FORM 10-QSB
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITES EXCHANGE ACT OF 1934
For the quarterly period ended June 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)
580 VILLAGE BLVD, SUITE 120
WEST PALM BEACH, FL 33409
(Address of principal executive office)
52-2023491
(IRS Employer Identification Number)
(561) 687-1595
(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 2,305,467 shares of common stock, par value $.01 per share, as of August 18,
1998.
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
JUNE 30, 1998
(Unaudited)
I N D E X
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and
December 31, 1997 .................................................. F-2 and F-3
Unaudited Consolidated Statements of Operations For the Six Months
Period ended June 30, 1998 and 1997 ................................ F-4
Unaudited Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the Six Months Ended June 30, 1998 ................... F-5
Unaudited Consolidated Statement of Cash Flows For the Six Months
Ended June 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-20
PART II - OTHER INFORMATION
Item 1: Legal Proceedings ............................................ F-21
Item 2: Changes in Securities ........................................ F-21
Item 3: Defaults upon Senior Securities .............................. F-21
Item 4: Submission of Matters to a Vote of Security Holders .......... F-21
Item 5: Other Information ............................................ F-21
Item 6: Exhibits and Reports on Form 8-K ............................. F-21
Signatures ................................................... F-21
</TABLE>
1
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,920,198 $ 1,705,216
Interest receivable 553,315 621,751
Mortgage loans held for sale (net of allowance of $1,301,308 and
$450,000 respectively) 36,351,398 36,046,571
Miscellaneous receivables 142,210 155,843
Prepaid expenses 274,416 274,211
Due from related parties 98,791 105,564
Other current assets 483,557 568,666
----------- -----------
Total current assets 39,823,885 39,477,822
PROPERTY AND EQUIPMENT
Furniture and equipment 1,842,996 1,352,212
Automobile 99,047 99,047
----------- -----------
1,942,043 1,451,259
Less accumulated depreciation and amortization 431,289 272,137
----------- -----------
Total property and equipment 1,510,754 1,179,122
----------- -----------
OTHER ASSETS
Property held for sale 207,500 207,500
Deposits 246,673 167,229
Deferred loan fees 171,417 --
Deferred tax asset 558,000 558,000
----------- -----------
Total other assets 1,183,590 932,729
----------- -----------
$42,518,229 $41,589,673
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Warehouse finance facilities $ 36,440,684 $ 35,463,034
Cash overdraft -- 264,409
Current maturities of long-term debt 296,172 366,495
Due to related parties 90,642 --
Accounts payable, accrued expenses and other
current liabilities 4,988,375 3,477,063
------------ ------------
Total current liabilities 41,815,873 39,571,001
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 2,591,775 554,745
------------ ------------
Total liabilities 44,407,648 40,125,746
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock, $.01 par value; authorized,
20,000,000; issued and outstanding,
2,305,467 shares 23,055 22,000
Preferred Stock, $.01 par value; authorized,
10,000,000; issued and outstanding 2,560 shares,
voting, liquidation preferences $1,000 per share 26 21
Additional paid-in capital 8,141,370 6,992,430
Retained earnings (deficit) (10,053,870) (5,550,524)
------------ ------------
Total stockholders' equity (deficit) (1,889,419) 1,463,927
------------ ------------
$ 42,518,229 $ 41,589,673
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Commissions and fees $ 7,780,679 $ 3,209,425 $ 3,513,408 $ 1,696,300
Interest 2,121,716 54,469 808,308 33,377
------------ ------------ ------------ ------------
9,902,395 3,263,894 4,321,716 1,729,677
------------ ------------ ------------ ------------
Expenses
Selling 4,474,189 1,744,301 2,487,992 1,071,501
General and administrative 7,636,002 2,107,900 4,724,936 1,194,048
Interest 2,075,550 80,964 1,038,248 38,417
------------ ------------ ------------ ------------
14,185,741 3,933,165 8,251,176 2,303,966
------------ ------------ ------------ ------------
Net loss before income tax credit (4,283,346) (669,271) (3,929,460) (574,289)
Income tax credit
Current -- (68,000) -- (68,000)
Deferred -- (22,000) -- (22,000)
------------ ------------ ------------ ------------
-- (90,000) -- (90,000)
------------ ------------ ------------ ------------
NET LOSS $ (4,283,346) $ (579,271) $ (3,929,460) $ (484,289)
============ ============ ============ ============
Basic EPS calculation
Net income (loss) $ (4,283,346) $ (3,929,460)
Less: Preferred stock dividend (70,000) (40,000)
Preferred stock discount (150,000) --
------------ ------------
Income available for common stockholders $ (4,503,346) $ (3,969,460)
============ ============
<CAPTION>
Weighted
Dates Outstanding Shares Outstanding Fraction of Period Average Shares
----------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
January 1 - March 2 2,200,000 2/6 733,333
Issuance of common
stock on March 3 105,467
----------
March 3 - June 30 2,305,467 4/6 1,536,978
---------- ------------
Weighted-average shares 2,270,311 2,305,467
============ ============
Basic loss per share $ (1.98) $ (1.72)
============ ============
Pro forma information
Pro forma net income (loss)
Historical net income (loss) $ (579,271) $ (484,289)
Pro forma provision (credit) for income taxes (152,757) (122,433)
------------ ------------
Pro forma net income (loss) $ (426,514) $ (361,856)
============ ============
Pro forma per share data
Pro forma net income (loss) per share $ (.31) $ (0.24)
============ ============
Weighted-average shares outstanding 1,366,667 1,533,333
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Retained
------------------------- ----------------------- Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
----------- ----------- ---------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 2,200,000 $ 22,000 2,060 $ 21 $6,992,430 $ (5,550,524) $ 1,463,927
Conversion of preferred
stock on March 3, 1998 105,467 1,055 (500) (5) (1,050)
Issuance of preferred stock on
June 30, 1998 1,000 10 999,990 1,000,000
Accretion of preferred stock discount 150,000 (150,000)
Preferred stock dividends (70,000) (70,000)
Net loss for the six months
ended June 30, 1998 (4,283,346) (4,283,346)
----------- ----------- ---------- ---------- ---------- ------------ -----------
Balance at June 30, 1998 2,305,467 $ 23,055 2,560 $ 26 $8,141,370 $(10,053,870) $(1,889,419)
=========== =========== ========== ========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,283,346) $ (579,271)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 159,152 22,846
Provision for doubtful accounts 870,500
Deferred and refundable income taxes (90,000)
(Increase) decrease in operating assets:
Interest receivable 68,436 (38,756)
Mortgage loans held for sale (1,175,327)
Miscellaneous receivables 13,633 (44,191)
Prepaid expenses (205) (94,951)
Other current assets 85,109
Deposits (79,444) (19,143)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other current liabilities 1,441,312 242,746
----------- -----------
1,383,166 (21,449)
----------- -----------
Net cash used in operating activities (2,900,180) (600,720)
Cash flows from investing activities
Expenditures for property and equipment (160,720) (334,865)
Proceeds (payments) for related party receivable 6,773 (60,325)
----------- -----------
Net cash used in investing activities (153,947) (395,190)
----------- -----------
Cash flows from financing activities
Warehouse borrowings 977,650
Proceeds from issuance of common stock 4,049,460
Proceeds from issuance of preferred stock 1,000,000
Decrease in cash overdraft (264,409) (161,534)
Proceeds from related party payable 90,642
Proceeds from long-term debt 1,961,156 46,344
Payments for deferred loan fees (171,417)
Payments for long-term debt (324,513) (24,875)
----------- -----------
Net cash provided by financing activities 3,269,109 3,909,395
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 214,982 2,913,485
Cash and cash equivalents at beginning of year 1,705,216 644,685
----------- -----------
Cash and cash equivalents at end of period $ 1,920,198 $ 3,558,170
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Income taxes $ - 0 - $ - 0 -
=========== ===========
Interest $ 2,405,261 $ 102,827
=========== ===========
Supplemental schedules of noncash investing and financing activities:
Dividend paid by transfer of investment in 430 Carroll Street, Inc. $ - 0- $ 175,224
=========== ===========
Conversion of 500 shares of preferred stock into 105,467 shares of common stock $ -0- $ -0-
=========== ===========
Capital asset and lease obligation additions $ 330,064 $ -0-
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 two wholly-owned subsidiaries, Bankers Direct Mortgage
Corporation ("BDMC") and Direct Mortgage Partners Inc. ("DMP"), CFI is
engaged in originating, 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 both
conventional conforming loans (originated and sold through BDMC) and
nonconforming loans (originated and sold through DMP). Significant
inter-company accounts and transactions have been eliminated in
consolidation.
C. Geographic Concentration
BDMC is approved by the U.S. Department of Housing and Urban
Development/Federal Housing Administration ("FHA") as a non-supervised
mortgagee, by the Veteran's Administration as a VA Automatic Lender and an
approved FNMA Seller / Servicer. The Company is licensed and registered to
do business in 23 states with licensing in process in an additional 6
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 only 51.1 % of total BDMC and
DMP loan production as compared to 98% Florida production during the
second quarter of 1997. 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 June 30, 1998 are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1998.
8
<PAGE>
The consolidated financial statements of the Company include the accounts
of all wholly owned subsidiaries. All significant intercompany 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, subsequent to the report date, 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 June 30, 1998, the balances payable under the notes and leases are as
follows:
10% convertible debentures $1,700,000
Bank notes payable in equal monthly installments
of $3,856; interest rates ranging from 6.875% to 11% 158,438
Various capitalized lease obligations 1,029,509
----------
2,887,947
Less portion payable in one year 296,172
----------
Long-term debt payable $2,591,775
==========
Annual maturities of long-term debt are as follows:
Remainder of 1998 143,706
1999 318,259
2000 2,020,919
2001 192,884
2002 110,181
Thereafter 101,998
---------
2,887,947
=========
9
<PAGE>
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 second quarter of 1998, an
additional advance was made to officers in the amount of $15,791 . The
advances are noninterest bearing and are due on demand and included in due
from related parties.
NOTE 4 - COMMITMENTS, CONTINGENICES AND REVENUE FROM MAJOR CUSTOMER
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 has warehouse lines of credit from two
financial institutions aggregating $ 75 million at June 30, 1998. At
June 30, 1998, the utilized and outstanding balance on these
facilities totaled $36.4 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 these two facilities was $1,741,458 for the six months ended June
30, 1998.
At December 31, 1997 the Company was in violation of several financial
covenants with its two warehouse lenders. Both lenders issued waivers
of the default through April 30, 1998 and have been conducting ongoing
negotiations as necessary to amend the warehouse borrowing agreements.
The Company determined that it could operate at its current funding
levels with lesser warehouse availability, so it requested and was
granted a reduction to $25 million in one of these facilities
subsequent to the end of the first quarter of 1998. That same lender
subsequently extended the current borrowing arrangement until July 31,
1998 under new terms and conditions which are financially less
favorable to the Company.
The other warehouse lender continues to review the operations of the
Company and consider an appropriate relationship structure from which
to go forward. Although the original extension to April 30, 1998 has
expired, the lender continues to advance funds to the Company as
needed to fund its mortgage lending and purchase activity. Based on a
verbal understanding between the Company and this lender made
subsequent to the end of the first quarter, the Company has agreed not
to draw down more than $35 million of the $50 million facility until
such time as the new terms are finalized. This temporary limitation of
borrowing ability is not expected to have an adverse effect on the
Company's operations. Subsequent to the second quarter this warehouse
lender has extended their committment to the Company through December
31, 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 June 30, 1998,
totaled $24,184,927. The sales
10
<PAGE>
price to the takeout investors carries an additional 150 basis points
of revenue that CFI will recognized when the loans close with the take
out investor.
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 six
months ended June 30, 1998 was $585,560 while equipment rental and
lease expenses during the same period was $205,713 .
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of June 30, 1998 are
as follows:
Capitalized
Operating Lease
Leases Obligations
----------- ----------
Years ending December 31,
Remainder of 1998 $ 747,367 $ 212,748
1999 1,285,515 425,493
2000 868,528 385,463
2001 218,965 212,723
2002 98,802 119,534
Thereafter -- 22,395
----------- ----------
Total minimum future payments $ 3,219,177 1,378,356
===========
Less amount representing interest 348,847
----------
$1,029,509
==========
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
<PAGE>
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.
There were additional conversions of preferred stock to common shares
subsequent to the period end. 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.
In connection with the preferred stock transaction, the Company
granted warrants 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.
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.) 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 August
19, 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.
b.) 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 3
preferred units to 4 shares of Common Stock.
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 for $10.2 million and a confirmation of $3
million cash on deposit from Union Trading-Financial as the partial
proceeds from these initial subscriptions. Timing of the receipt of
the proceeds from this first tranche of this underwriting is
uncertain, and accordingly delays in the receipt of these funds may
limit the Company's ability to fund current operations or to achieve
its growth objectives.
c.) Unaudited Pro Forma Financial Information. The following is an
unaudited pro forma condensed balance sheet for the Company as of June
30, 1998, which reflects the impact of the subsequent capital
transactions described in Note 6 a.) and b.) above, as if they had
closed on or before June 30, 1998.
CFI Mortgage Corporation
Pro Forma Condensed Balance Sheet
June 30, 1998
(Unaudited)
ASSETS
Current assets $ 42,652,468
Property and Equipment (net of accumulated
accumulated depreciation and amortization) 1,510,754
Other Assets 1,183,590
------------
$ 45,346,812
============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities $ 41,815,873
Long Term Liabilities 891,775
------------
42,707,648
Stockholder's equity
Common Stock 23,055
Preferred Stock 43
Preferred Stock Subscribed (net of underwriter discounts) 3,000,000
Additional Paid in Capital 9,669,936
Retained earnings (deficit) (10,053,870)
------------
2,639,164
------------
$ 45,346,812
============
12
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RUSULTS
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.
Management has concentrated on the development of the wholesale
production offices opened by Direct Mortgage Partners in 1997 while
opening new offices in Plantation, Florida, Parsippany, New Jersey and
Portland, Oregon. Closings for DMP in the first six months of 1998
totaled $145 million. BDMC opened an additional retail office in
Lakewood, Colorado. BDMC has 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 six months
of 1997 to $113 million in the comparable period for 1998.
With the increased production, support operations have expanded to
effectively handle the workload. Headcount increased from 236 at
December 31, 1997 to 259 at June 30, 1998, primarily as the result of
adding sales personnel and production support staff in the Company's
expanding branch network. The 259 employees consisted of 70
commissioned sales personnel and 189 production support and
administrative personnel.
Comparison for the first six months Ended June 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 six months ended June 30, 1998 total lending volume was
$258 million with 32 % from BDMC, 56 % from DMP and 12 % brokered to
other lenders. During the six months ended June 30, 1997, total
lending volume was $97 million with 83.8 % from BDMC, 0% from DMP and
16.2% 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 0% of the total
funding volume during the six months ended June 30, 1997 to 56% of
funding volume during the comparable period in 1998 indicates a very
positive trend related to DMP's contribution to company revenues.
Revenues
The Company's revenues, including interest income, were $9,902,395 for
the six months ended June 30, 1998, which represents an increase of
203% or $6,638,501 from the six months ended June 30, 1997 revenues
of $3,263,894 . 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 six months ended June 30, 1998, total loan sales were $253 million
vs. only $97 million during the same six months last year for an
increase of 161 %. Additionally, there were no sub prime loan sales
during the six months ended June 30, 1997 while current year same six
months sales of sub prime loans reached $135 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 $54,469
during the same six months last year to $2,121,716 for the six months
ended June 30, 1998.
Expenses
Selling Expenses for the six months ended June 30, 1998 were
$4,474,189, which represents an increase of $2,729,889 from the same
six 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 had
an insignificant increase of .01% of loans originated for the
comparable six months period ended June 30, 1998 and 1997.
General and Administrative Expenses were $7,636,002 during the six
months ended June 30, 1998 which was an increase of $5,528,101 over
the same comparable period last year. Compensation related expenses,
including temporary services, accounted for $3 million or 57% of this
increase. The rapid growth in loan origination activity created an
immediate need
13
<PAGE>
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 six months ended June 30, 1998 increased by $359,316 over the same
comparable period last year. Equipment related expenses of
depreciation and leasing charges were up by $261,319 in the first six
months of 1998 over the same comparable period in 1997. The occupancy
and equipment related expense increases represented approximately
11.8% of the total G&A expense increases.
General office expenses related to office supplies and postage costs
were also higher in the first six months of 1998 vs. the same
comparable period in 1997. This category of expenses was up by
$221,214 and accounted for 4.2 % 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
$470,383 higher in the first six 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 six 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 $872,500 between the first six
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 six
months ended June 30, 1998, interest expense was $2,075,549, which was
$1,994,585 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.
Although interest expense increased significantly, net interest income
(loss), which is the difference between interest income and interest
expense, improved from a loss of $26,395 during the six months ended
June 30, 1997 to income of $47,167 during the same comparable period
in the current year, an improvement of $73,562.
Net Income (Loss)
The Company generated a net loss before taxes of $4,283,346 in the six
months ended June 30, 1998 vs. a loss before taxes of $669,272 during
the same comparable period last year, an increase of $3,614,074. The
operating losses experienced by the Company during the six months
ended June 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 more than $800,000 which was recorded at the end
of the second quarter. This reserve increase was due almost entirely
to loans that the company funded between 1995 and 1997 and is not
indicative of future loss expectations on current loan production.
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, the Company has begun to assess the re-deployment it's
capital to the business opportunities with the highest potential
return to the Company. Certain strategic decisions to implement this
redeployment of capital will be finalized and implemented during the
third quarter of 1998.
Comparison for The Three Months Ended June 30, 1998 and 1997
During the three months ended June 30, 1998 total lending volume was
$141 million with 26.6% from BDMC, 62.4% from DMP and 11% brokered to
other lenders. During the three months ended June 30, 1997, total
lending volume was $58.6 million with 75.7% from BDMC, 0% from DMP and
24.3% 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 0% of the total
funding volume during the three months ended June 30, 1997 to 62.4% of
funding volume during the three months ended June 30, 1998 indicates a
very positive trend related to DMP's contribution to company
revenues.
14
<PAGE>
Revenues
The Company's revenues, including interest income, were $4,321,716 for
the three months ended June 30, 1998, which represents an increase of
150% or $2,592,039 from the three months ended June 30, 1997
revenues of $1,729,677. 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 three months ended June 30, 1998, total loan sales were $144
million vs. only $49 million during the same three months last year
for an increase of 194%. Additionally, there were no sub prime loan
sales during the three months ended June 30, 1997 while current year
same three months sales of sub prime loans reached $84 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 $33,377
during the same three months last year to $808,308 for the three
months ended June 30, 1998.
Expenses
Selling Expenses in the three months ended June 30, 1998 were
$2,487,992, which represents an increase of $1,416,491 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 were up .01% to 1.80% of loans originated for both the three
months ended June 30,1998 and 1997.
General and Administrative Expenses were $4,724,937 during the three
months ended June 30, 1998 which was an increase of $3,530,887 over
the same three months last year. Compensation related expenses,
including temporary services, accounted for $1.6 million or 46% of
this increase. The rapid 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 three months ended June 30, 1998 increased by $188,106 over the
same three months last year. Equipment related expenses of
depreciation and leasing charges were up by $167,520 in the three
months ended june 30,1998 over the same three months in 1997. The
occupancy and equipment related expense increases represented
approximately 11% 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 June 30,1998 vs. the same
three months in 1997. This category of expenses was up by $119,768 and
accounted for 3.7% of the total G&A increase. These expense increases
are consistent with the added branch locations and overall increase in
business activity.
15
<PAGE>
Professional service fees, primarily accounting and legal, were
$414,782 higher in the three months ended June 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 three 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 $819,416 between three months ended
June 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 June 30, 1998, interest expense was $1,038,248,
which was $999,831 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.
Although interest expense increased significantly, net interest income
(loss), which is the difference between interest income and interest
expense, decreased from a loss of $5,040 during the three months ended
June 30, 1997 to a loss of $229,940 during the same three months in
the current year, a decrease of $224,900. This loss in the second
quarter of 1998 was attributed to a write-off of interest receivable.
Net Income (Loss)
The Company generated net loss before taxes of $3,929,460 in the three
months ended June 30, 1998 vs. a loss before taxes of $574,289 during
the same three months last year, an increase of of $3,355,170. The
operating losses experienced by the Company during the three months
ended June 30, 1998 were significantly impacted by several
non-recurring events. The most significant impact involved an increase
in reserves for potential future loan losses of more than $800,000
which was recorded at the end of the second quarter. This reserve
increase was due almost entirely to loans that the company funded
between 1995 and 1997 and is not indicative of future loss
expectations on current loan production. 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 three months ended June 30,
1998, the California operations lost nearly $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 second quarter of 1998 exceeded
$300,000 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, the Company has begun to assess the re-deployment it's
capital to the business opportunities with the highest potential
return to the Company. Certain strategic decisions to implement this
redeployment of capital will be finalized and implemented during the
third quarter of 1998.
Financial Condition
June 30, 1998 compared to December 31, 1997:
Cash in banks, net of overdrafts, increased $479,391 to $1,920,198 at
June 30, 1998 from $1,440,807 at December 31, 1997. The net increase
resulted from a combination of an increase in mortgage loans held for
sale, net of the corresponding warehouse borrowing; an increase in
accounts payable and accrued expenses, capital expenditures and Long
Term Debt. The overdraft at December 31, 1997 was fully funded in the
first quarter of 1998.
Mortgage loans held for sale totaled $36,661,883 at June 30, 1998 and
relate directly to the warehouse finance facilities debt of
$36,440,684. Each of these items increased less than 5% compared to
their respective December 31, 1997 balances.
Total liabilities excluding warehouse debt increased by $3,334,253 or
71.5% from December 31, 1997 to June 30, 1998.
16
<PAGE>
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 an increase in cash and cash equivalents of
$214,982 during the six months ended June 30, 1998, compared to an
increase in cash of $2,913,485 , which was attributable to the IPO
during the same period last year Net cash used in operating activities
during the first six months of 1998 was $2,900,180 vs. a net cash use
of $600,720 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 $1,175,327
during the six month period ended 1998.
Net cash used in investing activities totaled $153,947 during the six
months ended June 30, 1998 as compared to the same period in 1997 when
cash used in investing activities was $395,190 .
Net cash provided by financing activities totaled $3,269,109 during
the six months ended June 30, 1998 vs. net cash used by financing
activities of $3,909,395 during the same period last year. The primary
source of financing cash provided during the current year was from
increased warehouse borrowings, which is consistent with higher 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 a combination of loan purchase facilities and
traditional warehouse lines with five different financial
institutions. At June 30, 1998, the three purchase facilities
aggregated to $33,500,000 and ranged in size from $1 million to $25
million. The utilized and outstanding portions of these purchase
facilities at June 30, 1998 was $24,184,927 and they carried interest
rates from 8.25% to the note rate on the underlying loan being sold.
The aggregate warehouse facilities totaled $65 million, with $50
million from one institution and $15 million from the other. At June
30, 1998, the utilized and outstanding balance on these facilities
totaled $36.4 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.
The $15 million facility is with Bank One, Texas, NA, which has been
extended through August 31, 1998. The Company is not aware of any
covenant violations with regards to this warehouse facility as of June
30, 1998 based on the terms of the existing agreement. The Company's
other warehouse facility, which is with Nikko Financial Services, is a
total of $50 million with $35 million on a committed basis and $15
million on a bid basis. This facility has a current maturity date of
December 31, 1998. As of June 30, 1998, the Company was in violation
of the net worth covenant of this agreement, however Nikko has
provided the Company a waiver of this covenant violation through
September 1, 1998. The Company should be in compliance with this debt
covenant upon receipt of the initial proceeds of the Series D
Convertible Redeemable Preferred Stock offering.
17
<PAGE>
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 3
preferred units to 4 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 will be
sufficient to fund the Company's current operations and expansion
through the remainder of 1998 and 1999. There can be no assurance that
the Company will be able to obtain an additional capital infusion 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 achieve its growth objectives if
its cash needs are not be met by the sources indicated.
Capital Expenditures
Capital Expenditures during the six months ended June 30, 1998 were
$490,784 which was primarily in the area of computer equipment
($244,230) and computer software ($145,665). These expenditures were
in support of certain system upgrades and production branch expansion.
18
<PAGE>
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 and again as of June 30, 1998, the Company did
not 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.
The Company has appealed NASDAQ's determination in an oral hearing on
July 31, 1998 and is awaiting a final decision from NASDAQ. As a
result of the sale of 1,000,000 of Series B Convertible Preferred
Stock to a single investor in June, 1998, the conversion of the
Company's $1.7 million Convertible Debenture to a Series C Convertible
Preferred Stock issue in August 1998, and upon receipt of the proceeds
from the initial subscriptions received on the Company's $14 million
Series D Convertible-Redeemable Preferred offering through Union
Trading, management believes that it meets all applicable listing
standards. Furthermore, management has taken actions that, if
successful, will reduce or eliminate current operating losses
experienced by the Company in past quarters such that the Company
could maintain compliance with all applicable listing standards.
Accordingly, the Company believes that NASDAQ will continue to list
the Company's Common Stock on the SmallCap Market. However, there can
be no assurance that NASDAQ will agree to continue listing the
Company's Common Stock.
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. The
Company currently also has a $15,000,000 warehouse credit facility
with Bank One, Texas, N.A. ("Bank One"), that matures on August 31,
1998, and a $50,000,000 revolving accumulation repurchase agreement
with Nikko Financial Services, Inc. ("Nikko") that matures on December
31, 1998. 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, any 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."
o Managing Potential Growth
Since its inception, the Company has grown rapidly, and has a total of
282 full-time employees as of March 31, 1998. This growth has placed,
and is expected to continue to place, a significant strain on the
Company's management and physical and capital resources. The Company
anticipates that it will need to hire additional key personnel in
order to implement fully its business strategy. No assurance can be
given as to whether, when, if ever, and under what terms the Company
will be able to attract such new personnel. In order to manage such
growth successfully, the Company will be required, among other things,
to implement and manage its operational and financial systems on a
timely basis and to train, manage and expand its growing employee
base. 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.
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
19
<PAGE>
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.
The Company believes that it has the product offerings, facilities,
personnel and competitive and financial resources for continued
business success. However, future revenues, cost, margins and profits
are all influenced by a number of factors, as discussed above.
20
<PAGE>
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 June
30, 1998.
21
<PAGE>
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)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form consolidated
balance sheets, and consolidated statements of income of the Company in the
Company" Form 10-QSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,920,198
<SECURITIES> 0
<RECEIVABLES> 38,206,021
<ALLOWANCES> 1,301,308
<INVENTORY> 0
<CURRENT-ASSETS> 39,823,885
<PP&E> 1,942,043
<DEPRECIATION> 431,289
<TOTAL-ASSETS> 42,518,229
<CURRENT-LIABILITIES> 41,815,873
<BONDS> 2,591,775
0
26
<COMMON> 23,055
<OTHER-SE> (1,912,500)
<TOTAL-LIABILITY-AND-EQUITY> 42,518,229
<SALES> 0
<TOTAL-REVENUES> 9,902,395
<CGS> 0
<TOTAL-COSTS> 11,237,691
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 872,500
<INTEREST-EXPENSE> 2,075,550
<INCOME-PRETAX> (4,283,346)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,283,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,283,346)
<EPS-PRIMARY> (1.98)
<EPS-DILUTED> 0.00
</TABLE>
