As filed with the Securities and Exchange Commission on July 8, 1998
Registration Statement No. 333-44691
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CFI MORTGAGE INC.
(Name Of Small Business Issuer In Its Charter)
-----------------------------------
Delaware 6199 52-2023491
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification
Incorporation or Classification Number)
Organization) Code Number)
580 Village Boulevard
Suite 120
West Palm Beach, Florida 33409
(561) 687-1595
(Address and Telephone Number of Principal Executive Offices)
(Address of Principal Place of Business or Intended Principal Place of Business)
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Christopher C. Castoro
Chief Executive Officer
CFI Mortgage Inc.
580 Village Boulevard
Suite 120
West Palm Beach, Florida 33409
(561) 687-1595
(Name, Address and Telephone Number of Agent for Service)
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Copy to:
Joseph A. Smith, Esq.
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
(212) 351-4500
fax: (212) 661-0989
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CALCULATION OF REGISTRATION FEE
========================================================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to Offering Price Aggregate Amount of
Registered be Registered Per Share(3)(4) Offering Price Registration Fee
========================================================================================================================
Shares of Common Stock
underlying IPO Warrants .......... 100,000 Shares (1) $6.00 $ 600,000 $ 204
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Shares of Common Stock
underlying Additional Warrants ... 240,000 Shares (1) $8.50 $2,040,000 $ 692
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Shares of Common Stock,
$.01 par value ................... 640,000 Shares (2) $6.25 $4,000,000 $1,356
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Shares of Common Stock,
$.01 par value ................... 200,000 Shares (5) $5.00 $1,000,000 $ 295
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Total Registration Fee ............. $2,547*
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* $2,252 previously paid.
(1) Pursuant to rule 416, there are also being registered such indeterminable
number of additional securities which may be issued as a result of the
anti-dilution provisions of the IPO Warrants and the Additional Warrants.
(2) Represents the number of shares of Common Stock initially issuable upon
conversion of the Series A Convertible Preferred Stock, dividends payable
in shares of the Company's Common Stock, and includes such indeterminable
number of additional shares which may be issued as a result of the
fluctuation of the conversion price.
(3) Estimated solely for purpose of calculating the registration fee pursuant
to Rule 457(c) based on the closing sale price of the Common Stock on the
Nasdaq SmallCap Market on January 16, 1998.
(4) The maximum aggregate price per unit of the IPO Warrants and the Additional
Warrants has been calculated pursuant to Rule 457(g).
(5) Represents the maximum number of shares of Common Stock which may be issued
upon conversion of the Series B Convertible Preferred Stock, and dividends
which may be paid in shares of the Company's Common Stock. Pursuant to Rule
416, there is also being registered such indeterminable number of
additional securities which may be issued as a result of the anti-dilution
provisions of the Series B Convertible Preferred Stock.
Approximate Date of Proposed Sale to the Public:
From time to time after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
-------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT TO COMPLETION, DATED July 8, 1998
PROSPECTUS
CFI MORTGAGE INC.
1,180,000 Shares of Common Stock
This Prospectus relates to the following securities of CFI Mortgage Inc., a
Delaware corporation (the "Company"): (a) 100,000 shares of common stock, $.01
par value (the "Common Stock"), underlying warrants (the "IPO Warrants")
entitling the holder to purchase one share of the Company's Common Stock
exercisable at $6.00, subject to adjustment in certain circumstances (the
"Shares Underlying IPO Warrants"); (b) 240,000 shares of Common Stock underlying
warrants (the "Additional Warrants") entitling the holder to purchase one share
of Common Stock exercisable at $6.50, subject to adjustment in certain
circumstances (the "Shares Underlying Additional Warrants") and (c) 840,000
shares of Common Stock issuable to the Selling Stockholders upon conversion of
their Convertible Preferred Stock (as hereinafter defined), subject to
adjustment in certain circumstances (the "Conversion Shares"). The IPO Warrants
expire on May 27, 2002 and the Additional Warrants expire on September 17, 2001.
See "Description of Capital Stock." The Shares Underlying IPO Warrants, the
Shares Underlying Additional Warrants and the Conversion Shares are referred to
collectively herein as the "Shares."
The Shares may be offered and sold by the Selling Stockholders from time to
time, pursuant to this Prospectus, on terms to be determined at the time of
sale, in transactions in the over-the-counter market, in negotiated
transactions, or by a combination of these methods, at fixed prices that may be
changed, at market prices prevailing at the time of the sale, at prices related
to such market prices or at negotiated prices. The Selling Stockholders may
effect such transactions by selling the Shares to or through securities
broker-dealers or other agents, and such broker-dealers or other agents may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers of the Shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Common Stock
or interests therein as a pledgee and may, from time to time, effect
distributions of Shares or interests in such capacity. See "Selling
Stockholders" and "Plan of Distribution." The Selling Stockholders and any
brokers, dealers or agents through whom sales of the Common Stock are made may
be deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any profits realized by them on the sale of
the Common Stock may be considered to be underwriting compensation.
The Company is not offering and selling any of the Shares offered hereby
and will not receive any of the proceeds from sales of Shares by the Selling
Stockholders; however, the Company will receive the proceeds from the exercise
of the Warrants. The Company has agreed to bear all of the expenses in
connection with the registration and sale of the Shares offered hereby by the
Selling Stockholders (other than underwriting discounts and selling
commissions).
Information concerning the Selling Stockholders may change from time to
time and will be set forth in supplements to this Prospectus.
See "Risk Factors" on pages 5 to 11 for a discussion of certain material
factors which should be considered in connection with an investment in the
Shares offered hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THE OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
--------------------
Prior to the Company's initial public offering (the "Public Offering") of
1,000,000 shares of Common Stock in May 1997, there was no established trading
market for the Common Stock. The Company's Common Stock is now included for
quotation on the Nasdaq SmallCap Market under the symbol "CFIM." The reported
closing sale price of the Common Stock on the Nasdaq SmallCap Market on July xx,
1998 was $xx.xx per share.
--------------------
The date of this Prospectus is ____, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
AVAILABLE INFORMATION
The Company's principal executive offices are located at 580 Village
Boulevard, Suite 120, West Palm Beach, Florida 33409, telephone (561) 687-1595.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files proxy statements, reports and other information
with the Securities and Exchange Commission (the "SEC"). This filed material can
be inspected and copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices in Chicago, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and in New York, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may also be obtained by mail from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC maintains a Web Site address which contains reports,
proxy and information statements and other information regarding the registrants
that file electronically with the SEC. The address of such site is
http://www.sec.gov.
The Company has filed with the SEC a Registration Statement on Form SB-2
(together with any amendments thereto, the "Registration Statement") under the
Securities Act with respect to the registration of the Shares. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the SEC. Statements contained in this
Prospectus or in any document incorporated by reference herein as to the
contents of any contract or documents referred to herein or therein are not
necessarily complete and, in each instance, reference is made to the copy of
such documents filed as an exhibit to the Registration Statement or such other
documents, which may be obtained from the SEC as indicated above upon payment of
the fees prescribed by the SEC. Each such statement is qualified in its entirety
by such reference.
FORWARD-LOOKING STATEMENTS
The matters discussed in this Prospectus under "Risk Factors," in addition
to certain statements contained elsewhere in this Prospectus or in the company's
filings under the Exchange Act, are "Forward-Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and are thus
prospective. Such forward-looking statements are subject to risks, uncertainties
and other factors which could cause actual future results or trends to differ
materially from future results or trends expressed or implied by such
forward-looking statements. The most significant of such risks, uncertainties
and other factors are discussed in this Prospectus under "Risk Factors" and
prospective investors are urged to carefully consider such factors. Updated
information will be periodically provided by the Company as required by the
Securities Act and the Exchange Act. The Company, however, undertakes no
obligation to publicly release the results of any revisions to such
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, (a) all references herein to the
"Company" or "CFI" refer to CFI Mortgage Inc. and its wholly-owned subsidiaries,
Bankers Direct Mortgage Corporation ("BDMC") and Direct Mortgage Partners, Inc.
("DMP") and (b) all references to the Company's or CFI's activities, results of
operations or financial condition prior to the date of the Company's initial
public offering (the "Public Offering") relate to the activities, results of
operations or financial condition of CFI Mortgage Corporation. Each prospective
investor is urged to read this Prospectus in its entirety.
The Company
CFI Mortgage Inc. (the "Company") is a diversified financial services
company headquartered in West Palm Beach, Florida. The Company provides
mortgages and mortgage related services to individuals directly and indirectly
through mortgage brokers and mortgage lenders. The Company originates,
processes, underwrites and funds residential mortgage loans which are sold on
either an individual or bulk basis to institutional and private investors for
investment or securitization purposes. Through its subsidiaries, the Company
originates and purchases both mortgage loans originated to standard government
agency guidelines (conforming loans) and mortgage loans originated to standards
that do not conform to agency guidelines (non-conforming loans). Non-conforming
loans typically fail to meet agency guidelines due to credit impairment, higher
loan-to-value ratios and debt-to-income ratios, and are priced to compensate for
the additional credit risk. In 1997, the breakdown of conforming versus
non-conforming was 70% conforming and 30% non-conforming, and for the three
months ended March 31, 1998, the breakdown was 47.9% conforming and 52.1%
non-conforming. The Company produced $75.2 million in non-conforming closed
loans in 1997 and $60.0 million in the three months ended March 31, 1998
compared to less than $5 million in non-conforming loans in 1996. Since its
inception, the Company has experienced average annual growth of 75.76% in the
volume of loans closed with an annual growth rate of 11.5% in 1997.
All of the Company's operations are conducted through its wholly-owned
subsidiaries, BDMC and DMP. BDMC was incorporated in Florida as Creative
Industries, Inc. in April 1989. In October 1990, Creative Industries, Inc.'s
name was changed to Creative Financing, Inc. In May 1995, Creative Financing,
Inc.'s name was changed to CFI Mortgage Corporation ("CFI Mortgage"). DMP was
incorporated in Florida in August 1997. In March 1997, CFI Mortgage Inc. was
incorporated in Delaware, and immediately prior to the Public Offering, Vincent
J. Castoro and Christopher C. Castoro, who owned all of the issued and
outstanding common stock of CFI Mortgage (the "Existing Stockholders"),
contributed their shares of common stock of CFI Mortgage to the Company in
exchange for all of the outstanding shares of Common Stock of the Company (the
"Exchange"). From April 1989 until December 31, 1996, CFI Mortgage was treated
as an S corporation under Subchapter S (an "S corporation") of the Internal
Revenue Code of 1986, as amended (the "Code"). See "Reorganization and
Termination of S Corporation Status." The Company also owns a nominal 10%
interest in a Florida corporation affiliated with the Company's Chairman which
provides survey and appraisal services to the Company's production offices
located in the State of Florida. To date, the capital required for this venture
has been limited, and the "related entity" has not required capital to fund
operations nor has it provided revenue to the Company. Simultaneous with the
Exchange, CFI Mortgage ceased to be treated as an S corporation.
Use of Proceeds
The Company will not receive any proceeds from the sale by the Selling
Stockholders of the Shares. All proceeds from the sales thereof are solely for
the account of the Selling Stockholders.
Risk Factors
An investment in the Common Stock offered hereby is speculative and
involves a high degree of risk, including risks associated with the competitive
nature of the mortgage banking business, government regulation and dilution. See
"Risk Factors."
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3
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Summary Financial Data
(In thousands, except share and per share data)
Year Ended December 31, Three Months Ended March 31,
----------------------- ----------------------------
1997 1996 1998 1997
---- ---- ---- ----
Statements of Operations
Data:
Revenues ................................... $ 8,267 7,857 5,581 1,534
Expenses ................................... 14,217 7,546 5,935 1,629
Net income
(loss) ..................................... (5,392) 311 (354) (95)
Income available for
common stockholders ........................ (5,542) (534)
Basic net income (loss)
per common
share(1) ................................... (3.11) (0.24)
Weighted average shares .................... 1,783,250
outstanding ................................ 2,235,156
Pro Forma Information
(unaudited):
Pro forma provision
(credit) for income
taxes
(2)
Pro Forma net income
(loss)(2) .................................. 110 (31)
--------- ---------
Per Share Data
(unaudited): ............................... 201 (64)
========= =========
Pro Forma net income per
share
(2)(3) ..................................... 0.17 (0.05)
Pro forma weighted
average shares
outstanding (2)(3) ......................... 1,200,000 1,200,000
Operating Data
(unaudited):
Loans
originated ................................. 168,031 162,495 56,136 24,693
Loans
purchased .................................. 89,281 68,319 61,058 14,173
Total loans originated
or
purchased .................................. 257,312 230,814 117,195 38,866
Average principal
balance per loan
originated or
purchased .................................. 86 87 99 92
Average loan to value
ratio ...................................... 77% 91% 74% 89%
Loan
sales ...................................... 257,312 230,814 110,200 38,866
December 31,
------------
1997 1996 March 31, 1998
---- ---- --------------
Balance Sheet Data:
Working capital (deficit)................... $ (93) $1,083 $ (462)
Total assets................................ -- 2,431 42,215
Total liabilities........................... 40,125 1,022 41,135
Stockholders' equity........................ 1,464 1,409 1,080
- ----------------
(1) Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders less $150,000 for discount
accretion for the year ended December 31, 1997 and less $150,000 for
discount accretion and $30,000 preferred stock dividend for the three
months ended March 31, 1998 by the weighted-average common shares
outstanding for the period.
(2) Prior to the Public Offering, the Company was treated as an S corporation,
so that in lieu of payment of income taxes at the corporate level, the
stockholders individually reported their pro rata share of the Company's
income, deductions, losses and credits. The pro forma presentation reflects
the provision for income taxes as if the Company had always been a C
corporation at an assumed effective tax rate of 34%.
(3) Pro forma net income per share has been computed by dividing pro forma net
income by the 1,200,000 shares of Common Stock of the Company received by
the Existing Stockholders in exchange for the shares of CFI Mortgage. See
"Reorganization and Termination of S Corporation Status."
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4
RISK FACTORS
An investment in the Shares offered hereby is speculative and involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors relating to the business of the Company and the Shares
offered hereby, together with the information and financial data set forth
elsewhere in this Prospectus, before investing in the Shares.
Possible Delisting of Securities; Risk of Low Priced Stocks
The Common Stock is currently included in the Nasdaq SmallCap Market under
the symbol "CFIM." The Common Stock may be delisted unless, among other things,
the Company (a) maintains either at least (i) $2,000,000 in net tangible assets,
(ii) market capitalization of $35,000,000 or (iii) earns net income (in latest
fiscal year or two of last three fiscal years) of $500,000; (b) has a public
float of 500,000 shares with a market value of $1,000,000; and (c) the bid price
of the Common Stock is at least $1.00 per share. As of March 31, 1998, the
Company did not meet the required standards for continued inclusion in the
Nasdaq SmallCap Market in that its net tangible assets were below $2,000,000,
and the Company has received a formal notice of delisting from NASDAQ. The
Company has appealed NASDAQ's determination, and following closing of the sale
of $1,000,000 of Series B Convertible Preferred Stock to a single investor in
June, 1998, believes that it meets all applicable listing standards. See
"Description of Capital Stock-Series B Convertible Preferred Stock."
Accordingly, the Company expects NASDAQ continue to list the Company's Common
Stock. However, there can be no assurance that NASDAQ will agree to continue
listing the Company's Common Stock. If the Company should fail to meet one or
more of such standards again in the future, the Common Stock would be subject to
deletion from the Nasdaq SmallCap Market. If this should occur, trading, if any,
in the Common Stock would then continue to be conducted in the over-the-counter
market on the Electronic Bulletin Board, a National Association of Securities
Dealers, Inc. ("NASD")--sponsored inter-dealer quotation system, or in what are
commonly referred to as "pink sheets." As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Common Stock. In addition, if the Common Stock ceases to be quoted on
Nasdaq SmallCap Market and the Company fails to meet certain other criteria,
trading in the Common Stock would be subject to a Commission rule that imposes
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors.
For transactions covered by this rule, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, if the Company's
securities were no longer quoted on Nasdaq SmallCap Market, the rule may affect
the ability of broker-dealers to sell the Common Stock and the ability of
purchasers to sell their Common Stock in the secondary market.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the
"Penny Stock Rule") requires additional disclosure in connection with any trades
involving a stock defined as penny stock (any non-Nasdaq equity security that
has a market price or exercise price of less than $5.00 per share and less than
$2,000,000 in net tangible assets, subject to certain exceptions). Unless
exempt, the rules require the delivery, prior to any transaction involving a
penny stock, of a disclosure schedule prepared by the Commission explaining
important concepts involving the penny stock market, the nature of such market,
terms used in such market, broker-dealer's duties to the customer, a toll-free
telephone number for inquiries about the broker-dealer's disciplinary history
and the customer's rights and remedies in case of fraud or
5
abuse in the sale. Disclosure must also be made about commissions payable to
both the broker-dealer and the registered representative, and current quotations
for the securities. Finally, monthly statements must be sent disclosing recent
price information for penny stock held in the account and information on the
limited market in penny stocks.
Ability of the Company to Issue Additional Shares of Common Stock without
Stockholder Approval
The Company has the ability to issue shares of Common Stock (or securities
which are convertible into Common Stock) from time to time without stockholder
approval and has already done so on three occasions. Such transactions have the
potential to seriously dilute the interests of existing stockholders and may
negatively affect the price of the Company's Common Stock in the market. The
Company intends to raise additional capital in one or more public or private
equity offerings in the future. There can be no assurance that the Company will
be able to complete any such equity offering. The Company has a total of
17,694,533 shares of Common Stock authorized but unissued.
General Business Risks
The Company's business is subject to various business risks. Economic
conditions affect the decision to buy or sell residences. Changes in the level
of consumer confidence, real estate values, prevailing interest rates and
investment returns expected by the financial community could make mortgage loans
of the types originated, refinanced and purchased by the Company less attractive
to borrowers or investors. In addition, a decline in real estate values will
have a negative impact on the loan-to-value ratio for the related mortgage
loans, weakening the collateral coverage and resulting in greater exposure in
the event of a default. See "--Credit Risks Associated with Nonconforming Loans"
and "Business."
Federal Programs
The Company's ability to sell its mortgage loans to institutional
investors, who in turn generate funds by selling mortgage-backed securities, is
largely dependent upon the continuation of programs administered by the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Corporation
("FHLMC") and the Government National Mortgage Association ("GNMA"), which
facilitate the issuance of such securities, as well as the Company's continued
eligibility to participate in such programs. In addition, approximately 29% and
9% (based on mortgage loan originations and purchases for 1997 and the three
months ended March 31, 1998, respectively) of the Company's revenue is dependent
upon the continuation of various programs administered by the Federal Housing
Administration (the "FHA"), which insures mortgage loans, and the Department of
Veterans Affairs (the "VA"), which partially guarantees mortgage loans. Although
the Company is not aware of any proposed actions, the discontinuation of, or a
significant reduction in, the operation of such programs could have a material
adverse effect on the Company's operations. In addition, the mortgage loan
products eligible for such programs may be changed from time to time by the
sponsor. The profitability of specific types of mortgage loan products may vary
depending on a number of factors, including the administrative costs to the
Company of purchasing or originating such types of mortgage loans. See
"Business--Description of Operations" and "Business--Regulation."
6
Dependence on Availability of Funding Sources
The Company's ability to originate and purchase mortgage loans depends to a
large extent upon its ability to secure financing on acceptable terms. The
Company currently funds substantially all of the loans it originates and
purchases through warehouse borrowings or under collateralized loan purchase
agreements ("Purchase Agreements"). These Purchase Agreements are provided by
several commercial banks, which generally are terminable at will by either
party. The Company currently also has a $25,000,000 warehouse credit facility
with Bank One, Texas, N.A. ("Bank One"), that matures on July 31, 1998, and a
$50,000,000 revolving accumulation repurchase agreement with Nikko Financial
Services, Inc. ("Nikko") that matures on August 31, 1998. The Company's
borrowings are in turn repaid with the proceeds received by the Company from
selling such loans. The Company has relied upon a few lenders to provide the
primary credit facilities for its loan originations and purchases. During the
year ended December 31, 1997 and three months ended March 31, 1998, 60% and 46%,
respectively, of the loans originated or purchased by the Company were sold to
six purchasers. During the year ended December 31, 1997, five purchasers
accounted for 53.6% of such sales and three purchasers accounted for 38% of such
sales during the three months ended March 31, 1998. Accordingly, any failure to
renew or obtain adequate funding under the Company's financing facilities or
other financing arrangements, or any substantial reduction in the size of or
increase in the cost of such facilities, could have a material adverse effect on
the Company's results of operations and financial condition. To the extent the
Company is not successful in maintaining or replacing existing financing, it may
have to curtail its mortgage loan purchase and origination activities, which
could have a material adverse effect on the Company's financial condition and
results of operations.
At December 31, 1997, the Company was in default of several of the
financial covenants contained in its agreements with Bank One and Nikko. The
Company amended the Bank One facility in April 1998 to reduce the total
commitment from $50,000,000 to $25,000,000 and extend the maturity date to July
31, 1998 at terms and conditions less favorable to the Company. The Company had
negotiated a waiver of such default with its other warehouse lender, Nikko,
through June 1, 1998. Subsequently, Nikko submitted a written proposal to the
Company that extends the current borrowing relationship through August 31, 1998
at terms not significantly different from the existing terms. The new terms
include a committed facility limit of $35 million plus an additional $15 million
available on an uncommitted, negotiated basis. In addition, the Company has in
place available unused financing sources which management believes are adequate
to operate the business at current levels of operations for the next year, and
management believes there are alternative sources for such credit facilities.
For example, the Company could enter into arrangements with proposed
institutional purchasers to fund mortgage loans with such institutional
purchasers' warehouse lines of credit (a procedure known as "table funding"),
although such an arrangement would be less profitable to the Company than its
current method of financing mortgage loans. To date, the Company has not
utilized table funding to any significant degree.
Credit Risks Associated with Nonconforming Loans
The Company is subject to various risks associated with originating
nonconforming loans, including, but not limited to, the risk that borrowers will
not satisfy their debt service payments, including payments of
7
interest and principal, and that the realizable value of the property securing
such loans will not be sufficient to repay the borrower's obligations to the
Company. Because of the Company's increasing focus on credit-impaired borrowers,
the actual rates of delinquencies, foreclosures and losses on such loans could
be higher under adverse economic conditions than delinquencies, foreclosures and
losses currently experienced in the mortgage lending industry in general. These
risks increase during an economic downturn or recession. Any sustained period of
increased delinquencies, foreclosures, losses or increased costs could adversely
affect the Company's ability to sell, and could increase the cost of selling,
loans on a whole loan basis, which could adversely affect the Company's
financial condition and results of operations. In addition, in an economic
slowdown or recession, the value of the Company's mortgage servicing rights may
be impaired. See "--Value of Mortgage Servicing Rights."
Interest Rate Fluctuations
Changes in interest rates can have differing effects on various aspect of
the Company's business, particularly in the areas of volume of mortgage loans
originated and purchased, net interest income, sales of mortgage loans and the
value of the Company's purchased mortgage servicing rights.
Net Interest Income. The Company currently sells all of the mortgage loans
it originates and purchases. The Company receives net interest income during the
period of time from originating a mortgage loan until it is sold to an investor.
Net interest income (interest earned less interest expense) is directly related
to the difference between the yield earned on mortgage loans originated or
purchased by the Company and the cost of funds borrowed by the Company
("spread"). The factors which can affect the spread include interest rates
charged by lenders, the relationship between long term and short term interest
rates and the use of compensating balance (escrow funds held on deposit with
lending banks) to decrease interest rates charged on borrowed funds. There can
be no assurance that the spread will not decrease from its current level. A
decrease in the spread would have a negative effect on the Company's net
interest income. See "Business--Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Volume of Mortgage Loans Originated and Purchased. In periods of declining
interest rates, such as have occurred recently, demand for mortgage loans
typically increases, particularly for mortgage loans related to refinancing of
existing loans. In periods of rising interest rates, demand for mortgage loans
typically declines. The Company could be materially adversely affected by a
decline in demand for mortgage loans in the State of Florida, which is the area
in which the Company originates and purchases the majority of its loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Sales of Mortgage Loans. The sale of mortgage loans may generate a gain or
loss to the Company. Gains or losses result primarily from three factors. First,
the Company may originate or purchase a loan at a price (i.e., interest rate and
discount) which may be higher or lower than the Company would receive if it
immediately sold the loan in the secondary market. These pricing differences
occur principally as a result of competitive pricing conditions in the primary
loan origination market. Second, gains or losses from the sale of loans acquired
and accumulated for bulk sale depend upon the rate of borrower defaults and
bankruptcies during the accumulation period. Third, gains or losses upon the
sale of loans may result from changes in interest rates which result in changes
in the market value of the loans, or commitments to originate or
8
purchase loans, from the time the price commitment is given to the customer
until the time that the loan is sold by the Company to the investor. In order to
reduce the effect of interest rate changes on the gain and loss on loan sales,
the Company generally commits to sell all its warehouse loans (i.e., mortgage
loans that have closed) and its pipeline loans (i.e., mortgage loans which are
not yet closed but for which the interest rate has been established) to
institutional investors for delivery at a future time for a stated price. In
general, the Company will not establish an interest rate for a mortgage loan
until it has obtained a commitment from an institutional investor to purchase
the loan. These commitments are on a "best efforts" basis, and the Company has
no obligation to sell a loan to an investor unless and until the loan closes.
See "Business--Description of Operations."
Value of Mortgage Servicing Rights
The prices obtained by the Company upon the sale of mortgage servicing
rights depend upon a number of factors, including the general supply of and
demand for mortgage servicing rights, as well as prepayment and delinquency
rates on the portfolios of mortgage servicing rights being sold. Interest rate
changes can affect the ability to sell or the profitability of a sale of
mortgage servicing rights to a third party. Purchasers of mortgage servicing
rights analyze a variety of factors, including prepayment sensitivity of
servicing rights, to determine the purchase price they are willing to pay. Thus,
in periods of declining interest rates, sales of mortgage servicing rights
related to higher interest rate loans may be less profitable than sales of
mortgage servicing rights related to lower interest rate loans. Since these
factors are largely beyond the control of the Company, there can be no assurance
that the current level of profitability from the sale of mortgage servicing
rights will be maintained. Because the Company generally sells mortgage
servicing rights on mortgage loans it originates or purchases within 30 to 90
days of closing, the length of time the Company is exposed to the risk of
declines in value of the rights is relatively short. If the rate of prepayment
of the related mortgage loans exceeds the rate assumed by the Company, due to a
significant reduction in interest rates or otherwise, accelerated amortization
or, in extreme cases, write-offs of servicing rights may become necessary,
thereby decreasing earnings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Description of
Operations."
Possible Losses on Mortgage Loans During Bulking Period
Although the Company sells substantially all of the loans that it
originates and purchases, the Company acquires and accumulates some loans for
bulk sale. During the time the loans are held pending sale, the Company is not
able to use the proceeds received from selling the loans to fund new
originations. The Company could be materially adversely affected by a delay in
selling the mortgage loans once a substantial amount have been acquired for bulk
sale. Furthermore, during the bulking period, the Company is subject to various
business risks associated with lending, including the risk of borrower defaults
and bankruptcies, the risk of fraud and losses and the risk that an increase in
interest rates would result in a decline in the value of loans to potential
purchasers.
Geographic Concentration in Florida Market
Of the Company's loan origination and purchase volume for the year ended
December 31, 1997 and three months ended March 31, 1998, 91% and 54%,
respectively, were derived from the State of Florida. Although the Company is
licensed or registered in 19 states, the Company currently does the large
majority
9
of its business inside the State of Florida. Consequently, the Company's results
of operations and financial condition are affected by general trends in the
Florida economy and its residential real estate market.
Legislative and Regulatory Risk
Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. The reduction or elimination of the mortgage interest
deduction could have a material adverse effect on the demand for the mortgage
loans offered by the Company.
The operations of the Company are subject to extensive regulation by
federal and state governmental authorities and agencies including the U.S.
Department of Housing and Urban Development ("HUD"), FNMA, FHA and VA.
Consequently, the Company is subject to various laws, rules and regulations and
judicial and administrative decisions that, among other things, regulate credit
granting activities, govern secured transactions and establish collection,
repossession and claims handling procedures and other trade practices. Failure
to comply with requirements can lead to loss of approved status, termination of
servicing contracts without compensation to the servicer, demands for
indemnification or mortgage loan repurchases, class action lawsuits and
administrative enforcement actions. Although the Company believes that it is in
compliance in all material respects with applicable federal and state laws,
rules and regulations, there can be no assurance that more restrictive laws,
rules and regulations will not be adopted in the future which could make
compliance more difficult or expensive, restrict the Company's ability to
originate, purchase, or sell mortgage loans, further limit or restrict the
amount of interest and other fees that may be earned or charged on mortgage
loans originated, purchased, or serviced by the Company or otherwise adversely
affect the business or prospects of the Company. See "Business--Regulation."
From time to time federal legislation has been proposed to regulate certain
practices with respect to mortgage servicers holding escrow accounts of
borrowers, a business in which the Company proposes to engage in the future.
Such legislation, if enacted, would establish in all states a uniform
requirement for the payment of interest on such escrow accounts and otherwise
regulate such escrow accounts in ways which would negatively affect the benefits
which the Company would derive from such accounts. It is impossible to predict
whether such legislation or any similar legislation regulating escrow practices
will be enacted, or if enacted, what form it will take. See
"Business--Regulation."
Liabilities Under Representations and Warranties
In the ordinary course of business, the Company makes representations and
warranties to the purchasers and insurers of mortgage loans and the purchasers
of mortgage servicing rights regarding compliance with laws, regulations and
program standards and as to accuracy of information. The Company generally
receives similar representations and warranties from the correspondents from
whom it purchases loans. Although the Company has not incurred losses in any
material respect as a result of mortgage loan repurchases due to breaches in
representations and warranties, there can by no assurance that the Company will
not experience such losses in the future. See "Business--Description of
Operations."
10
Delinquency and Default Risks
The Company originates and purchases nonconforming subprime and
conventional loans as well as loans insured by the FHA or partially guaranteed
by the VA. In the case of nonconforming subprime and conventional loans, the
Company is generally at risk for any mortgage loan default until the loan is
sold (typically within 10 to 90 days of closing). The Company seeks to minimize
this risk for conventional loans with a loan-to-value ratio of greater than 80%
by requiring the borrowers to obtain private mortgage insurance ("PMI") which
would cover any default or other defect. Once the Company sells the loan, the
risk of loss from mortgage loan default and foreclosure generally passes to the
purchaser or insurer of the loan. The Company has from the time a FHA or VA
mortgage loan is originated or purchased until the first payment is due (which
is a minimum of 31 days after the loan closes) to request insurance or a
guarantee certificate. Once the insurance or guarantee certificate is issued,
the Company has no risk of default except with respect to certain losses related
to foreclosure of FHA mortgage loans and losses which exceed the VA's guarantee
limitation. See "Business--Description of Operations."
Under limited circumstances, the Company could be subject to the risk of
liability for the removal of environmental pollutants from properties upon which
it has foreclosed. See "--Possible Environmental Liabilities" below and
"Business--Environmental Matters."
Relationship with Brokers and Correspondents
During the year ended December 31, 1997 and the three months ended March
31, 1998, brokers and correspondents accounted for approximately 36.2% and
52.1%, respectively, of the mortgage loans originated and purchased by the
Company, while 63.8% and 47.9%, respectively, of such mortgage loans were
originated by the Company's retail division. None of these brokers or
correspondents is contractually obligated to do business with the Company.
Further, the Company's competitors also have relationships with the Company's
brokers and correspondents and actively compete with the Company in its efforts
to expand its broker and correspondent networks. Accordingly, there can be no
assurance that the Company will be successful in maintaining its existing
relationships or expanding its broker and correspondent networks.
The Company originated and purchased loans in the year ended December 31,
1997 from a total of 183 brokers and five correspondents, who accounted for
approximately 30% and 6.2%, respectively, of the total volume of loans
originated and purchased during such period. The Company originated and
purchased loans in the three months ended March 31, 1998 from a total of 190
brokers and zero correspondents, who accounted for approximately 52.1% and 0%,
respectively, of the total volume of loans originated and purchased during such
period. Accordingly, if any of the Company's principal brokers and
correspondents ceased to do business with the Company, the volume of the
Company's loan originations and purchases, as well as the Company's results of
operations and financial condition, could be materially adversely affected. See
"Business--Description of Operations."
Competition
The Company faces strong competition in originating, purchasing and selling
mortgage loans and mortgage servicing rights. The Company's competition is
principally from savings and loan associations, other mortgage companies,
commercial banks and, to a lesser degree, credit unions and insurance
11
companies, depending upon the type of mortgage loan product offered. Many of
these institutions have greater financial and other resources than the Company
and maintain a significant number of branch offices in the areas in which the
Company conducts operations. Increased competition for mortgage loans from
larger lenders may result in a decrease in the volume of loans originated and
purchased by the Company, thereby possibly reducing the Company's revenues. See
"Business--Competition."
Possible Environmental Liabilities
In the ordinary course of its business, the Company from time to time
forecloses on properties securing mortgage loans. Under various federal, state
and local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean up
hazardous or toxic substances or chemical releases at such property and may be
held liable to a governmental entity or to third parties for property damage,
personal injury, and investigation and clean up costs incurred by such parties
in connection with the contamination. Liability under such laws has been
interpreted to be joint and several unless the harm is divisible, and there is a
reasonable basis for allocation of responsibility. Although the Company has not
incurred losses in any material respect as a result of liabilities under
environmental laws, there can be no assurance that the Company will not
experience such losses in the future. See "Business--Environmental Matters."
Dependence on Key Personnel
The Company's future success will depend to a significant extent on the
efforts of key management personnel, including Vincent C. Castoro, Chairman of
the Board, Christopher C. Castoro, Chief Executive Officer, Don M. Lashbrook,
Chief Operating Officer, Paul R. Garrigues, Chief Financial Officer and Vincent
J. Castoro, Vice President, respectively, of the Company. At the closing of the
Public Offering, the Company entered into three-year employment agreements with
each of Vincent C. Castoro, Christopher C. Castoro and Vincent J. Castoro. The
loss of one or more of these key employees could have a material adverse effect
on the Company's business. See "Management."
Managing Potential Growth
Since its inception, the Company has grown rapidly, and has a total of 282
full-time employees as of March 31, 1998. This growth has placed, and is
expected to continue to place, a significant strain on the Company's management
and physical and capital resources. The Company anticipates that it will need to
hire additional key personnel in order to implement fully its business strategy.
No assurance can be given as to whether, when, if ever, and under what terms the
Company will be able to attract such new personnel. In order to manage such
growth successfully, the Company will be required, among other things, to
implement and manage its operational and financial systems on a timely basis and
to train, manage and expand its growing employee base. Further, management will
be required to successfully maintain relationships with various governmental
agencies, real estate professionals, institutional investors, providers of
warehouse loans, advertising agencies and other third parties and to maintain
control over the strategic direction of the Company in a rapidly changing
marketplace. There can be no assurance that the Company's current personnel,
systems, procedures and quality and accounting controls will be adequate to
support the Company's future operations, that management will be able to
identify, hire, train, motivate or manage needed and qualified personnel, or
that management will be able to identify and exploit existing and potential
opportunities. If the Company is unable to manage growth effectively, the
Company's business, financial
12
condition and operating results will be materially adversely affected. See
"--Dependence on Key Personnel," "Business--Properties," and "Management."
Control by Officers and Directors
Directors and officers of the Company and their affiliates beneficially own
1,207,000 shares, or approximately 52.4%, of the Company's outstanding Common
Stock prior to the issuance of any of the Shares. As a result, the Company's
directors, officers and their affiliates will continue to be able to elect a
majority of the Company's Board of Directors, to dissolve, merge, or sell the
assets of the Company, and to direct and control the Company's operations,
policies and business decisions. The Company's directors, officers and their
affiliates will also be able to direct the outcome of any proposal requiring
stockholder approval. Such control may be considered to have anti-takeover
effects and may delay or prevent a takeover attempt that a stockholder might
consider to be in such stockholder's best interest. See "Principal
Stockholders."
Fluctuations in Performance; Seasonality
The Company's operating results can fluctuate substantially from period to
period as a result of a number of factors, including the volume of loan
originations and purchases, interest rates and the level of sales of mortgage
servicing rights. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, the mortgage banking industry
is generally subject to seasonal trends. These trends reflect the general
pattern of resales of homes, which sales typically peak during the spring and
winter seasons and decline from January through March. See
"Business--Seasonality."
Factors Affecting Market Price of the Common Stock; Possible Volatility of Stock
Price
The market price of the Common Stock may be influenced by many factors,
including the depth and liquidity of the market for the Common Stock, investor
perceptions of the Company and its industry, and general economic and market
conditions. The market price of the Common Stock may also be significantly
influenced by factors such as the announcement of new products by the Company or
its competitors, quarter-to-quarter variations in the Company's results of
operations and conditions in the industry. In addition, in recent years the
stock market has experienced extreme price and volume fluctuations that have had
a substantial effect on the market prices of emerging growth companies,
including financial services companies. These extreme price and volume
fluctuations experienced by emerging growth companies may be unrelated to the
operating performance of a specific company and may be caused by investors'
perceptions of the prospects for the general economy, the stock market in
general, emerging companies or financial services companies. There can be no
assurance that the market price of the Common Stock will be stable or will
increase in accordance with operating performance by the Company.
No Dividends
The Company has not paid any cash dividends (except for S corporation
distributions to the Existing Stockholders) on its Common Stock since its
inception and does not currently anticipate paying dividends on its Common Stock
in the foreseeable future. The Company conducts substantially all of its
operations through its subsidiaries. Accordingly, the Company's ability to pay
dividends is also dependent upon the ability of its subsidiaries to make cash
distributions to the Company. The payment of dividends to the
13
Company by its subsidiaries is and will continue to be restricted by or subject
to, among other limitations, applicable provisions of state and federal laws,
contractual provisions, the earnings of such subsidiaries and various business
considerations. See "Dividend Policy."
Effects of Certain Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation and Bylaws
and the Delaware General Corporation Law could delay or frustrate the removal of
incumbent directors and could make difficult a merger, tender offer or proxy
contest involving the Company, even if such events could be viewed as beneficial
by the Company's stockholders. For example, the Certificate of Incorporation
requires a 70% supermajority vote of stockholders to amend certain provisions of
the Bylaws pertaining to the calling of special meetings and the election and
removal of directors. In addition, the Board of Directors has the ability to
issue "blank check" preferred stock without stockholder approval, and has done
so on two occasions. The rights of the holders of Common Stock may be materially
limited or qualified by the issuance of additional series of preferred stock.
The Company is also subject to provisions of the Delaware General Corporation
Law that prohibit a publicly held Delaware corporation from engaging in a broad
range of business combinations with a person who, together with affiliates and
associates, owns 15% or more of the corporation's outstanding voting shares (an
"interested stockholder") for three years after the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
See "Description of Capital Stock--Certain Charter, Bylaw and Statutory
Provisions."
Limitation of Net Operating Loss Carry Forward
Upon conversion into common stock of the Company's outstanding convertible
securities, the ownership percentage of the Directors and officers of the
Company will fall below 50%. This event will trigger an Internal Revenue Section
382 annual limitation on utilization of the Company's Net Operating Loss Tax
Carry Forward. As a result, some of this tax benefit may be lost to the Company
in future periods.
14
REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
From April 17, 1989 (inception) through December 31, 1996, CFI Mortgage was
treated for federal income tax purposes as an S corporation, and was treated as
an S corporation for certain state corporate income tax purposes under certain
comparable state laws. As a result, CFI Mortgage's historical earnings had been
taxed directly to CFI Mortgage's stockholders at their individual federal and
state income tax rates, rather than to CFI Mortgage. Pursuant to the terms of a
contribution agreement (the "Contribution Agreement"), the Existing Stockholders
contributed their stock of CFI Mortgage to the Company, in exchange for
1,200,000 shares of Common Stock. The Existing Stockholders were Vincent J.
Castoro and Christopher C. Castoro, who received a portion of their Common Stock
as gifts from their father, Vincent C. Castoro (collectively with the Existing
Stockholders, the "Prior Stockholders"), the Company's Chairman of the Board and
former Chief Executive Officer, in 1993.
From April 17, 1989 through December 31, 1996, CFI Mortgage had not paid
any of its earnings to the Prior Stockholders in the form of S corporation
distributions. On March 26, 1997, CFI Mortgage distributed as a dividend (the
"Distribution") to the Existing Stockholders CFI Mortgage's 40% interest (the
"Interest") in Carroll Street, a New York corporation whose principal asset is a
building located in Brooklyn, New York. The remaining 60% of Carroll Street is
owned by Vincent C. Castoro. The distribution of the Interest, which was
recorded on CFI Mortgage's balance sheet at December 31, 1996 as having a value
of $175,224, was intended to offset taxes payable at the applicable statutory
rate by the Existing Stockholders on the estimated net earnings of CFI Mortgage
for the period from January 1, 1996 to December 31, 1996 and to distribute to
the Existing Stockholders previously earned and undistributed S corporation
earnings.
As an S corporation, the Company's income, whether or not distributed, was
taxed at the stockholder level for federal and state tax purposes. As a result
of the Exchange, the Company and CFI Mortgage, which became a wholly-owned
subsidiary of the Company, became fully subject to federal and state income
taxes. The pro forma provision for income taxes in the accompanying statements
of income shows results as if the Company had always been fully subject to
federal taxes at an assumed tax rate of 34%.
USE OF PROCEEDS
This Prospectus relates to Shares being offered and sold for the accounts
of the Selling Stockholders. The Company will not receive any of the proceeds
from the sale of the Shares offered by the Selling Stockholders. All proceeds
from the sales thereof are solely for the accounts of the Selling Stockholders.
The Company will receive proceeds from the exercise of the Warrants, if any are
exercised. The Company expects to use these proceeds for working capital and
general corporate purposes. The Company will pay for certain expenses related to
the registration of the Shares. See "Selling Stockholders" and "Plan of
Distribution."
DIVIDEND POLICY
The Company has no present intention to pay cash dividends on the Common
Stock. Any determination in the future to pay dividends will depend on the
Company's financial condition, capital requirements, results of operations,
contractual limitations and any other factors deemed relevant by the Board of
Directors. Pursuant to the terms of the Convertible Preferred Stock, the Company
is currently prohibited from paying cash dividends. For a discussion of
distributions paid by the Company prior to the Public Offering, see
"Reorganization and Termination of S Corporation Status."
15
PRICE RANGE OF THE COMPANY'S COMMON STOCK
Effective May 27, 1997, the Common Stock of the Company was included in the
Nasdaq Small Cap Market under the symbol "CFIM." The following table sets forth
for the calendar periods indicated the high and low bid prices on the Nasdaq
Small Cap Market for the Common Stock for the period commencing May 27, 1997.
The prices set forth below do not include retail mark-ups, mark-downs or
commissions and represent prices between dealers and are not necessarily actual
transactions.
Common Stock
------------
High Low
---- ---
1998
First Quarter ................................ $10.00 $6.00
Second Quarter (through June 30).............. 14.56 6.875
1997
Second Quarter (from May 27) ................. $10.75 $5.75
Third Quarter ................................ 15.25 7.38
Fourth Quarter ............................... 12.44 7.00
There were approximately 50 stockholders of record of Common Stock as of
April 30, 1998.
16
SELECTED FINANCIAL DATA
(In thousands, except share and per share data)
The following selected income statement data for the years ended December
31, 1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997
are derived from the Company's audited financial statements and notes thereto
included elsewhere herein. The selected financial data for the three months
ended March 31, 1998 and 1997 are derived from the unaudited financial
statements of the Company and, in the opinion of the Company, reflect all
adjustments consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations of the Company
for these periods. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the full
year.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and the notes thereto and other
financial information included elsewhere in this Prospectus.
17
Year Ended December 31, Three Months Ended March 31,
----------------------- ----------------------------
1997 1996 1998 1997
---- ---- ---- ----
Statements of Operations Data:
Revenues ............................................... $ 8,267 $ 7,857 $ 5,581 $ 1,534
Expenses:
Selling .......................................... 5,214 3,277 1,986 673
General and administrative ....................... 7,818 3,570 2,911 914
Interest ......................................... 1,185 549 1,037 43
Write down of land and investment to
fair market value .............................. -- 150 -- --
Total expenses ................................ 14,217 7,546 5,934 1,629
Net (loss) income before income tax credit ............. (5,950) 311 (354) (95)
Deferred income tax credit ............................. 558 - -- --
Net income (loss) ...................................... (5,392) 311 (354) (95)
Loss available for common stockholders ................. (5,542) (534)
Basic net loss per common share(1) ..................... $ (3.11) $ (0.24)
Weighted average shares outstanding .................... 1,783,250 2,235,156
============= ===========
Pro Forma Information (unaudited):
Pro forma provision (credit) for income ................ 110 (31)
taxes(2)
Pro forma net loss(2) .................................. $ 201 $ (64)
Per Share Data (unaudited):
Pro forma net income (loss) per share(2)(3) ............ $ 0.17 $ (0.05)
Pro forma weighted average shares
outstanding(2)(3) ................................... 1,200,000 1,200,000
Operating Data (unaudited):
Loans originated ....................................... $ 168,031 $ 162,495 $ 56,136 $ 24,693
Loans purchased ........................................ $ 89,281 $ 68,319 $ 61,058 $ 14,173
Total loans originated or purchased .................... $ 257,312 $ 230,814 $ 110,200 $ 38,866
Average principal balance per loan originated
or purchased ........................................ $ 86 $ 87 $ 99 $ 92
Average loan-to-value ratio ............................ 77% 91% 74% 89%
Loan sales ............................................. $ 257,312 $ 230,814 $ 110,200 $ 38,866
18
December 31, March 31,
------------ ---------
1997 1996 1998
---- ---- ----
Balance Sheet Data:
Working capital (deficit) .......... $ (93) $ 1,083 $ (462)
Total assets ....................... 41,589 2,431 42,215
Total liabilities .................. 40,125 1,022 41,135
Stockholders' equity ............... 1,464 1,409 1,080
- ------------------
(1) Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders less $150,000 for discount
accretion for the year ended December 31, 1997 and less $150,000 for
discount accretion and $30,000 preferred stock dividend for the three
months ended March 31, 1998 by the weighted-average common shares
outstanding for the period.
(2) Prior to the Public Offering, the Company was treated as an S corporation
for federal and state income tax purposes. See "Reorganization and
Termination of S Corporation Status." The pro forma presentation reflects
the provision for income taxes as if the Company had always been a C
corporation at an assumed effective tax rate of 34%.
(3) Pro forma net income per share has been computed by dividing pro forma net
income by the 1,200,000 shares of Common Stock received by the Existing
Stockholders in exchange for the shares of CFI Mortgage. See
"Reorganization and Termination of S Corporation Status."
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and accompanying notes set forth therein included
elsewhere in this Prospectus.
General
The Company, through its wholly-owned subsidiaries, BDMC and DMP, is a
rapidly growing mortgage banker engaged in originating, purchasing and selling
conforming and non-conforming loans on one-to-four family residential units
through its retail, wholesale and consumer finance divisions.
The Company has been aggressively pursuing the diversification of its
production channels while expanding its presence nationally to reduce the risks
from geographic concentration and a limited product line. The results of these
efforts have generally been favorable, with the establishment of three regional
wholesale offices in Illinois, Georgia and New Jersey. The Company was
successful in attracting seasoned professionals to staff these offices, which
reduced the start up time and costs while providing the Company with established
non-conforming regional operations drawing business from four (4) new states.
During the first quarter of 1998, the Company purchased an economic
interest in California Pacific Mortgage Corporation ("Cal Pac") with the intent
of providing the Company with a direct mail non-conforming production platform
currently licensed to do business in nine (9) western states and to utilize Cal
Pac's licenses to offer the Company's other loan products in these markets. By
early in the second quarter of 1998, it became apparent to management that the
Cal Pac operation would require more capital than anticipated to achieve desired
production levels, and so the costs associated with growing this operation would
act as a drain away from other critical operations. Accordingly the decision was
made to withdraw from that venture in June 1998. The withdrawal from this
operation is expected to reduce operating expenses significantly beginning in
July 1998 with little impact on revenues.
The start-up costs associated with the national expansion coupled with the
increased corporate overhead put in place to support the production network
created a loss for the year ended December 31, 1997. The loss is viewed as an
investment in the future with the newly added offices already yielding increased
non-conforming production. The Company continued its efforts to improve
technology and operating efficiency during the year. Progress was made in
networking all offices for communication and data flow with the installation of
a wide area network.
Progress toward the goal of improving the Company's secondary market
execution was made during the first quarter of 1998 as the Company received
Fannie Mae Seller/Servicer approval for BDMC. In preparation for the Company's
seller/servicer status, management had established loan subservicing
relationships with Advanta Mortgage Corp. USA for non-conforming loans and
Cenlar, F.S.B. for all other loan products. Utilization of subservicers provides
immediate loan servicing capability with no start up costs and can also improve
the Company's collection efforts while loans are held in warehouse pending sale
to an investor. However, utilization of a subservicer is most cost effective
when a loan is serviced over several years. The Company's practice of using
subservicers for 15 to 90 days while a loan is pending sale does not provide the
opportunity for future servicing revenues to offset the initial loan set up
costs charged by the subservicer. Accordingly, management terminated the
subservicing relationship with Cenlar effective May 31, 1998 and began servicing
all loan products other than non-conforming loans in house. The Advanta
subservicing relationship is currently under review to determine the feasibility
of cancellation in favor of in house servicing.
In the third and fourth quarters of 1997, operational changes were made to
utilize the Company's warehouse facilities with Bank One and Nikko. The Company
believes that the use of these facilities will allow for improved earnings due
to interest rate spreads with this fact contributing to an increase in interest
income, and also changes the balance sheet as the loans held for sale are now
reflected in the balance sheet as
20
an asset with the outstanding balance in the warehouse facilities reflected as a
liability. As production increases these facilities are expected to contribute
positively to earnings, assuming that the Company successfully resolves its
existing defaults with each of these lenders or else replaces these
relationships with similar facilities from other lenders. During the fourth
quarter of 1997, the Company recorded an adjustment of $2,400,000 reversing
revenues recognized in the third quarter of 1997.
Results of Operations
The primary source of the Company's revenue is from activities related to
providing homeowner financing solutions through either BDMC, the Company's
retail conforming and government insured mortgage banking subsidiary, DMP, the
Company's wholesale subprime lending subsidiary, or by brokering loans to other
lenders who provide a competitive product for the particular type of loan
required.
During the three months ended March 31, 1998, total lending volume was $117
million with 47.9% from BDMC, 47.5% from DMP and 4.6% brokered to other lenders.
During the three months ended March 31, 1997, total lending volume was $38.9
million with 77.1% from BDMC, 0% from DMP and 22.9% brokered to other lenders.
Subprime lending activity from DMP can generate profit margins nearly twice that
of BDMC's conforming and government retail production. For that reason,
management has focused on increasing DMP funding activity, and views the
increase from 0% of the total funding volume during the three months ended March
31, 1997 to 47.5% of funding volume during the three months ended March 31, 1998
as a positive trend.
Comparison of Three Months Ended March 31, 1998 and 1997
The Company's revenues, including interest income, were $5,580,680 for the
three months ended March 31, 1998, which represents an increase of 263% or
$4,046,463 from the three months ended March 31, 1997 revenues of $1,534,217.
This increase in revenues is reflective of several factors.
The first factor impacting improved revenue levels involved loan sales
activity, both in terms of the balance of loans sold and of the product mix
between conforming/government and subprime loans. The majority of revenue from
the Company's business activity is recorded upon sale of the loans it has
originated to third party investors. In the three months ended March 31, 1998,
total loan sales were $110 million compared to only $45 million during the same
quarter last year, an increase of 144%. Additionally, there were no subprime
loan sales during the three months ended March 31, 1997 while current year same
quarter sales of subprime loans reached $54 million. Subprime loans carry profit
margins that can be more than twice the profit margins of conforming/government
loans which further amplified the effect of increased sales activity.
The other major factor responsible for the increase in revenues was
interest income. The Company earns interest income on the loans it originates at
the note interest rates from the time it funds the loan until the loan is sold
to third party investors. Subprime loans typically carry note interest rates
that can be 2% to 4% higher than rates on conforming/government loans.
Management successfully established warehouse borrowing facilities late in 1997
that allowed the Company the opportunity to hold loans longer before sale to an
investor. As a result of the higher loan funding levels, longer holding period
and higher note rates on the subprime portion of the Company's portfolio,
interest income increased from only $21,092 during the same quarter last year to
$1,313,409 for the three months ended March 31, 1998.
21
Selling expenses in the three months ended March 31, 1998 were $1,986,197,
which represents an increase of $1,313,397 from the same quarter last year. The
higher level of selling expenses was related to the higher commission costs
driven by the increase in total loans originated. As a percentage of loans
originated, selling expenses were unchanged at 1.70% of loans originated for
both the three months ended March 31, 1998 and 1997.
General and administrative expenses were $2,911,067 during the three months
ended March 31, 1998 which was an increase of $1,997,215 over the same quarter
last year. Compensation related expenses, including temporary services,
accounted for $1.4 million or 70% of this increase. The rapid growth in loan
origination activity created an immediate need for administrative and
operational staffing increases. Management believes that the staffing
infrastructure currently in place is capable of supporting the Company's planned
growth through the remainder of 1998 without further significant increases.
The growth in branch locations and business volume resulted in increased
occupancy and equipment related expenses. Occupancy costs in the three months
ended March 31, 1998 increased by $171,200 over the same quarter last year.
Equipment related expenses of depreciation and leasing charges were up by
$93,800 in the first quarter of 1998 over the same quarter in 1997. The
occupancy and equipment related expense increases represented approximately 14%
of the total G&A expense increases.
General office expenses related to office supplies and postage costs were
also higher in the first quarter of 1998 compared to the same quarter in 1997.
This category of expenses was up by $101,300 and accounted for 3% of the total
G&A increase. These expense increases are consistent with the added branch
locations and overall increase in business activity.
Professional service fees, primarily accounting and legal, were $60,800
higher in the first quarter of 1998 over the same quarter in 1997, and reflect
the additional effort required to support the Company's increased reporting
activities as a public company in 1998. As the Company was still a closely held
"S" corporation during the first quarter of 1997, the Company required much less
support in the area of accounting and legal services.
The final significant increase in G&A expenses occurred in the area of loan
loss provision, which increased $53,100 from the first quarter of 1997 to the
first quarter of 1998. The Company's higher lending activity coupled with the
introduction of higher risk subprime loan originations required the
establishment of a correspondingly higher reserve against potential loan losses.
Interest expense is primarily the cost of funds borrowed from warehouse
lenders to fund the Company's loan originations during the holding period
between funding and sale to an investor. During the three months ended March 31,
1998, interest expense was $1,037,302, which was $994,755 higher than the same
quarter last year. This increase was due to extending the holding period of
loans while increasing the absolute size of loans being held in warehouse.
Although interest expense increased significantly, net interest income (loss),
which is the difference between interest income and interest expense, improved
from a loss of $21,455 during the three months ended March 31, 1997 to income of
$276,107 during the same quarter in the current year, an increase of $297,562.
22
The Company generated a net loss before taxes of $353,886 in the three
months ended March 31, 1998 compared to a loss before taxes of $94,982 during
the same quarter last year. The level of earnings during the first quarter of
1998 was short of management expectations.
While subprime sales of $53.7 million were only 2.5% short of the $55
million budgeted, shortfalls in sales execution resulted in much lower than
anticipated profit margins on those sales. These shortfalls were due to pricing
incentives offered as part of an incentive program to attract new broker
relationships in new markets. Compounding the reduced profit margins were
increased expenses associated with start up costs of DMP's high loan-to-value
second trust deed equity mortgage program implementation which was established
in California sooner than originally planned, and which failed to achieve
expected lending volume and profitability levels.
Comparison of the Years Ended December 31, 1997 and 1996
For 1997, revenues increased $409,000 (5.2%) to $8,267,000 in 1997 from
$7,858,000 in 1996. Commissions and fees decreased by $852,000 (11.3%) to
$6,715,000 from $7,567,000 in 1996. The decrease in commissions and fees was
attributable to an increase in wholesale production volume and a larger balance
of "Loans Held for Sale" at year-end December 31, 1997 compared to December 31,
1996, resulting in unrealized gains at December 31, 1997.
Interest income increased $1,261,000 (433.3%) to $1,552,000 in 1997 from
$291,000 in 1996. The increase in interest income was primarily due to the
Company holding mortgage loans for sale longer and thus earning additional
interest income over this time period. Total loan volume in 1997 was
$257,313,000 compared to $230,814,000 in 1996, an increase of $26,499,000
representing a 11.5% increase.
Total expenses increased $6,672,000 (88.4%) to $14,218,000 in 1997 from
$7,546,000 in 1996. The expenses increased at a much faster rate than total
revenues primarily due to not realizing during 1997 economies of scale and the
efficiencies associated with the Company's implementation and investment in
technology, and due to the addition of experienced staff. Management believes
these efficiencies will be realized in 1998.
Selling expenses increased $1,937,000 (59.1%) to $5,214,000 in 1997 from
$3,277,000 in 1996. Commissions and benefits accounted for approximately
two-thirds of this increase, which was directly related to the increased volume.
The remainder was the result of the national expansion and the upfront costs
associated with establishing the support functions required for this expansion
to be successful.
General and administrative expenses increased $4,249,000 (119.0%) to
$7,819,000 in 1997 from $3,570,000 in 1996. Salaries and benefits accounted for
over half of this increase. The Company added senior management personnel
experienced in the mortgage industry. Additional expenses were incurred in 1997
as part of the national expansion and the upfront costs associated with
establishing the production support functions required for this expansion to be
successful. During the year ended December 31, 1997, the Company opened two (2)
retail production offices, seven (7) non-conforming wholesale offices and one
(1) consumer direct office which sources customers through direct mailings. In
addition, the provision for loan losses in 1997 was $432,000, which represented
1.2% of loans held for sale at December 31, 1997.
23
Interest expense increased $636,000 (115.6%) to $1,186,000 in 1997 from
$550,000 in 1996. This was primarily due to the increase in loan volume of 11.5%
in 1997 as compared to 1996. In addition, the average cost of borrowings
increased due to the introduction of non-conforming loans, and loans were
aggregated for a longer period of time by the Company to take advantage of bulk
sale premiums.
The Company experienced a loss before taxes of $5,951,000 in 1997 compared
to income before taxes of $311,000 in 1996 as a result of the national expansion
and the up front costs associated with establishing the support functions
required for this expansion to be successful. The second, third and fourth
quarter losses were significantly attributable to the increases in selling,
general and administrative and interest expenses associated with the above
activities. The first quarter loss was primarily the result of the seasonality
of home sales in Florida. Home sales typically decline in the first quarter of
the year due in part to Florida's homestead laws, which reduce a purchaser's
taxes resulting in many home purchasers buying before year end. The increased
demand at year end tends to drive up administrative costs in the first quarter.
Financial Condition
March 31, 1998 Compared to December 31, 1997:
Cash in banks, net of overdrafts, decreased $683,410 to $757,397 at March
31, 1998 from $1,440,807 at December 31, 1997. The net decrease resulted from a
combination of an increase in mortgage loans held for sale, net of the
corresponding warehouse borrowing; a decrease in accounts payable and accrued
expenses, and capital expenditures. The overdraft at December 31, 1997 was fully
funded in the first quarter.
Mortgage loans held for sale totaled $37,277,275 at March 31, 1998 and
relate directly to the warehouse finance facilities debt of $36,758,165. Each of
these items increased less than 5% compared to their respective December 31,
1997 balances.
Total liabilities excluding warehouse debt decreased $286,281, a 6%
decrease from the respective balance at December 31, 1997.
Liquidity and Capital Resources
The Company has operated on a negative cash flow basis, but expects to
reverse this trend based on the increases in the volume of loan. Currently, the
Company's cash requirements include the funding of (i) mortgage originations and
purchases pending their sale, (ii) the points and expenses paid in connection
with acquisition of correspondent loans, (iii) ongoing administrative and other
operating expenses, and (iv) new retail and wholesale office locations and
equipment.
On May 30, 1997, the Company completed the initial public offering of
1,000,000 shares of its Common Stock at $5 per share. The net proceeds from the
offering, after deducting underwriting discounts and commissions and offering
expenses, aggregated $3,800,525. In connection with the offering, the Company
granted the underwriter the IPO Warrants to purchase 100,000 shares of Common
Stock at an exercise price of $6 per share. The warrants are exercisable for a
period of four years commencing May 1998.
24
On December 3, 1997, the Company issued and sold 2,000 shares of Series A
Convertible Preferred Stock at $1,000 per share in a private placement. The net
proceeds from the sale, after deducting selling and other related expenses,
aggregated $1,821,753. The Convertible Preferred Stock is convertible for two
years into shares of Common Stock at a price equal to 85% of the five-day
average bid prices immediately prior to the conversion date, subject to a
maximum conversion price of $6.50 per share (or $6.00 if the date of this
Prospectus is later than July 22, 1998). The discount on the conversion price is
accounted for as a charge against retained earnings and was amortized over the
non-convertible period of 60 days following December 3, 1997. On March 3, 1998,
500 shares of the Convertible Preferred Stock, plus accrued dividends of
approximately $10,000 were converted into 105,467 shares of Common Stock.
Furthermore, the Company is obligated to register for resale the shares of
Common Stock issuable upon conversion of the Preferred Stock and, if the resale
registration statement has not been declared effective by July 20, 1998, the
Company is subject to cash penalty payments to the holders of the Convertible
Preferred Stock. This Prospectus satisfies these registration requirements. In
connection with the Convertible Preferred Stock transaction, the Company granted
the underwriter the Additional Warrants to purchase 240,000 shares of Common
Stock at an exercise price of $8.50 per share (since reduced to $6.50) in order
to obtain the underwriter's consent to the Convertible Preferred Stock
transaction, as required by the underwriting agreement signed by the Company in
connection with its IPO. The Additional Warrants are exercisable until September
17, 2001. In addition, the Company issued 60 shares of Convertible Preferred
Stock with identical terms as payment for fees for the private placement. The
cost is included in the net proceeds from the transaction and have been
amortized over the non-conversion term.
On May 18, 1998, the Company issued $1,700,000 principal amount of
convertible debentures to a single investor. The investor is committed to
purchase a further $500,000 principal amount of such debentures upon the
effective date of a registration statement registering the underlying shares of
Common Stock into which such debentures may be converted and may, at its option,
purchase a further $1,000,000 principal amount of such debentures. The
debentures are due April 30, 2000, bear interest at a rate of 10% per annum
(payable in cash or Common Stock at the option of the Company) and are
convertible into shares of the Company's Common Stock at a conversion rate equal
to the lesser of $9.625 or 85% of the lowest three-day average closing bid price
of the Company's Common Stock during the fifteen day period ending on the day
prior to conversion. Such conversion price shall be 80% of such market price for
conversions subsequent to 240 days following the closing date of May 18, 1998.
In addition, the holder may convert only up to one-third of the issue upon the
date of this Prospectus, and an additional one-third on each of the 30th and the
60th days after the date of this Prospectus. In addition, the holder is limited
to converting no more than 10% of the principal amount in any calendar week. The
Company has the right to redeem the debentures at any time at a price of 115% of
the principal amount, plus any accrued but unpaid interest. The debentures are
subordinate to the Company's bank line and two warehouse line of credit
agreements. The investor also received warrants to purchase 50,000 shares of the
Company's Common Stock at a price of $8.75 per share, and the right to require
the Company to register the holder's conversion shares for resale commencing 60
days after the date of this Prospectus.
On June 30, 1998, the Company sold 1,000 shares of its Series B Convertible
Preferred Stock to a single investor for an aggregate purchase price of
$1,000,000. The Series B Convertible Preferred Stock is convertible into shares
of the Company's Common Stock at a price equal to 85% of the five-day average
bid prices immediately prior to the conversion date, subject to a floor price of
$5.00 per share. The Company is obligated to register for resale the shares of
Common Stock issuable upon conversion of the Series B
25
Convertible Preferred Stock. This Prospectus satisfies these registration
requirements. See "Description of Capital Stock-Series B Convertible Preferred
Stock."
Historically, the Company has relied on a small group of warehouse lenders
to fund its mortgage origination and purchase activity, while relying on a
combination of capital infusions and cash flow from operations for other cash
needs. The Company uses a combination of loan purchase facilities and
traditional warehouse lines with five different financial institutions. At March
31, 1998, the three purchase facilities aggregated to $41,000,000 and ranged in
size from $2,000,000 to $25,000,000. The utilized and outstanding portions of
these purchase facilities at March 31, 1998 was $20,611,605 and they carried
interest rates from 8.25% to the note rate on the underlying loan being sold.
The aggregate warehouse facilities totaled $60,000,000, with $25,000,000
from one institution and $35,000,000 from the other. At March 31, 1998, the
utilized and outstanding balance on these facilities totaled $36,800,000 and
carried interest rates based on LIBOR plus a margin of 125 to 150 basis points
or Fed Funds plus a margin of 175 to 250 basis points.
At December 31, 1997, the Company was in violation of several financial
covenants with its two warehouse lenders. Both lenders issued waivers of the
default through April 30, 1998 and have been conducting ongoing negotiations as
necessary to amend the warehouse borrowing agreements. The Company determined
that it could operate at its current funding levels with lesser warehouse
availability, so it requested and was granted in April 1998 a reduction from
$50,000,000 to $25,000,000 for the Bank One facility. Bank One subsequently
extended the current borrowing arrangement until July 31, 1998 under new terms
and conditions which are financially less favorable to the Company.
The other lender, Nikko, provided the Company with a further waiver of such
default through June 1, 1998. Subsequently, Nikko submitted a written proposal
to the Company that extends the current borrowing relationship through August
31, 1998 at terms not significantly different from the existing terms. The new
terms include a committed facility limit of $35 million plus an additional $15
million available on an uncommitted, negotiated basis.
Other than as described above, the Company did not raise any additional
capital during the first half of 1998. However, the Company will need additional
capital in order to attract and retain new, lower cost borrowing relationships
and to fund its continued expansion. Accordingly, management has been actively
pursuing potential sources for an additional $5,000,000 to $10,000,000 capital
infusion in the third quarter.
Management believes that cash from operating activities, together with this
planned third quarter capital infusion and existing borrowing relationships will
be sufficient to fund the Company's expansion through the remainder of 1998.
There can be no assurance that the Company will be able to obtain an additional
capital infusion in the third quarter or that existing borrowing relationships
will remain in place on favorable terms. Accordingly, the Company may be limited
in its ability to achieve its growth objectives if its cash needs are not met by
the sources indicated.
26
The Company experienced a decrease in cash and cash equivalents of $947,819
during the three months ended March 31, 1998, compared to a decrease in cash of
$427,474 during the same period last year.
Net cash used in operating activities during the first quarter of 1998 was
$1,937,906 compared to a net cash use of $245,536 during the same quarter in
1997. The single largest component of cash use in the current period was from
Mortgage Loans Held for Sale, which increased by, and used cash of $1,283,788
during the first quarter of 1998.
Net cash used in investing activities totaled $183,372 during the three
months ended March 31, 1998 as compared to the same quarter in 1997 when cash
used in investing activities was $76,423.
Net cash provided by financing activities totaled $1,173,459 during the
three months ended March 31, 1998 compared to net cash used by financing
activities of $105,515 during the same quarter last year. The primary source of
financing cash provided during the current year was from increased warehouse
borrowings, which is consistent with higher loan balances being held for sale.
Capital expenditures in the first quarter of 1998 totaled $234,131 which
mainly consisted of $119,939 in computer equipment and $88,840 in computer
software. These expenditures were attributed to system upgrades and new branch
offices.
Hedging, Inflation and Interest Rates
The Company actively manages the interest rate risk associated with
conforming loans by committing particular loan applications to permanent
investors at the time that the rate and price are guaranteed to the applicant,
with the investor agreeing to honor the rate and price committed provided that
the resulting loan is closed and presented for purchase within a specific time
frame. The time frame is set with ample time for delivery based on the rate and
price expiration date given the applicant.
To date, the Company has not elected to hedge against the interest rate
risk associated with nonconforming loans. This decision is subject to review on
an ongoing basis but given the current profit margins and the lack of volatility
associated with pricing for nonconforming loans sold on a whole loan basis, the
Company has decided against employing hedging techniques utilizing costly
financial instruments. The period where risk exists is limited since the rate
and price are only guaranteed once the application has been approved with whole
loan sales of closed loans occurring on a bi-monthly basis.
Certain Accounting Pronouncements
SFAS 128
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings Per Share," which supersedes Accounting
Principles Board No. 15, Earnings per Share ("APB 15"), and is effective for the
Company for the year ended December 31, 1997. SFAS 128 establishes standards by
simplifying the computation and presentation of earnings (loss) per share, and
applies to public entities with publicly held common stock. It replaces the
presentation of primary earnings (loss) per share with a presentation of basic
earnings (loss) per share. SFAS 128 also requires dual presentation of basic and
diluted earnings (loss) per share on the face of the statements of operations.
Basic earnings (loss) per share
27
excludes dilution and are computed by dividing income available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted earnings (loss) per share reflect the potential dilution that could
occur if preferred stock contracts, options and warrants were to be exercised or
converted or otherwise resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings (loss) per share is computed
similarly to fully diluted earnings (loss) per share pursuant to APB 15. The
Company adopted SFAS 128 for the year ended December 31, 1997.
SFAS 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which provides accounting and
reporting standards for transfers and servicing of financial assets and
Extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. SFAS No. 125
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Implementation of SFAS No. 125, effective as of January
1, 1997, did not have a significant effect on the financial condition or results
of operations of the Company.
SFAS 123
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 31, 1995, or
for an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a company to choose either
a new fair value-based method or the current APB Opinion 25 intrinsic
value-based method of accounting for its stock-based compensation arrangements.
The statement requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value-based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under APB Opinion 25.
28
BUSINESS
General
The Company is a diversified financial services company headquartered in
West Palm Beach, Florida. The Company provides mortgages and mortgage related
services to individuals directly and indirectly through mortgage brokers and
mortgage lenders. The Company originates, processes, underwrites and funds
residential mortgage loans which are sold on either an individual or bulk basis
to institutional and private investors for investment or securitization
purposes. Through its subsidiaries, the Company originates and purchases both
mortgage loans originated to standard government agency guidelines (conforming
loans) and mortgage loans originated to standards that do not conform to agency
guidelines (non-conforming loans). Non-conforming loans typically fail to meet
agency guidelines due to credit impairment, higher loan-to-value ratios and
debt-to-income ratios, and are priced to compensate for the additional credit
risk. In 1997, the breakdown of conforming versus non-conforming was 70%
conforming and 30% non-conforming, and for the three months ended March 31,
1998, the breakdown was 47.9% conforming and 52.1% nonconforming. The Company
produced $75.2 million in non-conforming closed loans in 1997 and $60.0 million
in the three months ended March 31, 1998 compared to less than $5 million in
non-conforming loans in 1996. Since its inception, the Company has experienced
average annual growth of 75.76% in the volume of loans closed with an annual
growth rate of 11.5% in 1997.
All mortgage loans are sold on a non-recourse servicing released basis with
customary representations and warranties. Loans are serviced until sold by one
of two subservicers, depending on the type of loan. The subservicers provide for
servicing transfer and satisfaction functions which allow for compliance with
regulatory guidelines during this interim period.
The Company has used the proceeds of the initial public offering which
closed on May 30, 1997 to increase its production network, diversify production
geographically, improve technology and create an infrastructure capable of
handling the increased production that is expected in the future. Through March
31, 1998, the Company opened three (3) retail production offices, nine (9)
non-conforming wholesale offices and one (1) consumer direct office which
sources customers through direct mailings. The new offices were located in five
(5) non-Florida states with licensing capability to transact business in
nineteen (19) states. The production offices source mortgage loan applications
through fifty-nine (59) commissioned loan officers and twenty-one (21) wholesale
account executives who call on mortgage brokers, mortgage bankers, and lenders.
During 1997, the Company upgraded computer hardware and established a wide area
network for communication and data flow. The production support divisions of the
Company expanded both in size and scope in an effort to achieve the Company's
goal of providing superior support to production units. The total employees of
the Company expanded from 118 at December 31, 1996 to 236 on December 31, 1997
to 282 on March 31, 1998, including the staffing required for the new production
units and the staffing required by the production support divisions.
All of the Company's operations are conducted through its wholly-owned
subsidiaries, Bankers Direct Mortgage Corporation and Direct Mortgage Partners,
Inc. BDMC was incorporated in Florida as Creative Industries, Inc. in April
1989. In October 1990, Creative Industries, Inc.'s name was changed to Creative
Financing, Inc. In May 1995, Creative Financing, Inc.'s name was changed to CFI
Mortgage Corporation. DMP was incorporated in Florida in August 1997. In March
1997, CFI Mortgage Inc. was
29
incorporated in Delaware, and immediately prior to the initial public offering
in May 1997, the Existing Stockholders, who owned all of the issued and
outstanding common stock of CFI Mortgage, contributed their shares of common
stock of CFI Mortgage to the Company in exchange for all of the outstanding
shares of Common Stock of the Company. From April 1989 until December 31, 1996,
CFI Mortgage was treated as an S corporation. See "Reorganization and
Termination of S Corporation Status." The Company also owns a nominal 10%
interest in a Florida corporation, Bankers Professional Associates ("BPA"),
which is a "related entity" by virtue of an 80% ownership interest in BPA by
Vincent C. Castoro, the Company's Chairman. BPA provides survey and appraisal
services to the Company's production offices located in the State of Florida.
The Company believes that the terms under which services were provided by BPA
are no less favorable to the Company than those terms generally available from
unaffiliated third parties.
General Background
The Company currently has two wholly-owned subsidiaries, BDMC, the
Company's retail production arm originating both conforming and non-conforming
products, and DMP, the non-conforming production platform for the Company. DMP
produces non-conforming loans on a wholesale basis through mortgage brokers,
mortgage bankers and lenders.
Loans are funded through the use of good funds checks provided through Bank
One Capital Corporation. Once funding checks clear, the Company borrows under
its warehouse agreement with Bank One to cover the checks. Once a week
warehoused loans are moved to secure funds advanced under a revolving warehouse
line of credit provided by Nikko, which carries a preferential rate and a higher
advance rate compared to the Company's warehouse agreement. The Company's
document custodian also acts as custodian for all funding facilities. Loan level
tracking of the Company's borrowings, interest expense and interest accrual is
accomplished through the use of customized software provided by a national
vendor specializing in warehouse management software.
Business Strategy
The Company's objective is to be a diversified financial services provider
specializing in mortgage related services. The key elements of the Company's
business strategy are as follows:
o Provide its stockholders with superior returns based on profitability.
o Continue controlled growth in stable and improving geographic areas
with teams of experienced professionals.
o Build customer loyalty by providing superior service in all of its
production channels, including a diversified product menu, consistent
underwriting utilizing automated underwriting whenever possible, and
timely closings.
o Manage all aspects of loan quality in a manner which allows the loans
produced through its subsidiaries to command superior pricing from
investors.
o Increase the capacity of each regional hub by obtaining licensing and
employing executives in states not currently penetrated.
o Sell additional mortgage related products and services to its mortgage
clients.
o Provide additional services linked to the loan process.
o Develop alternative delivery channels which allow for reduced cost
through direct contact with the ultimate customer.
30
o Grow its retail production channel by offering a full spectrum of
products emphasizing the production of more profitable non-conforming
and alternative products.
o Monitor execution alternatives for the sale of mortgage loans and
servicing rights to improve profitability.
Description of Operations
Bankers Direct Mortgage Corporation Production Operations
The Company's retail production subsidiary, BDMC, operates through
standalone branches located in Florida and Colorado. Commissioned loan officers
source the business through realtors and builders or other contacts.
Applications are taken primarily in face-to-face interviews either by hand or on
laptop computers. The loan officer submits the application to the branch office
for processing either in hard copy or through electronic transfer via modem. For
conforming loans, application information is transmitted through the FNMA
automated underwriting system. The application is then processed in accordance
with the required conditions. For all other loan types, applications are
processed in the branch with verifications collected for key financial
information with a complete credit file submitted to the centralized
underwriting area. Certain loan types require the investor to underwrite the
loan. In these situations, the centralized underwriting area submits the
application package to the ultimate loan investor for approval. Once a loan is
underwritten the branch collects the conditions required by underwriting for
approval. When all conditions have been satisfied, the branch submits a request
to close to the centralized closing area. Closing documents are generated
through the Company's closing department preparation software and the loans are
then closed by approved closing agents who have executed closing agreements and
provided insured closing letters from title insurers.
The loan programs offered reflect guidelines and terms which match those
published by approved investors. The pricing offered the Loan Officers is
generated from a pricing model which prices to generate a specific dollar profit
on each loan regardless of loan size. This philosophy has allowed the Company to
price larger, more efficient loans aggressively, which has increased its average
loan size. When rates and prices are committed to applicants, the interest rate
risk is transferred to the ultimate investor by locking the rate and price with
the investor based upon an agreed to closed loan delivery date.
Conforming closed loans are shipped to institutional and private investors
in accordance with commitments made at the time that the rate and price are
guaranteed. Investors then review the loan files and upon clearing any funding
conditions, the investor wires the proceeds to the Company's account at the
warehouse bank for distribution to pay off the loan with the excess deposited in
the Company's operating account to use to fund operations.
Conforming loans are serviced on behalf of the Company under subservicing
arrangements with Cenlar, F.S.B. Borrowers are notified at closing of the
subservicer. For a fee, the subservicer handles all normal servicing functions
until the loan is sold to the permanent investor including the loan satisfaction
and transfer processes.
31
Direct Mortgage Partners Production Operations
The Company's wholesale production subsidiary, Direct Mortgage Partners,
operates through its regional operations hubs located in five states utilizing
twenty-one (21) account executives to obtain non-conforming applications and
closed loans from mortgage brokers and mortgage lenders located in nineteen (19)
states. Direct Mortgage Partners also has a consumer direct office which obtains
application inquiries in response to direct mail campaigns targeting specific
market segments. Each regional center has the capability to process, underwrite,
close, and post-close the loans produced in the region.
The subsidiary's regional operations hubs follow strict procedural and
policy guidelines. Credit information is submitted to the hub where the
application is credit graded. The grade is communicated to the broker/lender who
completes the processing and submits the processed application for underwriting,
credit grading and pricing. Prior to approval, the operations hubs re-verifies
credit and depending upon the characteristics of the application, re-verifies
the property value. Applications with characteristics outside of the published
matrices require a second signoff from the centralized credit and compliance
area of DMP.
When loans are approved the closing documents are generated by the
operational hub through the closing document preparation software and the loans
are then closed by approved closing agents who have executed closing agreements
and provided the Company with insured closing letters from title insurers.
Non-conforming loans are sold on either a flow or bulk basis with the
Company distributing listings of closed loans and their characteristics to
institutional and private investors who bid on loan(s) on an auction basis. This
process improves the Company's execution. The bids are subject to the review of
the complete closed loan file which normally takes place on site. Once funding
conditions are cleared, the investor's funding occurs as with conforming loans.
The loan programs and guidelines offered to the brokers and lenders reflect
conservative standards offered by a variety of investors who purchase
non-conforming loans routinely from mid-size aggregators such as the Company.
The pricing offered the brokers and lenders reflects differences based upon
credit grade and loan characteristics within the grade. These differences
reflect the adjustments received from the investors for which the Company
aggregates product. The ultimate price offered the broker or lender allows for a
specific profit percentage to be earned on each loan. The Company also charges
certain fees on each loan at closing to increase revenue and offset operational
costs.
To date, the interest rate risk created by guaranteeing a rate and price
has been managed by regularly selling bulk packages of closed loans reducing the
period where interest rate risk exists. Hedging of the interest rate risk has
been considered and will continue to be considered but to date the profit
margins generated on the loans and the lack of volatility in Investor pricing
have negated the need to incur the expense of hedges utilizing financial
instruments.
Corporate Support for Production Subsidiaries
The Company also provides the services listed below to each subsidiary:
o Human Resource and Personnel Management
o Primary Marketing Support
32
o Post-Closing Support
o Legal Support
o Administrative Services Support
o Information Systems Support
o Finance and Accounting Support
o Funding Support/Warehouse Management
In addition, the Company monitors the areas of Quality Control and
Regulatory Compliance and Interest Rate Risk Management for both subsidiaries
providing compliance direction, document approval, fair lending self testing,
documentation authenticity validation and the policies and procedures utilized
for broker approval and Interest Rate Risk Management.
The Company has contracted with Vincam, a national professional employer
organization, to handle payroll and benefits administration while providing
legal guidance in personnel matters. By utilizing Vincam, the Company is able to
provide a competitive benefits package throughout the United States. The Company
provides technical support in the creation and design of professional marketing
materials. Each subsidiary handles post-closing functions, except servicing
transfer government loan insuring and follow-up documentation delivery to
investors. These critical functions along with file storage and retrieval have
been centralized to control risk and decrease costs and are handled for each
subsidiary by the Company. Real Estate Settlement Procedures Act ("RESPA")
compliance and licensing related issues are referred to outside counsel due to
the critical nature of these issues. The Company provides administrative
services support for each subsidiary. Purchasing, vendor management, and
physical plant management have been centralized to reduce costs and duplication.
The Company provides hardware and software support for all subsidiaries and
employees. The Company operates a wide area network utilizing Novel servers and
ISDN lines to allow for efficient communication and data management. A variety
of software packages are installed on the network with customized vendor
provided software packages providing the means for loan processing,
underwriting, closing, secondary marketing, accounting and post-closing
functions. Customized interfaces between the software and a central database
improve the efficiency of the data input function and reporting. The central
database will provide the Company with data mining capability in the future. The
Company's help desk reduces downtime providing users with immediate support for
hardware and software issues.
The Company, through its customized accounting software, provides branch
level profitability analysis, which is used as the basis for compensation for
branch managers.
Year 2000 Issues
The "Year 2000" problem is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to miscalculate or fail. This "Year 2000" problem creates risk
for the Company from problems in its own computer systems and from third parties
with whom the Company deals on transactions nationwide.
The Company has conducted a preliminary review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to avoid any
33
potential problems. The Company has few internally developed applications that
it utilizes for its operations, and has been communicating with associated third
parties to ensure that they are addressing the issue. The potential impact of
the "Year 2000" issue will depend not only on the corrective measures the
Company undertakes, but also on the way in which the issue is addressed by
businesses and other entities who they provide or exchange data with.
It is certain that the Company's operations could be negatively impacted if
not adequately resolved, but at this time it is difficult to quantify the
potential financial impact of such situations.
Seasonality
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general pattern of resales of homes, which sales
typically peak during the spring and summer seasons and decline from January
through March. In addition, the primary home market in Florida, the Company's
historical base of operations, tends to increase during the fourth quarter,
while the second home market increases from October through April. Refinancings
tend to be less seasonal and more closely related to changes in interest rates.
The mortgage servicing business is generally not subject to seasonal trends,
except to the extent that growth of a mortgage servicing portfolio is generally
higher in periods of greater mortgage loan originations.
Competition
The mortgage banking industry is highly competitive. The Company competes
with financial institutions, mainly mortgage companies, commercial banks and
savings and loan associations and, to a certain extent, credit unions and
insurance companies, depending upon the type of mortgage loan product offered.
The Company competes principally by purchasing or originating a variety of types
of mortgage loans, emphasizing the quality of its service and pricing the loans
at competitive rates. Many of the Company's competitors have financial resources
substantially greater than those of the Company. Many of the nation's largest
mortgage companies and commercial banks have a significant number of branch
offices in areas in which the Company's correspondents and wholesale and retail
branches operate. Increased competition for mortgage loans from larger lenders
may result in a decrease in the volume of loans originated and purchased by the
Company, thereby possibly reducing the Company's revenues.
Regulation
The operations of the Company are subject to extensive regulation by
federal and state governmental authorities and are subject to various laws and
judicial and administrative decisions that, among other things, regulate credit
activities, require disclosures to customers, govern secured transactions and
establish collection, repossession and claims handling procedures and other
trade practices. The Company is subject to the rules and regulations of the FHA,
FNMA and VA and state regulatory authorities with respect to originating,
processing, underwriting, selling, securitizing and servicing mortgage loans.
In addition, there are other federal and state statutes and regulations, as
well as judicial decisions, affecting the Company's operations. Those rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for mortgage loans, prohibit discrimination and
establish underwriting guidelines which include provisions for inspections and
appraisals, require credit
34
reports on prospective borrowers and fix maximum loan amounts, and with respect
to the VA loans, fix maximum interest rates. Moreover, lenders such as the
Company are required to submit annually to the FHA, FNMA and VA audited
financial statements, and each regulatory entity has its own financial
requirements. The Company's affairs also are subject to examination by the FHA,
FNMA and VA at all times to assure compliance with all applicable regulations,
policies and procedures. Mortgage origination activities are subject to, among
other regulatory requirements, the Equal Credit Opportunity Act, the Federal
Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real Estate
Settlement Procedures Act and the regulations promulgated thereunder which
prohibit discrimination and require the disclosure of certain basic information
to mortgagors concerning credit terms and settlement costs. Many of the
aforementioned regulatory requirements are designed to protect the interests of
consumers, while others protect the owners or insurers of mortgage loans.
Failure to comply with these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the servicer, demands
for indemnification or loan repurchases, class action lawsuits and
administrative enforcement actions.
There are various state and local laws and regulations affecting the
Company's operations. The Company is in possession of all licenses required by
the State of Florida to conduct its business operations. Conventional mortgage
operations also may be subject to state usury statutes. FHA and VA mortgage
loans are exempt from the effect of such statutes.
Environmental Matters
To date, the Company has not been required to perform any investigation or
remediation activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future. In the ordinary course of its business, the Company from time to time
forecloses on properties securing loans. Although the Company primarily lends to
owners of residential properties, there is a risk that the Company could be
required to investigate and clean up hazardous or toxic substances or chemical
releases at such properties after acquisition by the Company, and may be held
liable to a governmental entity or to third parties for property damage,
personal injury and investigation and clean up costs incurred by such parties in
connection with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
property.
Employees
The Company has 282 employees at March 31, 1998, 220 of whom were salaried
employees and 62 of whom were compensated on a commission basis. Substantially
all of the Company's employees work on a full-time basis. None of the Company's
employees are represented by a union. The Company considers its relations with
its employees to be satisfactory.
Properties
The Company's executive and administrative offices are located at 580
Village Boulevard, Suite 120, West Palm Beach, Florida 33409, where the Company
leases approximately 21,161 square feet of office space at an aggregate annual
rent of approximately $222,132. The lease provides for certain scheduled rent
increases and expires May 31, 2001.
35
The Company maintains 17 other offices in the States of California,
Colorado, Florida, Georgia, Illinois and Tennessee pursuant to leases with
various expiration dates through 2002, at monthly rental rates ranging from $586
to $7,463. The Company considers its facilities to be satisfactory for its
current needs.
Legal Proceedings
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the results of operations or financial condition of the Company.
36
MANAGEMENT
Executive Officers and Directors
Set forth below is information concerning the current executive officers
and directors of the Company.
Name Age Title
- ---- --- -----
Vincent C. Castoro(1)............. 63 Chairman of the Board of Directors
Christopher C. Castoro(1)......... 32 Chief Executive Officer and Director
Vincent J. Castoro(1)............. 30 Vice President and Director
Thomas J. Healy................... 48 Director
Robert J. Thompson................ 48 Director
Don M. Lashbrook.................. 45 Chief Operating Officer
Paul R. Garrigues................. 42 Chief Financial Officer
Robert A. Simm.................... 33 Chief Accounting Officer
- ------------------
(1) Vincent C. Castoro is the father of Vincent J. Castoro and Christopher C.
Castoro.
Vincent C. Castoro founded the Company in April 1989 and has been a
director of the Company since that date. Mr. Castoro is currently Chairman of
the Board of Directors and served as the Chief Executive Officer of the Company
from March 1991 until June 1997. Prior to founding the Company, Mr. Castoro was
involved in the heating oil distribution business in the New York metropolitan
region.
Christopher C. Castoro has been the Chief Executive Officer of the Company
since June 1997 and was Executive Vice President of the Company since July 1993
and a director of the Company since April 1989. From April 1989 to June 1993,
Mr. Castoro served as the Secretary and Treasurer of the Company. Mr. Castoro is
a member of the Mortgage Bankers Association of America, and has served on that
organization's Secondary Marketing Committee since 1994. Mr. Castoro also serves
as an member of the Advisory Board of the Chase Manhattan Mortgage Corporation.
Vincent J. Castoro has been Vice President of the Company since June 1997,
was previously President of the Company from 1993 until June 1997 and has been a
director of the Company since April 1989. From April 1991 through May 1993, Mr.
Castoro served as the Vice President of the Company.
Thomas J. Healy has been the Managing Director of Strategic Services at
Bayview Financial Trading Group LLP since September 1997. From November 1990 to
September 1997, Mr. Healy was Director of the Mortgage Banking Strategies Group
at CoreStates Capital Markets, a division of CoreStates Bank, N.A. in Fort
Lauderdale since November 1990. From March 1987 to November 1990, Mr. Healy was
the Managing Director of Reserve Financial Management Corp., an investment
banking firm in Miami, Florida. Mr. Healy is a Master Faculty Fellow of the
Mortgage Banking Association School of Mortgage Banking and an accomplished
lecturer and author in the mortgage banking industry.
Robert J. Thompson is the founder of R. Thompson & Company, a lobbying
practice formed in 1983 which performs a wide variety of public relations
services for both the government and private sector. Prior to founding R.
Thompson & Company, Mr. Thompson served in the White House as Special Assistant
to President Ronald Reagan and Deputy Director of Legislative Affairs from
February 1982 to November 1982 after serving as Executive Assistant for
Congressional Relations to then Vice President George Bush.
37
Don M. Lashbrook has been the Chief Operating Officer of the Company since
June 1997. Mr. Lashbrook served as the Senior Vice President-Risk Management of
Citizens Mortgage Corporation, an Atlanta, Georgia based mortgage lender from
March 1996 through May 1997. From February 1994 through February 1996, Mr.
Lashbrook was Executive Vice President and Director of the Risk Management
Division of Barnett Mortgage Company, a subsidiary of Barnett Banks, Inc. Prior
to February 1994, Mr. Lashbrook was Senior Vice President of Marketing for
Maryland National Mortgage Corporation, a subsidiary of Maryland National Bank.
Paul R. Garrigues has been the Chief Financial Officer of the Company since
April 1998. Mr. Garrigues previously served as the Chief Financial Officer of
Monument Mortgage, Inc., a full service mortgage banker located in Walnut Creek,
California from March 1992 through April 1998.
Robert A. Simm has been the Chief Accounting Officer of the Company since
August 1993. From January 1989 through July 1993, Mr. Simm was employed by the
New York City accounting firm of Leventhal, Zupnick, Berg & Co., most recently
as a Senior Accountant.
The Board of Directors of the Company is divided into two classes. Class 1
directors serve for a term expiring at the 1998 annual meeting of stockholders,
and Class 2 directors serve for a term expiring at the 1999 annual meeting of
stockholders (and in each case, until their respective successors are duly
elected and qualified). Mr. Vincent C. Castoro, Mr. Healy and Mr. Thompson are
Class 1 directors, and Mr. Vincent J. Castoro and Mr. Christopher C. Castoro are
Class 2 directors. At each annual meeting of stockholders, successors to the
class of directors whose term expires at such meeting will be elected to serve
for two-year terms and until their successors are duly elected and qualified.
Board Committees
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee and the Compensation Committee each consists of at least two
directors who are not employees of the Company. Messrs. Healy and Thompson are
the members of these Committees. The Audit Committee has the authority and duty
to recommend to the Board of Directors the auditors to be engaged as the
Company's independent public accountants and to review the results and scope of
the audit and other services provided by the Company's independent public
accountants and to take such other action as it deems appropriate to ensure the
appropriate safeguarding of the Company's assets and appropriate accounting of
its assets and liabilities. The Compensation Committee has all powers of, and
the authority to exercise all duties of, the Board in matters relating to
executive compensation and administration of stock option and other employee
benefit plans of the Company, subject to the terms of such plans. The
Compensation Committee has the authority and duty to nominate directors of the
Company for election at each annual meeting of stockholders, to nominate
directors of the Company to fill vacancies and to nominate directors of any
subsidiary of the Company; in each case, such nominations are subject to
approval by the Board.
Compensation of Directors
The non-employee members of the Board of Directors receive $500 per meeting
attended. No other directors receive or will receive cash or other compensation
for services on the Board of Directors or any committee thereof. All directors
are entitled to reimbursement for reasonable expenses incurred in the
performance of their duties as Board members.
38
Employment Agreements
The Company has entered into three-year employment contracts with each of
Messrs. Vincent C. Castoro, Christopher C. Castoro and Vincent J. Castoro
providing for annual base salaries of $100,000. Each employment agreement
provides that the employee is eligible to receive options under the Company's
Stock Option Plan and cash bonuses based upon the financial performance of the
Company and the employee's contribution to that performance. Each employment
agreement contains confidentiality and non-competition provisions.
Executive Compensation
The following table sets forth the cash compensation of the Company's Chief
Executive Officer and the Company's three other most highly compensated
executive officers for the three fiscal years ended December 31, 1997. The
remuneration described in the table does not include the cost to the Company of
benefits furnished to the each such officer, including premiums for health
insurance and other benefits provided to such individual that are extended in
connection with the conduct of the Company's business. The value of such
benefits did not exceed 10% of each such officer's cash compensation.
Annual Compensation
--------------------------- Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
Vincent C. Castoro 1997 $ 94,778 ___ ___
Chairman 1996 $ 71,623 ___ ___
1995 $ 57,200 ___ ___
Christopher C. Castoro 1997 $ 93,001 ___ ___
Chief Executive Officer 1996 $ 78,000 ___ ___
1995 $ 78,000 ___ ___
Don M. Lashbrook 1997 $110,338 ___ ___
Chief Operating Officer and 1996 N/A ___ ___
Vice President 1995 N/A ___ ___
Vincent J. Castoro 1997 $ 93,001 ___ ___
Vice President 1996 $ 78,000 ___ ___
1995 $ 78,000 ___ ___
No options or other form of long-term compensation were granted to, or
exercised or held by, the named executive officers during the year ended
December 31, 1997.
Stock Option Plan
The Company's Board of Directors adopted the Company's Stock Option Plan
(the "Stock Option Plan") as of May 27, 1997. The Stock Option Plan is
administered by the Compensation Committee. All employees and directors of, and
consultants to, the Company as may be determined from time to time by the
Compensation Committee are eligible to receive options under the Stock Option
Plan.
39
A total of 80,000 shares were authorized for issuance under the Stock
Option Plan. The Stock Option Plan was amended in 1998 to increase the number of
options which may be granted thereunder from 80,000 to 450,000 shares of Common
Stock, subject to stockholder approval. Upon consummation of the Public
Offering, the Company granted options with respect to 40,000 (the "Initial
Options") shares at an exercise price equal to the initial public offering price
to certain eligible participants under the Stock Option Plan. None of the
Initial Options were granted to Vincent C. Castoro, Vincent J. Castoro or
Christopher C. Castoro. Furthermore, the Company granted options with respect to
7,000 shares at an exercise price equal to of the initial public offering public
of $5.00 to the Company's chief accounting officer, Robert A. Simm. As of the
date of this Prospectus, 80,000 options are outstanding under the Stock Option
Plan and the Board has approved an additional 283,250 options, subject to
receiving stockholder approval.
The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must be at least equal to the
fair market value of the Common Stock at the date of grant, and 110% of the fair
market value of the Common Stock at the date of grant for any incentive stock
option granted to a holder of more than 10% of the outstanding Common Stock.
Stock options are exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years after the date of grant. Options
shall be exercisable at such rate and times as may be fixed by the Compensation
Committee on the date of grant. The aggregate fair market value (determined at
the time the option is granted) of the Common Stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under all stock option plans of the Company) shall not
exceed $100,000; to the extent this limitation is exceeded, such excess options
shall be treated as non-qualified stock options for purposes of the Stock Option
Plan and the Code.
At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no such
designation shall be deemed non-qualified stock options.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
Common Stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months.
Stock options terminate at the end of the 30th business day following the
holder's termination of employment or service. This period is extended to one
year in the case of the disability or death of the holder and, in the case of
death, the stock option is exercisable by the holder's estate. The
post-termination exercise period for any individual may be extended by the Board
of Directors, but not beyond the expiration of the original term of the option.
The number of shares of Common Stock covered by outstanding options, the
number of shares of Common Stock available for issuance under the Stock Option
Plan and the exercise price per share of outstanding options will be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split or stock dividend. In the
event of a merger or sale of
40
all or substantially all of the assets of the Company, the Compensation
Committee or the Board of Directors will make such adjustment as it deems
equitable in respect of outstanding options, including, without limitation, the
revision or cancellation of any such options.
Each option may be subject to provisions to assure that any exercise or
disposition of Common Stock will not violate federal and state securities laws.
No option may be granted under the Stock Option Plan after the day
preceding the tenth anniversary of the adoption of the Stock Option Plan.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Option Plan and may, with the consent of the
affected holder of an outstanding option at any time withdraw or amend the terms
and conditions of outstanding options. Any amendment which would increase the
number of shares issuable pursuant to the Stock Option Plan or to any individual
thereunder or change the class of individuals to whom options may be granted
shall be subject to the approval of the stockholders of the Company, only if the
rules of any exchange on which the Common Stock is included, or any
self-regulatory organization having jurisdiction over the Company shall require
such approval; if no such approval is required, the Board of Directors may
approve any such amendment.
41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with the Company's Chairman and Former Chief Executive Officer
Since inception, Vincent C. Castoro, the Company's Chairman and former
Chief Executive Officer, has advanced an aggregate of $448,969 to the Company
for working capital purposes. These advances, which were without interest, were
repaid in their entirety during the year ended December 31, 1996. In addition,
during the year ended December 31, 1996 and 1997, the Company advanced $12,949
and $4,148, respectively to Mr. Castoro which has been repaid as of December 31,
1997. The Company has made advances to three officers aggregating approximately
$88,000 and $83,000 as of March 31, 1998 and December 31, 1997, respectively.
The advances are non-interest bearing and due upon demand.
Transfer of Interest in Carroll Street; Gifting of Shares
In connection with its formation, in April 1989, CFI Mortgage issued, in
equal shares, an aggregate of 2,500 shares of common stock to Vincent J.
Castoro, Christopher C. Castoro and Robert Castoro. Robert Castoro, who is also
a son of Vincent C. Castoro, is not currently involved in the business of the
Company. In June 1992, CFI Mortgage issued 5,000 shares of common stock to
Vincent C. Castoro in exchange for 40% of the capital stock of Carroll Street.
The remaining 60% of the equity interest in Carroll Street is owned by Vincent
C. Castoro. In connection with the transfer to CFI Mortgage of the interest in
Carroll Street, Mr. Castoro's sons transferred to their father an aggregate of
250 shares of common stock, with the result that Vincent C. Castoro owned 5,250
shares of common stock of CFI Mortgage. Robert Castoro gave his remaining 750
shares to Vincent C. Castoro when he resigned from CFI Mortgage in 1993.
Thereafter, on March 1, 1993, Vincent C. Castoro gave 3,000 shares of CFI
Mortgage common stock to each of Vincent J. Castoro and Christopher C. Castoro.
In March 1997, CFI Mortgage Inc. was incorporated in Delaware, and immediately
prior to the Company's initial public offering, Vincent J. Castoro and
Christopher C. Castoro contributed their 7,500 shares of common stock of CFI
Mortgage to the Company in exchange for 1,200,000 shares of Common Stock of the
Company.
Distribution of the Interest
From April 17, 1989 through December 31, 1996, CFI Mortgage had not paid
any of its earnings to the Prior Stockholders in the form of S corporation
distributions. On March 26, 1997, CFI Mortgage distributed to the Existing
Stockholders CFI Mortgage's 40% interest in Carroll Street, a New York
corporation whose principal asset is a building located in Brooklyn, New York.
The remaining 60% of Carroll Street is owned by Vincent C. Castoro. The
distribution of the Interest, which was recorded on CFI Mortgage's balance sheet
at December 31, 1996 as having a value of $175,224, was intended to offset taxes
payable at the applicable statutory rate by the Existing Stockholders on the
estimated net earnings of CFI Mortgage for the period from January 1, 1996 to
December 31, 1996 and to distribute to the Existing Stockholders previously
earned and undistributed S corporation earnings.
42
Transactions in Connection with Termination of S Corporation Status
Pursuant to the terms of the Contribution Agreement and as described above,
the Existing Stockholders contributed to the Company their stock in CFI
Mortgage, in exchange for 1,200,000 shares of Common Stock. As a result, the
Company and CFI Mortgage, which became a wholly-owned subsidiary of the Company,
are fully subject to federal and state income taxes, and the Company recorded a
deferred tax asset on its balance sheet.
Title Company and Appraisal Company
The Company is a 49% shareholder in Real Estate Associates Title Inc.
("Title Company"), a Florida corporation incorporated in February 1996. The
Company acquired its interest in Title Company for $5,000. The remaining
shareholder of Title Company is Harbor Holdings Co. ("HHC"), a Florida
corporation. HHC is owned by James F. Miller, Esq. (51%) and Christopher C.
Castoro (49%). From time to time Mr. Miller performs legal services for the
Company.
Title Company had gross revenues of $20,000 for the year ended December 31,
1996, all of which was derived from title searches relating to loans originated
by the Company. Rates charged by the Title Company are regulated by the State of
Florida Office of Insurance Commission.
In addition, Vincent J. Castoro is a 49% shareholder in Clairco, Inc.
("Appraisal Company"), a Florida corporation incorporated in April 1996. The
remaining shareholder of Appraisal Company is Robert J. Clair, who formerly was
employed by the Company as an appraiser. The only capital contributed to the
Appraisal Company has been utilized for miscellaneous filing and legal fees.
Appraisal Company had gross revenues of $82,500 for the year ended December
31, 1996, all of which was derived from property appraisals relating to FHA
loans originated by the Company. Rates charged for FHA appraisals are regulated
by the FHA.
In January 1997 both Title Company and Appraisal Company ceased operations.
In (month) 1997, the Company began utilizing Bankers Professional Associates
("BPA") for survey and appraisal services to the Company's production offices
located in the State of Florida. The Company is a 10% shareholder in BPA and
Vincent C. Castoro, the Company's Chairman, is an 80% shareholder in BPA. The
Company paid BPA a total of $xxx,xxx and $xx,xxx during the year ended December
31, 1997 and the quarter ended March 31, 1998, respectively, for these services.
The Company believes such transactions with its officers/shareholders were
made on terms no less favorable to the Company than those generally available
from unaffiliated third parties. Future transactions with its
officers/shareholders will be on terms no less favorable to the Company than
those generally available from unaffiliated third parties and will be ratified
by a majority of the independent outside disinterested members of the Company's
board of directors. In the future, no loans will be made to officers, directors,
post-offering 5% or greater shareholders or affiliates thereof, except for bona
fide business purposes.
43
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 31, 1998, certain information
with respect to the beneficial ownership of the Common Stock by: (i) each of the
Company's Directors, (ii) each officer named in the Summary Compensation Table,
(iii) all directors and executive officers of the Company as a group, and (iv)
each other person (including any "group," as that term is used in Section
13(d)(3) of the Exchange Act) who is known by the Company to own beneficially 5%
or more of the Common Stock. The Company believes that the beneficial owners of
the Common Stock. The Company believes that the beneficial owners of the Common
Stock listed below, based on information furnished by such owners, have sole
voting and investment power with respect to such shares, except as noted below.
The address of each person listed below is 580 Village Boulevard, Suite 120,
West Palm Beach, Florida 33409, unless otherwise indicated.
Name of Beneficial Owner Number of Shares Percent of Class
- ------------------------ ---------------- ----------------
Vincent C. Castoro .......................... -- *
Vincent J. Castoro .......................... 600,000 26.0%
Christopher C. Castoro ...................... 600,000 26.0%
Thomas J. Healy ............................. -- *
Robert J. Thompson .......................... -- *
Robert A. Simm(1) ........................... 7,000 *
Don M. Lashbrook ............................ -- *
Paul R. Garrigues ........................... -- *
All directors and executive officers
as a group (eight persons) ................ 1,207,000 52.3%
- ----------
* Less than 1%
(1) Includes 7,000 options to purchase shares of Common Stock held by Mr. Simm
which are currently exercisable.
44
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
the Delaware General Corporation Law (the "DGCL") and to provisions contained in
the Company's Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus forms a
part. Reference is made to such exhibits for a detailed description of the
provision thereof summarized below.
The authorized capital stock of the Company consists of 10,000,000 shares
of Preferred Stock, par value $.01 per share (the "Preferred Stock"), and
20,000,000 shares of Common Stock, par value $.01 per share.
Common Stock
Subject to prior rights of any Preferred Stock then outstanding and to
contractual limitations, if any, the holders of outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available
therefor, as declared by the Board of Directors and paid by the Company.
In the event of any liquidation, dissolution or winding-up of the Company,
holders of Common Stock will be entitled to share equally and ratably in all
assets available for distribution after payment of creditors, holders of any
series of Preferred Stock outstanding at the time, and any other debts,
liabilities and preferences. Since the Company's Board of Directors has the
authority to fix the rights and preferences of, and to issue, the Company's
authorized but unissued Preferred Stock without approval of the holders of its
Common Stock, the rights of such holders may be materially limited or qualified
by the issuance of the Preferred Stock.
The Common Stock presently outstanding is, and the Shares offered and sold
hereby will be, fully paid and non-assessable.
Preferred Stock
The Board of Directors is empowered to issue Preferred Stock from time to
time in one or more series, without stockholder approval, and with respect to
each series to determine (subject to limitations prescribed by law) (1) the
number of shares constituting such series, (2) the dividend rate on the shares
of each series, whether such dividends shall be cumulative and the relation of
such dividends to the dividends payable on any other class of stock, (3) whether
the shares of each series shall be redeemable and the terms of any redemption
thereof, (4) whether the shares shall be convertible into Common Stock or other
securities and the terms of any conversion privileges, (5) the amount per share
payable on each series or other rights of holders of such shares on liquidation
or dissolution of the Company, (6) the voting rights, if any, for shares of each
series, (7) the provision of a sinking fund, if any, for each series, and (8)
generally any other rights and privileges not in conflict with the Certificate
of Incorporation for each series and any qualifications, limitations or
restrictions thereof.
45
Series A Convertible Preferred Stock
General. Pursuant to the Certificate of Designations, Voting Powers,
Preferences and Rights of the Series of Preferred Stock of CFI Mortgage Inc. to
be Designated Series A Convertible Preferred Stock (the "Series A Certificate of
Designations"), filed December 2, 1997, the Company authorized the issuance of
2,400 shares of Series A Convertible Preferred Stock (the "Convertible Preferred
Stock"). The holders of Convertible Preferred Stock are entitled to the rights,
preferences and privileges set forth below (which do not purport to be complete
and are qualified in their entirety by reference to the Series A Certificate of
Designations).
Dividends. Holders of Convertible Preferred Stock are entitled to receive,
in preference to the holders of Common Stock, an 8% cumulative annual dividend
payment per share of Convertible Preferred Stock. Dividends are payable only
upon conversion of the shares and are payable in cash or shares of Common Stock,
at the option of the Company. The Conversion Shares have been registered for
resale pursuant to the terms of the Registration Rights Agreement, dated as of
December 2, 1997 (the "Registration Rights Agreement"), by and between the
Company and the Initial Investor named therein by means of the registration
statement of which this Prospectus is a part. Dividends on the Convertible
Preferred Stock will be cumulative from the date of original issuance. As long
as any Convertible Preferred Stock shall be outstanding, the Company shall not
declare, pay, or set aside for payment any dividend or declare or make any
distribution upon or purchase, redeem or otherwise acquire Common Stock or any
other series or class of capital stock.
Voting Rights. The holders of Convertible Preferred Stock have the right to
vote on all matters on which the holders of Common Stock have the right to vote,
and each holder of shares of Convertible Preferred Stock shall have the right to
cast one vote for each whole share of Common Stock which would be issued to such
holder upon conversion of such holder's shares of Convertible Preferred Stock
assuming that such conversion were to occur on the date immediately prior to the
record date for the determination of stockholders entitled to vote. The holders
of Convertible Preferred Stock shall vote together as one class with the holders
of Common Stock, except as otherwise required by Delaware law. The Company shall
not amend, alter or repeal any of the provisions of its Certificate of
Incorporation or Bylaws so as to affect adversely the powers, preferences,
qualifications, limitations or rights of the holders of the Convertible
Preferred Stock.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of
Convertible Preferred Stock are entitled to receive out of the assets of the
Company available for distribution to stockholders, before any distribution is
made on any other stock of the Company, $1,000 per share in cash, plus
accumulated and unpaid dividends, which dividends shall be payable on a pro rata
basis among holders of Preferred Stock in cash. If upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the amounts
payable with respect to the Convertible Preferred Stock (and any series of
preferred stock ranking in parity with the Convertible Preferred Stock in
respect of distributions upon liquidation, dissolution or winding-up of the
Company) are not paid in full, the holders of the Convertible Preferred Stock
will share ratably in any distribution of assets of the Company in proportion to
the full respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of Convertible Preferred Stock will not be entitled to
further participation in any distribution of assets by the Company. A
consolidation or
46
merger of the Company with or into one or more corporations where the Company is
not the surviving corporation, a sale or transfer of all or substantially all of
the assets of the Company for cash or securities or a Change of Control (as
defined in the Series A Certificate of Designations) shall be deemed to be a
liquidation, dissolution or winding up of the Company.
Conversion. The Convertible Preferred Stock is convertible into shares of
Common Stock as soon as the registration statement of which this Prospectus is a
part of is declared effective (the "Effective Date") but no later than February
1, 1998. The Conversion Price per share will be equal to the lower of (i)(x)
average closing bid price of the Common Stock as calculated over the five
trading-day period (the "Average Price") ending on the day prior to the date of
conversion times (y) 85%, or (ii) the Average Price on the Closing Date, which
was $8.50 (the "Maximum Price"), subject to adjustment. Each share of
Convertible Preferred Stock will be convertible into the number of shares of
Common Stock determined by dividing the Purchase Price by the Conversion Price
in effect on the date the Conversion Notice is received by the Company. No
fractional shares will be issued, and in lieu of any fractional share, an
adjustment in cash will be made based on the market price of the Common Stock on
the last trading day prior to the date of conversion. In partial consideration
of the holder of the Convertible Preferred Stock giving its consent to the
Company's subsequent $2.2 million convertible debt financing, the Maximum Price
was reduced to $6.50. See "Mangement's Discussion and Analysis--Liquidity and
Capital Resources."
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including: the issuance of capital stock of the Company as a
dividend or distribution on any shares of Common Stock; subdivisions,
combinations and reclassifications or recapitalizations of the Common Stock; the
issuance by the Company (to all holders of Common Stock or otherwise) of Common
Stock, or of rights, warrants or convertible securities entitling the holder to
subscribe for or purchase Common Stock, at less than the current market price
(as calculated in the Series A Certificate of Designations); and the combination
of the Company's shares of Common Stock into a larger number of shares. No
adjustment in the Conversion Price is required unless such adjustment would
require a change of at least 5% in the price then in effect, but any adjustment
that would otherwise be required to be made shall be carried forward and taken
into account in any subsequent adjustment. Before taking any action which would
cause an adjustment effectively reducing the Conversion Price below the par
value of the Common Stock, the Company will take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and non-assessable shares of Common Stock
at the Conversion Price as so adjusted.
Automatic Conversion. The Convertible Preferred Stock is subject to
automatic conversion on December 3, 1999, if not sooner converted.
Optional Conversion. The Company may, at its option, force conversion, pro
rata, of the Convertible Preferred Stock outstanding by giving the holders
thereof notice (i) starting 60 days from the Effective Date, if the Common Stock
trades at a price equal to or in excess of 150% of the Maximum Price for 20
consecutive trading days, the Company may elect to force conversion of up to an
additional 25% of the Convertible Preferred Stock outstanding; (ii) starting 90
days from the Effective Date, if the Common Stock trades at a price equal to or
in excess of 175% of the Maximum Price for 20 consecutive trading days, the
Company may elect to force conversion of up to an additional 25% of the
Convertible Preferred Stock originally issued by the Corporation; and (iii)
starting 120 days from the Effective Date, if the Common Stock trades at a price
equal to or in excess of 200% of the Maximum Price for 20 consecutive trading
days,
47
the Company may elect to force conversion of up to all of the remaining
Convertible Preferred Stock outstanding.
Series B Convertible Preferred Stock
General. Pursuant to the Certificate of Designations of Rights and
Preferences of the Series B Convertible Preferred Stock of CFI Mortgage Inc.
(the "Series B Certificate of Designations"), filed June 30, 1998, the Company
authorized the issuance of 1,000 shares of Series B Convertible Preferred Stock
(the "Series B Convertible Preferred Stock"). The holders of Series B
Convertible Preferred Stock are entitled to the rights, preferences and
privileges set forth below (which do not purport to be complete and are
qualified in their entirety by reference to the Series B Certificate of
Designations).
Dividends. Holders of Convertible Preferred Stock are entitled to receive,
in preference to the holders of Common Stock, a 6% cumulative annual dividend
payment per share of Series B Convertible Preferred Stock. Dividends are payable
only upon conversion of the shares and are payable in cash or shares of Common
Stock, at the option of the Company. Dividends on the Series B Convertible
Preferred Stock will be cumulative from the date of original issuance.
Voting Rights. The holders of Series B Convertible Preferred Stock have the
right to vote on all matters on which the holders of Common Stock have the right
to vote, and each holder of shares of Series B Convertible Preferred Stock shall
have the right to cast one vote for each whole share of Common Stock which would
be issued to such holder upon conversion of such holder's shares of Series B
Convertible Preferred Stock assuming that such conversion were to occur on the
date immediately prior to the record date for the determination of stockholders
entitled to vote. The holders of Series B Convertible Preferred Stock shall vote
together as one class with the holders of Common Stock, except as otherwise
required by Delaware law. The Company shall not amend, alter or repeal any of
the provisions of its Certificate of Incorporation or Bylaws so as to affect
adversely the powers, preferences, qualifications, limitations or rights of the
holders of the Convertible Preferred Stock without the consent of the holders of
a majority of the Series B Convertible Preferred Stock.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Series B
Convertible Preferred Stock are entitled to receive out of the assets of the
Company available for distribution to stockholders, before any distribution is
made on any other stock of the Company junior to the Series B Preferred Stock,
$1,000 per share in cash, plus accumulated and unpaid dividends, which dividends
shall be payable on a pro rata basis among holders of Series B Preferred Stock
in cash. If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the amounts payable with respect to the Series B
Convertible Preferred Stock (and any series of preferred stock ranking in parity
with the Series B Convertible Preferred Stock in respect of distributions upon
liquidation, dissolution or winding-up of the Company) are not paid in full, the
holders of the Series B Convertible Preferred Stock will share ratably in any
distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of Series B Convertible Preferred Stock will not be entitled to further
participation in any distribution of assets by the Company.
Conversion. The Series B Convertible Preferred Stock is convertible into
shares of Common Stock at the election of the holder. The Conversion Price per
share will be equal to the higher of (i)(x) average
48
closing bid price of the Common Stock as calculated over the five trading-day
period (the "Average Price") ending on the day prior to the date of conversion
times (y) 85%, or (ii) $5.00 (the "Minimum Price"), subject to adjustment. Each
share of Series B Convertible Preferred Stock will be convertible into the
number of shares of Common Stock determined by dividing the Purchase Price by
the Conversion Price in effect on the date the Conversion Notice is received by
the Company. No fractional shares will be issued, and in lieu of any fractional
share, an adjustment in cash will be made based on the market price of the
Common Stock on the last trading day prior to the date of conversion.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including: the issuance of capital stock of the Company as a
dividend or distribution on any shares of Common Stock; subdivisions,
combinations and reclassifications or recapitalizations of the Common Stock; the
issuance by the Company (to all holders of Common Stock or otherwise) of Common
Stock, and the combination of the Company's shares of Common Stock into a larger
number of shares.
Automatic Conversion. The Convertible Preferred Stock is subject to
automatic conversion on June 30, 2001, if not sooner converted, at the
discretion of the Company.
Redemption. The Company may redeem the Series B Convertible Preferred
Stock, in whole or in part, at any time at its sole discretion. The redemption
price per share shall be the greater of $1,350 plus any accrued but unpaid
dividends, or the Average Price of the Common Stock into which such share of
Series B Convertible Preferred Stock could be converted on the date of the
Company giving notice of redemption, plus any accrued but unpaid dividends. The
holder has 30 days from the date of notice of redemption to elect to convert
such shares prior to redemption.
Warrants
The holders of the Warrants do not have any of the rights or privileges of
stockholders of the Company, including voting rights and rights to receive
dividends, prior to exercise of the Warrants. The Company has reserved out of
its authorized but unissued shares a sufficient number of shares of Common Stock
for issuance on exercise of the Warrants. The Common Stock issuable on exercise
of the Warrants will be, when issued, duly authorized, validly issued, fully
paid and nonassessable.
The Company is required to file a new registration statement or a
post-effective amendment to the Registration Statement of which this Prospectus
is a part with the SEC with respect to the securities underlying the Warrants
prior to the exercise of the Warrants and to deliver a prospectus with respect
to such securities to all warrantholders.
IPO Warrants
As part of the consideration to Strasbourger, Pearson, Tulcin, Wolff, Inc.
(the "Underwriter") for its underwriting services rendered in connection with
the Company's Initial Public Offering, the Company granted to the Underwriter
IPO Warrants to purchase up to 100,000 shares of Common Stock at any time after
May 27, 1998 until May 27, 2002 at an exercise price of $6.00 per share, subject
to certain adjustments. The IPO Warrants contain antidilution provisions in the
event of any recapitalization, split-ups of shares, discounted transactions or
certain stock dividends, as well as certain registration rights. The IPO
Warrants can not be transferred, sold, assigned or hypothecated, in part or in
whole (other than by will or
49
pursuant to the laws of descent and distribution) except to officers of the
Underwriter. The Company has agreed that, upon request of the then holder(s) of
a majority of the IPO Warrants and the underlying securities, if issued, which
were originally issued to the Underwriter or its designees, made at any time
within the period commencing one year and ending five years after the effective
date of the Public Offering (May 27, 1997) the Company will file at its sole
expense (other than seller's commissions and expenses of seller's counsel or
others hired by seller), no more than once, a registration statement under the
Securities Act registering or qualifying the shares underlying the IPO Warrants
for public sale. The Company has also agreed, with certain limitations, that if,
at any time within the period commencing one year and ending five years after
the Closing Date, it should file a registration statement with the Commission
pursuant to the Securities Act, the Company, at its own expense (other than
seller's commissions and seller's counsel and others hired by seller), will
offer to said holder(s) the opportunity to register or qualify the shares
underlying the IPO Warrants. The registration statement of which this Prospectus
is a part satisfies these registration rights.
Additional Warrants
In connection with the issuance and sale of the Convertible Preferred
Stock, the Company granted to certain affiliates of the Underwriter certain
warrants (the "Additional Warrants") to purchase up to 240,000 shares of Common
Stock at any time from September 17, 1998 until September 17, 2001 at an
exercise price of $6.50 per share, subject to certain adjustments. The
Additional Warrants are otherwise identical to the IPO Warrants except that they
contain provisions for a "cashless exercise."
Options
As of the date of this Prospectus, 80,000 options are outstanding under the
Stock Option Plan. The Compensation Committee has amended the Stock Option Plan
to increase the number of options which may be granted thereunder from 80,000 to
450,000 shares of Common Stock, subject to stockholder approval and tentatively
granted an additional 283,250 options under the expanded Plan, again, subject to
stockholder approval. Upon consummation of the Public Offering, the Company
granted options to purchase up to 40,000 shares of Common Stock, at exercise
prices equal to the initial public offering price, pursuant to the provisions of
the Company's Stock Option Plan. See "Management--Stock Option Plan." The
Company has filed a registration statement on Form S-8 under the Securities Act
to register these shares.
Voting Rights
Stockholders are entitled to one vote for each share of Common Stock held
of record.
Certain Charter, Bylaw and Statutory Provisions
The Company's Certificate of Incorporation contains certain provisions that
could discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. Effective as of the next meeting for the
election of directors, the Certificate of Incorporation provides for a
classified Board of Directors consisting of two classes as nearly equal in size
as practicable. Each class will hold office until the second annual meeting for
election of directors following the election of such class; provided, however,
that the initial terms of the directors in the first and second classes of the
Board of Directors will expire in 1998 and 1999, respectively. The Company's
Certificate of Incorporation provides
50
that no director may be removed except for cause and by the vote of not less
than 70% of the total outstanding voting power of the securities of the Company
which are then entitled to vote in the election of directors. The Certificate of
Incorporation permits the Board of Directors to create new directorships and the
Company's Bylaws permit the Board of Directors to elect new directors to serve
the full term of the class of directors in which the new directorship was
created. The Bylaws also provide that the Board of Directors (or its remaining
members, even if less than a quorum) is empowered to fill vacancies on the Board
of Directors occurring for any reason for the remainder of the term of the class
of directors in which the vacancy occurred. A vote of not less than 70% of the
total outstanding voting power of the securities of the Company which are then
entitled to vote in the election of directors is required to amend the foregoing
provisions of the Certificate of Incorporation.
The Certificate of Incorporation prohibits any action required to be taken
or which may be taken at any annual or special meeting of stockholders of the
Company to be taken, without a meeting, denying the power of stockholders of the
Company to consent in writing, without a meeting, to the taking of any action.
This provision may discourage another person or entity from making a tender
offer for the Company's Common Stock because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders meeting, and not by
written consent.
Certain provisions in the Certificate of Incorporation, the Bylaws and the
DGCL could have the effect of delaying, deferring or preventing changes in
control of the Company.
Certain Provisions of Delaware Law
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of the Company's outstanding voting
stock) from engaging in a "business combination" (as defined in Section 203)
with the Company for three years following the date that person became an
interested stockholder unless: (i) before that person became an interested
stockholder, the Board approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon completion of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the Company outstanding at
the time the transaction commenced (excluding stock held by directors who are
also officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) on or
following the date on which that person became an interested stockholder, the
business combination is approved by the Company's Board and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least 66
2/3% of the outstanding voting stock of the Company not owned by the interested
stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three
51
years or who were recommended for election or elected to succeed such directors
by a majority of such directors then in office.
Indemnification of Directors and Officers
Article NINTH of the Company's Certificate of Incorporation provides that,
to the full extent permitted by the DGCL, directors shall not be personally
liable to the Company or its stockholders for damages for breach of any duty
owed to the Company or its stockholders.
The Certificate of Incorporation and Bylaws of the Company provide that the
Company shall, to the fullest extent permitted by applicable law, as amended
from time to time, indemnify all directors of the Company, as well as any
officers or employees of the Company to whom the Company has agreed to grant
indemnification.
The Company will apply for directors' and officers' liability insurance
which is intended to provide the Company's Directors and officers protection
from personal liability in addition to the protection provided by the Company's
Certificate of Incorporation and Bylaws as described above.
Transfer Agent
The transfer agent for the Common Stock is Continental Stock Transfer and
Trust Company, 2 Broadway, New York, New York 10004.
52
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of the
Shares offered hereby. The Selling Stockholders may sell all or a portion of the
shares of Common Stock which may be issued to them from time to time while the
registration statement of which this Prospectus is a part remains effective. To
the extent required, the number of Shares to be sold, the names of the Selling
Stockholders, the purchase price, the name of any agent or dealer and any
applicable commissions with respect to a particular offer will be set forth in
an accompanying supplement to this Prospectus. The aggregate proceeds to the
Selling Stockholders from the sale of Common Stock offered hereby will be the
prices at which such securities are sold, less any commissions. There can be no
assurance that the Selling Stockholders will convert any of their Convertible
Preferred Stock or exercise any of their Warrants nor sell any of the shares of
Common Stock issuable upon their conversion or exercise, respectively.
The Shares may be sold by the Selling Stockholders in transactions on the
over-the-counter market, in negotiated transactions, or by a combination of
these methods, at fixed prices that may be changed, at market prices prevailing
at the time of sale, at prices related to such market prices or at negotiated
prices. A Selling Stockholder may elect to engage a broker or dealer to effect
sales in one or more of the following transactions: (a) block trades in which
the broker or dealer so engaged will attempt to sell the converted shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction, (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus, and
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers. In effecting sales, brokers and dealers engaged by Selling
Stockholders may arrange for other brokers or dealers to participate. Brokers or
dealers may receive commissions or discounts from Selling Stockholders in
amounts to be negotiated (and, if such broker-dealer acts as agent for the
purchaser of such shares, from such purchaser). Broker-dealers may agree with
the Selling Stockholders to sell a specified number of such shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for a Selling Stockholder, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment to
such Selling Stockholder. Broker-dealers who acquire shares as principal may
thereafter resell such shares from time to time in transactions (which may
involve crosses and block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such shares commissions as described above. The
Selling Stockholders may also pledge such shares to banks, brokers or other
financial institutions as security for margin loans or other financial
accommodations that may be extended to such Selling Stockholders, and any such
bank, broker or other institution may similarly offer, sell and effect
transactions in such shares.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of shares of Common Stock may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares of Common Stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
53
Under the securities laws of certain states, the Common Stock may be sold
in such states only through registered or licensed brokers or dealers. In
addition, in certain states the shares of Common Stock may not be sold unless
such shares have been registered or qualify for sale in such state or an
exemption from registration or qualification is available and is complied with.
The Company has agreed to indemnify the Selling Stockholders against certain
liabilities under the Securities Act.
The Company shall use its best efforts to maintain the effectiveness of the
Registration Statement for a period of thirty months through the preparation and
filing with the SEC of such amendments and post-effective amendments to the
Registration Statement, and such supplements to this Prospectus, as may be
required by the rules, regulations or instructions applicable to the use of Form
SB-2 by the Securities Act or rules and regulations thereunder or otherwise
necessary to keep the Registration Statement effective and will cause the
Prospectus as so supplemented to be filed pursuant to Rule 424 under the
Securities Act.
The Company will pay all expenses incident to the offering and sale of the
Common Stock to the public other than underwriting discounts and selling
commissions.
54
SELLING STOCKHOLDERS
The Shares covered by this Prospectus are those issuable upon (i) exercise
of IPO Warrants and (ii) conversion of the Convertible Preferred Stock. The
shares are offered by the Selling Stockholders identified in the table below. It
is unknown if, when, or in what amounts a Selling Stockholder may offer the
Shares for sale. There is no assurance that the Selling Stockholders will sell
any or all of the Shares offered hereby.
Because the Selling Stockholders may offer all or some of the shares
pursuant to the offering, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares
that will be held by the Selling Stockholders after completion of the offering,
no estimate can be given as to the amount of the shares that will be held by the
Selling Stockholders after completion of the offering.
The following table sets forth certain information regarding beneficial
ownership of Warrants, Convertible Preferred Stock and Common Stock of each
Selling Stockholder as of May 20, 1998 and as adjusted to give effect to the
sale of the Shares offered hereby.
Beneficial Ownership Before Offering Beneficial Ownership After
------------------------------------ --------------------------
Offering
Number of Shares Number of --------
of Convertible Number of Shares to Number of Shares
Number of Preferred Stock Shares be Offered of Common Stock
--------- --------------- ------ ---------- ---------------
Warrants of Common Stock
-------- ---------------
Baldock Ventures Limited..... -- 1,500(3) 105,467 336,236(1)(2) -- --
Settondown Capital Ltd. ..... -- 60(3) -- 9,230(1)(2) -- --
Baldock Ventures Limited -- 1,000(4) 200,000(1) -- --
Allan M. Levine.............. 100,000 -- -- 100,000 -- --
Michael J. Schumacher........ 100,000 -- -- 100,000 -- --
LEXUS Partners Limited 100,000 -- -- 100,000 -- --
Larry Kaplan 40,000 -- -- 40,000 -- --
- ----------
(1) Both the Series A and Series B Convertible Preferred Stock are convertible
into shares of Common Stock. The Conversion Price is subject to adjustment,
and the number of shares of Common Stock beneficially owned and being
offered by each Selling Stockholder will vary accordingly to reflect
changes in the market price of the Common Stock, stock dividends, stock
splits and certain other circumstances. See "Description of Capital
Stock--Series A Convertible Preferred Stock--Conversion and--Series B
Convertible Preferred Stock--Conversion." All of such shares are registered
for resale pursuant to this Prospectus under Securities and Exchange
Commission Rule 416.
(2) Based upon the Maximum Conversion Price of $6.50. See "Description of
Capital Stock--Series A Convertible Preferred Stock--Conversion."
(3) Series A Preferred Stock.
(4) Series B Preferred Stock. Number of shares to be offered is based on the
Minimum Conversion Price of $5.00 per share.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby, will be
passed upon for the Company by Epstein Becker & Green, P.C., New York, New York.
55
EXPERTS
The financial statements of CFI Mortgage Corporation as of and for the year
ended December 31, 1997, included in this Prospectus and in the related
Registration Statement, have been audited by Grant Thornton LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing. The financial statements of CFI Mortgage Corporation as of and for
the year ended December 31, 1996, included in this Prospectus and in the related
Registration Statement, have been audited by Weinick Sanders Leventhal & Co. LLP
(successor to the practice of Martin Leventhal & Company LLP, independent
certified public accountants), independent public accountants, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements: December 31, 1997 and 1996
Consolidated Balance Sheet as of December 31, 1997 F-4
Consolidated Statements of Operations for the
Year Ended December 31, 1997 F-6
Consolidated Statement of Changes in
Stockholders' Equity for the Year Ended
December 31, 1997 F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F-8
Notes to Consolidated Financial Statements F-9
Consolidated Financial Statements: March 31, 1998 (unaudited) F-18
Consolidated Balance Sheet as of March 31, 1998 F-19
Unaudited Consolidated Statements of Operations for the
Three Month Periods ended March 31, 1998 and 1997 F-21
Unaudited Statement of Changes in Stockholders' Equity for
the Three Months Ended March 31, 1998 F-22
Unaudited Statements of Cash Flows for the Three Month
Period Ended March 31, 1998 and 1997 F-23
Notes to the Unaudited Consolidated Financial Statements F-24
57
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
CFI Mortgage Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of CFI Mortgage Inc.
and Subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of CFI
Mortgage Inc. and Subsidiaries for the year ended December 31, 1996 were audited
by other auditors whose report dated February 7, 1997, except for Note 1a and
12, as to which the date is March 18, 1997, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CFI Mortgage
Inc. and Subsidiaries as of December 31, 1997 and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
March 20, 1998, except for Note 9, as to
which the date is April 7, 1998
58
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of CFI Mortgage Inc. and Subsidiaries
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of CFI Mortgage Corporation for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of operations, stockholders' equity and
cash flows are free from material misstatement. An audit includes examining on a
test basis, evidencing supporting the amounts and disclosures in the statements
of operations, stockholders' equity and cash flows. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the results of
operations and cash flows. We believe that our audit of the statements of
operations, stockholders' equity and cash flows provides a reasonable basis for
our opinion.
In our opinion, the statements of operations, stockholders' equity and cash
flows referred to above present fairly, in all material respects, the results of
operations and cash flows of CFI Mortgage Corporation for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
WEINICK SANDERS LEVENTHAL & CO., LLP (Successor to the Practice of Martin
Leventhal & Company LLP)
New York, New York
February 7, 1997, except for portions of notes 1a and 12 as to which the date is
March 18, 1997
59
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 1) $1,705,216
Interest receivable (Note 2) 621,751
Mortgage loans held for sale (net of allowance of
$450,000) (Notes 1, 3 and 9) 36,046,571
Miscellaneous receivables 155,843
Prepaid expenses 274,211
Due from related parties (Note 6) 105,564
Other current assets 568,666
-----------
Total current assets 39,477,822
PROPERTY AND EQUIPMENT (Notes 1 and 7)
Furniture and equipment 1,352,212
Automobile 99,047
1,451,259
Less accumulated depreciation and amortization 272,137
1,179,122
OTHER ASSETS
Property held for sale (Note 4) 207,500
Deposits 167,229
Deferred tax asset (Notes 1 and 11) 558,000
-----------
932,729
$41,589,673
===========
The accompanying notes are an integral part of this statement.
60
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET (continued)
December 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Warehouse finance facilities (Notes 3 and 9) $35,463,034
Cash overdraft 264,409
Current maturities of long-term debt (Notes 3 and 7) 366,495
Accounts payable, accrued expenses and other
current liabilities (Note 8) 3,477,063
------------
Total current liabilities 39,571,001
LONG-TERM LIABILITIES
Long-term debt, less current maturities (Notes 3 and 7) 554,745
------------
40,125,746
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 1 and 12)
Common Stock, $.01 par value; authorized,
20,000,000; issued and outstanding,
2,200,000 shares 22,000
Preferred Stock, $.01 par value; authorized,
10,000,000; issued and outstanding
2,060 shares, voting, liquidation preference $1,000 per share 21
Additional paid-in capital 6,992,430
Retained earnings (deficit) (5,550,524)
------------
1,463,927
$41,589,673
The accompanying notes are an integral part of this statement.
61
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1996
1997 1996
---------- ---------
Revenues
Commissions and fees $6,715,241 $7,566,764
Interest 1,552,023 290,904
----------- ----------
8,267,264 7,857,668
----------- ----------
Expenses
Selling 5,213,625 3,276,575
General and administrative 7,818,532 3,569,708
Interest 1,185,608 549,648
Write-down of land and investment to fair
market value (Notes 1, 4 and 5) 150,511
----------- ----------
14,217,765 7,546,442
----------- ----------
Net (loss) income before income tax credit (5,950,501) 311,226
Deferred income tax credit 558,000
NET (LOSS) INCOME $(5,392,501) $311,226
=========== ==========
Per share data, net loss per common share $(3.11)
=======
Pro forma information (unaudited) (Note 10)
Pro forma net income (unaudited)
Historical net income $311,226
Pro forma provision for income taxes 109,989
----------
Pro forma net income $201,237
==========
Pro forma per share data (unaudited)
Pro forma net income per share $.17
==========
Weighted average shares outstanding 1,783,250 1,200,000
=========== ==========
The accompanying notes are an integral part of these statements.
62
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997
Additional
Common stock Preferred stock paid-in
Shares Amount Shares Amount capital
-------- ------ -------- ------ -----------
Balance at January 1, 1996
Net income for the year ended December 31, 1996 7,500 $ 7,500 $1,234,673
--------- ------- ----------
Balance at December 31, 1996 7,500 7,500 1,234,673
Distribution of investment in 430 Carroll
Street, Inc. to stockholders at March 26,
1997 (Note 5)
Exchange of shares of CFI Mortgage Corp.
for shares of CFI Mortgage Inc. 1,192,500 4,500 (4,500)
Issuance of common stock on May 27,
1997 as a result of a public offering less
expenses of the offering of $1,199,475 1,000,000 10,000 3,790,525
Issuance of preferred stock on December 3,
1997 as a result of a private placement
less expenses of the offering of $178,247 2,060 $21 1,821,732
Accretion of preferred stock discount 150,000
Net loss for the year ended December 31, 1997
--------- ------- ----- --- ----------
Balance at December 31, 1997 2,200,000 $22,000 2,060 $21 $6,992,430
========= ======= ===== === ==========
Retained
earnings
(deficit) Total
---------- ----------
Balance at January 1, 1996 $ (144,025) $1,098,148
Net income for the year ended December 31, 1996 311,226 311,226
----------- -----------
Balance at December 31, 1996 167,201 1,409,374
Distribution of investment in 430 Carroll
Street, Inc. to stockholders at March 26,
1997 (Note 5) (175,224) (175,224)
Exchange of shares of CFI Mortgage Corp.
for shares of CFI Mortgage Inc.
Issuance of common stock on May 27,
1997 as a result of a public offering less
expenses of the offering of $1,199,475 3,800,525
Issuance of preferred stock on December 3,
1997 as a result of a private placement
less expenses of the offering of $178,247 1,821,753
Accretion of preferred stock discount (150,000)
Net loss for the year ended December 31, 1997 (5,392,501) (5,392,501)
----------- ----------
Balance at December 31, 1997 $(5,550,524) $1,463,927
=========== ==========
The accompanying notes are an integral part of this statement.
63
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
1997 1996
---------- --------
Cash flows from operating activities
Net (loss) income $(5,392,501) $311,226
------------ ------------
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities
Depreciation and amortization 181,681 34,444
Provision for doubtful accounts 432,000 72,957
Provision for deferred tax credit (558,000)
Write-down of land and investment to fair market value 150,511
(Increase) decrease in assets and liabilities
Interest receivable (621,751)
Mortgage loans held for sale (36,478,571)
Other current assets 313,921 (341,969)
Miscellaneous receivables (54,375) (103,638)
Prepaid expenses (222,918) 16,486
Deposits (118,980) (10,155)
Accounts payable, accrued expenses and other current liabilities 3,021,061 (10,335)
------------ ------------
(34,105,932) (191,699)
------------ ------------
Net cash (used in) provided by operating activities (39,498,433) 119,527
------------ ------------
Cash flows from investing activities
Expenditures for property and equipment (594,893) (121,693)
Payments for related party receivable (92,615)
------------
Net cash used in investing activities (687,508) (121,693)
------------ ------------
Cash flows from financing activities
Warehouse borrowings 35,463,034
Proceeds from issuance of common stock 3,920,525
Proceeds from issuance of preferred stock 1,821,753
Cash overdraft (121,449) 385,858
Proceeds from long-term debt 377,839 179,584
Payments for long-term debt (215,230)
Decrease in due to officers (361,918)
Payments for deferred offering costs (120,000)
------------ ------------
Net cash provided by financing activities 41,246,472 83,524
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,060,531 81,358
Cash and cash equivalents at beginning of year 644,685 563,327
------------ ------------
Cash and cash equivalents at end of year $1,705,216 $644,685
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for
Income taxes $ - 0 - $ - 0 -
============ ============
Interest $ 1,555,502 $ 910,975
============ ============
Supplemental schedules of non-cash investing and financing activities:
Dividend paid by transfer of investment in 430 Carroll Street, Inc. $ 175,224
============
Capital asset and lease obligation additions $ 579,047
============
The accompanying notes are an integral part of these statements
64
CFI Mortgage Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Creative Industries, Inc. was incorporated in the State of Florida in
April 1989, and operates as a licensed mortgage lender. In October
1990, the Corporation's name was changed to Creative Financing, Inc.
and on May 24, 1995 the Corporation's name was changed to CFI
Mortgage, Corporation ("CFI Mortgage"). CFI Mortgage Inc. ("CFI") was
incorporated in Delaware on March 18, 1997. Immediately prior to the
initial public offering (see Note 12), the existing stockholders of
CFI Mortgage contributed all of their shares of CFI Mortgage common
stock to CFI in exchange for 1,200,000 shares of common stock of CFI.
Through its two wholly-owned subsidiaries, Bankers Direct Mortgage
Corporation ("BDMC") and Direct Mortgage Partners Inc. ("DMP"), CFI is
engaged in originating, purchasing and selling loans secured primarily
by first mortgages on one- to four-residential properties and
purchasing and selling servicing rights associated with such loans.
The loans are both conventional conforming loans (originated and sold
through BDMC) and nonconforming loans (originated and sold through
DMP). Significant intercompany accounts and transactions have been
eliminated in consolidation.
b. Geographic Concentration
BDMC is approved by the U.S. Department of Housing and Urban
Development/Federal Housing Administration ("FHA") as a nonsupervised
mortgagee. Both BDMC and DMP are licensed and registered in
approximately 19 states, primarily in the southern United States, as
mortgage lenders with approximately 16 branch offices. Approximately
91%, or $234,747,000, of loans were originated and/or sold in the
State of Florida. Consequently, CFI's results of operations and
financial condition are affected by general trends in the Florida
economy and its residential real estate market.
c. Revenue Recognition
Mortgage Loans Held for Sale
Mortgage loans held for sale in the course of business are stated at
the lower of cost or market which approximates fair value (see Note
3). Management has established a reserve allowance of $450,000 at
December 31, 1997 for potential losses on a loan-by-loan basis.
Gain on Sale
The gain or loss on sales of mortgage loans to investors is recognized
upon purchase of the loan by the investor. In June 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and
65
Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 125"), which was effective for transactions occurring after
December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and
Extinguishments of liabilities. This statement also provides standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No. 125 on
January 1, 1997, did not have a material effect on the Company's
financial statements.
Origination Fees
CFI accounts for origination fee income on mortgages held for sale in
conformity with Statement of Financial Accounting Standards No. 91.
This statement requires that origination fees be offset by their
direct loan costs and the net deferred income be recognized over the
life of the loan.
d. Cash and Cash Equivalents
Cash and cash equivalents include time deposits and highly liquid
investments with original maturities of three months or less.
CFI invests its cash in high-quality financial institutions, which at
times may be in excess of Federal Deposit Insurance Corporation
insurance limits. CFI has not incurred any losses in such accounts and
believes it is not exposed to any significant credit risk on cash.
e. Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. CFI's policy is to provide for
depreciation and amortization over their estimated useful lives
ranging between three to seven years as a charge to operations at
accelerated rates. Expenditures for maintenance, repairs and minor
renewals are charged to operations; expenditures for betterments are
charged to the property accounts. Upon retirement or other disposition
of property and equipment, the carrying value and related accumulated
depreciation and amortization are removed from the accounts.
f. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions in determining the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
g. Income Taxes
The Company complies with Statement of Financial Accounting Standards
No. 109 ("SFAS 109"), "Accounting for Income Taxes," which requires an
asset and liability approach to financial accounting and reporting for
income taxes. Deferred income tax assets and liabilities are computed
for differences between financial statement and tax basis of assets
and liabilities that will result in future taxable or deductible
amounts, based on the enacted tax laws and rates to the periods in
which the differences are expected to affect taxable
66
income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount to be realized.
h. Earnings (Loss) Per Common Share
Earnings (loss) per common share are based on the weighted average
number of common shares outstanding. In March 1997, the Financial
Accounting Standards Board issued Statement No. 128 ("SFAS 128"),
"Earnings Per Share," which requires dual presentation of basic and
diluted earnings per share on the face of the statements of
operations. Basic earnings (loss) per share excludes dilution and is
computed by dividing income available to common stockholders less
$150,000 for discount accretion (see Note 12) by the weighted-average
common shares outstanding for the period. Diluted earnings (loss) per
share reflect the potential dilution that could occur if preferred
stock contracts, options and warrants were to be exercised or
converted or otherwise resulted in the issuance of common stock that
then shared in the earnings of the entity. The Company adopted SFAS
128 for the year ended December 31, 1997.
Since the effect of outstanding options, warrant and preferred stock
conversions is antidilutive, it has been excluded from the computation
of earnings (loss) per common share.
i. Reclassification
Certain revenues and expenses for 1996 have been reclassified to conform to
the 1997 presentation.
NOTE 2 - INTEREST RECEIVABLE
Interest earned on mortgages held for sale from origination to date of sale
is recognized as earned. Interest receivable of $621,751 at December 31,
1997 represents interest earned on mortgages held for sale.
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of December 31, 1997 is made by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimated fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or methodologies may have a material effect on the
estimated fair value amounts. The amounts listed below as of December 31,
1997 are in thousands.
Carrying Estimated
amount fair value
-------- ----------
Assets
Mortgage loans held for sale $36,047 $37,998
Liabilities
Warehouse finance facilities $35,463 $35,463
Long-term debt $ 921 $ 921
67
The fair value estimates as of December 31, 1997 are based on pertinent
information available to management as of December 31, 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from
the amounts presented herein. The following describes the methods and
assumptions used by the Company in estimating fair values.
Mortgage loans held for sale - Fair value is estimated using the quoted
market prices from investors and commitments to purchase loans on a
non-servicing basis.
Warehouse finance facilities and long term-debt - Rates currently available
to the Company for debt with similar terms and remaining maturities are
used to estimate the fair value of existing debt.
NOTE 4 - PROPERTY HELD FOR SALE
CFI acquired a parcel of land in Florida which it intended to develop. As
the cost of the land exceeded its fair value of $207,500 by $45,735, the
statement of operations for 1996 reflects a charge of $45,735 to reflect
the asset's fair value at December 31, 1996.
NOTE 5 - INVESTMENT IN 430 CARROLL STREET, INC.
In 1992, CFI Mortgage issued 5,000 shares of its common stock in exchange
for 40% of the capital stock of 430 Carroll Street, Inc., a land holding
corporation which was owned by the CEO of CFI Mortgage. The basis of the
40% interest is $280,000. In December 1996, management determined to divest
itself of this investment. In February 1997, an appraisal of the
corporation's land revealed that CFI's investment had been impaired and the
investment's fair market value was $175,224. The accompanying financial
statements reflect a charge to operations of $104,776 in 1996 to record the
investment at its appraised fair market value at December 31, 1996.
On February 1, 1997, the Board of Directors approved a dividend of CFI's
undistributed Subchapter S earnings in the amount of $175,224, which was
paid through the transfer of title of this 40% stock interest to certain
stockholders.
NOTE 6 - RELATED PARTY TRANSACTIONS
In February 1996, the Company acquired a 49% interest for $5,000 in a
corporation which performed title searches for the Company. An officer of
the Company effectively owns 25% of this affiliate. The Company paid fees
of $20,000 in 1996 to this entity. The Company's $5,000 investment was
charged to operations in 1996. Such fees were regulated by the State of
Florida Office of Insurance Commission. Another officer of the Company
acquired a 49% interest in a corporation in 1996 which performed $82,500 of
appraisal services for the Company in 1996. In January 1997, both of these
entities ceased operations.
The Company has made advances to three officers aggregating approximately
$83,000 as of December 31, 1997. The advances are non-interest-bearing and
are due on demand and included in due from related parties.
NOTE 7 - LONG-TERM DEBT
In 1997, CFI acquired certain property and equipment assets partially
financed through various bank notes. The notes are collateralized by the
equipment purchased. The Company also leases
68
certain office equipment under various capital leases. The economic
substance of the leases is that the Company is financing the acquisition of
the assets through the leases. At December 31, 1997, the balances payable
under the notes and leases are as follows:
Bank notes payable in equal monthly installments
of $4,310; interest rates ranging from 6.875% to 11%. $175,526
Various capitalized lease obligations 545,714
-------
721,240
Less portion payable in one year 166,495
-------
Long-term debt payable $554,745
========
Annual maturities of long-term debt are as follows:
1998 $166,495
1999 184,201
2000 164,901
2001 81,631
2002 83,088
Thereafter 40,924
--------
$721,240
========
In addition, included in current maturities of long-term debt is a bank
note payable of $200,000 bearing interest at the bank's prime rate plus 1%
and is due on demand. The note is collateralized by certain mortgages held
for sale, aggregating $252,000.
NOTE 8 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities at
December 31, 1997 are comprised of the following:
Accrued expenses $ 803,531
Accounts payable 572,645
Accrued interest 800,190
Accrued commissions and payroll 708,375
Other 592,322
----------
$3,477,063
==========
NOTE 9 - COMMITMENTS, CONTINGENCIES AND REVENUE FROM MAJOR CUSTOMER
a. Warehouse Lines of Credit
CFI has warehouse lines of credit from two financial institutions
aggregating $100,000,000 which were entered into in June and November
1997 and expire one year from their inception. The warehouse lines of
credit are used for short-term financing of mortgages held for sale
and are collateralized by the underlying mortgages held for sale. At
December 31, 1997, CFI had outstanding borrowings of $9,428,971 and
$26,034,063 under these agreements. Interest on the outstanding
borrowings is based upon the Federal funds rate and LIBOR rate,
respectively, plus .5 % to 3 %, (approximately 7.5 % at December 31,
1997) and interest expense was $565,798 and $171,426, respectively,
pursuant to these agreements for the year ended December 31, 1997. CFI
has violated
69
certain covenants in these agreements including net equity, cash flows
and certain ratios. CFI has obtained waivers for these violations from
the two financial institutions through April 30, 1998.
The financial institutions expect to renew these lines under terms
which the Company can reasonably meet over the next year. In addition,
the Company has in place available unused financing sources which
management believes are adequate to operate the business at current
levels of operations for the next year.
b. Mortgage Purchase Agreements and Revolving Purchase Facilities
In its normal course of business, CFI has entered into various
mortgage purchase agreements and two revolving purchase agreements
with various banks and investors. Under these mortgage purchase
agreements, the banks and investors purchase mortgages held for sale
from CFI without recourse.
Under the revolving repurchase agreements, CFI sells mortgage loans,
subject to certain warranties as defined, to two financial
institutions that have a takeout commitment from an investor. The
mortgage loans that CFI has sold to these financial institutions which
have yet to be closed with the investor by December 31, 1997 were
$14,407,489 and $4,463,625, respectively, at December 31, 1997. In
addition, CFI earns an additional 150 basis points when the loans
close with the investor. This broker fee is recorded as revenue upon
closing with the investor.
Included in commissions and fees revenue is approximately $2,239,000
(27% total revenue) earned from one of the financial institutions with
a revolving purchase agreement with the Company.
c. Leases
CFI leases its corporate headquarters, loan office facilities and
certain office equipment under various operating leases. The office
leases generally require CFI to pay certain escalation costs for real
estate taxes, operating expenses, usage and common area charges. Rent
expense for real property leases charged to operations in 1997 and
1996 was $651,374 and $403,786, respectively, and $220,032 and
$162,894, respectively, for equipment leases.
Minimum future rental payments under noncancellable operating leases
having remaining terms in excess of one year as of December 31, 1997
are as follows:
Capitalized
Operating lease
leases obligations
------ -----------
Years ending December 31,
1998 $1,331,201 $221,642
1999 1,094,477 221,642
2000 894,263 183,612
2001 287,283 77,441
2002 48,808 42,949
---------- --------
Total minimum future payments $3,656,032 747,286
==========
Less amount representing interest 201,572
--------
$545,714
========
70
d. Legal Proceedings
The Company is a party to various legal proceedings arising in the
ordinary course of its business. Management believes that none of
these actions, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial condition of
the Company.
e. Employment Contracts
The Company has entered into several employment contracts with certain
officers and employees which expire between 1998 and 2002.
NOTE 10 - SUPPLEMENTAL PRO FORMA INFORMATION (UNAUDITED)
CFI Mortgage and its stockholders had elected S Corporation status for
Federal income tax reporting purposes. Under this election, the individual
stockholders reported all of the corporation's income and expenses on their
personal income tax returns and were liable for all taxes thereon for the
year ended December 31, 1996. Simultaneously with the exchange, CFI
terminated its S Corporation status. The following gives pro forma effect
to CFI's statements of operations for 1996 as if CFI and its stockholders
had not elected S Corporation status for the year ended December 31, 1996.
Historical net income, as reported $311,226
Provision for income taxes 109,989
--------
Pro forma net income $201,237
========
The provision for income taxes is comprised of
Current payable $167,283
Deferred (57,294)
--------
$109,989
========
In 1996, the deferred tax credit arises from the timing differences of the
allowance for doubtful accounts and the write-downs in carrying values of
the investment in 430 Carroll Street, Inc. and property held for sale.
A reconciliation of the statutory income tax to pro forma effective rate at
December 31, 1996 is as follows:
Federal statutory rate 34.0%
Nondeductible items 1.3
----
Effective tax rate 35.3%
====
Pro forma net income per share (unaudited) was computed by using the
weighted average number of shares outstanding during each period
retroactively reflecting the exchange.
NOTE 11 - INCOME TAXES
The Company and all of its subsidiaries file a consolidated Federal income
tax return. Income tax expense is allocated pursuant to the separate tax
return attributes of each subsidiary. The
71
Company's deferred Federal and state income tax asset is comprised of a
benefit of a net operating loss carryforward of approximately $6,000,000
which expires in 2018 and is based on the 37.5% net federal and state
income tax rate currently in effect:
1997
----
Net operating loss carryforward $2,231,000
==========
Valuation allowance $1,673,000
==========
Deferred tax asset $ 558,000
==========
For the year ended December 31, 1997, the Federal statutory tax rate and
the Company's effective rate differ due to the valuation allowance on the
deferred tax asset. Although the Company has incurred a tax loss in 1997,
management believes that it is more likely than not that it will generate
taxable income sufficient to realize a portion of the tax benefit
associated with net operating loss carryforwards prior to their expiration.
If the Company is unable to generate sufficient taxable income in the
future through operating results, increases in the valuation allowance will
be required through a charge to expense. However, if the Company achieves
sufficient profitability to utilize a greater portion of the deferred tax
asset, the valuation allowance will be reduced through a credit to income.
NOTE 12 - STOCKHOLDERS' EQUITY
On May 30, 1997, CFI completed the initial public offering of 1,000,000
shares of its Common Stock at $5 per share. The net proceeds from the
offering, after deducting underwriting discounts and commissions and
offering expenses, aggregated $3,800,525. In connection with the offering,
CFI granted the underwriter warrants to purchase 100,000 shares of Common
Stock at an exercise price of $6 per share. The warrants are exercisable
for a period of four years commencing May 1998.
On December 3, 1997, CFI issued and sold 2,000 shares of 8% Convertible
Preferred Stock, $.01 par value, at $1,000 per share in a private
placement. The net proceeds from the sale, after deducting selling and
other related expenses, aggregated $1,821,753. The Preferred Stock is
convertible for two years into Common Shares at a price equal to 85% of the
five-day average bid prices immediately prior to the conversion date. The
discount on the conversion price is accounted for as a charge against
retained earnings and is amortized over the non-convertible period.
Included in the statement of changes in stockholders' equity for the year
ended December 31, 1997 is a charge of $150,000 pursuant to the conversion
discount. On March 3, 1998, 500 shares of the Preferred Stock, plus accrued
dividends of approximately $10,000 were converted into 105,467 of Common
Shares.
In connection with the preferred stock transaction, the Company granted
warrants to purchase 240,000 shares of common stock at an exercise price of
$8.50 per share. The warrants are exercisable until September 17, 2001. In
addition, the Company issued 60 shares of Preferred Stock with identical
terms as payment for fees for the private placement. The cost is included
in the net proceeds from the transaction and will be amortized over the
non-conversion term.
NOTE 13 - STOCK OPTIONS
The Company adopted a 1997 Stock Option Plan, effective May 27, 1997
whereby the Company may grant incentive and nonqualified options to
eligible participants that vest in accordance with a vesting schedule,
determined in the sole discretion of the Compensation Committee of the
Company's Board of Directors. The 1997 Stock Option Plan provides for the
72
issuance of options with a term of 10 years. All of the options have an
exercise price equal to or greater than the fair market value of the stock
at grant date. The options granted in fiscal 1997 vest 100% at the grant
date or ratably over a period of two years beginning on the first
anniversary of the date of grant. A summary of the Company's 1997 Stock
Option Plan as of December 31, 1997, and changes during the year then ended
are as follows:
Option Option price
shares range
------ -----
Outstanding at beginning of year
Granted 80,000 $5.00 - 9.81
Exercised --
Forfeited --
------ ------------
Outstanding at end of year 80,000 $5.00 - 9.81
====== ============
The number of options exercisable at December 31, 1997 was 70,000. The
weighted-average fair value of options granted during 1997 was $7.39.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for grants in fiscal 1997: a dividend yield of 0%; a risk-free
interest rate range of 6.57% to 6.96%; an expected life of ten years for
all grants; and a volatility range from 66% to 70%.
Options outstanding as of December 31, 1997 are summarized below:
Options outstanding Options exercisable
Weighted --------------------------
average Weighted Weighted
remaining Average average
Ranges of Number contractual Exercise Number exercise
exercise prices outstanding life Price Exercisable price
--------------- ----------- ---- ----- ----------- -----
$5.00 to $ 7.50 40,000 9.41 $5.00 40,000 $5.00
$7.75 to $10.00 40,000 9.42 9.78 30,000 9.81
-------------- ------ ---- ---- ------ ----
$5.00 to $10.00 80,000 9.80 $7.39 70,000 $7.06
============== ====== ==== ==== ====== ====
The Company applies APB Opinion 25 and related interpretations in
accounting for the Plan.
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's pro forma net
income and pro forma net loss per common share for the year ended December
31, 1997 would approximate the amounts below:
As reported Pro forma
----------- ---------
Net loss plus discount accretion of $150,000 $(5,542,501) $(5,961,135)
Net loss per common share $(3.11) $(3.34)
In February 1998, the Board of Directors approved a recommendation from the
Company's Compensation Committee to amend the 1997 Stock Option Plan to
allow for the issuance of up to 450,000 options. In addition, the Company
has granted an additional 283,250 options during 1997 subject to the
approval of the amendment to the 1997 Stock Option Plan by the Company's
stockholders.
NOTE 14 - FOURTH QUARTER ADJUSTMENT (UNAUDITED)
During the fourth quarter of 1997, the Company recorded an adjustment of
$2,400,000 (unaudited) reversing revenues recognized in the third quarter of
1997.
73
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
74
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
March 31, 1998
--------------
CURRENT ASSETS
Cash and cash equivalents $ 757,397
Interest receivable 712,741
Mortgage loans held for sale (net of allowance of $483,892) 37,277,275
Miscellaneous receivables 137,575
Prepaid expenses 261,995
Due from related parties 99,805
Other current assets 696,808
-----------
Total current assets 39,943,596
PROPERTY AND EQUIPMENT
Furniture and equipment 1,586,343
Automobile 99,047
-----------
1,685,390
Less accumulated depreciation and amortization 340,541
-----------
Total property and equipment 1,344,849
-----------
OTHER ASSETS
Property held for sale 207,500
Deposits 160,692
Deferred tax asset 558,000
-----------
Total other assets 926,192
-----------
$42,214,637
===========
The accompanying notes are an integral part of this statement
75
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET (continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 1998
--------------
CURRENT LIABILITIES
Warehouse finance facilities $ 36,758,165
Cash overdraft
Current maturities of long-term debt 380,123
Accounts payable, accrued expenses and other
current liabilities 3,267,454
------------
Total current liabilities 40,405,742
------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 728,854
------------
Total liabilities 41,134,596
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; authorized,
20,000,000; issued and outstanding,
2,305,467 shares 23,055
Preferred Stock, $.01 par value; authorized,
10,000,000; issued and outstanding
1,560 shares, voting, liquidation preference $1,000 per share 16
Additional paid-in capital 7,141,380
Retained earnings (deficit) (6,084,410)
------------
Total stockholders' equity 1,080,041
------------
$ 42,214,637
============
The accompanying notes are an integral part of this statement.
76
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
March 31,
---------
1998 1997
---- ----
Revenues
Commissions and fees $ 4,267,271 $ 1,513,125
Interest 1,313,409 21,092
----------- -----------
5,580,680 1,534,217
----------- -----------
Expenses
Selling 1,986,197 672,800
General and administrative 2,911,067 913,852
Interest 1,037,302
----------- -----------
42,547
5,934,566 1,629,199
Net loss before income tax credit (353,886) (94,982)
Provision for income taxes ___________ ____________
NET INCOME (LOSS) $ (353,886) $ (94,982)
=========== ===========
Basic EPS calculation
Net loss $(353,886)
Less: Preferred stock dividend (30,000)
Preferred stock discount (150,000)
-----------
Loss available for common stockholders $ (533,886)
===========
Dates Shares Fraction of Weighted
Outstanding Outstanding Period Average Shares
- ----------- ------------ ----------- --------------
Period
- --- --
January 1 - March 2 2,200,000 2/3 1,466,667
Issuance of common
Stock on March 3 105,467
---------
March 3 - March 31 2,305,467 1/3 768,489
========= ----------
Weighted-average shares 2,235,156
=========
Basic loss per share $ (0.24)
=========
Pro forma information
Pro forma net loss
Historical net loss $ (94,982)
Pro forma provision (credit) for income taxes
$ (31,309)
Pro forma net loss $ (63,673)
============
Pro forma per share data
Pro forma net loss per share $ (0.05)
============
Weighted average shares outstanding 2,235,156 1,200,000
The accompanying notes are an integral part of these statements.
77
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 1998
Common Stock Preferred Stock Additional
----------------------- --------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Balance at December 31, 1997 2,200,000 $22,000 2,060 $ 21 $6,992,430
Accretion of preferred stock discount 150,000
Conversion of preferred stock on March 3, 1998 105,467 1,055 (500) (5) (1,050)
Preferred Stock Dividends
Net loss for the three months ended March 31, 1998 _________ ________ __________ _________ __________
Balance at March 31, 1998 2,305,467 $ 23,055 1,560 $ 16 $7,141,380
========= ======== ========== ========= ==========
Retained
Earnings
(Deficit) Total
--------- -----
Balance at December 31, 1997 (5,550,524) $1,463,927
Accretion of preferred stock discount (150,000)
Conversion of preferred stock on March 3, 1998
Preferred Stock Dividends (30,000) (30,000)
Net loss for the three months ended March 31, 1998
(353,886) (353,886)
---------- ----------
Balance at March 31, 1998 (6,084,410) $1,080,041
=========== ==========
The accompanying notes are an integral part of this statement.
78
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
================================
1998 1997
----- ----
Cash flows from operating activities:
Net loss $ (353,886) $ (94,982)
----------- -----------
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and amortization 68,404 10,651
Provision for doubtful accounts 53,084
(Increase) decrease in operating assets:
Interest receivable (90,990) 90,866
Mortgage loans held for sale (1,283,788)
Miscellaneous receivables 18,268 (20,592)
Prepaid expenses 12,216 32,439
Other current assets (128,143)
Deposits 6,538 1,779
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other current liabilities (239,609) (265,697)
----------- -----------
(1,584,020) 150,554
----------- -----------
Net cash used in operating activities (1,937,906) (245,536)
----------- -----------
Cash flows from investing activities
Expenditures for property and equipment (189,131) (7,907)
Proceeds (payments) for related party receivable 5,759 (68,516)
----------- -----------
Net cash used in investing activities (183,372) (76,423)
----------- -----------
Cash flows from financing activities
Warehouse borrowings 1,295,131
Decrease in Cash overdraft (264,409) (96,167)
Proceeds from long-term debt 261,155 155,000
Payments for long-term debt (118,418) (139,348)
Payments for deferred offering costs (25,000)
----------- -----------
Net cash provided by (used in) financing activities 1,173,459 (105,515)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (947,819) (427,474)
Cash and cash equivalents at beginning of year 1,705,216 644,685
----------- -----------
Cash and cash equivalents at end of period $ 757,397 $ 217,211
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Income taxes $ - 0 - $ - 0 -
================ ================
Interest $ 972,229 $ 21,092
================ ================
Supplemental schedules of non-cash investing and financing activities:
Dividend paid by transfer of investment in 430 Carroll Street, Inc. $ - $ 175,224
================ ================
Conversion of 500 shares of preferred stock to 105,467 shares of common $ - 0 - $ - 0 -
================ ================
stock $ - 0 - $ - 0 -
================ ================
Capital asset and lease obligation additions $ 45,000 $ - 0 -
================ ================
The accompanying notes are an integral part of these statements.
79
CFI MORTGAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
NOTE 1 - GENERAL
A. Organization
Creative Industries, Inc. was incorporated in the State of Florida in
April 1989, and operates as a licensed mortgage lender. In October
1990, the Corporation's name was changed to Creative Financing, Inc.
and on May 24, 1995 the Corporation's name was changed to CFI Mortgage
Corporation ("CFI Mortgage"). CFI Mortgage Inc. ("CFI" or "Company")
was incorporated in Delaware on March 18, 1997. Immediately prior to
the Company's initial public offering on May 27, 1997, the existing
stockholders of CFI Mortgage contributed all of their shares of CFI
Mortgage common stock to CFI in exchange for 1,200,000 shares of CFI
common stock.
B. Business
Through its two wholly-owned subsidiaries, Bankers Direct Mortgage
Corporation ("BDMC") and Direct Mortgage Partners Inc. ("DMP"), CFI is
engaged in originating, purchasing and selling loans secured primarily
by first mortgage on one to four unit residential properties and
purchasing and selling servicing rights associated with such loans.
The loans are both conventional conforming loans (originated and sold
through BDMC) and nonconforming loans (originated and sold through
DMP). Significant intercompany accounts and transactions have been
eliminated in consolidation.
C. Geographic Concentration
BDMC is approved by the U.S. Department of Housing and Urban
Development/Federal Housing Administration ("FHA") as a nonsupervised
mortgagee, by the Veteran's Administration as a VA Automatic Lender
and an approved FNMA Seller / Servicer. BDMC is licensed and
registered to do business in 24 states with licensing in process in an
additional 10 states. DMP operates through its nine regional offices.
A reduction in geographic concentration occurred in the first quarter
of 1998 with Florida production accounting for only 54.3% of total
BDMC and DMP loan production as compared to 100% Florida production
during the first quarter of 1997. While CFI's results of operations
and financial condition remain sensitive to general trends in the
Florida economy and its residential real estate market, this
dependency is being reduced to a more acceptable level of risk.
D. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and the instruction of Form 10-QSB
and Regulation S-B. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, considered
80
necessary for a fair presentation of the results for the interim
period have been included. Operating results for the quarter ended
March 31, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 1998.
The consolidated financial statements of the Company include the
accounts of all wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
NOTE 2 - LONG TERM DEBT
In 1997, CFI acquired certain property and equipment assets partially
financed through various bank notes. The equipment purchased
collateralized the notes. The Company also leases certain office
equipment under various capital leases. The economic substance of the
leases is that the Company is financing the acquisition of the assets
through the leases. At March 31, 1998, the balances payable under the
notes and leases are as follows:
Bank notes payable in equal monthly installments
of $4,310; interest rates ranging from 6.875% to 11% $166,511
Various capitalized lease obligations 802,466
--------
968,977
Less portion payable in one year 240,123
--------
Long-term debt payable $728,854
Annual maturities of long-term debt are as follows:
Remainder of 1998 177,505
1999 261,937
2000 252,633
2001 139,569
2002 56,855
Thereafter 80,478
--------
968,977
=======
In addition, included in current maturities of long-term debt is a bank
note payable of $140,000 bearing interest at the bank's prime rate plus
1% and is due on demand. The note is collateralized by certain mortgage
held for sale, aggregating $195,711.
NOTE 3 - RELATED PARTY TRANSACTIONS
In February 1996, the company acquired a 49% interest for $5,000 in a
corporation that performed title searches for the Company. An officer
of the company effectively owns 25% of this affiliate. The company paid
fees of $20,000 in 1996 to this entity. The company's $5,000 investment
was charged to operations in 1996. Such fees were regulated by the
State of Florida Office of Insurance Commission. Another officer of the
Company acquired a 49% interest in a corporation in 1996 that performed
$82,500 of appraisal services for the Company in 1996. In January 1997,
both of these entities ceased operations.
81
The Company has made advances to three officers aggregating
approximately $83,000 as of December 31, 1997. An additional $4,671
was advanced in the first quarter ended March 31, 1998. The advances
are non-interest bearing and are due on demand and included in due
from related parties.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
a. Warehouse lines of credit
Warehouse lines of credit are used for short-term financing of
mortgages held for sale and are collateralized by the underlying
mortgages held for sale. CFI has warehouse lines of credit from two
financial institutions aggregating $85 million at March 31, 1998. At
March 31, 1998, the utilized and outstanding balance on these
facilities totaled $36.8 million and carried interest rates based on
LIBOR plus a margin of 125 to 150 basis points or Fed Funds plus a
margin of 175 to 250 basis points. Interest expense from utilization
of these two facilities was $897,128 for the quarter ended March 31,
1998.
At December 31, 1997 the Company was in violation of several financial
covenants with its two warehouse lenders. Both lenders issued waivers
of the default through April 30, 1998 and have been conducting ongoing
negotiations as necessary to amend the warehouse borrowing agreements.
The Company determined that it could operate at its current funding
levels with lesser warehouse availability, so it requested and was
granted a reduction to $25 million in one of these facilities
subsequent to the end of the first quarter of 1998. That same lender
subsequently extended the current borrowing arrangement until July 31,
1998 under new terms and conditions which are financially less
favorable to the Company.
The other warehouse lender continues to review the operations of the
Company and consider an appropriate relationship structure from which
to go forward. Although the original extension to April 30, 1998 has
expired, the lender continues to advance funds to the Company as
needed to fund its mortgage lending and purchase activity. Based on a
verbal understanding between the Company and this lender made
subsequent to the end of the first quarter, the Company has agreed not
to draw down more than $35 million of the $50 million facility until
such time as the new terms are finalized. This temporary limitation of
borrowing ability is not expected to have an adverse effect on the
Company's operations. Management believes that this facility will also
be renewed and extended under terms that the Company can reasonably
meet over the remainder of 1998.
b. Mortgage Purchase Agreements and Revolving Purchase Facilities
In its normal course of business, CFI has entered into various
mortgage purchase agreements and two revolving purchase agreements
with various banks and investors. Under these mortgage purchase
agreements, the banks and investors purchase mortgages held for sale
from CFI without recourse.
82
Under the revolving repurchase agreements, CFI sells mortgage loans,
subject to certain warranties as defined, to two financial
institutions that have a takeout commitment from an investor. The
mortgage loans that CFI has sold to these financial institutions which
are pending settlement with takeout investors at March 31, 1998
totaled $20,611,605. The sales price to the takeout investors carries
an additional 150 basis points of profit that CFI will recognize when
the loans close with the take out investor.
c. Leases
CFI leases its corporate headquarters, loan office facilities and
certain office equipment under various operating leases. The office
leases generally require CFI to pay certain escalation costs for real
estate taxes, operating expenses, usage and common area charges. Rent
expense for real property leases charged to operations in the quarter
ended March 31, 1998 was $277,203 while equipment rental and lease
expenses during the same period was $81,773.
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of March 31, 1998 are
as follows:
Capitalized
Operating Lease
Leases Obligations
------ -----------
Years ending December 31,
1998 $1,072,118 $265,233
1999 1,176,592 327,251
2000 953,435 287,221
2001 292,213 141,767
2002 282 57,664
---------- --------
Total minimum future payments $3,543,165 1,079,136
==========
Less amount representing interest 276,670
--------
$802,466
d. Legal Proceedings
The Company is a party to various legal proceedings arising in the
ordinary course of its business. Management believes that none of
these actions, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial condition of
the Company.
e. Employment Contracts
The Company has entered into several employment contracts with certain
officers and employees which expire between 1998 and 2002
NOTE 5 - STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
a.) On May 30, 1997, CFI completed the initial public offering of
1,000,000 shares of its common stock at $5 per share. The net proceeds
from the sale, after
83
deducting underwriting discounts and commissions and offering
expenses, aggregated $3,800,525. In connection with the offering, CFI
granted the underwriter warrants to purchase 100,000 shares of common
stock at an exercise price of $6 per share. The warrants are
exercisable for a period of four years commencing May 1998.
On December 3, 1997, CFI issued and sold 2,000 shares of 8%
convertible preferred stock, $0.01 par value, at $1,000 per share in a
private placement. The net proceeds from the sale, after deducting
selling and other related expenses, aggregated $1,821,753. The
preferred stock is convertible for two years into common shares at a
price equal to 85% of the five-day average bid prices immediately
prior to the conversion date. The discount on the conversion price,
which was $300,000, is accounted for as a charge against retained
earnings and is amortized over the non-convertible period. Included in
the statement of changes in stockholders equity are charges of
$150,000 in the year ended December 31, 1997 and $150,000 in the
quarter ended March 31, 1998 pursuant to the conversion discount. On
March 3, 1998, 500 shares of the preferred stock, plus accrued
dividends of approximately $10,000 were converted into 105,467 of
common shares.
In connection with the preferred stock transaction, the Company
granted warrants to purchase 240,000 shares of common stock at an
exercise price of $8.50 per share. The warrants are exercisable until
September 17, 2001. In addition, the Company issued 60 shares of
preferred stock with identical terms as payment for fees for the
private placement. The cost is included in the net proceeds from the
transaction and will be amortized over the non-conversion term.
b.) Earnings per share (EPS) have been presented on a non-dilutive basis.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common
stock that then share in the earnings of the entity. Since the effect
of outstanding warrants, options and preferred stock conversion is
antidilutive, it has been excluded from the computation of EPS.
84
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations, other than those contained in this
Prospectus, in connection with the offering covered by this Prospectus. If given
or made, such information and representations must not be relied upon as having
been authorized by the company or any other person. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy, any of the
Securities other than those to which it relates or an offer to sell, or a
solicitation of any offer to buy, to any person in any jurisdiction in which
such offer or solicitation is not authorized, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the facts set forth in this
Prospectus or in the affairs of the company since the date hereof.
---------------------
TABLE OF CONTENTS
Page
Available Information .....................................................
Forward-Looking Statements ................................................
Prospectus Summary ........................................................
Risk Factors ..............................................................
Reorganization and Termination of S Corporation Status ....................
Use of Proceeds ...........................................................
Dividend Policy ...........................................................
Price Range of the Company's Common Stock .................................
Selected Financial Data ...................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations .....................................
Business ..................................................................
Management ................................................................
Principal Stockholders ....................................................
Description of Capital Stock ..............................................
Plan of Distribution ......................................................
Selling Stockholders ......................................................
Legal Matters .............................................................
Experts ...................................................................
Index to Consolidated Financial Statements ................................ F-58
__________________, 1998
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85
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CFI MORTGAGE INC.
PROSPECTUS
__________, 1998
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86
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes
indemnification of directors, officers, employees and agents of the Company;
allows the advancement of costs of defending against litigation; and permits
companies incorporated in Delaware to purchase insurance on behalf of directors,
officers, employees and agents against liabilities whether or not in the
circumstances such companies would have the power to indemnify against such
liabilities under the provisions of the statute.
The Company's Certificate of Incorporation provides for indemnification of
its officers and directors to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law.
The Company's Certificate of Incorporation eliminates and liability of a
director to the Company or its stockholders for monetary damages for breach of
such director's fiduciary duties to the Company, except where a director: (a)
breaches his or her duty of loyalty to the Company or its stockholders; (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law; (c) authorizes payment of an illegal dividend or a stock
repurchase; or (d) obtains an improper personal benefit. While liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available if (i) a director breaches, or fails to
perform, his duties as a director; and (ii) the director's breach of, or failure
to perform, those duties constitute: (A) a violation of criminal law, unless the
director had reasonable cause to believe his conduct was lawful or had no
reasonable cause to believe his conduct was unlawful; (B) a transaction from
which the director derived an improper personal benefit, either directly or
indirectly; (C) a circumstance under which the liability provisions regarding
unlawful distributions are applicable; (D) in a proceeding by or in the right of
the corporation to procure a judgment in its favor or by or in the right of a
shareholder, conscious disregard for the best interest of the corporation, or
willful misconduct; or (E) in a proceeding by or in the right of someone other
than the corporation or a shareholder, recklessness or an act or omission which
was committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety, or property.
Certificate and Bylaws. The Company's Certificate of Incorporation and
Bylaws provide that the Company shall, to the fullest extent permitted by law,
indemnify all directors of the Company, as well as any officers, agents or
employees of the Company to whom the Company has agreed to grant
indemnification.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be borne by the
Company in connection with the registration, issuance and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All items are estimated except the registration and filing fees.
SEC registration fee $ 2,252
Printing expenses $ 0
Legal fees and expenses $25,000
Accounting fees and expenses $25,000
Miscellaneous $ 1,748
-------
Total $54,000
=======
87
Item 26. Recent Sales of Unregistered Securities
In connection with its formation in April 1989, CFI Mortgage Corporation
("CFI Mortgage") issued, in equal shares, an aggregate of 2,500 shares of common
stock to each of Vincent J. Castoro, Christopher C. Castoro and Robert Castoro.
Robert Castoro, who is also a son of Vincent C. Castoro, is not currently
involved in the business of the Company. In June 1992, CFI Mortgage issued 5,000
shares of common stock to Vincent C. Castoro in exchange for 40% of the capital
stock of 430 Carroll Street Inc. ("Carroll Street"). The remaining 60% of the
equity interest in Carroll Street continued to be owned by Vincent C. Castoro.
In connection with the transfer to CFI Mortgage of the interest in Carroll
Street, Mr. Castoro's sons transferred to their father an aggregate of 250
shares of common stock, with the result that Vincent C. Castoro owned 5,250
shares of common stock of CFI Mortgage. Robert Castoro gave his remaining 750
shares to his father when he resigned from CFI Mortgage in 1993. Thereafter, on
March 1, 1993, Vincent C. Castoro gave 3,000 shares of common stock to each of
Vincent J. Castoro and Christopher C. Castoro. In March 1997, CFI Mortgage Inc.
was incorporated in Delaware, and immediately prior to the Offering Vincent J.
Castoro and Christopher C. Castoro contributed their 7,500 shares of common
stock of CFI Mortgage to the Company in exchange for 1,200,000 shares of Common
Stock of the Company. Such securities were issued to a total of four
individuals, all of whom at the time of such issuance were officers and
employees of the Company, in transactions qualifying for the exemption from
registration afforded by Section 4(2) of the Securities Act.
On December 3, 1997, the Registrant sold 2,000 shares of Series A
Convertible Preferred Stock for $2,000,000 to one institutional investor and
issued an additional 60 shares to a broker as partial payment of its commission.
The foregoing shares were sold without registration in a transaction qualifying
for exemption from registration afforded by Section 4(2) of the Securities Act.
In addition, the Company issued 240,000 Warrants with an exercise price of $8.50
to the underwriter of its initial public offering in connection with such
transaction in order to secure such firm's contractually required consent. The
exercise price of such warrants was subsequently reduced to $6.50.
On May 18, 1998, the Company issued $1,700,000 principal amount of
convertible debentures to a single investor. The investor is committed to
purchase a further $500,000 principal amount of such debentures upon the date of
this Prospectus. The debentures are due April 30, 2000, bear interest at a rate
of 10% per annum (payable in cash or Common Stock at the option of the Company)
and are convertible into shares of the Company's Common Stock at a conversion
rate equal to the lesser of $9.625 or 85% of the lowest three-day average
closing bid price of the Company's Common Stock during the fifteen day period
ending on the day prior to conversion. Such conversion price shall be 80% of
such market price for conversions subsequent to 240 days following the closing
date of May 18, 1998. In addition, the holder may convert only up to one-third
of the issue upon the date of this Prospectus, and an additional one-third on
each of the 30th and the 60th days after the date of this Prospectus. In
addition, the holder is limited to converting no more than 10% of the principal
amount in any calendar week. The Company has the right to redeem the debentures
at any time at a price of 115% of the principal amount, plus any accrued but
unpaid interest. The debentures are subordinate to the Company's bank line and
two warehouse line of credit agreements. The investor also received warrants to
purchase 50,000 shares of the Company's Common Stock at a price of $8.75 per
share. The foregoing securities were sold without registration in a transaction
qualifying for exemption from registration afforded by Section 4(2) of the
Securities Act.
88
On June 30, 1998, the Company sold 1,000 shares of Series B Convertible
Preferred Stock for $1,000,000 to one institutional investor, The foregoing
shares were sold without registration in a transaction qualifying for exemption
from registration afforded by Section 4(2) of the Securities Act.
Item 27. Exhibits
Exhibit
Number Description
+3.1 Certificate of Incorporation of the Registrant
+3.2 Bylaws of the Registrant
+3.3 Specimen Common Stock certificate
++3.4 Certificate of Designation of the Series A Convertible Preferred
Stock of the Registrant
*3.5 Certificate of Designation of the Series B Convertible Preferred
Stock of the Registrant
5.1 Opinion of Epstein Becker & Green, P.C. [To be filed by amendment]
*24.1 Consent of Weinick Sanders Leventhal & Co. LLP (successor to the
practice of Martin Leventhal & Company LLP, certified public
accountants)
24.2 Consent of Epstein Becker & Green, P.C. (included in Exhibit 5.1)
*24.3 Consent of Grant Thornton LLP
*25 Power of Attorney
- --------------
+ Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-6660) dated May 27, 1997.
++ Previously filed.
* Filed herewith.
89
Item 28. Undertakings
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the law or high end of the estimate maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that (1) for the purpose of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed pursuant to Rules
424(b)(1), and 42(b)(4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement at the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment, if any, that contains a form of prospectus
90
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
91
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of West
Palm Beach, State of Florida, on July 6, 1998.
CFI MORTGAGE INC.
By: /s/ Christopher C. Castoro
-------------------------------
Christopher C. Castoro
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons on behalf of the
Registrant and in the capacities and on the dates stated. Each person whose
signature appears below hereby authorizes Christopher C. Castoro and Vincent J.
Castoro and any of them acting individually, with full power of substitution of
file one or more amendments, including Post-Effective Amendments, to this
Registration Statement, which Amendments may make such changes as any of them
deems appropriate, and each person whose signature appears below, individually
and in each capacity stated below, hereby appoints Christopher C. Castoro and
Vincent J. Castoro and any of them acting individually, with full power of
substitution, as Attorney-in-Fact to execute his name on his behalf to file any
such Amendments to this Registration Statement.
Signature Title Date
--------- ----- ----
/s/ Paul R. Garrigues
- --------------------------
Paul R. Garrigues Chief Financial Officer July 6, 1998
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
*
- --------------------------
Vincent C. Castoro Chairman of the Board of Directors July 6, 1998
/s/ Christopher C. Castoro
- --------------------------
Christopher C. Castoro Chief Executive Officer and Director July 6, 1998
/s/ Paul R. Garrigues
- --------------------------
Paul R. Garrigues Chief Financial Officer July 6, 1998
*
- --------------------------
Robert A. Simm Principal Accounting Officer July 6, 1998
92
*
- --------------------------
Vincent J. Castoro Vice-President and Director July 6, 1998
*
- --------------------------
Thomas J. Healy Director July 6, 1998
*
- --------------------------
Robert J. Thompson Director July 6, 1998
By: /s/ Christopher C. Castoro
--------------------------
Christopher C. Castoro
Attorney-in-fact
94