FORM 10-QSB
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
----------------------------------------------
Commission File Number: 0-22271
----------------------------------------------
CFI MORTGAGE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State of jurisdiction of incorporation or organization)
2200 FLORIDA MANGO ROAD, SUITE 201
WEST PALM BEACH, FL 33409
(Address of principal executive office)
52-2023491
(IRS Employer Identification Number)
(561) 689-8040
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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 filing requirements within
the past 90 days.
Yes _X_ No __
The number of shares outstanding of each of the issuer's classes of common stock
was 3,301,406 shares of common stock, par value $.01 per share, as of November
23,1998.
CFI MORTGAGE INC. AND SUBSIDIARIES
SEPTEMBER 30, 1998
(Unaudited)
I N D E X
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997 ................................................F-2 and F-3
Unaudited Consolidated Statements of Operations For the Nine Months
Period ended September 30, 1998 and 1997 ............................. F-4
Unaudited Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the Nine Months Ended September 30, 1998 .............. F-5
Unaudited Consolidated Statements of Cash Flows For the Nine Month
Period Ended September 30, 1998 and 1997 ............................. F-6
Notes to the Unaudited Consolidated Financial Statements ............. F-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................F-8 to F-
PART II - OTHER INFORMATION
Item 1: Legal Proceedings ........................................... F-
Item 2: Changes in Securities ....................................... F-
Item 3: Defaults upon Senior Securities ............................. F-
Item 4: Submission of Matters to a Vote of Security Holders ......... F-
Item 5: Other Information ........................................... F-
Item 6: Exhibits and Reports on Form 8-K ............................. F-
Signatures ................................................. F-
1
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 133,050 $ 1,705,216
Interest receivable 385,879 621,751
Mortgage loans held for sale (net of allowance of $930,171
and $450,000, respectively) 39,051,170 36,046,571
Miscellaneous receivables 47,939 155,843
Prepaid expenses 222,653 274,211
Due from related parties 104,427 105,564
Other current assets 53,802 568,666
----------- -----------
Total current assets 39,998,920 39,477,822
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 695,525 1,352,212
Automobile 52,584 99,047
----------- -----------
748,109 1,451,259
Less accumulated depreciation and amortization 184,385 272,137
----------- -----------
Total property and equipment 563,724 1,179,122
----------- -----------
OTHER ASSETS
Property held for sale 207,500
Deposits 92,065 167,229
Deferred tax asset 331,525 558,000
----------- -----------
Total other assets 423,590 932,729
----------- -----------
$40,986,234 $41,589,673
=========== ===========
The accompanying notes are an integral part of these statements.
2
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Warehouse finance facilities $ 39,532,037 $ 35,463,034
Cash overdraft 264,409
Current maturities of long-term debt 86,969 366,495
Due to related parties 80,479
Accounts payable, accrued expenses and other
current liabilities 4,566,525 3,477,063
------------ ------------
Total current liabilities 44,266,010 39,571,001
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 213,849 554,745
------------ ------------
Total liabilities 44,479,859 40,125,746
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock, $.01 par value; authorized, 20,000,000; issued and
outstanding, 2,785,598 shares 27,856 22,000
Preferred Stock, $.01 par value; authorized, 10,000,000; issued and
outstanding 3,000 shares; voting, liquidation preferences $1,000 per share 30 21
Additional paid-in capital 9,876,397 6,992,430
Retained earnings (deficit) (13,397,908) (5,550,524)
------------ ------------
Total stockholders' equity (deficit) (3,493,625) 1,463,927
------------ ------------
$ 40,986,234 $ 41,589,673
============ ============
The accompanying notes are an integral part of these statements.
3
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues
Commissions and fees $ 9,612,493 $ 5,883,680 $ 1,831,814 $ 2,674,254
Interest 2,969,632 516,128 847,915 461,660
------------ ------------ ------------ ------------
12,582,125 6,399,808 2,679,729 3,135,914
------------ ------------ ------------ ------------
Expenses
Selling 6,326,156 3,278,732 1,851,967 1,534,432
General and administrative 11,189,888 4,138,093 3,553,885 2,030,192
Interest 3,013,499 336,431 937,949 255,467
------------------------------------------------------------------------
20,529,543 7,753,256 6,343,801 3,820,091
------------------------------------------------------------------------
Loss from continuing operations (7,947,418) (1,353,448) (3,664,072) (684,177)
Gain on disposal of BDMC 536,664 0 536,664 0
------------------------------------------------------------------------
Net loss before income tax credit (7,410,754) (1,353,448) (3,127,408) (684,177)
Income tax credit
Current 0 0 0 68,000
Deferred 0 0 0 22,000
------------------------------------------------------------------------
0 0 0 90,000
========================================================================
NET LOSS $ (7,410,754) $ (1,353,448) $ (3,127,408) $ (774,177)
========================================================================
Basic EPS calculation
Net income (loss) $ (7,410,754) $(3,127,408)
Less: Preferred stock dividend (136,630) (66,630)
Preferred stock discount (300,000) (150,000)
------------ -----------
Income available for common stockholders $ (7,847,384) $(3,344,038)
============ ===========
Fraction of Weighted Fraction of Weighted
Dates Outstanding Shares Outstanding Period Average Shares Period Average Shares
----------------- ------------------ ------ -------------- ------ --------------
January 1 - March 2 2,200,000 61/273 491,575
Issuance on March 3 2,305,467 150/273 1,266,740 30/92 751,783
Issuance on July 31 2,406,146 10/273 88,137 10/92 261,538
Issuance on Aug. 10 2,630,882 39/273 375,840 39/92 1,115,265
Issuance on Sept. 18 2,706,699 6/273 59,488 6/92 176,524
Issuance on Sept. 24 2,785,598 7/273 71,426 7/92 211,948
---------- ----------
Weighted-average shares 2,353,206 2,517,057
========== ==========
Per share amounts:
Loss from continuing operations $ (3.56) $ (1.54)
Gain on disposal of BDMC 0.23 0.21
----------- ---------
Net loss $ (3.33) $ (1.33)
=========== =========
Pro forma information
Pro forma net income (loss)
Historical net income (loss) $ (1,353,448) $ (774,177)
Pro forma provision (credit) for income taxes (472,637) (319,880)
------------- -----------
Pro forma net income (loss) $ (880,811) $ (454,297)
============= ===========
Pro forma per share data
Pro forma net income (loss) per share $ (0.54) $ (0.21)
============ ============
Weighted-average shares outstanding 1,644,445 2,200,000
============ ============
The accompanying notes are an integral part of these statements.
4
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 1998
(Unaudited)
Common Stock Preferred Stock Additional
-------------------- --------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Balance at December 31, 1997 2,200,000 $ 22,000 2,060 $ 21 $ 6,992,430
Conversion of preferred stock on March 3, 1998 103,427 1,034 (500) (5) (1,029)
Preferred dividends paid in stock on March 3, 1998 2,040 21 9,842
Issuance of preferred stock on June 30, 1998 1,000 10 999,990
Accretion of preferred stock discount 300,000
Conversion of preferred stock on July 31, 1998 100,000 1,000 (500) (5) (995)
Preferred dividends paid in stock on July 31, 1998 679 7 3,390
Conversion of preferred stock on August 10,1998 214,254 2,142 (560) (6) (2,136)
Preferred dividends paid in stock on August 10, 1998 10,482 105 27,292
Conversion of debt on August 19, 1998 1,700 17 1,536,358
Conversion of preferred stock on September 18, 1998 71,301 713 (100) (1) (712)
Preferred dividends paid in stock on Sept. 18, 1998 4,516 45 6,289
Conversion of preferred stock on September 24, 1998 74,106 741 (100) (1) (740)
Preferred dividends paid in stock on Sept. 24, 1998 4,793 48 6,418
Preferred stock dividends
Net loss for the nine months ended Sept. 30, 1998 0 0 0 0 0
-----------------------------------------------------------------------------
Balance at September 30, 1998 2,785,598 $ 27,856 3,000 $ 30 $ 9,876,397
=============================================================================
Retained
Earnings
(Deficit) Total
--------- -----
Balance at December 31, 1997 $ (5,550,524) $ 1,463,927
Conversion of preferred stock on March 3, 1998
Preferred dividends paid in stock on March 3, 1998 9,863
Issuance of preferred stock on June 30, 1998 1,000,000
Accretion of preferred stock discount (300,000)
Conversion of preferred stock on July 31, 1998
Preferred dividends paid in stock on July 31, 1998 3,397
Conversion of preferred stock on August 10,1998
Preferred dividends paid in stock on August 10, 1998 27,397
Conversion of debt on August 19, 1998 1,536,375
Conversion of preferred stock on September 18, 1998 6,334
Preferred dividends paid in stock on Sept. 18, 1998
Conversion of preferred stock on September 24, 1998
Preferred dividends paid in stock on Sept. 24, 1998 6,466
Preferred stock dividends (136,630) (136,630)
Net loss for the nine months ended Sept. 30, 1998 (7,410,754) (7,410,754)
-----------------------------
Balance at September 30, 1998 $(13,397,908) $ (493,625)
=============================
The accompanying notes are an integral part of these statements.
5
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30
================================
1998 1997
Cash flows from operating activities:
Net income (loss) $ (7,410,754) $ (1,353,448)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 223,686 66,330
Provision for doubtful accounts 1,114,034
(Increase) decrease in operating assets:
Interest receivable 212,783 (352,409)
Mortgage loans held for sale (10,180,189) (24,534,437)
Miscellaneous receivables 38,555 (63,903)
Prepaid expenses (1,636) (451,566)
Other current assets 175,975 (167,664)
Deposits (14,341) (83,806)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other current liabilities 2,335,402 1,478,598
--------------------------------
(6,095,731) (24,108,857)
--------------------------------
Net cash used in operating activities (13,506,485) (25,462,305)
--------------------------------
Cash flows from investing activities:
Expenditures for property and equipment (275,871) (745,881)
Disposal of BDMC, net of cash received (388,200)
Proceeds (payments) for related party receivable 1,087 (201,240)
--------------------------------
Net cash used in investing activities (662,984) (947,121)
--------------------------------
Cash flows from financing activities:
Warehouse borrowings 10,387,292 22,277,228
Proceeds from issuance of common stock 3,920,525
Proceeds from issuance of preferred stock 1,000,000
Increase (decrease) in cash overdraft (264,409) 90,500
Proceeds from related party payable 80,479
Proceeds from long-term debt 1,961,156 211,089
Conversion of debt into preferred stock (163,625)
Payments for long-term debt (403,590) (207,502)
--------------------------------
Net cash provided by financing activities 12,597,303 26,291,840
--------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,572,166) (117,586)
Cash and cash equivalents at beginning of year 1,705,216 644,685
--------------------------------
Cash and cash equivalents at end of period $ 133,050 $ 527,099
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 0 $ 0
================================
Interest $ 3,420,978 $ 160,111
================================
Supplemental schedules of noncash investing and financing activities:
Dividend paid by transfer of investment in 430 Carroll Street, Inc. $ 0 $ 175,224
================================
Conversion of 1,760 shares of preferred stock into 563,088 shares
of common stock $ 0 $ 0
================================
Capital asset and lease obligation additions $ 330,064 $ 269,061
================================
The accompanying notes are an integral part of these statements.
6
CFI MORTGAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
NOTE 1 - GENERAL
A. 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. ("CFI" or "Company") was incorporated in
Delaware on March 18, 1997. Immediately prior to the Company's initial
public offering on May 27, 1997, 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 CFI common stock.
B. Business
Through its wholly-owned subsidiary, Direct Mortgage Partners Inc. ("DMP"),
CFI is engaged in purchasing and selling loans secured primarily by first
mortgage on one to four unit residential properties and purchasing and
selling servicing rights associated with such loans. The loans are
nonconforming loans originated and sold through DMP. Significant
inter-company accounts and transactions have been eliminated in
consolidation.
C. Geographic Concentration
The Company is licensed and registered to do business in 22 states. DMP
operates through its nine regional offices. The Company achieved it's goal
of geographic diversification in the second quarter of 1998 with Florida
production accounting for less than 50% of total DMP loan production. While
CFI's results of operations and financial condition remain sensitive to
general trends in the Florida economy and its residential real estate
market, this dependency is being reduced to a more acceptable level of
risk.
D. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instruction of Form 10-QSB and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation of the results for the interim period have been
included. Operating results for the quarter ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998.
7
The consolidated financial statements of the Company include the accounts
of all wholly owned subsidiaries. All significant inter-company balances
and transactions have been eliminated in consolidation.
NOTE 2 - LONG TERM DEBT
On May 18, 1998, the Company issued $1,700,000 principal amount of
convertible debentures to a single investor. The investor is committed to
purchase a further $500,000 principal amount of such debentures upon the
effective date of a registration statement registering the underlying
common stock. The debentures are due April 30, 2000, bear interest at a
rate of 10% per annum (payable in cash or Common Stock at the option of the
Company) and are convertible into shares of the Company's Common Stock at a
conversion rate equal to the lesser of $9.625 or 85% of the lowest
three-day average closing bid price of the Company's Common Stock during
the fifteen day period ending on the day prior to conversion. Such
conversion price shall be 80% of such market price for conversions
subsequent to 240 days following the closing date of May 18, 1998. In
addition, the holder may convert only up to one-third of the issue upon the
effective date of the registration statement, and an additional one-third
on each of the 30th and the 60th days after such date. In addition, the
holder is limited to converting no more than 10% of the principal amount in
any calendar week. The Company has the right to redeem the debentures at
any time at a price of 115% of the principal amount, plus any accrued but
unpaid interest. The debentures are subordinate to the Company's bank line
and two warehouse line of credit agreements. The investor also received
warrants to purchase 50,000 shares of the Company's Common Stock at a price
of $8.75 per share. The foregoing securities were sold without registration
in a transaction qualifying for exemption from registration afforded by
Section 4(2) of the Securities Act.
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 share 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.
In 1997 and 1998, CFI acquired certain property and equipment assets
partially financed through various bank notes. The equipment purchased
collateralized the notes. The Company also leases certain office equipment
under various capital leases. The economic substance of the leases is that
the Company is financing the acquisition of the assets through the leases.
At September 30, 1998, the balances payable under the notes and leases are
as follows:
Bank notes payable in equal monthly installments
of $1,496.87; interest rates ranging from
7.751% to 11.123% 21,558
Various capitalized lease obligations 279,260
----------
300,818
Less portion payable in one year 86,969
----------
Long-term debt payable $ 213,849
==========
Annual maturities of long-term debt are as follows:
Remainder of 1998 20,869
1999 88,974
2000 88,677
2001 53,246
2002 39,646
Thereafter 9,406
---------
300,818
=========
9
NOTE 3 - RELATED PARTY TRANSACTIONS
In February 1996, the company acquired a 49% interest for $5,000 in a
corporation that performed title searches for the Company. An officer of
the company effectively owns 25% of this affiliate. The company paid fees
of $20,000 in 1996 to this entity. The company's $5,000 investment was
charged to operations in 1996. Such fees were regulated by the State of
Florida Office of Insurance Commission. Another officer of the Company
acquired a 49% interest in a corporation in 1996 that performed $82,500 of
appraisal services for the Company in 1996. In January 1997, both of these
entities ceased operations.
The Company has made advances to three officers aggregating approximately
$83,000 as of December 31, 1997. During the third quarter of 1998, an
additional advance was made to officers in the amount of $15,144 The
advances are non-interest bearing and are due on demand and included in due
from related parties.
In addition, On July 15, 1998 Mr. Vincent C. Castoro, Chairman of the Board
of Directors, personally loaned CFI Mortgage Inc. $100,000 (One Hundred
thousand Dollars) and in return holds a promissory note with an interest
rate of 6% and a due date of August 15, 1998. The Company did not repay the
loan principal or interest on the due date and is therefor in default under
the terms of the note.
NOTE 4 - COMMITMENTS and CONTINGENCIES
a.) Warehouse lines of credit
Warehouse lines of credit are used for short-term financing of
mortgages held for sale and are collateralized by the underlying
mortgages held for sale. CFI currently has outstanding borrowings from
two warehouse lenders, however only one of these lenders, Nikko
Financial Services, continues to make advances for new loan
originations. The other lender, Bank One Texas had outstandings of
$1,046,676 at September 30, 1998. The Nikko facility has a committed
limit of $35 million and an additional $15 million on a negotiated
basis with total outstandings of $38,485,361 at September 30, 1998.
At September 30, 1998 the total outstandings under all facilities
totaled $39.5 million and carried interest rates based on LIBOR plus a
margin of 125 to 150 basis points or Fed Funds plus a margin of 175 to
250 basis points. Interest expense from utilization of the warehouse
lines was $3,013,499 for the nine months ended September 30, 1998. On
November 17, 1998 Nikko notified CFIM that, effective November 30,
1998 further advances under the existing warehouse agreement will be
on a discretionary rather than committed basis. The loss of CFIM's
only remaining active warehouse commitment raises serious doubts as to
CFIM's ability to continue its lending operations beyond November 30,
1998. Management is seeking alternative warehouse lending sources,
however there can be no assurances that an alternative source of
warehouse financing will be found in time to sustain CFIM's lending
ability beyond November 30, 1998.
b. Mortgage Purchase Agreements and Revolving Purchase Facilities
In its normal course of business, CFI has entered into various
mortgage purchase agreements and two revolving purchase agreements
with various banks and investors. Under these mortgage purchase
agreements, the banks and investors purchase mortgages held for sale
from CFI without recourse.
Under the revolving repurchase agreements, CFI sells mortgage loans,
subject to certain warranties as defined, to two financial
institutions that have a takeout commitment from an investor. The
mortgage loans that CFI has sold to these financial institutions,
which are pending settlement with takeout investors at September 30,
1998, totaled $13,528,525. The sales price to the takeout investors
carries up to an additional 150 basis points of revenue that CFI will
recognized when the loans close with the take out investor. As of
September 30, 1998 the mortgage purchase agreements and revolving
purchase agreements were terminated.
10
c. Leases
CFI leases its corporate headquarters, loan office facilities and
certain office equipment under various operating leases. The office
leases generally require CFI to pay certain escalation costs for real
estate taxes, operating expenses, usage and common area charges. Rent
expense for real property leases charged to operations in the Nine
months ended September 30, 1998 was $826,549 while equipment rental
and lease expenses during the same period was $301,200.
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of September 30, 1998
are as follows:
Capitalized
Operating Lease
Leases Obligations
----------- ----------
Years ending December 31,
Remainder of 1998 $ 162,070 $ 29,251
1999 544,063 117,006
2000 411,104 109,489
2001 53,060 67,328
2002 10,321 45,305
Thereafter 682 9,810
----------- ----------
Total minimum future payments $ 1,181,300 378,189
===========
Less amount representing interest 98,929
----------
$279,260
==========
d. Legal Proceedings
The Company is a party to various legal proceedings arising in the
ordinary course of its business. Management believes that none of
these actions, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial condition of
the Company.
e. Employment Contracts
The Company has entered into several employment contracts with certain
officers and employees that expire between 1998 and 2002
NOTE 5 - STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
a.) 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 sale, 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 price 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 2,000 shares of Series A 8%
convertible preferred stock, $0.01 par value, at $1,000 per share in a
private placement. The net proceeds from the sale, after deduction
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,
which was $300,000, is accounted for as a charge against retained
earnings and is amortized over the non-convertible period. Included in
the statement of changes in
11
stockholders equity are charges of $150,000 in the year ended December
31, 1997 and $150,000 in the quarter ended March 31, 1998 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.
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 net proceeds from the sale, after deduction of
selling and other related expenses, aggregated $905,000. 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
conversion date, subject to a minimum floor conversion price of $5.00
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 third quarter there were additional conversions of preferred
stock to common shares. On July 31, 1998, 500 shares of the Series B
preferred stock plus accrued interest of $3,397 were converted into 100,679
shares of CFI common stock and on August 10, 1998, 560 shares of the Series
A preferred stock plus accrued interest of $30,684 were converted into
224,736 shares of CFI common stock. On September 10, 1998 100 shares of the
A preferred stock plus accrued interest of $ 6,334 were converted to 75,817
shares of CFI common stock. On September 24, 1998 100 shares of the A
preferred stock plus accrued interest of $ 6,465 were converted to 78,899
shares of CFI common stock.
In connection with the preferred stock transaction, the Company granted
warrants to its underwriters, Straussbourger, Pearson, Tulcin & Wolff to
purchase 240,000 shares of common stock at an exercise price of $6.00 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
non-conversion term.
Redemption of Convertible Subordinate Debenture in exchange for Convertible
Preferred Stock. On May 18, 1998 the company issued a $2.2 million
Convertible Subordinate Debenture to Thomson, Kernaghan & Co., Ltd. of
which $1.7 million was outstanding at June 30, 1998. On August19, 1998 the
company redeemed the outstanding balance of the Debenture in exchange for
the issuance of 1,700 shares of Convertible Preferred Stock to Thomson,
Kernaghan & Co., Ltd. The effect of this transaction on the Company's
balance sheet will be to convert a $1.7 million debt to $1.7 million of
equity, subject to certain discounts.
Convertible-Redeemable Preferred Stock Offering. In August 1998, the
company entered into an agreement with Union Trading-Financial Limited for
the placement of the Company's Convertible-Redeemable Preferred Stock. The
Preferred Stock Units will be offered at $20 each and will be convertible
into the Company's Common Stock at the rate of 1 preferred unit to 2.5
shares of Common Stock.
The offering was expected to generate net proceeds after marketing and
advisory services costs of up to $14 million by April 1999 at the rate of
$1 million to $2 million per month. On August 19, 1998 the Company had
received three executed subscription agreements for $10.2 million and a
letter from the underwriter, Union Trading-Financial, that $3 million cash
was on deposit as the partial proceeds from these initial subscriptions.
However, as of November 23, 1998 there has been no cash received from these
initial subscriptions raising significant doubt as to the collectability of
the subscriptions. Given the significant doubt as to collectability, CFIM
has not recorded the preferred stock subscribed under this Series D
Preferred Stock offering.
Furthermore, the terms of CFIM's initial public offering underwriting
agreement require the consent of CFI's underwriter, Strasbourger Pearson
Tulcin and Wolff for any issuance of common stock or securities convertible
into common stock. In a letter dated October 28, 1998 CFIM's underwriter
denied its consent for CFIM to issue it Series D Convertible Preferred
Stock offering. With the recent decline in the market price of CFIM's
common stock, the underwriter of the Series D has requested that the
conversion features of the Series D Preferred be altered from a 1 preferred
share for 2.5 common shares to 1 preferred share for 5 common shares.
Given that no cash has yet been received on the Series D Preferred
offering, that CFIM's IPO underwriter has denied consent for this offering
and that there is a current proposal to modify the terms of the offering,
it appears highly unlikely that any proceeds from this offering will be
received before the end of the first quarter of 1999 if at all.
12
b.) Earnings per share (EPS) have been presented on a non-dilutive basis.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common
stock that then share in the earnings of the entity. Since the effect
of outstanding warrants, options and preferred stock conversion is
antidilutive, it has been excluded from the computation of EPS.
NOTE 6 - SUBSEQUENT EVENTS
a.) Termination of Del Mar Asset Purchase Transaction - The Company had
previously announced that on September 30, 1998 it had entered into an
Asset Purchase Agreement and Plan of Reorganization among Del Mar,
CFIM and Michael Shustek, subject to completion of due diligence and
approval by both companies shareholders and CFIM's IPO underwriter.
The transaction as proposed called for the purchase of 100% of the
assets of Del Mar Mortgage and Del Mar Holdings for 5.5 million shares
of CFI common stock. By letter dated October 28, 1998, CFIM's IPO
underwriters denied consent for the company to issue common shares
under the Del Mar Asset Purchase transaction. Further, on October 28,
1998 management of Del Mar notified the Company that "a merger of the
two companies would not be in the best interest of Del Mar or its
shareholders" and so Del Mar terminated the agreement.
b.) Common Stock Subscription - On October 30, 1998 the company received a
subscription agreement from MediForce Inc., a publicly traded company,
to purchase 1,333,333 shares of CFI Common Stock for $2 million. In
connection with this transaction, Mediforce advanced $150,000 to CFI
and provided a note in the amount of $1,850,000. The terms of the note
call for a payment of $850,000 on November 14, 1998 and $1,000,000 on
November 30, 1998. As of November 23, 1998 there have been no payments
made under this note by Mediforce.
In a letter dated November 13, 1998 CFI's IPO underwriter indicated
that they were only willing to grant consent for CFIM to sell shares
of common stock to Mediforce, Inc and thereby raise critically needed
capital if the Company made significant cash payments to the
underwriter. In as much as the Company had no means to make payments
to the underwriter, consent has not been granted. By letter dated
November 23, 1998, MediForce, Inc. notified the Company that the
Subscription Agreement and Promissory Note are withdrawn and of no
further force and effect and has made demand for return of the
original $150,000 advance.
c.) Sale of Series C Convertible Preferred Shares - On October 30, 1998
the Company and General Information Technologies Inc. (GETI) entered
into an agreement with Thomson Kernaghan & Co. Limited (Thomson)
whereby Thomson sold its interest in the Company, consisting of 1,700
Series C Convertible Preferred shares, to GETI for the sum of
$2,125,000. GETI is a wholly owned subsidiary of MediForce Inc., the
party that executed the subscription agreement described in NOTE 6,
section a. above. The closing date of the agreement is November 12,
1998. Payment of the purchase price consists of a $1,700,000
promissory note issued by GETI to Thomson and 212,500 common shares of
CFI to be issued by the Company to Thomson as consideration for
$170,000 of interest and $255,000 premium. In a letter dated November
13, 1998 the Company's IPO underwriter withheld their consent for the
Company to issue the portion of the 212,500 shares under this
agreement that related to prepaid interest and the premium.
If, on May 1, 1999, the prior 5 day average closing bid price of the
common shares of the company is below $2.00, then the company will
deliver another 70,500 of its common shares to Thomson. In the event
that funding is obtained from the Company's Series D Preferred
offering in the amount of $5,000,000 or more, Thomson will be paid not
less than 25% of such funding up to the balance of the promissory
note. As part of the agreement, the exercise price of Thomson's
warrants to purchase 50,000 shares of CFI common stock was reduced
from $2.6563 to $2.00.
d.) Sale of Series A and B Convertible Preferred Shares - Although not a
party to this transaction, the Company is aware that the holder of its
Series A and B Convertible Preferred Shares had entered into an
agreement with GETI to sell its interest in those issues effective
October 30, 1998.
e.) CFI Common Stock moved to OTC-Bulletin Board Market - 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
SmallCap Market in that its net tangible assets had fallen below
$2,000,000 and so the Company had received a formal notice of
delisting from Nasdaq. On July 31, 1998 the company appealed this
notice at an oral hearing and had been awaiting a final decision from
Nasdaq. On November 17, 1998 Nasdaq informed the Company by letter
that a determination had been made to delist the Company's securities
from The Nasdaq Stock Market effective with the close of business on
November 17, 1998.
13
f.) Change in Nikko warehouse facility - On November 18, 1998 the Company
received a notification from Nikko that effective November 30, 1998
further advances for new loan fundings would be under the Repurchase
agreement which provides Nikko with the ability to evaluate whether or
not it will enter into any new transactions with CFIM. In effect, the
Company will no longer have a committed warehouse facility effective
November 30, 1998. Any future warehouse advances will be entirely at
Nikko's discretion. Given that Nikko may decline the Company's request
for loan fundings after November 30, 1998, it would not be prudent to
make loan funding commitments beyond that date.
g.) Voluntary Plan of Reorganization - The Company has received a verbal
commitment from an investor to recapitalize the company with up to $2
million if the Company can successfully restructure its existing
liabilities. Accordingly, the Company will be presenting a voluntary
plan of reorganization to all its creditors wherein all creditors will
be offered 1 share of CFIM common stock for each dollar owed by CFIM.
The success of this reorganization plan is dependent on full
acceptance by all of the Company's creditors and the consent of its
underwriters to issue the related common shares. There can be no
assurance that all the creditors will accept CFIM's common shares in
lue of payment, that the underwriters will consent to the issuance of
the underlying shares or that the investor promising to recapitalize
the Company will perform as indicated. In the event that the plan is
not successful by December 11, 1998, management intends to seek
liquidation of the Company though the filing of a Chapter 7 bankruptcy
action on December 14, 1998.
NOTE 7 - GOING CONCERN RISK
As discussed in Note 1, the accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has incurred losses and negative cash flow from continuing
operations and has accumulated a retained deficit of $13.4 million through
September 30, 1998. Total Stockholders Equity is a deficit of $3.5 million
as of September 30, 1998.
The Company's working capital is not sufficient to sustain operations. CFIM
has not been able to pay any of its employees since October 31, 1998 and so
on November 18, 1998 all the employees of CFIM were laid off. Approximately
35 to 40 employees remain and are voluntarily working for no compensation
in the effort to structure a voluntary reorganization of the Company and to
complete sales of loans currently held in the warehouse. The lack of cash
to fund the haircut on new loan fundings has resulted in a suspension of
all new lending activity and the closure of all but one lending branch
location.
The Company's ability to return to normal operations is totally dependent
on the success of its previously mentioned voluntary plan of reorganization
and subsequent additional capital infusion. If this plan is not successful
or the additional capital is not forthcoming, 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 herein
do not include any adjustments that might result from the outcome of this
uncertainty.
14
Note 8 - Sale of Subsidiary
On September 11, 1998 CFI Mortgage Inc. (CFIM) completed the sale of one of
its two operating subsidiaries, Bankers Direct Mortgage Corporation (BDMC),
to IMN Financial Corp. (IMNF) by means of a sale of all of the capital
stock of BDMC to IMNF. The Sale was made pursuant to a stock Purchase
Agreement dated as of September 4, 1998, the form of which has been
previously filed as an exhibit with the 8K on September 29, 1998. The
purchase price consisted of the assumption of all liabilities of BDMC and
IMNF's agreement to pay CFIM one-eighth of one percent of the value of all
closed loans by BDMC for the two years following closing, but only if
BDMC's operations are profitable in the quarter in which such loans are
closed. Further, such payments will only be made if the net book value of
BDMC was at least $0 at closing or if less than $0, then such payments
will be first be applied to make up any negative net worth in BDMC. The
company agreed not to engage in the retail conforming mortgage business
conducted by BDMC for a period of five years following the closing. IMNF
also hired Vincent J. Castoro, the company's former vice president and a
Director as an employee of IMNF as of the closing. Mr. Castoro continues to
serve as a director of CFIM.
Prior to the consummation of the sale of BDMC, there were no material
relationships between CFIM or BDMC or any of their respective officers,
directors or affiliates, and IMNF or any of its directors, officers or
affiliates. The terms of the transaction were established by arm's-length
negotiation. Below is the Pro Forma Financial Information
The Actual Balance Sheet contained in the body of this financial statement
above (Page F-2 & F3) is the Balance Sheet at September 30, 1998 which
accounts for the sale of BDMC. The following unaudited pro forma
Consolidated Statement of Operations indicates the Consolidated figures for
CFIM & DMP as if the sale of BDMC had been effective January 1, 1998 and
1997.
The unaudited pro forma financial information should be read in conjunction
with the historical financial statements and related notes of the company.
15
CFI MORTGAGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited Pro Forma )
For the Nine For the Nine For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- ------------
Commissions and fees $ 5,821,844 $ 1,262,824 $ 971,240 $ 1,262,824
Interest 2,354,468 162,362 774,123 147,521
----------- ----------- ----------- -----------
8,176,312 1,425,187 1,745,364 1,410,345
----------- ----------- ----------- -----------
Expenses
Selling 3,703,571 404,060 1,167,118 404,060
General and administrative 8,462,463 1,304,975 2,904,519 1,302,371
Interest 2,319,609 102,196 806,751 102,196
----------- ----------- ----------- -----------
14,485,643 1,811,231 4,878,389 1,808,627
----------- ----------- ----------- -----------
Loss from continuing operations (6,309,331) (386,044) (3,133,025) (398,281)
Gain on disposal of BDMC 536,664 0 536,684 0
----------- ----------- ----------- -----------
Net loss before income tax credit (5,772,668) (386,044) (2,596,361) (398,281)
Income tax credit
Current 0 0 0 0
Deferred 0 0 0 0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS $(5,772,668) $ (386,044) $(2,596,361) $ (398,281)
=========== =========== =========== ===========
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
Certain of the matters discussed herein 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. The Company undertakes no obligation to
release publicly any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect
the occurrence of anticipated or unanticipated events.
General Business
CFI Mortgage, Inc. is a mortgage banker engaged in originating,
purchasing and selling conventional, government insured and sub prime
(B/C) loans on one to four family residential units through its
wholly-owned subsidiaries, Bankers Direct Mortgage Corporation and
Direct Mortgage Partners, Inc. CFI common shares are traded on the
NASDAQ small cap market system under the symbol CFIM until November
17, 1998 at which time the Company's securities were moved to the Over
the Counter Bulletin Board.
The following comparative analysis and discussion may be misleading
due to the following. Information for the Nine months ended September
30, 1997 includes nine months of operations of Bankers Direct Mortgage
Corporation "BDMC" and only one month for Direct Mortgage Partners
"DMP". In addition due to the sale of BDMC on August 31, 1998 the Nine
Months ended September 30, 1998 only includes eight months of BDMC
operations and Nine months of DMP operations.
In 1997 Management had concentrated on the development of the
wholesale production offices of DMP by opening new offices in
Plantation, Florida, Parsippany, New Jersey and Portland, Oregon.
Closings for DMP in the first Nine months of 1998 totaled $204 million
as compared to the comparable period in 1997 of $18 million an
increase of $186 million. In addition BDMC opened an additional retail
office in Lakewood, Colorado. BDMC had also concentrated on internal
development of the existing offices through the hiring of quality loan
officers. BDMC's production increased from $97 million in the first
Nine months of 1997 to $150 million in the comparable period for 1998
an increase of $53 million.
With the increased production, Direct Mortgage Partners support
operations were expanded to effectively handle the workload. However,
as a result of the sale of Banker Direct Mortgage Corporation total
headcount has decreased from 236 at December 31, 1997 to 142 at
September 30, 1998. The 142 employees consisted of 23 commissioned
sales personnel and 119 production support and administrative
personnel.
Comparison for the first Nine months Ended September 30, 1998 and 1997
The primary source of the Company's revenue is from activities related
to providing homeowner financing solutions through either Bankers
Direct Mortgage, the Company's retail conforming and government
insured mortgage banking subsidiary, Direct Mortgage Partners, the
Company's wholesale sub prime lending subsidiary, or by brokering
loans to other lenders who provide a competitive product for the
particular type of loan required.
During the Nine months ended September 30, 1998 total lending volume
was $354 million with 31.2% from BDMC, 58% from DMP and 10.8% brokered
to other lenders. During the Nine months ended September 30, 1997,
total lending volume was $173 million with 68.8%from BDMC, 10.6% from
DMP and 20.6% brokered to other lenders. Sub prime lending activity
from DMP can generate profit margins nearly twice that of BDMC's
conforming and government retail production. For that reason
management has focused on increasing DMP funding activity. The
increase from 10.6% of the total funding volume during the Nine months
ended September 30, 1997 to 58% of funding volume during the
comparable period in 1998 indicates a very positive trend related to
DMP's contribution to company revenues.
17
Revenues
The Company's revenues, including interest income, were $12,582,125
for the Nine months ended September 30, 1998, which represents an
increase of 96.6% or $6,182,316 from the Nine months ended September
30, 1997 revenues of $6,399,808. This dramatic increase in revenues is
reflective of several factors.
The first factor impacting improved revenue levels involved loan sales
activity, both in terms of the balance of loans sold and of the
product mix between conforming / government and sub prime. The
majority of revenue from the Company's business activity is recorded
upon sale of the loans it has originated to third party investors. In
the Nine months ended September 30, 1998, total loan sales were $351
million vs. only $163 million during the same Nine months last year
for an increase of $188 million or 115%. Additionally, there was only
$18 million in sub prime loan sales during the Nine months ended
September 30, 1997 while current year same Nine months sales of sub
prime loans reached $195 million. Sub prime loans carry profit margins
that can be more than twice the profit margins of conforming /
government loans which further amplified the effect of increased sales
activity.
The other major factor responsible for the increase in revenues was
interest income. The Company earns interest income on the loans it
originates at the note interest rates from the time it funds the loan
until the loan is sold to third party investors. Sub prime loans
typically carry note interest rates that can be 2% to 4% higher than
rates on conforming / government loans. Management successfully
established warehouse borrowing facilities late in 1997 that allowed
the Company the opportunity to hold loans longer before sale to an
investor. As a result of the higher loan funding levels, longer
holding period and higher note rates on the sub prime portion of the
Company's portfolio, interest income increased from only $516,128.52
during the same Nine months last year to $2,969,632 for the Nine
months ended September 30, 1998.
Expenses
Selling Expenses for the Nine months ended September 30, 1998 were
$6,326,156, which represents an increase of $3,047,424 from the same
Nine months last year. The higher level of Selling Expenses was
related to the higher commission costs driven by the increase in total
loans originated. As a percentage of loans originated, Selling
Expenses decreased by .13% between the comparable Nine months period
ended September 30, 1998 and 1997.
General and Administrative Expenses were $11,189,888 during the Nine
months ended September 30, 1998 which was an increase of $7,051,795
over the same comparable period last year. Compensation related
expenses, including temporary services, accounted for $6.7 million or
55% of this increase. The growth in loan origination activity created
an immediate need for administrative and operational staffing
increases. Management believes that the staffing infrastructure
currently in place is capable of supporting the Company's planned
growth through the remainder of 1998 without further significant
increases.
The growth in branch locations and business volume resulted in
increased occupancy and equipment related expenses. Occupancy costs in
the Nine months ended September 30, 1998 increased by $415,697 over
the same comparable period last year. Equipment related expenses of
depreciation and leasing charges were up by $302,172 in the first Nine
months of 1998 over the same comparable period in 1997. The occupancy
and equipment related expense increases represented approximately
10.2% of the total G&A expense increases.
General office expenses related to office supplies and postage costs
were also higher in the first Nine months of 1998 vs the same
comparable period in 1997. This category of expenses was up by
$274,089 and accounted for 3.89% of the total G&A increase. These
expense increases are consistent with the added branch locations and
overall increase in business activity.
Professional service fees, primarily accounting and legal, were
$750,461 higher in the first Nine months of 1998 over the same
comparable period in 1997, and reflect the additional effort required
to support the company's increased reporting activities as an SEC
registrant in 1998. The Company was still a closely held "S"
corporation during the first Five months of 1997, and so the Company
needed much less support in the area of accounting and legal services
at that time.
18
The final significant increase in G&A expenses occurred in the area of
loan loss provision, which was up $1,126,964 between the first Nine
months of 1997 and 1998. The Company's higher lending activity coupled
with the introduction of higher risk sub-prime loan originations
required the establishment of a correspondingly higher reserve against
potential loan losses.
Interest Expense is primarily the cost of funds borrowed from
warehouse lenders to fund the Company's loan originations during the
holding period between funding and sale to an investor. During the
Nine months ended September 30, 1998, interest expense was $3,013,498,
which was $2,677,067 higher than the same comparable period last year.
This increase was due to extending the holding period of loans while
increasing the absolute size of loans being held in warehouse.
Net Income (Loss)
The Company generated a net loss before taxes of ($7,410,754) in the
Nine months ended September 30, 1998 vs. a loss before taxes of ($
1,353,448) during the same comparable period last year, an increase of
$6,057,306. The operating losses experienced by the Company during the
Nine months ended September 30, 1998 were significantly impacted by
several non-recurring events, primarily during the second quarter. The
most significant impact involved an increase in reserves for potential
future loan losses of $690,857 which was recorded at the end of the
second and third quarters. Somewhat related to the loss reserve
analysis was the reversal of nearly $300,000 in interest income which
had been accrued on non performing loans as long ago as the first
quarter of 1997.
Another major factor in the operating losses was the impact of a major
branch expansion effort in California, which proved to be too capital
intensive for the Company to adequately fund the growth required to
reach sustained profitability. During the Six months ended June 30,
1998, the California operations lost in excess of $500,000 and so, at
the end of the second quarter the Company withdrew from its California
expansion effort. Costs and contingent liabilities from the withdrawal
will not be material, and so the losses from this effort effectively
ceased at the end of the second quarter of 1998.
The Company's numerous capital raising efforts, and related regulatory
filing requirements, have resulted in dramatically increased
consulting, legal, accounting and brokerage fees. Total costs related
to capital raising efforts in the first half of 1998 approached
$400,000 and are not expected to reoccur in future periods.
And finally, the Company has evaluated it's two mortgage banking
operations to clearly determine relative contribution to operating
results relative to capital investment required. As a result of this
process, it was determined that one of its susidiary's Bankers Direct
Mortgage Corporation would be sold and on August 31, 1998 the sale was
transacted.
Comparison for The Three Months Ended September 30, 1998 and 1997
During the three months ended September 30, 1998 total lending volume
was $96 million with 32.1% from BDMC, 62.0% from DMP and 5.9% brokered
other lenders. During the three months ended September 30, 1997, total
lending volume was $79.7 million with 57.6% from BDMC, 23.1% from DMP
and 19.3% brokered to other lenders. Sub prime lending activity from
DMP can generate profit margins nearly twice that of BDMC's conforming
and government retail production. For that reason management has
focused on increasing DMP funding activity. The increase from 19.3% of
the total funding volume during the three months ended September 30,
1997 to 62.0% of funding volume during the three months ended
September 30, 1998 indicates a very positive trend related to DMP's
contribution to company revenues.
Revenues
The Company's revenues, including interest income, were $2,679,729 for
the three months ended September 30, 1998, which represents a decrease
of 150% or $456,184 from the three months ended September 30, 1997
revenues of $3,135,914. This decrease is mainly attributable to the
sale of BMDC on August 31, 1998 and lower non-conforming loan sales in
the quarter.
19
The main factor impacting reduced revenue levels involved loan sales
activity, both in terms of the balance of loans sold and of the
product mix between conforming / government and sub prime. The
majority of revenue from the Company's business activity is recorded
upon sale of the loans it has originated to third party investors. In
the three months ended September 30, 1998, total loan sales were $98
million vs. $61 million during the same three months last year an
increase of 37 million. Although sales volume increased in the current
period as compared to the same prior year period it did not increase
at the same rate as expenses in the comparable period.
Expenses
Selling Expenses in the three months ended September 30, 1998 were
$1,851,967, which represents an increase of $317,535 from the same
three months last year. The higher level of Selling Expenses was
related to the higher commission costs driven by the increase in total
loans originated. As a percentage of loans originated, Selling
Expenses remained constant at 1.90% of loans originated for both the
three months ended September 30, 1998 and 1997.
General and Administrative Expenses were $3,553,885 during the three
months ended September 30, 1998 which was an increase of $1,523,693
over the same three months last year. Compensation related expenses,
including temporary services, accounted for $2.2 million or 52.98% of
this increase. The growth in loan origination activity created an
immediate need for administrative and operational staffing increases.
Management believes that the staffing infrastructure currently in
place is capable of supporting the Company's planned growth through
the remainder of 1998.
The growth in branch locations and business volume resulted in
increased occupancy and equipment related expenses. Occupancy costs in
the three months ended September 30, 1998 increased by $97,234 over
the same three months last year. Equipment related expenses of
depreciation and leasing charges were up by $40,852 in the three
months ended September 30, 1998 over the same three months in 1997.
The occupancy and equipment related expense increases represented
approximately 6.38% of the total G&A expense increases.
General office expenses related to office supplies and postage costs
were also higher in the three months ended September 30,1998 vs. the
same three months in 1997. This category of expenses was up by $52,874
and accounted for 3.47% of the total G&A increase. These expense
increases are consistent with the added branch locations and overall
increase in business activity.
Professional service fees, primarily accounting and legal, were
$357,818 higher in the three months ended September 30, 1998 over the
same three months in 1997, and reflect the additional effort required
to support the company's increased reporting activities as an SEC
registrant in 1998. The Company was still a closely held "S"
corporation during the first five months of 1997, and so the Company
needed much less support in the area of accounting and legal services
at that time.
The final significant increase in G&A expenses occurred in the area of
loan loss provision, which was up $254,465 between three months ended
September 30, 1998 and 1997. The Company's higher lending activity
coupled with the introduction of higher risk sub-prime loan
originations required the establishment of a correspondingly higher
reserve against potential loan losses.
Interest Expense is primarily the cost of funds borrowed from
warehouse lenders to fund the Company's loan originations during the
holding period between funding and sale to an investor. During the
three months ended September 30, 1998, interest expense was $937,948
which was $682,481 higher than the same three month period last year.
This increase was due to extending the holding period of loans while
increasing the absolute size of loans being held in warehouse.
Net Income (Loss)
The Company generated net loss before taxes of $3,127,408 in the three
months ended September 30, 1998 vs. a loss before taxes of $2,443,231
during the same three months last year, an increase of of $684,177.
The operating losses experienced by the Company during the three
months ended September 30, 1998 were mainly impacted by reduced loan
sales in the current quarter.
20
And finally, the Company has evaluated it's two mortgage banking
operations to clearly determine relative contribution to operating
results relative to capital investment required. As a result of this
process, it was determined that one of its susidiary's Bankers Direct
Mortgage Corporation would be sold and on August 31, 1998 the sale was
transacted.
Financial Condition
September 30, 1998 compared to December 31, 1997:
Cash in banks, net of overdrafts, decreased $1,572,166 to $133,050 at
September 30, 1998 from $1,705,216 at December 31, 1997. The net
decrease resulted from a the losses incurred through the third quarter
ended September 30, 1998 The overdraft at December 31, 1997 was fully
funded in the first quarter of 1998.
Mortgage loans held for sale totaled $39,051,170 at September 30, 1998
and relate directly to the warehouse finance facilities debt of
$39,532,037. Each of these items increased less than 9% and 12%
respectively compared to their respective December 31, 1997 balances.
Total liabilities excluding warehouse debt increased by $285,110 or
6% from December 31, 1997 to September 30, 1998.
Capital Expenditures, Liquidity and Capital Resources
The Company's normal cash requirements are to fund its new loan
production, to meet operating expenses, including sales and marketing
activities, to satisfy accrued liabilities and accounts payable, to
fund expansion of the branch network and to satisfy other liabilities
as they become due.
Cash Flows
The Company experienced a decrease in cash and cash equivalents of
$1,572,166 during the Nine months ended September 30, 1998, compared
to a decreasing cash of $117,586 during the same period last year Net
cash used in operating activities during the first Nine months of 1998
was $13,506,485 vs. a net cash use of $25,462,305 during the same
comparable period in 1997. The single largest component of cash use in
the current period was from Mortgage Loans held for sale, which
increased by, and used cash of $10,180,189 during the Nine month
period ended 1998.
Net cash used in investing activities totaled $662,984 during the Nine
months ended September 30, 1998 as compared to the same period in 1997
when cash used in investing activities was $947,121.
Net cash provided by financing activities totaled $12,597,303 during
the Nine months ended September 30, 1998 vs. net cash used by
financing activities of $26,291,840 during the same period last year.
The primary source of financing cash provided during the current year
was from warehouse borrowings, which is consistent with loan balances
being held for sale, issuance of preferred stock and an increase in
long term debt.
Liquidity and Capital Resources
The Company's primary ongoing cash requirements include the funding of
(i) mortgage originations and purchases pending their sale, (ii)
administrative and other operational expenses, and (iii) costs
associated with equipment and facility expansion efforts.
Historically, the Company has relied on a small group of warehouse
lenders to fund its mortgage origination and purchase activity, while
relying on a combination of Capital infusions and cash flow from
operations for other cash needs.
The Company uses one traditional warehouse line. At September 30,
1998, The utilized and outstanding portions of this warehouse line was
$39,129,307. The aggregate warehouse line limit was $50 million and
carries interest rates based on LIBOR plus a margin of 125 to 150
basis points or Fed Funds plus a margin of 175 to 250 basis points.
The company previously had a warehouse line of $15 million with Bank
One, Texas, NA, which has been discontinued as of September 30,
1998.The Company's other warehouse line, which is with Nikko Financial
Services, has been 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 has been
terminated.
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Liquidity and Capital Resources (Continued)
The Company raised additional capital during the quarter ended June
30, 1998 through the issuance of a $1 million, 8% Series "B" preferred
stock offering. Additionally, the company issued a convertible
subordinate debenture for $1.7 million during the quarter, which
subsequent to quarter end, was exchanged for a like amount 10% Series
"C" preferred stock. In addition to these transactions, the Company
will need additional capital in order to attract and retain new, lower
cost borrowing relationships, to fund its current operations and to
support its expansion plans. Accordingly, management has entered into
an underwriting agreement with Union Trading-Financial Limited for the
placement of the Company's Convertible-Redeemable Preferred Stock
entirely outside of the United States exclusively to non-U.S.
residents. The Preferred Stock Units will be offered at $20 each and
will be convertible into the Company's Common Stock at the rate of 1
preferred unit to 2.5 shares of Common Stock on a best efforts basis.
The offering is expected to generate net proceeds to the Company of up
to $14 million by April 1999 at the rate of $1 million to $2 million
per month. On August 19, 1998 the Company received three executed
subscription agreements totaling $10.2 million and a confirmation of
$3 million on deposit from Union Trading-Financial as the partial net
proceeds under this initial subscription.
Management believes that the proceeds from this initial tranche of the
Union Trading Underwriting, when received, together with existing
borrowing relationships will be sufficient to fund the Company's
continued operations for the next twelve to eighteen months at current
levels of lending activity. There can be no assurance as to the
timeliness of the receipt of the initial proceeds, nor that the
company will be able to obtain additional proceeds from the Union
Trading Underwriting, or that existing borrowing relationships will
remain in place on favorable terms. Accordingly, the Company may be
limited in its ability to fund current operations or to achieve its
growth objectives if its cash needs are not met by the sources
indicated.
Management believes that cash from operating activities, together with
the proceeds from the planned Series D Convertible-Redeemable
Preferred Stock offering and existing borrowing relationships may be
sufficient to fund the Company's current operations through the
remainder of 1998. There can be no assurance that the Company will be
able to obtain an additional capital infusion or obtain new warehouse
borrowing relationships in a timely manner. Accordingly, the Company
is limited in its ability to fund current operations or achieve its
growth objectives due to the fact circumstances mentioned above.
Capital Expenditures
Capital Expenditures during the Nine months ended September 30, 1998
were $275,871 which was primarily in the area of computer equipment
and computer software. These expenditures were in support of certain
system upgrades and production branch expansion.
Risk Factors
The Company wishes to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act by cautioning readers
that numerous important factors discussed below, among others, in some
cases have caused, and in the future could cause the Company's actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. The
following include some, but not all, of the factors or uncertainties
that could cause actual results to differ from projections:
o Possible Delisting of Securities; Risk of Low Priced Stocks
As of March 31, 1998, June 30, 1998and again as of September 30, 1998,
the Company didnot meet the required standards for continued inclusion
in the NASDAQ SmallCap Market in that its net tangible assets were
below $2,000,000, and the Company has received a formal notice of
delisting from NASDAQ. As of November 17, 1998 the Company stock has
been delisted from the NASDAQ Small Cap Market and moved to the Over
the Counter Bulletin Board Market.
22
o General Business Risks
The Company's business is subject to various business risks. Economic
conditions affect the decision to buy or sell residences. Changes in
the level of consumer confidence, real estate values, prevailing
interest rates and investment returns expected by the financial
community could make mortgage loans of the types originated,
refinanced and purchased by the Company less attractive to borrowers
or investors. In addition, a decline in real estate values will have a
negative impact on the loan-to-value ratio for the related mortgage
loans, weakening the collateral coverage and resulting in greater
exposure in the event of a default.
o Dependence on Availability of Funding Sources
The Company's ability to originate and purchase mortgage loans depends
to a large extent upon its ability to secure financing on acceptable
terms. The Company currently funds substantially all of the loans it
originates and purchases through borrowings under collateralized loan
purchase agreements ("Purchase Agreements") with several commercial
banks, which generally are terminable at will by either party. As of
November 30, 1998 the Company will no longer have the use of its
committed warehouse credit facility with Nikko. The Warehouse credit
facility with Bank One, Texas, N.A. ("Bank One") matured on August 31,
1998 and was not renewed at the option of Bank One. The Company's
borrowings are in turn repaid with the proceeds received by the
Company from selling such loans. The Company has relied upon a few
lenders to provide the primary credit facilities for its loan
originations and purchases. Accordingly, the failure to renew or
obtain adequate funding under the Company's financing facilities or
other financing arrangements, or any substantial reduction in the size
of or increase in the cost of such facilities, could have a material
adverse effect on the Company's results of operations and financial
condition. To the extent the Company is not successful in maintaining
or replacing existing financing, it may have to curtail its mortgage
loan purchase and origination activities, which could have a material
adverse effect on the Company's financial condition and results of
operations.
o Credit Risks Associated with Nonconforming Loans
The Company is subject to various risks associated with originating
nonconforming loans, including, but not limited to, the risk that
borrowers will not satisfy their debt service payments, including
payments of interest and principal, and that the realizable value of
the property securing such loans will not be sufficient to repay the
borrower's obligations to the Company. Because of the Company's
increasing focus on credit-impaired borrowers, the actual rates of
delinquencies, foreclosures and losses on such loans could be higher
under adverse economic conditions than delinquencies, foreclosures and
losses currently experienced in the mortgage lending industry in
general. These risks increase during an economic downturn or
recession. Any sustained period of increased delinquencies,
foreclosures, losses or increased costs could adversely affect the
Company's ability to sell, and could increase the cost of selling,
loans on a whole loan basis, which could adversely affect the
Company's financial condition and results of operations. In addition,
in an economic slowdown or recession, the value of the Company's
mortgage servicing rights may be impaired.
o Liabilities Under Representations and Warranties
In the ordinary course of business, the Company makes representations
and warranties to the purchasers and insurers of mortgage loans and
the purchasers of mortgage servicing rights regarding compliance with
laws, regulations and program standards and as to accuracy of
information. The Company generally receives similar representations
and warranties from the correspondents from whom it purchases loans.
Although the Company has not incurred losses in any material respect
as a result of mortgage loan repurchases due to breaches in
representations and warranties, there can by no assurance that the
Company will not experience such losses in the future." below and
"Business--Environmental Matters."
23
o Managing Potential Growth
Since its inception, the Company has grown rapidly, and has a total of
142 full-time employees as of September 30, 1998. This growth has
placed a significant strain on the company's management and physical
and capital resources. The Company anticipates that it will need to
reduce personnel in order to implement fully its business
restructuring plan. No assurance can be given as to whether, when, if
ever, and under what terms the Company will be able to successfully
complete this restucturing plan Further, management will be required
to successfully maintain relationships with various governmental
agencies, real estate professionals, institutional investors,
providers of warehouse loans, advertising agencies and other third
parties and to maintain control over the strategic direction of the
Company in a rapidly changing marketplace. There can be no assurance
that the Company's current personnel, systems, procedures and quality
and accounting controls will be adequate to support the Company's
future operations, that management will be able to identify, hire,
train, motivate or manage needed and qualified personnel, or that
management will be able to identify and exploit existing and potential
opportunities. If the Company is unable to manage growth effectively,
the Company's business, financial condition and operating results will
be materially adversely affected.
o Factors Affecting Market Price of the Common Stock; Possible
Volatility of Stock Price
The market price of the Common Stock may be influenced by many
factors, including the depth and liquidity of the market for the
Common Stock, investor perceptions of the Company and its industry,
and general economic and market conditions. The market price of the
Common Stock may also be significantly influenced by factors such as
the announcement of new products by the Company or its competitors,
quarter-to-quarter variations in the Company's results of operations
and conditions in the industry. In addition, in recent years the stock
market has experienced extreme price and volume fluctuations that have
had a substantial effect on the market prices of emerging growth
companies, including financial services companies. These extreme price
and volume fluctuations experienced by emerging growth companies may
be unrelated to the operating performance of a specific company and
may be caused by investors' perceptions of the prospects for the
general economy, the stock market in general, emerging companies or
financial services companies. There can be no assurance that the
market price of the Common Stock will be stable or will increase in
accordance with operating performance by the Company.
o No Dividends
The Company has not paid any cash dividends (except for S corporation
distributions to the Existing Stockholders) on its Common Stock since
its inception and does not currently anticipate paying dividends on
its Common Stock in the foreseeable future. The Company conducts
substantially all of its operations through its subsidiaries.
Accordingly, the Company's ability to pay dividends is also dependent
upon the ability of its subsidiaries to make cash distributions to the
Company. The payment of dividends to the Company by its subsidiaries
is and will continue to be restricted by or subject to, among other
limitations, applicable provisions of state and federal laws,
contractual provisions, the earnings of such subsidiaries and various
business considerations.
o A general economic slowdown.
o The unanticipated expenses of assimilating newly acquired
business into the Company's business structure, as well as, the
impact of unusual expenses from ongoing evaluations of business
strategies, asset valuations, acquisitions, divestitures and
organizational structures.
o Unpredictable delays or difficulties in development of new
product programs.
o Rapid or unforeseen escalation of the cost of regulator
compliance and/or litigation, including but not limited to,
environmental compliance, licenses, adoptions of new, or changes
in accounting policies and practices and the application of such
policies and practices.
o The effects of changes in monetary and fiscal policies, laws and
regulations, other activities of governments, agencies and
similar organizations, and social and economic conditions,
unforeseen inflationary pressures and monetary fluctuation, the
ability or inability of the Company to hedge against fluctuations
in interest rates.
24
o The ability or inability of the company to continue its current
practices relating to mortgage loans held for sale.
o Increased competition within the company's markets.
In addition to the risk factors discussed above, the mortgage banking
industry is generally subject to seasonal trends. These trends reflect
the general pattern of resales of homes, which sales typically peak
during the spring and summer seasons and decline from January through
March. Additionally, the primary home market in Florida tends to
increase during the fourth quarter, while the second home market
increases from October through April. Refinancing tends to be less
seasonal and more closely related to changes in interest rates.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
During the reporting period, the Company was not involved in any material legal
proceedings. The Company was involved in routine litigation that is incidental
to its business.
Item 2. CHANGES IN SECURITIES
During the quarter ended June 30, 1998 the Company completed two private
placements to institutional investors. The first transaction was the issuance of
a $1.7 million convertible debenture on May 18, 1998 and the second transaction
as the issuance of a $1 Million Series B Convertible Preferred Stock on June 30,
1998. See MD*A-Liquidity and Capital Resources for further discussion.
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
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the quarter ended
September 30, 1998.
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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)
Date: August 19, 1998 /s/ Vincent C. Castoro
------------------------------------------------
Vincent C. Castoro
(CEO and Principal Executive Officer)
Date: August 19 1998 /s/ Vincent J. Castoro
------------------------------------------------
Vincent J. Castoro
(President and Principal Administrative Officer)
Date: August 19 1998 /s/ Paul R. Garrigues
------------------------------------------------
Paul R. Garrigues
(CFO and Principal Financial Officer)
27