UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Or
( ) 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: 0-22271
CFI MORTGAGE INC.
(Exact Name of Small Business Issuer as specified in its charter)
Delaware
(State or Other jurisdiction of 52-2023491
incorporation or organization) (I.R.S. Employer Identification No.)
631 U.S. Highway #1 Suite 309
North Palm Beach, Florida 33408
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including
area code 561-842-0678
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether 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 Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
3,826,412 shares, $01 par value, as of July 1, 1999
(Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date)
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
JUNE 30, 1999
(Unaudited)
I N D E X
Page No.
Part I - Financial Information:
Item 1. Consolidated Financial Statements (Unaudited):
Balance Sheets
At June 30, 1999 and December 31, 1998 ......... F-2
Statements of Operations
For the Six Months and Three Months Ended
June 30, 1999 and 1998 ......................... F-3
Statements of Cash Flows
For the Six Months Ended
June 30, 1999 and 1998 ......................... F-4 - F-5
Notes to Consolidated Financial Statements ..... F-6 - F-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .. F-13 - F-19
Part II - Other Information:
Item 3 Through Item 9 - Not Applicable ................... F-9 - F-20
Signatures ............................................. F-21
F-1
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
A S S E T S
June 30, December 31,
1999 1998
------------ ------------
Current assets:
Cash $ 51,107 $ 2,371
State tax refund receivable -- 76,621
Prepaid expenses 23,067 53,658
Due from related parties 86,037 86,037
------------ ------------
Total current assets 160,211 218,687
Property and equipment, at cost, less accumulated
depreciation of $90,982 and $87,902, respectively 58,495 61,575
------------ ------------
$ 218,706 $ 280,262
============ ============
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
Liabilities not subject to compromise:
Current liabilities:
Accounts payable of subsidiary $ 1,539,341 $ 1,539,341
Accrued expenses and other current liabilities 106,243 --
------------ ------------
1,645,584 1,539,341
Liabilities subject to compromise:
Current liabilities:
Unsecured liabilities 12,900 12,900
------------ ------------
Unsecured non-priority liabilities:
Accounts payable 948,933 948,933
Due to banks 6,686,000 6,686,000
Accrued expenses and other current liabilities 967,321 964,321
------------ ------------
Total unsecured non-priority liabilities 8,602,254 8,599,254
------------ ------------
15% Demand convertible debentures and accrued interest 103,883 --
------------ ------------
Total liabilities 10,364,621 10,151,495
------------ ------------
Stockholders' capital deficiency:
Common stock, $.01 par value
Authorized 20,000,000 shares
Issued and outstanding - 3,826,412
and 3,301,391, respectively 38,264 33,014
Preferred stock, $.01 par value
Authorized 10,000,000 shares
Issued and outstanding - 2,375
and 2,450, respectively 24 25
Additional paid-in capital 10,156,240 10,154,246
Accumulated deficit (20,340,443) (20,058,518)
------------ ------------
Total stockholders' capital deficiency (10,145,915) (9,871,233)
------------ ------------
$ 218,706 $ 280,262
============ ============
See accompanying notes to financial statements.
F-2
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six For the Three
Months Ended Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Commissions and fees $ 1,358 $ 7,780,679 $ 1,358 $ 3,133,018
Interest -- 2,121,716 -- 808,307
------------ ------------ ------------ ------------
Total revenues 1,358 9,902,395 1,358 3,941,325
------------ ------------ ------------ ------------
Expenses:
Selling -- 4,474,189 -- 2,487,992
General and administrative 190,939 7,636,002 148,329 4,724,935
Interest 5,463 2,075,550 3,963 1,038,248
------------ ------------ ------------ ------------
Total expenses 196,402 14,185,741 152,292 8,251,175
------------ ------------ ------------ ------------
Net loss ($ 195,044) ($ 4,283,346) ($ 150,934) ($ 4,309,850)
============ ============ ============ ============
Basic earnings per
common share:
Net loss ($ 195,044) ($ 4,283,346) ($ 150,934) ($ 4,309,850)
Less: Preferred stock
dividends (79,640) (70,000) (55,847) (40,000)
Preferred stock
discount -- (150,000) -- --
------------ ------------ ------------ ------------
Net loss available to
common stockholders ($ 274,684) ($ 4,503,346) ($ 206,781) ($ 4,349,850)
============ ============ ============ ============
Weighted average shares 3,708,391 2,270,311 3,826,412 2,252,734
============ ============ ============ ============
Earnings per share - basic:
Net loss ($ .07) ($1.98) ($.05) ($1.93)
============ ============ ============ ============
See accompanying notes to financial statements.
F-3
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six
Months Ended
June 30,
1999 1998
--------------------------
Cash flows from operating activities:
Net loss from continuing operations ($ 195,044) ($4,283,346)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,080 159,152
Interest accrued on stockholders loans and debentures 5,463 --
Provision for doubtful accounts and loan losses -- 870,500
(Increase) decrease in asset and liabilities:
State tax refund receivable 76,621 --
Interest receivable -- 68,436
Mortgage loans held for sale -- (1,175,327)
Other current assets -- 85,109
Miscellaneous receivables -- 13,633
Prepaid expenses 30,591 (205)
Deposits -- (79,444)
Accounts payable, accrued expenses
and other current liabilities 26,605 1,441,312
----------- -----------
Total adjustments 142,360 1,383,166
----------- -----------
Net cash used in operating activities (52,684) (2,900,180)
----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment -- (160,720)
Payments of related party receivable -- 6,773
----------- -----------
Net cash used in investing activities -- (153,947)
----------- -----------
Cash flows from financing activities:
Proceeds from 15% demand convertible debentures 101,420 --
Proceeds from issuance of preferred stock -- 1,000,000
Proceeds from related party payable -- 90,642
Payments for deferred loan fees -- (171,417)
Warehouse borrowings -- 977,650
Cash overdraft -- (264,409)
Proceeds from long-term debt -- 1,961,156
Payments of long-term debt -- (324,513)
----------- -----------
Net cash provided by financing activities 101,420 3,269,109
----------- -----------
Net increase in cash and cash equivalents 48,736 214,982
Cash and cash equivalents at beginning of period 2,371 1,705,216
----------- -----------
Cash and cash equivalents at end of period $ 51,107 $ 1,920,198
=========== ===========
See accompanying notes to financial statements.
F-4
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Six
Months Ended
June 30,
-----------------------
1999 1998
---------- ----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Income taxes $ -- $ --
========== ==========
Interest $ -- $2,405,261
========== ==========
Supplemental Schedules of Noncash Investing
and Financing Activities:
Accrued dividends on preferred stock $ 79,640 $ --
========== ==========
Capital asset and lease obligation additions $ -- $ 330,064
========== ==========
See accompanying notes to financial statements.
F-5
CFI MORTGAGE INC. AND SUBSDIARY
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
NOTE 1 - PETITION FOR RELIEF UNDER CHAPTER 11.
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a
voluntary petition for relief under Chapter 11 of Title 11 of the
United States Code in the Southern District of Florida. On June 11,
1999, the bankruptcy court confirmed a plan of reorganization
pursuant to which CFI was discharged from any debt that arose before
the date of confirmation. As a result of the confirmation of the
Plan, CFI is no longer threatened by any litigation, claims, and
assessments which may have existed as of December 31, 1998.
The Plan provides for an infusion of $800,000 by a lender
which is secured by CFI's assets. The lender has the option of
converting the loan to common stock of CFI at a rate to be determined
after the effective date of the Plan.
Each general creditor shall receive one share of common
stock for each dollar of debt in the reorganized CFI.
The preferred stockholder of Series "A" and "B"
convertible preferred stock shall receive 2 million shares of common
stock in exchange for the preferred stock in the reorganized CFI.
The Company's subsidiary, Direct Mortgage Partners, Inc.
(DMP) was not a party to the petition for relief under Chapter 11.
Only debts that were guaranteed by CFI and two other creditors shall
be satisfied by issuance of common stock for each dollar of debt in
the reorganized CFI. The aforementioned debts are included in the
total unsecured non-priority liabilities. As at June 30, 1999 and
December 31, 1998 liabilities of DMP that are not guaranteed by CFI
amounted to $1,539,341, respectively.
On June 28, 1999, the Company's Amended Plan of
Reorganization was approved and confirmed on August 2, 1999.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES.
(a) Going Concern:
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company's ability to return to normal operations is totally dependent
on the success of its voluntary plan of reorganization and subsequent
additional capital infusion. If this plan is not successful or the
additional capital is not forthcoming or is insufficient, management
intends to move the Company into a Chapter 7 bankruptcy liquidation.
Such conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
F-6
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(b) Basis of Presentation:
The accompanying unauditing financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
with the instructions for Form 10-QSB and Article 10 and
Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, the statements contain all
adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position as of June
30, 1999 and the results of operations for the six and three
months ended June 30, 1999 and 1998 and cash flows for the six
months ended June 30, 1999 and 1998. The results of operations
for the six and three months ended June 30, 1999 and 1998 are
not necessarily indicative of the results to be expected for
the full year.
The December 31, 1998 balance sheet has been
derived from the audited financial statements at that date
included in the Company's annual report on Form 10-KSB. These
unaudited financial statements should be read in conjunction
with the financial statements and notes thereto included in
the Company's annual report on Form 10-KSB.
(c) Organization:
Creative Industries, Inc. was incorporated in the
State of Florida in April 1989, and operates as a licensed
mortgage lender. In October 1990, the Corporation's name was
changed to Creative Financing, Inc. and on May 24, 1995 the
Corporation's name was changed to CFI Mortgage Corporation
("CFI Mortgage"). CFI Mortgage Inc. was incorporated in
Delaware on March 18, 1997. Immediately prior to the initial
public offering, the existing stockholders of CFI Mortgage
contributed all of their shares of CFI Mortgage common stock
to CFI in exchange for 1,200,000 shares of common stock of
CFI. Through its two wholly-owned subsidiaries, Bankers Direct
Mortgage Corporation ("BDMC"), which was sold on September 11,
1998, and Direct Mortgage Partners Inc., which ceased
operations in the 4th Quarter of 1998, CFI has been engaged in
originating, purchasing and selling loans secured primarily by
first mortgages on one-to-four-residential properties as well
as purchasing and selling servicing rights associated with
such loans. The loans were both conventional conforming loans
(originated and sold through BDMC) and nonconforming loans
(originated and sold through DMP). Significant intercompany
accounts and transactions have been eliminated in
consolidation.
(d) Geographic Concentration:
Prior to the sale, BDMC was approved by the U.S.
Department of Housing and Urban Development/Federal Housing
Administration ("FHA") as a nonsupervised mortgagee. Both BDMC
and DMP were licensed and registered in approximately 22
states, primarily in the southern United States, as mortgage
lenders with approximately 9 branch offices.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(e) Use of Estimates:
F-7
The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(f) Income Taxes:
The Company complies with Statement of Financial
Accounting Standards No. ("SFAS 109"), "Accounting for Income
Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets are computed for differences between
financial statement and tax basis of assets and liabilities
that will result in future taxable or deductible amounts,
based on the enacted tax laws and rates to the periods in
which differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount to be realized.
(g) Earnings (Loss) Per Common Share:
Earnings (loss) per common share are based on the
weighted average number of common shares outstanding. In March
1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128") "Earning Per Share" which
requires dual presentation of basic and diluted earnings per
share on the face of the statements of operations. Basic
earnings (loss) per share excludes dilution and is computed by
dividing income available to common stockholders by the
weighted-average common shares outstanding for the period.
Diluted earnings (loss) per share reflect the potential
dilution that could occur if preferred stock conversions,
options and warrants were to be exercised or converted or
otherwise resulted in the issuance of common stock that then
shared in the earnings of the entity. The Company adopted SFAS
128 for the year ended December 31, 1997.
Since the effect of outstanding options, warrants
and preferred stock conversions are antidilutive in all
periods presented, it has been excluded from the computation
of earnings (loss) per common share.
NOTE 3 - INTEREST RECEIVABLE.
Interest earned on mortgages held for sale from
origination to date of sale is recognized as earned.
F-8
NOTE 4 - RELATED PARTY TRANSACTIONS.
On July 15, 1998, Mr. Vincent C. Castoro, Chairman
of the Board of Directors, loaned CFI Mortgage Inc. $100,000
and in return holds a promissory note with an interest rate of
6% with a due date of August 15, 1998. The Company did not
repay the loan principal or interest on the due date and the
balances of $105,750 and $102,750 which included accrued
interest have been included in accrued expenses and other
current liabilities, as at June 30, 1999 and December 31,
1998, respectively.
The Company has made advances to three officers
aggregating approximately $86,000 as of June 30, 1999 and
December 31, 1998, respectively. The advances are
noninterest-bearing and are due on demand and are included in
due from the related parties.
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities are
comprised of the following:
June 30, December 31,
1999 1998
-------- --------
Professional fees $152,000 $152,000
Dividends on preferred stock 137,781 137,781
Accrued interest 44,713 44,713
Accrued payroll 377,077 377,077
Deposit payable 150,000 150,000
Loans payable - officer 105,750 102,750
-------- --------
$967,321 $964,321
======== ========
Each general creditor shall receive one share of common
stock for each dollar of debt in the reorganized CFI Mortgage Inc.
NOTE 6 - COMMITMENTS.
(a) Leases:
Effective April 1, 1999, CFI rents its corporate
headquarters, and office facilities from a stockholder on a month to
month basis at $1,890 per month including certain escalation costs
for real estate taxes, operating expenses, usage and common area
charges. Rent expense for real property leases charged to operations
for the six months ended June 30, 1999 was $5,670.
(b) Employment Contracts:
The Company had entered into several employment contracts
with certain officers and employees which expire between 1998 and
2002 which have been disavowed under the Chapter 11 Plan.
F-9
NOTE 7 - INCOME TAXES.
The Company and its subsidiaries file a consolidated
federal income tax return. As of December 31, 1998, the Company and
its subsidiaries have a net operating loss carryforward of
approximately, $19,000,000 available to reduce future taxable income
which expires in the year 2014. The deferred tax asset resulting from
the operating loss carryforward of approximately $7,125,000 in
managements estimate requires a valuation allowance in the same
amount based upon management's assessment that there is not assurance
the tax asset will be realized.
NOTE 8 - STOCKHOLDERS' EQUITY.
On May 30, 1997, CFI completed the initial public offering
of 1,000,000 shares of its common stock at $5 per share. The net
proceeds from the offering, after deducting underwriting discounts
and commissions and offering expenses, aggregated $3,800,525. In
connection with the offering, CFI granted the underwriter warrants to
purchase 100,000 shares of common stock at an exercise priced of $6
per share. The warrants are exercisable for a period of four years
commencing May 1998.
On December 3, 1997, CFI issued and sold 2,060 shares of
Series "A" 8% convertible preferred stock $.01 par value, at $1,000
per share in a private placement. The net proceeds from the sale,
after deducting selling and other related expenses, aggregated
$1,821,753. The preferred stock is convertible for two years into
common shares at a price equal to 85% of the five-day average bid
prices immediately prior to the conversion date. The discount on the
conversion price is accounted for as a charge against retained
earnings and is amortized over the nonconvertible period. Included in
the statement of changes in stockholders' equity for the year ended
December 31, 1997 is a charge of $150,000 pursuant to the conversion
discount. On March 3, 1998, 500 shares of the preferred stock, plus
accrued interest of approximately $10,000 were converted into 105,467
of common shares.
In connection with the preferred stock transaction, the
Company granted warrants to purchase 240,000 shares of common stock
at an exercise price of $8.50 per share. The warrants are exercisable
until September 17, 2001. In addition, the Company issued 60 shares
of preferred stock with identical terms as payment for fees for the
private placement. The cost will be included in the net proceeds from
the transaction and will be amortized over the nonconversion term.
On May 18, 1998, the Company issued $1,700,000 principal
amount of the convertible debentures to a single investor.
F-10
NOTE 8 - STOCKHOLDERS' EQUITY. (Continued)
On August 19, 1998, the entire convertible debenture was
retired in exchange for the issuance of 1,700 shares of Series "C",
10% convertible preferred stock, $0.01 par value in a private
placement on terms substantially identical to the original debenture.
In connection with this issuance of Series "C" preferred stock,
warrants to purchase 50,000 shares of the Company's common stock at a
price of $8.75 a shares held by the debenture holder were surrendered
in favor of new warrants to purchase 50,000 shares of the Company's
common stock at a price of $2.6563 per share which was the closing
market bid price on the effective date of the exchange.
On June 30, 1998, CFI issued and sold 1,000 shares of
Series B, 8% convertible preferred stock, $0.01 par value, at $1,000
per share in a private placement. The proceeds from the sale amounted
to $1,000,000. The preferred stock is convertible for two years into
common shares at a price equal to 85% of the five-day average bid
prices immediately prior to the per common share. The discount on the
conversion price, which was $150,000, is accounted for as a charge
against retained earnings and is amortized over the non-convertible
period.
During the six months ending June 30, 1999, 75 shares of
preferred stock were converted into 525,021 shares of common stock
and accordingly additional paid-in capital increased by $1,994 and
accumulated deficit increased by $7,242.
NOTE 9 - 15% DEMAND CONVERTIBLE DEBENTURES.
During the quarter ending June 30, 1999, the Company
received $101,420 net of expenses of $11,825 from the sale of 15%
demand convertible debentures through a Private Securities
Subscription Agreement. The debentures are collateralized by all
assets of the Company not pledged in the bankruptcy proceedings and
956,000 shares of the Company's common stock owned by two
stockholders. Interest accrues at 15% per annum and at the Company's
option be paid in shares of the Company's common stock. The
outstanding debentures plus accrued interest may be converted into
the common stock of the Company at 2% of the Company's common stock
for each $80,000 of principal. In addition, 80,000 and 44,000
warrants at $.08 per share and $.15 per share, respectively were
issued.
NOTE 10 - OTC - BULLETIN BOARD MARKET.
The common stock of CFI moved to the OTC - Bulletin Board
Market as the Company did not meet the required minimum standards for
continued inclusion in the NASDAQ Small Cap Market, effective with
the close of business on November 17, 1998.
F-11
NOTE 11 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board periodically
issues new accounting standards in a continuing effort to improve the
quality of financial information and to promote uniformity in its
presentation. Management has reviewed all such pronouncements made in
the last fiscal year and concluded that none have a material impact
on the Company's presentation of its financial position, results of
operations and cash flows.
NOTE 12 - YEAR 2000.
The Company recognizes the need to ensure its operation
will not be adversely affected by Year 2000 software failures. The
Company is communicating with suppliers, customers and other with
which it does business to coordinate Year 2000 conversion. The cost
of achieving compliance is estimated to be a minor increase over the
cost of normal software upgrades and replacements.
F-12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Certain of the matters discussed in this Form 10-QSB may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. As such, these forward-looking statements may
involve known and unknown risks and uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements.
GENERAL BUSINESS
CFI Mortgage Inc. (the "Company") is a diversified financial services company
headquartered in North Palm Beach, Florida. The Company provides mortgages and
mortgage-related services to individuals indirectly through mortgage brokers and
mortgage lenders. The Company originates, processes, underwrites and funds
residential mortgage loans that are sold on an individual basis to institutional
and private investors. The Company originates loans that do not conform to
agency guidelines (non-conforming loans). Non-conforming loans typically fail to
meet agency guidelines due to credit impairment, higher loan-to-value ratios and
debt-to-income ratios, and are priced to compensate for the additional credit
risk.
During the quarter ended June 30, 1999 the company administered the bankruptcy
reorganization process. The Company complied with certain document production
requirements and negotiated the Amended Plan of Reorganization, which was
subsequently approved by the company's creditors on June 28,1999.
The company also negotiated a "Net Branch Agreement" with several Mortgage
Banking Companies. The agreements allow the Company to market their services to
mortgage brokers in multiple states. The agreement calls for the Company to pay
between 1/2% and 1% of the loan amounts originated under the arrangement.
These Net Branch Agreements allowed the company to restructure its operating
procedures and to commence operations late in the third quarter. Currently, the
Company's operating division is doing business in several states through these
net branch agreements. Historically, the Company had focused primarily on
originating conventional conforming and government-insured loans. Sub-prime
lending has the ability to generate gross profit margins up to twice the level
of the Conforming lending. The Company sells substantially all of the mortgages
it originates and purchases, including the right to service such loans, to
institutional purchasers, including national and regional commercial banks and
mortgage banks. These institutional purchasers thereafter portfolio or resell
the mortgages as mortgage-backed securities.
Business Strategy
The Company's business strategy is to increase profitably the volume of its loan
purchases and the size of its broker network by (i) continuing to provide
quality service to its network of brokers /correspondents; (ii) broadening its
sub-prime product offerings; (iii) selling its mortgage loans in bulk for cash;
(iv) continuing its investment in "mortgage loan origination systems"; (v)
maintaining its underwriting standards; (vi) expanding onto the Internet to
offer mortgage related services to the companies broker network through
E-Commerce.
Continuing to Provide Quality Service
The Company provides a high level of service to its brokers and correspondents.
These services include preliminary approval of most brokered loans and certain
correspondent loans within one day, consistent application of its underwriting
guidelines and funding or purchase of loans generally within three to ten days
of preliminary approval. In addition, the Company services each broker and
correspondent with a team of professionals that includes a business development
representative, experienced underwriters, with processors assisting them to
handle
F-13
applications submitted by each broker. The Company believes that this commitment
to service provides a competitive advantage in establishing and maintaining
productive broker and correspondent relationships.
Broadening Product Offerings
The Company frequently reviews its pricing and loan products relative to
its competitors and introduces new loan products in order to meet the needs of
its correspondents and brokers. For example, the non conforming home equity loan
market is a logical extension of the Company's end product offering. The Company
entered this market through its wholesale division, specifically by lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes.
Whole Sale Lending Platform
Management believes that lending through correspondents can he an efficient and
cost efficient method of producing loans because of the low fixed expenses and
capital investment required. Correspondents are paid for the loans purchased by
the Company based on a percentage of the loan balance purchased. Such percentage
is determined based upon a daily rate sheet that reflects market demand for
particular loans on that day. If efficiently utilized, correspondent lending can
allow the Company to match its costs more directly with the volume of loans
purchased so that a portion of the Company's cost is variable rather than fixed.
The correspondent origination approach also allows the Company the flexibility
to adjust to varying market conditions by quickly entering or exiting geographic
markets as economic conditions dictate.
The Company attracts and maintains relationships with correspondents by offering
a variety of services that provide incentives for the correspondents to sell
mortgage loans to the Company. The Company's strategy with respect to its
correspondents has been to provide a high level of service together with
competitive pricing. Services provided include timely underwriting and approval
or rejection of a loan (within 24 hours after receipt of a completed loan
application), timely purchase of loans (within five to ten days after they are
approved for acquisition), information sessions and updates regarding current
underwriting practices and new products. In addition, the Company provides
correspondents with a variety of products.
As the Company moves forward with its Internet delivery strategy, correspondent
relationships will provide a potential customer base for the sale of Internet
mortgage loan leads in geographic markets where the Company lacks the licensing
or physical presence to originate loans directly. Management believes that
correspondent lending can be structured to manage risks and maintain quality
control. The Company will approve correspondents only after a thorough review of
the reputation and mortgage lending expertise of such entities, including a
review of references and financial statements.
The Company requires that a full appraisal of the collateral property for any
loan that it acquires or originates be performed in connection with the
origination of the loan. All appraisals are performed by third party, fee-based
appraisers and generally conform to current FNMA, FHLMC and secondary market
requirements for residential property appraisals. Each such appraisal generally
includes, among other things, an inspection of the exterior and interior of the
subject property and, where available, data from sales within the preceding 12
months of similar properties within that same general location of the subject
property.
A credit report by an independent, nationally recognized credit reporting agency
reflecting the applicant's complete credit history is also required. The credit
report typically contains information reflecting delinquencies, repossessions,
judgements, foreclosures, bankruptcies and similar instances of adverse credit
that can be discovered by a search of public records. An applicant's recent
credit performance weighs heavily in the evaluation of risk by the Company. The
credit report is used to evaluate the borrower's record and must be current at
the time of application. A lack of credit history will not necessarily preclude
a loan if the borrower has sufficient equity in the property. Slow payments on
the borrower's credit report must be satisfactorily explained and will impact
the amount of the loan for which the applicant can be approved.
The Company requires title insurance coverage issued by an approved ALTA title
insurance company on the collateral property for all loans it originates or
purchases. The Company and its assignees will be the named
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insured on the policy. Title insurance policies indicate the lien position of
the mortgage loan and protect the Company against loss if the title or lien
position is not as indicated. The applicant is also required to secure hazard
insurance and, if required, flood insurance in an amount sufficient to cover the
lesser of (i) the new loan balance or (ii) an amount sufficient to cover
replacement costs of the Mortgaged property.
The Company has implemented a quality control program to monitor compliance with
the Company's established lending and servicing policies and procedures, as well
as with applicable laws and regulatory guidelines. The Company believes that the
implementation and enforcement of its comprehensive underwriting criteria and
its quality control program are a significant element in the Company's efforts
to originate and purchase high quality mortgage loans. The Company's quality
control's all loans in order to evaluate compliance with underwriting criteria
Sale of Loan
The sale of mortgage loans may generate a gain or loss to the Company. Gains or
losses result primarily from two factors. First, the Company may purchase a loan
at a price (i.e., interest rate, and discount) which may be higher or lower than
the Company would receive if it immediately sold the loan in the secondary
market. These pricing differences occur principally as a result of competitive
pricing conditions in the primary loan origination market. Second, gains or
losses upon the sale of loan may result from changes in interest rates which
result in changes in the market value of the loans, or commitments to originate
or to purchase loans, from the time the price commitment is given to the broker
until the time that the loan is sold by the Company to the investor.
Financing of Mortgage Banking Operations
The Company's primary cash flow requirement involves the funding of its loan
production. The Company finances its mortgage loan purchases through warehouse
lines of credit or loan purchase agreements it accesses through its Net branch
affiliation that they have entered into with several unaffiliated commercial
banks or financial services companies. These credit facilities are
collateralized by the underlying loans are provide for either a short term (60
to 90 days) borrowing or an interim purchase of the loan by the funding bank
while awaiting final purchase by the end investor.
Total amounts available under these facilities as of September 27, 1999, are
approximately $17.5 million. The maximum facility amount is established by the
lending institution based on the individual Net Branch Affiliates net worth. The
cost of these warehouse borrowing and interim purchase facilities is made up of
interest charged at a floating rate of either Fed Funds or Prime plus a margin
over prime rate.
BANKRUPTCY PROCEEDING:
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provides
for an infusion of $800,000 by a lender, which is secured by CFI's assets. The
lender has the option of converting the loan to common stock of CFI at a rate of
2% of the company per $80,000 funded to the Company. Each general creditor shall
receive one share of common stock for each dollar of debt in the reorganized
CFI. The Plan was confirmed on August 2, 1999.CFI will no longer threatened by
any litigation, claims, and assessments on a cash basis, which may have existed
as of December 31, 1998. The only liabilities the company can incur would be an
additional common stock distribution to a creditor whom the company has objected
to their claim and the court might award an additional distribution over the
amount the company had scheduled in its Bankruptcy filings. The company believes
in the validity of the amount due creditors in its Bankruptcy Filings. In the
event that the Company losses some or all of the claims objections the existing
shareholders would be further diluted to the degree that the award to the
creditor exceeds the amount scheduled on the companies Bankruptcy filings. The
overage to the creditors would be paid in the Company's
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Common Stock. The dilution tied to the Bankruptcy reorganization is significant.
The Company has 3,826,912 Common Shares Outstanding. The result of the
Reorganization Plan will result in the distribution of approximately 7,767,820
shares of Common Stock. Additional issuance of stock will be required pending
the outcome of the claim objections pending.
PLAN OF REORGANIZATION:
See Company's annual 10K filing for the amended plan of reorganization (Exhibit
1) and amended disclosure statement (Exhibit 2) as filed with the Securities and
Exchange Commission.
EVENTS LEADING TO THE CHAPTER 11 PETITION:
Beginning in September 1998, as a result of a number of factors, cash prices in
the sub-prime mortgage market significantly deteriorated and in some cases
investor yield requirements increased some 200 basis points. This in turn
significantly devalued the Company's loans held for sale and subsequent
revenues.
The Company previously had a warehouse line of $15 million with Bank One, Texas,
NA., which was discontinued as of September 30, 1998. The Company's other
warehouse line, which was with Nikko Financial Services, was terminated
effective November 30, 1998. As of September 30, 1998, the Company was in
violation of the net worth covenant of this agreement. In addition, the Company
previously had a purchase facility agreement with Fidelity Bank and Trust
aggregating $25 million. As of September 30, 1998 the use of that facility was
terminated. Upon termination of the warehouse line with Nikko, further advances
for new loan funding could only be under a repurchase agreement which provided
Nikko with the ability to evaluate whether or not it would enter into any new
transactions with the Company. The Company no longer had a committed warehouse
facility. Given that Nikko could decline the Company's request to fund loans
after November 30, 1998, the Company was not able to make loan-funding
commitments beyond November 30, 1998.
As of March 31,1998 and again as of June 30,1998, the Company did not meet the
required minimum standards for continued inclusion in the NASDAQ Small-Cap
Market in that its net tangible assets had fallen below $2,000,000 and so the
Company received a formal notice of de-listing from NASDAQ. On July 31, 1998 the
Company appealed the notice of de-listing at an oral hearing and awaited a final
decision from NASDAQ. On November 17, 1998 NASDAQ informed the Company by letter
that a determination had been made to de-list the Company's securities from The
NASDAQ Stock Market effective with the close of business on November 17, 1998.
The Company attempted a non-bankruptcy workout with its creditors. The Company
received a commitment from an investor to re-capitalize the Company with up to
$2 million if the Company could restructure its then-existing liabilities.
Accordingly, the Company presented a voluntary, non-bankruptcy plan of
reorganization to all its creditors (and those of its subsidiaries) wherein all
creditors were offered 1 share of the Company's common stock for each dollar
owed.
The success of that reorganization plan was dependent on full acceptance by all
of the Company's creditors and the consent of its underwriters to issue the
related common shares. All creditors did not accept the Company's common shares
in lieu of payment, and the underwriters did not consent to the issuance of the
underlying shares, which resulted in the investor not agreeing to re-capitalize
the Company.
The Company disclosed in a letter to the creditors that in the event that the
voluntary plan was not successful by December 11, 1998, management intended to
seek liquidation of the Company though the filing of a Chapter 7 bankruptcy
action on December 14, 1998." Prior to a Chapter 7 bankruptcy petition being
filed, the Company consulted with its bankruptcy counsel, Kevin C. Gleason, and
was advised that a plan similar to the attempted workout could be accomplished
through a petition under Chapter 11 of the bankruptcy code, without the need for
the unanimous consent of the creditors. With its only alternatives being
liquidation under Chapter 7, or an reorganization under Chapter 11, the
Directors elected to seek a course of action under reorganization.
The substantial decrease in the Company's net worth from November 24, 1998
through March 10, 1999 was overwhelmingly due to the devaluation of the mortgage
portfolios of the Company's subsidiary, DMP.
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COMPARISON OF QUARTERS ENDED JUNE 30, 1999 AND 1998
The Company recorded $1,358 in revenues for the current period. With the loss of
the Company's credit facilities the Company was unable fund loans after November
30, 1998, and subsequently discontinued its mortgage-banking operations. On
March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. As such, the
Company did not have any operating subsidiary in the current quarter when
compared to last year when the Company had two operating subsidiaries.
EXPENSES
The Company recorded total operating expenses of $152,292 for the quarter ended
June 30, 1999. This reflected the discontinued mortgage banking operations, and
administrative expenses primarily associated with the filing and subsequent
approval of the bankruptcy reorganization petition. General and administrative
expenses accounted for $148,329, and interest $3,963, of the total expenses.
Preferred stock dividends of $55,847 were accrued for the quarter ended June 30,
1999
NET INCOME (LOSS)
The Company generated a net loss of $206,781 in the quarter ended June 30, 1999,
which included $152,292 in operating expenses, primarily associated with the
filing and subsequent approval of the bankruptcy reorganization petition, and
$55,847 in accrued dividends.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
The Company recorded $1,358 in revenues for the six months ended June 30, 1999.
With the loss of the Company's credit facilities the Company was unable fund
loans after November 30, 1998, and subsequently discontinued its
mortgage-banking operations. On March 10, 1999, CFI Mortgage Inc. ("CFI")
commenced a voluntary petition for relief under Chapter 11 of Title 11 of the
United States Code. As such, the Company did not have any operating subsidiaries
in the current period when compared to last year when the Company had two
operating subsidiaries.
The Company recorded total expenses of $195,044 for the six months ended June
30, 1999. This reflected the discontinued mortgage banking operations, and
administrative expenses primarily associated with the filing and subsequent
approval of the bankruptcy reorganization petition. General and administrative
expenses accounted for $190,939, and interest $5,463 of the total expenses.
Preferred stock dividends of $79,640 were accrued for the six months ended June
30, 1999.
The Company generated net loss of $274,684 for the six months ended June 30,
1999, which included $195,044 in operating losses, primarily associated with the
filing and subsequent approval of the bankruptcy reorganization petition, and
$79,640 in accrued dividends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's is dependent on stock sales or third party borrowings to sustain
operations. During the quarter ending June 30, 1999, the Company received
$101,420 net of expense of $11,825 from the sale of 15% demand convertible
debentures through a Private Securities Subscription Agreement (The "Ronco
Agreement"). The debentures are collateralized by all the assets of the Company
not pledged in the Bankruptcy proceedings and 956,000 shares of the Company's
common stock owned by two stockholders.
Management believes that the planned third quarter capital infusion, combined
with acquisitions as outlined in the amended plan of Reorganization, will be
sufficient to fund the Company's expansion through the remainder of 1999. There
can be no assurance that the Company will be able to obtain an additional
capital infusion in the third quarter or that the planned acquisitions will be
consummated.
F-17
RISK FACTORS
SEASONALITY
The mortgage banking industry is subject to seasonal trends. These trends
reflect the general pattern of re-sales of homes, which sales typically peak
during the spring and summer seasons and decline from January through March. In
addition, the primary home market in Florida tends to increase during the fourth
quarter, while the second home market increases from October through April.
Refinancing tend to be less seasonal and more closely related to changes in
interest rates. The mortgage servicing business is generally not subject to
seasonal trends, except to the extent that growth of a mortgage servicing
portfolio is generally higher in periods of greater mortgage loan originations.
COMPETITION
The mortgage banking industry is highly competitive. The Company competes with
financial institutions, mainly mortgage companies, commercial banks and savings
and loan associations and, to a certain extent, credit unions and insurance
companies, depending upon the type of mortgage loan product offered. The Company
competes principally by purchasing or originating a variety of types of mortgage
loans, emphasizing the quality of its service and pricing the loans at
competitive rates. Many of the Company's competitors have financial resources
substantially greater than that of the Company. Many of the nation's largest
mortgage companies and commercial banks have a significant number of branch
offices in areas in which the Company's correspondents and wholesale and retail
branches operate. Increased competition for mortgage loans from larger lenders
may result in a decrease in the volume of loans originated and purchased by the
Company, thereby possibly reducing the Company's revenues. The top five
competitors in the market are a) the Associates, b) Household Financial, c)
ContiMortgage Corp., d) Green Tree Financial and e) the Money Store.
REGULATION
The operations of the Company are subject to extensive regulation by federal and
state governmental authorities and are subject to various laws and judicial and
administrative decisions that, among other things, regulate credit activities,
require disclosures to customers, govern secured transactions and establish
collection, repossession and claims handling procedures and other trade
practices. The Company is subject to the rules and regulations of the Federal
Housing Administration ("FHA"), FNMA and the Department of Veteran Affairs (the
"VA") and state regulatory authorities with respect to originating, processing,
underwriting, selling, securitizing and servicing mortgage loans.
In addition, there are other federal and state statutes and regulations, as well
as judicial decisions, affecting the Company's operations. Those rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for mortgage loans, prohibit discrimination and
establish underwriting guidelines which include provisions for inspections and
appraisals, require credit reports on prospective borrowers and fix maximum loan
amounts, and with respect to the VA loans, fix maximum interest rates. Moreover,
lenders such as the Company are required to submit annually to the FHA, FNMA and
VA audited financial statements, and each regulatory entity has its own
financial requirements. The Company's affairs also are subject to examination by
the FHA, FNMA and VA at all times to assure compliance with all applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among other regulatory requirements, the Equal Credit Opportunity
Act, the Federal Truth-in-Lending Act, the Home Mortgage Disclosure Act and
RESPA and the regulations promulgated thereunder which prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Many of the aforementioned regulatory
requirements are designed to protect the interests of consumers, while others
protect the owners or insurers of mortgage loans. Failure to comply with these
requirements can lead to loss of approved status, termination of servicing
contracts without compensation to the servicer, demands for indemnification or
loan repurchases, class action lawsuits and administrative enforcement actions.
There are various state and local laws and regulations affecting the Company's
operations. The Company is in possession of all licenses required by the State
of Florida to conduct its business operations and for the states were
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it transacts business. Conventional mortgage operations also may be subject to
state usury statutes. FHA and VA mortgage loans are exempt from the effect of
such statutes.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
re-mediation activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future. In the ordinary course of its business, the Company from time to time
forecloses on the properties securing loans. Although the Company primarily
lends to owners of residential properties, there is a risk that the Company
could be required to investigate and clean up hazardous or toxic substances or
chemical releases at such properties after acquisition by the Company, and may
be held liable to a governmental entity or to third parties for property damage,
personal injury and investigation and clean up costs incurred by such parties in
connection with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
property.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a result of the confirmation of the bankruptcy plan, the Company is no longer
threatened with any litigation, claims and assessments which may have existed as
of year end December 31, 1998.
The Company is aware of an additional suit pending against Christopher Castoro
and Don L. Lashbrook by Thomson, Kernaghan & Co. The Company is not a party to
the suit.
The Company was served on August 17, 1999 with a lawsuit from the "Unofficial
Creditors Committee" seeking $10,000,000 in damages. All of the former officers
and directors of the Company were named as well Gulf Insurance Company, the
Company's Officer & Directors insurance carrier. The Company, its Directors and
former Directors and former Officers believe the suit to be without merit and
intend to vigorously defend the action.
Claims objections in the bankruptcy proceedings are ongoing. When objections
to a claim are made, such objection shall preclude the
consideration of such claim as "allowed" for purposes of timely distribution in
accordance with the Plan. The Disbursing Agent shall escrow sufficient shares of
common stock to cover all potential distributions with respect to claims that
have objections filed against them. The Company has filed objections to many of
substantial claims. See Exhibit 3 of the Company's annual 10K report as filed
with the Securities & Exchange Commission for all disputed claims that if
adjudicated against the Company in bankruptcy court will result in payment of
one share of common stock being issued for every one dollar ($1.00) owed. Claims
objections are being done post-confirmation.
ITEM 2. CHANGES IN SECURITIES
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provided
for an infusion of $800,000 by a lender (Ronco), which is secured by CFI's
assets. The Ronco Funding subscription represents Class 1 of CFI Mortgages
Inc.'s Creditor class in regards to the Companies Bankruptcy Reorganization
plan.. Ronco, or its assigns, shall have the option to convert the amount of the
loan to common stock of the Company pro rata, at the rate of 2 percent of the
outstanding common shares of the Company for each $80,000 of gross
disbursements. Such shares to be determined after the Effective Date, and to
represent two percent (2%) of the Company's outstanding common stock after
distributions to claimants in Classes 2 and 3. A warrant for one share of the
stock of the Company will also be issued to Lender, or its assigns, for each
share of common stock issued to Ronco pursuant to the Agreement with the
Company.
F-19
During the quarter ended June 30, 1999, the Company received $101,420 net of
expense of $11,825 from the sale of 15% demand convertible debentures through
the Private Securities Subscription Agreement with Ronco. The debentures are
collateralized by all assets of the Company not pledged in the Bankruptcy
Proceedings and 956,000 of the Company's common stock owned by two stockholders.
Interest accrues at 15% per annum and at the Company's option be paid in shares
of the Company's common stock. In addition, 80,000 and 44,000 warrants at $.08
per share and $.15 per share, respectively were issued.
The following table sets forth the range of high and low closing prices per
share of the Common stock during the period since December 31, 1998.
- -----------------------------------------------------------------------
1999 High Low
- -----------------------------------------------------------------------
First Quarter $ 0.34 $ 0.07
Second Quarter $ 0.34 $ 0.06
Third Quarter (through 9/27/99) $ 0.42 $ 0.25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION - SUBSEQUENT EVENTS
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provided
for an infusion of $800,000 by a lender (Ronco), which is secured by CFI's
assets. The Ronco Funding subscription represents Class 1 of CFI Mortgages
Inc.'s Creditor class in regards to the Companies Bankruptcy Reorganization
plan.. Ronco, or its assigns, shall have the option to convert the amount of the
loan to common stock of the Company pro rata, at the rate of 2 percent of the
outstanding common shares of the Company for each $80,000 of gross
disbursements. Such shares to be determined after the Effective Date, and to
represent two percent (2%) of the Company's outstanding common stock after
distributions to claimants in Classes 2 and 3. A warrant for one share of the
stock of the Company will also be issued to Lender, or its assigns, for each
share of common stock issued to Ronco pursuant to the Agreement with the
Company.
Subsequently, as of September 27, 1999 Ronco Funding, Inc. has subscribed a
gross amount of $284,000. The Company was funded $256,000 which was less the
$28,000 in funding commissions due to the agent of Ronco Funding. The Funding to
date represents (when converted) an approximate seven percent (7%) equity
interest. The Company was granted an extension on September 15, 1999 by the
bankruptcy court extending the time Ronco Funding, Inc and or its assigns, has
to fulfill the $800,000 subscription until October 1, 1999. There can be no
assurances that any additional subscriptions will be made.
On June 28, 1999 the Company's Amended Plan of Reorganization was approved. On
August 2, 1999 the Company's bankruptcy reorganization was confirmed.
Subsequent to the March 10, 1999 petition for relief filing under Chapter 11,
the following material agreements were made through the bankruptcy proceedings.
An agreement was reached to conduct an assignment for the benefit of creditors
for the Company's subsidiary Direct Mortgage Partners. In addition, by request
of the major creditors of the Company, a mechanism was included in an amendment
to the plan and the order confirming the plan, which preserves any and all
causes of action held by the unofficial creditors committee, before or after
commencement of the case, to be prosecuted post-confirmation, at the unofficial
creditors committee's expense.
F-20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CFI MORTGAGE INC.
(Registrant)
CFI MORTGAGE INC.
(Registrant)
Date: September 27, 1999 /s/ Stephen E. Williams
------------------------------------------------
Stephen E. Williams
President, CEO
Date: September 27, 1999 /s/ Rodger W. Stubbs
------------------------------------------------
Rodger W. Stubbs
(Principal Administrative Officer)
F-21