<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- --------------
Commission file number: 0-22271
CFI MORTGAGE INC.
(Exact Name of Small Business Issuer as specified in its charter)
Delaware
-------- 52-2023491
(State or Other jurisdiction of ----------
incorporation or organization) (I.R.S. Employer Identification No.)
631 U.S. Highway #1 Suite 309
-----------------------------
North Palm Beach, Florida 33408
------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including
area code 561-842-0678
------------
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
3,826,412 shares, $01 par value, as of April 1, 1999
(Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date)
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
MARCH 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
I N D E X
---------
Page No.
--------
Part I - Financial Information:
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited):
Balance Sheets
At March 31, 1999 and December 31, 1998 .................................... F-2
Statements of Operations
For the Three Months Ended
March 31, 1999 and 1998 .................................................... F-3
Statements of Cash Flows
For the Three Months Ended
March 31, 1999 and 1998 .................................................... F-4 - F-5
Notes to Consolidated Financial Statements ................................. F-6 - F-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............................. F-12 - F-16
Part II - Other Information:
Item 3 Through Item 9 - Not Applicable .................................................. F-17
Signatures ............................................................................ F-18
</TABLE>
F-1
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
A S S E T S
-----------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 5,701 $ 2,371
State tax refund receivable 76,621 76,621
Prepaid expenses 34,602 53,658
Due from related parties 86,037 86,037
------------ ------------
Total current assets 202,961 218,687
Property and equipment, at cost, less accumulated
depreciation of $89,442 and $87,902, respectively 60,035 61,575
------------ ------------
$ 262,996 $ 280,262
============ ============
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
------------------------------------------------
<CAPTION>
<S> <C> <C>
Liabilities not subject to compromise:
Current liabilities:
Accounts payable of subsidiary $ 1,539,341 $ 1,539,341
Accrued expenses and other current liabilities 49,136 --
------------ ------------
1,588,477 1,539,341
------------ ------------
Liabilities subject to compromise:
Current liabilities:
Unsecured liabilities 12,900 12,900
------------ ------------
Unsecured non-priority liabilities:
Accounts payable 948,933 948,933
Due to banks 6,686,000 6,686,000
Accrued expenses and other current liabilities 965,821 964,321
------------ ------------
Total unsecured non-priority liabilities 8,600,754 8,599,254
------------ ------------
Total liabilities 10,202,131 10,151,495
------------ ------------
Stockholders' capital deficiency:
Common stock, $.01 par value
Authorized 20,000,000 shares
Issued and outstanding - 3,826,412
and 3,301,391, respectively 38,264 33,014
Preferred stock, $.01 par value
Authorized 10,000,000 shares
Issued and outstanding - 2,375
and 2,450, respectively 24 25
Additional paid-in capital 10,156,240 10,154,246
Accumulated deficit (20,133,663) (20,058,518)
------------ ------------
Total stockholders' capital deficiency (9,939,135) (9,871,233)
------------ ------------
$ 262,996 $ 280,262
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
---------------------------------
1999 1998
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<S> <C> <C>
Revenues:
Commissions and fees $ -- $ 4,647,661
Interest -- 1,313,409
----------- -------------
Total revenues -- 5,961,070
----------- -------------
Expenses:
Selling -- 1,986,197
General and administrative 42,610 2,911,067
Interest 1,500 1,037,302
----------- -------------
Total expenses 44,110 5,934,566
----------- -------------
Net income (loss) ($ 44,110) $ 26,504
=========== ===========
Basic earnings per common share:
Net income (loss) ($ 44,110) $ 26,604
Less: Preferred stock dividends (23,793) (30,000)
Preferred stock discount -- (150,000)
----------- -------------
Net loss available to common stockholders ($ 67,903) ($ 153,496)
=========== ===========
Weighted average shares 3,589,058 2,235,156
=========== ===========
Earnings per share - basic:
Net loss ($ .02) ($ .07)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
---------------------------------
1999 1998
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations ($ 44,110) $ 26,504
----------- -------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,540 68,404
Interest accrued on stockholders loans 1,500 --
Provision for doubtful accounts and loan losses -- 53,084
(Increase) decrease in asset and liabilities:
Interest receivable -- (90,990)
Mortgage loans held for sale -- (1,664,178)
Other current assets -- (128,143)
Miscellaneous receivables -- 18,268
Prepaid expenses 19,056 12,216
Deposits -- 6,538
Accounts payable, accrued expenses
and other current liabilities 25,344 (239,609)
----------- -------------
Total adjustments 47,440 (1,964,410)
----------- -------------
Net cash provided by (used in) operating activities 3,330 (1,937,906)
----------- -------------
Cash flows from investing activities:
Expenditures for property and equipment -- (189,311)
Payments of related party receivable -- 5,759
----------- -------------
Net cash used in investing activities -- (183,552)
----------- -------------
Cash flows from financing activities:
Warehouse borrowings -- 1,295,131
Cash overdraft -- (264,409)
Proceeds from long-term debt -- 261,155
Payments of long-term debt -- (118,418)
----------- -------------
Net cash provided by financing activities -- 1,173,459
----------- -------------
Net increase (decrease) in cash and cash equivalents 3,330 (947,999)
Cash and cash equivalents at beginning of period 2,371 1,705,216
----------- -------------
Cash and cash equivalents at end of period $ 5,701 $ 757,217
=========== =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CFI MORTGAGE INC. AND SUBSIDIARY
(Debtor-In-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
---------------------------------
1999 1998
----------- -------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period:
Income taxes $ - $ -
=========== =============
Interest $ - $ 972,229
=========== =============
Supplemental Schedules of Noncash Investing
and Financing Activities:
Accrued dividends on preferred stock $23,793 $ -
=========== =============
Capital asset and lease obligation additions $ - $ 45,000
=========== =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CFI MORTGAGE INC. AND SUBSDIARY
(Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
NOTE 1 - PETITION FOR RELIEF UNDER CHAPTER 11.
On March 10, 1999, CFI Mortgage Inc. ("CFI")
commenced a voluntary petition for relief under Chapter 11 of
Title 11 of the United States Code in the Southern District of
Florida. On June 11, 1999, the bankruptcy court confirmed a plan
of reorganization pursuant to which CFI was discharged from any
debt that arose before the date of confirmation. As a result of
the confirmation of the Plan, CFI is no longer threatened by any
litigation, claims, and assessments which may have existed as of
December 31, 1998.
The Plan provides for an infusion of $800,000 by a
lender which is secured by CFI's assets. The lender has the
option of converting the loan to common stock of CFI at a rate
to be determined after the effective date of the Plan.
Each general creditor shall receive one share of
common stock for each dollar of debt in the reorganized CFI.
The preferred stockholder of Series "A" and "B"
convertible preferred stock shall receive 2 million shares of
common stock in exchange for the preferred stock in the
reorganized CFI.
The Company's subsidiary, Direct Mortgage Partners,
Inc. (DMP) was not a party to the petition for relief under
Chapter 11. Only debts that were guaranteed by CFI and two other
creditors shall be satisfied by issuance of common stock for
each dollar of debt in the reorganized CFI. The aforementioned
debts are included in the total unsecured non-priority
liabilities. As at March 31, 1999 and December 31, 1998
liabilities of DMP that are not guaranteed by CFI amounted to
$1,539,341, respectively.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES.
(a) Going Concern:
The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company's ability to return to normal operations is
totally dependent on the success of its voluntary plan of
reorganization and subsequent additional capital infusion. If
this plan is not successful or the additional capital is not
forthcoming or is insufficient, management intends to move the
Company into a Chapter 7 bankruptcy liquidation.
Such conditions raise substantial doubt about the
Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
F-6
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(b) Basis of Presentation:
The accompanying unauditing financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions for Form 10-QSB and Article 10 and Regulation S-B.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
the statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the
financial position as of March 31, 1999 and the results of
operations and cash flows for the three months ended March 31,
1999 and 1998. The results of operations for the three months
ended March 31, 1999 and 1998 are not necessarily indicative of
the results to be expected for the full year.
The December 31, 1998 balance sheet has been derived
from the audited financial statements at that date included in
the Company's annual report on Form 10-KSB. These unaudited
financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's
annual report on Form 10-KSB.
(c) Organization:
Creative Industries, Inc. was incorporated in the
State of Florida in April 1989, and operates as a licensed
mortgage lender. In October 1990, the Corporation's name was
changed to Creative Financing, Inc. and on May 24, 1995 the
Corporation's name was changed to CFI Mortgage Corporation ("CFI
Mortgage"). CFI Mortgage Inc. was incorporated in Delaware on
March 18, 1997. Immediately prior to the initial public
offering, the existing stockholders of CFI Mortgage contributed
all of their shares of CFI Mortgage common stock to CFI in
exchange for 1,200,000 shares of common stock of CFI. Through
its two wholly-owned subsidiaries, Bankers Direct Mortgage
Corporation ("BDMC"), which was sold on September 11, 1998, and
Direct Mortgage Partners Inc., which ceased operations in the
4th Quarter of 1998, CFI has been engaged in originating,
purchasing and selling loans secured primarily by first
mortgages on one-to-four-residential properties as well as
purchasing and selling servicing rights associated with such
loans. The loans were both conventional conforming loans
(originated and sold through BDMC) and nonconforming loans
(originated and sold through DMP). Significant intercompany
accounts and transactions have been eliminated in consolidation.
(d) Geographic Concentration:
Prior to the sale, BDMC was approved by the U.S.
Department of Housing and Urban Development/Federal Housing
Administration ("FHA") as a nonsupervised mortgagee. Both BDMC
and DMP were licensed and registered in approximately 22 states,
primarily in the southern United States, as mortgage lenders
with approximately 9 branch offices. In 1997, approximately 91%
or $234,747,000 of loans were originated and/or sold in the
State of Florida.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(e) Use of Estimates:
F-7
<PAGE>
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions in determining the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(f) Income Taxes:
The Company complies with Statement of Financial
Accounting Standards No. ("SFAS 109"), "Accounting for Income
Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets are computed for differences between financial
statement and tax basis of assets and liabilities that will
result in future taxable or deductible amounts, based on the
enacted tax laws and rates to the periods in which differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to
the amount to be realized.
(g) Earnings (Loss) Per Common Share:
Earnings (loss) per common share are based on the
weighted average number of common shares outstanding. In March
1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128") "Earning Per Share" which requires dual
presentation of basic and diluted earnings per share on the face
of the statements of operations. Basic earnings (loss) per share
excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average common shares
outstanding for the period. Diluted earnings (loss) per share
reflect the potential dilution that could occur if preferred
stock conversions, options and warrants were to be exercised or
converted or otherwise resulted in the issuance of common stock
that then shared in the earnings of the entity. The Company
adopted SFAS 128 for the year ended December 31, 1997.
Since the effect of outstanding options, warrants and
preferred stock conversions are antidilutive in all periods
presented, it has been excluded from the computation of earnings
(loss) per common share.
NOTE 3 - INTEREST RECEIVABLE.
Interest earned on mortgages held for sale from
origination to date of sale is recognized as earned.
F-8
<PAGE>
NOTE 4 - RELATED PARTY TRANSACTIONS.
On July 15, 1998, Mr. Vincent C. Castoro, Chairman of
the Board of Directors, loaned CFI Mortgage Inc. $100,000 and in
return holds a promissory note with an interest rate of 6% with
a due date of August 15, 1998. The Company did not repay the
loan principal or interest on the due date and the balances of
$104,250 and $102,750 which included accrued interest have been
included in accrued expenses and other current liabilities, as
at March 31, 1999 and December 31, 1998, respectively.
The Company has made advances to three officers
aggregating approximately $86,000 as of March 31, 1999 and
December 31, 1998, respectively. The advances are
noninterest-bearing and are due on demand and are included in
due from the related parties.
NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities are
comprised of the following:
March 31, December 31,
1999 1998
--------- ------------
Professial fees $152,000 $152,000
Dividends on preferred stock 137,781 137,781
Accrued interest 44,713 44,713
Accrued payroll 377,077 377,077
Deposit payable 150,000 150,000
Loans payable - officer 104,250 102,750
--------- ------------
$965,821 $964,321
========= ============
Each general creditor shall receive one share of
common stock for each dollar of debt in the reorganized CFI.
NOTE 6 - COMMITMENTS.
(a) Leases:
Effective April 1, 1999, CFI rents its corporate
headquarters, and office facilities from a stockholder on a
month to month basis at $1,890 per month including certain
escalation costs for real estate taxes, operating expenses,
usage and common area charges.
(b) Employment Contracts:
The Company had entered into several employment
contracts with certain officers and employees which expire
between 1998 and 2002 which have been disavowed under the
Chapter 11 Plan.
F-9
<PAGE>
NOTE 7 - INCOME TAXES.
The Company and its subsidiaries file a consolidated
federal income tax return. As of December 31, 1998, the Company
and its subsidiaries have a net operating loss carryforward of
approximately, $19,000,000 available to reduce future taxable
income which expires in the year 2014. The deferred tax asset
resulting from the operating loss carryforward of approximately
$7,125,000 in managements estimate requires a valuation
allowance in the same amount based upon management's assessment
that there is not assurance the tax asset will be realized.
NOTE 8 - STOCKHOLDERS' EQUITY.
On May 30, 1997, CFI completed the initial public
offering of 1,000,000 shares of its common stock at $5 per
share. The net proceeds from the offering, after deducting
underwriting discounts and commissions and offering expenses,
aggregated $3,800,525. In connection with the offering, CFI
granted the underwriter warrants to purchase 100,000 shares of
common stock at an exercise priced of $6 per share. The warrants
are exercisable for a period of four years commencing May 1998.
On December 3, 1997, CFI issued and sold 2,060 shares
of Series "A" 8% convertible preferred stock $.01 par value, at
$1,000 per share in a private placement. The net proceeds from
the sale, after deducting selling and other related expenses,
aggregated $1,821,753. The preferred stock is convertible for
two years into common shares at a price equal to 85% of the
five-day average bid prices immediately prior to the conversion
date. The discount on the conversion price is accounted for as a
charge against retained earnings and is amortized over the
nonconvertible period. Included in the statement of changes in
stockholders' equity for the year ended December 31, 1997 is a
charge of $150,000 pursuant to the conversion discount. On March
3, 1998, 500 shares of the preferred stock, plus accrued
interest of approximately $10,000 were converted into 105,467 of
common shares.
In connection with the preferred stock transaction,
the Company granted warrants to purchase 240,000 shares of
common stock at an exercise price of $8.50 per share. The
warrants are exercisable until September 17, 2001. In addition,
the Company issued 60 shares of preferred stock with identical
terms as payment for fees for the private placement. The cost
will be included in the net proceeds from the transaction and
will be amortized over the nonconversion term.
On May 18, 1998, the Company issued $1,700,000
principal amount of the convertible debentures to a single
investor.
F-10
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY. (Continued)
On August 19, 1998, the entire convertible debenture
was retired in exchange for the issuance of 1,700 shares of
Series "C", 10% convertible preferred stock, $0.01 par value in
a private placement on terms substantially identical to the
original debenture. In connection with this issuance of Series
"C" preferred stock, warrants to purchase 50,000 shares of the
Company's common stock at a price of $8.75 a shares held by the
debenture holder were surrendered in favor of new warrants to
purchase 50,000 shares of the Company's common stock at a price
of $2.6563 per share which was the closing market bid price on
the effective date of the exchange. On March 1999, Series "C"
preferred stock was converted into 2,500,000 shares of the
Company's common stock.
On June 30, 1998, CFI issued and sold 1,000 shares of
Series B, 8% convertible preferred stock, $0.01 par value, at
$1,000 per share in a private placement. The proceeds from the
sale amounted to $1,000,000. The preferred stock is convertible
for two years into common shares at a price equal to 85% of the
five-day average bid prices immediately prior to the per common
share. The discount on the conversion price, which was $150,000,
is accounted for as a charge against retained earnings and is
amortized over the non-convertible period.
During the quarter ending March 31, 1999, 75 shares
of preferred stock were converted into 525,021 shares of common
stock and accordingly additional paid-in capital increased by
$1,994 and accumulated deficit increased by $7,242.
NOTE 9 - OTC - BULLETIN BOARD MARKET.
The common stock of CFI moved to the OTC - Bulletin
Board Market as the Company did not meet the required minimum
standards for continued inclusion in the NASDAQ Small Cap
Market, effective with the close of business on November 17,
1998.
NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board periodically
issues new accounting standards in a continuing effort to
improve the quality of financial information and to promote
uniformity in its presentation. Management has reviewed all such
pronouncements made in the last fiscal year and concluded that
none have a material impact on the Company's presentation of its
financial position, results of operations and cash flows.
NOTE 11 - YEAR 2000.
The Company recognizes the need to ensure its
operation will not be adversely affected by Year 2000 software
failures. The Company is communicating with suppliers, customers
and other with which it does business to coordinate Year 2000
conversion. The cost of achieving compliance is estimated to be
a minor increase over the cost of normal software upgrades and
replacements.
F-11
<PAGE>
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. (the "Company") is a diversified financial services company
headquartered in North Palm Beach, Florida. The Company provides mortgages and
mortgage-related services to individuals indirectly through mortgage brokers and
mortgage lenders. The Company originates, processes, underwrites and funds
residential mortgage loans that are sold on an individual basis to institutional
and private investors. The Company originates loans that do not conform to
agency guidelines (non-conforming loans). Non-conforming loans typically fail to
meet agency guidelines due to credit impairment, higher loan-to-value ratios and
debt-to-income ratios, and are priced to compensate for the additional credit
risk.
During the first quarter, the company set out to try and attract new operating
capital and new warehouse relationships. When it became apparent that the
liabilities of the Company and its subsidiaries were insurmountable in its
efforts to attract new operating capital or warehouse lines, the company decided
to effectuate reorganization under Chapter 11.
The Company needed to ascertain the contingent liabilities outstanding, stemming
from, and on behalf of its subsidiaries. Previously, the company maintained a
large accounting staff in which the Company now had limited personnel and
resources to complete the exhaustive filings. The majority of the Company's
efforts during the quarter were spent effectuating the filing of the plan.
Subsequently, as of September 27, 1999 Ronco Funding, Inc. has subscribed a
gross amount of $284,000. The Company was funded $256,000 which was less the
$28,000 in funding commissions due to the agent of Ronco Funding. The Company
was granted an extension on September 15, 1999 by the bankruptcy court extending
the time Ronco Funding, Inc and or its assigns, has to fulfill the $800,000
subscription until October 1, 1999. There can be no assurances that any
additional subscriptions will be made.
BANKRUPTCY PROCEEDING:
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provides
for an infusion of $800,000 by a lender, which is secured by CFI's assets. The
lender has the option of converting the loan to common stock of CFI at a rate of
2% of the company per $80,000 funded to the Company. Each general creditor shall
receive one share of common stock for each dollar of debt in the reorganized
CFI. The Plan was confirmed on August 2, 1999.CFI will no longer threatened by
any litigation, claims, and assessments on a cash basis, which may have existed
as of December 31, 1998. The only liabilities the company can incur would be an
additional common stock distribution to a creditor whom the company has objected
to their claim and the court might award an additional distribution over the
amount the company had scheduled in its Bankruptcy filings. The company believes
in the validity of the amount due creditors in its Bankruptcy Filings. In the
event that the Company losses some or all of the claims objections the existing
shareholders would be further diluted to the degree that the award to the
creditor exceeds the amount scheduled on the companies Bankruptcy filings. The
overage to the creditors would be paid in the Company's Common Stock. The
dilution tied to the Bankruptcy reorganization is significant. The Company has
3,826,912 Common Shares Outstanding. The result of the Reorganization Plan will
result in the distribution of approximately 7,767,820 shares of
F-12
<PAGE>
Common Stock. Additional issuance of stock may be required pending the outcome
of the claim objections pending.
PLAN OF REORGANIZATION:
See Company's annual 10K filing for the amended plan of reorganization (Exhibit
1) and amended disclosure statement (Exhibit 2) as filed with the Securities and
Exchange Commission.
EVENTS LEADING TO THE CHAPTER 11 PETITION:
Beginning in September 1998, as a result of a number of factors, cash prices in
the sub-prime mortgage market significantly deteriorated and in some cases
investor yield requirements increased some 200 basis points. This in turn
significantly devalued the Company's loans held for sale and subsequent
revenues.
The Company previously had a warehouse line of $15 million with Bank One, Texas,
NA., which was discontinued as of September 30, 1998. The Company's other
warehouse line, which was with Nikko Financial Services, was terminated
effective November 30, 1998. As of September 30, 1998, the Company was in
violation of the net worth covenant of this agreement. In addition, the Company
previously had a purchase facility agreement with Fidelity Bank and Trust
aggregating $25 million. As of September 30, 1998 the use of that facility was
terminated. Upon termination of the warehouse line with Nikko, further advances
for new loan funding could only be under a repurchase agreement which provided
Nikko with the ability to evaluate whether or not it would enter into any new
transactions with the Company. The Company no longer had a committed warehouse
facility. Given that Nikko could decline the Company's request to fund loans
after November 30, 1998, the Company was not able to make loan-funding
commitments beyond November 30, 1998.
As of March 31,1998 and again as of June 30,1998, the Company did not meet the
required minimum standards for continued inclusion in the NASDAQ Small-Cap
Market in that its net tangible assets had fallen below $2,000,000 and so the
Company received a formal notice of de-listing from NASDAQ. On July 31, 1998 the
Company appealed the notice of de-listing at an oral hearing and awaited a final
decision from NASDAQ. On November 17, 1998 NASDAQ informed the Company by letter
that a determination had been made to de-list the Company's securities from The
NASDAQ Stock Market effective with the close of business on November 17, 1998.
The Company attempted a non-bankruptcy workout with its creditors. The Company
received a commitment from an investor to re-capitalize the Company with up to
$2 million if the Company could restructure its then-existing liabilities.
Accordingly, the Company presented a voluntary, non-bankruptcy plan of
reorganization to all its creditors (and those of its subsidiaries) wherein all
creditors were offered 1 share of the Company's common stock for each dollar
owed.
The success of that reorganization plan was dependent on full acceptance by all
of the Company's creditors and the consent of its underwriters to issue the
related common shares. All creditors did not accept the Company's common shares
in lieu of payment, and the underwriters did not consent to the issuance of the
underlying shares, which resulted in the investor not agreeing to re-capitalize
the Company.
The Company disclosed in a letter to the creditors that in the event that the
voluntary plan was not successful by December 11, 1998, management intended to
seek liquidation of the Company though the filing of a Chapter 7 bankruptcy
action on December 14, 1998." Prior to a Chapter 7 bankruptcy petition being
filed, the Company consulted with its bankruptcy counsel, Kevin C. Gleason, and
was advised that a plan similar to the attempted workout could be accomplished
through a petition under Chapter 11 of the bankruptcy code, without the need for
the unanimous consent of the creditors. With its only alternatives being
liquidation under Chapter 7, or an reorganization under Chapter 11, the
Directors elected to seek a course of action under reorganization.
The substantial decrease in the Company's net worth from November 24, 1998
through March 10, 1999 was overwhelmingly due to the devaluation of the mortgage
portfolios of the Company's subsidiary, DMP.
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COMPARISON OF QUARTERS ENDED MARCH 31, 1999 AND 1998
The Company did not record any revenues for the current period. With the loss of
the Company's credit facilities the Company was unable fund loans after November
30, 1998, and subsequently discontinued its mortgage-banking operations. On
March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provides
for an infusion of $800,000 by a lender, which is secured by CFI's assets. The
lender has the option of converting the loan to common stock of CFI at a rate of
2% of the company per $80,000 funded to the Company. There can be no assurance
that such financing can be accomplished.
EXPENSES
The Company recorded total expenses of $44,110 for the quarter ended March 31,
1999. This reflected the discontinued mortgage banking operations, and expenses
were primarily associated with the filing of the bankruptcy petition. Preferred
stock dividends of $23,793 were accrued in the quarter ended March 31, 1999
compared to $30,000 for the quarter ended March 31, 1998.
NET INCOME (LOSS)
The Company generated net loss before taxes of $67,903 in the quarter ended
March 31, 1999, which included $44,110 in operating expenses and $23,793 in
dividends accrued.
LIQUIDITY AND CAPITAL RESOURCES
The Company's is dependent on stock sales or third party borrowings to sustain
operations. The Company did not raise any additional capital during the first
quarter of 1999. The Bankruptcy Plan provides for an infusion of $800,000 by a
lender, which is secured by CFI's assets, not pledged in the Bankruptcy
Proceedings. The lender has the option of converting the loan to common stock of
CFI at a rate of 2% of the company per $80,000 funded to the Company. There can
be no assurance that such financing can be accomplished.
Management believes that the planned second quarter capital infusion, combined
with acquisitions as outline in the amended plan of Reorganization, will be
sufficient to fund the Company's expansion through the remainder of 1999. There
can be no assurance that the Company will be able to obtain an additional
capital infusion in the second quarter or that planned acquisition will be
consummated
RISK FACTORS
SEASONALITY
The mortgage banking industry is subject to seasonal trends. These trends
reflect the general pattern of re-sales of homes, which sales typically peak
during the spring and summer seasons and decline from January through March. In
addition, the primary home market in Florida tends to increase during the fourth
quarter, while the second home market increases from October through April.
Refinancing tend to be less seasonal and more closely related to changes in
interest rates. The mortgage servicing business is generally not subject to
seasonal trends, except to the extent that growth of a mortgage servicing
portfolio is generally higher in periods of greater mortgage loan originations.
COMPETITION
The mortgage banking industry is highly competitive. The Company competes with
financial institutions, mainly mortgage companies, commercial banks and savings
and loan associations and, to a certain extent, credit unions and insurance
companies, depending upon the type of mortgage loan product offered. The Company
competes principally by purchasing or originating a variety of types of mortgage
loans, emphasizing the quality of its service and pricing the loans at
competitive rates. Many of the Company's
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competitors have financial resources substantially greater than that of the
Company. Many of the nation's largest mortgage companies and commercial banks
have a significant number of branch offices in areas in which the Company's
correspondents and wholesale and retail branches operate. Increased competition
for mortgage loans from larger lenders may result in a decrease in the volume of
loans originated and purchased by the Company, thereby possibly reducing the
Company's revenues. The top five competitors in the market are a) the
Associates, b) Household Financial, c) ContiMortgage Corp., d) Green Tree
Financial and e) the Money Store.
REGULATION
The operations of the Company are subject to extensive regulation by federal and
state governmental authorities and are subject to various laws and judicial and
administrative decisions that, among other things, regulate credit activities,
require disclosures to customers, govern secured transactions and establish
collection, repossession and claims handling procedures and other trade
practices. The Company is subject to the rules and regulations of the Federal
Housing Administration ("FHA"), FNMA and the Department of Veteran Affairs (the
"VA") and state regulatory authorities with respect to originating, processing,
underwriting, selling, securitizing and servicing mortgage loans.
In addition, there are other federal and state statutes and regulations, as well
as judicial decisions, affecting the Company's operations. Those rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for mortgage loans, prohibit discrimination and
establish underwriting guidelines which include provisions for inspections and
appraisals, require credit reports on prospective borrowers and fix maximum loan
amounts, and with respect to the VA loans, fix maximum interest rates. Moreover,
lenders such as the Company are required to submit annually to the FHA, FNMA and
VA audited financial statements, and each regulatory entity has its own
financial requirements. The Company's affairs also are subject to examination by
the FHA, FNMA and VA at all times to assure compliance with all applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among other regulatory requirements, the Equal Credit Opportunity
Act, the Federal Truth-in-Lending Act, the Home Mortgage Disclosure Act and
RESPA and the regulations promulgated thereunder which prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. Many of the aforementioned regulatory
requirements are designed to protect the interests of consumers, while others
protect the owners or insurers of mortgage loans. Failure to comply with these
requirements can lead to loss of approved status, termination of servicing
contracts without compensation to the servicer, demands for indemnification or
loan repurchases, class action lawsuits and administrative enforcement actions.
There are various state and local laws and regulations affecting the Company's
operations. The Company is in possession of all licenses required by the State
of Florida to conduct its business operations and for the states were it
transacts business. Conventional mortgage operations also may be subject to
state usury statutes. FHA and VA mortgage loans are exempt from the effect of
such statutes.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
re-mediation activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future. In the ordinary course of its business, the Company from time to time
forecloses on the properties securing loans. Although the Company primarily
lends to owners of residential properties, there is a risk that the Company
could be required to investigate and clean up hazardous or toxic substances or
chemical releases at such properties after acquisition by the Company, and may
be held liable to a governmental entity or to third parties for property damage,
personal injury and investigation and clean up costs incurred by such parties in
connection with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
property.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a result of the confirmation of the bankruptcy plan, the Company is no longer
threatened with any litigation, claims and assessments which may have exited as
of year end December 31, 1998.
The Company is aware of an additional suit pending against Christopher Castoro
and Don L. Lashbrook by Thomson, Kernaghan & Co. The Company is not a party to
the suit.
The Company was served on August 17, 1999 with a lawsuit from the "Unofficial
Creditors Committee" seeking $10,000,000 in damages. All of the former officers
and directors of the Company were named as well Gulf Insurance Company, the
Company's Officer & Directors insurance carrier. The Company, its Directors and
former Directors and former Officers believe the suit to be without merit and
intend to vigorously defend the action.
In the event an objection to a claim is made, such objection shall preclude the
consideration of such claim as "allowed" for purposes of timely distribution in
accordance with the Plan. The Disbursing Agent shall escrow sufficient shares of
common stock to cover all potential distributions with respect to claims that
have objections filed against them. The Company has filed objections to the
substantial claims. See Exhibit 3 to the Company's annual 10K report as filed
with the Securities & Exchange Commission for all disputed claims that if
adjudicated against the Company in bankruptcy court will result in payment of
one share of common stock being issued for every one dollar ($1.00) owed. Claims
objections are being done post-confirmation.
ITEM 2. CHANGES IN SECURITIES
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provided
for an infusion of $800,000 by a lender (Ronco), which is secured by CFI's
assets. The Ronco Funding subscription represents Class 1 of CFI Mortgages
Inc.'s Creditor class in regards to the Companies Bankruptcy Reorganization
plan.. Ronco, or its assigns, shall have the option to convert the amount of the
loan to common stock of the Company pro rata, at the rate of 2 percent of the
outstanding common shares of the Company for each $80,000 of gross
disbursements. Such shares to be determined after the Effective Date, and to
represent two percent (2%) of the Company's outstanding common stock after
distributions to claimants in Classes 2 and 3. A warrant for one share of the
stock of the Company will also be issued to Lender, or its assigns, for each
share of common stock issued to Ronco pursuant to the Agreement with the
Company. No fundings from this subscription occurred during the first quarter.
During the quarter ended March 31, 1999, 259,335 shares of common stock were
issued and 75 shares of preferred stock were retired. The shares of common stock
were issued when 50 shares of convertible preferred stock, plus accrued interest
of approximately $4,668, were converted by the preferred stockholders on January
14, 1999 at a price of $ .21 per common share which represented 85% of the five
day average bid prices immediately prior to the conversion date.
265,686 shares of common stock were issued and 25 shares of preferred stock were
retired. The shares of common stock were issued when 25 shares of convertible
preferred stock, plus accrued interest of approximately $2,775 were converted by
the preferred stockholders on March 1, 1999 at a price of $ .10 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 and low closing prices per
share of the Common stock during the period since December 31, 1998.
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- ---------------------------------------------------------------------------
1999 High Low
- ---------------------------------------------------------------------------
First Quarter $ 0.34 $ 0.07
Second Quarter $ 0.34 $ 0.06
Third Quarter (through 9/27/99) $ 0.42 $ 0.25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION - SUBSEQUENT EVENTS
On March 10, 1999, CFI Mortgage Inc. ("CFI") commenced a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code. The Plan provided
for an infusion of $800,000 by a lender (Ronco), which is secured by CFI's
assets. The Ronco Funding subscription represents Class 1 of CFI Mortgages
Inc.'s Creditor class in regards to the Companies Bankruptcy Reorganization
plan.. Ronco, or its assigns, shall have the option to convert the amount of the
loan to common stock of the Company pro rata, at the rate of 2 percent of the
outstanding common shares of the Company for each $80,000 of gross
disbursements. Such shares to be determined after the Effective Date, and to
represent two percent (2%) of the Company's outstanding common stock after
distributions to claimants in Classes 2 and 3. A warrant for one share of the
stock of the Company will also be issued to Lender, or its assigns, for each
share of common stock issued to Ronco pursuant to the Agreement with the
Company.
Subsequently, as of September 27, 1999 Ronco Funding, Inc. has subscribed a
gross amount of $284,000. The Company was funded $256,000 which was less the
$28,000 in funding commissions due to the agent of Ronco Funding. The Funding to
date represents (when converted) an approximate seven percent (7%) equity
interest. The Company was granted an extension on September 15, 1999 by the
bankruptcy court extending the time Ronco Funding, Inc and or its assigns, has
to fulfill the $800,000 subscription until October 1, 1999. There can be no
assurances that any additional subscriptions will be made.
On June 28, 1999 the Company's Amended Plan of Reorganization was approved. On
August 2, 1999 the Company's bankruptcy reorganization was confirmed.
Subsequent to the March 10, 1999 petition for relief filing under Chapter 11,
the following material agreements were made through the bankruptcy proceedings.
An agreement was reached to conduct an assignment for the benefit of creditors
for the Company's subsidiary Direct Mortgage Partners for the benefit of its
creditors. In addition, by request of the major creditors of the Company, a
mechanism was included in an amendment to the plan and the order confirming the
plan, which preserves any and all causes of action held by the unofficial
creditors committee, before or after commencement of the case, to be prosecuted
post-confirmation, at the unofficial creditors committee's expense.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed an 8K with the Securities and Exchange Commission on March 13,
1999 announcing the Company has filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code.
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SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CFI MORTGAGE INC.
(Registrant)
CFI MORTGAGE INC.
(Registrant)
Date: September 27, 1999 /s/ Stephen E. Williams
------------------------------------------------
Stephen E. Williams
(President, CEO)
Date: September 27, 1999 /s/ Rodger W. Stubbs
------------------------------------------------
Rodger W. Stubbs
(Principal Administrative Officer)
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