AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
REGISTRATION NO. 333-56889
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ARBOR NATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK (6282) ( )
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
------------------------
333 EARLE OVINGTON BOULEVARD
UNIONDALE, NY 11553
(516) 832-8002
(Address, including zip code and telephone number, including area code
of registrant's principal executive offices)
------------------------------
IVAN KAUFMAN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
333 EARLE OVINGTON BOULEVARD
UNIONDALE, NY 11553
(516) 832-8002
(Name, address, including zip code and
telephone number, including area code of agent for service)
------------------------------
COPIES TO:
JONATHAN A. BERNSTEIN, ESQ. RICHARD A. LIPPE, ESQ. FRED B. WHITE III, ESQ.
STEPHEN M. GOODMAN, ESQ. MELTZER, LIPPE,GOLDSTEIN, WOLF SKADDEN, ARPS, SLATE,MEAGHER
PRYOR CASHMAN SHERMAN & & SCHLISSEL, P.C. & FLOM LLP
FLYNN LLP THE CHANCERY 919 THIRD AVENUE
410 PARK AVENUE 190 WILLIS AVENUE NEW YORK, NY 10022
NEW YORK, NY 10022-4441 MINEOLA, NY 11501
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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 statement 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,
check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED JUNE 15, 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.
SHARES
[LOGO]
COMMON STOCK
------------------
All of the shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Arbor
National Holdings, Inc., a New York corporation (the "Company" or "ANHI").
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price will be $ per share. See "Underwriting" for information relating
to factors considered in determining the initial offering price. The Company has
applied to have the Common Stock approved for quotation on the NASDAQ National
Market under the symbol "ARBH."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 10.
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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.
------------------------
Underwriting
Discounts and Proceeds to
Price to Public(1) Commissions(1) Company(2)
Per Share..........................................
Total..............................................
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $813,000.
(3) The Underwriters have been granted an option, exercisable within 30 days of
the date hereof, to purchase up to additional shares of Common Stock
on the same terms and conditions as set forth above. If the Underwriters
exercise such option in full, the total price to public, underwriting
discount and proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
The Common Stock is offered by the Underwriters when, as and if delivered to
and accepted by them, subject to their right to withdraw, cancel or reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of the shares to the Underwriters will be made through
the facilities of The Depository Trust Company, New York, New York on or about
.
LEHMAN BROTHERS FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1998.
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES
"FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-
LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" CONSTITUTE CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 (as amended, the "Registration Statement") of which this
Prospectus is a part under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document are summaries of the material terms
of such contract, agreement or other document. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement (including the exhibits thereto)
filed by the Company with the Commission may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available
for inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a website that contains reports, proxy and
information statements and other information. The website address is http://
www.sec.gov.
The Company has applied to have the Common Stock approved for quotation on
the NASDAQ National Market, and the Registration Statement and such reports,
proxy and information statements and other information concerning the Company
may also be inspected at the offices of the NASDAQ National Market located at
1735 K Street, N.W., Washington, D.C. 20006.
Upon the effectiveness of the Registration Statement, the Company will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and, in accordance therewith, will file
reports, proxy and information statements and other information with the
Commission. Such reports, proxy and information statements and other information
can be inspected and copied at the addresses set forth above. The Company
reports its financial statements on a year ended December 31. The Company
intends to furnish its shareholders with annual reports containing consolidated
financial statements audited by its independent certified public accountants and
with quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.
Arbor National Holdings, Inc. is a New York corporation formed in June 1998.
The Company's principal executive offices are located at 333 Earle Ovington
Blvd., Uniondale, New York 11553 and its telephone number is (516) 832-8002.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE COMBINED FINANCIAL STATEMENTS AND THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF THE FACTORS SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED (I) THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE TRANSACTIONS DESCRIBED BELOW UNDER "RECENT
DEVELOPMENTS" AND "REORGANIZATION TRANSACTIONS" HAVE BEEN COMPLETED AND THAT THE
OVER-ALLOTMENT OPTION DESCRIBED IN "UNDERWRITING" IS NOT EXERCISED; AND (II)
REFERENCES TO THE "COMPANY" MEAN, AS APPROPRIATE, PRIOR TO THE EXCHANGE
TRANSACTION (AS DEFINED BELOW), ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC ("ANCM")
AND ARBOR SECURED FUNDING, INC. ("ASF"), AND AFTER THE EXCHANGE TRANSACTION,
ARBOR NATIONAL HOLDINGS, INC. ("ANHI") AND ITS SUBSIDIARIES.
THE COMPANY
Arbor National Holdings, Inc. is a fully integrated real estate financial
services company. The Company funds, on a negotiated basis, high-yielding
lending and investment opportunities in commercial real estate through mezzanine
loans, bridge loans, note acquisitions and other customized financing structures
("Customized Financing"). It also derives substantial revenue from the
origination for sale and servicing of government-sponsored and conduit mortgage
loans ("Permanent Loans") for multifamily and other types of commercial
properties.
In recent years the Company has experienced significant growth. Total
revenues increased from $16.7 million to $24.3 million for the years ended
December 31, 1996 and 1997, respectively, and from $4.3 million to $8.0 million
for the quarters ended March 31, 1997 and 1998, respectively. Pro forma net
income increased from $2.5 million to $5.2 million for the years ended December
31, 1996 and 1997, respectively, and from $0.7 million to $2.0 million for the
quarters ended March 31, 1997 and 1998, respectively. At March 31, 1998, the
Company's commercial servicing portfolio consisted of 136 loans aggregating
approximately $536 million and its portfolio of loans held for investment
consisted of 38 loans aggregating approximately $56 million.
The Company targets the market for transactions under $20 million,
particularly in the $1 million to $5 million range, where management believes it
has competitive advantages, particularly its lower cost structure and its
in-house capabilities. The Company generates a continuing pipeline of real
estate finance and investment opportunities through its six full-service offices
in Atlanta, Boston, Chicago, Dallas, San Francisco and Uniondale, New York, its
three satellite offices in Miami, Los Angeles and Florence, Kentucky (greater
Cincinnati, Ohio) and its extensive network of strategic relationships with
investment banking firms, brokers, developers, real estate owners and operators,
and other financial institutions.
The Company's Customized Financing activities highlight its unique
strengths. First, the Company's strong presence and established relationships in
the marketplace facilitate its ability to source and identify many
non-traditional lending opportunities. Second, the specialized lending expertise
and entrepreneurial abilities of its staff enable the Company to provide
creative, flexible financing structures, thus enhancing value for the Company
and its borrowers. Third, the Company, as a provider of both transitional
financing under its Customized Financing activities and permanent mortgage
financing under its Permanent Loan activities, is uniquely positioned in its
targeted market as a single source of financing solutions.
The Company's Permanent Loan activities consist of originating commercial
mortgage loans pursuant to government-sponsored and conduit loan programs, and
selling those loans, typically on a whole loan basis, to government-sponsored
entities or other secondary market investors, while retaining the servicing of
those loans for a fee. As compared to Customized Financing activities, the
Company's Permanent Loan activities generate a more stable and predictable flow
of revenue through servicing and other fee income. In addition, the Permanent
Loan activities keep the Company closely apprised of trends in the commercial
real estate market and provide an additional source for Customized Financing
opportunities. The
3
Company primarily originates permanent loans pursuant to the FNMA DUS Program
(as defined below), under which it is one of 28 approved lenders. To date, the
Company has had no credit losses on its commercial servicing portfolio.
The Chief Executive Officer and founding stockholder of the Company is Ivan
Kaufman, who was the co-founder, chairman and controlling stockholder of Arbor
National Holdings, Inc. ("Old Arbor"), a publicly held, NASDAQ traded company
that went public on August 7, 1992 and was subsequently sold in January 1995 to
BankAmerica Corporation. From 1983 through 1994, under Mr. Kaufman's management,
Old Arbor's residential mortgage lending activities grew to 25 branches in
eleven states, with approximately 1,000 employees, originating more than $4
billion of loans annually and servicing nearly $5.5 billion. In connection with
the sale of Old Arbor to BankAmerica Corporation, the commercial mortgage
lending operations were acquired by Mr. Kaufman. Since this acquisition, the
Company has evolved to become a full service provider of real estate financial
services to owners and developers of commercial and multifamily real estate
properties. In anticipation of the Offering, ANHI was formed in 1998 as a
holding company for ANCM and ASF, which were reorganized into a single entity
and then acquired by ANHI through an exchange of equity. See "Recent
Developments" and "Reorganization Transactions."
COMPETITIVE ADVANTAGES
- BREADTH OF PRODUCT OFFERINGS--Since the Company offers both short-term and
long-term funding capabilities, as well as the skills and expertise to
develop creative, flexible financing structures, the Company can present
itself as a single-source financing alternative, attracting individual
clients with diverse and complex needs.
- FOCUS ON UNDERSERVED MARKET--The Company specializes in Customized
Financing transactions under $20 million, particulary the $1 million to $5
million range, which larger financial institutions will not consider, or,
because of organizational constraints, cannot offer on terms comparable to
those provided by the Company.
- ORIGINATION SYNERGIES--The Company's participation in Permanent Loan
programs provides significant synergies with the Customized Financing
business. The Permanent Loan programs create a stream of opportunities
that require transitional financing to position the underlying property
for a Permanent Loan while also providing an effective exit strategy for
Customized Financing transactions generated from other sources.
- RAPID EXECUTION CAPABILITY--The Company's in-house expertise enables it to
act on proposals quickly and decisively and analyze opportunities, provide
commitments and close transactions within a few weeks and sometimes days,
if required. The Company believes its reputation for rapid execution
attracts, from both borrowers and other lenders, opportunties that would
not otherwise be available.
- CONTINUITY AND EXPERIENCE OF MANAGEMENT--The four senior executive
officers of the Company (including Mr. Kaufman) have an average of more
than twelve years of experience in real estate finance and investing,
while the 21 vice presidents and regional directors average almost sixteen
years of relevant industry experience. Eleven members of the Company's
management team worked with Mr. Kaufman at Old Arbor. The remainder have
been recruited because of their particular product specialization and
expertise in analyzing and structuring complex financial transactions in
commercial real estate.
- COMMITMENT OF SENIOR MANAGEMENT AND KEY EMPLOYEES--In addition to the
substantial ownership of the Company by Mr. Kaufman, all senior executives
and eighteen key employees have made significant equity investments in the
Company which align their interests with those of the Company's other
stockholders.
4
- NETWORK OF RELATIONSHIPS--In addition to the market presence represented
by its full-service and satellite offices, the Company generates
significant opportunities through referrals from an extensive network of
strategic relationships with investment banking firms, brokers,
developers, real estate owners and operators and other financial
institutions.
BUSINESS STRATEGIES
- INCREASE CUSTOMIZED FINANCING OPPORTUNITIES by using the additional
capital from this Offering to offer an expanded range of maturities and
other terms suitable for various borrowers and projects.
- GROW THE COMPANY'S STREAM OF INTEREST INCOME by using the additional
capital from this Offering to permit longer retention of bridge and
mezzanine loans on the Company's balance sheet.
- DIVERSIFY THE COMPANY'S ORIGINATIONS AND INVESTMENTS beyond loans on
multifamily properties to include financings of assisted-living
facilities, hotels and other types of commercial property developments.
- CONTINUE THE COMPANY'S GEOGRAPHIC EXPANSION into selected major real
estate markets throughout the United States to expand its originations
capabilities by increasing local awareness of the Company's capabilities
and improving the Company's ability to monitor local activity for suitable
opportunities.
- INCREASE THE AVERAGE OUTSTANDING LOAN BALANCE of Customized Financing
activities through the utilization of the additional capital from this
Offering to fund larger transactions in the under $20 million market.
- LEVERAGE THE COMPANY'S CORE COMPETENCIES TO EXPAND ITS SERVICES and
develop related products, such as the FHA-insured multifamily and
healthcare financing program, as well as acquiring or developing in-house
property management capabilities.
RECENT DEVELOPMENTS
ANCM, which will become a wholly-owned subsidiary of ANHI on the closing of
this Offering (see "Reorganization Transactions"), acquired 100% of the
outstanding stock of ASF as of April 1, 1998 through the following series of
transactions, all of which occurred on that date (referred to herein as the "ASF
Transactions").
Prior to its acquisition by ANCM, ASF distributed a dividend of certain
assets that were not consistent with the intended business of the Company to
Ivan Kaufman, its sole stockholder, at their net book value of $1.5 million,
leaving ASF with assets consisting primarily of 19 loans in the aggregate amount
of $9.2 million. Immediately thereafter, Mr. Kaufman sold the outstanding common
stock of ASF for its remaining net book value of approximately $3.7 million to
the Ivan and Lisa Kaufman Family Trust, a trust for the benefit of Mr. Kaufman's
family members (hereinafter known as the "Trust"). Immediately thereafter, and
simultaneously with the purchase of Class B membership interests by certain
officers and employees of ANCM, the Trust, which was already a Class A member of
ANCM, purchased an additional Class A membership interest in ANCM by
transferring the ASF shares to ANCM. As a result of this transfer, the S
corporation status of ASF terminated. In connection with such transfer, Mr.
Kaufman agreed to indemnify the Company for any and all losses which may be
incurred by the Company or ANCM relating to any assets formerly owned by ASF and
any financing commitments previously made by ASF and subsequently transferred to
ANCM.
REORGANIZATION TRANSACTIONS
On June , 1998, all of the members of ANCM entered into an agreement (the
"Exchange Agreement") pursuant to which they agreed to exchange their membership
interests in ANCM for an
5
aggregate of 7,500,000 shares of Common Stock (the "Exchange Shares"). Pursuant
to the Exchange Agreement, the exchange is to be effected without further action
by the members immediately prior to the closing of the Offering, at which time
each holder of membership interests shall receive a pro rata allocation of the
Exchange Shares based on such member's capital account in ANCM relative to the
aggregate capital accounts of all members.
As a result of this Reorganization, the Company will record a deferred tax
liability of $2.2 million and make a [$6.0 million] distribution to members of
previously undistributed earnings. See "Selected Financial Data."
Prior to this Offering, the Company received certain financial management,
marketing and human resources services, as well as office space, from Arbor
Management LLC ("Arbor Management"), a company owned by Mr. Kaufman, for which
the Company paid a management fee. See "Certain Relationships and Related
Transactions." In addition to the transactions which will occur pursuant to the
Exchange Agreement (the "Exchange Transaction"), the Company will also make the
following administrative changes no later than the closing of the Offering: (1)
the sub-lease for the Company's Uniondale, New York office will be transferred
to the Company; (2) all employees, including senior management, will be employed
and paid by the Company; and (3) all employee benefit programs will be provided
and administered by the Company.
6
THE OFFERING
Common Stock Offered hereby....... shares(1)
Shares to be Outstanding After the shares(2)
Offering........................
NASDAQ National Market Symbol..... ARBH
Use of Proceeds................... The net proceeds from the Offering will be used
initially to repay outstanding indebtedness of the
Company and as working capital for general corporate
purposes relating to the growth of the Company.
- ------------------------
(1) Assumes that the Underwriters' over-allotment option is not exercised. If
such over-allotment option is exercised in full, up to an additional
shares of Common Stock will be issued and sold by the Company. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding on June ,
1998. Does not include shares of Common Stock reserved for issuance
under the Company's 1998 Stock Plan (as defined herein) including
shares issuable under options which will be granted at the closing of
this Offering. See "Management--Employee Benefit Plans.
7
SUMMARY SELECTED FINANCIAL DATA
The following table presents summary historical combined financial
information for the Company at the dates and for the periods indicated. The
historical operations data for the years ended December 31, 1997, 1996 and 1995
and balance sheet data as of December 31, 1997 and 1996 have been derived from
the audited combined financial statements of the Company included elsewhere in
this Prospectus. The historical balance sheet data as of December 31, 1995 has
been derived from the Company's unaudited combined financial statements. The
historical operations data presented for the three month periods ended March 31,
1998 and 1997 and balance sheet data presented as of March 31, 1998 have been
derived from unaudited interim combined financial statements and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the three month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for any other interim period or the entire year ending December 31,
1998. The summary historical combined financial information should be read in
conjunction with, and is qualified in its entirety by reference to, the Combined
Financial Statements and related notes as set forth elsewhere herein as well as
"Recent Developments."
OPERATIONS DATA:
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Interest earned...................... $ 2,529,979 $ 1,672,747 $ 9,641,121 $ 6,783,312 $ 3,725,904
Fee-based services, including gain on
sale of loans and real estate...... 4,373,022 2,340,814 12,686,908 8,794,147 2,627,716
Servicing revenue, net............... 539,241 305,253 1,957,983 1,082,699 394,461
Income from investment in real estate
held for sale, net of operating
expenses........................... 540,334 -- -- -- --
Total revenues....................... 7,982,576 4,318,814 24,286,012 16,660,158 6,748,081
Net income........................... 3,432,110 1,175,870 8,632,262 4,302,596 714,807
Provision for pro forma income
taxes(1)........................... 1,383,244 479,548 3,468,648 1,753,788 299,523
Pro forma net income................. 2,048,866 696,322 5,163,614 2,548,808 415,284
BALANCE SHEET DATA:
AT MARCH 31, AT DECEMBER 31,
---------------------------- --------------------------------------------
1998 1998
PRO FORMA(3) ACTUAL 1997 1996 1995
------------- ------------- -------------- ------------- -------------
Loans held for sale, net............ $ 11,826,971 $ 11,826,971 $ 46,482,348 $ 45,729,204 $ 35,349,890
Loans held for investment, net...... 54,821,182 56,273,289 68,609,906 38,685,564 36,030,439
Total assets........................ 93,491,402 94,308,355 140,181,758 94,761,612 79,926,724
Notes payable....................... 58,565,230 58,565,230 110,227,947 75,909,788 68,394,767
Total liabilities................... 75,988,049 67,853,049 117,148,176 81,298,478 72,243,186
Total equity........................ 17,503,353 26,455,306 23,033,582 13,463,134 7,683,538
8
OTHER DATA:
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
1998 1997 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
Return on average equity (2) 33.1% 20.9% 28.3% 24.1% 5.7%
Return on average assets (2) 7.0% 3.2% 4.4% 2.9% 0.9%
Debt to equity ratio............. 2.2x 4.6x 4.8x 5.6x 8.9x
Total originations:
Permanent Loans................ $ 23,779,000 $ 34,013,000 $ 215,545,000 $ 244,287,000 $ 104,374,000
Customized Financing........... $ 11,649,000 $ 18,080,000 $ 174,377,000 $ 74,103,000 $ 81,729,000
Commercial servicing portfolio
(4)............................ $ 535,765,000 $ 418,541,000 $ 529,956,000 $ 385,518,000 $ 211,633,000
Number of loans in commercial
servicing portfolio............ 136 117 133 110 111
Selling and administrative
expenses as a percentage of
total revenue.................. 14.3% 19.2% 14.4% 21.0% 23.1%
- ------------------------
(1) The pro forma provision for income taxes represents the difference between
historical income taxes and the income taxes that would have been reported
had the Company filed income tax returns as a taxable C corporation for each
of the periods presented using a pro forma income tax rate of 40%.
(2) Return on average equity and assets are based on pro forma net income and
historical average equity and assets, respectively. Return on average equity
and assets for the three months ended March 31, 1998 and 1997 are
annualized.
(3) The pro forma balance sheet gives effect to (i) the distribution by ASF of
$1,462,000 of ASF assets to Ivan Kaufman, its sole stockholder, on April 1,
1998, (ii) the contribution of capital by members on April 1, 1998 of
$717,062, net of a distribution of capital to a former employee, and (iii) a
distribution of previously undistributed earnings of [$6,000,000]. See
"Recent Developments" and "Reorganization Transactions."
(4) The Company's commercial servicing portfolio represents commercial loans
serviced for third parties for a fee and does not include loans held for
investment.
9
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK IN ADDITION TO THE OTHER INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its success depends
to a significant extent upon the experience of Ivan Kaufman and other senior
management executives of the Company. The Company believes that Mr. Kaufman in
particular has an established reputation in the real estate investment industry
which is expected to aid the Company in obtaining investment opportunities.
Prior to the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will acquire a key man life insurance
policy with respect to Mr. Kaufman in the amount of $5 million.
While the Company believes that it could replace these key executives, the
loss of their services could have a material adverse effect on the operations of
the Company through a diminished capacity to obtain investment opportunities and
to structure and execute potential investments. The Company may not successfully
recruit additional personnel and any additional personnel that are recruited may
not have the requisite skills, knowledge or experience necessary or desirable to
enhance the incumbent management. While directing the growth of the Company's
business, Mr. Kaufman and several of these executives have simultaneously
engaged, on a part-time basis, in other business activities of Mr. Kaufman which
are not competitive with the business of the Company. Their active involvement
in these other activities is not expected to continue beyond December 31, 1998.
The employment agreements of these key executives require them to devote
substantially all of their business time to rendering services for the Company
subsequent to December 31, 1998. See "Management--Employment Agreements." From
the closing of this Offering through December 31, 1998, Mr. Kaufman will
reimburse the Company for the services of these executives in his other business
ventures at a rate of $25,000 per month, an amount which is equal to the
estimated maximum portion of their time spent on such ventures, multiplied by
their per annum salary for 1998.
BROAD DISCRETION ON INVESTMENTS. The Company's business plan is general in
nature and subject to change based upon changing conditions and opportunities.
The Company invests in real estate-related assets, which may be subject to
varying degrees of risk generally incident to the ownership of real property.
Management has broad discretion and authority to invest in whatever loans or
other real estate-related assets the Company deems appropriate. The Company has
entered into, and may continue to enter into, joint venture arrangements with
third parties. The Company in certain instances will not have control over the
day-to-day operations of businesses and assets in which it invests in the form
of a joint venture, and will therefore be dependent on third-party partners for
the success of any such joint venture. Further, the Company may engage in
construction financing for development stage projects which is inherently
riskier than the Company's Permanent Loan and other Customized Financing
activities. Also, there are no limits as to the size of a particular transaction
which can result in significant concentration of capital in a single investment.
No assurance can be given that management's decisions on funding any particular
investment or any type of investment structure in this regard will result in a
profit for the Company.
CREDIT CONCENTRATION OF LOANS HELD FOR INVESTMENT. As of March 31, 1998,
46.9% of the Company's portfolio of loans held for investment consisted of three
loans of $11.1 million, $5.5 million and $10.4 million. These loans were held by
two unrelated borrowers and secured by individual properties or interests in
investment partnerships. A default by either borrower on any of these loans
would significantly reduce the value of such portfolio. In such event, the
business, prospects, financial condition and results of operations of the
Company could be materially adversely affected.
POSSIBLE VOLATILITY IN QUARTERLY RESULTS. Primarily due to the nature of
Customized Financing transactions, trends in origination volume, revenues and
earnings may fluctuate, causing the Company's quarterly results from these
activities to fluctuate and limiting the value of comparing operating results
from quarter to quarter. These limitations may result in uncertainty in the
market for the Common Stock and may
10
therefore affect the stock price. Historically, the Company has experienced
increased transactions and higher revenues and earnings in the fourth quarter
primarily due to borrowers' desire to consummate transactions by year end.
VALUE OF COMPANY ASSETS DEPENDENT ON CONDITIONS BEYOND COMPANY'S
CONTROL. Customized Financing transactions are relatively illiquid. The ability
of the Company to change the mix of its investments in response to changes in
economic and other conditions will be limited. No assurances can be given that
the fair market value of any assets acquired by the Company will not decrease in
the future. The underlying value of the assets is dependent upon a number of
factors which are beyond the control of the Company. Among these factors may be
the ability of the Company's borrowers to operate their properties in a manner
that generates revenue sufficient to cover debt service due to the Company;
changes in interest rates and in the availability, cost and terms of financing;
adverse changes in national or local economic conditions; competition from other
properties offering the same or similar services and adverse changes in
governmental rules and fiscal policies.
ACCESS TO FUNDING SOURCES. The Company requires access to short-term
warehouse credit facilities in order to fund loan originations and purchases
pending the sale of such loans. The Company currently has a $90 million
warehouse line of credit funded by four financial institutions, a repurchase
agreement with Fannie Mae and a $10 million repurchase agreement with an
institutional investor. The Company has also borrowed funds from Mr. Kaufman.
Although the Company expects to be able to maintain and expand its existing
warehouse credit facilities and to obtain replacement or additional financing as
the current arrangements expire or become fully utilized, there can be no
assurance that such financing will be available on reasonable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions."
RISK OF LOSS ON LOANS SOLD UNDER THE FNMA DUS PROGRAM. The Company is
approved by the Federal National Mortgage Association ("Fannie Mae" or "FNMA")
to participate in its Delegated Underwriting and Servicing Program ("FNMA DUS
Program"). Under this program, the Company originates, sells and services
multifamily loans for Fannie Mae without having to obtain Fannie Mae's prior
approval for each loan. This program requires the Company to share the risk of
loss by paying a portion of the losses on mortgages it originates under the
program, up to 20 percent of the original principal balance of the loan. See
"Business--Permanent Loans--FNMA DUS." Additionally, changes in the Company's
estimates of defaults under the FNMA DUS Program could materially impact the
value of rights to service. The Company is required to maintain a letter of
credit or restricted cash balances based on the size of its servicing portfolio
of FNMA DUS loans which totaled $2.4 million at March 31, 1998. As of March 31,
1998, the unpaid principal balance of loans placed in the FNMA DUS Program by
the Company totaled $327 million (out of a total of $536 million principal
balance of Permanent Loans serviced by the Company). As of March 31, 1998, the
Company had a reserve of $1.7 million to provide for future loan losses under
the FNMA DUS Program. While the Company believes that this reserve is
sufficient, actual loan losses under the FNMA DUS Program could exceed this
reserve and could have a materially adverse effect on the Company's performance,
which in turn may adversely affect the price of the Common Stock.
RETAINED RISKS OF LOANS SOLD. In connection with the Company's origination
and sale of certain loans, the Company must make certain representations and
warranties concerning loans originated by the Company and sold to investors.
These representations and warranties cover such matters as title to mortgaged
property, lien priority, environmental reviews and certain other matters. The
Company's representations and warranties rely in part on similar representations
and warranties made by the borrower or others. The Company would have a claim
against the borrower or another party in the event of a breach of any
representations or warranties that are made by the borrower or others; however,
the Company's ability to recover on any such claim would be dependent upon the
financial condition of the party against which such claim is asserted. In
addition, the Company makes certain representations and
11
warranties even though it does not receive similar representations and
warranties from borrowers or others, and the Company is not entitled to
indemnity with respect to violations of such representations and warranties.
There can be no assurance that the Company will not experience a material loss
as a result of representations and warranties it makes, which loss may in turn
adversely affect the Company's operations.
RISK OF LOSS FROM CHANGES IN GENERAL ECONOMIC CONDITIONS. Periods of
economic slowdown or recession, rising interest rates or declining demand for
real estate could adversely affect the Company's business. In addition, periods
of economic slowdown or recession, whether general, regional or industry-
related, may increase the risk of default on multifamily and commercial loans,
which may also have an adverse effect on the Company's business, financial
condition and results of operations. The Company may experience losses as a
result of reduced servicing fees from loans that are foreclosed and may
experience losses from mortgages in the FNMA DUS Program if the value of the
underlying asset declines. Such periods also may be accompanied by decreased
demand for multifamily or commercial properties, resulting in declining values
of properties securing outstanding loans, thereby weakening collateral coverage
and increasing the possibility of losses in the event of default. Significant
increases in the number of properties available for sale during recessionary
economic periods may depress the prices at which foreclosed properties may be
sold or delay the timing of such sales. There can be no assurance that the
multifamily or commercial markets will be adequate for the sale of foreclosed
properties and any material deterioration of such markets could reduce
recoveries from the sale of repossession inventory.
FAILURE TO SUCCESSFULLY MANAGE INTEREST RATE VOLATILITY MAY ADVERSELY AFFECT
RESULTS OF OPERATIONS. In general, when the Company establishes an interest
rate on a loan held for sale, it attempts to contemporaneously lock in an
interest yield to the institutional investor purchasing that loan. By selling
these loans shortly following origination, the Company limits its exposure to
interest rate fluctuations. However, the Company will accumulate some loans for
bulk sale and in these circumstances the Company hedges its interest rate risk
with forward commitments and put options. The Company does not hedge its loans
held for investment because these loans are generally variable rate loans that
are based on short term LIBOR. However, the operations and profitability of the
Company are likely to be adversely affected during any period of unexpected or
rapid changes in interest rates. For example, a substantial or sustained
increase in interest rates could adversely affect the ability of the Company to
originate loans. In such event, the business, prospects, financial condition and
results of operations of the Company could be materially adversely affected.
POSSIBLE CHANGES IN THE MARKET FOR WHOLE LOAN SALES. The Company sells all
of its loan originations to a limited number of institutional purchasers. There
can be no assurance that such purchasers will continue to purchase the Company's
loans and to the extent that the Company could not successfully replace such
loan purchasers, the Company's cash flow, results of operations, financial
condition and business prospects could be materially adversely affected. Also,
the inability of the Company to sell its loan originations limits revenue
generated from servicing such originations and may slow growth in its Customized
Financing activities. Further, adverse conditions in the commercial
mortgage-backed securitization market could negatively impact the ability of the
Company to complete whole loan sales, as many of the Company's whole loan
purchasers securitize the loans they purchase from the Company.
UNCERTAINTIES RESULTING FROM GOVERNMENT REGULATION AND CHANGES IN
GOVERNMENTAL PROGRAMS. The operations of the Company are subject to regulation
by federal, state and local government authorities (such as the Federal Housing
Administration, a division of the United States Department of Housing and Urban
Development ("FHA/HUD")), various laws and judicial and administrative
decisions, and regulations of government sponsored entities (such as Fannie Mae)
that purchase mortgages originated and serviced by the Company. These laws,
regulations and decisions require the Company, among other things, to maintain a
minimum net worth and minimum lines of credit, to submit financial reports, and
to maintain a quality control plan for the underwriting, origination and
servicing of loans. These laws and regulations also impose requirements and
restrictions affecting, among other things, the Company's loan originations,
12
credit activities, maximum interest rates, finance and other charges,
disclosures to customers, the terms of secured transactions, collection,
repossession and claims handling procedures, personnel qualifications, and other
trade practices. Although the Company believes that it is in compliance in all
material respects with applicable local, state and federal laws, rules and
regulations and with the requirements of entities purchasing mortgages, there
can be no assurance that more restrictive laws, rules, regulations or
requirements will not be adopted in the future that could make compliance more
difficult or expensive, restrict the Company's ability to originate, purchase,
sell or service loans or further limit or restrict the amount of interest and
other charges earned on loans.
LIMITATION ON LIABILITY OF OFFICERS AND DIRECTORS OF THE COMPANY. The
Company's Certificate of Incorporation (the "Certificate of Incorporation")
contains a provision which limits the liability of a director or officer to the
Company and its shareholders for money damages except for liability resulting
from (a) actual receipt of an improper benefit or profit in money, property or
services or (b) deliberate dishonesty established by a final judgment as being
material to the cause of action. The Company will indemnify its officers and
directors from any action or claim brought or asserted by any party by reason of
any allegation that such persons are otherwise accountable or liable for the
debts or obligations of the Company or its affiliates.
ANTI-TAKEOVER PROVISIONS. The Certificate of Incorporation and the
Company's Bylaws (the "Bylaws") include provisions that could delay, defer or
prevent a takeover attempt that may be in the best interest of shareholders.
These provisions include the ability of the Board of Directors to issue up to
10,000,000 shares of preferred stock (the "Preferred Stock") without any further
shareholder approval, and requirements that shareholders give advance notice
with respect to certain proposals (including nomination of directors) that they
may wish to present for a shareholder vote. Issuance of Preferred Stock could
also discourage bids for Common Stock at a premium as well as create a
depressive effect on the market price of the Common Stock. In addition, under
certain conditions, Section 912 of the New York Business Corporation Law (the
"NYBCL") would prohibit the Company from engaging in a "business combination"
with an "interested shareholder" (in general, a shareholder owning directly or
indirectly 20% or more of the Company's outstanding voting stock) for a period
of five years unless the business combination is approved in a prescribed manner
or meets prescribed conditions.
CONTROL OF FOUNDING STOCKHOLDER. After giving effect to the Offering, Mr.
Kaufman, the Trust, and the Ivan Kaufman Grantor Retained Annuity Trust (the
"Kaufman Grantor Trust"), two trusts for the benefit of his family, will, in the
aggregate, directly or indirectly, beneficially own or control % of the
outstanding Common Stock. As a result, these stockholders, acting togther, are
able to effectively control virtually all matters requiring approval by the
stockholders of the Company, including amendment of the Certificate of
Incorporation, the approval of mergers or similar transactions and the election
of all directors. Mr. Kaufman and Mr. Lippe are the co-trustees of the Kaufman
Grantor Trust and Mr. Lippe is the sole trustee of the Trust. In addition, Mr.
Kaufman and Richard A. Lippe, are two of the five current directors of the
Company. See "Management" and "Security Ownership of Certain Beneficial Owners
and Management."
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT ON FUTURE OFFERINGS ON MARKET
PRICE OF COMMON STOCK. The market price of the Common Stock may experience
fluctuations that are unrelated to the operating performance of the Company. In
particular, the price of the Common Stock may be affected by general market
price movements as well as developments specifically related to the real estate
finance industry and the financial services sector such as, among other things,
interest rate movements, quarterly variations or changes in financial estimates
by securities analysts and a significant reduction in the price of the stock of
another participant in the real estate finance industry.
The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock,
Preferred Stock or debt securities. There can be no assurance that the Company
will be successful in raising sufficient additional equity or debt capital on
13
acceptable terms. In addition, the actual or perceived effect of such offerings
may be the dilution of the book value or earnings per share of the Common Stock
outstanding, which may result in the reduction of the market price of the Common
Stock.
NO ANTICIPATED DIVIDENDS. The Company does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The decision whether to
apply legally available funds to the payment of dividends on the Common Stock
will be made by the Board of Directors of the Company from time to time in the
exercise of its business judgment, taking into account, among other things, the
Company's results of operations and financial condition, any then existing or
proposed commitments by the Company for the use of available funds and the
Company's obligations with respect to the holders of any then outstanding
indebtedness or Preferred Stock. The Company's ability to pay dividends may be
restricted from time to time by financial covenants in its credit agreements or
in arrangements with or regulations of government sponsored entities pertaining
to minimum cash reserve requirements.
POSSIBLE NEGATIVE EFFECT ON STOCK PRICE FROM ABSENCE OF PRIOR MARKET FOR
COMMON STOCK. There has been no public market for the Common Stock prior to the
Offering and there can be no assurance that a public market will develop or, if
it develops, that it will be sustained following the Offering. Certain factors,
such as changes in market conditions generally, could cause the market price of
the Common Stock to vary substantially. See "Shares Eligible for Future Sale"
and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price per
share of Common Stock is substantially higher than the net tangible book value
per share of the Common Stock. Purchasers of shares of Common Stock in this
Offering will experience immediate and substantial dilution of $ in the
pro forma net tangible book value per share of Common Stock. See "Dilution."
SHARES AVAILABLE FOR FUTURE SALE. Upon completion of this Offering, the
Company will have shares of Common Stock outstanding ( shares if the
Underwriters' over-allotment option is exercised in full). The shares
offered hereby ( shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restrictions or further
registration under the Securities Act, except for any shares purchased by
"affiliates" of the Company, as such term is defined in Rule 144 promulgated
under the Securities Act. The remaining shares of Common Stock are "restricted
securities" within the meaning of Rule 144. Restricted securities may only be
sold in private transactions or pursuant to Rule 144. The Company has agreed to
register for resale twelve months after the closing of the Offering the shares
owned by certain stockholders of the Company prior to the Offering
(approximately 1,125,000 shares). Until that time, all shares owned by
stockholders of the Company prior to the Offering may not be sold in the public
market due to the restrictions of Rule 144. See "Shares Eligible for Future
Sale." In addition, an aggregate of shares are issuable upon the exercise
of outstanding stock options and shares of Common Stock are reserved for
issuance under the 1998 Stock Plan (as defined below). The Company and each of
the stockholders of the Company have agreed that they will not, without the
prior written consent of Lehman Brothers on behalf of the Underwriters, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase, or otherwise sell or dispose of (or announce any offer,
sale, contract of sale, pledge, grant or any option to purchase or other sale or
disposition of) any shares of Common Stock or any other securities convertible
into, or exercisable for shares of Common Stock or other similar securities of
the Company, currently beneficially owned, for a period of 180 days after the
date of this Prospectus. Lehman Brothers may, in its sole discretion, at any
time and without prior notice, release all or any portion of the shares of
Common Stock subject to such agreements. In any event, the shares owned by the
stockholders of the Company prior to the Offering may not be sold for twelve
months from the date of the Offering due to the restrictions of Rule 144. Sales
of substantial amounts of Common Stock (including shares issued upon the
exercise of outstanding options) in the public market after this Offering or the
prospect of such sales could adversely affect the market price of the Common
Stock and may have a material adverse effect on the Company's ability to raise
any necessary capital to fund its future operations. See "Shares Eligible for
Future Sale," "Management's
14
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from this Offering (after deducting
underwriting discounts and commissions and estimated expenses of the Offering)
are estimated to be approximately $ million (approximately $
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to use the net proceeds it receives from the Offering (i) to pay
down its outstanding borrowings from Mr. Kaufman; (ii) to reduce the current
outstanding balance on its warehouse line; and (iii) as working capital for
general corporate purposes related to the funding of its anticipated future
growth.
15
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
March 31, 1998, (ii) at March 31, 1998, as adjusted to give effect to the ASF
Transactions and the Exchange Transaction, and (iii) at March 31, 1998, as
adjusted to give effect to the application of the estimated net proceeds of this
Offering after underwriting discounts and commissions. See "Use of Proceeds."
The data set forth below should be read in conjunction with the other financial
information appearing elsewhere in this Prospectus, including the Combined
Financial Statements and the related notes thereto.
MARCH 31, 1998
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------------- ------------- -----------------
Notes payable and repurchase agreements............................ $ 44,879,927 $ 44,879,927 $
Note payable--Ivan Kaufman......................................... 13,685,303 13,685,303
------------- ------------- ---
Total notes payable and repurchase agreements...................... 58,565,230 58,565,230
------------- ------------- ---
Stockholders' Equity
Equity(1)........................................................ 26,455,306
Preferred Stock, $.01 par value; 10,000,000 shares authorized; no
shares issued and outstanding..................................
Common Stock $.01 par value; 30,000,000 shares authorized; no
shares issued and outstanding, actual; 7,500,000 pro forma, as
adjusted to give effect to the Reorganization Transactions;
shares issued and outstanding, as adjusted following the
Offering....................................................... -- 75,000
Additional paid-in capital....................................... -- 17,428,353
------------- ------------- ---
Total stockholders' equity......................................... 26,455,306 17,503,353
------------- ------------- ---
Total capitalization............................................... $ 85,020,536 $ 76,068,583 $
------------- ------------- ---
------------- ------------- ---
- ------------------------
(1) Equity consists of (a) 100 shares of no par value common stock with a value
of $1,000 and retained earnings of $5,141,820 of ASF; and (b) members'
capital of $21,312,486 of ANCM.
(2) As adjusted to give effect to the following:
(a) the distribution by ASF of $1,462,000 of ASF assets to Ivan Kaufman, its
sole stockholder, on April 1, 1998;
(b) an additional $717,062 comprised of contributions of capital by members
on April 1, 1998, net of a distribution of capital to a former employee;
(c) Reorganization transactions comprised of the following:
(i) the deferred tax liability of $2,207,000 as a result of the
Company's election to terminate its LLC and S corporation
status;
(ii) the payment of [$6,000,000] of previously undistributed
earnings; and
(iii) the exchange of members' interests for shares of Common Stock.
(3) As adjusted to reflect the receipt of the net proceeds of this Offering
(after deducting underwriting discounts and estimated Offering expenses).
16
DIVIDEND POLICY
The Company does not anticipate paying cash dividends on the Common Stock in
the foreseeable future. The decision whether to apply legally available funds to
the payment of dividends on the Common Stock will be made by the Board of
Directors of the Company from time to time in the exercise of its business
judgment, taking into account, among other things, the Company's results of
operations and financial condition, any then existing or proposed commitments by
the Company for the use of available funds, and the Company's obligations with
respect to the holders of any then outstanding indebtedness or Preferred Stock.
The Company's ability to pay dividends may be restricted from time to time by
financial covenants in its credit agreements or in arrangements with or
regulations of government sponsored entities pertaining to minimum cash reserve
requirements.
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their Common Stock
from the public offering price. The pro forma net tangible book value of the
Company as of March 31, 1998 was $17,503,353, or $2.33 per share of Common
Stock. Net tangible book value represents the amount of the Company's tangible
net worth divided by the pro forma total number of shares of Common Stock
outstanding as of March 31, 1998 pro forma to give effect to the ASF
Transactions and the transactions described in "Prospectus Summary--
Reorganization Transactions." After adjusting for, and giving effect to, the
sale of shares of Common Stock by the Company in the Offering and the
application of the estimated net proceeds therefrom at an assumed public
offering price of $ per share (the midpoint of the filing range set
forth on the cover of this Prospectus), and after the deduction of underwriting
discounts and commissions and estimated Offering expenses payable by the
Company, the adjusted pro forma net tangible book value of the Company as of
March 31, 1998 would have been $ million or $ per share of
Common Stock. This represents an immediate increase in net tangible book value
of $ per share to existing shareholders and an immediate dilution of
$ per share to purchasers of shares in the Offering. The following table
illustrates this per share dilution:
Public offering price per share of Common Stock offered hereby.......... [ ]
Pro forma net tangible book value per share before offering............. [ ]
Increase per share attributable to new investors........................ [ ]
Adjusted pro forma net tangible book value per share after offering..... [ ]
Dilution per share to new investors..................................... [ ]
--- ---
--- ---
The following table summarizes on a pro forma basis the relative investments
of investors pursuant to this Offering and the current stockholders of the
Company:
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
Existing stockholders...................... 7,500,000 [ ]% $ 17,503,353 [ ]% $ 2.33
New investors..............................
Total(1)...................................
- ------------------------
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to shares of Common Stock. See "Underwriting."
If the over-allotment option is exercised in full, the new investors will
have paid [$ ] and will hold shares of Common Stock, representing
[ %] of the total consideration and [ %] of the total number of
outstanding shares of Common Stock. See "Description of Securities" and
"Underwriting."
17
SELECTED FINANCIAL DATA
The following tables present historical combined financial information for
the Company at the dates and for the periods indicated. The historical
operations data for the years ended December 31, 1997, 1996 and 1995 and balance
sheet data as of December 31, 1997 and 1996 have been derived from the audited
combined financial statements of the Company included elsewhere in this
Prospectus. The historical operations data for the years ended February 28, 1995
and 1994 and balance sheet data as of December 31, 1995, February 28, 1995 and
1994 have been derived from unaudited combined financial statements. The
historical operations data presented for the three month periods ended March 31,
1998 and 1997 and balance sheet data presented as of March 31, 1998 have been
derived from unaudited interim combined financial statements and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the three month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for any other interim period or the entire year ending December 31,
1998. The historical combined financial information should be read in
conjunction with, and is qualified in its entirety by reference to, the Combined
Financial Statements and related notes as set forth elsewhere herein.
OPERATIONS DATA:
THREE MONTHS ENDED MARCH YEARS ENDED FEBRUARY
31, YEARS ENDED DECEMBER 31, 28,
------------------------- ----------------------------------- ----------------------
1998 1997 1997 1996 1995 1995 1994
------------- ---------- ----------- ---------- ---------- ---------- ----------
Interest earned......... $ 2,529,979 $1,672,747 $ 9,641,121 $6,783,312 $3,725,904 $2,470,793 $1,556,136
Fee-based services,
including gain on sale
of loans and real
estate................ 4,373,022 2,340,814 12,686,908 8,794,147 2,627,716 891,520 680,845
Servicing revenue,
net................... 539,241 305,253 1,957,983 1,082,699 394,461 397,029 188,919
Income from investment
in real estate held
for sale, net of
operating expenses.... 540,334 -- -- -- -- -- --
Total revenues.......... 7,982,576 4,318,814 24,286,012 16,660,158 6,748,081 3,759,342 2,425,900
Net income(loss)........ 3,432,110 1,175,870 8,632,262 4,302,596 714,807 (899,891) 264,141
Provision(benefit) for
pro forma income
taxes(1).............. 1,383,244 479,548 3,468,648 1,753,788 299,523 (350,430) 107,558
Pro forma net income.... 2,048,866 696,322 5,163,614 2,548,808 415,284 (539,461) 156,583
BALANCE SHEET DATA:
AT MARCH 31, AT DECEMBER 31, AT FEBRUARY 28,
------------------------- ----------------------------------- ----------------------
1998 1998
PRO FORMA(3) ACTUAL 1997 1996 1995 1995 1994
------------- ---------- ----------- ---------- ---------- ---------- ----------
Loans held for sale,
net................... $11,826,971 $11,826,971 $46,482,348 $45,729,204 $35,349,890 $6,671,548 $46,899,797
Loans held for
investment, net....... 54,821,182 56,273,289 68,609,906 38,685,564 36,030,439 4,806,727 4,199,140
Total assets............ 93,491,402 94,308,355 140,181,758 94,761,612 79,926,724 15,094,285 54,044,192
Notes payable........... 58,565,230 58,565,230 110,227,947 75,909,788 68,394,767 7,375,168 52,303,481
Total liabilities....... 75,988,049 67,853,049 117,148,176 81,298,478 72,243,186 8,126,554 52,832,040
Total equity............ 17,503,353 26,455,306 23,033,582 13,463,134 7,683,538 6,967,731 1,212,152
18
OTHER DATA:
AT OR FOR
AT OR FOR THE THE
THREE MONTHS ENDED AT OR FOR THE YEARS ENDED
MARCH 31, YEARS ENDED DECEMBER 31, FEBRUARY 28,
--------------------------- ---------------------------------------- ------------
1998 1997 1997 1996 1995 1995
------------- ------------ ------------ ------------ ------------ ------------
Return on average equity (2)............... 33.1% 20.9% 28.3% 24.1% 5.7% (13.2%)
Return on average assets (2)............... 7.0% 3.2% 4.4% 2.9% 0.9% (1.6%)
Debt to equity ratio....................... 2.2x 4.6x 4.8x 5.6x 8.9x 1.1x
Total originations:
Permanent Loans.......................... $23,779,000 $ 34,013,000 $215,545,000 $244,287,000 $104,374,000 $141,319,000
Customized Financing..................... $11,649,000 $ 18,080,000 $174,377,000 $ 74,103,000 $ 81,729,000 $ 9,162,000
Commercial servicing portfolio (4)......... $535,765,000 $418,541,000 $529,956,000 $385,518,000 $211,633,000 $222,000,000
Number of loans in commercial servicing
portfolio................................ 136 117 133 110 111 94
Selling and administrative expenses as a
percentage of total revenue.............. 14.3% 19.2% 14.4% 21.0% 23.1% 30.9%
1994
------------
Return on average equity (2)............... 20.7(5)
Return on average assets (2)............... 0.6(5)
Debt to equity ratio....................... 43.2x
Total originations:
Permanent Loans.......................... $174,997,000
Customized Financing..................... $ 0
Commercial servicing portfolio (4)......... $166,000,000
Number of loans in commercial servicing
portfolio................................ 67
Selling and administrative expenses as a
percentage of total revenue.............. 23.4%
- ------------------------
(1) The pro forma provision (benefit) for income taxes represents the difference
between historical income taxes and the income taxes that would have been
reported had the Company filed income tax returns as a taxable C corporation
for each of the periods presented using a pro forma income tax rate of 40%.
(2) Return on average equity and assets are based on pro forma net income and
historical average equity and assets, respectively. Return on average equity
and assets for the three months ended March 31, 1998 and 1997 are
annualized.
(3) The pro forma balance sheet gives effect to (i) the distribution by ASF of
$1,462,000 of ASF assets to Ivan Kaufman, its sole stockholder, on April 1,
1998, (ii) the contribution of capital by members on April 1, 1998 of
$717,062, net of a distribution of capital to a former employee, and (iii) a
distribution of previously undistributed earnings of [$6,000,000]. See
"Prospectus Summary--Recent Developments" and "Prospectus
Summary--Reorganization Transactions."
(4) The Company's commercial servicing portfolio represents commercial loans
serviced for third parties for a fee and does not include loans held for
investment.
(5) Return on average equity and assets are based on the ending balances at
February 28, 1994 and the Company's initial capitalization in 1993.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S COMBINED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Arbor National Holdings, Inc. is a fully integrated real estate financial
services company. The Company funds, on a negotiated basis, high-yielding
lending and investment opportunities in commercial real estate through
Customized Financing structures. It also derives substantial revenue from the
origination for sale and servicing of Permanent Loans for multifamily and other
types of commercial properties.
RECENT DEVELOPMENTS
ANCM, which became a wholly-owned subsidiary of ANHI on the date of this
Prospectus (see "Prospectus Summary--Reorganization Transactions"), acquired
100% of the outstanding stock of ASF as of April 1, 1998 through the ASF
Transactions.
Prior to its acquisition by ANCM, ASF distributed a dividend of certain
assets which were not consistent with the intended business of the Company to
Ivan Kaufman, its sole stockholder. Immediately thereafter, Mr. Kaufman sold the
outstanding common stock of ASF to the Trust. Immediately thereafter,
simultaneously with the purchase of Class B membership interests by certain
officers and employees of ANCM, the Trust, which was already a Class A member of
ANCM, purchased an additional Class A membership interest in ANCM by
transferring the ASF shares to ANCM.
ORIGINATION VOLUME
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31, % CHANGE
-------------------- ---------------------------------- --------------------------------
1998 1997 1997 1996 1995 Q1 1997-1998 1996-1997
--------- --------- ---------- ---------- ---------- ----------------- -------------
Permanent Loans.............. $ 23,779 $ 34,013 $ 215,545 $ 244,287 $ 104,374 (30)% (12 )%
Customized Financing......... 11,649 18,080 174,377 74,103 81,729 (36 ) 135
--
--------- --------- ---------- ---------- ---------- ---
Total.................... $ 35,428 $ 52,093 $ 389,922 $ 318,390 $ 186,103 (32 )% 22%
--
--
--------- --------- ---------- ---------- ---------- ---
--------- --------- ---------- ---------- ---------- ---
1995-1996
-------------
Permanent Loans.............. 134%
Customized Financing......... (9 )
---
Total.................... 71%
---
---
The increase in the Company's Permanent Loan origination volume from 1995 to
1996 was primarily attributable to increased originations from the Company's
FNMA DUS product line, which commenced in December 1995. The decrease in the
Company's Permanent Loan origination volume from 1996 to 1997 and for the first
quarter ended March 31, 1997 as compared to the first quarter ended March 31,
1998 was primarily attributable to increased competition in the permanent
lending market and management's decision not to compete solely on price. In
1996, the Company decided to concentrate its efforts on high yielding lending
and investment opportunities in commercial real estate through Customized
Financing activities, a market that management believes to be underserved,
especially on transactions under $20 million. This strategic decision had a
significant impact on the Company's revenues as discussed below. The Company
also believes that there is significant growth opportunity in the Customized
Financing
20
market especially in bridge and mezzanine loans. Due to the nature of these
activities, origination volume and the timing of recognizing the related revenue
will fluctuate. See "Risk Factors--Possible Volatility in Quarterly Results."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. The following table sets forth the components of the Company's
revenues:
THREE MONTHS ENDED MARCH
31,
-------------------------- %
1998 1997 CHANGE
------------ ------------ -----------
Interest earned.......................................................... $ 2,529,979 $ 1,672,747 51%
Gain on sale of loans and real estate.................................... 2,193,245 615,833 256
Originated mortgage servicing rights..................................... 588,225 1,056,170 (44)
Fee income............................................................... 1,591,552 668,811 138
------------ ------------ ---
Fee-based services, including gain on sale of loans and real estate...... 4,373,022 2,340,814 87
------------ ------------ ---
Servicing revenue, net................................................... 539,241 305,253 77
Income from investment in real estate held for sale, net of operating
expenses............................................................... 540,334 -- --
------------ ------------ ---
Total revenues........................................................... $ 7,982,576 $ 4,318,814 85%
------------ ------------ ---
------------ ------------ ---
Interest earned increased $857,000 or 51% to $2.5 million for the three
months ended March 31, 1998 from $1.7 million for the three months ended March
31, 1997. This increase was primarily due to a 61% increase in the weighted
average balance of loans held for investment (primarily bridge and mezzanine
loans) which, due to their customized characteristics and risk profiles, yield
higher interest rates and are held for substantially longer periods of time as
compared to loans held for sale. The weighted average loan balance of loans held
for sale decreased 21%.
Gain on sale of loans and real estate, which primarily represented all cash
gains, increased $1.6 million or 256% to $2.2 million for the three months ended
March 31, 1998 from $616,000 for the three months ended March 31, 1997. This
increase was primarily attributable to increased revenues from Customized
Financing activities. Past experience has shown that the nature of these
Customized Financing activities vary greatly and are highly negotiated, and as a
result the amount and timing of revenue recognition will fluctuate. The Company
expects this trend to continue in the future.
Originated mortgage servicing rights, which are the allocated cost of the
unsold portion of the loans and are recognized when loans are sold, decreased
$468,000 or 44% to $588,000 for the three months ended March 31, 1998 from $1.1
million for the three months ended March 31, 1997. This decrease was primarily
attributable to a 37% decrease in the volume of FNMA DUS loans sold for the
quarter ended March 31, 1998 compared to the quarter ended March 31, 1997 which
was a direct result of a decrease in the average loan size of originations from
the fourth quarter of 1996 to the fourth quarter of 1997.
Fee income comprised of origination, exit and commitment fees increased
$923,000 or 138% to $1.6 million for the three months ended March 31, 1998 from
$669,000 for the three months ended March 31, 1997. This increase was primarily
attributable to (a) fees earned on backup commitments to lend and purchase real
estate and (b) the increase in the Company's Customized Financing activities.
Servicing revenue, net increased $234,000 or 77% to $539,000 for the three
months ended March 31, 1998 from $305,000 for the three months ended March 31,
1997. This increase was primarily attributable to a 28% increase in the
Company's commercial servicing portfolio combined with an overall increase in
the
21
weighted average servicing fee from March 31, 1997 to March 31, 1998 due to the
increase in the FNMA DUS portfolio, which yield higher weighted average
servicing fees than other loans serviced.
Income from investment in real estate held for sale consisted of rental
income earned, less operating expenses incurred during the three months ended
March 31, 1998. The asset generating this rental income, net was acquired in
September 1997.
EXPENSES. The following table sets forth the components of the Company's
expenses:
THREE MONTHS ENDED MARCH
31,
-------------------------- %
1998 1997 CHANGE
------------ ------------ -----------
Interest expense......................................................... $ 1,944,208 $ 925,038 110%
Employee compensation and benefits....................................... 1,231,366 1,053,338 17
Selling and administrative............................................... 1,137,522 827,068 38
Provision for loan losses................................................ 237,370 337,500 (30)
------------ ------------ ---
Total expenses........................................................... $ 4,550,466 $ 3,142,944 45%
------------ ------------ ---
------------ ------------ ---
Interest expense increased $1.0 million or 110% to $1.9 million for the
three months ended March 31, 1998 from $925,000 for the three months ended March
31, 1997. This increase was primarily attributable to (a) increased borrowings
to finance loans held for investment, which due to their customized
characteristics and risk profiles carry a higher borrowing rate than loans held
for sale; and (b) the interest cost associated with the increase in debt to
finance growth in investments in real estate held for sale, other real estate
joint ventures and other investments.
Employee compensation and benefits increased $178,000 or 17% to $1.2 million
for the three months ended March 31, 1998 from $1.1 million for the three months
ended March 31, 1997. This increase reflected increased staffing levels
associated with Customized Financing activities and the geographic and product
expansion of the Company's lending activities.
Selling and administrative expenses increased $310,000 or 38% to $1.1
million for the three months ended March 31, 1998 from $827,000 for the three
months ended March 31, 1997. This increase was primarily attributable to the
geographic and product expansion of the lending activities and a one time
increase in depreciation expense of $104,000 related to a change in the
estimated useful life of certain capitalized equipment.
Provision for loan losses decreased $100,000 or 30% to $237,000 for the
three months ended March 31, 1998 from $338,000 for the three months ended March
31, 1997. This decrease was directly attributable to a 37% decrease in the
volume of FNMA DUS loans sold for the quarter ended March 31, 1998 compared to
the quarter ended March 31, 1997. Under the FNMA DUS Program, the Company
assumes responsibility for a portion of any loss that may result from borrower
defaults based on FNMA loss sharing formulas. The Company's portion of the loss
sharing is limited to a maximum of 20% of the original principal balance.
22
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. The following table sets forth the components of the Company's
revenues:
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 % CHANGE
------------- ------------- ---------------
Interest earned......................................................... $ 9,641,121 $ 6,783,312 42%
Gain on sale of loans and real estate................................... 6,195,440 3,220,366 92
Originated mortgage servicing rights.................................... 3,148,981 2,958,029 6
Fee income.............................................................. 3,342,487 2,615,752 28
--
------------- -------------
Fee-based services, including gain on sale of loans and real estate..... 12,686,908 8,794,147 44
--
------------- -------------
Servicing revenue, net.................................................. 1,957,983 1,082,699 81
--
------------- -------------
Total revenues.......................................................... $ 24,286,012 $ 16,660,158 46%
--
--
------------- -------------
------------- -------------
Interest earned increased $2.9 million or 42% to $9.6 million for 1997 from
$6.8 million for 1996. This increase was primarily due to a 38% increase in the
weighted average outstanding balance of loans held for investment (primarily
bridge and mezzanine loans) which, due to their customized characteristics and
risk profiles, yield higher interest rates and are held for substantially longer
periods of time as compared to loans held for sale. The weighted average loan
balance of loans held for sale increased 53% from 1996 to 1997.
Gain on sale of loans and real estate, which primarily represented all cash
gains, increased $3.0 million or 92% to $6.2 million for 1997 from $3.2 million
for 1996. This increase was primarily attributable to (a) increased revenues
from Customized Financing activities and (b) increased margins from Permanent
Loans originated for sale offset by a 17% decrease in volume of Permanent Loans
sold.
Originated mortgage servicing rights, which are the allocated cost of the
unsold portion of the loans and are recognized when loans are sold, increased
$191,000 or 6% to $3.1 million for 1997 from $3.0 million for 1996. This
increase was primarily attributable to the increase in the volume of FNMA DUS
loans sold, as a percentage of total sold loan volume, from 1997 to 1996. The
FNMA DUS loans yield higher servicing fees than other loans serviced and
therefore generate greater servicing values.
Fee income increased $727,000 or 28% to $3.3 million for 1997 from $2.6
million for 1996. This increase was primarily attributable to the increase in
the Company's Customized Financing activities.
Servicing revenue, net increased $875,000 or 81% to $2.0 million for 1997
from $1.1 million for 1996. This increase was directly attributable to a 37%
increase in the Company's commercial servicing portfolio combined with an
overall increase in the weighted average servicing fee from 1997 to 1996 due to
the increase in the FNMA DUS portfolio, which yield higher weighted average
servicing fees than other loans serviced.
EXPENSES. The following table sets forth the components of the Company's
expenses:
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 % CHANGE
------------- ------------- -------------
Interest expense........................................................ $ 6,242,616 $ 4,048,947 54%
Employee compensation and benefits...................................... 4,920,495 3,893,873 26
Selling and administrative.............................................. 3,493,022 3,499,691 --
Provision for loan losses............................................... 997,617 915,051 9
------------- ------------- ---
Total expenses.......................................................... $ 15,653,750 $ 12,357,562 27%
------------- ------------- ---
------------- ------------- ---
23
Interest expense increased $2.2 million or 54% to $6.2 million for 1997 from
$4.0 million for 1996. This increase was primarily attributable to (a) increased
borrowings to finance loans held for investment (primarily bridge and mezzanine
loans), which due to their customized characteristics and risk profiles, carry a
higher borrowing rate than loans held for sale; and (b) the interest costs
associated with the increase in debt to finance growth in investments in real
estate held for sale and other real estate joint ventures, the bulk of which
occurred in the fourth quarter of 1997.
Employee compensation and benefits increased $1.0 million or 26% to $4.9
million for 1997 from $3.9 million for 1996. This increase reflected increased
commissions and incentives associated with the Customized Financing activities,
and the geographic and product expansion of the Company's lending activities.
Selling and administrative expenses remained stable from 1996 to 1997, yet
as a percentage of revenue, the selling and administrative expenses decreased to
14% in 1997 from 21% in 1996, which was primarily attributable to the Company's
decision to build the appropriate infrastructure in 1996 to expand the Company's
Customized Financing activities, and the geographic and product expansion of the
Company's lending activities.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. The following table sets forth the components of the Company's
revenues:
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 % CHANGE
------------- ------------ -------------
Interest earned.......................................................... $ 6,783,312 $ 3,725,904 82%
Gain on sale of loans and real estate.................................... 3,220,366 1,806,063 78
Originated mortgage servicing rights..................................... 2,958,029 -- --
Fee income............................................................... 2,615,752 821,653 218
------------- ------------ ---
Fee-based services, including gain on sale of loans and real estate...... 8,794,147 2,627,716 235
------------- ------------ ---
Servicing revenue, net................................................... 1,082,699 394,461 174
------------- ------------ ---
Total revenues........................................................... $ 16,660,158 $ 6,748,081 147%
------------- ------------ ---
------------- ------------ ---
Interest earned increased $3.1 million or 82% to $6.8 million for 1996 from
$3.7 million for 1995. This increase was primarily due to an increase in the
average balance of loans outstanding resulting from increased FNMA DUS
originations in 1996. The Company's FNMA DUS loan origination business commenced
in December of 1995.
Gain on sale of loans and real estate, which primarily represented all cash
gains, increased $1.4 million or 78% to $3.2 million for 1996 from $1.8 million
for 1995. This increase was primarily attributable to increased revenues from
Customized Financing activities.
The increase in originated mortgage servicing rights, which are the
allocated cost of the unsold portion of the loans and are recognized when loans
are sold, was a direct result of the adoption on January 1, 1996 of SFAS # 122
(Accounting for Mortgage Servicing Rights, superseded by SFAS # 125). The
Company did not capitalize originated mortgage servicing rights in 1995.
24
Fee income increased $1.8 million or 218% to $2.6 million for 1996 from
$822,000 for 1995. This increase was primarily attributable to (a) increased
volume of loans sold from the Company's FNMA DUS product line, which commenced
in December 1995 and (b) the increase in the Company's Customized Financing
activities.
Servicing revenue, net increased $688,000 or 174% to $1.1 million for 1996
from $394,000 for 1995. This increase is directly attributable to a 82% increase
in the Company's commercial servicing portfolio combined with an overall
increase in the weighted average servicing fee from 1996 to 1995 due to the
increase in the FNMA DUS portfolio, which yield higher weighted average
servicing fees than other loans serviced.
EXPENSES. The following table sets forth the components of the Company's
expenses:
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 % CHANGE
------------- ------------ -------------
Interest expense......................................................... $ 4,048,947 $ 2,188,687 85%
Employee compensation and benefits....................................... 3,893,873 1,876,897 107
Selling and administrative............................................... 3,499,691 1,560,834 124
Provision for loan losses................................................ 915,051 406,856 125
------------- ------------ ---
Total expenses........................................................... $ 12,357,562 $ 6,033,274 105%
------------- ------------ ---
------------- ------------ ---
Interest expense increased $1.9 million or 85% to $4.1 million for 1996 from
$2.2 million for 1995. This increase was primarily due to an increase in the
average balance of loans outstanding resulting from increased FNMA DUS
originations in 1996. The Company's FNMA DUS loan origination business commenced
in December of 1995.
Employee compensation and benefits increased $2.0 million or 107% to $3.9
million for 1996 from $1.9 million for 1995. This increase was primarily
attributable to increased sales' salaries and commissions, which are based
substantially on loan production, the geographic and product expansion of the
Company's lending activities and the increase in the servicing portfolio.
Selling and administrative expenses increased $1.9 million or 124% to $3.5
million for 1996 from $1.6 million for 1995. This increase was primarily
attributable to the Company's decision to build the appropriate infrastructure
in 1996 to support the Customized Financing activities, and the geographic and
product expansion of the Company's lending activities.
Provision for loan losses increased $508,000 or 125% to $915,000 for 1996
from $407,000 for 1995. This increase was primarily attributable to increased
loan origination volume from the Company's FNMA DUS product line, which
commenced in December of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs consist of funding its Customized
Financing activities, and its Permanent Loan activities. To meet these needs,
the Company currently relies on borrowings under its warehouse facility,
repurchase agreements, borrowings from Ivan Kaufman and cash flow from
operations. The maximum permitted borrowings under the warehouse facility were
$90 million at March 31, 1998 and December 31, 1997 and $70 million at December
31, 1996. At March 31, 1998, December 31, 1997 and December 31, 1996,
outstanding borrowings under the warehouse facility were $26.9 million, $36.3
million and $26.8 million, respectively, leaving available funds of $63.1
million, $53.7 million and $43.2 million, respectively. Borrowings under the
warehouse facility are secured by a pledge of the loans funded.
Under the warehouse facility, the interest rate charged for borrowings is
based on the Company's option to use either Federal Funds or LIBOR plus 1% to
1.5% for Permanent Loans and 2.25% to 3% for specified Customized Financing
activities. The warehouse facility expires on November 26, 1998 and is
25
funded by four financial institutions. The Company expects to be able to renew
or replace the warehouse facility when its current term expires.
The Company also funds loan originations through repurchase agreements with
FNMA and a Wall Street firm which, for financial reporting purposes, are
characterized by the Company as borrowing transactions. Both of these repurchase
agreements are uncommitted and therefore have no stated expiration date. The
FNMA repurchase agreement allows the Company to fund FNMA DUS loan originations,
that the Company has committed to sell to institutional investors, at an
interest rate of LIBOR plus 0.4% to 0.55%. Under this agreement, the Company is
required to arrange for institutional investors to take delivery of the loans
within 60 days of the date of such borrowings; otherwise the Company is required
to repurchase the loans. As of March 31, 1998, December 31, 1997 and December
31, 1996, total outstanding borrowings under this agreement were $7.5 million,
$27.4 million and $6.0 million, respectively.
The repurchase agreement with the Wall Street firm provides the Company with
up to $10 million (with temporary increases above the $10 million allowed at the
Wall Street firm's discretion) of additional funds for loan originations at an
interest rate of LIBOR plus 1.75%. As of March 31, 1998, December 31, 1997 and
December 31, 1996, total outstanding borrowings under this agreement were $8.9
million, $16.7 million and $5.0 million, respectively.
In the event these agreements were to be terminated, the Company believes
that other financial institutions would provide it with similar repurchase
agreements, but no assurances can be made that the Company will obtain such
financing on reasonable terms or at all.
The borrowing agreements contain certain covenants, including, among others,
limitations on indebtedness, liens, mergers, changes in control and sales of
assets, and requirements for the Company to maintain a minimum servicing
portfolio, minimum net worth and other financial ratios. The Company was in
compliance with these covenants as of March 31, 1998.
Historically, the Company has borrowed funds from Ivan Kaufman. Borrowings
outstanding from Mr. Kaufman (and/or the Trust and the Ivan Kaufman Grantor
Retained Annuity Trust effective March 31, 1998 (the "Kaufman Grantor Trust"))
totaled $13.7 million at March 31, 1998, $28.8 million at December 31, 1997 and
$25.4 million at December 31, 1996. Interest on virtually all of the Company's
borrowings from Mr. Kaufman is at the prime interest rate plus 1%, or 9.5% at
March 31, 1998. The borrowings from Mr. Kaufman are subordinate to the warehouse
facility. The Company plans to repay the total balance of outstanding borrowings
from Mr. Kaufman with the proceeds from this Offering. See "Use of Proceeds."
In June 1998, the Company entered into a 50/50 joint venture with a Wall
Street investment banking firm pursuant to which each of the joint venture
partners agreed to contribute up to $25 million in equity to the joint venture.
In addition, the Wall Street firm agreed to provide $200 million of financing to
fund Customized Financing activities, including $75 million for mezzanine loans
to the joint venture in the form of a repurchase agreement. The interest rate
charge for the financing is LIBOR plus 2%. The repurchase agreement expires in
June 2000. The Company believes that this joint venture will greatly enhance the
Company's ability to increase its Customized Financing activities in the future.
The Company sells its loans to various institutional investors. The terms of
these purchase arrangements vary according to each investors purchase
requirements; however, the Company believes that the loss of any one or group of
such investors would not have a material adverse effect on the Company.
As of a result of the Offering, the Company believes that the increase in
equity will allow the Company to reduce its borrowing rate on its Customized
Financing and Permanent Loan activities.
The anticipated increase in business is expected to be funded by additional
borrowings under the warehouse facility, repurchase agreements, increased
capital resulting from this Offering and funds
26
provided from operations, all of which are expected to enable the Company to
fund its operations for a minimum of twelve months following completion of this
Offering.
INFLATION AND SEASONALITY
In general, when the Company establishes an interest rate on a loan held for
sale, it attempts to concurrently lock in an interest yield to the institutional
investor purchasing that loan. By selling these loans shortly following
origination the Company limits its exposure to interest rate fluctuations.
However, the Company will accumulate some loans for bulk sale and in these
circumstances the Company hedges its interest rate risk with forward commitments
and put options. The Company does not hedge its loans held for investment
because these loans are generally variable rate loans based on short term LIBOR.
However, the operations and profitability of the Company are likely to be
adversely affected during any period of unexpected or rapid changes in interest
rates. For example, a substantial or sustained increase in interest rates could
adversely affect the ability of the Company to originate loans. In such event,
the financial condition and results of operations of the Company could be
materially adversely affected.
The Company is generally not subject to seasonal trends. However,
historically the Company has experienced increased transactions and higher
revenues and earnings in the fourth quarter primarily due to borrowers' desire
to consummate transactions by year end.
YEAR 2000 RISK
The Company has implemented a Year 2000 program to ensure that the Company's
computer systems and applications will function properly beyond 1999. The
Company believes that is has allocated adequate resources for this purpose and
expects its systems to be compliant by January 1, 1999. Although the Company
expects all of its systems to be Year 2000 compliant by January 1, 1999, there
can be no assurances that all of the Company's and vendor and business partner
systems will be Year 2000 compliant. The Company's cost to comply with the Year
2000 initiative is not expected to be material.
INCOME TAXES
Effective April 1, 1998, ASF distributed a dividend of certain assets which
were not consistent with the intended business of the Company to Ivan Kaufman,
its sole stockholder, and immediately thereafter the outstanding common stock of
ASF was sold to the Trust. Immediately thereafter, the Trust contributed the
common stock of ASF with a book value of $3.7 million, which approximated fair
value, to ANCM in exchange for ownership interests in ANCM. Simultaneous with
the contribution, ASF ceased to be treated as an S corporation. Upon the
effective date of the Offering, all members of ANCM, pursuant to the terms of
the Exchange Agreement, will contribute their ownership interest in ANCM to the
Company in exchange for 7,500,000 shares of Common Stock (the "Exchange"), which
will constitute all of the shares of Common Stock outstanding prior to the
Offering. Simultaneous with the Exchange, ANCM will no longer be recognized as a
limited liability company for tax purposes.
As a limited liability company and S corporation, the Company's income,
whether or not distributed, was taxed at the member or shareholder level for
federal and most state tax purposes. As a result of the Exchange, the Company
and ANCM, which will become a wholly-owned subsidiary of the Company, will be
fully subject to federal and state income taxes at the corporate level, and will
result in the Company recording a deferred tax liability on its balance sheet.
The amount of deferred tax liability to be recorded as of the date of the
Exchange will depend upon timing differences between financial reporting and tax
reporting. The pro forma provision for income taxes in the accompanying
statements of operations shows results as if the Company had always been fully
subject to federal and state taxes at an assumed combined rate of 40%.
27
BUSINESS
THE COMPANY
Arbor National Holdings, Inc. is a fully integrated real estate financial
services company. The Company funds, on a negotiated basis, high-yielding
lending and investment opportunities in commercial real estate through
Customized Financing structures. It also derives substantial revenue from the
origination for sale and servicing of Permanent Loans for multifamily and other
types of commercial properties.
In recent years the Company has experienced significant growth. Total
revenues increased from $16.7 million to $24.3 million for the years ended
December 31, 1996 and 1997, respectively, and from $4.3 million to $8.0 million
for the quarters ended March 31, 1997 and 1998, respectively. Pro forma net
income increased from $2.5 million to $5.2 million for the years ended December
31, 1996 and 1997, respectively, and from $0.7 million to $2.0 million for the
quarters ended March 31, 1997 and 1998, respectively. At March 31, 1998, the
Company's commercial servicing portfolio consisted of 136 loans aggregating
approximately $536 million and its portfolio of loans held for investment
consisted of 38 loans aggregating approximately $56 million.
The Company targets the market for transactions under $20 million,
particularly in the $1 million to $5 million range, where management believes it
has competitive advantages, particularly its lower cost structure and its
in-house capabilities. The Company generates a continuing pipeline of real
estate finance and investment opportunities through its six full-service offices
in Atlanta, Boston, Chicago, Dallas, San Francisco and Uniondale, New York, its
three satellite offices in Miami, Los Angeles and Florence, Kentucky (greater
Cincinnati, Ohio) and its extensive network of strategic relationships with
investment banking firms, brokers, developers, real estate owners and operators,
and other financial institutions.
The Company's Customized Financing activities highlight its unique
strengths. First, the Company's strong presence and established relationships in
the marketplace facilitate its ability to source and identify many
non-traditional lending opportunities. Second, the specialized lending expertise
and entrepreneurial abilities of its staff enable the Company to provide
creative, flexible financing structures, thus enhancing value for the Company
and its borrowers. Third, the Company, as a provider of both transitional
financing under its Customized Financing activities and permanent mortgage
financing under its Permanent Loan activities, is uniquely positioned in its
targeted market as a single source of financing solutions.
The Company's Permanent Loan activities consist of originating commercial
mortgage loans pursuant to government-sponsored and conduit loan programs, and
selling those loans, typically on a whole loan basis, to government-sponsored
entities or other secondary market investors, while retaining the servicing of
those loans for a fee. As compared to Customized Financing activities, the
Company's Permanent Loan activities generate a more stable and predictable flow
of revenue through servicing and other fee income. In addition, the Permanent
Loan activities keep the Company closely apprised of trends in the commercial
real estate market and provide an additional source for Customized Financing
opportunities. The Company primarily originates permanent loans pursuant to the
FNMA DUS Program, under which it is one of 28 approved lenders. To date, the
Company has had no credit losses on its commercial servicing portfolio.
The Chief Executive Officer and founding stockholder of the Company is Ivan
Kaufman, who was the co-founder, chairman and controlling stockholder of Old
Arbor, a publicly held, NASDAQ traded company that went public on August 7, 1992
and was subsequently sold in January 1995 to BankAmerica Corporation. From 1983
through 1994, under Mr. Kaufman's management, Old Arbor's residential mortgage
lending activities grew to 25 branches in eleven states, with approximately
1,000 employees, originating more than $4 billion of loans annually and
servicing nearly $5.5 billion. In connection with the sale of Old Arbor to
BankAmerica Corporation, the commercial mortgage lending operations were
acquired by Mr. Kaufman. Since this acquisition, the Company has evolved to
become a full service
28
provider of real estate financial services to owners and developers of
commercial and multifamily real estate properties. In anticipation of the
Offering, ANHI was formed in 1998 as a holding company for ANCM and ASF which
were reorganized into a single entity and then acquired by ANHI through an
exchange of equity. See "Prospectus Summary--Recent Developments" and
"Prospectus Summary-- Reorganization Transactions."
INDUSTRY OVERVIEW
The Company believes that the financing of commercial and multifamily real
estate offers significant growth opportunities. Commercial and multifamily real
estate encompass a wide spectrum of assets including multifamily, office,
industrial, retail and hospitality. These assets are financed by an estimated
$1.0 trillion of outstanding commercial real estate debt, and the Company
estimates that $125 billion to $150 billion in commercial real estate mortgages
are refinanced each year in addition to the mortgage financing of new
construction.
Commercial mortgage banks have arranged a significant portion of the debt
financing for commercial real estate. However, since the early 1990s, the
commercial mortgage banking industry has experienced significant change, in part
due to expensive technological demands, increasingly standardized underwriting
requirements, more demanding borrowers and lenders and the growth of a market
for securitized commercial real estate mortgage pools. Many of the existing
firms lack the capital and financial sophistication to compete effectively in
today's rapidly changing market, and as a result the commercial mortgage banking
industry is moving toward greater consolidation. Moreover, lenders such as banks
and life insurance companies which have traditionally been the primary source
for commercial real estate financing, are increasingly constraining borrowers
due to their relatively inflexible underwriting standards, including lower
loan-to-value ratios, thereby creating significant demand for mezzanine and
other forms of gap financing. Accordingly, the Company believes that the
emerging market leaders in the real estate finance sector will be fully
integrated finance companies capable of originating, underwriting, structuring,
managing and retaining real estate risk.
COMPETITIVE ADVANTAGES
- BREADTH OF PRODUCT OFFERINGS--Since the Company offers both short-term and
long-term funding capabilities, as well as the skills and expertise to
develop creative, flexible financing structures, the Company can present
itself as a single-source financing alternative, attracting individual
clients with diverse and complex needs.
- FOCUS ON UNDERSERVED MARKET--The Company specializes in Customized
Financing transactions under $20 million, particularly the $1 million to
$5 million range, which larger financial institutions will not consider,
or, because of organizational constraints, cannot offer on terms
comparable to those provided by the Company.
- ORIGINATION SYNERGIES--The Company's participation in Permanent Loan
programs provides significant synergies with the Customized Financing
business. The Permanent Loan programs create a stream of opportunities
that require transitional financing to position the underlying property
for a Permanent Loan while providing an effective exit strategy for
Customized Financing transactions generated from other sources.
- RAPID EXECUTION CAPABILITY--The Company's in-house expertise enables it to
act on proposals quickly and decisively and analyze opportunities, provide
commitments and close transactions within a few weeks and sometimes days,
if required. The Company believes its reputation for rapid execution
attracts, from both borrowers and other lenders, opportunities that would
not otherwise be available.
29
- CONTINUITY AND EXPERIENCE OF MANAGEMENT--The four senior executive
officers of the Company (including Mr. Kaufman) have an average of more
than twelve years of experience in real estate finance and investing,
while the 21 vice presidents and regional directors average almost sixteen
years of relevant industry experience. Eleven members of the Company's
management team worked with Mr. Kaufman at Old Arbor. The remainder have
been recruited because of their particular product specialization and
expertise in analyzing and structuring complex financial transactions in
commercial real estate.
- COMMITMENT OF SENIOR MANAGEMENT AND KEY EMPLOYEES--In addition to the
substantial ownership of the Company by Mr. Kaufman, all senior executives
and eighteen key employees have made significant equity investments in the
Company which align their interests with those of the Company's other
stockholders.
- NETWORK OF RELATIONSHIPS--In addition to the market presence represented
by its full-service and satellite offices, the Company generates
significant opportunities through referrals from an extensive network of
strategic relationships with investment banking firms, brokers,
developers, real estate owners and operators and other financial
institutions.
BUSINESS STRATEGIES
- INCREASE CUSTOMIZED FINANCING OPPORTUNITIES by using the additional
capital from this Offering to offer an expanded range of maturities and
other terms suitable for various borrowers and projects.
- GROW THE COMPANY'S STREAM OF INTEREST INCOME by using the additional
capital from this Offering to permit longer retention of bridge and
mezzanine loans on the Company's balance sheet.
- DIVERSIFY THE COMPANY'S ORIGINATIONS AND INVESTMENTS beyond loans on
multifamily properties to include financings of assisted-living
facilities, hotels and other types of commercial property developments.
- CONTINUE THE COMPANY'S GEOGRAPHIC EXPANSION into selected major real
estate markets throughout the United States to expand its originations
capabilities by increasing local awareness of the Company's capabilities
and improving the Company's ability to monitor local activity for suitable
opportunities.
- INCREASE THE AVERAGE OUTSTANDING LOAN BALANCE of Customized Financing
activities through the utilization of the additional capital from this
Offering to fund larger transactions in the under $20 million market.
- LEVERAGE THE COMPANY'S CORE COMPETENCIES TO EXPAND ITS SERVICES and
develop related products, such as the FHA-insured multifamily and
healthcare financing program, as well as acquiring or developing in-house
property management capabilities.
CUSTOMIZED FINANCING ACTIVITIES
Through its Customized Financing activities, the Company actively pursues
lending and investment opportunities with real estate owners and property
developers who need interim financing until permanent financing can be obtained.
The Company targets transactions under $20 million, particularly in the $1
million to $5 million range, where the Company believes it has competitive
advantages, particularly its lower cost structure and its in-house capabilities.
These loans generally are not intended to be "permanent" in nature, but rather
are intended to be of a relatively short-term duration, with extension options
as deemed appropriate, and generally require a balloon payment of principal and
interest at maturity. The Company's customized loans generally yield higher
interest rates and fee income than Permanent Loans. Borrowers in the market for
these types of loans include, but are not limited to, owners or developers
30
seeking either to acquire or refurbish real estate or to pay down debt and
reposition a property for permanent financing.
The Company targets borrowers with reputations for enhancing value, but who
may lack the financial capacity to qualify for bank financing beyond a certain
level. Loan structures vary as they are customized to fit the characteristics
and purpose of the financing. The bridge and mezzanine loans are underwritten in
accordance with guidelines designed to evaluate the borrowers' ability to
satisfy the repayment conditions of the loan. See "Underwriting." The Company
evaluates the various exit strategies for converting the short term financing
into a Permanent Loan, thereby increasing the volume of loans generated for the
Company's Permanent Loan program. As part of the determination to proceed with
the short term financing, the Company will include terms such as exit and other
fees that give the borrower strong incentives to obtain permanent financing
through the Company.
For the years ended December 31, 1997, and 1996, the Company originated $174
million and $74 million of Customized Financing transactions, respectively. In
addition to the interest and fee income earned on these originations, additional
Customized Financing transactions have provided the Company with the opportunity
to earn significant fee income without having to close on such transactions.
Some of these situations have involved providing, for a fee, commitments or
back-up commitments to borrowers, often with a strong likelihood that such
commitments would not be utilized, to enable such borrowers to consummate
commercial real estate transactions. Other situations have involved acquiring,
and selling at a profit prior to closing, contracts to purchase loans and
commercial properties. The Company expects that it will continue to generate
significant revenue from activities that do not involve the actual funding of a
loan (and a corresponding increase in origination volume), although no assurance
can be given that any such activities will occur. During 1997, the Company
earned $418,500 in fee income without closing any loans held as a result of such
transactions.
The Customized Financing team is comprised of ten employees with an average
of fifteen years of experience in structuring these types of transactions. This
group reports directly to Mr. Kaufman, who is actively involved in many of these
transactions.
MEZZANINE LOANS. The Company believes that there is a growing need for
mezzanine capital (i.e. capital representing the level between 65% and 90% of
property value) as a result of current commercial mortgage lending practices
setting loan-to-value targets as low as 65%. The Company's mezzanine financing
may take the form of subordinated loans, commonly known as second mortgages, or,
in the case of loans originated for securitization, partnership loans (also
known as pledge loans) or preferred equity investments with terms up to 60
months. For example, on a commercial property subject to a first lien mortgage
loan with a principal balance equal to 70% of the value of the property, the
Company could lend the borrower (typically a partnership) an additional 15% to
20% of the value of the property. In some instances, the Company may provide
mezzanine financing for construction projects where a third party lender has
provided only 85% to 90% of the total project costs. The Company believes that
as a result of (i) the significant changes in the lending practices of
traditional commercial real estate lenders, primarily relating to more
conservative loan-to-value ratios, and (ii) the significant increase in
securitized lending with strict loan-to-value ratios imposed by the rating
agencies, there will be an increasing demand for mezzanine capital by borrowers.
Typically, the borrower will pledge to the Company either the property
subject to the first lien (giving the Company a second lien position typically
subject to an inter-creditor agreement) or an equity interest in the borrower.
If the borrower's equity interest is pledged, then the Company would be in a
position to take over the operation of the property in the event of a default by
the borrower. The Company may also require additional collateral such as
personal guarantees, letters of credit or other collateral unrelated to the
subject property. By borrowing against the additional value in their properties,
borrowers obtain an additional level of liquidity to apply to property
improvements or alternative uses.
31
Mezzanine loans generally provide the Company with the right to receive a
stated interest rate on the loan balance plus various commitment and exit fees.
In certain instances, the Company will negotiate to receive a percentage of net
operating income or gross revenues from the property, payable to the Company on
an ongoing basis, and a percentage of any increase in value of the property,
payable upon maturity or refinancing of the loan, or the Company will otherwise
seek terms to allow the Company to charge an interest rate that would provide an
attractive risk-adjusted return. Alternatively, mezzanine loans can take the
form of a non-voting preferred equity investment in a single purpose entity
borrower with substantially similar terms.
BRIDGE LOANS. The Company provides short-term financing to fund
opportunistic property acquisitions by a borrower or to fund the rehabilitation
of an owned property to enable the borrower to perform upgrades and other
property management enhancements, thereby increasing the property's value prior
to qualifying for a Permanent Loan. The Company is typically approached by a
borrower who has identified an undervalued property (i.e. an under-managed
property or a property located in a recovering market) and who is in need of
immediate financing to capitalize on the opportunity. The bridge facility allows
the borrower to focus on the purchase of the property without the concern of
negotiating long-term financing at the same time. Moreover, traditional lenders
will often constrain the amounts available for long-term financing to the
"as-is" value of the property, while the Company, through the bridge loan, is
able to give consideration to the potential stabilized value of the asset.
The Company's bridge loans are secured by first lien mortgages on the
property with terms generally up to 36 months and are subject to its customary
underwriting analysis. See "--Underwriting." As with mezzanine loans, bridge
loans generally provide the Company with commitment, exit and other fees and
interest at a rate that would provide an attractive risk-adjusted return.
NOTE ACQUISITIONS. The Company acquires real estate notes from borrowers
interested in restructuring and repositioning their short term debt and from
traditional lenders, who for a variety of reasons, (such as risk mitigation or
other strategic reasons) wish to divest certain assets from their portfolio. In
most circumstances the Company is able to acquire these notes at a discount. In
certain instances, the Company may seek joint venture partners with larger
balance sheet capability to purchase such notes. The Company's strategy upon
acquisition of notes from either a borrower or a traditional lender is to use
its management resources to resolve any dispute concerning the note or the
property securing it, and to identify and resolve any existing operational or
any other problems at the property. The Company will then either restructure the
debt obligation for immediate resale or sale at a later date or reposition it
for permanent financing. In some instances, the Company may take fee title to
the property underlying the real estate note. See "--Investment in Real Estate
and Other Investments."
LOANS HELD FOR INVESTMENT. At March 31, 1998, the Company's portfolio of
loans held for investment amounted to $56 million, or 60% of the Company's total
assets. Loans held for investment, net, principally bridge, mezzanine and note
acquisitions, are carried at amortized cost less unearned income and allowance
for loan losses. The net book value of loans held for investments, net,
represents fair value at each date.
As of March 31, 1998, 46.9% of the Company's portfolio loans held for
investment consisted of three loans of $11.1 million, $5.5 million and $10.4
million. These loans were held by two unrelated borrowers and secured by
individual properties or interests in investment partnerships. To date, the
Company has not experienced any losses on its portfolio of loans held for
investment. As of March 31, 1998 there was one delinquent loan in this portfolio
with an outstanding principal balance of approximately $300,000. The Company
anticipates repayment of this loan in full. See "Risk Factors--Credit
Concentration of Loans Held for Investment."
32
LOANS HELD FOR INVESTMENT, NET
BY TYPE OF LOAN
AS OF AS OF
MARCH 31, 1998 DECEMBER 31, 1997
------------------------------------------ -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
STATED TERM TO STATED
# INTEREST MATURITY # INTEREST
-- AMOUNT RATE(1)(2) IN MONTHS -- AMOUNT RATE(1)(2)
---------- ------------- --------------- ---------- -------------
Bridge Loans....................... 10 $37,167,868 11.2% 9 10 $32,049,330 10.7%
Mezzanine.......................... 4 6,275,416 11.6 16 3 6,177,891 11.7
Note Acquisitions & Mortgages...... 22 12,773,453 9.7 30 26 32,031,121 9.8
Other.............................. 2 1,300,000 15.0 13 2 1,300,000 15.0
-- -- --
---------- --- ---------- ---
Total............................ 38 57,516,737 11.0% 14 41 71,558,342 10.4%
-- -- --
-- -- --
--- ---
--- ---
Less: Unearned Income.............. (505,416) (2,270,403)
Allowance for loan losses.......... (738,032) (678,033)
---------- ----------
LOANS HELD FOR INVESTMENT, NET..... $56,273,289 $68,609,906
---------- ----------
---------- ----------
AS OF
DECEMBER 31, 1996
------------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
REMAINING AVERAGE REMAINING
TERM TO STATED TERM TO
MATURITY # INTEREST MATURITY
IN MONTHS -- AMOUNT RATE(1)(2) IN MONTHS
--------------- ---------- ------------- ---------------
Bridge Loans....................... 9 4 $1,015,947 10.8% 11
Mezzanine.......................... 18 4 3,410,000 11.1 24
Note Acquisitions & Mortgages...... 15 24 35,801,781 10.0 24
Other.............................. 16 2 728,137 15.0 28
-- -- --
---------- ---
Total............................ 13 34 40,955,865 10.2% 24
-- -- --
-- -- --
---
---
Less: Unearned Income.............. (1,801,750)
Allowance for loan losses.......... (468,551)
----------
LOANS HELD FOR INVESTMENT, NET..... $38,685,564
----------
----------
- ------------------------
(1) The weighted average stated interest rate does not include commitment, exit
and other fees.
(2) The weighted average stated interest rates are primarily six-month LIBOR
based.
33
PERMANENT LOANS
Through its Permanent Loan activities, the Company originates, underwrites,
warehouses and sells into the secondary markets commercial real estate loans,
principally multifamily loans. The Company generally sells its mortgage loans on
a servicing retained basis, which generates a stable and predictable source of
fee revenue, and on a non-recourse basis, except for standard FNMA DUS
requirements described below. The average size of these loans is $4.5 million.
The Company funds these loans using its warehouse lines of credit and repurchase
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
For the years ended December 31, 1997 and 1996, the Company originated $216
million and $244 million of Permanent Loans, respectively. The Permanent Loan
team is comprised of seven loan originators and twenty underwriters having an
average of eleven and six years of experience, respectively, in FNMA DUS and
conduit loan programs. Underwriting standards are established by the Company's
Chief Underwriter, who has over seventeen years of underwriting, sales and
product experience. Additionally, in the last two years the Company has expanded
its FHA/HUD lending activities by adding a dedicated team of four loan
originators and two underwriters with between six and twenty years of
experience. The FHA group is led by a former Vice President and Manager of
Insured Loans for GMAC Commercial Mortgage Corp.
Below is a description of the types of Permanent Loan programs in which the
Company participates:
FNMA DUS. In October, 1995, the Company became an approved FNMA DUS
originator. An approved FNMA DUS lender is delegated the authority to approve,
commit and close loans for multifamily mortgages on a national basis with a
standby commitment from Fannie Mae that it will purchase the loans. In contrast
to a "prior approval" lender, FNMA DUS lenders do not need to obtain the
approval of Fannie Mae prior to making the loan. In return for the delegated
authority to make loans and the commitment to purchase such loans by Fannie Mae,
FNMA DUS lenders must maintain a minimum capital base and retain a certain level
of credit risk on the loans they make. The FNMA DUS lender takes first loss risk
up to 5% of the loan amount, and above 5%, Fannie Mae and the FNMA DUS lender
share the loss, with the FNMA DUS lender's maximum loss capped at 20% of the
original loan amount. In return for sharing the risk of loss, the participants
receive a servicing fee that is significantly higher than what is typically
found in the industry. See "--Servicing."
The Company is one of only 28 currently approved FNMA DUS lenders. The
Company believes that as one of these few FNMA DUS lenders, it has certain
competitive advantages in the multifamily mortgage origination business. These
advantages include the competitive-tiered pricing afforded by Fannie Mae's
position as the largest purchaser of housing related mortgages in the nation,
the ability to commit and close mortgages without the delay and the accompanying
market risks of such delay for an approval process by the mortgage purchaser.
The Company expects Fannie Mae loan originations will continue to be a
significant part of its commercial mortgage banking activities. The Company
originated $149 million and $168 million of FNMA DUS mortgages for the years
ended December 31, 1997 and 1996, respectively. The Company, as a FNMA DUS
lender, has experienced no losses or delinquencies on its portfolio of FNMA DUS
loans as of March 31, 1998.
CONDUIT. The Company's conduit program involves the origination for sale
(on a non-recourse basis) and servicing of commercial mortgage loans typically
for B-C quality commercial credits, primarily multifamily properties, but also
for office buildings, retail centers, hotels, warehouses and assisted living
facilities. Mortgage loans are sold to institutional investors, including Fannie
Mae. Since the Company maintains a number of Wall Street relationships,
borrowers are assured of competitive rates. Mortgages originated under this
program are underwritten in accordance with investor guidelines designed to
evaluate the borrower's ability to satisfy the repayment conditions of the loan.
See "--Underwriting." The Company originated $40 million and $67 million of
conduit mortgages for the years ended December 31, 1997 and 1996, respectively.
34
FHA MULTIFAMILY AND HEALTHCARE. The Company is an approved lender in the
FHA/HUD mortgage insurance program. The FHA group of professionals implement the
origination, underwriting and processing of FHA/HUD insured financing
nationwide. The uses for financing provided through the FHA/HUD mortgage
insurance programs consist of the acquisition, refinancing, new construction and
substantial rehabilitation of multifamily housing, assisted living and nursing
home facilities nationwide. Upon receiving HUD's firm commitment to insure the
mortgage, the Company issues Government National Mortgage Association backed
securities that are sold primarily to investment banking institutions and
pension funds. The Company will usually retain the right to service the loans on
behalf of the purchasers for a continuing servicing fee. See "--Servicing." The
Company has recently begun actively seeking transactions under the FHA/HUD
mortgage insurance program. The Company currently has a pipeline of
approximately $100 million of FHA/HUD products at various stages of processing.
SALE PROCEDURES. Permanent Loans are often committed to be sold prior to
the time the loan is funded. The Company typically completes the sale of a
Permanent Loan to an investor within ten to 60 days following the closing of a
loan. The actual length of time a loan is held prior to sale into the secondary
market is determined by the Company's capital markets group. The objective of
the capital markets group is to maximize the Company's gain on sale of the loan
while also earning a favorable yield during the holding period.
In connection with such sales, the Company makes certain representations and
warranties to investors covering matters such as title to mortgaged property,
lien priority, environmental reviews and certain other matters. See "Risk
Factors -- Retained Risks of Loans Sold." The Company bases these
representations and warranties on representations and warranties from borrowers
and its own due diligence. The Company may also retain certain other liabilities
with respect to loans it sells to investors, as it does under the FNMA DUS
Program as described above. See also "Risk Factors -- Risk of Loss on Mortgage
Loans Sold Under the FNMA DUS Program." After selling a mortgage loan, the
Company typically retains the right to service the loan. See "--Servicing."
INVESTMENT IN REAL ESTATE AND OTHER INVESTMENTS
From time to time the Company is presented with or otherwise identifies real
estate investment opportunities. In these situations, the Company may act solely
on its own behalf, through a wholly owned subsidiary or in partnership with
other investors. Typically these transactions are analyzed with the expectation
that the Company will have the ability to sell the property within a six to
twenty-four month time horizon, with a significant return on invested capital.
The Company currently retains the services of third-party management companies,
but may in the future decide to manage such real property interests itself.
The Company may also pursue investments in, among other assets, construction
loans, distressed loans, property development and finance-related assets,
operating companies in real estate-related busi-
nesses (such as loan origination, loan servicing and property management
companies) and fee interests in real property.
MARKETING AND SOURCING
The Company serves its markets directly through its network of six full
services offices located in Atlanta, Boston, Chicago, Dallas, San Francisco and
Uniondale, New York, as well as through three satellite offices located in
Miami, Los Angeles and Florence, Kentucky (greater Cincinnati, Ohio). These
offices are staffed by approximately fifteen loan originators who solicit
property owners, developers and mortgage loan brokers. In some instances, the
originators will accept loan applications meeting the Company's underwriting
criteria from a select group of mortgage loan brokers. Mortgage loan brokers act
as intermediaries between property owners and the Company in arranging real
estate loans and earn a fee, generally paid by the borrower, based upon the
principal amount of each loan funded. Since a large
35
portion of the Company's marketing effort in its branches is through the
development of relationships with borrowers and brokers, the Company does not
incur significant expenses in the form of advertising its lending services to
the general public.
Once potential borrowers have been identified, the Company determines which
of its financing products best meets the borrowers needs. Loan originators in
every branch office have access to and are able to offer borrowers the full
array of both Customized Financing and Permanent Loan products. After
identifying a suitable product, the Company works with the borrower to prepare a
loan application. Upon completion by the borrower, the application is forwarded
to the Company's underwriters for due diligence or, in the case of FHA insured
loans, to the FHA, which conducts the due diligence and makes decisions on
commitments. See "--Underwriting."
UNDERWRITING
The Company's loan originators work in conjunction with underwriters whose
responsibility is to perform due diligence on all Customized Financing and
Permanent Loans prior to approval and commitment. The Company's underwriters
complete a comprehensive assessment of the proposed loan including a review of
(1) borrower financial position and credit history, (2) past operating
performance of the underlying collateral, (3) potential changes in project
economics and (4) third party appraisal, environmental, and engineering studies.
Additionally, underwriters complete an independent market assessment which
includes a property inspection, review of tenant and lease files, survey of
market comparables and an analysis of area economic and demographic trends.
Key factors considered in credit decisions include, but are not limited to,
debt service coverage, loan-to-value ratios, property financial and operating
performance, quality of property management, borrower credit history and tenant
profile. With respect to Permanent Loans, specific underwriting guidelines are
set by Fannie Mae and other investors. These standards vary from investor to
investor and may include a subjective element based on the totality of
circumstances relating to the credit risk and generally do not involve
mechanical application of a set formula. With respect to Customized Financing,
additional consideration is given to other factors, such as alternative forms of
collateral and identifying a potential exit strategy. The Company refines its
underwriting criteria based on actual loan portfolio experience and as market
conditions and investor requirements evolve.
The Company utilizes the underwriting criteria established by the FHA to
recommend loans for FHA insurance. The Company provides the FHA with the
requisite information necessary for its credit review. These loans are then
examined by the FHA, which makes the decision as to whether to approve the loan.
LOAN APPROVAL PROCESS
PERMANENT LOANS. A comprehensive written report is prepared on every loan
application submitted to the Company's Permanent Loan committee for approval.
The four members of the committee have an average of over seventeen years of
industry experience. All loans require approval by a majority of the committee.
This presentation includes a description of the prospective borrower and any
guarantors, the collateral, and the proposed use of loan proceeds, as well as
borrower and property financial statements and analysis. Each application is
evaluated from a number of underwriting perspectives. Since Permanent Loans are
limited or non-recourse to the borrower, primary emphasis is placed on the
property's economic performance, physical condition and local housing market,
along with prudent application of debt service coverage and loan-to-value
ratios. Even so, the Company also examines, when circumstances warrant, borrower
liquidity, net worth, cash investment, income, credit history and operating
experience.
The Company's loan originators, in conjunction with regional office
underwriters, the Company's Chief Underwriter and its Vice President-Capital
Markets, are primarily responsible for initial reviews of borrowers, properties
and loan terms. Upon the borrower's execution of the loan application, the
36
Company's underwriting group conducts due diligence under the direct supervision
of the Chief Underwriter. The underwriter assigned to the case presents the
transaction to the Permanent Loan committee with the advice, consent and support
of the Chief Underwriter. Following loan approval and prior to funding, the
Company's underwriting and servicing departments assure that all loan approval
terms have been satisfied, that they conform with lending policies (including
authorized exceptions) and that all required documentation is present and in
proper form.
CUSTOMIZED FINANCING. As with Permanent Loans, a written report is
generated for every customized loan transaction the Company is considering
financing. The guidelines utilized to prepare these reports do not depart
substantially from those used for Permanent Loans. Each loan is reviewed and
approved by executives in the Customized Financing group and, if approved,
presented for final approval by Mr. Kaufman. Following the approval of any such
loan, the Company's underwriting and servicing departments assure that all loan
approval terms have been satisfied and that they conform with lending
requirements established for that particular transaction.
SERVICING
The Company services an expanding loan portfolio which contributes a
relatively predictable and stable source of cash flow. The Company's loan
servicing operations are designed to provide prompt customer service and
accurate and timely information for account follow-up, financial reporting and
management review. The Company's loans are serviced through the loan
administration department located in the Company's Boston office. Following the
funding of an approved loan, all pertinent loan data is entered into the
Company's data processing system, which provides monthly billing statements,
tracks payment performance and processes contractual interest rate adjustments
on variable rate loans. Regular loan service efforts include payment processing
and collection follow-up, as well as tracking the performance of additional
borrower obligations with respect to the maintenance of casualty insurance
coverage, payment of property taxes and senior liens, if applicable. On a
quarterly basis, the Company obtains and analyzes operating statements and
detailed rent rolls on the properties securitizing the commercial loans
serviced. In addition, inspections of the property are performed annually or
more frequently if necessary, e.g. properties undergoing major improvements. The
Company has in-house asset management expertise to assist in the inspection
process. With these procedures already in place, if loans become delinquent or
non-performing the Company has current information about the underlying
collateral and can react quickly by changing management companies, commencing
foreclosure proceedings and negotiating workouts with the borrowers on behalf of
the investors.
COMMERCIAL SERVICING PORTFOLIO. The Company's commercial servicing
portfolio represents commercial loans serviced for third parties for a fee and
does not include loans held for investment. Yield maintenance and lockout
provisions tend to discourage and, in the case of a lockout provision, prevent
early loan payoffs by the borrower. These provisions enable the Company to
better determine future cash flow from its existing portfolio and to calculate
the potential to refinance maturing loans. In addition, the Company receives its
pro rata share of the servicing fee (calculated on a present value basis) for
loans that are prepaid under the FNMA DUS Program. To date, the Company's
commercial servicing portfolio has not experienced any losses. As of March 31,
1998, there was one delinquent loan with an outstanding principal balance of
less than $100,000.
37
COMMERCIAL SERVICING PORTFOLIO
(DOLLARS IN MILLIONS)
FNMA WAREHOUSE
DECEMBER 31, 1997 DUS CONDUIT & OTHER TOTAL
--------- ----------- ----------- ---------
Unpaid principal balance.................................. $ 291.9 $ 180.4 $ 57.7 $ 530.0
Weighted average interest rate............................ 8.07% 9.12% 7.81% 8.40%
Weighted average servicing fee............................ 0.45% 0.27% 0.42% 0.38%
Remaining months to maturity.............................. 129 74 140 111
Number of loans serviced.................................. 51 66 16 133
DECEMBER 31, 1996
Unpaid principal balance.................................. $ 136.3 $ 193.6 $ 55.6 $ 385.5
Weighted average interest rate............................ 8.12% 9.28% 9.71% 8.93%
Weighted average servicing fee............................ 0.45% 0.21% 0.45% 0.33%
Remaining months to maturity.............................. 126 83 143 107
Number of loans serviced.................................. 26 72 12 110
On March 31, 1998, the Company had a portfolio of $536 million of commercial
loans serviced for a fee. The characteristics of the portfolio on that date were
substantially similar to those of the December 31, 1997 portfolio.
INTEREST RATE MANAGEMENT TECHNIQUES
In general, when the Company establishes an interest rate on a loan held for
sale, it attempts to contemporaneously lock in an interest yield to the
institutional investor purchasing that loan. By selling these loans shortly
following origination the Company limits its exposure to interest rate
fluctuations. However, the Company will accumulate some loans for bulk sale and
in these circumstances the Company hedges its interest rate risk with forward
commitments and put options. The Company does not hedge its loans held for
investment because these loans are generally variable rate loans which are based
on short term LIBOR. However, the operations and profitability of the Company
are likely to be adversely affected during any period of unexpected or rapid
changes in interest rates. For example, a substantial or sustained increase in
interest rates could adversely affect the ability of the Company to originate
loans.
38
COMPETITORS
The Permanent Loan and Customized Financing industries are highly
competitive and the Company competes with companies which may have greater
financial resources and lower costs of capital available to them. Although
management believes that the Company is well positioned to continue to compete
effectively in each facet of its business, there can be no assurance that it
will do so or that the Company will not encounter further increased competition
in the future which could limit its ability to compete in its Permanent Loan and
Customized Financing activities.
EMPLOYEES
As of May 31, 1998, the Company had 83 employees, including four senior
executives, 46 employees directly involved in the production of loan
transactions and 33 administrative, servicing and corporate personnel. None of
the employees are represented by collective bargaining agreements, and
management believes that it has good relations with its employees.
PROPERTIES
The Company believes that its current facilities are adequate for its
present needs and that it would not have any difficulty in obtaining additional
or alternate space at prevailing rates if necessary. The Company's current
facilities are as follows:
SQUARE LEASE
LOCATION FEET EXPIRATION CHARACTER OF USE
- -------------------------------------------- --------- ------------------ --------------------------------------
Uniondale, NY............................... 18,200 May, 2004 Executive, production and
administrative offices
Boston, MA.................................. 6,800 June, 2003 Production, servicing and
administrative offices
San Francisco, CA........................... 2,500 January, 2001 Production office
Los Angeles, CA............................. 300 November, 1998 Production office
Miami Beach, FL............................. 1,200 May, 2001 Production office
Atlanta, GA................................. 2,600 March, 2001 Production office
Burr Ridge (Chicago), IL.................... 1,800 March, 1999 Production office
Florence, KY (greater Cincinnati, Ohio)..... 1,200 December, 1999 Production office
Dallas, TX.................................. 3,500 November, 2001 Production office
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is from time to time
subject to litigation. The Company does not believe that any litigation to which
the Company is currently subject is likely, individually or in the aggregate, to
have a material adverse effect on the financial condition of the Company.
39
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR NOMINEES
The following table sets forth certain information with respect to the
director, director nominees and executive officers of the Company. It is
anticipated that all such persons will continue to serve in such capacities
following the completion of this Offering.
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Ivan Kaufman......................................... 37 Chairman of the Board, President, Chief Executive
Officer and Director
Joseph Martello...................................... 42 Senior Vice President, Chief Financial Officer and
Director Nominee
Walter K. Horn....................................... 55 Senior Vice President, General Counsel and Secretary
Elliot Silverman..................................... 47 Senior Vice President--Human Resources, Organization
Development, Marketing and Management Information
Systems
Richard A. Lippe, Esq................................ 59 Director Nominee
Larry Swedroe........................................ 46 Director Nominee
Scott Rudolph........................................ 40 Director Nominee
IVAN KAUFMAN is the founding stockholder, Chairman of the Board, President,
Chief Executive Officer and Director of the Company. From 1983 until its sale in
1995, Mr. Kaufman was the co-founder, President and Chief Executive Officer of
Old Arbor. Mr. Kaufman served on the National Advisory Board of Fannie Mae in
1994. He has also served on Fannie Mae's regional advisory and technology
boards, as well as the Board of Directors of the Empire State Mortgage Bankers
Association. Mr. Kaufman is a director of Star Multicare Services, Inc., a
publicly traded placement service for registered and licensed nurses and home
health care aides. From 1990 to 1995, Mr. Kaufman was the Tri-State regional
spokesperson for Global Relief, a nationwide environmental effort spearheaded by
the American Forestry Association. Mr. Kaufman currently serves on the Executive
Board of the North Shore Hebrew Academy and is a Board Trustee of the Great Neck
Synagogue. He also serves as Treasurer of the Israeli Tribute Committee and is a
Trustee of Dowling College and the Walt Frasier Foundation. Mr. Kaufman earned a
Juris Doctor degree from Hofstra University School of Law and a Bachelor of Arts
in Business Administration from Boston University.
JOSEPH MARTELLO has been Senior Vice President and Chief Financial Officer
of the Company since 1995 and is a director nominee for the Company. From 1990
until its sale in 1995, Mr. Martello was Vice President and Chief Financial
Officer of Old Arbor. Mr. Martello is a cum laude graduate from Hofstra
University and became a certified public accountant in New York in 1980.
WALTER K. HORN, Esq. has been Senior Vice President, Secretary and General
Counsel of the Company since 1995. Previously, Mr. Horn was General Counsel and
Secretary of Old Arbor from 1991 until its sale in 1995, and was Vice President
of Old Arbor from 1992 until its sale in 1995. Mr. Horn has a Juris Doctor
degree from St. John's University School of Law and was admitted to the New York
State Bar in 1968.
ELLIOT SILVERMAN has been Senior Vice President--Human Resources,
Organization Development, Marketing and Management Information Systems of the
Company since February 1998. Prior to joining the Company, Mr. Silverman was
Vice President of Human Resources of Barnes Jewish Hospital from 1996-1998; and
the Executive Vice President, Human Resources and Communications for Prudential
Home Mortgage from 1993 to 1996; and the Vice President--Human Resources for
Bankers Trust Company from 1981 to 1992. Mr. Silverman received a Master degree
in Education from Columbia University and a Bachelor of Arts degree in
Psychology from Queens College.
40
NON-EMPLOYEE DIRECTOR NOMINEES
LARRY SWEDROE is a director nominee of the Company. Since 1996, Mr. Swedroe
has been a principal of Buckingham Asset Management, a privately held financial
advisory firm. From 1986 to 1996, Mr. Swedroe was Vice Chairman of Prudential
Home Mortgage and prior to that he was a Senior Vice President of Citicorp
Homeowners, Inc. Mr. Swedroe is a director of Amerin Corp., a mortgage insurance
company, and a director of Mobile Application Servers, a software company. Mr.
Swedroe received a Masters of Business Administration in Finance from New York
University and a Bachelor of Arts degree in Finance from Bernard Baruch College.
RICHARD A. LIPPE, Esq. is a director nominee of the Company. For more than
the past five years, Mr. Lippe has been a practicing attorney in the State of
New York and is a stockholder and officer of Meltzer, Lippe, Goldstein, Wolf and
Schlissel, P.C., a law firm. Mr. Lippe is Chairman of the Board of Silicon
Island Equities, LLC, a privately held investment banking firm, and is a
director of OmniCorder Technologies, Inc., a privately held company which
develops breast cancer detection equipment and Collaborative Laboratories, Inc.,
a privately held contract research and manufacturing biotechnology company. Mr.
Lippe was a director of Old Arbor from 1993 until its sale in 1995. Mr. Lippe is
the Managing Trustee of the Keene Asbestos Liquidating Trust. Mr. Lippe has a
Juris Doctor degree from the University of Pennsylvania Law School and was
admitted to the New York State Bar in 1964.
SCOTT RUDOLPH is a director nominee of the Company. Mr. Rudolph has been the
Chairman of the Board and Chief Executive Officer since 1993 and President since
1986 of NBTY, Inc., a publicly traded vitamin, mineral and food supplement mail
order business. Mr. Rudolph is the Chairman of the Dowling College Board of
Trustees. He received a Bachelor of Arts degree in Marketing from Dowling
College.
COMPENSATION OF DIRECTORS
Each of the non-employee director nominees will receive a retainer for 1998
of 1,000 shares of Common Stock for their services. Subsequent to 1998, each
non-employee director will receive an annual retainer of $15,000 which shall be
payable, at the election of such director, either 50% in shares of Common Stock
and 50% in cash or 100% in shares of Common Stock. In addition, non-employee
directors receive a fee of $750 for each committee meeting attended in person,
unless the committee meeting is held on the same day as the meeting of the Board
of Directors, and a fee of $250 for each telephonic meeting attended.
Non-employee directors are also reimbursed for reasonable expenses incurred to
attend meetings. The non-employee director nominees will receive, upon initial
election to the Board of Directors, an option to purchase 3,000 shares of Common
Stock, and thereafter will receive annually an option to purchase 1,000 shares
of Common Stock. All such options are priced at 100% of the market price at
grant and become exercisable over the two year period following the date of
grant expiring ten years from the date of grant.
The Board of Directors intends to have both a standing Audit Committee and a
standing Compensation Committee. The Audit Committee, which is anticipated to be
comprised of Messrs. Lippe (Chair), Swedroe and Rudolph, assists the Board of
Directors in exercising its fiduciary responsibilities for oversight of audit
and related matters, including corporate accounting, reporting and control
practices. It is responsible for recommending to the Board of Directors the
independent auditors for the following year. The Audit Committee intends to meet
periodically with management, financial personnel and the independent auditors
to review internal accounting controls and auditing and financial reporting
matters.
The Compensation Committee, which is anticipated to be comprised of Larry
Swedroe (Chair) and Richard Lippe, is responsible for overseeing the Company's
executive compensation programs. It shall administer certain compensation and
benefit plans and approves annual compensation and recommends to the Board of
Directors long-term incentive compensation to be granted pursuant to the
Company's 1998 Stock Plan for executive officers, directors, employees and
consultants of the Company.
41
REMUNERATION OF EXECUTIVE OFFICERS--SUMMARY COMPENSATION TABLE
The following table discloses compensation paid by the Company for the
services of the chief executive officer and the four other most highly paid
executive officers of the Company for the years ended December 31, 1997, 1996
and 1995.
LONG-TERM COMPENSATION(1)
--------------------------------------
AWARDS
ANNUAL COMPENSATION --------------------------------------
---------------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS
- ------------------------- --------- --------- --------- ------------------- --------------------- ---------------
Ivan Kaufman (2)......... 1997 $ 120,000 -- -- -- --
Chairman of the 1996 120,000 -- -- -- --
Board, President and 1995 -- $ 140,000 -- -- --
Chief Executive Officer
Joseph Martello (2)(3)... 1997 $ 50,000 -- -- -- --
Senior Vice President and 1996 31,250 -- -- -- --
Chief Financial 1995 -- -- -- -- --
Officer
Walter K. Horn (2)(3).... 1997 $ 50,000 -- -- -- --
Senior Vice President, 1996 31,250 -- -- -- --
General 1995 -- -- -- -- --
Counsel and Secretary
Dana Eng................. 1997 $ 110,000(4) -- -- -- --
Former Senior Vice 1996 54,000 -- -- -- --
President, Marketing 1995 -- -- -- -- --
Scott Brown.............. 1997 $ 63,301(5) -- -- -- --
Former Senior Vice 1996 125,000 -- -- -- --
President, Capital 1995 20,832 $ 120,833 -- -- --
Markets
PAYOUTS
-------------
NAME AND PRINCIPAL LTIP ALL OTHER
POSITION PAYOUTS COMPENSATION
- ------------------------- ------------- -------------
Ivan Kaufman (2)......... -- --
Chairman of the -- --
Board, President and -- --
Chief Executive Officer
Joseph Martello (2)(3)... -- --
Senior Vice President and -- --
Chief Financial --
Officer
Walter K. Horn (2)(3).... -- --
Senior Vice President, -- --
General -- --
Counsel and Secretary
Dana Eng................. -- --
Former Senior Vice -- --
President, Marketing -- --
Scott Brown.............. -- $ 100,000(6)
Former Senior Vice -- --
President, Capital -- --
Markets
- ------------------------
(1) During the fiscal years ended December 31, 1997, 1996 and 1995, the Company
paid no long-term compensation to any of the named executive officers.
However, in June 1998, the Company's Board of Directors adopted the 1998
Stock Plan, an omnibus long-term incentive plan under which the Compensation
Committee of the Board of Directors recommends for approval by the Board of
Directors, grants of stock options, restricted stock or stock appreciation
rights for officers, directors, employees or consultants of the Company. The
Company anticipates that long-term compensation may be issued to certain
officers, directors, employees and consultants of the Company in the future
as and when approved by the Board of Directors. See "--Compensation of
Directors" and "--Employee Benefit Plans."
(2) Beginning January 1, 1999, the employment agreements of Messrs. Kaufman,
Martello and Horn will require them to devote substantially all of their
business time to rendering services to the Company. Accordingly, pursuant to
such employment agreements, the salaries expensed to the Company of Messrs.
Kaufman, Martello and Horn will increase in the future as a result of them
devoting more time to the Company. See "--Employment Agreements."
(3) Compensation reported for Messrs. Martello and Horn represents compensation
paid to them for services rendered to or for the Company during the periods
indicated. During 1996 and 1997, Messrs. Martello and Horn (and during 1996,
Ms. Eng) also devoted a substantial portion of their business time to
rendering services for an affiliate of the Company, for which time they
received additional compensation from the affiliate consisting of a salary,
bonus and certain perquisites, including 401(k) contributions.
(4) Ms. Eng resigned in March 1998.
(5) Represents compensation paid to Mr. Brown until his resignation in June
1997.
(6) Represents severance payment to Mr. Brown.
EMPLOYMENT AGREEMENTS
IVAN KAUFMAN. Mr. Kaufman entered into an employment agreement with the
Company, dated June , 1998. The term of employment is through December 31,
2003. The salary for 1998 is $175,000 per
42
annum and increases to $250,000 per annum beginning January 1, 1999, with a 10%
yearly increase thereafter. Commencing January 1, 1999, Mr. Kaufman is required
to devote substantially all his full business time and attention to the affairs
of the Company. Prior thereto he is required to devote no less than 75% of his
business time and attention to the affairs of the Company. Mr. Kaufman will
receive an initial grant of stock options at an exercise price equal to
the proposed Offering price of the Company's Common Stock. These options shall
be non-qualified options and shall remain exercisable for ten years from the
date of grant. Such options will become fully vested seven years from the date
of grant, subject to acceleration if within three years of the date of grant,
the Company's Common Stock sustains a target price which is two times the
Offering price for a period of twenty consecutive trading days or in the event
of a change in control of the Company or the death or disability of Mr. Kaufman.
Mr. Kaufman's employment under the agreement may be terminated by the Company at
any time for cause or upon Mr. Kaufman's death or disability. Mr. Kaufman is
restricted from competing with the Company for three years after the termination
of his employment in the event that he resigns or is terminated for cause.
Should Mr. Kaufman's employment be wrongfully terminated, he is entitled to
receive severance equal to three times his base salary plus three times the
highest annual bonus paid to him, if any. The Agreement also provides for
disability and insurance benefits.
JOSEPH MARTELLO. Mr. Martello entered into an employment agreement with the
Company, dated June , 1998. The term of employment is through December 31,
2001. Commencing January 1, 1999, Mr. Martello is required to devote
substantially all of his full business time and attention to the affairs of the
Company. Prior thereto, he may engage in activities not related to the Company,
provided that these activities do not interfere with his responsibilities to the
Company as determined by the Chief Executive Officer. The per annum salary is
$175,000 for the term of the contract. Mr. Martello will receive an initial
grant of stock options at an exercise price equal to the proposed Offering
price of the Company's Common Stock. These options shall be incentive stock
options, shall remain exercisable for ten years from the date of grant and will
become fully vested [ ] years from the date of grant. Mr. Martello's employment
under the agreement may be terminated by the Company at any time for cause or
upon Mr. Martello's death or disability. Mr. Martello is restricted from
competing with the Company for one year after the termination of his employment
in the event that he resigns or is terminated for cause provided that the
Company pays Mr. Martello a sum equal to his per annum base salary during the
non-competition period.
WALTER K. HORN, ESQ. Mr. Horn entered into an employment agreement with the
Company, dated June , 1998. The term of employment is through December 31,
2001. Commencing January 1, 1999, Mr. Horn is required to devote substantially
all of his full business time and attention to the affairs of the Company. Prior
thereto, he may engage in activities not related to the Company, provided that
these activities do not interfere with his responsibilities to the Company as
determined by the Chief Executive Officer. The per annum salary is $175,000 for
the term of the contract. Mr. Horn will receive an initial grant of stock
options at an exercise price equal to the proposed Offering price of the
Company's Common Stock. These options shall be incentive stock options, shall
remain exercisable for ten years from the date of grant and will become fully
vested [ ] years from the date of grant. Mr. Horn's employment under the
agreement may be terminated by the Company at any time for cause or upon Mr.
Horn's death or disability. Mr. Horn is restricted from competing with the
Company for one year after the termination of his employment in the event that
he resigns or is terminated for cause, provided that the Company pays Mr. Horn a
sum equal to his per annum base salary during the non-competition period.
ELLIOT SILVERMAN. Mr. Silverman entered into an employment agreement with
the Company, dated June , 1998. The term of employment is through December
31, 2001. Commencing January 1, 1999, Mr. Silverman is required to devote
substantially all of his full business time and attention to the affairs of the
Company. Prior thereto, he may engage in activities not related to the Company,
provided that these activities do not interfere with his responsibilities to the
Company as determined by the Chief Executive Officer. The per annum salary is
$175,000 for the term of the contract. Mr. Silverman will receive an initial
grant of stock options at an exercise price equal to the proposed Offering
price of the Company's
43
Common Stock. These options shall be incentive stock options, shall remain
exercisable for ten years from the date of grant and will become fully vested
[ ] years from the date of grant. Mr. Silverman's employment under the
agreement may be terminated by the Company at any time with or without cause or
upon Mr. Silverman's death or disability. Mr. Silverman is restricted from
competing with the Company for one year after the termination of his employment
in the event that he resigns or is terminated for cause provided that the
Company pays Mr. Silverman a sum equal to his per annum base salary during the
non-competition period. Mr. Silverman is also entitled to certain relocation and
severance benefits.
EMPLOYEE BENEFIT PLANS
1998 STOCK PLAN. In July 1998, the Company adopted the 1998 Stock Plan which
will be presented for stockholder approval at the Company's annual meeting of
stockholders to be held on or about May 1999. The purpose of the 1998 Stock Plan
is to enable the Company to attract, retain and motivate key employees,
directors, and, on occasion, consultants, by providing them with stock options,
restricted or deferred stock and/or certain other equity based incentives.
Options granted under the 1998 Stock Plan may be either incentive stock options,
as defined in Section 422A of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options. The Company has reserved shares of Common
Stock for issuance under the 1998 Stock Plan. It is intended that, as of the
effective date, options to purchase an aggregate of shares will be granted
to Mr. Kaufman and an aggregate of shares will be granted to other
employees at an exercise price equal to the Offering Price.
The 1998 Stock Plan will be administered by the Compensation Committee of
the Board. The Compensation Committee has the power to determine the terms of
any options granted thereunder, including the exercise price, the number of
shares subject to the option, and the exercisability thereof. Options granted
under the 1998 Stock Plan are generally not transferable, and each option is
generally exercisable during the lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the 1998 Stock Plan must
be at least equal to the fair market value of the shares of Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of stock of the Company, the
exercise price of any incentive stock option granted must be equal at least 110%
of the fair market value on the grant date. The term of all options under the
1998 Stock Plan may not exceed ten years. The specific terms of each option
grant will be reflected in a written stock option agreement.
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of the date of this Prospectus, after giving effect to the
Exchange Transaction, of (i) each person known by the Company to beneficially
own 5% or more of the shares of outstanding Common Stock, (ii) each of the
Company's executive officers, directors and director nominees, and (iii) all of
the Company's executive officers, directors and director nominees as a group.
Except as otherwise indicated, all shares are beneficially owned, and sole
investment and sole voting power is held by the persons named as owners.
AMOUNT AND PERCENTAGE OWNERSHIP
NATURE OF SHARES ------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- ------------------------------------------------------------------------ ----------------- ----------- -----------
The Ivan and Lisa Kaufman Family Trust(2)(3)............................ 4,163,049 55.51% %
Ivan Kaufman(3)(4)...................................................... 1,910,662 25.48
The Ivan Kaufman Grantor Retained Annuity Trust(3)(5)................... 276,810 3.69
Richard A. Lippe, Esq.(6)(9)(10)........................................ 176,306 2.35
Walter K. Horn, Esq.(3)................................................. 131,236 1.75
Elliot Silverman(3)..................................................... 102,099 1.36
Joseph Martello(3)(9)................................................... 96,380 1.29
Larry Swedroe(7)(9)(11)................................................. 14,586 0.19
Scott Rudolph(8)(9)..................................................... -- --
All officers and directors as a group (7 persons)(12)................... 6,871,128 91.62% %
- ------------------------
(1) Assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting."
(2) This is a trust created by Mr. Kaufman for the benefit of his family.
Richard A. Lippe is the sole trustee of this trust.
(3) The address for each of these persons is 333 Earle Ovington Boulevard,
Uniondale, New York 11553.
(4) Does not include 276,810 shares held by the Ivan Kaufman Grantor Retained
Annuity Trust and 4,163,049 held by the Ivan and Lisa Kaufman Family Trust.
Includes 43,609 shares held by Arbor Management, which is wholly-owned by
Ivan Kaufman and his spouse.
(5) This is a trust created by Mr. Kaufman for the benefit of his family. Ivan
Kaufman and Richard A. Lippe are co-trustees of this trust.
(6) The address for this person is 190 Willis Avenue, Mineola, New York 11501.
(7) The address for this person is 403 Conway Village Drive, St. Louis, Missouri
63141.
(8) The address for this person is 90 Orville Drive, Bohemia, New York 11716.
(9) Director nominee.
(10) Does not include 4,163,049 shares held by the Ivan and Lisa Kaufman Family
Trust and 276,810 shares held by the Ivan Kaufman Grantor Retained Annuity
Trust. Includes 176,306 shares held by Camila Bellick, the spouse of Richard
A. Lippe, for which shares Mr. Lippe has disclaimed beneficial ownership.
(11) Represents 14,586 shares held by Mona Swedroe, the spouse of Larry Swedroe.
(12) Prior to its acquisition by ANCM (See "Prospectus Summary--Recent
Developments"), ASF, an indirect wholly owned subsidiary of ANCM, provided
certain members of ANCM financing to acquire their membership interests. As
a result of the ASF Transactions and the Exchange Transaction, ASF, as
pledgee, shares beneficial ownership of a total of 892,251 shares (or
11.9%). The total listed for all officers and directors as a group includes
374,785 shares owned by certain officers listed above and does not include
517,466 shares owned by other employees of the Company.
45
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share. The following summary description relating to
the capital stock does not purport to be complete. Reference is made to the
Certificate of Incorporation and the By-laws of the Company, which are filed as
exhibits to the Registration Statement of which this Prospectus forms a part,
for a detailed description of the provisions thereof summarized below.
COMMON STOCK
GENERAL. The Company has 30,000,000 authorized shares of Common Stock,
7,500,000 of which were issued and outstanding prior to the Offering. All shares
of Common Stock currently outstanding are validly issued, fully paid and
non-assessable, and all shares which are the subject of this Prospectus, when
issued and paid for pursuant to this offering, will be validly issued, fully
paid and non-assessable.
VOTING RIGHTS. Each share of Common Stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of shareholders. The holders
are not permitted to vote their shares cumulatively. Accordingly, the holders of
more than fifty percent (50%) of the issued and outstanding shares of Common
Stock can elect all of the Directors of the Company. See "Security Ownership of
Certain Beneficial Owners and Management."
DIVIDEND POLICY. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by the Company's Board of Directors
out of the funds legally available therefor. Any such dividends may be paid in
cash, property or additional shares of Common Stock. The Company has not paid
any dividends since its inception and presently anticipates that all earnings,
if any, will be retained for development of the Company's business and that no
dividends on the shares of Common Stock will be declared in the foreseeable
future. Any future dividends will be subject to the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
the operating and financial condition of the Company, its capital requirements,
general business conditions and other pertinent facts. Therefore there can be no
assurance that any dividends on the Common Stock will be paid in the future. See
"Dividend Policy."
MISCELLANEOUS RIGHTS AND PROVISIONS. Holders of Common Stock have no
preemptive or other subscription right, conversion rights, redemption or sinking
fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of the Company, each share of Common Stock is entitled
to share ratably in any assets available for distribution to holders of the
equity of the Company after satisfaction of all liabilities, subject to the
rights of holders of Preferred Stock.
PREFERRED STOCK
The Board of Directors is authorized by the Company's Certificate of
Incorporation to authorize and issue up to 10,000,000 shares of Preferred Stock,
$.01 par value, in one or more series. No shares of Preferred Stock have been
authorized for issuance by the Board of Directors and the Company has no present
plans to issue any such shares. In the event that the Board of Directors does
issue Preferred Stock, it may exercise its discretion in establishing the terms
of the Preferred Stock. In the exercise of such discretion, the Board of
Directors may determine the voting rights, if any, of the series of Preferred
Stock being issued, which could include the right to vote separately or as a
single class with the Common Stock and/or other series of Preferred Stock; to
have more or less voting power per share than that possessed by the Common Stock
or other series of Preferred Stock; and to vote on certain specified matters
presented to the shareholders or on all of such matters or upon the occurrence
of any specified event or condition.
46
Upon liquidation, dissolution or winding up of the Company, the holders of
Preferred Stock may be entitled to receive preferential cash distributions fixed
by the Board of Directors when creating the particular series thereof before the
holders of the Common Stock are entitled to receive anything. Preferred Stock
authorized by the Board of Directors could be redeemable or convertible into
shares of any other class or series of stock of the Company.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of shares of Common Stock by, among other things,
establishing preferential dividends, liquidation rights or voting power. The
issuance of Preferred Stock could be used to discourage or prevent efforts to
acquire control of the Company through the acquisition of shares of Common
Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer and Trust Company 6201 15th Avenue, Brooklyn, New York 11219.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Elliot Silverman, Senior Vice President-Human Resources and Organization
Development of the Company, is indebted to the Company in an amount equal to
$200,000. This indebtedness arose on April 1, 1998 in connection with Mr.
Silverman's purchase of a membership interest in ANCM and is evidenced by a
seven year promissory note payable to the Company, which bears interest at prime
and will be secured by the shares of Common Stock issued to Mr. Silverman
pursuant to the Exchange Agreement. See "Prospectus Summary--Reorganization
Transactions."
Joseph Martello, the Company's Senior Vice President, Chief Financial
Officer and a director nominee, is indebted to the Company in an amount equal to
$100,000. This indebtedness arose on April 1, 1998, in connection with Mr.
Martello's purchase of a membership interest in ANCM and is evidenced by a seven
year promissory note payable to the Company, which bears interest at prime and
will be secured by the shares of Common Stock issued to Mr. Martello pursuant to
the Exchange Agreement. See "Prospectus Summary--Reorganization Transactions."
Camila Bellick, the wife of Richard A. Lippe, Esq., a director nominee of
the Company, is indebted to the Company in an amount equal to $275,000.
Indebtedness of $75,000 arose on April 1, 1998, in connection with Ms. Bellick's
purchase of a membership interest in ANCM and is evidenced by a seven year
promissory note payable to the Company, which bears interest at prime.
Indebtedness of $200,000 arose in June of 1998 and is evidenced by a prommisory
note payable to the Company on October 1, 1998, which bears interest at prime.
The aggregate indebtedness of $275,000 will be secured by the shares of Common
Stock issued to Ms. Bellick pursuant to the Exchange Agreement. See "Prospectus
Summary-- Reorganization Transactions."
Arbor Management, which is entirely owned by Ivan Kaufman and his wife,
provides office space and various services to the Company, including management
services, bookkeeping, human resources and information system support. In 1997,
the Company paid Arbor Management an aggregate of $504,000 for these services, a
rate which the Company believes is at or below market.
Anivan, Inc. ("Anivan"), which is owned by a relative of Mr. Kaufman,
identifies loan portfolios owned by third parties for possible acquisition by
the Company. Anivan pays its own expenses and assumes all risks in connection
with identification, preliminary review and the underwriting of these loan
portfolios. The gains and losses generated from the subsequent sales of the
loans and servicing income are shared by the Company with Anivan on an
approximately equal basis. In connection with the purchase of a $26 million loan
portfolio in 1997, the Company paid Anivan fees and compensation of
approximately $200,000.
47
Historically, the Company has borrowed funds from Mr. Kaufman. Borrowings
outstanding from
Mr. Kaufman (and/or the Trust and the Kaufman Grantor Trust effective March 31,
1998) totaled $13.7 million at March 31, 1998, $28.8 million at December 31,
1997 and $25.4 million at December 31, 1996. Interest on virtually all of the
Company's borrowings from Mr. Kaufman is at the prime interest rate plus 1%, or
9.5% at March 31, 1998. The borrowings from Mr. Kaufman are subordinate to the
warehouse facility. The Company plans to repay the total balance of outstanding
borrowings from Mr. Kaufman with the proceeds from this Offering. See "Use of
Proceeds."
ASF has entered into a loan agreement dated January 5, 1998 with President
R.C.--St. Regis Management Company ("Regis") (the "Loan Agreement") pursuant to
which the Company agreed to provide a line of credit in the amount of
$14,800,000 to Regis. The general partner of Regis is Massena Management, LLC,
of which Mr. Kaufman is President and sole member. Borrowings under the line of
credit bear interest at 13.5% per annum, are secured by the accounts, equipment,
inventory and intangibles of Regis, and are repayable on the earlier of (i) 60
months following the Opening Date of the Project (each is defined in the
"Management Agreement," as defined in the Loan Agreement or (ii) upon an Event
of Default (as defined in the Loan Agreement). As of May 31, 1998, no amount was
outstanding under the Loan Agreement. This commitment is covered by Mr.
Kaufman's indemnification. See "Prospectus Summary--Recent Developments."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have shares of
Common Stock outstanding ( shares if the Underwriters' over-allotment
option is exercised in full). The shares offered hereby ( shares if
the Underwriter's over-allotment option is exercised in full) will be freely
tradeable without restrictions or further registration under the Securities Act.
An aggregate of 7,500,000 are held by "affiliates" of the Company within the
meaning of the Securities Act and other former members of ANCM and are not
covered by an effective registration statement, which shares will be subject to
the resale limitations of Rule 144.
In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate," as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then-outstanding
shares of Common Stock (approximately shares after the completion of the
Offering), or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner of notice of sale.
In addition, affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, in order to
sell shares of Common Stock which are not restricted securities. Under Rule
144(k), a person who is not an affiliate and has not been an affiliate for at
least three months prior to the sale and who has beneficially owned restricted
shares for at least a two-year holding period may resell such shares without
compliance with the foregoing requirements.
The Company, its executive officers and directors have agreed that they will
not, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, pledge, grant of any option to purchase
or other sale or disposition of) any shares of Common Stock or other capital
stock of the company or any other securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock, or other capital stock of the
Company, for a period of 180 days from the date of this Prospectus, without the
prior written consent of Lehman Brothers, on behalf of the Underwriters. Lehman
Brothers may, in its sole discretion, at any time and without notice, release
all or any portion of the securities subject to such lock-up agreements. See
"Underwriting."
Under Rule 144, the stockholders of the Company prior to the Offering will
not be able to sell any of their shares in the public market until one year
after the closing of the Offering. The Company has agreed
48
to register shares held by certain stockholders of the Company (approximately
1,125,000 shares) for resale twelve months after the Offering.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of such shares for future sale will
have on the market price of the Common Stock prevailing from time to time. Sale
of substantial amounts of Common Stock (including shares issued upon the
exercise of outstanding options), or the perception that such sales could occur,
could adversely affect prevailing market prices for the Common Stock.
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
underwriting agreement relating to the offering of shares of Common Stock in the
United States and Canada (the "Underwriting Agreement"), the form of which is
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, between the Company and each of the underwriters named below (the
"Underwriters"), for whom Lehman Brothers Inc. and Friedman, Billings, Ramsey &
Co., Inc. are acting as representatives (the "Representatives"), the
Underwriters have severally agreed to purchase from the Company, and the Company
has agreed to sell to each Underwriter, the aggregate number of shares of Common
Stock set forth opposite the name of each such Underwriter below:
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------------------ -----------------
Lehman Brothers Inc...................................................................................
Friedman, Billings, Ramsey & Co., Inc.................................................................
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the initial public offering price
on the cover page of this Prospectus, and to certain dealers at such price less
a selling concession not in excess of $. per share to certain other
Underwriters or to certain other brokers or dealers. After the initial offering
to the public, the offering price and other selling terms may be changed by the
Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to certain conditions and that if any of the above
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement all the shares of Common Stock agreed to be purchased by
either the Underwriters as the case may be, pursuant to the Underwriting
Agreement must be so purchased.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payment that the Underwriters may be
required to make in respect thereof.
The Company has granted to the Underwriters a 30-day option to purchase up
to an additional shares of Common Stock on the same terms and conditions
as set forth above to cover over allotments, if any. To the extent that such
option is exercised, each Underwriter will be committed, subject to certain
conditions, to purchase a number of the additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding tables.
Pursuant to the terms of lock-up agreements, the holders of [ ] shares of
the Company's Common Stock have agreed, for a period of up to 180 days after the
date of this Prospectus, that, subject to certain exceptions, they will not
contract to sell or otherwise dispose of any shares of Common Stock, any options
or warrants to purchase shares of Common Stock or any securities convertible
into, or exchangeable for, shares of Common Stock, owned directly by such
holders or with respect to which they have the power of disposition, without the
prior written consent of Lehman Brothers Inc., on behalf of the Representatives.
Lehman Brothers Inc. may, in its sole discretion, and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. Under Rule 144, the shares of Common Stock subject to
49
lock-up agreements will not, in any event, be eligible for sale in the public
market, until twelve months after the Offering.
In addition, the Company and the directors and executive officers of the
Company have agreed that until 180 days after the date of this Prospectus
subject to certain exceptions, the Company will not, without prior written
consent of Lehman Brothers Inc., on behalf of the Representatives, offer, sell
contract to sell or otherwise dispose of any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this Offering, the issuance of shares of Common
Stock upon the exercise of outstanding options and warrants and the grant of
options to purchase shares of Common Stock under existing employee stock option
or stock purchase plans. Furthermore, the Company has agreed not to file any
registration statements on Form S-8 to register the [ ] shares of Common
Stock reserved for issuance pursuant to its Stock Option Plans until at least 90
days after the date of this Prospectus. See "Management--Stock Options Plans"
and "Shares Eligible for Future Sale."
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined through negotiations between the Company
and the Representatives. Among the factors to be considered in such negotiations
are prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment options described herein.
In general, purchase of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other matters
will be passed on for the Company by Pryor Cashman Sherman & Flynn LLP, New
York, New York as special counsel to the Company. Certain legal matters will
also be passed on for the Company by Meltzer, Lippe, Goldstein, Wolf &
Schlissel, P.C., Mineola, New York. Richard A. Lippe, a member of such firm, is
a director nominee of the Company and may be deemed to beneficially own certain
shares of Common Stock. See "Security
50
Ownership of Certain Beneficial Owners and Management." Certain legal matters
will be passed on for the Underwriters by Skadden, Arps, Slate, Meagher & Flom
LLP.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997, except
Arbor National Commercial Mortgage, LLC and subsidiary as of December 31, 1996
and for the year ended December 31, 1996 and ten months ended December 31, 1995,
appearing in this Prospectus and Registration Statement, have been audited by
Grant Thornton LLP, independent certified public accountants, whose report which
expresses reliance upon the work of another auditor appears elsewhere herein.
The financial statements of Arbor National Commercial Mortgage, LLC and
subsidiary (combined with those of the Company and not presented separately
herein) as of December 31, 1996 and for the year ended December 31, 1996 and ten
months ended December 31, 1995, have been audited by Ernst & Young LLP,
independent auditors, as stated in their report as appears elsewhere herein.
Such financial statements of the Company are included herein in reliance upon
the respective reports of such firms given upon the authority as such experts in
accounting and auditing.
51
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
INDEX TO FINANCIAL STATEMENTS
PAGE
-----------
Report of Independent Certified Public Accountants.................................................. F-2
Report of Independent Auditors...................................................................... F-3
Financial Statements:
Combined Balance Sheets at December 31, 1997 and 1996, and at
March 31, 1998 (Unaudited)...................................................................... F-4
Combined Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 and for the
Three Months Ended (Unaudited)
March 31, 1998 and 1997......................................................................... F-5
Combined Statements of Equity for the Years Ended December 31, 1997, 1996 and 1995 and for the
Three Months Ended March 31, 1998 (Unaudited)................................................... F-6
Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 and for the
Three Months Ended (Unaudited)
March 31, 1998 and March 31, 1997............................................................... F-7
Notes to Combined Financial Statements.............................................................. F-8
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Members of
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC AND SUBSIDIARIES AND AFFILIATE
We have audited the accompanying combined balance sheet of Arbor National
Commercial Mortgage, LLC and Subsidiaries and Affiliate as of December 31, 1997,
and the related combined statements of operations, equity, and cash flows for
the year then ended. These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Arbor National
Commercial Mortgage, LLC and Subsidiaries and Affiliate as of December 31, 1997,
the combined results of their operations and their combined cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
We have audited the balance sheet of Arbor Secured Funding, Inc., a member of
the combined group, as of December 31, 1996, and the related statements of
operations, equity, and cash flows for the years ended December 31, 1996 and
1995. The contribution of Arbor Secured Funding, Inc. to combined total assets
and net income represented 34 percent of combined total assets at December 31,
1996, and 35 percent and 44 percent of combined net income for the years ended
December 31, 1996 and 1995, respectively. We have also audited the statements of
operations, equity, and cash flows of Arbor National Commercial Mortgage
Corporation, the other member of the combined group, for the two months ended
February 28, 1995. The contribution of Arbor National Commercial Mortgage
Corporation to net income represented 0 percent of combined net income for the
year ended December 31, 1995. Separate financial statements of Arbor National
Commercial Mortgage, LLC and Subsidiary, the other member of the combined group,
as of December 31, 1996 and for the year ended December 31, 1996 and the ten
months ended December 31, 1995, included in the December 31, 1996 combined
balance sheet and combined statements of operations, equity, and cash flows for
the years ended December 31, 1996 and 1995, were audited and reported on
separately by other auditors.
We also have audited the combination of the accompanying combined balance sheet
as of December 31, 1996 and the related combined statements of operations,
equity, and cash flows for the years ended December 31, 1996 and 1995. In our
opinion, such combined statements have been properly combined on the basis
described in Note 1 of the notes to the combined financial statements.
/s/ Grant Thornton LLP
Grant Thornton LLP
New York, New York
May 28, 1998
F-2
REPORT OF INDEPENDENT AUDITORS
To the Members
Arbor National Commercial Mortgage, LLC
We have audited the consolidated balance sheets of Arbor National Commercial
Mortgage, LLC and subsidiary (the "Company") as of December 31, 1996 and the
related consolidated statements of income, equity and cash flows for the year
ended December 31, 1996 and the ten months ended December 31, 1995 (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arbor National
Commercial Mortgage, LLC at December 31, 1996 and the consolidated results of
their operations and their cash flows for the year ended December 31, 1996 and
the ten months ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements, in 1996
the Company changed its method of accounting for mortgage servicing rights.
Ernst & Young LLP
New York, New York
January 17, 1997
F-3
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED BALANCE SHEETS
MARCH 31, December 31,
---------------------------- -----------------------------
PRO FORMA
1998 1998 1997 1996
------------- ------------- -------------- -------------
(UNAUDITED)
ASSETS
Cash and cash equivalents.......................... $ 2,380,899 $ 2,261,337 $ 1,903,405 $ 782,252
Restricted cash.................................... 2,417,863 2,417,863 2,362,822 1,639,930
Loans held for sale, net........................... 11,826,971 11,826,971 46,482,348 45,729,204
Loans held for investment, net..................... 54,821,182 56,273,289 68,609,906 38,685,564
Other investments.................................. 1,250,000 1,250,000 500,000 3,032,046
Investment in real estate held for sale............ 11,248,703 11,248,703 10,790,930 --
Investment in real estate joint ventures........... 1,375,305 1,375,305 1,307,652 --
Capitalized mortgage servicing rights, net......... 5,457,721 5,457,721 5,031,854 2,534,529
Other receivables and deferred costs............... 2,228,789 1,713,197 2,675,081 1,989,803
Property and equipment, net........................ 483,969 483,969 517,760 368,284
------------- ------------- -------------- -------------
Total assets....................................... $ 93,491,402 $ 94,308,355 $ 140,181,758 $ 94,761,612
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
LIABILITIES AND EQUITY
Notes payable and repurchase agreements............ $ 44,879,927 $ 44,879,927 $ 81,392,653 $ 50,484,303
Note payable--Class A member....................... 13,685,303 13,685,303 28,835,294 25,425,485
Accounts payable and accrued expenses.............. 5,731,526 5,803,526 5,293,116 3,957,180
Allowance for possible losses under the DUS product
line............................................. 1,652,005 1,652,005 1,474,635 686,500
Unearned revenue................................... 1,832,288 1,832,288 152,478 745,010
Distribution payable............................... 6,000,000 -- -- --
Deferred tax liability, net........................ 2,207,000 -- -- --
------------- ------------- -------------- -------------
Total liabilities.................................. 75,988,049 67,853,049 117,148,176 81,298,478
------------- ------------- -------------- -------------
Commitments and contingencies
Equity............................................. 17,503,353 26,455,306 23,033,582 13,463,134
------------- ------------- -------------- -------------
Total liabilities and equity....................... $ 93,491,402 $ 94,308,355 $ 140,181,758 $ 94,761,612
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
See accompanying notes to combined financial statements.
F-4
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE
MONTHS ENDED MARCH 31, For the years ended December 31,
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------- ------------- ------------
(UNAUDITED)
Revenues:
Interest earned.................................... $ 2,529,979 $ 1,672,747 $ 9,641,121 $ 6,783,312 $ 3,725,904
Fee-based services, including gain on sale of loans
and real estate.................................. 4,373,022 2,340,814 12,686,908 8,794,147 2,627,716
Servicing revenue, net............................. 539,241 305,253 1,957,983 1,082,699 394,461
Income from investment in real estate held for
sale, net of operating expenses.................. 540,334 -- -- -- --
------------ ------------ ------------- ------------- ------------
Total revenues....................................... 7,982,576 4,318,814 24,286,012 16,660,158 6,748,081
------------ ------------ ------------- ------------- ------------
Expenses:
Interest expense................................... 1,944,208 925,038 6,242,616 4,048,947 2,188,687
Employee compensation and benefits................. 1,231,366 1,053,338 4,920,495 3,893,873 1,876,897
Selling and administrative......................... 1,137,522 827,068 3,493,022 3,499,691 1,560,834
Provision for loan losses.......................... 237,370 337,500 997,617 915,051 406,856
------------ ------------ ------------- ------------- ------------
Total expenses....................................... 4,550,466 3,142,944 15,653,750 12,357,562 6,033,274
------------ ------------ ------------- ------------- ------------
Net income..................................... $ 3,432,110 $ 1,175,870 $ 8,632,262 $ 4,302,596 $ 714,807
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
Unaudited pro forma information:
Pro forma income before income taxes............... $ 3,432,110 $ 1,175,870 $ 8,632,262 $ 4,302,596 $ 714,807
Pro forma provision for income taxes............... 1,383,244 479,548 3,468,648 1,753,788 299,523
------------ ------------ ------------- ------------- ------------
Pro forma net income............................... $ 2,048,866 $ 696,322 $ 5,163,614 $ 2,548,808 $ 415,284
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
See accompanying notes to combined financial statements.
F-5
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENTS OF EQUITY
COMMON STOCK ADDITIONAL RETAINED
---------------------- PAID-IN EARNINGS
SHARES PAR VALUE CAPITAL (DEFICIT)
--------- ----------- ------------ ------------
Balance--December 31, 1994........................................... 92,500 $ 925 $ 7,606,418 $ (639,612)
Net income........................................................... 714,807
Issuance of common stock............................................. 100 1,000
--------- ----------- ------------ ------------
Balance--December 31, 1995........................................... 92,600 1,925 7,606,418 75,195
Change in legal structure............................................ (92,500) (925) (7,606,418) 192,085
--------- ----------- ------------ ------------
Balance--January 1, 1996............................................. 100 1,000 -- 267,280
Capital contributions................................................
Net income........................................................... 1,499,502
--------- ----------- ------------ ------------
Balance--December 31, 1996........................................... 100 1,000 -- 1,766,782
Capital contributions................................................
Withdrawals and distributions........................................
Net income........................................................... 1,510,454
--------- ----------- ------------ ------------
Balance--December 31, 1997........................................... 100 1,000 -- 3,277,236
CAPITAL CONTRIBUTIONS................................................
WITHDRAWALS AND DISTRIBUTIONS........................................
NET INCOME........................................................... 1,864,584
--------- ----------- ------------ ------------
BALANCE--MARCH 31, 1998.............................................. 100 $ 1,000 $ -- $ 5,141,820
--------- ----------- ------------ ------------
--------- ----------- ------------ ------------
MEMBERS' CAPITAL
---------------------------
CLASS A CLASS B TOTAL
------------- ------------ -------------
Balance--December 31, 1994........................................... $ 6,967,731
Net income........................................................... 714,807
Issuance of common stock............................................. 1,000
------------- ------------ -------------
Balance--December 31, 1995........................................... -- -- 7,683,538
Change in legal structure............................................ $ 7,415,258 --
------------- ------------ -------------
Balance--January 1, 1996............................................. 7,415,258 7,683,538
Capital contributions................................................ $ 1,477,000 1,477,000
Net income........................................................... 2,332,029 471,065 4,302,596
------------- ------------ -------------
Balance--December 31, 1996........................................... 9,747,287 1,948,065 13,463,134
Capital contributions................................................ 2,000,000 636,000 2,636,000
Withdrawals and distributions........................................ (963,499) (734,315) (1,697,814)
Net income........................................................... 5,974,848 1,146,960 8,632,262
------------- ------------ -------------
Balance--December 31, 1997........................................... 16,758,636 2,996,710 23,033,582
CAPITAL CONTRIBUTIONS................................................ -- --
WITHDRAWALS AND DISTRIBUTIONS........................................ (10,386) (10,386)
NET INCOME........................................................... 1,567,526 3,432,110
------------- ------------ -------------
BALANCE--MARCH 31, 1998.............................................. $ 16,758,636 $ 4,553,850 $ 26,455,306
------------- ------------ -------------
------------- ------------ -------------
See accompanying notes to combined financial statements.
F-6
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE
MONTHS ENDED MARCH 31, For the years ended December 31,
------------------------ -------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income.............................................. $ 3,432,110 $ 1,175,870 $ 8,632,262 $ 4,302,596 $ 714,807
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 156,809 19,500 93,230 63,256 41,550
Amortization of capitalized mortgage servicing
rights.............................................. 162,358 95,741 584,420 237,273 43,893
Capitalization of mortgage servicing rights........... (588,225) (1,056,170) (3,148,981) (2,958,029) --
Write-off of capitalized mortgage servicing rights
from servicing sales................................ -- -- 67,236 312,454 --
Provision for loan losses............................. 237,370 337,500 997,617 915,051 406,856
Deferred income taxes................................. -- -- -- -- (24,000)
Changes in operating assets and liabilities:
Loans held for sale, net............................ 34,655,377 17,294,239 (753,144) (10,379,314) (28,678,342)
Loans held for investment, net...................... 12,276,617 (447,008) (30,133,824) (2,883,676) (31,630,568)
Other receivables and deferred costs................ 961,884 (86,754) (685,278) 411,908 126,105
Accounts payable and accrued expenses............... 510,410 (257,323) 1,335,936 629,581 2,600,213
Unearned revenue.................................... 1,679,810 78,150 (592,532) 224,190 520,820
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities..... 53,484,520 17,153,745 (23,603,058) (9,124,710) (55,878,666)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Other investments....................................... (750,000) (181,954) 2,532,046 (911,458) (2,120,588)
Investment in real estate held for sale, net............ (457,773) -- (10,790,930) -- --
Investment in real estate joint ventures, net........... (67,653) -- (1,307,652) -- --
Additions to property and equipment..................... (123,018) (35,134) (242,706) (158,618) (69,362)
Increase in restricted cash............................. (55,041) (313,941) (722,892) (1,639,930) --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities............... (1,453,485) (531,029) (10,532,134) (2,710,006) (2,189,950)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Increase (decrease) in notes payable and repurchase
agreements, net....................................... (36,512,726) (18,600,457) 30,908,350 15,064,634 28,848,570
Increase (decrease) in note payable --Class A member.... (15,149,991) 2,800,584 3,409,809 (7,549,613) 32,171,029
Capital contributions by members........................ -- 240,000 2,636,000 1,477,000 --
Withdrawals and distributions of members' capital....... (10,386) (1,697,814) (1,697,814) -- --
Issuance of common stock................................ -- -- -- -- 1,000
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by financing activities... (51,673,103) (17,257,687) 35,256,345 8,992,021 61,020,599
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........................... 357,932 (634,971) 1,121,153 (2,842,695) 2,951,983
Cash at beginning of period............................... 1,903,405 782,252 782,252 3,624,947 672,964
----------- ----------- ----------- ----------- -----------
Cash at end of period..................................... $ 2,261,337 $ 147,281 $ 1,903,405 $ 782,252 $ 3,624,947
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................ $ 1,450,623 $ 545,411 $ 4,323,327 $ 2,333,418 $ 1,263,465
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income taxes........................................ $ 57,666 $ 56,794 $ 72,415 $ 69,834 $ 3,854
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
See accompanying notes to combined financial statements.
F-7
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION
Arbor National Holdings, Inc. ("ANHI"), a New York corporation, was organized in
June 1998 to own 100% of Arbor National Commercial Mortgage, LLC ("Arbor").
Arbor is a fully integrated real estate financial services company which funds,
on a negotiated basis, high-yielding lending and investment opportunities in
commercial real estate through mezzanine loans, bridge loans, note acquisitions
and other customized financing structures. It also derives substantial revenue
from the origination for sale and servicing of government-sponsored and conduit
mortgage loans for multifamily and other types of commercial properties.
Upon the effective date of the offering, all members of Arbor, pursuant to the
terms of the Exchange Agreement, will contribute their ownership interest in the
Company to ANHI in exchange for 7,500,000 shares of Common Stock (the
"Exchange") of ANHI, which will constitute all of the shares of Common Stock
outstanding prior to this Offering.
ORGANIZATION
Effective April 1, 1998, Arbor Secured Funding Inc. ("ASF") distributed a
dividend of certain assets which were not consistent with the intended business
of the Company to Ivan Kaufman, its sole stockholder, and immediately
thereafter, the outstanding common stock of ASF was sold to the Ivan and Lisa
Kaufman Family Trust. Immediately thereafter, the Ivan and Lisa Kaufman Family
Trust contributed the stock of ASF, with a book value of approximately $3.7
million, which approximates fair value, to Arbor in exchange for ownership
interest in Arbor. Arbor and ASF are collectively referred to as the "Company"
or "Companies" prior to the reorganization.
Arbor, a New York limited liability company, is the successor to Arbor National
Commercial Mortgage Corporation (the "Corporation"). Effective January 1, 1996,
the Corporation liquidated and distributed its assets to its stockholder.
Immediately thereafter, the stockholder contributed these assets and liabilities
to Arbor. This change in legal structure resulted in no change to the carrying
value of assets and liabilities.
In October 1995, the Company was approved by the Federal National Mortgage
Association ("FNMA") as a Delegated Underwriting and Servicing ("DUS") lender.
Under the FNMA DUS program, the Company originates, underwrites, sells and
services mortgage loans on multifamily properties. The Company assumes
responsibility for a portion of any loss that may result from borrower defaults,
based on FNMA loss sharing formulas. Generally, the Company is responsible for
the first 5% of the unpaid principal balance and a portion of any additional
losses to an overall maximum of 20% of the original principal balance. FNMA
bears any remaining loss.
Under the terms of the Master Loss Sharing Agreement between FNMA and the
Company, the Company is responsible for funding 100% of mortgagor delinquency
(principal and interest) and servicing advances (taxes, insurance and
foreclosure costs) until the amounts advanced exceed 5% of the unpaid principal
balance at the date of default. Thereafter, the Company may request interim loss
sharing adjustments which allow the Company to fund 25% of such advances until
final settlement under the Master Loss Sharing Agreement.
F-8
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's loan origination business also includes originating mortgages for
sale into conduit programs and originating mezzanine, bridge loans, and note
acquisitions for its own investment. Mortgages originated under conduit programs
are sold to nationally recognized broker/dealers and are subsequently
securitized. The Company usually retains the right to service these mortgages
for a fee.
The Company also buys or enters into joint ventures to buy real estate
properties which it holds for sale or for its own investment.
PRINCIPLES OF COMBINATION
Voting control of Arbor and ASF is vested principally in the same shareholder
and the Companies are under common management. Because of these relationships,
the financial statements of the Companies have been prepared as if they were a
single entity. Arbor includes certain subsidiaries. All significant transactions
either between Arbor, its subsidiaries or the combined Companies have been
eliminated in combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
RECLASSIFICATION
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks and short-term
investments with maturities of three months or less at purchase.
RESTRICTED CASH
Restricted cash is composed of cash and cash equivalents which are being
maintained as collateral for possible losses resulting from loans originated
under the FNMA DUS program in accordance with the terms of the Master Loss
Sharing Agreement between FNMA and the Company. For cash flow purposes,
restricted cash is not considered a cash equivalent.
LOANS HELD FOR SALE
Loans held for sale are collateralized multifamily real estate loans and are
reported at the lower of cost or market, on an aggregate basis.
F-9
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR INVESTMENT
Loans held for investment are typically collateralized by multifamily and
residential real estate which the Company intends to hold to maturity. These
loans are carried at cost.
INVESTMENT IN REAL ESTATE HELD FOR SALE
Investment in real estate held for sale represents multifamily real estate
properties which the Company intends to sell.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets ranging from three to seven years.
Leasehold improvements are amortized over the lesser of the useful life of the
asset or the remaining lease period.
REVENUE RECOGNITION
Fee-based services include commitment fees, broker fees, loan origination fees
and gain on sale of loans and real estate. Revenue recognition occurs when the
related services are performed, unless significant contingencies exist, and for
the sale of loans, when all the incidence of ownership passes to the buyer.
The Company also buys and sells notes and real estate properties. Revenue
recognition from the sale, which is included in fee-based services, occurs when
all the incidence of ownership passes to the buyer. In some circumstances, the
Company elects to retain an interest in the property. When this occurs, the
investment in real estate is recorded at the Company's original cost and revenue
is recognized on the percentage of the property sold.
INTEREST EARNED
Included in interest earned is income generated from an investment in a limited
partnership. The underlying assets invested in this limited partnership were
mortgage derivatives and principally generate interest income. For the years
ended December 31, 1997, 1996 and 1995, income earned from the investment in
this limited partnership was approximately $700,000, $900,000 and $120,000,
respectively. Income from this limited partnership for the three months ended
March 31, 1998 and March 31, 1997, was $0 and $182,000, respectively. The
Company sold its limited partnership interest in December 1997.
CAPITALIZED MORTGAGE SERVICING RIGHTS
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS No. 125 supersedes but generally
retains the requirements of SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS, which the Company adopted on January 1, 1996. Both statements require
that an entity recognize, as separate assets, rights to service mortgage loans
for others irrespective of how those servicing rights are
F-10
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquired, whether purchased or originated, by allocating the total cost of the
loans between the loans and the servicing rights thereto based on their relative
fair values. In addition, SFAS No. 125 eliminates the distinction between normal
and excess servicing to the extent the servicing fee does not exceed that
specified in the contract. The adoption of SFAS No. 125 did not have a material
impact on the Company's financial position or results of operations for the
three months ended March 31, 1998 and for the year ended December 31, 1997.
SFAS No. 125 requires that Capitalized Mortgage Servicing Rights ("MSRs") be
assessed for impairment based on the fair value of those rights. Fair values are
estimated considering market prices for similar MSRs, when available, and by the
estimated discounted future net cash flows of the capitalized MSRs. For purposes
of impairment evaluation and measurement, the MSRs are stratified based on
predominant risk characteristics of the underlying loans, which the Company has
identified as loan type, geographic location and note rate. To the extent that
the carrying value of the MSRs exceeds fair value by individual stratum, a
valuation allowance is established. The allowance may be adjusted in the future
as the values of MSRs increase or decrease. The cost of MSRs is amortized over
the period of estimated net servicing income.
FINANCIAL INSTRUMENTS
The Company uses financial instruments having off-balance sheet risk in the
normal course of business in order to reduce the Company's exposure to
fluctuations in interest rates and market prices. Included in Note 9 are
disclosures relating to financial instruments having off-balance sheet risk.
These disclosures indicate the magnitude of the Company's involvement in such
activities and reflect the instruments at their face, contract or notional
amounts which do not necessarily represent the credit risk of such instruments.
In connection with the Company's hedging and loan sale programs, the Company has
credit risk exposure to the extent purchasers are unable to meet the terms of
their forward purchase contracts. None of the forward payment obligations of any
of the Company's counterparties is secured or subject to margin requirements.
The Company enters into options on forward delivery contracts and
mortgage-backed securities (collectively referred to as hedging contracts) for
the purpose of minimizing its exposure to movements of interest rates on
rate-locked loan commitments and loans held for sale. Option premiums are
deferred when paid and recognized as an adjustment to gains or losses on sales
of loans over the lives of the options on a straight-line basis.
INCOME TAXES
Arbor is a limited liability company ("LLC") as of January 1, 1996 (which is
taxed as a partnership), and accordingly, the taxable income or loss of Arbor is
includable in the Federal and state income tax returns of Arbor's individual
members. Arbor will incur state income taxes in those states where it is not
recognized as an LLC. Prior to becoming an LLC, Arbor was an S corporation from
March 1, 1995 to December 31, 1995. Prior to March 1, 1995, Arbor was a C
corporation.
ASF was an S corporation as of October 1, 1995. As a result, ASF income is taxed
directly to its shareholder. Prior to October 1, 1995, ASF was a C corporation.
F-11
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Simultaneous with the Exchange, Arbor will no longer be recognized as an LLC for
tax purposes and simultaneous with the ASF contribution, ASF will cease to be
treated as an S corporation.
INTERIM PERIOD INFORMATION
The unaudited combined financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1998 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instruction to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
consisting of normal recurring accruals considered necessary for a fair
presentation of the results for the interim period have been included.
2. LOANS HELD FOR SALE
Loans held for sale consist of:
December 31,
MARCH 31, ----------------------------
1998 1997 1996
------------- ------------- -------------
Principal....................................... $ 12,004,566 $ 46,834,819 $ 46,171,004
Unearned discount, net.......................... (177,595) (352,471) (441,800)
------------- ------------- -------------
Loans held for sale, net........................ $ 11,826,971 $ 46,482,348 $ 45,729,204
------------- ------------- -------------
------------- ------------- -------------
3. CAPITALIZED MORTGAGE SERVICING RIGHTS
SFAS No. 125 requires that Capitalized MSRs be assessed for impairment based on
the fair value of those rights. Fair values are estimated considering market
prices for similar MSRs, when available, and by estimating the discounted future
net cash flows of the capitalized MSRs.
The estimated fair value of the Capitalized MSRs as of March 31, 1998, December
31, 1997 and December 31, 1996 was approximately $6.2 million, $5.8 million and
$3.0 million, respectively, which was in excess of book value and did not
require a valuation allowance to be established.
F-12
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
3. CAPITALIZED MORTGAGE SERVICING RIGHTS (CONTINUED)
Capitalized MSRs and the related valuation allowance activity as of March 31,
1998 and December 31, 1997 and 1996 were as follows:
December 31,
MARCH 31, --------------------------
1998 1997 1996
------------ ------------ ------------
Balance at beginning of period.......................................... $ 5,031,854 $ 2,534,529 $ 126,227
Additions............................................................... 588,225 3,148,981 2,958,029
Amortization............................................................ (162,358) (584,420) (237,273)
Servicing sale.......................................................... -- (67,236) (312,454)
------------ ------------ ------------
Balance at end of period................................................ 5,457,721 5,031,854 2,534,529
Valuation allowance
Balance at beginning of period.......................................... -- -- --
Additions............................................................... -- -- --
Reductions.............................................................. -- -- --
------------ ------------ ------------
Balance at end of period................................................ -- -- --
------------ ------------ ------------
Capitalized mortgage servicing rights, net.............................. $ 5,457,721 $ 5,031,854 $ 2,534,529
------------ ------------ ------------
------------ ------------ ------------
4. PROPERTY AND EQUIPMENT
Property and equipment consist of :
December 31,
MARCH 31, --------------------------
1998 1997 1996
------------ ------------ ------------
Furniture and equipment................................................. $ 885,961 $ 762,943 $ 520,598
Leasehold improvements.................................................. 13,280 13,280 13,280
------------ ------------ ------------
899,241 776,223 533,878
Accumulated depreciation and amortization............................... (415,272) (258,463) (165,594)
------------ ------------ ------------
Property and equipment, net............................................. $ 483,969 $ 517,760 $ 368,284
------------ ------------ ------------
------------ ------------ ------------
5. MORTGAGE SERVICING
At March 31, 1998, December 31, 1997 and 1996, the Company was servicing, for a
fee, commercial loans of approximately $536 million, $530 million and $386
million, respectively. Cash held in escrow by the Company for certain of these
loans at March 31, 1998, December 31, 1997 and 1996, was approximately $14.9
million, $15.3 million and $11.7 million, respectively. These cash balances and
related escrow liabilities are not reflected in the accompanying balance sheets.
These escrows are maintained in separate accounts at two federally insured
depository institutions. At March 31, 1998, December 31, 1997 and 1996, the
Company's servicing portfolio included FNMA DUS loans of approximately $327
million, $292 million and $136 million, respectively. Properties securing the
loans in the Company's servicing portfolio at
F-13
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
5. MORTGAGE SERVICING (CONTINUED)
March 31, 1998 are located throughout the United States with approximately 22%
in Texas and 18% in Colorado.
6. NOTES PAYABLE AND REPURCHASE AGREEMENTS
The Company utilizes a warehouse line of credit and repurchase agreements in
conjunction with the origination and sale of loans. Borrowings underlying these
arrangements are secured by the Company's loans held for sale and held for
investment.
December 31,
MARCH 31, ----------------------------
1998 1997 1996
------------- ------------- -------------
Warehouse line of credit, commercial banks, $90 million committed
line, expiration November 1998, interest is variable based on
the Federal funds rate, the weighted average note rate was
7.18%, 7.51% and 7.33%, respectively. $ 26,926,482 $ 36,306,212 $ 26,760,000
Repurchase agreement, financial institution, $40 million
committed line, expiration March 1997, interest is variable
based on LIBOR, the weighted average note rate was 6.31%. 12,600,000
Repurchase agreement, financial institution, uncommitted line,
interest is variable based on LIBOR, the weighted average note
rate was 6.13%, 5.56% and 5.42%, respectively. 7,500,544 27,375,420 6,042,733
Repurchase agreement, financial institution, uncommitted line,
interest is variable based on the Federal funds rate, the
weighted average note rate was 7.43%, 7.63% and 7.40%,
respectively. 8,900,000 16,650,000 5,000,000
Other borrowings, interest is variable based on LIBOR, the
weighted average note rate was 5.59%, 5.18% and 5.95%,
respectively. 1,552,901 1,061,021 81,570
------------- ------------- -------------
Notes payable and repurchase agreements $ 44,879,927 $ 81,392,653 $ 50,484,303
------------- ------------- -------------
------------- ------------- -------------
The warehouse facility contains various financial covenants and restrictions,
including minimum net worth, debt-to-equity ratio and a minimum servicing
portfolio.
7. NOTE PAYABLE--CLASS A MEMBER
Note payable--Class A member is an unsecured demand note with interest
predominantly at 9.5% and is subordinated to the warehouse facility. The Company
periodically borrows from the Class A member for working capital and investment
purposes. Total interest expense incurred by the Company and paid to the Class A
member was approximately $531,000 and $423,000 for the three months ended March
31, 1998 and 1997, respectively, and $2,379,000, $334,000 and $994,000,
respectively, for the years ended December 31, 1997, 1996 and 1995.
F-14
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
8. MEMBERS' CAPITAL
The Class A member has full voting rights and effective control of the Company
and has the power to direct the Company's management and policies. The Class B
members consist primarily of employees of the Company who do not have voting
rights except in certain limited instances.
9. COMMITMENTS AND CONTINGENCIES
Minimum annual operating lease payments under leases with a term in excess of
one year in effect as of December 31, 1997 are as follows:
1998...................................... $ 334,947
1999...................................... 207,474
2000...................................... 162,180
2001...................................... 80,753
---------
$ 785,354
---------
---------
Total rent expense for the three months ended March 31, 1998 and 1997 was
$75,000 and $51,000, respectively, and for the years ended December 31, 1997,
1996 and 1995 was $243,000, $224,000 and $103,000, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company enters into financial instruments with off-balance sheet risk in the
normal course of business through the origination and sale of mortgage loans and
the management of potential loss exposure caused by fluctuations of interest
rates. Financial instruments with off-balance sheet risk include commitments to
extend credit, forward commitments, firm takeouts, and put options. These
instruments involve, to varying degrees, elements of credit and interest rate
risk. Credit risk is managed by the Company by entering into agreements only
with Wall Street investment bankers having primary dealer status and with
permanent investors meeting the standards of the Company. At any time, the risk
to the Company, in the event of default by the purchaser, is the difference
between the contract price and current market prices.
At March 31, 1998, December 31, 1997 and 1996, the Company had $19.3 million,
$38.9 million and $42.9 million, respectively, in notional amounts of mandatory
forward commitments, and firm takeouts outstanding. Unrealized gains and losses
on these instruments are included in the lower of cost or market valuation of
loans held for sale.
Until a locked interest rate commitment is extended by the Company to a
borrower, there is no market risk to the Company. Total commitments outstanding
to borrowers totaled approximately $98.5 million as of March 31, 1998, $5.4
million of which had locked interest rates. As of March 31, 1998, the Company
also had outstanding a backup commitment to purchase real estate of $87.5
million and a commitment to lend up to $14.8 million to an entity owned by the
Class A member.
LITIGATION
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the financial position or the results of
operations of the Company.
F-15
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATION OF BORROWER RISK
The Company is subject to concentration risk in that, as of March 31, 1998,
December 31, 1997 and 1996, the unpaid principal balance relating to 3, 8, and
10 loans represented approximately 46.9%, 41.9%, and 63.1% of total loans held
for investment, respectively. As of March 31, 1998, December 31, 1997 and 1996
the above amounts are with two unrelated borrowers. The total number of loans
held for investment by the Company were 38, 41, and 34 as of March 31, 1998,
December 31, 1997 and 1996, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying values and the estimated fair values
of financial instruments, as of March 31, 1998, December 31, 1997 and 1996, in
accordance with the requirements of SFAS No. 107, Disclosures About Fair Value
of Financial Instruments. Fair value estimates are dependent upon subjective
assumptions and involve significant uncertainties resulting in variability in
estimates with changes in assumptions.
MARCH 31, 1998 December 31, 1997 December 31, 1996
---------------------- ---------------------- ----------------------
CARRYING ESTIMATED Carrying Estimated Carrying Estimated
VALUE FAIR VALUE value fair value value fair value
---------- ---------- ---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents............ $2,261,337 $2,261,337 $1,903,405 $1,903,405 $ 782,252 $ 782,252
Restricted cash...................... 2,417,863 2,417,863 2,362,822 2,362,822 1,639,930 1,639,930
Loans held for sale, net............. 11,826,971 12,118,514 46,482,348 47,356,788 45,729,204 46,426,406
Loans held for investment, net....... 56,273,289 56,273,289 68,609,906 68,609,906 38,685,564 38,685,564
Other investments.................... 1,250,000 1,250,000 500,000 500,000 3,032,046 3,032,046
Capitalized mortgage servicing
rights, net........................ 5,457,721 6,176,160 5,031,854 5,769,562 2,534,529 2,971,986
Off-balance sheet instruments used
for hedging purposes............... (91,726) (74,364) -- (120,000) -- (10,163)
Financial liabilities:
Notes payable and repurchase
agreements......................... 44,879,927 44,879,927 81,392,653 81,392,653 50,484,303 50,484,303
Note payable -- Class A member....... 13,685,303 13,685,303 28,835,294 28,835,294 25,425,485 25,425,485
The following methods and assumptions were used by the Company in estimating the
fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS: Fair value approximates the carrying value
reported in the balance sheets.
RESTRICTED CASH: Fair value approximates the carrying value reported in
the balance sheets.
LOANS HELD FOR SALE, NET: Fair values of loans held for sale are based on
a pricing model using current market assumptions.
LOANS HELD FOR INVESTMENT, NET: Fair values of variable-rate loans with
no significant change in credit risk are based on carrying values. Fair
values of other loans are estimated using discounted cash flow
methodology, using discount rates, which, in the opinion of management,
best reflect current market interest rates that would be offered for
loans with similar characteristics and credit quality.
F-16
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS: Fair value approximates the carrying value reported in
the balance sheets.
CAPITALIZED MORTGAGE SERVICING RIGHTS, NET: Fair values of capitalized
mortgage servicing rights are estimated using a discounted future net
cash flow methodology.
OFF-BALANCE SHEET INSTRUMENTS USED FOR HEDGING PURPOSES: Fair values of
the off-balance sheet instruments (put options, and forward commitments)
are based on pricing models using current market assumptions.
NOTES PAYABLE AND REPURCHASE AGREEMENTS: Fair value of variable-rate
notes payable and repurchase agreements approximates the carrying values
reported in the balance sheets.
NOTE PAYABLE--CLASS A MEMBER: Fair value approximates the carrying value
reported in the balance sheets.
11. RELATED-PARTY TRANSACTIONS
At March 31, 1998, December 31, 1997 and 1996, the Company serviced loans owned
by the Class A member and certain family members totaling approximately $1.4
million, $1.4 million and $1.6 million, respectively.
For the three months ended March 31, 1998 and the years ended December 31, 1997,
1996 and 1995, the Company participated in several shared functions, including
office space, financial management, marketing, information systems and human
resources with other companies owned by the Class A member. The Company paid
management fees of $255,000 and $126,000 for the three months ended March 31,
1998 and 1997, respectively, and $504,000, $300,000, and $0, respectively, for
the years ended December 31, 1997, 1996 and 1995.
Anivan, Inc. ("Anivan"), which is owned by a party related to the Class A
member, identifies loan portfolios owned by third parties for possible
acquisition by the Company. Anivan pays its own expenses and assumes all risks
in connection with identification, preliminary review and the underwriting of
these loan portfolios. The gains and losses generated from the subsequent sales
of these loans and servicing income are shared with Anivan on an approximately
equal basis. During the three months ended March 31, 1998 and 1997, the Company
purchased loan portfolios of $0 and $22,680, respectively, and for the years
ended December 31, 1997, 1996 and 1995, loan portfolios of $26 million, $10
million and $17 million, respectively. The Company paid Anivan fees and
compensation of $14,000 and $17,000 for the three months ended March 31, 1998
and 1997, and $200,000, $220,000 and $240,000, respectively, for the years ended
December 31, 1997, 1996 and 1995.
12. EMPLOYEE BENEFITS
The Company maintains a 401(k) profit sharing plan (the "401(k) Plan") which was
created effective January 1, 1995 for all employees who have completed six
months of continuous service. The Company matches 25% of the first 6% of each
employee's contribution. The Company has the option to increase the employer
match based on Company operating results. The Company's 401(k) Plan expense was
F-17
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED (UNAUDITED)
MARCH 31, 1998 AND 1997
12. EMPLOYEE BENEFITS (CONTINUED)
approximately $9,000 and $9,000, respectively, for the three months ended March
31, 1998 and 1997, and $59,000, $45,000 and $12,000, respectively, for the years
ended December 31, 1997, 1996 and 1995.
13. NET WORTH
Due to the nature of the Company's mortgage banking activities, the Company is
subject to supervision by certain regulatory agencies. Among other things, these
agencies require the Company to meet certain minimum net worth requirements as
defined. The Company's adjusted net worth at March 31, 1998, December 31, 1997
and 1996 exceeded these requirements.
14. SUBSEQUENT EVENTS
In June 1998, the Company entered into a 50/50 joint venture with a Wall Street
investment banking firm pursuant to which each of the joint venture partners
agreed to contribute up to $25 million in equity to the joint venture. In
addition, the Wall Street firm agreed to provide $200 million of financing to
fund customized financing activities, including $75 million for mezzanine loans
to the joint venture in the form of a repurchase agreement. The interest rate
charge for the financing is LIBOR plus 2%. The repurchase agreement expires in
June 2000. The Company believes that this joint venture will greatly enhance the
Company's ability to increase its customized financing activities in the future.
15. UNAUDITED PRO FORMA INFORMATION
INCOME TAXES
Pro forma adjustments for income taxes represent the difference between
historical income taxes and the income taxes that would have been reported had
the Company filed income tax returns as a taxable C corporation for each of the
periods presented using a pro forma income tax rate of 40%. As a result of the
Company's election to terminate its LLC and S corporation status, the Company is
required to record a deferred tax liability for the tax effect of temporary
differences between financial reporting and tax reporting. The net deferred tax
liability recorded at March 31, 1998 was $2,207,000. The principal components of
the Company's net deferred tax liability consists of capitalized mortgage
servicing rights, deferred gain on sale of an investment and the allowance for
loan losses.
PRO FORMA COMBINED BALANCE SHEET
The accompanying unaudited pro forma combined balance sheet at March 31, 1998
gives effect to (i) the distribution of $1,462,000 of ASF assets to Ivan
Kaufman, the sole stockholder on April 1, 1998, (ii) the net contribution of
$717,062 in capital by members on April 1, 1998, which includes a distribution
of capital to a former employee of $152,938, and (iii) the establishment of a
$6,000,000 distribution payable for previously undistributed earnings which is
intended to be distributed. The pro forma balance sheet at March 31, 1998 does
not reflect the sale of shares in the initial public offering.
F-18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITY TO ANY PERSON IN ANY JURISDICTION WHERE AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
--------------
TABLE OF CONTENTS
PAGE
----
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 15
Capitalization............................................................ 16
Dividend Policy........................................................... 17
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 28
Management................................................................ 40
Security Ownership of Certain Beneficial/ Owners and Management........... 44
Description of Securities................................................. 46
Certain Relationships and Related Transactions............................ 47
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 49
Legal Matters............................................................. 50
Experts................................................................... 51
Index to Financial Statements............................................. F-1
SHARES
[LOGO]
NATIONAL HOLDINGS, INC.
COMMON STOCK
----------------------
PROSPECTUS
JUNE , 1998
----------------------
LEHMAN BROTHERS
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated amount of various expenses in
connection with the issuance and distribution of the securities being
registered, other than underwriting commissions and discounts:
SEC registration fee.............................................................. $ 16,927
NASD filing fee................................................................... 5,750
Nasdaq Listing Application Fee.................................................... 52,500
Transfer agent's fee and expenses *............................................... 15,000
Accounting/Tax fees and expenses *................................................ 125,000
Legal fees and expenses *......................................................... 350,000
"Blue Sky" fees and expenses (including legal fees) *............................. 75,000
Costs of printing and engraving *................................................. 75,000
Miscellaneous *................................................................... 97,823
---------
Total *....................................................................... $ 813,000
---------
---------
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under provisions of the Certificate of Incorporation and the By-Laws of the
Company, each person who is or was a director or officer of the Company may be
indemnified by the Company to the full extent permitted or authorized by the
Business Corporation Law of New York.
Under such law, to the extent that such person is successful on the merits
of defense of a suit or proceeding brought against him by reason of the fact
that he is a director or officer of the Company, he shall be indemnified against
expenses (including attorneys' fees) reasonably incurred in connection with such
action.
If unsuccessful in defense of a third-party civil suit or if a criminal suit
is settled, such a person may be indemnified under such law against both (1)
expenses (including attorneys' fees) and (2) judgments, fines and amounts paid
in settlement if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Company, and with respect
to any criminal action, had no reasonable cause to believe his conduct was
unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Company, or if such suit is settled, such a person may be indemnified under such
law against costs of settlement and expenses (including attorneys' fees)
incurred in the defense or settlement of such suit if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company except that if such a person is adjudged to be liable
in such suit for negligence or misconduct in the performance of his duty to the
Company, he cannot be made whole even for expenses unless the court determines
that he is fairly and reasonably entitled to indemnity for such costs of
settlement and expenses.
[Upon the effectiveness of this Registration Statement] The Company and its
officers and directors will be covered by officers' and directors' liability
insurance. The policy coverage is $[ ], which includes reimbursement for
costs and fees. There is a maximum deductible under the policy of $[ ] for
each claim.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In January 1996, April 1997 and April 1998, ANCM issued membership interests
to 13, 10 and 14 purchasers thereof, respectively. The aggregate consideration
received in each transaction was $8,500,000, $2,500,000 and $4,600,000 ,
respectively. These securities were issued in reliance on Section 4(2) of the
Securities Act.
As of June , 1998, all of the members of ANCM have entered into the
Exchange Agreement, pursuant to which, effective on the closing of the Offering,
all of the previously outstanding membership interests in ANCM will be exchanged
for 7,500,000 shares of Common Stock. The Common Stock will be issued in
reliance upon the exemption from the registration requirements of the Securities
Act provided by Section 4(2).
ANCM may have failed to comply with certain requirements of Section 4(2) of
the Securities Act in connection with its sales of membership interests. In
connection with the execution of the Exchange Agreement, each member of ANCM was
given the opportunity to rescind the purchase of such member's membership
interest and have such member's capital contribution returned.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Company.**
3.2 By-laws of the Company.
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Pryor Cashman Sherman & Flynn LLP*
10.1 Form of 1998 Stock Incentive Plan
10.2 Form of 1998 Stock Incentive Plan for Non-Employee Directors.
10.3 Exchange Agreement.
10.4 Employment Agreement between the Company and Ivan Kaufman, dated as of June 30, 1998.
10.5 Employment Agreement between the Company and Joseph Martello, dated as of June 30, 1998.
10.6 Employment Agreement between the Company and Walter K. Horn, dated as of June 30, 1998.
10.7 Employment Agreement between the Company and Elliot Silverman, dated as of June 30, 1998.
10.8 Office Lease Agreement dated August 31, 1993 between Arbor National Mortgage, Inc. and HMCC Associates.*
10.9 Sublease Agreement dated August 1, 1995 between Bank of America Mortgage and Arbor National Commercial
Mortgage, LLC.*
10.10 Ivan Kaufman Indemnification
11 Computation of Earnings per share and Fully Diluted Earnings per Common Share.*
21 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.**
23.2 Consent of Ernst & Young LLP.**
23.3 Consent of Pryor Cashman Sherman & Flynn LLP (included in Exhibit 5.1).*
27.1 Financial Data Schedule.
- ------------------------
* To be filed by amendment.
** Previously filed.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Uniondale, state of New York on July 7, 1998.
ARBOR NATIONAL HOLDINGS, INC.
By: /s/ IVAN KAUFMAN
-----------------------------------------
Ivan Kaufman
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 to be signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman, President, Chief
/s/ IVAN KAUFMAN Executive Officer and
- ------------------------------ Director (Principal July 7, 1998
Ivan Kaufman Executive Officer)
Senior Vice President and
Chief Financial Officer
/s/ JOSEPH MARTELLO and Director Nominee
- ------------------------------ (Principal Financial and July 7, 1998
Joseph Martello Principal Accounting
Officer)
II-4
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Members of
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC AND SUBSIDIARIES AND AFFILIATE
In connection with our audit of the combined financial statements of Arbor
National Commercial Mortgage, LLC and Subsidiaries and Affiliate referred to in
our report dated May 28, 1998, which is included in the Prospectus constituting
Part I of this Registration Statement, we have also audited Schedule II for each
of the three years in the period ended December 31, 1997. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
Grant Thornton LLP
New York, New York
May 28, 1998
S-1
ARBOR NATIONAL COMMERCIAL MORTGAGE, LLC
AND SUBSIDIARIES AND AFFILIATE
SCHEDULE II--VALUATION ALLOWANCE ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COLUMN B COLUMN C COLUMN E
------------ ----------- COLUMN D ------------
COLUMN A BALANCE AT CHARGED TO ------------ BALANCE AT
- ----------------------------------------------------------- BEGINNING COSTS AND DEDUCTIONS-- END OF
DESCRIPTION OF YEAR EXPENSES WRITE-OFFS YEAR
- ----------------------------------------------------------- ------------ ----------- ------------ ------------
1997
Loans held for investment................................ $ 468,551 $ 209,482 $ -- $ 678,033
Allowance for possible losses under the DUS product
line................................................... 686,500 788,135 -- 1,474,635
------------ ----------- ------------ ------------
$ 1,155,051 $ 997,617 $ -- $ 2,152,668
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
1996
Loans held for investment................................ $ 240,000 $ 228,551 $ -- $ 468,551
Allowance for possible losses under the DUS product
line................................................... -- 686,500 -- 686,500
------------ ----------- ------------ ------------
$ 240,000 $ 915,051 $ -- $ 1,155,051
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
1995
Loans held for investment................................ $ 50,000 $ 406,856 $ (216,856) $ 240,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
S-2