U.S. SECURITIES AND EXHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 333-27037
UNITED FINANCIAL MORTGAGE CORP.
(Name of small business Issuer in its charter)
Illinois 36-3440533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Enterprise Drive, Suite 206 60523
Oak Brook, Illinois (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (630) 571-7222
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock The Chicago Stock Exchange
Securities to be registered under Section 12(g) of the Act:
None
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year_________$10,045,228
The aggregate market value of the voting and non-voting common equity
held by non-affiliates was $3,868,870 on July 15, 1999.
<PAGE>
(Issuers involved in bankruptcy proceedings during the past five years)
Check whether the Issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
(Applicable only to corporate registrants) State the number of shares
outstanding of each of the Issuer's classes of common equity, as of the
latest practicable date. 3,900,029.
Documents incorporated by reference. If the following documents are
incorporated by reference, briefly describe them and identify the part of
the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b)
or (c) of the Securities Act of 1933("Securities Act"). The listed documents
should be clearly described for identification purposes (. e.g., annual
report to security holders for fiscal year ended December 24, 1990).
Transitional Small Business Disclosure Form (Check one): Yes [ ] No [X]
<PAGE>
PART I
Item 1. Description of Business
The Company was formed as an Illinois corporation in April of 1986 to
engage in the business of mortgage banking. The Company is licensed as a
mortgage banker in the states of Arkansas, California, Colorado, Delaware,
Florida, Illinois, Indiana, Kentucky, Maryland, Missouri, New Mexico,
Oregon, South Carolina, Utah, Washington, Wisconsin and Texas. The Company
also does business in other states that do not have mortgage banking
licensure statues, including, Idaho, Kansas, Montana, Ohio, Oklahoma, West
Virginia and Wyoming. The Company's mortgage banking business principally
has focused on retail and wholesale residential mortgage origination
activities. The Company is expanding its mortgage servicing activities by
retaining servicing on selected loans that it produces. The Company's
principal lines of business are conducted through the Retail Origination
Division, the Wholesale Origination Division and the Servicing Division.
The Company's Retail and Wholesale Origination business is principally
conducted in the states of Illinois, California, Nevada, Missouri and
Florida.
The loans that the Company originates and expects to service primarily
are first mortgages secured by single (one to four units) family residences,
although the Company also may originate, sell and service loans secured by
first mortgages on multi-family residential properties (more than four
units) and to a lesser extent, other mortgage assets.
The Company's loan production activities generate revenue through (i)
origination fees and gains on the sale of loans to broker-dealers and
institutional investors, and (ii) interest on mortgage loans held, or
"warehoused" from their origination or purchase until their sale to
broker-dealers and institutional investors. The Company's expanded loan
servicing division is expected to produce income from loan servicing fees.
The Company also engages in the brokerage or origination of loans on
commercial real estate, including shopping centers, office properties and
other commercial loans. The Company either brokers(e.g. arranges for loan
funding 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 between the interest rate paid to the issuer of the
credit line and the interest rate paid by the borrower.
<PAGE>
At this time, the Company's primary sources of loan originations
are its Wholesale and Retail Divisions. On April 30, 1999, the
Company's Retail Division operated three (5) full service retail
origination offices. At such date, the retail offices were located
in three (4) 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; Clearwater , Florida; Tampa, Florida 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 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 has focused on retail loan
origination because it is management's experience that profit margins
in retail origination generally are greater than profits relating to
wholesale activities.
The Wholesale Origination Division
Wholesale loan origination involves the funding by the Company
of loans submitted by non-affiliated mortgage brokers. The Company
realizes revenues from the sale of such loans to investors for a
price greater than the amount paid to the mortgage broker. The timing
of the sale of loans to investors and failure to comply with investor
underwriting guidelines could result in losses on loan sales.
Management believes that substantially all underwriting and related
issues generally are resolved with the investor prior to closing. It
is management's experience that wholesale loan origination tends to
be less profitable on a per loan basis than retail origination, 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.
The Company's Wholesale Division, which was established in June,
1994, operates from its corporate headquarters in Oak Brook, Illinois
and Irvine, California. The Wholesale Division of the Company
acquires loans from a network of mortgage brokers and other financial
intermediaries, including banks, who are screened by the Company.
<PAGE>
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 prospective borrowers for the origination of
mortgage loans. The Company derives revenues from the premium that
is received from the purchaser of the loan. Generally, that premium
is shared on a negotiated basis with loan officers and others who
procure the loan and assist in the loan origination process.
The Company's Retail Origination Division solicits loans
directly from consumers and through real estate brokers, builders and
other real estate professionals. In developing its retail network,
the Company has followed a strategy of establishing offices in areas
where its experience indicates strong loan demand. This gives the
Company added flexibility to open and close offices as dictated by
mortgage demand.
Establishing a reputation for prompt and responsive customer
service is another integral component of the Company's marketing
strategies. The Company believes that the ability to process loan
applications quickly provides a distinct advantage over its
competitors. It is management's experience that the average period
between receipt of a loan application and the Company's lending
commitment is generally less than 10 days. The Company endeavors to
process loans quickly, while maintaining comprehensive underwriting
controls through its automated techniques for loan origination,
processing, underwriting and closing. The Company's computer system
integrates the Company's loan origination activities to expedite loan
processing, and enhances its ability to respond to market
opportunities.
Quality Control of Mortgage Origination
In order to ensure that the Company originates high quality
mortgage loans, it has retained the services of a quality control
company with an industry wide reputation to conduct audits of the
Company's loan origination activities on a monthly basis. The
Quality Control company audits pursuant to contractual specifications
approximately ten (10%) percent of the aggregate retail and wholesale
loans originated by the Company on a monthly basis. The audit
process includes verification of mortgage information, including:
employment status, wages/salaries; credit standing; property
appraisal; confirmation of the borrower's savings and other assets;
and compliance with other applicable underwriting guidelines. The
Quality Control company selects loan files on a random basis. The
Company receives a quality control management report from the Quality
Control company at the conclusion of each monthly audit.
<PAGE>
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 an unaffiliated 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. 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. Non-conforming loans generally
are underwritten by the Company in accordance with the 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, reconfirmation of 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.
<PAGE>
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 based upon the assessment of the
risk associated with a longer commitment period. Servicing
compensation (based upon FNMA guidelines) generally ranges from .25%
to .50% per annum on the outstanding principal balances of the loans.
Servicing fees are collected from monthly mortgage payments. Other
sources of loan servicing revenues include late charges and use of
funds benefits.
As a servicer of mortgage loans underlying mortgage backed
securities issued by FNMA, FHLMC or other investors, the Company is
obligated to make timely payments of principal and interest to
security holders, whether or not such payments have been made by
borrowers on the underlying mortgage loans. In accordance with
applicable FHA and VA guidelines, the Company is insured by FHA
against foreclosure loss on FHA loans, and the VA guarantees against
foreclosure loss on VA loans, subject to certain limitations.
Although FNMA and FHLMC are 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 believes that an important source for its loan-
servicing portfolio is loans produced by the Company. The servicing
rights for selected loans are retained by the Company after such
loans are sold to investors. In addition, the Company may 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.
<PAGE>
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, mortgage
bankers and mortgage brokers. 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 also is fragmented in that no single lender has a
significant market share of total origination volume. MBA data
indicates that overall mortgage origination volume is shared in
varying percentages among commercial banks, savings and loan and
mortgage banking companies. MBA data also indicates that
historically, mortgage banks have had an estimated twenty-thirty
percent (20-30%) share of total origination volume. Commercial banks,
savings banks, savings and loan associations and mortgage banking
companies service the bulk of residential mortgages. It is
management's belief that market share among competitors generally
shifts more slowly in servicing than in origination. Management of
the Company does not anticipate any significant changes in the market
share described above in the near term.
The Company's mortgage loan production activities are subject to
the Truth-in-Lending Act and Regulation Z promulgated thereunder.
The Truth-in-Lending Act contains disclosure requirements designed to
provide consumers with uniform, understandable information with
respect to the terms and conditions of loans and credit transactions
in order to give them the ability to compare credit terms. The
Truth-in-Lending Act also guarantees consumers a three day right to
cancel 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 lenders to supply the applicant
with a name and address of the reporting agency.
<PAGE>
The Federal Real Estate Settlement Procedure Act ("RESPA")
imposes, among other things, limits on the amount of funds a borrower
is required to deposit with the Company in an escrow account for the
payment of taxes, insurance premiums or other charges. The Company
has policies, procedures and systems in place to ensure compliance
with RESPA.
The Company believes it is in possession of all licenses in
those states in which it does business that require such licenses,
except where the absence of such licenses is not material to the
business and operations of the Company as a whole. Conventional
mortgage operations also may be subject to state usury statutes. FHA
and VA loans are exempt from the effect of such statutes.
Item 2. Description of Property
The Company's corporate and administrative headquarters are
located in leased facilities in Oak Brook, Illinois. These
facilities comprise approximately 4,800 square feet of space in a
building leased by the Company for a ten year term at annual rate of
approximately $9.50 to $15.63 per square foot, triple net, which
lease expires in 2003. In addition, at April 30, 1999, 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, 1999 was $332,000. The Company believes that its
present facilities are adequate for its current level of operations.
None of the Company's leased facilities are leased from affiliates of
the Company.
Lease commitments for the five (5) years following April 30,
1999 are as follows:
April 30, 2000___________________________$321,967
April 30, 2001___________________________$276,870
April 30, 2002___________________________$186,662
April 30, 2003 ________________________ $ 84,449
April 30, 2004 ___________________________$ 0
The Company's corporate headquarters are located at 600
Enterprise Drive Suite #206, Oak Brook, Illinois 60523 and its
telephone number is (630) 571-7222.
<PAGE>
Item 3. Legal Proceedings.
In June 1995, Lawyers Title initiated a non-wage garnishment
proceeding against the Company and its bank. 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.
On March 13, 1999 the matter was settled. The settlement does
not require any further payments by the Company.
The Company is a defendant in a series of complaints relating to
its business activities. The aggregate amount of these claims is
approximately $300,000. The Company has aggressively defended its
position in these matters and has filed counter-claims in certain of
the cases. The Company does not believe the outcome of these lawsuits
will have a material impact on its financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 25, 1998, the Company conducted its Annual Meeting of
Shareholders and shareholders approved management's recommendation
regarding the election of directors and the appointment of
independent auditors.
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Company's registration statement regarding 800,000 shares of
Common Stock became effective with the United States Securities and
Exchange Commission on May 26, 1998. The Company's Common Stock
began trading on May 27, 1998 at a price of $6.50 per share.
The Company's Common Stock is traded on The Chicago Stock
Exchange ("CSX") under the symbol UFM.
The range of high and low sale prices of the Company's Common
Stock, as reported by the CSX from May 27, 1998 through July 15, 1999
were $2.00 and $10.00, respectively.
Holders. As of July 15, 1999, there were approximately 525
holders of record of the shares.
Dividends. The Company has never declared or paid a dividend on
its Common Stock, and management expects that a substantial portion
of the Company's earnings, if any, for the foreseeable future will be
used to expand loan origination and servicing capabilities. The
decision to pay dividends, if any, in the future is within the
discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements, financial condition and
other relevant factors such as loan covenants or other contractual
obligations.
<PAGE>
Item 6. Management Discussion and Analysis of Operations.
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Management Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements which
involve risks and uncertainties. Actual events or results may differ
materially from those discussed in the forward-looking statements as
a result of certain factors.
The Company, founded in 1986, operates as a full-service
mortgage banking company engaged in the origination and sale of first
mortgage loans secured by residential real estate. On a limited
scale, the Company also originates commercial loans; and services
residential mortgage loans.
Results of Operations
Two Years Ended April 30, 1999
The fiscal year ended April 30, 1999 was a period of
significant accomplishment for the Company. Interest rates were
favorable, loan volume and revenues were at an all time high, the
Company entered into several strategic alliances and the Company
completed its first asset acquisition.
Commission and fee revenue increased from $6,730,416 for the
twelve months ended April 30, 1998 to $8,571,594 for the twelve
months ended April 30, 1999. This percentage increase of
approximately 27% is primarily the result of an increase in the
number of loan originations. The increase in loan originations was
the result of lower interest rates and an increase in loan
origination efforts.
Interest income increased from $665,646 for the twelve months
ended April 30, 1998 to $1,457,953 for the twelve months ended April
30, 1999. This increase was attributable to the increase in loan
originations and higher interest income on invested capital.
Salary and commissions expenses increased from $4,008,346 for
the twelve months ended April 30, 1998 to $4,539,018 for the twelve
months ended April 30, 1999. The increase was attributed to two main
factors: the increased number of loan originations in the comparable
time periods and continued investment in the expansion of
the Company's sales organization.
Selling and administrative expenses increased from $1,990,349
for the twelve months ended April 30, 1998 to $3,460,977 for the
twelve months ended April 30, 1999. This percentage increase of
approximately 74% reflected the increase in loan volume and
incremental expenses associated with this increase. In addition, the
continued efforts in infrastructure and technology advancements have
added to the increase.
<PAGE>
Depreciation expense increased from $45,805 for the twelve
months ended April 30, 1999 to $80,704 for the twelve months ended
April 30, 1999. This principally resulted from technology
investments made during fiscal year 1999. This investment is in line
with the Company's strategy of technological advancement and
infrastructure improvements.
Interest expense increased from $975,953 for the twelve months
ended April 30, 1998 to $1,054,921 for the twelve months ended April
30, 1999. This increase was the result of increased use of warehouse
lines of credit to fund the increased loan originations.
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 twelve months ending
April 30,1998 and April 30, 1999, respectfully. This consists of
$156,000 recorded as advisory fees in fiscal years 1998 and 1999.
Without this non-cash charge, net income available to common
shareholders would have been $397,429 in fiscal year 1998 and
$508,715 in fiscal year 1999.
In addition, in fiscal year 1999 there was an extraordinary
litigation settlement of $150,000. Net income available to common
shareholders for fiscal year 1999 also reflects a non-cash deferred
tax provision of $271,000. Without these two events, and the advisor
fee impact net income for fiscal year 1999 would have been $929,715.
Liquidity and Capital Resources
During the twelve months ended April 30, 1998 and April 30,
1999, net cash generated(used) by operating activities was $397,010
and $435,221, respectively. Net cash generated by operating
activities increased from the first twelve months of 1998 to the
first twelve months of 1999. This, despite increased expenses
associated with being a public company and infrastructure growth.
Net cash generated(used) by investing activities decreased from
($411,537) for the fiscal year ended April 30, 1998 to ($243,907) for
the fiscal year ended April 30, 1999. The increase in cash from 1998
to 1999 was largely attributable to the sale of two foreclosed
properties. This was partially offset by investments in fixed assets
and the increase in retaining servicing rights on certain closed
loans during the period in 1999.
Cash flow from financing activities for the fiscal year 1998
and fiscal year 1999 was ($29,673) and 2,179,612, respectively. This
change resulted largely from the net proceeds of the public offering
which occurred in early fiscal year 1999. Net proceeds from the
public offering totaled $4,146,437. A portion of these proceeds were
used to redeem certain preferred shares for $750,000 and the
redemption of certain 1996 debentures.
Therefore, the net cash flow from operating, financing, and
investing activities was ($44,200) for the fiscal year ended April
30, 1998 and $2,370,926 for the first the fiscal year ended April 30,
1999.
Capital expenditures for the period ended April 30, 1999 were
approximately $300,000, principally in technology and to a lesser
extent for the expansion of sales organization facilities. These
capital expenditures include a new loan tracking system, a new
underwriting system, a new accounting system, and several computers.
All of these items are Year 2000 compliant and move the company
forward in using technology as a competitive advantage. The Company
believes it will continue to make investments in technology in the
near future to enhance and maintain its product and service
offerings.
<PAGE>
Cash flow requirements depend on the level and timing of the
Company's activities in loan origination in relation to the timing of
the sale of such loans. In addition, the Company requires cash flow
for the payment of operating expenses, interest expense, and capital
expenditures. Currently, the Company's primary sources of funding
are borrowings under warehouse lines of credit, proceeds from the
sale of loans in the secondary market and internally generated funds.
During the past twelve months, the Company has pursued its
strategy of servicing mortgage loans. In order to engage in this
business, the Company has retained the servicing rights on the loans
that the Company originates. Such retention has resulted in some
reduction in short term cash flow available to the Company. The
Company has employed capital to finance the retention of servicing
rights. This capital principally would have been expended to pay the
costs associated with loan origination, such as loan officer
compensation and miscellaneous overhead expenses. However, the
retention of servicing rights is expected to create an asset on the
Company's balance sheet and create future cash flow streams.
During the fiscal year 1999, the Company obtained two new
credit lines and an increase to an existing credit line. These
transactions brought an additional $41 million in loan funding
capacity to the Company. The Company is continually in discussions
with various lenders for additional lines of credit.
Acquisition
On October 9, 1998 the Company completed its first acquisition
by acquiring certain assets of Mortgage Service America, Inc., a
Lombard, Illinois mortgage Company. Management thinks that the
transaction will serve to fulfill its growth strategies in the
wholesale business segment. The acquisition is expected to assist
the Company in the development of its servicing portfolio. In
addition, the acquisition is expected to facilitate the Company's
growth strategy into other areas.
Alliances
During the fiscal year 1999 the Company entered into a strategic
alliance to exclusively provide mortgage products and services to the
customers of one of Chicago's oldest and most highly regarded
financial institutions, the Austin Bank of Chicago. Austin Bank
meets the financial services needs of retail and commercial customers
on Chicago's West Side and nearby suburbs.
Also, during fiscal year 1999, the company signed an agreement
with Bank Rate Monitor to provide mortgage rates and financing to the
Bank Rate Monitor Infobank. The agreement calls for United
Financial's information to be available at all sites that Bank Rate
Monitor supplies information. This includes Yahoo!, Excite,
Realtor.com, Microsoft's Money Insider, Quicken, Kiplinger, Motley
Fool and America Online.
In addition, the Company signed an agreement with Microsoft
Corp. to team with MSN Sidewalk to provide to World Wide Web visitors
with the opportunity to get information on the many different types
of mortgage loans offered by the Compqny, calculated mortgage
payments, and apply on-line for a mortgage at
www.Chicago.Sidewalk.com.
<PAGE>
Industry Trends
The growth in volume that the mortgage industry has seen over
the past few years has resulted from a general downward trend in
interest rates. The Company believes that mortgage volume may tend
to decrease on a relative basis in higher interest environments.
Higher interest rates generally result in smaller mortgage companies
leaving the market resulting in potentially larger market shares for
continuing mortgage bankers. This trend is beginning to occur now as
interest rates have begun to increase.
The Company also believes that the industry will continue to
offer broader and more diversified product offerings and that
technology will play an increasing part in real estate transactions.
This includes expanded use of Internet capabilities which the Company
will continue to aggressively pursue.
The Company's business base is concentrated principally in the
Midwest and West. As such, the Company may be subject to the effects
of economic conditions and real estate markets specific to such
locales.
Inflation and Seasonality
The Company believes the effect of inflation, other than its
potential effect on market interest rates, has been insignificant.
Historically, seasonal fluctuations in mortgage originations
generally do not have a material effect on the financial condition or
operations of the Company. Due to the technological and
infrastructure advancements, such as increasing the servicing
portfolio, the Company hopes to continue to minimize seasonality
fluctuations.
<PAGE>
Item 7. Financial Statements
UNITED FINANCIAL MORTGAGE CORP.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Table of Contents_________________________________________________________10
Report of Independent Certified Public Accountants________________________11
Balance Sheet at April 30, 1998 and 1999_______________________________12-13
Statement of Income for the years
ended April 30, 1998 and 1999_____________________________________________14
Statement of Stockholders' Equity for the years
ended April 30, 1998 and 1999_____________________________________________15
Statement of Cash Flows for the years
ended April 30, 1998 and 1999_____________________________________________16
Notes to Financial Statements__________________________________________17-23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
UNITED FINANCIAL MORTGAGE CORP.
Financial Statements as of April 30, 1998 and April 30, 1999
together with the Independent Auditors' Report
To the Board of Directors and Stockholders of
United Financial Mortgage Corp.
We have audited the accompanying balance sheets of United
Financial Mortgage Corp. as of April 30, 1998 and April 30, 1999, and
the related statements of income, stockholders' equity and cash flows
for the years ended April 30, 1998 and April 30, 1999. 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, 1998 and April 30,
1999 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting
principals.
CRAIG SHAFFER AND ASSOCIATES, LTD., C.P.A.
Des Plaines, Illinois
July 11, 1999
Respectfully submitted,
By: /S/ Craig Shaffer
Craig Shaffer and Associates, Ltd.
Certified Public Accountants
July 11, 1999
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Balance Sheet
Year Ended Year Ended
April 30, 1998 April 30, 1999
<S> <C> <C>
A S S E T S
Current Assets:
Cash $ 1,974,011 $ 4,344,937
Loans held for sale 13,261,136 32,073,320
Mortgage Loan Investments 1,331,287 1,906,234
Accounts Receivable 83,494 315,860
Due From Employees 13,511 14,700
Due From Officers 64,873 2,439
Deferred Tax Asset 5,636 0
U.S. Savings Bond 2,000 2,000
Note Receivable 140,878 110,000
Prepaid Expense 8,882 177,098
Total current assets $ 16,885,708 $ 38,946,588
Furniture, Fixtures & Equipment
Cost 342,771 645,519
Accumulated Depreciation (200,484) (276,512)
Total Furniture, Fixtures,
& Equipment 142,287 369,007
Other Assets:
Servicing Rights 74,286 185,980
Land Investments 303,250 0
Escrow Deposits 8,076 60,793
Deferred Organization Costs 143,425 0
Security Deposits 11,302 16,403
Deferred Advisor Fees 234,000 78,000
Investments 5,750 5,750
Goodwill Net 0 132,715
Total Other Assets 780,089 479,641
Total Assets $ 17,808,084 $ 39,795,236
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY
Year Ended Year Ended
April 30, 1998 April 30, 1999
<S> <C> <C>
Current Liabilities:
Accounts Payable $ 207,462 $ 235,952
Leases Payable 0 12,295
Accrued Expenses 171,773 177,675
Taxes Payable 0 62,959
Deferred Income Taxes 0 270,599
Escrow Payable 8,076 32,892
Notes Payable - Current 14,149,244 32,375,632
Total current liabilities $ 14,536,555 $ 33,168,004
Non-Current Notes Payable 425,000 0
Leases Payable 0 31,551
Total liabilities $ 14,961,555 $ 33,199,555
Stockholders Equity
Common Shares, 20,000,000 Authorized,
No Par Value, Shares Issued and
Outstanding; 3,100,029 at
April 30, 1998 and 3,898,219
at April 30, 1999. $ 2,382,895 $ 6,529,332
Preferred Shares, 5,000,000 Authorized,
No Par Value, 213 Series A Redeemable
Shares Issued And Outstanding;
value $1,065,000 at April 30, 1998
and 63 shares issued and
Outstanding April 30, 1999. $ 1,065,000 $ 315,000
Retained Earnings (601,366) (248,651)
Total Stockholders' Equity $ 2,846,529 $ 6,595,681
Total liabilities and
stockholders' equity 17,808,084 39,795,236
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Statement of Income
Year Ended Year Ended
April 30, 1998 April 30, 1999
<S> <C> <C>
Revenues:
Commissions and Fees $ 6,730,416 $ 8,571,594
Interest Income 665,646 1,457,953
Other Income and Expense (13,466) 15,681
7,382,596 10,045,228
Expenses:
Salaries & Commissions $ 4,008,346 $ 4,539,018
Selling & Administrative 1,990,349 3,460,977
Depreciation 45,805 80,704
Interest Expense 975,953 1,054,921
Cost and Expense of Litigation 80,587 150,000
$ 7,101,040 $ 9,285,620
Income (loss) Before Income Taxes $ 281,556 $ 759,608
Income Tax Provision 40,127 339,228
Net Income (loss) 241,429 420,380
Less Dividends Paid on Preferred Stock 0 67,665
Net Income (loss) Applicable to
Common Shareholders 241,429 352,715
Basic Net Income(loss) Per Share 0.08 0.09
Diluted Net Income Per Share 0.07 0.09
Shares used in computation of basic
net income per share 3,100,029 3,828,918
Shares used in computation of diluted
net income per share 3,342,029 4,070,918
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Statement of Stockholders Equity
Twelve Months Ended April 30, 1999
Common Retained
Stock Earnings Total
<S> <C> <C> <C>
Balance, April 30, 1997 2,382,895 (842,795) 1,540,100
Net Income for the year ended
April 30, 1998 241,429
Balance, April 30, 1998 2,382,895 (601,366) 1,781,529
Net Proceeds From Public Offering
of 800,000 shares 4,153,508
Retirement of 1,810 Shares (7,071)
Net Income for the period
ended April 30, 1999 420,380
Dividend Paid on Preferred Stock (67,665)
Balance, April 30, 1999 6,529,332 (248,651) 6,280,681
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
<TABLE>
United Financial Mortgage Corp.
Statement of Cash Flows
<S> <C> <C>
Year Ended Year Ended
April 30, 1998 April 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income or (Loss) $ 241,429 $ 420,380
Adjustments to Reconcile Net Inco
To Net Cash Provided by Operating Activities
Depreciation 45,805 76,028
Changes In:
Prepaids & Other Current Assets 69,216 (448,852)
Accrued Expenses & Other Current Liabilities 18,240 364,276
Accounts Payable 27,479 28,490
Deposits
(5,159) (5,101)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 397,010 $ 435,221
CASH FLOWS FROM INVESTING ACTIVITIES
Land Sales (303,250) 303,250
Purchase of Fixed Assets (34,001) (302,748)
Goodwill net of 4,076 amortization 0 (132,715)
Servicing Rights (74,286) (111,694)
NET CASH PROVIDED FROM INVESTING ACTIVITIES (411,537) (243,907)
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Receivable $ (29,115) 30,878
Changes in Short Term Debt 0 12,295
Changes in Long Term Debt 126,968 (393,449)
Officers Loans (29,846) 62,434
Deferred Advisor Fees 156,000 156,000
Deferred Offering Expenses (49,192) 143,425
Preferred Stock Redeemed 0 (750,000)
Common Stock Proceeds - Net 0 4,146,437
Mortgage Loans Made (935,810) (19,387,131)
Changes in Bank Line of Credit 731,322 18,226,388
Preferred Stock Dividend 0 (67,665)
CASH PROVIDED (USED) BY FINANCING ACTIVITIES (29,673) 2,179,612
INCREASE (DECREASE) IN CASH (44,200) 2,370,926
Cash at Beginning of Period 2,018,211 1,974,011
Cash at End of Period 1,974,011 4,344,937
The accompanying notes are an integral part of this statement
</TABLE>
<PAGE>
UNITED FINANCIAL MORTGAGE CORP.
Notes to Audited Financial Statements
Organization and Business of the Company
United Financial Mortgage Corp. is an Illinois corporation
organized on April 30, 1986 to engage in the residential mortgage
banking business. The Company is a licensed mortgage banker in the
states of Illinois, Wisconsin, Missouri, Arkansas, California,
Colorado, Connecticut, Delaware, Florida, Kentucky, Maryland, Nevada,
North Carolina, Oregon, South Carolina, Texas, Utah, Virginia,
Washington and Indiana. The Company is an approved mortgagee by the
Department of Housing and Urban Development and is qualified to
originate mortgage loans insured by the Federal Housing
Administration as well as service loans for the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation.
Summary of Significant Accounting Policies
Net Income(Loss) Per Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share." SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Earnings per share amounts for
all periods have been presented and, where appropriate, restated to
conform to SFAS No. 128 requirements.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Revenue Recognition
Revenue is recognized when loans are sold after closings.
Interest income from mortgages held by the Company and from short
term cash investments is recognized as earned.
Commissions and Fees
Commissions and fees principally consist of premiums received
from purchasers of mortgage loans originated by the Company. Gains
(losses) from purchasing, selling, investing in or otherwise trading
in closed mortgage loans are an immaterial portion of the Company's
revenues and are included in the Statement of Income under the item
entitled Revenues: Commissions and Fees.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term
investments with maturity of three months or less.
Accounts Receivable
Accounts receivable consist of advances made in connection with
loan origination activities.
<PAGE>
Concentration of Credit Risk
Credit risk with respect to mortgage loan receivables and
accounts receivable is generally diversified due to the large number
of customers and the timely sale of the loans to investors, generally
within one (1) month. The Company performs extensive credit
investigation and verification procedures on loan applicants before
loans are approved and funds disbursed. In addition, each loan is
secured by the underlying real estate property. As a result, the
Company has not deemed it necessary to provide reserves for the
ultimate realization of the mortgage loan receivables.
Fixed Assets
Fixed assets consist of furniture, fixtures, equipment and
leasehold improvements and are recorded at cost and are depreciated
using the straight line method over their estimated useful lives.
Furniture, fixtures and equipment are depreciated over 5-7 years and
leasehold improvements over the shorter of the lease term or the
estimated useful life of the asset. Upon asset retirement or other
disposition, cost and the related allowance for depreciation are
removed from the accounts, and gain or loss is included in the
statement of income. Amounts expended as repairs and maintenance are
charged to operations.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments,
including cash and cash equivalents, mortgage receivables, accounts
receivables, accounts payable and notes payable, as reported in the
accompanying balance sheet, approximates fair value.
Income Taxes
The Company accounts for income taxes using the liability method
in accordance with SFAS No. 109., _Accounting for Income Taxes._ The
liability method provides that deferred tax assets and liabilities
are determined based on differences between financial reporting and
tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
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.
Certain Relationships and Related Transactions
On November 20, 1998, the Company completed a second mortgage
loan on the principal residence of Mr. Rocco Cappiello, a director of
the Company, in the amount of $130,000. The loan was made on terms
generally more favorable to the Company than would otherwise be
available in the competitive marketplace. Further, the Company
secured its loan position with collateral, both real and personal
property, substantially in excess of its underwriting guidelines for
other similar loans in the ordinary course of its business. The loan
was made from funds other than the net proceeds from the Company's
recently completed public offering.
<PAGE>
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." ("SFAS 130"). SFAS 130,
establishes the standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses) as
part of a full set of financial statements. This statement requires
that all elements of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years
beginning after December 15, 1997. Since the standard applies only
to the presentation of comprehensive income, it should not have any
impact on the Company's results of operations, financial position or
cash flows. Comprehensive income and regular income are one and the
same for the current period.
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 131,
"Disclosures about segments of an Enterprise and Related
Information." ("SFAS 131"). SFAS 131 is effective for years
beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for fiscal years beginning after
December 15, 1997, and therefore the Company has adopted the new
requirements.
Year 2000 Impact
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Certain computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions, or engage in similar
business activities.
The Company has reviewed its computer systems and applications
to determine if these programs are Year 2000 compliant and if not,
the efforts that will be necessary to bring the programs into
compliance. The Company has not identified any computer system or
application that, upon failure to be year 2000 compliant, would have
a material adverse impact on its business activities or results of
operations.
<PAGE>
The Company is participating in Year 2000 readiness testing
sponsored by the Mortgage Bankers Association. If any issues arise
from this test the Company will react in a timely manner to address
these issues.
Notes Payable
The Company has mortgage warehouse credit facilities aggregating
$62 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:
April 30, 1999
$20 million mortgage warehouse credit facility at a
commercial bank; interest at LIBOR;
plus 160 basis points; expires 10/28/99 $ 20,108,902
$25 million mortgage warehouse credit facility at a
commercial bank; interest at LIBOR;
plus 185 basis points; expires 09/99 10,481,425
$15 million mortgage warehouse credit facility at a
commercial bank; interest at Libor;
plus 150 basis point; expires 2/2000 635,944
$2 million mortgage warehouse credit facility at a
commercial bank; interest at LIBOR;
plus 160 basis points; expires 10/28/99 1,149,361
Total $ 32,375,632
Retirement Plan
The Company has a 401K plan that all eligible employees may
participate in. Company contributions to the plan are discretionary.
<PAGE>
Lease Commitments
The Company conducts its operations from leased premises and has
several equipment leases as part of standard business practice. The
following table reveals the estimated minimum rental payments under
the Company's operating leases. Total rent expense under these
leases was approximately $332,000 for the twelve months ended April
30, 1999.
Future minimum rental payments for the next five years at April
30, 1999 are as follows:
Period Ending April 30, Operating Leases
2000 321,967
2001 276,870
2002 186,662
2003 84,449
2004 0
Total Commitment $ 869,948
Income Taxes
The income tax provision consists of the following for the
period ended April 30:
1998 1999
Current:
Federal $ 30,096 $ 48,635
State 10,031 14,324
SubTotal 40,127 62,959
Deferred:
Federal $ 0 311,221
State 0 46,200
SubTotal 0 357,421
Total $ 40,127 $ 420,380
The components of the deferred tax asset (liability) are as
follows for the periods ending April 30:
1998 1999
Loss Carry-Forward $ (5,636) $ 0
Accelerated Depreciation 72,798 24,415
Deferred Receivables 3,659 (295,014)
Deferred Tax Asset (Liability)70,821 (270,599)
Valuation Allowance (76,457) 0
Net Deferred Tax Asset
(Liability) $ 5,636$ (270,599)
The effective tax rate for the three month periods ended April
30, 1998 and April 30, 1999: the statutory Federal tax of 34%;
and state tax rate of 7%.
<PAGE>
Series A Preferred Stock
The Series A Preferred Stock is non-voting, nonparticipating and
has a liquidation preference upon dissolution of the Company of
$5,000 per share. The holders of the Preferred Stock are entitled to
a variable dividend only at the discretion of and determination by
the Board of Directors. No dividend was declared for the year ended
April 30, 1998 and $67,665 was declared for 1999.
Stockholders' Equity
Warrants
At April 30, 1999, 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 November 15, 1999.
In certain circumstances, the warrants have certain "piggy back" or
other registration rights.
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 November 15, 1999 and contain certain registration rights.
The Company has reserved 242,000 common shares for issuance upon
exercise of all warrants.
On May 26, 1998, the Company commenced an initial public
offering of 800,000 shares of its common stock at a price of $6.50
per share. Gross offering proceeds totaled $5,200,000.
Gross offering proceeds have been applied as follows:
Underwriting Commission $520,000
Non-Accountable Expenes Allowance $156,000
Redemption of Series A Preferred Stock $750,000
Offering Expenese $375,493
Repayment of 1996 Debentures, and accrued
interest $489,000
In March of 1999, the Company started a stock repurchase
program. As of April 30, 1999, the Company has purchased 1,810
shares and has returned to `authorized but not issued' shares.
Servicing
During the recent year ended April 30, 1999, the Company has
continued to build a servicing portfolio. As of the balance sheet
date, the servicing portfolio was nine million, seven hundred eighty-
eight thousand, four hundred thirteen dollars (9,788,413) in
residential loans.
<PAGE>
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.
During the period ending April 30, 1999, the Company granted
options for a total of 74,500 shares of stock at $6.50 per share.
Mr. Steve Khoshabe, the Executive Vice President of the Company was
awarded 50,000 of these options.
At April 30, 1998, the Company had not granted any options under
the Plan.
At April 30, 1998, the Company has reserved 500,000 common
shares for issuance upon exercise of all options.
Contingencies
In June 1995, Lawyers Title initiated a non-wage garnishment
proceeding against the Company and its bank. 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.
On March 13, 1999 the matter was settled. The settlement does
not require any further payments by the Company.
The Company is a defendant in a series of complaints relating to
its business activities. The aggregate amount of these claims is
approximately $300,000. The Company has aggressively defended its
position in these matters and has filed counter-claims in certain of
the cases. The Company does not believe the outcome of these lawsuits
will have a material impact on its financial statements.
Expansion
On October 9, 1998, the Company purchased certain assets of
Mortgage Service of America, Inc. for $187,291 under the purchase
method of accounting. MSA was is in the mortgage loan origination
business and originated primarily first mortgages. The purchase
price was paid in cash. Assets in the amount of $50,000 are being
depreciated over their useful lives and goodwill of $137,291 will be
amortized over 15 years. Due to the method of accounting used by
MSA, it is not possible to present a pro forma combined financial
statement. If included, management does not believe it would present
a material change to the Company's financial statements.
<PAGE>
United Financial Mortgage Corp.
Notes to Audited Financial Statements
Basis of Presentation
Earnings per share is presented in accordance with the provision
of the Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128), which requires the presentation of "basic" and
"diluted" earnings per share. Basic earnings per share is based on
the weighted average shares outstanding without regard for common
stock equivalents such as stock options and warrants. Diluted
earnings per share includes the effect of common stock equivalents.
The following reconciles basic earnings per share to diluted earnings
per share under the provisions of SFAS 128:
Period ended April 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share
Income Available to Common
Shareholders 241,429 3,100,029 0.0778
Effect of Dilutive Securities
Options and Warrants 242,000
Diluted Earnings Per Share
Income Available to Common
Shareholders 241,429 3,342,029 0.0722
Period ended April 30, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic Earnings Per Share
Income Available to Common
Shareholders 352,715 3,828,917 0.0921
Effect of Dilutive Securities
Options and Warrants 242,000
Diluted Earnings Per Share
Income Available to Common
Shareholders 352,715 4,070,917 0.0866
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
Not Applicable
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
(a) Recent Sales of Unregistered Securities.
The Company has never declared or paid a dividend on its
Common Stock, and management expects that a substantial portion
of the Company's earnings, if any, for the foreseeable future
will be used to expand loan origination and servicing
capabilities. The decision to pay dividends, if any, in the
future is within the discretion of the Board of Directors and
will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors
such as loan covenants or other contractual obligations.
(b) Use of Proceeds
(1) On May 26, 1998, the Company's Registration Statement
(No. 333-27037) on Form SB-2 became effective with the
United States
Securities and Exchange Commission.
(2) The offering commenced on May 27, 1998.
(3) Not Applicable.
(4) (i)The offering terminated on June 4, 1998 after the
sale of 800,000 shares of the Company's common stock. An over-
allotment option for an additional 120,000 shares which were
registered were not sold.
(ii) The managing underwriter was Mills Financial Services,
Inc.
(iii) The title of each class of securities registered
is as follows:
Amount
Class Registered
Common Stock _______________________920,000
Underwriter's Warrants_______________80,000
Common Stock Within Underwriter's
Warrant_________________________80,000
<PAGE>
(iv) No shares were sold by any selling security holders.
920,000 shares were registered for the account of
the Company with an aggregate offering price of
$5,980,000. 800,000 shares were sold for an aggregate
offering price of $5,200,000.
(v) The amount of the expenses incurred for the
Company's account in connection with the issuance and
distribution of the shares registered is as follows:
Underwriting Discounts and Commissions_______520,000
Finder's Fees________________________________ None
Non-Accountable Expense Allowance Paid to the
Underwriter______________________________156,000
Other Expenses_______________________________375,493
Total Expenses___________________________ $1,051,493
(V)(A) $750,000 of the offering proceeds were paid to the
Joseph Khoshabe Trust, dated September 22, 1995 as the
redemption price for 150 shares of Series A Preferred
Stock. The Company also paid $489,000 to repay the
principal and accrued interest on certain 1996
Debentures. These applications of offering proceeds
were disclosed in the registration statement.
(VI) The net proceeds to the Company after deducting total
expenses and the other uses described above was: $2,909,507.
(VII) The net offering proceeds to the Company have been
invested in temporary investments, and for the other uses set
forth in the prospectus.
(VIII) Not Applicable.
<PAGE>
Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual
Compensation
Name and Principal Position Year Salary Bonus (1)(2)(3)(4)(6)
Joseph Khoshabe, President 1999 $244,166 $47,561 $11,565
1998 $180,000 -0- $ 3,161
1997 $180,000 -0- $ 3,161
1996 $170,000(4) -0- $ 3,161
1995 $160,000 -0- $ 3,161
Steve Y. Khoshabe, 1999 $ 86,500 -0- $ 3,495
Executive Vice President (5) 1998 $ 50,063 -0- $ 2,210
1997 $ 46,093 -0- $ 2,210
1996 $ 40,393 -0- $ 2,210
_____________________
(1) Includes: $1,980 for annual disability premiums; and $9,505 for
annual health insurance premiums for Mr. Khoshabe and his
dependents.
(2) Does not include a $25,000 annual car allowance payable to Mr.
Joseph Khoshabe.
(3) Does not include a $12,000 annual car allowance payable to Steve
Khoshabe.
(4) This salary amount was not paid to Mr. Khoshabe. This salary
amount is included to satisfy applicable accounting
requirements.
(5) Effective as of June 15, 1998, Mr. Steve Khoshabe's annual base
salary was increased to $90,000. Mr. Khoshabe's annual car
allowance also was increased effective as of May 1, 1998 from
$7,200 to $12,000. These increases are attributable to the
increase in Mr. Khoshabe's responsibilities as a consequence of
the public offering by the Company.
(6) Effective as of June 15, 1998, Mr. Joseph Khoshabe's annual base
salary was increased from $180,000 to $250,000 in accordance
with the terms of his employment agreement.
<PAGE>
Items 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information known to the
Company regarding beneficial ownership of the Company's Common Stock
at the date of this Proxy Statement, by (1) each person known by the
Company to beneficially own more than 5% of the Company's Common
Stock, and (ii) the officers and directors of the Company
beneficially owning such Common Stock. The Company believes that Mr.
Joseph Khoshabe as trustee of the Joseph Khoshabe Trust, under trust
agreement dated September 22, 1995 (the "J.K. Trust"), has sole
investment and voting power with respect to the shares beneficially
owned by the J.K. Trust.
Number of
Name and Address of Beneficial Owner Shares Percent Owned (1)
J.K. Trust 2,531,842 61.8%
c/o United Financial Mortgage Corp.
600 Enterprise Drive
Suite 206
Oak Brook, Illinois 60521
Rocco M. Cappiello 210,455(2) 5.1%
30 S. Wacker
Suite 1310
Chicago, Illinois 60606
______________________
(1) The computations include the issuance of 322,000 shares of
Common Stock upon exercise of various outstanding warrants.
(2) Mr. Rocco M. Capiello has the right to acquire 195,000 of such
shares within sixty (60) days of the effective date (May 26,
1998) of the Company's registration statement, upon exercise of
a certain Advisor Warrant.
The J.K. Trust is the principal shareholder of the Company. Mr.
Joseph Khoshabe originally purchased the shares and then had them
reregistered in the name of the J.K. Trust for estate planning
purposes. Mr. Khoshabe as the trustee of the J.K. Trust is the
beneficial owner of 2,531,842 shares of the Common Stock of the
Company. In connection with the organization of the Company and its
initial capitalization, the J.K. Trust paid a total of $130,070 for
100% of the Company's common stock. Therefore, the J.K. Trust
purchased its ownership interest in the Company for $.051 per share.
The J.K. Trust has agreed with the Underwriter and the Company,
with the exception of 100,000 shares which may be sold six (6) months
after the effective date of the registration statement described
above that it will not sell the remainder of the shares held by it
for a period of twelve (12) months after such effective date.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
The Company's Board of Directors authorized the issuance of 213
shares of Series A Non-Voting Preferred Stock ("Preferred Stock").
The outstanding shares of Preferred Stock were purchased from the
Company for total cash consideration of $1,065,000 or $5,000 per
share. The 213 shares of Preferred Stock includes 113 shares
purchased by the J.K. Trust on June 10, 1996 for a cash payment to
the Company of $565,000. The J.K. Trust purchased these shares of
Preferred stock as a capital infusion to compensate for the $565,000
judgment that was paid in connection with certain terminated
litigation matters.
On June 5, 1998, 150 shares of the Preferred Stock were redeemed
by the Company for a redemption price of $750,000 and no longer are
outstanding.
The redemption price for the Preferred Stock represents the
original purchase price for such shares. The decision to redeem the
shares by the Company was made solely by the holder of such shares,
namely Mr. Joseph Khoshabe, the President and then sole director of
the Company.
The J.K. Trust for which Mr. Joseph Khoshabe is the trustee will
continue to h old sixty-three (63) shares of Preferred Stock after
the redemption described above.
The Company may pay variable dividends with respect to the
Preferred Stock as determined by the Board of Directors of the
Company on an annual basis.
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.
<PAGE>
SIGNATURES
In accordance with the Exchange Act, this report has been signed
below on July 30, 1999 by the following persons on behalf of the
registrant and in the capacities indicated.
Registrant: United Financial Mortgage Corp.
By: /S/ Joseph Khoshabe
Joseph Khoshabe, President,
Principal Executive Officer
and a Director
By: /S/Steve Y. Khoshabe
Steve Y. Khoshabe, Executive VP
And Principal Accounting Officer
By: /S/ John A. Clark
John A., Clark, Director
By: /S/ David B. Mirza
David B. Mirza, Director
By: /S/ Rocco M. Cappiello
Rocco M. Cappiello, Director
By: /S/ Robert S. Luce
Robert S. Luce,
Secretary and a Director
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports of Form
8-K.
(a) (1) Financial Statements.
The following financial statements and notes thereto,
and the related Independent Auditor's Report, are
filed as part of this Form 10-K on Pages 11 to 21
hereof:
Independent Auditors' Report
Balance Sheets at April 30, 1998 and 1999
Statements of Operations for the years ended April 30,
1998 and 1999
Statements of Stockholders' Equity for the years ended
April 30, 1998 and 1999
Statements of Cash Flows for the years ended April 30,
1998 and 1999
Notes to Financial Statements
(2) Financial Statement Schedules.
All financial statement schedules have been omitted
because such schedules are not required or the
information required has been included in the
financial statements and notes thereto.
(3) Exhibits
The following exhibits are filed with this report or
incorporated by reference as set forth below.
3.1 Certificate of Incorporation of the Registrant.*
3.1.1 Certificate of Amendment of Certificate of
Incorporation.*
3.2 By-laws of the Registrant.*
4.1 Description of specimen stock certificate representing
Common Stock.*
10.1.1 Employment Agreement between the Registrant and
Joseph Khoshabe.*
10.4 Non-Qualified and Incentive Stock Option Plan*
___________
*Incorporated by reference from registrant's Registration
Statement on Form SB-2 (No. 333/27037), which was declared
effective by the Securities Exchange Commission on May 26,
1998.
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed by the
Company during the period covered by this report:
Form 8-K dated 04/29/99
Form 8-K dated 04/15/99
Form 8-K dated 03/29/99
Form 8-K dated 03/19/99
Form 8-K dated 02/05/99
Form 8-K dated 01/28/99
Form 8-K dated 10/22/98
Form 8-K dated 10/13/98
Form 8-K dated 10/02/98
Form 8-K dated 09/23/98
Form 8-K dated 09/03/98
Form 8-K dated 07/24/98
Form 8-K dated 07/10/98
