SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 2001.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From ___________ to
___________.
Commission File Number 000-27081
AMERICAN HOME MORTGAGE HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-4066303
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
520 Broadhollow Road, Melville, NY 11747
(Address of Principal Executive Offices) (Zip Code)
(516) 949-3900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, $0.01 par value NASDAQ National Market
Securities registered Pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] or No [ ].
Indicate by a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant based upon the closing sale price of its Common
Stock on March 21, 2002, on the NASDAQ National Market was $83,362,347.
As of March 21, 2002, there were 12,042,275 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
The information required to be furnished pursuant to Part III of
this Form 10-K will be set forth in, and incorporated by reference from, the
registrant's definitive proxy statement for the registrant's 2002 annual meeting
of stockholders, which definitive proxy statement will be filed by the
registrant with the Securities and Exchange Commission not later than 120 days
from the end of the fiscal year ended December 31, 2001.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS .......................................................... 3
ITEM 2. PROPERTIES ........................................................ 11
ITEM 3. LEGAL PROCEEDINGS ................................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS ........................................................ 12
ITEM 6. SELECTED FINANCIAL DATA ........................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................... 14
ITEM 8. FINANCIAL STATEMENTS .............................................. 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES ...................................... 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................ 24
ITEM 11. EXECUTIVE COMPENSATION ............................................ 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .... 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................... 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ... 25
SIGNATURES .................................................................. 26
INDEX TO FINANCIAL STATEMENTS
INDEX TO EXHIBITS
2
PART I
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Readers are
cautioned that actual results could differ materially from those indicated in
such statements as a result of certain factors, including those set forth under
"Business - Special Notes of Caution" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report.
ITEM 1. BUSINESS
GENERAL
American Home Mortgage Holdings, Inc. ("American Home" and, together with
its wholly-owned subsidiary, American Home Mortgage Corp. ("AHM"), the
"Company") is an independent retail mortgage banking company primarily engaged
in the business of originating and selling residential mortgage loans. The
Company offers a broad array of residential mortgage products targeted primarily
to high-credit-quality borrowers over the Internet, as well as through its
approximately 551 primarily commission-compensated loan originators. The Company
operates from 63 loan offices in the New York metropolitan area and six other
eastern states, and in California, Illinois, New Mexico and Arizona. The Company
operates primarily as a mortgage banker, underwriting, funding and selling its
loan products to more than 45 different buyers. The Company also markets its
mortgage products over the Internet through its Internet site,
MORTGAGESELECT.COM. Mortgage products are originated online through arrangements
with a number of popular Web sites and through the Company's own Web site.
Since its founding in 1988, AHM has increased its origination volume
through the expansion of its branch office network and the addition of sales
personnel. The Company's loan originations totalled $7.8 billion in 2001. The
Company traditionally focuses on residential purchase transactions rather than
refinancing by concentrating its marketing, advertising and personnel resources
on lending to home buyers rather than to home owners seeking to refinance their
mortgage loans.
On June 15, 1999, American Home was formed to serve as a holding company
for AHM. In conjunction with the closing of the initial public offering of the
common stock of American Home, all of the issued and outstanding shares of
common stock of AHM were exchanged for 4,999,900 shares of American Home's
common stock. On October 6, 1999, American Home completed its initial public
offering of 2.5 million shares of common stock at a price of $6.00 per share.
On December 30, 1999, American Home acquired Marina Mortgage Company, Inc.
("Marina"), a California mortgage banking corporation. Marina is a full service
retail mortgage lender. Marina, which initially operated as a wholly-owned
subsidiary of American Home, was merged into AHM on December 31, 2001.
On June 30, 2000, American Home acquired First Home Mortgage Corp. ("First
Home"), an Illinois corporation. Prior to the acquisition, First Home was an
independent mortgage lender based in metropolitan Chicago. Formed in 1987, First
Home originates primary residential mortgage loans. First Home now operates as a
division of American Home. The acquisitions of Marina, in 1999, and First Home,
in 2000, represent an expansion of the Company's traditional east coast lending
activities into the west and midwest geographic regions of the country.
On October 31, 2000, the Company acquired from Roslyn National Mortgage
Corporation ("RNMC") four RNMC branches (located in Columbia, Maryland, Vienna,
Virginia, West Hartford, Connecticut and Patchogue, New York) (the "Roslyn
Branches"), RNMC's mortgage application pipeline and certain fixed assets, and
assumed the real property leases of the Roslyn Branches. The Roslyn Branches
have become part of the American Home branch network and have helped the Company
expand its originations in the mid-Atlantic region through both a retail and
wholesale presence.
On March 30, 2001, the Company acquired the Pennsylvania and Maryland loan
production offices of ComNet Mortgage Services (the "ComNet Branches"), the
residential mortgage division of Commonwealth Bank, a subsidiary of Commonwealth
Bancorp, Inc. ("Commonwealth"), Commonwealth's mortgage application pipeline and
certain fixed assets, and assumed the real property leases of the ComNet
Branches. The ComNet Branches have also been integrated into the American Home
branch network, further supporting the Company's expansion of its originations
in the mid-Atlantic region.
The Company is currently licensed to conduct its business in all 50 states
and the District of Columbia.
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RECENT DEVELOPMENTS
In August of 2001, the Company entered into an agreement to acquire Valley
Bancorp, Inc. ("Valley Bancorp") and its wholly-owned subsidiary, Valley Bank of
Maryland ("Valley Bank"), a federal savings bank located in suburban Baltimore,
Maryland, for a combination of cash and stock, subject to certain adjustments.
Under the terms of the definitive agreement, the Company will pay 1.25 times
Valley Bancorp's book value, or approximately $5.5 million. It is anticipated
that the acquisition of Valley Bank will substantially increase net interest
income and provide a more stable and diverse funding base. This transaction is
subject to regulatory approval and is expected to close by the end of the third
quarter of 2002.
OPERATIONS
Lending to Home Buyers. The Company has focused on making loans to home
buyers rather than to home owners seeking to refinance their mortgages. However,
because of the historically low interest rates, there was substantial
refinancing activity in 2001. In 2001, 42.7% of the mortgage loans the Company
originated were made to home buyers, compared to 57.3% which were made to home
owners seeking refinancing.
Web Site. The Company's Web site, MORTGAGESELECT.COM, provides customers
with 24-hour access to its interest rates and product terms and the ability to
lock in an interest rate, to file a pre-approval request or application, to
check the status of their pending applications and to obtain their credit
reports. The Company's Web site also provides mortgage customers with an array
of "tools" that assist them in determining how much financing they can afford,
what kind of mortgage best suits their needs and otherwise provides answers to
frequently asked questions.
Underwriting Loans to the Standards of Investors who Buy the Company's
Loans. The Company's underwriting process is designed to ensure that virtually
every loan it originates is in a standardized form and can be sold to a
third-party investor by conforming the loan to the underwriting and credit
standards of that investor. Whenever possible, the Company uses "artificial
intelligence" underwriting systems, including Fannie Mae's Desktop
Underwriter(R), to ensure consistency with its investors' predetermined
standards. These systems interface with the Company's "enterprise" computer
system. In addition, the Company has a series of internal and external quality
control procedures in place to ensure compliance with its underwriting
standards.
Sales. The Company's loan originators are primarily compensated through
sales commissions, which is customary in the industry and encourages
responsiveness to the Company's customers. The Company's loan originators
actively guide customers through the loan application process, keeping customers
informed about rate changes and market conditions.
BUSINESS DIVISIONS AND MARKETS
The Company's business is organized into the following three divisions,
each of which focuses on a distinct production channel of the residential loan
market: the retail division, the Internet division and the wholesale division.
THE RETAIL DIVISION
In 2001, the Company's retail division accounted for approximately 75% of
its origination volume. Prior to the acquisition of Marina, First Home, the
Roslyn Branches and the ComNet Branches, this division consisted of 14 offices
in the eastern United States, including the Company's Melville, New York
headquarters. With the addition of Marina, First Home, the Roslyn Branches and
the ComNet Branches, the Company expanded its retail base by an additional 49
offices located in the western and midwestern United States and on the eastern
seaboard. The Company's retail division has six origination channels: community
loan offices; direct-to-consumer advertising; realtor joint ventures; the
Corporate Affinity Program; telemarketing; and the Real Estate Direct Program.
Community Loan Offices. The Company's community loan offices serve the
regions in which they operate and obtain business by developing and nurturing a
referral network of realtors, real estate attorneys, builders and accountants.
They also facilitate the efficient processing and closing of a borrower's loan.
Available services include pre-approval commitments based on Fannie Mae's
Desktop Underwriter(R), flexible rate lock-in and extension policies, holding of
escrows and other accommodations that help a borrower and facilitate a real
estate transaction. The Company's community loan offices provide special
services to builders, including issuing commitments to lend to buyers in their
projects as their onsite resource for mortgage financing.
In order to attract and retain experienced loan originators, the Company
offers a high level of support that includes a broad product range, technical
help desk support, flexible extension policies, expenditures on trade shows,
educational seminars and other marketing initiatives and promotional materials.
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Direct to Consumer Advertising. The Company advertises its products in
selected local and regional print media. Customer calls generated by advertising
are handled by the Company's more experienced loan originators who use the
Company's consultative sales approach.
Joint Ventures. The Company uses joint ventures with mid-size real estate
brokerage firms to expand distribution of its mortgage offerings. Typically, the
Company and its partners each have a 50% interest in the venture. Each venture
makes loans, retaining the application and processing fees, points and discounts
earned in connection with the mortgages it originates. The venture then sells
the mortgage loans to the Company, which in turn resells the loans to
institutional buyers.
Corporate Affinity Program. Under this program, the Company makes loans to
employees of large companies and firms who are members of its Corporate Affinity
Program. The employees receive special group discounts, service guarantees and
other accommodations.
Telemarketing. The Company maintains a staff of loan originators and
telemarketers who place calls to persons identified as having high-interest rate
loans due to poor past credit history, but who have improved their credit
history and would now qualify for lower interest rate mortgages.
Real Estate Direct. The Company established its Real Estate Direct Program
to reach customers at the beginning of the home-buying process. Under this
program, the Company places advertisements for a particular home that not only
describe the home, but also a package of available mortgage financing terms. The
Company believes that it benefits by having early access to potential borrowers,
many of whom, although they may not buy the particular property advertised, may
become customers of the Company.
THE INTERNET DIVISION
The Company launched its Internet division, MORTGAGESELECT.COM, in January
of 1999. In 2001, the Company's Internet division accounted for approximately
17% of its origination volume. MORTGAGESELECT.COM primarily reaches customers by
serving as the exclusive or semi-exclusive mortgage provider on other
destination Web sites, including aggregators, specialty interest sites, and bank
sites serviced under private label outsourcing agreements. Customers also reach
MORTGAGESELECT.COM directly by accessing WWW.MORTGAGESELECT.COM. Internet
customers can apply online, shop for rates, check their loan status, receive
e-mail notification when a desired rate becomes available, educate themselves on
the loan process, use analytical tools and perform other functions, 24 hours a
day, seven days a week.
The Company, which currently has three full service call centers, built
its call center capacity by transferring experienced managers and personnel from
its traditional origination channels to its Internet division. The Company's
experience is that having a number of smaller call centers allows it to best
manage and motivate its sales representatives and create an atmosphere that is
most conducive to its consultative sales approach. Innovative technology also
allows the Company to transfer calls and work freely between centers for peak
efficiency and ease of growth.
THE WHOLESALE DIVISION
The Company has established relationships with more than 75 mortgage
brokers. The Company's wholesale division actively solicits referrals of
borrowers from this network of independent mortgage brokers.
A mortgage broker deals directly with the borrower and submits the fully
processed loan application to the Company for an underwriting determination. The
Company applies its usual underwriting standards to each wholesale-originated
mortgage, issues a written commitment and, upon satisfaction of all lending
conditions, closes the mortgage. The Company offers mortgage brokers direct
access to Fannie Mae's Desktop Underwriter(R), which enables them to give their
clients immediate approvals. The Company also offers to these mortgage brokers
the Company's entire product line, the ability to provide approval within 24 to
48 hours of receipt of a file, flexible lock-in and extension policies,
personalized service, knowledgeable and experienced wholesale loan originators
and support of mortgage broker industry events, such as trade shows and
educational seminars.
THE COMPANY'S MORTGAGE PRODUCTS
The Company offers a broad and competitive range of mortgage products that
aim to meet the mortgage needs of all borrowers. Its product line includes
Fannie Mae-eligible loans, jumbo loans, adjustable rate mortgages, FHA-insured
and VA-guaranteed loans, alternate "A" loans, non-prime loans, home equity or
second mortgage loans, construction loans and bridge loans. The Company provides
its full product line through each of its three divisions.
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The Company's network of loan buyers allows it to identify specific loan
features, to identify a loan buyer who will purchase loans with those specific
features and to select a buyer who will accept the lowest yield for loans with
those features. As a result, the Company is able to offer a wide range of
products that it believes are well-priced and that have many different features
to suit a customer's needs.
The following table summarizes information with respect to the most
important categories of mortgage loans the Company originated for the year ended
December 31, 2001:
MORTGAGE LOAN ORIGINATION SUMMARY
% OF TOTAL
MORTGAGE TYPE NUMBER OF LOANS DOLLAR VOLUME DOLLAR VOLUME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------- ----------------------- -----------------------
2001 2000 2001 2000 2001 2000
------ ------ -------- -------- ----- -----
($ in millions)
Fannie Mae Eligible Fixed 27,850 8,179 $4,569.1 $1,420.8 58.8% 46.7%
Jumbo Fixed ............. 1,709 501 668.1 183.4 8.6 6.0
Adjustable Rate (ARMs) .. 2,987 1,643 960.6 449.1 12.4 14.8
FHA/VA .................. 10,228 5,888 1,368.5 768.4 17.6 25.3
Alternate "A" Loans ..... 62 351 12.7 69.5 0.2 2.3
Non-Prime Loans ......... 577 662 79.4 64.0 1.0 2.1
Home Equity/Second ...... 2,670 1,638 91.7 77.1 1.2 2.5
Construction Loans ...... 13 11 7.1 6.0 0.1 0.2
Bridge Loans ............ 67 50 8.5 4.3 0.1 0.1
------ ------ -------- -------- ----- -----
TOTAL ............ 46,163 18,923 $7,765.7 $3,042.6 100.0% 100.0%
====== ====== ======== ======== ===== =====
Conforming and Government-Insured Fixed Rate Loans. These mortgage loans
conform to the underwriting standards established by Federal National Mortgage
Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation
("Freddie Mac"). This product is limited to high-quality borrowers with good
credit records and involves adequate down payments or mortgage insurance. These
loans may qualify for insurance from the Federal Housing Authority (FHA) or
guarantees from the Veterans Administration (VA). The Company has been
designated by the U.S. Department of Housing and Urban Development (HUD) as a
direct endorser of loans insured by the FHA and as an automatic endorser of
loans partially guaranteed by the VA, allowing it to offer FHA or VA mortgages
to qualified borrowers. FHA and VA mortgages must be underwritten within
specific governmental guidelines, which include borrower income verification,
asset verification, borrower credit worthiness, property value and property
condition.
Jumbo Loans. Jumbo loans are considered non-conforming mortgage loans
because they have a principal loan amount in excess of the loan limits set by
Fannie Mae and Freddie Mac (currently, $300,700 for single-family, one-unit
mortgage loans in the continental United States). The Company offers jumbo loans
with creative financing features, such as the pledging of security portfolios.
Its jumbo loan program is geared to the more financially-sophisticated borrower.
Adjustable Rate Mortgages (ARM). The ARM's defining feature is a variable
interest rate that fluctuates over the life of the loan, usually 30 years.
Interest rate fluctuations are based on an index that is related to Treasury
bill rates, regional or national average cost of funds of savings and loan
associations, or another widely published rate, such as LIBOR. The period
between the rate changes is called an adjustment period and may change every six
months or one year. The Company also offers ARMs with a fixed period of three
years, five years or ten years. Some of the Company's ARMs may include payment
caps, which limit the interest rate increase for each adjustment period.
Alternate "A" Loans. From a credit risk standpoint, alternate "A" loan
borrowers present a risk profile comparable to that of conforming loan
borrowers, but entail special underwriting considerations, such as a higher loan
to value ratio or limited income verification.
Non-Prime Mortgage Loans. The non-prime mortgage loan focuses on customers
whose borrowing needs are not served by traditional financial institutions.
Borrowers of non-prime mortgage loans may have impaired or limited credit
profiles, high levels of debt service to income, or other factors that
disqualify them for conforming loans. By originating mortgage loans to borrowers
with higher credit risk, the Company offsets this risk with higher interest
rates than would be charged for its conventional loans. Offering this category
of mortgage loans on a limited basis allows the Company to provide loan products
to borrowers with a variety of differing credit profiles.
Home Equity or Second Mortgage Loans. These loans are generally secured by
second liens on the related property. Home equity mortgage loans can take the
form of a home equity line of credit, which generally bears an adjustable
interest rate,
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while second mortgage loans are closed-end loans with fixed interest rates. Both
types of loans are designed for borrowers with high-quality credit profiles.
Home equity lines generally provide for a 5- or 15-year draw period where the
borrower withdraws needed cash and pays interest only, followed by a 10- to
20-year repayment period. Second mortgage loans are fixed in amount at the time
of origination and typically amortize over 15 to 30 years with a balloon payment
due after 15 years.
Construction Loans. The Company offers a variety of construction loans for
owner-occupied single-family residences. These loans are available on a rollover
basis, meaning that the borrower can secure funding for the land purchase and
construction of the home, then roll the financing over into a permanent mortgage
loan. During the construction period, interest-only payments are made.
Withdrawals during the construction period, to cover the costs associated with
each stage of completion, are usually made in five to ten disbursements.
Bridge Loans. The bridge loans that the Company makes are short-term loans
and may be used in conjunction with the other loan products. Bridge loans
provide a means for a borrower to obtain cash based on the equity of a current
home that is on the market but not yet sold and to use that cash to purchase a
new home.
SALE OF LOANS AND SERVICING RIGHTS
The Company's business strategy is to sell the loans it originates,
typically within 45 days of origination, rather than hold them for investment.
The Company sells its loans to Fannie Mae, large national banks, thrifts and
smaller banks, securities dealers, real estate investment trusts and other
institutional loan buyers. The Company also swaps loans with Fannie Mae for
mortgage-backed securities, which the Company then sells.
Typically, the Company sells or swaps the loans with limited recourse. By
doing so, the Company reduces its exposure to default risk at the time it sells
the loan, except that it may be required to repurchase the loan if it breaches
the representations or warranties that it makes in connection with the sale of
the loan, in the event of an early payment default, or if the loan does not
comply with the underwriting standards or other requirements of the ultimate
investor.
The Company sells or swaps the loans under agreements to the buyers and
institutions described above, many of whom compete directly with the Company for
mortgage originations. The agreements generally do not have a limit as to the
principal amount of loans that the Company may sell, and establish an ongoing
sale program under which these investors and institutions stand ready to buy so
long as the loans the Company offers for sale meet their underwriting standards.
Generally, the Company sells the servicing rights to its loans at the time
it sells those loans. When it swaps loans for mortgage-backed securities, at the
time of completing the swap it sells the servicing rights to the loans to an
independent loan servicer. The prices at which the Company is able to sell its
mortgage servicing rights vary over time and may be materially adversely
affected by a number of factors, including the general supply of, and demand
for, mortgage servicing rights and changes in interest rates.
In 2001, the three institutional investors that bought the most loans from
the Company were Wells Fargo Funding, Principal Residential Funding and Astoria
Federal Savings Bank, which accounted for 65.9%, 8.8% and 4.7% of the Company's
total loan sales, respectively.
LOAN UNDERWRITING
The Company's primary goal in making a decision whether to extend a loan
is whether that loan conforms to the expectations and underwriting standards of
the institution that buys that type of loan. Typically, these buyers focus on a
potential borrower's credit history, often as summarized by credit scores,
income and stability of income, liquid assets and net worth and the value and
the condition of the property to be pledged. Whenever possible, the Company uses
artificial intelligence underwriting systems to determine whether a particular
loan meets those standards and expectations. In those cases where artificial
intelligence is not available, the Company relies on its credit officer staff to
make the determination.
QUALITY CONTROL
The Company has hired an outside firm to perform quality control testing
for it. The firm randomly samples 10% of the loans the Company originates. It
checks the accuracy of the borrower's income and assets and the credit report
used to make the loan, reviews whether the loan buyer's underwriting standards
were properly applied, examines whether the loan complies with government
regulations and, for 1% of the loans the Company originates, it reappraises the
underlying property. The firm issues monthly reports which the Comapny uses to
identify areas that need corrective action or could use improvement. To date,
those reports have not identified material quality control concerns, although
there can be no assurances that the Company will not experience material quality
control concerns in the future.
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GOVERNMENT 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 and government sponsored enterprises, including, without limitation,
HUD, FHA, VA, Fannie Mae, Freddie Mac and Ginnie Mae. These rules and
regulations impose obligations and restrictions on the Company's loan
origination and credit activities, including, without limitation, the
processing, underwriting, making, selling, securitizing and servicing of
mortgage loans.
The Company's lending activities also are subject to various federal laws,
including the Federal Truth-in-Lending Act and Regulation Z thereunder, the
Homeownership and Equity Protection Act of 1994, the Federal Equal Credit
Opportunity Act and Regulation B thereunder, the Fair Credit Reporting Act of
1970, the Real Estate Settlement Procedures Act of 1974 and Regulation X
thereunder, the Fair Housing Act, the Home Mortgage Disclosure Act and
Regulation C thereunder and the Federal Debt Collection Practices Act, as well
as other federal statutes and regulations affecting its activities. The
Company's loan origination activities also are subject to the laws and
regulations of each of the states in which it conducts its activities.
These laws, rules, regulations and guidelines limit mortgage loan amounts
and the interest rates, finance charges and other fees the Company may assess,
mandate extensive disclosure and notice to its customers, prohibit
discrimination, impose qualification and licensing obligations on it, establish
eligibility criteria for mortgage loans, provide for inspections and appraisals
of properties, require credit reports on prospective borrowers, regulate payment
features, and prohibit kickbacks and referral fees, among other things. These
rules and requirements also impose on the Company certain reporting and net
worth requirements. Failure to comply with these requirements can lead to, among
other things, loss of approved status, termination of contractual rights without
compensation, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
The Company is subject to audits by various regulatory authorities. To
date, the audits have not found any material violations. In addition, the
Company's "enterprise" computer application assists it in complying with
government regulations by automatically selecting the requisite loan disclosure
documents, calculating permissible fees and charges and assuring that products
offered to a particular borrower meet the requirements of that borrower's state.
The Company's legal compliance is reviewed as part of its quality control
process, which is performed by an independent contractor with expertise in these
matters.
Although the Company believes that it has systems and procedures in place
to ensure compliance with these requirements and believes that it currently is
in compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations, that more restrictive laws, rules and
regulations will not be adopted in the future, or that existing laws, rules and
regulations or the mortgage loan documents with borrowers will not be
interpreted in a different or more restrictive manner. The occurrence of any
such event could make compliance substantially more difficult or expensive,
restrict the Company's ability to originate, purchase, sell or service mortgage
loans, further limit or restrict the amount of interest and other fees and
charges earned from mortgage loans that the Company originates, purchases or
services, expose it to claims by borrowers and administrative enforcement
actions, or otherwise materially and adversely affect its business, financial
condition and results of operations.
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 purchasing a home, the competitive
advantage of tax deductible interest, when compared with alternative sources of
financing, could be eliminated or seriously impaired by this type of
governmental action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for the kind of
mortgage loans the Company offers.
The Company also is performing various mortgage-related operations on the
Internet. The Internet, and the laws, rules and regulations related to it, are
new and still evolving. As such, there exist many opportunities for the
Company's business operations on the Internet to be challenged or to become
subject to legislation, any of which may materially and adversely affect its
business, financial condition and results of operations.
INFORMATION SYSTEMS
The Company's enterprise system controls most aspects of the Company's
operations, from the processing of a loan application through the closing of the
loan and the sale of the loan to institutional investors. The system also
performs checks and balances on many aspects of the Company's operations, and it
supports the Company's marketing efforts. The Company's enterprise system
functions on a wide area network that connects all of its branches in "real
time." With its wide area network, a transaction at any one of its locations is
committed centrally and is therefore immediately available to all personnel at
all other locations. An important benefit of the enterprise system is that it
aids the Company in controlling its business process.
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The system assures that the Company's underwriting policies are adhered to, that
only loans that are fully approved are disbursed, and that the correct
disclosures and loan documents are used based on a borrower's state and loan
program. The Company's enterprise system also provides its management with
operating reports and other key data. MORTGAGESELECT.COM has developed a
proprietary Web site and supporting call center software through the efforts of
its in-house computer programming staff.
COMPETITION
Mortgage banking is highly competitive. A large number of banks, non-bank
mortgage lenders, and mortgage brokers offer mortgage loans. Many of these
competing mortgage originators share a business strategy and capability similar
to that of the Company and many of them are larger than the Company, with
substantially more capital and greater marketing and technical resources than
the Company.
SPECIAL NOTES OF CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this report may constitute "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements generally discuss the Company's plans and objectives for future
operations. They also include statements containing a projection of revenues,
income, capital expenditures, dividends, capital structure or other financial
terms. The following statements particularly are forward-looking in nature:
o the Company's strategy;
o development of the Company's Internet capabilities;
o projected joint ventures or acquisitions; and
o projected capital expenditures.
The forward-looking statements in this report are based on the Company's
management's beliefs, assumptions and expectations of its future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties, some of which are not currently
known to the Company, that may cause its actual results, performance or
financial condition to be materially different from the expectations of future
results, performance or financial condition it expresses or implies in any
forward-looking statements. Some of the important factors that could cause the
Company's actual results, performance or financial condition to differ
materially from its expectations are:
o general volatility of the capital markets and the market price of
the Company's shares;
o changes in the real estate market, interest rates or the general
economy of the markets in which the Company operates;
o economic, technological or regulatory changes affecting the use of
the Internet;
o the Company's ability to employ and retain qualified employees;
o changes in government regulations that are applicable to the
Company's regulated brokerage and property management businesses;
o the Company's ability to identify and complete acquisitions and
successfully integrate businesses it acquires;
o changes in the demand for the Company's services;
o the degree and nature of the Company's competition; and
o the other factors referenced in this report, including, without
limitation, those under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business."
9
When used in this report, the words "plan," "believe," "anticipate,"
"estimate," "expect," "objective," "projection," "forecast," "goal" or similar
words are intended to identify forward-looking statements. The Company qualifies
any and all of its forward-looking statements entirely by these cautionary
factors.
10
ITEM 2. PROPERTIES
The Company's current Executive and Administrative Offices are located at
520 Broadhollow Road, Melville, New York 11747, and consist of approximately
58,200 square feet. The lease covering these premises expires in January of 2009
and the annual rent is $1,140,000. The Company also has a New York office
located at 114 West 47th Street, 17th Floor, New York, New York 10036. These
premises consist of approximately 7,000 square feet and the lease expires in
December of 2006. The annual rent is $371,496. The Company owns an office
building in Mt. Prospect, Illinois, which serves as the regional operation
center for the First Home division, and consists of approximately 35,700 square
feet.
The Company leases an aggregate of 47 spaces for its regional operation
center and lending offices in Arizona, California, Connecticut, Florida,
Illinois, Maryland, New Mexico, New York and Virginia (including its New York,
New York offices and Melville, New York headquarters). As of December 31, 2001,
these facilities had an annual aggregate base rental of approximately $4.6
million, and ranged in size from 400 to 57,100 square feet with remaining lease
terms ranging from one to seven years.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is at times subject to
various legal proceedings. The Company does not believe that any of its current
legal proceedings, individually or in the aggregate, will have a material
adverse effect on its operations or financial condition.
A multitude of class action lawsuits have been filed against companies in
the mortgage banking industry, which allege, among other things, violations of
the terms of the mortgage loan documents and certain laws, rules and regulations
(including, without limitation, consumer protection laws). These lawsuits may
result in similar suits being filed against the Company. In addition, the
publicity generated by such lawsuits may result in legislation that affects the
manner in which the Company conducts its business and its relationships with
mortgage brokers, correspondents and others. Any of these developments may
materially and adversely affect the Company's business, financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the NASDAQ National Market under
the symbol AHMH and began trading on October 4, 1999. The following table sets
forth the high, low and closing sales prices for the Company's common stock as
reported by the NASDAQ National Market for the periods indicated.
2001 2000
-------------------------------------------- --------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
High $ 8.130 $ 13.090 $ 18.000 $ 20.873 $ 8.875 $ 6.375 $ 5.250 $ 5.375
Low 5.130 6.600 10.450 11.873 6.000 4.563 4.375 3.875
End of period 7.500 11.900 10.450 12.073 6.375 4.563 5.250 4.750
As of March 21, 2002, the closing sales price of the Company's common
stock, as reported on the NASDAQ National Market, was $13.51.
The Company began paying a quarterly cash dividend in the amount of $0.03
per share of common stock in April of 2001. The Company paid three such
dividends in 2001.
As of March 21, 2002, the Company had 26 stockholders of record. The
Company believes, based on the number of proxy statements and related materials
requested in connection with its annual meeting of stockholders, that there are
approximately 1,092 beneficial owners of its common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2001 and 2000 and
for the years ended December 31, 2001, 2000 and 1999 have been derived from the
Company's audited consolidated financial statements, included elsewhere in this
report. The selected financial data as of December 31, 1999, 1998 and 1997 and
for the years ended December 31, 1998 and 1997 have been derived from prior year
audited consolidated financial statements. These consolidated financial
statements include all adjustments, which the Company considers necessary for a
fair presentation of its consolidated financial position and results of
operations for these periods. You should not assume that the results below
indicate results that the Company will achieve in the future. The operating data
are derived from unaudited financial information that the Company compiled.
12
You should read the information below along with all the other financial
information and analysis presented in this report, including the Company's
financial statements and related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- -------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues
Gain on sales of mortgage loans ............................. $118,554 $ 52,731 $21,957 $18,981 $10,597
Interest income, net ........................................ 9,098 3,271 1,704 734 369
Other ....................................................... 401 2,278 1,201 502 356
-------- -------- ------- ------- -------
Total revenues .......................................... 128,053 58,280 24,862 20,217 11,321
-------- -------- ------- ------- -------
Expenses
Salaries, commissions and benefits, net ..................... 55,778 27,894 11,611 9,430 5,317
Occupancy and equipment ..................................... 8,250 5,584 2,429 1,654 909
Marketing and promotion ..................................... 6,313 4,058 1,774 1,236 962
Data processing and communications .......................... 4,442 2,826 1,133 952 612
Provision for loss .......................................... 352 127 28 153 117
Other ....................................................... 12,331 7,625 2,550 1,543 946
-------- -------- ------- ------- -------
Total expenses .......................................... 87,466 48,114 19,525 14,968 8,862
-------- -------- ------- ------- -------
Income before income taxes and minority interest .............. 40,587 10,166 5,337 5,249 2,459
Income taxes(1) ......................................... 16,253 4,267 1,441 328 140
Minority interest ....................................... 1,028 508 35 51 --
-------- -------- ------- ------- -------
Net income before cumulative effect of change in
accounting principle ........................................ 23,306 5,391 3,861 4,870 2,319
Cumulative effect of change in accounting principle,
net of income taxes ....................................... 2,143 -- -- -- --
-------- -------- ------- ------- -------
Net income ..................................... $ 25,448 $ 5,391 $ 3,861 $ 4,870 $ 2,319
======== ======== ======= ======= =======
Net income per share:
Basic before cumulative effect of change in accounting
Principle ................................................. $ 2.25 $ 0.63 $ 0.69 $ 0.97 $ 0.46
Basic after cumulative effect of change in accounting
principle ................................................. $ 2.45 $ 0.63 $ 0.69 $ 0.97 $ 0.46
Diluted before cumulative effect of change in accounting
principle ................................................. $ 2.14 $ 0.63 $ 0.69 $ 0.97 $ 0.46
Diluted after cumulative effect of change in accounting
principle ................................................. $ 2.34 $ 0.63 $ 0.69 $ 0.97 $ 0.46
Weighted average number of shares outstanding:
Basic ....................................................... 10,374 8,580 5,595 5,000 5,000
Diluted ..................................................... 10,883 8,580 5,603 5,000 5,000
BALANCE SHEET DATA:
Cash and cash equivalents ................................... $ 26,393 $ 6,005 $ 3,414 $ 2,892 $ 2,058
Mortgage loans held for sale, net ........................... 419,900 143,967 65,115 34,667 24,676
Total assets ................................................ 501,125 183,532 85,884 42,392 28,914
Warehouse lines of credit ................................... 351,454 130,484 56,805 34,070 24,454
Other liabilities ........................................... 70,477 25,855 11,056 2,298 1,886
Total stockholders' equity .................................. 78,617 26,612 18,000 5,924 2,574
OPERATING DATA:
Total mortgage originations (in millions) ................... $ 7,764 $ 3,043 $ 1,348 $ 1,158 $ 724
Home purchases .......................................... $ 3,326 $ 2,590 $ 978 $ 749 $ 562
Refinancings ............................................ $ 4,438 $ 452 $ 370 $ 409 $ 162
Number of loans originated .................................. 46,163 18,923 7,732 6,543 4,361
Loan originators at period end .............................. 551 475 220 76 71
Number of branches at period end ............................ 63 53 28 12 8
- ----------
(1) Prior to September 29, 1999, the Company elected to be treated as an S
corporation for federal and state income tax purposes. Prior to the
Company's election to be treated as an S corporation, all federal taxes
were taxable to and paid by the Company's sole shareholder. Income taxes
for the years ended December 31, 1998, 1997, and 1996 reflect state income
taxes only.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company has made forward-looking statements in this annual report on
Form 10-K that are subject to risks and uncertainties. Forward-looking
statements include information concerning the Company's possible or assumed
future results of operations. Also, when the Company has used such words as
"believe," "expect," "anticipate," "plan," "could," "intend" or similar
expressions, it is making forward-looking statements. You should note that an
investment in the Company's securities involves certain risks and uncertainties
that could affect its future financial results. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in
"Business - Special Notes of Caution" and elsewhere in this report on Form 10-K.
The Company is an independent retail mortgage banking company primarily
engaged in the business of originating and selling residential mortgage loans.
The Company offers a broad array of residential mortgage products targeted
primarily to high-credit-quality borrowers over the Internet, as well as through
its 551 primarily commission-compensated loan originators. The Company operates
from 63 loan offices in New York, California, Illinois, Maryland, Virginia,
Pennsyvania, New Mexico, Connecticut, New Jersey, Arizona, Massachusetts,
Florida and Colorado. The Company operates primarily as a mortgage banker,
underwriting, funding and selling its loan products to more than 45 different
buyers. In January of 1999, the Company began marketing its mortgage products
over the Internet through its Internet site, MORTGAGESELECT.COM. Mortgage
products are originated online through arrangements with a number of popular Web
sites and through the Company's own Web site.
As a mortgage bank, the Company generates revenues through the origination
and subsequent resale of funded loans. These revenues are made up of net gain on
sale and interest income. Net gain on sale consists of the net gain on the sale
of mortgage loans and mortgage servicing rights, which are sold generally within
45 days of origination. This net gain is recognized based on the difference
between the combined selling price of the loan and its related servicing rights,
and the carrying value of the mortgage loans and servicing rights sold. Net gain
on sale also includes loan-related fees consisting of application,
documentation, commitment and processing fees paid by borrowers. Net interest
income consists of the difference between interest received by the Company on
its mortgage loans held for sale and interest paid by it under its credit
facilities.
The Company's expenses largely consist of:
o salaries and benefits paid to employees;
o occupancy and equipment costs;
o Internet-related expenses, including licensing and participation
fees and advertising costs;
o marketing, promotion and advertising costs; and
o data processing and communication costs.
A substantial portion of these expenses is variable in nature. Commissions paid
to loan originators are 100% variable, while other salaries and benefits
fluctuate from quarter to quarter based on the Company's assessment of the
appropriate levels of non-loan originator staffing, which correlates to the
current level of loan origination volume and the Company's perception of future
loan origination volume.
Seasonality affects the mortgage industry, as loan originations are
typically at their lowest levels during the first and fourth quarters due to a
reduced level of home buying activity during the winter months. Loan
originations generally increase during the warmer months, beginning in March and
continuing through October. As a result, the Company may experience higher
earnings in the second and third quarters and lower earnings in the first and
fourth quarters.
Interest rate and economic cycles also affect the mortgage industry, as
loan originations typically fall in rising interest rate environments. During
these periods, refinancing originations decrease, as higher interest rates
provide reduced economic incentives for borrowers to refinance their existing
mortgages. Due to stable and decreasing interest rate environments over recent
years, the Company's to-date performance may not be indicative of results in
rising interest rate environments. In addition, the Company's recent and rapid
growth may distort some of its ratios and financial statistics and may make
period-to-period comparisons difficult. In light of this growth, the Company's
to-date earnings performance may be of little relevance in
14
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of its results in future periods.
On December 30, 1999, the Company acquired Marina, a residential mortgage
lender headquartered in Irvine, California, with offices in California and
Arizona. The Company agreed to issue 753,420 shares of its common stock in
exchange for the 34,600 outstanding shares of Marina common stock and to pay
$2.5 million in cash over five years. The Company issued 201,043 shares on
October 15, 2000 and 157,985 shares on January 31, 2001 to the prior Marina
shareholders in accordance with the first and second earnout provisions of the
merger agreement and the prior shareholders may receive additional consideration
over the next four years based on two additional earnout provisions, which are
primarily based on derived earnings formulas. The Company accounted for this
transaction as a purchase transaction and generated goodwill of approximately
$4.5 million, which was originally to be amortized over 20 years. The results of
operations for Marina were not included in the Company's consolidated financial
statements as of December 31, 1999. Marina was merged into American Home, the
Company's wholly-owned subsidiary, on December 31, 2001.
On June 30, 2000, American Home acquired First Home, an Illinois
corporation, which was merged into AHM, the Company's wholly-owned subsidiary.
The shareholders of First Home will receive an aggregate of 489,760 shares of
American Home's common stock and $3.6 million over a period of two years. In
addition, the shareholders of First Home may receive additional consideration
consisting of cash and shares of common stock of the Company based on the future
results of the financial performance of the First Home division of the Company.
First Home is a full-service retail lender based in metropolitan Chicago. First
Home originates and purchases mortgage loans for sale in the secondary mortgage
market. It operates 24 branch offices in three states.
On October 31, 2000, American Home acquired the Roslyn Branches for
$509,478 and the assumption of certain liabilities, including the assumption of
the real property leases for the four acquired branch offices. These branch
offices are located in Maryland, Virginia, Connecticut and New York and are
full-service retail lending offices.
On March 30, 2001, the Company closed an asset purchase transaction with
Commonwealth. Under the agreement, the Company acquired five loan production
offices of ComNet. The terms of the transaction included a nominal amount of
cash consideration for the purchase of ComNet's mortgage application pipeline,
fixed assets and trademark, as well as the assumption of real property leases of
the five acquired branch offices, which are located in Pennsylvania and
Maryland.
In August of 2001, the Company entered into an agreement to acquire Valley
Bancorp and its wholly-owned subsidiary, Valley Bank, a federal savings bank
located in suburban Baltimore, Maryland, for a combination of cash and stock,
subject to certain adjustments. Under the terms of the definitive agreement, the
Company will pay 1.25 times Valley Bancorp's book value, or approximately $5.5
million. It is anticipated that the acquisition of Valley Bank will
substantially increase net interest income and provide a more stable and diverse
funding base. This transaction is subject to regulatory approval and is expected
to close by the end of the third quarter of 2002.
The Company may, from time to time, engage in other acquisitions. Any
acquisition made by the Company may result in potentially dilutive issuances of
equity securities, the incurrence of additional debt and the amortization of
expenses related to goodwill and other intangible assets. The Company also may
experience difficulties in integrating the operations, services, products and
personnel of acquired companies or the diversion of management's attention from
ongoing business operations.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, recently released by the Securities
and Exchange Commission, requires all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements.
MORTGAGE LOANS HELD FOR SALE - Mortgage loans held for sale represent
mortgage loans originated and held pending sale to interim and permanent
investors. The mortgages are carried at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements calculated on the aggregate loan basis. The Company separately
evaluates for impairment the estimated fair value of its commitments to lend. If
it is determined that impairment exists, the Company records a charge to
earnings in the current period. The Company generally sells whole loans without
servicing retained. Gains or losses on such sales are recognized at the time
legal title transfers to the investor based upon the difference between the
sales proceeds from the final investor and the basis of the loan sold, adjusted
for net deferred loan fees and certain direct costs and selling costs. The
Company defers net loan origination costs as a component of the loan balance on
the balance sheet. Such costs are not amortized and are recognized into income
as a component of the gain or loss upon sale.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company has developed risk
management programs and processes designed to manage market risk associated with
normal business activities.
15
Risk Management of the Mortgage Pipeline. The Company's mortgage-committed
pipeline includes interest rate lock commitments ("IRLCs") that have been
extended to borrowers who have applied for loan funding and meet certain defined
credit and underwriting criteria. Effective with the adoption of the Financial
Accounting Standards Board Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, the
Company classifies and accounts for the IRLCs as free-standing derivatives.
Accordingly, IRLCs are recorded at fair value with changes in fair value
recorded to current earnings. The Company uses other derivative instruments to
economically hedge the IRLCs, which are also classified and accounted for as
free-standing derivatives. Gains (losses) on IRLCs represent the change in value
from rate-lock inception to funding date.
Risk Management of Mortgage Loans Held for Sale. The Company's risk
management objective for its mortgage loans held for sale is to protect earnings
from an unexpected charge due to a decline in value. The Company's strategy is
to engage in a risk management program involving the use of mortgage forward
delivery contracts designated as fair value hedging instruments to hedge 100% of
its agency-eligible conforming and non-conforming loans. At the inception of the
hedge, the Company formally documents the relationship between the forward
delivery contracts and the mortgage inventory as well as its objective and
strategy for undertaking the hedge transactions. The notional amount of the
forward delivery contracts, along with the underlying rate and terms of the
contracts, are equivalent to the unpaid principal amount of the mortgage
inventory being hedged; hence, the forward delivery contracts effectively fix
the forward sales price and thereby substantially eliminate interest rate and
price risk to the Company.
Termination of Hedging Relationships. The Company employs a number of risk
management monitoring procedures to ensure that the designated hedging
relationships are demonstrating, and are expected to continue to demonstrate, a
high level of effectiveness. Hedge accounting is discontinued on a prospective
basis if it is determined that the hedging relationship is no longer effective
or expected to be effective in offsetting changes in fair value of the hedged
item. Additionally, the Company may elect to de-designate a hedge relationship
during an interim period and re-designate upon the rebalancing of a hedge
profile and the corresponding hedge relationship. When hedge accounting is
discontinued, the Company continues to carry the derivative instruments at fair
value with changes in their value recorded in earnings.
LOAN ORIGINATION FEES - The Company records loan fees, discount points and
certain direct origination costs as an adjustment of the cost of the loan. These
fees and costs are included in gain on sales of loans when the loan is sold.
INTEREST RECOGNITION - The Company accrues interest income as it is
earned. Loans are placed on a nonaccrual status when any portion of the
principal or interest is 90 days past due or earlier when concern exists as to
the ultimate collectibility of principal or interest. Loans are returned to an
accrual status when principal and interest become current and are anticipated to
be fully collectible. Interest expense is recorded on outstanding lines of
credit at a rate based on a spread to the LIBOR and the Fed Funds rate.
16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's statement of operations expressed as a percentage of
total revenues. Any trends illustrated in the following table are not
necessarily indicative of future results.
YEAR ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------ ------ ------
RESULTS OF OPERATIONS:
Gain on sales of mortgage loans ................................... 92.6% 90.5% 88.3%
Interest income - net ............................................. 7.1 5.6 6.9
Other ............................................................. 0.3 3.9 4.8
------ ------ ------
Total revenues ................................................ 100.0 100.0 100.0
------ ------ ------
Salaries, commissions and benefits, net ........................... 43.6 47.9 46.7
Occupancy and equipment ........................................... 6.4 9.6 9.8
Marketing and promotion ........................................... 4.9 7.0 7.1
Data processing and communications ................................ 3.5 4.8 4.6
Provision for loss ................................................ 0.3 0.2 0.1
Other ............................................................. 9.6 13.1 10.3
------ ------ ------
Total expenses ................................................ 68.3 82.6 78.6
------ ------ ------
Income before income taxes and minority interest in income
of in consolidated joint ventures ............................ 31.7 17.4 21.4
Income taxes ...................................................... 12.7 7.3 5.8
Minority interest in income of consolidated joint ventures ........ 0.8 0.8 0.1
------ ------ ------
Net income before cumulative effect of change in accounting
principle, as reported .................................... 18.2% 9.3% 15.5%
====== ====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Total Revenues. The Company's total revenues for the year ended December
31, 2001, compared to the year ended December 31, 2000, increased to $128.1
million from $58.3 million in 2000, an increase of $69.8 million, or 119.7%,
primarily as a result of strong origination growth and the subsequent sale of
loans and a generally favorable interest rate environment. Loan sales increased
to $7.5 billion in 2001 from $2.7 billion in 2000 (which amounts include $443.9
million and $272.8 million of originations in which the Company acted as broker,
respectively).
Net gain on the sales of mortgage loans increased to $118.6 million in
2001 from $52.7 million in 2000, an increase of $65.8 million, or 124.8%. The
increase primarily resulted from an increased loan volume, due in large part to
the First Home, ComNet and Roslyn acquisitions and Internet-generated loan
closings.
Interest income - net increased to $9.1 million in 2001 from $3.3 million
in 2000, an increase of $5.8 million, or 178.1%. The improvement resulted
primarily from an increase in loans held for sale and an in increase in the
Company's effective interest rate spread.
Other income totaled $401,000 in 2001 compared to $2.3 million in 2000.
Other income primarily consists of volume incentive bonuses received from loan
purchasers. The decline was a result of the Company selling loans to loan buyers
that offer high prices, but do not offer volume bonuses.
Salaries, Commissions and Benefits. Salaries, commissions and benefits
increased to $55.8 million in 2001 from $27.9 million in 2000, an increase of
$27.9 million, or 100.0%. The increase was largely due to the inclusion of a
full year of expenses for First Home and the Roslyn Branches, and the inclusion
of the ComNet Branches following their acquisition, increased staffing levels
and overtime at the Company's corporate headquarters and increased staffing
levels at MORTGAGESELECT.COM'S call centers. As of December 31, 2001, the
Company employed 1,325 people compared to 1,006 people at December 31, 2000.
Occupancy and Equipment Expenses. Occupancy and equipment expenses
increased to $8.3 million in 2001 from $5.6 million in 2000, an increase of $2.7
million, or 47.7%. The increase in costs reflects the inclusion of First Home
and the Roslyn Branches for a full year and the acquisition of the ComNet
Branches, opening of new community loan offices and greater depreciation charges
as a result of the Company's increased investments in computer networks.
17
Marketing and Promotion Expenses. Marketing and promotion expenses
increased to $6.3 million in 2001 from $4.1 million in 2000, an increase of $2.2
million, or 55.6%. Increased advertising expenses in support of retail
operations and our MORTGAGESELECT.COM Internet Web site accounted for the
increase.
Data Processing and Communications. Data processing and communication
costs increased to $4.4 million in 2001 from $2.8 million in 2000, an increase
of $1.6 million, or 57.2%. The increase was a result of operating First Home and
the Roslyn Branches for a full year, the acquisition of the ComNet Branches, the
growth at MORTGAGESELECT.COM'S call centers and the opening of new community
loan offices.
Other Expenses. Other expenses increased to $12.3 million in 2001 from
$7.6 million in 2000, an increase of $4.7 million, or 61.7%. These expenses,
which consist generally of office supplies, travel, professional fees and
insurance, have increased as a result of the growth at MORTGAGESELECT.COM'S call
centers, the inclusion of a full year of expenses for First Home and the Roslyn
Branches, and the inclusion of the ComNet Branches following their acquisition,
new office openings and higher loan production.
Income Taxes. Income taxes increased to $16.3 million in 2001 from $4.3
million. in 2000, an increase of $12.0 million, or 280.1%. The increase was
primarily due to increased revenue.
Net Income. Net income, before cumulative effect of change in accounting
principle, increased to $23.3 million in 2001 from $5.4 million in 2000, an
increase of $17.9 million, or 332.3%. The increase was generally a result of an
increase in loan volume, due in large part to a favorable interest rate
enviornment, the inclusion of First Home and the Roslyn Branches for a full
year, the ComNet acquisition and Internet-generated loan closings.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Total Revenues. The Company's total revenues for the year ended December
31, 2000, compared to the year ended December 31, 1999, increased to $58.3
million from $24.9 million in 1999, an increase of $33.4 million, or 134.4%,
primarily as a result of strong origination growth and the subsequent sale of
loans and a generally favorable interest rate environment. Loan sales increased
to $2.7 billion in 2000 from $1.3 billion in 1999 (which amounts include $272.8
million and $64.6 million of originations in which the Company acted as broker,
respectively).
Net gain on the sales of mortgage loans increased to $52.8 million in 2000
from $22.0 million in 1999, an increase of $30.8 million, or 140.2%. The
increase was generally a result of an increase in loan volume, due in large part
to the Marina and First Home acquisitions and increased Internet-generated loan
closings.
Interest income - net increased to $3.3 million in 2000 from $1.7 million
in 1999, an increase of $1.6 million, or 92.0%. The improvement resulted from
increased loan originations and from more efficient cash management, including
the implementation of sweep accounts, which use existing cash balances overnight
to reduce outstanding borrowings.
Other income increased to $2.3 million in 2000 from $1.2 million in 1999,
an increase of $1.1 million, or 89.6%. The increase was due primarily to volume
incentive bonuses from various investors. These bonuses represent payments
received by the Company when it meets certain volume targets specified in its
various agreements with loan purchasers. The Company accrues volume incentive
income when targets are reached.
Salaries, Commissions and Benefits. Salaries, commissions and benefits
increased to $27.9 million in 2000 from $11.6 million in 1999, an increase of
$16.3 million, or 140.2%. The increase was largely due to the inclusion of
expenses of Marina, First Home and the Roslyn Branches following these
acquisitions and increased staffing levels related to our MORTGAGESELECT.COM
Internet Web site. As of December 31, 2000, the Company employed 1,006 people
compared to 543 people at December 31, 1999.
Occupancy and Equipment Expenses. Occupancy and equipment expenses
increased to $5.6 million in 2000 from $2.4 million in 1999, an increase of $3.2
million, or 129.9%. The increase in costs is reflective of the acquisitions of
Marina, First Home and the Roslyn Branches, the opening of new community loan
offices and Internet call centers and greater depreciation charges as a result
of the Company's increased investments in computer networking.
Marketing and Promotion Expenses. Marketing and promotion expenses
increased to $4.1 million in 2000 from $1.8 million in 1999, an increase of
$2.3, or 128.7%. Increased advertising expenses in support of retail operations
and our MORTGAGESELECT.COM Internet Web site accounted for the increase.
Data Processing and Communications. Data processing and communication
costs increased to $2.8 million in 2000 from $1.1 million in 1999, an increase
of $1.7 million, or 149.4%. The increase was a result of the acquisitions of
Marina, First
18
Home and the Roslyn Branches, the growth in our MORTGAGESELECT.COM Internet Web
site and the opening of new office locations.
Other Expenses. Other expenses increased to $7.6 million in 2000 from $2.5
million in 1999, an increase of $5.1 million, or 199.1%. These expenses, which
consist generally of office supplies, travel, professional fees and insurance,
have increased as a result of the growth in our MORTGAGESELECT.COM Internet Web
site, the acquisitions of Marina, First Home and the Roslyn Branches, new office
openings and higher employment levels.
Income Taxes. Income taxes increased to $4.3 million in 2000 from $1.4
million in 1999, an increase of $2.8 million, or 196.1%. The increase was
primarily due to increased revenue and a change in the tax status of AHM. Prior
to September 29, 1999, AHM elected to be treated as an S corporation. Income
taxes for 1999 also include a non-cash, non-recurring tax expense of $625,000
resulting from this change.
Net Income. Net income increased to $5.4 million in 2000 from $3.9 million
in 1999, an increase of $1.5 million, or 39.6%. The increase was generally a
result of an increase in loan volume, due in large part to the Marina and First
Home acquisitions and increased Internet-generated loan closings.
LIQUIDITY AND CAPITAL RESOURCES
To originate a mortgage loan, the Company draws against a $310 million
pre-purchase facility with UBS Paine Webber ("Paine Webber"), a $100 million
facility with Residential Funding Corporation ("RFC"), and a facility of $75
million with Morgan Stanley Dean Witter Mortgage Capital, Inc. ("Morgan
Stanley"). These facilities are secured by the mortgages owned by the Company,
and by certain of its other assets. Advances drawn under the facilities bear
interest at rates that vary depending on the type of mortgages securing the
advances. These loans are subject to sublimits, advance rates and terms that
vary depending on the type of securing mortgages and the ratio of the Company's
liabilities to its tangible net worth. At March 21, 2002, the aggregate
outstanding balance under the warehouse facilities was $205 million, the
aggregate outstanding balance in drafts payable was $8 million and the aggregate
maximum amount available for additional borrowings was $280 million.
The documents governing the Company's warehouse facilities contain a
number of compensating balance requirements and restrictive financial and other
covenants that, among other things, require the Company to maintain a minimum
ratio of total liabilities to tangible net worth and maintain a minimum level of
tangible net worth, liquidity, stockholder's equity and leverage ratios, as well
as to comply with applicable regulatory and investor requirements. The facility
agreements also contain covenants limiting the ability of the Company's
subsidiary to:
o transfer or sell assets;
o create liens on the collateral; and
o incur additional indebtedness,
without obtaining the prior consent of the lenders, which consent may not be
unreasonably withheld. These limits on its subsidiary may in turn restrict
American Home's ability, as the holding company, to pay cash or stock dividends
on its stock.
In addition, under the Company's warehouse facilities, the Company will
not continue to finance a mortgage loan that it holds if:
o the loan is rejected as "unsatisfactory for purchase" by the
ultimate investor and has exceeded its permissible 120-day warehouse
period;
o the Company fails to deliver the applicable mortgage note or other
documents evidencing the loan within the requisite time period;
o the underlying property that secures the loan has sustained a
casualty loss in excess of 5% of its appraised value; or
o the loan ceases to be an eligible loan (as determined pursuant to
the warehousing agreement).
In addition to the Paine Webber, RFC and Morgan Stanley warehouse
facilities, the Company has purchase and sale agreements with Fannie Mae and
Paine Webber. Pursuant to these arrangements, the Company obtains commitments
from the ultimate buyer, which may be a bank, a pension fund or an investment
bank, to purchase its loans. These loans are then sold together with the
commitment from the ultimate buyer to one of the two institutions above, who
subsequently take
19
responsibility for consummating the final transaction. These agreements allow
the Company to accelerate the sale of its mortgage loan inventory resulting in a
more effective use of the warehouse facility. The combined capacity available
under the Company's purchase and sale agreements is $603 million. Amounts sold
and being held under these agreements at December 31, 2001 and December 31, 2000
were $499 million and $259 million, respectively. Amounts so held under these
agreements at March 21, 2002 were $352 million. At March 21, 2002, the maximum
combined amount was $603 million. These agreements are not committed facilities
and may be terminated at the discretion of the counterparties.
The Company makes certain representations and warranties under the
purchase and sale agreements regarding, among other things, the loans'
compliance with laws and regulations, their conformity with the ultimate
investor's underwriting standards and the accuracy of information. In the event
of a breach of these representations or warranties or in the event of an early
payment default, the Company may be required to repurchase the loans and
indemnify the investor for damages caused by that breach. The Company has
implemented strict procedures to ensure quality control and conformity to
underwriting standards and minimize the risk of being required to repurchase
loans. In addition, an outside firm performs quality control tests for it.
Please see "Business--Quality Control." The Company has been required to
repurchase loans it has sold from time to time; however, these repurchases have
not had a material impact to the Company.
As of December 31, 2001, the Company's warehouse facility borrowings were
$351.5 million and its outstanding drafts payable were $35.4 million, compared
to $130.5 million in borrowings and $8.3 million in drafts payable as of
December 31, 2000. At December 31, 2001, its loans held for sale were $419.9
million compared to $144.0 million at December 31, 2000.
Cash and cash equivalents increased to $26.4 million at December 31, 2001
from $6.0 million at December 31, 2000.
The Company's primary sources of cash and cash equivalents during the year
ended December 31, 2001 were as follows:
o $ 6.0 million increase in accrued expenses and other liabilities;
o $ 27.0 million increase in drafts payable;
o $ 27.2 million proceeds from issuance of capital stock; and
o $221.0 million increase in warehouse lines of credit.
The Company's primary uses of cash and cash equivalents during the year
ended December 31, 2001 were as follows:
o $ 1.4 million increase in prepaid expenses and security deposits;
o $ 1.1 million increase in loans held for investment;
o $ 2.8 million for the acquisition of businesses;
o $ 3.6 million to purchase furniture and office and computer
equipment for new branch offices;
o $ 14.9 million increase in accounts receivable; and
o $275.9 million net increase in mortgage loans held for sale.
Cash and cash equivalents increased to $6.0 million at December 31, 2000 from
$3.4 million at December 31, 1999.
The Company's primary sources of cash and cash equivalents during the year ended
December 31, 2000 were as follows:
o $ 1.2 million decrease in prepaid expenses and security deposits;
o $ 4.9 million increase in drafts payable; and
o $71.0 million increase in warehouse lines of credit.
20
The Company's primary uses of cash and cash equivalents during the year
ended December 31, 2000 were as follows:
o $ 0.9 million increase in accounts receivable;
o $ 2.1 million for the acquisition of businesses;
o $ 2.1 million to purchase furniture and office and computer
equipment for new branch offices;
o $ 5.3 million decrease in accounts payable, net of assumed
liabilities; and
o $75.6 million net increase in mortgage loans held for sale.
The Company's ability to originate loans depends in large part on its
ability to sell these mortgage loans at par or for a premium in the secondary
market so that it may generate cash proceeds to repay borrowings under its
warehouse facility. The value of the Company's loans depends on a number of
factors, including:
o interest rates on the Company's loans compared to market interest
rates;
o the borrower credit risk classification;
o loan-to-value ratios; and
o general economic conditions.
The Company's existing cash balances and funds available under its working
capital credit facilities, together with cash flows from operations, are
expected to be sufficient to meet its liquidity requirements for at least the
next 12 months. The Company does, however, expect to continue its expansion and
expects that eventually it will have to arrange for additional sources of
capital through the issuance of debt or equity or additional bank borrowings.
The Company has no commitments for any additional financings, and it cannot
ensure that it will be able to obtain any additional financing at the times
required and on terms and conditions acceptable to it. If the Company fails to
obtain needed additional financing, its growth could slow and operations could
be affected.
INFLATION
For the period 1997 to 2001, inflation has been relatively low and the
Company believes that inflation has not had a material effect on its results of
operations. To the extent inflation increases in the future, interest rates will
also likely rise, which would impact the number of loans the Company originates.
This impact would adversely affect the Company's future results of operations.
COMMITMENTS
The Company had the following commitments (excluding derivative financial
instruments) at December 31, 2001:
LESS THAN AFTER
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
Warehouse facilities $419,900,181 $419,900,181 $ -- $ -- $ --
Operating leases 20,265,266 4,576,750 6,969,465 4,973,070 3,745,981
Notes payable 3,014,314 752,796 1,240,558 167,264 853,704
RISK MANAGEMENT
The Company depends on substantial borrowings to conduct its business.
Movements in interest rates can pose a major risk to the Company in either a
rising or declining interest rate environment. When interest rates rise, loans
held for sale and any applications in process with agreed upon rates decrease in
value. To preserve the value of such loans or applications in process with
agreed upon rates, the Company executes mandatory loan sale agreements (forward
sales of mortgage-backed securities) to be settled at future dates with fixed
prices. However, when interest rates decline, customers may choose to abandon
their applications. In that case, the Company may be required to purchase loans
at current market prices to fulfill existing mandatory loan sale agreements,
thereby incurring losses upon sale. The Company uses an interest rate hedging
21
program to attempt to manage these risks. Through this program, the Company
purchases and forward sells mortgage-backed securities and acquires options on
mortgage and treasury futures.
Although the Company generally sells its loans within 45 days after
funding, there may be unexpected delays that could increase its interest rate
exposure. Even though the Company uses hedging and other strategies to minimize
its exposure to interest rate risks, no hedging or other strategy can completely
protect it. Moreover, hedging strategies involve transaction and other costs.
The Company cannot ensure that its hedging strategy and the hedges that it makes
will adequately offset the risk of interest rate volatility or that its hedges
will not result in losses.
The Company performs daily analysis to determine its risk exposures under
various interest rate scenarios and manages these risks through a combination of
forward sales of mortgage-backed securities and options on treasury futures. All
derivatives are obtained for hedging (or other than trading) purposes, and
management evaluates the effectiveness of the hedges on an ongoing basis.
The following tables summarize the Company's interest rate sensitive
instruments:
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
Instruments:
Commitments to fund mortgages at agreed-upon rates............. $718,040,976 $6,498,114 $241,926,526 $7,453,609
Forward delivery commitments.............................. 575,786,980 291,449 224,172,000 (3,738,524)
Option contracts to buy securities........................ 175,000,000 161,750 10,000,000 167,150
In the event that the Company does not deliver into the forward delivery
commitments or exercise its option contracts, the instruments can be settled on
a net basis. Net settlement entails paying or receiving cash based upon the
change in market value of the existing instrument. All forward delivery
commitments and option contracts to buy securities are to be contractually
settled within six months of the balance sheet date.
The following describes the methods and assumptions the Company uses in
estimating fair values of the above financial instruments:
o Fair value estimates are made as of a specific point in time based
on estimates using present value or other valuation techniques.
These techniques involve uncertainties and are significantly
affected by the assumptions used and the judgments made regarding
risk characteristics of various financial instruments, discount
rates, estimates of future cash flows, future expected loss
experience, and other factors.
o Changes in assumptions could significantly affect these estimates
and the resulting fair values. Derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many
cases, could not be realized in an immediate sale of the instrument.
Also, because of differences in methodologies and assumptions used
to estimate fair values, the fair values used by the Company should
not be compared to those of other companies.
o The fair value of commitments to fund with agreed upon rates are
estimated using the fees and rates currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the
counterparties.For fixed rate loan commitments, fair value also
considers the difference between current market interest rates and
the existing committed rates.
o The fair value of these instruments is estimated using current
market prices for dealer or investor commitments relative to the
Company's existing positions.
The Company's hedging program contains an element of risk because the
counterparties to its mortgage and treasury securities transactions may be
unable to meet their obligations. While the Company does not anticipate
nonperformance by any counterparty, it is exposed to potential credit losses in
the event the counterparty fails to perform. The Company's exposure to credit
risk in the event of default by a counterparty is the difference between the
contract and the current market price. The Company minimizes its credit risk
exposure by limiting the counterparties to well-capitalized banks and securities
dealers who meet established credit and capital guidelines.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
These
22
Statements make significant changes to the accounting for business combinations,
goodwill, and intangible assets. SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations. In addition, it further
clarifies the criteria for recognition of intangible assets separately from
goodwill. This statement is effective for business combinations completed after
June 30, 2001.
SFAS 142 discontinues the practice of amortizing goodwill and indefinite
lived intangible assets and initiates an annual review for impairment.
Impairment would be examined more frequently if certain indicators of such are
encountered. Intangible assets with a determinable useful life will continue to
be amortized over that period. Recorded goodwill and intangible assets will be
affected when SFAS 142 is adopted effective January 1, 2002, however, the
Company has not completed its assessment of the impact.
The Financial Accounting Standards Board is considering a number of
mortgage banking industry-related issues concerning the implementation of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The ultimate conclusions reached concerning
these issues could result in material changes to the recorded carrying values of
the Company's derivative instruments, which would have a significant impact on
its reported earnings.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required to be included in this Item 7A regarding
Quantitative and Qualitative Disclosures about Market Risk is included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management."
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The information required by this Item 8 is incorporated by reference to
the Company's Consolidated Financial Statements and Independent Auditors' Report
included in this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company intends to file with the Securities and Exchange Commission a
definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A,
which will involve the election of directors, within 120 days of the end of the
year covered by this Form 10-K. Information regarding directors of the Company
will appear under the caption "Election of Directors" in the Proxy Statement for
the Company's 2002 Annual Meeting of Stockholders, and is incorporated herein by
reference. Information regarding executive officers of the Company will appear
under the caption "Executive Officers" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear under the caption
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information to be included under the caption "Securities Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information to be included under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with this Report.
The following documents are filed as part of this Report on Form 10-K.
1. Financial Statements
The information called for by this paragraph is set forth in the Financial
Statements and Independent Auditors' Report beginning at page F-1 of this
Form 10-K.
2. Financial Statement Schedules
None.
3. Exhibits
The information called for by this paragraph is contained in the Index to
Exhibits of this Report on Form 10-K, which is incorporated herein by
reference.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2001, the Company did not file any
Reports on Form 8-K with the Securities and Exchange Commission.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, American Home Mortgage Holdings, Inc., a
corporation organized and existing under the laws of the State of Delaware, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 29th day of March, 2002.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
By: /s/ Michael Strauss
--------------------------------------------
Name: Michael Strauss
Title: President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Michael Strauss Chairman of the Board, President &
- -------------------------------------------- Chief Executive Officer
Michael Strauss (Principal Executive Officer) March 29, 2002
/s/ Richard D. Silver Controller
- -------------------------------------------- (Principal Financial Officer and
Richard D. Silver Principal Accounting Officer) March 29, 2002
/s/ John A. Johnston
- --------------------------------------------
John A. Johnston Director March 29, 2002
/s/ Nicholas R. Marfino
- --------------------------------------------
Nicholas R. Marfino Director March 29, 2002
/s/ Michael A. McManus Jr.
- --------------------------------------------
Michael A. McManus Jr. Director March 29, 2002
/s/ C. Cathleen Raffaeli
- --------------------------------------------
C. Cathleen Raffaeli Director March 29, 2002
/s/ Leonard Schoen, Jr.
- --------------------------------------------
Leonard Schoen, Jr. Director March 29, 2002
/s/ Kenneth Slosser
- --------------------------------------------
Kenneth Slosser Director March 29, 2002
26
INDEX TO FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE HOLDINGS, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER
31, 2001:
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2
Consolidated Statements of Income for the Years Ended December
31, 2001, 2000 and 1999 F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2001, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Home Mortgage Holdings, Inc.
We have audited the accompanying consolidated balance sheets of American Home
Mortgage Holdings, Inc. and its subsidiaries (the "Company") as of December 31,
2001 and 2000, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of American Home Mortgage Holdings,
Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their 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.
March 20, 2001
F-1
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Cash and cash equivalents $ 26,392,590 $ 6,005,392
Accounts receivable 23,877,352 8,982,453
Mortgage loans held for sale- net 419,900,181 143,967,142
Mortgage loans held for investment - net 1,305,902 260,243
Real estate owned 438,533 355,817
Mortgage servicing rights - net 45,551 37,014
Premises and equipment - net 9,072,133 7,152,454
Prepaid expenses and security deposits 3,218,545 1,835,279
Goodwill 16,874,185 14,936,582
------------ ------------
TOTAL ASSETS $501,124,972 $183,532,376
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse lines of credit $351,453,879 $130,483,671
Drafts payable 35,359,821 8,349,482
Accrued expenses and other liabilities 15,108,385 9,065,255
Income taxes payable 12,951,628 2,358,254
Deferred income taxes 4,042,787 2,110,150
------------ ------------
Notes payable 3,014,314 3,972,281
------------ ------------
Total liabilities 421,930,814 156,339,093
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12) -- --
MINORITY INTEREST 577,392 581,418
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 per share, 1,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 per share par value, 19,000,000 shares authorized,
11,991,200 and 8,985,584 shares issued and outstanding in 2001 and
2000, respectively 119,912 89,855
Additional paid-in capital 47,952,517 20,462,791
Retained earnings 30,544,337 6,059,219
------------ ------------
Total stockholders' equity 78,616,766 26,611,865
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $501,124,972 $183,532,376
============ ============
See notes to consolidated financial statements.
F-2
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Gain on sales of mortgage loans $118,553,988 $52,730,668 $21,957,076
Interest income - net 9,098,292 3,271,064 1,703,498
Other 400,685 2,278,321 1,201,436
------------ ----------- -----------
Total revenues 128,052,965 58,280,053 24,862,010
------------ ----------- -----------
EXPENSES:
Salaries, commissions and benefits - net 55,778,233 27,893,827 11,611,275
Occupancy and equipment 8,249,806 5,583,648 2,428,870
Marketing and promotion 6,312,777 4,058,105 1,774,169
Data processing and communications 4,441,850 2,825,895 1,132,970
Provision for loss 352,463 127,000 27,967
Other 12,331,139 7,625,057 2,549,636
------------ ----------- -----------
Total expenses 87,466,268 48,113,532 19,524,887
------------ ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
IN INCOME OF CONSOLIDATED JOINT VENTURES 40,586,697 10,166,521 5,337,123
INCOME TAXES 16,252,852 4,266,727 1,441,125
------------ ----------- -----------
INCOME BEFORE MINORITY INTEREST IN INCOME OF
CONSOLIDATED JOINT VENTURES 24,333,845 5,899,794 3,895,998
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES 1,027,912 508,344 35,112
------------ ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 23,305,933 5,391,450 3,860,886
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAXES 2,142,552 -- --
------------ ----------- -----------
NET INCOME $ 25,448,485 $ 5,391,450 $ 3,860,886
============ =========== ===========
Per share data:
Basic before cumulative effect of change in accounting principle $ 2.25 $ 0.63 $ 0.69
Basic after cumulative effect of change in accounting principle $ 2.45 $ 0.63 $ 0.69
Diluted before cumulative effect of change in accounting principle $ 2.14 $ 0.63 $ 0.69
Diluted after cumulative effect of change in accounting principle $ 2.34 $ 0.63 $ 0.69
Weighted average number of shares - basic 10,373,858 8,579,859 5,595,251
Weighted average number of shares - diluted 10,883,403 8,579,859 5,602,587
See notes to consolidated financial statements.
F-3
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
BALANCE, DECEMBER 31, 1998 $ 50,000 $ 267,600 $ 5,606,507 $ 5,924,107
Net income -- -- 3,860,886 3,860,886
Distributions -- -- (994,013) (994,013)
S corporation distribution note -- -- (7,805,611) (7,805,611)
Issuance of common stock,
initial public offering - net 25,000 12,139,180 -- 12,164,180
Issuance of common stock,
purchase of Marina Mortgage Co., Inc. 7,534 4,842,610 -- 4,850,144
-------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1999 82,534 17,249,390 667,769 17,999,693
Net income -- -- 5,391,450 5,391,450
Issuance of common stock,
purchase of First Home Mortgage Corp. 4,898 2,206,462 -- 2,211,360
Issuance of common stock,
purchase of Marina Mortgage Co., Inc. 2,010 968,019 -- 970,029
Issuance of common stock,
Omnibus Stock Plan 333 -- -- 333
Issuance of common stock,
purchase of Coastline 80 38,920 -- 39,000
-------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 2000 89,855 20,462,791 6,059,219 26,611,865
Net income -- -- 25,448,485 25,448,485
Issuance of common stock,
purchase of Marina Mortgage Co., Inc. 1,580 968,449 -- 970,029
Issuance of common stock,
Omnibus Stock Plan - net of income taxes 2,705 3,309,726 -- 3,312,431
Issuance of common stock, warrants 1,750 1,363,250 -- 1,365,000
Issuance of common stock, secondary
stock offering 24,022 21,848,301 -- 21,872,323
Dividends paid -- -- (963,367) (963,367)
-------- ----------- ------------ -------------
Balance, December 31, 2001 $119,912 $47,952,517 $ 30,544,337 $ 78,616,766
======== =========== ============ =============
See notes to consolidated financial statements.
F-4
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,448,485 $ 5,391,450 $ 3,860,886
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,568,590 1,562,334 378,282
Provision for loss 352,463 127,000 27,967
Origination of mortgage loans held for sale (7,328,170,495) (2,769,766,933) (1,283,174,874)
Proceeds on sale of mortgage loans 7,052,237,440 2,694,153,009 1,265,275,964
Increase in income taxes payable 10,593,374 1,511,791 846,463
Deferred income taxes 1,932,637 1,578,125 532,025
Other 26,378 (6,667) (1,000)
(Increase) decrease in operating assets:
Accounts receivable (14,894,899) (893,109) (4,007,135)
Prepaid expenses and security deposits (1,383,266) 1,167,511 (1,194,400)
Increase (decrease) in operating liabilities: