UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No 333-27037
UNITED FINANCIAL MORTGAGE CORP.
(Exact name of small business issuer as specified 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
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 registered
Common Stock The Chicago Stock Exchange
Securities to be registered under Section 12(g) of the Act:
None
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the 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 ____X____ No
State the Number of shares outstanding of each of the issuer's common
equity as of the last practicable date:
Outstanding
Class December 14, 1998
Common Stock, No Par Value 3,900,029
Transitional Small Business Disclosure Format (check one)
Yes ________ No ____X____
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
QUARTERLY REPORT ON FORM 10-QSB
QUARTER ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets (Unaudited) October 31, 1998 and 1997 3
Statement of Operations (Unaudited) - six months
ended October 31, 1998 and 1997. 5
Statement of Stockholder's Equity (Unaudited) - six
months ended October 31, 1998 and 1997. 6
Statements of Cash Flows (Unaudited) - six months
ended October 31, 1998 and 1997. 7
Notes to Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II OTHER INFORMATION 19
EXHIBITS 20
SIGNATURES 21
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Balance Sheet
(Unaudited)
Six Months Ended Six Months Ended
October 31, 1997 October 31, 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,060,337 $ 4,376,970
Loans Held For Sale 15,514,440 28,077,731
Mortgage Loan Investments 724,111 994,004
Accounts Receivable 109,259 156,766
Due From Employees 86,160 30,318
Due from Officers 45,134 67,516
Deferred Tax Asset 45,763 0
U.S. Savings Bond 2,000 2,000
Notes Receivable 101,000 225,200
Prepaid Expense 0 106,374
Total Current Assets 18,688,204 34,366,879
Furniture, Fixtures & Equipment
Cost 311,900 533,740
Accumulated Depreciation (176,239) (226,043)
Net Furniture, Fixtures
& Equipment 142,448 204,698
Other Assets:
Servicing Rights 0 69,040
Escrow Deposits 24,521 5,750
Goodwill 0 20,579
Deferred Organization Costs 139,781 0
Security Deposits 6,143 20,678
Deferred Advisor Fees 312,000 156,000
Investments 5,750 5,750
Total Other Assets 488,195 332,338
Total Assets 19,312,060 35,006,914
The accompanying Notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Balance Sheet
(Unaudited)
Six Months Ended Six Months Ended
October 31, 1997 October 31, 1998
<S> <C> <C>
LIABILITES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payable $ 117,382 $ 215,721
Deferred Income 0 0
Accrued Expenses 54,498 82,025
Leases Payable 0 15,929
Deferred Income Taxes 0 34,789
Escrow Payable 50,727 20,579
Notes Payable - Current 15,908,031 28,282,843
Total Current Liabilities 16,130,638 28,651,886
Non-Current Notes Payable 387,498 29,227
Total Liabilities 16,518,136 28,681,113
Stockholders' Equity
Common Shares, 20,000,000
Authorized, No Par Value,
Shares Issued and Outstanding;
3,100,029 at October 31, 1997
and 3,900,029 at
October 31, 1998. 2,382,895 6,536,403
Preferred Shares, 5,000,000
authorized, No Par Value, 213
Series A Redeemable Shares Issued
And Outstanding at Oct 31, 1997
and 63 Issued And Outstanding at
Oct 31, 1998. 1,065,000 315,000
Retained Earnings (653,971) (525,602)
Total Stockholders Equity 2,793,924 6,325,801
Total Liabilities Plus
Stockholders Equity 19,312,060 35,006,914
The accompanying Notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Condensed Statement of Income
(Unaudited)
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
Oct 31, 1997 Oct 31, 1997 Oct 31, 1998 Oct 31, 1998
<S> <C> <C> <C> <C>
Revenues:
Commissions and Fees $ 1,703,202 $ 3,125,347 $ 2,346,833 $ 4,596,604
Interest Income 303,222 402,320 346,793 716,938
Other Income and Expenses 0 0 0 (18,683)
Total Revenues 2,006,424 3,527,667 2,693,626 5,294,859
Expenses:
Salaries & Commissions $ 966,235 $ 1,923,424 $ 1,438,385 $ 2,983,747
Selling & Administrative 588,707 969,004 752,346 1,458,214
Depreciation 10,923 21,561 13,379 25,559
Interest Expense 244,901 418,910 392,201 716,938
Cost and Expense of
Litigation 0 5,944 0 0
Total Expenses 1,810,766 3,338,843 2,596,311 5,184,458
Income (loss) Before
Income Taxes 195,658 188,824 97,315 110,401
Income Tax Provision 0 0 33,289 34,789
Net Income (loss) 195,658 188,824 64,026 75,612
Less Div. Paid on Preferred
Stock 0 0 0 0
Net Income(loss) Applicable
to Common Shareholders 195,658 188,824 64,026 75,612
Basic Net Income (loss)
Per Common Share .0631 0.0609 0.0164 .0201
Diluted Net Income(loss)
Per Common Share .0585 0.0565 0.0155 .0189
Shares used in computation
of Basic Net Income
Per Share 3,100,029 3,100,029 3,900,029 3,757,807
Shares used in computation
of Diluted Net Income
Per Share 3,342,029 3,342,029 4,142,029 3,999,807
The accompanying Notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Statement of Stockholders Equity
Six Months Ended October 31, 1998
(Unaudited)
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 end
April 30, 1998 241,429
Balance, April 30, 1998 2,382,895 (601,366) 1,781,529
Net Proceeds From Public Offering of
800,000 shares 4,153,508
Net Income for the period ended
October 31, 1998 75,612
Balance, October 31, 1998 6,536,403 (525,754) 6,010,649
The accompanying Notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Statement of Cash Flows
(Unaudited)
Six Months Ended Six Months Ended
Oct 31, 1997 Oct 31, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income or (Loss) $ 188,824 $ 75,612
Adjustments to Reconcile Net
Income To Net Cash Provided by
Operating Activities
Depreciation 21,561 25,559
Changes In:
Prepaids & Other Current Assets (245,684) (181,783)
Accrued Expenses & Other
Current Liabilities (56,384) (42,456)
Accounts Payable (62,601) 8,259
Deposits (455) (21,879)
NET CASH PROVIDED BY OPERATING ACTIVITIES (154,739) 136,688)
CASH FLOWS FROM INVESTING ACTIVITIES
Land Sales 0 303,250
Purchase of Fixed Assets (3,130) (190,969)
Goodwill 0 (60,291)
Servicing Rights 0 5,246
Investments (5,750) 0
NET CASH PROVIDED FROM INVESTING ACTIVITIES (8,880) 57,236
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Receivable 10,763 (84,322)
Changes in Short Term Debt 89,466 (395,773)
Changes in Long Term Debt 0 15,929
Officers Loans (10,107) (2,643)
Deferred Advisor Fees 78,000 78,000
Deferred Offering Expenses (45,548) 143,425
Preferred Stock Redeemed 0 (750,000)
Common Stock Proceeds - Net 0 4,153,508
Mortgage Loans Made (2,406,938) (14,809,312)
Changes in Bank Line of Credit 2,490,109 14,133,599
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 205,745 2,482,411
INCREASE (DECREASE) IN CASH 42,126 2,402,959
Cash at Beginning of Period 2,018,211 1,974,011
Cash at End of Period 2,060,337 4,376,970
The accompanying Notes are an integral part of this statement
</TABLE>
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
Notes to Financial Statements
October 31, 1998
(Unaudited)
Interim Financial Data
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with
the Company's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998. In the opinion of management, all adjustments
(consisting only of adjustments of a normal and recurring nature)
considered necessary for a fair presentation of the results of
operations have been included. Operating results for the six month
period ended October 31, 1998 are not necessarily indicative of the
results that might be expected for the year ended April 30, 1999.
Organization and Business of the Company
United Financial Mortgage Corp. 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 loans for the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation.
Summary of Significant Accounting Policies
Net Income(Loss) Per Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Earnings per share amounts for
all periods have been presented and, where appropriate, restated to
conform to SFAS No. 128 requirements.
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.
<PAGE>
United Financial Mortgage Corp.
Notes to Unaudited Financial Statements
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 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, generally
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.
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 andleasehold 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 basis 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.
<PAGE>
United Financial Mortgage Corp.
Notes to Unaudited Financial Statements
Goodwill
On October 9th, 1998 United Financial Mortgage Corp. purchased
certain assets of Mortgage Service of America, Inc., an Illinois mortgage
company. As part of the transaction broker fees and startup costs were
incurred and accounted for as an investment in the goodwill account of
the balance sheet
Notes Payable
The Company has mortgage warehouse credit facilities aggregating
$51 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 compensating balances.
Amounts outstanding under the various credit facilities consist
of the following:
October 31, 1998
$20 million mortgage warehouse credit facility at a
commercial bank; interest at LIBOR; plus 160 basis
points; expires 10/28/99 $ 17,705,333
$20 million mortgage warehouse credit facility at a
commercial bank; interest at LIBOR plus 185 basis
points; expires 09/99 0
$10 million mortgage warehouse credit facility at a
commercial bank; interest at Prime plus 1 percent;
expires 07/99 0
$1 million mortgage warehouse credit facility at a
commercial bank; interest at LIBOR; plus 160 basis
points; expires 10/28/98 265,086
Total $ 17,970,419
Convertible Debentures
In connection with a 1996 bridge financing during the period from
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 were to be redeemed upon the completion of an initial public
offering before maturity. If not repaid by maturity, the debentures were
to convert to 85,000 shares of Common Stock. The automatic conversion of
the debentures was extended until July of 1998. In July, the debentures
were redeemed plus accrued interest.
<PAGE>
United Financial Mortgage Corp.
Notes to Unaudited Financial Statements
Lease Commitments
The Company conducts its operations from leased premises and has several
equipment leases as part of standard business practice. The following table
reveals the estimated minumum rental payments under the Company's operating
leases. Total rent expense under these leases was approximately $127,509,301
for the six months ended October 31, 1998.
Future minimum rental payments for the next five years at
October 31, 1998 are as follows:
Period Ending October 31, Operating Leases
1999 $ 369,116
2000 286,913
2001 248,447
2002 95,721
2003 74,306
2004 9,900
Total Commitment $ 608,733
Income Taxes
The income tax provision consists of the following for the
period ended October 31:
1997 1998
Current:
Federal $ 0 $ 0
State 0 0
Deferred:
Federal $ 0 $ 23,193
State 0 11,596
Total $ 0 $ 34,789
The components of the deferred tax asset (liability) are as
follows for the periods ending October 31:
1997 1998
Loss Carry-Forward $(148,564) $ 0
Accelerated Depreciation 12,099 (10,626)
Deferred Receivables 3,368 (478,747)
Deferred Tax Asset
(Liability) 133,097 (489,373)
Valuation Allowance (87,334) 136,491
Net Deferred Tax Asset
(Liability) $ 45,763 $(352,882)
The effective tax rate for the three month periods ended Oct 31,
1997 and Oct 31, 1998 differ from the statutory Federal tax rate
of 34% due to valuation reserves on the recording tax loss
carry-forwards.
<PAGE>
United Financial Mortgage Corp.
Notes to Unaudited Financial Statements
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.
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
bonds have been converted.
The Company has reserved 110,000 shares of Common Stock for the
conversion of the debentures.
As of April 30, 1997, seventeen (17) units had been sold for aggregate
gross proceeds of $425,000. Debentures totaling $425,000 and 42,500 shares
of Common Stock were issued in conjunction with the sales. These debentures
plus interest were paid off during the quarter ended July 31, 1998.
Initial Public Offering
On May 26, 1998, the Company commenced an initial public offering of
800,000 shares of its common stock at a price of $6.50 per share. The
Company granted the underwriters a 45 day option to purchase up to an
additional 120,000 shares of common stock to cover over-allotments. The
underwriters did not acquire any additional shares of common stock pursuant
to the over allotment option. The net proceeds to the Company from the
offering, were $4,158,507. The Company has and intends to continue to use
the net proceeds for capital expenditures, sales, and marketing, expansion
of internal operations and working capital and general corporate purposes.
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.
<PAGE>
United Financial Mortgage Corp.
Notes to Unaudited Financial Statements
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. 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 October
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 242,000 common shares for issuance upon
exercise of all warrants.
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 October 31, 1997 and October 31, 1998, the Company had not
granted any options under the Plan.
At October 31, 1998, the Company has reserved 500,000 common
shares for issuance upon exercise of all 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 does not believe the outcome of these
lawsuits will have a material impact on the financial statements.
In June, 1995, Lawyers Title initiated a non-wage garnishment proceeding
against United Financial and its bank, which resulted in a lien being placed
upon United Financial's bank account in the amount of $565,649.26. Lawyers
Title had previously obtained a judgement 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 United Financial on the grounds that the money was tendered to United
Finacial by Dearborn Title in the mistaken belief that this money was owed to
United Financial 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.
United Financial has vigorously denied that Lawyers Title is
entitled to these funds and has claimed that Dearborn Title owed to
United Financial sums in excess of $565,649.26 and that United
Financial is entitled to retain these funds. By agreement of the
parties, the $565,649.26 was subsequently deposited with the Court.
On October 10, 1996 the United States District Court entered
judgment in favor of Lawyers Title against United Financial in the
amount of $583,049.26. The $565,649.26 plus interest held by the
Clerk of the Court was ordered to be paid to Lawyers Title. On November 6,
1996, United Financial appealed the October 10, 1996 judgement order to the
United Stated Court of Appeals for the Seventh Circuit.
<PAGE>
United Financial Mortgage Corp.
Notes to Unaudited Financial Statements
On July 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 judgement. The matter was remanded to
the District Court with directions.
On February 5, 1998, the District Court entered an order wherein
the motions for partial summary judgement by the Company and Lawyers
Title were each granted in part and denied in part.
The Company anticipates that the District Court will set for
jury trial all remaining issues in controversy, but, to date, no
trial date has been set.
Basis of Presentation
Earnings per share is presented in accordance with the provision
of the Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128), which requires the presentation of "basic" and
"diluted" earnings per share. Basic earnings per share is based on
the weighted average shares outstanding without regard for common
stock equivalents such as stock options and warrants. Diluted
earnings per share includes the effect of common stock equivalents.
The following reconciles basic earnings per share to diluted earnings
per share under the provisions of SFAS 128:
Period ended October 31, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share
Income Available to Common
Shareholders 188,824 3,100,029 0.0609
Effect of Dilutive Securities
Options and Warrants 242,000
Diluted Earnings Per Share
Income Available to Common
Shareholders 188,824 3,342,029 0.0565
Period ended October 31, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share
Income Available to Common
Shareholders 75,612 3,757,807 .0201
Effect of Dilutive Securities
Options and Warrants 242,000
Diluted Earnings Per Share
Income Available to Common
Shareholders 75,612 3,999,807 .0019
<PAGE>
ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements which involve risks
and uncertainties. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of certain factors.
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
Six Months Ended October 31, 1997 and 1998
The six month period ended October 31, 1998 was a period of significant
accomplishment for the Company. Interest rates were favorable, loan volume
was up, and the company completed its first acquisition.
Commission and fee revenue increased from $3,527,667 for the six months
ended October 31, 1997 to $5,294,859 for the six months ended October, 1998.
This percentage increase of approximately 50% is primarily the result of an
increase in the number of loan originations. The increase in loan
originations was the result of lower interest rates and an increase in loan
origination efforts.
Interest income increased from $402,320 for the six months ended
October 31, 1997 to $716,938 for the six months ended October 31, 1998.
This increase was attributable to the increase in loan originations and
higher interest income on invested capital.
Salary and commissions expenses increased from $1,923,424 for the six
months ended October 31, 1997 to $2,983,747 for the six months ended October
31, 1998. The increase was attributed to two main factors. The increased
number of loan originations in the comparable time periods and continued
investment in the expansion of the Company's sales organization.
Selling and administrative expenses increased from $969,004 for
the six months ended October 31, 1997 to $1,458,214 for the six
months ended October 31, 1998. This percentage increase of
approximately 50% reflected the continued efforts in infrastructure
and technology advancements. In addition, the incremental costs
associated with being a public company contributed to the increase
Depreciation expense increased slightly from $21,561 for the six
months ended October 31, 1998 to $25,559 for the six months ended
October 31, 1998. This is principally a result from the purchase of
additional computer equipment in the first half of fiscal year 1999.
This computer equipment acquisition is in line with the Company's
strategy for technological advancement and infrastructure improvements.
Interest expense increased from $418,910 for the six months
ended October 31, 1997 to $716,938 for the six months ended October
31, 1998. This increase was the result of increased use of warehouse
lines of credit to fund the increased loan originations.
<PAGE>
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 the six months ending October 31,
1997 and October 31, 1998, respectfully. This consists of $156,000
recorded as advisory fees in the first half of 1997 and 1998. Without
this non-cash charge, net income would have been $344,824 in the first half
fiscal year 1998 and $231,612 in the first half fiscal year 1999.
Liquidity and Capital Resources
During the six months ended October 31, 1997 and October 31, 1998, net
cash generated(used) by operating activities was($154,739) and ($136,688)
respectively. Net cash used by operating activities decreased from the first
half of 1998 to the first half of 1999, despite increased expenses associated
with being a public company and infrastructure growth.
Net cash generated (used) by investing activities increased from
($8,880) for the period ended October 31, 1998 to $57,236 for the quarter
ended October, 1998. The increase in cash provided from 1998 to 1999 is
largely attributable to the sale of two foreclosed properties from 1998 in
1999. This was partially offset by investments in fixed assets and goodwill
associated with the purchase of certain assets of Mortgage Service America,
Inc. on October 9th of this year.
Cash flow from financing activities for the first half of 1998 and first
half of 1999 was $205,745 and 2,482,411, respectively. This change is
largely from the public offering. Net proceeds from the public offering
totaled $4,153,508. A portion of these proceeds were used to redeem certain
preferred stock shares(150 shares totalling $750,000) and certain 1996
debentures($490,000).
Therefore, the net cash flow from operating, financing, and
investing activities was $205,745 for the first half ended October
31, 1997 and $2,402,9959 for the first half ended October 31, 1998.
Capital expenditures for the period ended October 31, 1998 were
approximately $90,000, 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 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
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 a contemplated,
but uncompleted, public offering in late fiscal 1994 and fiscal 1995.
<PAGE>
The Company used $750,000 of the proceeds of the offering to
redeem a portion of the Series A Preferred Shares held by the J.K.
Trust, and approximately $490,000 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 from 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 is expected to create an asset on the Company's balance
sheet.
The Company obtained two new credit lines during the past six months
totalling $30 million in additional loan funding capacity. The Company is
continually 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 continue to 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.
Acquisition
On October 9, 1998 the Company completed its first acquisition by
acquiring certain assets of Mortgage Service America, Inc. a Lombard,
Illinois Mortgage Company. Management thinks that the transaction will
serve to fulfill its growth strategies in the wholesale business segment.
The acquisition is expected to assist the company in the development of
its servicing portfolio. In addition, the acquisition is expected to
facilitate the company's growth strategy into other areas.
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 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 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 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.
<PAGE>
Inflation and Seasonality
The Company believes the effect of inflation, other than its
potential effect on market interest rates, has been insignificant.
Historically, seasonal fluctuations in mortgage originations
generally do not have a material effect on the financial condition or
operations of the Company. Due to the technological and infrastructure
advancements, such as increasing the servicing portfolio, the Company
hopes to continue to minimize seasonality fluctuations.
Accounting Developments
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." ("SFAS 130"). SFAS 130, establishes the standards
for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) as part of a full set of financial
statements. This statement requires that all elements of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The statement is effective for
fiscal years beginning after December 15, 1997. Since the standard applies
only to the presentation of comprehensive income, it should not have any
impact on the Company's results of operations, financial position or
cash flows.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
segments of an Enterprise and Related Information." ("SFAS 131"). SFAS 131
if effective for years beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS
No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997, and therefore the Company has adopted the new
requirements.
<PAGE>
Year 2000 Impact
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Certain
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
or engage in similar business activities.
The Company has reviewed its computer systems and applications to
determine if these programs are Year 2000 compliant and if not, the efforts
that will be necessary to bring the programs into compliance. The Company
has not identified any computer system or application that, upon failure to
be year 2000 compliant, would have a material adverse impact on its business
activities or results of operations. However, the preliminary results of
this review indicate that some of the Company's accounting and financial
reporting applications are not Year 2000 compliant. For purposes of
enhancing operating efficiencies, the Company has already undertaken a
project that will replace its core financial systems with computer software
that will better serve the Company in the future. This new software,
that is expected to be fully operational by the end of 1999, is Year
2000 compliant.
The Company is currently evaluating any necessary modifications to other
existing software programs so that these programs will function properly with
respect to dates in the year 2000. The cost of these modifications is not
expected to be material and all conversions and modifications are expected to
be completed in a timely manner. The company will be participating in the
near future in year 2000 readiness test sponsored by the Mortgage Bankers
Association. If any issues arise from this test the company will
react in a timely manner to address these issues.
Certain Relationships and Related Transactions
On November 20, 1998 the Company completed a second mortgage
loan on the principal residence of Mr. Rocco Cappiello, a director of
the Company, in the amount of $150,000. The loan was made on terms
generally more favorable to the Company that would otherwise be
available in the competitive marketplace. Further, the Company
secured its loan position with collateral, both real and personal
property, substantially in excess of its underwriting guidelines for
other similar loans in the ordinary course of its business. The loan
was made from funds other than the net proceeds from the Company's
recently completed public offering.
On December 8, 1998, Mr. Joseph Khoshabe, as Trustee of the
Joseph Khoshabe Trust, ("Trust") granted an option to Mills Financial
Services, Inc. ("Mills") to purchase up to 300,000 of its restricted
common shares of the Company at a purchase price of $3.50 per share.
The option was granted for 45 days in consideration of Mills payment
of $25,000 to the Trust.
<PAGE>
PART II - OTHER INFORMATION
ITEM
1. Legal Proceedings - See page 13, hereof.
2. Changes in Securities - None
(a) None
(b) None
(c) None
(d) None
3. Defaults upon Senior Securities - None
4. Submission of Matters to a vote of Security Holders
On August 25, 1998, the Company held its annual meeting of
shareholders. Shareholder's voted to elect the proposed slate
of directors and approved the appointment of the Company's
independent auditors.
5. Other Information - None
6. Exhibits and Reports on form 8-K
(a) Exhibit (see exhibit list)
(b) Reports on Form 8-K - (1) The Company filed current reports
on Form 8-K on September 3, 1998, September 23,
1998, October 2, 1998, October 13, 1998
and October 22, 1998.
<PAGE>
ITEM 6(a) EXHIBIT LIST
DESCRIPTION
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
United Financial Mortgage Corp.
December 14, 1998 By: /s/ Joseph Khoshabe
Joseph Khoshabe
Chairman and Chief Executive
Officer
December 14, 1998 By: /s/ Steve Khoshabe
Steve Khoshabe
Chief Financial Officer
December 14, 1998 By: /s/ Robert S. Luce
Robert S. Luce, Secretary
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916823
<NAME> UNITED FINANCIAL MORTGAGE CORP
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> APR-30-1998 APR-30-1999
<PERIOD-START> MAY-01-1997 MAY-01-1998
<PERIOD-END> OCT-31-1997 OCT-31-1998
<CASH> 2,060,337 4,376,970
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 18,688,204 34,366,879
<PP&E> 311,900 533,740
<DEPRECIATION> (176,239) (226,043)
<TOTAL-ASSETS> 19,312,060 35,006,914
<CURRENT-LIABILITIES> 16,130,638 28,651,886
<BONDS> 0 0
0 0
1,065,000 315,000
<COMMON> 2,382,895 6,536,403
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 19,312,060 35,006,914
<SALES> 3,125,833 4,596,604
<TOTAL-REVENUES> 3,527,667 5,294,859
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,291,933 4,467,520
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 418,910 716,938
<INCOME-PRETAX> 188,824 110,401
<INCOME-TAX> 0 34,789
<INCOME-CONTINUING> 188,824 75,612
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 188,824 75,612
<EPS-PRIMARY> .06 .02
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