<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-27037
800,000 SHARES
OF
COMMON STOCK
LOGO
OF
UNITED FINANCIAL MORTGAGE CORP.
United Financial Mortgage Corp. (the "Company") hereby offers 800,000 shares
of Common Stock, no par value ("Common Stock" or "Shares"). The initial
offering price of the Common Stock will be $6.50 per share. The Company
anticipates that upon completion of this offering, the Common Stock will be
listed on the Chicago Stock Exchange ("CSE") under the symbol UFM. Prior to
this offering there has been no public market for these securities. No
assurance can be given that a trading market will develop, or, if developed,
that it can or will be maintained for these securities. See "Underwriting" for
information relating to the determination of the offering price. There are
certain risk factors which should be considered before purchasing Shares. See
"Risk Factors."
---------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION.
SEE "RISK FACTORS" AND "DILUTION."
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
NEITHER THE ATTORNEY GENERAL OF THE STATES OF NEW YORK OR NEW JERSEY, THE
NEW JERSEY BUREAU OF SECURITIES NOR THE SECURITIES LAW COMMISSIONER OF ANY
OTHER JURISDICTION HAS PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $6.50 $0.65 $5.85
Total(3)........................................ $5,200,000 $520,000 $4,680,000
- -------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(See footnotes on next page)
The Common Stock is offered on a "firm commitment" basis by the underwriter
when, as and if delivered to and accepted by it, subject to prior sale and
certain other conditions and legal matters. It is expected that delivery of
the Shares will be made against payment in Los Angeles, California, on or
about June 1, 1998.
---------------
MILLS FINANCIAL SERVICES, INC.
---------------
The date of this Prospectus is May 26, 1998.
<PAGE>
(Footnotes to distribution table)
(1) In addition, the Underwriter will receive: (a) a non-accountable expense
allowance of 3% of the gross proceeds from this offering of the Shares;
(b) an Underwriter's Warrant to purchase 80,000 Shares based upon 10% of
the Shares sold in the public offering at a price of $7.80 per Share (120%
of the public offering price of the Shares); (c) certain other
compensation, all as more particularly described in "Underwriting."
Further, the Company will indemnify the Underwriter against certain civil
liabilities arising under the Act. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $259,000,
excluding the Underwriter's non-accountable expense allowance. However,
commissions and the non-accountable expense allowance (aggregating 13.0%
of gross offering proceeds) will be paid from the proceeds of the
offering. See "Underwriting."
(3) The Company has granted to the Underwriter an option, exercisable within
45 days after the date hereof, to purchase up to 120,000 additional shares
of Common Stock solely to cover over-allotment, if any. If such option is
exercised in full, the Price to Public, Underwriting Discount and Proceeds
to Company at the offering price of $6.50 per share would be $5,980,000,
$598,000 and $5,382,000, respectively. See "Underwriting."
----------------
Prior to this offering, there has been no public market for the securities
of the Company and there can be no assurance that any such market will develop
or be sustained after this offering. The initial public offering price of the
securities has been determined by negotiation between the Company and the
Underwriter and does not necessarily reflect the Company's asset value,
performance or any other established criteria. For information regarding the
factors considered in determining the initial public offering price of the
securities and the terms of the Underwriter's Warrant, see "Underwriting."
AS OF THE DATE OF THIS PROSPECTUS, THE COMPANY WILL BECOME SUBJECT TO THE
REPORTING REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934 AND IN
ACCORDANCE THEREWITH WILL FILE REPORTS, PROXY STATEMENTS AND OTHER INFORMATION
WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY INTENDS TO FURNISH
ITS STOCKHOLDERS WITH ANNUAL REPORTS CONTAINING AUDITED FINANCIAL STATEMENTS
AND SUCH OTHER PERIODIC REPORTS AS THE COMPANY DEEMS APPROPRIATE OR AS MAY BE
REQUIRED BY LAW.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) found
elsewhere in this Prospectus. All information in this Prospectus unless
otherwise indicated, assumes no exercise of any outstanding warrants. All
references to shares of Common Stock described in this Prospectus have been
adjusted to give effect to a two (2) for three (3) reverse stock split that was
implemented by the Company on May 9, 1995. Prospective investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
United Financial Mortgage Corp. (the "Company") is an Illinois corporation
organized on April 30, 1986 to engage in the residential mortgage banking
business. The Company's primary focus has been the retail and wholesale
origination of mortgage loans for one-to-four family properties. The Company is
an approved mortgage loan seller/servicer with the Federal Home Loan Mortgage
Corporation ("FHLMC" or "Freddie Mac") and with the Federal National Mortgage
Association ("FNMA" or "Fannie Mae"). In addition, the Company is an approved
mortgagee by the Federal Housing Administration ("FHA") and the Department of
Veteran's Affairs ("VA").
The Company's strategy is to expand retail and wholesale loan origination;
and build a quality servicing business. Increased loan origination will expand
the Company's revenue base and provide select loans for the expansion of its
servicing business. An expanded servicing business consisting of quality loans
will enhance earnings by providing revenues on a stabilized basis. Servicing
revenues generally are realized on a consistent basis without the cyclical
dynamics generally attributable to the loan origination business. Expanded
servicing also will create an additional asset that Management believes will
increase the Company's value over the long term.
Management believes that the Company's business plan of combining expanded
loan origination with the development of a quality servicing portfolio, along
with the Company's continuing objective of improving operating efficiencies,
strategically will place the Company in a strong competitive position entering
the 21st century.
THE WHOLESALE ORIGINATION DIVISION
Wholesale loan origination involves the funding by the Company of loans
submitted by unaffiliated 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 Company generally sells loans to investors at pre-
approved purchase prices which serves to reduce the risk of a loss on such
sale(s). Wholesale loan origination tends to generate less revenues on a per
transaction basis than retail origination, 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. This operating structure enables the Company to quickly enter
new markets.
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 who procure the loan and assist in the loan origination process.
The Company sells substantially all of the mortgage loans that it produces.
The Company sells these loans to investors (which may include brokers/dealers,
banks, thrifts, insurance companies, and state and local housing
3
<PAGE>
finance agencies), either as individual loans or pursuant to certain bulk
purchase commitments. The Company also engages in the origination and brokerage
of loans on commercial real estate assets, 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
commercial loans.
The Company's loan origination activities are conducted through its corporate
headquarters offices in Oak Brook, Illinois; Creve Coeur, Missouri; Las Vegas,
Nevada and Irvine, California.
THE SERVICING DIVISION
The Company's long term plans include the servicing of select loans that it
originates. Loan servicing consists of collecting principal and interest
payments from borrowers, remitting aggregate principal and interest payments to
investors, making cash advances, when required, accounting for principal and
interest, collecting funds for payment of mortgage-related expenses, such as
taxes and insurance, inspecting the mortgage premises as required, contacting
delinquent mortgagors, conducting foreclosures and property dispositions in the
event of unremedied defaults and generally administering the mortgage loans.
QUALITY CONTROL
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 Company's offices are located at 600 Enterprise Drive, Suite #206, Oak
Brook, Illinois 60521 and its telephone number is (630) 571-7222.
THE OFFERING
Securities Offered.................... 800,000 shares of Common Stock to
be issued and sold by the Company
("Common Stock" or "Shares").
Common Stock Outstanding Before
Offering(1)..........................
3,100,029(3)
Common Stock To Be Outstanding After
Offering(2)..........................
3,900,029(3)
Use of Proceeds....................... For expansion of origination of
mortgage loans, servicing activi-
ties, repayment of debt, purchase
of preferred stock and for working
capital purposes.
Proposed CSE Symbol(2)................ UFM
- --------
(1) Unless otherwise indicated, references in this Prospectus to Common Stock
Outstanding Before and After this offering do not include (i) issuance of
up to 80,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrant; (ii) 500,000 shares reserved for issuance under the
Company's Non-Qualified and Incentive Stock Option Plan (the "Stock Option
Plan"); and (iii) up to 242,000 shares of Common Stock issuable upon
exercise of certain Warrants as described herein. See "Description of
Securities" for a description of securities issued in connection with
certain prior financings of the Company.
4
<PAGE>
(2) CSE symbols do not imply that a meaningful or sustained trading market for
the securities will develop.
(3) As of January 31, 1998.
RISK FACTORS
The securities offered hereby involve a high degree of risk and immediate
and substantial dilution. See "Risk Factors" and "Dilution."
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following financial and operating information of the Company does not
purport to be complete and is qualified in its entirety by reference to the
more detailed financial and operating information contained elsewhere herein.
See "Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
APRIL 30, JANUARY 31,(1)(2)
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
Statement of earnings data:
Total revenues............ $ 6,442,428 $ 5,696,382 $ 4,558,438 $ 5,316,194
Total expenses............ 7,024,040 6,405,032 5,187,511 5,101,005
Earnings (loss) before
income taxes............. (581,612) (708,650) (629,073) 215,189
Income taxes.............. -0- (53,774) -0- -0-
Net earnings (loss)....... (581,612) (654,876) (629,073) 215,189
Net income (loss) applicable
to Common Shareholders..... $ (581,612) $ (654,876) $ (629,073) $ 215,189
Earnings (loss) Per Share:
Earnings (loss) per common
share.................... $ (.193) $ (.211) $ (.203) $ 0.069
Number of shares
outstanding................ 3,001,975 3,100,029 3,095,029 3,100,029
Balance Sheet Data:
Total assets.............. $20,068,331 $16,662,646 $11,533,707 $13,154,935
Total liabilities......... $17,860,855 $14,057,546 $ 8,927,803 $10,334,645
Stockholder's equity...... $ 2,207,476 $ 2,605,100 $ 2,605,904 $ 2,820,290
</TABLE>
- -------
(1) This Prospectus contains unaudited financial statements for the nine
months ended January 31, 1997 and audited financial statements for the
nine months ended January 31, 1998 (See "Financial Statements").
(2) Commencing from the effective date of the registration statement relating
to this Prospectus, Mr. Khoshabe's employment agreement with the Company
will be effective on the following terms:
1. Employment Term--Five (5) years.
2. Annual Salary--$250,000.
3. Annual Salary Increase--Ten percent (10%).
4. Health Insurance for Mr. Khoshabe and his family--$5,000 (annual
estimated premium).
5. Car Allowance--$25,000 per annum.
6. Long Term Disability--$1,980 (annual estimated premium).
7. Incentive Compensation--Additional cash compensation in the amount of
ten percent (10%) of any increase in the Company's net income before
taxes as compared to the preceding fiscal year.
In addition, for fiscal 1996 and 1997, the Company recorded $170,000 and
$180,000 of salary for Mr. Khoshabe of which the 1996 amount was recorded,
but not paid. For each of the nine (9) month periods ending respectively
January 31, 1997 and January 31, 1998, Mr. Khoshabe was paid $135,000 as
reflected in the financial statements of the Company.
5
<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk. Prospective
investors should carefully consider, among other things, the following risk
factors before a decision is made to purchase any Shares.
RISKS RELATING TO REGISTRATION RIGHTS OF CERTAIN SHAREHOLDERS AND WARRANT
HOLDERS.
The Company previously issued 567,149 shares of restricted Common Stock and
warrants to purchase 242,000 shares ("Shares"). The impact of the subsequent
sales of these Shares could have a depressive effect upon the public market
price for the Shares held by purchasers of Shares in this offering. See
"Description of Securities" and "Shares Eligible for Future Sale."
RISKS RELATING TO SERVICING OPERATIONS
The Company intends to expand its loan servicing activities and those
operations will be subject to all of the risks inherent in the establishment
of a new business enterprise, including the absence of a substantial operating
history, and if the Company decides to establish an internal servicing
department, the need to assemble an experienced administrative staff.
Additional risks relating to servicing operations include early mortgage loan
prepayments which result from sales of underlying properties and refinancing
transactions. Such prepayments may result in reduced revenues to the Company.
The success of any mortgage servicing operation that may be expanded by the
Company will depend in part on the Company's ability to sell promptly those
mortgage loans to investors, with servicing rights retained. Accordingly,
adverse changes in the secondary market, including the level of activity or
underwriting criteria of FNMA, FHLMC and other investors could have a material
adverse effect on this aspect of the Company's business. See "The Company and
the Business--the Servicing Division."
RISKS RELATING TO CREDIT FACILITIES
The Company has available three (3) credit facilities from three (3) lender
for up to Twenty Two Million Five Hundred Thousand Dollars ($22,500,000) for
the purpose of funding loans. One facility for up to $20.0 million will expire
on October 28, 1998, unless extended. The Company also has available a
commercial credit facility of up to One Million Five Hundred Thousand Dollars
($1,500,000) for the purpose of originating and servicing commercial loans and
another credit facility for up to One Million Dollars ($1,000,000) for loan
repurchases from investors. There can be no assurance that these or other
credit facilities will continue to be available to the Company on an
indefinite basis. See "The Company and its Business--Loan Funding and
Warehousing."
Included with the aggregate credit facilities described above, the Company
also has available a commercial credit facility of up to One Million Five
Hundred Thousand Dollars ($1,500,000) for the purpose of originating and
servicing commercial loans and another credit facility for One Million Dollars
($1,000,000) for loan repurchases from investors. There can be no assurance
that these or other credit facilities will continue to be available to the
Company on an indefinite basis. See "The Company and its Business--Loan
Funding and Warehousing."
RISKS RELATING TO AVAILABILITY OF PERSONAL GUARANTIES
Certain of the Company's credit facilities have been personally guarantied
by Mr. Joseph Khoshabe, the Company's President. Mr. Khoshabe does not have
any obligation to make any personal guaranties available to the Company in the
future. The absence of such personal guaranties in the future may adversely
affect the Company's ability to borrow.
6
<PAGE>
GENERAL BUSINESS RISKS
The Company's business is subject to various business risks. The Company's
mortgage banking activities are dependent on the demand for mortgage loans by
potential borrowers and investors. Changes in the level of consumer
confidence, real estate values, prevailing interest rates, and investment
returns expected by the financial community could make mortgage loans of the
type arranged by the Company less attractive to borrowers or investors.
The Company's long-term strategy is to expand its loan servicing division.
Although mortgage servicing fees generally provide more predictable cash flow
as compared with income from mortgage origination, which may fluctuate with
general economic conditions, servicing activities also entail certain risks.
In addition, the Company may be required to advance delinquent loan payments
pursuant to the regulations of FNMA and FHLMC; and the requirements of certain
private investors. Although the Company would be expected to be reimbursed for
all or a portion of such advances, it would not be compensated for the costs
of making such advances.
The risks to which the Company's business is subject becomes more acute in
an economic slowdown or recession. During such periods, foreclosures and
losses to investors generally increase and could result in an increased
incident of claims and legal actions against the Company. In addition, such
conditions could lead to a potential decline in demand for the Company's loan
origination services. Although the Company's retail and wholesale loan
origination activities occur primarily in certain states, it is anticipated
that its loan servicing could include properties in states other than those
where it conducts origination activities. Adverse economic conditions could
result in reduced loan production by the Company and could cause an increase
in delinquencies and foreclosures relating to loans serviced by the Company in
the future.
In addition, the mortgage banking business is highly competitive and price
sensitive, and some of the Company's competitors have greater financial
resources and pricing flexibility than the Company. See "The Company and its
Business."
INTEREST RATE RISKS
Prevailing market interest rates, which have an impact on borrower decisions
to obtain new loans or to refinance existing loans, affect the Company's
ability to originate mortgage loans. When interest rates decrease, the
economic advantages of refinancing mortgage loans increase. However, when
interest rates decrease, increases in the rate of prepayments of mortgage
loans may reduce the period during which the Company earns servicing income
from loan servicing activities. The Company believes that these effects should
be offset by increased loan origination and a related increase in the size of
the Company's servicing portfolio. Furthermore, as a result of the Company's
strategy of maintaining continuing customer relationships, the Company
historically has been able to recapture a substantial amount of refinanced
loans and home purchase mortgages from prior customers. No assurance can be
given that the Company will be able to recapture such loans in the future.
NEED FOR ADDITIONAL CAPITAL TO IMPLEMENT LONG-TERM PLANS
The Company's cash flow requirements are related to its overhead costs, the
cost of funding loans prior to sale, payment of direct and indirect costs of a
closed loan and the costs of expansion. At the current level of operation, the
Company believes its existing capital, the net proceeds of this offering,
existing credit facilities as well as cash flow from operations will meet the
Company's cash flow requirements for at least the next 12 months and,
thereafter, for the foreseeable future. However, as the Company seeks to
materially expand its loan origination business and its servicing business,
and if such expansion is achieved, the Company's cash flow requirements will
increase.
Because the Company's loan origination business requires continued access to
adequate credit facilities, the Company is dependent on the availability of
such credit facilities for the origination of loans prior to their sale. In
addition, the Company may be required to invest capital in establishing or
acquiring a portfolio of loans to
7
<PAGE>
expand its loan servicing business. This capital may be required either to
purchase an existing servicing portfolio or to fund the cost of retaining the
servicing rights on loans which are originated and sold by the Company. In the
event that the proceeds received by the Company from this offering, cash flows
from operations, existing capital and current credit facilities prove to be
insufficient to meet the Company's capital requirements to fund loans prior to
sale and to expand its loan servicing business, the Company may be required to
seek additional financing. There can be no assurance that such financing will
be available on favorable terms, or at all. To the extent that the Company is
not successful in maintaining or replacing existing financing or obtaining
additional financing, it may have to curtail its loan origination activities
and the expansion of its loan servicing business, which could have a material
adverse effect on the Company.
The Company believes that the increase in its equity capital resulting from
the sale of Common Stock offered hereby will enhance the Company's ability to
obtain additional credit. As a result, the Company will continue to employ
substantial leverage in the conduct of its business. The degree to which the
Company is leveraged could have important consequences to holders of the
Common Stock. Such potential consequences include the following: (i) the
Company's ability to grow will depend on its ability to obtain additional
future financing and that ability may be impaired by the extent of leverage
employed by the Company; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing funds available to finance existing
operations or the expansion of the Company's business: and (iii) the extent of
leverage may place the Company at a competitive disadvantage and make it more
vulnerable to economic downturns. See "The Company and its Business."
RISKS ASSOCIATED WITH APPROVAL AS A FHLMC AND A FNMA SERVICER
The Company is an approved seller/servicer of mortgage loans for FHLMC and
FNMA. In addition, the Company is an approved mortgagee by HUD and is
qualified to originate mortgage loans insured by the FHA and VA. If the
Company fails to comply with the seller/servicer guidelines relating to its
loan origination and servicing activities, its approval as a seller/servicer
could be withdrawn and its servicing rights could be transferred to another
servicer without compensation to the Company. See "The Company and its
Business--The Servicing Division."
RISKS ASSOCIATED WITH REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY
When a mortgage loan originator (retail or wholesale) sells a mortgage loan
to FNMA, FHLMC or other investors, it makes certain representations and
warranties as to the compliance by the originator with applicable underwriting
guidelines. A loan originator or the purchaser of loan servicing rights
generally becomes obligated to the investor with respect to the accuracy of
those representations and warranties, and if those representations and
warranties are incorrect, the investor may require the servicer or the lender
who originated the loan to repurchase the mortgage loan. Consequently, any
loss resulting from a material inaccuracy in the representations and
warranties would fall on the servicer or the Company as the originating
seller/servicer of the loan. The Company will attempt to limit its exposure to
repurchase risks through (i) quality control requirements imposed on its
origination staff, both internally and through third party quality control
experts, and (ii) by negotiating appropriate representations and warranties
and indemnification from entities from which it acquires mortgage loans. In
addition, with respect to mortgage loans originated by it, the Company will be
required in the ordinary course of business, to make representations and
warranties to the purchasers of servicing rights, and investors and insurers
of such loans. Losses resulting from a material inaccuracy in those
representations and warranties would fall on the Company. From time to time,
the Company could be obligated to repurchase loans as a result of breach of
such representations and warranties. A breach or breaches of representations
and warranties could have a material adverse affect upon the financial
condition of the Company. See "The Company and its Business."
RISKS ASSOCIATED WITH LACK OF DIVERSIFIED PORTFOLIO
In the event the Company services loans in geographic markets which suffer
from slow growth or poor economic conditions, the Company could experience a
high rate of delinquency and foreclosures. Such
8
<PAGE>
conditions could materially and adversely effect the Company's revenue and net
income. Although the Company might attempt to reduce such risk through the
acquisition of servicing portfolios in diverse geographic regions, there can
be no assurance that such attempts would be successful. See "The Company and
its Business--The Loan Servicing Division."
GREATER RESOURCES OF COMPETITORS
The mortgage banking industry is competitive and competition is based
heavily on price. Many of the Company's competitors have greater financial
resources than the Company and consequently may be able to achieve economies
of scale that are unavailable to the Company.
REGULATION
Mortgage banking is a highly regulated industry. The industry is subject to
the rules and regulations of, and examination by, FNMA, FHLMC, FHA, the
Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the
Veteran's Administration ("VA") and state regulatory authorities with respect
to originating, processing, underwriting, selling, securitizing and servicing
residential mortgage loans. In addition, there are other federal and state
statutes and regulations affecting such activities. These rules and
regulations, among other things, govern how mortgage originators originate
loans; and with respect to loan servicing, govern how mortgage servicers
process a mortgagor's payment, require an annual analysis of escrow balances
and also regulate the procedure for making investor payments.
There also are numerous rules and regulations imposed on mortgage loan
originators and servicers. These rules and regulations require originators to
obtain or maintain licenses, establish eligibility criteria for mortgage
loans, prohibit discrimination, provide for inspections and appraisals of
properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan
amounts. Failure to comply with these requirements could lead to loss of
approved status, termination of servicing contracts without compensation to
the servicer, demands for indemnification or loan repurchases, class action
lawsuits and administrative enforcement actions. There can be no assurance
that more restrictive laws, rules and regulations will not be adopted in the
future, which could make compliance more difficult and expensive.
DEPENDENCE UPON THE PRESIDENT
The success of the Company generally is dependent upon Mr. Khoshabe, its
president. The loss of the services of Mr. Khoshabe could have an adverse
effect upon the Company if a replacement cannot be quickly retained. No
assurance can be given that a suitable replacement could be attracted to the
Company. The Company does not have "key-man" life insurance on the life of Mr.
Khoshabe. See "Management." The Company also has an employment agreement with
Mr. Khoshabe wherein he has agreed to maintain his employment with the Company
for a term of 5 years commencing from the effective date of the registration
statement relating to this Prospectus. See "Management--Compensation of
Directors and Executive Officers."
DIVIDEND POLICY
The Company has never declared or paid a dividend on its Common Stock, and
management expects that the substantial portion of the Company's future
earnings will be retained for expansion or development of the Company's
business. 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. See "Dividend
Policy."
CONTROL BY THE PRESIDENT
The Joseph Khoshabe Trust, dated September 22, 1995, ("J.K. Trust") of which
Mr. Joseph Khoshabe is the trustee, currently owns approximately 81.6% of the
outstanding Common Stock of the Company. Upon completion of this offering, the
J.K. Trust will own approximately 64.8% of the outstanding Common Stock of
9
<PAGE>
the Company. Accordingly, the J.K. Trust and indirectly, Mr. Joseph Khoshabe,
the President of the Company, will continue to exercise control over the
Company, including control over the election of directors and the appointment
of officers of the Company, after the completion of this offering. The
practical effect of Mr. Khoshabe's control over the election of the Board of
Directors is that Mr. Khoshabe's employment with the Company cannot be
terminated. For example, if the Board of Directors were to terminate Mr.
Khoshabe's employment contract, then Mr. Khoshabe, as the trustee of the J.K.
Trust could call a special meeting of shareholders. At such special meeting,
the J.K. Trust could vote to remove all directors other than Mr. Khoshabe. The
reconstituted Board of Directors could then reemploy Mr. Khoshabe. See
"Principal Stockholders."
CONFLICTS OF INTEREST
The Board of Directors generally has the responsibility for determining the
compensation of the employees of the Company, including the Company's
officers. Prior to the election of the additional Board members as described
herein, no independent outside authority has reviewed or approved the
decisions of the Board of Directors concerning compensation matters.
Historically, Mr. Joseph Khoshabe, as the sole director, set his own
compensation. Thirty (30) days after the completion of the offering described
in this Prospectus, three (3) non-employee designees have agreed to become
members of the Board. It is contemplated that audit and compensation
committees composed of non-employee members of the Board of Directors will be
established. See "Management."
A potential conflict of interest may exist as a result of Mr. Joseph
Khoshabe's affiliation with the J.K. Trust resulting from his capacity as the
trustee of the J.K. Trust. It is possible that the interests of the J.K. Trust
could conflict with the interests of the Company. Another potential conflict
of interest could arise between the Company and the Underwriter relating to
the current indebtedness of $80,000 owed to the Company by Mr. Joseph
Kurczyodyna, President of the Underwriter. The Company is not aware of any
actual conflicts relating to the above matters. See "Principal Stockholders"
and "Underwriting."
NO PRIOR PUBLIC MARKET FOR SECURITIES; POSSIBLE VOLATILITY OF SECURITIES
PRICES
Prior to this Offering, there has been no public market for the Company's
securities. Concurrently with the Offering, the Company's Common Stock will be
listed on the Chicago Stock Exchange ("CSE"). However, there can be no
assurance that an active trading market will develop after this offering, or
that, if developed, it will be sustained. Recent history relating to the
market prices of newly public companies indicates that, there may be
significant volatility in the market for such securities because of factors
unrelated, as well as related, to such company's operating performance. See
"Underwriting."
ARBITRARY DETERMINATION OF OFFERING PRICE
The public offering price of the Shares has been arbitrarily determined by
negotiations between the Company and the Underwriter. Among the factors
considered in determining the offering price were the Company's financial
condition and prospects, market prices of similar securities of comparable
publicly traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and the
general condition of the securities market. However, the offering price of the
Shares does not necessarily bear any relationship to the Company's assets,
book value, earnings, or any other established criterion of value. See
"Underwriting."
MARKET OVERHANG FROM WARRANTS
Immediately after the offering, the Company will have outstanding warrants
to purchase 242,000 Shares, including warrants issued in connection with
certain prior financings of the Company. To the extent that such warrants are
exercised, dilution of the interests of the Company's stockholders may occur.
Moreover, the terms upon which the Company would be able to obtain additional
equity capital may be adversely affected since the holders of the outstanding
warrants can be expected to exercise them, to the extent they are able to, at
a time when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than those provided in the
warrants. Furthermore, the sale of Common Stock or other securities held by or
issuable to the holders, or merely the potential of such sales, could have an
adverse effect on the market price of the Company's securities. See
"Description of Securities" and "Shares Eligible for Future Sale."
10
<PAGE>
STOCK OPTION PLAN
The Company has reserved 500,000 shares of its Common Stock for issuance
upon exercise of stock options (for which no options have been granted)
pursuant to its Non-Qualified and Incentive Stock Option Plan ("Plan").
Exercise of outstanding stock options will reduce the percentage of Common
Stock held by the public stockholders and dilute the market value for those
shares. Further, the terms on which the Company could obtain additional
capital during the life of the stock options may be adversely affected, and it
might be expected that the holders of the stock options would exercise same at
a time when the Company would be able to obtain equity capital on terms more
favorable than those provided for in the stock options. The Company may file a
registration statement under the Act to register Common Stock to be issued to
employees and others pursuant to the Plan. Exercise of these registration
rights will result in dilution of the interest of the public stockholders and
could involve a substantial expense to the Company and could prove a hindrance
to future financings. See "Management--Stock Option Plan."
POSSIBLE RESALES UNDER RULE 144
After the consummation of the offering, 3,100,029 shares of Common Stock
held by the Company's present stockholders will not have been registered under
the Act, but may, under certain circumstances, be available for public sale by
means of ordinary brokerage transactions in the open market pursuant to Rule
144, promulgated under the Act, subject to certain limitations. In general,
under Rule 144, a person (or persons whose shares are aggregated) who has
satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period the number of securities which does not exceed
the greater of 1% of the then outstanding shares of Common Stock or the
average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the
sale of securities, without any limitation, by a person who is not an
affiliate of the Company and who has satisfied a three-year holding period.
The possibility of any such sale may adversely affect the market price of the
Company's securities. In addition, holders of warrants, the holders of Shares
issuable upon exercise of stock options granted pursuant to the Stock Option
Plan and Shares issued with respect to certain prior financings of the
Company, have certain registration rights under the Act, which would permit
the future public sale of the underlying shares of Common Stock. See "Shares
Eligible for Future Sale."
POSSIBLE DELISTING FROM THE CHICAGO STOCK EXCHANGE ("CSE") AND "PENNY STOCK"
RISKS
The trading of the Company's stock on the CSE is conditioned upon the
Company meeting certain asset, capital and surplus, earnings and stock price
tests. If the Company fails any of these tests, the Common Stock may be
delisted from trading on the CSE. The effects of delisting include the limited
release of the market prices of the Company's securities and limited news
coverage of the Company. Delisting may restrict investors' interest in the
Company's securities and materially adversely affect the trading market and
prices for such securities and the Company's ability to issue additional
securities or to secure additional financing. In addition to the risk of
volatility of stock prices and possible delisting, low price stocks are
subject to the additional risks of additional federal and state regulatory
requirements and the potential loss of effective trading markets. In
particular, if the Common Stock were delisted from trading on the CSE and the
trading price of the Common Stock was less than $5.00 per share, the Common
Stock could be subject to Rule 15g-9 under the Securities Exchange Act of
1934, as amended, which, among other things, requires that broker/dealers
satisfy special sales practice requirements, including making individualized
written suitability determinations and receiving any purchaser's written
consent prior to any transaction. If the Company's securities were delisted
and the trading price was less than $5.00 per share, the Company's securities
also could be deemed penny stocks under the Securities Enforcement and Penny
Stock Reform Act of 1990, which would require additional disclosure in
connection with trades in the Company's securities, including the delivery of
a disclosure schedule explaining the nature and risks of the penny stock
market. Such requirements could severely limit the liquidity of the Company's
securities and the ability of purchasers in this offering to sell their
securities in the secondary market.
AFFECT OF FUTURE ISSUANCE OF PREFERRED SHARES
The Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designations preferences and
relative participating, optional or other special rights and qualifications,
limitations or restrictions thereof,
11
<PAGE>
including dividend rights, terms of redemption (including sinking fund
provisions), conversion rights and liquidation preferences of the shares
constituting any series, without further vote or action by the shareholders.
The issuance of preferred stock by the Board of Directors could adversely
affect the rights and/or voting power of holders of Common Stock. The
authority possessed by the Board of Directors to issue preferred stock
potentially could be used to discourage attempts by others to obtain control
of the Company through merger, tender offer, proxy contest or otherwise, by
making such attempts more difficult to achieve or more costly. See
"Description of Securities."
POTENTIAL EXPENSES ARISING FROM INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Articles of Incorporation and Bylaws of the Company provide for
indemnification of each director and officer or former director or officer or
any person who may have served at the request of the Company as a director or
officer of another corporation in which the Company owns securities or is a
creditor. Such provisions eliminate, with certain exceptions, the personal
liability of the directors to the Company and the Company's stockholders for
monetary damages as a result of a breach of fiduciary duty, making it more
difficult to assert a claim and obtain damages from a director in the event of
a breach of his or her fiduciary duty. The Company will indemnify against
reasonable costs and expenses incurred in connection with any action, suit or
proceeding to which any of the individuals described above were made a party
by reason of his or her being or having been such a director or officer,
unless such director has been adjudicated to have been liable for negligence
or misconduct in his or her corporate duties. As of the date of this
Prospectus, the Company is not aware of any existing or pending litigation
involving a director that will require indemnification by the Company. To the
extent the Company is required to expend funds to indemnify officers and
directors, there could be a materially adverse effect on the financial
condition of the Company.
Notwithstanding the foregoing indemnification provisions of the Company's
Articles of Incorporation and Bylaws, the Company has been informed that, in
the opinion of the Commission, indemnification for liabilities arising under
the Securities Act is against public policy and is therefore unenforceable.
See "Commission Position on Indemnification for Securities Act Liabilities."
DILUTION AND SHARE PRICE DISPARITY
At the public offering price of $6.50 per share for the sale of the shares
offered hereby, purchasers of the shares will incur immediate dilution of
approximately $4.96 per share in net tangible book value which represents a
percentage dilution of 76.4%. See "Dilution."
Prospective investors also should consider the purchase price disparity
between what current shareholders paid for their shares and the offering price
of $6.50 per share. Current shareholders have paid share prices ranging from
$.05 per share to $2.25 per share and have been issued shares upon conversion
of debentures at the conversion rate of $4.50 per share. On average, current
shareholders have paid $.39 per share.
LACK OF UNDERWRITING HISTORY
Mills Financial Services, Inc., the Underwriter, has not previously
participated as an underwriter on a firm commitment basis and has not
previously been an underwriter of an initial public offering. In 1994, Mills
Financial Services, Inc. attempted an initial public offering for the Company
on a best efforts--minimum or none basis. Mills Financial Services, Inc. was
not successful in completing the minimum sales amount and the offering was
withdrawn by the Company. Prospective purchasers of the Common Stock offered
hereby should consider the limited experience of Mills Financial Services,
Inc. in evaluating an investment in the Common Stock. See "Underwriting."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The Company believes that this Prospectus contains forward-looking
statements, including statements regarding, among other items, the Company's
future plans and growth strategies and anticipated trends in the industry in
which the Company operates. These forward-looking statements are based largely
on the Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially from these forward-looking statements as a result of
the factors described herein, including, among others, regulatory or economic
influences. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this Prospectus
will in fact transpire or prove to be accurate.
12
<PAGE>
RISKS RELATING TO USE OF OFFERING PROCEEDS
Prospective investors are urged to consider management's broad discretion in
allocating a substantial percentage (24.8%) of the net offering proceeds to
working capital. This broad discretion may result in management's application
of working capital in ways not contemplated at the time of this Offering. See
"Use of Proceeds."
RISKS RELATING TO FINANCIAL STATEMENT LOSSES
Prospective investors are urged to carefully review and consider the
operating losses incurred by the Company as reflected in the financial
statements attached hereto. No assurance can be given that such operating
losses will not continue in the future.
NEGATIVE RETAINED EARNINGS
At January 31, 1998, the Company had negative retained earnings of
$(627,606). This balance represents the results of the Company's operation
from inception to January 31, 1998. The Company's operations have been
negatively impacted by the accounting requirement to record interest expense
in the amount of $225,101 and $69,380 for fiscal years ended April 30, 1996
and 1997, respectively. These amounts were based on the value of the common
stock component of the Company's units issued in each fiscal year in
connection with the 1995 Bridge Financing and the 1996 Financing. The
aggregate of these non-cash, interest expenses through January 31, 1998 is
$438,233. In addition, during the fiscal year ended April 30, 1997, the
Company paid and recorded as an expense the amount of $734,000 as the result
of a judgment and related litigation expense concerning a dispute over the
entitlement to funds paid to the Company. Although the non-cash interest
expenses and the judgment amount are not directly related to operation by the
Company of its business as a residential mortgage banker, the impact of these
items has resulted in the Company having negative retained earnings.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, and after deducting underwriting discounts, the underwriter's
non-accountable expense allowance and other expenses of the offering estimated
at an aggregate of approximately $935,000 (approximately $1,036,400 if the
over-allotment option is exercised in full), will be $4,265,000 (approximately
$4,943,600 if the over-allotment option is exercised in full). The Company
intends to use the net proceeds of this Offering approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
DOLLAR OF NET
DESCRIPTION AMOUNT PROCEEDS
----------- ----------- -----------
<S> <C> <C>
Originate Mortgage Loans.......................... $2,000,000 46.9%
Redemption of a portion of Series A Preferred
Stock(1)......................................... 750,000 17.6%
Retirement of Convertible Debentures(2)........... 425,000 10.0%
General Working Capital and Capital Expenditures
purposes(3)...................................... 1,090,000 24.8%
---------- -----
</TABLE>
- --------
(1) The J.K. Trust is the holder of such shares of Series A Preferred Stock.
Mr. Joseph Khoshabe, the President of the Company, controls the J.K. Trust
in his capacity as trustee of the trust. See "Certain Relationships and
Related Transactions" and "Description of Securities--Series A Preferred
Stock" for additional information regarding the Preferred Stock held by
the J.K. Trust.
(2) The Convertible Debentures are held by unaffiliated holders who purchased
the debentures pursuant to the 1996 Financing. Net proceeds of this
Offering up to $425,000 have been allocated to the redemption of all of
the 1996 Debentures. Some holders of 1996 Debentures may elect to receive
1996 Conversion Shares (common stock), as defined herein, rather than
receive payment of the redemption price and accrued interest upon
redemption of the 1996 Debentures. Any unallocated net proceeds of this
Offering not otherwise applied to redeem the 1996 Debentures will be
allocated to general working capital of the Company. See "History of
Security Placements--1996 Financing."
(3) The Company expects that the net proceeds relating to General Working
Capital and Capital Expenditure purposes will be applied as follows:
$300,000 for computer enhancements; up to $600,000 for the opening of new
loan origination offices and $190,000 for general working capital.
13
<PAGE>
The net proceeds from this Offering will not be utilized to make loans to
officers, directors or other affiliates of the Company.
While the foregoing represents the Company's present intention with respect
to the use of the offering proceeds, capital requirements or business
opportunities, none of which are currently anticipated, could cause Management
to elect to use proceeds for other general corporate purposes and for other
purposes not contemplated at this time. Pending the use of the net proceeds,
the Company will invest them in money market accounts and short-term
certificates of deposit.
The Company believes that cash flow from operations, together with the net
proceeds of this Offering, will meet the Company's cash requirements for at
least the next twelve (12) months.
DIVIDEND POLICY
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. See
"Risk Factors--Dividend Policy."
DETERMINATION OF THE OFFERING PRICE
No market for the Shares has existed prior to this offering, and no
assurance can be made that a viable public market will be developed or be
sustained after the offering. The initial public offering price of the Shares
has been determined by negotiations among the Company and the Underwriter.
Among the factors considered by the Company and representatives of the
Underwriter in determining the initial public offering price of the Shares, in
addition to prevailing market conditions, were the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuations of companies in related
businesses.
DILUTION
At January 31, 1998, the Company had outstanding an aggregate of 3,100,029
shares of Common Stock having an aggregate net tangible book value of
$1,755,290, or approximately $0.57 per share. Net tangible book value per
share consists of total assets less intangible assets and liabilities, divided
by the total number of shares of Common Stock outstanding.
After giving effect to the sale of 800,000 shares of Common Stock at the
public offering price of $6.50 per share, the pro forma net tangible book
value of the Common Stock at January 31, 1998 would be $5,982,788, or
approximately $1.54 per share. This represents an immediate increase in pro
forma net tangible book value of $.97 per share to the present shareholders
and an immediate dilution of $4.96 per share to the public purchasers. The
following table illustrates the dilution which investors participating in this
offering will incur and the benefit to current shareholders as a result of
this offering:
<TABLE>
<S> <C> <C>
Public offering price per share (1)................................ $6.50
Net tangible book value per share before Offering (2)............ .57
Increase per share attributable to Shares offered hereby......... .97
---
Pro forma net tangible book value per Share after offering......... 1.54
-----
Dilution of net tangible book value per Share to purchasers in this
offering.......................................................... $4.96
=====
</TABLE>
- --------
(1) Represents the public offering price per share of Common Stock before
deductions of underwriting discounts and commissions and estimated
expenses of the offering.
14
<PAGE>
(2) Assumes no exercise of Warrants or the Underwriter's over-allotment
option. See "Description of Securities" and "Underwriting."
The following table sets forth the number and percentages of shares of
Common Stock issued, and the amount and percentage of consideration and
average price per share paid by existing shareholders of the Company as of
January 31, 1998, and to be paid by purchasers pursuant to this Offering
(based the public offering price of $6.50 per Share and before deducting
underwriting discounts and commissions and estimated expenses of this
offering).
<TABLE>
<CAPTION>
OWNERSHIP CONSIDERATION
----------------- ------------------ APPROXIMATE
NUMBER OF AVERAGE PRICE
SHARES PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
New Shareholders.......... 800,000 20.5% $5,200,000 81.1% $6.50
Existing Shareholders..... 3,100,029 79.5% $1,215,019 18.9% $ .39
--------- ------ ---------- ------
3,900,029 100.00% $6,415,019 100.00%
========= ====== ========== ======
</TABLE>
The foregoing table gives effect to the sale of the Shares offered hereby
and does not give effect to the exercise of the Underwriter's over-allotment
option or any Warrants.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1998 to give effect to the receipt and anticipated use of the net
proceeds of this Offering based upon the public offering price of $6.50 per
share.
<TABLE>
<CAPTION>
JANUARY 31, 1998
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Notes payable and line of credit..................... $ 9,517,019 $ 9,517,019
----------- -----------
1996 Financing Convertible Debentures................ 425,000 --
Series A Preferred Stock, no par value; no stated
value per share; authorized 213 shares; issued and
outstanding--213 shares actual and 63 shares as
adjusted............................................ 1,065,000 315,000
Stockholders' Equity
Common Stock, no par value; authorized--20,000,000
shares; issued and outstanding--3,100,029 actual;
and 3,900,029 as adjusted......................... 2,382,895 6,647,895
Retained Earnings.................................. (627,606) (627,606)
----------- -----------
Total Stockholders' Equity....................... 1,755,289 6,020,289
----------- -----------
Total Capitalization............................. $12,762,308 $15,852,308
=========== ===========
</TABLE>
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 and
services commercial loans; and services residential mortgage loans.
RESULTS OF OPERATIONS
Two Years Ended April 30, 1997
Commissions and fees decreased from $5,810,360 for the year ended April 30,
1996 to $5,292,856 for the year ended April 30, 1997. This percentage decrease
of approximately 9% is primarily the result of a decrease in the number of
loan originations from 1,656 during the year ended April 30, 1996 to 1,460
during the year ended April 30, 1997. Aggregate loan volume originated
decreased from $200 million to $190 million between the same periods. The
decrease in loan originations was the result of higher interest rates.
Interest income decreased from $632,068 for the year ended April 30, 1996 to
$403,526 for the year ended April 30, 1997. This decrease was attributable to
decreased loan activity.
15
<PAGE>
Salary and commission expenses decreased from $4,398,955 for the year ended
April 30, 1996 to $3,731,207 for the year ended April 30, 1997. This decrease
was directly attributable to the decreased number of loan originations,
investment in the expansion of the Company's sales organization during fiscal
1996 and the Company operating more efficiently in 1997.
Additionally, during the year ended April, 1996, the President of the
Company waived salary entitlements of any kind partially to offset the effect
of expansion upon the Company's salary and commission expense. $170,000 of
compensation expense was recorded for the President for the period ended April
30, 1996 in conformity with applicable accounting requirements. Also, the
Company has no contractual obligation or agreement with Mr. Khoshabe regarding
the payment of any compensation relating to the fiscal year ended April 30,
1996. Mr. Khoshabe was paid a salary during fiscal 1997 in the amount of
$180,000 that is reflected in the financial statements for that fiscal period.
Selling and administrative expenses decreased from $1,901,754 for the year
ended April 30, 1996 to $1,593,958 for the year ended April 30, 1997. This
percentage decrease of approximately 19% reflected increased operating
efficiencies of the Company.
Depreciation expense increased slightly from $32,658 for the year ended
April 30, 1996 to $38,045 for the year ended April 30, 1997 principally as a
result of additional computer equipment acquired in fiscal 1997.
Interest expense decreased from $690,673 for the year ended April 30, 1996
to $307,766 for the year ended April 30, 1997. This approximate 55% decrease
in interest expense was the result of reduced use of lines of credit and lower
interest charges on various financings.
During the fiscal year ending April 30, 1997, the Company recognized a loss
from a judgment 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 judgment and associated legal expenses
totaled approximately $734,000.
During the fourth quarter of the year ending April 30, 1996 salary and
commission costs increased approximately $75,000 and administrative cost
increased approximately $140,000. This was the result of the Company starting
an expansion plan. The Company does not expect these costs to have a material
impact on future operating results. These adjustments to operating results
were non-recurring in nature and were attributed to the fourth quarter when
they were incurred.
As a result of the foregoing, net loss increased from a loss of $581,612 for
the year ended April 30, 1996 to a loss of $708,650 in the year ended April
30, 1997. Without the effect of the aforementioned judgment, net income for
the year ended April 30, 1997 would have been $25,406. The Company made no
provision for income taxes in fiscal 1996 and recorded a deferred tax asset of
$45,763 for fiscal year 1997.
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 fiscal years 1996 and 1997. This consists of $156,000
recorded as advisory fees in both fiscal 1996 and 1997 and amortization of
debenture discount of $225,101 recorded in fiscal 1996 and $69,380 recorded in
fiscal 1997. Without these non-cash charges, and without the judgment referred
to above, net income (loss) would have been ($200,511) in fiscal 1996 and
$304,560 in fiscal 1997.
Nine Months ended January 31, 1997 and 1998
This Prospectus contains unaudited financial statements for the nine months
ended January 31, 1997; and audited financial statements for the nine months
ended January 31, 1998. (See "Financial Statements"). The unaudited financial
statements for nine months ended January 31, 1997 and the audited financial
statements for nine months ended January 31, 1998 are discussed below.
Commissions and fees increased from $4,195,183 for the nine months ended
January 31, 1997 to $4,890,898 for the comparable period in fiscal 1998. This
percentage increase of approximately 17% principally was the result of an
increase in the number of loan originations from period to period.
16
<PAGE>
Interest income increased from $363,255 for the nine months ended January
31, 1997 to $425,296 for the comparable period in fiscal 1998. The increase in
interest income of approximately 17% between periods was attributable to an
increase in loan originations and higher interest income on invested capital.
Salary and commission expenses decreased from $3,058,293 for the nine months
ended January 31, 1997 to $2,903,612 for the nine month period ended January
31, 1998. This decrease was due to economies of scale benefiting the Company
as it positioned itself for future growth.
Selling and administrative expenses increased from $1,195,986 for the nine
month period ended January 31, 1997 to $1,448,632 for the nine month period
ended January 31, 1998. This percentage increase of approximately 17% reflects
increased expenses related to increased loan originations and the higher costs
associated with increased staffing in the sales organization. Selling and
administrative expenses as a percentage of revenues was a constant of 27% in
the corresponding periods.
Depreciation expense increased from $29,423 for the nine months ended
January 31, 1997 to $32,836 for the nine months ended January 31, 1998.
Interest expense increased from $228,809 for the nine month period ended
January 31, 1997 to $688,360 for the nine month period ended January 31, 1998.
This increase was attributable to higher costs of borrowings.
As a result of the foregoing, net income increased from ($629,073) for the
nine months ended January 31, 1997 to $215,189 for the nine months ended
January 31, 1998.
Costs and expense of litigation decreased from $675,000 for the nine months
ended January 31, 1997 to $27,565 for the nine months ended January 31, 1998.
This decrease was due to the non-recurring payment of $675,000 as the result
of a judgment and related litigation expense during the nine months ended
January 31, 1997.
As referred to above, the Company's results of operations include certain
non-cash charges related to certain equity transactions. These included
$117,000 of advisory fees in the nine months ended January 31, 1997 and 1998
and $46,875 amortization of discount in the nine months ended January 31, 1997
and $143,750 amortization of discount in the nine months ended January 31,
1998. Without these non-cash charges, net income would have been ($465,198)
for the nine months ended January 31, 1997 and $475,939 for the nine months
ended January 31, 1998.
During the period ended January 31, 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 books and records at a
carrying value equal to 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, 1996 and April 30, 1997, net cash generated
(used) by operating activities was ($269,036) and ($607,513), respectively.
During the nine month periods ending January 31, 1997 and January 31, 1998,
net cash generated (used) by operating activities was ($950,275) and $275,609,
respectively. Net cash generated by operating activities decreased from fiscal
year 1996 to fiscal year 1997 primarily because of decreased loan originations
and higher financing costs. Net cash generated by operating activities
increased from the nine month period ended January 31, 1996 to the nine month
period ended January 31 primarily because of increased loan origination volume
and lower financing costs.
The balances of accounts receivable at April 30, 1997 and January 31, 1998
were comparable for the periods.
Capital expenditures for the year ended April 30, 1997 were approximately
$29,618 principally in computer technology and to a lesser extent for the
expansion of sales organization facilities. The Company believes it will
continue to make investments in computer technology in the near future to
upgrade and maintain its product and
17
<PAGE>
service offerings. The Company believes that such investments could aggregate
$200,000 to $300,000 over the next two years, but has no specific plans at
present for such expenditures.
The Company may consider acquisitions of other mortgage businesses as part
of implementing its strategies. There are no specific plans at present for
such expenditures.
Cash flow requirements depend on the level and timing of the Company's
activities in loan originations 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
this 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 four years at
various times, principally to fund the costs associated with a contemplated,
but uncompleted, public offering in late fiscal 1994 and fiscal 1995. These
transactions are more fully described in the section entitled "Historical
Security Placements."
The Company is obligated to use $750,000 of the proceeds of this Offering to
redeem a portion of the Series A Preferred Shares held by the J.K. Trust, and
$425,000 of the proceeds to retire certain convertible debentures. The Company
anticipates employing the remainder of the net proceeds of this financing as
additional equity to commit to the funding of mortgage loans and for the
purpose of supporting increased lines of credit to be used to fund such loans.
Although the Company cannot be assured of the availability of additional
credit, the Company reasonably anticipates that the availability of the net
proceeds of this Offering will result in an increase in the availability of
credit to the Company.
The commitment of additional capital and an increased credit amount will
permit the Company to fund or purchase a greater number of mortgage loans. The
ability of the Company to profit from such increased funding capability will
depend upon the Company's ability to originate additional loans or purchase
loans which generate fees, commissions and net interest income in the
aggregate which exceeds the Company's expenses. There can be no assurance that
the Company will be able to employ the additional capital and credit resources
to fund transactions which result in a profit 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 which it
originates. Such retention will result in a 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 will be required to obtain additional capital to achieve its
long-term objectives. The Company has no commitments to obtain such capital
and there can be no assurance that such capital will be available to the
Company in the future or, if available, will be on terms acceptable to the
Company.
The Company's existing capital, the proceeds of this offering and other
financing, its credit facilities, as well as cash flow expected to be
generated from operations, are expected to satisfy the Company's cash
requirements for at least the next twelve (12) months, and principally will be
applied to originate loans. However, Management believes that the Company will
require additional credit over the next three (3) years in order to expand its
loan origination capabilities and expand its loan servicing business. The
Company is presently in discussions with various lenders for additional lines
of credit, and Management believes that the increase in the Company's equity
as a result of this financing 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. If such additional
18
<PAGE>
credit is not available to the Company, the Company could be required to
reduce the scope of its operations, which could adversely affect the Company's
results of operation.
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, but higher interest rates generally result in
smaller mortgage companies leaving the market resulting in potentially larger
market shares for continuing mortgage bankers. The Company believes that
proceeds from the 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, including expanded use of
Internet capabilities. The Company believes that the proceeds from the
financing will allow the Company to make 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
California and, as such, may be subject to the effects of economic conditions
and real estate markets specific to such locales.
INFLATION AND SEASONALITY
The Company believes the effect of inflation, other than its potential
effect on market interest rates, has been insignificant. Seasonal fluctuations
in mortgage originations generally do not have a material effect on the
financial condition or results of operations of the Company.
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 extinguishments
of liabilities. SFAS 125 requires that after a transfer of financial assets,
an entity recognize 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 operations, financial condition, or liquidity will be
immaterial.
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."
Upon consummation of the offering, 150 shares of the Preferred Stock will be
redeemed by the Company for a redemption price of $750,000 and no longer will
be 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.
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<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.
PRINCIPAL STOCKHOLDERS
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 Prospectus, as adjusted to reflect the sale of the Common Stock offered
hereby, by (i) each person known by the Company to beneficially own more than
5% of the Company's Common Stock, (ii) the Company's sole director, and (iii)
the officer and director of the Company beneficially owning such Common Stock.
The Company believes that Mr. Joseph Khoshabe as trustee 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 him.
<TABLE>
<CAPTION>
PERCENT OWNED(1)
NUMBER OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- ------------------------------------ --------- -------- --------
<S> <C> <C> <C>
J. K. Trust...................................... 2,531,842 81.6% 64.8%
c/o United Financial Mortgage Corp.
600 Enterprise Drive
Suite 206
Oak Brook, IL 60521
Rocco M. Cappiello............................... 211,150(2) 6.4% 5.1%
30 S. Wacker
Suite 1310
Chicago, Illinois 60606
</TABLE>
- --------
(1) The computations include the issuance of 242,000 shares of Common Stock
upon exercise of various outstanding warrants which are exercisable within
60 days of the date of this Prospectus. See "Description of Securities--
Warrants."
(2) Mr. Rocco M. Cappiello has the right to acquire 195,000 of such shares
within sixty (60) days of the effective date of the registration statement
relating to this Prospectus upon exercise of the Advisor Warrant. See
"Description of Securities--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 this offering, that it will not sell the remainder of
20
<PAGE>
the shares held by it for a period of twelve (12) months after the effective
date of the registration statement relating to this Prospectus.
THE COMPANY AND ITS BUSINESS
MORTGAGE BANKING OPERATIONS
GENERAL
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, Virginia 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 January 31, 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.
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<PAGE>
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, 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. See "Loan Funding and Warehousing."
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
final 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.
22
<PAGE>
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.
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.
23
<PAGE>
TYPES OF LOANS ORIGINATED
The Company makes available on a retail and wholesale basis a wide variety
of mortgage products that are designed, in conjunction with the prospective
purchasers of such loans, to respond to consumer needs and competitive
factors.
Virtually all residential mortgage loans produced by the Company fall into
three (3) categories, which relate to the type of investors that will
subsequently purchase such loans. These categories are (i) loans that comply
with the requirements for sale to, or exchange for securities issued by FNMA
and FHLMC ("conforming conventional loans"); (ii) loans insured by the FHA or
partially guaranteed by the VA (collectively "Government Loans"); and (iii)
loans secured by mortgage liens or trust deeds on single (one to four unit)
family homes, which do not conform to FNMA, FHLMC, FHA or VA requirements
("nonconforming conventional loans") because of certain loan characteristics
and/or non-conforming credit issues.
The following table sets forth the number and dollar amount of the Company's
mortgage loan production on both a retail and wholesale basis for the periods
indicated (differences are due to rounding):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
(APPROXIMATE VOLUME OF LOANS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Residential Loans
Number of loans.. 1,460 1,656 1,049 1,340 952 647
Volume of loans.. $ 190 $ 200 $ 71 $ 153 $ 82 $ 56
</TABLE>
The Company offers 15-year and 30-year conventional mortgages and 15-year
and 30-year FHA and VA mortgages, as well as special products designed to
offer lower rates or lower principal and interest payments to its customers.
The Company offers a wide variety of combinations of interest rates and points
on many of its products so that its customers may elect to pay higher points
at closing and lower interest rates over the life of the loan, or pay a higher
interest rate and reduce or eliminate points payable at closing. The Company
also has "limited document" loan programs which do not require verification of
assets or income, first time home buyer programs and loan programs for sub-par
credits. In addition, the Company offers buydown-type mortgages, which allow
the borrower to make lower monthly payments for the first one, two or three
years of the loan. While the Company offers both fixed rate mortgages and
adjustable rate mortgages ("ARMs") and other residential mortgages, the demand
for fixed rate mortgages tends to increase in low interest rate periods and
decrease when rates are higher on a relative basis. The Company determined
that it would be inappropriate to record an accrual for losses with respect to
"limited document" and "sub-par-credit" loan programs because the Company only
accepts "limited document" loans for low loan to value and strong credit
scoring borrowers. With respect to programs for "sub-par credits", the Company
only participates in such loan programs where there is low loan to value. The
Company believes that these actions serve to substantially eliminate any loss
exposure for such non-conforming loans. Additionally, such "limited document"
and "sub-par credit" loans are sold in the secondary market on a pre-approved
basis. This means that the loan would not be originated unless there is an
investor in place who pre-approved the purchase of the loan.
Conforming conventional loans originated by the Company under FNMA or FHLMC
programs have maximum loan sizes which are larger than those loans qualifying
for the FHA and VA programs. The Company offers to make or purchase loans with
principal balances in excess of the FNMA and FHLMC maximum amounts ("jumbo
loans"), although the Company generally does not make or acquire single family
loans in excess of $1 million.
Mortgage loans originated by the Company are either purchase money loans,
which fund the purchase of primarily owner-occupied residential real property,
or refinance loans, which repay and replace existing mortgage loans. The
volume of refinance loans as a percentage of the Company's total mortgage loan
origination volume for the periods ended April 30, 1997, 1996, 1995, 1994 and
1993 was approximately twenty percent (20%), twenty percent (20%), sixty
percent (60%), fifty percent (50%) and sixty percent (60%) respectively. At
January 31, 1998, approximately thirty-five percent (35%) of the Company's
loan applications in process were refinance loans. See "The Company and its
Business--Mortgage Banking Operations--Servicing Division" below.
24
<PAGE>
LOAN FUNDING AND WAREHOUSING
The Company's mortgage loans on both a retail and wholesale basis are funded
with available cash resources and borrowings under lines of credit with banks.
See "Risk Factors--Need for Additional Capital to Implement Long Term Plans."
The Company repays borrowings and replenishes its cash resources with the
proceeds from the sale of mortgage loans. Borrowings under the lines of credit
generally are based on the prime rate of the lending bank.
The Company normally "warehouses" or holds, mortgage loans funded as
described above for ten (10) to one hundred eighty (180) days (on average
twenty (20) days during the year ended April 30, 1997), depending upon the
delivery dates negotiated with institutional investors, the volume of loan
origination, the availability of cash resources and the amount available under
warehousing lines of credit. The Company receives, as net interest income, the
difference between the interest received on mortgage loans held prior to sale
and the interest paid by the Company under such lines of credit. The Company
attempts to mitigate interest rate risk by warehousing mortgage loans for
relatively short time periods. This is accomplished by selling the loan to the
preselected investor as soon as possible after the loan closing. As described
above, this "holding" period averaged 20 days during the year ended April 30,
1997. Although this strategy may limit the amount of net interest income,
management believes this strategy is prudent, because it protects the Company
from unexpected interest rate fluctuations.
SALE OF LOANS
Mortgage loans originated by the Company on both a retail and wholesale
basis are sold to investors in the secondary market. In the future, the
Company expects to retain the right to service such loans on a selected basis
to build a high quality servicing portfolio. Conventional conforming loans
generally are sold for cash as individual whole loans to investors. The
Company is an approved seller/servicer with FNMA and FHLMC. The Company
expects to sell loans to FNMA and to FHLMC for cash or in exchange for
securities issued by FNMA and FHLMC which are then sold to securities dealers.
In connection with such exchanges, the Company will be required to pay a fee
for agency guarantees of principal and interest payments to holders of the
securities backed by the mortgage loans. The Company generally sells its
conventional non-conforming loans to institutional investors in privately
negotiated transactions. During fiscal 1997, virtually all of the Company's
mortgage loans were sold to non-agency investors. Loans generally are sold
pursuant to commitments negotiated with institutional investors to purchase
loans meeting defined criteria. The Company expects to enter into new
commitments with these investors in the ordinary course of its business.
In the ordinary course of business, the Company makes representations and
warranties to the purchasers and insurers of mortgage loans and remains liable
on VA loans in excess of the amounts guaranteed by the VA. Losses relating to
such representations and warranties and contingent VA loan exposures have been
immaterial.
In connection with loan exchanges and sales, the Company makes
representations and warranties which it believes are customary in the industry
relating to, among other things, compliance with laws, regulations, program
standards and information accuracy. In the event of a breach of these
representations and warranties, the Company could be required to repurchase
such loans. In fiscal years 1997, 1996, 1995, 1994, 1993 and 1992, the Company
has not experienced any losses relating to such representations and warranties
or to its contingent VA loan exposure.
THE SERVICING DIVISION
The Company's long term strategy is to expand its loan servicing division.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow funds for payment of mortgage related
expenses such as taxes and insurance, making advances to cover delinquent
payments, making inspections as required of the mortgaged premises, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in
the event of unremedied defaults and generally administering the loans.
25
<PAGE>
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, GNMA 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.
With respect to mortgage loans securitized through GNMA programs, 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, FHLMC and
GNMA would be obligated to reimburse 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.
26
<PAGE>
REGULATION
The Company's mortgage banking business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans. Those rules and regulations,
among other things, prohibit discrimination and establish underwriting
guidelines which include provisions for inspections and appraisals, require
credit reports on prospective borrowers and fix maximum interest rates.
Moreover, lenders are subject to FNMA, FHA, FHLMC, GNMA and VA examinations at
any times to assure compliance with the applicable regulations, policies and
procedures.
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.
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.
EMPLOYEES
As of January 31, 1998, the Company had approximately 55 employees,
substantially all of whom were full-time employees. Of these, approximately 21
were employed at the Company's Oak Brook, Illinois headquarters and the
remainder were employed at the branch offices, including employees who are
commission-based loan officers. None of the Company's employees is represented
by a union. The Company considers its relations with its employees to be good.
PROPERTIES
The Company's corporate and administrative headquarters are located in
leased facilities in Oak Brook, Illinois. These facilities comprise 4,807
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, 1997, 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, 1997 was $172,963.00. 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.
27
<PAGE>
Lease commitments for the five (5) years following April 30, 1997 are as
follows:
<TABLE>
<S> <C>
April 30, 1998................................................ $144,076
April 30, 1999................................................ $122,050
April 30, 2000................................................ $111,898
April 30, 2001................................................ $ 84,213
April 30, 2002................................................ $ 81,876
</TABLE>
The Company's corporate headquarters are located at 600 Enterprise Drive,
Suite #206, Oak Brook, Illinois 60521 and its telephone number is (630) 571-
7222.
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.
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.
28
<PAGE>
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
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.
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Joseph Khoshabe 53 President, Chief Executive Officer,
and Sole Director
Steve Y. Khoshabe 26 Executive Vice President and Chief Financial Offi-
cer
Glen H. Schap 50 Vice President and Secretary
John A. Clark 50 Nominee Director
David B. Mirza 59 Nominee Director
Robert S. Luce 51 Assistant Secretary and Nominee Director
</TABLE>
The Company has nominated Dr. David B. Mirza, Mr. John A. Clark and Mr.
Robert S. Luce to become directors of the Company. Messrs. Mirza, Clark and
Luce have agreed to become directors of the Company thirty (30) days after the
closing of the transactions contemplated in this prospectus. No assurance can
be given that any such director might change his decision to become a director
at some later date.
29
<PAGE>
JOSEPH KHOSHABE has been President and Chief Executive Officer of the
Company since its formation in 1986. Mr. Khoshabe is responsible for the day-
to-day administration of all operating activities at the Company, including
the supervision of all loan origination activities; personnel management and
financial matters affecting the Company. Prior to formation of the Company,
Mr. Khoshabe was an executive with the Cracker Jack Division of Borden, Inc.,
where he was employed for approximately 19 years. Mr. Khoshabe holds a
Bachelor of Arts Degree in Business Administrative/Economics from Governors
State University and a Bachelor of Science/Accounting from Tehran University.
STEVE Y. KHOSHABE joined the Company in December 1994 and became Executive
Vice President and Chief Financial Officer of the Company on June 3, 1996. Mr.
Khoshabe is the son of Mr. Joseph Khoshabe. Mr. Khoshabe was a student at the
Loyola University of Chicago, Graduate School of Business prior to joining the
Company. Mr. Khoshabe holds a Bachelor of Science degree in
Marketing/Economics from Bradley University and a Masters of Business
Administration/Finance from Loyola University of Chicago. Mr. Steve Khoshabe's
principal responsibilities include the monitoring of interest rates on the
Company's numerous loan products, quality control and managing the Company's
secondary marketing activities.
GLEN A. SCHAP joined the Company in 1992 as Vice President and Secretary.
Mr. Schap manages the Company's loan origination activities. Mr. Schap's
responsibilities include loan closing and the packaging and delivery of closed
loans to investors. Mr. Schap was associated with commercial and residential
loan departments of various banks and financial services companies for 15
years prior to joining the Company. Mr. Schap holds a degree in Economics from
Northeastern Illinois University.
JOHN A. CLARK retired as President and Chief Executive Officer of a Chicago
area banking group with $1.2 billion in assets in April of 1997. Mr. Clark
received a B.S. degree from the University of Wisconsin at Stevens Point,
Wisconsin.
DR. DAVID B. MIRZA has been employed at Loyola University, Chicago School of
Business Administration as an Associate Professor and Chair of the Economics
Department for the past five years. Prior to joining the faculty at Loyola
University, Mr. Mirza taught at Kalamazoo College and Dartmouth College. Dr.
Mirza holds a B.A. degree from Earlham College and a Ph.D. degree in Economics
from Northwestern University
ROBERT S. LUCE is an attorney who has been practicing financial services law
for 25 years, and provides legal services to the Company on certain matters
from time to time.
Directors are elected at each annual meeting of stockholders and serve until
the next annual meeting. Executive officers are elected at each annual meeting
of the Board of Directors and, subject to individual contractual arrangements,
serve at the pleasure of the Board of Directors. For a further description of
the employment agreement between the Company and its President, see
"Management--Employment Agreement."
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY BONUS COMPENSATION(1)(2)(3)(4)(6)
------------------ ---- ------ ----- ---------------------------
<S> <C> <C> <C> <C>
Joseph Khoshabe, Presi-
dent 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, Exec-
utive Vice President(6) 1997 $ 46,093 -0- $2,210
1996 $ 40,393 -0- $2,210
Glen A. Schap 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>
- --------
30
<PAGE>
(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 Nominee Directors have received any director
compensation from the company
(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 the closing of the proposed public offering, Mr.
Steve Khoshabe's annual base salary will be increased to $90,000.
This increase is attributable to an anticipated significant
increase in his responsibilities as a consequence of the public
offering by the Company.
EMPLOYMENT AGREEMENT FOR JOSEPH KHOSHABE
The Company has entered into an Employment Agreement with Mr. Joseph
Khoshabe to retain his services to the Company as President and Chief
Executive Officer. The Employment Agreement contains the following important
terms:
<TABLE>
<CAPTION>
Term Five (5) Years(1)
<S> <C>
Annual Salary $250,000
Annual Increases 10%
Health Insurance for Mr. Khoshabe
and his family $ 5,000 (Annual Estimated Premium)(2)
Car Allowance $ 25,000 (Per Annum)
Long Term Disability Insurance $ 1,980 (Annual Premium)(2)
</TABLE>
Incentive Compensation:
Additional cash compensation in the amount of ten
percent (10%) of any increase in the Company's net
income before income taxes as compared to the
preceding fiscal year.
- --------
(1) Commencing from the effective date of the registration statement relating
to this Prospectus.
(2) These items may increase in the future subject to premium costs.
The Employment Agreement may be terminated by the Board of Directors only by
unanimous vote and Mr. Khoshabe will be a member of the Board of Directors
after the three (3) additional nominees assume their directorships.
STOCK OPTION PLAN
On December 15, 1993 the Company adopted a Non-Qualified and Incentive Stock
Option Plan (the "Stock Option Plan" or "Plan") which provides for the grant
of non-qualified stock options ("Non-Qualified Options"), and incentive stock
options ("Incentive Options"). 500,000 shares of Common Stock have been
reserved for issuance under the Plan. The Plan is administered by a Stock
Option Committee appointed by the Board of Directors. Members of the Stock
Option Committee may not participate in the Plan. No options have been granted
under the Plan.
All salaried officers and key employees of the Company and any subsidiaries
are eligible to receive options under the Plan. The total amount of Common
Stock for which options may be granted to any one person may not exceed 10% of
the total shares reserved for issuance under the Plan. The Plan will terminate
by its terms on December 31, 2003 and also may be terminated at any time by
the exercise of all outstanding options.
31
<PAGE>
Options granted may be exercisable for up to ten years. If any options
granted under the Plan expire, terminate or are canceled for any reason
without having been exercised in full, the corresponding number of unpurchased
shares reserved for issuance upon exercise thereof will again be available for
the purposes of the Plan. The purchase price of the Common Stock under each
option shall not be less than 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 delivery of shares of the Company's common stock, or a
combination of cash and shares.
Options will be exercisable immediately, after a period of time or in
installments. Options will terminate not later than the expiration of ten
years from the date of grant, subject to earlier termination due to
termination of service. Except under certain circumstances where termination
of service is due to retirement or death, in which event options may be
exercised for an additional period of time following such termination of
service, the option may be exercised only while the optionee remains in the
employ of the Company or one of its subsidiaries.
UNITED FINANCIAL MORTGAGE CORP. 401(K) PLAN
The Company has adopted a 401(K) plan ("401(K) Plan") which became effective
on May 1, 1995. The 401(K) Plan provides for employee pre-tax contributions
from one percent (1%) to fifteen percent (15%) of salary. The Plan provides
for discretionary employee matching and employee discretionary contributions
to be determined by the employee each plan year. Company contributions, if
any, to the 401K Plan are made in the exercise of the Company's sole
discretion. The Plan covers all employees who satisfy eligibility
requirements.
COMPANY POLICY ON AFFILIATE TRANSACTIONS
All affiliate transactions are or will be on terms no less favorable to the
Company than those generally available from unaffiliated third parties and are
or will be ratified by a majority of independent outside disinterested members
of the Company's Board of Directors not having any interest in the
transactions. Mr. Khoshabe's Employment Agreement and the Company's Stock
Option Plan were entered into by the Company prior to the adoption of the
Company's Policy on Affiliate Transactions.
HISTORY OF SECURITY PLACEMENTS
2 FOR 3 REVERSE STOCK SPLIT
On May 9, 1995, the Company implemented a reverse stock split on the basis
that each outstanding three (3) shares of common stock, no par value, were
converted to two (2) shares of common stock, no par value. The reverse stock
split reduced the Company's outstanding shares of Common Stock at that date to
3,002,000 shares from approximately 4,530,000 shares. All share information
has been restated for the reverse stock split.
HISTORICAL STOCK ISSUANCES
All of Mr. Khoshabe's shares of common stock have been reregistered in the
name of the J. K. Trust. Prior to transfer to the J. K. Trust, Mr. Khoshabe
paid $130,070 for his shares of Common Stock, or $.051 per share. See
"Principal Stockholder."
1993 PRIVATE PLACEMENT
During the period from September 8, 1993 to December 14, 1993 ("1993 Private
Placement"), the Company engaged in an offering of 268,000 shares of its
Common Stock for $400,000.
PRIOR REGISTRATION STATEMENT
The Prior Registration Statement which was declared effective on June 14,
1994 registered 900,000 Units of the Company. Each Unit consisted of one (1)
share of Common Stock; and one (1) Class A Redeemable Stock Purchase Warrant.
The Prior Registration Statement also registered 90,000 Underwriter's
Warrants, the securities included in such Warrants and 128,460 shares of
Common Stock held by the Non-Affiliated Shareholders. The public offering
contemplated in the Prior Registration Statement failed to close on a "best
efforts" basis because,
32
<PAGE>
in part, of changes in the capital markets, and, at that time, the Company's
inability to attract a securities underwriting firm(s) to conclude a firm
commitment underwriting. No securities were sold by the Company pursuant to
the prior Registration Statement. The SEC consented to the withdrawal of the
Prior Registration Statement effective as of October 25, 1994.
1994 PRIVATE PLACEMENT
Under the terms of the November 15, 1994 private placement ("1994 Private
Placement"), the Company sold 220,000 shares of Common Stock for $2.25 per
Share. Gross proceeds from the 1994 Private Placement were $495,000. The net
proceeds of that offering were applied to (i) repurchase shares of Common
Stock from certain shareholders in the 1993 Private Placement who elected to
sell their shares to the Company; (ii) expand loan origination and servicing
activities and (iii) provide working capital to the Company.
Pursuant to the terms of the 1994 Private Placement, the Company offered
shareholders in the 1993 Private Placement the opportunity to either: (i)
retain some or all of their Shares and, with respect to the retained Shares,
granted to such shareholders registration rights entitling them to sell all of
such shares pursuant to a registration statement filed by the Company within
six (6) months of the effective date of the then proposed registration
statement, subject to state securities law regulations or underwriting
constraints; or (ii) sell some or all of their Shares back to the Company at
the original subscription price for the Shares, plus annual compounded
interest at ten percent (10%) of the subscription price for the Shares for the
period that the subscription proceeds were held by the Company. The Company
purchased 73,461 shares from such holders for $126,371.
1995 BRIDGE FINANCING
Pursuant to the terms of the May 15, 1995 private placement regarding a
certain bridge financing ("1995 Bridge Financing"), the Company offered and
sold two and one-half (2 1/2) units ("Units") each consisting of one (1)
$100,000, ten percent (10%) convertible debenture ("Debenture") and 22,000
shares of no par value common stock ("1995 Unit Shares"). Gross proceeds from
the 1995 Bridge Financing were $250,000.
The Debenture component of the Units provided for a maturity of twelve (12)
months commencing from the expiration date of the 1995 Bridge Financing
("Redemption Date"). The Debentures also provided for the payment of accrued
interest at an annual rate of ten percent (10%), commencing from the
expiration date of the offering through the Redemption Date. The Debentures
also provided for redemption and payment by the Company, in full, including
both principal and accrued interest, upon the completion of the then proposed
registration statement contemplated by the Company. The Debentures were not
redeemed on the Redemption Date, and pursuant to their terms, were
automatically converted into 55,555 Shares ("1995 Conversion Shares"). The
1995 Unit Shares and the 1995 Conversion Shares are not subject to redemption.
The Unit Shares and the Conversion Shares previously had been accorded
certain registration rights which provided that the Company within six (6)
months of the effective date of the then proposed registration statement,
would file another registration statement, at its expense, to register such
shares.
EXPIRATION OF REGISTRATION RIGHTS RELATING TO THE 1993, 1994 AND 1995 PRIVATE
PLACEMENTS
The registration rights granted by the Company in connection with the 1993
Private Placement, the 1994 Private Placement and the 1995 Bridge Financing
have expired by their terms. Therefore, with respect to the common stock
issued by the Company in connection with these offerings, the Company is under
no contractual obligation to file a registration statement for such shares or
include them in any registration statement otherwise filed by the Company.
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 consist 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").
33
<PAGE>
The 1996 Debenture component of the Units provides for a term of up to
twelve (12) months commencing from the expiration date of the 1996 Financing
("Redemption Date"). The 1996 Debenture also provides 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 provides
for mandatory redemption and payment by the Company, in full, including both
principal and accrued interest, upon the completion of this offering. If the
1996 Debentures are not redeemed, then the 1996 Debentures automatically
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.
Holders of 1996 Debentures representing 65,000 1996 Conversion Shares have
agreed to extend the automatic conversion of such debentures until June 30,
1998. Holders of the remaining 1996 Debentures have not responded to the
Company's extension request. The Company will accept responses to its
extension request through May 18, 1998. Any holders of 1996 Debentures who
elect not to accept the extension request or otherwise fail to respond will be
issued 1996 Conversion Shares as of April 30, 1998.
The 1996 Unit Shares and the 1996 Conversion Shares have been accorded
certain registration rights which provide that the Company, within six (6)
months of the effective date of the registration statement relating to this
Prospectus will file another registration statement, at its sole expense, to
register such shares.
Prospective investors in this offering should understand that the sale of
Shares by holders in the 1993 Private Placement, the 1994 Private Placement,
the 1995 Bridge Financing, the 1996 Financing and the shares relating to the
Warrants, as described herein, could have an adverse affect on the market
price of the Company's common stock at the time such sales are made.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 20,000,000 shares of Common stock, no par
value, and 5,000,000 shares of serial preferred stock. As of the date hereof,
and before consummation of this offering, 3,100,029 shares of Common Stock
were issued and outstanding. The outstanding Common Stock is fully paid and
non-assessable. The Company has one series of preferred stock, the Series A
Preferred Stock, of which 213 shares were purchased for a cash subscription
price of $1,065,000. All shares of Series A Preferred Stock are registered in
the name of the J.K. Trust.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share. No
cumulative voting is required or permitted. Therefore, the holders of a
majority of shares voting for the election of directors can elect all
directors, and the remaining holders will not be able to elect any directors.
Holders of Common Stock are entitled to receive such dividends, if any, as
the Board of Directors may from time to time declare out of funds the Company
has legally available for the payment of dividends. Holders of the Common
Stock are entitled to share pro rata in any dividends declared. It is not
anticipated that dividends will be paid in the near future. Future dividend
policy will depend upon conditions existing at that time, including the
Company's earnings and financial condition.
Upon liquidation, dissolution or winding-up of the Company, Common Stock
stockholders are entitled to receive pro rata all of the assets of the Company
available for distribution to stockholders. Stockholders of the Company do not
have preemptive rights or other rights to subscribe for or purchase any stock,
options, warrants or other securities offered by the Company.
PREFERRED STOCK
The Articles of Incorporation of the Company authorizes its Board of
Directors to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the designations, preferences, powers and relative
participating, optional and other rights, qualifications, limitations and
restrictions thereof, including the dividend rate, conversion rights, voting
rights, redemption rights and liquidation preference, and to fix the number of
34
<PAGE>
shares to be included in any such series. The Preferred Stock may rank
superior to the Common Stock with respect to the payment of dividends or
amounts upon liquidation, dissolution or winding-up, or both. In addition, any
such shares of Preferred Stock may have class or series voting rights.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company
may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of the Company's Common Stock.
SERIES A PREFERRED STOCK
In 1988, 1992 and 1996 the Company's Board of Directors authorized the
issuance of an aggregate of 213 shares of Series A Non-Voting Preferred Stock
("Preferred Stock"), all of which shares were purchased by Mr. Joseph
Khoshabe, the Company's president. As described elsewhere herein, all such
shares of Preferred Stock were registered in the name of the J. K. Trust. The
shares of Preferred Stock were purchased for a total consideration of
$1,065,000, or $5,000 per share. The holders of Preferred Stock are entitled
to receive variable dividends as determined by the Board of Directors from
time to time; and do not have voting rights. The amount of the variable
dividend is determined solely at the discretion of the Company's Board of
Directors. Such variable dividends were declared for the years ended April 30,
1994, April 30, 1995, April 30, 1996 and April 30, 1997 in the amounts of
$19,000, $25,515, $-0-, and $-0- respectively.
The terms of the Preferred Stock additionally provide that upon any
liquidation, dissolution or winding-up of the affairs of the Company, whether
voluntarily or involuntarily, after payment or provision for payment of debts
and other liabilities of the Company, the holder(s) of shares of Preferred
Stock shall be entitled to receive from the Company $5,000 per share, from the
remaining net assets of the Corporation before any distribution is made with
respect to the Common Stock. The liquidation value for the Preferred Stock is
$5,000 per share.
WARRANTS
1994 Warrant
In connection with the 1994 Private Placement, the Company issued 22,000
warrants ("the 1994 Warrants") to Mills Financial Services, Inc., the
placement agent, on the basis of one (1) warrant for each ten (10) shares of
common stock sold in the 1994 Private Placement. The 1994 warrants were issued
for consideration of $100.00 and are exercisable for a period of five (5)
years from the date of issuance. Each 1994 Warrant is exercisable to purchase
one (1) share of common stock at $1.65 per share. The 1994 Warrants provide
for a single demand right of registration for the shares underlying the
warrants exercisable by a majority of the holders thereof, which right of
demand may not be exercised until six months after the effective date of the
registration statement for this Prospectus. In addition, the 1994 Warrants
provide for additional rights to "piggy-back" the underlying shares on other
registration statements filed by the Company.
1995 Bridge Finance Warrants
In connection with the 1995 Bridge Financing, the Company has issued 25,000
warrants ("the 1995 Bridge Finance Warrants") to the placement agents or
associates of the placement agents on the basis of 10,000 warrants for each
Unit ($100,000) sold in the offering. The 1995 Bridge Finance Warrants were
issued for nominal consideration and are exercisable for a period of five (5)
years from the date of issuance. Each 1995 Bridge Finance Warrant is
exercisable to purchase one (1) share of common stock at $4.505 per share.
Each of the 1995 Bridge Finance Warrants provide for a single demand right of
registration for the shares underlying the warrants. In addition, the 1995
Bridge Finance Warrants provide for additional rights to "piggy-back" the
underlying shares on registration statements filed by the Company, including
the registration statement of which this
35
<PAGE>
Prospectus is a part. Mills Financial Services, Inc. was issued 5,000 of the
1995 Bridge Finance Warrants for its participation in the 1995 Bridge
Financing. Mills Financial Services, Inc. has agreed to a waiver of its
"piggy-back" registration rights with respect to the registration statement
relating to this Prospectus.
Advisor Warrant
Effective as of November 15, 1995, the Company issued for $100, a warrant to
purchase 195,000 shares of common stock of the Company to an advisor of the
Company who provided, from time to time since 1994, advice and consulting
services to the Company. The warrant is exercisable at $0.50 per share through
April 30, 1999. The warrant contains customary "piggyback" registration
rights, one demand registration right at the Company's expense and one
registration right paid for by the holder(s) of such warrant with respect to
both the warrant and the underlying shares of common stock. The demand
registration right and the "piggy-back" registration rights are not available
to the holders of the Advisor Warrant(s) until six (6) months after the
effective date of the registration statement relating to this Prospectus.
Underwriter's Warrant
The Company has agreed to issue for $100.00 an Underwriter's Warrant
entitling the Underwriter to purchase Shares of the Company's common stock in
an amount equal to ten percent (10%) of the Shares sold in this offering (not
including any Shares sold pursuant to the over-allotment option), at an
exercise price of one hundred twenty percent (120%) of the Public Offering
price exercisable any time, in whole or in part, between the first and fifth
anniversary dates of the effective date of this offering. At any time during
the exercise term, the holders of a majority of these securities shall have
the right to require the Company to prepare and file one (1) post-effective
amendment to the registration statement relating to this offering, or a
separate registration statement, if then required under applicable law,
covering all or any portion of the securities. In addition, for a period of
seven (7) years after the effective date of the registration statement
relating to this offering, the holders of these securities shall have
unlimited "piggyback" registration rights.
TRANSFER AGENT AND WARRANT AGENT
Corporate Stock Transfer, Inc. has been appointed registrar and transfer
agent for the Common Stock and the warrant agent for the Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the offering, the Company will have 3,900,029 shares of
Common Stock outstanding (4,020,029 if the over-allotment option is exercised
in full). Of these shares, 800,000 (920,000 if the over-allotment option is
exercised in full) will be freely tradeable without restriction or
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless held by affiliates of the Company. All of the remaining
3,100,029 shares will be "restricted securities" as that term is defined in
Rule 144 promulgated under the Securities Act and may only be sold in the
public market if such shares are registered under the Securities Act or sold
in accordance with Rule 144 promulgated thereunder.
In general, under Rule 144 a person (or persons whose shares are aggregated)
including an affiliate, who has beneficially owned his shares for one year,
may sell in the open market within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the outstanding shares of the
Company's Common Stock (approximately 39,000 shares or approximately 41,200
shares if the over-allotment option is exercised in full), or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
limitations on the manner of sale, notice requirements and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is deemed not to be an "affiliate" or a recent
"affiliate" of the Company and who has beneficially owned his shares for at
least two (2) years, may sell such shares in the public market under Rule
36
<PAGE>
144(k) without regard to the volume limitations, manner of sale provisions,
notice requirements or availability of current information provisions referred
to above. Restricted shares properly sold in reliance upon Rule 144 are
thereafter freely tradeable without restrictions or registration under the
Act, unless thereafter held by an "affiliate" of the Company.
Of the 3,100,029 restricted shares currently outstanding, a total of
2,531,842 shares are held by J.K. Trust, an affiliate of the Company. J.K.
Trust has entered into an agreement not to sell any shares for a period of 6
months following the date of this Prospectus and thereafter for an additional
period of 6 months to limit sales, if any, to not more than 100,000 shares. As
an affiliate of the Company, J.K. Trust will be further subject to the volume
limitations of Rule 144(e)(1) with respect to any such sales. A total of
219,026 of the restricted shares were acquired from the Company by non-
affiliates more than three (3) years prior to the date of this Prospectus and
are therefore eligible for sale under Rule 144k. The Company has obtained
agreements from shareholders owning 94,045 of the 219,026 shares not to sell
any shares for a period of 6 months following the date of this Prospectus. The
balance of 349,161 of the restricted shares were acquired from the Company by
non-affiliates more than 1 year ago and less than 3 years ago and are
therefore eligible for sale under Rule 144(e)(2) subject to certain volume
restrictions commencing 90 days from the completion of this offering. The
Company has obtained agreements from shareholders owning 124,082 of the
349,161 of shares not to sell any shares for a period of 6 months following
the date of this Prospectus. The Underwriter has no plans, proposals,
arrangements or understanding regarding waiver of the lock up agreements.
Additionally, 500,000 shares of the Company's common stock are reserved for
issuance under the Company's Stock Option Plan.
Future sales of substantial amounts of Common Stock in the public market, or
the availability of such shares for future sale, could impair the Company's
ability to raise capital through an offering of securities and may adversely
affect the then-prevailing market prices for the Company's stock.
UNDERWRITING
The Underwriter named below (the "Underwriter") has agreed, subject to the
terms and conditions of the Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement), to purchase from the
Company the following respective number of shares of Common Stock at the
public offering price less the underwriting discounts and additional
compensation set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS SHARES
------------ -------
<S> <C>
Mills Financial Services, Inc.................................... 800,000
-------
Total........................................................ 800,000
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent. The nature of the Underwriter's
obligation is that it is committed to purchase all the Shares offered if any
of such Shares are purchased.
The Company has been advised, that the Underwriter proposes to offer the
Shares directly to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at this price less a
concession not in excess of $.32 per Share. After commencement of the public
offering, the offering price and other selling terms may be changed by the
Underwriter.
The Company has granted to the Underwriter a 45-day option to purchase up to
120,000 additional shares of Common Stock at the public offering price, less
the underwriting discounts and other compensation, set forth on the cover page
of this Prospectus. The Underwriters may exercise such option only to cover
over-allotments,
37
<PAGE>
if any, made in connection with the sale of the Shares of Common Stock offered
hereby. To the extent that the Underwriter exercises such option, the Company
will be obligated, pursuant to such option, to sell such shares to the
Underwriter to the extent such option is exercised.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriter may be required to make in respect thereof. It is
the opinion of the Securities and Exchange Commission that such
indemnification is contrary to public policy and unenforceable.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the aggregate offering price of the Common Stock offered
hereby (including any shares of Common Stock purchased pursuant to the
Underwriter's overallotment option). No portion of the non-accountable expense
allowance has been paid to the Underwriter to date.
The Company also has agreed to sell to the Underwriter, an Underwriter's
Warrant to purchase 80,000 shares at a price of $.001 per warrant. The
Underwriter's Warrant will be exercisable for a period of five years,
commencing upon the date of the Prospectus, at an initial per share exercise
price equal to 120% of the initial public offering price. The Underwriter's
Warrants are not redeemable by the Company under any circumstances. Neither
the Underwriter's Warrants nor the shares of Common Stock issuable upon
exercise thereof may be transferred, assigned or hypothecated until one year
from the date of issuance of the Underwriter's Warrants, except they may be
assigned, in whole or in part, to any successor or officer of the Underwriter.
The Underwriter's Warrant will contain anti-dilution provisions for
appropriate adjustment of the exercise price and number of shares which may be
purchased upon exercise upon the occurrence of certain events.
The holders of a majority of the Underwriter's Warrants and/or underlying
securities shall have the right, during the four-year period commencing one
year from the date of this Prospectus, on one occasion (which shall be at the
Company's sole expense) to require the Company to register the Common Stock
underlying the Underwriter's Warrants (the "Registrable Securities") by means
of a registration statement pursuant to the Securities Act, or a post-
effective amendment thereto, as appropriate, so as to enable such holders to
publicly offer the Registrable Securities. Moreover, if during the six-year
period commencing one year following the date of this Prospectus the Company
shall register any of its securities for sale pursuant to a post-effective
amendment or new registration statement (with the exception of Form S-8 or
other inappropriate form), upon request by any of the holders of the
outstanding Registrable Securities, the Company shall be required to include
such securities as a part of the registration statement.
The holders of the Underwriter's Warrants shall have no voting, dividend or
other rights as shareholders of the Company unless and until the exercise of
such Warrants. The number of securities deliverable upon any exercise of the
Underwriter's Warrants and the exercise price of such Warrants are subject to
adjustment to protect against any dilution upon the occurrence of certain
events including sales of shares at less than the market price (or, if no
market price exists, at less than fair market value), issuance of stock
dividends, stock splits, subdivision or combination of outstanding stock and
reclassification of stock.
During the exercise period, the Underwriter is given, at nominal cost, the
opportunity to profit from a rise in the market price for the Company's Common
Stock, if any, at the expense of the Company's then shareholders. For the life
of the Underwriter's Warrant, the Company may be deprived of favorable
opportunities to procure additional equity capital, if it should be needed for
the business of the Company, and the holders of the Underwriter's Warrants may
be expected to exercise such Warrants at a time when the Company would, in all
likelihood, be able to obtain equity capital, if then needed, by the sale of
additional shares on terms more favorable than those provided by the
Underwriter's Warrants.
The Company has also agreed that the Underwriter shall have the right of
first refusal for three years to manage, underwrite or purchase for its own
account any sale by the Company of debt or equity securities of the Company,
any subsidiary or successor of the Company or, subject to certain exceptions,
by any shareholder of the Company owning in excess of ten percent of the
outstanding Common Stock.
38
<PAGE>
The Company (with certain exceptions) and J.K. Trust, the sole shareholder
owning in excess of 10% of the Common Stock of the Company have agreed
pursuant to Lock-up Agreements not to sell or grant any option for sale or
otherwise dispose of, directly or indirectly, any shares of the Common Stock
of the Company for a period of six-months after the date of consummation of
this Offering, without the prior written consent of the Underwriter other
than, in the case of the Company, the shares of Common Stock to be sold to the
Underwriter in this Offering and the grant of Options to purchase shares of
Common Stock pursuant to the Company's Stock Plan and the issuance of shares
under such Options. In addition, J.K. Trust has agreed that after the
expiration of the six-month lock-up period, it will not sell more than 100,000
shares of the Company's Common Stock for a period of six-months thereafter.
The Company has also agreed, for the three-year period commencing upon
consummation of this Offering, at the request of the Underwriter, to nominate
and use its best efforts (including solicitation of proxies) to elect a
designee of the Underwriter to the Board of Directors of the Company or,
alternatively, to permit a designee of the Underwriter to receive notice of
and attend all special and regular meetings of the board of directors of the
Company. No designee has been chosen as of the date hereof.
The foregoing does not purport to be a complete statements of the terms and
conditions of the Underwriting Agreement and related documents, copies of
which are on file at the offices of the Underwriter, the Company and the
Securities and Exchange Commission, forms of which have been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the offering price has been determined through
negotiation between the Company and the Underwriter. Such price was based on a
number of factors, including, but not limited to the following: estimates of
the business potential and earnings prospects of the Company, the present
state of the Company's development, an assessment of the Company's management,
the consideration of these factors in relation to market valuations of
companies engaged in the same or similar business, and the current condition
of the mortgage industry and the economy as a whole.
The Underwriter has advised the Company that the Underwriter does not intend
to confirm sales to any account over which it exercises discretionary
authority without the prior, specific written approval of the customer.
The Underwriter has not previously participated as an underwriter in an
underwriting on a firm-commitment basis and has not previously been an
underwriter of an initial public offering. In 1994, the Underwriter attempted
an initial public offering for the Company on a best efforts--minimum or none
basis. The Underwriter was not successful in completing the minimum sales
amount and the offering was withdrawn by the Company. Prospective purchasers
of the Common Stock offered hereby should consider this limited experience in
evaluating the securities offered hereby. See "Risk Factors--Lack of
Underwriting History."
In connection with the 1993 Private Placement, the Underwriter received
$40,000 in commissions, and no other expense reimbursement or compensation. In
connection with the 1994 Private Placement, the Underwriter received (i)
$32,850 in commissions, (ii) no reimbursement of expenses and (iii) a warrant
to purchase 22,000 shares of the Common Stock of the Company at an exercise
price of $1.65 per share. In connection with the 1995 Bridge Financing, the
Underwriter received (i) $5,000 in commissions, (ii) no reimbursement of
expenses and (iii) a warrant to purchase 5,000 shares of Common Stock of the
Company at an exercise price of $4.505 per share. In connection with the 1996
Bridge Financing, the Underwriter received (i) $16,250 in commissions, (ii) no
reimbursement of expenses and no warrants. In addition, in connection with a
1993 Consulting Agreement, the Underwriter received $30,000 as compensation
for the provision of investment banking services to the Company.
The Company has loaned an aggregate principal amount of $62,500 to Mr.
Joseph E. Kurczodyna, the President of the Underwriter. $50,000 of the
principal balance was loaned in 1994. The remainder of the principal
39
<PAGE>
balance was loaned in November 1996 ($2,500) and February 1997 ($10,000). On
September 5, 1997, the principal and accrued interest of $17,500 were
consolidated into a single, demand promissory note of $80,000 bearing interest
at 9%.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its bylaws, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
LEGAL MATTERS
The legality of the shares offered hereby will be passed upon for the
Company by Robert S. Luce, Esq. Mr. Luce is the Assistant Secretary of the
Company. Mr. Luce has no ownership interest in the Company. Certain legal
matters will be passed upon for the Underwriter by Peter B. Shaeffer, Esq.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Craig Shaffer and Associates, Ltd., independent accountants,
to the extent and for the periods indicated in their report appearing
elsewhere herein, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 with the
Washington Office of the Commission in accordance with the provisions of the
Securities Act with respect to the securities offered hereby. The Prospectus
does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the
rules and regulations of the Commission. For further information with respect
to the Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits filed as a part thereof. Statements
herein contained concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. The Registration Statement
and the exhibits may be inspected, without charge at, or copies thereof
obtained at prescribed rates from, the Public Reference Section of the
Commission at Room 1024 at its principal office, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549; or the Public Reference Section of the
Midwest Regional Office at Room 1400, 500 West Madison Avenue, Chicago,
Illinois 60661-2511.
No dealer, salesman or any other person has been authorized to give any
information which is not contained in this Prospectus or to make any
representation in connection with this offering other than those which are
contained in the Prospectus, and if given or made, such information or
representation must be relied upon as having been authorized by the Company.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities which are offered hereby to any person in
any jurisdiction where such offer
or solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale hereunder shall under any circumstances create any implications that
there has been no change in the affairs of the Company or the facts which are
herein set forth since the date hereof.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The historical financial statements of United Financial Mortgage Corp. are
included herein as listed below:
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Certified Public Accountants................. F-3
Balance Sheet at April 30, 1996 and 1997 and at January 31, 1997
(unaudited) and January 31, 1998 (audited)........................ F-4 & F-5
Statement of Income for the Years Ended April 30, 1996 and 1997 and
for the nine (9) months ended January 31, 1997 (unaudited) and
January 31, 1998 (audited)........................................ F-6
Statement of Stockholders' Equity for the Years Ended April 30,
1996 and 1997 and for the nine (9) months ended January 31, 1997
(unaudited) and January 31, 1998 (audited)........................ F-7
Statement of Cash Flow for the Years Ended April 30, 1996 and 1997
and for the nine (9) months ended January 31, 1997 (unaudited) and
January 31, 1998 (audited)........................................ F-8
Notes to Financial Statements...................................... F-9 to F-14
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
United Financial Mortgage Corp.
Financial Statements as of April 30, 1996, April 30, 1997, and January 31,
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, 1996, April 30, 1997, and January 31, 1998, and the
related statements of income, stockholders' equity and cash flows for the
years April 30, 1996, April 30, 1997 and the nine months ended January 31,
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, 1996, April 30, 1997, and January 31, 1998 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The financial statements as of January 31, 1997 were not audited and
accordingly no opinion or assurance is placed on them.
Craig Shaffer and Associates, Ltd.,
C.P.A.
Des Plaines, Illinois
February 20, 1998
F-3
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
YEAR YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
ASSETS 1996 1997 1997 1998
------ ----------- ----------- ----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash.................... $ 1,960,759 $ 2,018,211 $ 1,880,210 $ 1,824,051
Loans held for sale..... 16,294,332 13,090,077 7,957,947 8,762,730
Mortgage Loan........... 938,209 566,536 635,243 1,226,484
Accounts Receivable..... 52,207 59,043 161,689 140,890
Due from Employees...... 13,810 65,692 64,932 0
Due from Officers....... 0 35,027 0 72,452
Deferred Tax Asset...... 0 45,763 0 45,763
U.S. Savings Bonds...... 2,000 2,000 2,000 2,000
Note Receivable......... 21,000 111,763 180,988 169,830
----------- ----------- ----------- -----------
Total current assets.. 19,282,317 15,994,112 10,883,009 12,244,200
Furniture, Fixtures &
Equipment
Cost.................... 279,152 308,770 286,814 333,870
Accumulated
Depreciation........... (116,634) (154,678) (146,057) (187,515)
----------- ----------- ----------- -----------
162,518 154,092 140,757 146,355
Other assets:
Investments.............
Escrow Deposits......... 71,353 24,066 22,298 31,363
Deferred Organization
Costs.................. 0 94,233 52,500 143,425
Security Deposits....... 6,143 6,143 6,143 6,143
Real Property
Investment............. 0 0 0 303,250
Servicing Rights........ 0 0 0 7,199
Deferred Advisor fees... 546,000 390,000 429,000 273,000
----------- ----------- ----------- -----------
Total other assets.... 623,496 514,442 509,941 764,380
----------- ----------- ----------- -----------
$20,068,331 $16,662,646 $11,533,707 $13,154,935
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
NINE MONTHS
ENDED NINE MONTHS
YEAR ENDED YEAR ENDED JANUARY ENDED
LIABILITIES AND APRIL 30, APRIL 30, 31, JANUARY
STOCKHOLDERS' EQUITY 1996 1997 1997 31, 1998
-------------------- ----------- ----------- ----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts Payable......... $ 214,967 $ 179,983 $ 46,326 $ 184,709
Deferred Income.......... 6,000 6,000 6,000
Accrued Expenses......... 121,888 102,455 83,335 157,146
Taxes Payable............ 26,495 29,088 43,668 0
Deferred Income Taxes.... 8,011 0 8,011 0
Escrow Payable........... 71,353 24,066 22,298 50,771
Notes Payable--Current... 17,150,171 13,417,922 8,483,790 9,517,019
----------- ----------- ----------- -----------
Total current
liabilities........... 17,598,885 13,759,514 8,693,428 9,909,645
Non-Current Notes Payable.. 261,970 298,032 234,375 425,000
----------- ----------- ----------- -----------
Total liabilities...... 17,860,855 14,057,546 8,927,803 10,334,645
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; $500,000 at
April 30, 1996; and
$1,065,000 at January 31,
1997 and 1998............. 500,000 1,065,000 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;
3,001,975 at April 30,
1996; 3,095,029 at
January 31, 1997 and
3,100,029 at January 31,
1998.................... 1,895,395 2,382,895 2,357,896 2,382,896
Retained Earnings........ (187,919) (842,795) (816,992) (627,606)
----------- ----------- ----------- -----------
Total stockholders'
equity................ 2,207,476 2,605,100 2,605,904 2,820,290
----------- ----------- ----------- -----------
$20,068,331 $16,662,646 $11,533,707 $13,154,935
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1996 1997 1997 1998
---------- ---------- ----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
Revenues:
Commissions and Fees......... $5,810,360 $5,292,856 $4,195,183 $4,890,898
Interest Income.............. 632,068 403,526 363,255 425,296
---------- ---------- ---------- ----------
6,442,428 5,696,382 4,558,438 5,316,194
Expenses:
Salaries & Commissions....... 4,398,955 3,731,207 3,058,293 2,903,612
Selling & Administrative..... 1,901,754 1,593,958 1,195,986 1,448,632
Depreciation................. 32,658 38,045 29,423 32,836
Interest Expense............. 690,673 307,766 228,809 688,360
Costs and Expense of
Litigation.................. 0 734,056 675,000 27,565
---------- ---------- ---------- ----------
7,024,040 6,405,032 5,187,511 5,101,005
Income (loss) Before Income
Taxes......................... (581,612) (708,650) (629,073) 215,189
Income Tax Provision........... 0 (53,774) 0 0
---------- ---------- ---------- ----------
Net Income (loss).............. $ (581,612) $ (654,876) $ (629,073) $ 215,189
Less Dividends Paid on
Preferred Stock............... 0 0 0 0
Net Income (loss) Applicable to
Common Shareholders........... (581,612) (654,876) (629,073) 215,189
Earnings (loss) Per Common
Share......................... $ (.193) $ (.211) $ (.203) $ .069
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
---------- --------- ----------
<S> <C> <C> <C>
Balance as of April 30, 1995................. $1,601,768 $ 393,693 $1,995,961
Net Loss for the Year........................ 0 (581,612) 0
55,555 shares issued by bridge financing..... 249,998 0 0
73,461 shares repurchased.................... (126,371) 0 0
Additional Paid in Capital................... 170,000 0 0
Balance as of April 30, 1996................. $1,895,395 $(187,919) $1,707,476
Net Loss for the year........................ 0 (654,876) 0
55,555 shares issued on Bridge financing
conversion.................................. 275,001 0 0
42,500 shares issued on bridge financing..... 212,500 0 0
Balance as of April 30, 1997................. $2,382,896 (842,795) $1,540,100
Net Income for the nine months ended January
31, 1998.................................... 0 215,189 0
Balance January 31, 1998..................... 2,382,896 (627,606) $1,755,290
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JANUARY 31,
1996 1997 1997 1998
------------ ----------- ------------ -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net Income or (Loss)..... $ (581,612) $ (654,876) $ (629,073) $ 215,189
Adjustments to Reconcile
Net Income to Net
Cash Provided by
Operating Activities
Depreciation............. 32,658 38,045 29,423 32,836
Changes In
Prepaid Expenses &
Other Current
Assets.............. 178,899 68,522 (160,604) (16,152)
Accrued Expenses &
Other Current
Liabilities......... 13,886 (71,507) (70,435) 46,307
Accounts Payable..... 89,162 (34,984) (168,641) 4,726
Deposits............. (2,029) 47,287 49,055 (7,297)
------------ ----------- ------------ -----------
Net Cash Provided by
Operating Activities.... (269,036) (607,513) (950,275) 275,609
------------ ----------- ------------ -----------
Cash Flows from Investing
Activities
Purchase of Land....... 0 0 0 (303,250)
Purchase of Fixed
Assets................ (66,288) (29,618) (7,662) (25,100)
Servicing Rights....... 0 (7,199) 0 (7,199)
------------ ----------- ------------ -----------
Net Cash provided from
Investing Activities.... (66,288) (29,618) (7,662) (335,549)
------------ ----------- ------------ -----------
Cash Flows From Financing
Activities
Notes Receivable....... (21,000) (90,764) (159,988) (58,067)
Changes in Long Term
Debt.................. 12,009 (5,604) (27,595) 126,968
Changes in Short Term
Debt.................. 625 (5,604) 0 0
Officers Loans......... (948) (35,027) 0 (37,425)
Proceeds from Preferred
Stock Sales........... 0 565,000 565,000 0
Common Stock Proceeds.. 419,999 212,499 275,001 0
Warrant Proceeds....... 780,000 0 0 0
Deferred Advisor Fees.. (624,000) 156,000 117,000 117,000
Bond Proceeds net...... 239,583 41,037 0 0
Deferred Offering
Expenses.............. 0 (94,233) (52,500) (49,192)
Common stock on
conversion............ 0 275,000 187,500 0
Stock Purchase......... (126,371) 0 0 0
Mortgage Loans Made.... (11,635,920) 3,402,925 8,639,351 3,667,399
Changes In Bank Line of
Credit................ 11,678,599 (3,726,646) (8,666,381) (3,900,903)
------------ ----------- ------------ -----------
Cash Provided (Used) by
Financing Activities.... 722,576 694,583 877,388 (134,220)
------------ ----------- ------------ -----------
Increase (Decrease) in
Cash.................... 387,252 57,452 (80,549) (194,160)
Cash at Beginning of
Period.................. 1,573,507 1,960,759 1,960,759 2,018,211
------------ ----------- ------------ -----------
Cash at End of Period.... $ 1,960,759 $ 2,018,211 $ 1,880,210 $ 1,824,051
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement
F-8
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED AND UNAUDITED 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 as well as advances made to branch offices.
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 fund 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 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.
F-9
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED AND UNAUDITED FINANCIAL STATEMENTS--CONTINUED
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.
Real Property Investment
During the period ended January 31, 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 books and records at a
carrying value equal to 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 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.
Servicing Rights
During the period ended January 31, 1998, the Company acquired limited
servicing rights. These have been recorded in accordance with SFAS No. 125.
Miscellaneous
During the fourth quarter of the year ending April 30, 1996, the Company
started an expansion plan pursuant to which the Company incurred higher salary
and administrative costs.
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
compensating balances.
Amounts outstanding under the various credit facilities consist of the
following:
<TABLE>
<CAPTION>
APRIL 30, 1997
--------------
<S> <C>
$11 million mortgage warehouse credit facility at a
commercial bank; interest at prime; expires 10/28/97..... $ 6,913,312
$1.5 million mortgage warehouse credit facility at a
commercial bank; interest at prime; expires 2/14/98...... 566,536
Mortgage warehouse credit facility for the amount shown at
a commercial bank; interest at the Federal Funds rate
plus 2.25%; this loan will be paid off when the related
loan is sold............................................. 199,750
$10 million mortgage warehouse credit facility at a
financial institution; interest at the Libor rate plus
2.25%-2.75%; expires 9/30/97............................. 5,738,324
-----------
Total................................................... $13,417,922
===========
</TABLE>
F-10
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED AND UNAUDITED FINANCIAL STATEMENTS--CONTINUED
CONVERTIBLE DEBENTURES
In connection with the 1995 Bridge Financing, in May, 1995 the Company
issued $250,000 of convertible debentures with an interest rate of 10% and a
maturity of one year and convertible into 55,555 shares of Common Stock if not
repaid. The debentures were not repaid and thereby converted to Common Stock
in May, 1996.
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.
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 $177,612 and $172,963 for the years ended April 30, 1996 and
1997.
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>
1998.................. $144,076
1999.................. 122,050
2000.................. 111,898
2001.................. 84,213
2002.................. 81,876
--------
$544,113
========
</TABLE>
INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-----------------
1996 1997
------- --------
<S> <C> <C>
Current:
Federal.............................................. $ 3,683 $ 0
State................................................ 1,054 0
------- --------
4,737 0
------- --------
Deferred:
Federal.............................................. (2,605) (40,330)
State................................................ (2,132) (13,444)
------- --------
(4,737) (53,774)
------- --------
Total.................................................. $ 0 $(53,774)
======= ========
</TABLE>
The components of the deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
APRIL
APRIL 30, 30,
1997 1996
--------- -------
<S> <C> <C>
Loss carry-forward................................... $(141,730)
Deferred receivables................................. 3,368
Accelerated depreciation............................. 12,099 (8,011)
--------- -------
Deferred Tax Asset (Liability)....................... 126,263 (8,011)
Valuation Allowance.................................. (80,500)
--------- -------
Net Deferred Tax Asset (Liability)................... $ 45,763 $(8,011)
--------- -------
</TABLE>
The effective tax rate for the years ended April 30, 1997 and 1996 differ
from the statutory Federal tax rate of 34% due to valuation reserves on the
recording tax loss carry-forwards.
F-11
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED AND UNAUDITED FINANCIAL STATEMENTS--CONTINUED
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.
The debentures were not paid at maturity and converted in their entirety to
Common Stock in May, 1996.
In connection with the bridge financing, the placement agent was issued, for
nominal consideration, warrants to purchase 25,000 shares of the Company's
Common Stock at an exercise price of $4.505 per share. The warrants are
exercisable for a period of five years and contain certain registration
rights.
1996 Financing
Beginning in November, 1996 the Company offered for sale twenty-two (22)
units of another financing. Each unit consists of a convertible debenture with
face value of $25,000 and 2,500 shares of Common Stock. The debentures carry
an interest rate of 10% and mature in 12 months, or paid in full upon the
effectiveness of a registration statement. If not paid by maturity, the
debentures convert to an additional aggregate 110,000 shares of Common Stock.
The conversion shares would be granted certain registration rights. For
accounting purposes, the shares issued as a component of the unit were
recorded at $5.00 per share, the conversion price of the debentures. This
resulted in a like amount recorded as discount on the debenture, which is
being amortized as interest expense on the debentures.
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.
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
F-12
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED AND UNAUDITED FINANCIAL STATEMENTS--CONTINUED
dividend only at the discretion of and determination by the Board of
Directors. No dividends were declared for the years ended April 30, 1996 and
1997.
STOCKHOLDERS' EQUITY
Common Stock
In the period ended April 30, 1996 pursuant to the terms of the sale of
Common Stock in the 1994 Private Placement, the Company repurchased 73,461
shares of Common Stock for an aggregate price of $126,371. The Company has
retired these shares.
Warrants
At April 30, 1997, 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 April 30, 1997, 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. For accounting purposes, as of November 15, 1994,
the Company recorded deferred advisor expense of $780,000 based upon a per
share price of $4.50, which is being amortized over the life of the advisor
warrant.
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 April 30, 1997, the Company had not granted any options under the Plan.
At April 30, 1997, 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 relating to the operation
of a branch office in Nevada. The complaints are for $182,000. The Company
also is a defendant in another action alleging wrongful termination where the
plaintiff is seeking damages of $50,000. The Company denies any liability
regarding these matters; intends to vigorously defend against the allegations
and has filed counterclaims in certain of these suits. Management believes
that resolution of these matters will not have a material impact on the
Company's financial statements.
In October, 1996 the United States District Court entered into 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
F-13
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED AND UNAUDITED FINANCIAL STATEMENTS--CONTINUED
transfers made in the year ending April 30, 1994. There can be no assurance
that the judgment will be reversed on appeal or otherwise. The Company has
recorded expenses of approximately $734,000, including the judgment and
related attorney's fees, as of April 30, 1997.
EMPLOYEE BENEFIT PLANS
Effective May 1, 1995, the employees of the Company who meet certain
eligibility requirements can participate in the Company's 401(k) plan. Under
the plan, the Company may, at its discretion, contribute to the plan. The
Company has made no contributions to the plan.
Compensation Relating to the President of the Company For Fiscal Year Ended
April 30, 1996
During the fiscal year ended April 30, 1996, the President of the Company
waived all salary entitlements of any kind to partially offset the effect of
expansion upon the Company's salary and commission expense. For accounting
purposes, $170,000 of compensation expense was recorded for the President for
the period ended April 30, 1996. Also, the Company has no contractual
obligation or agreement with Mr. Khoshabe regarding the payment of any
compensation relating to the fiscal year ended April 30, 1996. Mr. Khoshabe
was paid a salary during fiscal 1997 in the amount of $180,000 that is
reflected in the financial statements for that fiscal period.
RELATED PARTY TRANSACTIONS
In June, 1996, the J.K. Trust purchased 113 shares of Series A Preferred
Stock for a cash payment of $565,000. The President, Chief Executive and
Chairman of the Board of the Company is the trustee of the J.K. Trust. The
trust is the majority shareholder of the Company.
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
compensating balances.
Amounts outstanding under the various credit facilities consist of the
following:
<TABLE>
<CAPTION>
JANUARY 31, 1998
(UNAUDITED)
----------------
<S> <C>
$20 million mortgage warehouse credit facility at a
commercial bank; interest at prime, less .75 percent,
expires 10/28/98....................................... $8,228,053
$1.5 million mortgage warehouse credit facility at a
commercial bank; interest at prime; expires 2/14/98.... 418,000
$1.0 million mortgage credit facility at a commercial
bank; with interest at prime, expires 10/28/98......... 870,966
----------
Total................................................. $9,517,019
==========
</TABLE>
PENDING PUBLIC OFFERING OF COMMON STOCK
In December, 1997, the Company intends to file an amendment to a
registration statement with the Securities and Exchange Commission for an
underwritten initial public offering of the Company's Common
F-14
<PAGE>
UNITED FINANCIAL MORTGAGE CORPORATION
NOTES TO AUDITED AND UNAUDITED FINANCIAL STATEMENTS--CONCLUDED
Stock. Upon the effectiveness of the registration statement, and receipt of
funds from the offering, the Company is obligated to retire all convertible
debentures outstanding and accrued interest thereon from the 1996 Bridge
Financing and to redeem 150 shares of the Series A Preferred Stock
(aggregating $750,000).
In addition, upon the effectiveness of the above offering, the Company will
enter into a five year employment agreement with the President and Chief
Executive Officer. The agreement provides for a base salary of $250,000 per
year, certain health, disability and allowance benefits and an annual
incentive compensation payment equal to 10% of the increase in the Company's
pre-tax income from the prior year.
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.
INCOME TAXES
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
JANUARY 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Current:
Federal............................................... $ 0 $ 0
State................................................. 0 0
-------- --------
0 0
-------- --------
Deferred:
Federal............................................... 0 0
State................................................. 0 0
-------- --------
0 0
-------- --------
Total................................................... $ 0 $ 0
======== ========
</TABLE>
The components of the deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
------------------
1997 1998
-------- ---------
<S> <C> <C>
Loss carry-forward................................... $ 0 $(141,730)
Deferred receivables................................. 0
Accelerated depreciation............................. 0 9,578
-------- ---------
Deferred Tax Asset (Liability)....................... 0 132,152
Valuation Allowance.................................. 0 (86,389)
-------- ---------
Net Deferred Tax Asset (Liability)................... $ 0 $ 45,763
======== =========
</TABLE>
The effective tax rate for the years ended January 31, 1997 and 1998 differ
from the statutory Federal tax rate of 34% due to valuation reserves on the
recording tax loss carry-forwards.
F-15
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES PERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN GIVEN OR MADE
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON TO WHOM, OR IN ANY JURISDICTION IN WHICH SUCH OF-
FER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF
OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 14
Determination of the Offering Price....................................... 14
Dilution.................................................................. 14
Capitalization............................................................ 15
Management Discussion and Analysis of Results of Operations and Financial
Condition................................................................ 15
Certain Relationships and Related Transactions............................ 19
Principal Stockholders.................................................... 20
The Company and its Business.............................................. 21
Legal Proceedings......................................................... 28
Management................................................................ 29
History of Security Placements............................................ 32
Description of Securities................................................. 34
Shares Eligible for Future Sale........................................... 36
Underwriting.............................................................. 37
Commission Position on Indemnification for Securities Act Liabilities..... 40
Legal Matters............................................................. 40
Experts................................................................... 40
Additional Information.................................................... 40
Index to Financial Statements ............................................ F-1
</TABLE>
----------------
UNTIL JULY 6, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SE-
CURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLI-
GATION OF DEALERS TO DELIVER A PROSPECTUS AS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR SOLD ALLOTMENTS OR SUBSCRIPTIONS.
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800,000 SHARES
OF
COMMON STOCK
LOGO
UNITED FINANCIAL
MORTGAGE CORP.
----------------
PROSPECTUS
----------------
MILLS FINANCIAL SERVICES, INC.
MAY 26, 1998
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