AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1998
REGISTRATION STATEMENT NO. 333-44691
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
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)
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Delaware 6199 52-2023491
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) 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:
JAMES R. TANENBAUM, ESQ.
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4982
(212) 806-5400
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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. |_|
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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 MARCH 5, 1998
PROSPECTUS
CFI MORTGAGE INC.
980,000 SHARES OF COMMON STOCK
This Prospectus relates to the following securities of CFI Mortgage Inc., a
Delaware corporation (the "Company"): (a) 240,000 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) 100,000 shares of Common Stock underlying
warrants (the "Additional Warrants") entitling the holder to purchase one share
of the Company's Common Stock exercisable at $8.50, subject to adjustment in
certain circumstances (the "Shares Underlying Additional Warrants"), and (c)
640,000 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, 2001 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 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 Shares Underlying IPO Warrants only are
being offered by the Company upon the exercise of the IPO Warrants. 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 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.
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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 March
2, 1998 was $6.06 per share.
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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.
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
The Company is a rapidly growing mortgage banker engaged in originating,
purchasing and selling nonconforming subprime and conventional loans on
one-to-four unit properties through its retail, wholesale and consumer finance
divisions. The Company operates primarily in the State of Florida. The Company's
business strategy is to increase profitably the volume of its loan originations
and purchases. All loan applications, whether originated or purchased by the
Company, are subject to the Company's underwriting criteria and the guidelines
set forth by the relevant governmental loan program or private investors, as
applicable. The Company sells substantially all of the mortgage loans it
originates or purchases, together with the related mortgage servicing rights, to
institutional purchasers, including national and regional commercial banks and
other mortgage lenders. See "Business--Sale of Loans."
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 the time of the Exchange, 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"). Simultaneous with the
Exchange, CFI Mortgage ceased to be treated as an S corporation. See
"Reorganization and Termination of S Corporation Status."
RECENT DEVELOPMENTS
On October 30, 1997, DMP entered into a $50,000,000 revolving accumulation
repurchase agreement with Nikko Financial Services Inc. As of December 31, 1997,
the interest rate on this facility varied by product type from 6.75% to 7.25%.
This facility allows the Company to finance and accumulate nonconforming
subprime mortgage loans for bulk loan sale to final investors. DMP's obligations
under this facility are guaranteed by the Company. The facility also contains
customary representations, warranties and covenants.
The Company has recently expanded its operations both within Florida and to
five other states by opening offices in Anaheim Hills, California; Colorado
Springs, Colorado; Tampa and Orlando, Florida; Atlanta, Georgia; Chicago,
Illinois; and Knoxville, Tennessee; and has hired 55 additional employees to
meet its growing originations. During the nine months ended September 30, 1997,
the Company originated $23,988,348 in nonconforming loans compared to $0 in the
nine months ended September 30, 1996. The Company no longer purchases loans from
correspondents.
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."
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Nine Months Ended
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1996 1995 1997 1996
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(unaudited)
STATEMENTS OF OPERATIONS DATA:
Revenues.............................. $ 8,312 $ 5,493 $ 7,223 $ 5,769
Expenses.............................. 8,001 5,082 8,576 5,979
Net income (loss)..................... 311 411 (1,353) (209)
PRO FORMA INFORMATION (UNAUDITED):
Pro forma provision (credit) for
income taxes(2)..................... $ 110 $ (49) $ 473) $ (69)
---------- ----------- ----------- ----------
Pro forma net income (loss)(2)........ $ 201 $ 460 $ (880) $ (140)
========== ========== =========== ===========
PER SHARE DATA (UNAUDITED):
Pro forma net income (loss)
per share(2)(3)..................... $ 0.17 $ 0.38 $ (0.54) $ (0.12)
Pro forma weighted average
shares outstanding(2)(3)............ 1,200,000 1,200,000 1,644,445 1,200,000
OPERATING DATA (UNAUDITED):
Loans originated...................... $ 162,495 $ 129,351 $117,919 $126,241
Loans purchased....................... $ 68,319 $ 47,667 $60,936 $50,192
Total loans originated or purchased... $ 230,814 $ 177,018 $178,856 $176,434
Average principal balance per
loan originated or purchased........ $ 87 $ 82 $84 $86
Average loan-to-value ratio........... 91.2% 89.7% 92.6% 90.4%
Loan sales............................ $ 230,814 $ 177,018 $156,606 $176,434
DECEMBER 31,
1996 1995 SEPTEMBER 30, 1997
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BALANCE SHEET DATA:
Working capital....................... $1,083 $ 776 $ 2,649
Total assets.......................... 2,431 1,913 28,822
Total liabilities..................... 1,022 815 25,140
Stockholders' equity.................. 1,409 1,098 3,681
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(1) In 1989, the Company acquired a parcel of land in Florida for development.
In 1996, management decided to sell the land and accordingly reclassified
the land as a current asset at December 31, 1996. As the cost of the land
exceeded its fair market 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.
In 1992, the Company issued 5,000 shares
of its common stock in exchange for 40% of the capital stock of 430 Carroll
Street Corp. ("Carroll Street"). The basis of the 40% interest is $280,000.
In December 1996, management determined to sell the investment. In February
1997, the investment's fair market value was appraised at $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.
(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."
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.
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 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 48%
(based on 1996 mortgage loan originations and purchases) and 37% (based on
mortgage and loan originations and purchases for the nine months ended September
30, 1997) 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--Loan Production" and
"Business--Sale of Loans."
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 borrowings under collateralized loan purchase agreements
("Purchase Agreements") with several commercial banks, which generally are
terminable at will by either party. The Company currently also has a $50,000,000
warehouse credity facility with Bank One, Texas, N.A., that matures on June 30,
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, 1996 and the nine months ended
September 30, 1997, 94% and 71%, respectively, of the loans originated or
purchased by the Company were sold to four and ten purchasers, respectively.
During the year ended December 31, 1996, one of these purchasers accounted for
61% of such sales and four purchasers accounted for 56% of such sales during the
nine months ended September 30, 1997. 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.
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. See "Business--Financing of
Mortgage Banking Operations."
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 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. Although the Company currently sells all of the
mortgage loans it originates and purchases, in the future it may retain some or
all of its loan portfolio. In such an event, the Company may receive net
interest income. 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 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--Sale
of Loans."
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-off's of servicing rights may become necessary,
thereby decreasing earnings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Sale of Loans" and
"Business--Financing of Mortgage Banking 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
All of the Company's loan origination and purchase volume for the year
ended December 31, 1996 and 93% for the nine months ended September 30, 1997
were derived from the State of Florida. Although the Company is licensed or
registered in 12 states, the Company currently does the large majority 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, FHLMC, GNMA, 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--Sale of Loans."
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--Sale of Loans."
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, 1996 and nine months ended September 30,
1997, brokers and correspondents accounted for approximately 30% and 34%,
respectively, of the mortgage loans originated and purchased by the Company,
while 70% and 66%, 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,
1996 from a total of 17 brokers and ten correspondents, who accounted for
approximately 14% and 16%, respectively, of the total volume of loans originated
and purchased during the year ended December 31, 1996. The Company originated
and purchased loans in the nine months ended September 30, 1997 from a total of
30 brokers and five correspondents, who accounted for approximately 24% and 10%,
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--Loan Production."
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 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,
President, 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, Vincent J. Castoro and
Christopher C. 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 currently has a
total of 239 full-time employees. 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 maintain successfully 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 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 54.9%, of the Company's outstanding Common
Stock. 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.
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. While the Company presently
meets the required standards for continued inclusion in the Nasdaq SmallCap
Market, there can be no assurance that it will continue to be able to do so. If
the Company should fail to meet one or more of such standards, 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 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 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.
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 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. 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."
ABILITY OF THE COMPANY TO ISSUE ADDITIONAL SHARES OF COMMON STOCK
The Company has the ability to issue shares of Common Stock from time to
time without stockholder approval. 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 17,800,000 shares of Common Stock
authorized but unissued.
REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
From April 17, 1989 (inception) through the date of the Public Offering,
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 Chief Executive Officer, in 1993. See "Certain Relationships and
Related Party Transactions." 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, and the Company recorded a deferred
tax asset on its balance sheet. See "Selected Financial Data."
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.
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. For a discussion of distributions paid by the Company prior to the
Public Offering, see "Reorganization and Termination of S Corporation Status."
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 (through March 2)....................... $8.50 $ 5.00
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 ten shareholders of record of Common Stock as of
March 2, 1998. This number does not include beneficial owners holding shares
through nominee or "street" names. The Company believes that it has more than
500 beneficial holders of Common Stock.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The historical balance sheet and results of operations of the Company
included in the selected pro forma condensed financial data are as of December
31, 1996 and September 30, 1997, for the years ended December 31, 1996 and 1995,
and for the nine months ended September 30, 1997 and 1996.
The following selected income statement data for the years ended December
31, 1996 and 1995 and the balance sheet data as of December 31, 1996 and 1995
are derived from the Company's audited financial statements and notes thereto
included elsewhere herein audited by Weinick Sanders Leventhal & Co., LLP
(successor to the practice of Martin Leventhal & Company LLP, certified public
accountants), independent public accountants, as set forth in their report also
included elsewhere herein. The selected financial data for the nine months ended
September 30, 1997 and 1996 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 nine months ended September 30, 1997 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.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1996 1995 1997 1996
---- ---- ---- ----
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenues.......................................... $ 8,312 $ 5,493 $ 7,223 $ 5,769
Expenses:
Selling......................................... 3,277 2,568 3,279 2,510
General and administrative.................... 3,570 1,804 4,138 2,794
Interest...................................... 1,004 710 1,159 675
Write down of land and investment to
fair market value(1).......................... 150 -- -- --
Total expenses............................ 8,001 5,082 8,576 5,979
Net income (loss)................................. 311 411 (1,353) (209)
PRO FORMA INFORMATION (UNAUDITED):
Pro forma provision (credit)
for income taxes(2)............................ 110 (49) (473) (69)
Pro forma net income (loss)(2)................. $ 201 $ 460 $ (881) $ (140)
PER SHARE DATA (UNAUDITED):
Pro forma net income (loss) per
share(2)(3).................................. $ 0.17 $ 0.38 $ (0.54) $ (0.12)
Pro forma weighted average shares
outstanding(2)(3)............................ 1,200,000 1,200,000 1,644,445 1,200,000
OPERATING DATA (UNAUDITED):
Loans originated.................................. $ 162,495 $ 129,351 $117,919 $126,241
Loans purchased................................... $ 68,319 $ 47,667 $60,936 $50,192
Total loans originated or purchased............... $ 230,814 $ 177,018 $178,856 $176,434
Average principal balance per
loan originated or purchased.................... $ 87 $ 82 $84 $86
Average loan-to-value ratio....................... 91.2% 89.7% 92.6% 90.4%
Loan sales........................................ $ 230,814 $ 177,018 $156,606 $176,434
DECEMBER 31,
1996 1995 SEPTEMBER 30, 1997
---- ---- ------------------
BALANCE SHEET DATA:
Working capital...................... $1,083 $ 776 $ 2,649
Total assets......................... 2,431 1,913 28,822
Total liabilities.................... 1,022 815 25,140
Stockholders' equity................. 1,409 1,098 3,681
- ------------------ (1) In 1989, the Company acquired a parcel of land in Florida
for development. In 1996, management decided to sell the land and
accordingly reclassified the land as a current asset at December 31, 1996.
As the cost of the land exceeded its fair market 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.
In 1992, the Company issued 5,000 shares of its common stock in exchange
for 40% of the capital stock of Carroll Street. The basis of the 40%
interest is $280,000. In December 1996, management determined to sell the
investment. In February 1997, the investment's fair market value was
appraised at $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.
(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."
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.
GENERAL
The Company through its wholly-owned subsidiaries, Bankers Direct Mortgage
Corporation and Direct Mortgage Partners, Inc., is a rapidly growing mortgage
company focused on the origination, purchase and sale of nonconforming subprime
and conventional loans on one-to-four unit properties through its retail,
wholesale and consumer finance divisions.
The Company sells substantially all of the mortgage loans it originates or
purchases, together with the related mortgage servicing rights, to institutional
purchasers, including national and regional commercial banks and other mortgage
lenders. The institutional purchasers thereafter resell the mortgage loans as
mortgage-backed securities issued or guaranteed by the FNMA, FHLMC or GNMA.
The Company's correspondent division purchases mortgage loans through its
network of approved independent correspondent lenders that have originated the
loans from property owners. Correspondents are primarily mortgage lenders,
mortgage brokers, savings and loan associations and small commercial banks. At
December 31, 1996 and September 30, 1997, the Company had ten and five
correspondents, respectively, from whom it purchased mortgage loans. Management
believes that correspondent lending permits the Company to purchase high quality
loans in a cost efficient manner. Management believes that lending through
correspondents is an efficient and cost-effective method of producing loans
because of the low fixed expenses and capital investment required of the
Company. All loans purchased from correspondents are subject to the Company's
underwriting criteria, and the Company maintains a quality control function
which reports directly to executive management. By utilizing correspondent
lending from time to time, the Company can match its costs directly with the
volume of loans purchased so that a substantial portion of the Company's cost is
variable rather than fixed.
The Company implemented its business strategy in 1993. Since then, the
Company's retail division has grown rapidly through the repeat and referral
business generated by the Company's positive name recognition and commitment to
service as well as competitive pricing. The correspondent and broker divisions
have also experienced rapid growth due to the Company's ability to attract
experienced, quality personnel. In turn, this additional personnel has allowed
the Company to increase its efficiency and the quality of its originations.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues, including interest income, increased $1,454,000 (25.2%) to
$7,223,000 for the nine months ended September 30, 1997 compared to $5,769,000
for the comparable prior year period. The increase is due to greater fee income
per loan produced, while the number of loans remained relatively constant. The
1997 product mix showed a sharp increase in subprime loan production, which
generates greater fee income per loan than conforming loans.
Selling expenses increased $769,000 (30.6%) to $3,279,000 for the nine
months ended September 30, 1997 compared to $2,510,000 for the comparable prior
year period. Commissions and benefits accounted for over two-thirds of this
increase, which was directly related to the increased revenues. 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.
Selling expenses as a percentage of revenues were relatively constant: 45.4% in
1997 and 43.5% in 1996.
General and administrative expenses increased $1,344,000 (48.1%) to
$4,138,000 for the nine months ended September 30, 1997 compared to $2,794,000
for the comparable prior year period. Salaries and benefits rose over $965,000.
The non-commissioned support staff increased from 61 to 150 between September
30, 1996 and September 30, 1997, an increase of 146%. The Company added senior
management personnel with experience in the revised operational structure that
the Company now utilizes. Additional expenses were incurred in 1997 as part of
the national expansion and upfront costs associated with establishing the
support functions required for this expansion to be successful. As a percentage
of revenues, general and administrative expenses increased to 57.3% in 1997 from
48.4% in 1996.
Interest expense increased $484,000 (71.7%) to $1,159,000 for the nine
months ended September 30, 1997 compared to $675,000 for the comparable prior
year period. The average cost of borrowings increased due to the introduction of
subprime loans, and loans were aggregated for a longer period of time by the
Company to take advantage of bulk sale premiums.
Loss before taxes increased $1,144,000 (547.4%) to $1,353,000 for the nine
months ended September 30, 1997 compared to $209,000 for the comparable prior
year period as a result of the national expansion and the upfront costs
associated with establishing the support functions required for this expansion
to be successful. The second and third quarter losses were significantly
attributable to the increases in general and administrative expenses and
interest expense caused by those changes. 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. See "Risk Factors - Geographic
Concentration" and "--Fluctuations in Performance; Seasonality."
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
For 1996, revenues increased $2,819,000 (51.3%) to $8,312,000 from 1995
revenues of $5,493,000. The increased revenue was the result of opening three
loan offices in Florida and adding 43 persons to the Company's selling staff in
1996. The new offices and additional personnel, together with an increase in the
bank lines of credit, enabled the Company to originate more conventional
mortgage loans which historically have higher fees and have generated a higher
gain on sale of the mortgage loans.
Selling expenses increased $709,000 (27.6%) in 1996 to $3,277,000. This
increase is attributable to the increased personnel and selling costs associated
with the new offices as well as an increase in selling costs at all locations
arising from the Company's higher loan volume. As a percentage of revenues,
selling expenses decreased from 46.7% in 1995 to 39.4% in 1996. This decrease
resulted from allocating the Company's fixed costs over a larger revenue base.
General and administrative expenses totaled $3,570,000 in 1996 compared to
$1,804,000 in 1995, an increase of $1,766,000 (98.2%). As a percentage of
revenues, these expenses increased to 43.0% in 1996 from 32.8% in 1995. General
expenses increased in 1996 primarily because of increased administrative
personnel costs required to service the increased loan volume in the loan
offices and in corporate headquarters. The increased loan volume in 1996 also
resulted in increased operating and administrative costs.
Although actual interest expense increased $294,000 (41.4%) in 1996 to
$1,004,000 compared to $710,000 in 1995, as a percentage of revenues interest
expense remained relatively constant, 12.1% in 1996 compared to 12.9% in 1995.
Interest expense increased in 1996 because of the Company's increased borrowing
levels under Purchase Agreements. As the Company is a Subchapter S corporation
for federal income tax purposes, no provision for taxes is required.
The Company previously acquired a parcel of land in Florida for
development. In 1996, management decided to sell the land and accordingly
reclassified the land as a current asset at December 31, 1996. In conjunction
with this decision, management also decided to terminate its investment in
Carroll Street. As the cost of the land exceeded its fair market value of
$207,500 by $45,735 and the basis of the investment in Carroll Street exceeded
its fair market value of $175,224 by $104,776, the statement of operations for
1996 reflects a change of $150,511 to reflect the assets at their fair market
value on December 31, 1996.
Net income decreased $100,000 to $311,000 in 1996 from $411,000 in 1995 due
to the items discussed above.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
For 1995, the Company had revenues of $5,493,000, an increase of $3,340,000
(155.1%) over revenues of $2,153,000 in 1994. This increase is attributable to
management's expansion of existing loan offices by hiring more personnel to
better service its existing markets and opening two new loan offices with
increased selling personnel which generated business from new markets.
Selling expenses increased by $1,505,000 (141.6%) in 1995 to $2,568,000.
This increase resulted from hiring 43 additional selling personnel in existing
and new loan offices and the increase in selling costs directly related with the
increased volume in 1995. Selling expenses decreased to 46.7% of revenues in
1995 compared to 49.4% in 1994. The decrease resulted from fixed selling costs
at existing locations remaining constant while revenues increased.
General and administrative costs were $1,804,000 in 1995 which is $575,000
(46.5%) higher than the $1,229,000 expended in 1994. This increase resulted from
additional personnel costs, operating costs, and processing costs incurred in
1995 relating to the increased loan volume in 1995. As a percentage of revenues,
however, general and administrative costs decreased to 32.8% in 1995 from 57.1%
in 1994 because fixed general and administrative costs remained relatively
constant in both periods.
Interest expense in 1995 doubled to aggregate $710,000 from $354,000 in
1994. The increase is attributable to the larger average borrowings under the
Company's Purchase Agreements required by increased loan volume in 1995.
However, interest expense as a percentage of revenue decreased to 12.9% of
revenues in 1995 from 16.4% in 1994. The percentage decrease is attributable to
average borrowing interest rate on its lines of credit.
The Company's net income in 1995 was $411,000 compared to a net loss of
$493,000 in 1994. The improved earnings in 1995 is a result of volume increasing
155.1% while costs and expenses incurred increased 92.1%.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
For the third quarter ended September 30, 1997 compared to third quarter
ended September 30, 1996, cash in banks net of overdraft of $476,358 decreased
$187,223 or 135%. Cash in banks as of third quarter 1997 was $427,099 compared
to cash in banks for third quarter 1996 of $479,071. The decrease in cash in
banks was a result of the Company's use of its own operating funds to fund its
loan originations, purchases and continued costs of operations due to the
Company's bulking of loans for sale. Simultaneously, the Company has been
selling larger pools of mortgage loans for delivery to investors to maximize
profit opportunities.
Fees and mortgages receivable increased $2,452,590 or 448%, to $2,999,686
at September 30, 1997 from $547,096 at September 30, 1996. Miscellaneous
receivables increased $3,944 (2%) at September 30, 1997 from $161,427 at
September 30, 1996. This increase was a result of selling larger pools of
mortgage loans for delivery to investors.
In December 1996, management determined that its investment in land in
Florida and a 40% interest in a real estate corporation were no longer
compatible with its strategic business plan and the proceeds from the disposal
of these assets would be better suited for the business' strategy. The 40%
interest in the real estate corporation was used as payment in lieu of cash to
the Existing Stockholders of their undiluted S corporation earnings during the
quarter ended September 30, 1997. At September 30, 1996, the Company's
investments in land in Florida was considered a long-term investment.
Accounts payable and other current liabilities increased $1,136,380 (163%)
to $1,834,600 at September 30, 1997 from $698,220 at September 30, 1996. The
principal increases were accounts payable $560,413, accrued commissions and
payroll $40,890, accrued professional fees of $40,000 and various other general
administrative and operating expenses of $112,029.
Notes payable at September 30, 1997 were $452,232 with a corresponding
liability at September 30, 1996 of $74,320.
The Company expended $981,545 from September 30, 1996 to September 30, 1997
to acquire property assets, primarily to furnish the Company's new retail
locations.
During the nine months ended September 30, 1997, the Company advanced the
Chairman of the Board $90,000 which was a receivable at September 30, 1997, and
has since been repaid.
The Company's deficit increased $918,376 (260%) to $1,271,471 at September
30, 1997 from a deficit of $353,095 at September 30, 1996. This increase was
directly attributable to an increase in the Company's net loss.
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Cash in banks, net of overdrafts of $386,000, decreased $305,000 or 54%, to
$259,000 at December 31, 1996 from $563,000 at December 31, 1995. The decrease
was primarily due to the Company's use of its own operating funds to fund its
loan originations and purchases, and payments of $120,000 to an underwriter and
counsel in conjunction with the initial sale of the Company's securities to the
public.
Fees and mortgages receivable increased $342,000 or 63%, to $883,000 at
December 31, 1996 from $541,000 at December 31, 1995. Miscellaneous receivables
increased $30,000 (42%) at December 31, 1996 from $71,000 at December 31, 1995.
This increase was a result of additional loan originations and purchases
remaining in inventory including two loans aggregating $134,000 which were
repurchased from a bank.
In December 1996, management determined that its investment in land in
Florida and a 40% interest in a real estate corporation were no longer
compatible with its strategic business plan and the proceeds from the disposal
of these assets would be better suited for the business' strategy. The 40%
interest in the real estate corporation was used as payment in lieu of cash to
the Existing Stockholders of their undistributed S corporation earnings. At
December 31, 1995, these assets were considered long-term investments.
Accounts payable and other current liabilities remained relatively constant
at December 31, 1996 and 1995.
Notes and loans payable were $180,000 at December 31, 1996 with no
corresponding liability at December 31, 1995. $133,000 of loans are payable to a
bank, for the repurchase of two mortgages which were subsequently sold in 1997
and the bank repaid.
The Company expended $122,000 in 1996 and $67,000 in 1995 to acquire
property assets, primarily to furnish the Company's new retail locations. The
Company also repaid in 1996 a liability to its Chairman of the Board in the
amount of $348,969 and advanced the CEO $12,949 which was a receivable at
December 31, 1996.
Stockholders' equity increased $311,000 (28%) to $1,409,000 at December 31,
1996 from $1,098,000 at December 31, 1995. This increase was directly
attributable to the Company's net income of $311,000.
DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Cash and interest-bearing deposits increased $455,000 or 421% to $563,000
at December 31, 1995 from $108,000 at December 31, 1994 primarily due to
proceeds from loans from the Company's CEO of $238,000 and from an increase in
accounts payable and other current liabilities.
Fees and mortgages receivable increased $399,000 or 281% to $541,000 at
December 31, 1995 from $142,000 at December 31, 1994 primarily due to an
increase in loan origination and purchase volume which exceeded the volume of
loans sold.
Accounts payable and other current liabilities increased $257,000 at
December 31, 1995 to $466,000 from $209,000 at December 31, 1994. This 122%
increase arose from an increase in the various amounts payable to employees and
brokers due to a higher concentration of loans in the fourth quarter of 1995.
Stockholders' equity increased $411,000 to $1,098,000 at December 31, 1995
from $687,000 at December 31, 1994, due to net income of $411,000.
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's primary cash requirements include the funding of
(i) mortgage originations and purchases pending their sale, (ii) ongoing
administrative and other operating expenses, and (iii) new retail and wholesale
locations. 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, 1996 and the nine months ended September 30, 1997, 94% and 71%,
respectively, of the loans originated or purchased by the Company were sold to
four and ten purchasers, respectively. One of these purchasers accounted for 61%
of such sales during 1996, and four of these purchasers accounted for 56% of
such sales during the third quarter of 1997.
For the nine months ended September 30, 1996, cash used in operating
activities was $39,000. This deficit was financed by cash on hand and an
increase in accounts payable and accrued expenses of $232,000.
On June 30, 1997, BDMC entered into a $50,000,000 credit agreement with
Bank One, Texas, N.A. (the "Bank One Facility"), maturing on June 30, 1998. As
of September 30, 1997, $22,277,000 had been utilized and was outstanding. An
annual facility fee of $125,000 will be charged. The effective rate at September
30, 1997 was approximately 7.0%. The Bank One Facility is used to finance
mortgage loan originations and is secured by the specific mortgage loans
originated. BDMC's obligations under the Bank One Facility are guaranteed by the
Company. The Bank One Facility also contains customary representations,
warranties and convenants.
At September 30, 1997, the Company also had aggregate purchase facilities
of $25,000,000 from three financial institutions ranging from $2,000,000 to
$20,000,000. The utilized and outstanding portions of the facilities at
September 30, 1997 were $19,266,000. The unused purchase facilities aggregated
$5,734,000. Interest rates range from 9.5% to the rate on the purchased loan.
For the nine months ended September 30, 1997, net cash used in operating
activities was $3,185,000. The major uses were $22,937,000 for the funding of
Bank One loan originations, $2,117,000 for the increase in fees and loans
receivable, and $1,353,000 for the net loss for the period. The loss was
financed by the Public Offering proceeds and the use of the credit facilities.
The cash proceeds from the Public Offering of $3,921,000 were used (i) to fund
mortgage loans, (ii) to expand the Company's retail, subprime, and consumer
finance divisions, (iii) for primary marketing and brand recognition and (iv) to
purchase new technology and infrastructure.
The Company anticipates that cash from operating activities, together with
funds available under its purchase agreements, will be sufficient to fund its
operations for the next twelve months if the Company's future operations are
consistent with management's expectations. The Company may need additional
financing thereafter. There can be no assurance that the Company will be able to
obtain financing on a favorable or timely basis. The type, timing and terms of
financing selected by the Company will depend on its cash needs, the
availability of other financing sources and the prevailing conditions in the
financial markets.
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 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.
HEDGING, INFLATION AND INTEREST RATES
To date, the Company has not employed hedging or any other techniques to
lock in gains on loans it originates or purchases for sale. Management
anticipates the employment of hedging through the use of U.S. treasury
securities in the future. The Company believes a hedging strategy of using U.S.
treasury securities may be the most effective way to manage its interest rate
risk on loans prior to sale.
Inflation has had no material effect on the Company's results of
operations. Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates which affect the Company's ability to earn a
spread between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans. Generally, first mortgage production
increases relative to second mortgage production in response to low interest
rates and second mortgage production increases relative to first mortgage
production during periods of high interest rates. Fluctuating interest rates
also may affect the net interest income earned by the Company resulting from the
difference between the yield to the Company on loans held pending sales and the
interest paid by the Company for funds borrowed under the Company's Purchase
Agreements. In addition, inverse or flattened interest yield curves could have
an adverse impact on the profitability of the Company in the future.
CERTAIN ACCOUNTING PRONOUNCEMENTS
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 or 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. The Company has determined to use
the fair value-based method of accounting for stock options.
SFAS 122
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS No. 122"), which amends SFAS No. 65 "Accounting for
Certain Banking Activities." Through December 31, 1996, the Company has sold all
its servicing rights when it sold its loans. Management anticipates that in the
future, the Company may retain servicing rights on certain loans that it sells.
SFAS No. 122 requires mortgage banking entities to recognize as a separate
asset the rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. Mortgage banking entities that acquire or
originate loans and subsequently sell or securitize those loans and retain the
mortgage servicing rights are required to allocate the total cost of the loans
to the mortgage servicing rights and the mortgage loans. The Company determines
fair values based upon the present value of estimated net future servicing
revenues less the estimated cost to service loans, adjusted based on the same
assumptions used on the gain on sale calculation. The cost allocated to these
servicing rights is amortized in proportion to and over the period of estimated
net future cash flows related to the servicing income.
BUSINESS
GENERAL
The Company is a rapidly growing mortgage banker engaged in originating,
purchasing and selling nonconforming subprime and conventional loans on
one-to-four unit properties through its retail, wholesale and consumer finance
divisions. The Company operates primarily in the State of Florida.
The Company originates mortgage loans through its retail division, which
operates ten offices located in Melbourne, Port St. Lucie, Stuart, Palm Beach
Island, Wellington, West Palm Beach (2), Deerfield Beach, Fort Lauderdale and
Miami. The Company purchases mortgage loans through its wholesale division,
which operates two offices, and through correspondents. The Company sells
substantially all of the mortgage loans it originates and purchases, including
the right to service such loans, to institutional purchasers, including national
and regional commercial banks and mortgage bankers. These institutional
purchasers thereafter resell the mortgage loans as mortgage-backed securities
issued or guaranteed by FNMA, FHLMC or GNMA.
The Company receives loan servicing fees and subservicing fees on loans it
originates and purchases. The Company retains servicing rights on these loans
until the loans are sold and transferred.
BUSINESS STRATEGY
The Company's business strategy is to increase profitably the volume of its
loan originations and purchases and the size of its servicing portfolio by (i)
expanding its retail division by opening new offices, further penetrating both
its established and recently entered markets and expanding into new areas of
Florida and other states; (ii) continuing to provide quality service to its
network of brokers and correspondents; (iii) broadening its product offerings;
(iv) bulking and selling its mortgage loans; (v) continuing its investment in
mortgage loan origination systems; (vi) maintaining its underwriting standards
and (vii) expanding its relationships with brokers and correspondents.
EXPANSION OF RETAIL DIVISION
The Company intends to continue to expand its retail division both
throughout the State of Florida and into other states. The Company intends to
open a minimum of two new retail offices during the next 12 months.
The Company currently operates in the largest metropolitan areas of South
Florida and five other states. In selecting possible locations for additional
offices, the Company seeks established metropolitan areas which are undergoing
expansion through significant new subdivision construction.
CONTINUING TO PROVIDE QUALITY SERVICE
The Company provides a high level of service to its brokers and
correspondents on both its nonconforming subprime and conventional loan
originations. These services include preliminary approval of most brokered loans
and certain correspondent loans within one day, consistent application of its
underwriting guidelines and funding or purchase of loans generally within three
to ten days of preliminary approval. In addition, the Company services each
broker and correspondent with a team of professionals that includes a business
development representative, experienced underwriters and, in the case of
brokered loans, loan officers working on a primarily commission basis with
processors assisting them to handle applications submitted by each broker. The
Company believes that this commitment to service provides a competitive
advantage in establishing and maintaining productive broker and correspondent
relationships.
BROADENING PRODUCT OFFERINGS
The Company frequently reviews its pricing and loan products relative to
its competitors and introduces new loan products in order to meet the needs of
its correspondents and brokers. For example, the Company's recent entry into the
non-conforming home equity loan market was a logical extension of the Company's
current product offerings. The Company has begun to enter this market through
its retail and correspondent lending division, specifically by lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes. For
the nine months ended September 30, 1997, nonconforming subprime mortgage loans
accounted for approximately 25% of the Company's total mortgage loan production
compared to less than two percent for the year ended December 31, 1996.
INVESTING IN INFORMATION AND PROCESSING TECHNOLOGIES
In its continued effort to increase efficiency, the Company intends to look
continually for ways to improve efficiencies through upgrading its computer
hardware and maintaining its systems.
MAINTAINING UNDERWRITING STANDARDS
Since its organization in 1989, the Company has developed an underwriting
process designed to thoroughly, but efficiently, review and underwrite each
prospective loan. Based on its belief that an experienced staff provides a more
effective means of assessing credit risk, the Company employs seven
underwriters, with an average of 14 years of mortgage loan experience, to ensure
that all originated or purchased loans satisfy the Company's underwriting
criteria. Such criteria were developed based on underwriting guidelines
promulgated by the FHA, and are in conformity with such FHA guidelines. Each
loan must be signed off by an underwriter, undergo a full appraisal review and
is subject to pre- and post-funding audits to confirm compliance with the
underwriting procedures and guidelines. The Company believes that the depth and
experience of its underwriting staff, coupled with its consistent underwriting
procedures and criteria provide it with the infrastructure needed to manage and
sustain the Company's recent growth, while maintaining the quality of loans
originated or purchased.
The Company also maintains a quality control division, which is responsible
for monitoring compliance by brokers and correspondents with the Company's
underwriting guidelines. This division is currently staffed by two full-time
employees, who report directly to senior management.
EXPANSION OF BROKER AND CORRESPONDENT RELATIONSHIPS
The Company intends to continue to increase the volume of its loan
originations and purchases through a strategy that includes greater originations
and purchases from its existing brokers and correspondents, establishment of new
broker and correspondent relationships and expansion of its retail division, as
discussed above.
During the twelve month period ended December 31, 1996, the Company
originated and purchased loans through 17 brokers and ten correspondents, who
accounted for 14% and 16%, respectively, of the total loans originated and
purchased during the such period. The Company originated and purchased loans in
the nine months ended September 30, 1997 from a total of 30 brokers and five
correspondents, who accounted for approximately 24% and 10%, respectively, of
the total volume of loans originated and purchased during the nine months ended
September 30, 1997. Accordingly, the Company believes that there is an
opportunity to increase loan volume from its existing brokers and
correspondents, and to establish active relationships with additional brokers
and correspondents.
LOAN PRODUCTION
RETAIL DIVISION
The Company's retail division, which was established in 1989, employs 49
commissioned loan officers to market the Company's loan offerings to real estate
brokers and new home builders. An additional nine commissioned loan officers
directly solicit potential borrowers through mail and telephone solicitations
and radio advertisements. See "--Marketing." The loan officers are supported by
24 operational personnel who process the documentation submitted in connection
with new resulting loan applications. The loan officers are located in the
Company's Melbourne, Port St. Lucie, Stuart, Palm Beach Island, West Palm Beach
(2), Deerfield Beach and Fort Lauderdale, Florida retail offices. In view of the
geographic concentration of the Company's operations, the Company could be
adversely affected by economic downturns affecting the State of Florida as a
whole. The retail division offers a full variety of mortgage loan products,
including government and FNMA loans. Management believes that this flexibility
offers the Company a strategic advantage over banks, which generally do not
offer subprime lending, and mortgage brokers, who often do not underwrite
government loans.
In addition, management believes that retail mortgage lending has certain
advantages over correspondent and wholesale mortgage lending. These advantages
include: (i) greater fee income per loan; (ii) increased technological
efficiency; and (iii) the ability to market a discounted loan product directly
to the borrower.
GREATER FEE INCOME. In retail lending, the Company performs all the tasks
required in the loan origination process, thereby eliminating any intermediaries
from the transaction. This permits the Company to maximize fee income and to be
a low cost provider of mortgage loans. This structure provides the Company with
a competitive advantage over mortgage brokers, who must outsource a significant
portion of the loan origination process, and over banks, which usually have
greater overhead expenses than the Company. In addition, keeping the entire loan
origination process in-house leads to more effective quality control and better
communication among the various personnel involved. As an added benefit,
successfully meeting the borrowers' needs often leads to repeat and referral
business.
TECHNOLOGICAL EFFICIENCY. FNMA and FHLMC are developing underwriting
computer software programs, which essentially assume the functions currently
performed by an underwriter in the mortgage loan process. These programs are
potentially significant to the Company's retail division, since they
de-emphasize the mortgage processing function and increase the importance of
being able to directly access the borrower. Management intends to utilize a
portion of the net proceeds of the Public Offering to acquire licenses for these
programs.
DISCOUNTED PRICING DIRECT TO THE BORROWER. The Company directly solicits
the public to offer a low cost option in mortgage loans. The Company bears the
entire cost of this campaign. Since the Company provides any leads to its retail
loan officers, it pays the loan officers a reduced commission on the mortgage
loans so produced. The resulting savings are passed on to the borrower in the
form of a lower interest rate, reduced origination fees, or a combination of the
two.
All retail loan applications are subject to the Company's underwriting
criteria and the guidelines set forth by the FHA, VA, GNMA, FNMA, FHLMC or
private investors, as applicable. The Company verifies each applicant's income
and bank deposits as well as the accuracy of the other information submitted by
the applicant, and obtains and reviews a credit report from a credit reporting
agency, a preliminary title report and a real estate appraisal. The mortgage
loan is then underwritten by the Company, and the closing of the loan takes
place at the offices of a title agent. The average time to process any given
loan is one month, with the loan typically being funded one week after approval.
Since the organization of the retail division, it has originated
$504,646,675 in mortgage loans. The sale of loans originated by the retail
division accounted for over 70% of the Company's revenue during 1996 and 66% of
such revenue for the nine months ended September 30, 1997.
CORRESPONDENT DIVISION
Through its correspondents, the majority of whom were located in Florida,
the Company purchased mortgage loans that have been originated by such
correspondents from property owners. Correspondents are primarily mortgage
lenders, mortgage brokers, savings and loan associations and small commercial
banks. The Company purchased loans from ten correspondents during the year ended
December 31, 1996 and five correspondents during the nine months ended September
30, 1997. During the year ended December 31, 1996 and nine months ended
September 30, 1997 the sale of loans purchased by the correspondent division
accounted for 16% and 2%, respectively, of the Company's revenues.
The Company no longer purchases loans from correspondents.
WHOLESALE DIVISION
The Company's wholesale division, established in May 1993, originates
nonconforming subprime and conforming mortgage loans through brokers (generally,
licensed mortgage brokers and other real estate professionals) who submit
mortgage applications for brokered loans on behalf of the borrower. As other
financial institutions were exiting the wholesale mortgage lending business, the
Company made a decision to incorporate expansion into the wholesale mortgage
market as an integral part of its business strategy. Expansion into the
wholesale mortgage banking business involves the establishment of wholesale
branch offices and the incurrence of the fixed expenses associated with
maintaining those offices. However, wholesale mortgage purchases typically
provide for higher profit margins than correspondent production. Each wholesale
branch office can serve a relatively sizable geographic area compared to the
retail branch offices by establishing relationships with large numbers of
independent brokers who bear most of the cost of identifying and interacting
directly with loan applicants. Accordingly, management believes that the
establishment of the wholesale division affords an opportunity to identify
markets where higher profit margins and diversification of the Company's sources
of loan volumes can be appropriately balanced against the increased earnings
risks associated with a somewhat higher fixed cost structure.
At December 31, 1996 and September 30, 1997, the Company had two and six,
respectively, wholesale branches, serving approximately 17 and 51 brokers,
respectively, located in Tampa and Orlando. The Company receives loan
applications through these brokers, underwrites the loan, funds the loan at
closing and prepares all closing documentation. The wholesale branches also
handle all follow-up procedures on these loans. All loan applications processed
by the wholesale division are subject to underwriting and quality control
standards comparable to those used in the Company's correspondent lending
program.
CONSUMER FINANCE DIVISION
The Company's consumer finance division, established in July 1997, employs
eight loan officers to originate home equity loans. The Company believes that
the consumer finance division is able to identify and target individuals who,
based on its historic customer profiles, are likely customers for the Company's
products. The loan officers offer refinancing packages to existing homeowners.
The Company purchases lists and advertises in local newspapers to seek out
interested customers. The potential borrower then contacts a loan officer who
proceeds to determine the applicant's qualifications for the Company's products,
negotiates loan terms with the borrower and processes the loan through
completion.
The following table shows mortgage loan production volume by division for
each of the three years ended December 31, 1996 and nine months ended September
30, 1997 and 1996.
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------- -------------------
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
RETAIL DIVISION:
Volume $162,494,286 $129,351,449 $31,698,308 $115,772,437 $126,241,884
Percentage of total volume 70% 73% 49% 65% 72%
CORRESPONDENT DIVISION:
Volume $ 36,068,238 $ 30,391,384 $18,077,824 $17,187,071 $26,935,109
Percentage of total volume 16% 17% 28% 10% 15%
WHOLESALE DIVISION:
Volume $ 32,251,204 $ 17,275,068 $15,310,608 $43,749,667 $23,257,591
Percentage of total volume 14% 10% 23% 24% 13%
CONSUMER FINANCE DIVISION:
Volume -- -- -- $2,146,929 --
Percentage of total volume -- -- -- 1% --
TOTAL LOAN PRODUCTION:
Volume $230,813,728 $177,017,901 $65,086,740 $178,856,104 $176,434,584
Number of loans 2,666 2,167 869 2,142 2,051
Average loan size $ 86,577 $ 81,688 $ 74,898 $83,500 $86,024
Loan to value ratio 91.23% 92.86% 92.88% 92.60% 90.40%
The Company originates and purchases conventional mortgage loans and
mortgage loans insured by the FHA or partially guaranteed by the VA. All
mortgage loans purchased or originated by the Company are purchased or
originated for resale. Presently, the majority of the Company's loans are
conforming loans, i.e., mortgage loans which qualify for inclusion in purchase
and guarantee programs sponsored by FNMA, FHLMC and GNMA.
The Company originates and purchases a variety of mortgage loan products
that are designed to respond to consumer needs and competitive factors. In
addition to 15-year and 30-year conventional mortgage loans and 15-year and
30-year FHA mortgage loans and VA mortgage loans, the Company purchases and
originates products designed to provide lower interest rates or lower principal
and interest payments to borrowers, including balloon mortgage loans that have
relatively short maturity dates (e.g., five to seven years) and longer
amortization schedules (e.g., 25 or 30 years) and adjustable-rate mortgage
loans. The Company also purchases and originates mortgage loans featuring a
variety of combinations of interest rates and discount points so that borrowers
may elect to pay higher points at closing and less interest over the life of the
loan, or pay a higher interest rate and reduce or eliminate points payable at
closing. The portion of total loans held for sale at any time which consist of a
particular product type depends upon the interest rate environment at the time
the loans are made.
The following table shows mortgage loan production volume by type of loan
for each of the three years ended December 31, 1996 and nine months ended
September 30, 1997 and 1996.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
NONCONVENTIONAL LOANS:
Volume - - - $27,253,528 $1,148,550
Percentage of total volume - - - 15% 0.7%
CONVENTIONAL LOANS:
Volume $119,144,558 $91,569,366 $19,943,005 $85,906,475 $89,162,063
Percentage of total volume 52% 52% 31% 48% 50%
FHA/VA LOANS:
Volume $111,669,170 $85,448,535 $45,143,735 $65,696,101 $86,123,971
Percentage of total volume 48% 48% 69% 37% 49%
TOTAL LOANS:
Volume $230,813,728 $177,017,901 $65,086,740 $178,856,104 $176,434,584
Number of loans 2,666 2,167 869 2,142 2,051
Average loan size $86,577 $81,688 $74,898 $83,500 $86,024
UNDERWRITING
The following is a description of the underwriting guidelines currently
employed by the Company with respect to mortgage loans which it originates or
purchases from others. The Company may revise such guidelines from time to time
in connection with changing economic and market conditions, subject to criteria
established by the FHA, VA, GNMA, FNMA, FHLMC or private investors, as
applicable.
The Company specializes in mortgage loans that conform to the underwriting
standards of the FHA, and are in conformity with FHA guidelines. In analyzing
loan applications, the Company analyzes both the borrower's credit and the value
of the underlying property which will secure the loan, including the
characteristics of the underlying first lien, if any.
The Company considers factors pertaining to the borrower's current
employment, stability of employment and income, financial resources, and
analysis of credit, reflecting not only the ability to pay, but also the
willingness to repay contractual obligations. The property's age, condition,
location, value and continued marketability are additional factors considered in
each risk analysis.
All of the Company's underwriting determinations are made without regard to
sex, marital status, race, color, religion, age or national origin. Each
application is evaluated on its individual merits, applying the guidelines set
forth below, to ensure that each application is considered on an equitable
basis.
The Company originates mortgage loans with different credit characteristics
depending on the credit profiles of individual borrowers and/or the program
under which the prospective borrower applies for the loan. The mortgage loans
originated by the Company generally have amortization schedules ranging from 15
years to 30 years, bear interest at either fixed or adjustable rates and require
monthly payments which are due as of a scheduled day of each month which is
fixed at the time of origination. The collateral securing loans acquired or
originated by the Company are generally one- to four-family residences which are
to be occupied by the prospective borrower. It is the Company's policy not to
accept mobile or commercial properties or unimproved land as collateral.
The Company's mortgage loan program includes: (i) a full documentation
program and (ii) a non-income verification program. Under the full documentation
program, the borrower's total monthly debt obligations (which include principal
and interest on the new loan and all other mortgages, loans, charge accounts and
scheduled indebtedness) generally cannot exceed 41% of the borrower's monthly
gross income. Loans to borrowers who are salaried employees must be supported by
current employment information in addition to employment history which
information is generally verified based on written confirmation from employers,
one or more pay-stubs, recent W-2 tax forms, recent tax returns or telephone
confirmation from the employer. For the Company's non-income verification
program, proof of employment or self-employment is required.
The Company requires that a full appraisal of the property used as
collateral for any loan that it acquires or originates be performed in
connection with the origination of the loan. All appraisals are performed by
third party, fee-based appraisers and generally conform to current FNMA/FHLMC
secondary market requirements for residential property appraisals. Each such
appraisal generally includes, among other things, an inspection of the exterior
and interior of the subject property and, where available, data from sales
within the preceding 12 months of similar properties within the same general
location as the subject property.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's complete credit history is also required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. An
applicant's recent credit performance weighs heavily in the evaluation of risk
by the Company. The credit report is used to evaluate the borrower's record and
must be current at the time of application. A lack of credit history will not
necessarily preclude a loan if the borrower has sufficient equity in the
property. Slow payments on the borrower's credit report must be satisfactorily
explained and will normally reduce the amount of the loan for which the
applicant can be approved.
The Company requires title insurance coverage issued by an approved ALTA
title insurance company on all property securing mortgage loans it originates or
purchases. The Company and its assignees are generally named as the insured.
Title insurance policies indicate the lien position of the mortgage loan and
protect the Company against loss if the title or lien position is not as
indicated. The applicant is also required to secure hazard and, in certain
instances, flood insurance in an amount sufficient to cover the lesser of (i)
the new loan and (ii) an amount sufficient to cover replacement costs of the
mortgaged property.
Specified loan underwriting requirements must be satisfied prior to loan
approval and disbursement of funds. The Company must verify that the borrower
has at least a one-half interest in the mortgaged property. Additionally, the
Company requires that all owners in fee simple have signed the lien instrument.
In addition, the loan file must contain the promissory note, lien instrument and
other documents as required.
Upon completion of underwriting and processing of a loan, the closing of
the loan is scheduled with a closing attorney or agent approved by the Company.
The closing attorney or agent is responsible for completing the loan closing
transaction in accordance with applicable law and the Company's operating
procedures.
The Company has implemented a quality control program to monitor compliance
with the Company's established lending and servicing policies and procedures, as
well as with applicable laws and regulatory guidelines. The quality control
department, which consists of two employees, is separate from the underwriting
department, and reports directly to a member of senior management. The Company
believes that the implementation and enforcement of its comprehensive
underwriting criteria and its quality control program are a significant element
in the Company's efforts to originate and purchase high quality mortgage loans.
The Company's quality control department examines all loans in order to evaluate
compliance with underwriting criteria. The quality control department also
reviews loan applications for compliance with federal and state lending
standards, which may involve reverifying employment and bank information and
obtaining separate credit reports and property appraisals.
The Company periodically performs a post-funding quality control review to
monitor and evaluate the Company's loan origination policies and procedures. On
a monthly basis, at least ten percent of all loan originations and purchases are
subjected to a full quality control re-underwriting and review, the results of
which are reported to senior management. Discrepancies noted by the audit are
analyzed and corrective actions are instituted. However, to date, this quality
control process has not revealed material deficiencies in the Company's loan
underwriting procedures. A typical quality control review currently includes:
(a) reviewing the prior appraisal for each property; (b) running a new credit
report from a different credit report agency; (c) reviewing loan applications
for completeness, signatures, and for consistency with other processing
documents; (d) obtaining new written verification of income and employment; (e)
obtaining new written verification of mortgage to re-verify any outstanding
mortgages; and (f) analyzing the underwriting and program selection decisions.
The quality control process is updated from time to time as the Company's
policies and procedures change.
SALE OF LOANS
The Company customarily sells each mortgage loan that it originates or
purchases, together with the accompanying mortgage servicing rights, to
institutional investors. The Company routinely sells the loans it originates
into repurchase facilities who advance the Company a portion of the sales price.
The Company then accumulates loans for bulk sale to permanent investors. Upon
funding by the permanent investor, the Company uses the proceeds to pay back the
repurchase facility and the remainder, if any, is retained by the Company.
Under ongoing programs established with FNMA and FHLMC, the institutional
investors generally aggregate the conforming conventional loans they purchase
from the Company into pools which are assigned to FNMA or FHLMC in exchange for
mortgage-backed securities. The FHA mortgage loans and VA mortgage loans
purchased from the Company are generally pooled by the institutional investors
and sold in the form of GNMA mortgage-backed securities. The institutional
investor then sells the FHLMC, FNMA and GNMA securities to securities dealers.
Substantially all of the Company's conforming mortgage loans qualify under the
various FNMA, FHLMC and GNMA program guidelines which include specific property
and credit standards and loan size limits. The mortgage loans which do not
qualify for these programs are sold to subprime mortgage investor conduits.
In the case of conventional loans, the Company is generally at risk for any
mortgage loan default until the loan is sold (typically within 30 days of
closing). 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 seeks to minimize this risk for conventional loans with a
loan-to-value ratio of greater than 80% by requiring the borrowers to obtain
PMI. From the time an 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),
the Company has the right 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 foreclosures of FHA
mortgage loans and losses which exceed the VA's guarantee limitations. In
addition, exchanges of mortgage loans into agency securities and sales of
mortgage loans are generally made without recourse to the Company in the event
of default by the borrower, except with respect to the above-mentioned losses
related to VA and FHA mortgage loans. Under current VA guidelines, the VA
guarantees 50% of the original amount of loans of not more than $45,000; $22,500
of the original amount of loans which exceed $45,000 but are not more than
$56,250; the lesser of $36,000 or 40% of the original amount of loans which
exceed $56,200; or the lesser of $46,000 or 25% of the original amount of loans
which exceed $144,000 and are for the purchase or construction of a home or the
purchase of a condominium unit. In the case of loans insured by the FHA, the
Company will not be reimbursed for certain amounts if foreclosure becomes
necessary. Such amounts include interest on the mortgage loan for the first two
months subsequent to the loan becoming delinquent and a portion of the costs of
foreclosure (generally limited to one-third of such costs). In connection with
the Company's loan exchanges and sales, the Company makes representations and
warranties customary in the industry relating to, among other things, compliance
with laws, regulations and program standards and as to accuracy of information.
In the event of a breach of these representations and warranties, the Company
may become liable for certain damages or may be required to repurchase such
loans. Typically, any flaws with respect to repurchased loans would be corrected
and the loans resold or the loans would be sold back to the original
correspondent pursuant to an agreement. Although the Company has obtained an
Errors and Omissions insurance policy and a Mortgage Bankers Bond to insure
against the representations and warranties of its correspondents, there can be
no assurance that the coverage thereunder will prove to be sufficient.
Accordingly, although the Company has not incurred any material losses as a
result of mortgage loan repurchases due to breaches in representations and
warranties, there can be no assurance that the Company will not experience such
losses in the future.
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 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.
MARKETING
The Company routinely advertises its services through various media. This
advertising campaign utilizes cable and broadcast television, radio, real estate
periodicals, billboards, yellow page directories and local and regional
newspapers. Management has found that the effectiveness of the various
advertising media varies depending on where it is utilized, and it has attempted
to tailor the Company's advertising efforts accordingly. For example, yellow
page advertising appears to be more effective in smaller communities than it is
in Miami. Other types of advertising, such as cable television, are utilized to
introduce the Company to the general public, so that when a prospective borrower
is ready to apply for a mortgage loan, the Company's name recognition has
already been established.
The Company's advertising targets existing or potential home owners. In the
case of direct mail advertising or telemarketing, Company-employed loan
originators seek to inform the prospective borrower of the process involved in
purchasing a home or the savings that may be realized by refinancing an existing
loan. The Company views the initial contact between its originator and the
prospective borrower as the beginning of the loan origination process. In
addition, the Company's loan originators directly solicit local homeowners for
home improvement loans, and as a result obtain contractors, pool companies and
repair specialists as potential sources of loan referrals.
As an integral part of its marketing campaign, the Company sponsors
memberships in local real estate boards and professional mortgage associations
such as the Mortgage Bankers Association of America, the National Association of
Mortgage Brokers and the Florida Association of Mortgage Brokers. Management
believes that the Company's ongoing advertising campaign and longstanding
professional affiliations create a sense of trust and a recognition factor which
result in a significant number of referrals from real estate professionals.
During the year ended December 31, 1996 and nine months ended September 30,
1997, the Company spent approximately $199,500 and $179,682, respectively, on
advertising. The Company's strategy is to market continuously its services to
all potential referral sources in the community, thereby establishing a
perceived franchise value as a quality source for all mortgage lending needs.
FINANCING OF MORTGAGE BANKING OPERATIONS
The Company's primary cash flow requirement involves the funding of loan
production. The Company finances its mortgage loan originations and purchases
through Purchase Agreements it has entered into with several unaffiliated
commercial banks (each, a "Funding Bank"). These Purchase Agreements generally
are in the form of revolving collateralized purchase facilities, and provide for
the purchase by the Funding Bank of mortgage loans, up to the aggregate amount
of the facility. For each loan that it purchases, the Funding Bank receives from
the Company (i) a fee ranging from $0 to $25 per loan purchased and (ii)
interest on the unpaid principal balance of the mortgage loan from the date of
the loan closing through the date the loan is purchased by the institutional
investor. The Funding Bank only advances a percentage of the purchase amount
until the Company sells the loan to the permanent investor. The Purchase
Agreements contain various representations, warranties and covenants customary
in agreements of this type, which the Company are seeking to eliminate.
There can be no assurance that the Company will be able to comply with the
covenants in its various Purchase Agreements. Failure to comply could result in
the loss of the related financing. In addition, there can be no assurance that
the Company will be able to renew these Purchase Agreements at the end of their
terms or obtain replacement financing on terms acceptable to the Company. To the
extent that the Company loses its financing sources, or if the Company
experiences difficulty in selling its mortgage loans or mortgage-backed
securities, it may have to curtail its mortgage loan origination and purchase
activities, which could have a material adverse effect on the Company's
operations and financial condition. However, management believes it will be able
to renew or, alternatively, obtain similar financing in the future on terms
which are satisfactory to the Company. 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.
As of September 30, 1997, the Company had available an aggregate of
$32,000,000 pursuant to Purchase Agreements with Funding Banks.
On June 30, 1997, BDMC entered into a $50,000,000 credit agreement with
Bank One, Texas, N.A., maturing on June 30, 1998. As of September 30, 1997,
$22,277,000 had been utilized and was outstanding. An annual facility fee of
$125,000 will be charged. The effective rate at September 30, 1997 was
approximately 7.0%. The Bank One Facility is used to finance mortgage loan
originations and is secured by the specific mortgage loans originated. BDMC's
obligations under the Bank One Facility are guaranteed by the Company. The Bank
One Facility also contains customary representations, warranties and covenants.
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 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
granting 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, FHLMC, FNMA, GNMA 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 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, FHLMC,
FNMA, GNMA 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, FHLMC, FNMA, GNMA 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 currently has 239 employees, 157 of whom were salaried
employees and 82 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 4,200 square feet of office space at an aggregate annual
rent of approximately $73,348. The lease provides for certain scheduled rent
increases and expires in May 31, 1998.
The Company maintains 12 other offices in the States of Florida, Colorado,
Georgia, Illinois and Tennessee pursuant to leases with various expiration dates
through 1999, at monthly rental rates of from $863 to $4,288. 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.
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
Don M. Lashbrook.................. 45 President
Vincent J. Castoro(1)............. 30 Vice President and Director
Thomas J. Healy................... 48 Director
Robert J. Thompson................ 48 Director
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.
DON M. LASHBROOK has been the President 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.
VINCENT J. CASTORO has been Vice President of the Company since June 1997,
was previously President of the Company from 1993 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 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.
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 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.
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.
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.
EMPLOYMENT AGREEMENTS
The Company has entered into three-year employment contracts with each of
Messrs. Vincent C. Castoro, Vincent J. Castoro and Christopher C. 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, 1996. 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
FISCAL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
Vincent C. Castoro......................... 1996 $71,623 -- --
Chairman of the Board of Directors 1995 57,200 -- --
1994 57,200 -- --
Christopher C. Castoro..................... 1996 78,000 -- --
Chief Executive Officer 1995 78,000 -- --
1994 71,500 -- --
Vincent J. Castoro......................... 1996 78,000 -- --
Vice President 1995 78,000 -- --
1994 71,500 -- --
Robert A. Simm............................. 1996 51,208 -- --
Chief Accounting Officer 1995 48,807 -- --
1994 45,000 -- --
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, 1996.
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.
A total of 80,000 shares were authorized for issuance under the Stock
Option Plan. 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.
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 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.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH THE COMPANY'S CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Since inception, Vincent C. Castoro, the Company's Chairman and 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 the nine months ended September 30,
1997, the Company advanced $12,949 and $4,148, respectively to Mr. Castoro which
was a receivable at September 30, 1997. These advances were without interest.
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 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.
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 connection therewith, the Company has adopted a policy of doing business only
with unaffiliated vendors.
The Company believes such transactions with its officers/shareholders were
made on terms no less favorable to the Company than those generally available
from affiliated 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.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of February 24, 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 27%
Christopher C. Castoro.............................. 600,000 27%
Thomas J. Healy..................................... -- --
Robert J. Thompson.................................. -- --
Robert A. Simm(1)................................... 7,000 --
All directors and executive officers as a group
(six persons)....................................... 1,207,000 54.9%
- -----------------
(1) Includes 7,000 options to purchase shares of Common Stock held by Mr. Simm
which are currently exercisable.
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 Common Stock 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.
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 will be 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. 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 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 (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.
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, the Company may elect to force conversion of up to all of the remaining
Convertible Preferred Stock outstanding.
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 the underwriter (the "Underwriter") for it
services rendered in connection with the Company's 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 have not been transferred, sold,
assigned or hypothecated, in part or in whole (other than by will or 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, 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.
ADDITIONAL WARRANTS
In connection with the issuance and sale of the Convertible Preferred
Stock, the Company granted to certain affiliates of the Underwriter Additional
Warrants to purchase up to 240,000 shares of Common Stock at any time from
September 17, 1997 until September 17, 2001 at an exercise price of $8.50 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
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 intends to file 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 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 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.
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 nor sell any of the shares of Common Stock issuable upon their
conversion.
The Shares may be sold by the Selling Stockholders upon conversion 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.
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 the 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.
SELLING STOCKHOLDERS
The Shares covered by this Prospectus are those issuable upon (i) exercise
of IPO Warrants and Additional 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 March 2, 1998.
Number of Shares Number of Shares
Number of Warrants of Convertible Preferred of Common Stock
NAME OF SELLING STOCKHOLDER BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED
- --------------------------- ------------------ ------------------------ ------------------
Baldock Ventures Limited............... - 2,000 -(1)
Settondown Capital Ltd. ............... - 60 -(1)
LEXUS Partners Limited................. 100,000 - -
Allan M. Levine........................ 100,000 - -
Michael J. Schumacher.................. 100,000 - -
Larry Kaplan........................... 40,000 - -
- -------------------
(1) The Convertible Preferred Stock is 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."
LEGAL MATTERS
Certain legal matters, including the legality of the shares of Common Stock
offered hereby, will be passed upon for the Company by Stroock & Stroock & Lavan
LLP, New York, New York.
EXPERTS
The financial statements of CFI Mortgage Corporation as of December 31,
1996 and 1995 and for each of the two years in the period 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, 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.
CFI MORTGAGE INC. AND SUBSIDIARIES
DECEMBER 31, 1996
AND
SEPTEMBER 30, 1997 (UNAUDITED)
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
Report of Independent Certified Public Accountants
Financial Statements:..................................................... F-2
Consolidated Balance Sheets as at December 31, 1996 and 1995 and as at
September 30, 1997 (unaudited) and 1996 (unaudited).................. F-3
Consolidated Statements of Operations and Retained Earnings (Deficit)
For the Years Ended December 31, 1996 and 1995 and for the Nine
months ended September 30, 1997 and 1996 (unaudited)................. F-4
Consolidated Statements of Cash Flows For the Years Ended December 31,
1996 and 1995 and for the Nine months ended September 30, 1997
(unaudited) and 1996 (unaudited)..................................... F-5
Notes to Consolidated Financial Statements................................ F-6-F-10
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
CFI Mortgage Corporation
West Palm Beach, Florida
We have audited the accompanying balance sheets of CFI Mortgage Corporation
as at December 31, 1996 and 1995 and the related statements of operations and
retained earnings (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CFI Mortgage Corporation as
at December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Martin Leventhal & Company LLP
Certified Public Accountants
New York, N.Y.
February 7, 1997
DECEMBER 31,
1996 1995 SEPTEMBER 30, 1997
ASSETS (UNAUDITED)
Current assets:
Cash (Note 1).................................... $ 644,685 $563,327 $ 427,099
Fees and loans receivable (Note 2)................. 882,588 540,619 2,999,686
Loans held for sale.................................. -- -- 22,937,412
Miscellaneous receivables
(net of allowance for
doubtful accounts of
$18,000, $40,000, $18,000
and $9,000, respectively (Note 3).............. 101,468 70,787 165,371
Property held for sale (Note 4).................. 207,500 -- 207,500
Investment in 430 Carroll
Street Inc. (Note 5)........................... 175,224 -- --
Prepaid expenses and other
current assets................................. 51,293 67,779 502,859
Loans receivable--related
party (Note 6)................................. 12,949 -- 214,189
----------- --------- ----------
Total current assets......................... 2,075,707 1,242,512 27,454,116
--------- --------- ----------
Property and equipment
(Notes 1 and 7):
Furniture and equipment.......................... 241,641 155,625 1,210,113
Automobile....................................... 35,677 -- 82,147
-------- --------- -----------
277,318 155,625 1,292,260
Less accumulated depreciation.................... 90,456 56,012 156,786
-------- --------- ----------
Total property and
equipment...................................... 186,862 99,613 1,135,474
------- -------- ----------
Other assets:
Deferred and refundable income taxes............. - - 90,000
Property held for development.................... -- 253,235 --
Investment in 430 Carroll
Street Inc. (Note 5)........................... -- 280,000 --
Deferred offering costs.......................... 120,000 -- --
Deposits......................................... 48,249 38,094 132,055
--------- ------------ ------------
Total other assets............................. 168,249 571,329 222,055
--------- ----------- ------------
$2,430,818 $1,913,454 $28,811,645
========== ========== ===========
DECEMBER 31, SEPTEMBER 30, 1997
1996 1995 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Warehouse finance facilities...... -- -- 22,277,228
Cash overdraft.................... $ 385,858 $ -- $ 476,358
Bank loan payable (Note 9)........ 133,250 -- 108,375
Current maturities of
long-term debt (Note 7)......... 17,562 -- 108,252
Accounts payable, accrued
expenses and other current
liabilities (Note 8)............ 456,002 466,337 1,834,600
---------- ---------- ------------
Total current liabilities..... 992,672 466,337 24,804,813
---------- ---------- -----------
Long-term liabilities:
Notes payable (Note 7)............ 28,772 -- 235,605
Loans payable--related
party (Note 6).................. -- 348,969 --
------------ ---------- ----------------
Total long-term liabilities... 28,772 348,969 235,605
----------- ---------- -----------
Total liabilities............... 1,021,444 815,306 25,040,418
---------- ---------- ---------------
Commitments and contingencies
(Note 9).......................... -- -- --
Stockholders' equity (Note 9):
Common stock, $1 par value
Authorized, issued and
outstanding--7,500 shares....... 7,500 7,500 22,000
Additional paid-in capital........ 1,234,673 1,234,673 5,020,698
Retained earnings (deficit)....... 167,201 (144,025) (1,271,471)
--------- ---------- ------------
Total stockholders' equity.......... 1,409,374 1,098,148 3,771,227
---------- ---------- ------------
$2,430,818 $1,913,454 $28,811,645
========== ========== ===========
See accompanying notes to financial statements.
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1995 1997 1996
(*) (Unaudited) (Unaudited)
Revenues:
Commissions and fees......................... $8,289,788 $5,487,738 $ $
Interest..................................... 22,335 5,649
---------- ----------
Total revenues............................. 8,312,123 5,493,387 7,222,617 5,769,446
---------- ---------- ---------- ----------
Expenses:
Selling...................................... 3,276,575 2,567,762 3,278,732 2,509,730
General and administrative................... 3,569,708 1,804,091 4,138,093 2,794,213
Interest..................................... 1,004,103 710,294 1,159,240 674,573
Write down of land and investment to
fair market value (Notes 4 and 5).......... 150,511 -- -- --
---------- --------- --------- ---------
Total expenses........................... 8,000,897 5,082,147 8,576,065 5,978,516
---------- ---------- ---------- ----------
Net income (loss).............................. 311,226 411,240 (1,353,448) (209,070)
Retained earnings (deficit)
at beginning of period....................... (144,025) (555,265) 167,201 (144,025)
Less: Dividend (Note 5)........................ -- -- (175,224) --
--------- --------- ---------- ---------
Retained earnings (deficit)
at end of period............................. $ 167,201 $ (144,025) $ (1,361,471) $ (353,095)
========== ========== ============= ==========
Pro Forma Information
(Unaudited) (Notes 10 and 11)
Pro forma net income (loss)
(unaudited Note 10):
Historical net income (loss)........... $ 311,226 $ 411,240 $ (1,353,448) $ (209,070)
Pro forma provision
(credit) for income taxes............ 109,989 (48,968) (472,637) (68,903)
---------- ---------- ----------- ----------
Pro forma net income (loss)............ $ 201,237 $ 460,208 $ (880,811) $ (140,167)
========== ========== =========== ==========
Pro forma per share data
(unaudited) (Note 11):
Pro forma net income (loss)
per share............................ $.17 $.38 $(.54) $(.12)
==== ==== ===== =====
Pro forma weighted average
shares outstanding................... 1,200,000 1,200,000 1,644,445 1,200,000
========== ========== ========== ==========
(*) Reclassified for comparability.
See accompanying notes to financial statements.
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1995 1997 1996
---- ---- ---- ----
(*) (UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net income (loss)......................... $311,226 $ 411,240 $ (1,353,448) $(209,070)
-------- --------- ------------ ---------
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities
Depreciation............................ 34,444 19,348 66,330 22,386
Provision for doubtful accounts......... 72,957 43,733 -- --
Loss on sale of property assets......... -- 3,081 -- --
Write down of land and
investment to fair market value....... 150,511 -- -- --
(Increase) decrease in
fees and loans receivable............. (341,969) (399,092) (2,117,098) (6,477)
Loans held for sale....................... -- -- (22,937,412) --
Warehouse borrowings...................... -- -- 22,277,228 --
(Increase) decrease in
miscellaneous receivables............ (103,638) (19,480) (63,903) (90,640)
(Increase) decrease in
prepaid expenses..................... 16,486 (8,929) (451,566) 35,226
(Increase) decrease in deposits......... (10,155) (22,644) (83,806) (22,079)
Increase (decrease) in accounts
payable, accrued expenses and
other current liabilities............... (10,335) 256,746 1,478,598 231,883
------- --------- ---------- --------
Total adjustments......................... (191,699) (127,237) (1,831,629) 170,299
-------- --------- ------------- ---------
Net cash provided by (used in)
operating activities...................... 119,527 284,003 (3,185,077) (38,771)
--------- --------- ------------ --------
Cash flows used in investing activities:
Expenditures for property
and equipment........................... (121,693) (67,452) (1,014,942) (111,943)
Increase in loans
receivable-related party................ -- -- (201,240) --
---------- ---------- ----------- ----------
Net cash used in investing activities....... (121,693) (67,452) (1,216,182) (111,943)
-------- --------- ------------- -----------
See accompanying notes to financial statements.
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1995 1997 1996
---- ---- ---- ----
(*) (UNAUDITED) (UNAUDITED)
Increase (decrease) in bank
loan payable......................... 133,250 -- (24,875) --
Increase in note payable............. 46,334 -- 480,150 56,152
Deferred offering costs.............. (120,000) -- --- --
Proceeds from issuance of
common stock....................... 3,920,525 --
Increase (decrease) in due
to officers........................ (361,918) 238,237 --- (326,358)
Payments of long-term debt........... -- -- (182,627) (4,443)
-------- -------- -------- -------
Net cash provided by (used in)
financing activities................. 83,524 238,237 4,283,673 66,458
--------- --------- --------- ------
Net increase (decrease) in cash........ 81,358 454,788 (117,586) (84,256)
Cash at beginning of year.............. 563,327 108,539 644,685 563,327
--------- --------- --------- ---------
Cash at end of year.................... $ 644,685 $ 563,327 $ 527,099 $ 479,071
========= ========= ========= =========
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the period:
Income taxes....................... $ -- $ -- $ - $
========= ========= ========= =========
Interest........................... $ 910,975 $ 710,294 $ 874,050 $ 674,573
========= ========= ========= =========
Supplemental Schedules of
Non-Cash Investing and Financing
Activities: Dividend paid by
transfer of investment in 430
Carroll Street, Inc................ $ -- $ -- $ 175,224 $ --
========= ========= ======== =========
See accompanying notes to financial statements.
CFI MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(INFORMATION RELATING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
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 Offering the existing shareholders of CFI Mortgage will
contribute all of their shares of CFI Mortgage common stock to CFI in exchange
for 1,200,000 shares of Common Stock of CFI.
(B) GEOGRAPHIC CONCENTRATION:
Substantially all of CFI's loan origination and purchase volume is derived
from the State of Florida. Although CFI is licensed or registered in three
states, CFI intends to concentrate its loan origination and purchase activity 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) USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
(D) CASH:
CFI invests its cash in high quality financial institutions, which at times
may be in excess of the Federal Deposit Insurance Corporation insurance limits.
(E) ALLOWANCE FOR LOSSES:
The determination of the balance of the allowance for credit losses is
based on an analysis of the loan portfolio and reflects an amount which, in
management's judgment, is adequate to provide for potential loan losses.
Provisions for credit losses are charged to operating expenses.
(F) PROPERTY AND EQUIPMENT:
Equipment is stated at cost less accumulated depreciation. CFI's policy is
to provide for depreciation of physical properties over their estimated useful
lives 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 properties the carrying value and related accumulated
depreciation are removed from the accounts.
(G) 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. However,
since CFI's mortgage inventory is normally held for a short period of time,
management has elected to recognize such deferred income upon sale.
(H) INCOME TAXES:
CFI, with the consent of its stockholders, has elected to have its income
or loss reported directly by the stockholders under Subchapter S of the Internal
Revenue Code.
NOTE 2--FEES AND LOANS RECEIVABLE.
CFI sells its mortgages in the secondary market along with servicing rights
to investors as well as arranging for resale of the mortgages to these
investors. Fees receivable represents fees and mortgage payments from mortgages
sold but not yet funded by investors.
NOTE 3--MISCELLANEOUS RECEIVABLES.
Included in miscellaneous receivables at December 31, 1995 is a receivable
of $78,925 from a construction company whose principal was incarcerated.
Management estimated that an allowance for doubtful accounts of $40,000 was
required at December 31, 1995. During 1996 management reevaluated this
receivable and determined that it is worthless and charged the remaining $38,925
to bad debts in 1996.
NOTE 4--PROPERTY HELD FOR RESALE.
CFI acquired a parcel of land in Florida which it intended to develop. In
1996, management decided to sell the land and accordingly reclassified the land
as a current asset at December 31, 1996. As the cost of the land exceeded its
fair market 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 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 Company's CEO. The basis of the 40% interest is $280,000. In
December 1996, management determined, in conjunction with offering its
undeveloped land in Florida for sale, to divest 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 is $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 as at December
31, 1996.
On March 26, 1997, a dividend of CFI's undistributed subchapter "S"
earnings in the amount of $175,224 was paid by the transfer of title of this 40%
stock interest to CFI's two stockholders who are the sons of the CEO.
NOTE 6--RELATED PARTY TRANSACTIONS.
Since inception, the CEO would make non-interest bearing temporary cash
advances to CFI for its operational cash flow requirements. Through December 31,
1994, the CEO had advanced CFI (net of repayments) $164,966 and during 1995 made
additional advances to the CFI of $284,003. In 1996, these advances were repaid
to the CEO aggregating $448,969 as well as paid an advance to him of $12,949 and
an additional advance in 1997 of $4,148 which is classified in the accompanying
financial statements as a current asset at September 30, 1997 as it is the CEO's
intention to repay the advances within one year.
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. 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's $5,000 investment was charged to operations in 1996.
NOTE 7--LONG-TERM NOTES PAYABLE.
In 1996, CFI Mortgage acquired certain property assets and financed a
portion of the acquisition price through two long-term notes. The notes are
collateralized by the equipment purchased. At December 31, 1996, the balances
payable under the notes are as follows:
DEC. 31, SEPTEMBER 30, 1997
1996 (UNAUDITED)
11% interest bearing notes payable in equal monthly
installments of $869.............................................. $14,358 $6,537
8% interest bearing notes payable in equal monthly
installments of $874.............................................. 31,976 25,906
9.5% interest bearing notes payable in equal
monthly installments of $622...................................... - 11,119
8.65% interest bearing notes payable in equal monthly
installments of $500.............................................. - 28,667
9.5% interest bearing notes payable in equal monthly
installments of $429.............................................. - 11,717
8.45% interest bearing notes payable in equal monthly
installments of $416.............................................. - 15,850
10.27% interest bearing notes payable in equal monthly
installments of $3,242............................................ - 95,281
16.27% interest bearing notes payable in equal monthly
installments of $5,367............................................ - 148,776
$46,334 $343,853
Less: Portion payable in one year 17,562 108,223
------- ---------
Long-term notes payable $28,772 $235,630
======= ========
Annual maturities of long-term debt are as follows:
DEC. 31, SEPTEMBER 30,
1996 1997
---- ----
(UNAUDITED)
1997....................... $17,562 $20,832
1998....................... 13,982 108,223
1999....................... 9,664 109,946
2000....................... 5,126 97,668
2001....................... - 7,184
--------- ----------
$46,334 $343,853
======= ========
NOTE 8--ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accounts payable, accrued expenses and other current liabilities are
comprised of the following:
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1996 1995 1997 1996
---- ---- ---- ----
(UNAUDITED)
Accounts payable.......................... $123,477 $ 47,520 1,068,786 389,945
Accrued interest.......................... 93,128 -- 378,318 84,273
Accrued commissions and payroll........... 150,316 362,676 201,732 182,095
Accrued payroll taxes..................... 54,149 50,036 21,253 29,771
Sundry.................................... 34,932 6,105 164,511 12,136
-------- -------- ------------ ----------
$456,002 $466,337 $1,834,600 $698,220
======== ======== ========== ========
NOTE 9--COMMITMENTS AND CONTINGENCIES:
(A) LINES OF CREDIT:
CFI issues commitments for mortgage and other loans as part of its normal
business transactions of mortgage lending. To assist CFI in its normal business,
CFI maintains various mortgage purchase agreements, warehouse credit lines and
revolving purchase facility credit lines with various banks. Under these credit
lines, the financial institutions purchase the mortgages from the company
without recourse. The credit lines have repurchase agreements which obligate CFI
to have had furnished the bank with investors who committed to repurchase the
mortgage loans from the bank prior to CFI's sale of the mortgage to such
financial institution. Additionally, some of the agreements provide for
repurchase by CFI if any of the mortgage loans are not resold to investors and
go to actual foreclosure sale. At the foreclosure sale CFI, if necessary, will
repurchase the mortgage. At December 31, 1996, CFI is indebted to one of its
lenders for $133,250 due to the repurchase of two mortgages by CFI. Those
mortgages aggregating $134,297 were sold in 1997 and at December 31, 1996 were
included in mortgages receivable. Some of these obligations under these
agreements are personally guaranteed by the Company's stockholders.
At December 31, 1996 and September 30, 1997, CFI has aggregate lines of
credit, respectively, of $21,000,000 and $25,000,000 from five and three
financial institutions, respectively, ranging from $2,000,000 to $20,000,000.
The utilized and outstanding portions of the lines of credit at December 31,
1996 and September 30, 1997 are $17,216,766 and $19,266,000, respectively, the
largest of which is $10,010,365 and $14,538,271, respectively,--an amount that
is $2,010,365 over its $8,000,000 line with the bank at December 31, 1996. CFI
is also $2,068,919 over its $2,000,000 line of credit with another financial
institution at December 31, 1996. At September 30, 1997, CFI's borrowings do not
exceed any of its lines of credit maximum amounts. At December 31, 1996 and
September 30, 1997, CFI had unused lines of credit aggregating $7,863,518 and
$5,734,000, respectively. The lines bear interest at rates ranging from 9.0% to
9.5% at December 31, 1996 and September 30, 1997.
The outstanding balances of the lines are as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1995 1997 1996
---- ---- ---- ----
(UNAUDITED)
Maximum outstanding balance.............. $17,216,766 $13,640,117 $19,266,000 $17,216,766
Average outstanding balance.............. $12,309,621 $8,011,645 $13,216,100 $11,569,400
Weighted average interest rate........... 8.2% 8.9% 8.1% 8.2%
(B) LEASES:
CFI leases its corporate headquarters and loan office facilities under real
property operating leases. CFI leases office equipment under various operating
leases. The leases for the most part require CFI to pay certain escalation
clauses for real estate taxes, operating expenses, usage and common area
charges. Rent expense for real property leases charged to operations in 1996 and
1995 was $403,786 and $189,828, respectively, and $163,894 and $77,463,
respectively, for equipment leases. Rent expense for real property charged to
operations for the nine months ended September 30, 1997 and 1996 was $105,993
and $302,029, respectively, and $156,384 and $116,740, respectively, for
equipment leases.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1996 are as follows:
YEARS ENDING REAL
DECEMBER 31, PROPERTY EQUIPMENT
------------- --------- ---------
1996..................................... $337,384 $103,965
1997..................................... 262,532 66,790
1998..................................... 91,844 29,482
1999..................................... 19,837 11,080
-------- --------
Total minimum future
rental payments $711,597 $211,317
======== ========
YEARS ENDING REAL
SEPTEMBER 30 PROPERTY EQUIPMENT
------------ --------- -----------
UNAUDITED
1997..................................... $410,851 $156,384
1998..................................... 805,247 261,612
1999..................................... 524,110 181,596
2000..................................... 220,265 145,740
Total minimum future
rental payments
(C) INITIAL SALE OF CFI'S SECURITIES TO THE PUBLIC:
CFI entered into a letter of intent in December 1996 with an underwriter to
offer its common stock to the public. The arrangement was modified so that CFI
Mortgage Inc., which was incorporated in Delaware on March 18, 1997, will offer
for sale to the public up to 1,000,000 shares of its common stock (including
120,000 shares of common stock issuance upon exercise of the Underwriter's
over-allotment option) at $5 per share on a firm commitment basis. Immediately
prior to the Public Offering, the Existing Stockholders of CFI Mortgage will
contribute all of their shares of CFI's capital stock to CFI Mortgage Inc. in
exchange for all of the common stock 1,200,000 shares of CFI Mortgage Inc. (the
"Exchange"). The Underwriter received, among other items, 13% of the gross
proceeds from the Public Offering in payment of underwriting discounts and a
non-accountable expense allowance. Additionally, the Underwriter received
warrants at a price of $0.01 per warrant to purchase shares of CFI Mortgage
Inc.'s common stock equal to 10% of the number of common shares sold in the
Public Offering. The warrants are exercisable for five years at 120% of the
initial offering per share amount. The Underwriter may require CFI Mortgage Inc.
at its expense to register the warrants and the underlying shares of common
stock commencing one year after the closing of the initial offering. CFI paid
the underwriter $100,000 in December 1996 as a non-refundable deposit against
the fees to be earned.
(D) 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.
NOTE 10--SUPPLEMENTAL PRO FORMA INFORMATION (UNAUDITED).
CFI and its stockholders elected S corporation status for federal income
tax reporting purposes. Under this election, the individual stockholders report
all of the corporation's income and expenses on their personal income tax
returns and are liable for all taxes thereon. Simultaneously with the exchange,
CFI will cease to be treated as an S corporation. The following is the pro forma
effect to CFI's statements of operations for 1996 and 1995 and for the nine
months ended September 30, 1997 and 1996, as if CFI and its shareholders had not
elected S corporation status.
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- --------------
1996 1995 1997 1996
---- ---- ---- ----
(UNAUDITED)
Historical net income (loss)
as reported $311,226 $411,240 ($1,353,448) ($209,070)
Provision (credit) for
income taxes $109,989 (48,968) (472,637) (68,903)
-------- -------- --------- --------
Pro forma net income (loss) $201,237 $460,208 ($880,811) ($140,167)
======== ======== ========== ==========
The provision for income taxes
is comprised of:
Currently payable $167,283 $ -- $ -- $ --
Deferred (57,294) (48,968) ($472,637) ($68,903)
-------- -------- ---------- ---------
$109,989 ($48,968) $472,637 ($68,903)
======== ======== ======== =========
The Federal tax credit in fiscal 1995 is the result of the reduction in the
reserve against the deferred tax asset arising from the net operating
carryforward loss through fiscal 1994. At December 31, 1994 management was not
able to determine if the utilization of the net operating loss would be more
likely than not and accordingly the asset of $188,790 was fully reserved. In
1995, $139,822 of the deferred tax asset was utilized and management determined
that it was more likely than not the remaining net operating loss carryforward
would be utilized and, accordingly, the deferred tax asset reserve was written
off resulting in a credit to income tax expense of $48,968. 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 resale. Upon the successful
completion of the Company's initial sale of its securities to the public, a
deferred tax asset of $21,770 and a corresponding increase in stockholders'
equity will be reflected in the Company's financial statements.
A reconciliation of the statutory income tax to pro forma effective rate is
as follows:
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ---------------
1996 1995 1997 1996
---- ---- ---- ----
(UNAUDITED)
Federal statutory rate 34.0% 34.0% 34.0% 34.0%
Utilization of net operating
loss carryforward -- (46.4) -- --
Nondeductible items 1.3 0.5 1.0 (1.0)
--- --- --- ---
Effective tax rate 35.3% (11.9)% 35.0% 33.0%
==== ===== ===== =====
NOTE 11--NET INCOME PER SHARE--PRO FORMA (UNAUDITED).
Net income per share--pro forma (unaudited) was computed by using the
weighted average number of shares outstanding during each period retroactively
reflecting the proposed exchange.
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....................... 2
Forward-Looking Statements.................. 2
Prospectus Summary.......................... 3
Risk Factors................................ 5
Use of Proceeds............................. 12
Dividend Policy............................. 12
Price Range of the Company's Common
Stock................................... 13
Selected Financial Data..................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................... 16
Business.................................... 22
Management.................................. 32
Certain Relationships and Related
Party Transactions...................... 36
Principal Stockholders...................... 38
Description of Capital Stock................ 39
Plan of Distribution........................ 44
Selling Stockholders........................ 45
Legal Matters............................... 45
Experts..................................... 45
Index to Financial Statements............... F-1
CFI MORTGAGE INC.
PROSPECTUS
__________, 1998
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........................ $10,000
Accounting fees and expenses................... $ 4,000
Miscellaneous.................................. $ 1,748
--------
Total................................. $18,000
========
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 2,060 shares of Series A
Convertible Preferred Stock for $2,000,000 to certain institutional investors.
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
++5.1 Opinion of Stroock & Stroock & Lavan LLP
*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 Stroock & Stroock & Lavan LLP (included in Exhibit 5.1)
++25 Power of Attorney (included on signature page)
- --------------
+ 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.
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 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.
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 Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in the
City of West Palm Beach, State of Florida, on March 4, 1998.
CFI MORTGAGE INC.
By: /S/ CHRISTOPHER C. CASTORO
Christopher C. Castoro
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
* Chairman of the
Vincent C. Castoro Board of Directors March 4, 1998
/S/ CHRISTOPHER C. CASTORO Chief Executive
Christopher C. Castoro Officer and Director March 4, 1998
* Principal
Robert A. Simm Accounting Officer March 4, 1998
* Vice-President
Vincent J. Castoro and Director March 4, 1998
*
Thomas J. Healy Director March 4, 1998
*
Robert J. Thompson Director March 4, 1998
*By: /s/ CHRISTOPHER C. CASTORO
Christopher C. Castoro
Attorney-in-fact
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
+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
++5.1 Opinion of Stroock & Stroock & Lavan LLP
*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 Stroock & Stroock & Lavan LLP (included in Exhibit 5.1)
++25 Power of Attorney (included on signature page)
- --------------
+ 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.