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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-7614
GENEVA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-3404072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Centre Avenue Rockville Centre, NY 11570
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 255-1700
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes [] No [X] (2) Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of common stock outstanding at March 31, 2003 was
3,907,000. As of such date, the aggregate market value of the voting stock held
by non-affiliates, based upon the closing price of these shares on the Pink
Sheets, was approximately $831,460.
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements included in this
Annual Report on Form 10-K regarding future financial performance and results
and the other statements that are not historical facts are forward-looking
statements. These forward-looking statements reflect the Company's current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
historical results or those anticipated. The words "believe," "expect,"
"anticipate," "intend," "estimate," and other expressions which indicate future
events and trends identify forward-looking statements. Readers are cautioned not
to place undue reliance upon these forward-looking statements, which speak only
as of their dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as the result of new information,
future events or otherwise. The following factors among others, could cause
actual results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of various
segments of the economy and demographics of the Company's lending markets; (2)
the direction of interest rates; (3) the relationship between mortgage interest
rates and cost of funds; (4) federal and state regulation of the Company's
mortgage banking operations; (5) competition within the mortgage banking
industry; (6) the Company's management of cash flow and efforts to modify its
prior growth strategy; (7) the Company's efforts to improve quality control; and
other risks and uncertainties described in this Annual Report on Form 10-K and
in Geneva Financial Corp.'s other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes and events may
vary materially from those indicated.
PART I
ITEM 1. BUSINESS
General
Geneva Financial Corp. (the "Company") (formerly PMCC Financial Corp.) is a
specialty consumer mortgage banking company providing a broad array of
residential mortgage products to primarily prime credit borrowers seeking
"conventional" loans. The Company currently operates its mortgage banking
activities through a wholesale loan operation that originates loans through
independent mortgage brokers, and a retail loan operation that originates loans
principally through the use of the internet.
The Company is a holding company that conducts all of its business through
its wholly owned subsidiary, Geneva Mortgage Corp. ("Geneva") (formerly PMCC
Mortgage Corp. ("PMCC")). On February 18, 1998, the shareholders of PMCC
exchanged all of their outstanding common stock for shares of the Company, and
the Company completed an initial public offering of new shares of common stock.
On April 14, 2003, the Company changed its name to Geneva Financial Corp.
The Company's primary mortgage banking business objectives are to grow the
Company's operations through existing sources of originations, to continue to
offer a full range of mortgage products to qualified borrowers and to generate
positive cash flows by selling substantially all originated loans for cash to
institutional investors, usually without recourse, within a short period after
such loans are originated, thereby reducing exposure to interest rate and credit
risks.
After three years of declining originations, in 2002 the Company's loan
originations grew by $146 million or 73% to $346 million from $200 million in
2001. This increase was due to lower mortgage interest rates along with an
expansion of the Company's retail and wholesale lending business. Retail loan
originations were $157 million in 2002 compared to $41 million for 2001. This
increase was due to the expansion of the retail area through the use of leads
received through various Internet sources, including "LendingTree.com".
Wholesale loan originations were $189 million for 2002 compared to $159 million
in 2001. 45% of the Company's mortgage originations were derived from retail
mortgage loans in 2002 compared to 21% for 2001. For its fiscal years ended
December 31, 2002 and 2001, the Company had revenues from its mortgage banking
activities of $10.1 million, and $5.3 million, respectively.
The Company's wholesale division based in Florida originates mortgage loans
through independent mortgage bankers and brokers, who submit applications to the
Company on behalf of a borrower. The Company originates
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residential first mortgages on a retail basis primarily in New York and New
Jersey by a staff of experienced retail loan officers who obtain customers
through leads obtained utilizing the Internet and through referrals from local
real estate agents, builders, accountants, financial planners and attorneys. For
the year ended December 31, 2002, approximately 45% of the Company's mortgage
originations were derived from its retail mortgage operations and approximately
55% were derived from its wholesale operations.
The Company's revenues from mortgage banking activities are primarily
generated from the premiums it receives on the sale of mortgage loans it
originates, and from interest earned during the period the Company holds
mortgage loans for sale. The Company's mortgage loans, together with servicing
rights to these mortgages, are usually sold on a non-recourse basis to
institutional investors, in most cases within approximately 15 to 45 days of the
date of origination of the mortgage. In general, when the Company establishes an
interest rate at the origination of a mortgage loan, it may contemporaneously
lock in an interest yield to the institutional investor purchasing that loan
from the Company or may combine similar mortgage products into bulk packages of
from $3 to 12 million and put them out for bid to various institutional
investors. By selling these mortgage loans at the time of or shortly following
origination, the Company limits its exposure to interest rate fluctuations and
credit risks, although selling bulk packages expands the risks as the interest
rates are not locked in with the purchaser until the sale is made. To offset
some of this risk, the Company typically hedges a portion of its unlocked loan
rate pipeline by using future purchases and sales of Mortgage Backed Securities
or Treasury Bills. Furthermore, by selling its mortgage loans on a
"servicing-released" basis, i.e. selling the servicing rights to the mortgage
along with the mortgage loan, the Company avoids the administrative and
collection expenses of managing and servicing a loan portfolio and it avoids a
risk of loss of anticipated future servicing revenue due to mortgage prepayments
in a declining interest rate environment.
The Company also had generated revenue by charging fees for short-term
funding to independent real estate contractors ("rehab partners") for the
purchase, rehabilitation and resale of vacant one-to-four family residences
primarily in New York City and Long Island, New York. In August 2002, the
Company's management committed to a plan to discontinue the residential
rehabilitation properties segment line of operations with no intention of
getting back into this line at any time in the foreseeable future. This
determination was based upon the fact that there were no rehabilitation
properties purchased since early 2000 and the Company sold the properties on
hand since then. Also, the Company does not have a warehouse line in place to
purchase any new properties nor intends to pursue such a line. At December 31,
2002 the Company had no remaining properties. For the year ended December 31,
2002, the Company recorded a loss from the disposal of discontinued operations
of $347,000. For the year ended December 31, 2001, the Company recorded a loss
from discontinued operations of $173,000.
Business Strategy
During 2002 and 2001, the Company's management took numerous steps to
create a positive cash flow for the Company. These steps included changing the
methodology whereby the Company prices and sells its loans so that generally a
higher per loan gain is recognized than under the old methodology, and by
further reducing and consolidating operations as required. Certain expense
reductions were made in the first six months of 2001 including reducing
management salaries and consolidating the entire wholesale operations in the
Florida office. This resulted in a reduction in the number of staff employees
processing loans as well as other cost reductions. In May 2001, the Company was
listed on "LendingTree.com" which provides additional leads to potential
borrowers utilizing the Internet. In late 2001 and 2002, additional
commission-only loan officers were hired in the retail and wholesale areas to
increase the Company's volume of loan applications to take advantage of current
low mortgage rates. Beginning in August 2001, the Company has been selling
certain loans on a bulk basis as well as on an individual flow basis. Based on
pricing of these bulk sales, the Company typically earns an additional 100-175
basis points (100 basis points equals one percent) on loans sold in this manner.
The additional revenue created from selling loans on a bulk basis, a higher
number of loan applications as a result of lower mortgage interest rates, added
loan officers, and the "lendingtree.com" business without adding any significant
support staff have resulted in a profitable 2002 after profitable third and
fourth quarters of 2001.
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Operating Strategy
The Company's operating strategy includes the following elements:
o Continue to provide quality service. The Company seeks to provide high
levels of service to its retail customers and the brokers that are the
source of wholesale loan originations. This service includes prompt
preliminary approval of loans, consistent application of the Company's
underwriting guidelines and prompt funding of loans. To provide this level
of service, each loan is handled by a team of professionals that includes
experienced loan sales personnel, processors, underwriters and closers. The
Company believes that this commitment to service provides it with a
competitive advantage in establishing and maintaining a productive sales
force and satisfactory broker relationships;
o Maintain underwriting standards. The Company's underwriting process is
designed to review and underwrite each prospective loan and to ensure that
each loan can be sold to a third-party investor by conforming to its
requirements. The Company employs five underwriters, with an average of ten
years of relevant mortgage loan experience to ensure that all originated
loans satisfy the Company's underwriting criteria. Each loan is reviewed
and approved by an underwriter. The Company believes that its experienced
underwriting staff provides it with the infrastructure required to manage
and sustain the Company's origination volume while maintaining the quality
of loans originated;
o Broaden product offerings. The Company frequently reviews its pricing and
loan products relative to its competitors and introduces new loan products
in order to meet the needs of its customers who may be "retail" customers
and brokers who are sources of wholesale loan originations. The Company
successfully negotiates master commitments from its investors for special
niche products that are only offered to a limited number of companies
nationwide. The Company intends to continue to negotiate these specialized
master commitments; and
o Continue delegated underwriting approval status. The Company seeks to
provide a high level of service to its retail and wholesale accounts, by
having internal authority to approve a large portion of the loans it sells.
The Company has been delegated authority by certain institutional investors
to approve many of the Company's niche products. The Company has provided
training for its processors and underwriters to efficiently review each
file for compliance with investor guidelines. The Company believes that its
delegated authority to approve most loans provides it with a competitive
advantage because it allows the Company to provide additional services to
its borrowers and correspondents.
The Company does not currently intend to engage in mortgage securitization
activities.
Mortgage Products Offered
The Company believes it is one of a small group of multi-state mortgage
bankers that offer on a direct (or retail) basis a broad array of mortgage
products to principally prime credit borrowers (i.e., a credit-rated borrower
seeking a conventional loan). The Company's experience and expertise in numerous
types of mortgage products also gives it the ability to originate a full range
of mortgage products on a wholesale basis. The various products allow most
applicants to obtain a mortgage through the Company.
Mortgages are also offered with a variety of combinations of interest rates
and origination fees so that its customers may elect to "buy-down" the interest
rate by paying higher points at the closing or pay a higher interest rate and
reduce or eliminate points payable at closing. The Company's mortgage products
are further tailored, i.e., are offered with varying down payment requirements,
loan-to-value ratios and interest rates, to a borrower's profile based upon the
borrower's particular credit classification and the borrower's willingness or
ability to meet varying income documentation standards. The following are
examples of income documentation standards: the full income documentation
program pursuant to which a prospective borrower's income is evaluated based on
tax returns, W-2 forms and pay stubs; the stated income program pursuant to
which a prospective borrower's employment, rather than income, is verified; or
the no ratio loan program pursuant to which a prospective borrower's credit
history and collateral values, rather than income or
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employment, are verified. These loan variations give the Company the flexibility
to extend mortgages to a wider range of borrowers.
FHA/VA Mortgages. Until March 2001, the Company had been designated by the
United States Department of Housing and Urban Development ("HUD") as a direct
endorser of loans insured by the Federal Housing Administration ("FHA") and as
an automatic endorser of loans partially guaranteed by the Veterans
Administration ("VA"), allowing the Company to offer so-called "FHA" or "VA"
mortgages to qualified borrowers. In 2001, the Company allowed its HUD
designation to lapse and did not apply for renewal.
The following table sets forth the Company's mortgage loan production
volume by type of loan for each of the five years ended December 31, 2002.
Years Ended December 31,
($ in thousands)
------------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Conventional Loans:
Volume $359,143 $379,462 $191,312 $200,090 $345,685
Percentage of total volume 62% 68% 92% 100% 100%
FHA/VA Loans:
Volume $146,628 $167,153 $15,788 $ - $ -
Percentage of total volume 25% 30% 8% 0% 0%
Sub-Prime Loans
Volume $76,645 $14,083 $ - $ - $ -
Percentage of total volume 13% 2% 0% 0% 0%
Total Loans:
Volume $582,416 $560,698 $207,100 $200,090 $345,685
Number of Loans 3,793 3,662 1,437 1,243 1,673
Average Loan Size $154 $153 $144 $161 $207
- ------------
Operations
Markets. The Company currently solicits mortgage customers through 3
offices located in New York, New Jersey and Florida. The Company has mortgage
banking licenses or authority to conduct business in 10 states. These offices
allow the Company to focus on developing contacts with individual borrowers,
local brokers and referral sources such as accountants, attorneys and financial
planners.
Wholesale Mortgage Operations. Wholesale mortgage originations are the
responsibility of the Company's wholesale division, which solicits referrals of
borrowers from independent mortgage bankers and brokers located throughout the
states in which the Company is licensed. In wholesale originations, these
mortgage bankers and brokers deal directly with the borrowers by assisting the
borrower in collecting the necessary documents and information for a complete
loan application, and serving as a liaison to the borrower throughout the
lending process. The mortgage banker or broker submits this fully processed loan
application to the Company for underwriting determination.
The Company reviews the application of a wholesale originated mortgage with
the same underwriting standards and procedures used for retail loans. If the
loan is approved, the Company issues a written commitment, and upon satisfaction
of all lending conditions, closes the mortgage with a Company-retained attorney
or closing agent who is responsible for completing the transaction as if it were
a retail originated loan. Mortgages originated from the wholesale division are
sold to institutional investors similar to those that purchase loans originated
from the Company's retail operation. Because mortgage brokers may submit
individual loan files to several prospective lenders simultaneously, the Company
attempts to respond to an application as quickly as possible. Since the Company
has been delegated authority from institutional investors to approve most loans,
the Company generally issues an underwriting decision within 24 to 72 hours of
receipt of a file.
5
The Company has approved approximately 1,250 independent mortgage bankers
and brokers and works with approximately 150-200 of these on a regular basis.
The Company conducts due diligence on potential mortgage bankers and brokers,
including verifying financial statements of the company and credit checks of
principals, verifying business references provided by the bankers or brokers and
corroborating through the banking department that the mortgage banker or broker
is in good standing. Once approved, the Company requires that each mortgage
banker or broker sign an agreement of purchase and sale in which the mortgage
banker or broker makes representations and warranties governing both the
mechanics of doing business with the Company and the quality of the loan
submissions.
Through the wholesale division, the Company believes it can increase its
loan volume without incurring high marketing, labor and other overhead costs
because brokers conduct their own marketing and employ their own personnel to
attract customers, to assist the borrower in completing the loan application and
to maintain contact with borrowers.
Retail Mortgage Originations. The Company's typical retail customer is
assigned to one of the Company's mortgage loan officers working at one of the
Company's offices who spends approximately one hour interviewing the applicant
about his/her mortgage borrowing needs and explaining the Company's mortgage
product alternatives. When a "lead" is generated from the internet, the lead is
assigned to a loan officer and if an application is taken, a similar process is
followed. Once the loan application is completed, it is assigned to a loan
processor to be reviewed, entered on the operating system and run through an
Automated Underwriting System. The Company's review of a loan file and the
related underwriting process generally includes matters such as verification of
an applicant's sources of down payment, review of an applicant's credit report
from a credit reporting agency, receipt of a real estate appraisal, verification
of the accuracy of the applicant's income and other information, and compliance
with the Company's underwriting criteria and those of the institutional
investors. The Company's review/underwriting process allows it to achieve
efficiency and uniformity in processing, as well as quality control over all
loans.
The Company's goal is to promptly evaluate the loan file to reach
preliminary decisions within 24 to 72 hours of receipt. After a loan has been
approved, the Company issues a written loan commitment to the applicant which
sets forth, among other things, the principal amount of the loan, interest rate,
origination and/or closing fees, funding conditions and approval expiration
dates.
Approved applicants have a choice of electing to "lock-in" their mortgage
interest rate as of the application date or thereafter or to accept a
"prevailing" interest rate. A "prevailing" interest rate is subject to change in
accordance with market interest rate fluctuations and is set by the Company one
to five days prior to closing. At the closing, a Company-retained attorney or
closing agent is responsible for completing the mortgage transaction in
accordance with applicable law and the Company's operating procedures and
completion of appropriate documentation.
As a retail mortgage originator, the Company performs all the tasks
required in the loan origination process, thereby eliminating any intermediaries
from the transaction. This permits the Company to maximize fee income and to be
a low cost provider of mortgage loans. The Company believes that this structure
provides it with a competitive advantage over mortgage brokers, who must
outsource a significant portion of the loan origination process, and over banks,
which usually have greater overhead expenses than the Company. In addition,
handling the entire loan origination process in-house leads to effective quality
control and better communication among the various personnel involved.
Loan Funding and Borrowing Arrangements
The Company funds its mortgage banking activities in large part through
warehouse lines of credit. Its ability to continue to originate mortgage loans
is dependent on continued access to capital on acceptable terms. The warehouse
facilities require the Company to repay the amount it borrows to fund a loan
generally within 30 to 90 days after the loan is closed or when the Company
receives payment from the sale of the funded loan, whichever occurs first. These
borrowings are repaid with the proceeds received by the Company from the sale of
its originated loans to institutional investors or, in the case of residential
rehabilitation activities, with proceeds from the sale of the properties. Until
the loan is sold to an investor and repayment of the loan is made under the
warehouse lines, the warehouse line provides that the funded loan is pledged to
secure the Company's outstanding borrowings. The warehouse lines of credit
contain certain
6
covenants limiting indebtedness, liens, mergers, changes in control and sales of
assets and requires the Company to maintain minimum net worth and other
financial ratios.
On February 28, 2000, the Company entered into a Master Repurchase
Agreement that provides the Company with a warehouse facility (the "IMPAC Line")
through IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line provides a
committed warehouse line of credit of $20 million for the Company's mortgage
originations only. The IMPAC Line is secured by the mortgage loans funded with
the proceeds of such borrowings. Interest payable on the IMPAC Line is variable
based on the Prime Rate as posted by Bank of America, N.A. (4.25% at December
31, 2002) plus 0.50%. The IMPAC Line has no stated expiration date but is
terminable by either party upon written notice. In addition, the Company is
required to maintain certain financial and other covenants. As of December 31,
2002, the Company failed to meet certain of the financial ratios, and the Bank
has granted the Company a waiver. There can be no assurance that the Bank will
continue to grant such waivers if the Company continues to fail to meet the net
worth and financial ratios in the future. If such waivers are not granted, any
loans outstanding under the Credit Agreement become immediately due and payable,
which may have an adverse effect on the Company's business, operations or
financial condition. In August, 2002, the Company obtained a temporary increase
in the credit line to $25 million, and in December, 2002 obtained a further
temporary increase to $36.6 million through May 31, 2003. The balance
outstanding on the IMPAC Line was $35.2 million on December 31, 2002 and $24.7
million on March 31, 2003.
On August 29, 2002, the Company entered into a Warehouse and Security
Agreement and Servicing Agreement that provides the Company with a warehouse
facility (the "Provident Line") through The Provident Bank ("Provident"). The
Provident Line provides a committed warehouse line of credit of $5 million for
the Company's mortgage originations only. The Provident Line is secured by the
mortgage loans funded with the proceeds of such borrowings. Interest is variable
and payable monthly based on the One Month Libor Rate as published by the Wall
Street Journal on the last business day of the prior month plus from 4.43% to
8.43% depending on the type of loan and the length of time outstanding on the
line. The Provident Line has no stated expiration date but is terminable by
either party upon written notice. The total amount outstanding on the Provident
Line was $4.1 million at December 31, 2002 and $2.4 million at March 31, 2003.
In August 1998, the Company entered into a one-year Senior Secured Credit
Agreement (the "Chase Line") with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC") that provided a warehouse line of credit of $120
million ($90 million committed) to the Company. Interest was variable and
payable based on LIBOR plus 1.25% to 3.00% based upon the underlying collateral.
The total amount outstanding on the Chase Line at December 31, 2001 was
approximately $62,000. The line was paid in full in October 2002 and was
terminated.
During 1999, the Company entered into revolving line of credit agreement
with total credit available of $3.1 million. The interest rate on the line was
10% per annum. The line is secured by mortgage loans held for investment by the
Company that are not pledged under the Company's warehouse facilities. The total
outstanding under the line at both December 31, 2002 and 2001 was approximately
$155,000. These funds were used primarily for the cash expenditure in removing
the underlying loans from the warehouse facilities and for general operating
expenses.
On April 24, 2001, the Company borrowed $63,125 from a trust whose sole
trustee was Ronald Friedman, then owner of approximately 44% of the Company's
outstanding stock and as of March 31, 2003 owner of approximately 33% of the
Company's outstanding stock, and currently a consultant to the Company. This
loan was evidenced by a promissory note due and payable on demand with a
maturity of one year. The interest rate on the note was 12% per annum payable
monthly. The note was secured by properties which the Company owns. The Company
repaid $23,125 in May 2001 when a portion of the underlying collateral was sold
by the Company. The balance due on the note at December 31, 2001 was $40,000.
The note was paid in full during 2002. On October 18, 2001, the Company borrowed
an additional $100,000 from the same trust. This loan is evidenced by a
promissory note due and payable on demand with a maturity of one year. The
interest rate on the note is 10% per annum payable monthly. The note is secured
by certain receivables due to the Company. The Company repaid $50,000 in
November 2001 and $25,000 in December 2001 and $10,000 in 2002. The balance due
on the note at December 31, 2002 is $15,000. The note was paid in full in the
first quarter of 2003.
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In November 2002, the Company entered into a promissory note with Signature
Bank, N.A. for $350,000, which is secured by certain furniture and equipment and
is payable in monthly installments of $9,722 over a period of three years.
Interest payable is variable based on the Prime Rate as designated by Signature
Bank plus 1.50% (5.75% at December 31, 2002). The balance due from the note at
December 31, 2002 was $350,000.
Sale of Loans
The Company follows a strategy of selling all of its originated loans for
cash to institutional investors, usually on a non-recourse basis. This strategy
allows the Company to (i) generate near-term cash revenues, (ii) limit the
Company's exposure to interest rate fluctuations and (iii) substantially reduce
any potential expense or loss in the event the loan goes into default after the
first month of its origination. The non-recourse nature of the majority of the
Company's loan sales does not, however, entirely eliminate the Company's default
risk since the Company may be required to repurchase a loan from the investor or
indemnify an investor if the borrower fails to make its first mortgage payment
or if the loan goes into default and the Company is found to be negligent in
uncovering fraud in connection with the loan origination process.
Quality Control
The Company quality control policies require an independent review of its
mortgage originations. The Company outsources these reviews to a third party
with expertise in performing such reviews. They review approximately 10% of all
mortgage originations for compliance with federal and state lending standards,
which may involve re-verifying employment and bank information and obtaining
separate credit reports and property appraisals. Quality control reports are
submitted to senior management monthly.
Marketing and Sales
The Company has developed numerous marketing programs at both the corporate
and the branch office level. These programs include, among others, public
relations, promotional materials customized for consumers and real estate
professionals, collateral materials supporting particular product promotions,
educational seminars, trade shows, and sponsoring or promoting other special
events. The Company also conducts seminars in conjunction with other real estate
professionals targeting potential home buyers. The Company is active with local
boards of realtors, Better Business Bureaus and the Builders Association of
America. All of the Company's loan representatives support these activities with
extensive personal contact.
Competition
The mortgage banking industry is highly competitive in the states where the
Company conducts business. The Company's competitors include financial
institutions, including other mortgage bankers, state and national commercial
banks, savings and loan associations, credit unions, insurance companies and
other finance companies. Many of these competitors are substantially larger and
have considerably greater financial, technical and marketing resources than the
Company.
Competition in the mortgage banking industry is based on many factors,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan and interest rates. The
Company believes that its competitive strengths include providing prompt,
responsive service and flexible underwriting to independent mortgage bankers and
brokers. The Company's underwriters apply its underwriting guidelines on an
individual basis but have the flexibility to deviate from such guidelines when
an exception or upgrade is warranted by a particular loan applicant's situation,
such as evidence of a strong mortgage repayment history relative to a weaker
overall consumer-credit repayment history. This provides independent mortgage
bankers and brokers working with the Company the ability to offer loan programs
to a diversified class of borrowers.
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Information Systems
The Company continues to design and integrate into its operations the
ability to access critical information for management on a timely basis. The
Company uses, and from time to time updates and improves various software
programs designed specifically for the mortgage lending industry. Each branch
office provides senior management with mortgage originations and other key data.
The information system provides weekly and monthly detailed information on loans
in process, fees, commissions, closings, financial statements and other aspects
of running and managing the business.
Regulation
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local government
authorities. These rules and regulations impose obligations and restrictions on
the Company's loan originations and credit activities. In addition, these rules
limit the interest rates, finance charges and other fees the Company may assess,
mandate extensive disclosure to the Company's customers, prohibit discrimination
and impose qualification and licensing obligations on the Company. The Company's
loan origination activities are subject to the laws and regulations in each of
the states in which those activities are conducted. The Company's lending
activities are also subject to various federal laws, including the Federal
Truth-in-Lending Act and Regulation Z promulgated thereunder, the Homeownership
and Equity Protection Act of 1994, the Federal Equal Credit Opportunity Act and
Regulation B promulgated thereunder, the Fair Credit Reporting Act of 1970, the
Real Estate Settlement Procedures Act of 1974 and Regulation X promulgated
thereunder, the Fair Housing Act, the Home Mortgage Disclosure Act and
Regulation C promulgated thereunder and the Federal Debt Collection Practices
Act, as well as other federal and state statutes and regulations affecting the
Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to loss of approved status by the banking regulators
of the various state governments where the Company operates, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions by
federal and state governmental agencies.
The Company believes that it has systems and procedures to insure
compliance with these requirements and believes that it is currently in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations. However, there can be no assurance of full
compliance with current laws, rules and regulations or that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance substantially more difficult or expensive. In the event that the
Company is unable to comply with such laws or regulations, its business,
prospects, financial condition and results of operations may be materially
adversely affected.
Members of Congress, government officials and political candidates have,
from time to time, suggested the elimination of the mortgage interest deduction
for federal income tax purposes, either entirely or in part, based on borrower
income, type of loan, or principal amount. Because many of the Company's loans
are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantage of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for mortgage loans of the kind offered by the Company.
Seasonality
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general pattern of resales of homes, which sales
typically peak during the spring and summer seasons and decline from January
through March. Refinancings tend to be less seasonal and more closely related to
changes in interest rates.
9
Environmental Matters
In the course of its business, the Company may foreclose on properties
securing its mortgage loans. To date the Company has not been required to
perform any investigation or remediation activities, nor has it been subject to
any environmental claims relating to these activities. There can be no
assurance, however, that this will remain the case in the future. Although the
Company believes that the risk of an environmental claim arising from its
ownership of a residential property through foreclosure is immaterial, the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at a property, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and clean up costs incurred by such parties in connection with the
contamination, which costs may be substantial. In addition, the Company, as the
owner or former owner of a contaminated site, may be subject to common law
claims by third parties based on damages and costs resulting from environmental
contamination emanating from such property.
Employees
As of March 31, 2003, the Company has 60 employees, combined at all
locations, substantially all of whom are employed full-time. None of the
Company's employees are represented by a union. The Company considers its
relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive offices are located at 100 North Centre Avenue,
Rockville Centre, NY 11570 where the Company occupies 4,333 square feet of
office space under a lease that expires in July 2007 with an annual rent of
$104,000.
The Company occupies 3,350 square feet of office space in Union, New
Jersey, under a lease that was renewed in January 2003 with an annual rent of
$54,000. The lease expires in December 2007 and has options to renew for
successive 5 year terms.
The Company leases 3,500 square feet of office space in Deerfield Beach,
Florida. In December 2002, the Company entered into a new lease agreement that
expires in January 2008 which has annual rent of approximately $110,000. The
Company also leases 1,000 square feet of office space in Coral Gables, Florida
pursuant to a lease that expires on March 31, 2004 with annual rent of $19,000.
10
ITEM 3. LEGAL PROCEEDINGS
In July 2001, the Company was named one of twenty defendants in a class
action discrimination lawsuit filed in the Eastern District of the United States
District Court concerning the issuance of HUD mortgages "Maxine Wilson et al. v.
Isaac Tousie et al." The Company vigorously disputes this claim and believes it
is without merit. The Company's Errors and Omissions insurance company has
agreed to defend the Company in this matter. The Company is unable to predict
the outcome of this claim and, accordingly, no adjustments regarding this matter
have been made in the accompanying consolidated financial statements.
In 2001, the Company was named one of the defendants in a lawsuit by one of
the Company's investors "Wells Fargo Funding v. Premiere Mortgage Corp. v.
Stewart Title." The Company's investor has indicated that the Company is
required to repurchase various loans totaling in excess of $1,000,000 primarily
due to title issues. The Company vigorously disputes the amount of this claim
and believes that the underlying value of the properties involved will more than
adequately reimburse the investor for any potential losses. Additionally, the
Company feels that if any loss does occur, such loss would be covered by the
title insurers. The Company is unable to predict the outcome of this claim and,
accordingly, no adjustments regarding this matter have been made in the
accompanying consolidated financial statements.
The Company permanently closed its office in Roslyn Heights, NY, in
September 2000. In 2001, the landlord sued the Company for full restitution
under the original lease "LKM Expressway Plaza v. PMCC." The landlord was
awarded a summary judgment in December 2001 by the courts. In 2002, the Company
settled the lawsuit by agreeing to pay the landlord $376,680 with interest
thereon at 7.5% per annum payable in twelve monthly installments of $32,680,
along with 100,000 shares of the Company's Common Stock, which was valued at
$25,000. The landlord retained a judgment of $620,000 against the Company until
all payments under this settlement are made. As of March 31, 2003, all payments
have been made as required and the Company anticipates that all remaining
payments will be made as they come due.
Also in conjunction with the closing of its Roslyn office, the Company had
returned various office equipment that was leased under long-term operating
leases. In 2001, the lessor sued the Company for full restitution under the
original leases. In 2002, the Company settled and agreed to pay $5,890 in
eighteen monthly installments. Approximately $106,000 was included in the
expenses relating to the closing of the Roslyn office in the accompanying
financial statements for the year ended December 31, 2002.
In January 2002, the Company, the United States Attorney's office of the
Eastern District of New York ("U.S. Attorney") and the United States Department
of Housing and Urban Development ("HUD") signed a Consent Decree and Order to
resolve an investigation into the Company in a manner in which the Company would
not be prosecuted. The Company reimbursed HUD $100,000 for certain losses, costs
and expenses related to the loans under investigation. This amount was
reimbursed to the Company under its Errors and Omissions insurance. The U.S.
Attorney, primarily in 2000, had conducted the investigation based on
allegations asserted in a criminal complaint against a loan officer formerly
employed by the Company and Ronald Friedman, the former Chairman of the Board,
President and Chief Executive Officer of the Company and currently a consultant
to the Company. Mr. Friedman has settled the criminal suit against him by
entering a plea of guilty. As a result of the Investigation, the Company
incurred expenses in the aggregate of approximately $1.3 million from January 1,
2000 through December 31, 2001. These expenses include legal and professional
fees incurred in connection with the internal investigation of the Company,
criminal defense attorneys and negotiations of warehouse lines of credit
amendments. For the year ended December 31, 2001, the Company recorded a credit
of $205,000 for legal fees that were reimbursed through the Company's Directors
and Officers Insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range Of Common Stock
Prior to February 18, 1998, the date of the Company's initial public
offering of its common stock (the "Common Stock"), there was no public market
for the Common Stock. The Common Stock was initially listed on the American
Stock Exchange (the "Amex") under the symbol "PFC". On December 22, 1999,
following the Company's announcement concerning the Investigation as described
in "Item 1 - Business - Recent Developments" of this Report, the Amex suspended
trading in the Common Stock and commenced a review of the listing status of the
stock. On January 4, 2001, after a lengthy review and appeal process, the
Company's common stock was removed from listing and registration on the Amex.
The Company's common stock is currently trading over the counter on the Pink
Sheets under the symbol "PMCF". The delisting could have a material adverse
effect upon the Company in a number of ways, including its ability to raise
additional capital. In addition, the delisting could adversely affect the
ability of broker-dealers to sell the Common Stock, and consequently may limit
the public market for such stock and have a negative effect upon its trading
price.
The following table sets forth the closing high and low bid prices for the
Common Stock for the fiscal period indicated. The prices presented are bid
prices, which represent prices between broker-dealers and do not include retail
mark-ups and mark-downs or any commission to broker-dealers.
2000 High Low
- ---- ---- ----
1st Quarter............. N/A* N/A*
2nd Quarter............. N/A* N/A*
3rd Quarter............. N/A* N/A*
4th Quarter............. N/A* N/A*
2001 High Low
- ---- ---- ----
1st Quarter.............. $3.00 $0.13
2nd Quarter.............. $0.25 $0.10
3rd Quarter.............. $0.10 $0.05
4th Quarter.............. $0.25 $0.05
2002 High Low
- ---- ---- ----
1st Quarter.............. $0.55 $0.05
2nd Quarter.............. $0.75 $0.45
3rd Quarter.............. $0.85 $0.45
4th Quarter.............. $1.15 $0.50
* - Trading of the Company's common stock was suspended on December 22, 1999 and
was suspended throughout the year ended December 31, 2000, and commenced trading
on the Pink Sheets in January 2001.
The closing per share bid price of the Common Stock as reported by the Pink
Sheets on March 31, 2003, was $0.70. As of December 31, 2001, the Company had 38
shareholders of record and approximately 600 beneficial shareholders.
Dividend Policy
To date, the Company has not paid a dividend on its Common Stock and is
restricted to do so by covenants with its warehouse banks. The Company's ability
to pay dividends in the future is dependent upon the Company's earnings, capital
requirements and other factors. The Company currently intends to retain future
earnings for use in the Company's business.
12
Equity Compensation Plan Information
The following table sets forth information concerning the Company's equity
compensation plans at December 31, 2001:
Number of securities Weighted average Number of
to be issued upon exercise exercise price of securities
of outstanding options, outstanding options, remaining available
Plan Category warrants and rights warrants and rights for future issuance
- ---------------------------------------- ------------------------------ ----------------------- ---------------------
Equity compensation plans
approved by security holders 300,750 $7.68 449,250
Equity compensation plans not
approved by security holders 0 -- 0
----------- --------- --------
Total 300,750 $7.68 449,250
13
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Operations Data:
At or for the Years Ended December 31,
----------------- -------------- --------------- --------------- --------------
1997 1998 1999 2000 2001
----------------- -------------- --------------- --------------- --------------
($ in thousands, except per share data)
Revenues $39,364 $58,646 $52,577 $19,665 $5,574
Net income (loss) 3,701 1,938 (1,914) (9,002) (413)
Pro forma net income 1 2,150 2,709 N/A N/A N/A
Pro forma net income (loss)
per share - diluted 2 0.84 0.75 (0.51) (2.43) (0.11)
Operating Data:
Mortgage loans originated:
Conventional 177,825 359,143 379,462 191,312 200,090
FHA/VA 75,060 146,628 167,153 15,788 --
Sub Prime 61,675 76,645 14,083 -- --
----------------- -------------- --------------- --------------- --------------
314,560 582,416 560,698 207,100 200,090
================= ============== =============== =============== ==============
Number of loans originated 2,160 3,793 3,662 1,437 1,243
Average principal balance per loan
originated $146 $154 $153 $144 $161
Consolidated Balance Sheet Data:
Receivable from sales of loans $35,131 $20,789 $4,300 $ -- $ --
Mortgage loans held for sale, net 18,610 67,677 36,666 12,590 14,717
Residential rehabilitation properties 11,584 16,492 15,190 670 430
Total assets 68,427 112,809 63,546 15,800 16,968
Borrowings 59,410 94,674 50,584 12,374 14,075
Shareholders' equity 4,809 13,033 11,097 2,216 1,807
- ----------------------------
1 The pro forma presentation of statement of operations data reflects the
provision for income taxes as if the Company had been a C corporation at assumed
effective tax rates ranging from 41%. The pro forma statement of operations data
for 1997 also reflects an increase in officer compensation expense pursuant to
proposed employee contracts.
2 Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of common shares and share
equivalents outstanding.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Results of Operations
Years Ended December 31, 2001 and 2000
General
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
---------------------- --- ---------------------
2001 2000
---------------------- ---------------------
Sales of residential rehabilitation properties $269,750 $16,967,508
Gains on sales of mortgage loans, net 4,294,744 2,451,462
Loss on sales of delinquent loans -- (975,000)
Interest earned 1,010,380 1,221,312
---------------------- ---------------------
Total revenues $5,574,874 $19,665,282
====================== =====================
Revenues from the sale of residential rehabilitation properties decreased
$16.7 million, or 98%, to $270,000 for the year ended December 31, 2001 from
$17.0 million for the year ended December 31, 2000. The number of residential
rehabilitation properties sold was 4 for the year ended December 31, 2001
compared to 120 for the year ended December 31, 2000. This decrease was a result
of the Company's discontinuance of the acquisition of residential rehabilitation
properties coupled with the initiative to sell the completed properties on hand
as quickly as practicable during 2000.
Gains on sales of mortgage loans increased $1.8 million, or 72%, to $4.3
million for the year ended December 31, 2001 from $2.5 million for the year
ended December 31, 2000. Mortgage loan originations were $200.1 million and
$207.1 million for the year ended December 31, 2001 and 2000, respectively. This
3% decrease was primarily the result of a decline in retail originations arising
from the decrease in the number of retail loan officers, partly offset by an
increase in wholesale originations. In spite of this decrease in origination
volume, origination revenue increase due to the fact that beginning in August
2001, the Company has been selling loans on a bulk basis as well as on an
individual flow basis. Based on pricing of these bulk sales, the Company is
earning an additional 100-175 basis points (100 basis points equals one percent)
on loans sold in this manner.
The loss on sale of delinquent loans for the year ended December 31, 2000
was the result of the Company selling at discounted prices delinquent and
non-performing loans that it would normally maintain in its portfolio to
eventually work out and recover its investment through foreclosure procedures or
refinancing. There were no such losses in 2001.
Interest earned decreased $211,000, or 18%, to $1.0 million for the year
ended December 31, 2001 from $1.2 million for the year ended December 31, 2000.
This decrease was primarily due to a decrease in mortgage interest rates to
approximately 7.0% during 2001 from approximately 8.5% during 2000.
15
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
Years Ended December 31,
---------------------- ---- -------------------
2001 2000
---------------------- -------------------
Cost of sales-residential rehabilitation properties $442,518 $16,580,076
Compensation and benefits 2,614,499 5,018,448
Interest expense 975,612 1,983,774
Expenses resulting from Investigation (331,263) 1,669,900
Expenses relating to closing Roslyn office -- 875,065
Other general and administrative 2,286,728 3,523,357
---------------------- -------------------
Total expenses 5,988,094 $29,650,620
====================== ===================
Cost of sales - residential rehabilitation properties decreased $16.1
million, or 97%, to $443,000 for the year ended December 31, 2001 from $16.6
million for the year ended December 31, 2000. This decrease was the result of
the decrease in the number of properties sold in the year ended December 31,
2001 compared to the year ended December 31, 2000.
Compensation and benefits decreased $2.4 million, or 48%, to $2.6 million
for the year ended December 31, 2001 from $5.0 million for the year ended
December 31, 2000. This decrease was primarily due to a decrease in sales
commission resulting from a shift in mortgage loan originations from retail to
wholesale. Wholesale loan commissions are lower than retail due to the manner in
which loans are originated through independent brokers. In 2001, 87% of loans
were originated through the Company's wholesale operation compared to 76% in
2000. Additionally, the full effect of reductions in staff at the Company's
Roslyn and New Jersey locations that occurred throughout 2000 was fully realized
in 2001.
Interest expense decreased $1.0 million, or 51%, to $976,000 for the year
ended December 31, 2001 from $2.0 million for the year ended December 31, 2000.
This decrease was primarily attributable a decrease in warehouse interest rates
during 2001 due to decreases in the prime rate along with the decrease in
residential rehabilitation properties funded through the Company's warehouse
facilities.
As a result of the Investigation (see Item 3 - "Legal Proceedings"), the
Company incurred direct expenses of $1.7 million in the year ended December 31,
2000. These expenses include legal and professional fees incurred in connection
with the internal investigation of the Company, criminal defense attorneys and
warehouse lines of credit fees. During 2001, a credit of $331,000 was recorded
for these expenses due to re-negotiated amounts due to the Company's attorneys
and a reimbursement of certain legal fees by the Company's Directors and
Officers Insurance carrier.
As a result of the closing the Roslyn office, the Company incurred direct
expenses of $875,000 in the year ended December 31, 2000. These expenses include
termination and broker costs for the settlement with the landlord to terminate
the lease, write-offs of leasehold improvements and capitalized costs in
relation to the office space, losses on sales of furniture and equipment and
severance costs for terminated employees. No such expenses were incurred in
2001.
Other general and administrative expense decreased $1.2 million, or 34%, to
$2.3 million for the year ended December 31, 2001 from $3.5 million for the year
ended December 31, 2000. This decrease was primarily due to realization of the
full effect of decreased expenses in connection with the contraction in the
operations of the Company throughout 2000.
The net loss of $413,000 for the year ended December 31, 2001 was a
decrease of $8.6 million or 96%, from the net loss of $9.0 million for the year
ended December 31, 2000. In addition to the above changes in revenues and
expenses, for the year ended December 31, 2001 the Company did not record a tax
benefit of $165,000 for net operating losses generated due to the uncertainty of
the realization of this benefit in future periods. The Company has a net
operating loss carry forward at December 31, 2001 of $8.0 million for Federal
purposes and $10.1 million for state purposes, which resulted in a deferred tax
asset of $3.4 million, which was reserved in full at December 31, 2001.
16
Years Ended December 31, 2000 and 1999
General
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
---------------------- --- ---------------------
2000 1999
---------------------- ---------------------
Sales of residential rehabilitation properties $16,967,508 $35,960,124
Gains on sales of mortgage loans, net 2,451,462 12,634,550
Loss on sales of delinquent loans (975,000) (685,000)
Interest earned 1,221,312 4,666,844
---------------------- ---------------------
Total revenues $19,665,282 $52,576,518
====================== =====================
Revenues from the sale of residential rehabilitation properties decreased
$19.0 million, or 53%, to $17.0 million for the year ended December 31, 2000
from $36.0 million for the year ended December 31, 1999. The number of
residential rehabilitation properties sold was 120 for the year ended December
31, 2000 compared to 216 for the year ended December 31, 1999. This decrease was
a result of the Company's discontinuance of the acquisition of residential
rehabilitation properties partly offset by the initiative to sell the completed
properties on hand as quickly as practicable. Additionally, on certain
properties sold, a discount was given from the original contract pricing in
order to expedite the sale due to cash requirements.
Gains on sales of mortgage loans decreased $10.1 million, or 80%, to $2.5
million for the year ended December 31, 2000 from $12.6 million for the year
ended December 31, 1999. This decrease was due to a number of significant
factors. Mortgage loan originations were $207.1 million and $560.7 million for
the year ended December 31, 2000 and 1999, respectively. This 63% decrease was
primarily the result of a decline in retail originations arising from the
decrease in the number of retail loan officers, along with a significant
reduction in the mortgage origination market (particularly in the Northeast)
caused by increasing interest rates and a fall-off in mortgage refinancing. For
the year ended December 31, 2000, approximately 24% of the Company's mortgage
originations were derived from its retail mortgage operations and approximately
76% from its wholesale operations, compared to 56% retail and 44% wholesale for
the year ended December 31, 1999. Wholesale loans result in lower revenues due
to broker fees paid of approximately 1% being deducted directly from the gain on
sale, whereas retail loan commissions are shown on the statement of operations
as expenses. Costs per loan for wholesale loans are generally lower overall than
retail. Replacing the retail loan volume with wholesale loans reduced gains by
approximately $663,000 for the year ended December 31, 2000 compared to the year
ended December 31, 1999. In 1999, the Company was able to optimize the margins
received on the sales of loans by hedging positions in future sales of Mortgage
Backed Securities. This activity was halted due to the Investigation and
subsequent suspension of trading of the Company's stock. For the year ended
December 31, 2000, this resulted in approximately a 0.75% loss in revenue per
loan or $1.6 million in total compared to the year ended December 31, 1999.
Additionally, in past years, sub-prime loans were generally sold at a higher per
loan margin than conventional loans. Discontinuing the sub-prime loan
originations reduced gains by approximately $1.2 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999.
The loss on sale of delinquent loans for the year ended December 31, 2000
was the result of the Company selling at discounted prices delinquent and
non-performing loans that it would normally maintain in its portfolio to
eventually work out and recover its investment through foreclosure procedures or
refinancing. In prior years, GENEVA had warehouse lines where they could hold
these loans throughout the foreclosure process. Bank United terminated this
portion of their line immediately after the Investigation began in December
1999. In order to fulfill agreements with its lenders, the Company needed to
sell the loans to pay off the warehouse lines as well as to meet the Company's
additional cash requirements in the first nine months of 2000. These were
imposed by increased capital requirements and Amendment Fees for warehouse
lines, reduced warehouse commitments and additional professional fees (legal,
consulting and audit) that were incurred as a result
17
of the Investigation. The loss on sale of delinquent loans for the year ended
December 31, 1999 represented the reserve booked anticipating the sale of loans
on hand at December 31, 1999 that were subsequently sold at a discount.
Interest earned decreased $3.5 million, or 74%, to $1.2 million for the
year ended December 31, 2000 from $4.7 million for the year ended December 31,
1999. This decrease was primarily due to decreased mortgage originations for the
year ended December 31, 2000 as compared to the year ended December 31, 1999 and
the elimination of sub prime mortgage originations which generally are at higher
rates and are held for sale longer than conventional mortgage originations.
Additionally, there was a decrease in the amount of time a loan is held before
being sold to the final investor. This more rapid turnover allows the Company to
utilize a lower warehouse line but results in less interest earned by the
Company before the loan is sold.
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
Years Ended December 31,
---------------------- ---- -------------------
2000 1999
---------------------- -------------------
Cost of sales-residential rehabilitation properties $16,580,076 $33,084,179
Compensation and benefits 5,018,448 11,826,434
Interest expense 1,983,774 4,818,304
Expenses resulting from Investigation 1,669,900 --
Expenses relating to closing Roslyn office 875,065 --
Other general and administrative 3,523,357 5,969,821
---------------------- -------------------
Total expenses $29,650,620 $55,698,738
====================== ===================
Cost of sales - residential rehabilitation properties decreased $16.5
million, or 50%, to $16.6 million for the year ended December 31, 2000 from
$33.1 million for the year ended December 31, 1999. This decrease was the result
of the decrease in the number of properties sold in the year ended December 31,
2000 compared to the year ended December 31, 1999.
Compensation and benefits decreased $6.8 million, or 58%, to $5.0 million
for the year ended December 31, 2000 from $11.8 million for the year ended
December 31, 1999. This decrease was primarily due to decreased sales salaries
and commission, which are based substantially on mortgage loan originations, and
the reductions in staff at the Company's Roslyn and New Jersey locations, partly
offset by the personnel added in Florida as part of the Prime Mortgage Corp.
acquisition in July 1999. Total personnel decreased to 43 employees at December
31, 2000 from 185 at December 31, 1999.
Interest expense decreased $2.8 million, or 58%, to $2.0 million for the
year ended December 31, 2000 from $4.8 million for the year ended December 31,
1999. This decrease was primarily attributable to the decrease in mortgage
originations and the decrease in the amount of sub-prime mortgage originations
that generally are held on the warehouse lines longer than conventional mortgage
originations along with the decrease in residential rehabilitation properties
funded through the Company's warehouse facility and a decrease in the amount of
time a loan is held before being sold to the final investor
As a result of the Investigation, the Company incurred direct expenses of
$1.7 million in the year ended December 31, 2000. These expenses include legal
and professional fees incurred in connection with the internal investigation of
the Company, criminal defense attorneys and negotiations of warehouse lines of
credit amendments. Also included in these expenses are bank fees relating to
granting amendments to the Bank United line of credit and bonuses paid to the
Company's officers and employees.
As a result of the closing the Roslyn office, the Company incurred direct
expenses of $875,000 in the year ended December 31, 2000. These expenses include
termination and broker costs for the settlement with the landlord to terminate
the lease, write-offs of leasehold improvements and capitalized costs in
relation to the office space, losses on sales of furniture and equipment and
severance costs for terminated employees.
18
Other general and administrative expense decreased $2.5 million, or 42%, to
$3.5 million for the year ended December 31, 2000 from $6.0 million for the year
ended December 31, 1999. This decrease was primarily due to decreased expenses
in connection with the contraction in the operations of the Company, partly
offset by increases incurred in connection with the expansion in Florida from
the Prime acquisition, including rent and facilities expense, telephone and
marketing.
The net loss of $9.0 million for the year ended December 31, 2000 was an
increase of $7.1 million or 374%, from the net loss of $1.9 million for the year
ended December 31, 1999. In addition to the above changes in revenues and
expenses, for the year ended December 31, 2000 the Company did not record a tax
benefit of $2.5 million for net operating losses generated due to the
uncertainty of the realization of this benefit in future periods. The Company
has a net operating loss carry forward of $6.7 million at December 31, 2000.
Liquidity and Capital Resources
At December 31, 2001, the Company's principal financing needs consisted of
funding mortgage loan originations and residential rehabilitation properties. To
meet these needs, the Company relied on borrowings under its warehouse
facilities and bank lines of credit. The amount of outstanding borrowings under
the warehouse facilities at December 31, 2001 and 2000 was $14.0 million and
$12.3 million, respectively. The warehouse facilities are secured by the
mortgage loans and residential rehabilitation properties funded with the
proceeds of such borrowings. Effective August 2002 management committed to a
plan to discontinue the residential rehabilitation segment.
On February 28, 2000, the Company entered into a Master Repurchase
Agreement that provides the Company with a warehouse facility (the "IMPAC Line")
through IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line provides a
committed warehouse line of credit of $20 million for the Company's mortgage
originations only. The IMPAC Line is secured by the mortgage loans funded with
the proceeds of such borrowings. Interest payable is variable based on the Prime
Rate (4.75% at December 31, 2001) as posted by Bank of America, N.A. plus 0.50%.
The IMPAC Line has no stated expiration date but is terminable by either party
upon written notice. In addition, the Company is required to maintain certain
financial and other covenants. As of December 31, 2001, the Company failed to
meet certain of the financial ratios, and the Bank has granted the Company a
waiver. There can be no assurance that the Bank will continue to grant such
waivers if the Company continues to fail to meet the net worth and financial
ratios in the future. If such waivers are not granted, any loans outstanding
under the Credit Agreement become immediately due and payable, which may have an
adverse effect on the Company's business, operations or financial condition. In
August, 2002, the Company obtained a temporary increase in the credit line to
$25 million, and in December, 2002 obtained a further temporary increase to
$36.6 million through June 2003. The total amount outstanding on the IMPAC Line
at December 31, 2001 and March 31, 2003 was $13.7 million and $24.7 million,
respectively.
In August 1998, the Company entered into a one-year Senior Secured Credit
Agreement (the "Chase Line") with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC") that provided a warehouse line of credit of $120
million ($90 million committed) to the Company. The borrowings for residential
rehabilitation properties under this line are guaranteed by Ronald Friedman, the
Company's former President and CEO currently a consultant to the Company, and by
Robert Friedman, owner of 14% of the Company's outstanding stock and the father
of Ronald Friedman. Interest payable is variable based on LIBOR plus 1.25% to
3.00% based upon the underlying collateral. After the line expired in August
1999, Chase and PNC agreed to continue to extend the line. The total amount
outstanding on the Chase Line at December 31, 2001 and 2000 was $61,859 and
$160,786, respectively, all of which was related to remaining residential
rehabilitation properties. The interest rate was 7.25% at December 31, 2001. The
line was paid in full in October 2002.
On August 29, 2002, the Company entered into a Warehouse and Security
Agreement and Servicing Agreement that provides the Company with a warehouse
facility (the "Provident Line") through The Provident Bank ("Provident"). The
Provident Line provides a committed warehouse line of credit of $5 million for
the Company's mortgage originations only. The Provident Line is secured by the
mortgage loans funded with the proceeds of such borrowings. Interest payable is
variable monthly based on the One Month Libor Rate as published by the Wall
Street Journal on the last business day of the prior month plus from 4.43% to
8.43% depending on the type of loan and the
19
length of time outstanding on the line. The Provident Line has no stated
expiration date but is terminable by either party upon written notice. The
balance outstanding on this line at March 31, 2003 was $2.4 million.
The Company had previously maintained warehouse lines of credit with Bank
United, a federally chartered savings bank, of $120 million ($40 million of
which was committed by Bank United and the remainder of which was not committed)
(the "Bank United Line") and GMAC/RFC of $20 million that was used primarily for
sub-prime loans and residential rehabilitation properties. As of June 2000, both
lines were paid in full.
The Company had supplemented its Warehouse Facilities through a gestation
agreement (the "Gestation Agreement") that had a maximum limit of $30 million.
As of March 21, 2000, all loans funded under the Gestation Agreement had been
sold to the final investors.
The Company expects that the increased existing IMPAC Line and the new
Provident Line will be sufficient to fund all anticipated loan originations for
the current year. The Company is currently pursuing additional credit lines with
other facilities as well as a permanent increase in the IMPAC line.
On June 8, 2000, the Company borrowed $275,000 from a company wholly owned
by Robert Friedman, at the time owner of 14% of the Company's outstanding common
stock and as of March 31, 2003, owner of approximately 9.5% of the Company's
outstanding stock. Robert Friedman is the father of Ronald Friedman, the
Company's former President and CEO and currently a consultant to the Company.
This loan is evidenced by a promissory note due and payable on demand with a
maturity of one year. The interest rate on the note is 16% per annum payable
monthly. The note is secured by properties and a mortgage which the Company
owns. Under the same note, the Company borrowed an additional $50,000 in July
2000. The Company repaid $80,000 in August 2000 and $175,000 in October 2000
when a portion of the underlying collateral was sold by the Company. The balance
due on the note at December 31, 2001 is $70,000 and was paid in full when the
remaining underlying collateral was sold in June 2002.
On April 24, 2001, the Company borrowed $63,125 from a trust whose sole
trustee was Ronald Friedman, then owner of approximately 44% of the Company's
outstanding stock and as of March 31, 2003 owner of approximately 33% of the
Company's outstanding stock, and currently a consultant to the Company. This
loan is evidenced by a promissory note due and payable on demand with a maturity
of one year. The interest rate on the note is 12% per annum payable monthly. The
note is secured by properties that the Company owns. The Company repaid $23,125
in May 2001 when the Company sold a portion of the underlying collateral. The
balance due on the note at December 31, 2001 is $40,000. The note was paid in
full during 2002. On October 18, 2001, the Company borrowed an additional
$100,000 from the same trust. This loan is evidenced by a promissory note due
and payable on demand with a maturity of one year. The interest rate on the note
is 10% per annum payable monthly. The note is secured by certain receivables due
to the Company. The Company repaid $50,000 in November 2001 and $25,000 in
December 2001 when the Company received a portion of the underlying collateral.
The balance due on the note at December 31, 2001 is $25,000. The note was paid
in full during the first quarter of 2003.
In November 2002, the Company entered into an installment loan with
Signature Bank, N.A. for $350,000, which is secured by certain furniture and
equipment and is payable in monthly installments of $9,722 over a period of
three years. Interest payable is variable based on the Prime Rate (4.25% at
December 31, 2002) as designated by Signature Bank plus 1.50%.
The Company sells its loans to various institutional investors. The terms
of these purchase arrangements vary according to each investor's purchasing
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.
Net cash used in operations for the year ended December 31, 2001, was $1.3
million. The Company used cash due to the $2.1 million decrease in mortgage
loans held for sale and investment and received cash primarily through a net
decrease of $770,000 in other receivables. The Company increased its borrowings
under the warehouse facilities by $1.6 million.
20
Recent Accounting Pronouncements
During 2001, the Company adopted SFAS No. 133 SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement requires that an entity
recognize all derivatives as either asses or liabilities in the condensed
consolidated balance sheets and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative instrument depends on
its intended use and the resulting designation. Implementation of SFAS No. 133
did not have any material impact on the financial statements of the Company.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No 141 provides guidance on the accounting for a
business combination at the date a business combination is completed. The
statement requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, thereby eliminating the
pool-of-interests method. SFAS No. 142 provides guidance on how to account for
goodwill and intangible assets after acquisition is completed. The most
substantive change is that goodwill will no longer be amortized, but instead
will be tested for impairment periodically. This statement will apply to
existing goodwill and intangible assets, beginning in 2002, and is not expected
to have a material impact on the financial statements of the Company.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
accounting model for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires that those long-lived assets be
measured at the lower of carrying amount or fair value coast to sell, whether
reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred. It also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in
disposal transaction. The Company will adopt SFAS No. 144 in 2002 and is still
evaluating the effect on the Company's financial position.
In July 2001, the staff of the Securities and Exchange Commission released
Staff Accounting Bulletin 102, "Selected Loan Loss Allowance Methodology and
Documentation Issues" ("SAB 102"), to provide guidance on the development,
documentation and application of a systematic methodology as required by
Financial Reporting release No. 28 for determining allowances for loan and lease
losses in accordance with generally accepted accounting principals.
Implementation of SAB 102 did not have a material effect on its loan allowance
included in operations.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest rate movements significantly impact Geneva's volume of closed
loans. Interest rate movements represent the primary component of market risk to
the Company. In a higher interest rate environment, borrower demand for mortgage
loans, particularly refinancing of existing mortgages, declines. Interest rate
movements affect the interest income earned on loans held for sale in the
secondary market, interest expense on our warehouse lines, the value of mortgage
loans held for sale in the secondary market and ultimately the gain on the sale
of those mortgage loans. In addition, in an increasing interest rate
environment, the volume of mortgage loans that the Company originates declines.
The Company originates mortgage loans and manages the market risk related
to these loans by pre-selling them on a best efforts basis to the anticipated
secondary market investors at the same time that the borrowers' interest rates
are established. If the Company delivers mortgage loans within the time frames
established by the secondary market investors, there is no interest rate risk
exposure on those loans. However, if the loan closes but cannot be delivered
within those time frames, and if interest rates increase, the Company may
experience a reduced gain or may even incur a loss on the sale of the loan. In
many of these cases, however, the cost can be passed on to the borrower in the
form of an extension fee.
Due to the amount of warehouse lines available and the time constraints to
remove loans from the lines, during 2000 and through July 2001, Geneva sold all
loans closed through best effort commitments, which means there is no penalty if
the loans do not close. Beginning in August 2001 and continuing through the date
of this report, the Company has been selling loans on a bulk basis as well as on
an individual flow basis. Based on pricing of these bulk sales, the Company
typically earns an additional 100-175 basis points (100 basis points equals one
percent) on loans sold in this manner. By selling these mortgage loans at the
time of or shortly following origination, the Company limits its exposure to
interest rate fluctuations and credit risks, although selling bulk packages
expands the risks as the interest rates are not locked in with the purchaser
until the sale is made. To offset some of this risk, the Company will hedge a
portion of its un-locked loan rate pipeline by using future purchase and sales
of Mortgage Backed Securities or Treasury Bills. Some loans are sold on a
mandatory delivery basis. Selling on a mandatory delivery basis means the
Company is required to sell the loans to a secondary market investor at an
agreed upon price. This potentially generates greater revenue because secondary
market investors are willing to pay more for a mandatory delivery commitment.
However, it also exposes the Company to greater losses if the loans do not
close. Generally, Geneva does not sell loans on a mandatory basis until the
loans are closed, eliminating the risk of not closing the loan.
Management uses hedging strategies to protect against the risk incurred
with sales of mortgage loans in the secondary market when interest rates rise
and fall. Hedging strategies involve buying and selling mortgage-backed
securities or Treasury Notes so that if interest rates increase or decrease
sharply and the Company expects to suffer a loss on the sale of those loans, the
buying and selling of these hedges securities will offset a portion of the loss.
The Company analyzes the probability that a group of loans that have been
originated will not close, and try to match purchases and sales of hedges to the
amount expected will close. An effective hedging strategy is complex and no
hedging strategy can completely eliminate risk. Part of this is because the
prices of the hedges do not necessarily move in tandem with the prices of loans
originated and closed. To the extent the two prices do not move in tandem, the
hedging strategy may not work, and the Company may experience losses on sales of
mortgage loans in the secondary market. The other key factor is whether the
probability analysis properly estimates the number of loans that will actually
close. To the extent that the Company's hedging strategy is unable to
effectively match purchases and sales of mortgage-backed securities and Treasury
Notes with the sale of the closed loans originated, the Company's gains on sales
of mortgage loans will be reduced, or the Company will experience a net loss on
those sales.
The Company does not currently maintain a trading portfolio. As a result,
there is no exposure to market risk as it relates to trading activities. The
Company's loan portfolio is primarily held for sale. Accordingly, the Company
must perform market valuations of the pipeline, the mortgage portfolio held for
sale and the related sale commitments in order to properly record the portfolio
and the pipeline at the lower of cost or market. Therefore, the interest rates
of the Company's loan portfolio are measured against prevailing interest rates
in the market.
Because Geneva pre-sells mortgage loan commitments, the Company believes
that a 1% increase or decrease in long-term interest rates would not have a
significant adverse effect on earnings from interest rate sensitive assets. The
22
Company pays off warehouse lines when the loans are sold in the secondary
market. Because the loans are held in the warehouse lines for a short period of
time, the Company does not expect to incur significant losses from an increase
in interest rates on the warehouse lines.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The audited financial statements of the Company as of December 31, 2001 and for
each of the three years in the period ended are included in this Annual Report
on Form 10-K following Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
23
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
Name Age Position
- ----------------------- --------- ---------------------------------------------
Keith Haffner 55 President & Chief Executive Officer, Director
Stanley Kreitman 71 Chairman of the Board of Directors
Stephen J. Mayer 50 Executive Vice President & Chief Financial
Officer, Director, Secretary
Joel L. Gold 61 Director
Warren Katz 73 Director
- ------------------------
Keith Haffner has been President and Chief Executive Officer and a Director
of the Company since November 15, 2001 and Executive Vice President from October
1, 2001 through November 15, 2001. He served as interim Chief Executive Officer
of the Company from December 29, 1999 through September 18, 2000, and previously
an Executive Vice President of the Company beginning in 1996. Mr. Haffner had
been a Director of the Company from September 7, 1999 until July 28, 2000. From
1994 through 1995, Mr. Haffner was Executive Vice President of Exchange Mortgage
Corp. From 1986 through 1994, Mr. Haffner was Senior Vice President of Mortgage
Production Administration at MidCoast Mortgage Corp. Prior to 1986, Mr. Haffner
was employed at various positions with the Mortgage Bankers Association, the
Department of Housing and Urban Development and the Federal National Mortgage
Association (FNMA). Mr. Haffner received his B.A. in Political Science in 1969
and a Masters in Public Administration in Urban Studies and Real Estate Finance
in 1972 from American University.
Stanley Kreitman has been the Chairman of the Board of Directors since
December 29, 1999 and a Director of the Company since February 23, 1998. Mr.
Kreitman is a member of the Audit and Compensation Committees of the Board of
Directors. Since March 1994, Mr. Kreitman has been Vice Chairman of Manhattan
Associates, a merchant banking firm. From September 1975 through February 1994,
Mr. Kreitman was President of United States Bancnote Corporation. Mr. Kreitman
is Chairman of the Board of Trustees of New York Institute of Technology and he
is currently a member of the Board of Directors of Porta Systems Corp.,
Medallion Funding Corp., Century Bank and CCA Industries, Inc.
Stephen J. Mayer has been the Chief Financial Officer of the Company since
September 1999 and Executive Vice President since December 1999. He has been
Secretary of the Company since September 18, 2000 and a Director since November
15, 2001. From January 1999 to August 1999, Mr. Mayer served as a consultant to
various companies in the areas of accounting and financial reporting. From
October 1994 to December 1999, Mr. Mayer served as Vice President and Controller
at Franklin Capital Corp., a publicly held investment company. From 1992 to
1994, he was the Vice President and Controller at MidCoast Mortgage Corp.,
overseeing the accounting, cash management and reporting functions. From 1987 to
1992, Mr. Mayer was at Arbor National Mortgage, originally as Vice President -
Finance, which included overseeing accounting, reporting and administration, and
later as Vice President of Strategic Planning, which included acquisitions,
expansion and business planning. From 1980 to 1987, Mr. Mayer held various
financial management positions at Eastern States, a credit card processor. From
1974 to 1980, he was an auditor at Touche Ross & Co. Mr. Mayer received his BBA
in Accounting from the University of Notre Dame and is a Certified Public
Accountant.
Joel L. Gold has been a Director of the Company since February 23, 1998.
Mr. Gold is a member of the Audit and Compensation Committees of the Board of
Directors. Since December 1999, Mr. Gold has been Executive Vice President -
Investment Banking at Berry-Shino Securities, Inc. From September 1997 to
December 1999, Mr. Gold was Vice Chairman of Coleman and Company Securities,
Inc. From April 1996 through September 1997, Mr. Gold was
24
Executive Vice President and head of investment banking at L.T. Lawrence Co., an
investment banking firm. From April 1995 to April 1996, Mr. Gold was a managing
director and head of investment banking at Fechtor & Detwiler. From 1993 to
1995, Mr. Gold was a managing director at Furman Selz Incorporated, an
investment banking firm. Prior to joining Furman Selz, from 1991 to 1993, Mr.
Gold was a managing director at Bear Stearns & Co., an investment banking firm.
Previously, Mr. Gold was a managing director at Drexel Burnham Lambert for
nineteen years. He is currently a member of the Board of Directors of Concord
Camera and Sterling Vision, Inc. Mr. Gold has a law degree from New York
University and an MBA from Columbia Business School.
Warren R. Katz has been a Director of the Company since November 15, 2001
and Director of Corporate Accounts and a loan officer for Geneva Mortgage Corp.
since August 1998. From July 1992 to July 1998, Mr. Katz was a member of the
executive committee of Salant Corp. and Chairman and CEO of the Salant Stores
Division. From 1987 to 1992 he was Vice President, Regional Sales Manager -
Northeast and Midwest of Salant Menswear Group, an international private label
and brand name manufacturing and marketing company of men's apparel, including
Perry Ellis, John Henry and Manhattan. From 1983 to 1987 he was Senior Vice
President, General Merchandise Manager and a member of the executive committee
of Gimbels East, the 18-unit New York and Philadelphia division of Gimbel Bros.,
a major department store chain. From 1952 to 1983 he served in various
merchandising and management positions of increasing responsibility with
Gimbels. Mr. Katz served in the United States Navy from April 1953 to April 1955
and has a Bachelor of Science degree from New York University with a major in
retailing.
Compliance with Section 16 (a) of the Exchange Act
Section 16 of the Exchange Act requires that reports of beneficial
ownership of common shares and changes in such ownership be filed with the
Securities and Exchange Commission by Section 16 "reporting persons," including
directors, certain officers, holders of more than 10% of the outstanding common
shares and certain trusts of which reporting persons are trustees. We are
required to disclose in this Annual Report each reporting person whom we know to
have failed to file any required reports under Section 16 on a timely basis
during the fiscal year ended December 31, 2002. To our knowledge, our officers,
directors and 10% stockholders have complied with all Section 16(a) filing
requirements during the period ended December 31, 2002.
25
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning compensation
during the fiscal years indicated, to the Chief Executive Officer ("CEO") and
the most highly compensated executive officers whose aggregate cash compensation
exceeded $100,000 during the last fiscal year (the "named executive officers"):
Summary Compensation Table
Long-Term Compensation
Name of Individual Annual Compensation Other Annual Awards
and Principal Position Year Salary Bonus Compensation Securities Underlying Options (#)
- -----------------------------------------------------------------------------------------------------------------------------------
Keith Haffner (1) 2001 $ 29,296 - - -
Former Interim Chief 2000 $ 125,000 $ 70,692 - -
Executive Officer, Executive 1999 $ 123,723 $ 65,250 - -
Vice President and Secretary,
Former Director
Andrew Soskin (2) 2001 $ 160,000(3) - $ 95,241(4) -
Interim President and Chief 2000 $ 150,000 $100,000 $195,364(4) -
Executive Officer, Executive 1999 $ 129,301 - $304,526(4) 31,250
Vice President of Operations
and Sales of Geneva Mortgage
Corp., Director
- --------------------------------
(1) On December 29, 1999, Mr. Haffner became interim CEO and assumed a vacancy
on the Company's Board of Directors on September 7, 1999. He resigned from
the Board of Directors on July 28, 2000. His employment with the Company
was terminated in September 2000. Mr. Haffner was re-hired as Executive
Vice President on October 1, 2001 and became President on November 15,
2001. He became a Director of the Company on November 15, 2001.
(2) On December 29, 1999, Mr. Soskin became interim President and assumed a
vacancy on the Company's Board of Directors. Mr. Soskin became Interim
Chief Executive Officer of the Company in September 2000. Mr. Soskin
resigned as Interim President and CEO and a Director of the Company on
November 15, 2001. In lieu of cash salary, in 2001, a Company advance to
Mr. Soskin was forgiven for $160,000.
(3) Represents forgiveness of amounts owed to Company in lieu of salary.
(4) Consists of $95,241, $195,364 and $304,526 paid to Mr. Soskin for
commissions for loan origination volume in 2001, 2000 and 1999,
respectively.
Stock Options
No stock options were granted to the named executive officers during 2001.
Fiscal Year End Option Values
The named executive officers had no options outstanding at December 31,
2001.
Director Compensation
Directors who are salaried employees of the Company receive no
compensation, as such, for services as members of the Board. Mr. Kreitman
receives $5,000 per month for service as Chairman of the Board. Messrs. Gold and
Katz each receive $1,000 for each meeting attended. No other directors received
compensation for services during the year ended December 31, 2001.
26
Employment/Consulting Agreements
The Company had entered into an Employment Agreement with Ronald Friedman.
The Employment Agreement's original term was to expire on December 31, 2000. In
June 1999, Ronald Friedman's annual salary was increased by the Board of
Directors from $250,000 to $350,000. In May 2000, Ronald Friedman's Employment
Agreement was terminated by the Company's Board of Directors. The Company
simultaneously entered into a Consulting Agreement with Friedman to provide
general business services to the Company as mutually agreed upon by the Company
and Friedman. The Consulting Agreement's original term is for one year, unless
sooner terminated for death, physical or mental incapacity or cause or
terminated by either party with one hundred twenty (120) days written notice
from the Company or thirty (30) days' written notice from Friedman. The
Consulting Agreement is automatically renewed for consecutive one-year terms
unless terminated as indicated. The Agreement includes annual compensation for
Friedman of a salary of $240,000, and commissions of 6 basis points on all loans
closed by the Company. In April, 2001, Ronald Friedman's consulting fee was
reduced to $120,000.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of the Company
consists of Messrs. Kreitman, Gold and Katz. During the 2001 fiscal year, no
executive officer of the Company served as a director or member of the
compensation committee of another entity, one of whose executive officers served
as a Director or on the Compensation Committee of the Company.
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS:
The following table sets forth the beneficial ownership as of March 31,
2003 of the Common Stock of (i) each person known by the Company to own
beneficially five percent (5%) or more of the outstanding Common Stock; (ii)
each director of the Company; (iii) each named executive officer of the Company;
and (iv) all directors and executive officers of the Company as a group.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1) Percentage
- -------------------------------------- ------------------------- ----------
Ronald Friedman (2) (3)
c/o Cole Consulting, LLC 1,289,000 32.99%
100 North Centre Avenue
Suite 300A
Rockville Centre, NY 11570
The Ronald Friedman 1997 Grantor
Retained Annuity Trust (3) 398,077 10.19%
c/o Jennifer Friedman - Trustee
240 Cedar Drive
Hewlett Bay Park, NY 11557
Robert Friedman (3) (4) 372,693 9.54%
19536 Planters Point Drive
Boca Raton, FL 33434
Internet Business's International, Inc. (3) 269,230 6.89%
3900 Birch Street, Suite 103
Newport Beach, CA 92660
Stanley Kreitman (5) 71,667 1.80%
c/o Geneva Financial Corp
100 North Centre Avenue
Rockville Centre, NY 11570
Joel L. Gold (6) 39,667 1.00%
c/o Berry-Shino Securities, Inc.
425 Park Avenue,
New York, NY 10022
Stephen J. Mayer (7) 16,667 *
c/o Geneva Financial Corp
100 North Centre Avenue
Rockville Centre, NY 11570
Keith Haffner (8) 7,867 *
c/o Geneva Financial Corp
100 North Centre Avenue
Rockville Centre, NY 11570
Warren Katz (9) 4,334 *
c/o Geneva Financial Corp
100 North Centre Avenue
Rockville Centre, NY 11570
All Directors and Officers as group 140,202 3.48%
(5 Persons)
- -------------
* Less than 1% of outstanding shares of Common Stock.
28
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934 and generally includes voting and
investment power with respect to securities, subject to community property
laws, where applicable. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within sixty (60) days from
March 31, 2003 upon exercise of options or warrants. Each beneficial
owner's percentage ownership is determined by assuming that options or
warrants that are held by such person, (but not those held by any other
person), and that are currently exercisable or are exercisable within sixty
(60) days from March 31, 2003 have been exercised. Unless otherwise noted,
the Company believes that all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned by them.
(2) Excludes 398,077 shares held in the name of The Ronald Friedman 1997
Grantor Retained Annuity Trust, of which Ronald Friedman's wife, Jennifer
is the Trustee to which he disclaims beneficial ownership, and includes
1,289,000 shares which are to be sold to Stanley Kreitman under a stock
purchase agreement dated July 17, 2002, which is anticipated to be
completed pending approval of the New York State Banking Department.
(3) Effective July 28, 2000, the Company announced that Internet Business's
International, Inc. ("IBUI") purchased the 2,460,000 shares of the Company
held by Ronald Friedman, Robert Friedman and The Ronald Friedman 1997
Grantor Retained Annuity Trust (collectively, the "Sellers") in a private
transaction (the "Transaction"). The Company has been informed by the
Sellers that certain payments due under the agreement by IBUI to purchase
shares of the Company's stock from the Sellers were not made and that an
event of default has been declared against IBUI under this purchase
agreement and the shares held in escrow have been returned to the Sellers.
On March 2, 2001 IBUI filed an action against the Sellers for rescission of
the purchase of the Company's stock and return of the funds that were
expended. On August 16, 2001, the Sellers filed an action against IBUI for
the balance of the amounts due under the purchase agreement. At March 31,
2003, the transfer agent has indicated that IBUI owns 269,230 shares of the
Company's stock.
(4) Excludes an aggregate of 185,000 shares owned by Robert Friedman's adult
daughters, Donna Joyce and Suzanne Gordon, to which he disclaims beneficial
ownership.
(5) Includes shares underlying options issued in 1999 to purchase 5,000 shares
of the Company's Common Stock and options issued in 2002 to purchase 66,667
shares of the Company's Common Stock. Excludes 1,289,000 shares which are
to be purchased from Ronald Friedman under a stock purchase agreement dated
July 17, 2002, which is anticipated to be completed pending approval of the
New York State Banking Department.
(6) Includes shares underlying options issued in 1998 to purchase 5,000 shares
of the Company's Common Stock and options issued in 2002 to purchase 16,667
shares of the Company's Common Stock. Excludes 36,200 shares owned by Mr.
Gold's spouse, Miriam Gold, to which he disclaims beneficial ownership.
(7) Includes shares underlying options issued in 1998 to purchase 10,000 shares
of the Company's Common Stock and options issued in 2002 to purchase 6,667
shares of the Company's Common Stock.
(8) Includes shares underlying options issued in 2002 to purchase 6,667 shares
of the Company's Common Stock.
(9) Includes shares underlying options issued in 1998 to purchase 1,000 shares
of the Company's Common Stock and options issued in 2002 to purchase 3,334
shares of the Company's Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 8, 2000, the Company borrowed $275,000 from a company wholly owned
by Robert Friedman, at the time owner of 14% of the Company's outstanding common
stock and as of March 31, 2003, owner of approximately 9.5% of the Company's
outstanding stock. Robert Friedman is the father of Ronald Friedman, the
Company's former President and CEO and currently a consultant to the Company.
This loan is evidenced by a promissory note due and payable in one year. The
interest rate on the note is 16% per annum payable monthly. The note is secured
by properties and a mortgage which the Company owns. Under the same note, the
Company borrowed an additional $50,000 in July 2000. The Company repaid $80,000
in August 2000 and $175,000 in October 2000 when a portion of the underlying
collateral was sold by the Company. The balance due on the note at December 31,
2001 is $70,000 and was paid in full when the remaining underlying collateral
was sold in June 2002.
On April 24, 2001, the Company borrowed $63,125 from a trust whose sole
trustee was Ronald Friedman, then owner of approximately 44% of the Company's
outstanding stock and as of March 31, 2003 owner of approximately 33% of the
Company's outstanding stock, and currently a consultant to the Company. This
loan was evidenced by a promissory note due and payable on demand with a
maturity of one year. The interest rate on the note was 12% per annum payable
monthly. The note was secured by properties which the Company owned. The Company
repaid $23,125 in May 2001 when the Company sold a portion of the underlying
collateral. The balance due on the note at December 31, 2001 was $40,000. The
note was paid in full during 2002. On October 18, 2001, the Company borrowed an
additional $100,000 from the same trust. This loan was evidenced by a promissory
note due and payable on demand with a maturity of one year. The interest rate on
the note was 10% per annum payable monthly. The note was secured by certain
receivables due to the Company. The Company repaid $50,000 in November 2001 and
$25,000 in December 2001 when
29
the Company received a portion of the underlying collateral. The balance due on
the note at December 31, 2001 is $25,000. The note was paid in full during 2002.
The Company had amounts receivable due from a former officer of the Company
in the amount of $107,782 and $267,782 at December 31, 2001 and 2000,
respectively. These amounts consisted of general advances and a non-interest
bearing note that had undefined repayment terms. The note advances and loans
were made when the former officer was Executive Vice President of Sales and
Operations for Geneva Mortgage Corp. and prior to his becoming an officer of the
Company on December 29, 1999. In 2001, $160,000 of the amounts due was forgiven
in lieu of severance payment.
A relative of Ronald Friedman had an economic interest in a rehab partner
for the purchase and sale of rehabilitation properties with a subsidiary of
Geneva. At December 31, 2001 and 2000, the subsidiary owned no remaining
properties. At December 31, 2001, the Company has an outstanding receivable from
this rehab partner of approximately $344,000, substantially all of which has
been reserved.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K:
None
(b) The following exhibits are included in this report:
Exhibit
Number Description
------ -----------
3.1 -- Certificate of Incorporation (2)
3.2 -- Amendment to Certificate of Incorporation dated April 14, 2003(3)
3.3 -- Form of By-Laws (1)
4.1 -- Form of Common Stock Certificate (1)
4.2 -- Form of Representatives' Warrant (1)
10.1 -- 1997 Stock Option Plan (1)
10.2 -- Qualified Stock Option Plan for Premier Mortgage Corp. dated
April 1, 1997 (1)
10.3 -- Form of Contribution Agreement (1)
10.4 -- Form of Tax Indemnification Agreement (1)
10.5 -- Form of Contractors' Agreement (1)
10.6 -- Form of Stockholders' Agreement (1)
10.7 -- Purchase and Sale Agreement, Annex I, Sellers Warranty Agreement,
Sellers Servicing Agreement and Custody Agreement dated February
19, 2000 with IMPAC Warehouse Lending Group (2)
10.8 -- Warehouse Loan and Security Agreement and Servicing Agreement
dated as of August 29, 2002 with The Provident Bank (2)
30
16.1 -- Letter re: Change in Certifying Accountants (4)
21.1 -- Subsidiary of Registrant (3)
99.1 -- Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 -- Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
------------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement on Form S-1 (File No. 333-38783)
(2) To be filed by Amendment.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Report on Form 10-KSB dated December 31, 2002 and filed on April 15, 2003
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Report on Form 8-K dated February 28, 2000 and filed on March 6, 2000
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, our Chief Executive
Officer and Chief Financial Officer have each conducted an evaluation of the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in alerting them in a
timely manner to material information required to be included in our SEC
reports. In addition, our Chief Executive Officer and Chief Financial Officer
have each reviewed our internal controls, and there have been no significant
changes in our internal controls or in other factors that could significantly
affect those controls subsequent to the date of our last evaluation.
31
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001, 2000 and 1999
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
CONTENTS
- -------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5 - F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 -F-25
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders
Geneva Financial Corp. and Subsidiary
(f/k/a PMCC Financial Corp. and Subsidiary)
Rockville Centre, New York
We have audited the accompanying consolidated balance sheets of Geneva Financial
Corp. and Subsidiary (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 Geneva Financial
Corp. and Subsidiary as of December 31, 2001 and 2000, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Marcum & Kliegman LLP
April 17, 2002, except for Note 6,
which is May 21, 2002
Woodbury, New York
F-1
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
ASSETS
------
2001 2000
------------ ------------
Cash and cash equivalents $ 444,497 $ 21,988
Mortgage loans held for sale, net 14,717,900 12,590,415
Mortgage loans held for investment, net 175,237 226,650
Accrued interest receivable 120,000 150,000
Other receivables, net 647,371 1,417,611
Residential rehabilitation properties, net 430,014 670,395
Furniture, fixtures and equipment, net 320,528 512,718
Prepaid expenses and other assets 112,633 210,428
---------- ----------
TOTAL ASSETS $16,968,180 $15,800,205
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES
- -----------
Notes payable - principally warehouse lines of credit $14,075,082 $12,374,111
Accrued expenses and other liabilities 1,085,675 1,210,451
------------ -----------
TOTAL LIABILITIES 15,160,757 13,584,562
----------- -----------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $.01 par value; 40,000,000 shares
authorized; 3,850,000 and 3,750,000 shares issued 2001 and
2000, respectively and 3,807,000 and 3,707,000 shares
outstanding in 2001 and 2000, respectively 38,500 37,500
Additional paid-in capital 11,042,538 11,038,538
Accumulated deficit (9,019,144) (8,605,924)
Treasury stock, 43,000 shares, at cost (254,471) (254,471)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 1,807,423 2,215,643
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $16,968,180 $15,800,205
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------------
REVENUES
- --------
Sales of residential rehabilitation properties $ 269,750 $16,967,508 $35,960,124
Gains on sales of mortgage loans 4,294,744 2,451,462 12,634,550
Loss on sales of delinquent loans -- (975,000) (685,000)
Interest earned 1,010,380 1,221,312 4,666,844
---------- ------------ ------------
TOTAL REVENUES 5,574,874 19,665,282 52,576,518
---------- ----------- -----------
EXPENSES
- --------
Cost of sales, residential rehabilitation
properties 442,518 16,580,076 33,084,179
Compensation and benefits 2,614,499 5,018,448 11,826,434
Interest expense 975,612 1,983,774 4,818,304
Expense credit and expenses resulting from
investigation (331,263) 1,669,900 --
Expenses relating to the closing of the Roslyn
office -- 875,065 --
Other general and administrative 2,286,728 3,523,357 5,969,821
---------- ------------ ------------
TOTAL EXPENSES 5,988,094 29,650,620 55,698,738
---------- ----------- ------------
LOSS BEFORE BENEFIT FROM INCOME
- -------------------------------
TAXES (413,220) (9,985,338) (3,122,220)
-----
BENEFIT FROM INCOME TAXES -- (982,947) (1,208,000)
- ------------------------- ----------- ------------- --------------
NET LOSS $ (413,220) $ (9,002,391) $ (1,914,220)
=========== ============ =============
BASIC AND DILUTED LOSS PER SHARE $(0.11) $(2.43) $(0.51)
- -------------------------------- ====== ====== ======
BASIC AND DILUTED WEIGHTED
- --------------------------
AVERAGE COMMON SHARES
- ---------------------
OUTSTANDING 3,709,818 3,707,000 3,723,965
----------- ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
Additional Total
Common Paid-In Accumulated Treasury Shareholders'
Stock Amount Capital Deficit Stock Equity
---------------------------------------------------------------------------------------
Balance at January 1, 1999 3,724,800 $37,500 $10,846,033 $ 2,310,687 $(161,646) $13,032,574
Net loss -- -- -- (1,914,220) -- (1,914,220)
Treasury stock purchases (17,800) -- -- -- (92,825) (92,825)
Amortization of warrants -- -- 71,250 -- -- 71,250
--------- -------- ---------- ---------- ---------- ----------
Balance - December 31, 1999 3,707,000 37,500 10,917,283 396,467 (254,471) 11,096,779
- -------
Net loss -- -- -- (9,002,391) -- (9,002,391)
Amortization and issuance of warrants -- -- 121,255 -- -- 121,255
---------- -------- ---------- ---------- ---------- ----------
Balance - December 31, 2000 3,707,000 37,500 11,038,538 (8,605,924) (254,471) 2,215,643
- -------
Net loss -- -- -- (413,220) -- (413,220)
Common stock issued for services 100,000 1,000 4,000 -- -- 5,000
---------- -------- ---------- ---------- ---------- ----------
Balance - December 31, 2001 3,807,000 $38,500 $11,042,538 $(9,019,144) $(254,471) $ 1,807,423
- ------- ========== ======= =========== =========== ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (413,220) $ (9,002,391) $ (1,914,220)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Residential rehabilitation properties (exclusive
of cash paid directly to/by independent
contractors):
Contractual fees received 2,577 (387,432) (2,875,945)
Proceeds from sales of properties 269,750 16,967,508 35,960,124
Cost of properties acquired and other related
costs (31,946) (2,060,718) (31,782,418)
Common stock and warrants issued for services 5,000 121,255 71,250
Loss on sale and disposal of furniture, fixtures,
equipment and leasehold improvements -- 322,730 23,808
Deferred income tax benefit -- (333,000) (941,000)
Depreciation and amortization 197,183 280,679 219,825
Changes in operating assets and liabilities
Accrued interest receivable 30,000 (25,000) 198,940
Receivable from sales of loans -- 4,300,279 16,489,191
Mortgage loans held for sale and investment, net (2,076,072) 26,961,511 29,615,331
Other receivables, net 770,240 (20,855) (512,242)
Prepaid expenses and other assets 97,795 660,447 (338,324)
Due to affiliates -- -- (1,187,998)
Accrued expenses and other liabilities (124,776) (320,923) (831,775)
------------- ------------- --------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (1,273,469) 37,464,090 42,194,547
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchases of furniture, fixtures and equipment (4,993) (57,165) (365,698)
Proceeds received on sale of furniture, fixtures
and equipment -- 110,365 --
Acquisition of Prime Mortgage assets -- -- (250,000)
------------ ----------- ----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES $ (4,993) $ 53,200 $ (615,698)
------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended December 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Distributions to shareholders, net of distribution
payable $ -- $ -- $ (277,700)
Net increase (decrease) in notes payable-
principally warehouse lines of credit 1,635,971 (38,280,259) (44,089,369)
Proceeds from notes payable - related party 163,125 325,000 --
Repayment of notes payable - related party (98,125) (255,000) --
Decrease (increase) in restricted cash -- 500,000 (500,000)
Treasury stock purchased -- -- (92,825)
----------- ----------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,700,971 (37,710,259) (44,959,894)
---------- ------------ -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 422,509 (192,969) (3,381,045)
CASH AND CASH EQUIVALENTS - Beginning 21,988 214,957 3,596,002
- ------------------------- ----------- -------------- -------------
CASH AND CASH EQUIVALENTS - Ending $ 444,497 $ 21,988 $ 214,957
- ------------------------- ========== =============== =============
SUPPLEMENTAL INFORMATION
- ------------------------
Cash paid during the year for:
Interest $922,874 $2,125,867 $4,318,000
Income taxes $ -- $ 11,190 $ 504,647
Loans transferred from held for sale to held
for investment $ -- $ 787,621 $1,394,951
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Geneva Financial Corp. (the "Company") (formerly PMCC Financial Corp.), a
Delaware corporation, was organized in 1998 to own the stock of Geneva
Mortgage Corp. ("Geneva") (formerly PMCC Mortgage Corp. ("PMCC")) and its
subsidiaries. On February 17, 1998, the Company completed an initial public
offering ("IPO") of common stock through the issuance of 1,250,000 shares
at an initial public offering price of $9.00 per share. Subsequent to
year-end, PMCC Mortgage Corp. changed its name to Geneva Mortgage Corp.
Subsequent to year-end, PMCC Financial Corp. changed its name to Geneva
Financial Corp. The Company's common stock is currently trading on the Pink
Sheets under the symbol "PMCF".
On December 22, 1999, the American Stock Exchange (the "Amex") suspended
trading of the Company's common stock and commenced a review of the listing
status of the stock. On January 4, 2001, after a lengthy review and appeal
process, the Company's common stock was removed from listing and
registration on the Amex. The Company's common stock is currently trading
on the Pink Sheets under the symbol "PMCF".
Geneva is a mortgage banker operating primarily in New York, New Jersey and
Florida. Geneva's principal business activities are (i) the origination of
residential mortgage loans and the sale of such loans in the secondary
market on a servicing released basis and (ii) the funding of the purchase,
rehabilitation and resale of vacant residential real estate properties,
which the Company is in the process of winding down. Residential mortgage
loans are sold on a non-recourse basis except for indemnifications or
buybacks required for certain early payment defaults or other defects.
NOTE 2 - Significant Accounting Policies
-------------------------------
Basis of Presentation
---------------------
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and results of
operations for the periods then ended. Actual results could differ from
those estimates.
Consolidation
-------------
The consolidated financial statements of the Company include the accounts
of the Company, Geneva and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
-------------------------
For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand, money market accounts and other short-term liquid investments
with an original maturity of three months or less.
F-7
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Cash and Cash Equivalents, continued
-------------------------
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of December 31, 2001.
Mortgage Loans Held For Sale
----------------------------
Mortgage loans held for sale, including any deferred loan origination fees
or costs, are carried at the lower of cost or market value as determined by
outstanding commitments from investors, net of reserves for recourse
mortgages. Gains resulting from sales of mortgage loans are recognized as
of the date the loans are sold to permanent investors. Losses are
recognized when the market value is determined to be lower than cost. The
Company follows a strategy of selling all of its originated loans on a
non-recourse basis. This strategy allows the Company to (i) generate
near-term cash revenues, (ii) limit the Company's exposure to interest rate
fluctuations and (iii) substantially reduce any potential expense or loss
in the event the loan goes into default after the first month of its
origination. The non-recourse nature of the majority of the Company's loan
sales does not, however, entirely eliminate the Company's default risk. The
Company may be required to repurchase a loan from the investor or indemnify
an investor if the borrower fails to make its first mortgage payment or if
the loan goes into default and the Company is found to be negligent in
uncovering fraud in connection with the loan origination process. Reserves
for recourse mortgage sales were $25,000 and $114,000 at December 31, 2001
and 2000, respectively.
Mortgage Loans Held For Investment
----------------------------------
Mortgage loans held for investment are stated at their principal amount
outstanding, net of an allowance for loan losses. There was an allowance of
$50,000 at December 31, 2001 and there was no allowance at December 31,
2000. Loans are generally placed on a non-accrual basis when principal or
interest is past due 90 days or more and when, in the opinion of
management, full collection of principal and interest is unlikely. Income
on such loans is then recognized only to the extent that cash is received
and where future collection of principal is probable. Loan origination fees
and certain direct loan origination costs are deferred and recognized over
the lives of the related loans as an adjustment of the yield.
Other Receivables
-----------------
Other receivables consist primarily of notes and other amounts due from
officers of the Company, escrows held and shortages on sales of mortgage
loans and residential rehabilitation properties sold and, at December 31,
2000, a tax refund due the Company for net operating loss carrybacks.
Advances and notes due from former employees are retained on the books but
are fully reserved. Reserves for uncollectibles were $2,078,000 and
$1,797,000 at December 31, 2001 and 2000, respectively.
F-8
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Residential Rehabilitation Properties
-------------------------------------
Geneva's subsidiaries serve as conduits for funding the acquisition of
residential rehabilitation properties. The properties are acquired and
marketed by various independent contractors ("rehab partners"), but funded
by, and titled in the name of, one of the subsidiaries. The properties are
generally offered to the rehab partners by banks, other mortgage companies,
and government agencies that have acquired title and possession through a
foreclosure proceeding. Upon sale, the subsidiaries receive an agreed upon
fee plus reimbursement for any acquisition and renovation costs advanced.
In the event the properties are not sold within an agreed-upon time period,
generally within three to five months of acquisition, the subsidiaries are
also entitled to receive an additional interest cost-to-carry. The Company
records as revenue the gross sales price of these properties at such time
the properties are sold to the ultimate purchasers. The Company records
cost of sales equal to the difference between the gross sales price and the
amount of its contracted income pursuant to its agreements with the rehab
partners. The residential rehabilitation properties are carried at the
lower of cost or fair value less cost to sell (as determined by independent
appraisals of the properties). There was no reserve for property valuations
at December 31, 2001 and 2000. The agreements with the rehab partners
contain cross collateralization provisions and personal guarantees that
minimize the risks associated with changing economic conditions and failure
of the rehab partners to perform. In 2000, the Company halted the
acquisition of residential rehabilitation properties and began an
initiative to sell the completed properties on hand as quickly as
practicable.
Furniture, Fixtures and Equipment
---------------------------------
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. The Company provides for depreciation utilizing the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are stated at cost less accumulated amortization.
The Company provides for amortization utilizing the straight-line method
over the life of the lease or the estimated useful lives of the assets,
whichever is shorter.
Commitment Fees
---------------
Commitment fees received, which arise from agreements with borrowers that
obligate the Company to make a loan or to satisfy an obligation under a
specified condition, are initially deferred and recognized as income as
loans are delivered to investors, or are written off along with deferred
origination costs when it is evident that the commitment will not be
utilized.
Loan Origination Fees
---------------------
Loan origination fees received and direct costs of originating loans are
deferred and recognized as income or expense when the loans are sold to
investors. Net deferred origination costs were $845,000 and $620,000 at
December 31, 2001 and 2000, respectively, and are included in "Mortgage
loans held for sale, net" in the accompanying consolidated balance sheets.
F-9
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Income Taxes
------------
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standard ("SFAS") No. 109
"Accounting for Income Taxes". The primary objectives of accounting for
income taxes are to (a) recognize the amount of income tax payable for the
current year and (b) recognize the amount of deferred tax liability or
asset based on management's assessment of the tax consequences of events
that have been reflected in the Company's financial statements or tax
returns. Deferred tax assets and liabilities are recognized for the future
tax consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized.
Earnings Per Share of Common Stock
----------------------------------
Basic earnings per share (EPS) is determined by dividing net income (loss)
for the period by the weighted average number of common shares outstanding
during the same period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock which would then share in the earnings of the Company. There
were no outstanding dilutive stock options or warrants for the years ended
December 31, 2001, 2000 and 1999.
Recently Issued Accounting Pronouncements
-----------------------------------------
During 2001, the Company adopted SFAS No. 133. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. This Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the condensed consolidated balance sheets and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative instrument depends on its intended use and the resulting
designation. Implementation of SFAS No. 133 did not have any material
impact on the financial statements of the Company.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 provides guidance on the accounting for a
business combination at the date a business combination is completed. The
statement requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001, thereby eliminating
use of the pooling-of-interests method. SFAS No. 142 provides guidance on
how to account for goodwill and intangible assets after an acquisition is
completed. The most substantive change is that goodwill will no longer be
amortized, but instead will be tested for impairment periodically. This
statement will apply to existing goodwill and intangible assets, beginning
in 2002 and is not expected to have a material impact on the financial
statements of the Company.
F-10
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - Significant Accounting Policies, continued
-------------------------------
Recently Issued Accounting Pronouncements, continued
-----------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
accounting model for long-lived assets to be disposed of by sale and
resulting implementation issues. This statement requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. It also broadens the reporting of discontinued
operations to include all components of an entity with operations that can
be distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction. The
Company will adopt SFAS No.144 in 2002 and is still evaluating the effect
on the Company's financial position.
In July 2001, the staff of the Securities and Exchange Commission released
Staff Accounting Bulletin 102, "Selected Loan Loss Allowance Methodology
and Documentation Issues" ("SAB 102"), to provide guidance on the
development, documentation and application of a systematic methodology as
required by Financial Reporting Release No. 28 for determining allowances
for loan and lease losses in accordance with generally accepted accounting
principles. Implementation of SAB 102 did not have a material effect on the
loan loss allowance included in operations.
NOTE 3 - Furniture, Fixtures and Equipment
---------------------------------
Furniture, fixtures and equipment and their related useful lives are
summarized as follows at December 31:
2001 2000 Life in Years
---------------------------------
Furniture and fixtures $ 202,169 $202,169 7
Office equipment 831,304 826,311 5
--------- --------
1,033,473 1,028,480
Accumulated depreciation and amortization (712,945) (515,762)
--------- ---------
Furniture, fixtures and equipment, net $ 320,528 $ 512,718
========= =========
During the year ended December 31, 2000, the Company closed its office in
Roslyn Heights, New York, along with other branch locations. In relation to
these closings, the Company sold furniture and fixtures and office
equipment with a net book value of $254,529 for total proceeds of $110,365,
resulting in a net loss of $144,164. Additionally, in conjunction with the
Roslyn Heights closing and the termination of the lease thereon, the
Company wrote off leasehold improvements with a net book value of $178,566.
F-11
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3 - Furniture, Fixtures and Equipment, continued
---------------------------------
Depreciation and amortization expense related to furniture, fixtures and
office equipment, included in other general and administrative expense in
the consolidated statements of operations, amounted to $197,183, $280,679
and $219,825 for the years ended December 31, 2001, 2000 and 1999,
respectively.
NOTE 4 - Notes Payable
-------------
Notes payable consisted of the following at December 31:
2001 2000
-----------------------------
Warehouse lines of credit $13,785,442 $12,091,824
Revolving lines of credit 154,640 154,640
Note payable - related party 135,000 70,000
Installment loan payable -- 57,647
---------- ------------
$14,075,082 $ 12,374,111
========== ==========
At December 31, 2001 and 2000, substantially all of the mortgage loans held
for sale and investment and certain residential rehabilitation properties
were pledged to secure notes payable under warehouse lines of credit
agreements. The notes are repaid as the related mortgage loans or
residential rehabilitation properties are sold.
On February 28, 2000, the Company entered into a Master Repurchase
Agreement that provides the Company with a warehouse facility (the "IMPAC
Line") through IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line
provides a committed warehouse line of credit of $20 million for the
Company's mortgage originations only. The IMPAC Line is secured by the
mortgage loans funded with the proceeds of such borrowings. Interest
payable is variable based on the Prime Rate (4.75% at December 31, 2001) as
posted by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated
expiration date but is terminable by either party upon written notice. In
addition, the Company is required to maintain certain financial and other
covenants. As of December 31, 2001 the Company failed to meet certain of
the financial ratios, and the Bank has granted the Company a waiver. There
can be no assurance that the Bank will continue to grant waivers if the
Company fails to meet the net worth and financial ratios in the future. If
such waivers are not granted, any loans outstanding under the Credit
Agreement become immediately due and payable, which may have an adverse
effect on the Company's business, operations or financial condition. The
total amount outstanding on the IMPAC Line at December 31, 2001 and 2000
was $13,723,583 and $11,931,038, respectively.
In August 1998, the Company entered into a one-year Senior Secured Credit
Agreement (the "Chase Line") with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC") that provided a warehouse line of credit of
$120 million ($90 million committed) to the Company. The borrowings for
residential rehabilitation properties under this line are guaranteed by
Ronald Friedman, the Company's former President and CEO currently a
consultant to the Company, and by Robert Friedman, owner of 14% of the
Company's outstanding stock and the father of Ronald Friedman. Interest
payable is
F-12
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4 - Notes Payable, continued
-------------
variable based on LIBOR plus 1.25% to 3.00% based upon the underlying
collateral. The line was to expire in August 1999, but was extended to
December 31, 1999 and is currently past due. The total amount outstanding
on the Chase Line at December 31, 2001 and 2000 was $61,859 and $160,786,
respectively, all of which was related to remaining residential
rehabilitation properties. The interest rate was 7.25% at December 31,
2001.
The Company had previously maintained warehouse lines of credit with Bank
United, a federally chartered savings bank, of $120 million ($40 million of
which was committed by Bank United and the remainder of which was not
committed) (the "Bank United Line") and GMAC/RFC of $20 million that was
used primarily for sub-prime loans and residential rehabilitation
properties. As of June 2000, both lines were paid in full.
The Company had supplemented its Warehouse Facilities through a gestation
agreement that had a maximum limit of $30 million. As of March 21, 2000,
all loans funded under the gestation agreement had been sold to the final
investors.
During 1999, the Company entered into revolving line of credit agreements
with total credit available of $3.1 million. The interest rate on these
lines was 10% per annum. The lines are secured by mortgage loans held for
investment by the Company that are not pledged under the Company's
warehouse facilities. These funds were used primarily for the cash
expenditure in removing the underlying loans from the warehouse facilities
and for general operating expenses. The total outstanding under these lines
was $154,640 at December 31, 2001 and 2000.
On June 8, 2000, the Company borrowed $275,000 from a company wholly-owned
by Robert Friedman, owner of 14% of the Company's outstanding stock and
father of Ronald Friedman, the Company's former President and CEO and
currently a consultant to the Company. This loan is evidenced by a
promissory note due and payable on demand with a maturity of one year. The
interest rate on the note is 16% per annum payable monthly. The note is
secured by properties and a mortgage which the Company owns. Under the same
note, the Company borrowed an additional $50,000 in July 2000. The Company
repaid $80,000 in August 2000 and $175,000 in October 2000 when a portion
of the underlying collateral was sold by the Company. The balance due on
the note at December 31, 2001 and 2000 was $70,000.
On April 24, 2001, the Company borrowed $63,125 from a trust whose sole
trustee is Ronald Friedman, owner of 44% of the Company's outstanding stock
and currently a consultant to the Company. This loan is evidenced by a
promissory note due and payable on demand with a maturity of one year. The
interest rate on the note is 12% per annum payable monthly. The note is
secured by properties which the Company owns. The Company repaid $23,125 in
May 2001 when a portion of the underlying collateral was sold by the
Company. The balance due on the note at December 31, 2001 is $40,000. On
October 18, 2001, the Company borrowed an additional $100,000 from the same
trust. This loan is evidenced by a promissory note due and payable on
demand with a maturity of one year. The interest rate on the note is 10%
per annum payable monthly. The note is secured by certain receivables due
to the Company. The Company repaid $50,000 in November 2001 and $25,000 in
December 2001 when a portion of the underlying collateral was received by
the Company. The balance due on the note at December 31, 2001 was $25,000.
F-13
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - Notes Payable, continued
-------------
The Company had an installment loan, which was secured by certain furniture
and equipment and was payable in monthly installments of $8,219. The
interest rate on the loan was 9.125%. The loan matured and was paid in full
in July 2001.
NOTE 5 - Income Taxes
------------
The following summarizes the components of the benefit for current and
deferred income taxes for the years ended December 31, 2001, 2000 and 1999.
Year Ended December 31,
2001 2000 1999
------------------ -------------------- -------------------
Current:
Federal $ -- $ (631,947) $ (249,000)
State and local -- (18,000) (18,000)
Deferred -- (333,000) (941,000)
-------------- ------------ ------------
$ -- $ (982,947) $(1,208,000)
============== ============ ===========
The Company's net operating losses expire through 2021. The Company records
a deferred tax asset or (liability) for the tax effect of temporary
differences between financial reporting and tax reporting. The tax effect
of such temporary differences at December 31, 2001 and 2000 consists of:
December 31,
2001 2000
--------------------- ---------------------
Net operating loss carryforward $ 3,460,000 $ 3,088,000
Deferred origination costs (346,000) (254,000)
Reserves 246,000 251,000
Conversion of accounting method -- (118,000)
Other, net 14,000 (4,000)
------------- --------------
3,374,000 2,963,000
Valuation allowance (3,374,000) (2,963,000)
----------- -----------
Net deferred tax asset $ -- $ --
============ ============
F-14
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5 - Income Taxes, continued
------------
The benefit for income taxes for 2001, 2000 and 1999 differ from the
amounts computed by applying federal statutory rates due to:
Year Ended December 31,
2001 2000 1999
----------------- ------------------ -----------------
Federal statutory rate of 34% $(140,000) $(3,395,000) $(1,062,000)
State income taxes, net of Federal benefit (30,000) (699,000) (219,000)
Valuation allowance 170,000 2,963,000 --
Adjustment of prior deferred -- 102,000 --
Other, net -- 46,053 73,000
------------- -------------- -------------
$ -- $ (982,947) $(1,208,000)
============= ============ ===========
NOTE 6 - Non-cancelable Operating Leases
-------------------------------
The Company is obligated under various operating lease agreements relating
to branch and executive offices. Lease terms expire at various dates
through 2004, subject to renewal options. Management expects that in the
normal course of business, leases will be renewed or replaced by other
leases.
The following schedule represents future minimum rental payments required
under noncancelable operating leases for office space and equipment as of
December 31, 2001:
Year ending December 31, Amount
--------------------------------------------------------------------------
2002 $180,963
2003 152,796
2004 110,392
2005 103,992
2006 103,992
Thereafter 60,662
---------
Total minimum payments required $712,797
========
Total rent expense for the years ended December 31, 2001, 2000 and 1999 was
approximately $230,000, $909,000 and $710,000, respectively. In addition,
in the year ended December 31, 2000, the Company incurred $129,000 for a
settlement with the landlord at the Roslyn Heights office in order to
terminate the remaining 4.5 years of the lease. This cost is included in
expenses relating to closing Roslyn Office (see Note 12).
On May 21, 2002, the Company entered into a five year office lease, which
commences August 1, 2002 and has monthly rent of $8,667 per month.
F-15
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7 - Employee Benefits
-----------------
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan")
which was created effective January 1, 1994 for all employees who have
completed three months of continuous service. The Company matches 50% of
the first 2.5% of each employee's contribution. The Company's 401(k) Plan
expense was approximately $18,000, $54,000 and $71,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
NOTE 8 - Stock Option Plans
------------------
The Company has two stock option plans under which 750,000 common shares
have been reserved for issuance. Under the plans, the exercise price of any
incentive stock option will not be less than the fair market value of the
common shares on the date of grant. The term of any option may not exceed
ten years from the date of grant.
The first plan was adopted in 1997. Option activity is as follows:
Number Weighted average
of Shares exercise price
---------- -------------
Options at January 1, 1999 473,850 $7.01
Granted 348,750 7.65
Expired -- --
Forfeited (204,250) 7.09
---------
Outstanding at December 31, 1999 618,350 7.35
Granted -- --
Expired -- --
Forfeited (277,600) 6.95
---------
Outstanding at December 31, 2000 340,750 7.68
Granted -- --
Expired -- --
Forfeited (40,000) 7.71
---------
Outstanding at December 31, 2001 300,750 7.68
=========
Options exercisable at December 31, 2001 228,083 $7.69
=========
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company applied the intrinsic value method of accounting, as described
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", to its stock-based compensation to employees. Accordingly,
no compensation expense has been charged to operations for stock option
grants. The options vest over a three year period. Had compensation expense
been determined based on the fair value at the 1999, 2000 and 2001 grant
dates, consistent with the fair value methodology of SFAS No. 123, the
Company's net loss would have been $(2,086,044), $(9,182,411) and
$(653,494), respectively, basic and diluted EPS would have been $(0.56),
$(2.48) and $(0.18) for the years ended December 31, 1999, 2000 and 2001,
respectively. The weighted average remaining contractual life of all the
options is approximately 8 years.
F-16
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - Stock Option Plans, continued
------------------
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model. No options were granted in
2001 or 2000. The fair value of options granted in 1999 is approximately
$3.64 per share. The weighted average assumptions used in valuing the
option grants for the year ended December 31, 1999 are expected life of 5
years, interest rate of approximately 5.5%, and volatility (the measure by
which the stock price has fluctuated and will be expected to fluctuate
during the period) of 50%.
On January 2, 2002 the Company issued stock options under the Company's
1997 Stock Option Plan to certain board members and employees. The exercise
price of the options would be 10% above the average market price of the
Company's shares as listed on the Pink Sheets for five days after the
issuance of the options.
NOTE 9 - Related-Party Transactions
--------------------------
The Company has amounts receivable due from a former officer of the Company
in the amount of $107,782 and $267,782 at December 31, 2001 and 2000,
respectively. These amounts consist of general advances and a non-interest
bearing note that have undefined repayment terms.
A relative of Ronald Friedman had an economic interest in a rehab partner
for the purchase and sale of rehabilitation properties with a subsidiary of
Geneva. At December 31, 2001 and 2000, the subsidiary owned no remaining
properties. At December 31, 2001 and 2000, the Company had an outstanding
receivable from this rehab partner of approximately $344,000, substantially
all of which has been reserved, during the year ended December 31, 1999.
NOTE 10 - Financial Instruments With Off-Balance Sheet Risk and Concentrations
--------------------------------------------------------------------
In the normal course of the Company's business, there are various financial
instruments which are appropriately not recorded in the financial
statements. The Company's risk of accounting loss, due to the credit risks
and market risks associated with these off-balance sheet instruments,
varies with the type of financial instrument and principal amounts, and are
not necessarily indicative of the degree of exposure involved. Credit risk
represents the possibility of a loss occurring from the failure of another
party to perform in accordance with the terms of a contract. Market risk
represents the possibility that future changes in market prices may make a
financial instrument less valuable or more onerous.
In the ordinary course of business, the Company had issued commitments to
borrowers to fund approximately $13.8 million and $13.0 million of mortgage
loans at December 31, 2001 and 2000, respectively. At December 31, 2001,
$8.7 million relate to commitments to fund at locked-in rates and $5.1
million relate to commitments to fund at floating rates.
F-17
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - Financial Instruments With Off-Balance Sheet Risk and Concentrations,
----------------------------------------------------------------------
continued
---------
The Company enters into cash flow hedges in the form of treasury note
contracts to hedge the change in interest rates that may occur on locked in
loan commitments to borrowers, which are eventually sold to investors.
Pursuant to these treasury contracts, the Company enters into commitments
to purchase five and ten year U.S. Treasury Notes with an outside party.
Generally, no cash is exchanged at the outset of the contract. Gains or
losses are recognized at the end of the contract, which is generally three
months in term. At December 31, 2001 the Company had commitments to
purchase $1 million of U.S. Treasury notes. Before entering into a
derivative transaction for hedging purposes, it is determined that a high
degree of initial effectiveness exists between the change in value of the
hedged item and the change in the value of the determinative instrument
from movement in interest rates. High effectiveness means that the change
in the value of the derivative instrument will effectively offset the
change in the fair value of the hedge item. The effectiveness of each
hedged item is measured throughout the hedged period. Any hedge
ineffectiveness as defined by SFAS No. 133 is recognized in the statement
of operations. Derivatives accounted for using cash flow hedge accounting
for the period ended December 31, 2001 was not material to the results of
operations of the Company.
In the normal course of its mortgage banking activities, the Company enters
into optional commitments to sell the mortgage loans that it originates.
The Company commits to sell the loans at specified prices in future
periods, generally 30 days from date of commitment directly to permanent
investors. Market risk is associated with these financial instruments which
results from movements in interest rates and is reflected by gains or
losses on the sale of the mortgage loans determined by the difference
between the price of the loans and the price guaranteed in the commitment.
The Company may be exposed to a concentration of credit risk from a
regional economic standpoint as loans were primarily originated in the New
York Metropolitan area and Florida.
The Company currently finances its mortgage banking operations with a
single warehouse facility (the IMPAC Line, Note 4). The IMPAC Line has no
stated expiration date, but is terminable by either party upon written
notice. Management believes that there are other financial institutions
that could provide the Company with a similar facility on comparable terms.
However, a termination of the current warehouse facility without an
immediate replacement could cause an interruption to the Company's
operations and possible loss of revenue, which would affect operating
results adversely.
NOTE 11 - Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
SFAS No.107, "Disclosures About Fair Value of Financial Instruments",
requires the Company to disclose the fair value of its on-and off-balance
sheet financial instruments. A financial instrument is defined in SFAS
No.107 as cash, evidence of an ownership interest in an entity, or a
contract that creates a contractual obligation or right to deliver or
receive cash or another financial instrument from a second entity on
potentially favorable or unfavorable terms. SFAS No.107 defines the fair
value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
F-18
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - Disclosures About Fair Value of Financial Instruments, continued
-----------------------------------------------------
The estimated fair value of all of the Company's financial assets and
financial liabilities is the same as the carrying amount.
The following summarizes the major methods and assumptions used in
estimating the fair values of the financial instruments:
Financial Assets
----------------
Cash and cash equivalents - The carrying amounts for cash and cash
equivalents approximate fair value as they mature in 30 days or less and do
not present unanticipated credit concerns.
Mortgage loans held for sale, net - Fair value is estimated based on
current prices established in the secondary market or, for those loans
committed to be sold, based upon the price established in the commitment.
Mortgage loans held for investment - Fair value is based on management's
analysis of estimated cash flows discounted at rates commensurate with the
credit risk involved, or on sales price if committed to be sold.
Accrued Interest Receivable - The fair value of the accrued interest
receivable balance is estimated to be the carrying value.
Financial Liabilities
----------------------
Notes payable-warehouse and installment - The fair value of the notes
payable is based on discounting the anticipated cash flows using rates
which approximate the rates offered for borrowings with similar terms.
Note payable - related party
----------------------------
The fair value of the note payable - related party is estimated by
management to be the carrying value.
Limitations - SFAS No.107 requires disclosures of the estimated fair value
of financial instruments. Fair value estimates are made at a specific point
in time, based on relevant market information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument nor the resultant tax
ramifications or transaction costs. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
NOTE 12 - Commitments and Contingencies
----------------------------
Litigation
----------
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the Company will not be affected materially by the outcome of such
proceedings.
F-19
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Commitments and Contingencies, continued
-----------------------------
Litigation, continued
-----------
The U.S. Attorney's office for the Eastern District of New York ("U.S.
Attorney") has conducted an investigation (the "Investigation") into
allegations asserted in a criminal complaint against Ronald Friedman, the
former Chairman of the Board, President and Chief Executive Officer of the
Company, and a loan officer formerly employed by the Company.
The Company, the U.S. Attorney and the United States Department of Housing
and Urban Development ("HUD") agreed to a Consent Decree and Order and
resolved the case in a manner in which the Company will not be prosecuted,
and reimbursed HUD $100,000 for certain losses, costs and expenses related
to the loans under investigation. This amount was reimbursed to the Company
under its Errors and Omissions Insurance. Ronald Friedman settled the
criminal case against him by entering a plea of guilty.
As a result of this investigation, the Company incurred expenses in the
aggregate of approximately $1.3 million since January 2000. These expenses
include legal and professional fees incurred in connection with the
internal investigation of the Company, criminal defense attorneys and
negotiations of warehouse lines of credit amendments. For the year ended
December 31, 2001, the Company recorded a credit of $205,000 for legal fees
that were reimbursed through the Company's Directors and Officers
Insurance.
In July 2001, the Company was named one of twenty defendants in a class
action discrimination lawsuit filed in the Eastern District of the United
States District Court concerning the issuance of HUD mortgages "Maxine
Wilson et al. v. Isaac Tousie et al". The Company vigorously disputes this
claim and believes it is without merit. The Company's Errors and Omissions
insurance company has agreed to defend the Company in this matter. The
Company is unable to predict the outcome of this claim and, accordingly, no
adjustments regarding this matter have been made in the accompanying
consolidated financial statements.
In 2001, the Company was named one of the defendants in a lawsuit by one of
the Company's investors "Wells Fargo Funding v. Premiere Mortgage Corp. v.
Stewart Title". The Company's investor has indicated that the Company is
required to repurchase various loans totaling in excess of $1,000,000
primarily due to title issues. The Company vigorously disputes the amount
of this claim and believes that the underlying value of the properties
involved will more than adequately reimburse the investor for any potential
losses. Additionally, the Company feels that if any loss does occur, such
loss would be covered by the title insurers. The Company is unable to
predict the outcome of this claim and, accordingly, no adjustments
regarding this matter have been made in the accompanying consolidated
financial statements.
One of the Company's warehouse banks has indicated that the Company owes
such bank a total of $250,000 in penalties and fees in relation to its line
of credit with the bank. The Company vigorously disputes this claim and
believes it is without merit. The Company is unable to predict the outcome
of this claim and, accordingly, no adjustments regarding this matter have
been made in the accompanying consolidated financial statements.
F-20
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Commitments and Contingencies, continued
-----------------------------
Litigation, continued
----------
The Company permanently closed its office in Roslyn Heights, NY, in
September 2000. In conjunction with this closing, the Company had
negotiated with its landlord to terminate the remaining 4.5 years of its
lease at that location. This settlement included the payment of past due
rent owed under the lease and broker fees required to re-lease the premises
along with the issuance of 200,000 warrants to purchase the Company's
Common Stock at a price to be determined at such time the Company's stock
actively begins trading. The Company incurred an expense of $129,000 for
the settlement as well as an expense of $50,000 for the warrants, although
the warrants have not been issued. These were included in expenses relating
to closing the Roslyn office in the accompanying financial statements for
the year ended December 31, 2000. The Company was unable to fulfill its
obligation under the settlement agreement and in 2001 the landlord sued the
Company for full restitution under the original lease "LKM Expressway Plaza
v. PMCC".
The landlord was awarded a summary judgment in December 2001 by the courts
and damages are presently being determined. The Company believes that it
will be able to settle this claim for the amount of the original settlement
and will be able to make the required payments as they come due. However,
the Company is unable to predict the outcome of this claim and,
accordingly, no additional adjustments regarding this matter have been made
in the accompanying consolidated financial statements. (See Note 14)
Also in conjunction with the closing of its Roslyn Heights office, the
Company had returned various office equipment that was under long-term
leases. In 2001, the lessor sued the Company for full restitution under the
original leases. The lessor has requested summary judgment and the Company
has responded. The Company is unable to predict the outcome of this claim
and, accordingly, no adjustments regarding this matter have been made in
the accompanying consolidated financial statements.
Employment/Consulting Agreements
---------------------------------
The Company had entered into an Employment Agreement with Ronald Friedman.
The Employment Agreement's original term was to expire on December 31,
2000. In June 1999, Ronald Friedman's annual salary was increased by the
Board of Directors from $250,000 to $350,000. In May 2000, Ronald
Friedman's Employment Agreement was terminated by the Company's Board of
Directors. The Company simultaneously entered into a Consulting Agreement
with Ronald Friedman to provide general business services to the Company as
mutually agreed upon by the Company and Ronald Friedman. The Consulting
Agreement's original term is for one year, unless sooner terminated for
death, physical or mental incapacity or cause or terminated by either party
with one hundred twenty (120) days written notice from the Company or
thirty (30) days' written notice from Ronald Friedman. The Consulting
Agreement is automatically renewed for consecutive one-year terms unless
terminated as indicated. The Agreement includes annual compensation for
Friedman of a consulting fee of $240,000, and commissions of 6 basis points
on all loans closed by the Company. In April, 2001, Ronald Friedman's
consulting fee was reduced to $120,000.
F-21
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 13 - Segment Information
-------------------
The Company's operations consist of two principal activities (a) mortgage
banking and (b) funding the purchase, rehabilitation and resale of
residential real estate. The following table sets forth certain information
concerning these activities (in thousands):
Year Ended December 31,
---------------------------------------
2001 2000 1999
------------- -------------- ----------
Revenues:
Residential rehabilitation properties $ 270 $16,968 $35,960
Mortgage banking 5,305 2,697 16,617
------ -------- -------
$5,575 $19,665 $52,577
====== ======= =======
Less: (1)
Expenses allocable to residential rehabilitation
properties (cost of sales, interest expense and
compensation and benefits) $ 492 $17,859 $35,386
Expenses allocable to mortgage
banking (all other) 5,496 11,791 20,313
------ ------- -------
$5,988 $29,650 $55,699
====== ======= =======
Operating (loss) profit:
Residential rehabilitation properties $(222) $ (891) $ 574
Mortgage banking (191) (9,094) (3,696)
----- ------- -------
$(413) $(9,985) $(3,122)
===== ======= =======
Identifiable assets:
Residential rehabilitation properties $ 680 $ 1,070 $15,851
Mortgage banking 16,288 14,730 47,695
------- ------- -------
$16,968 $15,800 $63,546
======= ======= =======
(1) In managing its business, the Company specifically allocates
compensation and benefits to its residential rehabilitation segment.
All other expenses, including corporate overhead, are included in the
mortgage banking segment.
NOTE 14 - Shareholders' Equity
--------------------
Effective July 28, 2000, the Company announced that Internet Business's
International, Inc. ("IBUI") purchased the 2,460,000 shares of the Company
held by Ronald Friedman, Robert Friedman and the Ronald Friedman 1997
Guarantor Retained Annuity Trust (collectively, the "Sellers") in a private
transaction (the "Transaction"). This purchase represented 66.36% of the
3,707,000 shares of common stock of the Company outstanding. IBUI is a
holding company with a variety of Internet subsidiaries that trades
publicly under the symbol IBUI on the NASDAQ Bulletin Board. The Company
has been informed by the Sellers that certain payments due under the
agreement by IBUI to purchase shares of the Company's stock from the
Sellers were not made and that an event of default
F-22
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14 - Shareholders' Equity, continued
--------------------
has been declared against IBUI under this purchase agreement and the shares
held in escrow have been returned to the Sellers. On March 2, 2001 IBUI
filed an action against the Sellers for recission of the purchase of the
Company's stock and return of the moneys expended. On August 16, 2001 the
Sellers filed an action against IBUI for the balance of the amounts due
under the purchase agreement. These lawsuits are still outstanding and
pending. At December 31, 2001, the transfer agent has indicated that IBUI
owns 269,230 shares of the Company's stock or 7.26% of the total shares
outstanding.
The Company permanently closed its office in Roslyn Heights, NY. In
conjunction with this closing, the Company had negotiated with its landlord
to terminate the remaining 4.5 years of its lease at that location. This
settlement included the issuance of 200,000 warrants to purchase the
Company's Common Stock at a price to be determined at such time the
Company's stock actively begins trading. An expense of $50,000 for these
warrants was included in Expenses relating to closing the Roslyn office in
the accompanying financial statements for the year ended December 31, 2000,
although the warrants have not been issued (see Note 12).
In December 1998 the Company entered into a Financial Advisory and
Investment Banking Agreement with an investment bank under which the
investment bank is to provide regular and customary consulting advice to
the Company over an agreed period of time. In connection with this
agreement, the Company sold to the investment bank, for a nominal
consideration, warrants to purchase 125,000 shares of common stock at a
price of $6.75 per share. These warrants are exercisable over a five-year
period commencing December 1, 1999. The fair value of each warrant was
estimated at the date of grant using the Black-Scholes option-pricing model
at $1.14. Such fair value was expensed by the Company over the agreed
period of service of two years.
On December 3, 2001 the Company issued 100,000 shares of its common stock
as payment of certain liabilities, valued at $5,000.
NOTE 15 - Quarterly Financial Data (Unaudited)
------------------------------------
The following table is a summary of unaudited financial data by quarter for
the year ended December 31, 2001:
Year Ended December 31, 2001
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 961 $1,150 $1,487 $1,977
Expenses 1,455 1,608 1,164 1,761
------ ------ ------ ------
Net (loss) income $ (494) $ (458) $ 323 $ 216
======= ======= ======= =======
Basic and diluted net (loss) income
per share $(0.13) $(0.12) $0.09 $0.06
====== ====== ===== =====
F-23
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 16 - Management Plans
----------------
During 2001, the Company's management took numerous steps to create a
positive cash flow for the Company. These include changing the methodology
whereby the Company prices and sell its loans so that a higher per loan
gain is recognized and further reducing and consolidating operations as
required. Certain expense reductions were made in the first six months of
2001 including reducing management salaries and consolidating the entire
wholesale operation in the Florida office. This resulted in a reduction in
the number of staff employees processing loans as well as other cost
reductions. In May 2001, the Company was listed on "lendingtree.com" which
provides additional leads to potential borrowers utilizing the Internet.
Additional commission-only loan officers have been hired in late 2001 and
in 2002 in the retail and wholesale areas to increase the Company's volume
of loan applications and to take advantage of current low interest rates.
Beginning in August 2001 and continuing through the date of this report,
the Company has been selling loans on a bulk basis as well as on an
individual flow basis. Based on pricing of these bulk sales, the Company is
earning an additional 100 to 175 basis points (100 basis points equals one
percent) on loans sold in this manner. The additional revenue created from
selling loans on a bulk basis, a higher number of loan applications as a
result of lower mortgage interest rates, added loan officers and the
"lendingtree.com" business without added any significant support staff have
resulted in profitable third and fourth quarters of 2001 and an expectation
of future ongoing profitability and positive cash flow.
NOTE 17 - Subsequent Events (Unaudited)
----------------------------
On July 17, 2002, Ronald Friedman entered into a stock purchase agreement
to sell 1,289,000 shares of the Company common stock to Stanley Kreitman,
Chairman of the Board of Directors of the Company. The sale is anticipated
to be completed pending approval of the New York State Banking Department.
In August 2002, the Company's management committed to a plan to discontinue
the residential rehabilitation properties segment line of operations with
no intention of getting back into this line at any time in the foreseeable
future. This determination was based upon the fact that there have been no
rehabilitation properties purchased since early 2000 and the Company has
been selling off the properties on hand since then. Also, the Company does
not have a warehouse line in place to purchase any new properties nor does
it intend to pursue such a line.
Beginning October 2002, the Company began to use cash flow hedges in the
form of Mortgage Backed Securities ("MBS") along with Treasury note
contracts to hedge the change in interest rates that may occur on locked in
loan commitments to borrowers which are eventually sold to investors.
Notes Payable
-------------
In August 2002, the Company obtained a temporary increase in the IMPAC Line
to $25 million, and in December 2002 obtained a further temporary increase
to $36.6 million through May 31, 2003. As of December 31, 2002 the Company
failed to meet certain of the financial ratios, and the Bank has granted
the Company a waiver.
F-24
GENEVA FINANCIAL CORP. AND SUBSIDIARY
(f/k/a PMCC FINANCIAL CORP. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17 - Subsequent Events (Unaudited), continued
-----------------------------
Notes Payable, continued
------------------------
In August 2002, the Company entered into a Warehouse and Security Agreement
and Servicing Agreement that provides the Company with a warehouse facility
(the "Provident Line") through The Provident Bank ("Provident"). The
Provident Line provides a committed warehouse line of credit of $5 million
for the Company's mortgage originations only. The Provident Line is secured
by the mortgage loans funded with the proceeds of such borrowings. Interest
is variable and payable monthly based on the One Month Libor Rate as
published by the Wall Street Journal on the last business day of the prior
month plus from 4.43% to 8.43% depending on the type of loan and the length
of time outstanding on the line. The Provident Line has no stated
expiration date but is terminable by either party upon written notice.
In November 2002, the Company entered into a Promissory Note with Signature
Bank, N.A. for $350,000, which is secured by certain furniture and
equipment and is payable in monthly installments of $9,722 over a period of
three years. Interest payable is variable based on the Prime Rate as
designated by Signature Bank plus 1.50%.
Noncancellable Operating Leases
-------------------------------
On December 30, 2002, the Company renewed one of its office leases, which
has a five year term and monthly rent of approximately $8,000 per month.
On January 1, 2003, the Company entered into a five year office lease,
which has monthly rent of $4,467 per month, with options to renew for
successive 5 year terms.
Litigation
----------
In 2001, the landlord sued the Company for full restitution under the
original lease "LKM Expressway Plaza v. PMCC", which was settled in 2002.
The Company must pay the landlord $376,680 with interest thereon at 7.5%
per annum payable in twelve monthly installments of $32,680, the first
installment was due upon execution of the settlement agreement and the
remaining eleven payments commence June 1, 2002 and continue to April 1,
2003. Additionally, the Company was required to issue 100,000 shares of the
Company's common stock, which was valued at $25,000. As a result of the
settlement, the Company incurred an additional expense of approximately
$170,000, in excess of amounts previously accrued. The expense was included
in the expenses relating to the closing of the Roslyn office in the
financial statements for the year ended December 31, 2002.
Also in conjunction with the closing of its Roslyn office, the Company had
returned various office equipment that were long-term operating leases. In
2001, the lessor sued the Company for full restitution under the original
leases. In 2002 the Company settled and agreed to pay $5,890 in eighteen
monthly installments. The Company incurred an additional expense of
approximately $106,000, which was included in the expenses relating to the
closing of the Roslyn office in the financial statements for the year ended
December 31, 2002.
F-25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April 28, 2003
GENEVA FINANCIAL CORP.
By /s/ Keith Haffner
--------------------------
Keith Haffner, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dated indicated.
Signature Title Date
- ----------------------- ----------------------------------- ----------
/s/ Keith Haffner President and Chief Executive Officer, Director April 28, 2003
- -----------------------
Keith Haffner
/s/ Stanley Kreitman Chairman of the Board of Directors April 28, 2003
- -----------------------
Stanley Kreitman
Executive Vice President, Chief Financial Officer, April 28, 2003
Director and Secretary (Principal Accounting
/s/ Stephen J. Mayer Officer)
- ------------------------
Stephen J. Mayer
/s/ Joel L. Gold Director April 28, 2003
- ------------------------
Joel L. Gold
/s/ Warren Katz Director April 28, 2003
- ------------------------
Warren Katz
32
GENEVA FINANCIAL CORP. AND SUBSIDIARIES
Certification
I, Keith Haffner, President and Chief Executive Officer of Geneva Financial
Corp., certify that:
1. I have reviewed this annual report on Form 10-K of Geneva Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 28, 2003
/s/ Keith Haffner
----------------------------
Keith Haffner
President and Chief Executive Officer
33
GENEVA FINANCIAL CORP. AND SUBSIDIARIES
Certification
I, Stephen J. Mayer, Chief Financial Officer, Executive Vice President and
Secretary of Geneva Financial Corp., certify that:
1. I have reviewed this annual report on Form 10-K of Geneva Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 28, 2003
/s/ Stephen J. Mayer
----------------------------
Stephen J. Mayer
Chief Financial Officer,
Executive Vice President and
Secretary
34