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.
At this time, the Company's primary sources of loan originations are its Wholesale and Retail Divisions. On April 30, 2000, the Company's Retail Division operated five (5) 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; Champaign, Illinois; Creve Coeur, Missouri; Clearwater, Florida; and Las Vegas, Nevada. Wholesale origination principally is conducted from the Company's offices in Oak Brook, Illinois, Lombard, 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.
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.
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.
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.
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.
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.
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, 2000, the Company leased an aggregate of approximately 4,000 square feet in Lombard, Illinois, 1,146 square feet in Las Vegas, Nevada; 1,475 square feet in Irvine, California; and 900 square feet in St. Louis, Missouri. 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, 2000 was $459,783. 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.
The Company's corporate headquarters are located at 600 Enterprise Drive Suite #206, Oak Brook, Illinois 60523 and its telephone number is (630) 571-7222.
Item 3.
Item 3. Legal Proceedings.
The Company is involved in litigation in the normal course of business. This litigation is not expected to have a material effect in the Company's results of operations or financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 25, 1999, the Company conducted its Annual Meeting of Shareholders and shareholders approved management's recommendation regarding the election of directors, the appointment of independent auditors and vote on an amendment to the non-qualified and incentive stock option plan.
Item 5.
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 1, 1999 through July 15, 2000 were $1.00 and $4.12, respectively.
Holders. As of July 15, 2000, 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.
Item 6.
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 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 and April 30, 2000
The fiscal year ended April 30, 2000 was a period of significant challenge for the Company. Despite the fact that interest rates increased as compared to the prior year, loan volume and revenues remained relatively constant. However, the Company saw profit margins on revenue decrease for the same period last year due to an increasing interest rate environment. The Company believes it is still well positioned for the future due to prior key strategic initiatives that prepared the Company for interest rate increases.
Commission and fee revenue increased from $8,571,594 for the twelve months ended April 30, 1999 to $9,051,395 for the twelve months ended April 30, 2000. This is a percentage increase of approximately 5.6%.
Interest income increased from $1,457,953 for the twelve months ended April 30, 1999 to $1,824,603 for the twelve months ended April 30, 2000. This increase was attributable to the increase in higher interest income on invested capital.
Salary and commissions expenses increased from $4,539,018 for the twelve months ended April 30, 1999 to $6,408,302 for the twelve months ended April 30, 2000. The increase was attributed to two main factors: continued investment in the expansion of the Company's sales organization and the increasing cost of premiums paid on wholesale originations.
Selling and administrative expenses decreased from $3,460,977 for the twelve months ended April 30, 1999 to $3,039,924 for the twelve months ended April 30, 2000.
Depreciation and amortization expense increased from $80,704 for the twelve months ended April 30, 1999 to $127,414 for the twelve months ended April 30, 2000. This increase 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 $1,054,921 for the twelve months ended April 30, 1999 to $1,439,021 for the twelve months ended April 30, 2000. This increase was the result of the increased cost of borrowing as a result of a higher interest rate environment.
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 30,1999 and April 30, 2000, respectfully. This consists of $156,000 recorded as advisory fees in fiscal years 1999 and $78,000 for fiscal year 2000. Without this non-cash charge, net income available to common shareholders would have been $508,715 as compared to $352,715 in fiscal year 1999 and ($3,758) as compared to ($81,758) in fiscal year 2000.
Liquidity and Capital Resources During the twelve months ended April 30, 1999 and April 30, 2000, net cash generated(used) by operating activities was $435,221 and $267,329, respectively. Net cash generated by operating activities decreased from year to year largely due to the fluctuation in net income.
Net cash generated(used) by investing activities decreased from ($243,907) for the fiscal year ended April 30, 1999 to ($528,945) for the fiscal year ended April 30, 2000. The change in cash from 1999 to 2000 was largely attributable to the sale of two foreclosed properties in 1999 and the purchase of two properties in 2000. This was partially offset by investments in fixed assets and the increase in retaining servicing rights on certain closed loans during the time periods.
Cash flow from financing activities for the fiscal year 1999 and fiscal year 2000 was 2,179,612 and ($477,165) respectively. This change resulted largely from the net proceeds of a public offering that occurred in early fiscal year 1999.
Therefore, the net cash flow from operating, financing, and investing activities was $2,370,926 for the fiscal year ended April 30, 1999 and ($738,781) for the first the fiscal year ended April 30, 2000.
Capital expenditures for the year ended April 30, 2000 were approximately $75,000, principally in technology and to a lesser extent for the expansion of sales organization facilities. These capital expenditures include a new loan tracking system that coincides with the strategy of using technology as a competitive advantage. The Company believes it will continue to make investments in technology in the future to enhance and maintain its product and service offerings.
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 continued to pursue its strategy of servicing mortgage loans. In order to engage in this business, the Company has retained the servicing rights on certain 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, broker commissions, 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.
Industry Trends Higher interest rates in recent quarters have resulted in many mortgage companies leaving the market. This benefits the Company long-term because of less competition. However, the short-term effects include less origination activity and reduced margins.
The Company 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 principally is concentrated in the Midwest and Western United States. 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.
Item 7.
Item 7. Financial Statements
UNITED FINANCIAL MORTGAGE CORP.
FINANCIAL STATEMENTS
Page
Table of Contents_____________________________________ 9
Report of Independent Certified Public Accountants___________________10
Balance Sheet at April 30, 1999 and 2000__________________________11-12
Statement of Income for the years ended April 30, 1999 and 2000_________________________________________13
Statement of Stockholders' Equity for the years ended April 30, 1999 and 2000___________________________________14
Statement of Cash Flows for the years ended April 30, 1999 and 2000__________________________________ 15
Notes to Financial Statements_____________________________________16-22
INDEPENDENT AUDITOR'S REPORT
UNITED FINANCIAL MORTGAGE CORP.
Financial Statements as of April 30, 1999 and April 30, 2000 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, 1999 and April 30, 2000, and the related statements of income, stockholders' equity and cash flows for the years ended April 30, 1999 and April 30, 2000. 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, 1999 and April 30, 2000 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 24, 2000
Respectfully submitted,
By: /S/ Craig Shaffer Craig Shaffer and Associates, Ltd. Certified Public Accountants July 24, 2000
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 Arkansas, California, Colorado, Connecticut, Delaware, Florida, Illinois , Indiana, Kentucky, Maryland, Missouir, Nevada, New Mexico, North Carolina, Oregon, South Carolina, Texas, Utah, Virginia, Washington and Wisconsin. The Company also does business in other states that do not have mortgage banking liscensure statutes, 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, the Commercial Division, and the Servicing Division. The Company's Retail and Wholesale Origination business is conducted principally in the states of California, Illinois, and Nevada.
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. In addition, the Company is approved to issue Government National Mortgage Association securities.
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 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.
UNITED FINANCIAL MORTGAGE CORP. Notes to Audited Financial Statements 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.
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.
UNITED FINANCIAL MORTGAGE CORP. Notes to Audited Financial Statements 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. As of August 1999, Mr. Rocco Cappiello is no longer a director of the Company.
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.
UNITED FINANCIAL MORTGAGE CORP. Notes to Audited Financial Statements
Notes Payable The Company has mortgage warehouse credit facilities aggregating $49 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, 2000 $20 million mortgage warehouse credit facility at a commercial bank; interest at LIBOR; plus 160 basis points; expires 10/01/2000 $ 12,663,587
$2 million mortgage warehouse credit facility at a commercial bank; interest at LIBOR plus 160 basis points expires 10/01/2000 1,049,236
$25 million mortgage warehouse credit facility at a commercial bank; interest at Libor plus 150 basis point; expires 10/08/2000 15,855,865
$2 million mortgage warehouse credit facility at a commercial bank; interest at Prime; plus 50 basis points; expires 10/31/2003 0
Total $ 29,568,688
Retirement Plan The Company has a 401K plan that all eligible employees may participate in. Company contributions to the plan are discretionary.
UNITED FINANCIAL MORTGAGE CORP. Notes to Audited Financial Statements
Lease Commitments The Company conducts its operations from leased premises and has several equipment leases as part of standard business practice. The following table reveals the estimated minimum rental payments under the Company's operating leases. Total rent expense under these leases was approximately $459,783 for the twelve months ended April 30, 2000.
Future minimum rental payments for the next five years at April 30, 2000 are as follows:
Year Ending April 30, Operating Leases 2001 294,299 2002 255,269 2003 209,693 2004 124,892 2005 74,151
Total Commitment $ 958,304
Future lease payments capital leases at April 30, 2000:
Year Ending April 30, Capital Leases 2001 17,573 2002 12,008 2003 5,415 2004 451 Total Commitment $ 35,447 Less Interest 8,013 Less Short Term 14,093 Long Term $ 13,341
Income Taxes The income tax provision consists of the following for the period ended April 30:
1999 2000 Current: Federal $ 48,635 $ 0 State 14,324 0 SubTotal 62,959 0
Deferred: Federal $ 311,221 (62,261) State 46,200 (12,818) SubTotal 357,421 (75,079)
Total $ 420,380 $ (75,079)
United Financial Mortgage Corp. Notes to Audited Financial Statements
The components of the deferred tax asset (liability) are as follows for the periods ending April 30:
1999 2000 Contributions 0 1,283 Loss Carry-Forward 0 (282,627) Accelerated Depreciation 24,415 (34,766) Deferred Receivables (295,014) 165,951
Deferred Tax Asset (Liability) (270,599) (150,159) Valuation Allowance 0 (75,080)
Net Deferred Tax Asset (Liability) $ (270,599) $ (75,079)
The effective tax rate for the years ended April 30, 1999 and April 30, 2000: the statutory Federal tax of 34%; and state tax rate of 7%.
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. A dividend of $67,665 was declared for the year ended April 30, 1999 and $38,500 was declared for the year ended April 30, 2000.
Stockholders' Equity Warrants At April 30, 2000, the Company had total warrants outstanding to purchase 300,000 shares of the Company's Common Stock. The exercise price of the warrants range between $0.50 and $7.80 per share. Warrants for 25,000 shares expire on the fifth anniversary of their issuance. Warrants for 195,000 shares expire on November 15, 2000. Warrants for 80,000 shares expire May 2003. In certain circumstances, the warrants have certain "piggy back" or other registration rights.
As of April 30, 2000, 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, 2000 and contain certain registration rights.
The Company has reserved 300,000 common shares for issuance upon exercise of all warrants.
Treasury Stock In March of 1999, the Company commenced a stock repurchase program. As of April 30, 2000 the Company has purchased 11,770 shares and has returned such shares to `authorized but not issued' shares.
United Financial Mortgage Corp. Notes to Audited Financial Statements
Servicing During the recent year ended April 30, 2000, the Company has continued to build a servicing portfolio. As of the balance sheet date, the servicing portfolio was seventeen million, two hundred ninety three thousand, three hundred eighty eight dollars (17,293,388) in residential loans.
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.
During the period ending April 30, 2000 the Company granted options for 96,500 more shares of stock at $6.50 per share.
Contingencies The Company is involved in litigation in the normal course of business. This litigation is not expected to have a material effect in the Company's results of operations or financial condition.
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.
Credit Risk Financial instruments that potentially subject the Company to credit risk include cash balances at banks that exceed the related federal deposit insurance by $3,595,840 at April 30, 2000.
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, 1999 Income Shares Per Share (Numerator) (Denominator) Amount
Basic Earnings Per Share Income Available to Common Shareholders 352,715 3,828,917 .0921
Effect of Dilutive Securities Options and Warrants 242,000
Diluted Earnings Per Share Income Available to Common Shareholders 352,715 4,070,917 .0866
Period ended April 30, 2000 Income Shares Per Share (Numerator) (Denominator) Amount
Basic Earnings Per Share Income Available to Common Shareholders (81,758) 3,900,029 (.0209)
Effect of Dilutive Securities Options and Warrants 300,000
Diluted Earnings Per Share Income Available to Common Shareholders (81,758) 4,200,029 (.0194)
Item 8.
Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable
PART III
Item 9.
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 -N/A
Item 10.
Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual Compensation Name and Principal Position Year Salary Bonus (1)(2)(3)(4) Joseph Khoshabe, President 2000 $250,000 -0- $11,565 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
Steve Y. Khoshabe Executive Vice President 2000 $ 90,000 -0- $ 3,495 1999 $ 86,500 -0- $ 3,495 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.
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 60.3% c/o United Financial Mortgage Corp. 600 Enterprise Drive Suite 206 Oak Brook, Illinois 60521
Rocco M. Cappiello 210,455(2) 5.0% 3123 Crestwood Drive Northbrook, IL 60062 _________________ (1) The computations include the issuance of 300,000 shares of Common Stock upon exercise of various outstanding warrants.
(2) Mr. Rocco M. Capiello has the right to acquire 195,000 shares, 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.
Item 12.
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.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below on July 31, 2000 by the following persons on behalf of the registrant and in the capacities indicated.
Registrant: United Financial Mortgage Corp.
Directors: 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/ Bob Jones Bob Jones, Director
By: /S/ Anthony DiMucci Anthony DiMucci, Director
By: /S/ Robert S. Luce Robert S. Luce, Secretary and a Director
PART IV
Item 13.
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, 1999 and 2000 Statements of Operations for the years ended April 30, 1999 and 2000 Statements of Stockholders' Equity for the years ended April 30, 1999 and 2000 Statements of Cash Flows for the years ended April 30, 1999 and 2000 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 06/02/99 Form 8-K dated 07/01/99 Form 8-K dated 07/13/99 Form 8-K dated 08/26/99 Form 8-K dated 08/30/99 Form 8-K dated 09/21/99 Form 8-K dated 12/22/99 Form 8-K dated 01/28/00 Form 8-K dated 03/20/00 Form 8-K dated 04/11/00