do not have mortgage banking licensure statutes,
including, Idaho, Kansas, Montana, Ohio, Oklahoma, West Virginia and Wyoming.
The Company's mortgage banking business has principally focused on retail and
wholesale residential mortgage origination activities. The Company intends to
expand its mortgage servicing activities by retaining servicing on selected
loans that it produces. The Company's principal lines of business are
conducted through the Retail Origination Division, the Wholesale Origination
Division and the Servicing Division. The Company's Retail and Wholesale
Origination business is principally conducted in the states of Illinois,
California, Nevada, Missouri and Florida.
The loans that the Company originates and expects to service primarily are
first mortgages secured by single (one to four units) family residences,
although the Company also may originate, sell and service loans secured by
first mortgages on multi-family residential properties (more than four units)
and to a lesser extent, other mortgage assets.
The Company's loan production activities generate revenue through (i)
origination fees and gains on the sale of loans to broker-dealers and
institutional investors, and (ii) interest on mortgage loans held, or
"warehoused" from their origination or purchase until their sale to broker-
dealers and institutional investors. The Company's expanded loan servicing
division is expected to produce income from loan servicing fees.
The Company also engages in the brokerage or origination of loans on
commercial real estate, including shopping centers, office properties and
other commercial loans. The Company either brokers (e.g. arranges for the loan
from third-party lenders) or funds and services these commercial loans.
Commercial loans may be brokered to other financial institutions, in which
case, the Company receives a negotiated fee. If the Company originates and
services a commercial loan, then revenues are earned based upon the difference
in the interest rate paid to the issuer of the credit line and the interest
rate paid by the borrower.
At this time, the Company's primary sources of loan originations are its
Wholesale and Retail Divisions. On April 30, 1998, the Company's Retail
Division operated three (3) full service retail origination offices. At such
date, the retail offices were located in three (3) states and were staffed by
approximately 50 employees, including commission-based loan officers. The
retail offices are currently located as follows: Oak Brook, Illinois; Creve
Coeur, Missouri, and Las Vegas, Nevada. Wholesale origination principally is
conducted from the Company's offices in Oak Brook, Illinois and Irvine,
California.
The Company's mortgage banking activities principally focused on retail loan
origination for the period from inception through 1993. During the period from
1994 through 1995, the Company emphasized the wholesale origination. This
emphasis resulted from a general decrease in overall loan origination volume
for this period. The application of additional resources to "wholesale" loan
origination during this period served to increase the Company's loan volume.
During the period from 1996 to date, the Company focused on retail loan
origination because it is Management's experience that profit margins in
retail origination are generally greater than profits relating to wholesale
activities.
THE WHOLESALE ORIGINATION DIVISION
Wholesale loan origination involves the funding by the Company of loans
submitted by non-affiliated mortgage brokers. The Company realizes revenues
from the sale of such loans to investors for a price greater than the amount
paid to the mortgage broker. The timing of the sale of loans to investors and
failure to comply with investor underwriting guidelines could result in losses
on loan sales. Management believes that substantially all underwriting and
related issues generally are resolved with the investor prior to closing. It
is management's experience that wholesale loan origination tends to be less
profitable on a per loan basis than retail origination,
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but expansion into the wholesale sector is less costly than retail origination
because wholesale origination does not require the establishment of costly
office space and the related overhead expense. It is management's experience
that wholesale account executives generally work from their homes or in shared
office suites. This operating structure enables the Company to quickly enter
new markets.
It is management's experience that wholesale loan origination tends to be
less profitable on a per loan basis than retail origination because wholesale
loans are subject to two levels of costs, namely independent broker
compensation, and Company sales commissions paid to its personnel for the
production of the wholesale loan. On the other hand, retail loan origination
tends to be more profitable than wholesale origination because the Company
only pays compensation to its sales personnel in an amount less than the
aggregate costs for the wholesale origination of a comparable loan.
The Company's Wholesale Division, which was established in June, 1994
operates from its corporate headquarters in Oak Brook, Illinois and Irvine,
California. Through the Wholesale Division, the Company acquires loans from a
network of mortgage brokers and other financial intermediaries, including
banks, who are screened by the Company.
In addition to loan processing performed by the correspondent, the Wholesale
Division performs its own underwriting prior to committing to acquire such
loans. Correspondents qualify to participate in the Wholesale Division's loan
acquisition program after a review of their reputation, mortgage lending
experience and financial condition, including a review of references and
financial statements. No single correspondent accounts for a significant
portion of the Wholesale Division's mortgage loan production.
THE RETAIL ORIGINATION DIVISION
Retail loan origination involves the direct solicitation of realtors,
builders and other end borrowers for the origination of mortgage loans. The
Company derives revenues from the premium that is received from the purchaser
of the loan. Generally, that premium is shared on a negotiated basis with loan
officers and others who procure the loan and assist in the loan origination
process.
The Company's Retail Origination Division solicits loans directly from
consumers and through real estate brokers, builders and other real estate
professionals. In developing its retail network, the Company has followed a
strategy of establishing offices in areas where its experience indicates
strong loan demand. This gives the Company added flexibility to open and close
offices as dictated by mortgage demand.
Establishing a reputation for prompt and responsive customer service is
another integral component of the Company's marketing strategies. The Company
believes that the ability to process loan applications quickly provides a
distinct advantage over its competitors. It is management's experience that
the average period between receipt of a loan application and the Company's
lending commitment is generally less than 10 days. The Company endeavors to
process loans quickly, while maintaining comprehensive underwriting controls
through its automated techniques for loan origination, processing,
underwriting and closing. The Company's computer system integrates the
Company's loan origination activities to expedite loan processing, and
enhances its ability to respond to market opportunities.
QUALITY CONTROL OF MORTGAGE ORIGINATION
In order to ensure that the Company originates high quality mortgage loans,
it has retained the services of a quality control company with an industry
wide reputation to conduct audits of the Company's loan origination activities
on a monthly basis. The Quality Control company audits pursuant to contractual
specifications approximately ten (10%) percent of the aggregate retail and
wholesale loans originated by the Company on a monthly basis. The audit
process includes verification of mortgage information, including: employment
status, wages/salaries; credit standing; property appraisal; confirmation of
the borrower's savings and other assets; and compliance with other applicable
underwriting guidelines. The Quality Control company selects loan files on a
random basis. The Company receives a quality control management report from
the Quality Control company at the conclusion of each monthly audit.
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LOAN PROCESSING AND UNDERWRITING
Loan applications generally are prepared by Company loan officers and
verified by personnel in the Company's Retail Origination Division.
Verification procedures, include, among other things, obtaining: (i) written
confirmations of the applicant's income and bank deposits, (ii) a formal
credit report on the applicant from a credit reporting agency, (iii) a
preliminary title report, and (iv) a real estate appraisal. Appraisals for
conventional and FHA loans are prepared by third party, unaffiliated
appraisers who are pre-approved based upon their experience, education and
reputation standards. Completed loan applications are then transmitted to the
Company's Underwriting Department or to underwriting sub-contracting companies
who provide underwriting services to the Company. The Underwriting Department
of the Company or its sub-contractors contain experienced staff who verify the
completeness and accuracy of application information, and determine its
compliance with the Company's underwriting criteria and those of applicable
government agencies or other investors.
Underwriting criteria include loan-to-value ratios, borrower income
qualifications, investor requirements, insurance and property appraisal
requirements. The Company's underwriting guidelines for FHA, VA, FNMA and
FHLMC loans comply with the written underwriting guidelines of the relevant
agency.
The Company's underwriting guidelines for "non-conforming" loans are based
upon the underwriting standards required by investors to whom such loans are
sold. "Non-Conforming" loans generally include loan products that do not
comply with the underwriting guidelines of Freddie Mac, Fannie Mae, FHA or VA.
The Company believes that the implementation and enforcement of comprehensive
underwriting guidelines are expected. Non-conforming loans generally are
underwritten by the Company in accordance with the written underwriting
guidelines of the applicable investor who purchases the loans.
Most of the Company's underwriting personnel function independently of the
Company's loan origination personnel and do not report to any individual
directly involved in the loan origination process.
The Company's internal Quality Control Department reviews the Company's
origination activities including approximately one hundred percent (100%) of
all closed loans in order to enhance the ongoing evaluation of the loan
processing function, including employees, credit reporting agencies and
independent appraisers. In conducting such reviews, the Quality Control
Department reviews the loan applications for compliance with federal and state
lending standards, which involves a second verification of employment prior to
loan closing, reconfirming banking information, and obtaining separate credit
reports and property appraisals. The Quality Control Department submits all
review results directly to the president of the Company.
LOAN COMMITMENTS
Subsequent to underwriting approval, prior to loan funding, the Company
issues loan commitments to qualified applicants. Commitments indicate loan
amount, fees, funding conditions, approval expiration dates and interest
rates. Commitments providing for "fixed" interest rates beyond sixty (60) days
generally are not issued, unless the Company receives an appropriate fee
premium based upon the assessment of the risk associated with a longer
commitment period. Servicing compensation (based upon FNMA guidelines)
generally ranges from .25% to .50% per annum on the outstanding principal
balances of the loans. Servicing fees would be collected from monthly mortgage
payments. Other sources of loan servicing revenues may include late charges
and use of funds benefits.
As a servicer of mortgage loans underlying mortgage backed securities issued
by FNMA, FHLMC or other investors, the Company will be obligated to make
timely payments of principal and interest to security holders, whether or not
such payments have been made by borrowers on the underlying mortgage loans. In
accordance with applicable FHA and VA guidelines, the Company will be fully
insured by FHA against foreclosure loss on FHA loans, and the VA would
guarantee against foreclosure loss on VA loans, subject to a limitation of the
lesser of 25% of the loan amount and $46,000. Although FNMA and FHLMC would be
obligated to reimburse
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the Company for principal and interest payments advanced by the Company as a
servicer, the funding of delinquent payments or the exercise of foreclosure
rights involves prospective costs to the Company.
The Company expects that an important source for its loan servicing
portfolio will be selected loans produced by the Company. The servicing rights
for selected loans will be retained by the Company after such loans are sold
to investors. In addition, the Company intends to supplement its servicing
portfolio by purchasing mortgage servicing rights relating to loans originated
by other lenders. Such purchases will be made only after the Company has
conducted a due diligence analysis of the loan portfolio.
The Company intends to provide low cost and flexible servicing that is
responsive to the needs and requirements of its customers and investors.
SEASONALITY
It is management's experience that the mortgage loan origination business is
generally subject to seasonal trends. These trends reflect the general pattern
of sale and resale of homes. It is management's experience that loan
origination typically peaks during the spring and summer seasons, and declines
to lower levels from mid-November through January. The mortgage servicing
business is generally not subject to seasonal trends.
COMPETITION
The mortgage banking industry is highly competitive. The Company competes
with other financial institutions, such as mortgage banks, state and national
banks, savings and loan associations, savings banks, credit unions and
insurance companies and mortgage bankers. Some of the Company's competitors
have financial resources that are substantially greater than those of the
Company, including some competitors which have a significant number of offices
in areas where the Company conducts its business. The Company competes
principally by offering loans with competitive features, by emphasizing the
quality of its service and by pricing its range of products at competitive
rates.
Information published by the Mortgage Bankers Association of America ("MBA")
indicates that although the mortgage business is competitive, it is also
fragmented in that no single lender has a significant market share of total
origination volume. MBA data indicates that overall mortgage origination
volume is shared in varying percentages among commercial banks, savings and
loan and mortgage banking companies. MBA data also indicates that
historically, mortgage banks have had an estimated twenty-thirty percent (20-
30%) share of total origination volume. Commercial banks, savings banks,
savings and loan associations and mortgage banking companies service the bulk
of residential mortgages. It is management's belief that market share among
competitors generally shifts more slowly in servicing than in origination.
Management of the Company does not anticipate any significant changes in the
market share described above in the near term.
The Company's mortgage loan production activities are subject to the Truth-
in-Lending Act and Regulation Z promulgated thereunder. The Truth-in-Lending
Act contains disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions
of loans and credit transactions in order to give them the ability to compare
credit terms. The Truth-in-Lending Act also guarantees consumers a three day
right to cancel certain credit transactions, including any refinance mortgage
or junior mortgage loan on a consumer's primary residence. The Company
believes that it is in substantial compliance in all material respects with
the Truth-in-Lending Act.
The Company also is required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, sex, age or marital status.
Regulation B promulgated under ECOA restricts creditors from obtaining certain
types of information from loan applicants. It also requires certain
disclosures by lenders regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires the lenders to
supply the applicant with a name and address of the reporting agency.
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The Federal Real Estate Settlement Procedure Act ("RESPA") imposes, among
other things, limits on the amount of funds a borrower can be required to
deposit with the Company in an escrow account for the payment of taxes,
insurance premiums or other charges. The Company has policies, procedures and
systems in place to ensure compliance with RESPA.
The Company believes it is in possession of all licenses in those states in
which it does business that require such licenses, except where the absence of
such licenses is not material to the business and operations of the Company as
a whole. Conventional mortgage operations also may be subject to state usury
statutes. FHA and VA loans are exempt from the effect of such statutes.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate and administrative headquarters are located in
leased facilities in Oak Brook, Illinois. These facilities comprise
approximately 4,800 square feet of space in a building leased by the Company
for a ten year term at annual rate of approximately $9.50 to $15.63 per square
foot, triple net, which lease expires in 2003. In addition, at April 30, 1998,
the Company leased an aggregate of approximately 1,146 square feet in Las
Vegas, Nevada; 1,475 square feet in Irvine, California; and 900 square feet in
St. Louis, Missouri. The leases for Las Vegas, Nevada and Irvine, California
are on a month to month basis. The Company has no liability with respect to
the lease at Creve Coeur, Missouri. The aggregate annual lease payments on
properties leased by the Company as of April 30, 1998 was $192,000. The
Company believes that its present facilities are adequate for its current
level of operations. None of the Company's leased facilities are leased from
affiliates of the Company.
Lease commitments for the five (5) years following April 30, 1998 are as
follows:
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April 30, 1999................................................... $217,035
April 30, 2000................................................... $131,767
April 30, 2001................................................... $ 97,170
April 30, 2002................................................... $ 94,679
April 30, 2003................................................... $ 95,249
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The Company's corporate headquarters are located at 600 Enterprise Drive,
Suite #206, Oak Brook, Illinois 60523 and its telephone number is (630) 571-
7222.
ITEM 3. LEGAL PROCEEDINGS.
Discussed below are various legal proceedings relating to the Company. The
Company does not believe that any one or all of these cases in the aggregate
represent material litigation to the Company. Further, management is not aware
of any threat of material litigation.
Lawyers Title Insurance Corporation v. Dearborn Corporation
In June, 1995, Lawyers Title initiated a non-wage garnishment proceeding
against the Company and its bank which resulted in a lien being placed upon
the Company's bank account in the amount of $565,649.26 ("Lawyers Title
Litigation"). Lawyers Title had previously obtained a judgment by default
against Dearborn Title Corporation and its president, Eileen Rasulis, in the
amount of $5,931,494.59. Lawyers Title claimed entitlement to monies
purportedly held by the Company on the grounds that the money was tendered to
the Company by Dearborn Title in the mistaken belief that this money was owed
to the Company as a replacement for a funding check relating to a particular
real estate refinancing transaction which had previously been returned to
Dearborn for insufficient funds.
The Company has vigorously denied that Lawyers Title is entitled to these
funds and has claimed that Dearborn Title owed to the Company sums in excess
of the judgment and that the Company is entitled to retain these funds.
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On October 10, 1996, the United States District Court entered judgment in
favor of Lawyers Title and against the Company in the amount of $583,049.26.
On November 6, 1996, the Company appealed the October 10, 1996 judgment order
to the United States Court of Appeals for the Seventh Circuit.
On July 1, 1997, the United States Court of Appeals for the Seventh Circuit
issued its opinion and order affirming in part and reversing in part the
District Court's judgment. The matter has been remanded to the District Court
with directions.
The Company anticipates that the District Court will set this matter for
trial, but as yet, no trial date has been set.
Jeske and Levin v. United Financial Mortgage
In February, 1996, Keith Jeske and Mark Levin filed a complaint against the
Company and Joseph Khoshabe in the United States District Court for the
District of Nevada. The complaint alleges breach of oral and written
agreements, fraudulent inducement, unjust enrichment and other charges
relating to the purported breach of a branch office agreement entered into
between the Company and Levin and Jeske regarding the operation of a Las Vegas
branch office. Levin and Jeske alleged that the Company, among other things,
refused to pay payroll expenses and other fees incurred by the branch office
and misrepresented that the Company was VA approved and could provide VA loans
through the branch office. The complaint seeks an unspecified amount of
damages in excess of $50,000. The Company denies that any liability is owing
to either Jeske or Levin, intends to vigorously defend against the allegations
and has filed counterclaims alleging damages in excess of $100,000.
The litigation is in the discovery stage.
Creed v. United Financial Mortgage Corp.
In March of 1996, David Creed filed a complaint in the State court for Clark
County, Nevada, alleging that the Company, Jeske and Levin breached an
agreement with him to pay certain compensation of approximately $100,000.
Jeske and Levin filed a cross-claim against the Company and Joseph Khoshabe,
alleging claims for breach of oral and written agreements, fraudulent
inducement, unjust enrichment and other charges relating to the purported
breach of a branch office agreement entered into between the Company and Levin
and Jeske regarding the operation of the Las Vegas branch office. Levin and
Jeske alleged that the Company, among other things, refused to pay payroll
expenses and other fees incurred by the branch office and misrepresented that
the Company was V.A. approved and could provide loans through the branch
office. The complaint seeks an unspecified amount of damages in excess of
$50,000. The Company and Joseph Khoshabe have answered both the complaint and
cross-claims, denying any liability to Creed, Jeske or Levin. In addition, a
motion to dismiss will be filed after discovery on behalf of Joseph Khoshabe
on the grounds that he is not party to any of the agreements and is not the
alter-ego for the Company. The Company intends to vigorously defend against
the allegations, and has also filed counter-claims against Creed, Levin and
Jeske alleging that these individuals breached the branch office agreement and
also alleging that Levin and Jeske unlawfully converted monies belonging to
the Company.
State of Nevada Office of Labor Commissioner
In October, 1995, the Company was notified by the State of Nevada's Office
of Labor Commissioner that certain wage claims had been filed by 18
individuals, including Jeske and Levin relating to unpaid wages totaling
approximately $32,000. The Company has denied responsibility for these claims
and affirmatively stated that pursuant to the branch office agreement, Jeske
and Levin are solely and exclusively responsible for these claims.
The Company has retained Nevada counsel to assist on these Nevada litigation
matters.
Schweigert v. United Financial Mortgage Corp.
This action was filed in the Circuit Court of the 18th Judicial District
Circuit, DuPage County, Illinois. The plaintiff in this action alleges
wrongful termination of employment from the Company and damages relating
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thereto in excess of $50,000. The Company intends to vigorously defend this
litigation, does not believe that it has any liability with respect to this
claim and has filed counterclaims against the plaintiff and another party
alleging damages in excess of plaintiff's claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
period covered by this report.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company's registration statement regarding 800,000 shares of Common
Stock became effective with the United States Securities and Exchange
Commission on May 26, 1998. The Company's Common Stock began trading on May
27, 1998 at a price of $6.50 per share.
The Company's Common Stock is traded on The Chicago Stock Exchange ("CSX")
under the symbol UFM.
The range of high and low sale prices of the Company's Common Stock, as
reported by the CSX from May 27, 1998 through July 15, 1998 were $6.00 and
$8.4375, respectively.
Holders. As of July 15, 1998, there were approximately 500 holders of record
of the shares
Dividends. The Company has never declared or paid a dividend on its Common
Stock, and Management expects that a substantial portion of the Company's
earnings, if any, for the foreseeable future will be used to expand loan
origination and servicing capabilities. The decision to pay dividends, if any,
in the future is within the discretion of the Board of Directors and will
depend upon the Company's earnings, its capital requirements, financial
condition and other relevant factors such as loan covenants or other
contractual obligations.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS.
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company, founded in 1986, operates as a full-service mortgage banking
company engaged in the origination and sale of first mortgage loans secured by
residential real estate. On a limited scale, the Company also originates
commercial loans, and services residential mortgage loans.
RESULTS OF OPERATIONS
Two Years Ended April 30, 1998
Commissions and fees increased from $5,292,856 for the year ended April 30,
1997 to $6,730,416 for the year ended April 30, 1998. This percentage increase
of approximately 27% is primarily the result of an increase in the number of
loan originations from 1,460 during the year ended April 30, 1997 to 1,628
during the year ended April 30, 1998. Aggregate loan volume originated
increased from $190 million to $221 million between the same periods. The
increase in loan originations was the result of lower interest rates and an
increase in loan origination efforts.
Interest income increased from $403,526 for the year ended April 30, 1997 to
$665,646 for the year ended April 30, 1998. This increase was attributable to
the increase in loan originations and higher interest income on invested
capital.
Salary and commission expenses increased from $3,731,207 for the year ended
April 30, 1997 to $4,008,346 for the year ended April 30, 1998. The increase
was attributed to two main factors. The increased number of loan originations
in fiscal year 1998 as compared to fiscal year 1997 and investment in the
expansion of the Company's sales organization as compared to the previous
year.
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Selling and administrative expenses increased from $1,593,958 for the year
ended April 30, 1997 to $1,990,349 for the year ended April 30, 1998. This
percentage increase of approximately 25% reflected the investment in the
expansion of the Company's sales organization as well as expenses related to
increased loan origination.
Depreciation expense increased slightly from $38,045 for the year ended
April 30, 1997 to $45,805 for the year ended April 30, 1998 principally as a
result of additional computer equipment acquired in fiscal 1998. This computer
equipment acquisition is in line with the Company's strategy for technological
advancement and infrastructure improvements.
Interest expense increased from $307,766 for the year ended April 30, 1997
to $975,953 for the year ended April 30, 1998. This increase was the result of
increased use of warehouse lines of credit to fund the increased loan
originations.
During the fiscal year ending April 30, 1997, the Company recognized a loss
from a judgement rendered against the Company in the United States District
Court regarding past transactions with a title company. Total costs and
expenses including the amount of the judgement and associated legal expenses
totaled approximately $734,000.
As a result of the foregoing, there was a net loss of $654,876 for the year
ended April 30, 1997 as compared to net income of $241,429 for the year ended
April 30, 1998. Without the effect of the aforementioned judgement, net income
for the year ended April 30, 1997 would have been $25,406. The Company
recorded a deferred tax asset of $45,763 for fiscal year 1997. For fiscal year
1998 the Company's net tax expense of $40,127 includes a reduction due to the
loss carryforward from the previous year.
As a consequence of the accounting treatment afforded to certain equity
transactions entered into by the Company regarding warrants and other
financings, the Company's results of operations include non-cash charges
against income in fiscal years 1997 and 1998. This consists of $156,000
recorded as advisory fees in both fiscal 1997 and 1998. In addition, there was
amortization of debenture discount of $69,380 recorded in fiscal 1997 and
$106,250 for fiscal year 1998. Without these non-cash charges, and without the
judgement referred to above, net income would have been $250,786 in fiscal
1997 and $503,679 in fiscal 1998.
During the period ended April 30, 1998, the Company foreclosed on two (2)
mortgages and took legal title to two (2) single family homes in the State of
California (the "Real Property").
The Real Property is recorded on the Company's financial statements at a
carrying value at the amount of the foreclosed mortgages, including
foreclosure costs. No provision for a loss was recorded because the Company
has current appraisals for the Real Property, prepared by an independent
appraiser, reflecting fair market values in excess of the recorded carrying
values. Management has conducted preliminary research of the marketability of
the Real Property and believes there is an active market for the Real
Property. The Company expects to sell the Real Property in early fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended April 30, 1997 and April 30, 1998, net cash generated
(used) by operating activities was ($607,513) and $397,010, respectively. Net
cash generated by operating activities increased from fiscal year 1997 to
fiscal year 1998 primarily because of increased loan originations and reduced
litigation expenses.
Net cash used by investing activities increased from $29,618 for the year
ended April 30, 1997 to $411,537 for the year ended April 30, 1998. The
increase in cash used from 1997 to 1998 is largely attributable to the
purchase of the two foreclosed properties in California. In addition, the
company increased the origination of mortgage servicing rights in fiscal year
1998.
8
<PAGE>
Cash flow from financing activities for the years ended April 30, 1997 and
April 30, 1998 was $694,583 and ($29,623), respectively. This change is
largely due to preferred stock, common stock, and debenture transactions that
occurred in fiscal year 1997. These adjustments did not occur in 1998.
Proceeds from preferred stock sales in fiscal year 1997 totaled $565,000. In
addition, common stock and debenture proceeds totaled $253,536 in 1997.
Capital expenditures for the year ended April 30, 1998 were approximately
$34,000, principally in technology and to a lesser extent for the expansion of
sales organization facilities. The Company believes it will continue to make
investments in technology in the near future to enhance and maintain its
product and service offerings. The Company believes that such investments
could aggregate $200,000 to $300,000 over the next two years, especially in
the next several quarters.
Cash flow requirements depend on the level and timing of the Company's
activities in loan origination in relation to the timing of the sale of such
loans. In addition, the Company requires cash flow for the payment of
operating expenses, interest expense, and capital expenditures. Currently, the
Company's primary sources of funding are borrowings under warehouse lines of
credit, proceeds from the sale of loans in the secondary market and internally
generated funds. Management believes that a larger equity base resulting from
the subsequent public offering should increase the amount of credit available
to the Company.
Historically, the Company has funded its growth, in large part, from its
access to lines of credit and its operating activities. The Company has been
additionally capitalized by its President, Joseph Khoshabe, through various
purchases of Common Stock and Series A Preferred Stock. Further, the company
has sold Common Stock, debentures, and warrants during the past five years at
various times, principally to fund the costs associated with an uncompleted,
public offering in late fiscal 1994 and fiscal 1995.
The Company used $750,000 of the proceeds of its public offering to redeem a
portion of the Series A Preferred Shares held by the J.K. Trust, and
approximately $489,000 of the proceeds to retire certain convertible
debentures. Although the company cannot be assured of the availability of
additional credit, the Company reasonably anticipates that the availability of
net proceeds of the public offering will result in an increase in the
availability of credit to the Company.
The long-term plans of the Company also are to engage in the business of
servicing mortgage loans. In order to engage in this business, the Company
will be required to retain the servicing rights on the loans that it
originates. Such retention will result in the reduction in the revenue
available to the Company upon the sale of such mortgage loans. In such event,
the Company will be required to employ capital to finance the retention of
servicing rights. Such capital principally would be expended to pay the costs
associated with loan origination, such as loan officer compensation and
miscellaneous overhead expenses. However, the retention of servicing rights
also creates an asset on the Company's balance sheet.
The Company is presently in discussions with various lenders for additional
lines of credit. Management believes that the increase in the Company's equity
as a result of the public offering will enhance the Company's ability to
obtain the additional credit it will require to increase its servicing
portfolio of mortgage loans and reduce borrowing costs.
INDUSTRY TRENDS
The growth in volume that the mortgage industry has seen over the past few
years has resulted from a general downward trend in interest rates. The
Company believes that mortgage volume may tend to decrease on a relative basis
in higher interest rate environments. Higher interest rates generally result
in smaller mortgage companies leaving the market resulting in potentially
larger market shares for continuing mortgage bankers. The Company also
believes that proceeds from the upcoming financing will position the Company
to realize opportunities in such an environment, but there can be no assurance
that it will be able to do so.
The company also believes that the industry will continue to offer broader
and more diversified product offerings and that technology will play an
increasing part in real estate transactions. This includes expanded use
9
<PAGE>
of Internet capabilities. The Company believes that the proceeds from the
public offering will allow for the necessary investments in these technologies
as part of its working capital requirements.
The Company's business base is concentrated principally in the Midwest and
West. As such, the company may be subject to the effects of economic
conditions and real estate markets specific to such locales.
ACCOUNTING DEVELOPMENTS
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125"). SFAS 125, among other things, provides accounting and reporting
standards for transfers and servicing of financial assets, and extinguishment
of liabilities. SFAS 125 requires that after a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. SFAS 125
also requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 and
is to be applied prospectively. The Company expects that the impact of SFAS
125 on the results of the operations, financial condition, or liquidity will
be immaterial. However, as business conditions change, there is no guarantee
that this development will not materially affect the company. Therefore, the
Company will take a proactive stance on keeping abreast of this as well as
other accounting changes in the industry.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
UNITED FINANCIAL MORTGAGE CORPORATION
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Table of Contents........................................................ 11
Report of Independent Certified Public Accountants....................... 12
Balance Sheet at April 30, 1997 and 1998................................. 13
Statement of Income for the years ended April 30, 1997 and 1998.......... 14
Statement of Stockholders' Equity for the years ended April 30, 1997 and
1998.................................................................... 15
Statement of Cash Flow for the years ended April 30, 1997 and 1998....... 16
Notes to Financial Statements............................................ 17-21
</TABLE>
11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
UNITED FINANCIAL MORTGAGE CORP.
Financial Statements as of April 30, 1997 and April 30, 1998 together with
Independent Auditors' Report
To the Board of Directors and Stockholders of
United Financial Mortgage Corporation
We have audited the accompanying balance sheets of United Financial Mortgage
Corp. as of April 30, 1997 and April 30, 1998, and the related statements of
income, stockholders' equity and cash flows for the years ended April 30, 1997
and April 30, 1998. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Financial Mortgage
Corp. as of April 30, 1997 and April 30, 1998 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Craig Shaffer and Associates, Ltd.,
C.P.A.
Des Plaines, Illinois
July 11, 1998
12
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30,
ASSETS 1997 1998
------ ----------- -----------
<S> <C> <C>
Current Assets:
Cash............................................... $ 2,018,211 $ 1,974,011
Loans held for sale................................ 13,090,077 13,261,136
Mortgage Loan Investments.......................... 566,536 1,331,287
Accounts Receivable................................ 59,043 83,494
Due from Employees................................. 65,692 13,511
Due from Officers.................................. 35,027 64,873
Deferred Tax Asset................................. 45,763 5,636
U.S. Savings Bond.................................. 2,000 2,000
Note Receivable.................................... 111,763 140,878
Prepaid Expense.................................... 0 8,882
----------- -----------
Total current assets............................. $15,994,112 $16,885,708
=========== ===========
Furniture, Fixtures & Equipment
Cost............................................... $ 308,770 $ 342,771
Accumulated Depreciation........................... $ (154,678) $ (200,484)
----------- -----------
$ 154,092 $ 142,287
Other assets:
Servicing Rights................................... $ 0 $ 74,286
Land Investments................................... 0 303,250
Escrow Deposits.................................... 24,066 8,076
Deferred Organization Costs........................ 94,233 143,425
Security Deposits.................................. 6,143 11,302
Deferred Advisor Fees.............................. 390,000 234,000
Investments........................................ 0 5,750
----------- -----------
Total other assets............................... $ 514,442 $ 780,089
Total Assets..................................... $16,662,646 $17,808,084
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts Payable................................... $ 179,983 $ 207,462
Deferred Income.................................... 6,000
Accrued Expenses................................... 102,455 171,773
Taxes Payable...................................... 29,088 0
Deferred Income Taxes.............................. 0 0
Escrow Payable..................................... 24,066 8,076
Notes Payable--Current............................. 13,417,922 14,149,244
----------- -----------
Total current liabilities........................ $13,759,514 $14,536,555
Non-Current Notes Payable............................ 298,032 425,000
----------- -----------
Total liabilities................................ $14,057,546 $14,961,555
Commitments
Preferred Shares 5,000,000 authorized, No Par Value,
213 Series A Redeemable Shares Issued and
Outstanding; liquidation value $1,065,000 at April
30, 1997 and April 30, 1998......................... $ 1,065,000 $ 1,065,000
Stockholders' equity
Common Shares 20,000,000 Authorized, No Par Value
Shares Issued and Outstanding; 3,100,029 at April
30, 1997 and April 30, 1998....................... $ 2,382,895 $ 2,382,895
Retained Earnings.................................. (842,795) (601,366)
----------- -----------
Total stockholders' equity....................... $ 2,605,100 $ 2,846,529
----------- -----------
$16,662,646 $17,808,084
=========== ===========
</TABLE>
The accompanying Notes are an integral part of this statement
13
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
APRIL 30, 1997 APRIL 30, 1998
-------------- --------------
<S> <C> <C>
Revenues:
Commissions and Fees........................... $5,292,856 $6,730,416
Interest Income................................ 403,526 665,646
Other Income and Expense....................... 0 (13,466)
---------- ----------
5,696,382 7,382,596
Expenses:
Salaries & Commissions......................... $3,731,207 $4,008,346
Selling & Administrative....................... 1,593,958 1,990,349
Depreciation................................... 38,045 45,805
Interest Expense............................... 307,766 975,953
Cost and Expense of Litigation................. 734,056 80,587
---------- ----------
$6,405,032 $7,101,040
Income (loss) Before Income Taxes................ $ (708,650) $ 281,556
Income Tax Provision............................. (53,774) 40,127
Net Income (loss)................................ (654,876) 241,429
Less Dividends Paid on Preferred Stock........... 0 0
Net Income (loss) Applicable to Common
Shareholders.................................... (654,876) 241,429
Earnings (loss) Per Common Share................. $ (0.211) $ 0.078
========== ==========
</TABLE>
The accompanying Notes are an integral part of this statement
14
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
TWELVE MONTHS ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
--------- -------- ---------
<S> <C> <C> <C>
Balance, April 30, 1996.......................... 1,895,395 (187,919) 1,707,476
Issuance of 55,555 shares upon conversion of 1995
Bridge Financing Debentures..................... 275,000
Issuance of 42,500 shares in connection with 1996
Financing....................................... 212,500
Net Loss for the year............................ (654,876)
Balance, April 30, 1997.......................... 2,382,895 (842,795) 1,540,100
Net income for the year ended April 30, 1998..... 241,429
Balance, April 30, 1998.......................... 2,382,895 (601,366) 1,781,529
</TABLE>
The accompanying Notes are an integral part of this statement
15
<PAGE>
UNITED FINANCIAL MORTGAGE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
APRIL 30, 1997 APRIL 30, 1998
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income or (Loss)............................. $ (654,876) $ 241,429
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities................ $ 38,045 $ 45,805
Depreciation
Changes In:
Prepaid & Other Current Assets............... 68,522 69,216
Accrued Expenses & Other Current Liabilities. (71,507) 18,240
Accounts Payable............................. (34,984) 27,479
Deposits..................................... 47,287 (5,159)
----------- ----------
Net Cash Provided by Operation Activities........ $ (607,513) $ 397,010
----------- ----------
Cash Flows from Investing Activities
Land Purchase.................................. $ 0 $ (303,250)
Purchase of Fixed Assets....................... (29,618) (34,001)
Servicing Rights............................... (7,199) (74,286)
----------- ----------
Net Cash Provided from Investing Activities...... $ (29,618) $ (411,537)
Cash Flows from Financing Activities
Notes Receivable............................... $ (90,764) $ (29,115)
Changes in Short Term Debt..................... (5,604)
Changes in Long Term Debt...................... (5,604) 126,968
Officers Loans................................. (35,027) (29,846)
Deferred Advisor Fees.......................... 156,000 156,000
Deferred Offering Expenses..................... (94,233) (49,192)
Proceeds from Preferred Stock.................. 565,000 0
Common Stock Proceeds.......................... 212,499 0
Bond Proceeds Net.............................. 41,037 0
Common Stock on Conversion..................... 275,000 0
Mortgage Loans Made............................ 3,402,925 (935,810)
Changes in Bank Line of Credit................. (3,726,646) 731,322
----------- ----------
Cash Provided (Used) by Financing Activities..... 694,583 (29,673)
Increase (Decrease) in Cash...................... $ 57,452 $ (44,200)
Cash At Beginning of Period...................... $ 1,960,759 $2,018,211
----------- ----------
Cash At End of Period............................ $ 2,018,211 $1,974,011
=========== ==========
</TABLE>
The accompanying Notes are an integral part of this statement
16
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED FINANCIAL STATEMENTS
ORGANIZATION AND BUSINESS OF THE COMPANY
United Financial Mortgage Corporation, is an Illinois Corporation organized
on April 30, 1986 to engage in the residential mortgage banking business. The
Company is a licensed mortgage banker in the states of Illinois, Wisconsin,
Missouri, Arkansas, California, Colorado, Connecticut, Delaware, Florida,
Kentucky, Maryland, Nevada, North Carolina, Oregon, South Carolina, Texas,
Utah, Virginia, Washington and Indiana. The Company is an approved mortgagee
by the Department of Housing and Urban Development and is qualified to
originate mortgage loans insured by the Federal Housing Administration as well
as service for Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation.
REVERSE SHARE SPLIT
In 1995, the Company's shareholders approved a reverse split of the
Company's common shares pursuant to which each three outstanding common shares
became two common shares. The reverse split was effective May 9, 1995. The
accompanying financial statements reflect this reverse split as of May 1,
1995.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized when loans are sold after closings. Interest income
from mortgages held by the Company and from short term cash investments is
recognized as earned.
Commissions and Fees
Commissions and fees principally consist of premiums received from
purchasers of mortgage loans originated by the Company. Gains (losses) from
purchasing, selling, investing in or otherwise trading in closed mortgage
loans are an immaterial portion of the Company's revenues and are included in
the Statement of Income under the item entitled Revenues; Commissions and
Fees.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturity of three months or less.
Accounts Receivable
Accounts receivable consist of advances made in connection with loan
origination activities.
Concentration of Credit Risk
Credit risk with respect to mortgage loan receivables and accounts
receivable is generally diversified due to the large number of customers and
the timely sale of the loans to investors, usually within one (1) month. The
Company performs extensive credit investigation and verification procedures on
loan applicants before loans are approved and funds disbursed. In addition,
each loan is secured by the underlying real estate property. As a result, the
Company has not deemed it necessary to provide reserves for the ultimate
realization of the mortgage loan receivable.
17
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED FINANCIAL STATEMENTS--(CONTINUED)
Fixed Assets
Fixed assets consist of furniture, fixtures, equipment and leasehold
improvements and are recorded at cost and are depreciated using the straight
line method over their estimated useful lives. Furniture, fixtures and
equipment are depreciated over 5-7 years and leasehold improvements over the
shorter of the lease term or the estimated useful life of the asset. Upon
asset retirement or other disposition, cost and the related allowance for
depreciation are removed from the accounts, and gain or loss is included in
the statement of income. Amounts expended as repairs and maintenance are
charged to operations.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents, mortgage receivables, accounts receivables, accounts
payable and notes payable, as reported in the accompanying balance sheet,
approximates fair value.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." The liability
method provides that deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Earnings (Loss) per Common Share
Earnings (loss) per common share is calculated on net income (loss) after
deduction for dividends paid on the Series A Preferred Shares. The number of
common shares used in the computation is based upon the number of shares
outstanding at the end of the period.
NOTES PAYABLE
The Company has mortgage warehouse credit facilities aggregating $22.5
million with several commercial banks and other financial institutions. These
credit facilities are used to fund approved mortgage loans and are
collateralized by mortgage loans. The Company is not required to maintain
compensation balances.
Amounts outstanding under the various credit facilities consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
1998
-----------
<S> <C>
$20 million mortgage warehouse credit facility at a
commercial bank; interest at prime; less .75 percent expires
10/28/98.................................................... $13,261,137
$1.5 million mortgage warehouse credit facility at a
commercial bank; interest at prime; expires 2/14/98......... 624,021
The line is currently in negotiations with no anticipation of
not being renewed.
$1 million mortgage warehouse credit facility at a commercial
bank; interest at prime; expires 10/28/98................... 264,086
-----------
Total...................................................... $14,149,244
===========
</TABLE>
CONVERTIBLE DEBENTURES
In connection with the 1996 Bridge financing during the period November,
1996 to March, 1997 the Company issued $425,000 of convertible debentures with
an interest rate of 10% and a maturity of one year. The debentures are to be
paid upon the completion of an initial public offering before maturity. If not
repaid by maturity, the debentures convert into 85,000 shares of Common Stock.
These were extended until July of 1998.
18
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED FINANCIAL STATEMENTS--(CONTINUED)
LEASE COMMITMENTS
The Company conducts its operations from leased premises and with equipment
under several operating leases. Total rent expense under these leases was
approximately $192,000 for the twelve months ended April 30, 1998.
Future minimum rental payments for the next five years at April 30, 1998 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30, OPERATING LEASES
--------------------- ----------------
<S> <C>
1999.......................... $217,035
2000.......................... 131,761
2001.......................... 97,170
2002.......................... 94,679
2003.......................... 95,249
--------
$635,894
========
</TABLE>
INCOME TAXES
The income tax provision consists of the following year ended April 30:
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Current:
Federal............................................... $ 0 $30,096
State................................................. 0 10,031
Deferred:
Federal............................................... $(40,330) 0
State................................................. (13,444) 0
-------- -------
Total................................................... $(53,774) $40,127
======== =======
</TABLE>
The components of the deferred tax asset (liability) are as follows for the
years ending April 30:
<TABLE>
<CAPTION>
1997 1998
--------- -------
<S> <C> <C>
Loss carry-forward................................... $(141,730) $(5,636)
Accelerated depreciation........................... 12,099 3,659
Deferred Receivables................................. 3,368 72,798
--------- -------
Deferred Tax Asset (Liability)....................... 126,263 70,821
Valuation Allowance.................................. (80,500) (76,457)
--------- -------
Net Deferred Tax Asset (Liability)................... $ 45,763 $ 5,636
========= =======
</TABLE>
The effective tax rate for the years ended April 30, 1997 and April 30, 1998
differ from the statutory Federal tax rate of 34% due to valuation reserves on
the recording tax loss carryforwards.
RECENT FINANCING
1994 Private Placement
In November, 1994 the Company sold 220,000 shares of Common Stock for an
aggregate price of $2.25 per share. The net proceeds from this financing were
applied in part to offer purchasers in the 1993 Private Placement the option
of selling back some or all of their shares to the Company at the original
subscription price, plus annual compounded interest of 10% for the period
held. The Company repurchased 73,461 shares for an aggregate price of $126,371
in year ending April 30, 1996.
19
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the placement, the placement agent was issued, for
nominal consideration, warrants to purchase 22,000 shares of the Company's
Common Stock at an exercise price of $1.65 per share. The warrants were
exercisable for a period of five years, subject to customary anti-dilution
provisions and contain certain registration rights.
The holders of shares purchased in the 1993 Private Placement have fully
exercised their one-time right to sell their shares back to the Company and
there are no additional repurchase requirements by the Company.
1995 BRIDGE FINANCING
In May, 1995, the Company sold two and one-half (2 1/2) units of a bridge
financing with aggregate proceeds to the Company of $250,000. Each unit
consisted of a convertible debenture with face value of $100,000 and 22,000
shares of Common Stock. The debentures carried an interest rate of 10% and
matured in 12 months and were to be paid upon the effectiveness of a
registration statement. If not paid by maturity, the debentures were
convertible, in the aggregate, into 55,555 shares of Common Stock. The
conversion shares were granted certain registration rights. For accounting
purposes, the shares issued as a component of the unit were recorded at $4.50
per share, the conversion price for the debentures. This resulted in a like
amount recorded as discount on the debentures. The discount was amortized as
interest expense over the life of the debentures. These debentures have been
converted to 55,555 shares of Common Stock.
1996 FINANCING
Pursuant to the terms of the November 1, 1996 private placement ("1996
Financing"), the Company offered and sold seventeen (17) units ("Units") for
aggregate offering proceeds of $425,000. The Units consisted of one (1)
$25,000, ten percent (10%) convertible debenture ("1996 Debenture") and 2,500
shares of no par value common stock ("1996 Unit Shares").
The 1996 Debenture component of the Units provided for a term of up to
twelve (12) months commencing from the expiration date of the 1996 Financing
("Redemption Date"). The 1996 Debenture also provided for the payment of
accrued interest at an annual rate of ten percent (10%), commencing from the
date of subscription through the Redemption Date. The 1996 Debenture provided
for mandatory redemption and payment by the Company, in full, including both
principal and accrued interest, upon the completion of public offering. If the
1996 Debentures were not redeemed, then the 1996 Debentures automatically were
to convert to an additional 85,000 shares of Common Stock (5,000 shares for
each $25,000 1996 Debenture) ("1996 Conversion Shares"). The 1996 Conversion
Shares and the 1996 Unit Shares are not subject to mandatory redemption.
The 1996 Debentures, and accrued interest thereon, were repaid from the net
proceeds of the public offering.
SERIES A PREFERRED STOCK
The Series A Preferred Stock is non-voting, nonparticipating and has a
liquidation preference upon dissolution of the Company of $5,000 per share.
The holders of the Preferred Stock are entitled to a variable dividend only at
the discretion of and determination by the Board of Directors. No dividends
were declared for the years ended April 30, 1997 and 1998.
STOCKHOLDERS' EQUITY
Warrants
At April 30, 1998, the Company had total warrants outstanding to purchase
242,000 shares of the Company's Common Stock. The exercise price of the
warrants range between $0.50 and $4.505 per share.
20
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED FINANCIAL STATEMENTS--(CONTINUED)
Warrants for 47,000 shares expire on the fifth anniversary of their issuance.
Warrants for 195,000 shares expire on April 30, 1999. In certain
circumstances, the warrants have certain "piggy back" or other registration
rights. At January 31, 1998, all warrants outstanding were exercisable.
As of November 15, 1995 an advisor to the Company was issued warrants to
purchase 195,000 shares of the Company's Common Stock at an exercise price of
$0.50 per share. The warrants are exercisable until April 30, 1999 and contain
certain registration rights.
The Company has reserved 242,00 common shares for issuance upon exercise of
all options.
Stock Option Plan
In December, 1993 the Company adopted the Non-Qualified and Incentive Stock
Option Plan and established the number of common shares issuable under the
plan at 500,000 shares. The exercise price for shares under the plan is the
fair market value of the Common Stock on the date on which the option is
granted. The option price is payable either in cash, by the surrender of
common shares in the Company, or a combination of both. The aggregate number
of options granted in any one year cannot exceed 10% of the total shares
reserved for issuance under the plan. Options will be exercisable immediately,
after a period of time or in installments, and expire on the tenth anniversary
of the grant. The plan will terminate in December, 2003.
At April 30, 1997 and April 30, 1998, the Company had not granted any
options under the Plan.
At April 30, 1998, the Company reserved 500,000 common shares for issuance
upon exercise of options.
CONTINGENCIES
The Company is defendant in a series of complaints related to the operation
of a branch office in Nevada. The aggregate claims are for amounts in excess
of $182,000. The Company has filed counter-claims in certain of the instances.
The Company is also defendant in another action alleging wrongful termination
where the plaintiff is seeking damages in excess of $50,000. The Company
denies any liability in the matters, intends to vigorously defend against the
allegations and has filed counter claims in certain of these suits. The
company does not believe the outcome of these lawsuits will have a material
impact on the financial statements.
In October, 1996 the United States District Court entered a judgment in
favor of Lawyers Title Insurance Company against the Company in the amount of
$583,049 relating to a dispute over certain cash transfers made in the year
ending April 30, 1994. These monies were paid during the year ended April 30,
1997. There can be no assurance that the judgment will be reversed on appeal
or otherwise.
On July 1, 1997 the United States Court of Appeals for the Seventh Circuit
issued its opinion and order affirming in part and reversing in part the
District Court's Judgment. The matter has been remanded to the District Court
with directions.
SUBSEQUENT EVENTS
On June 4, 1998, the Company completed a public offering of 800,000 shares
of its Common Stock at $6.50 per share. Gross offering proceeds totaled
$5,200,000. Gross offering proceeds have been applied as follows:
<TABLE>
<S> <C>
Underwriting Commission......................................... $520,000
Non-Accountable Expense Allowance............................... $156,000
Redemption of Series A Preferred Stock.......................... $750,000
Offering Expenses............................................... $375,493
Repayment of 1996 Debentures, and accrued interest.............. $489,000
</TABLE>
21
<PAGE>
Two million, nine hundred, nine thousand, five hundred seven dollars
($2,909,507) remains after application of the above expenses and have been
invested in temporary investments.
LAND INVESTMENT
As of the date of the audit report, one property has been sold for two
hundred forty-one thousand dollars ($241,000) at which two hundred six
thousand dollars ($206,000) has been collected by the Company. The other
property is being actively marketed and the Company believes should be sold
soon.
SERVICING
During the recent year ended April 30, 1998 the Company has started to build
a servicing portfolio. As of balance sheet date the servicing portfolio was
three million, eight hundred thirty-nine thousand, two hundred thirty-three
dollars ($3,839,233) in residential loans and seven hundred thirty-nine
thousand, three hundred eighty-seven dollars ($739,387) in commercial loans.
22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) Recent Sales of Unregistered Securities.
The Company has never declared or paid a dividend on its Common Stock,
and Management expects that a substantial portion of the Company's
earnings, if any, for the foreseeable future will be used to expand loan
origination and servicing capabilities. The decision to pay dividends, if
any, in the future is within the discretion of the Board of Directors and
will depend upon the Company's earnings, its capital requirements,
financial condition and other relevant factors such as loan covenants or
other contractual obligations.
(b) Use of Proceeds
(1) On May 26, 1998, the Company's Registration Statement (No. 333-27037)
on Form SB-2 became effective with the United States Securities and
Exchange Commission.
(2) The offering commenced on May 27, 1998.
(3) Not Applicable.
(4)(i) The offering terminated on June 4, 1998 after the sale of 800,000
shares of the Company's common stock. An over-allotment option for an
additional 120,000 shares which were registered were not sold.
(ii) The managing underwriter was Mills Financial Services, Inc.
(iii) The title of each class of securities registered is as follows:
<TABLE>
<CAPTION>
AMOUNT
CLASS REGISTERED
----- ----------
<S> <C>
Common Stock.................. 920,000
Underwriter's Warrants........ 80,000
Common Stock Within
Underwriter's Warrant........ 80,000
</TABLE>
(iv) No shares were sold by any selling security holders.
920,000 shares were registered for the account of the Company with an
aggregate offering price of $5,980,000. To date, 800,000 shares have
been sold for an aggregate offering price of $5,200,000.
(v) The amount of the expenses incurred for the Company's account in
connection with the issuance and distribution of the shares registered is
as follows:
<TABLE>
<S> <C>
Underwriting Discounts and Commissions......................... $ 520,000
Finder's Fees.................................................. None
Non-Accountable Expense allowance Paid to the Underwriter...... 156,000
Other Expenses................................................. 375,493
----------
Total Expenses................................................. $1,051,493
</TABLE>
(V)(A) $750,000 of the offering proceeds was paid to the Joseph Khoshabe
Trust, dated September 22, 1995 as the redemption price for 150 shares of
Series A Preferred Stock. The Company also paid $489,000 to repay the
principal and accrued interest of the 1996 Debentures. These applications of
offering proceeds were disclosed in the registration statement.
(VI) The net proceeds to the Company after deducting total expenses and the
other uses described above was $2,909,507.
23
<PAGE>
(VII) The net offering proceeds to the Company have been invested in
temporary investments.
(VIII) Not Applicable.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1)(2)(3)(4)(6)(7)
- --------------------------- ---- ------ ----- ------------------
<S> <C> <C> <C> <C>
Joseph Khoshabe, President 1998 $180,000 -0- $3,161
1997 $180,000 -0- $3,161
1996 $170,000(5) -0- $3,161
1995 $160,000 -0- $3,161
1994 $162,352 -0- $3,161
Steve Y. Khoshabe, 1998 $ 50,063 -0- $2,210
Executive Vice President(6) 1997 $ 46,093 -0- $2,210
1996 $ 40,393 -0- $2,210
Glen A. Schap 1998 $ 40,000 -0- $8,750
1997 $ 30,677 -0- $8,780
1996 $ 25,333 -0- $8,780
1995 $ 28,754 -0- $8,780
1994 $ 26,083 -0- $8,780
</TABLE>
- --------
(1) Fiscal 1998 means for the fiscal year ended April 30, 1998.
(1) Includes: $1,980 for annual disability premiums; and $1,181 for annual
health insurance premiums for Mr. Khoshabe and his dependents.
(2) None of the Directors, other than Joseph Khoshabe, received any director
or other compensation from the Company as of April 30, 1998.
(3) Does not include a $25,000 annual car allowance payable to Mr. Joseph
Khoshabe.
(4) Does not include a $7,200 annual car allowance payable to Steve Khoshabe
and $2,210 of annualized health plan premiums.
(5) This salary amount was not paid to Mr. Khoshabe. This salary amount is
included to satisfy applicable accounting requirements.
(6) Effective as of June 15, 1998, Mr. Steve Khoshabe's annual base salary was
increased to $90,000. Mr. Khoshabe's annual car allowance also was
increased effective as of May 1, 1998 from $7,200 to $12,000. These
increases are attributable to the increase in Mr. Khoshabe's
responsibilities as a consequence of the public offering by the Company.
(7) Effective as of June 15, 1998, Mr. Joseph Khoshabe's annual base salary
was increased from $180,000 to $250,000 in accordance with the terms of
his employment agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at the date of
this Proxy Statement, by (1) each person known by the Company to beneficially
own more than 5% of the Company's Common Stock, and (ii) the officers and
directors of the Company beneficially owning such Common Stock. The Company
believes that Mr. Joseph Khoshabe as trustee
24
<PAGE>
of the Joseph Khoshabe Trust, under trust agreement dated September 22, 1995
(the "J.K. Trust"), has sole investment and voting power with respect to the
shares beneficially owned by the J.K. Trust.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL NUMBER OF
OWNER SHARES PERCENT OWNED(1)
------------------------------ --------- ----------------
<S> <C> <C>
J.K. Trust 2,531,842 61.8%
c/o United Financial Mortgage Corp.
600 Enterprise Drive
Suite 206
Oak Brook, IL 60521
Rocco M. Cappiello 211,150(2) 5.1%
30 S. Wacker
Suite 1310
Chicago, Illinois 60606
</TABLE>
- --------
(1) The computations include the issuance of 322,000 shares of Common Stock
upon exercise of various outstanding warrants.
(2) Mr. Rocco M. Cappiello has the right to acquire 195,000 of such shares
within sixty (60) days of the effective date (May 26, 1998) of the
Company's registration statement, upon exercise of the Advisor Warrant.
The J.K. Trust is the principal shareholder of the Company. Mr. Khoshabe
originally purchased the shares and then had them reregistered in the name of
the J.K. Trust for estate planning purposes. Mr. Khoshabe as the trustee of
the J.K. Trust is the beneficial owner of 2,531,842 shares of the Common Stock
of the Company. In connection with the organization of the Company and its
initial capitalization, the J.K. Trust paid a total of $130,070 for 100% of
the Company's common stock. Therefore, the J.K. Trust purchased its ownership
interest in the Company for $.051 per share.
The J.K. Trust has agreed with the Underwriter and the Company, with the
exception of 100,000 shares which may be sold six (6) months after the
effective date of the registration statement described above that it will not
sell the remainder of the shares held by it for a period of twelve (12) months
after such effective date.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's Board of Directors authorized the issuance of 213 shares of
Series A Non-Voting Preferred Stock ("Preferred Stock"). The outstanding
shares of Preferred Stock were purchased from the Company for total cash
consideration of $1,065,000 or $5,000 per share. The 213 shares of Preferred
Stock includes 113 shares purchased by the J.K. Trust on June 10, 1996 for a
cash payment to the Company of $565,000. The J.K. Trust purchased these shares
of Preferred Stock as a capital infusion to compensate for the $565,000
judgment that was paid in the Lawyers Title Litigation. See "Legal
Proceedings."
On June 5, 1998, 150 shares of the Preferred Stock were redeemed by the
Company for a redemption price of $750,000 and no longer are outstanding.
The redemption price for the Preferred Stock represents the original
purchase price for such shares. The decision to redeem the shares by the
Company was made solely by the holder of such shares, namely Mr. Joseph
Khoshabe, the President and then sole director of the Company.
The J.K. Trust for which Mr. Joseph Khoshabe is the trustee will continue to
hold sixty-three (63) shares of Preferred Stock after the redemption described
above.
25
<PAGE>
The Company also has paid variable dividends with respect to the Preferred
Stock as determined by the Board of Directors of the Company on an annual
basis. Once again, the decision to pay variable dividends with respect to the
Preferred Stock historically was made by Mr. Joseph Khoshabe as the sole
director of the board of directors. See "Financial Statements."
The J.K. Trust has agreed with the Underwriter that it will not sell within
twelve (12) months of the effective date of this registration statement more
than 100,000 shares of Common Stock, and that any such sale(s) shall not
commence earlier than six (6) months after such effective date. See
"Underwriting."
As an affiliate of the Company within the meaning of Rule 144(a)(1), the
J.K. Trust will be subject to the volume limitations of Rule 144(e) with
respect to any sales by it. Generally, the maximum amount of securities which
can be sold by a control affiliate during a three-month period pursuant to
Rule 144 is limited to the greater of one percent of the outstanding
securities of the Company or the average weekly volume traded for the four
week period prior to the date of filing the required notification of sale.
26
<PAGE>
SIGNATURES
In accordance with the Exchange Act, this report has been signed below on
July 29, 1998 by the following persons on behalf of the registrant and in the
capacities indicated.
Registrant: United Financial Mortgage Corp.
/s/ Joseph Khoshabe
By: _________________________________
Joseph Khoshabe, President,
Principal Executive Officer and a
Director
/s/ Steve Y. Khoshabe
By: _________________________________
Steve Y. Khoshabe, Executive Vice
President and Principal
Accounting Officer
/s/ John A. Clark
By: _________________________________
John A. Clark, Director
/s/ David B. Mirza
By: _________________________________
David B. Mirza, Director
/s/ Rocco M. Cappiello
By: _________________________________
Rocco M. Cappiello, Director
/s/ Robert S. Luce
By: _________________________________
Robert S. Luce, Secretary and a
Director
27
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K.
(a) (1) FINANCIAL STATEMENTS.
The following financial statements and notes thereto, and the related
Independent Auditors' Report, are filed as part of this Form 10-K on
Pages 11 to 21 hereof:
Independent Auditors' Report
Balance Sheets at April 30, 1997 and 1998
Statements of Operations for the years ended April 30, 1997 and 1998
Statements of Stockholders' Equity for the years ended April 30, 1997
and 1998
Statements of Cash Flows for the years ended April 30, 1997 and 1998
Notes to Financial Statements
(2) Financial Statement Schedules.
All financial statement schedules have been omitted because such
schedules are not required or the information required has been
included in the financial statements and notes thereto.
(3) Exhibits
The following exhibits are filed with this reports or incorporated by
reference as set forth below.
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Registrant.*
3.1.1 Certificate of Amendment of Certificate of Incorporation.*
3.2 By-laws of the Registrant.*
4.1 Description of specimen stock certificate representing Common Stock.*
10.1.1 Employment Agreement between the Registrant and Joseph Khoshabe.*
10.4 Non-Qualified and Incentive Stock Option Plan*
</TABLE>
- --------
*Incorporated by reference to the registrant's Registration Statement on Form
SB-2 (No. 333/27037), which was declared effective by the Securities
Exchange Commission on May 26, 1998.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K have been filed by the Company during the period
covered by this report.
28
