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
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.
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
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.
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.
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
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.
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.
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.
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.
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.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
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.
Equity Compensation Plan Information
The following table sets forth information concerning the Company's equity compensation plans at December 31, 2001:
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.
ITEM 7.
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:
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.
Expenses. The following table sets forth the Company's expenses for the periods indicated:
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.
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:
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
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:
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.
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
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.
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.
ITEM 7A.
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
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
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
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.
ITEM 11.
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"):
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.
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.
ITEM 12.
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.
(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.
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
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.
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)
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.
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.
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
FINANCIAL STATEMENTS
Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -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
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.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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.
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.
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.
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.
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.
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
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.
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.
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:
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:
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.
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.
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.
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.
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.
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.
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.
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):
(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
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:
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.
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.
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.
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
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