FORM 10-QSB/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
----------------------------------------------
Commission File Number: 0-22271
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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 May 14,
1998.
Transitional Small Business Disclosures Format (Check One):
Yes No X
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
MARCH 31, 1998
(Unaudited)
I N D E X
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PAGE NO.
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997 . . . . . . . . . . . F-2 and F-3
Unaudited Consolidated Statements of Operations For the
Three Month Periods ended March 31, 1998 and 1997 . . . F-4
Unaudited Statements of Changes in Stockholders' Equity for
the Three Months Ended March 31, 1998. . . . . . . . . . F-5
Unaudited Statement of Cash Flows For the Three Month
Periods Ended March 31, 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 . . . F-
Item 5: Other Information . . . . . . . . . . . . . . . . F-
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . F-
Signatures . . . . . . . . . . . . . . . . . . . F-
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 757,397 $ 1,705,216
Interest receivable 712,741 621,751
Mortgage loans held for sale (net of allowance
of $483,892 (unaudited) and $450,000 respectively) 37,277,275 36,046,571
Miscellaneous receivables 137,575 155,843
Prepaid expenses 261,995 274,211
Due from related parties 99,805 105,564
Other current assets 696,808 568,666
----------- -----------
Total current assets $39,943,596 39,477,822
PROPERTY AND EQUIPMENT
Furniture and equipment 1,586,343 1,352,212
Automobile 99,047 99,047
----------- -----------
1,685,390 1,451,259
Less accumulated depreciation and amortization 340,541 272,137
----------- -----------
Total property and equipment 1,344,849 1,179,122
----------- -----------
OTHER ASSETS
Property held for sale 207,500 207,500
Deposits 160,692 167,229
Deferred tax asset 558,000 558,000
----------- -----------
Total other assets 926,192 932,729
----------- -----------
$42,214,637 $41,589,673
=========== ===========
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1998 1997
(Unaudited)
------------ ------------
CURRENT LIABILITIES
Warehouse finance facilities $ 36,758,165 $ 35,463,034
Cash overdraft 264,409
Current maturities of long-term debt 380,123 366,495
Accounts payable, accrued expenses and other
current liabilities 3,267,454 3,477,063
------------ ------------
Total current liabilities 40,405,742 39,571,001
------------ ------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 728,854 554,745
------------ ------------
Total liabilities 41,134,596 40,125,746
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; authorized,
20,000,000; issued and outstanding,
2,305,467 shares 23,055 22,000
Peferred Stock, $.01 par value; authorized,
10,000,000; issued and outstanding
1,560 shares 16 21
Additional paid-in capital 7,141,380 6,992,430
Retained earnings (deficit) (6,084,410) (5,550,524)
------------ ------------
Total stockholders' equity 1,080,041 1,463,927
------------ ------------
$ 42,214,637 $ 41,589,673
============ ============
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three
Months Ended
MARCH 31,
---------
1998 1997
----------- -----------
Revenues
Commissions and fees $ 4,267,271 $ 1,513,125
Interest 1,313,409 21,092
----------- -----------
Total Revenues 5,580,680 1,534,217
----------- -----------
Expenses
Selling 1,986,197 672,800
General and administrative 2,911,067 913,852
Interest 1,037,302 42,547
----------- -----------
Total Expenses 5,934,566 1,629,199
----------- -----------
Net income (loss) before income tax credit (353,886) (94,982)
Provision for income taxes -- --
----------- -----------
NET INCOME (LOSS) $ (353,886) $ (94,982)
=========== ===========
Basic EPS calculation
Net income (loss) $ (353,886)
Less: Preferred stock dividend (30,000)
Preferred stock discount (150,000)
-----------
Income available for common stockholders $ (533,886)
===========
Dates Shares Fraction of Weighted
Outstanding Outstanding Period Average Shares
- ----------- ----------- ----------- --------------
January 1 - March 2 2,200,000 2/3 1,466,667
Issuance of common
stock on March 3 105,467
-------
March 3 - March 31 2,305,467 1/3 768,489
========= ---------
Weighted-average shares 2,235,156
=========
Basic loss per share $ (0.24)
=========
Pro forma information
Pro forma net income
Historical net income (loss) $ (94,982)
Pro forma provision (credit) for income taxes (31,309)
Pro forma net income (loss) $ (63,673)
Pro forma per share data
Pro forma net income (loss) per share $ (0.05)
Weighted average shares outstanding 2,235,156 1,200,000
=========== ============
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Preferred Stock 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
Accretion of preferred stock
discount 150,000 (150,000)
Conversion of preferred
stock on March 3, 1998 105,467 1,055 (500) (5) (1,050)
Preferred Stock Dividends (30,000) (30,000)
Net income (loss) for the
three months ended
March 31, 1998 (353,886) (353,886)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1998 2,305,467 $ 23,055 1,560 $ 16 $ 7,141,380 $(6,084,410) $ 1,080,041
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
CFI Mortgage Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (353,886) $ (94,982)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 68,404 10,651
Provision for doubtful accounts 53,084
(Increase) decrease in operating assets:
Interest receivable (90,990) 90,866
Mortgage loans held for sale (1,283,788)
Miscellaneous receivables 18,268 (20,592)
Prepaid expenses 12,216 32,439
Other current assets (128,143)
Deposits 6,538 1,779
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other current
liabilities (239,609) (265,697)
----------- -----------
(1,584,020) 150,554
----------- -----------
Net cash used in operating activities (1,937,906) (245,536)
Cash flows from investing activities
Expenditures for property and equipment (189,131) (7,907)
Proceeds (payments) for related party receivable 5,759 (68,516)
----------- -----------
Net cash used in investing activities (183,372) (76,423)
Cash flows from financing activities
Warehouse borrowings 1,295,131
Decrease in Cash overdraft (264,409) (96,167)
Proceeds from long-term debt 261,155 155,000
Payments for long-term debt (118,418) (139,348)
Payments for deferred offering costs (25,000)
Net cash provided by (used in) financing activities 1,173,459 (105,515)
NET DECREASE IN CASH AND CASH EQUIVALENTS (947,819) (427,474)
Cash and cash equivalents at beginning of year 1,705,216 644,685
----------- -----------
Cash and cash equivalents at end of period $ 757,397 $ 217,211
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Income taxes $ -0- $ -0-
=========== ===========
Interest $ 972,229 $ 21,092
=========== ===========
Supplemental schedules of non-cash 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 to 105,467 shares
of common stock $ -0- $ -0-
=========== ===========
Capital asset and lease obligation additions $ 45,000 $ -0-
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
intercompany 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 nonsupervised
mortgagee, by the Veteran's Administration as a VA Automatic Lender and an
approved FNMA Seller / Servicer. BDMC is licensed and registered to do
business in 24 states with licensing in process in an additional 10 states.
DMP operates through its nine regional offices. A reduction in geographic
concentration occurred in the first quarter of 1998 with Florida production
accounting for only 54.3% of total BDMC and DMP loan production as compared
to 100% Florida production during the first 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 March 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1998.
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
In 1997, 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 March 31,
1998, the balances payable under the notes and leases are as follows:
Bank notes payable in equal monthly installments
of $4,310; interest rates ranging from 6.875% to 11% $166,511
Various capitalized lease obligations 802,466
968,977
Less portion payable in one year 240,123
Long-term debt payable $728,854
Annual maturities of long-term debt are as follows:
Remainder of 1998 177,505
1999 261,936
2000 252,633
2001 139,568
2002 56,855
Thereafter 80,478
968,975
In addition, included in current maturities of long-term debt is a bank
note payable of $200,000 bearing interest at the bank's prime rate plus 1%
and is due on demand. The note is collateralized by certain mortgage held
for sale, aggregating $195,711.
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. An additional $4,671 was advanced in the
first quarter ended March 31, 1998. 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 $100 million at March 31, 1998. At March 31, 1998, the utilized
and outstanding balance on these facilities totaled $36.8 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 $897,128 for the
quarter ended March 31, 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. Management believes that this
facility will also be renewed and extended under terms that the Company can
reasonably meet over the remainder of 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 March 31, 1998 totaled $20,611,605. The sales
price to the takeout investors carries an additional 150 basis points of
profit 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 quarter ended March 31,
1998 was $277,203 while equipment rental and lease expenses during the same
period was $81,773.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of March 31, 1998 are as follows:
Capitalized
Operating Lease
LEASES OBLIGATIONS
Years ending December
31,
1998 $1,072,118 $265,232
1999 1,176,592 327,251
2000 953,435 287,221
2001 292,213 141,766
2002 682 57,664
0 0
Total minimum future $3,543,165 1,079,134
===========
payments
Less amount 276,669
representing interest
$802,465
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 which 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 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 nonconvertible
period. Included in the statement of changes in 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.
In connection with the preferred stock transaction, the Company granted
warrants to purchase 240,000 shares of common stock at an exercise price of
$8.50 per share. The warrants are exercisable until September 17, 2001. In
addition, the Company issued 60 shares of preferred stock with identical
terms as payment for fees for the private placement. The cost will be
included in the net proceeds from the transaction and will be amortized
over the nonconversion term.
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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RUSULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Certain of the matters discussed in this Form 10-QSB may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. As such, these forward-looking statements
may involve known and unknown risks and uncertainties and other factors
that may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements.
GENERAL BUSINESS
CFI Mortgage Inc. is a rapidly growing 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 and Irvine, California. Closings for DMP in
the first quarter totaled $60 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 $38.9 million in the first
quarter of 1997 to $57 million in the fist quarter of 1998.
With the increased production, support operations have expanded to
effectively handle the workload. Headcount increased from 236 at December
31, 1997 to 282 at March 31, 1998, primarily as the result of adding sales
personnel and production support staff in the Company's expanding branch
network. The 282 employees consisted of 62 commissioned sales personnel and
220 production support and administrative personnel.
COMPARISON OF QUARTERS ENDED MARCH 31, 1998 AND 1997
The primary source of the Company's revenue is from activities related to
providing homeowner financing solutions though 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 quarter ended March 31, 1998 total lending volume was $117
million with 47.9% from BDMC, 47.5% from DMP and 4.6% brokered to other
lenders. During the quarter ended March 31, 1997, total lending volume was
$38.9 million with 77.1% from BDMC, 0% from DMP and 22.9% 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 quarter ended
March 31, 1997 to 47.5% of funding volume during the quarter ended March
31, 1998 indicates a very positive trend related to DMP's contribution to
company profitability.
REVENUES
The Company's revenues, including interest income, were $5,580,680 for the
quarter ended March 31, 1998, which represents an increase of 263% or
$4,046,463 from the quarter ended March 31, 1997 revenues of $1,534,217.
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 quarter ended March 31, 1998,
total loan sales were $110 million vs. only $45 million during the same
quarter last year for an increase of 144%. Additionally, there were no sub
prime loan sales during the quarter ended March 31, 1997 while current year
same quarter sales of sub prime loans reached $54 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 $21,092 during the same quarter last year to $1,313,409 for the
quarter ended March 31, 1998.
EXPENSES
Selling Expenses in the quarter ended March 31, 1998 were $1,986,197, which
represents an increase of $1,313,197 from the same quarter 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 unchanged at 1.70% of loans originated
for both the quarters ended March 31, 1998 and 1997.
General and Administrative Expenses were $2,911,067 during the quarter
ended March 31, 1998 which was an increase of $1,997,067 over the same
quarter last year. Compensation related expenses, including temporary
services, accounted for $1.4 million or 70% 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 quarter
ended March 31, 1998 increased by $171,200 over the same quarter last year.
Equipment related expenses of depreciation and leasing charges were up by
$93,800 in the first quarter of 1998 over the same quarter in 1997. The
occupancy and equipment related expense increases represented approximately
14% of the total G&A expense increases.
General office expenses related to office supplies and postage costs were
also higher in the first quarter of 1998 vs. the same quarter in 1997. This
category of expenses was up by $101,300 and accounted for 10% 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 $60,800
higher in the first quarter of 1998 over the same quarter 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 quarter 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 $53,100 between first quarters 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 quarter ended March 31,
1998, interest expense was $1,037,302, which was $994,755 higher than the
same quarter 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 $21,455 during the quarter ended March 31,
1997 to income of $276,107 during the same quarter in the current year, an
improvement of $297,562.
NET INCOME (LOSS)
The Company generated net loss before taxes of $353,886 in the quarter
ended March 31, 1998 vs. a loss before taxes of $95,000 during the same
quarter last year. The level of earnings during the first quarter of fiscal
1998 fell short of company expectations.
While sub prime sales of $53.7 million were only 2.5% short of the $55
million projected, shortfalls in sales execution resulted in much lower
than anticipated profit margins on those sales. These shortfalls were due
to pricing incentives offered as part of an incentive program to attract
new broker relationships in new markets. Compounding the reduced profit
margins were increased expenses associated with start up costs of DMP's
high LTV second trust deed equity mortgage program implementation which was
established in California sooner than originally planned. These new product
channel will begin to generate revenues late in the second quarter of 1998.
FINANCIAL CONDITION
March 31, 1998 compared to December 31, 1997:
Cash in banks, net of overdrafts, decreased $683,410 to $757,397 at March
31, 1998 from $1,440,807 at December 31, 1997. The net decrease resulted
from a combination of an increase in mortgage loans held for sale, net of
the corresponding warehouse borrowing; a decrease in accounts payable and
accrued expenses, and capital expenditures. The overdraft at December 31,
1997 was fully funded in the first quarter.
Mortgage loans held for sale totaled $37,277,275 at March 31, 1998 and
relate directly to the warehouse finance facilities debt of $36,758,165.
Each of these items increased less than 5% compared to their respective
December 31, 1997 balances.
Total Liabilities excluding warehouse debt decreased $286,281, a 6.14%
decrease from the respective balance at December 31, 1997.
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 $947,819
during the quarter ended March 31, 1998, compared to a decrease in cash of
$427,474 during the same period last year.
Net cash used in operating activities during the first quarter of 1998 was
$1,937,906 vs. a net cash use of $245,536 during the same quarter 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
$1,283,788 during the first quarter of 1998.
Net cash used in investing activities totaled $183,372 during the quarter
ended March 31, 1998 as compared to the same quarter in 1997 when cash used
in investing activities was $76,423.
Net cash provided by financing activities totaled $1,173,459 during the
quarter ended March 31, 1998 vs. net cash used by financing activities of
$105,515 during the same quarter 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.
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 March 31,
1998, the three purchase facilities aggregated to $41,000,000 and ranged in
size from $2 million to $25 million. The utilized and outstanding portions
of these purchase facilities at March 31, 1998 was $20,611,605 and they
carried interest rates from 8.25% to the note rate on the underlying loan
being sold.
The aggregate warehouse facilities totaled $85 million, with $50 million
from one institution and $35 million from the other. At March 31, 1998, the
utilized and outstanding balance on these facilities totaled $36.8 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.
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. Management believes that this
facility will also be renewed and extended under terms that the Company can
reasonably meet over the remainder of 1998.
The Company did not raise any additional capital during the first quarter
of 1998. However, the Company will need additional capital or subordinated
debt in order to attract and retain new, lower cost borrowing relationships
and to fund its continued expansion. Accordingly, management has been
actively pursuing potential sources for an additional $2 million to $5
million capital / sub debt infusion in the second quarter. At this point
management is considering three potential opportunities including a.) $1
million sub debt loan from a shareholder, b.) $1.7 million sub debt with
certain preferred stock conversion features, and
c.) $3 million sub debt with warrants.
Management believes that cash from operating activities, together with this
planned second quarter capital / sub debt infusion and existing borrowing
relationships will be sufficient to fund the Company's expansion through
the remainder of 1998. There can be no assurance that the Company will be
able to obtain an additional capital / sub debt infusion in the second
quarter or that existing borrowing relationships will remain in place on
favorable terms. Accordingly, the Company may be limited in its ability to
achieve its growth objectives if its cash needs are not be met by the
sources indicated.
CAPITAL EXPENDITURES
Capital Expenditures in the first quarter totalling $234,131 which mainly
consisted of $119,939 in computer equipment and $88,840 in computer
software. These expenditures were attributed to system upgrades and new
branch offices.
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:
A general economic slowdown.
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.
Unpredictable delays or difficulties in development of new product
programs.
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.
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.
The ability or inability of the company to continue its current practices
relating to mortgage loans held for sale.
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.
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.
<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 SECURITES
During the quarter ended March 31, 1998, a total of 105,467 shares of the
Company's common stock were issued and 500 shares of preferred stock were
retired. The shares of common stock were issued when 500 shares of convertible
preferred stock, plus accrued interest of approximately $10,000, were converted
by the preferred stockholders on March 3, 1998 at a price of $4.836 per common
share which represented 85% of the five day average bid prices immediately prior
to the conversion date.
The following table sets forth the range of high, low and average closing prices
per share of the Common Stock and total number of shares traded during the
period since December 31, 1997.
Quarter Quarter Quarter Monthly
HIGH/ASK LOW/BID CLOSE/AVG Vol
PERIOD -------- ------- --------- -------
First Quarter $10.00 $6.00 $ 7.46 35,825
Second Quarter $14.56 $8.25 $10.09 127,544
(through 5/13/98)
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
None.
<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: May 15, 1998 /s/ Vincent C. Castoro
----------------------
Vincent C. Castoro
(CEO and Principal Executive Officer)
Date: May 15, 1998 /s/ Vincent J. Castoro
----------------------
Vincent J. Castoro
(President and Principal
Administrative Officer)
Date: May 15, 1998 /s/ Paul R. Garrigues
----------------------
Paul R. Garrigues
(CFO and Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 757,397
<SECURITIES> 0
<RECEIVABLES> 38,473,908
<ALLOWANCES> 483,892
<INVENTORY> 0
<CURRENT-ASSETS> 39,943,596
<PP&E> 1,685,390
<DEPRECIATION> 340,541
<TOTAL-ASSETS> 42,214,637
<CURRENT-LIABILITIES> 40,405,742
<BONDS> 728,854
0
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<COMMON> 23,055
<OTHER-SE> 1,056,986
<TOTAL-LIABILITY-AND-EQUITY> 42,214,637
<SALES> 0
<TOTAL-REVENUES> 5,580,680
<CGS> 0
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<INCOME-PRETAX> (353,886)
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