Form 10-K for WMF GROUP LTD filed on Mar 24 2000

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

/x/

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 1999

/ /

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES ACT OF 1934

For the transition period from to

Commission File Number 000-22567

The WMF Group, Ltd.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

54-1647759

(I.R.S. Employer

identification no.)

1593 Spring Hill Road, Suite 400

Vienna, Virginia

(Address of principal executive offices)

22182

(Zip code)

Registrant's telephone number, including area code (703) 610-1400

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $.01 par value

The Nasdaq Stock Market

Securities Registered pursuant to Section 12(g) 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 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/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best

of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K.

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $76.7 million based on the closing price of such

shares on The Nasdaq National Market as of March 17, 2000.

As of March 17, 2000 there were 10,959,321 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF STOCKHOLDERS

IS INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.

The WMF GROUP, LTD.

FORM 10-K

TABLE OF CONTENTS

Item No.

Page

PART I

Business

Properties

Legal Proceedings

Submission of Matters to a Vote of Security Holders

PART II

Market for Registrant's Common Equity and Related Stockholder Matters

Selected Financial Data

Management's Discussion and Analysis of Financial Condition and Results of Operations

7A.

Quantitative and Qualitative Disclosure about Market Risk

Financial Statements and Supplementary Data

Changes in and disagreements with Accountants on Accounting and Financial Disclosure

PART III

10.

Directors and Executive Officers of the Registrant

11.

Executive Compensation

12.

Security Ownership of Certain Beneficial Owners and Management

13.

Certain Relationships and Related Transactions

PART IV

14.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

A Warning About Forward Looking Statements

This report may contain "forward-looking statements." Any statement in this report, other than a statement of historical fact, may be a forward-looking

statement.

You can generally identify forward-looking statements by looking for words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or

"continue." Variations on those or similar words, or the negatives of such words, also may indicate forward-looking statements.

Although the Company believes that the expectations reflected in this report are reasonable, the Company cannot assure you that its expectations will be

correct. The Company has included a discussion entitled "Risk Factors" in this report, disclosing important factors that could cause its actual results to differ

materially from its expectations. If in the future you hear or read any forward-looking statements concerning the Company, you should refer to these Risk

Factors.

The forward-looking statements in this report are accurate only as of its date. If the Company's expectations change, or if new events, conditions or

circumstances arise, the Company is not required to, and may not, update or revise any forward-looking statement in this report.

PART I

Item 1. Business

Company Overview

The WMF Group, Ltd. (the "Company") is one of the largest commercial mortgage financial services companies in the United States, as measured by

servicing portfolio size, according to a 1999 survey published by the Mortgage Bankers Association of America (the "MBA"). The Company has been the

nation's largest originator of Federal National Mortgage Association ("Fannie Mae") and Federal Housing Administration ("FHA") insured multifamily and

healthcare loans and has originated more than $11 billion in conventional and FHA-insured multifamily and commercial loans since 1996. The Company had a

servicing portfolio of approximately $13.4 billion at December 31, 1999. The Company has 271 employees and operates 18 offices nationwide. The Company has

three principal lines of business: (i) mortgage banking, which includes the origination and servicing of loans; (ii) advisory services, which includes the

investment and asset management of commercial mortgage funds; and (iii) capital markets.

The WMF Group, Ltd. is a Delaware corporation formed in October 1992 under the name "WMF Holdings, Inc." Originally, the Company was created to hold

the operations of WMF/Huntoon, Paige Associates Limited ("WMF Huntoon Paige") and WMF Washington Mortgage Corp. ("WMF Washington

Mortgage"). WMF Washington Mortgage, WMF Carbon Mesa Advisors, Inc. ("WMF Carbon Mesa") and WMF CommQuote, Inc. ("WMF CommQuote"),

formerly known as WMF Capital Corp., are wholly-owned subsidiaries of the Company. WMF Huntoon Paige is a wholly-owned subsidiary of WMF

Washington Mortgage.

WMF Huntoon Paige has originated and serviced multifamily and healthcare mortgages insured by FHA under various owners and under various names

since 1979. WMF Washington Mortgage acquired WMF Huntoon Paige in 1991. WMF Washington Mortgage has originated and serviced multifamily and

commercial mortgages under various owners and names since 1984.

On April 1, 1996, NHP Incorporated ("NHP") purchased the Company and renamed it "NHP Financial Services, Inc." In early 1997, NHP was acquired by

Apartment Investment and Management Co. ("AIMCO"). As a condition of that purchase, AIMCO required NHP to spin off the Company. On December 8,

1997, the Company became an independent, publicly traded company. The Company's primary shareholders are Demeter Holdings Corporation ("Demeter"),

Phemus Corporation ("Phemus") and Capricorn Investors II, L.P. ("Capricorn"). Demeter and Phemus are affiliates of Harvard Private Capital Holdings, Inc.

("Harvard").

Industry Overview

The Company believes that the financing and servicing of commercial and multifamily real estate offers significant growth opportunities. Commercial and

multifamily real estate encompasses a wide spectrum of assets including multifamily, office, industrial, retail and hospitality. These assets are financed by an

estimated $1.4 trillion of outstanding commercial real estate debt. During the past ten years, total commercial mortgage originations have averaged

approximately $150 billion annually, of which approximately 75 percent consists of non-multifamily assets. The Company anticipates that on a stabilized basis,

the commercial real estate market will require debt financing for existing properties of approximately $100 to $120 billion annually, plus additional amounts for

new construction.

Mortgage banking involves the origination and servicing of mortgage loans. Commercial mortgage banks have arranged a significant portion of the debt

financing for commercial real estate. Historically, commercial mortgage banks originated and serviced loans for life insurance companies in specified geographic

regions. In addition to providing loans to life insurance companies, some commercial mortgage banks acted as originators for Government Sponsored

Enterprises ("GSEs") such as Fannie Mae and Federal Home Loan Mortgage Corporation ("Freddie Mac"), and also acted as brokers for other lenders. As a

result, a fragmented industry has developed which is comprised of small local and regional firms.

However, since the early 1990s the commercial mortgage banking industry has experienced significant change, in part due to the growth in commercial

mortgage securitization, the expanded involvement of GSEs, increased borrower sophistication and advances in information technology. Many of the existing

firms lack the capital, technology and financial sophistication to compete effectively in today's rapidly changing market. Accordingly, the Company believes

the commercial mortgage banking industry is going through a period of consolidation similar to that experienced in the residential mortgage industry. Although

consolidation provides significant growth opportunities for the Company, certain risks are also involved. See "Risk Factors—The Company May Be Unable to

Complete Acquisitions or Enter into New Business Lines."

Strategic Objectives

Because it has broad geographic scope, multiple investor relationships, underwriting expertise, operating systems and product development capabilities, the

Company believes that it is well-positioned to compete effectively in the commercial real estate financing industry. Technological demands, large and

sophisticated infrastructure for real estate underwriting and risk evaluation, and rapid market changes increasingly characterize this industry. The Company

believes that these developments will lead to the creation of large and sophisticated mortgage enterprises offering a wide spectrum of commercial finance

products and services. The Company seeks to use its existing infrastructure and market position to increase market share of its established businesses and to

expand into related businesses.

The Company seeks to increase reported earnings and cash flow through (i) acquisitions and internal growth, (ii) design and delivery of new mortgage

products, including structured loan products and participating loan products, (iii) expansion into related businesses, such as managing commercial mortgage

investment funds, and (iv) diversification of fee income sources.

Acquisitions. The Company has pursued a strategy of acquiring (1) multifamily and commercial mortgage businesses that either serve key real estate markets

in the United States or provide specialized services that enhance its product line, and (2) additional servicing portfolios. In the past, the Company has sought

to acquire companies with active and productive loan origination staffs, significant market share and servicing portfolios of $250 million or more and expects to

continue to do so in the future, to the extent adequate capital and attractive opportunities are available.

Since 1996, the Company has made six acquisitions (the "Acquisitions"):

•During 1996, the Company increased its portfolio of serviced mortgages by 40.9 percent from $4.4 billion to $6.2 billion, primarily as a result of

two acquisitions. On May 13, 1996, WMF Huntoon Paige purchased a portion of the loan production pipeline and servicing, as well as certain

other assets, of American Capital Resources Investment Corp. ("ACR") for approximately $4.2 million, plus potential future payments based on

realization of loans closed from the pipeline through August 1997.

•On December 31, 1996, WMF Washington Mortgage acquired all of the common stock of Detroit-based Proctor & Associates of Michigan

("Proctor"), the 37th largest commercial mortgage banking firm in the United States based on a survey by the MBA. WMF Washington

Mortgage paid approximately $3.7 million in cash to acquire Proctor. The acquisition brought to the Company a $1.1 billion loan servicing

portfolio of multifamily, retail and office building mortgages, as well as 17 active correspondent relationships with life insurance companies.

•On April 15, 1997, WMF Washington Mortgage purchased substantially all of the mortgage banking assets and liabilities of Askew Investment

Company ("Askew") in Dallas, Texas for $5.6 million, excluding transaction costs (82 percent of which was paid at closing and the remaining

18 percent of which was paid in the form of earnouts upon the attainment of certain performance objectives over a 36-month period). The

acquisition increased the Company's mortgage servicing portfolio and gave the Company access to the traditional insurance company

whole-loan buyers in the markets served by Askew. The purchase also provided the Company with a new source of loans it intended for

securitization through the Company's capital market relationships.

•On November 5, 1997, WMF Washington Mortgage purchased 100 percent of the outstanding stock of The Robert C. Wilson Company and its

Arizona subsidiary (collectively, "Robert C. Wilson") for a purchase price of approximately $4.0 million in cash (80 percent of which was paid at

closing and the remaining 20 percent of which was paid in the form of earnouts upon the attainment of certain performance objectives). Robert C.

Wilson provides mortgage and equity origination and servicing.

•On December 23, 1997, WMF Washington Mortgage purchased substantially all of the mortgage banking assets of New York Urban West, Inc.

("New York Urban") for a purchase price of approximately $4.9 million in cash (84 percent of which was paid at closing and the remaining

16 percent of which will be paid in the form of earnouts upon the attainment of certain performance objectives over a 42-month period).

•On March 27, 1998, the Company created WMF Carbon Mesa, which purchased certain assets of Carbon Mesa Advisors, Inc. and Strategic Real

Estate Partners for a total purchase price of $4.9 million, including an additional $1.7 million paid in 1999 when the Company exercised its option

to purchase certain additional assets. The purchase price was paid in combination of a cash, short-term notes and common stock. WMF Carbon

Mesa manages commercial mortgage investment funds, provides special asset management services and originates commercial mortgages.

The Company also grows its servicing portfolio through the acquisition of servicing rights. Since 1992, the Company has acquired servicing rights on

approximately $1.4 billion of mortgages in over 47 transactions.

Internal Growth. The Company has grown through internal expansion. This growth has occurred though a combination of opening of new offices, hiring

new loan officers, implementing loan officer training programs, and creating a national sales force capable of originating loans for multiple of investor sources.

Prospectively, the Company seeks to grow via continued expansion of its national origination system, further streamlining of its servicing operations, and the

realization of other operating efficiencies.

•The Company hired 10 new loan officers in 1999. Through training and other management initiatives, the Company has developed a national

sales force, capable of selling all loan products offered by the Company.

•The Company implemented a cost-reduction program, which resulted in savings of approximately $13 million during 1999 from previously

projected amounts. See "Major Developments in 1999—Cost-Saving Measures."

As a result of acquisitions and internal growth, the Company has increased loan originations, including conduit originations, by approximately 38 percent

annually, from approximately $240 million in 1992 to approximately $2.3 billion in 1999. The Company's servicing portfolio has increased by approximately

24 percent annually, from approximately $3.0 billion in 1992 to $13.4 billion as of December 31, 1999.

Design and delivery of new mortgage products. Since 1992, the Company has been involved in developing more than eight new products, including one of

the first whole-loan conduits (Common SenseSM), a revolving credit facility for real estate investment trusts, a bridge loan program for mark-to-market

properties and a forward commitment program for tax-credit new construction.

The Company intends to enhance its ability to develop new financing products in response to changing market conditions, including continued development

of bridge loan products, as well as the addition of high-yield, mezzanine and participating loan products and a small loan product. The Company cannot assure

you that it will be successful in developing any particular new product or, if a product is developed, that it will be profitable for the Company.

Expansion into related businesses. The Company seeks to build on its experience in evaluating real estate to expand its services and develop related

products. The Company has used its expertise to enter the advisory services/funds management business, to provide due diligence services for institutional

clients, and to expand its presence in the commercial mortgage-backed securities market. Other possible businesses may include asset management, commercial

leasing and management and the purchase and retention of commercial mortgage-backed securities. In 1999, the Company entered into a strategic alliance to

create an Internet portal for the commercial real estate industry called Redbricks.com. The Company intends to develop, with Redbricks.com and other on-line

origination sources, expanded distribution of its financial products and continuous process improvements in the delivery of services. Expansion may occur

through a combination of acquisitions, strategic alliances and internal business development. There can be no assurance that the Company will seek to

undertake any specific line of business, or that, if it undertakes a particular line of business, that the business will be successful.

Fee Diversification. The Company intends to manage the risks of the commercial real estate financing industry by (i) focusing its activities on earning

service, origination and asset management fees rather than earning interest on retained mortgage assets, (ii) developing strategic relationships with multiple

investors, (iii) lending to a variety of commercial asset classes and (iv) operating on a national basis.

•Fee-based Earnings. In 1999, approximately 97.4 percent of the Company's revenue was generated from origination, servicing and other related

fees and funds management. Of this amount, fees and other recurring revenue related to servicing and funds management agreements accounted

for approximately 42 percent of the Company's fee revenue. In addition to providing a stable and recurring source of earnings, this approach

requires significantly less capital and exposes the Company to lower levels of risk than the retention of mortgage assets. While it may make

minority investments in funds it manages, the Company does not intend to take significant principal risk positions.

•Multiple Investors. In the past, changes in the financial markets and investor requirements have contributed to the volatility of the commercial

mortgage financial markets. The Company seeks to manage this risk by developing strategic relationships with a variety of investor sources,

including commercial banks, GSEs, investment banks and insurance companies.

•Multiple Asset Classes. The Company has lent to a wide variety of commercial asset classes, including multifamily, retail, office, industrial and

hospitality. The Company believes that business and financing cycles vary among asset classes. By lending to multiple asset classes, the

Company can reduce risk and improve operating efficiency by redeploying its origination activities and resources as market conditions change.

•National Presence. The Company has 18 loan origination offices located throughout the country and has originated loans in every state and the

District of Columbia. This national presence provides another source of diversification, helping to mitigate the risk posed by changes in regional

business conditions.

See "Risk Factors" for a detailed discussion of the risks that may affect the Company.

Major Developments in 1999

Cost-Saving Measures. In response to its losses during 1998, the Company implemented a cost-reduction program, reducing its workforce by 37 percent

from peak levels in September 1998 and decreasing general and administrative expenses. The cost-reduction program resulted in estimated annual savings of

approximately $13 million during 1999 from previously projected amounts.

Issuance and Repayment of Subordinated Note. On September 4, 1998, the Company entered into a Credit Agreement with Commercial Mortgage Investment

Trust ("COMIT"), a real estate investment trust ("REIT") owned primarily by Harvard, Capricorn and the Company. Under the Credit Agreement, Harvard and

Capricorn contributed a total of $20 million to COMIT, and the Company then sold a $20 million subordinated note to COMIT. The Company also issued

warrants to COMIT entitling it to purchase 1,200,000 shares of common stock at $11.25 per share. COMIT later assigned 960,000 of the warrants to Harvard and

240,000 of the warrants to Capricorn. As part of the Recapitalization Plan, described below, Harvard and Capricorn surrendered those warrants. The Company

repaid $16.6 million of the subordinated note on December 31, 1998. On March 12, 1999, the Company repaid the remaining principal and interest due under the

subordinated note, and the note was canceled. GSIC Real Estate, Inc., the real estate investment arm of the Government of Singapore Investment Corporation

Pte. Ltd., became a significant investor in COMIT in 1999.

Recapitalization Plan. To provide for its working and other capital needs after its 1998 losses, the Company entered into the Recapitalization Plan. The

Recapitalization Plan had two parts and raised a total of approximately $27.5 million of new equity:

(1) Sale of $16.6 Million of Capital Stock to Demeter, Phemus and Capricorn

On December 31, 1998, Demeter, Phemus and Capricorn acquired 3,635,972 shares of the Company's Class A Non-Voting Convertible Preferred Stock (the

"Class A Stock") for total cash proceeds of approximately $16.6 million. On January 14, 1999, each share of Class A Stock was converted into one share of

common stock. As a result of these transactions, Demeter acquired 2,757,633 shares of the Company's common stock, Phemus acquired 151,145 shares of

common stock, and Capricorn acquired 727,194 shares of common stock.

As part of the Class A Stock transaction, Harvard and Capricorn canceled the warrants to purchase 1,200,000 shares of common stock issued to COMIT in

connection with the subordinated note. In addition, Demeter, Phemus and Capricorn entered into a Standby Purchase Agreement to purchase up to 664,028

shares of common stock not otherwise purchased in the rights offering described below, for a total

purchase price of $3,320,140. The Company applied the proceeds of the sale of Class A Stock to repay part of the subordinated note held by COMIT.

Because of their participation in this transaction, Demeter, Phemus and Capricorn agreed not to exercise, transfer or acquire any rights during the rights

offering.

(2) $10.9 Million Public Rights Offering/Private Placement

The Company issued all of its shareholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them on that

date. Each right entitled its holder to purchase one share of common stock for $5.00. The rights expired on March 8, 1999.

Through the rights offering, the Company sold a total of 1,482,271 shares of common stock for total proceeds of approximately $7.4 million. On March 19,

1999, Demeter, Phemus and Capricorn completed the purchase of a total of 664,028 shares of the Company's common stock pursuant to the Standby Purchase

Agreement, for total proceeds to the Company of approximately $3.3 million. In addition, on March 31, 1999, Capricorn purchased an additional 34,250 shares at

$5.375 per share, for proceeds to the Company of $0.2 million.

The Company applied the proceeds from the rights offering to repay the remaining subordinated note held by COMIT and other operating purposes. The

Recapitalization Plan resulted in the effective conversion of the Company's $20 million subordinated note into common stock and raised approximately

$7.5 million of additional common equity, which was used to repay borrowings under the Company's revolving line of credit and for working capital.

Stock Repurchase Plan. On May 4, 1999, the Company announced a stock repurchase plan. The Company's Board of Directors has authorized the

acquisition of up to $3 million of the Company's common stock from time to time in open market transactions, block purchases, or otherwise. As of March 17,

2000, the Company has acquired a total of 495,300 shares of common stock at an average price of $5.53 per share.

Redbricks Online Service. During 1999, the Company contributed to the development of Redbricks.com, a website designed for commercial real estate

developers and owners. On February 7, 2000, the Company announced the closing of a Fannie Mae targeted affordable housing loan that was used to

successfully test and design LoanConnection, the automated loan processing system of Redbricks.com.

Hiring of Credit Suisse First Boston. In October 1999, the Company announced that it had hired Credit Suisse First Boston to advise it on the development

of strategic relationships.

The Company's Lines of Business

Mortgage Services

Mortgage origination involves the making of loans to borrowers who use real estate property as collateral. The Company's staff of 54 loan originators targets

a wide variety of borrowers, including developers, local entrepreneurial owners, large portfolio owners and public companies such as real estate investment

trusts.

Currently, the Company originates mortgages through three channels—retail, correspondent and the Internet. For the retail operation, the Company has loan

originators in 18 offices located throughout the country. Those individuals directly solicit owners of real estate, as well as real estate service providers in their

markets. The Company believes that having a local presence within a market significantly adds to its understanding of the local economic, demographic and

real estate trends, thus allowing it to serve borrowers and investors better. A local presence also helps develop borrower relationships and identify new

customers.

In those markets where the Company does not have a retail presence, it acts through "correspondent relationships" with local commercial and multifamily

mortgage brokers. In this relationship, a local mortgage broker identifies potential borrowers and refers them to the Company for their loans. Currently, the

Company originates loans through correspondents throughout the United States. In 1999, the Company obtained approximately 31 percent of its $2.3 billion of

loan originations through correspondents.

The Company's relationship with correspondents differs between multifamily and commercial lending and FHA lending. For multifamily and commercial

lending, the Company enters into an agreement with each correspondent which generally provides that (1) the borrower will pay the correspondent, usually

based on a percentage of the loan, (2) in some instances, the Company will have a right of first refusal to finance properties meeting the criteria of its loan

programs and investors and (3) the correspondent may be eligible for incentive fees based on the servicing fees received by the Company from the originated

loans. Generally either party to a multifamily and commercial correspondent agreement may terminate the relationship without cause upon prior written notice.

The multifamily and commercial correspondent agreements usually do not place geographic restrictions on either the Company or the correspondent.

With respect to FHA lending, correspondents generally enter into agreements with the Company for each individual transaction and the terms of the

agreements vary from transaction to transaction. These agreements define the compensation, roles, representations and warranties for the correspondent and

the Company.

After it identifies a potential borrower, the Company determines which of its mortgage products best meets the borrower's needs. Then the Company works

with the borrower and a mortgage investor to prepare a loan application. When the borrower completes the application, the Company's underwriters conduct

due diligence. In the case of FHA loans, the FHA conducts due diligence. See "—Mortgage Underwriting" below. The loan is evaluated, and if appropriate,

submitted to a loan committee consisting of senior officers of the Company.

If the Company or the FHA approves the loan, the Company issues a commitment to the borrower. Normally, the Company simultaneously commits to sell the

loan to an appropriate investor. This simultaneous commitment from both a borrower and a mortgage investor enables the Company to eliminate its exposure to

interest rate changes for each transaction. Typical investors include insurance companies, banks, credit companies, GSEs (such as Fannie Mae) and other

institutional investors. Typically the Company funds a loan 15 to 30 days after the loan commitment. At that time, the Company funds the loan using its